CHAPTER 1

WHAT IS STRATEGY AND

WHY IS IT IMPORTANT?

Copyright ®2012 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin

 Definition of Strategic Management

◆ Strategic management is a branch of

management that focuses establishing
a strategic vision & mission, setting out goals
and objectives, developing and implementing
strategies, and using corrective steps, if
necessary, in order to attain the organization’s
strategic target.

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Five Tasks of Strategic Management

◆ Developing a Strategic Vision and Mission

◆ Setting Objectives
◆ Crafting Strategies
◆ Implementing the Strategies
◆ Evaluating Performance and Initiating
Corrective Adjustments

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 “Without a strategy the
organization is like a ship without
a rudder, going around in circles.”

Joel Ross and Michael Kami

“Quo
te”
 WHY????

◆ Why do some companies succeed while

others fail?

◆ Why did Dell do so well during the 1990s

and the first half of the 2000s?

◆ Why has Walmart been able to

persistently outperform its well-managed
rivals? (approx. 10,500 stores in 24 countries)
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◆ In the airline industry, how has Southwest
Airlines managed increasing its revenues
both in good times and bad, while rivals
such as United Airlines failed to do so?

◆ It is argued that the strategies that a

company pursues have a major impact on
its performance relative to its competitors.

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 WHAT DO WE MEAN BY STRATEGY ?

♦ What is our present situation?

● Business environment and industry conditions
● Firm’s financial and competitive capabilities
♦ Where do we want to go from here?
● Creating a vision for the firm’s future direction
♦ How are we going to get there?
● Crafting an action plan that will get us there

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 WHAT IS STRATEGY ABOUT?

♦ Strategy is all about How:

● How to attract and please customers.
● How to outcompete rivals.
● How to position the company in the
marketplace.
● How to respond to changing economic and
market conditions.
● How to manage functional pieces of the
business.
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 WHAT IS STRATEGY ABOUT?

♦ Strategy is all about How:

● How to improve the firm’s financial and
market performance.
● How to capitalize growth opportunities.
● How to achieve the firm’s performance
targets.

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 WHAT DO WE MEAN BY STRATEGY ?

♦ A strategy is a set of related actions that

managers take to increase their
company’s performance.

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 WHY DO WE NEED STRATEGIES ?

♦ A firm needs strategies:

● To improve its financial performance.
● To strengthen its competitive position.
● To gain a sustainable competitive
advantage over its market rivals.
♦ A creative, distinctive strategy:
● Can yield above-average profits.
● Makes competition difficult for rivals.

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 STRATEGY is about Competing Differently

♦ Strategy is about competing differently

from rivals—
● Doing what they don’t do or doing it better!
● Doing what they can’t do!
● Doing that which sets the firm apart and
attracts customers.
● Doing what we should or should not do to
produce a competitive edge.

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 Understanding Company Strategy -- What
to Look For
Diversification
Actions to Strengthen Responses to
Resources & Capabilities Changing Conditions

Actions and Offensive Moves

approaches to Pattern to Gain Edge
Manage Functional of Actions
Activities That
Define
Changes in
Defensive Moves Strategy
Product Line,
Quality, or Service
Pursuing New
Opportunities Actions to enter new
Geographic Markets
Forward or
Backward Integration,
Collaboration
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 Determinants of
Shareholders provide
Shareholder Value
Risk Capital (the capital
that cannot be recovered
if a company fails or goes
bankrupt.

The returns that

the shareholders
earn from
purchasing
shares in a
company.

To increase shareholder value, managers must

pursue strategies that increase the profitability
of the company and grow the profits.
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 ROIC (Profitability) = Return On Invested Capital

• Net profit Net income after tax

Capital invested Equity + Debt to creditors

The profit growth of a company is measured by

the increase in net profit over time.

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 The Quest for Competitive Advantage

♦ Competitive Advantage
● If a company’s strategies result in superior
performance, it is said to have a
competitive advantage.
● A competitive advantage is any attribute/factor that
enables a company to outperform its competitors.
● A company is said to have a competitive
advantage over its rivals when its
profitability is greater than the average
profitability of the industry.

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 The Quest for Competitive Advantage

♦ Sustained Competitive Advantage

● A company has a sustained competitive
advantage when its strategies enable it to
maintain above-average profitability for a
number of years.

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 The Quest for Competitive Advantage

♦ Competitive Advantage
● Meeting customer needs more effectively,
with products or services that customers
value more highly, or more efficiently, at
lower cost.
♦ Sustainable Competitive Advantage
● Giving buyers lasting reasons to prefer a
firm’s products or services over those of its
competitors.

