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STRATEGY: Core Concepts and Analytical Approaches

Strategy: Core Concepts and Analytical Approaches

CHAPTER 1

What Is Strategy and Why Is It

Important?

Copyright © 2010 by Arthur A. Thompson and Glo-Bus Software, Inc..

Chapter Learning Objectives

1. Understand the concept of “strategy” and the role of strategy in moving a company in the intended direction,

growing its business, and improving its financial and

market performance.

2. Develop an awareness of the four most reliable strategic

approaches for setting a company apart from rivals and winning a sustainable competitive advantage.

3. Learn why a company’s strategy evolves over time because of changing circumstances and ongoing management

efforts to improve the company’s strategy.

4. Understand the concept of a “business model,” how a

company’s business model connects to its strategy, and

why a company’s business model is important.

5. Learn the three tests that distinguish a winning strategy

from a so-so or flawed strategy.

6. Learn why good strategy and good strategy execution are

the most trustworthy signs of good management.

The Key Topics Covered in Chapter 1

� What Do We Mean by “Strategy?”

� Strategy and the Quest for Competitive Advantage

� Identifying a Company’s Strategy

� Why a Company’s Strategy Evolves Over Time

� A Company’s Strategy Is Partly Proactive and Partly Reactive

� Strategy and Ethics: Passing the Test of Moral Scrutiny

� The Relationship Between a Company’s Strategy and Its Business Model

� What Makes a Strategy a Winner?

� Why Crafting and Executing Strategy Are Important Tasks



The Three Big Strategic Questions Every Company Faces

There are three important questions that every company’s management team has to address:

1. What’s the company’s present situation?Industry conditions? Competitive pressures? The company’s

current market standing? Competitive strengths? Competitive weaknesses?

2. Where does the company want to go from here?What direction to head? Where to try to take the company? New or different businesses? New or different products?

Cater to different buyer groups or different buyer needs?

What performance targets to try to achieve?

3. How should it get there?

A company’s answer to “how will we get there?” is its strategy

What Do We Mean By “Strategy?”

� Management’s “action plan” to

� Consists of competitive moves andbusiness approaches used by

managers to run the company

► Grow the business

► Attract and please customers

► Compete successfully

► Conduct operations

► Achieve the targeted levels of performance

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

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

Strategyis HOWto . . .



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

►Management’s appetite for taking risks

►Managerial analysis and strategic thinking about how best to

proceed, given market conditions and a company’s 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.”

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!

Strategy and the Quest for Competitive Advantage

� The heart and soul of a company’s strategy are the actions and moves it is taking to

► Improve its financial performance,

► Strengthen its market position, and

► Gain a competitive advantage over rivals

� A creative, distinctive strategy that

(1) sets a company apart from rivals and

(2) causes an attractive numbers of buyers to be drawn to purchase its product/service despite the efforts of

competitors to erode this appeal

produces a competitive advantage over rivals and is a company’s most reliable ticket to above average profitability

A company is almost certain to earn significantly higher profits

when it enjoys a competitive advantage as opposed to when it competes with no advantage or is hamstrung by competitive

disadvantage



Why Competitive Advantage Matters

� A company is almost certain to earn significantly higher profits when it enjoys a competitive advantage as opposed to ► when it competes with no advantage or

► is hamstrung by competitive disadvantage

� Competitive advantage is the key to above-average profitability and financial performance because ► strong buyer preferences for the

company’s product offering translate into higher sales volumes and/or

► the ability to command a higher priceeither or both of which tend to improve earnings, return on investment, and other measures of financial performance.

A Great Strategy Leads to Sustainable Competitive Advantage

� A company’s strategy results in sustainable competitive advantage when ► Not only are an attractive number of buyers

drawn to purchase its products or services rather than those of competitors

► But the basis for this preference is also durable because there are actions and elements in the strategy that make buyer preferences for the company’s product/service lasting rather than temporary

The tight connection between competitive advantage and profitability means the quest for sustainable

competitive advantage is always center stage in crafting a strategy!

Strategic Approaches to Building Sustainable Competitive Advantage

� Be the industry’s low-cost provider

► Achieve a cost-based competitive advantage

� Incorporate differentiating features

► Win a competitive edge based on a 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 abetter job than rivals of serving the needs and preferences of buyers in the niche

� Develop expertise and resource strengthsnot easily imitated or matched by rivals

► Achieve a capabilities-based competitive advantage



Figure 1.1: Identifying a Company’s Strategy

Why Do Strategies Evolve?

�A company’s 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 Company’s Strategy Is a Blend of

Proactive Initiatives and Reactive Adjustments



Strategy, Ethics, and the Test of Moral Scrutiny

� A strategy is not ethical just because its various elements may be legal.

