What Is Strategy and Why Is It Important?

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. Where are we now?

2. Where do we want to go?

Business(es) Buyer

to be in and market positions to stake out

needs and groups to serve

to achieve

Outcomes

3. How will we get there?

A companys

answer to how will we get there? is its strategy

What Is Strategy?
Consists of the combination of competitive moves and

business approaches used by managers to run the company

Managements game plan to
Attract Stake

and please customers

out a market position successfully

Compete Grow

the business targeted objectives

Achieve

The Hows That Define a Firm's Strategy

How to please customers

How to respond to changing

market conditions
How to out compete rivals How to grow the business

Strategy is HOW to . . .

How to manage each functional piece of the business and

develop needed organizational capabilities

How to achieve strategic and financial objectives

What Are a Companys Strategic Choices?

Strategic choices are based on . . .
Trial-and-error organizational learning about
What What

has worked and has not worked

Managements appetite for taking risks Managerial analysis and strategic thinking about how

best to proceed, given prevailing circumstances

Identifying a Companys Strategy

Striving for Competitive Advantage

To achieve sustainable competitive advantage, a
Providing

companys strategy usually must be aimed at either

a distinctive product or service or Developing competitive capabilities rivals can not match

Achieving a sustainable competitive advantage greatly

enhances a companys prospects for

Winning

in the marketplace and Realizing above-average profits

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 Competitive Advantage

Strive to be the industrys low-cost provider

Out compete rivals on a key differentiating feature

Focus on a narrow market niche, doing a better job

than rivals of serving the unique needs of niche buyers

Develop expertise, resource strengths, and

capabilities not easily imitated by rivals

Examples of Strategies Based on Distinctive Capabilities

Sophisticated distribution systems Wal-Mart
Product innovation capabilities 3M Corporation Complex technological process Michelin Defect-free manufacturing Toyota and Honda Specialized marketing and merchandising know-how Coca-

Cola
Global sales and distribution capability Black & Decker Superior e-commerce capabilities Dell Computer Personalized customer service Ritz Carlton hotels

A Companys Strategy Is Partly Proactive and Partly Reactive

Why Do Strategies Evolve?

A companys strategy is a work in progress

Changes may be necessary to react to

Fresh

moves of competitors

Evolving

customer preferences
breakthroughs

Technological

Shifting
Crisis

market conditions

situations

What Is a Business Model?

A business model addresses How do we make money in

this business?
Is

the strategy capable of delivering good bottom-line results?

Do the revenue-cost-profit economics

of the strategy make good business sense?

Look Look Do

at revenue streams the strategy is expected to produce at associated cost structure and potential profit margins

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 - Deals with a companys competitive initiatives and business approaches Business Model Concerns whether revenues and costs flowing from the strategy demonstrate the business can be amply profitable and viable

Microsofts 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 and achieve large unit sales
Most costs in developing software are fixed; variable costs are small - once breakeven volume is reached, revenues from additional sales are almost pure profit Provide technical support to users at no cost

Redhat Linuxs Business Model

Rely on collaborative efforts of volunteer programmers to create the software Add value to free, downloadable version of Linux by offering users Red Hat Linux systems containing upgraded and tested features Charge a modest fee to those preferring to subscribe to Red Hat Linux version Release updated versions of Red Hat Linux every 4-6 months to small users and every 12-18 months to corporate users Make source code open and available to all users Make money by providing fees-based training, consulting, support, engineering, and content management services

Tests of a Winning Strategy

GOODNESS OF FIT TEST
How well does strategy fit the firms situation?

COMPETITIVE ADVANTAGE TEST

Does strategy lead to sustainable competitive advantage?

PERFORMANCE TEST
Does strategy boost firm performance?

Other Criteria for Judging the Merits of a Strategy

Internal consistency and unity among all pieces of the

strategy
Degree of risk the strategy poses as compared to

alternative strategies
Degree to which the strategy is flexible and adaptable to

changing circumstances While these criteria are relevant, they seldom override the importance of the three tests of a winning strategy!

Why Is Strategy Important?

A compelling need exists for managers to

proactively shape how a firms business will be conducted

A strategy-focused firm is more likely

to be a strong bottom-line performer than one that views strategy as secondary

Good Strategy + Good Strategy Execution = Good Management

Crafting and executing strategy are core management functions Among all things managers do, nothing affects a companys

ultimate success or failure more fundamentally than how well its management team
Charts the companys direction, Develops competitively effective strategic moves and business approaches, and Pursues what needs to be done internally to produce good dayin/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!

