Chapter

1
What Is Strategy and
Why Is It Important?

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 Chapter Roadmap
• What Is Strategy?
– Identifying a Company’s Strategy
– Strategy and the Quest for Competitive Advantage
– 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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 Video
• What strategy is?
– Presented by Dr Michael Eugene Porter

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 Key Strategic Questions

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 The Hows That
Define a Firm's Strategy
• How to please customers
• How to respond to changing
market conditions
• How to outcompete rivals
• How to grow the business
• How to manage each functional piece of the business
and develop needed organizational capabilities
• How to achieve strategic and financial objectives

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 What Are a Company’s Strategic Choices?
• Trial-and-error organizational learning about

– What has worked and

– What has not worked

• Management’s appetite for taking risks

• Managerial analysis and strategic thinking about

how best to proceed, given prevailing circumstances

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 A Company’s Menu of Strategy Options

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 Striving for
Competitive Advantage
• To achieve sustainable competitive advantage,
a company’s strategy usually must be aimed at
either
– Providing a distinctive product or service or
– Developing competitive capabilities rivals can not
match
• Achieving a sustainable competitive advantage
greatly enhances a company’s prospects for
– Winning in the marketplace and
– Realizing above-average profits

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 What separates a powerful strategy from an ordinary
strategy

is management’s ability to forge a series of moves, both

in the marketplace and internally, that produces

sustainable competitive advantage (SCA).

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 How to sustain a CA?

• The way you compete

– Product strategy
– Positioning strategy
– Manufacturing strategy
– Distribution strategy
• Basis of Competition
Sustainable
– Assets Competitive
– Competencies
• Where you compete
Advantage
– Product-market selection
• Whom you compete against
– Competitor selection

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 Strategic Approaches to Building Competitive
Advantage
• Strive to be the industry’s low-cost provider

• Outcompete rivals on a key differentiating feature

• Focus on a narrow market niche, doing a better job

than rivals of serving the unique needs of niche
buyers

• Develop expertise, resource strengths, and

capabilities not easily imitated by rivals

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 Examples: Strategies Based
on Distinctive Capabilities
• Sophisticated distribution systems – Wal-Mart
• Product innovation capabilities – 3M Corporation
• Complex technological process – Michelin
• Defect-free manufacturing – Toyota and Honda
• Specialized marketing and merchandising know-how – Coca-
Cola
• Global sales and distribution capability – Black & Decker
• Superior e-commerce capabilities – Dell Computer
• Personalized customer service – Ritz Carlton hotels

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 SCA of 248 businesses
• Reputation for quality
• Customer service / after-sale product support
• High profile / name recognition
• Retain good management and engineering staff
• Low-cost production
• Financial resources
• Customer orientation / feedback / market research
• Product-line breadth
• Technical superiority
• Installed base of satisfied customers

1-13 Continued…
 SCA of 248 businesses
• Segmentation / focus
• Product Characteristics / differentiation
• Continuing product innovation
• Market share
• Size / location of distribution
• Low price / high value offering
• Knowledge of business
• Pioneer / early entrant in industry
• Efficient, flexible production / operations
adaptable to customers

1-14 Continued…
 SCA of 248 businesses
• Efficient sales force
• Overall marketing skills
• Shared vision / culture
• Strategic goals
• Powerful well-know parent
• Location
• Efficient advertising / image
• Enterprising / entrepreneurial
• Good coordination
• Engineering R&D

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 SCA of 248 businesses
• Short-term planning
• Good distributor relations

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 Why Do Strategies Evolve?
• A company’s strategy is a work in progress

• Changes may be necessary to react to

– Fresh moves of competitors

– Evolving customer preferences

– Technological breakthroughs

– Shifting market conditions

– Crisis situations

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 Customer & Competitor Orientation

Market -Driven

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 Crafting Strategy Is an
Exercise in Entrepreneurship
• Strategy-making is a market-driven activity that
involves
– 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
“can do” to “should not do’ and “unsavory” or “shady” and
– Allows management to fulfill its ethical duties to all stakeholders

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 Role of Senior Executives: Linking Strategy
with Ethics
• Forbid pursuit of ethically questionable business
opportunities
• Insist all aspects of company strategy reflect high
ethical standards
• Make it clear all employees are expected 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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 Identifying a Company’s Strategy

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 A Company’s Strategy Is Partly Proactive and Partly Reactive

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 Relationship Between
Strategy and Business Model
Strategy . . . Business Model . . .
Deals with a company’s Concerns whether revenues
competitive initiatives and and costs flowing from the
business approaches strategy demonstrate a
business can be amply
profitable and viable

y
teg
ra ss
St i ne l
s e
Bu od
M

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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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 Microsoft’s
Business Model
Employ 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 and achieve large unit
sales

Most costs in developing software are fixed; variable costs

are small - once breakeven volume is reached, revenues from
additional sales are almost pure profit

Provide technical support to users at no cost

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 Tests of a Winning Strategy
• GOODNESS OF FIT TEST
– How well does strategy fit
the firm’s situation?

• COMPETITIVE ADVANTAGE TEST

– Does strategy lead to sustainable
competitive advantage?

• PERFORMANCE TEST
– Does strategy boost firm performance?
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 Other Criteria for Judging the 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

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 Why Is Strategy Important?

• A compelling need exists for managers to

proactively shape how a firm’s business
will be conducted

• A strategy-focused firm is more likely

to be a strong bottom-line performer
than 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 the company’s direction,
– Develops competitively effective strategic moves and business
approaches, and
– Pursues what needs to be done internally to produce good
day-in/day-out strategy execution

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 Video
• Strategy during a Recession

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