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Chapter 1
What Is Strategy and
Why Is It Important?
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“Without a strategy the
organization is like a ship
without a rudder, going
around in circles.”
Joel Ross and Michael Kami
Chapter Outline
 What Is Strategy?
 What Does the Strategy-Making, Strategy-Executing
Process Entail?
 Phase 1: Developing a Strategic Vision
 Phase 2: Setting Objectives
 Phase 3: Crafting a Strategy
 Phase 4: Implementing and Executing the Strategy
 Phase 5: Evaluating Performance and Initiating Corrective
Adjustments
 What Is the Role of the Board of Directors in the
Strategy-Making, Strategy-Executing Process?
 Why Is Strategy Important?
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Thinking Strategically:
The Three Big Strategic Questions
1. Where are we now?
2. Where do we want to go?
 Business(es) to be in and market
positions to stake out
 Buyer needs and groups to serve
 Outcomes to achieve
3. How will we get there?
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What Is Strategy?
 Consists of the combination of competitive
moves and business approaches used by
managers to run the company
 Management’s “game plan” to
 Stake out a market position
 Attract and please customers
 Compete successfully
 Conduct operations
 Achieve organizational objectives
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Striving for Competitive Advantage
 Central thrust of a company’s strategy
involves moves to strengthen a company’s
 Long-term competitive position and
 Financial performance
 Key components of strategy
 Offensive moves
 Defensive moves
What separates a powerful strategy from an
ordinary one is management’s ability to forge a series of
moves, both in the marketplace and internally, that
produce sustainable competitive advantage!
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Strategic Approaches to Building
Competitive Advantage
 Strive to be the industry’s low-cost provider
 Outcompete rivals on a key differentiating
feature
 Focus on a narrow market niche, doing a
better job than rivals of serving the unique
needs of niche buyers
 Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
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Fig. 1.1: Identifying a
Company’s Strategy
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Fig. 1.2: A Company’s Strategy Is
Partly Planned and Partly Reactive
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Why Do Strategies Evolve?
 A company’s strategy is a work in progress
 Changes may be necessary to react to
 A failing strategy
 Shifting market conditions
 Evolving customer preferences
 Fresh moves of competitors
 Technological breakthroughs
 Crisis situations
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What Is a Business Model?
 A business 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
the business can be
amply profitable and
viable
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Microsoft’s Business Model
Employ a cadre of highly skilled programmers to
develop proprietary code; keep source code hidden
from users
Sell resulting OS and software packages to PC makers
and users at relatively attractive prices and achieve
large unit sales
Most costs in developing software are fixed; variable
costs are small - once breakeven volume is reached,
revenues from additional sales are almost pure profit
Provide technical support to users at no cost
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Redhat Linux’s
Business Model
Rely on collaborative efforts of volunteer programmers to
create the software; make source code open and available to
all users
Add value to free, downloadable version of Linux by offering
users Red Hat Linux systems containing upgraded and
tested features
Charge a modest fee to those preferring to subscribe to Red
Hat Linux version
Make money by employing a cadre of technical support
personnel who provide technical support to users for a fee
Make as much or more money on providing technical
support services, training, and consulting as on selling
subscriptions to Red Hat Linux
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Figure 1.3: The Strategy-Making,
Strategy-Executing Process
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Develop a Strategic Vision & Mission
Phase 1 of the Strategic Management Process
 Involves thinking strategically about
 Future of company
 Where are we going?
 Tasks include
 Creating a roadmap of the future
 Deciding future business position to stake out
 Providing long-term direction
 Giving company a strong identity
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Strategic Vision
 A strategic vision concerns a firm’s future
business path -- “where we are going”
 Markets
to be pursued
 Future technology-product-customer focus
 Kind of company management is
trying to create
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Characteristics of a Strategic Vision
 Well-stated vision statements
 Are distinctive and specific
to a particular organization
 Avoid generic language
 Excite strong emotions
 Are challenging,
uncomfortable, nail biting
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Example: Vision Statement
Verizon Communications
To be the customer’s first choice
for communications and
information services in every
market we serve,
domestic and international.
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Example: Vision Statement
Levi Strauss & Company
We will clothe the world by
marketing the most appealing
and widely worn casual
clothing in the world.
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Example: Vision Statement
Microsoft Corporation
Empower people through
great software -- anytime,
anyplace, and on
any device.
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Example: Vision Statements
Mayo Clinic
The best care to every patient every day.
Scotland Yard
To make London the
safest city in the world.
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Example: Vision Statement
Toyota
We want to set the tone for the era . . .
Green and affordable . . . That means
establishing a new paradigm for
harmonizing personal transport with
the environment. It means
revolutionary cost savings in products
and production processes.
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Example: Vision Statement
Intel
Our vision: Getting to a billion connected computers
worldwide, millions of servers, and trillions of dollars of
e-commerce. Intel’s core mission is being the building
block supplier to the Internet economy and spurring
efforts to make the Internet more useful. Being
connected is now at the center of people’s computing
experience. We are helping to expand the capabilities
of the PC platform and the Internet.
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Example: Vision Statements
Greenpeace
To halt environmental abuse and promote
environmental solutions.
Goldman Sachs
To be the world’s premier investment
bank in every sector.
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Example: Vision Statement
General Electric
We will become number one or
number two in every market we
serve, and revolutionize this
company to have the speed and
agility of a small enterprise.
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Mission
 A mission statement focuses on current
business activities -- “who we are and what we
do”

