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What Is Strategy andWhy Is It Important?
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“Without a strategy the
organization is like aship without a rudder.”
Joel Ross and Michael Kami
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Thinking Strategically:The Three Big Strategic Questions
1. Where are we now?
2. Where do we want to go?
Business(es) to be in and market positions to stake out
Buyer needs and groups to serve
Outcomes to achieve
3. How will we get there?
A company’s answer to ―how
will we get there?‖ is its strategy
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What Is Strategy?
Consists of the combination of competitive moves and business approaches used by managers to run the
company
Management’s “game plan” toAttract and please customers
Stake out a market position
Compete successfully
Grow the business
Achieve targeted objectives
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How to please customers
How to respond to changing
market conditions
How to out compete rivals
How to grow the business
How to manage each functional piece of the business anddevelop needed organizational capabilities
How to achieve strategic and financial objectives
Strategyis HOW
to . . .
The Hows ThatDefine a Firm's Strategy
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What Are a Company’sStrategic Choices?
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 prevailing circumstances
Strategic choices are based on . . .
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Identifying a Company’s Strategy
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Striving for Competitive Advantage
To achieve sustainable competitive advantage, acompany’s strategy usually must be aimed at either
Providing a distinctive product or service or
Developing competitive capabilities rivals can not match
Achieving a sustainable competitive advantage greatlyenhances a company’s prospects for
Winning in the marketplace and
Realizing above-average profits
What separates a powerful strategy from an ordinary strategyis management’s ability to forge a series of moves,
both in the marketplace and internally, that produces sustainable competitive advantage!
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Strategic Approaches toBuilding Competitive Advantage
Strive to be the industry’s low-cost provider
Out compete rivals on a key differentiating feature
Focus on a narrow market niche, doing a better job
than rivals of serving the unique needs of niche
buyers
Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
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Examples of Strategies Basedon Distinctive Capabilities
Sophisticated distribution systems – Wal-Mart
Product innovation capabilities – 3M Corporation
Complex technological process – Michelin
Defect-free manufacturing – Toyota and Honda
Specialized marketing and merchandising know-how – Coca-
Cola
Global sales and distribution capability – Black & Decker
Superior e-commerce capabilities – Dell Computer
Personalized customer service – Ritz Carlton hotels
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A Company’s Strategy Is PartlyProactive and Partly Reactive
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A company’s strategy is a work in progress
Changes may be necessary to react to
Fresh moves of competitors
Evolving customer preferences
Technological breakthroughs
Shifting market conditions
Crisis situations
Why Do Strategies Evolve?
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What Is a Business Model?
A business model addresses “How do we make money inthis business?”
Is the 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 marginsDo resulting earnings streams and ROI indicate the strategy
makes sense and the company has a viable business model for
making money?
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Strategy - Deals with acompany’s competitive
initiatives and business
approaches
Business Model -
Concerns whether
revenues and costs
flowing from the strategy demonstrate the business
can be amply profitable
and viable
Relationship BetweenStrategy and Business Model
Mi ft’
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Microsoft’s Business Model
Employ a cadre of highly skilled programmers to developproprietary code; keep source code hidden from users
Sell resulting OS and software packages to PC makers and
users at relatively attractive prices and achieve large unitsales
Most costs in developing software are fixed; variable costsare small - once breakeven volume is reached, revenues
from additional sales are almost pure profit
Provide technical support to users at no cost
R dh t Li ’
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Redhat Linux’s Business Model
Rely on collaborative efforts of volunteer programmers to create thesoftware
Add value to free, downloadable version of Linux by offering users RedHat Linux systems containing upgraded and tested features
Charge a modest fee to those preferring to subscribe to Red Hat Linuxversion
Release updated versions of Red Hat Linux every 4-6 months to smallusers and every 12-18 months to corporate users
Make source code open and available to all users
Make money by providing fees-based training, consulting, support,engineering, and content management services
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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?
Oth C it i f J d i
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Other Criteria for Judgingthe Merits of a Strategy
Internal consistency and unity among all pieces of thestrategy
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!
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Why Is Strategy Important?
A compelling need exists for managers to
proactively shape how a firm’s business
will be conducted
A strategy-focused firm is more likelyto be a strong bottom-line performer
than one that views strategy as secondary
G d St t G d St t
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Good Strategy + Good StrategyExecution = Good Management
Crafting and executing strategy are core management functionsAmong all things managers do, nothing affects a company’s
ultimate success or failure more fundamentally than how well
its management team
Charts the 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!
