PART

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Concepts and
Techniques for Crafting
and Executing Strategy

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C HA P T E R

What is Strategy and Why

is it Important?

Learning
Objectives
LO 1
LO 2
LO 3

LO 4

LO 5

LO 6

Learn what we mean by a companys

strategy.
Grasp the concept of a sustainable
competitive advantage.
Develop an awareness of the four most
basic strategic approaches for winning a
sustainable competitive advantage.
Understand that a companys strategy tends
to evolve over time because of changing
circumstances and ongoing management
efforts to improve the companys strategy.
Learn why it is important for a company to
have a viable business model that outlines
the companys customer value proposition
and its profit formula.
Learn the three tests of a winning strategy.

Strategy means making clear-cut

choices about how to compete.
Jack Welch Former CEO of
General Electric

One must have strategies to execute

dreams.
Azim Premji CEO Wipro
Technologies and one of the
worlds richest people

If your firms strategy can be

applied to any other firm, you dont
have a very good one.
David J. Collis and Michael G.
Rukstad Consultants and
professors

In any given year, a group of companies will stand out as the

top performers, in terms of metrics such as profitability, sales
growth, or growth in shareholder value. Some of these companies will find that their star status fades quickly, due to little
more than a fortuitous constellation of circumstances, such as
being in the right business at the right time. But other companies somehow manage to rise to the top and stay there, year
after year, pleasing their customers, shareholders, and other

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stakeholders alike in the process. Companies such as Apple, Google, Coca-Cola, Procter & Gamble,
McDonalds, Berkshire Hathaway, and General Electric come to mindbut long-lived success is not
just the province of U.S. companies. Diverse kinds of companies, both large and small, from many
different countries have been able to sustain strong performance records, including Singapore Airlines,
Swedens IKEA (in home furnishings), Koreas Hyundai Heavy Industries (in shipbuilding and construction), Mexicos America Movil (in telecommunications), and Japans Nintendo (in video game systems).
What can explain the ability of companies like these to beat the odds and experience prolonged periods of profitability and growth? Why is it that some companies, like Southwest Airlines and Walmart,
continue to do well even when others in their industry are faltering? Why can some companies survive
and prosper even through economic downturns and industry turbulence?
Many factors enter into a full explanation of a companys performance, of course. Some come
from the external environment; others are internal to the firm. But only one thing can account for
the kind of long-lived success records that we see in the worlds greatest companiesand that is a
cleverly crafted and well executed strategy, one that facilitates the capture of emerging opportunities, produces enduringly good performance, is adaptable to changing business conditions, and can
withstand the competitive challenges from rival firms.
In this opening chapter, we define the concept of strategy and describe its many facets. We will
explain what is meant by a competitive advantage, discuss the relationship between a companys
strategy and its business model, and introduce you to the kinds of competitive strategies that can
give a company an advantage over rivals in attracting customers and earning above-average profits.
We will look at what sets a winning strategy apart from others and why the caliber of a companys
strategy determines whether it will enjoy a competitive advantage over other firms or be burdened
by competitive disadvantage. By the end of this chapter, you will have a clear idea of why the tasks
of crafting and executing strategy are core management functions and why excellent execution of an
excellent strategy is the most reliable recipe for turning a company into a standout performer over the
long term.

WHAT DO WE MEAN BY STRATEGY?

CORE CONCEPT

A companys strategy is its action plan for outperforming its competitors

and achieving superior profitability. In effect, it represents a managerial
commitment to an integrated array of considered choices about how to
compete.1 These include choices about:

A companys strategy
is its action plan for
outperforming its
competitors and achieving
superior profitability.

How to attract and please customers.

How to compete against rivals.
How to position the company in the marketplace.
How best to respond to changing economic and market conditions.
How to capitalize on attractive opportunities to grow the business.
How to achieve the companys performance targets.
The objective of a well-crafted strategy is not merely temporary competitive
success and profits in the short run, but rather the sort of lasting success that can
support growth and secure the companys future over the long term. In most
industries, there are many different avenues for outcompeting rivals and boosting

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LO 1
Learn what we mean by
a companys strategy.

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C ra f t i n g & E xe c u t i n g S t ra t e g y

company performance.2 Consequently, some companies strive to improve their performance by employing
strategies aimed at achieving lower costs than rivals, while others pursue strategies aimed at achieving
product superiority or personalized customer service or quality dimensions that rivals cannot match.
Some companies opt for wide product lines, while others concentrate their energies on a narrow product
lineup. Some competitors deliberately confine their operations to local or regional markets; others opt to
compete nationally, internationally (several countries), or globally (all or most of the major country
markets worldwide).

