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What Is Strategy
Chapter Title
and Why Is
It Important?
“Without a strategy the
organization is like a
ship without a rudder.”
rudder.”

Joel Ross and Michael Kami

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 Chapter Roadmap

What Do We Mean By Strategy?
 Strategy and the Quest for Competitive Advantage
 Identifying a Company’s Strategy
 Why a Company’s Strategy Evolves Over Time
 A Company’s 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?
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 Thinking Strategically:
The Three Big Strategic Questions
1. What’s the company’s present situation?

2. Where does the company need to go from here?

 Business(es) to be in and market positions to stake out

 Buyer needs and groups to serve

 Direction to head

3. How should it get there?

A company’s answer to “how
will we get there?” is its strategy

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 What Do We Mean By “Strategy”?

Consistsof competitive moves and business

approaches used by managers to run the
company

Management’s “action plan” to
 Grow the business
 Attract and please customers
 Compete successfully
 Conduct operations
 Achieve target levels of
organizational performance
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 The Hows That
Define a Firm's Strategy

How to grow the business

How to please customers

How to outcompete rivals

How to manage each functional
piece of the business (R&D, production, marketing,
HR, finance, and so on)

How to respond to changing market conditions

How to achieve targeted levels of performance

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 Choosing the “Hows” of Strategy

Strategic choices about “how” 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 market conditions and the company’s circumstances

In choosing a strategy, management is in effect saying,
“Among all the many different business approaches and
ways of competing we could have chosen, we have
decided to employ this particular combination of
competitive and operating approaches in moving the
company in the intended direction, strengthening its
market position, and competitiveness, and boosting
performance.”
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 Key Elements of a Successful Strategy

Developing a successful strategy hinges on making

competitive moves aimed at
 Appealing to buyers in ways to set the enterprise apart from
rivals and
 Carving out its own market position

Involves developing a distinctive “aha”
element to
 Attract customers and
 Produce a competitive edge

Copying competitive moves of other

successful companies rarely works!
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 Key Elements:
Comcast’s Strategy

Roll out high-speed Internet or broadband service to customers via
cable modems

Promote a new video-on-demand service to allow digital
subscribers to watch TV programs whenever they want

Promote a video-on-demand service so digital customers can order
and watch pay-per-view movies

Partner with Sony, MGM, and others to expand movie offerings

Use VoIP technology to offer subscribers Internet-based phone
service at a fraction of the cost charged by others

Use video-on-demand and CDV offerings to combat mounting
competition from satellite TV providers

Employ a sales force to sell advertising to businesses that were
shifting advertising dollars from sponsoring network programs to
sponsoring cable programs

Significantly improve customer service
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 Strategy and the Quest for
Competitive Advantage

The heart and soul of any strategy are the actions
and moves in the marketplace that a company
makes to strengthen its competitive position and
gain a competitive advantage over rivals

A creative distinctive strategy that sets a company
apart from rivals and yields a competitive
advantage is a company’s most reliable ticket to
above average profitability
 Competing with a competitive advantage is more
profitable than competing with no advantage
 Competing with a competitive disadvantage nearly
always results in below-average profitability
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 A Powerful Strategy Leads to
Sustainable Competitive Advantage

A company achieves sustainable competitive advantage
when an attractive number or buyers prefer its
products/services over those of rivals and when the basis
for this preference can be maintained over time
 Its nice when a strategy produces a temporary
competitive edge but a durable edge over rivals 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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 Four “Best” Strategic Approaches to
Building Sustainable Competitive Advantage

Being the industry’s low-cost provider (a cost-based
competitive advantage)

Incorporate differentiating features (a “superior product”
type of competitive advantage keyed to higher quality,
better performance, wider selection, value-added
services, or some other attribute)

Focusing on a narrow market niche (winning a
competitive edge by doing a better job than rivals
of serving the needs and preferences of
buyers comprising the niche)

Developing expertise and resource
strengths not easily imitated or matched by rivals
(a capabilities-based competitive advantage)
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 Competitive Advantage Examples

Strive to be the industry’s low-cost provider

 Wal-Mart
 Southwest Airlines

Outcompete rivals on a key differentiating feature
 Johnson & Johnson – Reliability in baby products
 Harley-Davidson – King-of-the-road styling
 Rolex – Top-of-the-line prestige
 Mercedes-Benz – Engineering design and performance
 L.L. Bean – Good value
 Amazon.com – Wide selection and convenience
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 Competitive Advantage Examples (cont)

Focus on a narrow market niche

 eBay – Online auctions
 Jiffy Lube International – Quick oil changes
 McAfee – Virus protection auctions
 Starbucks – Premium coffees and coffee drinks
 The Weather Channel – Cable TV

Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
 FedEx – Next-day delivery of small packages
 Walt Disney – Theme park management and family entertainment
 Toyota – Sophisticated production system
 Ritz-Carlton – Personalized customer service
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Fig. 1.1: Identifying a Company’s Strategy

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 Why Do Strategies Evolve?

