Chapter 1: What is strategy?

Strategic management is the integrative management field that combines analysis, formulation, and
implementation for the purpose of gaining a competitive advantage. The AFI strategy framework embodies
this view of strategic management.

What Strategy Is & its Role: Gaining and Sustaining Competitive Advantage

 Strategy is a long-term plan, a set of goal-directed actions a firm takes to gain and sustain superior
performance relative to competitors.
 To achieve superior performance, companies compete for resources and outcomes (profit):
- New ventures compete for financial and human capital.
- Existing companies compete for profitable growth.
- Charities compete for donations.
- Universities compete for the best students and professors.
- Sports teams compete for championships.
- Celebrities compete for media attention.
 In any competitive situation, a good strategy enables a firm to achieve superior performance.
 A good strategy consists of three elements:
1. Start with a clear diagnosis of the competitive challenge: accomplished through analysis of the
firm’s external and internal environments.
2. A guiding policy to address the competitive challenge: accomplished through strategy formulation
that results in the corporate, business, and functional strategy. The formulated strategy needs to be
consistent, often backed up with strategic commitments. Without consistency in a firm’s guiding
policy, a firm’s employees become confused and cannot make effective day-to-day decisions that
support the overall strategy, and other stakeholders, including investors, also become frustrated.
3. A set of coherent actions to implement the firm’s guiding policy: accomplished through strategy
implementation with actions consistent with its diagnosis of the competitive challenge.

 To gain a deeper understanding of what strategy is, it may be helpful to know what strategy is not:
1. Grandiose statements are not strategy. Statements of desire, on their own, are not strategy. “we will be
number 1”.
2. A failure to face a competitive challenge is not a strategy. If the firm does not define a clear competitive
challenge, managers have no way of assessing whether they are making progress in addressing it.
3. Operational effectiveness, competitive benchmarking, or other tactical tools are not strategies. Different
policies and initiatives (pricing strategy, Internet strategy, alliance strategy, operations strategy, IT strategy,
brand strategy, marketing strategy, HR strategy…) may be a necessary part of a firm’s functional and
global initiatives to support its competitive strategy, but these elements are not sufficient to achieve
competitive advantage.

What Is Competitive Advantage?

 Competitive advantage is relative to other competitors in the same industry or the industry average (to asses
competitive advantage, firm is compared to a benchmark either a competitor in the same industry or the
industry average).

‒ A firm that achieves superior performance relative to other competitors in the same industry or the
industry average has a competitive advantage.
 ‒ A firm that is able to outperform its competitors or the industry average over a prolonged period
of time has a sustainable competitive advantage.(apple over Samsung).
‒ If a firm underperforms its rivals or the industry average, it has a competitive disadvantage.
‒ If two or more firms perform at the same level, they have competitive parity.
 To gain a competitive advantage, a firm needs to provide one of the following:
- Goods or services consumers value more highly than those of its competitors (higher perceived
value, wider value gap).
- Goods or services similar to the competitors’ but at a lower price.
 The rewards of superior value creation and capture are profitability and market share.

What Is Strategic Positioning?

 Strategic positioning: The process of identifying a unique position within an industry allowing a firm to
provide value to customers while controlling costs.
Value Creation (price) – Costs = Economic Contribution (marginal cost)
 The greater the difference between value creation and cost, the greater the firm’s economic
contribution, the better, and the more likely it will gain competitive advantage.
 Strategic positioning requires trade-offs.
- The managers make conscious trade-offs that enable each company to strive for competitive
advantage in an industry.
- Since clear strategic positioning requires trade-offs, strategy is as much about deciding what not to do,
as it is about deciding what to do. Managers must carefully consider their strategic choices in the
quest for competitive advantage (how to allocate resources and what activities to pursue). Trying to
be everything to everybody will likely result in inferior performance. We Can’t create value without
incurring costs and we can’t reduce costs without harming quality.
- The key to successful strategy is to combine a set of activities to stake out a unique position within an
industry.
 Cost leader: The company aims to offer products or services at the lowest possible prices in the
industry through efficient operations and cost optimization.(Walmart)
 Differentiator: The company focuses on distinguishing its offerings from competitors by
providing unique features, superior quality, or exceptional customer experiences.(Nordstrom)
 Blue ocean

