Strategic Management

From Theory to Practice

Allen Amason, Andrew Ward

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000166460
• Edition: 2
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

A focus on creating and sustaining a flow of profitable transactions, in other words, the creation of sustainable competitive advantage is the seemingly simple, yet complex goal of strategic leaders and managers. Allen Amason and Andrew Ward approach the topic of strategic management with this focus in mind. Rather than simply teaching theory and research, Amason and Ward seek to convey the fundamental keys to how strategy works.

This book is designed to help students think critically and understand fully how to strategically manage their future firms. In so doing, it will enable them to adapt and learn, even as their circumstances change; to apply sound logic and reasoning, even in new and unfamiliar settings. By conveying enduring and fundamental principles of economic and human behavior rather than simply reporting on the latest innovations, this book succeeds in preparing students to excel in the business environment over time, regardless of how it evolves.

Chapter 1
An Introduction to Strategic Management

Google: A Story of Great Success

A Quest for Performance

Strategic Management

Basic Definitions

Plan, Ploy, Pattern, Position, and Perspective

Competitive Advantage

Focusing on Transactions

Strengths, Weaknesses, Opportunities, and Threats

Competitive Advantage and Firm Performance

The End of the Beginning

GOOGLE: A STORY OF GREAT SUCCESS

September 4th of 2018 marked 20 years since the incorporation of Google. Founded in 1996 by Larry Page and Sergey Brin, two graduate students at Stanford University, Google is one of the world’s most valuable companies and most iconic brands. Its first and still best-known product is its search engine. Page and Brin designed their new and better search engine around a superior system for analyzing the relationships among websites. The result was a program that enabled searches that were more efficient and more relevant than previously available. Hence, Google was created; the domain name was registered in September of 1997, and the company was incorporated in 1998. It went public through an IPO in 2004 and it was cemented into the English vernacular in June of 2006, when the company name itself, “Google,” was recognized as a transitive verb by the Oxford English Dictionary.

The story of Google’s founding and growth is fascinating for any number of reasons. The name was derived from the number googol, which is 1 followed by 100 zeros. This name was picked to signify the massive amount of information the service was designed to organize. The founders met in 1995, when one (Brin), a second-year graduate student at Stanford, was assigned to host the other (Page), a prospective graduate student, during a visit to the Stanford campus. The chemistry was apparent almost immediately, as the two talked, argued and debated throughout their first meeting. The pair ran their newly created search engine out of their dorm rooms initially and, by 1998, their program was handling over 10,000 search requests per day. Since then, the growth of the company has been nothing short of phenomenal. The initial public offering or IPO in 2004 generated approximately $1.9 billion. Twenty years later, Google’s market value was nearly $700 billion. Even famed investor Warren Buffet has stated that he made a mistake by not seeing the value and investing in Google early on. Indeed, an investor who purchased just a dozen shares of Google stock (worth about $1,000) at the time of the IPO, would have seen that investment grow to approximately $25,000 today.

But the lessons of Google’s success are really less about these fascinating historical details than they are about a consistent strategy for the company and the market and the relentless pursuit of opportunities to execute, learn, and adapt. At its essence, the strategy for Google has been, and continues to be, making the internet increasingly accessible to everyone. In so doing, it has been able to drive revenues and profits, by driving visitors to websites and platforms on which it sells ads. And Google has driven a lot of revenue. In 2004, Google’s revenues were $3.2 billion; by 2017 that number had grown to $110 billion. Of course, in 2017, Google was merely one subsidiary of a recently created parent company named Alphabet. But the majority of Alphabet’s revenues and earnings continued to come from Google and from the basic strategy of organizing and providing access to information, so as to drive traffic, clicks, and advertising.

