Business Strategy

Deepak Somaya

Module 4: Strategic Positioning and Strategic Renewal

Table of Contents
Lesson 4-0 Overview Lecture ..................................................................................................... 1
Lesson 4-0.1 Overview Lecture .............................................................................................. 1
Lesson 4-1 Generic Business Strategies ..................................................................................... 3
Lesson 4-1.1 Generic Business Strategies .............................................................................. 3
Lesson 4-2 Dual Strategies ....................................................................................................... 12
Lesson 4-2.1 Dual Strategies ................................................................................................ 12
Lesson 4-3 Strategic Renewal ................................................................................................... 18
Lesson 4-3.1 Strategic Renewal ............................................................................................ 18
Interview - Executive Expertise: Strategic Renewal ................................................................ 23
Lesson 4-4 The Manager’s Journey: Advice from Our Experts ............................................... 27
Lesson 4-4.1 The Manager’s Journey: Advice from Our Experts ........................................ 27

Lesson 4-0 Overview Lecture

Lesson 4-0.1 Overview Lecture
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Hello, I want to welcome you to this module on strategic positioning and strategic renewal. Let
us begin with the core idea of strategic fit, which you've seen a few times, and emphasizes the
alignment of the firm's internal attributes with its external environment. After learning how to
analyze a firm's external environment and its internal sources of competitive advantage, we need
to understand how to choose and implement a strategy that can actually bridge the two and bring
about strategic fit. In other words, we need to learn about the ways in which a firm can be
aligned with this environment, which are generally referred to as generic strategies. And
additionally, we need to learn how to readjust or modify the strategic alignment, if and more
typically when it goes out of sync.

The three main topics we will cover in this module are as follows. First, you will learn about
strategic positioning, by which we mean the generic business strategies that can align the internal
and external context of firms. The two main generic business strategies are called cost leadership
and differentiation. In addition, these strategies can be combined with the market scope, broad or
narrow, to which they're applied. Second, you'll learn about so-called dual or integrated
strategies, which are a combination of cost leadership and differentiation. Typically such dual
strategies are unsuccessful, due to the so-called stuck in the middle problem. And we will learn a
little bit about this problem and how it can be overcome. Lastly,we will discuss why strategic
renewal may sometimes be necessary for businesses, and review a dynamic capabilities
framework that may help with strategic renewal. My interviews with executive experts provide
some additional insights into these topics and compliment the lecture videos. We will also briefly
visit the soccer field to develop some intuition about some of these concepts. Please work
through all of these materials, as well as the interactive and practice questions built into this
module. They're designed to work together and help you learn better. Lego Group is the case for
this module. In recent years, Lego has become an extremely successful toy company, but in the
early 2000s the company was struggling and making losses. Addressing those challenges
required both a nuanced understanding of the company's strategy, as well as a significant
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strategic renewal for the company. I think this case study will help you learn how these concepts
from this module can be applied, and it should also be a lot of fun learning about Lego too.
Lesson 4-1 Generic Business Strategies
Lesson 4-1.1 Generic Business Strategies

In thinking about strategies that can help companies achieve a strategic fit, the field of strategic
management has developed a set of so-called generic business strategies. These strategies are
generic in the sense that they can apply to many different firms and in many different contexts.

The two main generic business strategies are cost leadership and differentiation advantage. Each
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of these two strategies refers to a distinct way in which companies can create competitive
advantage. In cost leadership, the company produces products or services that are similar to its
competitors but at a lower cost. In differentiation advantage on the other hand, the company
produces products or services that are unique and different from competitors, and can therefore
command a price premium.

While there are many examples, the contrast between these two strategies can readily be seen in
the department store industry. The giant US retailer Walmart is a typical example of a cost
leader. There are similar low cost retailers like Carrefour and Metro in other countries as well. At
the other end of the spectrum are the more high-end differentiated department stores like
Nordstrom and Bloomingdales in the United States, and Harrod's or [inaudible] in Europe. Let us
now try to understand cost leadership and differentiation strategies at a more fundamental level.
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What do they mean for the value that a business delivers to its customers or the costs that are
incurred in delivering that value? What do they mean for economic value added, EVA? How
does a business generate a profit when either of these two strategies are used? The key insight is
that cost leadership strategy places most of its emphasis on controlling costs in order to generate
economic value added and profits. The differentiated strategy does the opposite, it emphasizes
value creation for customers rather than cost control and produces higher EVA and profits in that
way.

