Chapter 1: What is Strategy

and Why is it Important?

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.
Troy University

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
“Strategy means making
clear-cut choices about
how to compete.”

Jack Welch
Former CEO, General Electric
 “Without a strategy the
organization is like a ship
without a rudder.”

Joel Ross and Michael Kami

Chapter Learning Objectives
1. Understand the role of business strategies in moving a
company in the intended direction, growing its business,
and improving its financial and market performance.
2. Develop an awareness of the four most reliable strategic
approaches for setting a company apart from rivals and
winning a sustainable competitive advantage.
3. Learn that business strategies evolve over time because
of changing circumstances and ongoing management
efforts to improve the company’s strategy.
4. Understand why a company’s strategy must underpinned
by a business model that produces revenues sufficient to
cover costs and earn a profit.
5. Gain awareness of the three tests that distinguish a
winning strategy from a so-so or flawed strategy.
6. Learn why good strategy and good strategy execution are
the most trustworthy signs of good management.
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 Chapter Roadmap
 What Do We Mean by “Strategy?”
 Strategy and the Quest for Competitive Advantage
 Identifying a Company’s Strategy
 Why a Company’s Strategy Evolves Over Time
 A Company’s Strategy Is Partly Proactive and
Partly Reactive
 Strategy and Ethics: Passing the Test of Moral
Scrutiny
 The Relationship Between a Company’s Strategy
and Its Business Model
 What Makes a Strategy a Winner?
 Why Are Crafting and Executing Strategy
Important?
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 Thinking Strategically:
The Three Big Strategic Questions
1. What’s the company’s present situation?
2. Where does the company need to go from
here?
 Business(es) to be in and market positions to
stake out
 Buyer needs and groups to serve
 Direction to head
3. How should it get there?
 A company’s answer to “how
will we get there?” is its strategy
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What Do We Mean By “Strategy?”

 Consists of competitive moves and

business approaches used by managers to
run the company
 Management’s “action plan” to
 Grow the business
 Attract and please customers
 Compete successfully
 Conduct operations
 Achieve the targeted levels of
organizational performance
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The Hows That Define a Firm's Strategy

 How to grow the business

Strategy
 How to please customers is HOW
to . . .
 How to outcompete rivals
 How to manage each functional
piece 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
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Choosing the “Hows” of Strategy
 Strategic choices about “how” are based on
 Trial-and-error organizational learning about what has
worked and what has not worked
 Management’s appetite for taking risks
 Managerial analysis and strategic thinking about how best
to proceed, given market conditions and a company’s
circumstances
 In choosing a strategy, management is in effect
saying,
“Among all the many different ways of competing we could
have chosen, we have decided to employ this combination
of competitive and operating approaches to move the
company in the intended direction, strengthen its market
position and competitiveness, and boost performance.”
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Key Elements of a Successful Strategy

 Developing a successful strategy hinges on

making competitive moves aimed at
 Appealing to buyers in ways to set the company
apart from rivals and
 Carving out its own market position
 Involves developing a distinctive “aha”
element to
 Attract customers and
 Produce a competitive edge

Copying competitive moves of other

successful companies rarely works!
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 Starbucks’ Strategy:
The Key Elements
 Expand number of Starbucks stores domestically by
blanketing metropolitan areas, then adding stores on the
city’s perimeter
 Make Starbucks a global brand by opening stores in an
increasing number of foreign locations
 View each store as a billboard for the company and as a
contributor to building the company’s brand and image
 Broaden in-store products to include coffee-flavored ice
cream, teas, fresh pastries, music CDs, and coffee
accessories
 Fully exploit the growing power of the Starbucks’ name
and brand image with out-of-store sales
 Display corporate responsibility and
environmental sustainability
 Control costs of opening new stores
 Promote customer-friendly service and enhance store
ambience by making Starbucks a great place to work
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For Discussion: Your Opinion

From your perspective as a consumer, does

Starbucks’ strategy (described in Illustration
Capsule 1.1) seem to be well-matched to industry
and competitive conditions?
1. Does the strategy seem to be keyed to a cost
advantage, differentiating features, serving the
unique needs of a niche, or developing resource
strengths and competitive capabilities rivals can’t
imitate or trump (or a mixture of these)?
2. What is there about Starbucks’ 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 actions a
company makes to
 Improve its financial performance,
 Strengthen its competitive position, and
 Gain a competitive advantage over rivals
 A creative, distinctive strategy that sets a
company apart from rivals and yields a competitive
advantage is a company’s most reliable ticket to
above average profitability
 Operating with a competitive advantage is more profitable
than operating without one
 Operating with a competitive disadvantage nearly always
results in below-average profitability
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 A Powerful Strategy Leads to
Sustainable Competitive Advantage
 A company achieves sustainable competitive
advantage when
 An attractive number of buyers prefer its
products/services over those of rivals and
 The basis for this preference is durable

 Its nice when a strategy produces

 A temporary competitive edge but
 A sustainable edge over rivals greatly enhances a
company’s prospects for above-average profitability