Strategy Is about Competing Differently Every strategy

Strategy is about
needs a distinctive element that attracts customers and produces a comcompeting differently
petitive edge. But there is no shortage of opportunity to fashion a strategy
from rivalsdoing what
that both tightly fits a companys own particular situation and is discerncompetitors dont do or,
ibly different from the strategies of rivals. In fact, competitive success
even better, doing what
requires a companys managers to make strategic choices about the key
they cant do!
building blocks of its strategy that differ from the choices made by competitorsnot 100 percent different, but at least different in several important respects. A strategy only stands a chance of succeeding when it is
predicated on actions, business approaches, and competitive moves aimed at appealing to buyers in ways
that set a company apart from rivals. Simply trying to mimic the strategies of the industrys successful
companies never works. Rather, every companys strategy needs to have some distinctive element that
draws in customers and produces a competitive edge. Strategy, at its essence, is about competing differentlydoing what rival firms dont do or what rival firms cant do.3
A companys strategy provides direction and guidance, in terms of not only what the company
should do but also what it should not do. Knowing what not to do can be as important as knowing what
to do, strategically. At best, making the wrong strategic moves will prove a distraction and a waste
of company resources. At worst, it can bring about unintended long-term consequences that put the
companys very survival at risk.
Figure 1.1 illustrates the broad types of actions and approaches that often characterize a companys
strategy in a particular business or industry. For a more concrete example of the specific actions constituting
a firms strategy, see Illustration Capsule 1.1, describing McDonalds strategy in the quick-service restaurant
industry.

Strategy and the Quest for Competitive Advantage

The heart and soul of any strategy are the actions and moves in the marketplace that
managers are taking to gain a competitive advantage over rivals. A company achieves
LO 2
a competitive advantage whenever it has some type of edge over rivals in attracting
Grasp the concept of a
sustainable competitive
buyers and coping with competitive forces. There are many routes to competitive
advantage.
advantage, but they all involve either giving buyers what they perceive as superior
value compared to the offerings of rival sellers or giving buyers the same value as
others at a lower cost to the firm. Superior value can mean a good product at a lower price, a superior product
that is worth paying more for, or a best-value offering that represents an attractive combination of price,
features, quality, service, and other appealing attributes. Delivering superior value or delivering value more
efficientlywhatever form it takesnearly always requires performing value chain activities differently than
rivals and building competencies and resource capabilities that are not readily matched. In Illustration Capsule
1.1, its evident that McDonalds has gained a competitive advantage over its rivals in the fast-food industry
through its efforts to minimize costs, ensure fast and consistent delivery of foods with wide appeal, and keep

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Actions to strengthen the
rms bargaining position
with suppliers, distributors,
and others

Actions to gain sales and market share via more

performance features, more appealing design, better
quality or customer service, wider product selection,
or other such actions.

Actions to upgrade,
build, or acquire
competitively important
resources and
capabilities

Actions and approaches

used in managing
R&D, production,
sales and marketing,
nance, and other
key activities

Actions to gain sales and

market share with lower
prices based on lower
costs
THE PATTERN
OF ACTIONS AND
BUSINESS APPROACHES
THAT DEFINE A
COMPANYS
STRATEGY

Actions to strengthen
competitiveness via strategic
alliances and collaborative
partnerships
Actions to strengthen market
standing and competitiveness
by acquiring or merging
with other companies

FIGURE 1.1

Actions to enter new

product or geographic
markets or to exit
existing ones

Actions to capture emerging

market opportunities and
defend against external
threats to the companys
business prospects

Identifying a Companys StrategyWhat to Look For

its prices low, thereby driving sales volume. A creative distinctive strategy such
as that used by McDonalds is a companys most reliable ticket for developing a
competitive advantage over its rivals. If a strategy is not distinctive, then there
can be no competitive advantage, since no firm would be meeting customer
needs better or operating more efficiently than any other.
If a companys competitive edge holds promise for being sustainable (as
opposed to just temporary), then so much the better for both the strategy
and the companys future profitability. What makes a competitive advantage
sustainable (or durable), as opposed to temporary, are elements of the
strategy that give buyers lasting reasons to prefer a companys products or
services over those of competitorsreasons that competitors are unable to
nullify or overcome despite their best efforts. In the case of McDonalds, the
companys unparalleled name recognition, reputation for tasty, quick-service
food, and formidable volume advantage make it difficult for competitors
to weaken or overcome McDonalds competitive advantage. Not only has
their strategy provided them with a sustainable competitive advantage, it
has made them one of the most admired companies on the planet.

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CORE CONCEPT
A company achieves a
competitive advantage
when it provides buyers
with superior value
compared to rival sellers
or offers the same value
at a lower cost to the
firm. The advantage is
sustainable if it persists
despite the best efforts of
competitors to match or
surpass this advantage.

