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CHAPTER 1 - WHAT IS STRATEGY AND WHY IS IT IMPORTANT?

WHAT DO WE MEAN BY STRATEGY?

Managers at all companies face 3 central questions in thinking strategically about their companys present
circumstances and prospects:

What is our present situation?

Business environment and industry conditions

Firms financial and competitive capabilities

Where do we want to go from here?

Creating a vision for the firms future direction

How are we going to get there?

Crafting an action plan for heading the firm in the intended direction, staking out a market position,
attracting customers, achieving the targeted financial and market performance, and getting the firm
where it wants to go is its strategy.

Strategic management plan:


1. What a company MIGHT DO & CAN DO? Explore what the company do best and Set the objectives
2. Establish an action plan To achieve the objectives
3. Balance scorecard: grow your business in a balance way with financial and non-financial perspectives

WHAT IS STRATEGY ABOUT?

Strategy is all about How:

How to attract and please customers.

How to outcompete rivals.

How to respond to economic and market conditions and growth opportunities.

How to manage functional pieces of the business.

How to improve the firms financial and market performance.


3 PILLARS OF A SUCCESSFUL STRATEGY

Execution & Implementation


Relevant Resources
Market Opportunities

WHY DO STRATEGY ?

A firm does strategy:

To improve its financial performance.

To strengthen its competitive position.

To gain a sustainable competitive advantage over its market rivals.

A creative, distinctive strategy:

Helps produce above-average profits.


Increases competitive pressures on rivals.

STRATEGY AND COMPETITORS

Strategy is about competing differently from rivals:

Doing what they dont do or doing it better!

Doing what they cant do!

Doing that which sets the firm apart and attracts customers.

Doing what we should or should not do to produce a competitive edge.

IDENTIFYING A COMPANYS STRATEGYWHAT TO LOOK FOR

- Definition:

A companys strategy is the set of actions that its managers take to outperform the companys competitors and achieve
superior profitability.
Strategy is a game plan - to move from A --> B: the way the company can achieve the goals with the most effective
and efficient way.
*SOMETHING WILL CHANGE IN THE MIDDLE: In todays world, strategic plan can be established for 5
years because of ongoing changes

WHY we do strategic management plan:

- Satisfy the customers needs


- Achieve the goals
- Make profit for the company
- Compete & Outperform the rivals

WHY strategy is CHOICE: a choice that you want to allocate your resources to be successful

Example: Illustration Capsule 1.1 , describing McDonalds strategy in the quick-service restaurant industry

Key initiatives of the Plan-to-Win strategy:

Improved restaurant operations: employee training programs, commitment to employee development


Affordable pricing: kept its prices low by closely scrutinizing administrative costs and other corporate expenses
Wide menu variety and beverage choices: expanded its menu beyond the popular-selling Big Mac and Quarter
Pounder to include such new, healthy quick-service items as grilled chicken salads, chicken snack wraps, and
premium chicken sandwiches; added an extensive line of premium coffees
Convenience and expansion of dining opportunities: McCafes helped McDonalds increase same store sales by
extending traditional dining hours; extended its drive-thru hours to 24 hours
Ongoing restaurant reinvestment and international expansion: opened 125 new restaurants in China and 40
new restaurants in Russia in 2008;

STRATEGY AND THE QUEST FOR COMPETITIVE ADVANTAGE

A companys strategy should be aimed either at providing a product or service that is distinctive from what competitors are
offering or at developing competitive capabilities that rivals cannot quite match:
Competitive Advantage
Require meeting customer needs either more effectively (with products or services that customers value more
highly) or more efficiently (by providing products or services at lower cost).
Sustainable Competitive Advantage
Requires giving buyers lasting reasons to prefer a firms products or services over those of its competitors.
4 key criterias: valuable, rare, non-substitute, inimmitated (VRIN)
Example: Disney has sustainable competitive advantage
STRATEGIC APPROACHES
Building a competitive advantage by:
Striving to become the industrys low-cost provider (efficiency).
Outcompeting rivals on differentiating features (effectiveness).
Offering the lowest (best) prices for differentiated goods (best-cost provider).
Focusing on better serving a niche markets needs (efficiency and\or effectiveness).

Example: Starbucks, the companys unparalleled name recognition, its reputation for high-quality specialty
coffees served in a comfortable, inviting atmosphere, and the accessibility of the shops make it difficult for
competitors to weaken or overcome Starbuckss competitive advantage.

STRATEGIC APPROACHES
The five most basic strategic approaches for setting a company apart from rivals, building strong customer loyalty and
winning a sustainable competitive advantage:

1. A low-cost provider strategy (Efficiency)


Achieving a cost-based advantage over rivals
Can produce a durable competitive edge when rivals find it hard to match the low-cost leaders
approach to driving costs out of the business
Example: Walmart and Southwest Airlines have earned strong market positions because of the low-cost
advantages they have achieved over their rivals

2. A broad differentiation strategy (Effectiveness)


Seeking to differentiate the companys product or service from that of rivals in ways that will appeal
to a broad spectrum of buyers
Outcompeting rivals on differentiating features
One way to sustain this type of competitive advantage is to be sufficiently innovative to thwart the
efforts of clever rivals to copy or closely imitate the product offering
Example: Apple (innovative products), Johnson & Johnson in baby products (product reliability), LVMH
(luxury and prestige), and BMW (engineering design and performance)

3. A focused low-cost strategy (Efficiency and/or Effectiveness)


Concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having
lower costs being able to serve niche members at a lower price
Example: Private-label manufacturers of food, health and beauty products, and nutritional supplements use
their low-cost advantage to offer supermarket buyers lower prices than those demanded by producers of
branded products.