Let me show this to you graphically. In this first graph is a typical or average industry
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competitor. This representative competitor incurs a certain cost but produces more value for
customers and thus creates some economic value added as shown here. Now, see what happens
with a cost leadership strategy in the second graph. The cost leader focuses on trying to bring
costs down while trying to maintain comparable value creation to the average industry
competitor. Now, because it's able to bring costs down more substantially than the corresponding
reduction in customer value, a cost leader can price in such a way as to undercut its typical
competitors and still make a good profit. Does low-cost competitors often employ Sam Walton
supposed formula when he started Walmart, buy cheap, sell for less than the other guy, and make
your profit on high volume and fast turnover? But please note that this is a low cost strategy, not
a low price strategy, which is in fact not a strategy at all, unless it's backed by the ability to keep
costs low. Differentiation employs a somewhat different approach, often in key branded
consumer product categories. Roberto Goizueta, former CEO of the Coca-Cola Company, is
quoted as having said, "If the three keys to selling real estate are location, location, location, then
the three keys to selling consumer products are differentiation, differentiation, differentiation."
With the strategy of differentiation advantage, companies focus on increasing the value created
for customers, often a subset of customers. Cost containment is not a major preoccupation, but it
is nonetheless important that costs don't rise too much. Then a successful differentiator can
charge a price premium above what its typical competitors may charge, and may still be able to
attract customers because of the value being provided to them. If costs are in check, the price
charged should be adequate to generate a nice profit. In both strategies, the profits that we have
mentioned are economic profits, which means that they are profits earned after paying the full
cost of capital which are included in the cost. Thus, the firm's profit performance would actually
be quite attractive indeed.

You might be wondering how exactly a company can produce a cost or differentiation advantage
over its competitors. The key here is to understand what drives cost or customer value in a
particular business, and then figure out how the firm's internal capabilities, resources, or activity
systems, that is its value chain or value network, can be modified, enhanced, and applied to these
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cost or value drivers. Let us take costs first. In some ways, cost leadership is simple to
understand because the ultimate goal is very clear, reduce the expense of producing the
company's product or service. However, there are many things that can affect cost in a business,
and here you can see a list of some of the more important ones. For example, scale in learning
economies can be important in some processing or manufacturing related industries, so also input
costs and specific costs reducing production techniques. I want to especially highlight
managerial inefficiency or bureaucracy because that can be a big source of hidden costs in many
businesses today and provide a very significant opportunity for a low-cost strategy. A key idea
behind this cost drivers exercise is to study the business and prioritize.
Where are most of the costs being incurred? Once the main drivers of costs have been identified,
we can turn to how these costs can be reduced. Now, let's say you're trying to reduce input costs
for Walmart, the costs of the products it stocks in its stores. Can you think of some ways in
which you can use the leavers of resources, capabilities, or activities to reduce Walmart's input
costs? Here's some things that Walmart already does to control input costs. Some input costs are
reduced by building or acquiring key resources. A network of warehouses say, a fleet of trucks, a
good IT system for managing the logistics, et cetera. Walmart has also done especially well at
developing strong supplier relationships, another resource, and building a great procurement
capability.

Walmart's procurement capability includes a number of key activities like gathering detailed
supplier cost data, analyzing consumer buying behavior, collecting price sensitivity data, and
hardball negotiation tactics with suppliers. Using this approach, you could look at any of the cost
drivers of a business and then ask yourself how the firm's resources, capabilities, or activity
systems can be augmented and used to reduce these costs. Of course, the goal here is to reduce or
eliminated unwanted costs that add very little or no value. To pursue a differentiation advantage,
a firm needs to identify levers that can help it increase value for customers. Now, the interesting
thing about value is that unlike cost, it does not come in one currency. So to figure out what
things might drive customer value, companies need to rely on market research and combine that
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with their own insights about customers. Some common factors that can affect customer
perceptions about value include product features, think about smartphones for example. Every
month there's some new phone in the market with some new must-have feature that they're trying
to entice customers with. This one has a so many megapixel camera, it has some new security
device, a better Cloud backup service, a better way to retrieve your phone if you misplaced it, it
doesn't break, or damage in water, the list goes on and on. Then there's customer service, which
in some industries like hotels can be very important for customers indeed.
Customer value can also be based on customization, a nice example is Starbucks coffee. I'm
always amazed at the number of different combinations that I can possibly buy at Starbucks. In
coffee's alone, there are four basic types, espresso, latte cappuccino, and Americano, and four
possible cup sizes. Then there are all the variations just within the latte, vanilla latte, mocha,
white chocolate mocha, pumpkin spice latte, et cetera. Then I can choose how much coffee,
decaf, half caff, single shot, double shot. All the types of milk, nonfat, two percent, whole milk,
half-and-half, soy, whipped cream or no whip cream, how hot you want it, the list goes on and
on. Someone has calculated that there are over 200 million combinations of coffee drinks
possible at Starbucks even before you begin to use the full range of syrups that they have. The
important thing here is that a lot of people go to stores like Starbucks because they want their
product or service to be customized, it's a source of value to them. Customers can also gain value
from compliments. A lot of the value that customers saw in the Apple iPod was the ability to buy
legal music, the complement from the iTunes store. Once we know what kinds of things
customers value, then it is back to figuring out how to use resources capabilities of the firm's
system of activities to create that value. Starbucks creates the customization around it's coffee
through its investment in some good equipment, recruitment and training of its staff, as well as a
set of activities surrounding order placement and delivery. For example, some of these activities
include the fact that every order gets repeated multiple times from cashier to barista and back
again, which all customers hear and thus begins to educate customers about how to customize
their coffee orders. So it begins to reinforce the value creation in Starbucks through
customization.
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Now, in addition to the cost differentiation distinction, each generic strategy can also be applied
with broad scope, for example, the most customer segments in sales channels, or with narrow
scope, only to specific segments and lower channels. The resulting combinations create four
possible generic strategies, broad cost leadership, and broad differentiation, and narrow or
focused low cost, and focused differentiation. So what purpose is served by limiting scope when
pursuing a cost or differentiation based strategic positioning? This is a little bit easier to see
when considering differentiation, so let's start there.

