1. Chapter 1: What is Strategy and Why is it Important?
Screen graphics created by:
Jana F. Kuzmicki, Ph.D.
Troy University 1

2. “Strategy means making clear-cut choices about how to compete.”
Jack Welch
Former CEO, General Electric

3. “Without a strategy the organization is like a ship without a rudder.”
Joel Ross and Michael Kami 3

4. Chapter Learning Objectives
Understand the role of business strategies in moving a company in the intended direction, growing its business, and improving its financial and market performance.
Develop an awareness of the four most reliable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.
Learn that business strategies evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy.
Understand why a company’s strategy must underpinned by a business model that produces revenues sufficient to cover costs and earn a profit.
Gain awareness of the three tests that distinguish a winning strategy from a so-so or flawed strategy.
Learn why good strategy and good strategy execution are the most trustworthy signs of good management. 4

5. Chapter Roadmap What Do We Mean by “Strategy?”
Strategy and the Quest for Competitive Advantage
Identifying a Company’s Strategy
Why a Company’s Strategy Evolves Over Time
A Company’s Strategy Is Partly Proactive and Partly Reactive
Strategy and Ethics: Passing the Test of Moral Scrutiny
The Relationship Between a Company’s Strategy and Its Business Model
What Makes a Strategy a Winner?
Why Are Crafting and Executing Strategy Important? 5

6. Thinking Strategically: The Three Big Strategic Questions
1. What’s the company’s present situation?
2. Where does the company need to go from here?
Business(es) to be in and market positions to stake out
Buyer needs and groups to serve
Direction to head
3. How should it get there?
A company’s answer to “how will we get there?” is its strategy 6

7. What Do We Mean By “Strategy?”
Consists of competitive moves and business approaches used by managers to run the company
Management’s “action plan” to
Grow the business
Attract and please customers
Compete successfully
Conduct operations
Achieve the targeted levels of organizational performance 7

8. The Hows That Define a Firm's Strategy
How to grow the business
How to please customers
How to outcompete rivals
How to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on)
How to respond to changing market conditions
How to achieve targeted levels of performance
Strategy is HOW to . . . 8

9. Choosing the “Hows” of Strategy
Strategic choices about “how” are based on
Trial-and-error organizational learning about what has worked and what has not worked
Management’s appetite for taking risks
Managerial analysis and strategic thinking about how best to proceed, given market conditions and a company’s circumstances
In choosing a strategy, management is in effect 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 company in the intended direction, strengthen its market position and competitiveness, and boost performance.” 9

10. Key Elements of a Successful Strategy
Developing a successful strategy hinges on making competitive moves aimed at
Appealing to buyers in ways to set the company apart from rivals and
Carving out its own market position
Involves developing a distinctive “aha” element to
Attract customers and
Produce a competitive edge
Copying competitive moves of other successful companies rarely works! 10

11. Starbucks’ Strategy: The Key Elements
Expand number of Starbucks stores domestically by blanketing metropolitan areas, then adding stores on the city’s perimeter
Make Starbucks a global brand by opening stores in an increasing number of foreign locations
View each store as a billboard for the company and as a contributor to building the company’s brand and image
Broaden in-store products to include coffee-flavored ice cream, teas, fresh pastries, music CDs, and coffee accessories
Fully exploit the growing power of the Starbucks’ name and brand image with out-of-store sales
Display corporate responsibility and environmental sustainability
Control costs of opening new stores
Promote customer-friendly service and enhance store ambience by making Starbucks a great place to work 11