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ILLUSTRATION CAPSULE 1.1

McDonalds Strategy in the Quick-Service Restaurant Industry

In 2011, McDonalds was setting new sales records despite a global economic slowdown and declining
consumer confidence in the United States. More than 64 million customers visited one of McDonalds
33,000 restaurants in 119 countries each day, which allowed the company to record 2011 revenues and
earnings of more than $27 billion and $5.5 billion, respectively. McDonalds performance in the marketplace
made it the top performing company on the Dow Jones Stock Market Index for 2011, with a 35 percent
return to investors. The companys sales were holding up well amid the ongoing economic uncertainty in
early 2012, with global sales as measured in constant currencies increasing by more than 4 percent in the
first quarter. The companys success was a result of its well-conceived and executed Plan-to-Win strategy
that focused on being better, not just bigger. Key initiatives of the Plan-to-Win strategy included:
Improved restaurant operations. McDonalds global restaurant operations improvement process involved
employee training programs ranging from on-the-job training for new crew members to college-level management courses offered at the companys Hamburger University. The company sends nearly 200 highpotential employees annually to its McDonalds Leadership Institute to build leadership skills. The company
trains its store managers to closely monitor labor, food, and utility costs. McDonalds excellence earned the
company 10th place on Fortunes list of the Worlds Most Admired Companies in 2011.
Affordable pricing. McDonalds kept its prices low by scrutinizing restaurant operating costs, administrative
costs, and other corporate expenses. McDonalds saw the poor economy in the United States as an opportunity to renegotiate its advertising contracts with newspapers and television networks. The company also
began to replace its company-owned vehicles with more fuel-efficient models when gasoline prices escalated dramatically. However, McDonalds did not sacrifice product quality in order to offer lower prices. The
company implemented extensive supplier monitoring programs to ensure that its suppliers did not change
product specifications to lower costs.
Wide menu variety and beverage choices. McDonalds has expanded its menu beyond the popular-selling Big
Mac and Quarter Pounder to include new, healthy quick-service items. The company has also added an extensive line of premium coffees that include espressos, cappuccinos, and lattes sold in its McCaf restaurant
locations in the United States, Europe, and the Asia/Pacific region.
Convenience and expansion of dining opportunities. The addition of McCafs helped McDonalds increase
same store sales by extending traditional dining hours. Customers wanting a midmorning coffee or an afternoon snack helped keep store traffic high after McDonalds had sold its last Egg McMuffin and before the
lunch crowd arrived to order Big Macs. The company also extended its drive-thru hours to 24 hours in many
cities where consumers tend to eat at all hours of the day and night.
Ongoing restaurant reinvestment and international expansion. With more than 14,000 restaurants in the
United States, the focus of McDonalds expansion of units was in rapidly growing emerging markets such as
China. The company also intends to refurbish 90 percent of the interiors and 50 percent of the exteriors of
its restaurants by the end of 2012 to make its restaurants a pleasant place for both customers and employees.
Developed with Jenna P. Pfeffer. Sources: Janet Adamy, McDonalds Seeks Way to Keep Sizzling, Wall Street Journal
Online, March 10, 2009; various annual reports; various company press releases.

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Four of the most frequently used and dependable strategic approaches to

setting a company apart from rivals, building strong customer loyalty, and winning
a competitive advantage are:
1.

2.

3.

4.

LO 3
Develop an awareness
of the four most
dependable strategic
approaches for setting
a company apart from
rivals and winning a
sustainable competitive
advantage.

Striving to be the industrys low-cost provider, thereby aiming for a cost-based

competitive advantage over rivals. Walmart and Southwest Airlines have
earned strong market positions because of the low-cost advantages they have
achieved over their rivals and their consequent ability to underprice competitors. These advantages in meeting customer needs efficiently have translated
into volume advantages, with Walmart as the worlds largest discount retailer
and Southwest as the largest U.S. air carrier, based on the number of domestic
passengers.4
Outcompeting rivals on the basis of differentiating features, such as higher quality, wider product
selection, added performance, value-added services, more attractive styling, and technological
superiority. Successful adopters of differentiation strategies include Apple (innovative products),
Johnson & Johnson in baby products (product reliability), Chanel and Rolex (luxury and prestige),
and Mercedes and BMW (engineering design and performance). These companies have achieved a
competitive advantage because of their ability to meet customer needs more effectively than rivals
can, thus driving up their customers willingness to pay higher prices. One way to sustain this type of
competitive advantage is to be sufficiently innovative to thwart the efforts of clever rivals to copy or
closely imitate the product offering.
Developing an advantage based on offering more value for the money. Giving customers more value for
their money by satisfying buyers expectations on key quality/features/performance/service attributes
while beating their price expectations is known as a best-cost provider strategy. This approach is a
hybrid strategy that blends elements of the previous approaches. Target is an example of a company
that is known for its hip product design (a reputation it built by featuring cheap-chic designers such as
Isaac Mizrahi), as well as a more appealing shopping ambience for discount store shoppers. It offers the
perfect illustration of a best-cost provider strategy.
Focusing on a narrow market niche within an industry. There are two types of strategies based on focus.
The first aims to achieve an advantage through greater efficiency in serving a niche; the goal of the second
is greater effectiveness in meeting the niches special needs. Prominent companies that enjoy competitive
success in a specialized market niche include eBay in online auctions, Jiffy Lube International in quick
oil changes, McAfee in virus protection software, and The Weather Channel in cable TV.

Winning a sustainable competitive edge over rivals with any of the preceding
four strategies generally hinges as much on building competitively valuable
expertise and capabilities that rivals cannot readily match as it does on having a
distinctive product offering. Clever rivals can nearly always copy the attributes of
a popular product or service, but for rivals to match the experience, know-how,
and specialized capabilities that a company has developed and perfected over a
long period of time is substantially harder to do and takes much longer. FedEx, for
example, has superior capabilities in next-day delivery of small packages. Apple has
demonstrated impressive product innovation capabilities in digital music players,
smartphones, and e-readers. Hyundai has become the worlds fastest-growing
automaker as a result of its advanced manufacturing processes and unparalleled
quality control system. Each of these capabilities has proved hard for competitors
to imitate or best.

