Chapter One
What is Strategy and
Why is it Important?
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Why do we need strategy?
The reasons why firms succeed and
fail is perhaps the central question
in strategy
Answers the fundamental question of
the firm
Where we are now?
Where we going?
How are we going to get there?
Strategic Management Defined
• decisions and actions that determine long-term
performance
• formulation and implementation of plans designed to
achieve objectives
• an action managers take to achieve one or more of an
organization’s goals
• unifying theme that gives coherence and direction to
organizational/individual decisions
• game plan management has for positioning the
company in its chosen market, competing successfully,
satisfying customers, and achieving good business
performance
• management’s action plan for running the business and
conducting operations; commitment to pursue a
particular set of actions in growing the business,
attracting customers, competing successfully,
conducting operations, and improving financial and
market performance
The “How” of Strategy
• How will we
• Grow? Build clientele? Improve performance?
• Lower cost? Superior products? Outstanding
service? Target high or low end? Narrow or
board product line? Focus on one part of the
vertical chain or be fully integrated? Local or
global competitor? Single or multiple industry?
Manufacture or outsource? Offensive or
defensive? Incremental or radical change?
Conservative or bold?
What is Strategy?
Strategy is not doing similar
activities better than your rivals –
that’s operational effectiveness
• continual improvement not a
sustainable advantage
• industry-wide cost reductions do not
lead to increased profitability
• examples: PCs, automobiles, airlines
What is Strategy?
1) Strategy is performing different activities or performing
similar activities in a different way
As suggested by the book: 4 of the most dependable
approaches are 1) low cost, 2) differentiating features, 3)
fulfilling specialized needs, and 4) build unassailable set
of capabilities.
• Who sells the most toilet paper in the U.S?
• 1 billion rolls
• Who is the country’s largest retailer of
wine?
• Who is the country’s third largest grocer?
• Where can you buy Dom Perignon for $90,
$11,000 crystal vases, 42-plasma screen
TVs for $3,000, and live Maine lobsters?
What is Strategy?
1) Strategy is performing different activities or
performing similar activities in a different way
Strategy is about positioning
a) Variety-based positioning
• offering a unique choice of goods/services Chic-fil-a, GameStop
b) Needs-based positioning
• serving most/all of a particular group of
customers’ needs - Babies R Us
c) Access-based positioning
• serving a set of customers that require unique
access – Kinkos, Movie Gallery, Superette
What is Strategy?
2) Strategy is about choosing a position
which requires tradeoffs, choosing what
not to do
• without tradeoffs, all firms would imitate
vs.
vs.
vs.
vs.
Time Magazine
• So why haven't American, United, US Airways and
the three other full-service carriers, which lost
$11 billion last year and stand to lose an
additional $5 billion this year, followed the lead of
the profitable discounters by cutting costs and
fares? Because that's not the way their business works.
They have made, and lost, their money by
providing the frequent departures, quick
connections, spacious seats and other amenities
that have been demanded by business flyers and
charging them dearly for that service — more than
five times the cost of a discount fare.
• HARD TO STRADDLE AND
REPOSITION!
What is Strategy?
2) Strategy is about choosing a position
which requires tradeoffs, choosing what
not to do
• without tradeoffs, all firms would
imitate
Tradeoffs arise from
• inconsistent image/reputation
• different activities, products,
equipment, employees, skills, systems,
machines
• priorities, internal coordination, and
control
What is Strategy?
3) Strategy is about combining activities as
advantages come from fit and reinforcing
Secondary Airports
No meals
Short hauls
No seats
No baggage
transfers
Quick Turns
Standard Fleet
Lean ground crews
Low Fares
Secondary Airports
No meals
Short hauls
No seats
No baggage
transfers
Quick Turns
Standard Fleet
Lean ground crews
Low Fares
Secondary Airports
No meals
Short hauls
No seats
No baggage
transfers
Quick Turns
Standard Fleet
Lean ground crews
Low Fares
Secondary Airports
No meals
Short hauls
No seats
No baggage
transfers
Quick Turns
Standard Fleet
Lean ground crews
Low Fares
Secondary Airports
No meals
Short hauls
No seats
No baggage
transfers
Quick Turns
Standard Fleet
Lean ground crews
Low Fares
Secondary Airports
No meals
Short hauls
No seats
No baggage
transfers
Quick Turns
Standard Fleet
Lean ground crews
Low Fares
Secondary Airports
No meals
Short hauls
No seats
No baggage
transfers
Quick Turns
Standard Fleet
Lean ground crews
Low Fares
How can Delta copy that?
What about Jet Blue?
What is Strategy?
3) Strategy is about combining activities as
advantages come from fit and reinforcing
Operational effectiveness is about
excellence in individual activities
Fit/integration increases sustainability by
reducing imitability
What is Strategy?
