What Is Strategy and Why Is It Important?Chapter 1

Chapter RoadmapWhat Do We Mean by Strategy?Strategy and the Quest for Competitive AdvantageIdentifying a Companys StrategyWhy a Companys Strategy Evolves Over TimeA Companys Strategy Is Partly Proactive and Partly ReactiveThe Relationship Between a Companys Strategy and Its Business ModelWhat Makes a Strategy a Winner?Why Are Crafting and Executing Strategy Important?

Why to Craft a Strategy?Strategy is, often, the difference between a high performing and underperforming business.Its a managements prescription of doing business.Game plan for pleasing customers.Path to achieve Competitive Advantage.

Thinking Strategically:The Three Big Strategic Questions1.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 outBuyer needs and groups to serveDirection to head3. How should it get there?A companys answer to how will we get there? is its strategy

So what is a strategy?

In businesses a strategy is the central, integrated and externally orientated concept of how a firm will achieve its objectives-how it will compete against rivals.

Long-term plan vs. StrategyHow are these two different?

Long-term plan is a sequence of steps and moves to reach a goal. (inward looking)Strategy entails competitive moves, positions, marketing conditions to guide a long term plan.

What Do We Mean By Strategy?Consists of competitive moves and business approaches used by managers to run the companyManagements action plan toGrow 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 businessHow to please customersHow to outcompete rivalsHow to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on)How to respond to changing market conditionsHow to achieve targeted levels of performance

Choosing the Hows of StrategyStrategic choices about how are based on Trial-and-error organizational learning about what has worked and what has not workedManagements appetite for taking risksManagerial analysis and strategic thinking about how best to proceed, given market conditions and a companys circumstances In choosing a strategy, management is 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.

A strategy has a better chance of succeeding when its predicted on actions, business approaches and competitive moves aimed at:1: appealing to buyers in ways that set company apart from rivals.2: carving out its own market positionCarbon-copy strategies among companies in the same industry is exception than a rule.Choosing the Hows of Strategy

Strategy and the Quest for Competitive AdvantageThe heart and soul of any strategy are actions a company makes to Improve its financial performance,Strengthen its competitive position, andGain 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 profitabilityOperating with a competitive advantage is more profitable than operating without oneOperating with a competitive disadvantage nearly always results in below-average profitability

What is a Competitive Advantage?To be specific: a firms ability to create value in a way its rivals cannot.Put it in another way: firms prefer to be winner in their respective industries rather than subpar or even average performers.Without a strategy that leads to competitive advantage, companies risk to be outcompeted by rivals or locked in mediocre financial performance.

A Powerful Strategy Leads to Sustainable Competitive AdvantageA 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 durableIts nice when a strategy produces A temporary competitive edge butA sustainable edge over rivals greatly enhances a companys prospects for above-average profitabilityWhat 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 AdvantageBe the industrys low-cost providerAchieve a cost-based competitive advantageIncorporate differentiating featuresSuperior product/service keyed to higher quality, better performance, wider selection, value-added services, or some other attributeFocus on a narrow market nicheWin a competitive edge by doing a better job than rivals of serving the needs and preferences of buyers in the nicheDevelop expertise and resource strengths not easily imitated or matched by rivalsAchieve a capabilities-based competitive

Figure 1.1: Identifying a Companys Strategy1-*

Why Do Strategies Evolve?A companys strategy is a work in progressChanges may be necessary to react toFinancial crisisFresh moves of competitorsEvolving customer preferencesTechnological breakthroughsEmerging market opportunitiesChanging political or economic climateNew ideas to improve strategyA companys strategy at any given point is fluid.

Figure 1.2: A Companys Strategy Is a Blend ofProactive Initiatives and Reactive Adjustments 1-*

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 produceLook at associated cost structure and potential profit marginsDo resulting earnings streams and ROI indicate the strategy has good potential to deliver acceptable profitability?

