CHAPTER 1

WHAT IS STRATEGY AND �WHY IS IT IMPORTANT?

McGraw-Hill/Irwin

Copyright ®2012 The McGraw-Hill Companies, Inc.

• Understand why every company needs a sound strategy to compete successfully, manage the conduct of its business, and strengthen its prospects for long-term success.
• Develop an awareness of the four most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.
• Understand that a company’s strategy tends to evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy.
• Learn why it is important for a company to have a viable business model that outlines the company’s customer value proposition and its profit formula.
• Learn the three tests of a winning strategy.

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What is Strategy?

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WHAT DO WE MEAN BY STRATEGY ?

• What is our present situation?
• Business environment and industry conditions
• Firm’s financial and competitive capabilities
• Where do we want to go from here?
• Creating a vision for the firm’s future direction
• How are we going to get there?
• Crafting an action plan that will get us there

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WHAT IS STRATEGY ABOUT?

• Strategy is all about How:
• How to outcompete rivals.
• How to respond to economic and market conditions and growth opportunities.
• How to manage functional pieces of the business.
• How to improve the firm’s financial and market performance.

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WHY DO STRATEGY ?

• A firm does strategy:
• To improve its financial performance.
• To strengthen its competitive position.
• To gain a sustainable competitive. advantage over its market rivals.
• A creative, distinctive strategy:
• Can yield above-average profits.
• Makes competition difficult for rivals.

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• Strategic management is the process of analysis, decisions and actions an organization undertakes in order to create and sustain competitive advantages.

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• Strategies are large‑scale action plans for interacting with the environment in order to achieve long‑term goals.

The Concept of Strategic

Management

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The Quest for Competitive Advantage

• Competitive Advantage
• Meeting customer needs more effectively, with products or services that customers value more highly, or more efficiently, at lower cost.
• Sustainable Competitive Advantage
• Giving buyers lasting reasons to prefer a firm’s products or services over those of its competitors.

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STRATEGY AND COMPETITORS

• Strategy is about competing differently from rivals—
• Doing what they don’t do or doing it better!
• Doing what they can’t do!
• Doing that which sets the firm apart and attracts customers.
• Doing what we should or should not do to produce a competitive edge.

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Why a Firm’s Strategy Evolves over Time

• Managers modify strategy in response to:
• Changing market conditions
• Advancing technology
• Fresh moves of competitors
• Shifting buyer needs
• Emerging market opportunities
• New ideas for improving the strategy

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The Evolving Nature of a Firm’s Strategy

• Realized (current) strategy is a blend of:
• Proactive (deliberate) strategy elements that include both continued and new initiatives.
• Reactive (emergent) strategy elements that are required due to unanticipated competitive developments and fresh market conditions.

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�Strategic Management Process

Adapted from Exhibit 1.2 Realized Strategy and Intended Strategy: Usually Not the Same

Source:H. Mintzberg and J. A. Waters, “Of Strategies, Deliberate and Emergent,” Strategic Management Journal 6 (1985), pp. 257-72.

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THE RELATIONSHIP BETWEEN A FIRM’S STRATEGY AND ITS BUSINESS MODEL

Realized�Strategy

Competitive Initiatives

Business Approaches

Business Model

Value Proposition

Profit Formula

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A Company’s Business Model

• How the business will make money :
• By providing customers with value.
• The firm’s customer value proposition
• By generating revenues sufficient to cover costs and produce attractive profits.
• The firm’s profit formula

It takes a proven business model—one that yields appealing profitability—to demonstrate viability of a firm’s strategy.

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Business Model Elements

• The Customer Value Proposition
• Satisfying buyer wants and needs at a price customers will consider a good value.
• The greater the value provided (V) and the lower the price (P), the more attractive the value proposition is to customers.

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Business Model Elements (cont’d)

• The Profit Formula
• Creating a cost structure that allows for acceptable profits, given that pricing is tied to the customer value proposition.
• V—the value provided to customers
• P—the price charged to customers
• C—the firm’s costs
• The lower the costs (C) for a given customer value proposition (V–P), the greater the ability of the business model to be a moneymaker.

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Sirius XM Vs. Free Radio Stations

Are the business models the same?

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IS OUR STRATEGY A WINNER?

Winning �Strategy

The Strategic �Fit Test

The Competitive Advantage Test

The Performance �Test

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WHAT MAKES A STRATEGY A WINNER?

• A winning strategy must pass three tests:
• The Fit Test
• Does it exhibit dynamic fit with the external and internal aspects of the firm’s overall situation?
• The Competitive Advantage Test
• Can it help the firm achieve a significant and sustainable competitive advantage?
• The Performance Test
• Can it produce good performance as measured by the firm’s profitability, financial and competitive strengths, and market standing?

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THE ROAD AHEAD

• Strategy is about asking the right questions:
• What must managers do, and do well, to make a firm a winner in the marketplace?
• Strategy requires getting the right answers:
• Good strategic thinking and good management of the strategy-making, strategy-executing process.
• First-rate capabilities and skills in crafting and executing strategy are essential to managing successfully.

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Internal

Environment

External

Environment

The Strategic

Management

Process

Strategic Intent

Strategic Mission

Strategic

Competitiveness

Above Average

Returns

Feedback

Strategy Formulation

Business-Level

Strategy

Competitive

Dynamics

Corporate-Level

Strategy

International

Strategy

Cooperative

Strategies

Acquisitions &

Restructuring

Strategy Implementation

Corporate

Governance

Structure

& Control

Strategic

Leadership

Entrepreneurship

& Innovation

Strategic

Actions

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Welcome and best wishes for your success!

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Who listens to the radio anymore?

• Given the shifts in how people listen to music, are the business models of Sirius XM and over-the-air broadcasters viable over the long term?
• Does Sirus XM’s strategy pass the three tests of a winning strategy? Does the strategy of over-the-air broadcasters pass the same tests?
• What internal and external factors will create difficulties for either competitor in changing its strategy or business model?

Follow-up

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