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LO 4
Understand that a
companys strategy
tends to evolve
over time because
of changing
circumstances and
ongoing management
efforts to improve the
companys strategy.

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Why a Companys Strategy Evolves over Time

The appeal of a strategy that yields a sustainable competitive advantage is
that it offers the potential for an enduring edge over rivals. However,
managers of every company must be willing and ready to modify the
strategy in response to changing market conditions, advancing technology,
unexpected moves by competitors, shifting buyer needs, emerging market
opportunities, and mounting evidence that the strategy is not working well.
Most of the time, a companys strategy evolves incrementally from
managements ongoing efforts to fine-tune the strategy and to adjust certain
strategy elements in response to new learning and unfolding events.5 But in
industries where industry and competitive conditions change frequently
and in sometimes dramatic ways, the life cycle of a given strategy is short.
Industry environments characterized by high-velocity change require
companies to repeatedly adapt their strategies.6 For example, companies in
industries with rapid-fire advances in technology like medical equipment,
electronics, and wireless devices often find it essential to adjust key elements
of their strategies several times a year, sometimes even finding it necessary
to reinvent their approach to providing value to their customers.
Regardless of whether a companys strategy changes gradually or swiftly,
the important point is that the task of crafting strategy is not a one-time
event but always a work in progress. Adapting to new conditions and constantly evaluating what is working well enough to continue and what needs
to be improved are normal parts of the strategy-making process, resulting
in an evolving strategy.7

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

A companys strategy
is shaped partly by
management analysis and
choice and partly by the
necessity of adapting and
learning by doing.

A Companys Strategy Is Partly Proactive and Partly Reactive

The evolving nature of a companys strategy means that the typical
CORE CONCEPT
company strategy is a blend of (1) proactive, planned initiatives to improve
the companys financial performance and secure a competitive edge, and
A companys deliberate
(2) reactive responses to unanticipated developments and fresh market
strategy consists of
conditions. The biggest portion of a companys current strategy flows from
proactive strategy
ongoing actions that have proven themselves in the marketplace and newly
elements that are both
planned and realized as
launched initiatives aimed at building a larger lead over rivals and further
planned; its emergent
boosting financial performance. This part of managements action plan
strategy consists of
for running the company is its deliberate strategy, consisting of proactive
reactive strategy elements
strategy elements that are both planned and realized as planned (while other
8
that emerge as changing
planned strategy elements may not work out)see Figure1.2.
conditions warrant.
But managers must always be willing to supplement or modify the
proactive strategy elements with as-needed reactions to unanticipated
conditions. Inevitably, there will be occasions when market and competitive
conditions take an unexpected turn that calls for some kind of strategic
reaction. Hence, a portion of a companys strategy is always developed on the fly, coming as a response
to fresh strategic maneuvers on the part of rival firms, unexpected shifts in customer requirements, fastchanging technological developments, newly appearing market opportunities, a changing political or
economic climate, or other unanticipated happenings in the surrounding environment. These unplanned,

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Abandoned
strategy elements

Deliberate Strategy
(Proactive Strategy Elements)
New planned initiatives plus
ongoing strategy elements
continued from prior periods

New strategy elements that emerge

as managers react adaptively to
changing circumstances

A
Companys
Current (or
Realized)
Strategy

Emergent Strategy
(Reactive Strategy Elements)

FIGURE 1.2

A Companys Strategy is a Blend of Proactive Initiatives and Reactive Adjustments

reactive, and adaptive strategy adjustments make up the firms emergent strategy. A companys strategy in
toto (its realized strategy) thus tends to be a combination of proactive and reactive elements, with certain
strategy elements being abandoned because they have become obsolete or ineffective. A companys realized
strategy can be observed in the pattern of its actions over time, which is a far better indicator than any of its
strategic plans on paper or any public pronouncements about its strategy.

A COMPANYS STRATEGY AND ITS BUSINESS MODEL

At the center of a companys strategy is the companys business model. A business
LO 5
model is managements blueprint for delivering a valuable product or service to
customers in a manner that will generate revenues sufficient to cover costs and
Learn why it is
important for a
yield an attractive profit.9 The two elements of a companys business model are
company to have a
(1) its customer value proposition and (2) its profit formula. The customer value
viable business model
proposition lays out the companys approach to satisfying buyer wants and
that outlines the
needs at a price customers will consider a good value. Plainly, from a customer
companys customer
perspective, the greater the value delivered (V) and the lower the price (P), the
value proposition and
its profit formula.
more attractive is the companys value proposition. The profit formula describes
the companys approach to determining a cost structure that will allow for
acceptable profits, given the pricing tied to its customer value proposition. The lower the costs (C), given
the customer value proposition (V P), the greater the ability of the business model to be a moneymaker.
Thus the profit formula reveals how efficiently a company can meet customer wants and needs and deliver
on the value proposition. The nitty-gritty issue surrounding a companys business model is whether it can
execute its customer value proposition profitably. Just because company managers have crafted a strategy
for competing and running the business, this does not automatically mean that the strategy will lead to
profitabilityit may or it may not.

