Chapter OneWhat is Strategy and Why is it Important?

Why do we need strategy?

The reasons why firms succeed and fail is perhaps the central question in strategy

Answers the fundamental question of the firmWhere we are now?Where we going?How are we going to get there?

Strategic Management Defined

decisions and actions that determine long-term performance formulation and implementation of plans designed to achieve

objectives unifying theme that gives coherence and direction to

organizational/individual decisions game plan management has for positioning the company in its

chosen market, competing successfully, satisfying customers, and achieving good business performance

integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage

What is a competitive advantage?

Competitive Advantage

When a firm implements a strategy that rivals can’t duplicate, or find it too expensive to do try to imitate

Today’s Competitive Landscape

Global Economy

Knowledge Intensity

InformationTechnology

Technology Change & Diffusion Hypercompetition

•Strategic Flexibility

•Intelligence Management

•Global Perspective

•Speed, Innovation & Integration

New Managerial Mindset

What is Strategy?

Strategy is not doing similar activities better than your rivals – that’s operational effectiveness continual improvement not a sustainable

advantage industry-wide cost reductions do not lead to

increased profitability examples: PCs, automobiles, airlines

What is Strategy?

1) Strategy is performing different activities or performing similar activities in a different way

Strategy is about positioninga) Variety-based positioning

offering a unique choice of goods/services - Chic-fil-a, GameStopb) Needs-based positioning

serving most/all of a particular group of customers’ needs - Babies R Us

c) Access-based positioning serving a set of customers that require unique access – Kinkos,

Movie Gallery, Superette

What is Strategy?

2) Strategy is about choosing a position which requires tradeoffs, choosing what not to do without tradeoffs, all firms would imitate

Tradeoffs arise from inconsistent image/reputation different activities, products, equipment,

employees, skills, systems, machines priorities, internal coordination, and control

What is Strategy?

3) Strategy is about combining activities as advantages come from fit and reinforcing

Operational effectiveness is about excellence in individual activities

Fit/integration increases sustainability by reducing imitability

What is Strategy?

4) The desire to grow is most threatening to an effective strategy Blurs uniqueness Creates compromises Reduces fit Erodes original advantages

So….how can firm’s be profitable?

1) Choose an attractive industry in which to compete - Where we compete? • Corporate level strategy

2) Attain a competitive advantage within an industry - How we compete?• Business level strategy

Two Models of Profitability

I/O Model (Industrial/Organizational Economics Model)

Resource Based Model

I/O ModelEnvironment Drives Strategy & Performance

Three Key Assumptions

Therefore, firms must find an attractive industry or segment within the industry to gain above average profitability

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I/O ModelEnvironment Drives Strategy & Performance

Resource Based ModelFirms’ Resources Drive Strategy & Performance

Three Key Assumptions

Therefore, firms must find an attractive industry or segment within the industry to gain above average profitability

Resource Based ModelFirms’ Resources Drive Strategy & Performance

What is strategic effectiveness?

Strategic Vision vs. Mission

A strategic vision concerns “wherewe are going” or ”what do we want to be.” Markets to be pursued Future product/ market/

customer/ technology focus Kind of company

management is trying to create

The mission statement focuses on its “who we are and what we do” Current product and service

offerings Customer needs being

served Technological

and businesscapabilities

Mission Statements

Boundaries of the current business Fundamental purpose that sets it apart from

other firms of its type Conveys

Who we are, What we do, and Why we are here

Objectives

Turns mission into performance outcomes Organizations produce what is measured Long and Short term

Types of Objectives Required

Outcomes focused

on improving financial

performance

Outcomes focused on improving competitive

vitality and future business position

Financial Objectives Strategic Objectives

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6 Characteristics of a Good Objective

U SMART Understandable Stretching Measurable Agreeable Realistic Timebound

Current financial results are “lagging indicators” reflecting results of past decisions and actions—good profitability now does not translate into stronger capability for delivering better financial results later

However, meeting or beating strategic performance targets signals growing competitiveness & strength in the marketplace, thus developing the capability for better financial performance in the years ahead

Good strategic performance is thus a “leading indicator” of a company’s capability to deliver improved future financial performance

Leading versus Lagging Indicators

Stakeholders

Individual or groups who Affect mission/vision of the firm Are affected by strategic outcomes of the firm Have enforceable claims on the performance of the firm

Capital Market Stakeholders Shareholders and capital suppliers

Product Market Stakeholders Customers, suppliers, communities, unions

Organizational Stakeholders Employees

Today’s firms must affectively balance the demands and expectations of all stakeholders.

Levels of Strategic Management

HP’s Corporate Strategy

Enterprise Storage & Servers

HP Services

Software Personal Systems

Imagining and Printing

Financial Services