What Is Strategy and Why Is It Important?

1. 000100101001001111010100100010010100100111101010010001001010010011110101000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 000100101001001111010100100010010100100111101010010001001010010011110101 Chapter 1 What Is Strategy andWhy Is It Important?

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

3. Chapter Outline • What Is Strategy? • What Does the Strategy-Making, Strategy-Executing Process Entail? • Phase 1: Developing a Strategic Vision • Phase 2: Setting Objectives • Phase 3: Crafting a Strategy • Phase 4: Implementing and Executing the Strategy • Phase 5: Evaluating Performance and Initiating Corrective Adjustments • What Is the Role of the Board of Directors in the Strategy-Making, Strategy-Executing Process? • Why Is Strategy Important?

4. 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 marketpositions to stake out • Buyer needs and groups to serve • Outcomes to achieve 3. How will we get there?

5. What Is Strategy? • Consists of the combination of competitive moves and business approaches used by managers to run the company • Management’s “game plan” to • Stake out a market position • Attract and please customers • Compete successfully • Conduct operations • Achieve organizational objectives

6. Striving for Competitive Advantage • Central thrust of a company’s strategy involves moves to strengthen a company’s • Long-term competitive position and • Financial performance • Key components of strategy • Offensive moves • Defensive moves What separates a powerful strategy from anordinary one is management’s ability to forge a series of moves, both in the marketplace and internally, thatproduce sustainable competitive advantage!

7. Strategic Approaches to Building Competitive Advantage • Strive to be the industry’s low-cost provider • Outcompete 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

8. Fig. 1.1: Identifying aCompany’s Strategy

9. Fig. 1.2: A Company’s Strategy Is Partly Planned and Partly Reactive

10. Why Do Strategies Evolve? • A company’s strategy is a work in progress • Changesmay be necessary to react to • A failing strategy • Shifting market conditions • Evolving customer preferences • Fresh moves of competitors • Technological breakthroughs • Crisis situations

11. What Is a Business Model? • A business model addresses “How do we make money in this 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 structureand 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?

12. Strategy- Deals with a company’s competitive initiatives and business approaches Business Model-Concerns whether revenues and costs flowing from the strategydemonstrate the business can be amply profitable and viable Strategy Business Model Relationship Between Strategy and Business Model

13. 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 and achieve large unit sales Most costs in developing software are fixed; variable costs are small - once breakeven volume is reached, revenues from additional sales are almost pure profit Provide technical support to users at no cost

14. Redhat Linux’sBusiness Model Rely on collaborative efforts of volunteer programmers to create the software; make source code open and available to all users Add value to free, downloadable version of Linux by offering users Red Hat Linux systems containing upgraded and tested features Charge a modest fee to those preferring to subscribe to Red Hat Linux version Make money by employing a cadre of technical support personnel who provide technical support to users for a fee Make as much or more money on providing technical support services, training, and consulting as on selling subscriptions to Red Hat Linux

15. Figure 1.3: The Strategy-Making, Strategy-Executing Process

16. Develop a Strategic Vision & Mission Phase 1 of the Strategic Management Process • Involves thinking strategically about • Future of company • Where are we going? • Tasks include • Creating a roadmap of the future • Deciding future business position to stake out • Providing long-term direction • Giving company a strong identity

17. Strategic Vision • Astrategic visionconcerns a firm’sfuturebusiness path -- “where we are going” • Markets to be pursued • Future technology-product-customer focus • Kind of company management is trying to create

18. Characteristics of a Strategic Vision • Well-stated vision statements • Are distinctive and specific to a particular organization • Avoid generic language • Excite strong emotions • Are challenging, uncomfortable, nail biting

19. Example: Vision Statement Verizon Communications To be the customer’s first choice for communications and information services in every market we serve,domestic and international.

20. Example: Vision Statement Levi Strauss & Company We will clothe the world by marketing the most appealing and widely worn casualclothing in the world.

