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Week 2: Strategic Management: Conventional Approaches

Team teaching

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Agenda

1. The Importance of Competitive Advantage
2. Competitive Advantage: A Means or an End?
3. The Importance of Stakeholders
4. The Strategic Management Process
5. Strategic Management in Developing Countries
6. Why do Most Strategies Fail? (Causal Ambiguity, Strategic Thinking, Profitability VS Risk)

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1. The Importance of Competitive Advantage

Competitive advantage: The ability to generate a higher profit margin compared to the industry’s average.
From an Islamic perspective, making a lot of profit is not a sin. On the contrary, making enough profit is necessary to ensure the long-term survival of an organization.
Competitive advantage from an Islamic perspective: The ability to earn a higher profit margin than the average in the industry. This allows the organization to reinvest more money in the enterprise and increases the probability of its long-term survival. From an Islamic perspective, seeking competitive advantage is a means (higher profit) to an end (long-term survival), not an end in itself. Additionally, competitive advantage is often derived from superior knowledge (core competencies), which allows the organization to stay in business without having to engage in corrupt business practices.

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2. Competitive Advantage: A Means or an End?

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3. The Importance of Stakeholders�

Stakeholders: Any persons or groups who are (or will be) affected by your organization’s actions
Primary stakeholders are those with whom you interact directly.
Secondary stakeholders are those with whom you come in contact infrequently.

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4. The Strategic Management Process�

1. Defining the vision and mission.
2. Doing an external analysis (OT)
3. Doing an internal analysis (SW).
4. Choosing appropriate business-level and corporate-level strategies.
5. Implementing these strategies.
6. Evaluating the effectiveness of these strategies before going for another cycle.

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5. Strategic Management in Developing Countries�

Khanna and Palepu (2006) argue that multi nationals are used to doing business in markets where there are powerful institutions to ensure a level playing field. However, such institutional infrastructure is often lacking in developing countries. They call this the institutional void.
Institutional void is the absence of specialized intermediaries, regulatory systems, and contract-enforcing mechanisms

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6. Why do Most Strategies Fail? (Causal Ambiguity, Strategic Thinking, Profitability VS Risk)

Category 1: These studies show that the thinking behind the strategy was wrong.
Category 2: These studies show that the process of strategic formulation and strategic execution is at fault.
Category 3: These studies assume that the strategy developed was wrong.
Category 4: These studies assume that the strategy developed was right but that subordinates—for whatever reasons—were unable to execute the strategy effectively.

Category 1: Example: Kodak (Digital Camera Disruption)

Kodak assumed its film business would remain dominant even as digital cameras emerged.

The thinking was wrong: management saw digital as a threat instead of an opportunity.

Result → Kodak filed for bankruptcy in 2012.

Lesson: Strategy failed because the logic behind it was flawed—the company clung to old assumptions.

Category 2: Example: Boeing 737 MAX Crisis

Strategy: Compete with Airbus A320neo by quickly introducing 737 MAX.

The process was rushed; engineering and safety reviews were bypassed, communication with regulators was inadequate.

Result → Two crashes, global grounding, reputational damage.

Lesson: Strategy (competing with Airbus) was sound, but process errors in design and execution doomed it.

Category 3: Example: New Coke (Coca-Cola, 1985)

Strategy: Replace original Coca-Cola formula with a sweeter taste to compete with Pepsi.

The strategy itself was wrong: consumers valued the original formula’s identity.

Result → Public backlash, reversal within months.

Lesson: The chosen strategy was misaligned with customer values.

Category 4: Example: JCPenney (Ron Johnson Era, 2011–2013)

Strategy: Move away from heavy discounting to an “everyday low pricing” model.

The idea (stabilize margins, reduce reliance on coupons) was reasonable.

Execution failed: employees didn’t communicate the value, shoppers accustomed to discounts left, stores mismanaged transitions.

Result → Sales collapsed, CEO ousted.

Lesson: Strategy was viable, but execution failed at the store level.

