“Strategy means making clear-cut choices about how to ... · strategy, and the tight connection between its strategy and its quest for sustainable competitive advantage. 2. Learn

STRATEGYCore Concepts and Analytical Approaches

Chapter 1PowerPoint Slides

Copyright © 2014 GLO-BUS Software, Inc. Page 1

~–1Copyright © 2014 by Glo-Bus Software, Inc.© Copyright 2014 by Arthur A. Thompson. All rights reserved. Not for distribution.Published and distributed by McGraw Hill Education, Burr Ridge, Illinois

Presentation Design by Charlie Cook

Copyright © 2014 by Glo-Bus Software, Inc. 0–2

“Strategy means makingclear-cut choices abouthow to compete.”

Jack WelchFormer CEO, General Electric


“Without a strategy the organization is like a ship without a rudder.”

Joel Ross and Michael KamiAuthors and Consultants


“If your firm’s strategy can be applied to any other firm, you don’t have a very good one.”

David J. Collis and Michael G. Rukstad

1. Understand the concept of “strategy,” how to identify a firm’s strategy, and the tight connection between its strategy and its quest for sustainable competitive advantage.

2. Learn why a firm’s strategy evolves over time and why its strategy is partly proactive and partly reactive.

3. Understand why a company’s strategy needs to pass ethical scrutiny.

4. Understand the “business model” concept, how a firm’s business model connects to its strategy, and why its business model is important.

5. Learn the three tests that distinguish a winning strategy from a weak or flawed strategy and why good strategy and good strategy execution are the most trustworthy signs of good management.

1–5Copyright © 2014 Glo-Bus Software, Inc.

Learning Objectives

What Do We Mean by “Strategy?”

Strategy and the Quest for Competitive Advantage

Identifying a Firm’s Strategy

Why a Firm’s Strategy Evolves Over Time

A Firm’s Strategy Is Partly Proactive and Partly Reactive

Strategy and Ethics: Passing the Test of Moral Scrutiny

The Relationship Between a Firm’s Strategy and Its Business Model

What Makes a Strategy a Winner?

Why Crafting and Executing Strategy Are Important Tasks


Chapter 1 Roadmap




Three Strategic Questions All Firms Must Answer


Industry conditions?

Competitive pressures?

Current market standing?

Competitive strengths and weaknesses?

Profitability?

Financial strength and credit rating?

Emerging buyer needs to serve?

Growth opportunities to pursue?

Markets to deemphasize or even abandon?

Choosing a strategic path for the company to pursue

Deciding how to measure the firm’s success

Actions to move the firm in the intended direction

Actions to compete against rivals

Actions to attract customers

Actions to achieve the targeted financial and market performance

What’s the company’s

present situation?

What’s should the company’s future

direction be and what are our performance

targets?

What is our plan for running the company and achieving the

targeted results?

A company’s strategy is defined by the specific market positioning, competitive moves, and business approaches that form management’s answer to “What’s our plan for running the company and producing good results?”

When company managers craft and embrace a strategy, they are committing to undertake one set of actions

rather than another in endeavoring to make the company successful in the marketplace and achieve

good business performance.

~–8Copyright © 2014 by Glo-Bus Software, Inc.

What Do We Mean by “Strategy”?

Core Concept: Strategy

A firm’s strategy consists of the competitive moves and business approaches that managers employ to attract and please customers, compete successfully, capitalize on opportunities to grow the business, respond to changing market conditions, conduct operations, and achieve the targeted financial and market performance.

When company managers craft and embrace a strategy, they are committing to undertake

one set of actions rather than another.


How Are Important Strategic Choices Made?


Ways to Arrive at Strategic Choices

Trial-and-error organizational

learning

Strategic thinking on the part of key

executives and their appetite for risk-

taking

Decisions based on analysis of the company’s

situation

The Hows That Comprise a Firm’s Strategy

1–11Copyright © 2014 by Glo-Bus Software, Inc.

