Chapter 01 Introduction to Strategic Management

CHAPTER 1
WHAT IS STRATEGY AND
WHY IS IT IMPORTANT?
McGraw-Hill/Irwin

1–2
Definition of Strategic Management
Strategic Management is a branch of
management that focuses on
● establishing a strategic vision & mission,
● setting goals and objectives,
● developing and implementing strategies,
and
● using corrective steps, if necessary, in
order to attain the organization’s strategic
targets.

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Five Tasks of Strategic Management
Developing a Strategic Vision and Mission
Setting Objectives
Crafting Strategies
Implementing the Strategies
Evaluating Performance and Initiating
Corrective Adjustments

“Without a strategy an
organization is like a ship without
a rudder, going around in circles.”
Joel Ross and Michael Kami
“Quote”

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Why Do Some Companies Succeed While
Others Fail?
Why did Dell do so well during the 1990s
and the first half of the 2000s?
Why has Walmart been able to
persistently outperform its well-managed
rivals? (approx. 10,500 stores in 24 countries) (Amazon, Alibaba, Tesco, eBay,
Best Buy) EDLC Business Model
What made Toyota successful all over the
world?
According to research conducted by the Lean Enterprise Research Centre, 60% of production activities in a typical
manufacturing operation are waste – they add no value at all for the customer.

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Why Do Some Companies Succeed
While Others Fail?
In the airline industry, how has Southwest
Airlines managed profitability both in
good and bad times, while rivals such as
United Airlines failed to do so?
Why did Nokia fail?
It is argued that the strategies that a
company pursues have a major impact on
its performance relative to its competitors.

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WHAT DO WE MEAN BY STRATEGY ?
♦ What is our present situation?
● Business environment and industry conditions
● Firm’s financial and competitive capabilities
♦ Where do we want to go from here?
● Creating a vision for the firm’s future direction
♦ How are we going to get there?
● Crafting an action plan that will get us there

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WHAT IS STRATEGY ABOUT?
♦ Strategy is all about How:
● How to attract and please customers.
● How to outcompete rivals.
● How to position the company in the
marketplace.
● How to respond to changing economic and
market conditions.
● How to manage functional pieces of the
business.

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WHAT IS STRATEGY ABOUT?
♦ Strategy is all about How:
● How to improve the firm’s financial and
market performance.
● How to capitalize growth opportunities.
● How to achieve the firm’s performance
targets.

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WHAT DO WE MEAN BY STRATEGY ?
♦ A strategy is a set of related actions that
managers take to increase their
company’s performance.

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STRATEGY is about Competing Differently
♦ Strategy is about competing differently
from rivals—
● Doing what they don’t do or doing it better!
● Doing what they can’t do!
● Doing that which sets the firm apart and
attracts customers.
 Strategies provide directions and guidance regarding
what we should do and what should not do to produce
a competitive edge.

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Understanding Company Strategy --
What to Look For
Pattern
of Actions
That Define
Strategy
Actions to develop
Resources & Capabilities
Diversification
Responses to
Changing Conditions
Offensive Moves
to Gain Edge
Changes in
Product Line,
Quality, or Service
Actions to enter new
Geographic Markets
Forward or
Backward Integration,
Collaboration
Actions and
approaches to
Manage Functional
Activities
Defensive Moves
Pursuing New
Opportunities

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WHY DO WE NEED STRATEGIES ?
♦ A firm needs strategies:
● To improve its financial performance.
● To strengthen its competitive position.
● To gain a sustainable competitive
advantage over its market rivals.
♦ A creative, distinctive strategy:
● Can yield above-average profits.
● Makes competition difficult for rivals.

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WHY CRAFTING AND EXECUTING
STRATEGY ARE IMPORTANT TASKS
♦ Strategy provides:
● A prescription for doing business.
● A road map to competitive advantage.
● A game plan for pleasing customers.
● A formula for attaining long-term standout
marketplace performance.
● A route to improving shareholder value.
Good Strategy + Good Strategy Execution =
Good Management

Copyright © Houghton Mifflin Company. All rights reserved. 1 | 17
Determinants of
Shareholder Value
To increase shareholder value, managers must
pursue strategies that increase the profitability
of the company and grow profits.
The returns
that the
shareholders
earn from
purchasing
shares in a
company.
Shareholders provide
Risk Capital (the capital
that cannot be recovered
if a company fails or
goes bankrupt.

ROIC (Profitability) = Return On Invested Capital
• Net profit Net income after tax
Capital invested
Equity + Debt to creditors
The profit growth of a company is measured by
the increase in net profit over time.

