Chapter 1 (SM) Final

8/4/2019 Chapter 1 (SM) Final

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What Is Strategy andWhy Is It Important?



“Without a strategy the

organization is like aship without a rudder.”

Joel Ross and Michael Kami



Thinking Strategically:The Three Big Strategic Questions

1. Where are we now?

2. Where do we want to go?

Business(es) to be in and market positions to stake out

Buyer needs and groups to serve

Outcomes to achieve

3. How will we get there?

A company’s answer to ―how

will we get there?‖ is its strategy



What Is Strategy?

Consists of the combination of competitive moves and business approaches used by managers to run the

company

Management’s “game plan” toAttract and please customers

Stake out a market position

Compete successfully

Grow the business

Achieve targeted objectives



How to please customers

How to respond to changing

market conditions

How to out compete rivals

How to grow the business

How to manage each functional piece of the business anddevelop needed organizational capabilities

How to achieve strategic and financial objectives

Strategyis HOW

to . . .

The Hows ThatDefine a Firm's Strategy



What Are a Company’sStrategic Choices?

Trial-and-error organizational learning about

What has worked and

What has not worked

Management’s appetite for taking risks

Managerial analysis and strategic thinking about how

best to proceed, given prevailing circumstances

Strategic choices are based on . . .



Identifying a Company’s Strategy



Striving for Competitive Advantage

To achieve sustainable competitive advantage, acompany’s strategy usually must be aimed at either

Providing a distinctive product or service or

Developing competitive capabilities rivals can not match

Achieving a sustainable competitive advantage greatlyenhances a company’s prospects for

Winning in the marketplace and

Realizing above-average profits

What separates a powerful strategy from an ordinary strategyis management’s ability to forge a series of moves,

both in the marketplace and internally, that produces sustainable competitive advantage!



Strategic Approaches toBuilding Competitive Advantage

Strive to be the industry’s low-cost provider

Out compete rivals on a key differentiating feature

Focus on a narrow market niche, doing a better job

than rivals of serving the unique needs of niche

buyers

Develop expertise, resource strengths, and

capabilities not easily imitated by rivals



Examples of Strategies Basedon Distinctive Capabilities

Sophisticated distribution systems – Wal-Mart

Product innovation capabilities – 3M Corporation

Complex technological process – Michelin

Defect-free manufacturing – Toyota and Honda

Specialized marketing and merchandising know-how – Coca-

Cola

Global sales and distribution capability – Black & Decker

Superior e-commerce capabilities – Dell Computer

Personalized customer service – Ritz Carlton hotels



A Company’s Strategy Is PartlyProactive and Partly Reactive



A company’s strategy is a work in progress

Changes may be necessary to react to

Fresh moves of competitors

Evolving customer preferences

Technological breakthroughs

Shifting market conditions

Crisis situations

Why Do Strategies Evolve?



What Is a Business Model?

A business model addresses “How do we make money inthis business?”

Is the strategy capable of delivering

good bottom-line results?

Do the revenue-cost-profit economics

of the strategy make good business sense?

Look at revenue streams the strategy is expected to produce

Look at associated cost structure and potential profit marginsDo resulting earnings streams and ROI indicate the strategy

makes sense and the company has a viable business model for

making money?



Strategy - Deals with acompany’s competitive

initiatives and business

approaches

Business Model -

Concerns whether

revenues and costs

flowing from the strategy demonstrate the business

can be amply profitable

and viable

Relationship BetweenStrategy and Business Model

Mi ft’



Microsoft’s Business Model

Employ a cadre of highly skilled programmers to developproprietary code; keep source code hidden from users

Sell resulting OS and software packages to PC makers and

users at relatively attractive prices and achieve large unitsales

Most costs in developing software are fixed; variable costsare small - once breakeven volume is reached, revenues

from additional sales are almost pure profit

Provide technical support to users at no cost

R dh t Li ’



Redhat Linux’s Business Model

Rely on collaborative efforts of volunteer programmers to create thesoftware

Add value to free, downloadable version of Linux by offering users RedHat Linux systems containing upgraded and tested features

Charge a modest fee to those preferring to subscribe to Red Hat Linuxversion

Release updated versions of Red Hat Linux every 4-6 months to smallusers and every 12-18 months to corporate users

Make source code open and available to all users

Make money by providing fees-based training, consulting, support,engineering, and content management services



Tests of a Winning Strategy

GOODNESS OF FIT TEST

How well does strategy fit

the firm’s situation?

COMPETITIVE ADVANTAGE TEST

Does strategy lead to sustainable

competitive advantage?

PERFORMANCE TEST

Does strategy boost firm performance?

Oth C it i f J d i



Other Criteria for Judgingthe Merits of a Strategy

Internal consistency and unity among all pieces of thestrategy

Degree of risk the strategy poses as compared to

alternative strategies

Degree to which the strategy is flexible and adaptable to

changing circumstances

While these criteria are relevant, they seldom override

the importance of the three tests of a winning strategy!



Why Is Strategy Important?

A compelling need exists for managers to

proactively shape how a firm’s business

will be conducted

A strategy-focused firm is more likelyto be a strong bottom-line performer

than one that views strategy as secondary

G d St t G d St t



Good Strategy + Good StrategyExecution = Good Management

Crafting and executing strategy are core management functionsAmong all things managers do, nothing affects a company’s

ultimate success or failure more fundamentally than how well

its management team

Charts the company’s direction, Develops competitively effective strategic moves and business

approaches, and

Pursues what needs to be done internally to produce good day-

in/day-out strategy execution

Excellent execution of an excellent strategy is the best test of managerial excellence -- and the most reliable

recipe for winning in the marketplace!