A coherent combination of

actions and approaches

about how to run the

company

How best to respond to changing economic and

market conditions

How to manage the functional pieces of the

business

How to achieve the firm’s performance targets

How to attract, please, and retain customers

How to compete against rivals

How to capitalize on growth opportunities

and grow the business

In choosing among all the “hows” and crafting a strategy for the company to pursue, management is 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 to move the firm in the intended direction, strengthen its market position and competitiveness, and meet or beat our performance targets.”


Choosing the Strategy




Good strategy-making is making choices to compete differently from rivals by:

► Appealing to buyers in ways that set a company apart from rivals—particularly when it comes to doing what rivals don’t do or can’t do

► Staking out a market position that is not crowded with other strong competitors


The Essence of Good Strategy-Making

Really successful strategies contain a distinctive “aha” element that

► Sets a company apart from rivals

► Attracts buyer attention

► Delivers what buyers perceive as superior value compared to the offerings of rivals

► This superior value is what converts buyers into loyal customers

Copycat strategies rarely work!!!


The Importance of Competing Differently

A firm achieves competitive advantage when a profitable number of buyers are drawn to purchase its products or services rather than those of competitors.

But a competitive advantage that is lasting ordurable or sustainable is even better!


Strategy and the Quest for Competitive Advantage

Core Concept

A firm achieves sustainable competitive advantage when buyers are drawn to purchase its products or services rather than those of competitors and when the basis for such purchases is durable, despite efforts of competitors to overcome or otherwise erode the appeal of its offering.


Strategic Approaches That Set a Firm Apart and Lead to Competitive Advantage


Becoming the industry’s

lowest-cost provider

Offering unique differentiating

features to customers

Focusing on a specific market

niche of customers

Developing specialized

expertise and resources

Dependable Routes to Competitive Advantage

Four dependable approaches to achieving a competitive edge over rivals:

1. Striving to become the industry’s low-cost provider (being more cost efficient than rivals).

2. Outcompeting rivals on important differentiating features (having a more appealing product/service).

3. Doing a better job than rivals of serving the special needs and tastes of buyers in a niche market.

4. Developing expertise and resource strengths that rivals cannot easily imitate or trump with capabilities of their own.


Strategic Approaches to Building Sustainable Competitive Advantage




A firm will earn significantly higher profits when it has a competitive advantage than when competing with no advantage or at a competitive disadvantage.

Without a strategy leading to competitive advantage, a firm risks being outcompeted by stronger rivals and/or locked into mediocre financial performance.

Consequently, the quest for sustainable competitive advantage should always rank

center stage in a crafting a strategy!


Why Winning a Sustainable Competitive Advantage Matters

A clear, specific, and deliberate action plan:► Helps avoid conflicting or inconsistent or uncoordinated strategic

actions and decisions on the part of different mangers in different parts of the organization

► Helps clarify what to do to strengthen the firm’s competitive position and try to build a competitive edge over rivals

► Lays out a path for improving the firm’s performance

A creative, distinctive strategy:► Sets the firm apart from rivals and deliver superior value to

customers

► Attracts buyers to a firm’s product/service despite the efforts of competitors to erode this appeal

► Can be a reliable pathway to above average profitability


Why Bother with Crafting a Strategy ?

1–21

1.1 Identifying a Company’s Strategy—What to Look ForFigure

Copyright © 2014 Glo-Bus Software, Inc.

Occasions often arise when it becomes advisable or necessary to modify strategy in response to:► Changing market conditions► Advancing technology► Fresh moves of competitors► Shifting buyer needs and preferences► Emerging market opportunities► New ideas for improving the strategy► Mounting evidence that some parts of the strategy are

no longer working well

all of which can impair company performance 1–22Copyright © 2014 Glo-Bus Software, Inc.

Why a Firm’s Strategy Evolves over Time

CORE CONCEPT

Changing circumstances and ongoing management efforts to improve the strategy cause a company’s strategy to evolve over time—a condition that makes the task of crafting a strategy a work in progress, not a one-time event.


