What Is Strategy
and Why Chapter
Is
Title
It Important?
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
“Without a strategy the
organization is like a
ship without a rudder.”
Joel Ross and Michael Kami
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?
3. How should it get there?
– A company’s answer to “how
will we get there?” is its strategy
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 target levels of
organizational performance
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 enterprise 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!
A Powerful Strategy Leads to
Sustainable Competitive Advantage
• A company achieves sustainable competitive advantage
when an attractive number or buyers prefer its
products/services over those of rivals and when the basis for
this preference can be maintained over time
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!
Four “Best” Strategic Approaches to
Building Sustainable Competitive Advantage
•
•
•
•
Being the industry’s low-cost provider
Incorporate differentiating features
Focusing on a narrow market niche
Developing expertise and resource
strengths not easily imitated or matched by
rivals
Competitive Advantage Examples
• Strive to be the 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
Mercedes-Benz – Engineering design and performance
L.L. Bean – Good value
Amazon.com – Wide selection and convenience
Competitive Advantage Examples
(cont)
• Focus on a narrow market niche
– eBay – Online auctions
– Jiffy Lube International – Quick oil changes
– McAfee – Virus protection auctions
– Starbucks – Premium coffees and coffee drinks
– The Weather Channel – Cable TV
• Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
– FedEx – Next-day delivery of small packages
– Walt Disney – Theme park management and family entertainment
– Toyota – Sophisticated production system
– Ritz-Carlton – Personalized customer service
Fig. 1.1: Identifying a Company’s Strategy
Why Do Strategies Evolve?
• A company’s strategy is a work in progress
• Changes may be necessary to react to
– Shifting market conditions
– Technological breakthroughs
– Fresh moves of competitors
– Evolving customer preferences
– Emerging market opportunities
– New ideas to improve strategy
– Crisis situations
Fig. 1.2: A Company’s Strategy Is
Partly Proactive and Partly Reactive
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
What Is a Business Model?
• A business model addresses “How do we
make money in this business?”
• 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
makes sense and the company has a viable business model
for making money?
Relationship Between
Strategy and Business Model
Strategy . . .
Business Model . . .
Deals with a company’s
competitive initiatives and
business approaches
Concerns whether revenues
and costs flowing from the
strategy demonstrate a
business can be amply
profitable and viable
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
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
Your Opinion
Who has the best business model –
Microsoft or Red Hat?
Financial Comparison
Tests of a Winning Strategy
• GOODNESS OF FIT TEST
– How well does strategy fit
the firm’s situation?
• COMPETITIVE ADVANTAGE TEST
– Does strategy lead to sustainable
competitive advantage?
• PERFORMANCE TEST
– Does strategy boost firm performance?
Robin Hood
Prince of Thieves
What is Robin Hood’s Business
Model?