Lesson 1 WHAT IS STRATEGY AND WHY IS IT IMPORTANT?

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 Corporate Governance: Role of Board of Directors in the Strategy-Making, Strategy-Executing Process Why Crafting and Executing Strategy Are Important Tasks

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

What Is Strategy? Achieve target objectives 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 target objectives

An Example of Strategy: Comcast Roll out a new video-on-demand service to allow customers to watch TV programs at any time Partner with Sony, MGM, and others to expand Comcast’s library of movie offerings Continue to roll out high-speed Internet or broadband service to customers via cable modems Use “voice-over-Internet-protocol” (VOIP) technology to offer subscribers Internet-based phone at a fraction of the cost charged by other providers Use the video-on-demand and VOIP service offerings to Differentiate Comcast’s service offering and Combat competition from direct-to-home satellite TV providers Employ a sales force to sell advertising to businesses that were shifting some of their advertising dollars from sponsoring network programs to sponsoring cable programs Significantly improve Comcast’s customer service

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 Achieving a sustainable competitive advantage greatly enhances a company’s prospects for Winning in the marketplace and Earning above-average profits 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!

Strategic Approaches to Building Competitive Advantage Strive to be the industry’s low-cost provider Differentiate the company’s product offering from rival brands in ways that customers find more appealing 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 Companies Pursuing Competitive Advantage 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

Fig. 1.1: Identifying a Company’s Strategy

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

Why Do Strategies Evolve? Changes in a company’s strategy are typically necessary in order to respond and react to Shifting market conditions Evolving customer preferences Fresh moves of competitors Technological breakthroughs Strategy changes also make sense When a strategy is performing poorly and needs to be “fixed” When management comes up with ideas for improving the strategy Thus, a company’s strategy is always a work in progress!

What Does the Term “Business Model” Mean? A company’s business model is the storyline for how and why the company’s strategy will generate a revenue stream and entail a cost structure that produces attractive earnings and return on investment In other words, do the revenue-cost-profit economics of the strategy make good business sense? Without the ability to deliver good profits The strategy is not viable The survival of the business is in doubt The company’s business model is sorely lacking and both the strategy and the business model have to be overhauled

Relationship Between Strategy and Business Model Strategy - Deals with a company’s competitive initiatives and business approaches Business Model -Concerns whether the revenues and costs flowing from the strategy are likely to generate attractive profits and return on investment, thus signifying whether the strategy and business model are viable

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

What Makes a Strategy a Winner? How well does the strategy fit the company’s internal and external situation? Is the strategy helping the company achieve a sustainable competitive advantage? Is the strategy resulting in better company performance?

Fig. 1.3: The Strategy-Making, Strategy-Executing Process

Developing a Strategic Vision Phase 1 of the Strategy-Making Process Involves thinking strategically about Future of company Where are we going? Developing a strategic vision entails Creating a roadmap of where the company is headed and why Deciding what position the company needs to stake out in the marketplace Providing long-term direction Giving company a strong identity

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

Mission vs. Strategic Vision 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 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

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! Its true mission is its answer to “What will we do to make a profit?” Making a profit is an objective or intended outcome!

Trader Joe’s 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.

Communicating the Strategic Vision An exciting, inspirational vision Contains memorable language Clearly maps company’s future direction Challenges and motivates workforce Provokes emotion and enthusiasm Winning support for the vision involves Putting “where we are going and why” in writing Distributing the statement organization-wide Having executives explain the vision to the workforce

Examples: Vision Slogans Levi Strauss & Company “We will clothe the world by marketing the most appealing and widely worn casual clothing in the world.” Microsoft Corporation “Empower people through great software— any time, any place, and on any device.” Mayo Clinic “The best care to every patient every day.”