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6. Why do Most Strategies Fail? (Causal Ambiguity)

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6. Why do Most Strategies Fail? (Shared Mental Model)

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6. Why do Most Strategies Fail? (Shared Mental Model)

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6. Why do Most Strategies Fail? (Return VS Risk)

It turns out that these same traits—imaginative, bold, resolute, risk relishing, ambitious—are also associated with higher failure rates.

The Paradox for Leadership is: strategies that position a business for greatness necessarily expose it to ruin.

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Materials related to Individual Assignment

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Importance of Vision and Mission Statements

To make sure all employees/managers understand the firm’s purpose or reason for being.

To provide a basis for prioritization of key internal and external factors utilized to formulate feasible strategies.

To provide a basis for the allocation of resources.

To provide a basis for organizing work, departments, activities, and segments around a common purpose.

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Figure 2.2

How to Gain and Sustain Competitive Advantages

Long Description:

The circular block at the center of the cycle reads Gain and Sustain Competitive Advantages. The cycle starts with the circular block at the top that reads, Establish a Clear Vision and Mission which leads to the second circular block at the right that reads, Formulate Strategies: Collect, Analyze, and Prioritize Data using matrices; establish a clear strategic plan. The second block leads to the third circular block at the bottom that reads, Implement Strategies: Establish structure; Allocate resources; Motivate and reward; Attract customers; Manage finances which further leads to the fourth circular block at the left that reads, Evaluate and Monitor Results: Take corrective actions; Adapt to change. The fourth block further leads to the first block and the cycle repeats.

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Levels of Strategy in an Organization

Corporate strategy decides where to play.

Business strategy decides how to win in each market.

Functional strategy decides how to execute daily.

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Corporate Strategy (Top Level)

Scope: The entire corporation.
Focus: “Which industries/markets should we compete in?”
Decisions: Portfolio management, diversification, global expansion, M&A.
Example (Tesla): Pursue balanced growth + improvement → expand into emerging markets, launch affordable models, strengthen vertical integration.

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Business Unit Strategy (Middle Level)

Scope: Individual business units (or product lines) within the corporation.
Focus: “How should this business compete in its industry?”
Decisions: Competitive positioning, cost leadership vs. differentiation, market segmentation.
Example (Tesla):

EV Division: Differentiate on innovation and quality → expand into mass-market with Model 2 (rumored small EV).
Energy Division (Tesla Energy): Growth via solar panels, Powerwall, and grid-scale batteries.
Autonomous Tech (FSD/AI): Focus on R&D leadership and partnerships to handle regulation.

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Functional Strategy (Operational Level)

Scope: Functions/departments within each business unit (marketing, operations, HR, R&D, finance, supply chain).
Focus: “How should each function support the business unit strategy?”
Decisions: Concrete policies, resource allocation, day-to-day tactics.
Example (Tesla):

Marketing: Position affordable EV as “sustainable mobility for all”; local campaigns in India/SE Asia.
R&D: Accelerate battery innovation; cut costs with new materials.
Operations/Supply Chain: Expand Gigafactories in emerging markets; secure lithium supply contracts.
HR: Hire local engineers in new markets; improve worker safety culture.
Finance: Allocate capital to affordable EV program, not just premium models.

Corporate → Business Unit → Functional

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Types of Corporate Strategies (Growth Strategy, high risk)

Strategy	Definition	Example
Forward Integration	Gaining ownership or increased control over distributors or retailers	Amazon began rapid delivery services in some U.S. cities.
Backward Integration	Seeking ownership or increased control of a firm’s suppliers	Starbucks purchased a coffee farm.
Horizontal Integration	Seeking ownership or increased control over competitors	&T acquired Susquehanna Bancshares.

Defined and exemplified in Table 5.3, alternative strategies that an enterprise could pursue can be categorized into 11 actions.

