Chapter 1: What Is Strategy and Why Is It Important?

What Is Strategy andWhy Is It Important?1ChapterScreen graphics created by:Jana F. Kuzmicki, Ph.D.Troy State University-Florida and Western Region Chapter RoadmapWhat Is Strategy?Identifying a Company’s StrategyStrategy and the Quest for Competitive AdvantageStrategy Is Partly Proactive and Partly ReactiveStrategy and Ethics: Passing the Test of Moral ScrutinyThe Relationship Between a Company’s Strategy and Its Business ModelWhat Makes a Strategy a Winner?Why Are Crafting and Executing Strategy Important?Thinking Strategically:The Three Big Strategic Questions1. Where are we now?2. Where do we want to go?Business(es) to be in and market positions to stake outBuyer needs and groups to serveOutcomes to achieve3. How will we get there?A company’s answer to “how will we get there?” is its strategyWhat Is Strategy?Consists of the combination of competitive moves and business approaches used by managers to run the companyManagement’s “game plan” toAttract and please customersStake out a market positionCompete successfullyGrow the businessAchieve targeted objectivesHow to please customersHow to respond to changing market conditionsHow to outcompete rivalsHow to grow the businessHow to manage each functional piece of the business and develop needed organizational capabilitiesHow to achieve strategic and financial objectivesStrategy is HOW to . . .The Hows ThatDefine a Firm's Strategy Fig. 1.1: Identifying a Company’s StrategyStriving forCompetitive AdvantageTo achieve sustainable competitive advantage, a company’s strategy usually must be aimed at eitherProviding a distinctive product or service orDeveloping competitive capabilities rivals can not matchAchieving a sustainable competitive advantage greatly enhances a company’s prospects forWinning in the marketplace andRealizing above-average profitsWhat 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!Strategic Approaches to Building Competitive AdvantageStrive to be the industry’s low-cost providerOutcompete rivals on a key differentiating featureFocus on a narrow market niche, doing a better job than rivals of serving the unique needs of niche buyersDevelop expertise, resource strengths, and capabilities not easily imitated by rivals Fig. 1.2: A Company’s Strategy Is Partly Proactive and Partly ReactiveA company’s strategy is a work in progressChanges may be necessary to react toFresh moves of competitorsEvolving customer preferencesTechnological breakthroughsShifting market conditionsCrisis situationsWhy Do Strategies Evolve?Ethical and moral standards go beyondProhibitions of law and the language of “thou shalt not” to issues ofDuty 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 “can do” to “should not do’ and “unsavory” or “shady” andAllows management to fulfill its ethical duties to all stakeholdersLinking Strategy With EthicsA Firm’s Ethical Responsibilitiesto Its StakeholdersOwners/shareholders – Rightfully expect some form of return on their investmentEmployees - Rightfully expect to be treated with dignity and respect for devoting their energies to the enterpriseCustomers - Rightfully expect a seller to provide them with a reliable, safe product or serviceSuppliers - Rightfully expect to have an equitable relationship with firms they supply and be treated fairlyCommunity - Rightfully expect businesses to be good citizens in their communityWhat Is a Business Model? A business model addresses “How do we make money in this business?”Is the strategy capable of deliveringgood bottom-line results?Do the revenue-cost-profit economicsof the strategy make good business sense?Look at revenue streams the strategy is expected to produceLook at associated cost structure and potential profit marginsDo resulting earnings streams and ROI indicate the strategy makes sense and the company has a viable business model for making money?Strategy - Deals with a company’s competitive initiatives and business approachesBusiness Model -Concerns whether revenues and costs flowing from the strategy demonstrate the business can be amply profitable and viableStrategyBusinessModelRelationship Between Strategy and Business ModelTests of a Winning StrategyGOODNESS OF FIT TESTHow well does strategy fitthe firm’s situation?COMPETITIVE ADVANTAGE TESTDoes strategy lead to sustainablecompetitive advantage?PERFORMANCE TESTDoes strategy boost firm performance?Other Criteria for Judging the Merits of a StrategyInternal consistency and unity among all pieces of the strategyDegree of risk the strategy poses as compared to alternative strategiesDegree to which the strategy is flexible and adaptable to changing circumstancesWhile these criteria are relevant, they seldom override the importance of the three tests of a winning strategy!Good Strategy + Good Strategy Execution = Good ManagementCrafting 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 teamCharts the company’s direction,Develops competitively effective strategic moves and business approaches, andPursues what needs to be done internally to produce good day-in/day-out strategy executionExcellent execution of an excellent strategy is the best test of managerial excellence -- and the most reliable recipe for winning in the marketplace!