1. Arthur A. Thompson The University of Alabama
STRATEGY
Core Concepts and Analytical Approaches
Strategy – Core Concepts and Analytic Approaches 5e Authur A. Thompson, The University of Alabama CHAPTER 1 What Is Strategy and Why Is It Important?
Arthur A. Thompson The University of Alabama
5th 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 © 2018 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 “business model” concept, 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 of a Firm’s Strategy to Its Business Model
What Makes a Strategy a Winner
Why Crafting and Executing Strategy Are Important Tasks
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7. 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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8. 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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9. 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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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. Thinking Strategically
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. A creative, distinctive strategy that sets a firm apart from rivals and delivers superior value to customers is its most reliable ticket for winning a competitive advantage over rivals.
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13. The Key to Crafting a “Good” Strategy
Crafting a good strategy entails deliberately choosing to compete differently from rivals by:
Appealing to buyers in ways that set a firm apart from rivals and that deliver superior value to buyers which requires
Doing what rivals don’t do or can’t do
Staking out a market position that is not crowded with other strong competitors
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14. The Importance of Competing Differently
Successful strategies contain distinctive “aha” elements that
Attract buyer attention with appealing product attributes unlike those of rivals
Deliver a perception of superior value that converts buyers into loyal customers
Gives the company added competitive power in the marketplace
Copycat strategies rarely work!!!
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15. Why Bother with Crafting a Strategy?
A clear, specific, and deliberate action plan:
Avoids ineffective strategic actions and decisions while strengthening the firm’s competitive position
Wins a competitive edge over rivals
Improves the firm’s financial performance
A creative, distinctive strategy:
Helps a firm stand out from its rivals
Attracts buyers despite competitors’ efforts
Is a reliable pathway to above average profitability
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16. Why Competitive Advantage Matters
A firm earns much higher profits with a competitive advantage than without an advantage.
A firm with no advantage risks being outcompeted by stronger rivals and achieving only mediocre financial performance.
The quest for a competitive edge must 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 sustainable long-term competitive advantage is most desirable.
A short-lived nondurable strategy is soon offset or overcome by competitors.
A strategy must include elements that cannot quickly or inexpensively be copied or overcome by rivals.
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18. Strategic Approaches to Building Sustainable Competitive Advantage
Become the low-cost provider by achieving a cost-based competitive advantages over rivals
Offer differentiating features that set the firm’s products apart from rivals
Offer customers more value for the money
Focus on better serving the unique needs and tastes of buyers in a niche market
Develop expertise, resources, and capabilities that are competitively valuable and that rivals cannot easily overcome
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19. Core Concepts
A firm achieves competitive advantage when an attractive number of buyers are drawn to purchase its products or services rather than those of competitors. It achieves sustainable competitive advantage when the basis for buyer preferences for its product offering relative to the offerings of its rivals is durable, despite competitors’ efforts to nullify or overcome the appeal of its offerings.
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20. Figure 1.1 Identifying a Company’s Strategy—What to Look For
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21. Why a Company’s Strategy Evolves over Time
It is 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
Evidence that the current strategy is not working well
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22. 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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23. A Firm’s Strategy Is Partly Proactive and Partly Reactive
A firm’s current strategy is typically a blend of:
Deliberate and proactive management actions to secure a competitive edge and improve the firm’s financial performance
Many of the current proactive strategy elements have usually been previously initiated and are working well enough to be continued, with the remainder being freshly crafted or entirely new
Strategic reactions to unforeseen developments and fresh market conditions—emerge on an as-needed basis
The latest version of a firm’s strategy reflects the disappearance of obsolete or ineffective strategy elements and the current prevailing combination of proactive and reactive elements.
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24. Figure 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments
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25. Strategy, Ethics, and Moral Scrutiny
A strategy is ethical only if it can pass the test of moral scrutiny.
To pass the test of moral scrutiny and qualify as ethical, a company’s actions and behaviors cannot cross the line from “should do” to “should not do”
A company’s strategy definitely crosses into the should not do zone and cannot pass moral scrutiny if it entails actions and behaviors that are deceitful, unfair or harmful to others, disreputable, or unreasonably damaging to the environment.
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26. 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, deceitful, unfair or harmful to others, disreputable, or unreasonably damaging to the environment.
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27. Strategy—Distinguishing Between What Is Legal and What Is Ethical
A legal strategic action or business approach does not 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”
“Within the bounds of acceptability” versus “outside the bounds of acceptability”
Many strategic actions fall in a gray zone and can be deemed ethical or unethical depending on how high one sets the bar for what qualifies as ethical behavior.