Long Description:

The data in the table are as follows:

Strategy, Forward Integration; Definition, Gaining ownership or increased control over distributors or retailers; Example, Amazon began rapid delivery services in some United States cities;

Strategy, Backward Integration; Definition, Seeking ownership or increased control of a firm’s suppliers; Example, Starbucks purchased a coffee farm;

Strategy, Horizontal Integration; Definition, Seeking ownership or increased control over competitors; Example, and T acquired Susquehanna Bancshares;

Strategy, Market Penetration; Definition, Seeking increased market share for present products or services in present markets through greater marketing efforts; Example, Under Armour signed tennis champion Andy Murray to a 4-year, $23 million marketing deal;

Strategy, Market Development; Definition, Introducing present products or services into new geographic area; Example, Gap opened its first five stores in China;

Strategy, Product Development; Definition, Seeking increased sales by improving present products or services or developing new ones; Example, Amazon just began offering its own line of baby diapers and wipes.

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Strategy	Definition	Example
Related Diversification	Adding new but related products or services	Facebook acquired the text-messaging firm WhatsApp for $19 billion.
Unrelated Diversification	Adding new, unrelated products or services	Kroger and Whole Foods Market are cooking meals, becoming restaurants.

Types of Corporate Strategies (Growth Strategy)

Long Description:

The data in the table are as follows:

Strategy, Related Diversification; Definition, Adding new but related products or services; Example, Facebook acquired the text-messaging firm WhatsApp for $19 billion;

Strategy, Unrelated Diversification; Definition, Adding new, unrelated products or services; Example, Kroger and Whole Foods Market are cooking meals, becoming restaurants;

Strategy, Retrenchment; Definition, Regrouping through cost and asset reduction to reverse declining sales and profit; Example, Staples closed 250 stores and reduced by 50% the size of other stores;

Strategy, Divestiture; Definition, Selling a division or part of an organization; Example, Sears Holdings divested its Lands’ End division to Sears’ shareholders;

Strategy, Liquidation; Definition, Selling all of a company’s assets, in parts, for their tangible worth; Example, The Trump Taj Mahal in Atlantic City, New Jersey, faces liquidation;

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Types of Corporate Strategies (Maintain/Hold Strategy, less risk)

Strategy	Definition	Example
Market Penetration	Seeking increased market share for present products or services in present markets through greater marketing efforts	Under Armour signed tennis champion Andy Murray to a 4-year, $23 million marketing deal.
Market Development	Introducing present products or services into new geographic area	Gap opened its first five stores in China.
Product Development	Seeking increased sales by improving present products or services or developing new ones	Amazon just began offering its own line of baby diapers and wipes.

Defined and exemplified in Table 5.3, alternative strategies that an enterprise could pursue can be categorized into 11 actions.

Long Description:

The data in the table are as follows:

Strategy, Forward Integration; Definition, Gaining ownership or increased control over distributors or retailers; Example, Amazon began rapid delivery services in some United States cities;

Strategy, Backward Integration; Definition, Seeking ownership or increased control of a firm’s suppliers; Example, Starbucks purchased a coffee farm;

Strategy, Horizontal Integration; Definition, Seeking ownership or increased control over competitors; Example, and T acquired Susquehanna Bancshares;

Strategy, Market Penetration; Definition, Seeking increased market share for present products or services in present markets through greater marketing efforts; Example, Under Armour signed tennis champion Andy Murray to a 4-year, $23 million marketing deal;

Strategy, Market Development; Definition, Introducing present products or services into new geographic area; Example, Gap opened its first five stores in China;

Strategy, Product Development; Definition, Seeking increased sales by improving present products or services or developing new ones; Example, Amazon just began offering its own line of baby diapers and wipes.

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Retrenchment Strategy	Definition	Example
Retrenchment	Regrouping through cost and asset reduction to reverse declining sales and profit	Staples closed 250 stores and reduced by 50% the size of other stores.
Divestiture	Selling a division or part of an organization	Sears Holdings divested its Lands’ End division to Sears’ shareholders.
Liquidation	Selling all of a company’s assets, in parts, for their tangible worth	The Trump Taj Mahal in Atlantic City, New Jersey, faces liquidation.