When you think about differentiated luxury products like Prada, or Ralph Lauren, Lamborghini
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cars, or Rolex watches, or Louboutin shoes, you might instinctively sense that they are targeted
at a narrower market segment and limited distribution channels. Here, narrow scope and
differentiation seem to be a natural fit partly because being more focused helps promote the aura
of exclusivity around the product making them more valuable to customers. If Prada was sold in
every little departmental store, it might lose some of its cache value as a high-end product.
Additionally, being narrow in channel scope might also help to contain some costs because the
volumes in which these products would be sold at non luxury retailers may be too small to justify
the logistics, inventory, and potential unsold stock. Using a narrow scope strategy can also help
firms with cost leadership.

Now, this might seem a bit counter-intuitive because we often think of scale as being useful to
reduce cost, but some businesses may not have significant scale economies to begin with.
Moreover, it may actually be possible to reduce costs by avoiding some customer segments that
are too costly to serve. So for example. The hamburger chain Checkers or Rally's, they're one
company, cater predominantly to drive-through sales and have drive-through lanes on both sides
of the restaurant. Clearly, they're losing some eat-in customers, but they avoid the real estate and
operational cost of catering to these customers and have lower costs overall by focusing on the
drive-through business. The Swedish do-it-yourself furniture chain, IKEA, is another example of
a business that's low cost and narrow scope. IKEA does not want to sell to customers who want
their furniture pre-assembled as they are too costly to serve. Similarly, the insurance company
GEICO only sells to customers through the phone and internet, not through insurance agents, so
they are focused by channel. This helps them avoid many of the costs of managing insurance
agents, even though they undoubtedly lose some business as a result. Moreover, GEICO provides
a nice example of how having broad scope can sometimes undermine the low cost model
entirely. If GEICO used agents to sell its insurance, these agents would likely want GEICO to
guarantee parity in rates with what GEICO charges in its direct channels. Now this type of
coordination can begin to undo GEICO's competitor advantage entirely as the agent based
channel is unlikely to be cost competitive with the direct to customer channel. GEICO's entire
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strategy is to lower costs in various ways, including the direct to customer channel, and
underprice other insurers. Quite simply coordinating the direct channel with an insurance agent
based channel would be a hassle that GEICO rather avoid. Now this type of coordination can
begin to undo GEICO's competitor advantage entirely as the agent based channel is unlikely to
be cost competitive with the direct to customer channel. GEICO's entire strategy is to lower costs
in various ways, including the direct to customer channel, and underprice other insurers. Quite
simply coordinating the direct channel with an insurance agent based channel would be a hassle
that GEICO rather avoid.

So what did we learn in this lesson? Well, firstly, we learned about four possible generic
strategies with which a company can strategically position itself, broad cost leadership, broad
differentiation, focused low cost, and focused differentiation. Secondly, we learned that to
achieve cost leadership or differentiation advantage, a firm needs to identify drivers of cost in the
business or drivers of customer value and then apply its resources, capabilities, or activities to
these cost or value drivers in order to create a competitive advantage.
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Lesson 4-2 Dual Strategies
Lesson 4-2.1 Dual Strategies

Previously we describe cost leadership and differentiation advantage as the two main generic
strategies that a company could pursue. We illustrated these two strategies as creating higher
economic value added respectively, by lowering costs and increasing customer value. But what
about a strategy that simultaneously does both? Increases customer value to some extent and
reduces costs at the same time, as illustrated in this graph. Such strategies are called dual
strategies, or a strategy of dual advantage. Sometimes they're also called integrated strategies
because they integrate some elements of cost reduction with some elements of differentiation.
From here onward, I will simply refer to them as dual strategies.
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In the early strategy literature, dual strategies were frowned upon. It was believed that to truly
develop a competitive advantage, companies needed to make a choice either, pursue cost
leadership or pursue differentiation advantage. Trying to do both it was felt would result in the
company being stuck in the middle in terms of strategic positioning. Being stuck in the middle
was considered to be a bad thing.

