THINKING
STRATEGICALLY:
The Concept of Strategy and the Pursuit
of Sustained Superior Profits
Business Proposition
Profits = Quantity (Revenue - Cost)
MARGIN
3 most fundamental variables in Business
Domain of Strategy
• strategic competitiveness and above normal returns
• concerns managerial decisions and actions which
materially affect the success and survival of business
enterprises
• involves the judgment necessary to strategically
position a business and its resources so as to
maximize long-term profits in the face of irreducible
uncertainty and aggressive competition
• strategy is the linkage between a business and its
current and future environment
Key Characteristics of Strategic Decisions

What makes a decision strategic?
• decision-making in the face of irreducible uncertainty
• requires irreversible commitments...involves allocation
of sunk investments ($, time, tangible & intangible
resources)
• requires choice and trade-offs
• multi-functional in scope/consequences
• entrepreneurial theorizing/future oriented
• infrequent and non-recurring
• dealing with competition
• concerning the external environment... primarily
product/market choices
Definitions
• The determination of the long run goals and
objectives of an enterprise, and the adoption
of courses of action and the allocation of
resources necessary for carrying out these
goals
• Alfred Chandler, Strategy and Structure
Distinguishing Strategy from Tactics
• Strategy is the overall plan for
deploying resources to establish a
favorable position
• Tactic is a scheme for a specific
maneuver
Common Elements in Successful Strategy
Successful
Strategy
EFFECTIVE IMPLEMENTATION
Long-term, simple
and agreed upon
objectives
Profound
understanding of
the competitive
environment
Objective
appraisal of
resources
$
Source: Adapted from Robert S. Grant, 1991
Concepts of Firm Performance
• firm survival
• accounting profits (ROA, ROE, ROS)
• surplus of revenues over expenses
• economic profit/rent (economic value added, positive NPV)
• normal return on capital
• abnormal return - surplus after all inputs
• shareholder value/market value…(EVA, Tobin’s q)
• Change in market value over time
Sources of Superior Performance
Above Normal
Profits
(in Excess of the Competitive Level)
Avoid
Competitors
Attractive
Industry
Attractive
Strategic
Group
Attractive
Niche
Entry
Barriers
Mobility
Barriers
Isolating
Mechanisms
Be Better Than
Competition
Cost
Advantage
Differentiation
Advantage
Elements of a Strategy
1. BUSINESS DEFINITION
Customer Needs
Technology
Products
Geographic Scope
2. BUSINESS STRATEGIC INTENT
Direction
Rate
Priorities
Elements of a Strategy
3. FINANCIAL TARGETS
Short-term
ROA
ROE
ROS
Long-term
4. SOURCES OF COMPETITIVE ADVANTAGE
Reputation and Consumer Loyalty
Brand name
Producer Learning
Economies of Scale and/or Scope
Location
Access to lower cost factors of production
Distribution and Shelf-space
etc.
Elements of a Strategy
5. KEY STRATEGIC DIMENSIONS
Product line Specialization
Brand Identification
Push vs Pull Marketing
Selling Approach
Distribution and Channel Selection
Product Quality
Technological leadership
Vertical Integration
Cost Position
Customer Service
Price Policy
Financial Leverage
Relationship with Parent Company, if any
Elements of a Strategy
6.
VALUE-ADDING ACTIVITIES
Research
Development
Procurement
Raw Material Processing*
Intermediate Production*
Final Production*
Marketing
Selling
Distribution*
Customer Service*
* For service businesses use Production Operations, Support Operations, and Delivery Operations
instead.
Elements of a Strategy
7. COMPETITIVE STRATEGY
Competitor A
Competitor B
Competitor C
Competitor D
etc.
Levels of Strategy
• Corporate strategy... defines the scope of the
business in terms of the industries and markets in
which it competes.
• includes decisions about diversification, vertical integration,
acquisitions, new ventures, divestments, allocation of scarce
resources between business units
• Business strategy... is concerned with how the firm
competes within a particular industry or market... to
win a business unit must adopt a strategy that
establishes a competitive advantage over its rivals.
• Functional strategy... the detailed deployment of
resources at the operational level
Levels of Strategy
CORPORATE
STRATEGY
BUSINESS
STRATEGY
CORPORATE
HEAD OFFICE
Division A
FUNCTIONAL
STRATEGIES
Source: Robert M. Grant,
Contemporary Strategy Analysis,
Division B
R&D
R&D
Personnel
Personnel
Finance
Finance
Production
Production
Marketing/Sales
Marketing/Sales
Basil Blackwell, 1991.