What Is Strategy and Why Is It Important?

Chapter 1

Chapter Roadmap
What Do We Mean by Strategy? Strategy and the Quest for Competitive Advantage Identifying a Companys Strategy Why a Companys Strategy Evolves Over Time A Companys Strategy Is Partly Proactive and Partly Reactive The Relationship Between a Companys 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. Whats the companys 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 companys 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 Managements action plan to
Grow the business
Attract and please customers Compete successfully

Conduct operations
Achieve the targeted levels of organizational performance

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 manage each functional piece 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 and what has not worked
Managements appetite for taking risks Managerial analysis and strategic thinking about how best to proceed, given market conditions and a companys circumstances

In choosing a strategy, management is in effect saying,

Among all the many different ways of competing we could have chosen, we have decided to employ this combination of competitive and operating approaches to move the company in the intended direction, strengthen its market position and competitiveness, and boost performance

Strategy and the Quest for Competitive Advantage

The heart and soul of any strategy are actions a company makes to
Improve its financial performance,
Strengthen its competitive position, and Gain a competitive advantage over

A creative, distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a companys most reliable ticket to above average profitability
Operating with a competitive advantage is more profitable than operating without one Operating with a competitive disadvantage nearly always results in belowaverage profitability

A Powerful Strategy Leads to Sustainable Competitive Advantage

A company achieves sustainable competitive advantage when
An attractive number of buyers prefer its products/services over those of rivals and The basis for this preference is durable

Its nice when a strategy produces

A temporary competitive edge but A sustainable edge over rivals greatly enhances a companys prospects for above-average profitability
What separates a powerful strategy from an ordinary strategy is managements ability to forge a series of moves, both in the marketplace and internally, that ! produces sustainable competitive advantage

Strategic Approaches to Building Sustainable Competitive Advantage

Be the industrys low-cost provider
Achieve a cost-based competitive advantage

Incorporate differentiating features

Superior product/service keyed to higher quality, better performance, wider selection, value-added services, or some other attribute

Focus on a narrow market niche

Win a competitive edge by doing a better job than rivals of serving the needs and preferences of buyers in the niche

Develop expertise and resource strengths not easily imitated or matched by rivals
Achieve a capabilities-based competitive

Figure 1.1: Identifying a Companys Strategy

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Why Do Strategies Evolve?

A companys strategy is a work in progress

Changes may be necessary to react to

Financial crisis Fresh moves of competitors

Evolving customer preferences

Technological breakthroughs Emerging market opportunities

Changing political or economic climate

New ideas to improve strategy

Figure 1.2: A Companys Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments

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What Is a Business Model?

A business model addresses How do we make money in this business?
Is the companys 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 has good potential to deliver acceptable profitability?

Relationship Between Strategy and Business Model

Strategy . . .
Deals with a companys competitive initiatives and business approaches

Business Model . . . Concerns

whether revenues and costs flowing from the strategy demonstrate a business can be profitable and viable

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Sequential Phases of Strategic Planning

1. Basic Financial Planning 2. Forecast-Based Planning 3. Externally-Oriented Planning (Strategic Planning) 4. Strategic Management

Dimensions Of Strategic Decisions

1. 2. 3. Strategic issues require Top-Management Decisions Top management has the perspective needed to understand the broad implications of such decision and power to authorize the necessary resource allocation Strategic Issues Require Large Amounts of the firms Resources Involve substantial allocation of people, physical assets, or money that either must be redirected from internal sources or outside the firm Commit the firm to action for an extended period Strategic issues often affect the firms long-term prosperity Strategic decisions commit the firm for a long time, the impact of such decisions lasts much longer Once a firm has committed itself to a particular strategy, its image and competitive advantage are tied to that strategy Firms become known in certain markets for certain products , with certain technologies They would jeopardize their previous gains if they shifted from these markets, markets, products, or technology

Dimensions Of Strategic Decisions

4. Strategic decisions are future oriented Strategic decisions are based on what managers forecast, rather than on what they know In such decisions, emphasis is on the development of projections that will enable the firm to select the most promising strategic option In a turbulent and competitive free enterprise environment, a firm will succeed only if it takes proactive (anticipatory) stance towards change 5. Strategic issues usually have multifunctional or multi-business consequences Complex implication for most areas of the firm Decisions about matters as: Customer mix Competitive emphasis Organizational structure Involve a number of firms SBUs, divisions, or program units All of these areas will be affected by allocation or reallocation of responsibilities and resources that result from these decisions 6. Strategic issues require considering the firms external environment