The challenging part is that few customers know, or care, which search engine they use, how any particular search engine works, or even how their use of search is monetized into revenue by the provider. Customers just want information, whether that information is an answer to a specific question, a response to a curiosity, or simply something to entertain an open or restless mind. People want information and Google’s success depends upon those people using Google’s platforms to find it. So, the people at Google work every day to improve the efficiency and breadth of their search engine. As a practical matter, that means continuously tweaking, expanding, and refining their algorithms, so that every query returns the very answer the customer wants, even when that customer isn’t sure what he or she is expecting. Google also works to make sure that, whenever or wherever customer needs arise, there is a Google platform available and accessible to facilitate the search. So, in addition to its core search engine, Google has developed a range of related products, things like YouTube, Gmail, Chrome, Maps, Translate, Android, Docs, Calendar, Photos, Files, and Scholar. Google has even invested in hardware, in the form of the Pixel phone, Pixelbook computer, and Google wireless wi-fi routers. What ties these products together is that they all provide accessibility to people who need information. By connecting these different products and platforms to Google’s constantly adapting and evolving search algorithms, Google provides users with usable information quickly and efficiently. What Google intends with all this, and what has indeed happened, is that millions and millions of users around the world have simply found Google to be the best, or at least the most convenient and accessible, alternative when seeking information. Hence, Google achieves billions and billions of user interactions each day. And each user interaction is an opportunity to generate revenue.

But what does it mean to say that users have found Google to be the best alternative? Well, that really depends upon the customer. Because every customer is different, each will naturally want, value, and seek different things. Some will choose based on the speed of the response, the variety of the responses, or perhaps the relevance in relations to their queries. To others though, the best may mean merely the simplest and the most accessible. So, when using a Google device, they might simply accept the default browser, Google Chrome, as the best. They might find Google Maps the easiest to use and so simply choose to use it, even if they are using an Apple device. Having created a Google account, to store files or photos, they might also choose to have a Gmail account, for reasons of convenience. What it means to be the best will vary from person to person and from user to user. So, Google must invest heavily not only in the underlying technological infrastructure to manage and deliver information but also in the broad array of platforms necessary to satisfy customers of all types, regardless of the information they are searching for and the way they connect in trying to reach it. What is more, Google must do all of this in the face of competitors who are constantly introducing new products and services designed to lure away its customers. It must do what it does in the face of changing customer tastes and preferences; in just a few short years, customers have shifted from stationary computers to mobile devices. The next shift could radically alter the way users search for information. So, Google has to be relentless in finding ways to remain the best, across every meaningful dimension, lest it lose users and so lose its revenue stream.

But Google’s sights are set on more than merely today’s customers and today’s revenue streams. What happens to Google’s revenues when advertisers are no longer willing to pay for visits and clicks? Could such a thing ever happen? Well, ask someone in the encyclopedia business about how their business changed with the proliferation of web-based search. Alternatively, ask someone involved in the manufacture, sale, and use of LORAN (long range navigation) equipment how their business was impacted by the evolution of satellite-based GPS (global position system) technology or how the demand for cathode ray tubes changed with the introduction of flat panel displays. Every product gives way, ultimately, to time and to changes in technologies and tastes. Just as what was popular yesterday is often no longer popular today, likewise will today’s leading products and services one day be displaced by different, and better, alternatives. Google understands this and so actively invests the profits from its current businesses in longer-term innovations that will, one day, provide the profits for the future.

Many of these innovations are housed and nurtured in Alphabet’s Other Bets division. In 2016, Alphabet made $4.4 billion (or 7% of total operating costs) worth of other bets. What sorts of bets is Alphabet making and what sorts of subsidiary companies are included under this new holding company? One example would be Google Fiber, which provides super high-speed internet connectivity in about 20 different cities around the U.S. Another example would be Google Ventures, which makes early-stage investments in start-up companies across a range of industries, including agriculture, robotics, and life sciences. There is Capital G, which is also an investment company. But whereas Google Ventures invests in early-stage firms, Capital G invests in more established but still young technology firms, with signifi-cant growth potential. Capital G has made some impressive investments and its portfolio includes firms like Lyft, Airbnb, credit karma, and glassdoor. There is Nest Labs, the maker of home automation equipment, most notably the Nest programmable thermostat and smoke alarm. Calico Labs is a biotech research and development company focused on aging and age-related diseases, and Verily Life Sciences is a research firm focused on data science and healthcare, with the goal of organizing the world’s health data so as to enable healthier lives. All of these “other bets” grew out of, and were funded by the original Google, and together, they produced more than $800 million in revenue in 2016.

