Strat Quiz 1

Ch 1-3

What is Strategy?

The set of coordinated actions that a company’s managers take in order to outperform the company’s competitors and achieve superior profitability

well crafted strategies provide lasting success - not just short term

guidance on what they should do and what they should not do

How to compete (strategy is about making choices and choosing how…)

How to position the company in the marketplace

how to attract customers

how to compete against rivals

how to achieve the company’s performance targers

how to capitalize on opportunities to grow the business

how to respond to changing economic and market conditions

Strategy is about competing differently

every company’s strategy needs to have a distinctive element that draws in customers and provides a competitive advantage

do what rival firms don’t do or what they can’t do - pressures rivals

copying does not make a good strategy

involves making choices about how best to compete differently from rivals

guides the company in both what it must do and what is must not do

Successful strategies…

are predicted on actions, business approaches, and competitive moves aimed at:

1. appealing to buyers in ways that set a company apart from its rivals

   • by either providing products with higher perceived values or efficiently producing at lower costs

2. staking our a market position that is not crowded with strong competitors

3 Central Questions all Business face

1. What is our present situation?

   • industry conditions, competitive pressures, market standing, competitive strengths and weaknesses, future prospects in light of changes taking place in the business environment

2. What should the company’s future direction be and what performance targets should we set?

   • what buyer needs to try to satisfy

   • which growth opportunities to emphasize

   • where to head and what outcomes to strive to achieve

3. What’s our plan for running the firm and achieving good results?

   • challenges managers to craft a series of competitive moves and business approaches-henceforth called a strategy-for heading the firm in the intended direction, staking out a market position, attracting customers, and achieving the targeted outcomes

Identifying a firm’s strategy - what to look for (the pattern or actions that define a company’s strategy)

• actions to strengthen the firm’s bargaining position with suppliers, distributors, and others

• actions to gain market share via more performance features, better designs, quality or customer service, wider product selection, or other such actions

• actions to gain increased market share or profitability via lower costs

• actions to enter new product or geographic markets or to exit existing ones

• actions to capture emerging market opportunities and defend against external threats to the company’s business prospects

• actions to strengthen standing and reputation through corporate responsibility and environmental sustainability programs

• actions to strengthen corporate culture, motivate employees, and create a productive working environment

• actions to strengthen competitiveness via strategic alliances, and collaborative partnerships, mergers, or acquisitions

Achieving competitive advantage

required meeting customer needs either more effectively (with products or services that customers value more highly than those offered by rivals) or more efficiently (by providing products or services at a lower cost to customers)

Achieving SUSTAINABLE competitive advantage requires:

• giving buyers lasting reasons to prefer a firm’s products or services over those of its competitors

• developing expertise and long-term competitively valuable capabilities that cannot be readily overcome by rivals

• putting the constant quest for sustainable competitive advantage at center stage in crafting the company’s strategy

5 basic strategic approaches

• low-cost provider

• focused differentiation

• focused low-cost

• broad differentiation

• best-cost provider

low-cost provider strategy

achieving a cost-based advantage over rivals by driving costs out of the business

broad differentiation strategy

differentiating the firm’s product or service from rivals in ways that appeal to a broad spectrum of buyers

focused low-cost strategy

concentrating on a narrow buyer segment (or market niche) by having lower costs to serve niche members at a lower price

focused differentiation strategy

concentrating on a narrow buyer segment (or market niche) by offering buyers customized attributed that meet their specialized needs and tastes better than rivals’ products

best-cost provider strategy

giving customers more perceived value for their money by satisfying their expectations on key quality features, performance, and/or service attributes that match or exceed their price expectations

Why a company’s strategy evolves over time

managers typically make adjustments in their company’s strategy in response to:

• changing market conditions

• advancing technology

• fresh moves of competitors

• shifting buyer needs

• emerging market opportunities

• new ideas for improving the strategy

Company’s strategy is a blend of proactive initiatives and reactive adjustments

deliberate strategy - proactive planned strategy elements

emergent strategy - reactive strategy elements

strategies are both proactive and reactive - the current (realized) strategy is determined by new planned initiatives and strategy elements from prior periods and new elements that emerge as managers adaptively react to changing circumstances

other strategy elements that don’t work are abandoned from the proactive initiatives

a company’s strategy is partly proactive and partly reactive

realized (current) strategy is a blend of

• proactive (deliberate) strategy elements that include planned initiatives to improve the company’s financial performance and secure a competitive edge

• reactive (emergent) strategy elements developed on the fly in response to unanticipated developments and fresh market conditions

• abandoned and superseded strategy elements that no longer fit with the company’s ongoing strategy

a company’s strategy and its business model (money)

How the firm will make money:

• by providing customers with value

• the firm’s customer value proposition

• by generating revenues sufficient to cover costs and produce attractive profits

• the firm’s profit formula

it takes a proven business model - one that yields appealing profitability - to demonstrate viability of a firm’s strategy

the relationship between a company’s strategy and its business model

Realized strategy:

• competitive initiatives

• business approaches

Business Model:

• value proposition

• profit formula

Business Model Elements: The Customer Value Proposition

The customer value proposition is:

• satisfying buyer wants and needs at a price customers will consider a good value

• the greater the value provided (V) and the lower the price (P), the more attractive the value proposition is to customers

Business Model Elements: The Profit Formula

The profit formula:

• Created a cost structure that allows for acceptable profits, given that pricing is tied to the customer value proposition

  • V - the value provided to customers

  • P - the price charged to customers

  • C - the firm’s costs

• The lower the costs (C) for a given customer value proposition (V-P), the greater the ability of the business model to be a moneymaker

The Business Model and the Value-Price-Cost Framework

Customer Value (V)

• Customer’s share (Customer Value Proposition)

Product Price (P)

• Firm’s share (Profit Formula)

Per-Unit Cost (C)

Three tests of a winning strategy:

• The Fit Test

  • exhibits good fit with situation (external and internal aspects of a firm’s dynamic situation)

• The Competitive Advantage Test

  • results in competitive advantage

• The Performance Test

  • promotes superior performance (as indicated by the firm’s profitability, financial and competitive strengths, and market standing)

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

Good Strategy + Good Strategy Execution = Good Management

What does the Strategy-Making, Strategy-Executing Process Entail?

1. Developing a strategic vision, a mission statement, and a set of core values

2. setting objectives for measuring the firm’s performance and tracking its progress

3. crafting a strategy to move the firm along its strategic course and achieve its objectives

4. executing the chosen strategy efficiently and effectively

5. monitoring developments, evaluation performance, and initiating corrective adjustments

Strategy-Making Strategy-Executing Process

Factors shaping decisions in the strategy-making strategy-execution process

external considerations

• does sticking with the company’s present strategic course present attractive opportunities for growth and profitability

• what kind of competitive forces are industry members facing, and are they acting to enhance or weaken the company’s prospects for growth and profitability

• what factors are driving industry change, and what impact on the company’s prospects will the have

• how are industry rivals positioned, and what strategic moves are they likely to make next

• what are the key factors of future competitive success, and does the industry offer good prospects for attractive profits for companies possessing those capabilities

internal considerations

• does the company have an appealing customer value proposition

• what are the company’s competitively important resources and capabilities, and are they potent enough to produce a sustainable competitive advantage

• does the company have sufficient business and competitive strength to seize market opportunities and nullify external threats

• are the company’s costs competitive with those of key rivals

• is the company competitively stronger or weaker then key rivals

Stage 1: Developing a Strategic Vision, Mission Statement, and Set of Core Values

Developing a strategic vision:

• delineates management’s aspirations for the firm to its stakeholders

• provides direction: “where we are going”

• sets forth a compelling rationale (strategic soundness) for the firm’s direction

• uses distinctive and specific language to set the firm apart from its rivals

Wording a Vision Statement Dos

• Be Graphic

• be forward-looking and directional

• keep it focused

• have some wiggle room

• be sure the journey is feasible

• indicate why the directional path makes good business sense

• make it memorable

Wording a Vision Statement Don’ts

• don’t be vague or incomplete

• don’t dwell on the present

• don’t use overly broad language

• don’t state the vision in bland or uninspiring terms

• don’t be generic

• don’t rely on superlatives

• don’t run on and on

Why communicate the vision?

• fosters employee commitment to the firm’s chosen strategic direction

• ensures understanding of its importance

• motivates, informs, and inspires internal and external stakeholders

• demonstrates top management support for the firm’s future strategic direction and competitive efforts

Putting the Strategic Vision in Place - What needs to be done:

• put the vision in writing and distribute it

• hold meetings to personally explain the vision and its rationale

• creates a memorable slogan or phrase that effectively expresses the essence of the vision

• emphasize the positive payoffs for making the vision happen

Why a Sound, Well-Communicated Strategic Vision Matters

• it crystallizes senior executives’ own views about the firm’s long-term direction

• it reduces the risk of rudderless decision making

• it is a tool for winning the support of organization members to help make the vision a reality

• it provides a beacon for lower-level managers in setting departmental objectives and crafting departmental strategies that are in sync with the firm’s overall strategy

• it helps an organization prepare for the future

Developing a Company Mission Statement

A well-conceived company mission statement:

• uses specific language to give the firm its own unique identity

• describes the firm’s present purpose- “who we are, what we do, and why we are here”

• focuses on describing the firm’s business, not on “making a profit”- earning a profit is an objective, not a mission

An “Ideal” Mission Statement

• identifies the company’s product or services

• specifies the. buyer needs it seeks to satisfy

• identifies the customer groups or markets it is endeavoring to serve

• gives the company its own identity that sets the company firm apart from its rivals