Linking the Vision With Company Values A statement of values is often provided to guide a 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 a company’s vision, strategy, and operating practices

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

Phase 2 of the Strategy-Making Process Setting Objectives Phase 2 of the Strategy-Making Process Purpose of setting objectives Converts vision into specific performance targets Creates yardsticks to track performance Pushes firm to be inventive, intentional, and focused in its actions Setting challenging, achievable objectives guards against Complacency Internal confusion Status quo performance

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

Strategic Performance Fosters Better Financial Performance A company’s achievement of satisfactory financial performance, by itself, is not enough Financial performance measures are “lagging indicators” reflecting results of past decisions and actions Of equal or greater importance is a company’s performance on measures of its strategic well-being — its competitiveness and market position Strategic performance measures are “leading indicators” of a company’s future financial performance Achievement of strategic performance targets Signals growing competitiveness Signals growing strength in the marketplace

Balanced Scorecard Approach – Strategic and Financial Objectives Balanced scorecard approach for measuring company performance requires having and pursuing both Financial objectives Strategic objectives Emphasis on achieving financial objectives should generally assume priority over achieving strategic objectives when a company’s Financial performance is dismal and/or The company’s survival is threatened Otherwise, management is advised to put more emphasis on achieving strategic objectives that strengthen a company’s business position and give it a growing competitive advantage over rivals—Why? Because an ever stronger market position is a company’s surest path to improving its profitability!

Nissan’s Strategic and Financial Objectives Increase sales to 4.2 million cars and trucks by 2008 (up from 3 million in 2003) Cut purchasing costs 20% and halve the number of suppliers Have zero net debt Maintain a return on invested capital of 20% Maintain a 10% or better operating margin

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!

Characteristics of Strategic Intent Indicates a firm’s intent to Stake out a particular business position over the long-term Be a winner in marketplace Involves establishing a grandiose performance target Out of proportion to its immediate capabilities and market posiItion and Devoting the company’s full resources and energies to achieving the target over time Signals relentless commitment to achieving a particular market position and competitive standing

Phase 3 of the Strategy-Making Process Crafting a Strategy Phase 3 of the Strategy-Making 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

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

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 a firm’s market position via acquisitions or new products Pursuing ways to strengthen firm’s competitive capabilities

Fig. 1.4: A Company’s Strategy-Making Hierarchy

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

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

Tasks of Corporate Strategy Moves to achieve diversification Actions to boost performance of individual businesses Capturing valuable cross-business synergies to provide 1 + 1 = 3 effects! Establishing investment priorities and steering corporate resources into the most attractive businesses

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 and directors

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

What Is a Strategic Plan? Its strategic vision and business mission A Company’s Strategic Plan Consists of Its strategic and financial objectives Its strategy

Implementing and Executing Strategy Phase 4 of the Strategy-Making 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 efficiency of the strategy being executed Showing measurable progress in achieving targeted results

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

Characteristics of Good Strategy Execution Involves creating strong “fits” between strategy and Organizational capabilities Organization’s work climate and culture Reward structure Internal operating systems The stronger the “fits” the Better the execution Higher a company’s odds of achieving its performance targets

Evaluating Performance and Making Corrective Adjustments Phase 5 of the Strategy-Making 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 and adjustments on an as-needed basis

Corporate Governance: Strategic Role of a Board of Directors Exercise strong oversight to ensure the five tasks of strategic management are executed to benefit Shareholders or Stakeholders Make sure executive actions are not only proper but also aligned with interests of stakeholders

Obligations of a Board of Directors Be inquiring critics and overseers Evaluate caliber of senior executives’ strategy-making and strategy-executing skills Institute a compensation plan for top executives rewarding them for results that serve interests of Stakeholders and Shareholders Oversee company’s financial accounting and reporting practices

Good Corporate Governance Matters The whole fabric of effective corporate governance is undermined when boards of directors shirk their responsibility to maintain ultimate control over Company’s strategic direction Major elements of a company’s strategy Business approaches management is using to implement and execute the strategy Board members are obligated to rein in a CEO who oversteps the bounds of sound business principles and ethical behavior A rubber stamp board abdicates its responsibility to shareholders Boards of directors have a very important oversight role in the strategy-making, strategy-executing process!

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

Good Strategy + Good Strategy Execution = Good Management Crafting and executing strategy are core management functions 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 Excellent execution of an excellent strategy is the best test of managerial excellence – and the most reliable recipe for winning in the marketplace!

Benefits of a “Strategic Approach” to Managing Good strategic thinking and 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