© Copyright 2014 by Arthur A. Thompson. All rights reserved. Not for distribution.

Published and distributed by McGraw Hill Education, Burr Ridge, Illinois

Copyright © 2014 by Glo-Bus Software, Inc.
Presentation Design
~–1
by Charlie Cook
 “Strategy means making
clear-cut choices about
how to compete.”
Jack Welch
Former CEO, General Electric

Copyright © 2014 by Glo-Bus Software, Inc. 0–2

 “Without a strategy the
organization is like a ship
without a rudder.”

Joel Ross and

Michael Kami
Authors and Consultants

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 “If your firm’s strategy can be
applied to any other firm, you
don’t have a very good one.”
David J. Collis and
Michael G. Rukstad

Copyright © 2014 by Glo-Bus Software, Inc. 0–4

 Learning Objectives

1. Understand the concept of “strategy,” how to identify a firm’s

strategy, and the tight connection between its strategy and its quest
for sustainable competitive advantage.
2. Learn why a firm’s strategy evolves over time and why its strategy
is partly proactive and partly reactive.
3. Understand why a company’s strategy needs to pass ethical
scrutiny.
4. Understand the “business model” concept, how a firm’s business
model connects to its strategy, and why its business model is
important.
5. Learn the three tests that distinguish a winning strategy from a
weak or flawed strategy and why good strategy and good strategy
execution are the most trustworthy signs of good management.
Copyright © 2014 Glo-Bus Software, Inc. 1–5
 Chapter 1 Roadmap

 What Do We Mean by “Strategy?”

 Strategy and the Quest for Competitive Advantage
 Identifying a Firm’s Strategy
 Why a Firm’s Strategy Evolves Over Time
 A Firm’s Strategy Is Partly Proactive and Partly Reactive
 Strategy and Ethics: Passing the Test of Moral Scrutiny
 The Relationship Between a Firm’s Strategy and Its Business
Model
 What Makes a Strategy a Winner?
 Why Crafting and Executing Strategy Are Important Tasks

Copyright © 2014 Glo-Bus Software, Inc. 1–6

 Three Strategic Questions
All Firms Must Answer

What’s should the What is our plan

What’s the
company’s future for running the
company’s company and
direction be and what
present achieving the
are our performance
situation? targets? targeted results?

Industry conditions? Emerging buyer needs to Actions to move the firm

Competitive pressures? serve? in the intended direction
Current market standing? Growth opportunities to Actions to compete
pursue? against rivals
Competitive strengths
and weaknesses? Markets to deemphasize or Actions to attract
even abandon? customers
Profitability?
Choosing a strategic path for Actions to achieve the
Financial strength and the company to pursue targeted financial and
credit rating? market performance
Deciding how to measure
the firm’s success

Copyright © 2014 Glo-Bus Software, Inc. 1–7

 What Do We Mean by “Strategy”?

 A company’s strategy is defined by the

specific market positioning, competitive
moves, and business approaches that form
management’s answer to “What’s our plan for
running the company and producing good
results?”
When company managers craft and embrace a strategy,
they are committing to undertake one set of actions
rather than another in endeavoring to make the
company successful in the marketplace and achieve
good business performance.
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 Core Concept: Strategy

A firm’s strategy consists of the competitive

moves and business approaches that managers
employ to attract and please customers, compete
successfully, capitalize on opportunities to grow
the business, respond to changing market
conditions, conduct operations, and achieve the
targeted financial and market performance.
When company managers craft and embrace a
strategy, they are committing to undertake
one set of actions rather than another.

Copyright © 2014 Glo-Bus Software, Inc. 1–9

 How Are Important Strategic Choices
Made?

Ways
Ways toto Arrive
Arrive at
at
Strategic
Strategic Choices
Choices

Strategic
Strategic thinking
thinking
Decisions
Decisions based
based
Trial-and-error
Trial-and-error on
on the
the part
part of
of key
key
on
on analysis
analysis of
of
organizational
organizational executives
executives and
and their
their
the
the company’s
company’s
learning
learning appetite
appetite for
for risk-
risk-
situation
situation
taking
taking

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 The Hows That Comprise a Firm’s Strategy

How best to respond to

How to attract, please,
changing economic and
and retain customers
market conditions
A coherent
combination of
actions and How to manage the
How to compete against
approaches functional pieces of the
rivals
about how to business
run the
company

How to capitalize on
How to achieve the firm’s
growth opportunities
performance targets
and grow the business

Copyright © 2014 by Glo-Bus Software, Inc. 1–11

 Choosing the Strategy

 In choosing among all the “hows” and crafting a

strategy for the company to pursue, management
is saying,
“Among all the many different business approaches
and ways of competing we could have chosen, we
have decided to employ this particular combination of
competitive and operating approaches to move the firm
in the intended direction, strengthen its market position
and competitiveness, and meet or beat our
performance targets.”

