CHAPTER 1

What Is Strategy and Why Is It Important?

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 Learning Objectives
This chapter will help you understand:
1. What we mean by a company’s strategy and why it
needs to differ from competitors' strategies.
2. The concept of a sustainable competitive advantage.
3. The five most basic strategic approaches for setting a
company apart from its rivals.
4. That a company’s strategy tends to evolve.
5. What constitutes a viable business model.
6. The three tests of a winning strategy.
 What Do We Mean By Strategy ?

A company’s strategy is the

coordinated set of actions that its
managers take in order to outperform
the company’s competitors and
achieve superior profitability.
All Businesses Face Three Central Questions
1. What is our present situation?
• Industry conditions and competitive pressures, market standing,
competitive strengths and weaknesses, and future prospects in
light of changes taking place in the business environment
2. What should the company’s future direction be and what
performance targets should we set?
• What buyer needs to try to satisfy
• Which growth opportunities to emphasize?
• Where to head and what outcomes to strive to achieve?
3. What’s our plan for running the company and achieving
good results?
• Challenges managers to craft a series of competitive moves and
business approaches—henceforth called a strategy—for heading
the firm in the intended direction, staking out a market position,
attracting customers, and achieving the targeted outcomes
 Strategy Is about Making Choices
Strategy is all about choosing How:
• How to position the firm in the marketplace
• How to attract customers
• How to compete against rivals
• How to achieve the firm’s performance targets
• How to capitalize on opportunities to grow the business
• How to respond to changing economic and market
conditions
Strategy Is about Competing Differently
Strategy as a choice:
• Is deciding to compete differently from rivals—
pressuring rivals by doing what they do not do or,
even better, doing what they cannot do.
• Guides the company in what it must do and also in
knowing what it must not do.
• Is successful when its actions, business approaches,
and competitive moves appeal to buyers in ways that:
• Set it apart from its rivals by either providing products with
higher perceived values or efficiently producing at lower costs.
• Stake out a market position that is not crowded with strong
competitors.
FIGURE 1.1 Identifying a Firm’s Strategy–What to Look for
Illustration Capsule 1.1 Apple Inc.: Exemplifying a
Successful Strategy
Key elements of Apple’s successful strategy are:
• Designing and developing its own operating systems,
hardware, application software and services.
• Continuously investing in R&D and frequently introducing
products.
• Strategically locating its stores and staffing them with
knowledgeable personnel.
• Maintaining a quality brand image, supported by premium
pricing.
• Committing to corporate social responsibility and
sustainability through supplier relations.
• Cultivating a diverse workforce rooted in transparency.
 Strategy and the Quest for
Competitive Advantage
Competitive advantage:
• Requires meeting customer needs either more effectively (with
products or services that customers value more highly) or more
efficiently (by providing products or services at a lower cost to
customers.)
Sustainable competitive advantage requires:
• Giving buyers lasting reasons to prefer a firm’s products or
services over those of its competitors.
• Developing expertise and long-term competitive capabilities that
cannot be readily overcome.
• Putting the constant quest for sustainable competitive advantage
at center stage in crafting your strategy.
 Basic Strategic Approaches (1 of 2)

Strategies for Building Competitive Advantage

Low-Cost Focused
Provider Differentiation
Focused Low- Broad Differentiation
Cost

Best-Cost Provider

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 Basic Strategic Approaches (2 of 2)
Low-cost provider strategy—achieving a cost-based advantage over
rivals
Broad differentiation strategy—differentiating the firm’s product or
service from rivals in ways that appeal to a broad spectrum of buyers
A focused low-cost strategy—concentrating on a narrow buyer
segment (or market niche) by having lower costs to serve niche
members at a lower price
Focused differentiation strategy—concentrating on a narrow buyer
segment (or market niche) by offering buyers customized attributes that
meet their specialized needs and tastes better than rivals’ products
Best-cost provider strategy—giving customers more perceived value
for their money by satisfying their expectations on key quality features,
performance, and/or service attributes that match or exceed their price
expectations
FIGURE 1.2 A Company’s Strategy Is a
Blend of Proactive Initiatives and Reactive
Adjustments
A Company’s Strategy and Its Business Model

How the firm 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.
 The Relationship Between a Company’s
Strategy and Its Business Model

REALIZED BUSINESS
STRATEGY MODEL
Competitive Initiatives Value Proposition
Business Approaches Profit Formula

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 Is The Company’s Strategy A Winner?

