Chapter 01

The tasks of crafting and executing company strategies are the heart and soul of managing a
business enterprise and winning in the marketplace. The key points to take away from this
chapter include the following:

A company's strategy is the game plan management is using to stake out a market position,
conduct its operations, attract and please customers, compete successfully, and achieve the
desired performance targets.

The central thrust of a company's strategy is undertaking moves to build and strengthen the
company's long-term competitive position and financial performance by competing differently
from rivals and gaining a sustainable competitive advantage over them.

A company achieves a sustainable competitive advantage when it can meet customer needs
more effectively or efficiently than rivals and when the basis for this is durable, despite the best
efforts of competitors to match or surpass this advantage.

A company's strategy typically evolves over time, emerging from a blend of (1) proactive and
deliberate actions on the part of company managers to improve the strategy and (2) reactive,
as-needed adaptive responses to unanticipated developments and fresh market conditions.

A company's business model is management's story line for how the strategy will be a
moneymaker. It contains two crucial elements: (1) the customer value proposition a plan for
satisfying customer wants and needs at a price customers will consider good value, and (2) the
profit formula a plan for a cost structure that will enable the company to deliver the customer
value proposition profitably. In effect, a company's business model sets forth the economic logic
for making money in a particular business, given the company's current strategy.

A winning strategy will pass three tests: (1) Fit (external, internal, and dynamic consistency),
(2) Competitive Advantage (durable competitive advantage), and (3) Performance (outstanding
financial and market performance).

Crafting and executing strategy are core management functions. How well a company performs
and the degree of market success it enjoys are directly attributable to the caliber of its strategy
and the proficiency with which the strategy is executed.


Chapter 02

The strategic management process consists of five interrelated and integrated stages:

Developing a strategic vision of the company's future, a mission that defines the company's
current purpose, and a set of core values to guide the pursuit of the vision and mission. This
managerial step provides direction for the company, motivates and inspires company
personnel, aligns and guides actions throughout the organization, and communicates to
stakeholders management's aspirations for the company's future.
Setting objectives to convert the vision and mission into performance targets and using the
targeted results as yardsticks for measuring the company's performance. Objectives need to
spell out how much of what kind of performance by when. Two broad types of objectives are
required: financial objectives and strategic objectives. A balanced-scorecard approach provides
a popular method for linking financial objectives to specific, measurable strategic objectives.

Crafting a strategy to achieve the objectives and move the company along the strategic course
that management has charted. Crafting deliberate strategy calls for strategic analysis, based on
the business model. Crafting emergent strategy is a learning-by-doing process involving
experimentation. Who participates in the process of crafting strategy depends on (1) whether
the process is emergent or deliberate and (2) the level of strategy concerned. Deliberate
strategies are mostly top-down, while emergent strategies are bottom-up, although both cases
require two-way interaction between different types of managers. In large, diversified
companies, there are four levels of strategy, each of which involves a corresponding level of
management: corporate strategy (multibusiness strategy), business strategy (strategy for
individual businesses that compete in a single industry), functional-area strategies within each
business (e.g., marketing, R&D, logistics), and operating strategies (for key operating units, such
as manufacturing plants). Thus, strategy making is an inclusive, collaborative activity involving
not only senior company executives but also the heads of major business divisions, functional-
area managers, and operating managers on the frontlines. The larger and more diverse the
operations of an enterprise, the more points of strategic initiative it has and the more levels of
management that play a significant strategy-making role.

Executing the chosen strategy and converting the strategic plan into action Managing the
execution of strategy is an operations-oriented, make-things happen activity aimed at shaping
the performance of core business activities in a strategy-supportive manner. Management's
handling of the strategy implementation process can be considered successful if things go
smoothly enough that the company meets or beats its strategic and financial performance
targets and shows good progress in achieving management's strategic vision.

Monitoring developments, evaluating performance, and initiating corrective adjustments in
light of actual experience, changing conditions, new ideas, and new opportunities. This stage of
the strategy management process is the trigger point for deciding whether to continue or
change the company's vision and mission, objectives, strategy, and/or strategy execution
methods.

The sum of a company's strategic vision and mission, objectives, and strategy constitutes a
strategic plan for coping with industry conditions, outcompeting rivals, meeting objectives, and
making progress toward the strategic vision. A company whose strategic plan is based around
ambitious stretch goals that require an unwavering commitment to do whatever it takes to
achieve them is said to have strategic intent.