Relationship Between Strategy and Business ModelStrategy . . . 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

1-*

Sequential Phases of Strategic PlanningBasic Financial Planning2.Forecast-Based Planning3.Externally-Oriented Planning (Strategic Planning)4.Strategic Management

Dimensions Of Strategic DecisionsStrategic issues require Top-Management DecisionsTop management has the perspective need to understand the broad implications of such decision and power to authorize the necessary resource allocation2. Strategic Issues Require Large Amounts of the firms ResourcesInvolve substantial allocation of people, physical assets, or money that either must be redirected from internal sources or outside the firmCommit the firm to action for an extended periodStrategic issues often affect the firms long-term prosperityStrategic decisions commit the firm for a long time, the impact of such decisions lasts much longerOnce a firm has committed itself to a particular strategy, its image and competitive advantage are tied to that strategyFirms become known in certain markets for certain products , with certain technologiesThey would jeopardize their previous gains if they shifted from these markets, markets, products, or technology

Dimensions Of Strategic Decisions4. Strategic decisions are future orientedStrategic decisions are based on what managers forecast, rather than on what they knowIn 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.Strategic issues usually have multifunctional or multi-business consequences Complex implication for most areas of the firm. Decisions about matters as:Customer mixCompetitive emphasisOrganizational structureInvolve 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 decisions6.Strategic issues require considering the firms external environment

The Strategy Diamond and the Five Elements of Strategy Arenas: where will we be activeDecisions 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 StrategyDifferentiators: 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: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 StrategyStaging: what will be our speed and sequence of moves? These staging choices depend on available resources, including cash, human capital, and knowledgeStaging 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 StrategyEconomic 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 DIAMONDStagingDifferentiatorsEconomic logicVehiclesArenas

Why Crafting and Executing Strategy is Important?

Leading the Process of Crafting and Executing StrategyChapter 2:

Chapter RoadmapWhat Does the Strategy-Making, Strategy-Executing process Entail?Phase 1: Developing a Strategic VisionPhase 2: Setting Objectives Phase 3: Crafting a Strategy Phase 4: Implementing and Executing the StrategyPhase 5: Evaluating Performance and Initiating Corrective AdjustmentsLeading 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 Process2-*

Developing a Strategic VisionPhase 1Involves thinking strategically aboutFuture direction of companyChanges in companys product/market/customer technology to improveCurrent market positionFuture prospectsA 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 VisionDelineates managements aspirations for the businessProvides a panoramic view of where we are goingCharts a strategic path Is distinctive and specific to a particular organizationAvoids use of generic language that is dull and boring and that could apply to most any companyCaptures 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 VisionA well-conceived, well-communicated vision functions as a valuable managerial tool toGive the organization a sense of direction, mold organizational identity, and create a committed enterpriseIlluminate the companys directional path Provide managers with a reference point toMake strategic decisionsTranslate the vision into hard-edged objectives and strategiesPrepare 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 Statement2-*

Table 2.3: Common Shortcomings in Company Vision Statements2-*

Expressing the Essence of the vision in a sloganeffectively conveying the vision to company personnel is assisted when management can capture the vision of where to head in a catchy or easily remembered slogan.

Strategic Vision vs. MissionA strategic vision concerns a firms future business path - where we are going Markets to be pursuedFuture product/market/ customer/technology focusKind of company management is trying to create

A companys mission statement typically focuses on its present business purpose - who we are and what we doCurrent product and service offeringsCustomer needs and customer groups being servedGeographic coverage

2-*

Characteristics of a Mission StatementIdentifies boundaries of a companys current business and says something aboutPresent products and servicesTypes of customers servedGeographic coverageConveysWho we are,What we do, andWhy 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 aMission StatementA complete mission statement should cover three things:Customer needs being met What is being satisfiedCustomer groups or markets being served Who is being satisfiedWhat 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 Visionwith Company ValuesCompanies 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 conductedCompany 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 Visionwith Company ValuesBut values statements remain a bunch of nice words until espoused beliefs, traits, and behaviors are Incorporated into companys operations and work practicesUsed 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 VisionWinning support for the vision involvesPutting where we are going and why in writingDistributing the statement organization-wideHaving executives explain vision to employeesAn engaging, inspirational visionChallenges and motivates workforceArticulates a compelling case for where company is headedEvokes positive support and excitementArouses a committed organizational effort to move in a common direction

Recognizing Strategic Inflection PointsSometimes an order-of-magnitude change occurs in a companys environment thatDramatically alters its future prospectsMandates radical revision of its strategic courseCritical decisions have to be made about where to go from hereA major new directional path may have to be takenA major new strategy may be neededResponding quickly to unfolding changes in the marketplace lessons a companys chances ofBecoming trapped in a stagnant business orLetting attractive new growth opportunities slip away