To understand why, I need to tell you a little story. The story is about the well-known Swedish
car companies Saab. Saab was originally an aircraft manufacturer, and introduced its first car, the
Ursaab in 1944. Being designed by an aerospace company, the Ursaab was said to have the most
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aerodynamic car design at the time. Over the years, Saab continued to design and make
interesting cars and by the late 1960s, had developed a very distinctive car design that was
instantly recognizable from the shape of its front and rear windshield. The car developed a
dedicated almost cult-like following. Saab owners were reputed to be highly educated. The
percentage of Saab owners that had PhDs was supposedly higher than any other car. Saab owners
were even accused of being snobs about their dedication to all things Saab, snob here being a pun
on the words Saab and snob. But did you notice what happened to the company's car models as
we got into the 1990's? They began to look distinctly unsaab like, didn't they? Do you know
why? In 1989, Saab was struggling to make profits with its traditional differentiated positioning,
and General Motors stepped in and acquired a 50 percent stake in the company.
General Motors' strategy was to do something that many car companies around the world were
doing at the time. Build multiple car models using a common platform to reduce costs by
economizing on the fixed cost of design, components, and tooling. In 1994, GM introduced a
redesigned Saab 900, based on the Opel Astra platform. By conventional accounting metrics, the
car was a major success. Saabs hold many units of the new car and even began to produce a
profit. But the redesign very unsaab like car was greeted with how the protests from Saab
enthusiasts. There was even a surge in demand for pre GM Saabs. Eventually, this lack of
enthusiasm about the new Saab designs took its toll. Saab essentially lost its distinctiveness. It
lost what made it unique and set it apart from other cars. Subsequent Saab models were not as
successful in the market. In 2000, GM acquired the rest of Saab, and despite many efforts to
revive the company, Saab was declared bankrupt in 2011. The company was eventually bought
by an investment group, production was stopped, and its future remains uncertain. So what
happened here? The key factor was that when GM tried to pursue savings and costs to make
Saab profitable, it was unable to retain key features that supported Saab's original differentiated
position.
Changes had to be made to fit GM's platform approach, which included changes in design,
performance, and components. Ultimately, as two authors who have closely studied Saab's
history put it, GM's configuration as a very high volume producer of economy to mid-range cars
sat uncomfortably with Saab's niche of individualism, technological sophistication, and premium
positioning.
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The example of Saab and GM provides a nice illustration of why dual advantage is so difficult.
Fundamental forces work against the creation of dual advantage. As Michael Porter put it, any
generic strategy constantly involves tradeoffs, tradeoffs, and tradeoffs. In implementing its
strategic positioning, a company must repeatedly tradeoff the possibility of creating more
differentiation with the possibility of reducing costs. Typically, resources and activities that lead
to more differentiation will tend to inflate costs and those that help to reduce cost will undermine
differentiation. If the company doesn't choose a clear strategy, it can end up like Saab under GM
doing neither differentiation nor cost control particularly well. It can end up being stuck in the
middle. The problem is that the tradeoffs between cost and differentiation need to be made
throughout the company in every part of the business. If a company is stuck in the middle, each
manager and employee making internal decisions within the company would be confused about
when and where they should try to reduce costs versus seeking to differentiate. The result is a
hodgepodge, a mishmash of cost reduction and differentiation attempts that don't mesh together
especially well. Drawing on the idea of strategic coherence introduced to you earlier, a dual
strategy can easily become internally incoherent. Often the company ends up with a competitive
disadvantage. That is, it ends up with above average costs and below average value creation for
customers relative to peers in its industry.
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Despite the difficulty of achieving it, we are increasingly seeing companies pursuing dual
advantage. Often, it goes by the label value positioning. One reason for this may be that many
industries already have established cost leaders and differentiators. So the big opportunities for a
new company may lie in a dual strategy. There are a number of companies that have actually
been successful with a dual strategy. How did they pull it off? What is needed is an approach that
successfully gets around the stuck in the middle problem. A coherent way to manage the
tradeoffs between cost and differentiation that can be communicated and implemented
throughout the organization. Often it requires a fundamentally different business model, or at
least a significant managerial innovation. Take the example of the computer company, Dell.
Dell's fundamental innovation in the computer industry was to build computers to order, and to
allow users to customize their computer orders to their particular needs. Dell then manufactured
those customized computer orders using a highly flexible production process.
As you might imagine, the ability to customize was a source of value to many customers
including me, thus giving Dell a bit of differentiation advantage. At the same time, Dell could
avoid the costs of buying parts and holding them in inventory or of making computers that may
not sell it retailers. Holding inventory and having unsold product is very expensive in digital
electronics, because products lose value very quickly. So these cost savings were quite
substantial for Dell. Thus Dell was able to out compete other computer companies on both cost
and value, a dual advantage. Another example is the Japanese car companies, Honda and Toyota,
who for a long time have held a reputation for making quality reliable cars. The secret to their
success is their adoption of total quality management practices in their design and manufacturing
that resulted in high-quality automobiles which became a significant source of customer value.
But TQM also helped Honda and Toyota to keep their costs in check.
An old adage in TQM circles is that quality is free. What that means is that by producing quality
products the first time, you do away with costly rework and repair, and also begin to identify
other sources of cost savings such as simplified design and production bottlenecks. So in the end,
producing higher-quality doesn't cost you much if anything. Both these examples highlight
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fundamental management innovations that simultaneously helped companies to decrease or at
least control costs while increasing value at the same time. Thus what they illustrate is that to
successfully pursue a dual advantage, companies have to implement such managerial
innovations, which provide a discipline and unambiguous pathway for simultaneously pursuing
cost and differentiation advantages. I want to be very explicit here, that a dual strategy is not
easy. It takes great strategic clarity about how the tradeoffs between cost and differentiation are
going to be managed. Hopefully, there's a managerial innovation that helps to manage those
tradeoffs. Even then, a successful dual advantage strategy requires clear communication about
the strategy itself and docker discipline in implementing it, to ensure that the company doesn't
slip into the stuck in the middle territory.