EXHIBITS GOOD FIT WITH

SITUATION
THREE RESULTS IN COMPETITIVE
TESTS OF A ADVANTAGE

WINNING PROMOTES SUPERIOR

PERFORMANCE
STRATEGY

© McGraw-Hill Education.
 What Makes a Strategy a Winner?
A winning strategy must pass three tests:
• The fit test
Does it exhibit good fit with the external and internal aspects of
the firm’s dynamic situation?
• The competitive advantage test
Is it likely to result in a sustainable competitive advantage?
• The performance test
Is it producing superior performance, as indicated by the firm’s
profitability, financial and competitive strengths, and market
standing?
 Why Crafting and Executing Strategy Are
Important Tasks
Strategy provides:
• A prescription for doing business.
• A road map to competitive advantage.
• A game plan for pleasing customers.
• A formula for attaining long-term standout marketplace
performance.
Good Strategy + Good Strategy Execution =
Good Management

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 CHAPTER 2
Charting a Company’s Direction:
Its Vision, Mission, Objectives, and Strategy

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 Learning Objectives
This chapter will help you understand:
1. Why it is critical for managers to have a clear strategic vision of
where the company needs to head, and why.
2. The importance of setting both strategic and financial objectives.
3. Why the strategic initiatives taken at various organizational levels
must be tightly coordinated.
4. What a company must do to achieve operating excellence and to
execute its strategy proficiently.
5. The role and responsibility of a company’s board of directors in
overseeing the strategic management process.
What Does the Strategy-Making, Strategy-
Executing Process Entail?
1. Developing a strategic vision, a mission
statement, and a set of core values
2. Setting objectives for measuring the firm's
performance and tracking its progress
3. Crafting a strategy to move the firm along its
strategic course and achieve its objectives
4. Executing the chosen strategy efficiently and
effectively
5. Monitoring developments, evaluating
performance, and initiating corrective
adjustments
FIGURE 2.1 The Strategy-Making, Strategy-Executing Process
STAGE 1: Developing a Strategic Vision,
Mission Statement, and Set of Core Values

Developing a strategic vision

• Delineates management’s aspirations for the firm to its
stakeholders
• Provides direction: “where we are going”
• Sets out the compelling rationale (strategic
soundness) for the firm’s direction
• Uses distinctive and specific language to set the firm
apart from its rivals
TABLE 2.1 Wording a Vision Statement—the Dos and Don’ts ( 1 of 2)

The Dos The Don’ts

Be graphic. Don’t be vague or incomplete.
Paint a clear picture of where the Never skimp on specifics about where the
company is headed and the market company is headed or how the company
position(s) the company is striving to stake intends to prepare for the future.
out.
Be forward-looking and directional. Don’t dwell on the present.
Describe the strategic course that will help A vision is not about what a firm once did or
the company prepare for the future. does now; it’s about “where we are going.”
Keep it focused. Don’t use overly broad language.
Focus on providing managers with All-inclusive language that gives the
guidance in making decisions and company license to pursue any opportunity
allocating resources. must be avoided.
Have some wiggle room. Don’t state the vision in bland or
Language that allows some flexibility uninspiring terms.
allows the directional course to be The best vision statements have the power
adjusted as market, customer, and to motivate company personnel and inspire
technology circumstances change. shareholder confidence about the
company’s future.
TABLE 2.1 Wording a Vision Statement—the Dos and Don’ts (2 of 2)

The Dos The Don’ts

Be sure the journey is feasible. Don’t be generic.
The path and direction should be within the A vision statement that could apply to
realm of what the company can accomplish; companies in any of several industries (or
over time, a company should be able to to any of several companies in the same
demonstrate measurable progress in industry) is not specific enough to provide
achieving the vision. any guidance.

