what is strategy ? why is it important - indiana...

©2014 KEAW

Strategic

Management What is Strategy ?

Why is it Important ?

Module #1

‘Crafting’ Strategy that Evolves Over Time Sustainable Competitive Advantage Three Tests of a Winning Strategy Creating a Viable Business Model

What is Strategy? Why is it Important? 2

Why Do We Need a Strategy?

  Without a strategy, we fill our time with . . .

. . . what we want, or

. . . what we think the boss wants, or

. . . by reacting.

  Without a strategy, time and resources are easily wasted on piecemeal, disparate activities.

“Are you sure you have a strategy?” Donald C. Hambrick and James W. Frederickson Academy of Management Executive 2001 Vol. 15 No. 4

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Strategies are Needed

To proactively shape how a company’s business will be conducted

To mold the independent actions & decisions of managers & employees

» into a coordinated, company-wide game plan

What is Strategy? Why is it Important?

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“Without a strategy the organization is like a ship without a rudder, going

around in circles.”

“Quote”

- Joel Ross & Michael Kami



What is Strategy ?

Strategy is management’s ’game plan’ to:

  Attract & please customers

  Stake out a market position

  Conduct operations

  Compete successfully

  Achieve organizational objectives

A company’s strategy includes the set of competitive moves & business approaches that management is employing to run the company & increase performance.

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Strategy is about asking the

RIGHT QUESTIONS

In order to get the RIGHT ANSWERS

Strategy Requires Critical Thinking


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The Three BIG Strategic Questions

1.   Where are we now?

2.   Where do we want to go?   Business(es) to be in?   Market positions to stake

out?   Buyer needs and groups

to serve?   Outcomes to achieve?

3.   How do we get there?


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  Strategic Leadership & Thinking Task of most effectively managing a

company’s strategy-making process

  Strategy Formation Task of determining and selecting strategies

  Strategy Implementation & Change Task of putting strategies into action to improve a

company’s efficiency and effectiveness

Why do some organizations succeed while others fail?

Competitive Advantage results when a company’s strategies lead to superior performance compared to competitors

Strategy - a set of related actions that managers take in to increase their company’s performance



The Strategy Process

“Strategy: Process, Content, Context” 3rd edition De Wit & Meyer Thomson Learning 2004

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Understanding a Company’s Strategy - What to Look For

Pattern of ACTIONs that Define Strategy

Actions to diversify Actions to outcompete rivals

Responses to changing external circumstances

Actions to alter geographic coverage

Actions to form strategic alliances and collaborative

partnerships

How functional activities are

managed

Efforts to pursue new opportunities or defend against threats

Actions to merge or acquire rival companies

Actions to strengthen resources & capabilities


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Factors Shaping the Choice of Business Strategy

Business Strategic Situation Craft the

strategy

External Factors Economic,

social, political & regulatory

factors

Competitive conditions

and industry attractiveness

Opportunities and threats to

business’s well-being

Internal Factors Resource strengths,

capabilities, and

weaknesses

Influences of key

executives

Shared values and corporate

culture

Identify and

evaluate alternatives

Determine relevance of internal

and external factors


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Economic, Social, Political, & Regulatory Factors

  Economic conditions (good or bad)   Trade restrictions, tariffs, and

import quotas

  Interest rates and stock prices   Pressures from special interest groups   Regulations & approval requirements   Health and nutrition concerns   Concerns about alcohol & drug abuse   Discrimination & sexual harassment   Corporate & local ‘right’ sizing   Et cetera . . . . . . .


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Competitive Conditions and Industry Attractiveness

A business strategy has to be responsive to:

  Fresh moves of rival competitors

  Changes in industry structure & economics

  Shifting buyer needs and expectations

  Pace of market growth

  New technological developments What is Strategy? Why is it Important?

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Strategic Management Principle

A business strategy can’t produce real

market success unless it is well-matched to

industry & competitive conditions !!



Dimensions of Strategy Process, Content, Context


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Realized Strategy Partly Planned & Partly Emergent

Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science

Quarterly, Vol. 30. No. 2, June 1985.


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  Intended or Planned Strategies   Strategies an organization plans to put into action

  Typically the result of a formal planning process

  Unrealized strategies are the result of unprecedented changes and unplanned events after the formal planning is completed

  Emergent Strategies   Unplanned responses to unforeseen circumstances

  Serendipitous discoveries and events may emerge that can open up new unplanned opportunities

  Must assess whether the emergent strategy fits the company’s needs and capabilities

  Realized Strategies   The product of whatever intended strategies are actually put

into action and of any emergent strategies that evolve


Realized Strategy Partly Planned & Partly Emergent


Realized Strategy Strategy Formation Activities


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Why Strategies Change and Evolve

There is always an ongoing need to react to:   Political and regulatory changes   Shifting market conditions   Fresh moves of competitors   New technologies   Evolving customer

preferences   New windows

of opportunity   Crisis situations


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Characteristics of Effective Strategy-Making

 Strategy is action-oriented

 Strategy evolves over time

 Strategy-making is a never-ending, ongoing task



Strategy Context


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Opportunities and Threats to Business’s Well-being

For strategy to be successful, it has to:

  Be well matched to capturing a business’s best opportunities

  And help counteract threats to the business’s well-being



Strategy Content


Corporate Level

vs Business

Level vs

Functional Level

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Strengths, Competencies, Capabilities & …Weaknesses

 A business must have … or be able to acquire … the resources, competencies, & competitive capabilities needed to execute the chosen strategy

 Resource deficiencies, gaps in skills, and weaknesses in competitive position make pursuit of certain strategies risky … or altogether unwise



Strategic Tensions Dimension Topic Tension


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Crafting Strategy is an Exercise in Entrepreneurship

Strategy-making is a market-driven & customer-driven activity that involves:   Keen eye for spotting

emerging market opportunities

  Keen observation of customer needs

  Innovation and creativity   Prudent risk-taking   Strong sense of how to grow

& strengthen business What is Strategy? Why is it Important?