What are the takeaways from this lesson? First, you learned that pursuing a dual advantage, that
is, simultaneously pursuing low cost and differentiation is generally very difficult and
discouraged in strategic management. The risk is that because cost and differentiation involve
different tradeoffs, the company may end up doing neither one very well. It becomes stuck in the
middle. However, with a managerial innovation that provides a clear and disciplined way of
managing the cost differentiation tradeoff, dual strategies may be possible.
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Lesson 4-3 Strategic Renewal
Lesson 4-3.1 Strategic Renewal

You have now learned quite a bit about the key strategic positioning choices that companies
might make. They could be cost leaders or differentiators and choose a broad or narrow focus
within each. But so far, we have treated these as one-time choices. In reality, as time rolls on,
things can change and often do change. Take the example of the US electronics retailer Circuit
City. Circuit City was a company that performed exceptionally well from 1982 to 2000. Its stock
price even appreciated six times faster than that of General Electric under its famous CEO Jack
Welch. Circuit City was featured as one of 10 great companies to emulate in Jim Collins book
Good to Great. Circuit City essentially had a differentiated advantage. It was known for having
excellent in-store customer service and for using its leading edge logistics to ensure that
customers found just the right assortment of products in every store. Its success was built on the
strategy. But in the fall of 2008, the company filed for bankruptcy after making a string of losses.
What happened? Well, there are many factors including some leadership missteps and the Great
Recession of 2008. But a major factor was that Circuit City faced increased competition from
discount retailers like Walmart and online retailers like Amazon.com and the company was
simply unable to adapt its overall strategy to this new environment reality. What made things
even worse is that in its attempts to cope, Circuit City first used up a lot of its cash and bought
back shares to boost up the stock price and then laid off most of its talented salespeople and
replace them with low-paid employees. These decisions simply ended up undermining the
company's key sources of competitive advantage and only accelerated its demise.
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Circuit City's example is by no means unusual. Many companies go through such challenges
which ultimately result in a fundamental misalignment between the company's environment and
its own internal sources of potential competitive advantage. The process can start from either
side, environmental change that diminishes the value of the company's internal strengths or a
deterioration of the company's internal fundamentals, which then undermines its competitive
advantage with respect to its environment. These two processes can feed on each other and make
things worse. The upshot is that the business is no longer well-aligned with the environment and
is no longer enjoying a clear competitive advantage. There are many examples in recent years
that are in various stages of this process. For example, Nokia and Blackberry who lost their
prominent position in wireless phones to the likes of Apple and Samsung. Kodak, who after
years of dominating the photography market, was unable to cope with the advent of digital
cameras and simply imploded. Keep Kodak in mind because we'll come back to it in a short
while. In any case, we now know that losing strategic alignment can be a major reason for a
company to seek strategic renewal. But how does one go about it? The concept of dynamic
capabilities is one that has some potential to help answer the question of how one does strategic
renewal.
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You should already have some idea what capabilities are, and dynamic capabilities are described
as capabilities that enable companies to change their resource or capability-based. Thus, they are
higher-order or secondary capabilities that help companies change how they survive and
perform. Dynamic capabilities are contrasted with operational capabilities, which essentially help
the company with current performance. That is to make a living in the present. Some types of
capabilities that can be thought of as dynamic are those related to acquisitions, alliances, new
product development, business development or organizational transformation.
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A useful dynamic capabilities framework to help plan a company's strategic renewal is the 3P
framework developed by Teece, Pisano, and Shuen. The 3P is referred to processes, positions,
and paths. Essentially processes are activities and routines that are well-encoded within the firm
and can be deployed effectively in pursuit of a new strategy. Positions are essentially resource
positions that can be similarly employed again to pursue a new strategy. Finally, paths refer to
opportunity essentially to the strategic options that lie before the firm, which can be exploited by
using the firm's processes and positions.
To help you better understand this basic framework, let's head back to the soccer field. One of
the features of soccer that many players and fans really love is the dynamic fluid nature of the
game. Teams are constantly having to improvise to the situation on the field not unlike our
hypothetical manager who's considering the strategic renewal of his or her company. So how
does a soccer player decide what moves to make, where to pass, where to run? Let's bring the
3Ps to help us understand. Most soccer teams engage in extensive training, they practice a lot of
set pieces and moves together. So they have some processes setup that can be deployed on the
field. At any point in time, the team may also be in a given position. Let's say one player may
have the ball in a good position on the field or they may have an advantage with more forwards
than the other team's defenders or they may have a good striker in a goal scoring position. There
are also a number of different paths open to them. Perhaps there's a short pass as well as a long
one, maybe even a direct shot at goal. So the dynamic strategy that needs to be devised at this
point of the game is where to pass, which real option among all the paths available should they
take, and how should the teams various processes and positions be brought to bear on that play to
make it successful. Look like Katie Murray got the last touch in there and the Illini have doubled
their lead.
The application of this 3P framework to companies may or may not be intuitive to you at this
stage, and I will confess that the framework lacks a lot of deep detail. Thus, it relies significantly
on the skill and judgment of those applying it.
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Nonetheless, it's valuable to have at least some way of addressing an important question like
strategic renewal than none at all. To help you get a better idea of how the framework can be
applied, I want you to recall the example of Kodak I mentioned earlier. A company that
struggled to cope with problems of strategic misalignment at a time of major environmental
change. But the company I really want to talk about is Kodak's counterpart in Japan, it's Japanese
twin Fujifilm. Fujifilm's business had eerie similarities to Kodak on a number upfront. Both
businesses relied heavily on film, and paper, and chemicals to make their revenues. Both had
similarly high market shares in analog photography in their respective home markets. But while
Kodak wilted and died in the harsh light of digital imaging, Fujifilm transformed and tried. How
did Fujifilm do it? Fujifilm took advantage of its positions, resources like deep knowledge and
strong intellectual property in the film, paper, and photo chemicals business. It also capitalize on
processes that it had developed and honed over a long period of time like meticulous product
development processes, marketing processes, and systems engineering processes. It then look for
alternative paths where these positions and processes could be exploited. So for example, Fuji
has developed a successful business in membranes and filters for industrial applications by
leveraging its strengths in film and polymers. It is also launched a successful cosmetics line
called ASTALIFT by leveraging its knowledge of chemicals like collagen, which is present in
both human skin and photo film, and of antioxidants, which are good for both photographs and
human skin. Fujifilm has also built some very successful businesses applying its film technology
towards coating an LCD screens and touchscreens, applications in which it enjoys significant
market share and very high profitability. What Fujifilm's example illustrates is that although
strategic renewal is hard, it is nonetheless possible by adopting a dynamic capabilities approach.