� Ethical standards are about “right” vs. “wrong” and a company’s duty—what it should do and should not do)

� A strategy is ethical only if can pass the test of moral scrutiny :► Requirement 1: It cannot entail actions and

behaviors that cross the line from “should do” to “should not do” (because such actions are unsavory, shady, unconscionable, injurious to others, or harmful to the environment)

► Requirement 2: It must allow management to fulfill its ethical duties to owners/shareholders, employees, customers, suppliers, the communities in which it operates, and society at large—and take their legitimate interests into account.

A Company’s Duty to Stakeholders

Owners/shareholders – Rightfully expect some form of return on their investment

Employees – Rightfully expect to be treated with dignity and respect and compensated fairly

Customers – Rightfully expect a seller to provide them with a reliable, safe product or service

Suppliers – Rightfully expect to be treated fairly and equitably by the firms they supply

Community – Rightfully expect businesses to be good citizens in their community

What Is a Business Model?

� A company’s business model sets forth how its

strategy and operating approaches will create value

for customers while at the same time generate ample revenues to cover costs and realize a profit.

► It is management’s blueprint for delivering a

valuable product or service to customers in a manner that will generate ample revenues to cover costs and yield an attractive profit

Absent the ability to earn good profits, a company’s strategy and operating blueprint are flawed, its business model is not viable, and its ability to survive is lacking.



The Two Crucial Elements of a Company’s Business Model

� The two crucial elements of a company’s business model are ► Its customer value proposition (the buyer

wants and needs it seeks to satisfy and whether customers will consider the price charged to be a “good value”—both of these are key ingredients in how the company plans to attract customers)

► Its profit proposition or “formula” for generating profits in the course of pursuing its customer value proposition (the strategy, key resources, and business processes it will utilize to generate the sales volumes, revenues, costs, and profit margins needed to yield good profits)—why there is reason to believe the strategy will prove profitable.

The Connection Between a Company’sStrategy and Its Business Model

Strategy

Deals with a company’s competitive initiatives

and business approaches

Business Model

Concerns whether revenues and costs flowing from

the strategy demonstrate a business can be

profitable and viable

The Business Model of Newspapers and Magazines

� A customer value proposition keyed to

delivering valuable information and

entertainment

� A profit proposition aimed at securing

sufficient revenues from subscriptions

and advertising fees to more than

cover the costs of producing and

delivering their products to readers.



The Business Model of Network TV and Radio Broadcasters

� Customer value proposition

► Provide audience with free and appealing

programming content

� Profit proposition

► Charge advertising fees based on

audience size that more than cover the

full costs of providing the program content

Gillette’s Business Model in Razor Blades

� A customer value proposition keyed to providing a close comfortable shave using a razor (a one-time purchase) and razor blades (purchased repeatedly)

� A profit proposition based on selling a “master product”—the razor—at an attractively low price and then making money on repeat purchases of inexpensively-produced razor blades sold at prices yielding high profit margins

Printer manufacturers like Hewlett-Packard, Lexmark, and Epson pursue much the same business model as Gillette—selling printers at a low (virtually breakeven) price and making large profit margins on the repeat purchases of printer supplies, especially ink cartridges.

Why Does A Company’s Business Model Matter?

� The strategy that company managers craft for competing successfully and running various parts of the business may or may not lead to profitability.

� Thus the role of a company’s business model is to provide convincing rationale for why the resources and business processes needed to execute the strategy will generate revenues sufficient to cover costs and produce attractive profits and return on investment.

► Companies that have been in business for a while and are making acceptable profits have a “proven” business model—because there is hard revenue-cost –profit evidence that their strategies and approaches to operating are capable of profitability.

► Companies that are in a start-up mode or that are losing money have “questionable” or unproven business models.



Tests of a Winning Strategy

�Goodness of Fit Test

► How well does the strategy

fit the company’s external

and internal situation?

�Competitive Advantage Test

► Is the strategy helping the company achieve a sustainable competitive advantage?

�Performance Test

► Is the strategy resulting in better company performance?

Why Crafting and Executing Strategy Are Important Tasks

�There’s a compelling need for managersto proactively shape how a firm’s business will be conducted

�Nothing affects a company’s ultimate success or failure more fundamentally than ►How well its management team

charts the company’s direction

►Develops competitively effective strategic moves and business approaches

►Pursues what needs to be done internally to produce good day-in/day-out strategy execution and operating excellence

Good Strategy + Good Strategy Execution = Good Management

�Crafting and executing strategy are core management functions

�Among all things managers do, nothing affects a company’s ultimate success or failure more fundamentally than how well its management team► Charts a company’s direction,

► Develops competitively effective strategic moves and business approaches, and

► Pursues what needs to be done internally to produce good day-in/day-out strategy execution

Excellent execution of an excellent strategy is thebest test of managerial excellence – and the

most reliable recipe for winning in the marketplace!

Strategy: Core Concepts and Analytical Approaches · Be the industry’s low-cost provider Achieve...

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