2 - The Concept of Strategy

THE CONCEPT OF STRATEGY
AGENDA
 The definition of strategy
 A brief history of strategy
 Value for whom: the shareholder approach vs. the stakeholder approach
 Strategic fit
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WHAT IS STRATEGY?
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SOME DEFINITIONS OF STRATEGY
Strategy: a plan, method, or series of actions designed to achieve a specific goal or effect.
-- Wordsmyth Dictionary
The determination of the long-run goals and objectives of an enterprise, and the adoption of courses of action
and the allocation of resources necessary for carrying out these goals.
-- Alfred Chandler, Strategy and Structure
Strategy: “a cohesive response to an important challenge.”

-- Richard Rumelt, Good Strategy/Bad Strategy
Lost Boy: “Injuns! Let’s go get’em!”

John Darling: “Hold on a minute. First we must have a strategy.”
Lost boy: “Uhh? What’s a strategy?”
John Darling: “It’s, er… it’s a plan of attack.”
-- Walt Disney’s Peter Pan
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Source: Grant, R. M. 2022. Contemporary Strategy Analysis. 11th Edition. Chichester, UK: Wiley.
A DEFINITION OF STRATEGY
A strategy is an integrated series of commitments and actions that provide a roadmap by which an organization
maximizes its internal resources and external positioning to gain competitive advantage.
A firm achieves a competitive advantage when it creates more economic value than competitors by engaging in a
strategy that is difficult or impossible for others to duplicate.
*This is not the only correct definition. However, there are some key elements in this definition that tell us about the
essence of strategy.
Source: Gulati, R., Mayo, A. J., & Nohria, N. 2013. Management. Mason, OH: South-Western, Cengage Learning.
KEY ELEMENTS IN THE DEFINITION OF STRATEGY
A strategy is an integrated series of commitments and actions that provide a roadmap by which an organization
maximizes its internal resources and external positioning to gain competitive advantage.
A firm achieves a competitive advantage when it creates more economic value than competitors by engaging in
a strategy that is difficult or impossible for others to duplicate.
Commitments and actions: strategy, in essence, is actions or actions to be taken in the future.
Internal resources: strategy is about how to take advantage of what you have.
External positioning: strategy is about how to interact with (react to or change) the external environment.
Value: strategy is about how to achieve high performance (i.e. profitability).
Competitive advantage: strategy views the world as competitive, rather than cooperative.
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WHAT IS YOUR LIFE STRATEGY?
1. Value: What is the goal(s) of your life (or the goal in the next five years)? What do you value most?
2. External positioning: How would you describe the environment around you? What are the opportunities and
challenges?
3. Internal resources: What are you good at? What are your resources and capabilities? What are the resources and
capabilities that you think are important but you are still lacking?
4. How would your understandings on 2 & 3 help you realize your goal(s) in 1? What are the actions you might
want to take based on your analysis of 2 & 3 (i.e. strategies)?
WHERE CAN WE FIND A FIRM’S STRATEGY?
 Often confidential:
 Business plan
 Board minutes
 Strategic planning documents
 Some can be found on companies’ websites (often in the “for investors” pages):
 Mission
 Vision
 Values
 Strategy statement
 Annual reports 8
AGENDA
 Strategic fit
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A BRIEF HISTORY OF STRATEGY
Origins and military antecedents

 Greek word: stratēgos (meaning: generalship)
stratos -ēgos
(meaning: army) (meaning: to lead)
 The first treatise on strategy: Sun Tzu’s The Art of War (500 BC)
Know the other and know yourself:

Triumph without peril.
-- Sun Tzu
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From corporate planning to strategic management

1950s-1960s
 Environment:
 Business environment was stable in the US and European countries
 Companies were growing in size and complexity (diversification was popular)
 Strategy was about “corporate planning”

 A typical format was a five-year corporate planning document
 Set goals and objectives
 Forecast key economic trends (e.g. market demand, the company’s market share, revenue, costs, and margins)
 Establish priorities for different products and business areas of the firm
 Allocate capital expenditures
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Source: Grant, R. M. 2016. Contemporary Strategy Analysis: Text and Cases. 9th Edition. Chichester, UK: Wiley.

