Chapter 1
What Is Strategy, and Why Is It Important?
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Grading Scheme
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Attendance:
Participation: 10%
Group Assignment: 15%
Individual Assignments: 15%
Midterm Exam: 30% (40 MCQ questions)
Final Exam: 30% (40 MCQ questions)
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Do Remember POLC from your first
course in management?
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P: Planning
O: Organizing
L: Leading
C: Controlling
What is the difference between operations manager
and strategic manager?
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Slide 1.4
Operations vs Strategic
Management
What do operations
managers do?
 Manage daily functions,
tasks and routines
 They put out fire
throughout the week
 Their focus is on shortterm goals
 Function of front-line
and middle managers
What do strategic
managers do?
 They plan and manage
direction
of
the
company
 They have a holistic
view of the company
 Their focus is long-term
 Function
of
top
management
PLANNING FOR SHIRT MANUFACTURING
Slide 1.6
DIFFERENCE
OPERATIONS
MANAGER
1. Makes plan to arrange
supply of inputs to
manufacture shirts.
2. Plans staff
requirements and task
allocation.
3. Monitors production
based on targets.
STRATEGIC MANAGER
1. Decides whether to get
into shirt manufacturing.
2. Decides whether to
expand factory capacity.
3. Arranges financing for
expansion.
4. Plans budget allocation
for the shirt making unit.
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Chapter Outline
1.1 What Strategy Is: Gaining and Sustaining
Competitive Advantage
• What Is Competitive Advantage?
• Industry vs. Firm Effects in Determining Firm Performance
1.2 Stakeholders and Competitive Advantage
• Stakeholder Strategy
• Stakeholder Impact Analysis
1.3 The AFI Strategy Framework
1.4 Implications for the Strategist
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About Strategic Management of
Organizations
 A Holistic Perspective of the Organization and How
you Plan to Compete, Survive and Sustain in a
competitive world.
 To be involved in strategic management, you must
have a Bird’s Eye View of the Organization.
 Question: What level of management is primarily
responsible for strategic management?
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Some Mission Statements
 Apple: To bring the best user experience to our
customers through innovative hardware, software and
services.
 Our company mission is to organize the world’s
information and make it universally accessible and
useful. Can you guess which company?
 To become our customer’s favorite place to eat with
inspired people who delight the customers each time
with unmatched quality, service, cleanliness and value
each time. Can you guess which company?
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Vision Statement:
Can you Guess Which Company?
 “to inspire the world with our innovative
technologies, products, and design that enrich
people's lives and contribute to social prosperity by
creating a new future.”
 “Our vision is to be earth's most customer centric
company; to build a place where people can come to
find and discover anything they might want to buy
online”
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Do Mission and Vision Statements
Change over time?
YES THEY CAN
 Sony’s Mission Statement in 1970s: To Make Made
in Japan Synonymous with Quality.
 Sony’s Mission Statement now: To be a company
that inspires and fulfills your curiosity through
unlimited passion for technology, content and
services, and relentless pursuit of innovation.
 EXAMPLE: SONY PLAYSTATION AIMS AT THIS
MISSION
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NIKE “Just Do It”
To bring inspiration and innovation to every athlete in the world
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Key Terms We Just Learnt
1.
2.
3.
4.
5.
6.
Mission
Scope
Vision
Objectives
Values
Organizational Culture?
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Chapter Case 1
©Kim Hong-JI/Reuters/Corbis
Apple: The World’s Most Valuable Company
 September 7th, 2021: World’s most valuable public
company of all time.
 Apple’s stock valuation reached $ 2.38 Trillion.
 If Apple was a country, it’s GDP would make it the
5th richest country in the world only after USA, China,
Japan and Germany.
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ChapterCase 1
 Founder Steve Jobs
 Business Model Innovation – powerful strategy
•
•
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•
•
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1997 – near bankruptcy
2001 – iPod launched revitalization
2001 – iTunes
2007 – iPhone
2010 – iPad
2020 – iPhone 12
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Chapter Case 1
 Growth potential industries
• Mobile Internet, TV, etc.
 Apple became the first $1 trillion company on earth.
 How many “Trillion Dollar” companies are there? How
did they reach this level?
To sustain Apple’s dominance and growth, they are
looking for 2 things:
 New industries to revolutionize
 New markets and new customers
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Let us watch this video
APPLE CAR
What is the Goal behind Strategy?
 Why do we need to manage a company strategically?”
