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McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc. All rights reserved.
1
Chapter Title
16/e PPT
What Is Strategyand Why Is
It Important?
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.
Troy University-Florida Region
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Without a strategy theorganization is like a
ship without a rudder.
Joel Ross and Michael Kami
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Chapter Roadmap
What Do We Mean By Strategy?
Strategy and the Quest for Competitive Advantage
Identifying a Companys Strategy
Why a Companys Strategy Evolves Over Time A Companys Strategy Is Partly Proactive and Partly Reactive
Strategy and Ethics: Passing the Test of Moral Scrutiny
The Relationship Between a Companys Strategy and Its
Business Model
What Makes a Strategy a Winner?
Why Are Crafting and Executing Strategy Important?
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Thinking Strategically:The Three Big Strategic Questions
1.Whats the companys 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 companys answer to how
will we get there? is its strategy
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What Do We Mean By Strategy?
Consists ofcompeti t ive movesand businessapproachesused by managers to run the
company
Managements action planto Grow the business
Attract and please customers
Compete successfully
Conduct operations
Achieve target levels of
organizational performance
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The Hows ThatDefine a Firm's Strategy
Howto grow the business
Howto please customers
Howto outcompete rivals
Howto manage each functional
piece of the business (R&D, production, marketing,
HR, finance, and so on)
Howto respond to changing market conditions
Howto achieve targeted levels of performance
Strategyis HOWto . . .
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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
Managements appetite for taking risks
Managerial analysis and strategic thinking about how best to
proceed, given market conditions and the companys circumstances
In choosing a strategy, management is in effect saying,
Among all the many different business approaches and
ways of competing we could have chosen, we have
decided to employ this particular combination ofcompetitive and operating approaches in moving the
company in the intended direction, strengthening its
market position, and competitiveness, and boosting
performance.
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Key Elements of a Successful Strategy
Developing a successful strategy hingeson makingcom peti t ive movesaimed at
Appealing to buyers in ways to set the enterprise apart from
rivals and
Carving out its own market position
Involves developinga distinctive aha
elementto
Attract customers and
Produce a competitive edge
Copying competi tive moves of other
suc cessfu l companies rarely wo rks!
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Key Elements:Comcasts Strategy
Roll out high-speed Internet or broadband service to customers viacable modems
Promote a new video-on-demand service to allow digital
subscribers to watch TV programs whenever they want
Promote a video-on-demand service so digital customers can order
and watch pay-per-view movies Partner with Sony, MGM, and others to expand movie offerings
Use VoIP technology to offer subscribers Internet-based phone
service at a fraction of the cost charged by others
Use video-on-demand and CDV offerings to combat mounting
competition from satellite TV providers
Employ a sales force to sell advertising to businesses that were
shifting advertising dollars from sponsoring network programs to
sponsoring cable programs
Significantly improve customer service
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For Discussion: Your Opinion
From your perspective as a cable or satellite serviceconsumer, does Comcasts strategy (as described in
Illustration Capsule 1.1) seem to be well-matched to
industry and competitive conditions?
Does the strategy seem to be keyed to a cost
advantage, differentiating features, serving the unique
needs of a niche, or developing resource strengths and
competitive capabilities rivals cant imitate or trump (or a
mixture of these)?
What is there about Comcasts strategy that can lead to
sustainable competitive advantage?
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Strategy and the Quest forCompetitive Advantage
The heart and soul of any strategy are the actionsand moves in the marketplace that a company
makes to strengthen its competitive position and
gain a competitive advantage over rivals
A creative distinctive strategy that sets a company
apart from rivals and yields a competitive
advantage is a companys most reliable ticket to
above average profitability Compet ing with a compet it ive advantage is more
pro f i table than com pet ing w ith no advantage
Compet ing w ith a compet it ive disadvantage nearly
always resu lts in below -average pro f i tabi l i ty
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A Powerful Strategy Leads toSustainableCompetitive Advantage
A company achieves susta inable com pet i tive advantagewhen 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
Its nice when a strategy produces a temporarycompetitive edge but a durable edge over rivals greatly
enhances a companys prospects for winning in the
marketplace and realizing above-average profits
What separates a pow erfu l s trategyfrom an ordinary
strategy is managements ability to forge a series of
moves, both in the marketplace and internally, that
prod uces susta inable com pet it ive advantage!
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Four Best Strategic Approaches toBuilding Sustainable Competitive Advantage
Being the industrys low-cost provider (a cost-basedcompetitive advantage)
Incorporate differentiating features (a superior producttype of competitive advantage keyed to higher quality,
better performance, wider selection, value-addedservices, or some other attribute)
Focusing on a narrow market niche (winning acompetitive edge by doing a better job than rivals
of serving the needs and preferences ofbuyers comprising the niche)
Developing expertise and resourcestrengths not easily imitated or matched by rivals(a capabilities-based competitive advantage)
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Competitive Advantage Examples
Strive to be the industrys low-cost provider Wal-Mart
Southw est Air lines
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
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Competitive Advantage Examples (cont)
Focus on a narrow market niche eBay Online auctions
Ji f fy L ube Internat ional 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
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Fig. 1.1: Identifying a Companys Strategy
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Test Your Knowledge
A companys strategy and its quest for competitive advantageare tightly related because
A. a companys strategy determines whether it will have lower or
higher costs than rivals and thus be at a competitive advantage
or disadvantage.
B. competitive advantage is essential to having a profitable
business model.
C. choosing a competitive advantage to pursue also helps a
company choose which business model is most appropriate.
