Chapter 1 Why is Strategy Important

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Chapter 1 Why is Strategy Important?
Without a strategy the organization is a ship
without a rudder Ross Kami If you dont
know where you are going, any road will take you
there The Koran (Alice in
Wonderland) Unless we change our direction we are
likely to end up where we are headed Chinese
Proverb Managements job is to see the company as
it is and what it can become and how to get it
there Emery More important than a business
skill, strategic planning is a critical life
skill Charnes
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Thinking StrategicallyThe 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 (objectives)
• 3. How will we get there?

Major Internal and External Environment Scanning
Effort
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What Is Strategy?
Strategic Actions

• Consists of the combination of competitive moves
  and business approaches used by managers to run
  the company
• Managements game plan to
• Increase shareholder value (corporate)
• Stake out a market position (biz/comp)
• Attract and please customers (biz/comp)
• Compete successfully (biz/comp)
• Conduct operations (functional/ops)
• Achieve organizational objectives (all)
• Satisfy stakeholders (all)

Create a Competitive Advantage through
distinctive competencies in industry KSFs
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Benefits of a Strategic Approachto
Managing

• Guides entire firm regarding what it iswe are
  trying to do and to achieve
• Helps unify numerous strategy-related decisions
  across the company
• Creates a proactive atmosphere
• Promotes development of an evolving business
  model focused on bottom-line success
• Provides basis for determining how best to
  allocate company resources

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Striving for Competitive Advantage

• Central thrust of a companys strategy involves
  efforts to create and sustain a competitive
  advantage
• Create Distinctive Competencies in Industry KSFs
• Use offensive and defensive moves to achieve
  financial and strategic objectives

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Strategic Approaches to Building Competitive
Advantage

• Strive to be the industrys 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
• Strive to offer the best value (best-cost
  provider)
• Develop expertise, resource strengths, and
  capabilities not easily imitated by rivals
  (Distinctive Competencies and a Distinctive
  Culture)

What should Erskines Competitive Advantage be?
Should the determination of the come before or
after the vision and/or mission statement?
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Identifying a companys Strategy
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A Companys Strategy Is Partly Planned and
Partly Reactive
Emergent Strategy
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Strategy and EthicsPassing the test of moral
scrutiny

• Ethical and moral standards are not governed by
  what is legal
• It involves right vs. wrong and duty
• Spectrum of grey areas, e.g. tobacco/alcohol ads,
  low cost apparel mfg, drug companies

How do you measure/rate a companys ethics?
Consider that you are a manager of a mutual fund
that specializes in maintaining a portfolio of
just the most ethical companies.
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What Is a Business Model?

• A business model describes the way a firm
  delivers customer value
• How it intends to get people to shop at its
  stores (e.g., provide clean and attractive
  interiors, helpful staff, use loss leader
  pricing, cultivate loyal customers with club
  cards, etc.)
• How it will make money--sometimes called the
  revenue model (e.g., efficient warehousing,
  distribution, and inventory control, more
  private-label items, etc.)
• Whether it grows through acquisition or by
  building new stores in other towns or locations
  where the new stores can still be efficiently
  served by its warehousing and distribution system

Really a business strategy
Really a corporate strategy
What is Erskines Business Model?
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Relationship Between Strategy and Business
Model

• Strategy
• Deals with a companys 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

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The Strategy-Making, Strategy-Executing Process
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Corporate Governance
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Characteristics of a Strategic Vision

• Well-stated vision statements
• Where you aspire to be in 5-10 years
• Drive the company
• Excite strong emotions
• Are challenging, uncomfortable, nail biting

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Generic Vision Statements

• Non-Profit
• A world without poverty
• A world with clean water.etc.
• Profit
• Become the supplier of choice for the filtration
  needs throughout the globe
• Become the premier provider of financial services
  in every one of our markets

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Characteristics of a Mission Statement

• Conveys
• What we do (product or service) and for whom
• Why we are here (purpose)
• How we deliver value
• Should guide and constrain the activities and
  strategies

A companys mission is not to make a profit! The
real mission is always What will we do to make
a profit?
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What is the Vision of the Business
Department?What is the Vision of the BA 490
Company?
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Generic Mission Example

• Provide the highest quality, custom measuring
  equipment, on-time, at a competitive price by
  highly motivated employees
• Satisfy consumer electronic needs with quality
  products at the lowest cost
• Statements of Commitment expand and clarify key
  points in a mission statement

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What is the Mission Statement of the BA 490
Company?
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Mission vs. Strategic Vision

• A mission statement focuses on current business
  activities -- who we are and what we do
• Current product and service offerings
• Customer needs being served
• Technological and business capabilities

• A strategic vision concerns a firms future
  business path -- where we are going
• Markets to be pursued
• Future technology-product-customer focus
• Kind of company management is trying to create

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Linking the Vision With Company Values

• A statement of values is often provided to guide
  the companys pursuit of its vision
• Values -- Beliefs, business principles, and ways
  of doing things incorporated into
• Companys operations (e.g., efficient, quality)
• Behavior of workforce (e.g., customer service,
  innovative)
• Values statements
• Contain between four and eight values
• Are ideally tightly connected to and reinforce
  companys vision, strategy, and operating
  practices

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What are Erskines Values? What are the BA 490
Companys Values?
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Setting Objectives
Phase 2 of the Strategic Management Process

• Converts strategic vision and mission into
  specific performance targets (key point)
• Creates consensus of purpose
• Creates yardsticks to track performance
• Pushes firm to focus on results
• Helps prevent complacency and coasting

