McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved

Chapter 1: What Is Strategy Chapter 1: What Is Strategy

and Why Is It Important?and Why Is It Important?

Screen graphics created by:Jana F. Kuzmicki, Ph.D.

Troy University

““Strategy means makingStrategy means making

clear-cut choices aboutclear-cut choices about

how to compete.”how to compete.”

Jack WelchJack Welch

Former CEO, General ElectricFormer CEO, General Electric

““Without a strategy the Without a strategy the

organization is like a ship organization is like a ship

without a rudder.”without a rudder.”

Joel Ross and Michael KamiJoel Ross and Michael Kami

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Chapter Learning Objectives

1. Understand the role of business strategies in moving a company in the intended direction, growing its business, and improving its financial and market performance.

2. Develop an awareness of the four most reliablestrategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.

3. Learn that business strategies evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy.

4. Understand why a company’s strategy must underpinned by a business model that produces revenues sufficient to cover costs and earn a profit.

5. Gain awareness of the three tests that distinguish a winning strategy from a so-so or flawed strategy.

6. Learn why good strategy and good strategy execution are the most trustworthy signs of good management.

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Chapter Roadmap

What Do We Mean by “Strategy?” Strategy and the Quest for Competitive Advantage Identifying a Company’s Strategy Why a Company’s Strategy Evolves Over Time A Company’s Strategy Is Partly Proactive and

Partly Reactive Strategy and Ethics: Passing the Test of Moral

Scrutiny The Relationship Between a Company’s Strategy

and Its Business Model What Makes a Strategy a Winner? Why Are Crafting and Executing Strategy

Important?

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Thinking Strategically:The Three Big Strategic Questions

1. What’s the company’s present situation?

2. Where does the company need to go from here?

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

Buyer needs and groups to serve

Direction to head

3. How should it get there?

A company’s answer to “how will we get there?” is its strategy

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What Do We Mean By “Strategy?”

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

Management’s “action plan” to

Grow the business

Attract and please customers

Compete successfully

Conduct operations

Achieve the targeted levels of organizational performance

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The Hows That Define a Firm's Strategy

How to grow the business

How to please customers

How to outcompete rivals

How to manage each functionalpiece of the business (R&D, production, marketing, HR, finance, and so on)

How to respond to changing market conditions

How to achieve targeted levels of performance

Strategy is HOW

to . . .

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Choosing the “Hows” of Strategy

Strategic choices about “how” are based on 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 market conditions and a company’s circumstances

In choosing a strategy, management is in effect saying,

“Among all the many different ways of competing we could have chosen, we have decided to employ this combination of competitive and operating approaches to move the company in the intended direction, strengthen its market position and competitiveness, and boost performance.”

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Key Elements of a Successful Strategy

Developing a successful strategy hinges on making competitive moves aimed atAppealing to buyers in ways to set the company

apart from rivals and Carving out its own market position

Involves developing a distinctive “aha” element to

Attract customers and Produce a competitive edge

Copying competitive moves of other successful companies rarely works!

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Starbucks’ Strategy: The Key Elements

Expand number of Starbucks stores domestically by blanketing metropolitan areas, then adding stores on the city’s perimeter

Make Starbucks a global brand by opening stores in an increasing number of foreign locations

View each store as a billboard for the company and as a contributor to building the company’s brand and image

Broaden in-store products to include coffee-flavored ice cream, teas, fresh pastries, music CDs, and coffee accessories

Fully exploit the growing power of the Starbucks’ name and brand image with out-of-store sales

Display corporate responsibility andenvironmental sustainability

Control costs of opening new stores Promote customer-friendly service and enhance store

ambience by making Starbucks a great place to work

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For Discussion: Your Opinion

From your perspective as a consumer, does Starbucks’ strategy (described in Illustration Capsule 1.1) seem to be well-matched to industry and competitive conditions?

1. Does the strategy seem to be keyed to a cost advantage, differentiating features, serving the unique needs of a niche, or developing resource strengths and competitive capabilities rivals can’t imitate or trump (or a mixture of these)?