1970s-1980s
 Environment:
 Diversification without synergy effect failed
 Oil shocks in 1974-1979 brought economic instability
 International competition from Japanese, Korean, and Southeast Asian firms was intensified
 Strategy was about market selection and competitive positioning

 The key determinant of profitability is a firm’s competitive environment
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1990s
 Strategy was about identifying how a firm is different from its competitors
 The key determinant of profitability is a firm’s resources and capabilities
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FROM STRATEGY AS PLAN TO STRATEGY AS DIRECTION
As the business environment has become more unstable and unpredictable, strategy has become less
concerned with detailed plans and more about guidelines for success.
Strategy-as-plan Strategy-as-direction
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21st century
 Environment:
 Digital technologies: winner-take-all markets and standards wars
 Periodic global crises: financial crisis in 2008 and the COVID-19 pandemic
 New demands: greater responsiveness to social pressures, environmental concerns…
 Hot topics in strategy
 New business models
 Cognitive bias and emotion in strategic decision making
 Corporate social responsibility
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AGENDA
 Strategic fit
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VALUE FOR WHOM?
A firm achieves a competitive advantage when it creates more economic value than competitors by engaging in
a strategy that is difficult or impossible for others to duplicate.
Whom the value should be distributed to?
The shareholder approach The stakeholder approach
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Source: Ireland, R. D., Hoskisson, R. E., & Hitt, M. A. 2013. The Management of Strategy: Concepts and Cases. 10th Edition. Cengage Learning.
THE SHAREHOLDER APPROACH
The shareholder approach: Firms’ overriding duty is to produce profits for owners.
Most English-speaking countries have endorsed this shareholder capitalism. In the US, Canada, the UK,
and Australia, company boards are required to act in the interests of shareholders.
What is the logic behind the shareholder approach?
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THE SHAREHOLDER APPROACH
The continuous operation of a firm needs three “contracts”:
1. The shareholders register in (sign contract with) government institutions to establish the firm as a
legal person.
2. The firm sign contract with employees and suppliers to organize the production.
3. The firm sign contract with customers to deliver products.
The shareholders initiate the firm. Without shareholders, the firm cannot exist in a legal sense.
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SEPARATION OF OWNERSHIP AND MANAGERIAL CONTROL
Ownership and managerial control

reside with the same group of people
With the growth of the firm

 Financial capital
 Human capital
Separation of ownership and

managerial control
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SEPARATION OF OWNERSHIP AND MANAGERIAL CONTROL
Benefits:
• More financial capital from diverse sources can be attracted to enlarge the scale of the firm.
• Professional managers with more managerial expertise than the owners can be hired.
• The firm’s operations will not be disturbed when shares are traded.
In essence, it is specialization that improves efficiency:

• Owner: specialized in investment risk bearing
• Manager: specialized in managerial decision making
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AGENCY RELATIONSHIP
The separation between owners and managers creates an agency relationship.
An agency relationship exists when one or more persons (the principal or principals) hire another person or
persons (the agent or agents) as decision-making specialists to perform a service. In other words, an agency
relationship exists when one party delegates decision-making responsibility to a second party for compensation.
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AGENCY PROBLEM
• The principal and the agent have different interests and goals.
• It is hard for the principal to closely monitor the agent.
To protect the interests of the shareholders who take investment risks and whose interests might be
harmed by the managers, the shareholder approach emphasizes that firms (decision makers of the firms)
should maximize shareholder value.
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A BRIEF SUMMARY: WHY EMPHASIZING SHAREHOLDER INTERESTS?
• The shareholders initiate the firm. Without shareholders, the firm cannot exist in a legal sense.
• Shareholders’ interests could be harmed by managers who have more information and whose
interests are not aligned with the shareholders. Hence, firms (especially powerful managers who want
to demonstrate their stewardship commitment) emphasize the maximization of shareholder value.
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THE CONCEPT OF STRATEGY

 The definition of strategy

 A brief history of strategy

Strategy: “a cohesive response to an important challenge.”

Lost Boy: “Injuns! Let’s go get’em!”

 The definition of strategy

 A brief history of strategy

Origins and military antecedents

Know the other and know yourself:

From corporate planning to strategic management

 Strategy was about “corporate planning”

From corporate planning to strategic management

 Strategy was about market selection and competitive positioning

From corporate planning to strategic management

 The definition of strategy

 A brief history of strategy

Whom the value should be distributed to?

The shareholder approach The stakeholder approach

What is the logic behind the shareholder approach?

Ownership and managerial control

With the growth of the firm

Separation of ownership and

In essence, it is specialization that improves efficiency:

The separation between owners and managers creates an agency relationship.

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