4) The desire to grow is most
threatening to an effective strategy
What is Strategy?
4) The desire to grow is most
threatening to an effective strategy
•
•
•
•
Blurs uniqueness
Creates compromises
Reduces fit
Erodes original advantages
Fig. 1.2: A Company’s Strategy Is
Partly Proactive and Partly Reactive
Fig. 1.2: A Company’s Strategy Is
Partly Proactive and Partly Reactive
Emergent strategy elements
What is strategic effectiveness?
Consistent, long-term
goals and objectives
What is strategic effectiveness?
Consistent, long-term
goals and objectives
Reflects and understanding
of the environment
What is strategic effectiveness?
Consistent, long-term
goals and objectives
Takes resources
into consideration
Reflects and understanding
of the environment
What is strategic effectiveness?
Consistent, long-term
goals and objectives
Takes resources
into consideration
Reflects and understanding
of the environment
Effectively
implemented
What is strategic effectiveness?
Consistent, long-term
goals and objectives
Reflects and understanding
of the environment
Strategic
Effectiveness
(fit)
Takes resources
into consideration
Effectively
implemented
Chapter Two
Managerial Process of
Crafting and Executing
Strategy
Fig. 2.1: The Strategy-Making, Strategy-Executing
Process
Developing a Strategic Vision
A strategic vision describes the route a company
intends to take in developing and strengthening
its business. It lays out the company’s strategic
course in preparing for the future.
A strategic vision exists only as words and has no organizational impact unless
and until it wins the commitment of company personnel and energizes them to
act in ways that move the company along the intended strategic path!
Elements of a Strategic Vision
• Delineates management’s aspirations for
the business
• Provides a panoramic view of “where we
are going” by charting a strategic path
• Is distinctive and specific
• Avoids use of generic, dull & boring language
that could apply to most any company
• Captures employees’ emotions steers
them in a common direction
• Is challenging and a bit beyond a
company’s immediate reach
Examples of Strategic Visions
Hilton Hotels Corporation
Our vision is to be the first choice of the world’s
travelers. Hilton intends to build on the rich heritage
and strength of our brands by:
• Consistently delighting our customers
• Investing in our team members
• Delivering innovative products and services
• Continuously improving performance
• Increasing shareholder value
• Creating a culture of pride
• Strengthening the loyalty of our constituents.
Examples of Strategic Visions
Caterpillar
Be the global leader in customer value.
eBay
Provide a global trading platform where practically
anyone can trade practically anything.
Strategic Vision vs. Mission
• A strategic vision
concerns “where
we are going”
• Markets to be
pursued
• Future product/
market/
customer/
technology focus
• Kind of company
management is
trying to create
• The mission
statement focuses
on its “who we are
and what we do”
• Current product and
service offerings
• Customer needs
being served
• Technological
and business
capabilities
Mission Statements
A well-conceived mission statement distinguishes a company’s
business makeup from that of other profit-seeking enterprises in
language specific enough to give the company its own identify!
• Boundaries of the current business
• Fundamental purpose that sets it
apart from other firms of its type
• Conveys
• Who we are,
• What we do, and
• Why we are here
Don’t offer me things
Don’t offer me shoes
Offer me comfort for my feet & the pleasure of
walking
Don’t offer me clothes
Offer me fashion, style, or an certain image
Don’t offer me books
Offer me hours of escape & the benefit of
knowledge
Don’t offer me furniture
Offer me comfort and a peaceful place to lounge
Don’t offer me things
Offer me ideas, emotions, ambience, feelings,
benefits
• (Our) vision is to dominate the
global foodservice business
industry. Global dominance means
setting the performance standards
for customer satisfaction while
increasing market share and
profitability through our
Convenience, Value and Execution
Strategies.
• (Our) vision is to dominate the
global toothpick industry. Global
dominance means setting the
performance standards for
customer satisfaction while
increasing market share and
profitability through our
Convenience, Value and Execution
Strategies.
• Our mission is to provide a
customer a means of moving people
and things up, down, sideways over
short distances with higher
reliability than any similar
enterprise in the world.
• One vision drives everything we do:
A computer on every desk and in
every home using great software as
an empowering tool
• Our business is renting cars. Our
mission is total customer
satisfaction.
• Our business is leasing camels. Our
mission is to totally alienate all of
our customers.
• To be the premier organization in
nurturing and enriching the bond
between people and animals
• We supply the computing industry
with chips, boards, systems, and
software. Our products are used as
“building blocks” to create
advanced computing systems for PC
users. Our mission is to be the
preeminent building block supplier
to the new computing industry
worldwide.
• To be the leading supplier of PCs
and PC servers in all customer
segments.