Indicate why the directional path makes Don’t rely on superlatives.

good business sense. Visions that claim the company’s strategic
The directional path should be in the long- course is one of being the “best” or “most
term interests of stakeholders, especially successful” usually lack specifics about
shareowners, employees, and suppliers. the path the company is taking to get
there.

Make it memorable. Don’t run on and on.

To give the organization a sense of direction A vision statement that is not short and to
and purpose, the vision needs to be easily the point will tend to lose its audience.
communicated. Ideally, it should be
reducible to a few choice lines or a
memorable “slogan.”
 Developing a Company Mission Statement

A well-conceived company mission statement:

• Uses specific language to give the firm its own unique
identity
• Describes the firm’s current business and purpose
—“who we are, what we do, and why we are here”
• Focuses on describing the firm’s business, not on
“making a profit”—earning a profit is an objective, not a
mission
 An “Ideal” Mission Statement
• Identifies the company’s product or services
• Specifies the buyer needs it seeks to satisfy
• Identifies the customer groups or markets it is
endeavoring to serve
• Gives the company its own identity that sets the
company firm apart from its rivals
• Clarifies the firm’s purpose and business
makeup to stakeholders
Linking the Vision and Mission with Core
Values
Core values:
• Are the beliefs, traits, and behavioral norms that
employees are expected to display in conducting the
firm’s business and in pursuing its strategic vision and
mission.
• Become an integral part of the firm’s culture and what
makes it tick when strongly espoused and supported
by top management.
• Match the firm’s vision, mission, and strategy,
contributing to the firm’s business success.
Stage 2: Setting Objectives

The purposes of setting objectives:

• To convert the vision and mission into specific,
measurable, challenging yet achievable, deadline
performance targets
• To focus efforts and align actions throughout the
organization
• To serve as yardsticks for tracking a firm’s
performance and progress
• To provide motivation and inspire employees to
greater levels of effort
Converting the Vision and Mission into
Specific Performance Targets

Specific
Characteristics Quantifiable
of Well-Stated (Measurable)
Challenging
Objectives (Motivating)
Deadline for
Achievement
 Setting Stretch Objectives

Setting stretch objectives promotes better overall

performance because stretch targets because
they:
• Push a firm to be more inventive.
• Increase the urgency for improving financial
performance and competitive position.
• Cause the firm to be more intentional and
focused in its actions.
• Create an exciting work environment and attract the
best people.
• Help prevent internal inertia and contentment with
modest gains in performance.
 Cautions About Stretch Goals
Realistic stretch goals
• Are definitely reachable, with a strong and coordinated
effort on the part of company personnel.
Overly ambitious stretch goals
• Are usually beyond the organization's capabilities to
reach, regardless of the level of effort.
• Involve radical expectations and often go unachieved,
and run the risk of killing motivation, eroding employee
confidence, and damaging both worker and company
performance.
• Can work as envisioned if:
• the company has ample resources and capabilities.

• its recent performance is strong.

 What Kinds of Objectives To Set
Financial Objectives Strategic Objectives
• Communicate top • Are the firm's goals
management’s goals for related to market
financial performance. standing and
• Are focused internally competitive position.
on the firm’s operations • Are focused externally
and activities. on competition vis-à-vis
the firm’s rivals.