Five ways of looking at Strategy

Plan Pattern

Position
Perspective ploy

SM
Strategic management is an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment

Strategic Management Process

SMP is the full set of commitments, decision and actions required for a firm to achieve strategic competitiveness and earn above-average return.

Strategic Management Process

The Strategy-Making, StrategyExecuting Process

Two model based on Above average Return

I/O Model based above-average return Resource based above-average return

I/O Model
I/O model Explains the external environments dominant influence on a firm's strategic action. It specifies that the industry in which a company chooses to compete has stronger influence on performance than do the choices managers make inside their organization. The firm's performance is believed to be determined primarily by range of industry properties, including economies of scale, barriers to market entry, diversification, product differentiation and the degree of concentration of firms in industry.

I/O model has four underlying assumption :

External environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns The external environmentthe general, industry and competitive environments imposes pressures and constraints on companies and determines strategies that will result in superior returns. In other words, the external environment pressures the company to adopt strategies to meet that pressure while simultaneously constraining or limiting the scope of strategies that might be appropriate and eventually

 2nd Assumption Most companies competing in an industry or in an industry segment control similar sets of strategically relevant resources and thus pursue similar strategies. This assumption presumes that, given a similar availability of resources, the majority of companies competing in a specific industryor in a segment of the industryhave similar capabilities and thus follow strategies that are similar. In other words, there are few significant differences among companies in an industry.

 3rd Assumption Resources used to implement strategies are highly mobile across firms. Significant differences in strategically relevant resources among companies in an industry tend to disappear because of resource mobility. Thus, any resource differences soon disappear as they are observed and acquired or learned by other companies in the industry.

 4th assumption Organizational decision makers are assumed to be rational and committed to acting in the firm's best interests, as shown by their profit-maximizing behaviours.

Based on its underlying assumptions, the I/O model prescribes a five-step process for companies to achieve above-average returns as shown in the

1.Study the external environmentgeneral,

industry and competitiveto determine the characteristics of the external environment that will both determine and constrain the companys strategic alternatives.

2.Select an industry (or industries) with a high potential for returns based on the structural characteristics of the industry.

 Firms can use this tool to understand an industry's profit potential and the strategy necessary to establish a defensible competitive position, given the industry's structural characteristic. I/O Model suggests that firms can earn above average returns by manufacturing standardized products, or producing differentiated product for which customer are willing to pay a price I/O Model suggest that above-average return are earned when firm implement the strategy dictated by the characteristics of general, industry, and competitor environment

Resource based model of Above average Return

This model assumes that each organization is a collection of unique resources and capabilities. The uniqueness of its resources and capabilities is the basis for a firm's strategy and its ability to earn above average returns The resource based model suggests that the strategy the firm chooses should allow it to use its competitive advantages in an attractive industry .

 This model assumes that firms acquire different resources and develop unique capabilities based on how they combine and use the resource, that resources and capabilities are the basis of competitive advantage. Resources are valuable, rare,costly to imitate and unsustainable.

 Research shows that both the industry environment and a firm's internal assets affect that firm's performance over time. To form vision and mission and subsequently to select one or more strategies and to determine how to implement them, firms used both I/O and resource based model

Vision
Corporate vision is a short, and inspiring statement of what the organization intends to become and to achieve at some point in the future, often stated in competitive terms. Vision refers to the category of intentions that are broad, all-inclusive and forward-thinking. It is the image that a business must have of its goals before it sets out to reach them. Vision is big picture thinking with passion that helps people feel what they are supposed to be doing in the organization

Mission
Mission specifies the business or business in which the firm intends to compete and the customer it intends to serve.

Stake Holder
Stake holders are the individuals and groups who can affect the vision and mission of the firm, are affected by the strategic outcomes achieved and have enforceable claims on a firm's performance Stake holder continue to support an organization when its performance meets or exceeds their expectation.

Classification of stake holder

Capital market Stakeholders
Share holders Major suppliers of capital ( banks) Primary customer Suppliers Host communities Union Employees Managers

Product Market stakeholders

Organizational stakeholders