The Strategy Diamond and the Five Elements of Strategy

1. 2. Arenas: where will we be active Decisions about a firms arenas may encompass its products, channels, market segments, geographic areas, technologies, and even stages in the value creation process. Vehicles: how will we get there? provide the means for participating in the targeted arenas (acquisitions, internal development, joint ventures, etc.) Wal-Mart is an example of a firm that has used different vehicles for expanding internationally In some markets, they have chosen to grow organically (such as Argentina), while in others they have used acquisitions of existing retailers (such as in England and Germany).

The Strategy Diamond and the Five Elements of Strategy

3. Differentiators: how will we win in the marketplace? are features and attributes of a companys product or services that help it beat its competitors in the marketplace Two critical factors in selecting differentiators are: (1) Make decisions early (2) Identifying and executing successful differentiators means making tough choices namely tradeoffs The earlier and more consistent the firm is at defining and driving these differentiators, the greater the likelihood that customers will recognize them

The Strategy Diamond and the Five Elements of Strategy

4. Staging: what will be our speed and sequence of moves? These staging choices depend on available resources, including cash, human capital, and knowledge Staging decisions should be driven by several factors: resources, urgency, credibility, and need for early wins. Opportunities must be matched with available resources. In addition, not all opportunities to enter new arenas are permanent; some have only brief windows. In these cases, early wins and the credibility of certain key stakeholders may be necessary to implement a strategy.

The Strategy Diamond and the Five Elements of Strategy

5. Economic logic: how will we obtain our returns? This reflects the firms ability to generate positive returns above the firms cost of capital. Both costs and revenues are considered. Sometimes economic logic resides primarily on the cost side of the equation Other times, economic logic may rest on the firms ability to increase the customers willingness to pay premium prices for products

BUSINESS STRATEGY DIAMOND

Arenas

Where will we be active? ( and

with how much emphasis?) Which product categories? Which channels? Arenas Which market segments? Which geographic areas? Which core technologies Which value-creation strategies? Vehicles Economic Vehicles logic How will we get there? Internal development? Joint ventures? Licensing/franchising? Experimentation? Differentiators Acquisitions? Differentiators

Staging

What will be our speed and

sequence of moves? Speed of expansion? Sequence of initiatives Economic logic

Staging

How will returns be obtained?

Lowest costs through scale advantages? Lowest costs through scope and replication advantages Premium prices due to unmatchable service? Premium prices due to proprietary product features?

How will we win?

Image? Customization? Price? Styling? Product reliability? Speed to market?

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Leading the Process of Crafting and Executing Strategy

Chapter 2:

Chapter Roadmap
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 Leading the Strategic Management Process Corporate Governance: The Role of the Board of Directors in the Strategy-Making, Strategy-Executing Process

Figure 2.1: The Strategy-Making, Strategy-Executing Process

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Developing a Strategic Vision

Phase 1
Involves thinking strategically about Future direction of company Changes in companys product/market/customer technology to improve Current market position Future prospects

A strategic vision describes the route a company intends to take in developing and strengthening its business. It lays out the companys strategic course in preparing for the future.

Key Elements of a Strategic Vision

Delineates managements aspirations for the business Provides a panoramic view of where we are going Charts a strategic path Is distinctive and specific to a particular organization
Avoids use of generic language that is dull and boring and that could apply to most any company

Captures the emotions of employees and steers them in a common direction Is challenging and a bit beyond a companys immediate reach

Role of a Strategic Vision

A well-conceived, well-communicated vision functions as a valuable managerial tool to
Give the organization a sense of direction, mold organizational identity, and create a committed enterprise Illuminate the companys directional path Provide managers with a reference point to
Make strategic decisions Translate the vision into hard-edged objectives and strategies Prepare the company 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!