2. What is there about Starbucks’ strategythat can lead to sustainable competitive advantage?

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Strategy and the Quest for Competitive Advantage

The heart and soul of any strategy are actions a company makes to

Improve its financial performance,

Strengthen its competitive position, and

Gain a competitive advantage over rivals

A creative, distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a company’s most reliable ticket to above average profitability

Operating with a competitive advantage is more profitable than operating without one

Operating with a competitive disadvantage nearly always results in below-average profitability

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A Powerful Strategy Leads to Sustainable Competitive Advantage

A company achieves sustainable competitive advantage when

An attractive number of buyers prefer its products/services over those of rivals and

The basis for this preference is durable

Its nice when a strategy produces A temporary competitive edge but A sustainable edge over rivals greatly enhances a

company’s prospects for above-average profitability

What separates a powerful strategy from an ordinarystrategy is management’s ability to forge a series ofmoves, both in the marketplace and internally, that

produces sustainable competitive advantage!

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Strategic Approaches to Building Sustainable Competitive Advantage

Be the industry’s low-cost provider Achieve a cost-based competitive advantage

Incorporate differentiating features Superior product/service keyed to higher quality,

better performance, wider selection, value-added services, or some other attribute

Focus on a narrow market niche Win a competitive edge by doing a

better job than rivals of serving the needs and preferences of buyers in the niche

Develop expertise and resource strengths not easily imitated or matched by rivals Achieve a capabilities-based competitive advantage

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Competitive Advantage Examples

Strive to be industry’s low-cost provider Wal-Mart Southwest Airlines

Outcompete rivals on a key differentiating feature Johnson & Johnson – Reliability in baby

products Harley-Davidson – King-of-the-road styling Rolex – Top-of-the-line prestige BMW– Engineering design and performance Amazon.com – Wide selection and

convenience

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Competitive Advantage Examples (con’t)

Focus on a narrow market niche

eBay – Online auctions

Best Buy – Home electronics

McAfee – Virus protection

Starbucks – Premium coffees and coffee drinks

The Weather Channel – Info about the weather

Develop expertise, resource strengths, andcapabilities not easily imitated by rivals

Walt Disney – Theme park management and family entertainment

Dell Computer – Build-to-order manufacturing capabilities

Ritz-Carlton – Personalized customer service

Figure 1.1: Identifying a Company’s Strategy

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Test Your Knowledge

A company’s strategy and its quest for competitive advantage are tightly related because

A. a company’s strategy determines whether it will have lower or higher costs than rivals and thus be at a competitive advantage or disadvantage.

B. competitive advantage is essential to having a profitable business model.

C. choosing a competitive advantage to pursue also helps a company choose which business model is most appropriate.

D. competitive advantage enables a company to achieve its strategic objectives.

E. a strategy that leads to sustainable competitive advantage is a company’s most reliable means of achieving above-average profitability and financial performance.

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Why Do Strategies Evolve?

A company’s strategy is a work in progress

Changes may be necessary to react to

Financial crisis

Fresh moves of competitors

Evolving customer preferences

Technological breakthroughs

Emerging market opportunities

Changing political or economic climate

New ideas to improve strategy

Figure 1.2: A Company’s Strategy Is a Blend ofProactive Initiatives and Reactive Adjustments

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Linking Strategy With Ethics

Ethical and moral standards go beyond Prohibitions of law and language of “thou shalt

not”

to issues of Duty and “right” vs. “wrong”

Ethical and moral standards address“What is the right thing to do?”

Two criteria of an ethical strategy Does not entail actions and behaviors that cross the line

from “should do” to “should not do” (because such actions are unsavory, shady, unconscionable, injurious to others, or harmful to the environment)

Allows management to fulfill its ethical duties to all stakeholders

A Firm’s Ethical Responsibilitiesto Its Stakeholders

Owners/shareholders – Rightfully expect some form of return on their investmentOwners/shareholders – Rightfully expect some form of return on their investment

Employees – Rightfully expect to be treated with dignity and respect for devoting their energies to the enterpriseEmployees – Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise

Customers – Rightfully expect a seller to provide them with a reliable, safe product or serviceCustomers – Rightfully expect a seller to provide them with a reliable, safe product or service

Suppliers – Rightfully expect to have an equitable relationship with firms they supply and be treated fairlySuppliers – Rightfully expect to have an equitable relationship with firms they supply and be treated fairly

Community – Rightfully expect businesses to be good citizens in their communityCommunity – Rightfully expect businesses to be good citizens in their community

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Role of Senior Executives:Linking Strategy with Ethics

Forbid pursuit of ethically questionable business opportunities

Insist all aspects of company strategyreflect high ethical standards

Make it clear that all employees areexpected to act with integrity

Install organizational checks and balances to Monitor behavior Enforce ethical codes of conduct Provide guidance to employees in gray areas

Display genuine commitment to conduct business activities ethically

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Test Your Knowledge

A company's strategy can be considered “ethical”

A. if all of its different actions and elements are legal and in compliance with governmental rules and regulations.

B. so long as its actions and behaviors can pass the test of “moral scrutiny” and are aboveboard in the sense of not being shady or unconscionable, injurious to others, or unnecessarily harmful to the environment.