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 The Essence of Good Strategy-Making

 Good strategy-making is making choices to

compete differently from rivals by:
► Appealing to buyers in ways that set a company apart
from rivals—particularly when it comes to doing what
rivals don’t do or can’t do
► Staking out a market position that is not crowded with
other strong competitors

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 The Importance of Competing Differently

 Really successful strategies contain a distinctive

“aha” element that
► Sets a company apart from rivals
► Attracts buyer attention
► Delivers what buyers perceive as superior value
compared to the offerings of rivals
► This superior value is what converts buyers into loyal
customers

Copycat strategies rarely work!!!

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 Strategy and the Quest for
Competitive Advantage

 A firm achieves competitive advantage when a

profitable number of buyers are drawn to
purchase its products or services rather than
those of competitors.

But a competitive advantage that is lasting or

durable or sustainable is even better!

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 Core Concept

A firm achieves sustainable competitive

advantage when buyers are drawn to
purchase its products or services rather
than those of competitors and when the
basis for such purchases is durable,
despite efforts of competitors to overcome
or otherwise erode the appeal of its offering.

Copyright © 2014 Glo-Bus Software, Inc. 1–16

 Strategic Approaches That Set a Firm Apart
and Lead to Competitive Advantage

Dependable
Dependable Routes
Routes to
to
Competitive
Competitive Advantage
Advantage

Becoming
Becoming thethe Offering
Offering unique
unique Focusing
Focusing on
on aa Developing
Developing
industry’s
industry’s differentiating
differentiating specific
specific market
market specialized
specialized
lowest-cost
lowest-cost features
features to
to niche
niche of
of expertise
expertise and
and
provider
provider customers
customers customers
customers resources
resources

Copyright © 2014 Glo-Bus Software, Inc. 1–17

 Strategic Approaches to Building
Sustainable Competitive Advantage

 Four dependable approaches to achieving a

competitive edge over rivals:
1. Striving to become the industry’s low-cost provider (being
more cost efficient than rivals).
2. Outcompeting rivals on important differentiating features
(having a more appealing product/service).
3. Doing a better job than rivals of serving the special needs
and tastes of buyers in a niche market.
4. Developing expertise and resource strengths that rivals
cannot easily imitate or trump with capabilities of their own.

Copyright © 2014 Glo-Bus Software, Inc. 1–18

 Why Winning a Sustainable
Competitive Advantage Matters

 A firm will earn significantly higher profits when it has a

competitive advantage than when competing with no
advantage or at a competitive disadvantage.
 Without a strategy leading to competitive advantage, a firm
risks being outcompeted by stronger rivals and/or locked
into mediocre financial performance.

Consequently, the quest for sustainable

competitive advantage should always rank
center stage in a crafting a strategy!

Copyright © 2014 Glo-Bus Software, Inc. 1–19

 Why Bother with Crafting a Strategy ?

 A clear, specific, and deliberate action plan:

► Helps avoid conflicting or inconsistent or uncoordinated strategic
actions and decisions on the part of different mangers in different
parts of the organization
► Helps clarify what to do to strengthen the firm’s competitive
position and try to build a competitive edge over rivals
► Lays out a path for improving the firm’s performance
 A creative, distinctive strategy:
► Sets the firm apart from rivals and deliver superior value to
customers
► Attracts buyers to a firm’s product/service despite the efforts of
competitors to erode this appeal
► Can be a reliable pathway to above average profitability
Copyright © 2014 Glo-Bus Software, Inc. 1–20
 Figure 1.1 Identifying a Company’s Strategy—What to Look For

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 Why a Firm’s Strategy
Evolves over Time
 Occasions often arise when it becomes advisable
or necessary to modify strategy in response to:
► Changing market conditions
► Advancing technology
► Fresh moves of competitors
► Shifting buyer needs and preferences
► Emerging market opportunities
► New ideas for improving the strategy
► Mounting evidence that some parts of the strategy are
no longer working well
all of which can impair company performance
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 CORE CONCEPT

Changing circumstances and ongoing

management efforts to improve the strategy
cause a company’s strategy to evolve over
time—a condition that makes the task of
crafting a strategy a work in progress, not
a one-time event.

