Chapter
1
What Is Strategy and
Why Is It Important?
1-1
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?
1-2
Thinking Strategically:
The Three Big Strategic Questions
1. Where are we now?
2. Where do we want to go?
Business(es) to be in and market positions to stake out
Buyer needs and groups to serve
Outcomes to achieve
3. How will we get there?
A company’s answer to “how
will we get there?” is its strategy
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What Is Strategy?
Consists of the combination of competitive moves and
business approaches used by managers to run the
company
Management’s “game plan” to
Attract and please customers
Stake out a market position
Compete successfully
Grow the business
Achieve targeted objectives
1-4
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
1-5
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
1-6
Key Elements:
Southwest Airlines’ Strategy
Grow the business by gradually adding more flights on
existing routes and initiating service to new airports
Make friendly service a company trademark
Maintain an aircraft fleet of only Boeing 737s
Encourage customers to make reservations and purchase
tickets at the company’s Web site
Avoid flying into congested airports
Employ a point-to-point route system
Economize on
Amount of time it takes terminal personnel to check
passengers in and on-load passengers
Costs
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Striving for
Competitive Advantage
To achieve sustainable competitive advantage, a
company’s strategy usually must be aimed at either
Providinga 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
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
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
1-9
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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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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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
1-12
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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What Is a Business Model?
A business model addresses “How do we make money in
this business?”
Isthe 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
Doresulting 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 - Deals with a Business Model
company’s competitive -Concerns whether
initiatives and business revenues and costs flowing
approaches from the strategy
demonstrate the 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 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
Provide technical
technical support
support to
to users
users at
at no
no cost
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
Doesstrategy lead to sustainable
competitive advantage?
PERFORMANCE TEST
Does strategy boost firm performance?
1-18
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
1-19
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
1-20
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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