In concluding this module, I want to highlight three key points for you. First, companies can
strategically position themselves by combining cost leadership and differentiation advantage
with narrow and broad scope. Second, while dual strategy is risky and can lead companies to
being stuck in the middle, they do have some potential if done with strategic clarity and
discipline. Finally, strategic renewal may become necessary when a company strategy loses its
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fundamental alignment between the firm and its environment. A useful framework for
developing a plan for strategic renewal is the 3P Dynamic capabilities framework. Thank you
and good luck.
Executive Expertise: Strategic Renewal

Our executive experts weighed in with their own experiences of making significant strategic
changes or pivots in their companies. What stuck out for me in their responses was the degree to
which large established companies have a harder time making such changes. They become
victims of their own past success and of large, complex organizations. Small startups, on the
other hand, seem to embrace strategic pivots with open arms, as part of the normal process of
figuring out their market and business model. In today's economy, this inherent flexibility and
adaptability must be considered a significant advantage for startups, even when they're up
against much larger, well resourced rivals. Listen. >>
 Business Strategy
Deepak Somaya

So how do you keep it from being irrelevant in ten years? We have robo-advisors out there right
now you can enter all your data and get a great financial plan. And I will tell you that it is
something that that we have to continue to take next steps on. So that value of advice also is not
hindered by a lack of innovation. So advice is great when we continue to innovate. But we know
that we're facing headwinds as people do less planning and secure their futures and they probably
in lower amounts of securing their futures. So one thing about insurance companies or
companies like Country, we have a rich trove of customer data. I mean, when you think about it
is transactions, all the way down to blood pressures. When it comes down to it, we know our
customer very, very well and so we need to capitalize on that. That's important. One of the
problems the industry has and I think is important, it's a concept called cognitive dissonance is
where you see something happening, it doesn't fit your frame of reference, you ignore it. And so
we try to desensitize ourselves from everything that's good. And try to create the famous burning
platform all the time. And, I mean, a little bit of paranoia is good in this industry and it makes
you want to change. In 2012, I started to look at the data. What's the data showing us? What do
our customers really have? Are they really secure? Are they better off? And, I asked to take a
look at the cohorts that we had in 2005 that remained with us in 2012. And were they better off?
And we found out that only about 7% had additional product. So we use some of the data to say,
okay, we haven't done what we said we're going to do, we have to redouble our effort. >>
 Business Strategy
Deepak Somaya