21. Example: Vision Statement Microsoft Corporation Empower people through great software -- anytime, anyplace, and onany device.

22. Example: Vision Statements Mayo Clinic The best care to every patient every day. Scotland Yard To make London thesafest city in the world.

23. Example: Vision Statement Toyota We want to set the tone for the era . . . Green and affordable . . . That means establishing a new paradigm for harmonizing personal transport with the environment. It means revolutionary cost savings in products and production processes.

24. Example: Vision Statement Intel Our vision: Getting to a billion connected computers worldwide, millions of servers, and trillions of dollars of e-commerce. Intel’s core mission is being the building block supplier to the Internet economy and spurring efforts to make the Internet more useful. Being connected is now at the center of people’s computing experience. We are helping to expand the capabilities of the PC platform and the Internet.

25. Example: Vision Statements Greenpeace To halt environmental abuse and promote environmental solutions. Goldman Sachs To be the world’s premier investment bank in every sector.

26. Example: Vision Statement General Electric We will become number one or number two in every market we serve, and revolutionize this company to have the speed and agility of a small enterprise.

27. A mission statement focuses on currentbusiness activities -- “who we are and what we do” Current product and service offerings Customer needs being served Technological and business capabilities Mission

28. Characteristics of a Mission Statement • Defines current business activities, highlighting boundaries of current business • Present products and services • Types of customers served • Conveys • Whatwe do, • Why we are here, and • Where we are now A company’s mission is not to make a profit! The real mission is always — “What will we do to make a profit?”

29. Example: Mission Statement (a unique grocery store chain) Our mission: To give our customers the best food and beverage values that they can find anywhere and to provide them with the information required for informed buying decisions. We provide these with a dedication to the highest quality of customer satisfaction delivered with a sense of warmth, friendliness, fun, individual pride, and company spirit.

30. Communicating the Vision • An exciting, inspirational vision • Contains memorable language • Clearly maps company’s future direction • Challenges and motivates workforce • Provokes emotion and enthusiasm

31. Values Linking the Vision With Company Values • A statement of values is often provided to guide the company’s pursuit of its vision • Values -- Beliefs, business principles, and ways of doing things incorporated into • Company’s operations • Behavior of workforce • Values statements • Contain between four and eight values • Are ideally tightly connected to and reinforce company’s vision, strategy, and operating practices

32. Example: Company Values Home Depot Entrepreneurial spirit Creating shareholder value Excellent customer service Building strong relationships Giving back to the community Taking care of people Respect for all people Doing the right thing

33. Example: Company Values Du Pont Safety Ethics Respect for people Environmental stewardship

34. Setting Objectives Phase 2 of the Strategic Management Process • Converts strategic vision and mission into specific performance targets • Creates yardsticks to track performance • Pushes firm to focus on results • Helps prevent complacency and coasting

35. Characteristics of Objectives • Represent commitment to achieve specific performance targets • Well-stated objectives are • Quantifiable • Measurable • Contain a deadline for achievement • Spell-out how muchof what kindof performance by when

36. Outcomes focusedon improving financialperformance Outcomes focused on improving long-term, competitivebusiness position $ Types of Objectives Required Financial Objectives Strategic Objectives

37. X % increase in annual revenues X % increase annually in after-tax profits X % increase annually in earnings per share Regular dividend increases Larger gross profit margin Larger operating profit margin Larger net profit margin X % return on capital employed (ROCE) X % return on assets (ROA) X % return on shareholder investment (ROE) Upward-trending stock price that builds significant shareholder value over time Strong bond and credit ratings Reduced levels of debt Sufficient internal cash flows to fund new capital investment Diversified revenue base Examples: FinancialObjectives

38. Winning additional market share (or reaching X % market share) Consistently getting new or improved products to market ahead of rivals Overtaking key competitors on product performance or quality or customer service Achieving lower overall costs than rivals Deriving X % of revenues from sale of new products introduced in past 5 years Being a recognized technological leader Achieving national or global market coverage for firm’s products Having broader or more attractive product selection than rivals Deriving X % of revenues from online sales Having a better-known or more respected brand name than rivals Improving global sales and distribution capabilities Examples: StrategicObjectives

