1. What Is Strategy and Why Is It Important?
Chapter 1
What Is Strategy and Why Is It Important?

2. Joel Ross and Michael Kami
“Without a strategy the organization is like a ship without a rudder, going around in circles.”
Joel Ross and Michael Kami

3. Chapter Outline What Is Strategy?
What Does the Strategy-Making, Strategy-Executing Process Entail?
Phase 1: Developing a Strategic Vision
Phase 2: Setting Objectives
Phase 3: Crafting a Strategy
Phase 4: Implementing and Executing the Strategy
Phase 5: Evaluating Performance and Initiating Corrective Adjustments
What Is the Role of the Board of Directors in the Strategy-Making, Strategy-Executing Process?
Why Is Strategy Important?

4. Thinking Strategically: The Three Big Strategic Questions
1. Where are we now?
2. Where do we want to go?
Business(es) to be in and market positions to stake out
Buyer needs and groups to serve
Outcomes to achieve
3. How will we get there?

5. What Is Strategy?
Consists of the combination of competitive moves and business approaches used by managers to run the company
Management’s “game plan” to
Stake out a market position
Attract and please customers
Compete successfully
Conduct operations
Achieve organizational objectives

6. Striving for Competitive Advantage
Central thrust of a company’s strategy involves moves to strengthen a company’s
Long-term competitive position and
Financial performance
Key components of strategy
Offensive moves
Defensive moves
What separates a powerful strategy from an ordinary one is management’s ability to forge a series of moves, both in the marketplace and internally, that produce sustainable competitive advantage!

7. Strategic Approaches to Building Competitive Advantage
Strive to be the industry’s low-cost provider
Outcompete 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

8. Fig. 1.1: Identifying a Company’s Strategy

9. Fig. 1.2: A Company’s Strategy Is Partly Planned and Partly Reactive

10. Why Do Strategies Evolve?
A company’s strategy is a work in progress
Changes may be necessary to react to
A failing strategy
Shifting market conditions
Evolving customer preferences
Fresh moves of competitors
Technological breakthroughs
Crisis situations

11. 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 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?

12. Relationship Between Strategy and Business Model
Strategy - Deals with a company’s 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
Strategy
Business
Model

13. 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 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

14. Redhat Linux’s Business Model
Rely on collaborative efforts of volunteer programmers to create the software; make source code open and available to all users
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
Make money by employing a cadre of technical support personnel who provide technical support to users for a fee
Make as much or more money on providing technical support services, training, and consulting as on selling subscriptions to Red Hat Linux

15. Figure 1.3: The Strategy-Making, Strategy-Executing Process

16. Develop a Strategic Vision & Mission
Phase 1 of the Strategic Management Process
Involves thinking strategically about
Future of company
Where are we going?
Tasks include
Creating a roadmap of the future
Deciding future business position to stake out
Providing long-term direction
Giving company a strong identity

17. Strategic Vision
A strategic vision concerns a firm’s future business path -- “where we are going”
Markets to be pursued
Future technology-product-customer focus
Kind of company management is trying to create

18. Characteristics of a Strategic Vision
Well-stated vision statements
Are distinctive and specific to a particular organization
Avoid generic language
Excite strong emotions
Are challenging, uncomfortable, nail biting

19. Example: Vision Statement
Verizon Communications
To be the customer’s first choice for communications and information services in every market we serve, domestic and international.

20. Example: Vision Statement
Levi Strauss & Company
We will clothe the world by marketing the most appealing and widely worn casual clothing in the world.

21. Example: Vision Statement
Microsoft Corporation
Empower people through great software -- anytime, anyplace, and on any device.

22. Example: Vision Statements
Mayo Clinic
The best care to every patient every day.
Scotland Yard
To make London the safest city in the world.

23. Example: Vision Statement
Toyota
We want to set the tone for the era Green and affordable That means establishing a new paradigm for harmonizing personal transport with the environment. It means revolutionary cost savings in products and production processes.

24. Example: Vision Statement
Intel
Our vision: Getting to a billion connected computers worldwide, millions of servers, and trillions of dollars of e-commerce. Intel’s core mission is being the building block supplier to the Internet economy and spurring efforts to make the Internet more useful. Being connected is now at the center of people’s computing experience. We are helping to expand the capabilities of the PC platform and the Internet.

25. Example: Vision Statements
Greenpeace
To halt environmental abuse and promote environmental solutions.
Goldman Sachs
To be the world’s premier investment bank in every sector.