Boards of directors have a duty to shareholders to play a vigilant role in overseeing
management's handling of a company's strategy-making, strategy executing process. This
entails four important obligations: (1) Critically appraise the company's direction, strategy, and
strategy execution, (2) evaluate the caliber of senior executives' strategic leadership skills, (3)
institute a compensation plan for top executives that rewards them for actions and results that
serve stakeholder interests especially those of shareholders, and (4) ensure that the company
issues accurate financial reports and has adequate financial controls.


Chapter 03

Thinking strategically about a company's external situation involves probing for answers to the
following seven questions:

Does the industry offer attractive opportunities for growth? Industries differ significantly on
such factors as market size and growth rate, geographic scope, life-cycle stage, the number and
sizes of sellers, industry capacity, and other conditions that describe the industry's demand-
supply balance and opportunities for growth. Identifying the industry's basic economic features
and growth potential sets the stage for the analysis to come, since they play an important role in
determining an industry's potential for attractive profits.

What kinds of competitive forces are industry members facing, and how strong is each force?
The strength of competition is a composite of five forces: (1) competitive pressures stemming
from the competitive jockeying among industry rivals, (2) competitive pressures associated
with the market inroads being made by the sellers of substitutes, (3) competitive pressures
associated with the threat of new entrants into the market, (4) competitive pressures stemming
from supplier bargaining power, and (5) competitive pressures stemming from buyer
bargaining. The nature and strength of the competitive pressures have to be examined force by
force and their collective strength must be evaluated. The strongest forces, however, are the
ultimate determinant of the intensity of the competitive pressure on industry profitability.
Working through the five-forces model aids strategy makers in assessing how to insulate the
company from the strongest forces, identify attractive arenas for expansion, or alter the
competitive conditions so that they offer more favorable prospects for profitability.

What factors are driving changes in the industry, and what impact will these changes have on
competitive intensity and industry profitability? Industry and competitive conditions change
because of a variety of forces, some coming from the industry's macro-environment and others
originating within the industry. The most common change drivers include changes in the long-
term industry growth rate, increasing globalization, changing buyer demographics,
technological change, Internet-related developments, product and marketing innovation, entry
or exit of major firms, diffusion of know-how, efficiency improvements in adjacent markets,
reductions in uncertainty and business risk, government policy changes, and changing societal
factors. Once an industry's change drivers have been identified, the analytical task becomes one
of determining whether they are acting, individually and collectively, to make the industry
environment more or less attractive. Are the change drivers causing demand for the industry's
product to increase or decrease? Are they acting to make competition more or less intense? Will
they lead to higher or lower industry profitability?

What market positions do industry rivals occupywho is strongly positioned and who is not?
Strategic group mapping is a valuable tool for understanding the similarities, differences,
strengths, and weaknesses inherent in the market positions of rival companies. Rivals in the
same or nearby strategic groups are close competitors, whereas companies in distant strategic
groups usually pose little or no immediate threat. The lesson of strategic group mapping is that
some positions on the map are more favorable than others. The profit potential of different
strategic groups varies due to strengths and weaknesses in each groups market position. Often,
industry competitive pressures and change drivers favor some strategic groups and hurt others.

What strategic moves are rivals likely to make next? Scouting competitors well enough to
anticipate their actions can help a company prepare effective countermoves (perhaps even
beating a rival to the punch) and allows managers to take rivals' probable actions into account
in designing their own company's best course of action. Managers who fail to study competitors
risk being caught unprepared by the strategic moves of rivals.

What are the key factors for competitive success? An industry's key success factors (KSFs) are
the particular strategy elements, product attributes, operational approaches, resources, and
competitive capabilities that all industry members must have in order to survive and prosper in
the industry. (KSFs) vary by industry and may vary over time as well. For any industry,
however, they can be deduced by answering three basic questions: (1) On what basis do buyers
of the industry's product choose between the competing brands of sellers, (2) what resources
and competitive capabilities must a company have to be competitively successful, and (3) what
shortcomings are almost certain to put a company at a significant competitive disadvantage?
Correctly diagnosing an industry's (KSFs) raises a company's chances of crafting a sound
strategy.

Does the outlook for the industry present the company with sufficiently attractive prospects for
profitability? The last step in industry analysis is summing up the results from answering
questions 1 to 6. If the answers reveal that a company's overall profit prospects in that industry
are above average, then the industry environment is basically attractive for that company; if
industry profit prospects are below average, conditions are unattractive for them. What may
look like an attractive environment for one company may appear to be unattractive from the
perspective of a different company.