Table 2.2: Characteristics of an Effectively Worded Vision Statement

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Table 2.3: Common Shortcomings in Company Vision Statements

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Strategic Vision vs. Mission

A strategic vision concerns a A companys mission

firms future business path where we are going

Markets to be pursued Future product/market/ customer/technology focus Kind of company management is trying to create

statement typically focuses on its present business purpose - who we are and what we do
Current product and service offerings Customer needs and customer groups being served Geographic coverage

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Characteristics of a Mission Statement

Identifies boundaries of a companys current business and says something about

Present products and services Types of customers served Geographic coverage

Conveys

Who we are, What we do, and Why we are here

A good mission statement describes a companys business makeup and purpose in language specific enough to give the company its own identity and distinguish it from other enterprises in the same or other industries!

Key Elements of a Mission Statement

A complete mission statement should cover three things: Customer needs being met

What is being satisfied

Customer groups or markets being served

Who is being satisfied

What the organization does (in terms of business approaches, technologies used, and activities performed) to satisfy the targeted needs of the targeted customer groups How customer needs are satisfied
A companys mission is not to make a profit! Its true mission is its answer to What will we do to make a profit? Making a profit is an objective or intended outcome!

Linking the Vision with Company Values

Companies often develop a statement of values to guide a companys pursuit of its vision and strategy and paint the white lines for how a companys business is to be conducted Company values statements typically contain four to eight beliefs, traits, and behaviors relating to such things as Fair treatment, integrity, ethical behavior, innovation, teamwork, product quality, customer satisfaction, social responsibility, community citizenship

Linking the Vision with Company Values

But values statements remain a bunch of nice words until espoused beliefs, traits, and behaviors are Incorporated into companys operations and work practices Used as benchmarks for job appraisal, promotions, and rewards

If company personnel are not held accountable for displaying company values in doing their jobs, then the company values statement is a bunch of empty words!

Communicating the Strategic Vision

Winning support for the vision involves
Putting where we are going and why in writing Distributing the statement organization-wide Having executives explain vision to employees

An engaging, inspirational vision

Challenges and motivates workforce Articulates a compelling case for where company is headed Evokes positive support and excitement Arouses a committed organizational effort to move in a common direction

 Sometimes an order-of-magnitude change occurs in a companys environment that

Dramatically alters its future prospects Mandates radical revision of its strategic course

Recognizing Strategic Inflection Points

Critical decisions have to be made about where to go from here

A major new directional path may have to be taken
A major new strategy may be needed

Responding quickly to unfolding changes in the marketplace lessons a companys chances of

Becoming trapped in a stagnant business or Letting attractive new growth opportunities slip away

Overcoming Resistance to a New Strategic Vision

Mobilizing support for a new vision entails
Reiterating basis for the new direction Addressing employee concerns head-on Calming fears Lifting spirits Providing updates and progress reports as events unfold

Payoffs of a Clear Strategic Vision

Crystallizes an organizations long-term direction

Reduces risk of rudderless decision-making

Creates a committed enterprise where organizational members enthusiastically pursue efforts to make the vision a reality Provides a beacon to keep strategy-related actions of all managers on common path Helps an organization prepare for the future

Setting Objectives
Phase 2
Purpose of setting objectives
Converts vision into specific performance targets
Creates yardsticks to track performance Well-stated objectives are

Quantifiable
Measurable Contain a deadline for achievement

Spell-out how much of what kind of performance by when

Importance of Setting Stretch Objectives

Objectives should be set at levels that stretch an organization to
Perform at its full potential, delivering the best possible results

Push firm to be more inventive

Exhibit more urgency to improve its business position Be intentional and focused in its actions
Theres no better way to avoid ho-hum results than by setting stretch objectives and using compensation incentives to motivate organization members to achieve the stretch performance targets!