• clarifies the firm’s purpose and business makeup to stakeholders

Linking the Vision and Mission with Core Values

Core Values:

• are the beliefs, traits, and behavioural norms that employees are expected to display in conducting the firm’s business and in pursuing its strategic vision and mission

• become an integral part of the firm’s culture and what makes it tick when strongly espoused and supported by top management

• match the firm’s vision, mission, and strategy, contributing to the firm’s business success

Stage 2: Setting Objectives - The purpose of setting objectives:

• to convert the vision and mission into specific, measurable, challenging yet achievable performance targets and deadlines for achieving these targets

• to focus efforts and align actions throughout the organization

• to serve as yardsticks for tracking a firm’s performance and progress

• to provide motivation and inspire employees to greater levels of effort

Converting the Vision and Mission into Specific Performance Targets

Characteristics of Well-Stated Objectives:

• specific

• quantifiable (measurable)

• challenging (motivating)

• deadline for achievement (time-limited)

Setting stretch objectives (how they promote better overall performance)

setting stretch objectives promotes better overall performance because stretch targets:

• push a firm to be more inventive

• increase the urgency for improving financial performance and competitive position

• cause the firm to be more intentional and focused in its actions

• create an exciting work environment and attract the best people

• help prevent internal inertia and contentment with modest gains in performance

cautions about stretch goals

realistic stretch goals:

• definitely reachable, with a strong and coordinated effort on the part of company personnel

overly ambitious stretch goals:

• are usually beyond the organization’s capabilities to reach, regardless of the level of effort

• involve radical expectations that often go unachieved, and run the risk of killing motivation, eroding employee confidence, and damaging both worker and company performance

• can work as envisioned if:

  • the company has ample resources and capabilities

  • its recent performance is strong

What kinds of objectives to set

Financial objectives:

• communicate top management’s goals for financial performance

• are focused internally on the firm’s operations and activities

strategic objectives:

• are the firm’s goals related to market standing and competitive position

• are focused externally on competing successfully against the firm’s rivals

The need for short-term and long-term objectives

short-term objectives:

• focus attention on quarterly and annual performance improvements to satisfy near-term shareholder expectations

long-term objectives”

• force consideration of what to do now to achieve optimal long-term performance

• help pose a barrier to overemphasizing achieving just short-term results and postponing/delaying actions needed to achieve long-term performance targets

Examples of common financial objectives

• an x percent increase in annual revenues

• annual increases in after-tax profits of x percent

• annual increases in earnings per share of x percent

• annual dividend increases of x percent

• profit margins of x percent

• an x percent return on capital employed (ROCE) or return on shareholders’ equity investment (ROE)

• increase shareholder value- in the form of an upward-trending stock price

• bond and credit ratings of x

• internal cash flows of x dollars to fund capital investment

Examples of common strategic objectives

• winning an x percent market share

• achieving lower overall costs than rivals

• overtaking key competitors on product performance or quality or customer service

• deriving x percent of revenues form the sale of new products introduced within the part five years

• having broader or deeper technological capabilities than rivals

• having a wider product line than rials

• having a better-known or more powerful brand name than rivals

• having stronger national or global sales and distribution capabilities than rivals

• getting new or improved products to market ahead of rivals

the need for a balanced approach to objective setting

a balanced scorecard approach:

• strives to place a balanced emphasis on achieving both financial and strategic objectives by tracking measures of both financial performance and the competitiveness of its market position

The four dimensions of a balanced scorecard:

• financial objectives

• customer: objectives relating to customers and the market

• internal process objectives relating to improving productivity and quality

• organizational objectives concerning human capital, culture, infrastructure, and innovation

good strategic performance is the key to better financial performance

good financial performance is not enough:

• current financial results are lagging indicators and do not assure the development of competitive capabilities for delivering better financial results in the future

• setting and achieving stretch strategic objectives signal improvements in a firm’s competitiveness and strength in the marketplace

• ongoing good strategic performance is a leading indicator of a firm’s increasing capability to deliver improved future financila performance

Setting objectives for every organizational level

• breaks down overall performance targets into targets for each of the organization’s separate units

• forsters setting lower-level performance targets or outcomes that support achievement of firm-wide strategic and financial objectives

• extends the top-down objective-setting process to all organizational levels

Stage 3: crafting a strategy - strategy making:

• addresses a series of strategic HOWs

• requires choosing among strategic alternatives

• should always entail actions to do things differently from competitors rather than running with the herd

• is a collaborative team effort that involves managers in various positions at all organizational levels

Strategy-making involves managers at all organizational levels

chief executive officer (CEO):

• has ultimate responsibility for leading the strategy-making process as the strategic visionary and chief architect of strategy

senior executives:

• fashion the major strategy components involving their areas of responsibility

managers of subsidiaries, divisions, geographic regions, plants, and other operating units (and key employees with specialized expertise):

• utilize on-the-scene familiarity with their business units to orchestrate their specific pieces of the strategy