4. A focused differentiation strategy


Concentrating on a narrow buyer segment and outcompeting rivals by offering buyers customized
attributes that meet their specialized needs and tastes better than rivals products
Example: Lululemon specializes in high-quality yoga clothing and the like, attracting a devoted set of buyers
in the process

5. A best-cost provider strategy


Giving customers more value for the money by satisfying their expectations on key quality features,
performance, and/or service attributes while beating their price expectations
Purpose: to have lower costs than rivals while simultaneously offering better differentiating attributes.
Example: Target is an example of a company that is known for its hip product design (a reputation it built
by featuring cheap-chic designers such as Isaac Mizrahi), as well as a more appealing shopping ambience
for discount store shoppers. Its dual focus on low costs as well as differentiation shows how a best- cost
provider strategy can offer customers great value for the money.

GAINING SUSTAINABLE COMPETITIVE ADVANTAGE


How to create a sustainable competitive advantage:
Develop valuable expertise and competitive capabilities over the long-term that rivals cannot readily copy,
match or best.
Put the constant quest for sustainable competitive advantage at center stage in crafting your strategy.

WHY A COMPANYS STRATEGY EVOLVES OVER TIME


Managers modify strategy in response to:
Changing market conditions
Advancing technology
Fresh moves of competitors
Shifting buyer needs
Emerging market opportunities
New ideas for improving the strategy
The evolving nature of a firms strategy:
Realized (current) strategy is a blend of:
Proactive (Deliberate) strategy elements that include both continued and new initiatives.
planned initiatives to improve the companys financial performance and secure a competitive edge
Reactive (Emergent) strategy elements that are required due to unanticipated competitive
developments and fresh market conditions.

THE RELATIONSHIP BETWEEN A FIRMS STRATEGY AND ITS BUSINESS MODEL

The two elements of a companys business model are:


(1) Customer value proposition = Perceived benefit/Cost (Price): lays out the companys approach to
satisfying buyer wants and needs at a price customers will consider a good value

(2) Profit formula: describes the companys approach to determining a cost structure that will allow for
acceptable profits, given the pricing tied to its customer value proposition

Value-Price-Cost Framework

Customer value proposition = Perceived benefit/Cost (Price)

- From a customer perspective: the greater the value delivered (V) and the lower the price (P), the more attractive is
the companys value proposition.
- From a company perspective: the lower the costs (C), the greater the ability of the business model to be a
moneymaker.
The profit formula reveals how efficiently a company can meet customer wants and needs and deliver on the value
proposition
Example:
Gillettes business model in razor blades involves selling a master product the razorat an attractively
low price and then making money on repeat purchases of razor blades that can be produced cheaply and sold
at high profit margins.
McDonalds invented the business model for fast food providing value to customers in the form of
economical quick-service meals at clean, convenient locations. Its profit formula involves such elements as
standardized cost-efficient store design, stringent specifications for ingredients, operating procedures specified
in detail for each unit, and heavy reliance on advertising and instore promotions to drive volume.

WHAT MAKES A STRATEGY A WINNER?


A winning strategy must pass three tests:
1. The Fit Test
2. The Competitive Advantage Test
3. The Performance Test

1. The Fit Test: How well does the strategy fit the companys situation?
External fit: To qualify as a winner, a strategy has to be well matched to:
industry and competitive conditions
a companys best market opportunities
other pertinent aspects of the business environment in which the company operates
Internal fit: A winning strategy must be tailored to the companys resources and competitive capabilities
and be supported by a complementary set of functional activities (i.e., activities in the realms of supply chain
management, operations, sales and marketing, and so on).
Dynamic fit: they evolve over time in a manner that maintains close and effective alignment with the
companys situation even as external and internal conditions change.

2. The Competitive Advantage Test: Is the strategy helping the company achieve a sustainable competitive
advantage?
Strategies that fail to achieve a durable competitive advantage over rivals are unlikely to produce superior
performance for more than a brief period of time.
Winning strategies enable a company to achieve a competitive advantage over key rivals that is long-lasting.
The bigger and more durable the competitive advantage, the more powerful it is.

3. The Performance Test: Is the strategy producing good company performance?

Two kinds of performance indicators tell the most about the caliber of a companys strategy (tm c chin lc):
(1) competitive strength and market standing
(2) profitability and financial strength.

Above-average financial performance or gains in market share, competitive position, or profitability are signs
of a winning strategy.

WHY CRAFTING AND EXECUTING STRATEGY ARE IMPORTANT TASKS


Strategy provides:

A prescription for doing business.

Only a handful of companies can boast of hitting home runs in the marketplace due to lucky breaks
or the good fortune of having stumbled into the right market at the right time with the right product.
Success will not be lasting unless the companies subsequently craft a strategy that capitalizes on
their luck, builds on what is working, and discards the rest.

A road map to competitive advantage.

The processes of crafting and executing strategies must go hand in hand is a company is to be
successful in the long term.
In the main, our competitors are acquainted with the same fundamental concepts and techniques
and approaches that we follow, and they are as free to pursue them as we are. More often than not,
the difference between their level of success and ours lies in the relative thoroughness and self-
discipline with which we and they develop and execute our strategies for the future.

A game plan for pleasing customers.

A formula for attaining long-term standout marketplace performance.

GOOD STRATEGY + GOOD STRATEGY EXECUTION = GOOD MANAGEMENT

Crafting and executing strategy are core management functions.


Good strategy and good strategy execution are the most telling signs of good management.
The rationale for using the twin standards of good strategy making and good strategy execution to determine
whether a company is well managed is therefore compelling:
The better conceived a company s strategy and the more competently it is executed, the more likely the
company will be a standout performer in the marketplace.
How well a company performs and the degree of market success it enjoys are directly attributable to:
o The caliber of its strategy
o The proficiency with which the strategy is executed

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