Value Creation

 Value creation occurs because companies with a good strategy are able to provide products or services to
consumers at a price point that they can afford while making a profit at the same time. Both parties
benefit from this trade as each captures a part of the value created. Value creation in turn lays the
foundation for the benefits that successful economies can provide (education, public safety, and health
care…).
 Superior performance allows a firm to reinvest some of its profits and to grow, which provides more
opportunities for employment and fulfilling careers. Strategic failure can be expensive.
Stakeholders:
 Stakeholders are organizations, groups, and individuals that can affect or be affected by a firm’s actions
and have a vested claim or interest in the performance and continued survival of the firm. Stakeholders
can be grouped by whether they are internal or external to a firm.
- Internal stakeholders include stockholders, employees (including executives, managers, and
workers), and board members.
- External stakeholders include customers, suppliers, alliance partners, creditors, unions,
communities, governments at various levels, and the media.
 There exists a Multifaceted exchange relationship between the company and a number of diverse internal
and external stakeholders. All stakeholders make specific contributions to a firm, and in turn, the firm
provides different types of benefits to different stakeholders.
- Employees contribute time and talents to the firm, receiving wages and salaries in exchange.
- Shareholders contribute capital hoping that the stock will rise, and the firm will pay dividends.
- Communities provide real estate, infrastructure, and public safety. In return, they expect that
companies will pay taxes, provide employment, and not pollute the environment.

Stakeholder Strategy:

 Stakeholder strategy is an integrative approach that allows firms to analyze and manage how various
external and internal stakeholders interact to jointly create and trade value. Stakeholder strategy
involves identifying key stakeholders, understanding their interests and concerns, and developing
strategies to address their needs while advancing the company's objectives. The ultimate goal of a
stakeholder strategy is to create value for both the company and its stakeholders, fostering mutual trust,
support, and long-term success.
 Effective stakeholder management exemplifies how managers can act to improve firm performance,
thereby enhancing the firm’s competitive advantage and the likelihood of its continued survival.
 Why effective stakeholder management can benefit firm performance:
CREATES COMPETITIVE ADVANTAGE BECAUSE

- Satisfied stakeholders are more cooperative and thus more likely to reveal information that can
further increase the firm’s value creation or lower its costs.
- Increased trust lowers the costs for firms’ business transactions.
- Can lead to greater organizational adaptability and flexibility.
- The likelihood of Negative outcomes can be reduced, creating more predictable and stable returns.
- Firms can build strong reputations that are rewarded in the marketplace by business partners,
employees, and customers. High-profile rankings are frequently celebrated and publicized.

Stakeholder impact analysis:

 The key challenge of stakeholder strategy is to effectively balance the needs of various stakeholders.
 Stakeholder impact analysis provides a decision tool with which managers can recognize, prioritize,
and address the needs of different stakeholders. Stakeholder impact analysis takes managers through a
five-step process of recognizing stakeholders’ claims.

 In each step, managers must pay particular attention to three important stakeholder attributes.
 1. Power: who has the most power? Depends on where you’re operating (plane: pilot has most power).
A stakeholder has power over a company when it can get the company to do something it would not
otherwise do.
2. Legitimacy: How legitimate is the claim or demand? A stakeholder has a legitimate claim when it is
perceived to be legally valid or otherwise appropriate.
3. Urgency: How urgent is it to satisfy the needs and what happens if we don’t? A stakeholder has an
urgent claim when it requires a company’s immediate attention and response.

Step 1: identify stakeholders.