Current product and service offerings
 Customer needs being served
 Technological and business capabilities
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Characteristics of a Mission
Statement
 Defines current business activities,
highlighting boundaries of current business
 Present products and services
 Types of customers served
 Conveys
 What we do,
 Why we are here, and
 Where we are now
A company’s mission is not to make a profit! The real
mission is always — “What will we do to make a profit?”
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Example: Mission Statement
(a unique grocery store chain)
Our mission: To give our customers the best
food and beverage values that they can find
anywhere and to provide them with the
information required for informed buying
decisions. We provide these with a dedication to
the highest quality of customer satisfaction
delivered with a sense of warmth, friendliness,
fun, individual pride, and company spirit.
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Communicating the Vision
 An exciting, inspirational vision
 Contains memorable language
 Clearly maps company’s future direction
 Challenges and motivates workforce
 Provokes emotion and enthusiasm
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Linking the Vision
With Company Values
 A statement of values is often provided to guide
the company’s pursuit of its vision
 Values -- Beliefs, business principles, and ways
of doing things incorporated into
 Company’s operations
 Behavior of workforce
 Values statements
 Contain between four and eight values
 Are ideally tightly connected to and reinforce
company’s vision, strategy, and operating
practices
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Example: Company Values
Home Depot
Creating
shareholder value
Entrepreneurial
spirit
Building strong
relationships
Excellent
customer service
Giving back to the
community
Taking care of
people
Respect for all
people
Doing the right
thing
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Example: Company Values
Du Pont
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Safety
Ethics
Respect for
people
Environmental
stewardship
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Setting Objectives
Phase 2 of the Strategic Management Process
 Converts strategic vision and
mission into specific performance
targets
 Creates yardsticks to track
performance
 Pushes firm to focus on results
 Helps prevent complacency and
coasting
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Characteristics of Objectives
 Represent commitment to achieve specific
performance targets
 Well-stated objectives are
 Quantifiable
 Measurable
 Contain a deadline for achievement
 Spell-out how much of what kind of
performance by when
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Types of Objectives Required
Financial Objectives
Strategic Objectives
Outcomes focused
Outcomes focused
on improving longon improving
financial performance term, competitive
business position
$
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Examples: Financial
Objectives
 X % increase in annual
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revenues
X % increase annually in
after-tax profits
X % increase annually in
earnings per share
Regular dividend increases
Larger gross profit margin
Larger operating profit
margin
Larger net profit margin
X % return on capital
employed (ROCE)
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 X % return on assets (ROA)
 X % return on shareholder





investment (ROE)
Upward-trending stock
price that builds significant
shareholder value over time
Strong bond and credit
ratings
Reduced levels of debt
Sufficient internal cash
flows to fund new capital
investment
Diversified revenue base
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Examples: Strategic
Objectives
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Winning additional market
share (or reaching X %
market share)
Consistently getting new or
improved products to market
ahead of rivals
Overtaking key competitors
on product performance or
quality or customer service
Achieving lower overall
costs than rivals
Deriving X % of revenues
from sale of new products
introduced in past 5 years
Being a recognized
technological leader
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Achieving national or global
market coverage for firm’s
products

