Chapter 01 - Lecture Note

Chapter 1 Lecture Note

What Is Strategy and
Why Is It Important?
Chapter Summary
Chapter One explores the concepts surrounding organizational strategy. It begins with an explanation of
the term strategy and offers a basis for how to identify a company’s particular strategy. Next, it explores
the importance of striving for competitive advantage in the marketplace and examines the role strategy
plays in achieving this advantage. The chapter then explores the idea that strategy is partly proactive and
partly reactive. Next, a discussion on strategy and ethics is given. This is followed by a close look at the
relationship between a company’s strategy and its business model. The chapter proceeds forward with a
look at what makes strategy a winner and then presents reasons for why crafting and executing strategy
are important. The chapter concludes with thoughts on the equation: good strategy + good strategy
execution = good management.

Lecture Outline
I. Introduction
Managers at all companies face three central questions in thinking strategically about their company’s
present circumstances and prospects: What’s the company’s present situation? Where does the
company need to go from here? How should it get there? “What’s the company’s present situation?”
prompts managers to evaluate industry conditions and competitive pressures, the company’s current
performance and market standing, its resource strength and capabilities and its competitive
weaknesses. “Where does the company need to go from here?” pushes managers to make choices
about the direction the company should be headed—what new or different customer groups and
customer needs it should endeavor to satisfy, what market positions it needs to be staking out, what
changes in its business makeup are needed. “How should it get there?” challenges managers to craft
and execute a strategy—a full-blown action plan—capable of moving the company in the intended
direction, growing its business, and improving its financial and market performance.

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II. What Do We Mean by Strategy?

1. A company’s strategy is management’s action plan for running the business, how to attract and
please customers, how to compete successfully, how to conduct operations, and how to improve
the company’s financial and market performance.
2. Normally, companies have a wide degree of strategic freedom in choosing the “hows” of strategy:
a. They can compete in a single industry.
b. They can diversify broadly or narrowly.
3. At companies intent on gaining sales and market share at the expense of competitors, managers
typically opt for the offensive strategies while risk-avoiding companies prefer conservative
strategies.
4. There is no shortage of opportunity to fashion a strategy that tightly fits a company’s own
particular situation and that is discernibly different from the strategies of rivals.
5. Illustration Capsule 1.1, Comcast’s Strategy to Revolutionize the Cable Industry, offers a
concrete example of the actions and approaches involved in crafting strategy.

Illustration Capsule 1.1, Comcast’s Strategy to Revolutionize the Cable Industry

Discussion Question: 1. Would Comcast be described as a risk taker or risk-averse? Why?
Answer: Comcast would be described as a risk taker. The company had the intention of gaining the
market share by revolutionizing the industry. It launched fresh initiatives such as Internet phone service,
video-on-demand, etc. to make its product offerings more distinctive and appealing to buyers.

Core Concept
A company’s strategy consists of the competitive moves and business approaches that managers
employ to attract and please customers, compete successfully, grow the business, conduct
operations, and achieve targeted objectives.

A. Strategy and the Quest for Competitive Advantage

1. The heart and soul of any strategy is the actions and moves in the market place that managers
are taking to improve the company’s financial performance, strengthen its long-term
competitive position, and gain a competitive edge over rivals.
2. What makes a competitive advantage sustainable as opposed to temporary are actions and
elements in the strategy that cause an attractive number of buyers to have a lasting preference
for a company’s products or services as compared to the offerings of competitors.

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Core Concept
A company achieves sustainable competitive advantage when an attractive number of buyers prefer
its products or services over the offerings of competitors and when the basis for this preference is
durable.