39. Objective Setting: A Balanced Scorecard Approach • A “balanced scorecard” for measuring company performance requires both financial objectives and strategic objectives • Company achievement of satisfactory financial performance, by itself, is not enough • A company’s financial performance measures are “lagging indicators” that reflect the results of past decisions and actions • Of equal or greater importance is a company’s performance on the measures of its strategic well-being—its competitiveness and market position • Unless a company’s performance in the marketplace reflects improving competitive strength and market penetration, its progress is less than inspiring and its ability to continue delivering good financial performance is suspect • The “lead indicators” of a company’s future financial performance and business prospects are growing competitiveness and strength in the marketplace

40. Balanced Scorecard Approach --Strategic vs. Financial Objectives? • Pursuit of better financial performance may assume priority over strategic performance targets when • Firm is struggling financially • Resource commitments for new strategic initiatives may hurt bottom-line for several years • Proposed strategic moves are risky • Otherwise, strategic objectives merit top priority — a firm consistently foregoing opportunities to strengthen its long-term competitive position • Risks diluting its competitiveness • Risks losing momentum in its markets • Hurts its ability to fend off rivals’ challenges

41. Example: Strategic andFinancial Objectives Unilever • Grow revenues by 5-6 % annually; • Increase operating profit margins from 11 % to 16 % within five years; • Trim the company’s 1,200 food, household, and personal care products down to 400 core brands; • Focus sales and marketing efforts on those brands with potential to become respected, market-leading global brands; and • Streamline the company’s supply chain.

42. Examples: Strategic Objectives Banc One Corporation To be one of the top three bankingcompanies in terms of market share inall significant markets we serve. Bristol-Myers Squibb To focus globally on those businesses inhealth and personal care where we can be number one or number two through delivering superior value to the customer.

43. Example: Strategic Objectives Ford Motor Company • To satisfy our customers by • Providing quality cars and trucks, • Developing new products, • Reducing the time it takes to bring new vehicles to market, • Improving the efficiency of all our plants & processes, and • Building on our teamwork with employees, unions, dealers, and suppliers.

44. Example: Strategic andFinancial Objectives Alcan Aluminum To be the lowest-cost producer of aluminum and to outperform the average return on equityof the Standard and Poor’s industrial stock index.

45. Example: Strategic andFinancial Objectives 3MCorporation • Annual growth in earnings per share of 10% or better, on average; • A return on stockholders’ equity of 20-25%; • A return on capital employed of 27% or better; and • Have at least 30% of sales come from products introduced in the past four years.

46. Short-Range VersusLong-Range Objectives • Short-Range objectives • Targets to be achieved soon • Serve as stair steps for reaching long-range performance • Long-Range objectives • Targets to be achieved within3 to 5 years • Prompt actions now that willpermit reaching targetedlong-range performance later

47. Concept of Strategic Intent A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective and concentrates its competitive actions and energies on achieving that objective!

48. Characteristics of Strategic Intent • Indicates firm’s intent to stake outa particular position over the long-term • Involves establishing a BHAG – “big, hairy, audacious goal” and then devoting the company’s full resources and energies to achieving it over time (Moon Shot) • Signals relentless commitmentto winning in the marketplace

49. Objectives Are Needed at All Levels Objective-setting process is mostly top-down, not bottom-up! 1. First, establish organization-wide objectives and performance targets 2. Next, set business andproduct line objectives 3. Then, establish functionaland departmentalobjectives 4.Individualobjectives are established last

50. Crafting a Strategy Phase 3 of the Strategic Management Process • Strategy-making involvesentrepreneurship – searching for opportunities • To do new things or • To do existing things in new or better ways • Strategizing involves • Picking up on happenings in the external environment and • Steering company activities in new directions dictated by shifting market conditions