D. competitive advantage enables a company to achieve itsstrategic objectives.
E. a strategy that leads to sustainable competitive advantage is a
companys most reliable means of achieving above-average
profitability and financial performance.
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Why Do Strategies Evolve?
A companys strategyis 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
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Fig. 1.2: A Companys Strategy IsPartly Proactive and Partly Reactive
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Crafting Strategy Is anExercise in Entrepreneurship
Strategy-making is a market-driven activity involving Studying market trends and competitors actions
Keen observation of customer needs
Scrutinizing business possibilities based on new
technologies
Building firms market position via acquisitions or new
product introductions
Pursuing ways to strengthen firms competitive
capabilities
Proactively searching out opportunities to
Do new things or
Do existing things in new or better ways
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Linking Strategy With Ethics
Ethical and moral standards go beyond Prohibitions of law and the language of thou shalt not
to issues of Duty and right vs. wrong
Ethical and moral standards address
What is the right thing to do?
Two criteria of an ethical strategy:
Does not entail actions and behaviors that cross the linefrom should do to should not do and unsavory or
shady and
Allows management to fulfill its ethical duties to all
stakeholders
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A Firms EthicalResponsibilities to Its Stakeholders
Owners/shareholdersRightfully expect some form ofreturn on their investment
Employees- Rightfully expect to be treated with dignity
and respect for devoting their energies to the enterprise
Customers- Rightfully expect a seller to provide themwith a reliable, safe product or service
Suppl iers- Rightfully expect to have an equitablerelationship with firms they supply and be treated fairly
Communi ty- Rightfully expect businesses to be goodcitizens in their community
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Role of Senior Executives:Linking Strategy with Ethics
Forbid pursuit of ethically questionable businessopportunities
Insist all aspects of company strategyreflect high ethical standards
Make it clear all employees areexpected to act with integrity
Install organizational checks and balances to Monitor behavior
Enforce ethical codes of conduct
Provide guidance to employees in gray areas
Display genuine commitment to conduct businessactivities ethically
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Test Your Knowledge
A company's strategy can be considered ethicalA. if all of its different actions and elements are legal and in
compliance with governmental rules and regulations.
B. so long as its actions and behaviors can pass the test of moral
scrutiny and are aboveboard in the sense of not being shadyor unconscionable, injurious to others, or unnecessarily
harmful to the environment.
C. only if all elements of the strategy are in accord with what is
generally considered as being in the overall best interests of
society at large.
D. so long as religious authorities and noted ethics experts find
nothing wrong in the companys actions.
E. if it is in compliance with the companys code of ethics and has
been approved by the companys chief ethics officer.
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What Is a Business Model?
A business model addresses How do we makemoney in this business? Is the strategy capable of delivering
good bottom-line results?
Do the revenue-cost-pro f i t econom icsof the strategy make good business sense? Look at revenue streamsthe strategy is expected to
produce
Look at associated cost st ructureand potential prof i tmargins
Do resulting earnings streams and ROI indicate the
strategy makes sense and the company has a viable
business model for making money?
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Relationship BetweenStrategy and Business Model
Strategy . . .Deals with a companys
competitive initiatives and
business approaches
Bus iness Model . . .Concerns whether revenues
and costs flowing from the
strategydemonstrate a
business can be amplyprofitable and viable
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Microsofts Business Model
Employ a cadre of highly skilled programmers to develop proprietarycode; keep source code hidden from users
Sell resulting OS and software packages to PC makers and users atrelatively 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 salesare almost pure profit
Provide modest level of technical support to users at no cost
Rejuvenate revenues by periodically introducing next-generationsoftware with features inducing PC users to upgrade their operating
systems
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Red Hats Business Model
Rely on collaborative efforts of volunteer programmers to create thesoftware
Collect and test enhancements and new applications submitted byvolunteer programmers for evaluation and inclusion in new releases
of Linux
Market upgraded and tested family of Red Hat products to largecompanies, charging a subscription fee that includes 24/7 supportwithin 1 hour in 7 languages
Make source code open and available to all users
Capitalize on specialized expertise required to use Linux byproviding fee-based training, consulting, software customization, and
client-directed engineering to Linus users
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Test Your Knowledge
The nitty-gritty issue surrounding a companys businessmodel is whether
A. the strategy is capable of producing sustainable
competitive advantage.
B. it matches the companys external and internal situation.
C. the chosen strategy makes good business sense from a
money-making perspective.
D. the companys strategy and strategic moves are mostlyproactive.
E. the companys strategy stands a really good chance of
hitting a home-run in the marketplace.
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For Discussion: Your Opinion
Who has the best business model
Microsoft or Red Hat?
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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?
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Other Criteria for Judgingthe Merits of a Strategy
Internal consistency and unity among all pieces ofthe 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 th ree testsof a winn ing st rategy!
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Why Is Strategy Important?
A compelling need exists formanagers
to proact ively shape howa firms
businesswill be conducted
A strategy -focused f i rmis more l ikelyto be a strong bot tom -l ine performer
than one that views strategy as secondary
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Good Strategy + Good Strategy Execution= Good Management
Crafting and executing strategy are core managementfunctions
Among all things managers do, nothing affects a
companys ultimate success or failure more
fundamentally than how well its management teamCharts a companys direction,
Develops competitively effective strategic moves and business
approaches, and
Pursues what needs to be done internally to produce goodday-in/day-out strategy execution
Excel lent execut io nof an excellent strategy is thebest test o f managerial excellence and the
most reliable recipe for winning in the marketplace!