Chapter 1

What Is Strategy?

What Strategy Is: Gaining and

Sustaining Competitive Advantage

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Strategic Management
Strategic Management: an integrative
management field that combines analysis,
formulation, and implementation in the
quest for competitive advantage

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Strategy
Strategy: a set of goal-directed actions a
firm takes to gain and sustain superior
performance relative to competitors
To achieve superior performance,
companies compete for resources:
New ventures: for financial and human capital
Existing companies: for profitable growth
Charities: for donations
Universities: for the best students and
professors
Sports teams: championships
Celebrities: media attention
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Elements of a Good Strategy

Analysis
Diagnosis of the competitive challenge

Formulation
Guiding policy to address the competitive
challenge

Implementation
A set of coherent actions to implement the
firms guiding policy

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Elements of a Good Strategy: Analysis

Analysis
Diagnosis of the competitive challenge
Accomplished through strategy analysis of the firms
internal and external environments

Example: Twitter
Competitive challenge: grow its user base
Become more valuable for online advertisers
Also: Facebook allows advertisers to target
their online ads precisely based on
demographic data
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Elements of a Good Strategy: Formulation

Formulation
Guiding policy to address the competitive challenge
Accomplished through strategy formulation,
resulting in the firms corporate, business, and
functional strategies

Example: Twitter
Rather than formulating a guiding policy to grow active
core users, Twitter defined its user base more broadly.
Defined users into 3 types to compare with Facebook
User types were hard to track and less valuable to advertisers.

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Elements of a Good Strategy: Implementation

Implementation
A set of coherent actions to implement the firms guiding
policy
Accomplished through strategy implementation

Example: Twitter
Different user definitions confused management
and limited guidance for employees.
Consequences of the unclear mission:
Frustration among managers and engineers
Turnover of key personnel

Internal turmoil resulted, including management

demotions and promotions of CEO friends.
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Competitive Advantage
Competitive Advantage: a firm that
achieves superior performance relative to
other competitors in the same industry or
the industry average
Always relative, not absolute

To assess competitive advantage:

Compare firm performance to a benchmark
Performance of other firms in the same industry
An industry average

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Competitive Advantage: Examples

In digital advertising: Google
Google has a competitive advantage over
Facebook, Twitter, and Yahoo

In smartphones: Apple
Apple has achieved a competitive advantage
over Samsung, Microsoft, and BlackBerry

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Competitive Advantage: Key Points

Competitive Advantage
Superior performance relative to other competitors
in the same industry or the industry average

Sustainable Competitive Advantage

Outperforming competitors or the industry average
over a prolonged period of time

Competitive Disadvantage
Underperformance relative to other competitors in
the same industry or the industry average

Competitive Parity
Performance of two or more firms at the same
level
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Strategy Is About Creating Superior Value

The rewards of superior value creation and
capture are profitability and market share.
Sam Walton (Walmart): offered lower prices.
Steve Jobs (Apple): put a ding in the
universe.
Mark Zuckerberg (Facebook): made the world
open and connected.
Larry Page and Sergey Brin (Google): made
information accessible.

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Strategic Positioning
Stake out a unique position within an
industry to provide value to customers,
while controlling costs.
The greater the difference between value
creation and cost:
the greater the firms economic contribution.
the more likely it will gain competitive
advantage.

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Strategic Positioning Requires Trade-offs

Managers must make conscious trade-offs.
Enables competitive advantage

In the retail industry, for example:

Walmart: everyday low prices
Nordstroms: professional sales people in a
luxury setting

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Unique Positioning
The key to successful strategy: combine activities
for a unique position in an industry
Competitive advantage has to come from:
performing different activities or
performing the same activities differently than rivals

Example: Walmarts strategic activities

strengthen its position as cost leader
Big stores in rural locations
Low corporate overhead
Low base wages

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Strategy Highlight 1.1 (1 of 2)

Threadless: an online design community and
apparel store
Let consumers work for them
Community members vote on which t-shirt designs they
like best.

Leverages the wisdom of the crowds

At Threadless, the customers play a critical role
across the entire value chain.
From idea generation to design, marketing, sales
forecasting, and distribution

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Strategy Highlight 1.1

(2 of 2)

Business model translates market research and

design into quick sales.
Good understanding of the market
Design contest participation

Threadless has sold every T-shirt it has printed.

Has a cult-like following
It is outperforming established companies
American Eagle, Old Navy, and Urban Outfitters

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What Strategy Is Not

1. Grandiose statements

Statements of desire
Ex: Our strategy is to win or We will be No.
#1

2. A failure to face a competitive challenge

Managers must know whether they are

making progress in addressing the challenge.

3. Operational effectiveness, competitive

benchmarking, or other tactical tools

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These support competitive strategy, but are

not sufficient to sustain it.

Industry Vs. Firm Effects In Determining Firm

Performance (1 of 3)
Industry effects: describe the underlying
economic structure of the industry.
Determined by elements common to all
industries
Examples:
Entry and exit barriers
Number and size of companies
Types of products and services offered

About 20% of a firms profitability depends

on the industry its in.