The typical firm’s strategy is a blend of:

► Current strategy elements that seem to be working well enough to be continued

► New proactive actions that managers believe have good potential for improving the strategy and boosting the firm’s performance

► As-needed strategic reactions developed in response to unanticipated developments and fresh market conditions


Strategy Is Partly Proactive and Partly Reactive




1–25

1.2 A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments

Figure

Copyright © 2014 Glo-Bus Software, Inc.

Just because a strategic action or business approach is legal does not necessarily mean it is ethical or morally acceptable

Ethical standards are about “right” vs. “wrong”, “moral” versus” immoral”, and not crossing the line from “should do” (or “okay to do”) to “should not do”.

What business behaviors can you identify that are legal but not ethical or morally acceptable?


Strategy—Distinguishing Between What Is Legal and What Is Ethical

A strategy is ethical only if it passes the test of moral scrutiny► Requirement 1:

• It cannot entail actions and behaviors that cross the line from “should do” to “should not do” (because actions or behaviors are unsavory, shady, unconscionable, injurious to others, or harmful to the environment)

► Requirement 2:• It must allow management to fulfill its ethical duties in a manner

that takes into account the legitimate interests of all stakeholders.


Strategy, Ethics, and the Test of Moral Scrutiny

CORE CONCEPT

A strategy is not ethical just because it involves actions that are legal. To meet the standard of being ethical, a strategy must entail actions that can pass moral scrutiny in the sense of not being unsavory, shady, unconscionable, or injurious to others.


The Relationship Between a Firm’s Strategy And Its Business Model


A Company’sStrategy

Deals with a company’s competitive initiatives

and business approaches

A Company’s Business Model

Concerns whether the revenues and

costs flowing from the strategy

demonstrate the business can be

profitable and viable

Its Customer Value Proposition

► How the firm will satisfy customer needs and requirements at a price customers will consider to be a good value.

The greater the value delivered to customers and the lower the price, the more attractive the value proposition is to customers.

Its Profit Proposition (or “Profit Formula”)

► How the firm will create and deliver customer value in a cost-efficient manner at a price that produces enough revenues to cover costs and enable attractive profits.

The lower a firm’s costs are in relation to the revenues generated, the more appealing is its profit proposition or “profit formula.”


The Two Crucial Elements of a Company’s Business Model




CORE CONCEPT

A firm’s business model is a blueprint for how its strategy and operating approaches will create value for customers while also generating ample revenues to cover costs and realize a profit.

Without the ability to earn adequate profits, a firm’s strategy and operating blueprint are flawed, its business model is not viable, and its ability to survive is questionable.


The Customer Value Proposition

► Provide audiences with free and appealing programming content.

The Profit Proposition

► Charge advertising fees based on an audience size that more than covers the full costs of providing the program content.


The Business Model of Network TV and Radio Broadcasters

The Customer Value Proposition

► Delivering valuable or interesting information and entertainment to readers.

The Profit Proposition

► Securing sufficient revenues from advertising fees and subscriptions to more than cover the costs of producing and delivering their products to readers.


The Business Model of Newspapers and Magazines

The Customer Value Proposition► To provide a close comfortable shave using a razor (a one-time

purchase) and razor blades (purchased repeatedly).

The Profit Proposition► To sell a “master product”—the razor—at an attractively low price

and then make money on repeat purchases of inexpensively-produced razor blades priced to yield high profit margins.

► Printer manufacturers pursue much the same business model as Gillette—selling printers at low (virtually breakeven) prices and making large profit margins on repeat purchases of printer supplies, especially ink cartridges.


Gillette’s Business Model in Razor Blades

The strategy managers craft to execute the company’s business model may or may not result in attractive profitability

Having a customer value proposition that actually satisfies buyer needs and requirements at a price buyers will consider a good value is necessary but not sufficient to determine the merits of a company’s business model.

