Chapter 1 PowerPoint Slides

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

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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 and
business 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

Strategy

How to please customers is HOW
to . . .

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

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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

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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 price
either 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 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 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

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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.

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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’s

Strategy and Its Business Model

Strategy Business Model

Deals with a company’s Concerns whether revenues
competitive initiatives and costs flowing from
and business the strategy demonstrate
approaches 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.

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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.

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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 managers
to 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 the
best test of managerial excellence – and the
most reliable recipe for winning in the marketplace!

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