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Five ways of looking at Strategy
Plan
Pattern
Position
Perspectiveploy
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SM
• Strategic management is an ongoing process thatevaluates and controls the business and the industries in
which the company is involved; assesses its competitors
and sets goals and strategies to meet all existing and
potential competitors; and then reassesses each strategyannually or quarterly [i.e. regularly] to determine how it
has been implemented and whether it has succeeded or
needs replacement by a new strategy to meet changed
circumstances, new technology, new competitors, a neweconomic environment., or a new social, financial, or
political environment
Strategic Management
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Strategic ManagementProcess
• SMP is the full set of commitments, decision and actionsrequired for a firm to achieve strategic competitiveness
and earn above-average return.
Strategic Management
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Strategic ManagementProcess
The Strategy Making Strategy
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The Strategy-Making, Strategy-Executing Process
Two model based on Above
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Two model based on Aboveaverage Return
• I/O Model based above-average return• Resource based above-average return
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I/O Model
• I/O model Explains the external environment’s dominantinfluence on a firm's strategic action.
• It specifies that the industry in which a company chooses
to compete has stronger influence on performance than
do the choices managers make inside their organization.
• The firm's performance is believed to be determined
primarily by range of industry properties, including
economies of scale, barriers to market entry,
diversification, product differentiation and the degree of
concentration of firms in industry.
•
I/O model has four
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I/O model has four underlying assumption :
• External environment is assumed to impose pressures and
constraints that determine the strategies that would result
in above-average returns
• The external environment — the general, industry and
competitive environments imposes pressures and
constraints on companies and determines strategies that
will result in superior returns.
• In other words, the external environment pressures the
company to adopt strategies to meet that pressure while
simultaneously constraining or limiting the scope of
t t i th t i ht b i t d t ll
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• 2nd
Assumption• Most companies competing in an industry or in an
industry segment control similar sets of strategically
relevant resources and thus pursue similar strategies.
• This assumption presumes that, given a similar
availability of resources, the majority of companies
competing in a specific industry — or in a segment of the
industry — have similar capabilities and thus follow
strategies that are similar. In other words, there are few
significant differences among companies in an industry.
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• 3rd
Assumption• Resources used to implement strategies are highly mobile
across firms. Significant differences in strategically
relevant resources among companies in an industry tend
to disappear because of resource mobility. Thus, anyresource differences soon disappear as they are observed
and acquired or learned by other companies in the
industry.
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• 4th
assumption• Organizational decision makers are assumed to be
rational and committed to acting in the firm's best
interests, as shown by their profit-maximizing
behaviours.
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Based on its underlying assumptions, the I/O model
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y g pprescribes a five-step process for companies toachieve above-average returns as shown in the
• 1.Study the external environment — general,
industry and competitive — to determine the
characteristics of the external environment that
will both determine and constrain the company’s
strategic alternatives.
• 2.Select an industry (or industries) with a high
potential for returns based on the structural
characteristics of the industry.
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• Firms can use this tool to understand an industry's profitpotential and the strategy necessary to establish a
defensible competitive position, given the industry's
structural characteristic.
• I/O Model suggests that firms can earn above averagereturns by manufacturing standardized products, or
producing differentiated product for which customer are
willing to pay a price
• I/O Model suggest that above-average return are earned
when firm implement the strategy dictated by the
characteristics of general, industry, and competitor
environment
Resource based model of
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Resource based model ofAbove average Return
• This model assumes that each organization is a collectionof unique resources and capabilities.
• The uniqueness of its resources and capabilities is the
basis for a firm's strategy and its ability to earn above
average returns• The resource based model suggests that the strategy the
firm chooses should allow it to use its competitive
advantages in an attractive industry .
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• This model assumes that firms acquire different resourcesand develop unique capabilities based on how they
combine and use the resource, that resources and
capabilities are the basis of competitive advantage.
• Resources are valuable, rare,costly to imitate andunsustainable.
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• Research shows that both the industry environment and afirm's internal assets affect that firm's performance over
time.
• To form vision and mission and subsequently to select
one or more strategies and to determine how toimplement them, firms used both I/O and resource based
model
Vision
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Vision
• Corporate vision is a short, and inspiring statement of what the organization intends to become and to achieve at
some point in the future, often stated in competitive
terms.
• Vision refers to the category of intentions that are broad,all-inclusive and forward-thinking.
• It is the image that a business must have of its goals
before it sets out to reach them.
• Vision is ―big picture‖ thinking with passion that helps
people feel what they are supposed to be doing in the
organization
Mission
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Mission
Mission specifies the business or business in which thefirm intends to compete and the customer it intends to
serve.
Stake Holder
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Stake Holder
Stake holders are the individuals and groups who can affectthe vision and mission of the firm, are affected by the
strategic outcomes achieved and have enforceable claims
on a firm's performance
Stake holder continue to support an organization when itsperformance meets or exceeds their expectation.
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Classification of stake holderCapital market Stakeholders
• Share holders
• Major suppliers of capital ( banks)
Product Market stakeholders• Primary customer
• Suppliers
• Host communities
• Union
Organizational stakeholders
• Employees
• Managers
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