1. STRATEGY CHAPTER 1 What Is Strategy and Why Is It Important?
Core Concepts and Analytical Approaches
Arthur A. Thompson The University of Alabama
4th Edition ( )
CHAPTER 1
What Is Strategy and Why Is It Important?
An e-book published and distributed by McGraw Hill Education, Burr Ridge, Illinois
Copyright © 2016 by Arthur A. Thompson, Glo-Bus Software, Inc. All rights reserved. Not for distribution.

2. “Strategy means making clear-cut choices about how to compete.”
Jack Welch
Former CEO General Electric
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3. “. Without a strategy the organization is like a ship without a rudder
Joel Ross and Michael Kami
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4. “If your firm’s strategy can be applied to any other firm, you don’t have a very good one.”
David J. Collis and Michael G. Rukstad
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5. Learning Objectives
Understand the concept of “strategy,” how to identify a firm’s strategy, and the tight connection between its strategy and its quest for sustainable competitive advantage.
Learn why a firm’s strategy evolves over time and why its strategy is partly proactive and partly reactive.
Understand the concept of a “business model,” how a firm’s business model connects to its strategy, and why its business model is important.
Learn the three tests that distinguish a winning strategy from a weak or flawed strategy and why good strategy and good strategy execution are the most trustworthy signs of good management.
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6. Chapter 1 Roadmap What Do We Mean by “Strategy”
Strategy and the Quest for Competitive Advantage
Identifying a Firm’s Strategy
Why a Firm’s Strategy Evolves Over Time
A Firm’s Strategy Is Partly Proactive and Partly Reactive
Strategy and Ethics: Passing the Test of Moral Scrutiny
The Relationship Between a Firm’s Strategy and Its Business Model
What Makes a Strategy a Winner
Why Crafting and Executing Strategy Are Important Tasks
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7. Three Strategic Questions All Firms Must Answer
What is the firm’s present situation?
What direction to head and what performance targets to set?
How to run the firm in ways that produce good results?
Industry conditions
Competitive pressures
Market standing vis-à-vis rivals
Competitive strengths and weaknesses
New buyer needs to satisfy
Growth opportunities to pursue
Markets to deemphasize or abandon
How to measure success
Strategy for competing successfully
How to attract customers
Deciding what market position to stake out
Actions to achieve performance targets
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8. What Do We Mean by “Strategy”?
A company’s strategy is defined by the specific market positioning, competitive moves, and business approaches that form management’s answer to “What’s our plan for running the company and producing good results?”
When company managers craft and embrace a strategy, they are committing to undertake one set of actions rather than another in endeavoring to make the company successful in the marketplace and achieve good business performance.
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9. Core Concept
A firm’s strategy consists of the competitive moves and business approaches that managers employ to attract and please customers, compete successfully, capitalize on opportunities to grow the business, respond to changing market conditions, conduct operations, and achieve the targeted financial and market performance.
A strategy represents managerial commitment to undertake one set of actions rather than another.
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10. The Hows That Define a Firm’s Strategy
A coherent combination of actions and approaches about how to run the company
How to respond to changing economic and market conditions
How to manage the functional pieces of the business
How to achieve the firm’s performance targets
How to attract, please, and retain customers
How to compete against rivals
How to capitalize on growth opportunities
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11. Choosing the Strategy
In arriving at choices among all the “hows” and combining them into a coherent strategy for the company to pursue, management is saying:
“Among all the many different ways of competing we could have chosen, we have decided to employ this combination of competitive and operating approaches to move the firm in the intended direction, strengthen its market position and competitiveness, and boost performance.”
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12. Core Concept
There is no one roadmap or prescription for running a firm in a successful manner. Many different avenues exist for competing successfully, staking out a market position, and operating the different pieces of a business.
But whichever strategic approach is chosen, it needs to feature a distinctive product offering that buyers believe delivers superior value and that offers potential for winning a competitive advantage over rivals.
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13. Why Bother with Crafting a Strategy?