Long Description:

The data in the table are as follows:

Strategy, Related Diversification; Definition, Adding new but related products or services; Example, Facebook acquired the text-messaging firm WhatsApp for $19 billion;

Strategy, Unrelated Diversification; Definition, Adding new, unrelated products or services; Example, Kroger and Whole Foods Market are cooking meals, becoming restaurants;

Strategy, Retrenchment; Definition, Regrouping through cost and asset reduction to reverse declining sales and profit; Example, Staples closed 250 stores and reduced by 50% the size of other stores;

Strategy, Divestiture; Definition, Selling a division or part of an organization; Example, Sears Holdings divested its Lands’ End division to Sears’ shareholders;

Strategy, Liquidation; Definition, Selling all of a company’s assets, in parts, for their tangible worth; Example, The Trump Taj Mahal in Atlantic City, New Jersey, faces liquidation;

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Tools used in each different stages

At Corporate Level
SWOT → TOWS → IFE/EFE → IE Matrix

Helps decide overall direction: growth, stability, retrenchment.
Example: Tesla’s IE Matrix suggested a “Balanced Growth + Improvement” corporate strategy.

BCG Matrix (Boston Consulting Group)

Used for portfolio management of different business units (Stars, Cash Cows, Question Marks, Dogs).
Example: Tesla’s Automotive = Star, Energy = Question Mark/Star, Autonomous AI = Question Mark.

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Tools used in each different stages

At Business Unit Level
Porter’s Generic Strategies (Cost Leadership, Differentiation, Focus)

Helps each BU define how to compete.
Example: Tesla Automotive → Differentiation + Cost Leadership blend (innovation + lower-cost models).

GE-McKinsey Matrix (9-Cell)

Evaluates BU attractiveness vs. competitive strength.
Example: EV market = high attractiveness, Tesla strong position → invest.

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Tools used in each different stages

At Functional Level
Balanced Scorecard (BSC)

Translates strategy into KPIs across Finance, Customer, Internal Processes, Learning & Growth.
Example: R&D tracks battery efficiency; HR tracks skilled hires; Marketing tracks brand penetration.

Value Chain Analysis (Porter)

Ensures each function adds value consistent with BU strategy.
Example: Tesla’s vertical integration aligns supply chain + R&D + logistics.

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Remember, Levels of Strategy in an Organization

Corporate strategy decides where to play.

Direction is chosen using SWOT, IFE/EFE, IE Matrix, BCG.(decide where to grow/hold/divest).

Business strategy decides how to win in each market.

Porter’s Strategies (decide how to win in each market).

Functional strategy decides how to execute daily.

Balanced Scorecard (decide how to execute efficiently).

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SWOT → TOWS → IFE/EFE → IE Matrix = Corporate Strategy.

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Step 1: SWOT Analysis of Tesla

Strengths (S):
S1: Strong brand in electric vehicles (EVs)
S2: Advanced technology in batteries & autonomous driving
S3: Global recognition and loyal customer base
S4: Vertical integration (Gigafactories, charging network)
Weaknesses (W):
W1: High production costs
W2: Overdependence on Elon Musk’s reputation
W3: Limited product range compared to rivals (few models)
W4: Quality issues and recalls

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Step 1: SWOT Analysis of Tesla

Opportunities (O):
O1: Global shift toward clean energy and EV adoption
O2: Expansion in emerging markets (India, Southeast Asia)
O3: Government incentives for EVs and renewable energy
O4: Growth in autonomous vehicle market
Threats (T):
T1: Intense competition (BYD, VW, GM, etc.)
T2: Rising raw material costs (lithium, cobalt)
T3: Regulatory scrutiny on self-driving tech
T4: Economic downturns reducing consumer spending

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Step 2: TOWS Matrix (Matching SWOT)

SO Strategies (Use strengths to exploit opportunities)
S1O1: Leverage Tesla’s strong EV brand to lead global clean energy adoption.
S2O4: Use advanced battery & autonomous tech to capture growth in self-driving markets.
S4O2: Use Gigafactories & supply chain control to expand into India and Southeast Asia.
S3O3: Build customer loyalty by marketing Tesla as the top choice for government-supported EV incentives.