Types of Objectives Required

Financial Objectives
Outcomes focused on improving financial performance

Strategic Objectives
Outcomes focused on improving competitive strength and market standing

Examples: Financial Objectives

Annual revenue growth of X% X % increase in after-tax profits annual Earnings per share growth of X% annually Annual dividend increases of X% Profit margins of X% X% return on capital employed (ROCE) Annual stock price increases that average X% over time Strong bond and credit ratings Sufficient internal cash flows to fund 100% of new capital investment Stable earnings during periods of recession

Examples: Strategic Objectives

Winning an X% market share within 3 years Achieving lower overall costs than rivals Overtaking key competitors on product performance or quality or customer service within 2 years Deriving X% of revenues from sale of new products introduced in past 5 years Being the recognized industry leader in product innovation and/or technological know-how Having a wider product line than rivals Consistently getting new or improved products to market ahead of rivals Having stronger national or global sales and distribution capabilities than rivals

Good Strategic Performance Is the Key to Better Financial Performance

Achieving good financial performance is not enough
Current financial results are lagging indicators reflecting results of past decisions and actions good profitability now does not translate into stronger capability for delivering even better financial results later

However, setting well-chosen strategic objectives and achieving them signals

Growing competitiveness Growing strength in the marketplace

A company that is growing competitively stronger is developing the capability for better financial performance in the years ahead
Good strategic performance is thus a leading indicator of a companys 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!

A Balanced Scorecard Approach Setting Strategic and Financial Objectives

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
(However, if a companys financial performance is dismal or if its very survival is in doubt because of poor financial results, then stressing the achievement of the financial objectives and temporarily de-emphasizing the strategic objectives may have merit)

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 companys business position and give it a growing competitive advantage over rivals!

Both Short-Term and Long-Term Objectives Are Needed

Short-term objectives
Targets to be achieved soon
Milestones or stair steps for reaching long-range performance targets

Long-term objectives
Targets to be achieved within 3 to 5 years

Calls for actions now that will permit reaching targeted long-range performance

Concept of Strategic Intent

A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective!

Characteristics of Strategic Intent

Indicates firms intent to making quantum gains in competing against key rivals and to establishing itself as a winner in the marketplace, often against long odds Involves establishing a grandiose performance target out of proportion to immediate capabilities and market position but then devoting the firms full resources and energies to achieving the target over time Entails sustained, aggressive actions to take market share away from rivals and achieve a much stronger market position

Objectives Are Needed at All Levels

The objective-setting process is more top-down than bottom up 1. First, set 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

Crafting a Strategy
Phase 3
Strategy-making involves astute entrepreneurship Actively searching for opportunities to do new things or Actively searching for opportunities to do existing things in new or better ways Strategizing involves Developing timely responses to happenings in the external environment and Steering company activities in new directions dictated by shifting market conditions

The Role of Astute Entrepreneurship in Crafting a Companys Strategy

Masterful strategies come partly (maybe mostly) by doing things differently from competitors where it counts

Innovating more creatively Being more efficient Being more imaginative Adapting faster
Rather than running with the herd! Good strategy-making is therefore inseparable from good entrepreneurshipone cannot exist without the other!

The Hows That Define a Firm's Strategy

How to grow the business

How to please customers How to outcompete rivals How to respond to changing market conditions How to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on) How to achieve targeted levels of performance

Who Is Involved in Strategy Making

CEO (chief executive officer)
Has ultimate responsibility for leading the strategy-making process Functions as strategic visionary and chief architect of strategy

Senior executives
Typically have influential roles in fashioning those strategy components involving their areas of responsibility

Managers of subsidiaries, divisions, geographic regions, plants, and other important operating units (and, often, key employees with specialized expertise)
Some pieces of the strategy are best orchestrated by on-the-scene company personnel with detailed familiarity of the piece of the business they are in charge of running

Why Is Strategy-Making Nearly Always a Collaborative Process

The job is often way too big for one person or a small executive groupmany strategic issues are complex or cut across multiple areas of expertise The more a companys operations cut across different products, industries and geographic areas, the more that headquarters executives must delegate strategy-making authority to down-the-line managers in charge of particular functions and operating units

Figure 2.2: A Companys Strategy-Making Hierarchy

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 Corporate Level Composed principally of Board of Directors, CEO and Administrative officers Responsible for firms Financial Performance and Non Financial Goals To large extent, attitudes at the corporate level reflect the concerns of stock holders and society at large In multi business firms: Determine what business to be involved What markets to enter How to grow the business: - Vertical Integration - Horizontal integration - Diversification - Develop synergies between the various units ( economies of scope) Set objectives for various business units Determine investment priorities using portfolio models for various units