26. Example: Vision Statement
General Electric
We will become number one or number two in every market we serve, and revolutionize this company to have the speed and agility of a small enterprise.

27. Mission
A mission statement focuses on current business activities -- “who we are and what we do”
Current product and service offerings
Customer needs being served
Technological and business capabilities

28. Characteristics of a Mission Statement
Defines current business activities, highlighting boundaries of current business
Present products and services
Types of customers served
Conveys
What we do,
Why we are here, and
Where we are now
A company’s mission is not to make a profit! The real mission is always — “What will we do to make a profit?”

29. Example: Mission Statement
(a unique grocery store chain)
Our mission: To give our customers the best food and beverage values that they can find anywhere and to provide them with the information required for informed buying decisions. We provide these with a dedication to the highest quality of customer satisfaction delivered with a sense of warmth, friendliness, fun, individual pride, and company spirit.

30. Communicating the Vision
An exciting, inspirational vision
Contains memorable language
Clearly maps company’s future direction
Challenges and motivates workforce
Provokes emotion and enthusiasm

31. Linking the Vision With Company Values
A statement of values is often provided to guide the company’s pursuit of its vision
Values -- Beliefs, business principles, and ways of doing things incorporated into
Company’s operations
Behavior of workforce
Values statements
Contain between four and eight values
Are ideally tightly connected to and reinforce company’s vision, strategy, and operating practices
Values

32. Example: Company Values
Home Depot
Entrepreneurial spirit
Creating shareholder value
Excellent customer service
Building strong relationships
Giving back to the community
Taking care of people
Respect for all people
Doing the right thing

33. Example: Company Values
Du Pont
Safety
Ethics
Respect for people
Environmental stewardship

34. Phase 2 of the Strategic Management Process
Setting Objectives
Phase 2 of the Strategic Management Process
Converts strategic vision and mission into specific performance targets
Creates yardsticks to track performance
Pushes firm to focus on results
Helps prevent complacency and coasting

35. Characteristics of Objectives
Represent commitment to achieve specific performance targets
Well-stated objectives are
Quantifiable
Measurable
Contain a deadline for achievement
Spell-out how much of what kind of performance by when

36. Types of Objectives Required
Financial Objectives
Strategic Objectives
Outcomes focused on improving financial performance
Outcomes focused on improving long-term, competitive business position $

37. Examples: Financial Objectives
X % increase in annual revenues
X % increase annually in after-tax profits
X % increase annually in earnings per share
Regular dividend increases
Larger gross profit margin
Larger operating profit margin
Larger net profit margin
X % return on capital employed (ROCE)
X % return on assets (ROA)
X % return on shareholder investment (ROE)
Upward-trending stock price that builds significant shareholder value over time
Strong bond and credit ratings
Reduced levels of debt
Sufficient internal cash flows to fund new capital investment
Diversified revenue base

38. Examples: Strategic Objectives
Winning additional market share (or reaching X % market share)
Consistently getting new or improved products to market ahead of rivals
Overtaking key competitors on product performance or quality or customer service
Achieving lower overall costs than rivals
Deriving X % of revenues from sale of new products introduced in past 5 years
Being a recognized technological leader
Achieving national or global market coverage for firm’s products
Having broader or more attractive product selection than rivals
Deriving X % of revenues from online sales
Having a better-known or more respected brand name than rivals
Improving global sales and distribution capabilities

39. Objective Setting: A Balanced Scorecard Approach
A “balanced scorecard” for measuring company performance requires both financial objectives and strategic objectives
Company achievement of satisfactory financial performance, by itself, is not enough
A company’s financial performance measures are “lagging indicators” that reflect the results of past decisions and actions
Of equal or greater importance is a company’s performance on the measures of its strategic well-being—its competitiveness and market position
Unless a company’s performance in the marketplace reflects improving competitive strength and market penetration, its progress is less than inspiring and its ability to continue delivering good financial performance is suspect
The “lead indicators” of a company’s future financial performance and business prospects are growing competitiveness and strength in the marketplace

40. Balanced Scorecard Approach --Strategic vs. Financial Objectives?
Pursuit of better financial performance may assume priority over strategic performance targets when
Firm is struggling financially
Resource commitments for new strategic initiatives may hurt bottom-line for several years
Proposed strategic moves are risky
Otherwise, strategic objectives merit top priority — a firm consistently foregoing opportunities to strengthen its long-term competitive position
Risks diluting its competitiveness
Risks losing momentum in its markets
Hurts its ability to fend off rivals’ challenges

41. Example: Strategic and Financial Objectives
Unilever
Grow revenues by 5-6 % annually;
Increase operating profit margins from 11 % to 16 % within five years;
Trim the company’s 1,200 food, household, and personal care products down to 400 core brands;
Focus sales and marketing efforts on those brands with potential to become respected, market-leading global brands; and
Streamline the company’s supply chain.

