1-1 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter

1
What Is Strategy and
Why Is It Important?

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.
Troy State University-Florida and Western Region

1-2 McGraw-Hill/Irwin © 2005 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
 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?

1-4 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
1-5 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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

1-6 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 The Hows That
Define a Firm's Strategy
 How to please customers

 How to respond to changing

market conditions Strategy
is HOW
 How to outcompete rivals to . . .

 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
1-7 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 What Are a Company’s Strategic
Choices?
Strategic choices 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 prevailing circumstances
1-8 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
1-9 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 Fig. 1.1: Identifying a Company’s Strategy

1-10 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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!
1-11 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
1-12 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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

1-13 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 Fig. 1.2: A Company’s Strategy Is Partly
Proactive and Partly Reactive

1-14 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
1-15 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
1-16 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
1-17 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 A Firm’s Ethical Responsibilities
to Its Stakeholders
Owners/shareholders
Owners/shareholders––Rightfully
Rightfullyexpect
expectsome
someform
formof
of
return
returnon
ontheir
theirinvestment
investment
Employees
Employees--Rightfully
Rightfullyexpect
expectto
tobe
betreated
treatedwith
withdignity
dignity
and
andrespect
respectfor
fordevoting
devotingtheir
theirenergies
energiesto
tothe
theenterprise
enterprise
Customers
Customers--Rightfully
Rightfullyexpect
expectaaseller
sellerto
toprovide
providethem
them
with
withaareliable,
reliable,safe
safeproduct
productor
orservice
service
Suppliers
Suppliers--Rightfully
Rightfullyexpect
expectto
tohave
havean
anequitable
equitable
relationship
relationshipwith
withfirms
firmsthey
theysupply
supplyand
andbe
betreated
treatedfairly
fairly
Community
Community--Rightfully
Rightfullyexpect
expectbusinesses
businessesto
tobe
begood
good
citizens
citizensin
intheir
theircommunity
community
1-18 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
1-19 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 What Is a Business Model?
 A business model addresses “How do we make 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?

1-20 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
teg
y and viable
S tra ss
ne l
i
s e
Bu od
M

1-21 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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

1-22 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 Redhat Linux’s
Business Model
Rely
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tocreate
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Add
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Linuxby
byoffering
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andtested
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Charge
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services
1-23 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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?

1-24 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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!
1-25 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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
1-26 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 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

Excellent execution of an excellent strategy is the best

test of managerial excellence -- and the most reliable
recipe for winning in the marketplace!
1-27 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.