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 The Quest for Competitive Advantage

● If a company has a competitive advantage,

it is likely to gain market share from its rivals
and thus grow it profits more rapidly than
those of rivals.

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 STRATEGIC APPROACH CHOICES

Building Competitive Advantage

Low-cost Differentiation Focus on Best-cost

provider on features market niche provider

Such as higher quality, Giving

wider product selection,
added performance,
customers
added services, more more value
attractive styling, and for their
technological
money
superiority

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 GAINING SUSTAINABLE COMPETITIVE
ADVANTAGE

♦ How to create a sustainable competitive

advantage:
● Put the constant quest for sustainable
competitive advantage through crafting your
strategy.
● Develop valuable expertise and competitive
capabilities over the long-term that rivals
cannot readily copy.

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 Why a Firm’s Strategy Evolves over Time

♦ Managers modify strategy in response to:

● Changing market conditions
● Advancing technology
● Fresh moves of competitors
● Shifting buyer needs
● Emerging market opportunities
● New ideas for improving the strategy

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 The Evolving Nature of a Firm’s Strategy

♦ Realized (current) strategy is a blend of:

● Proactive (deliberate) strategy elements that
are both planned and realized as planned.
● Reactive (emergent) strategy elements that
are required due to unanticipated changing
conditions.

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 Planned, Deliberate, Emergent
and Realized Strategies
Figure 1.6

Source: Adapted from H. Mintzberg and

A. McGugh, Administrative Science
Quarterly, Vol. 30. No. 2, June 1985.

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 Levels of Strategic Management
Figure 1.3

Operational
Level

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 Strategic Managers
❖ Corporate Level Managers
• Oversee the development of strategies for the
whole organization
• Consist of the CEO, other senior executives,
and corporate staff.
❖ Business Level Managers
• Responsible for managing business unit or
divisional performance
❖ Functional Managers
• Responsible for managing specific functional
departments
e.g. marketing, operations, accounting, human resources

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 Strategic Leadership
Good leaders of the strategy-making process
have a number of key attributes:
❖ Vision, eloquence, and consistency
❖ Articulation of the Business Model
❖ Commitment
❖ Being well informed
❖ Willingness to delegate and empower
❖ The astute use of power
❖ Emotional intelligence
• Self-awareness
• Self-regulation
• Motivation
• Empathy
• Social skills

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 Company’s Business Model
Is the management’s conception of how a set of
strategies his company pursues should mesh
together into a congruent whole, enabling the
company to gain competitive advantage and
achieve superior profitability

Is the management’s blueprint for delivering a

valuable product and service in a manner that
will yield an attractive profit.
The two elements of business model are: (i) its
consumer value proposition, & (ii) its profit
formula.

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 Company’s Business Model
Management’s model of how strategy will allow
the company to gain competitive advantage
and achieve superior profitability
A business model encompasses how the company will:
• Please its customers • Deliver those goods and
• Define and differentiate services to the market
its product offerings • Organize activities within
• Create value for its the company
customers • Configure its resources
• Acquire and keep • Achieve and sustain a
customers high level of profitability
• Produce goods or • Grow the business over
services time
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THE RELATIONSHIP BETWEEN A
FIRM’S STRATEGY AND ITS BUSINESS
MODEL

Realized Business
Strategy $$$? Model
Proactive
Value
(deliberate)
Proposition
strategy

Reactive
(emergent) Profit Formula
strategy

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 Business Model Elements (cont’d)

♦ The Profit Formula

● Creating a cost structure that allows for
acceptable profits, given that pricing is
tied to the customer value proposition.
► V—the value provided to customers
► P—the price charged to customers Profit =
► C—the firm’s costs P–C
● The lower the costs (C) for a given customer
value proposition (V–P), the greater the ability
of the business model to be a moneymaker.

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 IS OUR STRATEGY A WINNER?

- External Fit
The Strategic - Internal Fit
Fit Test - Dynamic Fit

The Competitive Winning The Performance

Advantage Test Test
Strategy

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 WHY CRAFTING AND EXECUTING
STRATEGY ARE IMPORTANT TASKS

♦ Strategy provides:
● A prescription for doing business.
● A road map to competitive advantage.
● A game plan for pleasing customers.
● A formula for attaining long-term standout
marketplace performance.

Good Strategy + Good Strategy Execution =

Good Management
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 Strategy in Nonprofit Enterprises
Nonprofit entities such as government
agencies, universities, and charities:
• Are not in business to make a profit
• Should use their resources efficiently
and effectively
• Set performance goals unique to the
organization
• Set strategies to achieve goals and compete
with other nonprofits for scarce resources
A successful strategy gives potential
donors a compelling message as to
why they should contribute.
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THANK YOU

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