But the value of these investments lies far beyond their immediate revenues. Indeed, many will likely never prove profitable or sustainable in the long term. Nevertheless, they have value in the here and now by creating options for the future. With each of these innovative new initiatives, Google is learning about the future, learning about emerging, new technologies, and learning about the evolving nature of the competitive environment. As society evolves, as customer behavior changes, as technologies, habits, fads, and fashions rise and fall, Google will be positioned to adapt and respond because of its presence across these many other bets. Stated differently, by investing in this wide range of nascent businesses and industries, Google is purchasing options in the future. Some of those options may expire, unused. But others may provide a valuable claim on exciting and profitable new opportunities.

So, the real story of Google’s impressive and ongoing success is partly about its founders, its origins, its name, and its growth, but it is mostly about an innovative strategy built on two fundamental truths. The first is that customers seek superior value and Google has created an extraordinary array of coordinated products and technologies designed to deliver value, through billions of transactions, so as to generate billions in revenues and profits. The second truth is that nothing lasts forever, not even a superior search engine supported by a brand hegemony as strong as Google’s. Google understands this and so purposefully reinvests a portion of its cash flow into things that will help it to learn, to adapt, and to one day create another great success story.

A QUEST FOR PERFORMANCE

Reflect for a moment on this story and consider some questions. How is it that some firms perform so well, while others struggle and fail? What is it about a firm that allows it to thrive, despite ongoing challenges from its competitors and ever-increasing demands from its customers? While the story of Google’s founding and growth is a stirring example of a company that has had great success and that is building for the future, what can be said of so many other companies that also had their moment upon the stage but then failed to sustain that momentum and ultimately disappeared? What separates a company like Google from so many others like Compaq, AoL, Gateway, Blackberry, Sun Microsystems (Facebook is now headquartered in the complex that formerly housed Sun), or NEXT, the company founded and run by Steve Jobs, prior to his return to Apple? What is it that enables the successful firms to perform well, to outpace their rivals and to continue to provide good value and good returns to their customers and stakeholders?

To use an old expression, performance really is the bottom line. Performance is the crux of business and of business education. While different people will adopt different definitions of performance and while some dimensions of performance will matter more to some than to others, performance itself is still the standard by which businesses are judged. Thus, the ability to understand, predict, and ultimately direct a firm’s performance is the goal of every business student, every manager, and every investor. Why do investors devote so much effort to the research and study of specific firms and industries? The answer is that they want to distinguish the exceptional opportunities from the marginal ones and the marginal ones from the ones that offer little potential. Moreover, they want to do this all before these differences become common knowledge in the marketplace.

Why do students study the principles of economics, marketing, management, and finance? Why do managers invest in continuing education and why do they commit resources to the research and analysis of their markets and competitors? The answer in each case is that they want to build firms that perform well and that, like Google, are considered outstanding among their peers.

STRATEGIC MANAGEMENT

This book is about that quest for performance. More specifically, this book is about how the principles and practices of strategic management can be used to enable better performance. Understood most simply, strategic management is a discipline, like marketing or accounting, within the larger academic field of business education. Over the years, strategic management has been defined in a number of different ways (see Box 1.1). While these definitions reflect the different perspectives and approaches common during the period in which they were written, they all describe a basic and fundamental phenomenon, the quest for superior performance.

Box 1.1 Some Prominent Definitions of Strategic Management

• The definition of the long-run goals and objectives of an enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out these goals.
  Alfred Chandler (1962)
• Strategy is the pattern of objectives, purposes, or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.
  Kenneth Andrews (1987)
• The fundamental pattern of present and planned resource deployments and environmental interactions that indicate how the organization will achieve its objectives.
  Charles Hofer and Dan Schendel (1978)
• What business strategy is all about is, in a word, competitive advantage … the sole purpose of strategic planning is to enable a company to gain, as efficiently as possible, a sustainable edge over its competitors.
  Kenichi Ohmae (1982)
• Strategy is a set of important decisions derived from a systematic decision making process, conducted at the highest levels of the organization.
  Daniel Gilbert et al. (1988)
• An integrated and coordinated set of commitments and actions designed to exploit cor...