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Magazines and newspapers employ a business model keyed to delivering

CORE CONCEPT
information and entertainment they believe readers will find valuable and a
A companys business
profit formula aimed at securing sufficient revenues from subscriptions and
model sets forth the
advertising to more than cover the costs of producing and delivering their
logic for how its strategy
products to readers. Mobile phone providers, satellite radio companies, and
will create value for
broadband providers also employ a subscription-based business model. The
customers, while at the
business model of network TV and radio broadcasters entails providing free
same time generate
programming to audiences but charging advertising fees based on audience
revenues sufficient to
size. Gillettes business model in razor blades involves selling a master
cover costs and realize a
productthe razorat an attractively low price and then making money
profit.
on repeat purchases of razor blades that can be produced very cheaply and
sold at high profit margins. Printer manufacturers like Hewlett-Packard,
Lexmark, and Epson pursue much the same business model as Gillette
selling printers at a low (virtually break-even) price and making large profit
margins on the repeat purchases of printer supplies, especially ink cartridges. McDonalds invented the
business model for fast foodproviding value to customers in the form of economical quick-service meals
at clean convenient locations. Its profit formula involves such elements as standardized cost-efficient store
design, stringent specifications for ingredients, detailed operating procedures for each unit, and heavy
reliance on advertising and in-store promotions to drive volume. Illustration Capsule 1.2 describes two
contrasting business models in radio broadcasting.

WHAT MAKES A STRATEGY A WINNER?

Three tests can be applied to determine whether a strategy is a winning strategy:
1.

2.

LO 6
The Fit Test: How well does the strategy fit the companys situation? To qualify
Learn the three tests of
as a winner, a strategy has to be well matched to industry and competitive cona winning strategy.
ditions, a companys best market opportunities, and other pertinent aspects of
the business environment in which the company operates. No strategy can
work well unless it exhibits good external fit and is in sync with prevailing market conditions. At the
same time, a winning strategy must be tailored to the companys resources and competitive capabilities
and be supported by a complementary set of functional activities (i.e.,
A winning strategy must
activities in the realms of supply chain management, operations, sales
pass three tests:
and marketing, and so on). That is, it must also exhibit internal fit and
1. The Fit Test
be compatible with a companys ability to execute the strategy in a com2.
The Competitive
petent manner. Unless a strategy exhibits good fit with both the exterAdvantage Test
nal and internal aspects of a companys overall situation, it is likely to be
3. The Performance Test
an underperformer and fall short of producing winning results. Winning strategies also exhibit dynamic fit in the sense that they evolve over
time in a manner that maintains close and effective alignment with the
companys situation even as external and internal conditions change.10
The Competitive Advantage Test: Can the strategy help the company achieve a sustainable competitive
advantage? Strategies that fail to achieve a durable competitive advantage over rivals are unlikely
to produce superior performance for more than a brief period of time. Winning strategies enable a
company to achieve a competitive advantage over key rivals that is long-lasting. The bigger and more
durable the competitive advantage, the more powerful it is.

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ILLUSTRATION CAPSULE 1.2

Sirius XM and Over-the-Air Broadcast Radio:

Two Contrasting Business Models
Sirius XM

Over-the-Air Radio Broadcasters

Customer value
proposition

Digital music, news, national

and regional weather, traffic
reports in limited areas, and talk
radio programming provided
for a monthly subscription fee.
Programming is interrupted only by
brief occasional ads.

Free-of-charge music, national and

local news, local traffic reports,
national and local weather, and
talk radio programming. Listeners
can expect frequent programming
interruption for ads.

Profit formula

Revenue generation: Monthly

subscription fees, sales of satellite
radio equipment, and advertising
revenues.

Revenue generation: Advertising

sales to national and local
businesses.

Cost structure: Fixed costs

associated with operating a
satellite-based music delivery
service.
Fixed and variable costs related to
programming and content royalties,
marketing, and support activities.

Profit margin: Sirius XMs

profitability is dependent on
attracting a sufficiently large
number of subscribers to cover its
costs and provide attractive profits.

3.

Cost structure: Fixed costs

associated with terrestrial
broadcasting operations.
Fixed and variable costs related to
local news reporting, advertising
sales operations, network affiliate
fees, programming and content
royalties, commercial production
activities, and support activities.
Profit margin: The profitability
of over-the-air radio stations was
dependent on generating sufficient
advertising revenues to cover costs
and provide attractive profits.

The Performance Test: Is the strategy producing good company performance? The mark of a winning
strategy is strong company performance. Two kinds of performance indicators tell the most about
the caliber of a companys strategy: (1) competitive strength and market standing and (2) profitability
and financial strength. Above-average financial performance or gains in market share, competitive
position, or profitability are signs of a winning strategy.

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Strategies that come up short on one or more of the preceding tests are plainly less appealing than
strategies passing all three tests with flying colors. Managers should use the same questions when
evaluating either proposed or existing strategies. New initiatives that dont seem to match the companys
internal and external situations should be scrapped before they come to fruition, while existing strategies
must be scrutinized on a regular basis to ensure they have good fit, offer a competitive advantage, and are
contributing to above-average performance or performance improvements.