Every company’s management team needs a clear, specific, and deliberate action plan that:
Results in a product offering that wins buyer applause
Helps strengthen the firm’s competitiveness and ability to compete successfully vis-à-vis rivals position
Is well-matched to ongoing shifts in market conditions
Lessens the likelihood different managers will inadvertently or unknowingly make decisions or pursue strategic actions that are conflicting or inconsistent or uncoordinated
Improves the firm’s financial performance
Helps produce a competitive edge over rivals
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14. The Key to Crafting a “Good” Strategy
Crafting a good strategy entails deliberately choosing to compete differently from rivals. This specifically means:
Appealing to buyers in ways that set a company’s product offering apart from rivals and that delivers what buyers view as “superior value”
May involve doing what rivals don’t do or can’t do
Staking out a market position that is not crowded with other strong competitors
Copycat strategies rarely work!!!!
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15. The Importance of Competing Differently
Really successful strategies contain a distinctive “aha” element that
Attracts buyer attention because the company’s product/service is appealing different from the offerings of rival companies
Delivers what buyers perceive as superior value
Converts buyers into loyal customers
Gives the company added competitive power in the marketplace
Moreover, the “aha element” acts to boost profitability and help gain a competitive edge over rivals!!!
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16. Why Competitive Advantage Matters
A firm will earn significantly higher profits when it has a competitive advantage than when competing with no advantage or at a competitive disadvantage.
Without a strategy that is capable of producing a competitive edge over rivals, a firm is at risk of being outcompeted by stronger rivals and/or locked into mediocre financial performance.
Consequently, the quest for a competitive edge over rivals should always rank center stage in a crafting a strategy!
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17. Strategy and the Quest for Sustainable Competitive Advantage
A strategy that produces a competitive edge over rivals merits applause.
But a strategy that leads to a lasting or durable or sustainable competitive advantage is far superior (and more profitable!) than one that turns out to be short-lived because it is readily offset or overcome by competitors!
This is why a company’s strategy needs to include elements that cannot be quickly or inexpensively copied or overcome by rivals.
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18. Core Concept
A firm achieves competitive advantage when an attractive number of buyers are drawn to purchase its products or services rather than those of competitors. A firm achieves sustainable competitive advantage when the basis for buyer preferences for its product/service offering relative to the offerings of its rivals is durable, despite competitors’ best efforts to nullify or overcome the appeal of its offering.
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19. Strategic Approaches to Building Sustainable Competitive Advantage
Striving to become the industry’s low-cost provider (achieving greater cost efficiencies than rivals).
Outcompeting rivals based on differentiating features with buyer appeal (offering a product/service that buyers believe delivers superior value).
Offering more value for the money (upscale product attributes at an appealingly low price).
Doing a better job than rivals of serving the unique needs and tastes of buyers in a niche market.
Developing resource strengths and competitive capabilities that rivals cannot easily overcome with capabilities of their own.
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20. Strategic Approaches That Can Produce a Competitive Edge
Be more cost efficient than rivals
Dependable Ways to Win a Competitive Edge over Rivals
Offer buyers unique differentiating features they believe are valuable
Do a better job than rivals of serving the special needs and tastes of buyers in a specific market niche
Offer buyers upscale features at an appealingly low price
Developing resource strengths and competitive capabilities rivals cannot match
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21. Figure 1.1 Identifying a Company’s Strategy—What to Look For
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22. Why a Company’s Strategy Evolves over Time
It is usually advisable, if not necessary, for a firm to modify its strategy in response to:
Changing market conditions
Advancing technology
Fresh moves of competitors
Shifting buyer needs and preferences
Emerging market opportunities
New ideas for improving the strategy
Mounting evidence that the current strategy is not working well
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23. Core Concept
Changing circumstances and ongoing management efforts to improve the strategy cause a company’s strategy to evolve over time—a condition that makes the task of crafting a strategy a work in progress, not a one-time event.
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24. A Firm’s Strategy Is Partly Proactive and Partly Reactive
The typical firm’s strategy is a blend of:
Current strategy elements that seem to be working well enough to be continued
New proactive actions that managers believe have good potential for improving the strategy and boosting the firm’s performance
As-needed strategic reactions developed in response to unanticipated developments and fresh market conditions
A firm’s strategy is always temporary and on trial, pending management’s decision to make proactive or reactive adjustments aimed at improving the strategy.