(i.e., what is the end-game?)
Answer:
To achieve competitive advantage
To sustain the competitive advantage
To ensure that the company is on track to achieve it’s
stated mission and vision.
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CAN YOU NAME SOME
COMPANIES THAT FAILED?
BEFORE TRYING TO UNDERSTAND HOW
COMPANIES SUCCEED, WE FIRST NEED
TO UNDERSTAND WHY COMPANIES FAIL
(WARREN BUFFET JR.)
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Remember these Key Words
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Competitive Advantage
Core Competency
Resources: Tangible Assets & Capabilities
The Resource-Based View
Dynamic Capabilities View
Foresight
Sustainable Growth
Triple-Bottom Line Goals (also referred to as
sustainability goals)
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Understanding Competitive
Advantage would require us to
answer the following question
WHY SOME SOME COMPANIES
DO BETTER THAN OTHERS?
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Purpose of Strategic Management: Gaining and
Sustaining Competitive Advantage
A GOOD STRATEGY CONSISTS OF:
ANALYSIS:
• Diagnosis of the competitive advantage
FORMULATION:
• Guiding policy to address the competitive challenge
IMPLEMENTATION:
• Set of coherent actions to implement the firm’s guiding
policy
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ANALYSIS:
• Diagnosis of the competitive advantage
Competitive Challenge for Steve Jobs
• 2001 – Recognized that with less than 5% market share,
Apple could not compete with Microsoft, Intel, and Dell in
the PC industry, thus Jobs needed to create the next big
thing
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FORMULATION:
• Guiding policy to address the competitive challenge
Guiding Policy – Business Model Innovation
• Seamless integration across music/photo/mobile devices
• iPods, iTunes, iPhones disrupted the existing PC market
• Shifted competitive focus to mobile devices
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IMPLEMENTATION:
• Set of coherent actions to implement the firm’s
guiding policy
Effectively Implemented Overarching Approach
• Simple Rules:
 Focused only on two computer models (laptop and desktop) in two
market segments (professional and consumer)
• Disrupted Industry Status Quo:
 Business model innovation through product innovations executed at
planned intervals
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Slide 1.44
Compare Apple’s and Nokia’s Strategies in Year 2007: at that
time Nokia was the market leader in mobile phones
What Is Competitive Advantage?
Competitive Advantage:
• Superior performance relative to other competitors in the
same industry or the industry average
 Key terms here – Superior and Relative
Sustainable Competitive Advantage:
• Outperforming over a prolonged period
Strategic Positioning
• Trade-offs are required
 Walmart versus Nordstrom
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Compare Walmart vs Norstrom’s
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Porter’s Generic Theory of
Competitive Strategy
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Compare Walmart to Nordstrom
 Walmart = Mission: Everyday low prices, save money
and live better = Cost Leadership Strategy
 Nordstrom = Mission: We provide unique products,
exceptional customer service and great experiences
=Differentiation Strategy
Question: Which strategy is more resilient during negative
economic situation?
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Compare Walmart vs Norstrom’s
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WHAT IS MORE DANGEROUS
THAN CHOOSING THE WRONG
STRATEGY?
 Not having any strategy at all
 Being stuck in the middle
Strategy Highlight 1.1
JetBlue: “Stuck in the Middle”?
 JetBlue ran into trouble by trying to combine two
different strategies simultaneously.
 There were a cost-leadership strategy, focused on low
prices, and a differentiation strategy, focused on
delivering unique features.
 Despite enjoying some early years of competitive
advantage, Jet Blue is struggling to maintain that edge.
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Strategy Highlight 1.1
 Stuck in the middle
• No clear strategy or strategic position
 Many firms attempting both low-cost and differentiated
products end up being stuck in the middle.
 This type of failure contributed to JetBlue’s recent
competitive disadvantage.
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WHAT STRATEGY IS NOT
 Grandiose statements
 Failure to face competitive challenges
 Operational effectiveness, competitive benchmarking,
or other tactical tools
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Definitions of strategy
Sources: A.D. Chandler, Strategy and Structure: Chapters in the History of American Enterprise, MIT Press, 1963, p. 13; M.E. Porter, ‘What is strategy?’,
Harvard Business Review, November–December 1996, p. 60; P.F. Drucker, ‘The theory of business’, Harvard Business Review, September–October
1994, pp. 95–106; H. Mintzberg, Tracking Strategies: Towards a General Theory, Oxford University Press, 2007, p. 3.