WHY CRAFTING AND EXECUTING STRATEGY

ARE IMPORTANT TASKS
Crafting and executing strategy are top-priority managerial tasks for a very big reason. A clear and reasoned
strategy is managements prescription for doing business, its road map to competitive advantage, its game
plan for pleasing customers, and its formula for improving performance. High-achieving enterprises are
nearly always the product of astute, creative, and proactive strategy making. Companies dont get to the
top of the industry rankings or stay there with illogical strategies, copy-cat strategies, or timid attempts
to try to do better. Only a handful of companies can boast of hitting home runs in the marketplace due to
lucky breaks or the good fortune of having stumbled into the right market at the right time with the right
product. And even then, unless they subsequently craft a strategy that capitalizes on their luck, building on
whats working and discarding the rest, success of this sort will be fleeting. So there can be little argument
that a companys strategy mattersand matters a lot.
The chief executive officer of one successful company put it well when he said:
In the main, our competitors are acquainted with the same fundamental concepts and techniques and approaches
that we follow, and they are as free to pursue them as we are. More often than not, the difference between their level
of success and ours lies in the relative thoroughness and self-discipline with which we and they develop and execute
our strategies for the future.

Good Strategy1Good Strategy Execution5Good Management

Crafting and executing strategy are thus core management functions.
How well a company
Among all the things managers do, nothing affects a companys ultimate
performs is directly
success or failure more fundamentally than how well its management team
attributable to the caliber
charts the companys direction, develops competitively effective strategic
of its strategy and the
moves and business approaches, and pursues what needs to be done
proficiency with which the
internally to produce good day-in, day-out strategy execution and operating
strategy is executed.
excellence. Indeed, good strategy and good strategy execution are the most
telling signs of good management. Managers dont deserve a gold star for
designing a potentially brilliant strategy but failing to put the organizational
means in place to carry it out in high-caliber fashion. Competent execution
of a mediocre strategy scarcely merits enthusiastic applause for managements efforts either. The rationale
for using the twin standards of good strategy making and good strategy execution to determine whether a
company is well managed is therefore compelling: The better conceived a companys strategy and the more
competently it is executed, the more likely the company will be a standout performer in the marketplace. In
stark contrast, a company that lacks clear-cut direction, has a flawed strategy, or cant execute its strategy
competently is a company whose financial performance is probably suffering, whose business is at longterm risk, and whose management is sorely lacking.

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13

THE ROAD AHEAD

Throughout the chapters to come and in the accompanying case collection, the spotlight will be trained
on the foremost question in running a business enterprise: What must managers do, and do well, to make
a company a winner in the marketplace? The answer that emerges is that doing a good job of managing
inherently requires good strategic thinking and good management of the strategy-making, strategyexecuting process.
The mission of this book is to provide a solid overview of what every business student and aspiring
manager needs to know about crafting and executing strategy. We will explore what good strategic thinking
entails, describe the core concepts and tools of strategic analysis, and examine the ins and outs of crafting
and executing strategy. The accompanying cases will help build your skills in both diagnosing how well the
strategy-making, strategy-executing task is being performed and prescribing actions for how the strategy
in question or its execution can be improved. The strategic management course that you are enrolled in
may also include a strategy simulation exercise where you will run a company in head-to-head competition
with companies run by your classmates. Your mastery of the strategic management concepts presented in
the following chapters will put you in a strong position to craft a winning strategy for your company and
figure out how to execute it in a cost-effective and profitable manner. As you progress through the chapters
of the text and the activities assigned during the term, we hope to convince you that first-rate capabilities in
crafting and executing strategy are essential to good management.

Strategic Thinking Capsule

Rejuvenating and Restructuring Wipro
Of late, Wipro had lost its No. 3 position to Cognizant and looked to be falling apart. The company
was not only lagging behind its peers in revenue and profit growth but rivals had overtaken it in
Indias over $70-billion IT sector. Lagging peers in making strategic, game-changing acquisitions,
consulting business had not delivered the desired results, and it was losing price premiums working
only on thin margins.
Wipro Chief Executive TK Kurien started the turnaround process by poaching star performers
from rival firms in a sweeping reorganization to signal that he meant business and that there was an
urgency to remove the laidback work culture.12 Within a year (in 2011), about 60 managers, some of
them long-termers in the 31 year-old company, either had left on their own or had been asked to. The
evaluation was based on how they were rated by customers directly or indirectly served by them. The
company was trying hard to regain its market position. For that it had to remove the flab, introduce
new capabilities, and reinvent the companys culture of excellence.
Kurien handpicked hard-charging specialists from the IT services market leader Tata Consultancy Services and revenue growth leader Cognizant and paid them the top dollar. These specialists
were meant to fill the space vacated by the departing executives. A Wipro executive justified the
large-scale revamp as follows: Somebody has to look beyond the popularity index and start questioning the inertia. Wipro cannot keep watching others run past. The company has to pick the lessons
very carefully and execute them now, dispassionately. A manager who left Wipro in December 2011
said that there are no pink slips, there are no slips at all; just an email about measuring up to the new
benchmarks.
Company insiders familiar with the strategic plan thought that by the end of 2013, almost half
the middle and senior management staff would have been replaced or ejected. The companys focus

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C ra f t i n g & E xe c u t i n g S t ra t e g y

was more on delivery models and the new business transformation practice focused on high-value
projects. For example, key people from TCS, Infosys, and Cognizant had been appointed at the Vice
President level to help the company hunt for fresh businessan area where it had been lagging.