3. Four of the most frequently used strategic approaches to setting a company apart from rivals
and achieving a sustainable competitive advantage are:
a. Striving to be the industry’s low-cost provider, thereby aiming for a cost-based
competitive advantage over rivals.
b. Outcompeting rivals based on such differentiating features as higher quality, wider
product selection, added performance, value-based services, more attractive styling,
technological superiority, or unusually good value for the money.
c. Focusing on a narrow market niche and winning a competitive edge by doing a better job
than rivals of serving the special needs and tastes of buyers comprising the niche.
d. Developing expertise and resource strengths that give the company competitive
capabilities that rivals cannot easily imitate or trump with capabilities of their own.
4. The bigger and more sustainable the competitive advantage, the better the company’s
prospects for winning in the market place and earning superior long-term profits relative to its
rivals.
B. Identifying a Company’s Strategy
1. A company’s strategy is reflected in its actions in the marketplace and the statements of
senior managers about the company’s current business approaches, future plans, and efforts
to strengthen its competitiveness and performance.
2. Figure 1.1, Identifying a Company’s Strategy – What to Look For, shows what to look for in
identifying the substance of a company’s overall strategy.
3. Once it is clear what to look for, the task of identifying a company’s strategy is mainly one of
researching information about the company’s actions in the marketplace and business
approaches.
4. To maintain the confidence of investors and Wall Street, most public companies have to be
fairly open about their strategies.
5. Except for some about-to-be-launched moves and changes that remain under wraps and in the
planning stage, there is usually nothing secret or undiscoverable about what a company’s
present strategy is.

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C. Why a Company’s Strategy Evolves over Time

1. Every company must be willing and ready to modify its strategy in response to changing
market conditions, advancing technology, competitive moves, shifting buyer needs and
preferences, emerging market opportunities, new ideas for improving the strategy, and
mounting evidence that the strategy is not working well.
2. Most of the time a company’s strategy evolves incrementally from management’s ongoing
efforts to fine tune pieces of the strategy, but, on occasion, major strategy shifts are called for.
3. Industry environments characterized by high velocity change require companies to rapidly
adapt their strategies.
4. Thus, a company’s strategy at any given point in time is fluid.

Core Concept
Changing circumstances and ongoing management efforts to improve the strategy cause a
company’s strategy to emerge and evolve over time – a condition that makes the task of crafting a
strategy a work in progress, not a one-time event.

Core Concept
A company’s strategy is shaped partly by management analysis and choice and partly by the
necessity of adapting and learning by doing.

D. A Company’s Strategy Is Partly Proactive and Partly Reactive

1 A company’s strategy is typically a blend of (1) proactive actions on the part of managers to
improve the company’s market position and financial performance and (2) as-needed
reactions to unanticipated developments and fresh market conditions.
2. Figure 1.2, A Company’s Strategy is a Blend of Proactive Initiatives and Reactive
Adjustments, depicts the typical blend found within a company’s strategy.
3. The biggest portion of a company’s current strategy flows from previously initiated actions
and business approaches that are working well enough to merit continuation and newly
launched managerial initiatives to strengthen the company’s overall position and
performance. This part of management’s game plan is deliberate and proactive.
4. There will be occasions when market and competitive conditions take an unexpected turn that
calls for some kind of strategic reaction or adjustment.
5. A portion of a company’s strategy is always developed on the fly. It comes about as a
reasoned response to unforeseen developments.
6. A company’s strategy thus tends to be a combination of proactive and reactive elements.

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III. Strategy and Ethics: Passing the Test of Moral Scrutiny

1. In choosing among strategic alternatives, company managers are well advised to embrace
actions that are aboveboard and can pass the test of moral scrutiny.
2. Crafting an ethical strategy means more than keeping a company’s strategic actions within
the bounds of what is legal.
3. A strategy is ethical only if it meets two criteria:
a. It does not entail actions and behaviors that cross the line from “can do” to “should not do.”
b. It allows management to fulfill ethical duties to all stakeholders.
4. It is not always easy to categorize a given strategic behavior as definitely ethical or definitely
unethical. Whether they are deemed ethical or unethical hinges on how clearly the boundaries
are defined.
5. Senior executives with strong character and ethical convictions are generally proactive in
linking strategic action and ethics; they forbid the pursuit of ethically questionable business
opportunities and insist all aspects of company strategy reflect high ethical standards.
6. Recent instances of corporate malfeasance, ethical lapses, and misleading or fraudulent
accounting practices at Enron, WorldCom, Tyco, Adelphia, Dynergy, HealthSouth, and other
companies leave no room to doubt the damage to a company’s reputation and business that
can result from ethical misconduct, corporate misdeeds, and even criminal behavior on the
part of company personnel.
7. There is little lasting benefit to unethical strategies and behavior and the downside risks can
be substantial.
IV. The Relationship Between a Company’s Strategy and Its Business Model
1. Closely related to the concept of strategy is the concept of a company’s business model.