A company’s strategy is a work in progress

Changes may be necessary to react to
 Shifting market conditions
 Technological breakthroughs
 Fresh moves of competitors
 Evolving customer preferences
 Emerging market opportunities
 New ideas to improve strategy
 Crisis situations
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 Fig. 1.2: A Company’s Strategy Is
Partly Proactive and Partly Reactive

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 Crafting Strategy Is an
Exercise in Entrepreneurship

Strategy-making is a market-driven activity involving
 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

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 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”

Ethicaland 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 “should do” to “should not do” and “unsavory” or
“shady” and
 Allows management to fulfill its ethical duties to all
stakeholders
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 A Firm’s Ethical
Responsibilities to Its Stakeholders
Owners/shareholders
Owners/shareholders –– Rightfully
Rightfullyexpect
expect some
some form
formof
of
return
return on
ontheir
theirinvestment
investment

Employees
Employees -- Rightfully
Rightfullyexpect
expect to
to be
betreated
treatedwith
with dignity
dignity
and
and respect
respect for
fordevoting
devotingtheir
theirenergies
energies totothe
the enterprise
enterprise

Customers
Customers -- Rightfully
Rightfullyexpect
expect aa seller
sellerto
toprovide
provide them
them
with
withaa reliable,
reliable,safe
safe product
product or
orservice
service

Suppliers
Suppliers -- Rightfully
Rightfullyexpect
expect to
to have
have an
anequitable
equitable
relationship
relationshipwith
withfirms
firms they
theysupply
supplyandand be
betreated
treatedfairly
fairly

Community
Community -- Rightfully
Rightfullyexpect
expect businesses
businesses to
tobe
be good
good
citizens
citizensin
intheir
their community
community
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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?

Abusiness 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?
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 Relationship Between
Strategy and Business Model
Strategy . . .
Deals with a company’s
competitive initiatives and
business approaches
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Business Model . . .
Concerns whether revenues
and costs flowing from the
strategy demonstrate a
business can be amply
profitable and viable
Microsoft’s Business Model

Employ
Employ aa cadre
cadre of
of highly
highly skilled
skilled programmers
programmers to
to develop
develop proprietary
proprietary
code;
code; keep
keep source
source code
code hidden
hidden from
from users
users

Sell
Sell resulting
resulting OS
OS and
and software
software packages
packages toto PC
PC makers
makers and
and users
users at
at
relatively
relatively attractive
attractive prices
prices to
to achieve
achieve aa 90%
90% or
or more
more market
market share
share

Most
Most costs
costs in
in developing
developing software
software are
are fixed;
fixed; variable
variable costs
costs are
are small;
small;
once
once break-even
break-even volume
volume is
is reached,
reached, revenues
revenues from
from additional
additional sales
sales
are
are almost
almost pure
pure profit
profit

Provide
Provide modest
modest level
level of
of technical
technical support
support to
to users
users at
at no
no cost
cost

Rejuvenate
Rejuvenate revenues
revenues by
by periodically
periodically introducing
introducing next-generation
next-generation
software
software with
with features
features inducing
inducing PC
PC users
users toto upgrade
upgrade their
their operating
operating
systems
systems
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Red Hat’s Business Model

Rely
Rely on
on collaborative
collaborative efforts
efforts of
of volunteer
volunteer programmers
programmers to
to create
create the
the
software
software

Collect
Collect and
and test
test enhancements
enhancements and
and new
new applications
applications submitted
submitted by
by
volunteer
volunteer programmers
programmers for
for evaluation
evaluation and
and inclusion
inclusion in
in new
new releases
releases
of
of Linux
Linux
Market
Market upgraded
upgraded andand tested
tested family
family of
of Red
Red Hat
Hat products
products to
to large
large
companies,
companies, charging
charging aa subscription
subscription fee
fee that
that includes
includes 24/7
24/7 support
support
within
within 11 hour
hour in
in 77 languages
languages

Make
Make source
source code
code open
open and
and available
available to
to all
all users
users

Capitalize
Capitalize on
on specialized
specialized expertise
expertise required
required to
to use
use Linux
Linux by
by
providing
providing fee-based
fee-based training,
training, consulting,
consulting, software
software customization,
customization, and
and
client-directed
client-directed engineering
engineering to
to Linus
Linus users
users
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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

 Does strategy lead to sustainable
competitive advantage?

PERFORMANCE TEST
 Does strategy boost firm performance?
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 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!
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 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
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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 a 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!
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