Customer Satisfaction as the Main Benchmark for the Wipro Staff

The most important new benchmark at Wipro was customer satisfaction. This meant that bonuses
and pay hikes would be linked to customer satisfaction levels and not just revenue or profit growth. A
quarter of incentives for each staff member now depended on the satisfaction levels among Wipros
clients such as Johnson & Johnson and Citibank.
Another measure introduced at Wipro was the evaluation of managers on their ability to work
across teams and functions as well as leadership attributes that inspired other team members to perform better. One outside observer noted that There is a method to this madness, which is focused
on creating a completely different organization with momentum. What Kurien is doing is partly shaking up the existing system and partly bringing new talent to infuse energy. A company executive who
was part of the revamp team said that, Traditionally, Wipro has been top-heavy. Now we are investing heavily in building internal systems to empower decision-making down the chain to the level of
project manager.
The first signs that this approach was working came in half-yearly results in fiscal year 2011-12,
when Wipro beat Street revenue expectations for the first time in two years.

The New Strategy-Structural Initiatives

Kurien had also replaced the joint-CEO structure (which had two Managing Directors at the same
time) and collapsed the overlapping business units, service lines, and geographic operations into
fewer divisions headed by mini CEO-like leaders with complete authority to take important decisions.
This came along with strategic investments such as the acquisition of SAICs IT unit. It was an effort
to move away from a pure services-driven business model to one that involved developing platforms
and products, including developing IP (Intellectual Property). It appointed a new Chief Technology
Officer who was given a mandate to focus the company to offer differentiated and unique offerings
to the customers. The company felt that the pure services business had become commoditized. Even
global IT companies have successfully copied the global delivery model first, and there was now little
that differentiates one from the other.
As another key structural initiative, Wipro had undertaken to form a Technology Executive Council (TEC) and a Technology Business Council (TBC) to gear up for future waves of growth. The TEC
consists of about 50 technology leaders identified from across horizontal service lines and verticals.
The TBC is a smaller council with around 18 members who work closely with customers in the field
to bring insights from the client side. The TEC and TBC will together define the roadmap for future
readiness of the company.
The council members are based in Wipro centers across the world and meet formally once a
quarter. However, they meet virtually once every fortnight. This requires a greater risk-taking culture
than in the services business. To get the best brains, it was increasingly involving startups and universities for this initiative.
Another Wipro initiative was in emerging high-technology areas such as Nanoelectronics, robotics, and low cost tablets. Wipro has identified cloud, mobility, and analytics as its focus growth areas
for the short term. Over the medium to long-term, the company sees the key growth drivers to be
machine-to-machine cyber-physical integration (making objects talk to one another), web science
(obtaining contextual information and acting on it), miniaturization, and natural user interfaces
(interfaces that come almost naturally to humans, such as touch and motion, instead of having to
learn it).

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15

Wipro has also launched Wipro Desktop as a Service (WDaaS), a desktop virtualization solution that delivers desktops, applications, and data as an on-demand service. WDaaS is an integrated
service offering which uses the market-leading desktop virtualization technologies of Citrix and
Microsoft and provides efficient plug and play desktop and application virtualization capabilities. The
solution is built on HP Converged Infrastructure. For enterprises that want to deploy desktop virtualization on-premises, WDaaS will offer a pre-configured appliance (hardware, software, and services)
that can be managed remotely by Wipro. This solution lowers deployment cost and reduces the implementation time by half as compared to the traditional system integration approach. For enterprises
seeking a hosted or cloud offering, Wipro delivers desktops and applications as a service from a
dedicated private cloud environment in its own data-centers or by leveraging cloud infrastructure
providers. These delivery models lower the Total Cost of Ownership (TCO) and move the desktop
cost from a CAPEX (Capital Expenditure) to an OPEX (Operational Expenditure) model.
Finally, Mr Kurien was not satisfied with the progress so far.13 According to him: We have done
some simple things well; we have done a lot of good things in front of the customer. But as an organization we are not aggressive enough. We are still not pushing enough into the market place and
that is one thing we have to change. Its about a couple of things; one is enabling the front end itself.
Deals are made and won, but delivery is won every day in the customers premises. We are taking the
power of Wipro to the customer but we have not done this universally. Wipro has an enormous amount
of technology and knowledge but we dont put enough of that in front of the customers. That to some
extent is our mindset, because we are very reticent as a company. In our business you dont have to
sell, customers should come to you because they see value and that is the change we have to bring
about. Many people talk about a trusted advisor and we have to get to that level.14
However there were doubts whether the change management process was being executed well.
It resulted in heartburn among those who have been asked to leave while creating uncertainty among
some of those who remained. A former employee said that Just when you think its over, it starts all
over again referring to the reorganization and key people leaving.