25. Figure 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments
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26. Strategy and Ethics: Passing the Test of Moral Scrutiny
A strategy is ethical only if it passes the test of moral scrutiny. To pass moral scrutiny, a strategy must
Not entail actions and behaviors that cross the line from “should do” to “should not do” (actions that are unsavory, shady, unconscionable, injurious to others, or harmful to the environment)
Allow management to fulfill its ethical duties in a manner that takes into account the legitimate interests of all stakeholders— that is to say, a firm’s strategic actions must not disenfranchise, discriminate against, or unfairly treat employees, suppliers, or shareholders nor should it adversely impact local communities in which the company operates or the public at large.
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27. Core Concept
A strategy cannot be considered ethical just because it involves actions that are legal. To meet the standard of being ethical, a strategy must entail actions that can pass moral scrutiny in the sense of not being morally objectionable, “shady,” dishonorable, unconscionable, injurious to other people, injurious to the well-being of local communities or the general public, or unnecessarily harmful to the environment.
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28. Strategy—Distinguishing Between What Is Legal and What Is Ethical
Just because a strategic action or business approach is legal does not necessarily mean it is ethical or morally acceptable.
Ethical standards are about
“Right” versus “wrong”
“Moral” versus” immoral”
Not crossing the line from “should do” to “should not do”
“Being within the bounds of acceptability” versus “outside the bounds of acceptability”
What business behaviors can you identify that are legal but not ethical or morally acceptable?
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29. The Relationship Between a Firm’s Strategy And Its Business Model
A Firm’s Business Model
Deals with the firm’s competitive initiatives and business approaches
Concerns whether the revenues and costs flowing from the strategy demonstrate the firm can be profitable and viable
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30. Core Concept
A firm’s business model sets forth how its strategy and operating approaches will create value for customers while also generating ample revenues to cover costs and realize a profit. Absent the ability to earn good profits, a firm’s strategy and operating blueprint are flawed, its business model is not viable, and its ability to survive is suspect.
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31. The Two Crucial Elements of a Firm’s Business Model
Its Customer Value Proposition
How the firm will satisfy customer needs and requirements at a price customers will consider to be a good value.
The greater the value delivered to customers and the lower the price, the more attractive the value proposition is to customers.
Its Profit Proposition (or “Profit Formula”)
How the firm will create and deliver customer value in a cost- efficient manner and at a price that produces enough revenues to cover costs and enable attractive profits.
The lower a firm’s costs are in relation to the revenues generated, the more appealing is its profit proposition or “profit formula.”
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32. Testing the “Validity” of a Company’s Profit Proposition
Can the company can create and deliver the intended customer value in a cost-efficient manner?
Will the company be able to charge a profitable price for the value provided to customers?
The revenues that can be generated are a function of the volume of customers attracted at the price being charged.
The costs of the company’s business model approach are dependent on the prices/costs of the resources and business processes it utilizes and the cost efficiency of its operating systems.
The lower a firm’s costs are in relation to its revenues, the greater its profit potential and the greater the appeal and attractiveness of its business.
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33. Proven vs. Unproven Business Models
Companies that have been in business for a while and are making sufficiently appealing profits have a “proven” business model.
A track record of good bottom-line profitability and return on investment provides hard evidence that a company’s business model approach is working and has promising long-term viability
However, new market conditions can cause a company’s previously profitable business model to become unprofitable
Firms in a start-up mode or that are losing money have “questionable” or “unproven” business models—it remains to be seen how good their business model is.
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34. The Business Model of Network TV and Radio Broadcasters
The Customer Value Proposition
Provide audiences with free and appealing programming content.
The Profit Proposition
Charge advertising fees to sponsors based on an audience size that more than covers the full costs of delivering the program content to audiences.
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35. Gillette’s Business Model in Razor Blades
The Customer Value Proposition
To provide a close comfortable shave using a razor (a one-time purchase) and razor blades (purchased repeatedly).
The Profit Proposition
To sell a “master product”—the razor—at an attractively low price and then make money on repeat purchases of inexpensively- produced razor blades priced to yield high profit margins.
