What Is Strategy

and WhyChapter
Is Title
It Important?

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
“Without a strategy the
organization is like a
ship without a rudder.”

Joel Ross and Michael

Kami
 Thinking Strategically:
The Three Big Strategic Questions
1. What’s the company’s present situation?

2. Where does the company need to go from

here?

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”?
• Consists of competitive moves and business
approaches used by managers to run the
company
• Management’s “action plan” to
– Grow the business
– Attract and please customers
– Compete successfully
– Conduct operations
– Achieve target levels of
organizational 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 enterprise 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!
 A Powerful Strategy Leads to
Sustainable Competitive Advantage
• A company achieves sustainable competitive advantage
when an attractive number or buyers prefer its
products/services over those of rivals and when the basis for
this preference can be maintained over time

What separates a powerful strategy from an ordinary

strategy is management’s ability to forge a series of
moves, both in the marketplace and internally, that
produces sustainable competitive advantage!
 Four “Best” Strategic Approaches to
Building Sustainable Competitive Advantage
• Being the industry’s low-cost provider
• Incorporate differentiating features
• Focusing on a narrow market niche
• Developing expertise and resource
strengths not easily imitated or matched by
rivals
Competitive Advantage Examples
• Strive to be the industry’s low-cost provider
– Wal-Mart
– Southwest Airlines
• Outcompete rivals on a key differentiating feature
– Johnson & Johnson – Reliability in baby products
– Harley-Davidson – King-of-the-road styling
– Rolex – Top-of-the-line prestige
– Mercedes-Benz – Engineering design and performance
– L.L. Bean – Good value
– Amazon.com – Wide selection and convenience
 Competitive Advantage Examples
(cont)
• Focus on a narrow market niche
– eBay – Online auctions
– Jiffy Lube International – Quick oil changes
– McAfee – Virus protection auctions
– Starbucks – Premium coffees and coffee drinks
– The Weather Channel – Cable TV
• Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
– FedEx – Next-day delivery of small packages
– Walt Disney – Theme park management and family entertainment
– Toyota – Sophisticated production system
– Ritz-Carlton – Personalized customer service
Fig. 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
– Shifting market conditions
– Technological breakthroughs
– Fresh moves of competitors
– Evolving customer preferences
– Emerging market opportunities
– New ideas to improve strategy
– Crisis situations
 Fig. 1.2: A Company’s Strategy Is
Partly Proactive and Partly Reactive
 A Firm’s Ethical
Responsibilities to Its Stakeholders
Owners/shareholders
Owners/shareholders––Rightfully
Rightfullyexpect
expectsome
someform
formof
ofreturn
returnon
on
their
theirinvestment
investment

Employees
Employees--Rightfully
Rightfullyexpect
expectto
tobe
betreated
treatedwith
withdignity
dignityand
and
respect
respectfor
fordevoting
devotingtheir
theirenergies
energiesto
tothe
theenterprise
enterprise

Customers
Customers--Rightfully
Rightfullyexpect
expectaaseller
sellerto
toprovide
providethem
themwith
withaa
reliable,
reliable,safe
safeproduct
productororservice
service

Suppliers
Suppliers--Rightfully
Rightfullyexpect
expectto
tohave
havean
anequitable
equitablerelationship
relationship
with
withfirms
firmsthey
theysupply
supplyand
andbe
betreated
treatedfairly
fairly

Community
Community--Rightfully
Rightfullyexpect
expectbusinesses
businessesto
tobe
begood
goodcitizens
citizensin
in
their
theircommunity
community
 What Is a Business Model?
• A business model addresses “How do we
make money in this business?”
• Do the revenue-cost-profit economics
of the strategy make good business sense?
– Look at revenue streams the strategy is expected to produce
– Look at associated cost structure and potential profit
margins
– Do resulting earnings streams and ROI indicate the strategy
makes sense and the company has a viable business model
for making money?
 Relationship Between
Strategy and Business Model
Strategy . . . Business Model . . .
Deals with a company’s Concerns whether revenues
competitive initiatives and and costs flowing from the
business approaches strategy demonstrate a
business can be amply
profitable and viable

y
t eg
St ra ss
si ne e l
B u od
M
 Microsoft’s Business Model
Employ a cadre of highly skilled programmers to develop proprietary code;
keep source code hidden from users

Sell resulting OS and software packages to PC makers and users at relatively

attractive prices to achieve a 90% or more market share

Most costs in developing software are fixed; variable costs are small; once
break-even volume is reached, revenues from additional sales are almost pure
profit

Provide
Provide modest
modest level
level of
of technical
technical support
support to
to users
users at
at no
no cost
cost

Rejuvenate
Rejuvenate revenues
revenues by
by periodically
periodically introducing
introducing next-generation
next-generation software
software with
with
features
features inducing
inducing PC
PC users
users to
to upgrade
upgrade their
their operating
operating systems
systems
 Red Hat’s Business Model
Rely on collaborative efforts of volunteer programmers to create the software

Collect and test enhancements and new applications submitted by volunteer

programmers for evaluation and inclusion in new releases of Linux

Market upgraded and tested family of Red Hat products to large companies,
charging a subscription fee that includes 24/7 support within 1 hour in 7
languages

Make
Make source
source code
code open
open and
and available
available to
to all
all users
users

Capitalize
Capitalize on
on specialized
specialized expertise
expertise required
required to
to use
use Linux
Linux by
by providing
providing fee-based
fee-based
training,
training, consulting,
consulting, software
software customization,
customization, and
and client-directed
client-directed engineering
engineering to
to
Linux
Linux users
users
 Your Opinion

Who has the best business model –

Microsoft or Red Hat?
Financial Comparison
 Tests of a Winning Strategy
• GOODNESS OF FIT TEST
– How well does strategy fit
the firm’s situation?

• COMPETITIVE ADVANTAGE TEST

– Does strategy lead to sustainable
competitive advantage?

• PERFORMANCE TEST
– Does strategy boost firm performance?
 Robin Hood
Prince of Thieves
What is Robin Hood’s Business
Model?