Core Concept
A company’s business model explains the rationale for why its business approach and strategy will
be a money maker. Absent the ability to deliver good profitability, the strategy is not viable and the
survival of the business is in doubt.

2. A company’s business model is management’s storyline for how and why the company’s product
offerings and competitive approaches will generate a revenue stream and have an associated cost
structure that produces attractive earnings and return on investment.
3. The concept of a company’s business model is consequently more narrowly focused than the
concept of a company’s business strategy. A company’s strategy relates broadly to its competitive
initiatives and business approaches while the business model zeros in on whether the revenues
and costs flowing from the strategy demonstrate business viability.

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4. Illustration Capsule 1.2, Microsoft and Red Hat Linux: Two Contrasting Business Models,
discusses the contrasting business models of Microsoft and Red Hat Linux.

Illustration Capsule 1.2, Microsoft and Red Hat Linux: Two Contrasting Business
Models
Discussion Question: 1. What is the prominent difference between the business models of these two
organizations?
Answer: The prominent difference in the business models employed by Microsoft and Red Hat Linux
can be found in their respective different revenue-cost-profit economics. Microsoft sells proprietary code
software while giving away service. Red Hat Linux, on the other hand, gives software away and depends
heavily on sales of technical support services, training, and consultancy services.

V. What Makes a Strategy a Winner?

1. Three questions can be used to test the merits of one strategy versus another and distinguish a
winning strategy from a losing or mediocre strategy:
a. How well does the strategy fit the company’s situation?
i. To qualify as a winner, a strategy has to be well matched to industry and competitive
conditions, a company’s best market opportunities, and other aspects of the enterprise’s
external environment. Unless a strategy exhibits a tight ft with both the external and
internal aspects of a company’s overall situation, it is likely to produce less than the best
possible business results.
b. Is the strategy helping the company achieve a sustainable competitive advantage?
i. The bigger and more durable the competitive edge that a strategy helps build, the more
powerful and appealing it is.
c. Is the strategy resulting in better company performance?
i. Two kinds of performance improvements tell the most about the caliber of a company’s
strategy: (1) gains in profitability and financial strength and (2) gains in the company’s
competitive strength and market standing.
2. Strategies that come up short on one or more of the above questions are plainly less appealing
than strategies passing all three test questions with flying colors.

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Core Concept
A winning strategy must fit the enterprise’s external and internal situation, build sustainable
competitive advantage, and improve company performance.

3. Other criteria for judging the merits of a particular strategy include internal consistency and unity
among all the pieces of strategy, the degree of risk the strategy poses as compared to alternative
strategies, and the degree to which it is flexible and adaptable to changing circumstances.
VI. Why are Crafting and Executing Strategy Important?
1. Crafting and executing strategy are top priority managerial tasks for two very big reasons:
a. There is a compelling need for managers to proactively shape or craft how the company’s
business will be conducted.
b. A strategy-focused organization is more likely to be a strong bottom-line performer.
A. Good Strategy + Good Strategy Execution = Good Management
1. Crafting and executing strategy are core management functions.
2. Among all the 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-to-day strategy execution and operating
excellence.
3. Good strategy and good strategy execution are the most trustworthy signs of good
management.
4. The better conceived a company’s strategy and the more competently it is executed, the more
likely it is that the company will be a standout performer in the marketplace.

Core Concept
Excellent execution of an excellent strategy is the best test of managerial excellence – and the most
reliable recipe for turning companies into standout performers.