© McGraw-Hill Education.
 The Need for Short-Term and
Long-Term Objectives
Short-Term Objectives:
• Focus attention on quarterly and annual performance
improvements to satisfy near-term shareholder
expectations.
Long-Term Objectives:
• Force consideration of what to do now to achieve optimal
long-term performance.
• Help pose a barrier to overemphasizing achieving just
short-term results and postponing/delaying actions
needed to achieve long-term performance targets.
Stage 3: Crafting a Strategy

Strategy making:
• Addresses a series of strategic hows.
• Requires choosing among strategic alternatives.
• Promotes actions to do things differently from
competitors rather than running with the herd.
• Is a collaborative team effort that involves managers in
various positions at all organizational levels.
FIGURE 2.2 A Company’s Strategy-Making Hierarchy
 A Firm’s Strategy-Making Hierarchy (1 of 2)

Corporate strategy
• Multibusiness strategy—how to gain synergies from
managing a portfolio of businesses together rather than
as separate businesses
Business strategy
• How to strengthen market position and gain
competitive advantage
• Actions to build competitive capabilities of single
businesses
• Monitoring and aligning lower-level strategies
 A Firm’s Strategy-Making Hierarchy (2 of 2)

Functional area strategies

• Add relevant detail to the “hows” of business strategy.
• Provide a game plan for managing a particular activity
in ways that support the business strategy.
Operational strategies
• Add detail and completeness to business and
functional strategies.
• Provide a game plan for managing specific operating
activities with strategic significance.
NOTE: These four strategies all impact each other.
UNITING THE STRATEGY-MAKING HIERARCHY

Components of a company’s
Corporate Level strategy up and down the
strategy hierarchy should be
cohesive and mutually
Business Level reinforcing.

Functional Level

Operational Level
A Strategic Vision + Mission + Objectives + Strategy = A Strategic Plan

• Its strategic
vision, business
mission, and
ELEMENTS OF A core values
FIRM’S STRATEGIC • Its strategic and
PLAN
financial
objectives
• Its chosen
strategy
Stage 4: Executing the Strategy

Converting strategic plans into actions requires:

• Directing organizational action
• Motivating people
• Building and strengthening the firm’s competencies
and competitive capabilities
• Creating and nurturing a strategy-supportive work
climate
• Meeting or beating performance targets
Managing the Strategy Execution Process
(1 of 2)

• Creating a strategy-supporting structure

• Staffing the firm with the needed skills and
expertise
• Developing and strengthening strategy-
supporting resources and capabilities
• Allocating ample resources to the activities
critical to strategic success
• Ensuring that policies and procedures facilitate
effective strategy execution
• Organizing work effort to achieve best practices
Managing the Strategy Execution Process
(2 of 2)

• Installing information and operating systems

that enable company personnel to perform
essential activities
• Motivating people by tying rewards and
incentives to the achievement of performance
objectives
• Creating a company culture conducive to
successful strategy execution
• Exerting the internal leadership needed to
propel implementation forward
Stage 5: Evaluating Performance and
Initiating Corrective Adjustments
Evaluating performance
• Deciding whether the enterprise is passing the three
tests of a winning strategy—good fit, competitive
advantage, strong performance
Initiating corrective adjustment
• Deciding whether to continue or change the firm’s
vision and mission, objectives, strategy, and strategy
execution methods
• Applying lessons based on organizational learning.
The Role of the Board of Directors in
Corporate Governance
Obligations of the board of directors:
• Oversee the firm’s financial accounting and reporting
practices compliance with GAAP principles.
• Critically appraise the firm’s direction, strategy, and
business approaches.
• Evaluate the caliber of senior executives’ strategic
leadership skills.
• Institute a compensation plan that rewards top
executives for actions and results that serve
stakeholder interests—especially shareholders.
 Achieving Effective Corporate Governance

A strong, independent board of directors:

• Is well informed about the firm’s performance.
• Guides and judges the CEO and other executives.
• Can curb management actions the board believes are
inappropriate or unduly risky.
• Can certify to shareholders that the CEO is doing what
the board expects.
• Provides insight and advice to top management.
• Is intensely involved in debating the pros and cons of
key strategic decisions and actions.