Chapter 1: Introduction to

Strategic management

Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University

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Chapter Roadmap

What Do We Mean by Strategy?

Strategy and the Quest for Competitive Advantage Identifying a Companys Strategy

Appreciate the importance of strategic

management as a process

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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
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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
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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 How to manage each functional
Strategy is HOW to . . .

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
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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 company apart from rivals and
Carving out its own market position

Involves developing a distinctive aha

element to
Attract customers and Produce a competitive edge

Copying competitive moves of other successful companies rarely works!

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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 rivals

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 below-average profitability
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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!
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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 advantage

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Figure 1.1: Identifying a Companys Strategy

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Test Your Knowledge

A companys strategy and its quest for competitive advantage are tightly related because
A. a companys 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 companys most reliable means of achieving above-average profitability and financial performance.
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For Discussion: Your Opinion

From your perspective as a consumer, does Starbucks strategy (described in Illustration Capsule 1.1) seem to be well-matched to industry and competitive conditions?
1. 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 cant imitate or trump (or a mixture of these)? 2. What is there about Starbucks strategy that can lead to sustainable competitive advantage?
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Test Your Knowledge

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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?
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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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Microsofts 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
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Red Hats 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 clientdirected engineering to Linux users
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For Discussion: Your Opinion

Who has the best business model Microsoft or Red Hat?

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Test Your Knowledge

The nitty-gritty issue surrounding a companys business model is whether
A. the strategy is capable of producing sustainable competitive advantage.
B. it matches the companys external and internal situation. C. the chosen strategy makes good business sense from a money-making perspective. D. the companys strategy and strategic moves are mostly proactive. E. the companys strategy stands a really good chance of hitting a home-run in the marketplace.
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The Nature and Value of Strategic Management

Strategic management: The set of decisions and actions that result in the formulation and implementation of plans designed to achieve a companys objectives

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Critical Tasks of Strategic Management -1. Formulate the companys mission and vision 2. Conduct an internal analysis 1. 3. Assess the external environment competitive and general contexts 2. 4. Implement the strategic choices 3. 5. Evaluate the success of the strategic process for future decision making

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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.
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Example of Strategic Vision

Red Hat
To extend our position as the most trusted Linux and open source provider to the enterprise. We intend to grow the market for Linux through a complete range of enterprise Red Hat Linux software, a powerful Internet management platform, and associated support and services.
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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!
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Mission Statement: Trader Joes

(a unique grocery store chain)

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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Strategic Vision vs. Mission

A strategic vision A companys mission

concerns a 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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Test Your Knowledge

The difference between a company's mission statement and the concept of a strategic vision is that
A. the mission statement lays out the desire to make a profit, whereas the strategic vision addresses what strategy the company will employ in trying to make a profit. B. a mission statement deals with where we are headed whereas a strategic vision provides the critical answer to how will we get there? C. a mission deals with what a company is trying to do and a vision concerns what a company ought to do. D. a mission statement typically concerns an enterprises present business scope and purposewho we are, what we do, and why we are herewhereas the focus of a strategic vision is on the direction the company is headed and what its future product-customer-market-technology focus will be. E. a mission is about what to accomplish for shareholders whereas a strategic vision concerns what to accomplish for customers.
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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
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Types of Objectives Required

Financial Objectives
Outcomes focused

Strategic Objectives
Outcomes focused on improving competitive strength and market standing

on improving financial
performance

$
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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 later
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Test Your Knowledge

Which of the following represents the best example of a well-stated strategic objective (as opposed to a well-stated financial objective)?
A. Achieve revenue growth of 150% annually B. Achieve a AA bond rating within 3 years and an annual cash flow of $750 million C. Invest more money in R&D to enable the company to offer customers the widest selection of products in the industry D. Increase market share from 15% to 20% and achieve the lowest overall costs of any producer in the industry, both within three years E. Pay more attention to reducing costs over the next two years
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Three Levels of Strategy

1. Corporate level
2. Business level

3. Functional level

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Alternative Strategic Management Structures

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Corporate Strategy
Orchestrated by headquarters executives and involves
Moves to diversify into different industries Actions to boost the combined performance

of the companys different businesses

Actions to capture cross-business synergies Establishing investment

priorities and steering corporate resources into the most attractive businesses
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Business Strategy
Concerns the actions and approaches crafted to produce successful performance in one specific line of business. Is usually the responsibility of the manager in charge of the business and involves
Crafting competitive moves to build

sustainable competitive advantage

Seeing that lower-level strategies within

the business are well-matched to the overall business strategy

Gaining approval of business-level strategic

moves by corporate-level officers and directors

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Functional Strategies
Concerns the game plan for a function, activity, or process within a business; is usually orchestrated by the functional head and involves Crafting functional strategic initiatives that will support the overall business strategy
Adding function-related

strategic details to the overall business strategy

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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
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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

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Benefits of Strategic Management

Managers at all levels interact in planning

and implementing strategy Similar to participative decision making Assessing strategy formulation requires looking at nonfinancial evaluations as well as financial ones Promoting positive behavioral consequences enables achievement of financial goals

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Risks of Strategic Management

Managers time away from other responsibilities - Unrealistic expectations promised by strategy formulators - Possible disappointment of participating subordinates if goal is not reached
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