Five ways of looking at Strategy

Plan

Pattern

Position

Perspectiveploy



SM

• Strategic management is an ongoing process thatevaluates and controls the business and the industries in

which the company is involved; assesses its competitors

and sets goals and strategies to meet all existing and

potential competitors; and then reassesses each strategyannually or quarterly [i.e. regularly] to determine how it

has been implemented and whether it has succeeded or

needs replacement by a new strategy to meet changed

circumstances, new technology, new competitors, a neweconomic environment., or a new social, financial, or

political environment

Strategic Management



Strategic ManagementProcess

• SMP is the full set of commitments, decision and actionsrequired for a firm to achieve strategic competitiveness

and earn above-average return.

Strategic Management



Strategic ManagementProcess

The Strategy Making Strategy



The Strategy-Making, Strategy-Executing Process

Two model based on Above



Two model based on Aboveaverage Return

• I/O Model based above-average return• Resource based above-average return



I/O Model

• I/O model Explains the external environment’s dominantinfluence on a firm's strategic action.

• It specifies that the industry in which a company chooses

to compete has stronger influence on performance than

do the choices managers make inside their organization.

• The firm's performance is believed to be determined

primarily by range of industry properties, including

economies of scale, barriers to market entry,

diversification, product differentiation and the degree of

concentration of firms in industry.

•

I/O model has four



I/O model has four underlying assumption :

• External environment is assumed to impose pressures and

constraints that determine the strategies that would result

in above-average returns

• The external environment — the general, industry and

competitive environments imposes pressures and

constraints on companies and determines strategies that

will result in superior returns.

• In other words, the external environment pressures the

company to adopt strategies to meet that pressure while

simultaneously constraining or limiting the scope of

t t i th t i ht b i t d t ll



• 2nd

Assumption• Most companies competing in an industry or in an

industry segment control similar sets of strategically

relevant resources and thus pursue similar strategies.

• This assumption presumes that, given a similar

availability of resources, the majority of companies

competing in a specific industry — or in a segment of the

industry — have similar capabilities and thus follow

strategies that are similar. In other words, there are few

significant differences among companies in an industry.



• 3rd

Assumption• Resources used to implement strategies are highly mobile

across firms. Significant differences in strategically

relevant resources among companies in an industry tend

to disappear because of resource mobility. Thus, anyresource differences soon disappear as they are observed

and acquired or learned by other companies in the

industry.



• 4th

assumption• Organizational decision makers are assumed to be

rational and committed to acting in the firm's best

interests, as shown by their profit-maximizing

behaviours.



Based on its underlying assumptions, the I/O model



y g pprescribes a five-step process for companies toachieve above-average returns as shown in the

• 1.Study the external environment — general,

industry and competitive — to determine the

characteristics of the external environment that

will both determine and constrain the company’s

strategic alternatives.

• 2.Select an industry (or industries) with a high

potential for returns based on the structural

characteristics of the industry.



• Firms can use this tool to understand an industry's profitpotential and the strategy necessary to establish a

defensible competitive position, given the industry's

structural characteristic.

• I/O Model suggests that firms can earn above averagereturns by manufacturing standardized products, or

producing differentiated product for which customer are

willing to pay a price

• I/O Model suggest that above-average return are earned

when firm implement the strategy dictated by the

characteristics of general, industry, and competitor

environment

Resource based model of



Resource based model ofAbove average Return

• This model assumes that each organization is a collectionof unique resources and capabilities.

• The uniqueness of its resources and capabilities is the

basis for a firm's strategy and its ability to earn above

average returns• The resource based model suggests that the strategy the

firm chooses should allow it to use its competitive

advantages in an attractive industry .



• This model assumes that firms acquire different resourcesand develop unique capabilities based on how they

combine and use the resource, that resources and

capabilities are the basis of competitive advantage.

• Resources are valuable, rare,costly to imitate andunsustainable.





• Research shows that both the industry environment and afirm's internal assets affect that firm's performance over

time.

• To form vision and mission and subsequently to select

one or more strategies and to determine how toimplement them, firms used both I/O and resource based

model

Vision



Vision

• Corporate vision is a short, and inspiring statement of what the organization intends to become and to achieve at

some point in the future, often stated in competitive

terms.

• Vision refers to the category of intentions that are broad,all-inclusive and forward-thinking.

• It is the image that a business must have of its goals

before it sets out to reach them.

• Vision is ―big picture‖ thinking with passion that helps

people feel what they are supposed to be doing in the

organization

Mission



Mission

Mission specifies the business or business in which thefirm intends to compete and the customer it intends to

serve.

Stake Holder



Stake Holder

Stake holders are the individuals and groups who can affectthe vision and mission of the firm, are affected by the

strategic outcomes achieved and have enforceable claims

on a firm's performance

Stake holder continue to support an organization when itsperformance meets or exceeds their expectation.



Classification of stake holderCapital market Stakeholders

• Share holders

• Major suppliers of capital ( banks)

Product Market stakeholders• Primary customer

• Suppliers

• Host communities

• Union

Organizational stakeholders

• Employees

• Managers



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Chapter 1 (SM) Final