Printer manufacturers pursue much the same business model as Gillette—selling printers at low (virtually breakeven) prices and making large profit margins on repeat purchases of printer supplies, especially ink cartridges.
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36. The Business Model of Newspapers and Magazines
The Customer Value Proposition
Delivering valuable or interesting information and entertainment to a diversity readers.
The Profit Proposition
Securing sufficient revenues from advertising fees and reader subscriptions to more than cover the costs of producing and delivering their products to readers.
Is this business model in danger of becoming obsolete and failing?
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37. What Makes a Strategy a Winner?
Testing the merits of one strategy versus another to distinguish a winning strategy from a flawed or weak strategy requires asking:
How well does the strategy fit the internal and external aspects of the company’s overall situation?
Is the strategy helping the company achieve a sustainable competitive advantage?
Is the strategy producing good company performance?
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38. The Three Tests of a Winning Strategy
The Goodness of Fit Test
Is the strategy well-matched to the firm’s internal and external situation?
The Competitive Advantage Test
Is the strategy helping the company achieve a sustainable competitive advantage?
The Performance Test
Is the strategy producing good company performance?
To qualify as a winning strategy, a strategy must pass all three tests
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39. Core Concept
For a company’s strategy to qualify as a “winning strategy,” there must be credible evidence that it is
Well-matched to the firm’s external and internal situation
Helping build a sustainable competitive advantage
Improving a company’s performance (which includes gains in profitability and financial strength and gains in the company’s competitive strength and market standing) .
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40. Why Crafting and Executing Strategy Are Important Tasks
Managers need to proactively shape how their firm will conduct business.
A clear and reasoned strategy prescribes the conduct of the business, its path to competitive advantage, and the actions it will take to please customers and improve its financial performance.
A firm’s success or failure relies fundamentally on how well its management team:
Charts its direction
Develops competitively effective strategic moves and business approaches
Pursues pursues what needs to be done internally to produce good day-in/day-out strategy execution and operating excellence
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41. Core Concept
How well a firm performs and the degree of market success it achieves are directly attributable to the caliber of its strategy and the proficiency with which the strategy is executed. Excellent execution of an excellent strategy is the best test of managerial excellence.
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42. Good Strategy + Good Strategy Execution = Good Management
The rationale for why good strategy and good strategy execution are the most telling and trustworthy signs of good management is compelling:
The better conceived a company’s strategy and the more competently it is executed, the more likely the company will be a standout performer in the marketplace.
A company that lacks clear-cut direction, has vague or undemanding performance targets, has a muddled or flawed strategy, or can’t seem to execute its strategy competently is a company whose financial performance is probably suffering, whose business is at long-term risk, and whose management is lacking.
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43. Welcome and best wishes for your success!
The Road Ahead
Every business student and every aspiring manager needs to know the answer to the following question:
What must managers do, and do well, to give a firm its best shot for being attractively profitable and successful in the marketplace?
The answer that emerges—and becomes the biggest lesson of this course—is that doing a good job of managing requires good strategic thinking, good strategy-making, and good strategy execution.
Welcome and best wishes for your success!
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44. The Road Ahead (cont’d)
In the coming chapters, we will explore strategic thinking, the core concepts and tools of strategic analysis, and the processes of crafting and executing strategy.
Then, in the strategy simulation exercise you will manage a firm in competition with firms managed by classmates, and have an excellent learn-by-doing opportunity to:
Apply what you have read about in the chapters.
Gain experience in crafting and executing strategy for the company you are assigned to manage and being held accountable for how well your company performs.
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45. What You Can Expect to Learn
Lesson 1:
First-rate capabilities in successfully crafting and executing strategy are basic skills every manager must possess.
Lesson 2:
Managers don’t deserve applause for coming up with a weak strategy that results in weak (or worse) financial performance and a weak (or worse) industry standing.
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46. “Commerce is a game of skill which many people play, but which few play well.”
Ralph Waldo Emerson, poet and essayist
If the understanding you gain from the chapters, the experience of running your simulation company, and other course-related assignments help you to become a savvy competitor and better equip you to succeed in business, then your time and energy spent in this course will prove worthwhile.
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