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Exercises
1. Go to www.redhat.com and check whether the company’s business model is working. Is the
company sufficiently profitable to validate its business model and strategy? Is its revenue stream
from selling technical support services growing or declining as a percentage of total revenues?
Does your review of the company’s recent financial performance suggest that its business model
and strategy are changing? Read the company’s latest statement about its business model and
about why it is pursuing the subscription approach (as compared to Microsoft’s approach of
selling copies of its operating software directly to PC manufacturers and individuals).
The responses offered by the students may include information such as the following. Red Hat
was established in 1994 and is currently headquartered in Raleigh, North Carolina. It is
considered a leader in the development, deployment, and management of Linux and open source
solutions for Internet infrastructures. This organization utilizes “Open Source” as the foundation
of its business model. This methodology permits code access for the software to any user of the
product. According to Red Hat, the end result of this applied methodology is rapid innovation.
However, this has not proven to be so successful to the organization’s bottom line profit.
According to the information gleaned from the company’s financial reports, the company has
sustained losses. Students should identify approximately what percent of revenues are derived
from selling technical support. The students should also address plans for changing that Red Hat
wishes to implement and relate the effect of those changes to potential financial impact. For
instance, its new marketing techniques may generate greater revenues for the organization.
Students should look at “Why Subscriptions?” for information about why Red Hat uses
subscriptions rather than the traditional method of software delivery. According to the site, “It’s a
perfect complement to the rapid innovation of the open source model.” In the traditional method
of software delivery, upgrades were costly, access to help was limited, and there was little
incentive to improve the software between upgrades. The balance of power rested on the side of
the vendor. For Red Hat, the subscription model allows for service and changes based on
customer feedback.
2. 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 maintaining a cost advantage, offering the
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)? Do you think
Comcast’s strategy has evolved in recent years? Why or why not? What is there about Comcast’s
strategy that can lead to sustainable competitive advantage?

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Comcast appears to be charting the course in the cable industry with new product offerings as
well as adding related products that capitalize on the technology. The strategy focuses primarily
on differentiating features and developing resource strengths and competitive capabilities rivals
can’t imitate or trump. However, some aspects of the strategy also focus on cost advantages such
as VoIP technology to offer Internet-based phone services at a fraction of the cost charged by
other providers. Comcaststrategy appears to be evolving constantly to meet the changing
technology and industry and competitive conditions. The aspects in Comcast’s strategy that can
lead to sustainable competitive advantage are technological investment such as video-on-demand
and VoIP, etc. (which would need to continue to evolve in order to remain on the cutting edge of
technology), partnerships with movie content providers, and its focus on customer service.
3. On December 15, 2003, Levi Strauss & Company announced it would close its two last
remaining apparel plants in the United States to finalize its transition from a clothing
manufacturer to a marketing, sales, and design company. Beginning in 2004, all Levi’s apparel
would be produced by contract manufacturers located in low-wage countries. As recently as
1990, Levi Strauss had produced 90 percent of its apparel in company-owned plants in the United
States employing over 20,000 production workers. With every plant closing, Levi Strauss &
Company provided severance and job retraining packages to affected workers and cash payments
to small communities where its plants were located. However, the economies of many small
communities have yet to recover and some employees have found it difficult to match their
previous levels of compensations and benefits.

Review Levi Strauss & Company’s discussion of its Global Sourcing and Operating Guidelines at
http://www.levistrauss.com/Citizenship/. Does the company’s strategy fulfill the company’s
ethical duties to all stakeholders—owners/shareholders, employees, customers, suppliers, the
communities in which it operates, and society at large? Does Levi Strauss’s strategy to outsource
all of its manufacturing operations to low-wage countries pass the moral scrutiny test? Is it ethical
for a company to close plants employing over 20,000 workers? Why or why not?

Student responses will vary. However, they should address the issues of being competitive versus
ethics of closing plants and laying off workers as well as the conflicting aspects in
satisfying/meeting different stakeholders needs. Specifically, in 1991 Levi Strauss became the
first multinational company to establish a comprehensive ethical code of conduct for
manufacturing and finishing contractors working with the company. This code, known as the
Global Sourcing and Operating Guidelines, directs business practices, such as fair employment,
worker health and safety, and environmental standards, among others. The company’s
groundbreaking code earned it the “America’s Corporate Conscience Award for International
Commitment from the Council on Economic Priorities.” Outsourcing production serves the
ethical duties to the owners/shareholders by pursuing a viable business strategy. It also satisfies
the ethical concerns of the new employee groups by establishing standards at the new factories
where once there were none. If a contractor in another country does not meet the standards, it
does not get Levi’s business. This provides incentives for the contractors who may otherwise give
little attention to worker safety, for instance, to treat workers more fairly and with more concern.
The company serves the communities in which it operates for similar reasons—it brings standards
to the communities’ facilities while providing jobs and improving quality of life at those plants.
Lastly, it enhances society at large by establishing corporate citizenship and social responsibility
as important issues in today’s global environment and makes ethics an issue that companies can
compete on rather than work to avoid.

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