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Chapter TitleChapter Title

16/e PPT16/e PPT

What Is Strategy

and Why Is

It Important?

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

Troy University-Florida Region

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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“Without a strategy

the organization is

like a ship without a

rudder.”Joel Ross and Michael

Kami

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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 target levels oforganizational performance

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The Hows ThatDefine 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 the company’s circumstances

In choosing a strategy, management is in effect saying,“Among all the many different business approaches and ways of competing we could have chosen, we have decided to employ this particular combination of competitive and operating approaches in moving the company in the intended direction, strengthening its market position, and competitiveness, and boosting performance.”

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Key Elements of a Successful Strategy

Developing a successful strategy hinges on making competitive moves aimed at Appealing to buyers in ways to set the enterprise 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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Key Elements: Comcast’s Strategy Roll out high-speed Internet or broadband service to customers via

cable modems Promote a new video-on-demand service to allow digital

subscribers to watch TV programs whenever they want Promote a video-on-demand service so digital customers can order

and watch pay-per-view movies Partner with Sony, MGM, and others to expand movie offerings Use VoIP technology to offer subscribers Internet-based phone

service at a fraction of the cost charged by others Use video-on-demand and CDV offerings to combat mounting

competition from satellite TV providers Employ a sales force to sell advertising to businesses that were

shifting advertising dollars from sponsoring network programs to sponsoring cable programs

Significantly improve customer service

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For Discussion: Your Opinion

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

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)?

What is there about Comcast’s strategy that 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 the actions and moves in the marketplace that a company makes to 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 Competing with a competitive advantage is more

profitable than competing with no advantage Competing 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 or buyers prefer its products/services over those of rivals and when the basis for this preference can be maintained over time

Its nice when a strategy produces a temporary competitive edge but a durable edge over rivals greatly enhances a company’s prospects for winning in the marketplace and realizing above-average profits

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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Four “Best” Strategic Approaches toBuilding Sustainable Competitive Advantage

Being the industry’s low-cost provider (a cost-based competitive advantage)

Incorporate differentiating features (a “superior product” type of competitive advantage keyed to higher quality, better performance, wider selection, value-added services, or some other attribute)

Focusing on a narrow market niche (winning a competitive edge by doing a better job than rivals of serving the needs and preferences of buyers comprising the niche)

Developing expertise and resource strengths not easily imitated or matched by rivals (a capabilities-based competitive advantage)

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Competitive Advantage Examples

Strive to be the 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

Mercedes-Benz – Engineering design and performance

L.L. Bean – Good value

Amazon.com – Wide selection and convenience

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Competitive Advantage Examples (cont)

Focus on a narrow market niche eBay – Online auctions

Jiffy Lube International – Quick oil changes

McAfee – Virus protection auctions

Starbucks – Premium coffees and coffee drinks

The Weather Channel – Cable TV

Develop expertise, resource strengths, andcapabilities not easily imitated by rivals FedEx – Next-day delivery of small packages

Walt Disney – Theme park management and family entertainment

Toyota – Sophisticated production system

Ritz-Carlton – Personalized customer service

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Fig. 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 Shifting market conditions

Technological breakthroughs

Fresh moves of competitors

Evolving customer preferences

Emerging market opportunities

New ideas to improve strategy

Crisis situations

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Fig. 1.2: A Company’s Strategy Is Partly Proactive and Partly Reactive

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Crafting Strategy Is anExercise in Entrepreneurship

Strategy-making is a market-driven activity involving Studying market trends and competitors’ actions Keen observation of customer needs Scrutinizing business possibilities based on new

technologies Building firm’s market position via acquisitions or new

product introductions Pursuing ways to strengthen firm’s competitive

capabilities Proactively searching out opportunities to

Do new things or Do existing things in new or better ways

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Linking Strategy With Ethics

Ethical and moral standards go beyond Prohibitions of law and the 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” and “unsavory” or “shady” and

Allows management to fulfill its ethical duties to all stakeholders

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A Firm’s EthicalResponsibilities to 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 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 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

margins Do resulting earnings streams and ROI indicate the

strategy makes sense and the company has a viable business model for making money?

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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 amply

profitable and viable

Strategy

Business

Model

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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

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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 Linus users

Capitalize on specialized expertise required to use Linux by providing fee-based training, consulting, software customization, and client-directed engineering to Linus 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 strategy fitthe firm’s situation?

COMPETITIVE ADVANTAGE TEST

Does strategy lead to sustainablecompetitive advantage?

PERFORMANCE TEST

Does strategy boost firm performance?

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Other Criteria for Judgingthe Merits of a Strategy

Internal consistency and unity among all pieces of the 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, they seldom override the importance of the three tests of a winning strategy!

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Why Is Strategy Important?

A compelling need exists for managersto proactively shape how a firm’sbusiness will be conducted

A strategy-focused firm is more likelyto 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!