Strategic Leadership - Class 1

This post is about learnings from strategy class by Prof. Greg LaBlanc, organizer of unSILOed podcast.

What is Strategy?

Strategy is not about goal formation and goal accomplishment. Instead, it is trying to achieve a goal where there are other goal seeking agents. Other agents' goal can be in conflict or alignment with yours.

Does not need a Strategy ❌	Need a Strategy ✅
Fastest route to Berkeley from Palo Alto	Fastest route to Berkeley from Palo Alto when other people are also driving
Trying to tie a tie	Trying to tie a tie when your kids are distracting you

You need strategy in war, sports, businesses.

To be someone who makes strategic decision for a large organization, you need to be comfortable with complexity, opacity, and uncertainity aka Fog of War. If it's an easy problem to solve, then there are thousands of people who can solve. Only way to be competitive is by tackling something that's C-O-U. If you are gonna wait till you can have some certainity, then likely you will lose as you will be the last mover.

In terms of Data and Decisions, if you are gonna wait till your hypothesis testing has p-value less than 0.05 i.e. you are sure about a good decision, you will wait forever in the world of business. This is in particular difficult for people coming from engineering background.

Engineering world -> Certainity | Strategy world -> Never have certainity

Business is one of the most complicated things in the world.

• Optimal Performance requires good operations, Sustained Performance requires good strategy
• Strategy is dynamic, forward looking
• Best practices can not be chosen separately. At a time a company is playng games on multiple front. For example, Apple simultaneously playing game with Google, Samsung, Facebook, FoxConn, Broadcomm.
• Your payoff depends on what the other players do

As a strategist, your goal should be to

• become world's best generalist (or integrator) as you can hire an expert for a skillset.
• delegate as much as possible

Value Creation and Capture

True performance of a firm is calcuated by Revenue - Cost - Return on Market Value of Equity = value created by a company. Most of the companies capture a fraction of value created by them.

If a company needs to increase its profitability, it can do one of the following three things:

1. Decrease cost
2. Increase customer willingness to pay
3. Increase volume with same per unit value

Potential Industry Earnings (PIE)

PIE = value of industry output - value of resources used to produce output. PIE is the upper limit on industry profits.

1. Substitute Products - bad ❌ | Complementary products - good ✅
   1. Litmus test -
      1. If it's good for you - substitute, bad for you - complement
      2. If price of one goes down and other products' also goes down = subsitutes.
   2. Tea Coffee are subsitutes. Coffee gets expensive, you buy tea
   3. Software Hardware are complementary. Software GenAI today are increaseing value of GPU are
2. Weak Supplier Bargaining Power
   1. Intel gave very little bargaining power to its supplier.
3. High Buyer Bargaining Power
   1. Emirates has significant high customers, so it has high bargaining power when it comes to negotiating with Airbus and Boeing.
   2. Walmart has a lot of bargaining power because of high customers, but P&G also has significant bargaining power.
4. Barriers to Entry
   1. Legal, Trade Secrets

Impact of Economies of Scale

Case Analysis

Beer Industry

1. Is the industry as a whole Concentrated | Super Compettive | Fragmented?
   1. Concentrated ✅ - couple of big players. Something is concentrated when you have economies of scale. Lower per unit cost at high volume. Companies move from left to right as they grow
2. Why incumbent beer companies go bigger?
   1. Change must be explained by change
   2. ❌ Increase in average demand can't correlate with increase in company output.
   3. In 1950s Entertainment industry (TV) created more demand for bottled beers
3. Coors has higher profit compared to others. Why?
   1. Their cost is lower. Why? You need to look at value chain of a company
      1. Portfolio - See product complementarity pics below.
      2. Procurement
      3. Manufacturing - Coors were operating at minimum efficient scale compared to other competitors. Their capacity utilization was high, which is a key in any industry.
      4. Packaging & Distribution - Coors own their distribution. With independent distributer, you compromise in quality and manufaturer pays for spillage.
      5. Sales and marketing - if you are monopoly you don't need to advertise.