Overcoming Resistance toa New Strategic VisionMobilizing support for a new vision entailsReiterating basis for the new directionAddressing employee concerns head-onCalming fearsLifting spiritsProviding updates and progress reports as events unfold

Payoffs of a Clear Strategic VisionCrystallizes an organizations long-term directionReduces risk of rudderless decision-makingCreates a committed enterprise where organizational members enthusiastically pursue efforts to make the vision a realityProvides a beacon to keep strategy-related actions of all managers on common pathHelps an organization prepare for the future

Setting ObjectivesPhase 2Purpose of setting objectivesConverts vision into specific performance targetsCreates yardsticks to track performanceWell-stated objectives areQuantifiableMeasurableContain a deadline for achievement Spell-out how much of what kind of performance by when

Importance of Setting Stretch ObjectivesObjectives should be set at levels that stretch an organization toPerform at its full potential, delivering the best possible resultsPush firm to be more inventiveExhibit more urgency to improve its business positionBe 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 RequiredFinancial ObjectivesStrategic ObjectivesOutcomes focused on improving financial performanceOutcomes focused on improving competitive strength and market standing

Examples: Financial ObjectivesAnnual revenue growth of X%X % increase in after-tax profits annualEarnings per share growth of X% annuallyAnnual dividend increases of X%Profit margins of X%X% return on capital employed (ROCE)Annual stock price increases that average X% over timeStrong bond and credit ratings Sufficient internal cash flows to fund 100% of new capital investmentStable earnings during periods of recession

Examples: Strategic ObjectivesWinning an X% market share within 3 yearsAchieving lower overall costs than rivalsOvertaking key competitors on product performance or quality or customer service within 2 yearsDeriving X% of revenues from sale of new products introduced in past 5 yearsBeing the recognized industry leader in product innovation and/or technological know-howHaving a wider product line than rivalsConsistently getting new or improved products to market ahead of rivalsHaving stronger national or global sales and distribution capabilities than rivals

Good Strategic Performance Is the Key to Better Financial PerformanceAchieving 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 laterHowever, setting well-chosen strategic objectives and achieving them signalsGrowing competitivenessGrowing strength in the marketplaceA company that is growing competitively stronger is developing the capability for better financial performance in the years aheadGood 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 ObjectivesA balanced scorecard for measuring company performance is optimal; it entailsSetting financial and strategic objectivesPlacing 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 NeededShort-term objectivesTargets to be achieved soonMilestones or stair steps for reaching long-range performance targetsLong-term objectivesTargets to be achieved within 3 to 5 yearsCalls for actions now that will permit reaching targeted long-range performance

Concept of Strategic IntentA 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 IntentIndicates firms intent to making quantum gains in competing against key rivals and to establishing itself as a winner in the marketplace, often against long oddsInvolves 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 timeEntails sustained, aggressive actions to take market share away from rivals and achieve a much stronger market position

Objectives Are Needed at All LevelsThe objective-setting process is more top-down than bottom up First, set organization-wide objectives and performance targets2. Next, set business and product line objectives3. Then, establish functional and departmental objectives4. Individual objectives are established

Crafting a StrategyPhase 3 Strategy-making involves astute entrepreneurship Actively searching for opportunities to do new things orActively searching for opportunities to do existing things in new or better ways Strategizing involvesDeveloping timely responses to happenings in the external environment andSteering 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 businessHow to please customersHow to outcompete rivalsHow to respond to changing market conditionsHow 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 MakingCEO (chief executive officer)Has ultimate responsibility for leading the strategy-making processFunctions as strategic visionary and chief architect of strategySenior executivesTypically have influential roles in fashioning those strategy components involving their areas of responsibilityManagers 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 ProcessThe job is often way too big for one person or a small executive groupmany strategic issues are complex or cut across multiple areas of expertiseThe 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 Hierarchy2-*

Three Levels of Strategy Corporate Level Composed principally of Board of Directors, CEO and Administrative officersResponsible for firms Financial Performance and Non Financial GoalsTo large extent, attitudes at the corporate level reflect the concerns of stock holders and society at largeIn multi business firms: Determine what business to be involvedWhat markets to enterHow to grow the business:Vertical IntegrationHorizontal integrationDiversificationDevelop synergies between the various units ( economies of scope)Set objectives for various business unitsDetermine investment priorities using portfolio models for various units

