What Is Strategy and Why IsIt Important? Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University-Florida Region
“Without a strategy the organization is like a ship without a rudder.” Joel Ross and Michael Kami
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?
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
What Do We Mean By “Strategy”? • Consists of 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 oforganizational performance
Strategy is HOWto . . . The Hows ThatDefine a Firm's Strategy • How to grow the business • How to please customers • How to outcompete rivals • Howto manage each functionalpiece 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
Choosing the “Hows” of Strategy • Strategic choices about “how” are based on • Trial-and-error organizational learning about what has worked andwhat 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.”
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”elementto • Attract customers and • Produce a competitive edge Copying competitive moves of other successful companies rarely works!
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
For Discussion: Your Opinion From your perspective as a cable or satellite service consumer, does Comcast’s strategy (as described in Illustration Capsule 1.1) seem to be well-matched to industry and competitive conditions? Does the strategy seem to be keyed to a cost advantage, differentiating features, serving the unique needs of a niche, or developing resource strengths and competitive capabilities rivals can’t imitate or trump (or a mixture of these)? What is there about Comcast’s strategy that can lead to sustainable competitive advantage?
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
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 ordinarystrategy is management’s ability to forge a series ofmoves, both in the marketplace and internally, that produces sustainable competitive advantage!
Four “Best” Strategic Approaches toBuilding 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)
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
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, andcapabilities 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
Test Your Knowledge A company’s strategy and its quest for competitive advantage are tightly related because A. a company’s strategy determines whether it will have lower or higher costs than rivals and thus be at a competitive advantage or disadvantage. B. competitive advantage is essential to having a profitable business model. C. choosing a competitive advantage to pursue also helps a company choose which business model is most appropriate. D. competitive advantage enables a company to achieve its strategic objectives. E. a strategy that leads to sustainable competitive advantage is a company’s most reliable means of achieving above-average profitability and financial performance.
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
Fig. 1.2: A Company’s Strategy Is Partly Proactive and Partly Reactive
Crafting Strategy Is anExercise 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
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” • Ethical and 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
A Firm’s EthicalResponsibilities to Its Stakeholders Owners/shareholders– Rightfully expect some form of return on their investment Employees - Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise 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 and be treated fairly Community - Rightfully expect businesses to be good citizens in their community
Role of Senior Executives:Linking Strategy with Ethics • Forbid pursuit of ethically questionable business opportunities • Insist all aspects of company strategyreflect high ethical standards • Make it clear all employees areexpected 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
Test Your Knowledge A company's strategy can be considered “ethical” A. if all of its different actions and elements are legal and in compliance with governmental rules and regulations. B. so long as its actions and behaviors can pass the test of “moral scrutiny” and are aboveboard in the sense of not being shady or unconscionable, injurious to others, or unnecessarily harmful to the environment. C. only if all elements of the strategy are in accord with what is generally considered as being in the overall best interests of society at large. D. so long as religious authorities and noted ethics experts find nothing “wrong” in the company’s actions. E. if it is in compliance with the company’s code of ethics and has been approved by the company’s chief ethics officer.
What Is a Business Model? • A business model addresses “How do we make money in this business?” • Is the strategy capable of deliveringgood bottom-line results? • Do the revenue-cost-profit economicsof 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?
Strategy . . . Deals with a company’s competitive initiatives and business approaches Business Model . . . Concerns whether revenues and costs flowing from the strategydemonstrate a business can be amply profitable and viable Strategy Business Model Relationship Between Strategy and 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 to achieve a 90% or more market share Most costs in developing software are fixed; variable costs are small; once break-even volume is reached, revenues from additional sales are almost pure profit Provide modest level of technical support to users at no cost Rejuvenate revenues by periodically introducing next-generation software with features inducing PC users to upgrade their operating systems Microsoft’s Business Model
Rely on collaborative efforts of volunteer programmers to create the software Collect and test enhancements and new applications submitted by volunteer programmers for evaluation and inclusion in new releases of Linux Market upgraded and tested family of Red Hat products to large companies, charging a subscription fee that includes 24/7 support within 1 hour in 7 languages Make source code open and available to all users Capitalize on specialized expertise required to use Linux by providing fee-based training, consulting, software customization, and client-directed engineering to Linus users Red Hat’s Business Model
Test Your Knowledge The nitty-gritty issue surrounding a company’s business model is whether A. the strategy is capable of producing sustainable competitive advantage. B. it matches the company’s external and internal situation. C. the chosen strategy makes good business sense from a money-making perspective. D. the company’s strategy and strategic moves are mostly proactive. E. the company’s strategy stands a really good chance of hitting a home-run in the marketplace.
For Discussion: Your Opinion Who has the best business model –Microsoft or Red Hat?
Tests of a Winning Strategy • GOODNESS OF FIT TEST • How well does strategy fitthe firm’s situation? • COMPETITIVE ADVANTAGE TEST • Does strategy lead to sustainablecompetitive advantage? • PERFORMANCE TEST • Does strategy boost firm performance?
Other Criteria for Judgingthe 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!
Why Is Strategy Important? • A compelling need exists for managersto proactively shape how a firm’sbusiness will be conducted • A strategy-focused firm is more likelyto be a strong bottom-line performerthan one that views strategy as secondary
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 thebest test of managerial excellence – and themost reliable recipe for winning in the marketplace!