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What Is Strategy
Chapter Title
and Why Is
It Important?

Screen graphics created by:


16/e PPT Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved.


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

Joel Ross and Michael Kami


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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”?

 Consistsof 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 target levels of
organizational performance
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The Hows That
Define a Firm's Strategy
 How to grow the business
 How to please customers Strategy
is HOW
 How to outcompete rivals to . . .

 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 the company’s circumstances
 In choosing a strategy, management is in effect saying,
“Among all the many different business approaches and
ways of competing we could have chosen, we have
decided to employ this particular combination of
competitive and operating approaches in moving the
company in the intended direction, strengthening its
market position, and competitiveness, and boosting
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 enterprise 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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Key Elements:
Comcast’s Strategy
 Roll out high-speed Internet or broadband service to customers via
cable modems
 Promote a new video-on-demand service to allow digital
subscribers to watch TV programs whenever they want
 Promote a video-on-demand service so digital customers can order
and watch pay-per-view movies
 Partner with Sony, MGM, and others to expand movie offerings
 Use VoIP technology to offer subscribers Internet-based phone
service at a fraction of the cost charged by others
 Use video-on-demand and CDV offerings to combat mounting
competition from satellite TV providers
 Employ a sales force to sell advertising to businesses that were
shifting advertising dollars from sponsoring network programs to
sponsoring cable programs
 Significantly improve customer service
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For Discussion: Your Opinion

From your perspective as a cable or satellite service


consumer, does Comcast’s strategy (as described in
Illustration Capsule 1.1) seem to be well-matched to
industry and competitive conditions?

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)?

What is there about Comcast’s 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 the actions
and moves in the marketplace that a company
makes to 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
 Competing with a competitive advantage is more
profitable than competing with no advantage
 Competing 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 or buyers prefer its
products/services over those of rivals and when the basis
for this preference can be maintained over time
 Its nice when a strategy produces a temporary
competitive edge but a durable edge over rivals greatly
enhances a company’s prospects for winning in the
marketplace and realizing above-average profits

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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Four “Best” Strategic Approaches to
Building Sustainable Competitive Advantage
 Being the industry’s low-cost provider (a cost-based
competitive advantage)
 Incorporate differentiating features (a “superior product”
type of competitive advantage keyed to higher quality,
better performance, wider selection, value-added
services, or some other attribute)
 Focusing on a narrow market niche (winning a
competitive edge by doing a better job than rivals
of serving the needs and preferences of
buyers comprising the niche)
 Developing expertise and resource
strengths not easily imitated or matched by rivals
(a capabilities-based competitive advantage)
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Competitive Advantage Examples

 Strive to be the 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
 Mercedes-Benz – Engineering design and performance
 L.L. Bean – Good value
 Amazon.com – Wide selection and convenience
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Competitive Advantage Examples (cont)

 Focus on a narrow market niche


 eBay – Online auctions
 Jiffy Lube International – Quick oil changes
 McAfee – Virus protection auctions
 Starbucks – Premium coffees and coffee drinks
 The Weather Channel – Cable TV
 Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
 FedEx – Next-day delivery of small packages
 Walt Disney – Theme park management and family entertainment
 Toyota – Sophisticated production system
 Ritz-Carlton – Personalized customer service
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Fig. 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
 Shifting market conditions
 Technological breakthroughs
 Fresh moves of competitors
 Evolving customer preferences
 Emerging market opportunities
 New ideas to improve strategy
 Crisis situations
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Fig. 1.2: A Company’s Strategy Is
Partly Proactive and Partly Reactive

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Crafting Strategy Is an
Exercise in Entrepreneurship
 Strategy-making is a market-driven activity involving
 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”
 Ethicaland 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” and “unsavory” or
“shady” and
 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 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?

model addresses “How do we make


 A business
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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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

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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 Linus 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 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

While these criteria are relevant, they seldom override


the importance of the three tests of a winning strategy!

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Why Is Strategy Important?

 A compellingneed 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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