12. For Discussion: Your Opinion
From your perspective as a consumer, does Starbucks’ strategy (described in Illustration Capsule 1.1) seem to be well-matched to industry and competitive conditions?
Does the strategy seem to be keyed to a cost advantage, differentiating features, serving the unique needs of a niche, or developing resource strengths and competitive capabilities rivals can’t imitate or trump (or a mixture of these)?
What is there about Starbucks’ strategy that can lead to sustainable competitive advantage?
Starbucks’ strategy appears to be well-matched to its industry and competitive conditions. Since 2000, the company’s sales had grown by more than 20% annually to reach $9.4 billion in Net earnings had increased from $95 million in 2000 to $672 million in However, profit margins are not provided in the Illustration Capsule; in the final analysis, a company’s success must be evaluated based on its profitability.
Starbucks’ strategy appears to be based on a mixture of the following: an emphasis on differentiating features and resource strengths and competitive capabilities, i.e. a differentiation strategy. It is the world’s leading specialty coffee retailer, offering a variety of unique, coffee-based drinks in 11,000 locations in the U.S. and approximately 4,500 stores located in 43 countries outside the U.S. In addition, its in-store sales included coffee beans, coffee-flavored products, pastries, and coffee accessories. A key aspect of Starbucks’ strategy was to fully exploit the growing power of the Starbucks name and brand image with out-of-store sales. Examples of such out-of-store sales included the sale of ground coffee and coffee beans in U.S. grocery stores. Starbucks also sold Frappuccino in U.S. grocery and convenience stores through a partnership with PepsiCo and sold coffee flavored ice creams in grocery stores through a partnership with Dreyer’s Grand Ice Cream. There are several other key aspects of Starbucks’ differentiation strategy. First, the company viewed each store as a contributor to building the company’s brand and image. Each detail was scrutinized to enhance the mood and ambience of the store, to make sure everything signaled best-of class and reflected the personality of the community and the neighborhood. The thesis was “Everything matters.” Next, Starbucks emphasized customer-friendly service and store ambience. It wanted Starbucks to be a great place to work. CEO Howard Schultz’s thesis was that high employee morale would spill over to inject energy, positive vibes, and a feel-good atmosphere into the operations of its stores, thereby making the Starbucks experience more pleasing to patrons.
While its specialty coffee products are a key factor in obtaining a competitive advantage, a key to sustaining a competitive advantage will be based on providing exceptional customer service to support its sales. For example, the company went to great lengths to make sure the store fixtures, the merchandise displays, the colors, the artwork, the banners, the music, and the aromas all blended to create a consistent, inviting, stimulating environment that evoked the romance of coffee, that signaled the company’s passion for coffee, and that rewarded customers with ceremony, stories, and surprise. While Starbucks strategy was largely on target, Schultz announced that Starbucks would slow the pace of store expansion in the U.S. and close 600 of its U.S. stores that were underperforming; over 70 percent of the stores scheduled for closing had been opened since 2006 and were in areas where Starbucks already had a number of other stores nearby. The basic reason why so many new Starbucks stores had failed to reach the expected sales and profit levels had to do with putting stores so close together that they cannibalized each others sales. 12

13. Strategy and the Quest for Competitive Advantage
The heart and soul of any strategy are actions a company makes to
Improve its financial performance,
Strengthen its competitive position, and
Gain a competitive advantage over rivals
A creative, distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a company’s most reliable ticket to above average profitability
Operating with a competitive advantage is more profitable than operating without one
Operating with a competitive disadvantage nearly always results in below-average profitability 13

14. A Powerful Strategy Leads to Sustainable Competitive Advantage
A company achieves sustainable competitive advantage when
An attractive number of buyers prefer its products/services over those of rivals and
The basis for this preference is durable
Its nice when a strategy produces
A temporary competitive edge but
A sustainable edge over rivals greatly enhances a company’s prospects for above-average profitability
What separates a powerful strategy from an ordinary strategy is management’s ability to forge a series of moves, both in the marketplace and internally, that
produces sustainable competitive advantage! 14

15. Strategic Approaches to Building Sustainable Competitive Advantage
Be the industry’s low-cost provider
Achieve a cost-based competitive advantage
Incorporate differentiating features
Superior product/service keyed to higher quality, better performance, wider selection, value-added services, or some other attribute
Focus on a narrow market niche
Win a competitive edge by doing a better job than rivals of serving the needs and preferences of buyers in the niche
Develop expertise and resource strengths not easily imitated or matched by rivals
Achieve a capabilities-based competitive advantage 15

16. Competitive Advantage Examples
Strive to be industry’s low-cost provider
Wal-Mart
Southwest Airlines
Outcompete rivals on a key differentiating feature
Johnson & Johnson – Reliability in baby products
Harley-Davidson – King-of-the-road styling
Rolex – Top-of-the-line prestige
BMW– Engineering design and performance
Amazon.com – Wide selection and convenience 16

17. Competitive Advantage Examples (con’t)
Focus on a narrow market niche
eBay – Online auctions
Best Buy – Home electronics
McAfee – Virus protection
Starbucks – Premium coffees and coffee drinks
The Weather Channel – Info about the weather
Develop expertise, resource strengths, and capabilities not easily imitated by rivals
Walt Disney – Theme park management and family entertainment
Dell Computer – Build-to-order manufacturing capabilities
Ritz-Carlton – Personalized customer service 17

18. Figure 1.1: Identifying a Company’s Strategy
1-18

19. Test Your Knowledge
A company’s strategy and its quest for competitive advantage are tightly related because
A. a company’s strategy determines whether it will have lower or higher costs than rivals and thus be at a competitive advantage or disadvantage.
B. competitive advantage is essential to having a profitable business model.
C. choosing a competitive advantage to pursue also helps a company choose which business model is most appropriate.
D. competitive advantage enables a company to achieve its strategic objectives.
E. a strategy that leads to sustainable competitive advantage is a company’s most reliable means of achieving above-average profitability and financial performance.
Answer: E 19

20. Why Do Strategies Evolve?
A company’s strategy is a work in progress
Changes may be necessary to react to
Financial crisis
Fresh moves of competitors
Evolving customer preferences
Technological breakthroughs
Emerging market opportunities
Changing political or economic climate
New ideas to improve strategy 20