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Industry Vs. Firm Effects In Determining Firm

Performance (2 of 3)
Firm effects: firm performance is
attributed to managerial actions.
More important factor in determining firm
performance than external environment forces

A firms strategy can explain up to 55% of

its performance.

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Industry Vs. Firm Effects In Determining Firm

Performance (3 of 3)
Exhibit 1.1

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Stakeholders and Competitive

Advantage

Value Creation for Society

(1 of 2)

Companies with good strategy generate

value for society.
Firms compete in their own self-interest.
Firms obeying the law and acting ethically

Companies with a good strategy:

Provide products or services to consumers at
an affordable price
Make a profit
Benefit both parties
Make society better
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Value Creation for Society (2 of 2)

Successful companies create value for the
economy:
Education, public safety, and health care

Superior performance allows a firm to

reinvest some of its profits for growth
More opportunities for employment

Example: Google
Employs 55,000 people
People rely on Google for information
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Strategic Failure is Expensive

HP has not been able to address the
competitive challenges effectively:
Stakeholders suffered
Shareholder value was destroyed
Had to lay off thousands of employees
Customers no longer received innovative
products

Google and HP illustrate the relationship

between individual firms and society at
large
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Black Swan Events

(1 of 2)

In the past, most people assumed that all

swans were white.
When they first encountered swans that were
black, they were surprised.

Today, the metaphor of a black swan

describes the high impact of a highly
improbable event.

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Black Swan Events

(2 of 2)

Trust between corporations and society

have deteriorated because of black
swans .
Accounting Scandals: Enron
Real Estate Bubble: 2008 financial crisis

Managerial actions can affect the wellbeing of people around the globe.
Most black swan events result from executive
actions (or inactions.)

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Stakeholders

(1 of 2)

Stakeholders:
Organizations, groups, and individuals
They can affect or are affected by a firms actions.

Have a vested claim or interest in the

performance and continued survival of the
firm.
Internal stakeholders:
Stockholders, employees (including executives,
managers, and workers), and board members

External stakeholders:
Customers, suppliers, alliance partners, creditors, unions,
communities, media, and governments at various levels
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Stakeholders

(2 of 2)

Stakeholders make contributions, and they

also receive benefits.
Employees
Shareholders
Communities

The firm is embedded in an exchange

relationship with internal and external
stakeholders.

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Exhibit 1.2 Internal and External Stakeholders in

an Exchange Relationship with the Firm

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Stakeholder Strategy
Managing stakeholders in order to gain
and sustain competitive advantage
Firms analyze and manage stakeholders
Determine how external and internal
stakeholders interact
Stakeholders can create and trade value

Exemplifies how managers can act to

improve firm performance
Enhances competitive advantage
Enhances continued survival

Example: Target Corporation

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Effective Stakeholder Management Benefits

Firm Performance
1. Cooperation and information availability
2. Lowered costs
3. Greater organizational adaptability and
flexibility
4. More predictable and stable returns
5. Stronger reputation

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Worlds Most Admired Companies

Most managers care about public
perception.
Fortune magazine publishes the Worlds
Most Admired Companies annually:
In 2014, the top five companies were Apple,
Amazon, Google, Berkshire Hathaway, and
Starbucks.

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Stakeholder Impact Analysis

(1 of 3)

Primary stakeholders: achieve their

objectives
Shareholders and investors

Other stakeholders: satisfy concerns

Employees, suppliers, and customers

Stakeholder impact analysis:

A decision tool
Managers recognize, prioritize, and address
stakeholder needs
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Stakeholder Impact Analysis

(2 of 3)

A five-step process recognizing

stakeholders claims.
Managers must note three stakeholder
attributes:
Power
Legitimacy
Urgency

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3
6

Exhibit 1.3 Stakeholder Impact Analysis

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Step 1: Identify Stakeholders

Focus on stakeholders that the firm has, or
potentially can have
Identify: powerful internal and external
stakeholders and their needs
For public-stock companies: shareholders and
suppliers of capital
Also: customers, suppliers, and unions

Example: Boeing
Its new 787 Dreamliner will be built in its nonunionized South Carolina factory

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Step 2: Identify Stakeholder Interests

Specify and assess the interests and claims of
stakeholders.
Use the power, legitimacy, and urgency criteria.

Shareholders:
Legal owners
Have legitimate claim on a companys profits

Employees can be turned into shareholders.

Coca-Cola, Google, Microsoft, Southwest Airlines,
Starbucks, Walmart, and Whole Foods all offer stock
ownership plans.

Shareholder activists put public pressure on

a company to change its strategy,
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Step 3: Identify Opportunities and Threats

Opportunities and threats are two sides of
the same coin.
Example: consumer boycotts can be a credible
threat.
Example: PETA: called for a boycott of McDonalds due
to alleged animal-rights abuses.