Clear, insightful diagnosis of a company's external situation is an essential first step in crafting
strategies that are well matched to industry and competitive conditions. To do cutting-edge
strategic thinking about the external environment, managers must know what questions to pose
and what analytical tools to use in answering these questions. This is why this chapter has
concentrated on suggesting the right questions to ask, explaining concepts and analytical
approaches, and indicating the kinds of things to look for.


Chapter 04

There are six key questions to consider in evaluating a company's ability to compete
successfully against market rivals:

How well is the present strategy working? This involves evaluating the strategy from a
qualitative standpoint (completeness, internal consistency, rationale, and suitability to the
situation) and also from a quantitative standpoint (the strategic and financial results the
strategy is producing). The stronger a company's current overall performance, the less likely the
need for radical strategy changes. The weaker a company's performance and/or the faster the
changes in its external situation (which can be gleaned from industry and competitive forces
analysis), the more its current strategy must be questioned.

Do the company's resources and capabilities have sufficient competitive power to give it a
sustainable advantage over competitors? The answer to this question comes from conducting
the four tests of a resource's competitive power. If a company has resources and capabilities
that are competitively valuable and rare, the firm will have a competitive advantage over
market rivals. If its resources and capabilities are also hard to copy, with no good substitutes,
then the firm may be able to sustain this advantage even in the face of active efforts by rivals to
overcome it.

Is the company able to seize market opportunities and overcome external threats to its future
well-being? The answer to this question comes from performing a SWOT analysis. The two most
important parts of SWOT analysis are (1) drawing conclusions about what story the compilation
of strengths, weaknesses, opportunities, and threats tells about the company's overall situation
and (2) acting on the conclusions to better match the company's strategy to its internal
strengths and market opportunities, to correct the important internal weaknesses, and to
defend against external threats. A company's strengths and competitive assets are strategically
relevant because they are the most logical and appealing building blocks for strategy; internal
weaknesses are important because they may represent vulnerabilities that need correction.
External opportunities and threats come into play because a good strategy necessarily aims at
capturing a company's most attractive opportunities and at defending against threats to its well-
being.

Are the company's prices, costs, and value proposition competitive? One telling sign of whether
a company's situation is strong or precarious is whether its prices and costs are competitive
with those of industry rivals. Another sign is how it compares with rivals in terms of
differentiationhow effectively it delivers on its customer value proposition. Value chain
analysis and benchmarking are essential tools in determining whether the company is
performing particular functions and activities efficiently and effectively, learning whether its
costs are in line with competitors, whether it is differentiating in ways that really enhance
customer value, and deciding which internal activities and business processes need to be
scrutinized for improvement. They complement resource and capability analysis by providing
data at the level of individual activities that provides more objective evidence of whether
individual resources and capabilities, or bundles of resources and linked activity sets, are
competitively superior.

On an overall basis, is the company competitively stronger or weaker than key rivals? The key
appraisals here involve how the company matches up against key rivals on industry key success
factors and other chief determinants of competitive success and whether and why the company
has a net competitive advantage or disadvantage. Quantitative competitive strength
assessments, using the method presented in Table 4.4, indicate where a company is
competitively strong and weak and provide insight into the company's ability to defend or
enhance its market position. As a rule, a company's competitive strategy should be built around
its competitive strengths and should aim at shoring up areas where it is competitively
vulnerable. When a company has important competitive strengths in areas where one or more
rivals are weak, it makes sense to consider offensive moves to exploit rivals' competitive
weaknesses. When a company has important competitive weaknesses in areas where one or
more rivals are strong, it makes sense to consider defensive moves to curtail its vulnerability.

What strategic issues and problems merit front-burner managerial attention? This analytical
step zeros in on the strategic issues and problems that stand in the way of the company's
success. It involves using the results of industry analysis as well as resource and value chain
analysis of the company's competitive situation to identify a "worry list" of issues to be resolved
for the company to be financially and competitively successful in the years ahead. The worry list
always centers on such concerns as "how to ," "what to do about ," and "whether to "
the purpose of the worry list is to identify the specific issues/problems that management needs
to address. Actually deciding on a strategy and what specific actions to take is what comes after
the list of strategic issues and problems that merit front-burner management attention is
developed.

Solid analysis of the company's competitive situation vis--vis its key rivals, like good industry
analysis, is a valuable precondition for good strategy making. A competently done evaluation of
a company's resources, capabilities, and competitive strengths exposes strong and weak points
in the present strategy and how attractive or unattractive the company's competitive position is
and why. Managers need such understanding to craft a strategy that is well suited to the
company's competitive circumstances.