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What Is Strategy and Why Is It Important?

Chapter 1

Chapter Roadmap
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 The Relationship Between a Company s Strategy and Its Business Model What Makes a Strategy a Winner? Why Are Crafting and Executing Strategy Important?

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?
Business(es) to be in and market positions to stake out Buyer needs and groups to serve Direction to head

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 the targeted levels of organizational 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
Strategy is HOW to . . .

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

Strategy and the Quest for Competitive Advantage

The heart and soul of any strategy are actions a company makes to
Improve its financial performance, Strengthen its competitive position, and Gain a competitive advantage over

A creative, distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a company s most reliable ticket to above average profitability
Operating with a competitive advantage is more profitable than operating without one Operating with a competitive disadvantage nearly always results in belowaverage profitability

A Powerful Strategy Leads to Sustainable Competitive Advantage

A company achieves sustainable competitive advantage when
An attractive number of buyers prefer its products/services over those of rivals and The basis for this preference is durable

Its nice when a strategy produces

A temporary competitive edge but A sustainable edge over rivals greatly enhances a company s prospects for above-average profitability
What separates a powerful strategy from an ordinary strategy is managements ability to forge a series of moves, both in the marketplace and internally, that ! produces sustainable competitive advantage

Strategic Approaches to Building Sustainable Competitive Advantage

Be the industry s low-cost provider
Achieve a cost-based competitive advantage

Incorporate differentiating features

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

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


What Is a Business Model?

A business model is a description of how a business makes (or intends to make) money The purpose of a business model is to insure that all the factors needed to operate a successful business are considered and analyzed to make sure they are reasonable and achievable It is the representation of a firm s underlying core logic and strategic choices for creating and capturing value within a value network

Business Model
The definition includes four key terms: 1. Core logic:  A properly crafted business model helps articulate and make explicit cause and effect relationship and internal consistency of strategic choices 2. The strategic choices that have been made

Business Model
3. Creating and capturing value  Represent two fundamental functions that all organizations must perform to remain viable over an extended period of time  Successful firms create substantial value by doing things in ways that differentiate them from the competitors  They might use the core competencies and capabilities that differentiate them from competitors  May even have a unique approach in securing capital that is needed to fund the creation of core competencies, capabilities and positional advantages

Business Model
4. Value network  Include suppliers, partners, distribution channels, and coalitions that extend the company s own resources  The firm may be able to create unique relationships with any of these parties or even with its end customers  The role a firm chooses to play with its value network is an important element of its business model

Components of a business model Strategic Choice

Customer (target market, Scope) Value Proposition Capabilities/ competencies Revenue/ pricing Competitors Output (offering) Strategy Branding Differentiation Mission

Value Network
Suppliers Customer information Information flow Product/ service flows

Capture Value
Cost Financial Aspects Profits

Create Value
Resources / assets Processes / activities

Key Ingredients of a Business Model

Copyright 2004 Pearson Education, Inc.

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A Business Model Is Not A Strategy

Strategy involves making choices Business model reflect these choices and their operating implication They facilitate analysis, testing, and validation of cause and effect relationship that flow from the strategic choices that have been made In some cases, executives can best effect this by directly translating one set of strategic choices into single business model In other cases, executives may wish to consider a range of business models simultaneously, each representing a different set of strategic choices before drawing a conclusion about the best business model for their organization

Difference Between Business Model and strategy

In the most simple sense, a business model is simply a model of a business process In business lingo, a business model is the method you use to do business It refers to the essence of the business transaction. According to Accenture a true business model is:  one that strips the business down to its essential logic for consistently achieving its principle objectives  will sharpen your organization s focus  establish framework for seizing opportunities, and improve your firm s mobility in today s rapidly changing business conditions Examples of business models: in a retail sense, one model could be brick and mortar storefronts, another could be selling merchandise over the Internet etailing, and still another would be mail-order (these also happen to be channels, and one business may employ all three models and even more)

Difference Between Business Model and strategy

A business strategy is far more encompassing A business strategy would include your business model but would define:  what products or services you propose to sell (or do sell?),  who your customers are,  how you intend to reach those customers,  how you will earn a profit on your sales,  how you will finance the business,  how each major function within your company will operate, as well as characteristics of your organizational structure and culture

Sequential Phases of Strategic Planning

1. Basic Financial Planning 2. Forecast-Based Planning 3. Externally-Oriented Planning (Strategic Planning) 4. Strategic Management

Dimensions Of Strategic Decisions

1.  2.   3.     Strategic issues require Top-Management Decisions Top management has the perspective needed to understand the broad implications of such decision and power to authorize the necessary resource allocation Strategic Issues Require Large Amounts of the firm s Resources Involve substantial allocation of people, physical assets, or money that either must be redirected from internal sources or outside the firm Commit the firm to action for an extended period Strategic issues often affect the firm s long-term prosperity Strategic decisions commit the firm for a long time, the impact of such decisions lasts much longer Once a firm has committed itself to a particular strategy, its image and competitive advantage are tied to that strategy Firms become known in certain markets for certain products , with certain technologies They would jeopardize their previous gains if they shifted from these markets, markets, products, or technology

Dimensions Of Strategic Decisions

4. Strategic decisions are future oriented  Strategic decisions are based on what managers forecast, rather than on what they know  In such decisions, emphasis is on the development of projections that will enable the firm to select the most promising strategic option  In a turbulent and competitive free enterprise environment, a firm will succeed only if it takes proactive (anticipatory) stance towards change 5. Strategic issues usually have multifunctional or multi-business consequences  Complex implication for most areas of the firm  Decisions about matters as:  Customer mix  Competitive emphasis  Organizational structure  Involve a number of firms SBUs, divisions, or program units  All of these areas will be affected by allocation or reallocation of responsibilities and resources that result from these decisions 6. Strategic issues require considering the firms external environment