Having broader or more
attractive product selection
than rivals

Deriving X % of revenues
from online sales

Having a better-known or
more respected brand name
than rivals

Improving global sales and
distribution capabilities
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Objective Setting: A Balanced
Scorecard Approach
 A “balanced scorecard” for measuring company performance
requires both financial objectives and strategic objectives
 Company achievement of satisfactory financial performance,
by itself, is not enough
 A company’s financial performance measures are “lagging
indicators” that reflect the results of past decisions and
actions
 Of equal or greater importance is a company’s performance on
the measures of its strategic well-being—its competitiveness
and market position
 Unless a company’s performance in the marketplace reflects
improving competitive strength and market penetration, its
progress is less than inspiring and its ability to continue
delivering good financial performance is suspect
 The “lead indicators” of a company’s future financial
performance and business prospects are growing
competitiveness and strength in the marketplace
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Balanced Scorecard Approach -Strategic vs. Financial Objectives?
 Pursuit of better financial performance may
assume priority over strategic performance
targets when
 Firm is struggling financially
 Resource commitments for new strategic
initiatives may hurt bottom-line for several years
 Proposed strategic moves are risky
 Otherwise, strategic objectives merit top priority
— a firm consistently foregoing opportunities to
strengthen its long-term competitive position
 Risks diluting its competitiveness
 Risks losing momentum in its markets
 Hurts its ability to fend off rivals’ challenges
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Example: Strategic and
Financial Objectives
Unilever
 Grow revenues by 5-6 % annually;
 Increase operating profit margins from 11 % to 16 %
within five years;
 Trim the company’s 1,200 food, household, and
personal care products down to 400 core brands;
 Focus sales and marketing efforts on those brands
with potential to become respected, market-leading
global brands; and
 Streamline the company’s supply chain.
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Examples: Strategic Objectives
Banc One Corporation
To be one of the top three banking
companies in terms of market share in
all significant markets we serve.
Bristol-Myers Squibb
To focus globally on those businesses in
health and personal care where we can be
number one or number two through delivering
superior value to the customer.
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Example: Strategic Objectives
Ford Motor Company
 To satisfy our customers by
 Providing quality cars and trucks,
 Developing new products,
 Reducing the time it takes to bring new
vehicles to market,
 Improving the efficiency of all our plants &
processes, and
 Building on our teamwork with employees,
unions, dealers, and suppliers.
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Example: Strategic and
Financial Objectives
Alcan Aluminum
To be the lowest-cost producer
of aluminum and to outperform
the average return on equity
of the Standard and Poor’s
industrial stock index.
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Example: Strategic and
Financial Objectives
3M Corporation
 Annual growth in earnings per share of 10%
or better, on average;
 A return on stockholders’ equity of 20-25%;
 A return on capital employed of 27% or
better; and
 Have at least 30% of sales come from
products introduced in the past four years.
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Short-Range Versus
Long-Range Objectives
 Short-Range objectives
 Targets to be achieved soon
 Serve as stair steps for
reaching long-range
performance
 Long-Range objectives
 Targets to be achieved within
3 to 5 years
 Prompt actions now that will
permit reaching targeted
long-range performance later
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Concept of Strategic Intent
A company exhibits strategic intent when it
relentlessly pursues an ambitious strategic
objective and concentrates its competitive
actions and energies on achieving that objective!
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Characteristics of Strategic Intent
 Indicates firm’s intent to stake out
a particular position over the
long-term
 Involves establishing a BHAG –
“big, hairy, audacious goal” and
then devoting the company’s full
resources and energies to
achieving it over time (Moon Shot)
 Signals relentless commitment to
winning in the marketplace
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Objectives Are Needed at All Levels
Objective-setting process is mostly
top-down, not bottom-up!
1. First, establish organization-wide objectives
and performance targets
2. Next, set business and
product line objectives
3. Then, establish functional
and departmental objectives
4. Individual objectives are established last
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Crafting a Strategy
Phase 3 of the Strategic Management Process
 Strategy-making involves entrepreneurship
– searching for opportunities
 To do new things or
 To do existing things in new or better ways
 Strategizing involves
 Picking up on happenings in the external
environment and
 Steering company activities in new directions
dictated by shifting market conditions
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Activities Involved in
Crafting a Strategy

Studying market trends and actions of
competitors
 Listening to customers, anticipating their
changing needs
 Scrutinizing business possibilities
based on new technology
Our strategy
will be . . .
 Building firm’s market position
via acquisitions or new products
 Pursuing ways to strengthen
firm’s competitive capabilities
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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
Strategy
is HOW
to . . .
 How to respond to changing
market conditions
 How to manage each functional piece of the
business and develop needed organizational
capabilities
 How to achieve strategic and financial objectives
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Linking Strategy With Ethics
 A company’s ethics and high moral standards go beyond
 Merely complying with laws and regulations
 A strategy that exemplifies high ethical and moral
standards addresses
 Issues of duty and
 What is morally responsible
 What it is “right” to do
and not do
 A strategy is not ethical
unless it can pass
moral scrutiny
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A Firm’s Ethical Responsibilities
to Its Stakeholders
Owners/shareholders – Rightfully expect some
form of return on their investment
Employees - Rightfully expect respect for their
worth and devoting their energies to firm
Customers - Rightfully expect a seller to provide
them with a reliable, safe product or service
Suppliers - Rightfully expect to have an equitable
relationship with firms they supply
Community - Rightfully expect businesses to be
good citizens in their community
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What Is a Strategic Plan?
Where firm is headed -Strategic vision and
business mission
Short and long term performance
targets -- Strategic and financial
objectives
Action approaches to achieve
targeted results -- A
comprehensive strategy
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Who Participates in Crafting
a Company’s Strategy?
56

Senior corporate
executives

Managers of business
units and major product
lines and key VPs

Functional area
managers

Operating managers
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Strategizing: An Individual
or Group Responsibility?