Managers should try to transform threats

into opportunities.
Example: Sony
Dutch government blocked PlayStation shipments due
to a toxic cable.
Sonys response included a redesign of its supplier
management system.
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Step 4: Identify Societal Responsibilities

What economic, legal, ethical, and
philanthropic responsibilities do we have
to our stakeholders?
Corporate Social Responsibility (CSR):
A framework to recognize and address
economic, legal, social, and philanthropic
expectations

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Exhibit 1.4 The Pyramid of Corporate Social

Responsibility

SOURCE: Adapted from A. B. Carroll (1991), The pyramid of corporate social responsibility:
Toward the moral management of organizational stakeholders, Business Horizons, July-August:
42.

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Step 5: Address Stakeholder Concerns

Managers decide the appropriate course of
action.
The attributes of power, legitimacy, and
urgency help to prioritize legitimate
claims.

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Strategy Highlight 1.2

(1 of 4)

On April 20, 2010, an explosion occurred.

At a drilling rig off the Louisiana coastline
Killed 11 workers

The oil spill continued for over three

months.
It released an estimated 5 million barrels
of crude oil into the Gulf of Mexico.
The largest environmental disaster in U.S.
history

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Strategy Highlight 1.2

(2 of 4)

The cleanup cost was $14 billion.

Tony Hayward, BPs CEO at the time, was
fired.
Experts said BPs problems were systemic:
Management repeatedly failed to put a safety
culture in place.

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Strategy Highlight 1.2

(3 of 4)

BP faced thousands of claims by many

small business owners.
Mainly in the tourism and seafood industries

Collectively, the small business owners

became powerful BP stakeholders.
BP paid out over $25 billion to settle their
claims.

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Strategy Highlight 1.2

(4 of 4)

Total cost for this incident: $60 billion

The Environmental Protection Agency
(EPA) banned BP from any new contracts
with the U.S. government.
This ban puts BP at a major competitive
disadvantage.

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The AFI Strategy Framework

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Overview of AFI
Outlines actions that managers take to
gain and sustain competitive advantage
AFI helps managers craft and execute a
strategy that enhances the chances of
achieving superior performance.
AFI includes three broad tasks:
Analyze (A)
Formulate (F)
Implement (I)

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The AFI Strategy Framework

(1 of 2)

AFI: A model that links three interdependent

strategic management tasks
Analyze
Formulate
Implement

This model help managers plan and implement

a strategy that can
Improve performance
Result in competitive advantage.

Each of these tasks are interdependent.

Each of these tasks can happen simultaneously.
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Exhibit 1.5 The AFI Strategy Framework

2)

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(2 of

Strategy Analysis (A) Topics and Questions

Strategic leadership and the strategy process:
What roles do strategic leaders play? What are the firms vision,
mission, and values? What is the firms process for creating
strategy and how does strategy come about? (Chapter 2)

External analysis:
What effects do forces in the external environment have on the
firms potential to gain and sustain a competitive advantage? How
should the firm deal with them? (Chapter 3)

Internal analysis:
What effects do internal resources, capabilities, and core
competencies have on the firms potential to gain and sustain a
competitive advantage? How should the firm leverage them for
competitive advantage? (Chapter 4)

Competitive advantage, firm performance, and business

models:
How does the firm make money? How can one assess and measure
competitive advantage? What is the relationship between
competitive advantage and firm performance? (Chapter 5)
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Strategy Formulation (F) Topics and

Questions
Business strategy:
How should the firm compete: cost leadership,
differentiation, or integration? (Chapters 6 and
7)

Corporate strategy:
Where should the firm compete: industry,
markets, and geography? (Chapters 8 and 9)

Global strategy:
How and where should the firm compete: local,
regional, national, or international? (Chapter 10)
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Strategy Implementation (I) Topics and

Questions
Organizational design:
How should the firm organize to turn the
formulated strategy into action? (Chapter 11)

Corporate governance and business

ethics:
What type of corporate governance is most
effective? How does the firm anchor strategic
decisions in business ethics? (Chapter 12)

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Implications for the Strategist

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The Difference Between Success and Failure

Lies in a Firms Strategy
Applying tools and frameworks can enable
your firm to be more successful.
You can apply the strategic management
toolkit to your own career:
To pursue your professional goals
Reference the myStrategy modules

Strategy is the art and science of success

and failure

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Competition Is Everywhere
Strategic management principles can be
applied universally.
Strategists work in:
Small start-ups and large, multi-national
companies
For-profit and nonprofit organizations
Private and public sectors
Developed and emerging economies

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The Strategist Follows a Three-step Process

1. Analyze the external and internal
environments.
2. Formulate an appropriate business and
corporate strategy.
3. Implement the formulated strategy
through structure, culture, and controls.

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The Role of Uncertainty and Complexity

Decisions must consider uncertainty and
complexity.
Maintain awareness of key stakeholders.
They can affect or be affected by decisions.

Monitor and evaluate progress toward

strategic objectives.
Make adjustments as necessary.

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