The sufficient condition that validates a company’s business model is whether the price being charged generates revenues big enough to

► Cover the costs of delivering the value to customers and also

► Yield a big enough profit margin to produce attractive profits and return on investment


Why a Firm’s Business Model Has to Be Carefully Evaluated

Core Concept

The nitty-gritty issue surrounding a company’s business model is whether it can execute its customer value proposition profitably

• The revenues that a company’s business model generates are a function of the volume of customers attracted at the price being charged

• The costs of a company’s business model approach are dependent on the resources and business processes it utilizes and the cost-efficiency of its operating systems

• The lower a firm’s costs are in relation to its revenues, the greater the profitability of its business model





Companies that have been in business for a while and are making sufficiently appealing profits have a “proven” business model.► A track record of good bottom-line profitability and return on

investment provides credible evidence that a company’s business model approach is working and has promising long-term viability

Firms in a start-up mode or that are losing money have “questionable” or “unproven” business models—it remains to be seen how good their business model is.


Proven vs. Unproven Business Models The Three Tests of a Winning Strategy


To qualify as a winning strategy, a strategy has to

pass all three tests

The Goodness of Fit Test

How well does the strategy fit the

firm’s situation?

The Competitive Advantage Test

Is the strategy resulting in better

strategic performance?

The PerformanceTest

Is the strategy producing better

financial performance?

Testing the merits of one strategy versus another requires getting satisfactory answers to three questions:

1. How well does the strategy fit the company’s situation?

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

3. Is the strategy producing good company performance?


What Makes a Strategy a Winner?

Because it is management’s responsibility to proactively shape how the firm will conduct business ► A clear and reasoned strategy is management’s prescription for

doing business, its road map to competitive advantage, and its game plan for pleasing customers and improving financial performance

Because nothing affects a company’s ultimate success or failure more fundamentally than how well its management team:► Charts the firm’s direction

► Develops competitively effective strategic moves and business approaches

► Pursues what must be done internally to produce good day-in/day-out strategy execution and operating excellence


Why Crafting and Executing Strategy Are Core Management Tasks

The better conceived a company’s strategy and the more competently it is executed, the more likely that the company will be a standout performer, both financially and in the marketplace

In stark contrast, a company that lacks clear-cut direction, has vague or undemanding performance targets, has a muddled or flawed strategy, or can’t seem to execute its strategy competently is a company whose financial performance is probably suffering, whose business is at long-term risk, and whose management is sorely lacking


Good Strategy + Good Strategy Execution = Good Management

CORE CONCEPT

How well a firm performs and the degree of market success it achieves are directly attributable to the caliber of its strategy and the proficiency with which the strategy is executed.

Excellent execution of an excellent strategy is the best test of managerial excellence.





Every business student and every aspiring manager needs to know the answer to the following question:

► What must managers do, and do well, to give a firm its best shot for being attractively profitable and successful in the marketplace?

► The answer that emerges—and becomes the biggest lesson of this course—is that doing a good job of managing requires good strategic thinking, good strategy-making, and good strategy execution.

Welcome and best wishes for your success!


The Road Ahead

In the coming chapters, we will explore strategic thinking, the core concepts and tools of strategic analysis, and the processes of crafting and executing strategy.

Then, in the strategy simulation exercise you will manage a firm in competition with firms managed by classmates, and have an excellent learn-by-doing opportunity to:

► Apply what you have read about in the chapters.

► Gain experience in crafting and executing strategy for your firm and being held accountable for how well your firm performs.


The Road Ahead (cont’d)

Lesson 1:

► First-rate capabilities in crafting and executing strategy are basic to managing successfully and are skills every manager needs to possess.

Lesson 2:

► Managers don’t deserve applause for coming up with a weak strategy that results in weak (or worse) financial performance and a weak (or worse) industry standing.


What You Can Expect to Learn


“Commerce is a game of skill which many people play, but which few play well.”

Ralph Waldo Emerson, poet and essayist

If the chapters, the experience of running your firm, and the other course-related assignments help you become a savvy competitor and better equip you to succeed in business, then the time and energy you spend in this course will prove worthwhile.

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“Strategy means making clear-cut choices about how to ... · strategy, and the tight connection between its strategy and its quest for sustainable competitive advantage. 2. Learn