42. Examples: Strategic Objectives
Banc One Corporation
To be one of the top three banking companies in terms of market share in all significant markets we serve.
Bristol-Myers Squibb
To focus globally on those businesses in health and personal care where we can be number one or number two through delivering superior value to the customer.

43. Example: Strategic Objectives
Ford Motor Company
To satisfy our customers by
Providing quality cars and trucks,
Developing new products,
Reducing the time it takes to bring new vehicles to market,
Improving the efficiency of all our plants & processes, and
Building on our teamwork with employees, unions, dealers, and suppliers.

44. Example: Strategic and Financial Objectives
Alcan Aluminum
To be the lowest-cost producer of aluminum and to outperform the average return on equity of the Standard and Poor’s industrial stock index.

45. Example: Strategic and Financial Objectives
3M Corporation
Annual growth in earnings per share of 10% or better, on average;
A return on stockholders’ equity of 20-25%;
A return on capital employed of 27% or better; and
Have at least 30% of sales come from products introduced in the past four years.

46. Short-Range Versus Long-Range Objectives
Short-Range objectives
Targets to be achieved soon
Serve as stair steps for reaching long-range performance
Long-Range objectives
Targets to be achieved within 3 to 5 years
Prompt actions now that will permit reaching targeted long-range performance later

47. Concept of Strategic Intent
A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective and concentrates its competitive actions and energies on achieving that objective!

48. Characteristics of Strategic Intent
Indicates firm’s intent to stake out a particular position over the long-term
Involves establishing a BHAG – “big, hairy, audacious goal” and then devoting the company’s full resources and energies to achieving it over time (Moon Shot)
Signals relentless commitment to winning in the marketplace

49. Objectives Are Needed at All Levels
Objective-setting process is mostly top-down, not bottom-up!
1. First, establish organization-wide objectives and performance targets
2. Next, set business and product line objectives
3. Then, establish functional and departmental objectives
4. Individual objectives are established last

50. Phase 3 of the Strategic Management Process
Crafting a Strategy
Phase 3 of the Strategic Management Process
Strategy-making involves entrepreneurship – searching for opportunities
To do new things or
To do existing things in new or better ways
Strategizing involves
Picking up on happenings in the external environment and
Steering company activities in new directions dictated by shifting market conditions

51. Activities Involved in Crafting a Strategy
Studying market trends and actions of competitors
Listening to customers, anticipating their changing needs
Scrutinizing business possibilities based on new technology
Building firm’s market position via acquisitions or new products
Pursuing ways to strengthen firm’s competitive capabilities
Our strategy will be . . .

52. The Hows That Define a Firm's Strategy
How to grow the business
How to please customers
How to outcompete rivals
How to respond to changing market conditions
How to manage each functional piece of the business and develop needed organizational capabilities
How to achieve strategic and financial objectives
Strategy is HOW to . . .

53. Linking Strategy With Ethics
A company’s ethics and high moral standards go beyond
Merely complying with laws and regulations
A strategy that exemplifies high ethical and moral standards addresses
Issues of duty and
What is morally responsible
What it is “right” to do and not do
A strategy is not ethical unless it can pass moral scrutiny

54. A Firm’s Ethical Responsibilities to Its Stakeholders
Owners/shareholders – Rightfully expect some form of return on their investment
Employees - Rightfully expect respect for their worth and devoting their energies to firm
Customers - Rightfully expect a seller to provide them with a reliable, safe product or service
Suppliers - Rightfully expect to have an equitable relationship with firms they supply
Community - Rightfully expect businesses to be good citizens in their community

55. What Is a Strategic Plan?
Where firm is headed -- Strategic vision and business mission
Short and long term performance targets -- Strategic and financial objectives
Action approaches to achieve targeted results -- A comprehensive strategy

56. Who Participates in Crafting a Company’s Strategy?
Senior corporate executives
Managers of business units and major product lines and key VPs
Functional area managers
Operating managers

57. Strategizing: An Individual or Group Responsibility?
Teams are increasingly used because
Finding market- and customer-driven solutions is necessary
Complex strategic issues cut across functional areas and departmental units
Ideas of people with different backgrounds and experiences strengthen strategizing effort
Groups charged with crafting the strategy often include the people charged with implementing it