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Slide 1.57
Strategic decisions
Source: From G. Johnson, K. Scholes and R. Whittington. Exploring Corporate Strategy, 8th edn, Pearson Education 2008.
Three horizons for strategy
Note: ‘profit’ on the vertical axis can be replaced by non-profit objectives; ‘business’ can refer to any set of activities; ‘time’
can refer to a varying number of years.
Source: M. Baghai, S. Coley and D. White, The Alchemy of Growth, Texere Publishers, 2000. Figure 1.1, p. 5.
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Industry vs. Firm Effects in
Determining Performance
Firm performance: Determined primarily by two
factors: industry effects and firm effects
Industry effects
• Firm performance attributed to the industry structure in
which a firm competes
Firm effects
• Firm performance attributed to the actions managers take
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Exhibit 1.1 Effects Determining
Superior Firm Performance
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WHAT IS A STAKEHOLDER?
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1.2 Stakeholders and Competitive
Advantage
There is an important relationship between:
• Strategic management
• Role of business in society (i.e., stakeholders)
Superior performance drives reinvestments
• Fulfilling careers (taking care of internal stakeholders)
• Shareholder value (taking care of owners and shareholders)
• Value for society (taking care of society- environment,
community, etc.)
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Black Swan Events
Profound impact of a highly improbable and unexpected
event:
• Most swans are white. The metaphor of a black swan
represents something unanticipated.
Erosion of the public’s trust in business and free-market
capitalism:
• Early 2000s – Accounting scandals at Enron, Arthur Andersen,
WorldCom, Tyco, Adelphia led to destruction of shareholder value.
• 2008 – Global Financial Crisis
• 2011 – Occupy Wall Street protest movement
• 2020 – Covid-19 Pandemic
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Black Swan Events: Two Key Points
1. Managers
• Managerial actions can affect the economic well-being of
countless global citizens.
2. Stakeholders
• Effective stakeholder management is necessary to ensure
continued survival and sustainable competitive advantage.
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Stakeholder Strategy
 An integrative approach to managing a diverse set of
stakeholders effectively in order to gain and sustain
competitive advantage
 Concerned with how the firm exchanges with various
stakeholders to create and trade value
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Exhibit 1.2
Internal and External Stakeholders
in an Exchange Relationship with the Firm
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Stakeholder Strategy
Effective stakeholder management can benefit firm
performance:
• Satisfied stakeholders are more cooperative
• Increased trust lowers transaction costs
• Effective management leads to greater adaptability and
flexibility
• Avoidance of negative outcomes
• Reduction of risk exposure
• Strong reputations rewarded in the marketplace
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Stakeholder Impact Analysis
A decision tool with
which managers can
recognize, assess, and
address the needs of
different stakeholders,
allowing the firm to
achieve competitive
advantage while acting
as a good corporate
citizen.
Power
Legitimacy
Urgency
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Exhibit 1.3 Stakeholder Impact
Analysis
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Corporate Social Responsibility (CSR)
 A framework that helps firms recognize and address
the economic, legal, social, and philanthropic
expectations that society has toward business.
CSR has four components of responsibility:
•
•
•
•
Economic
Legal
Ethical
Philanthropic
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Exhibit 1.4 Pyramid of Corporate
Social Responsibility
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Strategy Highlight 1.2
BP: “Lack of Business Integrity”?
BP’s strategic focus on cost reductions compromised the
implementation of an adequate safety culture resulting in the
2010 drilling rig explosion off the Louisiana coastline:
• Killing 11 workers
• Releasing an estimated 5 million barrels of crude oil into the
Gulf of Mexico over the next three months
• Causing the largest environmental disaster in U.S. history
• Costing BP $14 billion for the cleanup alone
Claiming a “lack of business integrity,” the EPA has banned BP
from any new contracts with the U.S. government.
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1.3 The AFI Framework
STRATEGIC ANALYSIS (A)
Chapter 2
• What roles do strategic leaders play?
• How does strategy come about?
Chapter 3
• How do external environmental forces impact sustainable competitive
advantage?
Chapter 4
• What effects do internal resources, capabilities, and core competencies
have on sustainable competitive advantage?
Chapter 5
• How do we make money?
• How can we assess and measure competitive advantage?
• What is the relationship between competitive advantage and firm
performance?
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STRATEGY FORMULATION (F)
Chapters 6 and 7
• How should we compete (cost leadership, differentiation,
or integration)?