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 Strategy Is Partly Proactive
and Partly Reactive

 The typical firm’s strategy is a blend of:

► Current strategy elements that seem to be working
well enough to be continued
► New proactive actions that managers believe have
good potential for improving the strategy and boosting
the firm’s performance
► As-needed strategic reactions developed in response
to unanticipated developments and fresh market
conditions

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 Figure 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives
and Reactive Adjustments

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 Strategy—Distinguishing Between What
Is Legal and What Is Ethical
 Just because a strategic action or business
approach is legal does not necessarily mean it is
ethical or morally acceptable
 Ethical standards are about “right” vs. “wrong”,
“moral” versus” immoral”, and not crossing the
line from “should do” (or “okay to do”) to “should
not do”.
What business behaviors can you identify that
are legal but not ethical or morally acceptable?

Copyright © 2014 Glo-Bus Software, Inc. 1–26

 Strategy, Ethics, and
the Test of Moral Scrutiny

 A strategy is ethical only if it passes the test of

moral scrutiny
► Requirement 1:
• It cannot entail actions and behaviors that cross the line from
“should do” to “should not do” (because actions or behaviors
are unsavory, shady, unconscionable, injurious to others, or
harmful to the environment)
► Requirement 2:
• It must allow management to fulfill its ethical duties in a manner
that takes into account the legitimate interests of all stakeholders.

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 CORE CONCEPT

A strategy is not ethical just because it

involves actions that are legal. To meet the
standard of being ethical, a strategy must
entail actions that can pass moral scrutiny in
the sense of not being unsavory, shady,
unconscionable, or injurious to others.

Copyright © 2014 Glo-Bus Software, Inc. 1–28

 The Relationship Between a Firm’s
Strategy And Its Business Model

A Company’s A Company’s
Strategy Business Model

Concerns whether
Deals with a
the revenues and
company’s
costs flowing from
competitive
the strategy
initiatives
demonstrate the
and business
business can be
approaches
profitable and viable

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 The Two Crucial Elements of a
Company’s Business Model
 Its Customer Value Proposition
► How the firm will satisfy customer needs and requirements at a
price customers will consider to be a good value.
The greater the value delivered to customers and the lower the
price, the more attractive the value proposition is to customers.
 Its Profit Proposition (or “Profit Formula”)
► How the firm will create and deliver customer value in a cost-
efficient manner at a price that produces enough revenues to
cover costs and enable attractive profits.
The lower a firm’s costs are in relation to the revenues generated,
the more appealing is its profit proposition or “profit formula.”

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 CORE CONCEPT

A firm’s business model is a blueprint for how its

strategy and operating approaches will create
value for customers while also generating ample
revenues to cover costs and realize a profit.
Without the ability to earn adequate profits, a
firm’s strategy and operating blueprint are flawed,
its business model is not viable, and its ability to
survive is questionable.

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 The Business Model of Network TV
and Radio Broadcasters

 The Customer Value Proposition

► Provide audiences with free and appealing
programming content.
 The Profit Proposition
► Charge advertising fees based on an audience size that
more than covers the full costs of providing the program
content.

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 The Business Model of
Newspapers and Magazines

 The Customer Value Proposition

► Delivering valuable or interesting information and
entertainment to readers.
 The Profit Proposition
► Securing sufficient revenues from advertising fees and
subscriptions to more than cover the costs of producing
and delivering their products to readers.

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 Gillette’s Business Model in Razor Blades

 The Customer Value Proposition

► To provide a close comfortable shave using a razor (a one-time
purchase) and razor blades (purchased repeatedly).

 The Profit Proposition

► To sell a “master product”—the razor—at an attractively low price
and then make money on repeat purchases of inexpensively-
produced razor blades priced to yield high profit margins.
► Printer manufacturers pursue much the same business model as
Gillette—selling printers at low (virtually breakeven) prices and
making large profit margins on repeat purchases of printer
supplies, especially ink cartridges.