Three Levels of Strategy

Three Levels of Strategy

Business Level Strategies Composed principally of business and corporate managers Translate the statements of direction and intent generated at corporate level into concrete objectives and strategies for individual divisions or SBUs Determine how the division or SBU will compete in the product- market arena Strive to identify and secure the most promising market segment within that arena Common business level strategies are: Overall low cost leadership Differentiation Focus a. Low cost focus b. Focus differentiation

Three Levels of Strategy

Functional Level Strategies Develop annual objectives and short-term strategies in functional areas Their principal responsibility is to implement or execute the firms strategic plans They a address issues relating to efficiency and effectiveness of their functional activities in increasing the firms

Single-business Firms

Corporate/ business level

Functional Level
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POM/R&D strategies

Financial/ accounting strategies

Marketing strategies

Human relations strategies

Multiple business Firms

Business 1

Business 2

Business 3

POM/R&D strategies

Marketing strategies

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Functional Level

Financial/ accounting strategies

Human relations strategies

Business Level

Corporate strategies

What Is a Strategic Plan?

Its strategic vision and business mission

A Companys Strategic Plan Consists of

Its strategy
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Its strategic and financial objectives

Implementing and Executing Strategy

Phase 4

Operations-oriented activity aimed at performing core business activities in a strategy-supportive manner

Tougher and more time-consuming than crafting strategy Key tasks include Improving the efficiency with which the strategy is being executed Showing measurable progress in achieving both operating excellence and targeted results

What Does Implementing and Executing the Strategy Involve

Building a capable organization Allocating resources to strategy-critical activities Establishing strategy-supportive policies Instituting best practices and programs for continuous improvement Installing 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

Evaluating Performance and Making Corrective Adjustments

Phase 5
Crafting and implementing a strategy is not a one-time exercise
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 a need for corrective actions and adjustments on an as-needed basis

Leading the Strategic Management Process

Diverse leadership challenges include
Exerting take-charge leadership Being a spark plug for change and action Ramrodding things through Achieving results

Leading the strategic management process can involve various styles and approaches

Being a hard-nosed authoritarian Being a perceptive listener Being a compromising decision maker Delegating authority to people closest to the action Being a coach Assuming a highly visible role in guiding the process Making brief ceremonial appearances

Things a Chief Strategy Implementer Must Do to Be Successful

1. Stay on top of whats happening 2. Make sure company has a
good strategic plan 3. Put constructive pressure on company to achieve good results

4. Push corrective actions to improve overall strategic

performance 5. Lead development of stronger core competencies and competitive capabilities initiatives

6. Display ethical integrity and lead social responsibility

Role #1: Stay on Top of Whats Happening

Develop a broad network of formal and informal sources of information Talk with many people at all levels Be an avid practitioner of MBWA
Observe situation firsthand

Monitor operating results regularly Get feedback from customers Watch competitive reactions of rivals

Role #2: Make Sure Company Has a Good Strategic Plan

Two key responsibilities of CEO and top-level executives
Effectively communicate companys vision, objectives, and major strategy components to down-the-line managers and key personnel

Exercise due diligence in reviewing lower-level strategies for consistency and support of higher-level strategies

Effective leadership minimizes potential for conflict between different levels in the strategy hierarchy

Role #3: Put Constructive Pressure on Company to Achieve Good Results

Successful leaders spend time
Mobilizing organizational energy behind
Good strategy execution and Operating excellence

Nurturing a results-oriented work climate Promoting enabling cultural drivers

Strong sense of involvement on part of company personnel Emphasis on individual initiative and creativity Respect for contributions of individuals and groups Pride in doing things right

 Requires deciding

Role #4: Push Corrective Actions to Improve Strategy-Making and StrategyExecution

When adjustments are needed What adjustments to make

Involves
Adjusting long-term direction, objectives, and strategy on an as-needed basis in response to unfolding events and changing circumstances Promoting fresh initiatives to bring internal activities and behavior into better alignment with strategy Making changes to pick up the pace when results fall short of performance targets

Role #5: Promote Stronger Core Competencies and Capabilities

Top management intervention is required to establish better or new
Resource strengths and competencies Competitive capabilities

Senior managers must lead the effort because

Competencies reside in combined efforts of different work groups and departments, thus requiring cross-functional collaboration Stronger competencies and capabilities can lead to a competitive edge over