Three Levels of Strategy Business Level StrategiesComposed principally of business and corporate managersTranslate the statements of direction and intent generated at corporate level into concrete objectives and strategies for individual divisions or SBUsDetermine how the division or SBU will compete in the product- market arenaStrive to identify and secure the most promising market segment within that arenaCommon business level strategies are: Overall low cost leadershipDifferentiationFocus Low cost focusFocus differentiation

Three Levels of Strategy Functional Level StrategiesDevelop annual objectives and short-term strategies in functional areasTheir principal responsibility is to implement or execute the firms strategic plansThey a address issues relating to efficiency and effectiveness of their functional activities in increasing the firms

* Single-business FirmsFunctional Level

*Multiple business FirmsBusiness LevelFunctional Level

What Is a Strategic Plan?Its strategic vision and business missionIts strategy Its strategic and financial objectivesA Companys Strategic PlanConsists of2-*

Implementing and Executing StrategyPhase 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 includeImproving the efficiency with which the strategy is being executedShowing measurable progress in achieving both operating excellence and targeted results

What Does Implementing and Executing the Strategy InvolveBuilding a capable organizationAllocating resources to strategy-critical activitiesEstablishing strategy-supportive policiesInstituting best practices and programs for continuous improvementInstalling information, communication, and operating systemsMotivating people to pursue the target objectivesTying rewards to achievement of resultsCreating a strategy-supportive corporate cultureExerting the leadership necessary to drive the process forward and keep improving

Evaluating Performance andMaking Corrective Adjustments Crafting and implementing a strategy is not a one-time exerciseCustomer needs and competitive conditions changeNew opportunities appear; technology advances; any number of other outside developments occurOne or more aspects of executing the strategy may not be going wellNew managers with different ideas take overOrganizational learning occursAll these trigger a need for corrective actions and adjustments on an as-needed basis

Phase 5

Leading the StrategicManagement ProcessDiverse leadership challenges includeExerting take-charge leadershipBeing a spark plug for change and actionRamrodding things throughAchieving resultsLeading the strategic management process can involve various styles and approachesBeing a hard-nosed authoritarianBeing a perceptive listenerBeing a compromising decision makerDelegating authority to people closest to the actionBeing a coachAssuming a highly visible role in guiding the processMaking brief ceremonial appearances

Things a Chief Strategy Implementer Must Do to Be SuccessfulStay on top of whats happeningMake sure company has a good strategic planPut constructive pressure on company to achieve good resultsPush corrective actions to improve overall strategic performanceLead development of stronger core competencies and competitive capabilitiesDisplay ethical integrity and lead social responsibility initiatives

Role #1: Stay on Topof Whats HappeningDevelop a broad network of formal and informal sources of informationTalk with many people at all levels Be an avid practitioner of MBWA Observe situation firsthandMonitor operating results regularlyGet feedback from customersWatch competitive reactions of rivals

Role #2: Make Sure CompanyHas a Good Strategic PlanTwo key responsibilities of CEO and top-level executivesEffectively communicate companys vision, objectives, and major strategy components to down-the-line managers and key personnelExercise due diligence in reviewing lower-level strategies for consistency and support of higher-level strategiesEffective leadership minimizes potential for conflict between different levels in the strategy hierarchy

Role #3: Put Constructive Pressure on Company to Achieve Good ResultsSuccessful leaders spend time Mobilizing organizational energy behindGood strategy execution andOperating excellence Nurturing a results-oriented work climatePromoting enabling cultural driversStrong sense of involvement on part of company personnelEmphasis on individual initiative and creativityRespect for contributions of individuals and groupsPride in doing things right

Role #4: Push Corrective Actions to Improve Strategy-Making and Strategy-Execution Requires decidingWhen adjustments are neededWhat adjustments to makeInvolves Adjusting long-term direction, objectives, and strategy on an as-needed basis in response to unfolding events and changing circumstancesPromoting fresh initiatives to bring internal activities and behavior into better alignment with strategyMaking changes to pick up the pace when results fall short of performance targets

Role #5: Promote Stronger CoreCompetencies and CapabilitiesTop management intervention is required to establish better or newResource strengths and competenciesCompetitive capabilitiesSenior managers must lead the effort becauseCompetencies reside in combined efforts of different work groups and departments, thus requiring cross-functional collaborationStronger competencies and capabilities can lead to a competitive edge over

Sears vs. Walmart***********IBM moving out of Desk top businessIntel moving out of memory chips to microprocessors****