Man, I think you'd have to change your strategic position over time. And there's a bit of a
balance because as much as we all say we're good at adapting to change and like change. It's
difficult for organizations, and the larger the organization it's difficult to change. So you may
lose value in the change. But I personally believe is that you make the best decision you can with
the best available information. And being careful to mind sunk cost fallacy, the idea that I've
spent a year or two years working on something that doesn't quite make sense. But because I've
spent the time working on it, I need to then continue to work on it. And I think it's a challenge,
but to me you constantly learn and your organization evolves and gets smarter. So, if you learn
new things that make the old decisions looking correct you have to change it. I don't think you
have an option. We've had a lot of those kind of decision because in a start up you're always
pivoting to try to find the right path, the market either. And just to put in context for a month,
that means the type of products we're offering, the rates we're serving the consumers that we're
going after, the way that we fund ourselves. And it's just broad, and I think the way we're able to
do it quickly as a startup is because of trust. And earlier on I talked a lot about trust and sincerity.
I think if you have the trust of your people and your employees, then they'll follow you almost
anywhere. What if you lose trust? It's very difficult. And I think in big organizations the reason
it's so challenging to change is because you have bureaucracy, you don't have as much trust.
Everyone is may be looking out for themselves. I believe in equity as a great motivator. And so if
in a startup, all of the employees or virtually all of the employees really are owners, and think of
themselves as owners, and have trust that the decisions that are being made. One are able to take
in their input, but really in the best interest of themselves. They're going to be much more mobile
in terms of embracing that change. >>
 Business Strategy
Deepak Somaya

I think it's very easy company stage dependent in the earliest days of fill glass that strategic
renewal process is probably just more about constantly pivoting to find that right product bargain
fit both between product and how we would go to market. And so I definitely have a lot of
experience there as we kind of went through that process. But once you get beyond a certain size
and certainly once you're a market leader, then that kind of thing becomes largely additive. So
what are you doing to make sure you remain a market leader? Or if you don't do enough of that,
what do you do once you have too many people who are immediately behind you? So
fortunately, we never got to the point where we had a lot of people right behind us, and we
weren't pivoting reactively. I think what we did would probably be more called adding, then
pivoting. And so we were very aggressive in making sure that we were always looking at our
story and how do we add to it? So if we were strong, because of x, y, and z, what could we do,
by way of adding a, b, and c to the big so that not only would we remain strong on the basis of x,
y, and z, but we would also further the gap between us and our competitors by throwing more
things in the way between us and them that we're adding value to customers?
 Business Strategy
Deepak Somaya
Lesson 4-4 The Manager’s Journey: Advice from Our Experts
Lesson 4-4.1 The Manager’s Journey: Advice from Our Experts

As we wrap up this course, I would like to thank our executive experts for their valuable insights
and advice. In parting, I asked these experts one last question. What advice would they give
aspiring managers, such as yourself, about how you can be an effective strategic leader? This is
what they had to say. I think you will find that to be great advice, and hopefully, a valuable final
gift from the course.
 Business Strategy
Deepak Somaya
I think the difference between success and failure, as I've learned, is making a few critical
decisions at the right time. It's not the day-to-day operational decisions that drive longer term
success, I think it's the five or 10 strategic decisions that you need to make over the course of a
few years. They really shape the direction of your business. It would seem that would be the kind
of thing that would require judgment and sifting through the 500 things that I'm sure that are on
your list of things to do to prioritize which are the most important and need the most time and
attention and focus. I think that's exactly right. I still think that at the end of the day, common-
sense decisions usually are the right ones. If you can put aside the inherent human fallacy of
being short-sighted and weighing short-term benefits or detriments more than the longer term.
But a lot of it is exactly what you said. I think it's very difficult to figure out which decisions are
the critical ones. If you can use the experience, and judgment, and thought, you can figure out
what's important and what's not, then I think your likelihood of success is much higher.