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Southwest Airlines Key Elements of Strategy

  Grow the business by gradually adding more flights on existing routes and initiating service to new airports

  Make friendly service a company trademark

  Maintain an aircraft fleet of only Boeing 737s

  Encourage customers to make reservations and purchase tickets at the company’s Web site

  Avoid flying into congested airports

  Employ a point-to-point route system

  Economize on:

  Amount of time it takes terminal personnel to check passengers in and on-load passengers

  Cost


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Strategic Approaches to Future Market Conditions

Keep from being swamped by the waves of change

Source: Adapted from Derek F. Abell, “Competing Today While Preparing for Tomorrow,” Sloan Management Review 40, No. 3 (Spring 1999), p. 75.

Company Approaches Reactive/Follower Proactive/Leader

Futu

re M

arke

t Con

ditio

ns

Rapid Revolutionary

Change

Gradual Evolutionary

Change

Aggressively altering strategy to make waves and

drive change

Revising strategy (hopefully in time) to catch the waves

of change

Anticipating change and

initiating strategic actions to ride the

crest of change


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A Firm’s Strategic Plan

Where firm is headed -

Strategic vision & business mission

Action approaches to achieve targeted results –

A comprehensive strategy

Long-term & short-term performance targets –

Strategic Goals & Objectives


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Rule-Breaking Strategies

Challenge fundamental conventions by:

1.   Reconceiving a product or service

(Tablets replacing PCs, books, cameras)

2.   Redefining the marketplace

(Detouring retailers by selling online at the company’s website ala Amazon)

3.   Redrawing industry boundaries

(Getting ‘affinity’ credit cards from General Motors, Delta Airlines or AOL)


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Sustainable Competitive Advantage

  To achieve sustainable competitive advantage, a company’s strategy usually must be aimed at either:   Providing a distinctive product or service or   Developing competitive capabilities rivals

cannot match

  Achieving a sustainable competitive advantage greatly enhances a company’s prospects for   Winning in the marketplace and   Realizing above-average profits

What separates a powerful strategy from an ordinary strategy is management’s ability to

forge a series of moves that produces a sustainable competitive advantage !!


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  Superior Performance   One company’s profitability relative to that of other companies

in the same or similar business or industry   Maximizing shareholder value is the ultimate goal of profit

making companies

  ROIC (Profitability) = Return On Invested Capital

  Net profit Net income after tax Capital invested Equity + Debt to creditors

  Competitive Advantage   When a company’s profitability is greater than the average of

all other companies in the same industry & competing for the same customers

= ROIC =

Sustainable Competitive Advantage When a company’s strategies enable it to maintain

above average profitability for a number of years


Sustainable Competitive Advantage

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Determinants of Shareholder Value

To increase shareholder value, managers must pursue strategies that increase the profitability

of the company and grow the profits.


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Tests of a Winning Strategy

1. GOODNESS OF FIT TEST Does it exhibit dynamic fit with the external & internal aspects of the firm’s overall strategy?

2. COMPETITIVE ADVANTAGE TEST Can it help the firm achieve a significant & sustainable competitive advantage?

3. PERFORMANCE TEST Can it produce good performance as measured by the firm’s profitability, financial & competitive strengths.


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Strategic Management Principle

To be a real winner, a strategy must: Fit the business internal &

external situations Build sustainable

competitive advantage Improve business

performance What is Strategy? Why is it Important?

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Strategy vs Business Model Strategy – Deals with a business’s competitive initiatives and business approaches

Business Model – Concerns whether the revenues and costs flowing from the strategy . . . . demonstrate that the business can be amply viable and profitable

Leads to


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Business Models

1.   Is the strategy that management is pursuing capable of delivering good bottom-line results?

2.   Do the revenue-cost-profit economics of the company’s strategy make good business sense?

  Look at the revenue streams the strategy is expected to produce

  Look at the associated cost structure and potential profit margins

  Do the resulting earnings streams and ROI indicate the strategy makes sense

A company’s business model addresses: ‘How do we make MONEY in this business?’

Does the strategy LEAD TO a viable business model ???


The Business Model Canvas Describes the way a company has selected to exploit its

capabilities relative to industry characteristics

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http://www.businessmodelgeneration.com/


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Microsoft’s Business Model

  Employ a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from users

  Sell resulting operating system and software packages to PC makers and users at relatively attractive prices and achieve large unit sales

  Most costs arise in developing the software; variable costs are small—once breakeven volume is reached, revenues from additional sales are almost pure profit.

  Provide technical support to users at no cost


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“Strategy means making clear-cut choices about

how to compete.”

“Quote”

-  Jack Welch Former CEO General Electric


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