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Step 2: TOWS Matrix (Matching SWOT)

WO Strategies (Minimize weaknesses with opportunities)
W3O2: Diversify product line with smaller, affordable EV models for emerging markets.
W4O1: Improve quality control to strengthen trust as global demand for EVs rises.
W1O3: Offset high production costs by leveraging government renewable energy incentives.

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Step 2: TOWS Matrix (Matching SWOT)

ST Strategies (Use strengths to counter threats)
S4T2: Use vertical integration to reduce exposure to volatile raw material costs.
S2T1: Strengthen Tesla’s tech edge to maintain advantage over BYD, VW, GM.
S1T3: Leverage strong EV brand to build regulatory trust and defend against self-driving scrutiny.

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Step 2: TOWS Matrix (Matching SWOT)

WT Strategies (Minimize weaknesses, avoid threats)
W2T1: Reduce reliance on Elon Musk’s persona by building stronger management team → prevents overexposure to competitor attacks.
W4T3: Address quality issues proactively to avoid reputational damage under regulatory scrutiny.
W1T4: Lower production costs to protect profitability during economic downturns.

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Qualitative Strategy (SWOT, TOWS) to Quantitative Strategy (IFE, EFE, IE)

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Internal Factor Evaluation (IFE) Matrix

INTERNAL FACTOR	CODE	WEIGHT	RATING	SCORE
S1. Strong brand in EVs	S1	0.10	4	0.40
Advanced battery & autonomy tech	S2	0.10	4	0.40
Global recognition & loyal customers	S3	0.05	4	0.20
Vertical integration	S4	0.10	3	0.30
W1. High production costs	W1	0.15	2	0.30
Overdependence on Musk	W2	0.10	2	0.20
Limited product range	W3	0.15	2	0.30
Quality issues & recalls	W4	0.15	2	0.30
Total		1.00		2.40

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External Factor Evaluation (EFE) Matrix

External Factor	Code	Weight	Rating	Score
Global EV adoption	O1	0.15	4	0.60
Emerging markets expansion	O2	0.10	3	0.30
Government incentives	O3	0.15	4	0.60
Growth in autonomous market	O4	0.10	3	0.30
Intense competition	T1	0.20	2	0.40
Rising raw material costs	T2	0.10	2	0.20
Regulatory scrutiny	T3	0.10	2	0.20
Economic downturn risk	T4	0.10	2	0.20
Total		1.00		2.80

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IFE = 2.40 (weak–average internal strength)�EFE = 2.80 (average–strong external position)

Tesla’s Hold & Maintain strategy:

(S1O1).
(S4O2, W3O2).
(W1O3, W4O1).

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From Corporate Strategy to Functional Strategy

Business Units:�- Automotive: Affordable EVs (W3O2), India/SE Asia (S4O2), Quality (W4O1)�- Energy: Growth with Powerwall/Megapack, ESG partnerships (W1O3)�- Autonomous/AI: FSD edge (S2T1), Regulatory trust (S1T3)
�Functional Strategies:�- R&D: Battery innovation (W1O3), Safety (S2O4)�- Operations: Gigafactory India (S4O2), Supply chain optimization (S4T2)�- Marketing: 'Tesla for Everyone' (S3O3), Brand defense (S1O1)�- HR/Governance: Leadership beyond Musk (W2T1), Safety culture (W4T3)�- Finance: Capital to Model 2 (W3O2), Cost control (W1T4)

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The Critical Question

Review your Individual Assignment (strategy at the corporate, business unit, or functional level) and analyze how it could fail (remember the 4 category of failure, shared ambiguity, mental model and return VS risk).

Then propose how to make the strategy more ethical and less prone to moral hazard at each level. In your answer, show how ethical safeguards at the corporate, business unit, and functional levels could reduce the likelihood of each type of failure.