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 Why a Firm’s Business Model Has to Be
Carefully Evaluated
 The strategy managers craft to execute the company’s business
model may or may not result in attractive profitability
 Having a customer value proposition that actually satisfies buyer
needs and requirements at a price buyers will consider a good
value is necessary but not sufficient to determine the merits of
a company’s business model.
 The sufficient condition that validates a company’s business
model is whether the price being charged generates revenues
big enough to
► Cover the costs of delivering the value to customers and also
► Yield a big enough profit margin to produce attractive profits and
return on investment
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 Core Concept

The nitty-gritty issue surrounding a company’s

business model is whether it can execute its
customer value proposition profitably
• The revenues that a company’s business model generates are a
function of the volume of customers attracted at the price being
charged
• The costs of a company’s business model approach are
dependent on the resources and business processes it utilizes
and the cost-efficiency of its operating systems
• The lower a firm’s costs are in relation to its revenues, the greater
the profitability of its business model

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 Proven vs. Unproven Business Models

 Companies that have been in business for a while

and are making sufficiently appealing profits have
a “proven” business model.
► A track record of good bottom-line profitability and return on
investment provides credible evidence that a company’s business
model approach is working and has promising long-term viability

 Firms in a start-up mode or that are losing money

have “questionable” or “unproven” business
models—it remains to be seen how good their
business model is.
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 The Three Tests of a Winning Strategy

The
TheCompetitive
Competitive The
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Goodnessofof The
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Toqualify
qualifyasasaa
winning
winningstrategy,
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to
pass
passall
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three
tests
tests

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 What Makes a Strategy a Winner?

 Testing the merits of one strategy versus another

requires getting satisfactory answers to three
questions:
1. How well does the strategy fit the company’s
situation?
2. Is the strategy helping the company achieve a
sustainable competitive advantage?
3. Is the strategy producing good company
performance?

Copyright © 2014 Glo-Bus Software, Inc. 1–39

 Why Crafting and Executing Strategy
Are Core Management Tasks
 Because it is management’s responsibility to proactively shape
how the firm will conduct business
► A clear and reasoned strategy is management’s prescription for
doing business, its road map to competitive advantage, and its
game plan for pleasing customers and improving financial
performance
 Because nothing affects a company’s ultimate success or failure
more fundamentally than how well its management team:
► Charts the firm’s direction
► Develops competitively effective strategic moves and business
approaches
► Pursues what must be done internally to produce good day-in/day-
out strategy execution and operating excellence
Copyright © 2014 Glo-Bus Software, Inc. 1–40
 Good Strategy + Good Strategy Execution
= Good Management

 The better conceived a company’s strategy and the more

competently it is executed, the more likely that the
company will be a standout performer, both financially and
in the marketplace
 In stark contrast, a company that lacks clear-cut direction,
has vague or undemanding performance targets, has a
muddled or flawed strategy, or can’t seem to execute its
strategy competently is a company whose financial
performance is probably suffering, whose business is at
long-term risk, and whose management is sorely lacking

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 CORE CONCEPT

How well a firm performs and the degree of

market success it achieves are directly attributable
to the caliber of its strategy and the proficiency
with which the strategy is executed.
executed

Excellent execution of an excellent strategy

is the best test of managerial excellence.

Copyright © 2014 Glo-Bus Software, Inc. 1–42

 The Road Ahead

 Every business student and every aspiring manager

needs to know the answer to the following question:
► What must managers do, and do well, to give a firm its
best shot for being attractively profitable and
successful in the marketplace?
► The answer that emerges—and becomes the biggest
lesson of this course—is that doing a good job of
managing requires good strategic thinking, good
strategy-making, and good strategy execution.
Welcome and best wishes for your success!

Copyright © 2014 Glo-Bus Software, Inc. 1–43

 The Road Ahead (cont’d)

 In the coming chapters, we will explore strategic thinking,

the core concepts and tools of strategic analysis, and the
processes of crafting and executing strategy.
 Then, in the strategy simulation exercise you will manage
a firm in competition with firms managed by classmates,
and have an excellent learn-by-doing opportunity to:
► Apply what you have read about in the chapters.
► Gain experience in crafting and executing strategy for your
firm and being held accountable for how well your firm
performs.

Copyright © 2014 Glo-Bus Software, Inc. 1–44

 What You Can Expect to Learn

 Lesson 1:
► First-rate capabilities in crafting and executing strategy
are basic to managing successfully and are skills every
manager needs to possess.
 Lesson 2:
► Managers don’t deserve applause for coming up with a
weak strategy that results in weak (or worse) financial
performance and a weak (or worse) industry standing.

Copyright © 2014 Glo-Bus Software, Inc. 1–45

 “Commerce is a game of skill which many
people play, but which few play well.”
Ralph Waldo Emerson, poet and essayist

If the chapters, the experience of running your firm, and

the other course-related assignments help you become
a savvy competitor and better equip you to succeed in
business, then the time and energy you spend in this
course will prove worthwhile.

Copyright © 2014 Glo-Bus Software, Inc. 1–46