57
Teams are increasingly used because

Finding market- and customer-driven solutions
is necessary

Complex strategic issues cut across
functional areas and departmental units

Ideas of people with different
backgrounds and experiences
strengthen strategizing effort

Groups charged with crafting the
strategy often include the people
charged with implementing it
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Figure 1.4: A Company’s
Strategy-Making Hierarchy
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Levels of Strategy-Making
in a Diversified Company
Corporate-Level
Managers
Corporate
Strategy
Two-Way Influence
Business-Level
Managers
Business Strategies
Two-Way Influence
Functional
Managers
Functional Strategies
Two-Way Influence
Operating
Managers
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Operating Strategies
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Levels of Strategy-Making in
a Single-Business Company
Business-Level
Managers
Business
Strategy
Two-Way Influence
Functional
Managers
Functional Strategies
Two-Way Influence
Operating
Managers
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Operating Strategies
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Tasks of Corporate Strategy
 Moves to achieve diversification
 Actions to boost performance of individual
businesses
 Capturing valuable cross-business
synergies to provide 1 + 1 = 3 effects!
 Establishing investment
priorities and steering
corporate resources into the
most attractive businesses
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Tasks of Business Strategy
 Initiating approaches to produce successful
performance in a specific business
 Crafting competitive moves to build
sustainable competitive advantage
 Developing competitively valuable
competencies and capabilities
 Uniting strategic activities of functional areas
 Gaining approval of business strategies by
corporate-level officers
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Tasks of Functional Strategies
 Game plan for a strategically-
relevant function, activity, or
business process
 Detail how key activities will
be managed
 Provide support for business
strategy
 Specify how functional
objectives are to be achieved
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Tasks of Operating Strategies
 Concern narrower
strategies for managing
grassroots activities and
strategically-relevant
operating units
 Add detail to business
and functional strategies
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Uniting the Company’s
Strategy-Making Effort
 A firm’s strategy is a collection of
initiatives implemented by
managers at all organizational
levels
 Separate levels of strategy must be
unified into a cohesive, companywide action plan
 Pieces of strategy should fit
together like the pieces of a puzzle
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Tests of a Winning Strategy

GOODNESS OF FIT TEST
 How well is strategy matched
to firm’s situation?

COMPETITIVE ADVANTAGE TEST
 Does strategy lead to sustainable
competitive advantage?

PERFORMANCE TEST
 Does strategy boost firm performance?
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Implementing and Executing Strategy
Phase 4 of the Strategic Management Process
 Action-oriented, operations-driven activity aimed
at shaping performance of core business activities
in a strategy-supportive manner
 Tougher and more time-consuming
than crafting strategy
 Key tasks include
 Improving the competence and
efficiency of the strategy being executed
 Showing measurable progress in achieving
targeted results
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What Does Strategy Implementation
and Execution Include?
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68
Building a capable organization
Allocating resources to strategy-critical activities
Establishing strategy-supportive policies
Instituting best practices and programs for
continuous improvement
Installing needed information, communication, and
operating systems
Motivating people to pursue the target objectives
Tying rewards to achievement of results
Creating a strategy-supportive corporate culture
Exerting the leadership necessary to drive the
process forward and keep improving
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Evaluating Performance and
Initiating Corrective Adjustments
Phase 5 of the Strategic Management Process

Tasks of crafting and implementing the strategy are
not a one-time exercise
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Customer needs and competitive
conditions change
New opportunities appear; technology
advances; any number of other
outside developments occur
One or more aspects of executing the
strategy may not be going well
New managers with different
ideas take over
Organizational learning occurs
All these trigger the need for corrective actions
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Monitoring, Evaluating, and
Adjusting as Needed
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70
Taking actions to adjust to the march of
events tends to result in one or more of the
following

Altering long-term direction and/or
redefining the mission/vision

Raising, lowering, or changing
performance objectives

Modifying the strategy

Improving strategy execution
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Strategic Role of a
Board of Directors
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
Critically appraise and ultimately approve
strategic action plans

Evaluate strategic leadership skills of the
CEO and candidates to succeed the CEO
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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 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-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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Benefits of a “Strategic Approach”
to Managing
 Good strategic thinking and good management of
the strategy-making, strategy-executing process
 Guides entire firm regarding “what it is
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we are trying to do and to achieve”
Helps unify numerous strategy-related
decisions across the company
Creates a proactive atmosphere
Promotes development of an
evolving business model focused
on bottom-line success
Provides basis for determining how
best to allocate company resources
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