What separates a powerful strategy from an ordinary

strategy is management’s ability to forge a series of
moves, both in the marketplace and internally, that
produces sustainable competitive advantage!
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 Strategic Approaches to Building
Sustainable Competitive Advantage
 Be the industry’s low-cost provider
 Achieve a cost-based competitive advantage
 Incorporate differentiating features
 Superior product/service keyed to higher quality,
better performance, wider selection, value-added
services, or some other attribute
 Focus on a narrow market niche
 Win a competitive edge by doing a
better job than rivals of serving the
needs and preferences of buyers in the niche
 Develop expertise and resource strengths
not easily imitated or matched by rivals
 Achieve a capabilities-based competitive advantage
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Competitive Advantage Examples
 Strive to be industry’s low-cost provider
 Wal-Mart
 Southwest Airlines
 Outcompete rivals on a key differentiating
feature
 Johnson & Johnson – Reliability in baby
products
 Harley-Davidson – King-of-the-road styling
 Rolex – Top-of-the-line prestige
 BMW– Engineering design and performance
 Amazon.com – Wide selection and
convenience
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Competitive Advantage Examples (con’t)

 Focus on a narrow market niche

 eBay – Online auctions
 Best Buy – Home electronics
 McAfee – Virus protection
 Starbucks – Premium coffees and coffee drinks
 The Weather Channel – Info about the weather
 Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
 Walt Disney – Theme park management and family
entertainment
 Dell Computer – Build-to-order manufacturing capabilities
 Ritz-Carlton – Personalized customer service
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Figure 1.1: Identifying a Company’s Strategy

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 Test Your Knowledge
A company’s strategy and its quest for competitive
advantage are tightly related because
A. a company’s strategy determines whether it will have
lower or higher costs than rivals and thus be at a
competitive advantage or disadvantage.
B. competitive advantage is essential to having a
profitable business model.
C. choosing a competitive advantage to pursue also helps
a company choose which business model is most
appropriate.
D. competitive advantage enables a company to achieve
its strategic objectives.
E. a strategy that leads to sustainable competitive
advantage is a company’s most reliable means of
achieving above-average profitability and financial
performance.
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Why Do Strategies Evolve?
 A company’s strategy is a work in progress

 Changes may be necessary to react to

 Financial crisis
 Fresh moves of competitors
 Evolving customer preferences
 Technological breakthroughs
 Emerging market opportunities
 Changing political or economic climate
 New ideas to improve strategy
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Figure 1.2: A Company’s Strategy Is a Blend of
Proactive Initiatives and Reactive Adjustments

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Linking Strategy With Ethics

 Ethical and moral standards go beyond

 Prohibitions of law and language of “thou shalt
not”
to issues of
 Duty and “right” vs. “wrong”
 Ethical and moral standards address
“What is the right thing to do?”
 Two criteria of an ethical strategy
 Does not entail actions and behaviors that cross the line
from “should do” to “should not do” (because such
actions are unsavory, shady, unconscionable, injurious
to others, or harmful to the environment)
 Allows management to fulfill its ethical duties to all
stakeholders
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 A Firm’s Ethical Responsibilities
to Its Stakeholders

Owners/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 enterprise

Customers – 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 fairly

Community – 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 strategy
reflect high ethical standards
 Make it clear that 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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 Test Your Knowledge
A company's strategy can be considered “ethical”
A. if all of its different actions and elements are legal and in
compliance with governmental rules and regulations.
B. so long as its actions and behaviors can pass the test of
“moral scrutiny” and are aboveboard in the sense of not
being shady or unconscionable, injurious to others, or
unnecessarily harmful to the environment.
C. only if all elements of the strategy are in accord with what
is generally considered as being in the overall best
interests of society at large.
D. so long as religious authorities and noted ethics experts
find nothing “wrong” in the company’s actions.
E. if it is in compliance with the company’s code of ethics
and has been approved by the company’s chief ethics
officer.

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What Is a Business Model?

 A business model addresses “How do we

make money in this business?”
 Is the company’s strategy capable of delivering
good bottom-line results?
 Do the revenue-cost-profit 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 has good potential to deliver acceptable
profitability?
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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 profitable
and viable

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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 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

Provide 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
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Red Hat’s Business Model

Rely 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

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 users

Capitalize on specialized expertise required to use Linux by providing

fee-based training, consulting, software customization, and client-
directed engineering to Linux users
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 Test Your Knowledge

The nitty-gritty issue surrounding a company’s

business model is whether
A. the strategy is capable of producing sustainable
competitive advantage.
B. it matches the company’s external and internal
situation.
C. the chosen strategy makes good business sense
from a money-making perspective.
D. the company’s strategy and strategic moves are
mostly proactive.
E. the company’s strategy stands a really good
chance of hitting a home-run in the marketplace.

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For Discussion: Your Opinion

Who has the best business model –

Microsoft or Red Hat?

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Tests of a Winning Strategy

 GOODNESS OF FIT TEST

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

 COMPETITIVE ADVANTAGE TEST

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

 PERFORMANCE TEST
 Is the strategy resulting in better company
performance?
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 Other Criteria for Judging
Merits of a Strategy

 Degree of risk the strategy poses as

compared to alternative strategies

 Degree to which the strategy is flexible

and adaptable to changing circumstances

While these criteria are relevant, they

seldom override the importance of the
three tests of a winning strategy!
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Why Should Crafting and Executing Strategy
Be Top-Priority Management Tasks?

 A compelling need exists for

managers to proactively
shape how a firm’s business
will be conducted

 A strategy-focused firm is
more likely to be a strong
bottom-line 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 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 the
best test of managerial excellence – and the
most reliable recipe for winning in the marketplace!
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