 In this step, the firm focuses on stakeholders that currently have, or potentially can have, a material
effect on a company. This prioritization identifies the most powerful internal and external
stakeholders as well as their needs.
Step 2: identify stakeholders’ interests and claims.
 Managers need to specify and assess the interests and claims of the stakeholders using the power,
legitimacy, and urgency criteria introduced earlier.
 As the legal owners, shareholders have the most legitimate claim on a company’s profits. Even
within stakeholder groups, there can be significant variation in the power a stakeholder may exert on the
firm.
 Many companies incentivize top executives by paying part of their overall compensation with
stock options. They also turn employees into shareholders through employee stock ownership
plans (ESOPs), allowing employees to purchase stock at a discounted rate or use company stock
as an investment vehicle for retirement savings.
 Shareholder activists tend to buy equity stakes in a corporation that they believe is
underperforming to put public pressure on a company to change its strategy. Even top-performing
companies are not immune to pressure by shareholder activists. Shareholder activists have much
more power over a firm. They can buy and sell a large number of shares at once, or exercise
block-voting rights in the corporate governance process. They frequently also demand seats on
the company’s boards to influence its corporate governance more directly, and with it exert
more pressure to change a company’s strategy.

Step 3: identify opportunities and threats.

 Since stakeholders have a claim on the company, opportunities and threats are two sides of the same
coin. In the best-case scenario, managers transform such threats into opportunities.

Step 4: identify social responsibilities.

 The framework of corporate social responsibility (CSR) helps firms recognize and address the
economic, legal, ethical, and philanthropic responsibilities.
 Society and shareholders require economic and legal responsibilities. Ethical and philanthropic
responsibilities result from a society’s expectations toward business.
 CSR has 4 components:
1. Economic Responsibilities (the foundational building block). To accomplish this, firms must
obey the law and act ethically in their quest to gain and sustain competitive advantage. Which
involve a company's obligation to generate profits and create economic value for its shareholders.
2. Legal Responsibilities. Laws and regulations are a society’s codified ethics, embodying notions
of right and wrong. Managers must ensure that their firms obey all the laws and regulations,
including but not limited to labor, consumer protection, and environmental laws.
 3. Ethical Responsibilities. A firm’s ethical responsibilities go beyond its legal responsibilities.
They embody the full scope of expectations, norms, and values of its stakeholders. Managers are
called upon to do what society deems just and fair.
4. Philanthropic Responsibilities. At the top of the pyramid are philanthropic responsibilities, Often
subsumed under the idea of corporate citizenship which involve voluntary actions taken by the
company to contribute to the well-being of society.
Step 5: address stakeholder concerns.
 Managers need to decide the appropriate course of action for the firm, given all of the preceding
factors. Thinking about the attributes of power, legitimacy, and urgency helps to prioritize the
legitimate claims and to address them accordingly.

The AFI Strategy Framework: GAINING AND SUSTAINING CA.

 The AFI Strategy framework helps managers craft and execute a strategy. A successful strategy details
a set of actions that managers take to gain and sustain competitive advantage.
 Effectively managing the strategy process is the result of three broad tasks: analyze, formulate, and
implement.
 They are highly interdependent and frequently happen simultaneously. Effective managers do not
formulate strategy without thinking about how to implement it, for instance. Likewise, while
implementing strategy, managers are analyzing the need to adjust to changing circumstances.
 This framework explains and predicts differences in firm performance, and helps managers formulate
and implement a strategy that can result in superior performance. In each of the three broad
management tasks, managers focus on specific questions.
1. Analyze (A):
external analysis: industry structure, benchmarks, competitive forces, PESTLE.
Internal analysis(resources, capabilities, core competencies, SWOT).
Vision, mission, values, competitive advantage.
2. Formulate (F):
Business strategy: strategic positioning (cost-leadership, differentiation, blue ocean).
Corporate strategy: vertical integration, diversification, strategic alliances, mergers, acquisitions.
Global strategy: competing around the world.
3. Implement (I):
Organizational design: structure, culture, and control
Corporate governance: business ethics and business models
Implementation is the graveyard of formulation, if you don’t implement it dies.