21. Figure 1.2: A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments
1-21

22. Linking Strategy With Ethics
Ethical and moral standards go beyond
Prohibitions of law and language of “thou shalt not”
to issues of
Duty and “right” vs. “wrong”
Ethical and moral standards address “What is the right thing to do?”
Two criteria of an ethical strategy
Does not entail actions and behaviors that cross the line from “should do” to “should not do” (because such actions are unsavory, shady, unconscionable, injurious to others, or harmful to the environment)
Allows management to fulfill its ethical duties to all stakeholders 22

23. A Firm’s Ethical Responsibilities to Its Stakeholders
Owners/shareholders – Rightfully expect some form of return on their investment
Employees – Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise
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 and be treated fairly
Community – Rightfully expect businesses to be good citizens in their community
1-23 23

24. Role of Senior Executives: Linking Strategy with Ethics
Forbid pursuit of ethically questionable business opportunities
Insist all aspects of company strategy reflect high ethical standards
Make it clear that all employees are expected to act with integrity
Install organizational checks and balances to
Monitor behavior
Enforce ethical codes of conduct
Provide guidance to employees in gray areas
Display genuine commitment to conduct business activities ethically 24

25. Test Your Knowledge A company's strategy can be considered “ethical”
A. if all of its different actions and elements are legal and in compliance with governmental rules and regulations.
B. so long as its actions and behaviors can pass the test of “moral scrutiny” and are aboveboard in the sense of not being shady or unconscionable, injurious to others, or unnecessarily harmful to the environment.
C. only if all elements of the strategy are in accord with what is generally considered as being in the overall best interests of society at large.
D. so long as religious authorities and noted ethics experts find nothing “wrong” in the company’s actions.
E. if it is in compliance with the company’s code of ethics and has been approved by the company’s chief ethics officer.
Answer: B 25

26. What Is a Business Model?
A business model addresses “How do we make money in this business?”
Is the company’s 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 has good potential to deliver acceptable profitability? 26

27. Relationship Between Strategy and Business Model
Deals with a company’s competitive initiatives and business approaches
Business Model Concerns whether revenues and costs flowing from the strategy demonstrate a business can be profitable and viable
Strategy
Business
Model
1-27 27

28. 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 to achieve a 90% or more market share
Most costs in developing software are fixed; variable costs are small; once break-even volume is reached, revenues from additional sales are almost pure profit
Provide modest level of technical support to users at no cost
Rejuvenate revenues by periodically introducing next-generation software with features inducing PC users to upgrade their operating systems
1-28 28

29. Red Hat’s Business Model
Rely on collaborative efforts of volunteer programmers to create the software
Collect and test enhancements and new applications submitted by volunteer programmers for evaluation and inclusion in new releases of Linux
Market upgraded and tested family of Red Hat products to large companies, charging a subscription fee that includes 24/7 support within 1 hour in 7 languages
Make source code open and available to all users
Capitalize on specialized expertise required to use Linux by providing fee-based training, consulting, software customization, and client-directed engineering to Linux users
1-29 29

30. Test Your Knowledge
The nitty-gritty issue surrounding a company’s business model is whether
A. the strategy is capable of producing sustainable competitive advantage.
B. it matches the company’s external and internal situation.
C. the chosen strategy makes good business sense from a money-making perspective.
D. the company’s strategy and strategic moves are mostly proactive.
E. the company’s strategy stands a really good chance of hitting a home-run in the marketplace.
Answer: C 30

31. For Discussion: Your Opinion
Who has the best business model – Microsoft or Red Hat?
Based on the results, Microsoft’s business model (based on selling proprietary code software and giving service away free) is a proven money-maker, generating billions in profits annually. However, the jury is still out on Red Hat’s business model of selling subscriptions to open-source software to large corporations and deriving substantial revenues from the sales of technical support, training, consulting, software customization, and engineering to generate revenues sufficient to cover costs and yield a profit. Red Hat’s fiscal 2007 revenues of $400 million and net income of $60 million are quite meager in comparison to Microsoft’s. 31

32. Tests of a Winning Strategy
GOODNESS OF FIT TEST
How well does the strategy fit the company’s external and internal situation?
COMPETITIVE ADVANTAGE TEST
Is the strategy helping the company achieve a sustainable competitive advantage?
PERFORMANCE TEST
Is the strategy resulting in better company performance? 32

33. Other Criteria for Judging Merits of a Strategy
Degree of risk the strategy poses as compared to alternative strategies
Degree to which the strategy is flexible and adaptable to changing circumstances
While these criteria are relevant, they seldom override the importance of the three tests of a winning strategy! 33

34. Why Should Crafting and Executing Strategy Be Top-Priority Management Tasks?
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

35. Good Strategy + Good Strategy Execution = Good Management
Crafting and executing strategy are core management functions
Among all things managers do, nothing affects a company’s ultimate success or failure more fundamentally than how well its management team
Charts a 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! 35