I think one of the things if you look at a lot of advice that tends to be things like have a big
dream, have a big picture, have a really big problem that you're solving. I agree with all those
that speak to how big of a company or how big of an opportunity you can have. But what I find
is that very few entrepreneurs lack that, almost all entrepreneurs have the big dream and they
have a big picture. They have a big thing that they think they can do whether it's the next
Facebook, Twitter, whatever. People are always framing up their dreams as the next big version
of something that is currently big. What a lot of people lack is a tactical plan to get there. So a lot
of people focus and over-focus on the word strategy thinking that strategy is somehow in conflict
with tactical, but really a good strategy I think has a series of tactical plans to get there. So a lot
of people don't spend enough time thinking about if this is my big dream, how do I tactically get
there? What are those small steps that will get me closer and closer to that? They're just trying to
hoist themselves up by their own bootstraps that end up at that big dream and that's just not
going to happen. It's an evolution. It's a process. All of these overnight successes that people hear
about always have 10 years of struggle behind them.
 Business Strategy
Deepak Somaya

The going in on this is that I'm not perfect. We all know that. You can probably take a survey
here in the company. They will be happy to tell you. The job you have, if you excel in that, that
actually prepares you for the next job. So that sounds pretty simple. The other one I think is a
little more difficult for people is that if you're going to be a strategic leader, you've got to be a
great listener and you've got to understand your people. So I worked for a number of leaders in
the air force that were what I would call classical servant leaders, that the pyramid was inverted
and they were at the bottom and they took care of the people. Yes, they were the leaders, but they
were available 24/7 on the flight line, etc. So I'd tell you that the preparation is number one, is
really understand yourself as a leader. What's your philosophy? What are you going to be
passionate about in leading people? Education is the second step. I would tell you that nothing
opens up your horizons more than having an opportunity to talk to people that are in non-
analogous companies, non-analogous industries. The MBA programs are a great example of that
because of the cohorts herein, my PhD was the same thing for me. So to me, I learned a lot from
that. The other one I will tell you is a continued thirst to be inquisitive about things and to never
think you know everything. So good strategic leaders, if you walk in with the answer, you'll be
wrong.
 Business Strategy
Deepak Somaya

I think data, obviously, is the primary thing that you have to be really good about. You have to
have some metric to measure whether or not your experiments are successful or not successful.
But the other thing that I think a lot of people don't necessarily spend enough time thinking about
is how can you do the lowest cost way to test your thesis? So a lot of people want to immediately
go into product and say we think that there's an opportunity here or we think that we're off a little
bit and if we only do a certain thing, then we'll be okay. So they start moving the product in that
direction. Product development is hands down your highest opportunity cost resource. So
anything you can do to fake it before you actually make the product commitments is worth the
investment. So in the early days at Fieldglass, in the early days here at Catalytic, we absolutely
are all about using some manual automated system like a Mechanical Turk, or having someone
play black box roles saying if this were a system, what would it do?
Having a human playing that role to see and test whether or not, that's a lot of value. If it is
valuable, then it becomes a lot easier for us to start replacing that black box with real automated
or with real technology. So I feel like a lot of people miss that for whatever reason. It seems very
obvious when I say it, but for some reason, a lot of entrepreneurs over-commit to their thesis.
Low-cost experiments, study the data as it's coming in, be merciless about killing the things that
aren't producing results. Even if you think that long-term will produce results, if it's not going to
be the thing that moves the needle for you in the short term, you should put on the back burner,
focus on the things that will move the needle for you on a short-term basis and double down with
your technology on that because technology is really more about improving your margins. I think
I've learned over the years that I'm not exactly sure. I think it's very difficult to. So perhaps one
of the lessons is humility. I think lesson is humility, and me as an example, I don't think I'm a
very good manager because being good manager requires a mass amount of discipline. I think
I'm much better at other parts of the process which include vision, and strategic direction, and
capital raising. But I've been very fortunate to have been surrounded by people that fill in other
parts of the pie. So my advice is actually know yourself.
 Business Strategy
Deepak Somaya
To your point humility, I think you have to be critical of your own skills and find things that you
really enjoy doing because you're generally going to be better at things that you enjoy. So if you
can critically understand what your skills are, and what your strengths are, and also what your
weaknesses are, and then find areas that really take advantage of those strengths, and then
surround yourself with people that can address the weaknesses, then I think you can be more
successful. Admit when you're wrong. Admit it fast and be open about the fact that you will be
wrong. Accept that you're going to be wrong. Take the arrows in the back. I think spend a lot of
time talking to customers. Never try to insert sales or marketing between you and customers.
They're valuable functions, but if you're not willing to listen to customers, if you're not willing to
go to sales events and hear the opportunities that they're basically telegraphing to you without
even knowing about it, or hear the complaints when they do have complaints, then you've
distanced yourself too far. I see a lot of people trying to make that customer relationships
someone else's problem, and I think that's a really big problem. So if you're going to be an
effective leader, I think you have to remain close in some way shape or form. To scale
practically, you do need to have people helping you do it, but you should always have your own
pet account that you're dealing with, your own set of sales activities that you're involved in very
hands-on. So how do you become a good strategic leader is you understand everybody's
strengths and weaknesses, your own as well, and then spend a lot of time listening, but also
encouraging open discussion. But I think understanding yourself becomes the most important
thing.