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The Quest for Competitive Advantage
♦ Competitive Advantage
● If a company’s strategies result in superior
performance, it is said to have a
competitive advantage.
● A competitive advantage is any
attribute/factor that enables a company to
outperform its competitors.

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♦ Competitive Advantage
● A company is said to have a competitive
advantage over its rivals when its
profitability is greater than the average
profitability of the industry.

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♦ Sustained Competitive Advantage
● A company has a sustained competitive
advantage when its strategies enable it to
maintain above-average profitability for a
number of years.

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● If a company has a competitive advantage,
it is likely to gain market share from its
rivals and thus grow it profits more rapidly
than those of rivals.

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STRATEGIC APPROACH CHOICES
Low-cost
provider
Differentiation
on features
Focus on
market niche
Best-cost
provider
Building Competitive Advantage
Such as higher quality,
wider product selection,
added performance,
added services, more
attractive styling, and
technological
superiority
Giving
customers
more value
for their
money

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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.
● Put the constant quest for sustainable
competitive advantage through crafting your
strategy.

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Why a Firm’s Strategy Evolves over Time
♦ Managers modify strategy in response
to:
● Changing market conditions
● Advancement in technology
● Fresh moves of competitors
● Shifting buyer needs
● Emerging market opportunities
● New ideas for improving the strategy

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The Evolving Nature of a Firm’s Strategy
● Proactive Strategies: Planned strategies.
● Deliberate strategies: Planned strategies that we put
into action.
● Unrealized strategies: Planned strategies that we
can’t put into action.
● Reactive/emergent strategies: Strategies required to
respond to unanticipated changing conditions.
● Realized strategy is a blend of deliberate strategies
and emergent strategies.

Planned, Deliberate, Emergent
and Realized Strategies
Source: Adapted from H. Mintzberg and
A. McGugh, Administrative Science
Quarterly, Vol. 30. No. 2, June 1985.
Figure 1.6

Levels of Strategic Management
Figure 1.3
Operational
Level

Strategic Managers
 Corporate Level Managers
• Oversee the development of strategies for the
whole organization
• Consist of the CEO, other senior executives,
and corporate staff.
 Business Level Managers
• Responsible for managing business unit or
divisional performance
 Functional Managers
• Responsible for managing specific functional
departments
e.g. marketing, operations, accounting, human resources

Strategic Leadership
 Vision, eloquence, and consistency
 Articulation of the Business Model (Michael Dell)
 Commitment (Ken Iverson, Nucor’s former CEO)
 Being well informed
 Willingness to delegate and empower
 The astute use of power
 Emotional intelligence (Daniel Goldman)
• Self-awareness
• Self-regulation
• Motivation
• Empathy
• Social skills
Good leaders of the strategy-making process
have a number of key attributes:

Company’s Business Model
Is the management’s conception of how a set of
strategies should mesh together into a
congruent whole, enabling the company to gain a
competitive advantage and achieve superior
profitability
Is the management’s blueprint for delivering a
valuable product and service in a manner that
will yield an attractive profit.

A business model encompasses how the company will:
Management’s model of how the strategy will
allow the company to gain a competitive
advantage and achieve superior profitability
• Please its customers
• Differentiate its product
offerings
• Create value for its
customers
• Acquire and keep
customers
• Outperform competitors
• Deliver those goods and
services to the market
• Organize activities within the
company
• Develop resources and
capabilities
• Grow the business over time

The two elements of a business model
are:
(i) its consumer value proposition, &
(ii) its profit formula

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Business Model Elements (cont’d)
♦ The Profit Formula
● Customer Value Proposition = V–P
● Profit = P – C
 V—the value provided to customers/ Utility
 P—the price charged to customers
 C—the firm’s costs

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THE RELATIONSHIP BETWEEN A
FIRM’S STRATEGY AND ITS BUSINESS
MODEL
Realized
Strategy
Proactive
(deliberate)
strategy
Reactive
(emergent)
strategy
Business
Model
Value
Proposition
Profit Formula
$$$?

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IS OUR STRATEGY A WINNER?
Winning
Strategy
The Strategic
Fit Test
The Competitive
Advantage Test
The Performance
Test
- External Fit
- Internal Fit
- Dynamic Fit

Strategy in Nonprofit Enterprises
Nonprofit entities such as government
agencies, universities, and charities:
• Are not in business to make a profit
• Should use their resources efficiently
and effectively
• Set performance goals unique to the
organization
• Set strategies to achieve goals and compete
with other nonprofits for scarce resources
A successful strategy gives potential
donors a compelling message as to
why they should contribute.

Chapter 01 Introduction to Strategic Management

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