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Characteristics of Objectives

• Represent commitment to achieve specific
  performance targets
• Well-stated objectives are
• Quantifiable
• Measurable
• Contain a deadline for achievement
• Spell-out how much of what kind of performance by
  when

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Examples Financial Objectives
Good Objectives
Marginal Objectives

• Strong bond and credit ratings
• Sufficient internal cash flows to fund new
  capital investment
• Diversified revenue base

• X increase in annual revenues by 12/31
• X increase annually in after-tax profits by
  12/31
• X increase annually in earnings per share by
  12/31
• X return on assets (ROA) by 12/31
• X return on shareholder investment (ROE) by
  12/31
• Reduced levels of debt by X by 12/31

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Examples StrategicObjectives
Good Objectives
Marginal Objectives

• Winning additional market share (or reaching X
  market share) by 12/31
• Overtaking key competitors on KSFs quality or
  customer service by 12/31
• Achieving lower overall costs than rivals by
  12/31
• Deriving X of revenues from sale of new
  products introduced in past 5 years
• Deriving X of revenues from online sales

• Achieving national or global market coverage for
  firms products
• Having broader or more attractive product
  selection than rivals
• Having a better-known or more respected brand
  name than rivals
• Improving global sales and distribution
  capabilities
• Being a recognized technological leader
• Consistently getting new or improved products to
  market ahead of rivals

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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
• Of equal or greater importance is a companys
  performance on the measures of its strategic
  well-beingits competitiveness and market
  position
• The lead indicators of a companys future
  financial performance and business prospects are
  growing competitiveness and strength in the
  marketplace (e.g., performance on KSFs)

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Short-Range VersusLong-Range Objectives

• Short-Range objectives (tactical)
• Targets to be achieved soon
• Serve as stair steps for reaching long-range
  performance
• Long-Range objectives (strategic)
• Targets to be achieved within3 to 5 years
• Prompt actions now that willpermit reaching
  targetedlong-range performance later

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Where do the BA 490 Companys Objectives come
from?What are the BA490 Companys Objectives?
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Characteristics of Strategic Intent(similar
to a vision)

• Indicates firms intent to stake out a particular
  position over the long-term
• Involves establishing a BHAG big, hairy,
  audacious goal and then devoting the companys
  full resources and energies to achieving it over
  time
• Signals relentless commitment to winning in the
  marketplace

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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 departmental
  objectives
• 4. Individual objectives are established last

What are MBOs?
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Byte Case Assignment

• Debate the Pros and Cons of locating the plant at
  the proposed NE location

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Ultimate Frisbee Case

• 4 male students (roommates) enjoy playing
  U-Frisbee
• Hard to find 14 players 2-7person teams
• Chuck publicizes desire to start a team and set
  1st meeting date
• team is open to all students, especially girls
• 11 students came to the first meeting Tues
  Thurs practices set
• Dues are established to fund travel to compete
  with other universities
• Chuck posts more flyers and 20 students (3 girls)
  are active by the 3rd practice
• Dues used to rent a 15-passenger bus to the 50
  mile trip to the first competition
• Which 15 players should they take on the bus?
  How would the strategic management process guide
  this decision?

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Crafting a Strategy
Phase 3 of the Strategic Management Process

• Develop Strategic Alternatives
• Be mutually exclusive (if not, consider bundling
  together)
• Be plausible and worthwhile
• Address all the strategic issues
• Develop a list of strategic issues from the
  firms situation analysis (external and internal)
• State problems or opportunities in question form,
  e.g., should we distribute internationally?
  Should we upgrade our technology? Should we
  increase our debt position or secure equity
  capital?
• Evaluate Strategic Alternatives
• Evaluate each against established criteria
• Examine ability to satisfy issue

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The Hows ThatDefine a Firm's Strategy

• How to grow the business
• How to please customers
• How to outcompete rivals
• How to respond to changing market conditions
• How to manage each functional piece of the
  business and develop needed organizational
  capabilities
• How to achieve strategic and financial objectives

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Linking Strategy With Ethics

• A companys ethics and high moral standards go
  beyond
• Merely complying with laws and regulations
• A strategy that exemplifies high ethical and
  moral standards addresses
• Issues of duty and
• What is morally responsible
• What it is right to do and not do
• A strategy is not ethical unless it can pass
  moral scrutiny

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A Firms Ethical Responsibilitiesto Its
Stakeholders
Owners/shareholders Rightfully expect some form
of return on their investment
Employees - Rightfully expect respect for their
worth and devoting their energies to firm
Customers - Rightfully expect a seller to provide
them with a reliable, safe product or service
Suppliers - Rightfully expect to have an
equitable relationship with firms they supply
Community - Rightfully expect businesses to be
good citizens in their community
Give examples of stakeholder conflicts
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Figure 1.4 A CompanysStrategy-Making
Hierarchy
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Tasks of Business (or Competitive) Strategy

• Crafting competitive and non-competitive moves to
  build sustainable competitive advantage
• Generic competitive strategies
• Alliances
• Developing competitively valuable competencies
  and capabilities (in KSFs)
• Uniting strategic activities of functional areas
• Gaining approval of business strategies by
  corporate-level officers

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Tests of a Winning Strategy

• GOODNESS OF FIT TEST
• How well is strategy matchedto firms situation?
• COMPETITIVE ADVANTAGE TEST
• Does strategy lead to sustainablecompetitive
  advantage?
• PERFORMANCE TEST
• Does strategy boost firm performance?
• ETHICS TEST
• Are the strategic actions morale and in keeping
  with stakeholder values?