Chapters 8 and 9
• Where should we compete (industry, markets, and
geography)?
Chapter 10
• Where (local, regional, national, and international) and how
should we compete around the world?
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STRATEGY IMPLEMENTATION (I)
Chapter 11
• How should we organize to put the formulated strategy into
practice?
Chapter 12
• What type of corporate governance is most effective?
• How do we anchor strategic decisions in business ethics?
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1.4 Implications for the Strategist
STRATEGY is the SCIENCE of SUCCESS and FAILURE.
 Strategists are challenged by competition, complexity,
uncertainty and volatility.
 The strategist is empowered by:
• The universality of strategic management principles.
• Knowledge that the actions they create have more influence
on firm performance than does the external environment.
• Following the 3-step AFI framework.
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ChapterCase 1
©Kim Hong-JI/Reuters/Corbis
Consider This…
• 2012
 Despite Apple’s $1 billion courtroom victory against Samsung,
Samsung sold more smartphones than Apple.
• 2013
 Samsung introduced the new Galaxy S4 model, intensifying
competition with Apple.
• Apple uncharacteristically botched the launch of the iPhone 5.
 The embedded Apple map app was far inferior to Google maps, used
in earlier versions of the iPhone.
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Chapter Case 1
Consider This…
• Samsung sold more smartphones than Apple in 2012.
• Apple’s top management team experienced turnover and
some executives were forced out.
• A few months after reaching $623 billion, Apple’s share price
dropped 30%, eliminating $200 billion in market valuation.
• This case underscores the challenges of creating and
sustaining a competitive advantage.
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Take-Away Concepts
LO 1-1
Explain the role
of strategy in a
firm’s quest for
competitive
advantage.
 Strategy is the set of goal-directed actions
a firm takes to gain and sustain superior
performance relative to competitors.
 A good strategy enables a firm to achieve
superior performance; it consists of three
elements:
• Diagnosis of the competitive challenge.
• Guiding policy to address the competitive
challenge.
• A set of coherent actions to implement the
firm’s guiding policy.
 Successful strategy requires three
integrative management tasks—analysis,
formulation, and implementation.
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Take-Away Concepts
LO 1-2
Define competitive
advantage,
sustainable
competitive
advantage,
competitive
disadvantage, and
competitive parity.
 Competitive advantage is always judged relative to
other competitors or the industry average.
 To obtain a competitive advantage, a firm must either
create more value for customers while keeping its
cost comparable to competitors.
 A firm able to outperform competitors for prolonged
periods of time has a sustained competitive
advantage.
 A firm that continuously underperforms its rivals or
the industry average has a competitive disadvantage.
 Two or more firms that perform at the same level
have competitive parity.
 An effective strategy requires that strategic trade-offs
be recognized and addressed—e.g., between value
creation and the costs to create the value.
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Take-Away Concepts
 A firm’s performance is more closely
LO 1-3
related to its managers’ actions (firm
Differentiate the
effects) than to the external circumstances
role of firm effects
surrounding it (industry effects).
and industry
effects in
 Firm and industry effects, however, are
determining firm
interdependent. Both are relevant in
performance.
determining firm performance.
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Take-Away Concepts
 Stakeholders are individuals or groups that
have a claim or interest in the performance
LO 1-4
and continued survival of the firm.
Evaluate the
 Internal stakeholders include stockholders,
relationship
employees, and board members.
 External stakeholders include customers,
between
suppliers, alliance partners, creditors,
stakeholder strategy
unions, communities, and governments.
and sustainable
 Several recent black swan events eroded
the public’s trust in business as an
competitive
institution and free-market capitalism as an
advantage.
economic system.
 Effective management of stakeholders is
necessary to ensure the continued survival
of the firm and to sustain any competitive
advantage.
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Take-Away Concepts
LO 1-5
Conduct a
stakeholder
analysis.
 Stakeholder impact analysis considers the needs of
different stakeholders.
 In a stakeholder impact analysis, managers pay
particular attention to three important stakeholder
attributes: power, legitimacy, and urgency.
 Stakeholder impact analysis is a five-step process
that answers the following questions for the firm:
1.
2.
3.
4.
5.
Who are our stakeholders?
What are our stakeholders’ interests and claims?
What opportunities and threats do our stakeholders
present?
What economic, legal, and ethical responsibilities
do we have to our stakeholders?
What should we do to effectively address the
stakeholder concerns?
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