58. Figure 1.4: A Company’s Strategy-Making Hierarchy

59. Levels of Strategy-Making in a Diversified Company
Corporate-Level Managers
Corporate
Strategy
Two-Way Influence
Business-Level Managers
Business Strategies
Two-Way Influence
Functional Managers
Functional Strategies
Two-Way Influence
Operating
Managers
Operating Strategies

60. Levels of Strategy-Making in a Single-Business Company
Business-Level Managers
Business
Strategy
Two-Way Influence
Functional Managers
Functional Strategies
Two-Way Influence
Operating
Managers
Operating Strategies

61. Tasks of Corporate Strategy
Moves to achieve diversification
Actions to boost performance of individual businesses
Capturing valuable cross-business synergies to provide = 3 effects!
Establishing investment priorities and steering corporate resources into the most attractive businesses

62. Tasks of Business Strategy
Initiating approaches to produce successful performance in a specific business
Crafting competitive moves to build sustainable competitive advantage
Developing competitively valuable competencies and capabilities
Uniting strategic activities of functional areas
Gaining approval of business strategies by corporate-level officers

63. Tasks of Functional Strategies
Game plan for a strategically-relevant function, activity, or business process
Detail how key activities will be managed
Provide support for business strategy
Specify how functional objectives are to be achieved

64. Tasks of Operating Strategies
Concern narrower strategies for managing grassroots activities and strategically-relevant operating units
Add detail to business and functional strategies

65. Uniting the Company’s Strategy-Making Effort
A firm’s strategy is a collection of initiatives implemented by managers at all organizational levels
Separate levels of strategy must be unified into a cohesive, company-wide action plan
Pieces of strategy should fit together like the pieces of a puzzle

66. Tests of a Winning Strategy
GOODNESS OF FIT TEST
How well is strategy matched to firm’s situation?
COMPETITIVE ADVANTAGE TEST
Does strategy lead to sustainable competitive advantage?
PERFORMANCE TEST
Does strategy boost firm performance?

67. Implementing and Executing Strategy
Phase 4 of the Strategic Management Process
Action-oriented, operations-driven activity aimed at shaping performance of core business activities in a strategy-supportive manner
Tougher and more time-consuming than crafting strategy
Key tasks include
Improving the competence and efficiency of the strategy being executed
Showing measurable progress in achieving targeted results

68. What Does Strategy Implementation and Execution Include?
Building a capable organization
Allocating resources to strategy-critical activities
Establishing strategy-supportive policies
Instituting best practices and programs for continuous improvement
Installing needed information, communication, and operating systems
Motivating people to pursue the target objectives
Tying rewards to achievement of results
Creating a strategy-supportive corporate culture
Exerting the leadership necessary to drive the process forward and keep improving

69. Evaluating Performance and Initiating Corrective Adjustments
Phase 5 of the Strategic Management Process
Tasks of crafting and implementing the strategy are not a one-time exercise
Customer needs and competitive conditions change
New opportunities appear; technology advances; any number of other outside developments occur
One or more aspects of executing the strategy may not be going well
New managers with different ideas take over
Organizational learning occurs
All these trigger the need for corrective actions

70. Monitoring, Evaluating, and Adjusting as Needed
Taking actions to adjust to the march of events tends to result in one or more of the following
Altering long-term direction and/or redefining the mission/vision
Raising, lowering, or changing performance objectives
Modifying the strategy
Improving strategy execution

71. Strategic Role of a Board of Directors
Critically appraise and ultimately approve strategic action plans
Evaluate strategic leadership skills of the CEO and candidates to succeed the CEO

72. Why Is Strategy Important?
A compelling need exists for managers to proactively shape how a firm’s 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

73. Good Strategy + Good Strategy Execution = Good Management
Crafting and executing strategy are core management functions
Among all the things managers do, nothing affects a company’s ultimate success or failure more fundamentally than how well its management team charts the company’s direction, develops competitively effective strategic moves and business approaches, and pursues what needs to be done internally to produce good day-in/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!

74. Benefits of a “Strategic Approach” to Managing
Good strategic thinking and good management of the strategy-making, strategy-executing process
Guides entire firm regarding “what it is we are trying to do and to achieve”
Helps unify numerous strategy-related decisions across the company
Creates a proactive atmosphere
Promotes development of an evolving business model focused on bottom-line success
Provides basis for determining how best to allocate company resources