Questions:
1. Assess the Business Model of Wipro.
2. Where do you think is this transformation headed to?

Key Points
1.
2.

3.

4.

A companys strategy is its action plan for outperforming its competitors and achieving superior
profitability.
The central thrust of a companys strategy is undertaking moves to build and strengthen the companys
long-term competitive position and financial performance by competing differently from rivals and
gaining a sustainable competitive advantage over them.
A company achieves a competitive advantage when it provides buyers with superior value compared
to rival sellers or offers the same value at a lower cost to the firm. The advantage is sustainable if it
persists despite the best efforts of competitors to match or surpass this advantage.
A companys strategy typically evolves over time, emerging from a blend of (1) proactive deliberate
actions on the part of company managers to improve the strategy, and (2) reactive emergent responses to
unanticipated developments and fresh market conditions.

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16
5.

6.

7.

C ra f t i n g & E xe c u t i n g S t ra t e g y

A companys business model sets forth the logic for how its strategy will create value for customers,
while at the same time generate revenues sufficient to cover costs and realize a profit. Thus, it contains
two crucial elements: (1) the customer value propositiona plan for satisfying customer wants and
needs at a price customers will consider good value, and (2) the profit formulaa plan for a cost
structure that will enable the company to deliver the customer value proposition profitably.
A winning strategy will pass three tests: (1) Fit (external, internal, and dynamic consistency),
(2)Competitive Advantage (durable competitive advantage), and (3) Performance (outstanding financial
and market performance).
Crafting and executing strategy are core management functions. How well a company performs and
the degree of market success it enjoys are directly attributable to the caliber of its strategy and the proficiency with which the strategy is executed.

Assurance of Learning Exercises

1.

2.

3.

Based on what you know about the quick-service restaurant industry, does McDonalds LO 1, LO 2,
strategy (as described in Illustration Capsule 1.1) seem to be well-matched to industry LO 3
and competitive conditions? Does the strategy seem to be keyed to a cost-based advantage, differentiating features, serving the unique needs of a niche, or some combination of these? What is there about
McDonalds strategy that can lead to sustainable competitive advantage?
Elements of Walmarts strategy have evolved in meaningful ways since the companys
LO 4, LO 6
founding in 1962. Prepare a one- to two-page report that discusses how its strategy has
evolved after reviewing all of the links at Walmarts About Us page, which can be found at walmartstores.com/AboutUs/. Your report should also assess how well Walmarts strategy passes the three
tests of a winning strategy.
Go to www.nytco.com/investors and check whether The New York Times recent
LO 5
financial reports indicate that its business model is working. Does the companys business model remain sound as more consumers go to the Internet to find general information and stay
abreast of current events and news stories? Is its revenue stream from advertisements growing or
declining? Are its subscription fees and circulation increasing or declining?

Exercise for Simulation Participants

Three basic questions must be answered by managers of organizations of all sizes as they begin the process
of crafting strategy:

After you have read the Participants Guide or Players Manual for the strategy simulation exercise that
you will participate in this academic term, you and your co-managers should come up with brief one- or
two-paragraph answers to these three questions prior to entering your first set of decisions. While your
answers to the first of the three questions can be developed from your reading of the manual, the second

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and third questions will require a collaborative discussion among the members of your companys management team about how you intend to manage the company you have been assigned to run.
1.

What is our companys current situation? A substantive answer to this question LO 1, LO 2,

should cover the following issues:
LO 3

2.

Where do we want to take the company during the time we are in charge? A complete LO 4, LO 6
answer to this question should say something about each of the following:

of the final decision round?

company in a successful manner?
3.

How are we going to get there? Your answer should cover these issues:

LO 4, LO 5

makes the most sense to pursue?

Endnotes
1

Jan Rivkin, An Alternative Approach to Making Strategic Choices, Harvard Business School, 9-702-433, 2001.
Michael E. Porter, What Is Strategy? Harvard Business Review 74, no. 6 (NovemberDecember 1996).
Ibid.
4
Walmartstores.com/download/2230.pdf; Southwest Airlines Fact Sheet, July 16, 2009.
5
Eric T. Anderson and Duncan Simester, A Step-by-Step Guide to Smart Business Experiments, Harvard Business Review 89, no. 3
(March 2011).
6
Shona L. Brown and Kathleen M. Eisenhardt, Competing on the Edge: Strategy as Structured Chaos (Boston, MA: Harvard Business
School Press, 1998).
7
Cynthia A. Montgomery, Putting Leadership Back into Strategy, Harvard Business Review 86, no. 1 (January 2008).
8
Henry Mintzberg and J. A. Waters, Of Strategies, Deliberate and Emergent, Strategic Management Journal 6 (1985); Costas Markides,
Strategy as Balance: From Either-Or to And, Business Strategy Review 12, no. 3 (September 2001).
9
Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, Reinventing Your Business Model, Harvard Business Review 86,
no. 12 (December 2008); Joan Magretta, Why Business Models Matter, Harvard Business Review 80, no. 5 (May 2002).
10
Jan Rivkin, An Alternative Approach to Making Strategic Choices.
2
3

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