C. only if all elements of the strategy are in accord with what is generally considered as being in the overall best interests of society at large.

D. so long as religious authorities and noted ethics experts find nothing “wrong” in the company’s actions.

E. if it is in compliance with the company’s code of ethics and has been approved by the company’s chief ethics officer.

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What Is a Business Model?

A business model addresses “How do we make money in this business?” Is the company’s strategy capable of delivering

good bottom-line results?

Do the revenue-cost-profit economicsof the strategy make good business sense? Look at revenue streams the

strategy is expected to produce

Look at associated cost structureand potential profit margins

Do resulting earnings streams and ROI indicate the strategy has good potential to deliver acceptable profitability?

Relationship Between Strategy and Business Model

Strategy . . . Deals with a company’s

competitive initiatives and business approaches

Business Model . . . Concerns whether revenues and costs flowing from the strategy demonstrate a

business can be profitable and viable

Strategy

Business

Model

Microsoft’s Business Model

Employ a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from usersEmploy a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from users

Sell resulting OS and software packages to PC makers and users at relatively attractive prices to achieve a 90% or more market shareSell resulting OS and software packages to PC makers and users at relatively attractive prices to achieve a 90% or more market share

Most costs in developing software are fixed; variable costs are small; once break-even volume is reached, revenues from additional sales are almost pure profit

Most costs in developing software are fixed; variable costs are small; once break-even volume is reached, revenues from additional sales are almost pure profit

Provide modest level of technical support to users at no costProvide modest level of technical support to users at no cost

Rejuvenate revenues by periodically introducing next-generation software with features inducing PC users to upgrade their operating systems

Rejuvenate revenues by periodically introducing next-generation software with features inducing PC users to upgrade their operating systems

Red Hat’s Business Model

Rely on collaborative efforts of volunteer programmers to create the softwareRely on collaborative efforts of volunteer programmers to create the software

Collect and test enhancements and new applications submitted by volunteer programmers for evaluation and inclusion in new releases of Linux

Collect and test enhancements and new applications submitted by volunteer programmers for evaluation and inclusion in new releases of Linux

Market upgraded and tested family of Red Hat products to large companies, charging a subscription fee that includes 24/7 support within 1 hour in 7 languages

Market upgraded and tested family of Red Hat products to large companies, charging a subscription fee that includes 24/7 support within 1 hour in 7 languages

Make source code open and available to all usersMake source code open and available to all users

Capitalize on specialized expertise required to use Linux by providing fee-based training, consulting, software customization, and client-directed engineering to Linux users

Capitalize on specialized expertise required to use Linux by providing fee-based training, consulting, software customization, and client-directed engineering to Linux users

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Test Your Knowledge

The nitty-gritty issue surrounding a company’s business model is whether

A. the strategy is capable of producing sustainable competitive advantage.

B. it matches the company’s external and internal situation.

C. the chosen strategy makes good business sense from a money-making perspective.

D. the company’s strategy and strategic moves are mostly proactive.

E. the company’s strategy stands a really good chance of hitting a home-run in the marketplace.

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For Discussion: Your Opinion

Who has the best business model –

Microsoft or Red Hat?

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Tests of a Winning Strategy

GOODNESS OF FIT TEST

How well does the strategy fitthe company’s external and internal situation?

COMPETITIVE ADVANTAGE TEST

Is the strategy helping the company achieve a sustainable competitive advantage?

PERFORMANCE TEST

Is the strategy resulting in better company performance?

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Other Criteria for JudgingMerits of a Strategy

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, theyseldom override the importance of the

three tests of a winning strategy!

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Why Should Crafting and Executing Strategy Be Top-Priority Management Tasks?

A compelling need exists for managers to proactively shape how a firm’s business will be conducted

A strategy-focused firm is more likely to be a strong bottom-line performerthan one that views strategy as secondary

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Good Strategy + Good Strategy Execution = Good Management Crafting and executing strategy are core

management functions Among all things managers do, nothing

affects a company’s ultimate success or failure more fundamentally than how well its management team Charts a 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 thebest test of managerial excellence – and the

most reliable recipe for winning in the marketplace!