Fig. 2.1: The Strategy-Making, Strategy-Executing
Process
Objectives
•
•
•
•
•
Turns mission into performance outcomes
Organizations produce what is measured
Long and Short term
All levels of the organization
Top-down, not Bottom-up
Types of Objectives Required
Financial Objectives
Outcomes focused
on improving
financial performance
$
Strategic Objectives
Outcomes focused
on improving
competitive vitality
and future business
position
6 Characteristics of a Good Objective
6 Characteristics of a Good Objective
2) Measurable
6 Characteristics of a Good Objective
6 Characteristics of a Good Objective
6 Characteristics of a Good Objective
6 Characteristics of a Good Objective
6 Characteristics of a Good Objective
• U SMART
•
•
•
•
•
•
Understandable
Stretching
Measurable
Agreeable
Realistic
Timebound
Objectives
• To be one of the top three banking companies in
terms of market share in all significant markets
we serve.
• To provide shareholders a secure investment with
a superior return.
• To be the low-cost producer of aluminum and to
outperform the average ROE of the Standard and
Poor’s industrial stock index.
• To achieve 100% total customer satisfaction…
everyday…in every restaurant…for every
customer
• To be the industry's innovative leader
• 30% of the company’ annual sales must come
from products fewer than four years old
Objectives
• Increase sales growth 6% to 8% and accelerate
core earning growth from 13% to 15% per share
in each of the next five years
• Capitalize on e-commerce
• Develop a smart card strategy that will help us
play a key role in shaping on-line payments
• Reduce greenhouse gasses by 10% by 2010
• We want to operate 6,000 stores by 2010
• Cut corporate overhead costs by $30 million per
year
Leading versus Lagging Indicators
• Current financial results are “lagging indicators”
reflecting results of past decisions and actions—
good profitability now does not translate into stronger
capability for delivering better financial results later
• However, meeting or beating strategic performance
targets signals growing competitiveness & strength in the
marketplace, thus developing the capability for better
financial performance in the years ahead
• Good strategic performance is thus a “leading
indicator” of a company’s capability to deliver
improved future financial performance
Unless a company sets and achieves stretch
strategic objectives, it is not developing the
competitive muscle to deliver even better financial
results in the years ahead!
One Balanced Scorecard
• A balanced scorecard for measuring
company performance is optimal; it entails
• Setting financial and strategic objectives
• Placing balanced emphasis on achieving
both types of objectives
Just tracking financial performance overlooks the
importance of measuring whether a company is
strengthening its competitiveness and market
position.
The surest path to sustained future profitability year after
year is to relentlessly pursue strategic outcomes
that strengthen a company’s business position and
give it a growing competitive advantage over rivals!
A Second Balanced Scorecard
Comprehensive view of the firm from
the customer, internal, financial
and innovation/learning
perspectives
• 1) How do customers see us?
• Time, quality, service & performance, costs
• 2) What must we excel at?
• 3) How do we look to shareholders?
• 4) Can we continue to improve and
create value?
A Third Balanced Scorecard
• Triple Bottom-line
• Economic, social and environmental
performance
Fig. 2.1: The Strategy-Making, Strategy-Executing
Process
Levels of Strategic Management
Levels of Strategic Management
Answers the question “Where?”
Levels of Strategic Management
Answers the question
“How?”
“How?”
“How?”
HP’s Corporate Strategy
Financial
Services
Enterprise
Storage &
Servers
HP
Services
Software
Personal
Systems
Imagining
and Printing
Where are we going to compete?
What businesses are we in?
HP’s Business Strategy
Financial
Services
Enterprise
Storage &
Servers
HP
Services
Software
How are we
going to
compete
against Sun
Microsystems?
Personal
Systems
How are we
going to
compete
against
Dell?
Imagining
and Printing
Xerox?
Cannon?
HP’s Business Strategy
Financial
Services
Enterprise
Storage &
Servers
HP
Services
Software
Personal
Systems
Imagining
and Printing
Profits are won and lost at the business level!!
So….how can firm’s be profitable?
1) Choose an attractive industry in
which to compete - Where we
compete?
Corporate level strategy
2) Attain a competitive advantage
within an industry - How we
compete?
Business level strategy
Two Models of Profitability
I/O Model (Industrial/Organizational
Economics Model)
Resource Based View of the Firm
I/O Model
General Environment
Industry Environment
Competitive Environment
Strategy
&
Performance
3 Assumptions
1) external environment imposes pressures/constraints
2) firms within an industry possess similar resources
3) resources are highly mobile
Therefore, firms must identify attractive segments within
an industry and acquire skills/resources to achieve
superior profitability
It’s about finding the right “place” to compete.
Resource Based View
Strategy
The Firm’s
&
Resources &
Performance
Capabilities
3 assumptions
1) internal environment critical to strategic action
2) firms are bundles of unique resources
3) resources may not be mobile across firms
Therefore, firms must develop the skill and resources to
take advantage of opportunities in their industries
It’s about finding the right “way” to compete.