What business behaviors can you identify that are legal but not ethical or morally acceptable?
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28. 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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29. 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 in jeopardy.
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30. 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.
From a customer perspective, the greater the value delivered and the lower the price, the more attractive the firm’s value proposition is to customers.
From a company perspective, however, the greater the value delivered and the higher the price that can be charged, the bigger the margin for covering the costs associated with its business approach and realizing an attractive profit and return on investment
Its Profit Proposition (or “Profit Formula”)
How the firm intends to generate a revenue stream that covers the costs of delivering attractive value to customers.
How it will control the costs of the value being delivered.
How the proposition will yield attractive profits for shareholders.
The lower a firm’s costs are in relation to revenues, the greater its profit potential and the more attractive its profit proposition.
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31. Testing a Firm’s Profit Proposition
Can the firm can create and deliver the intended customer value in a cost-efficient manner?
Can a profitable price be charged for the value it provides to customers?
Revenues generated are a function of the volume of customers attracted at the price being charged
The costs of the firm’s business model approach depend on the resources and business processes utilized and the cost efficiency of its operating systems
Lower costs in relation to revenues increase the profit potential and the attractiveness of the firm’s profit proposition
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32. Proven vs. Unproven Business Models
Companies that have been in business for a while and are making at least reasonably attractive profits have a “proven” business model— because there is hard revenue-cost evidence that their strategies and approaches to operating can yield good profits.
Start-up firms and unprofitable firms have “questionable” or “unproven” business models because their strategies and operating approaches have yet to produce good bottom-line results, thus raising doubts about their blueprint for making money and their viability as business enterprises
Companies that operate in uncertain, volatile market environments often have business models that quickly lose their effectiveness; for such companies to survive, they have to be adept at spotting the signs of impending crisis early and then swiftly reinvent their business model and strategy
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33. 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 program sponsors based on an audience size that exceed the full costs of providing program content.
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34. 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 (repeat purchases).
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—selling printers at low-to-breakeven prices to capture large profit margins on repeat purchases of printer supplies and, especially, ink cartridges.
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35. 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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36. What Makes a Strategy a Winner?
Testing a strategy’s merits versus another to distinguish a winning strategy from a flawed or weak strategy requires asking:
How well does the strategy fit the company’s situation?
Is the strategy helping the company achieve a sustainable competitive advantage?
Is the strategy producing good company performance?
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37. The Three Tests of a Winning Strategy
The Goodness of Fit Test
Is the strategy well-matched to the company’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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38. Core Concept
A winning strategy must be well-suited to the firm’s external and internal situation, help build a sustainable competitive advantage, and improve company performance.
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39. Why Crafting and Executing Strategy Are Important Tasks
There is a compelling need for managers to proactively shape how the company’s business will be conducted.
A clear and reasoned strategy is management’s prescription for doing business, its road map to competitive advantage, and its game plan for pleasing customers and improving financial performance.
High-performing enterprises are nearly always the product of astute, creative, and proactive strategy-making. Companies don’t get to the top of the industry rankings or stay there with flawed strategies, copycat strategies, or with strategies built around timid actions to try and do better
Even the best-conceived strategies will result in performance shortfalls if they are not executed proficiently. Good day-in/day-out strategy execution and operating excellence are essential for a company to perform close to its full potential.
Flawed and/or inept implementation and execution of a company’s strategy are a surefire recipe for underachievement, both financially and in competing against rivals.
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40. Good Strategy + Good Strategy Execution = Good Management
The better conceived and more competently a firm’s strategy is executed, the more likely that the firm will be a standout performer financially in the marketplace.
In contrast, a company that has a muddled or flawed strategy and/or can’t seem to execute its strategy competently is most likely an underperformer and in need of better management.
Weak implementation and execution undermine a strategy’s potential and pave the way for shortfalls in customer satisfaction and company performance.
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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. Good strategy and good strategy execution are the most telling and trustworthy signs of good management.
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42. Welcome and best wishes for your success!
The Road Ahead
Every business student and aspiring manager needs to know the answer to the following question:
What must managers do, and do well, to give a firm its best chance to be attractively profitable and successful in the marketplace?
The answer will become the biggest lesson of this course—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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43. The Road Ahead (continued)
The coming chapters explore strategic thinking, core concepts and tools of strategic analysis, and processes of crafting and executing strategy.
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 and being held accountable for how well your firm performs.
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44. 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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45. “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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