Strategy means making clear-cut choices about how to compete.

Transcription

1 Strategy means making clear-cut choices about how to compete. Jack Welch Former CEO, General Electric Copyright 2014 by Arthur A. Thompson. All rights reserved. Not for distribution. Published and distributed by McGraw Hill Education, Burr Ridge, Illinois Presentation Design ~ 1 by Charlie Cook 0 2 Without a strategy the organization is like a ship without a rudder. If your firm s strategy can be applied to any other firm, you don t have a very good one. Joel Ross and Michael Kami Authors and Consultants David J. Collis and Michael G. Rukstad Learning Objectives Roadmap 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. 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. Page 1

2 Three Strategic Questions All Firms Must Answer What Do We Mean by Strategy? What s the company s present situation? Industry conditions? Competitive pressures? Current market standing? Competitive strengths and weaknesses? Profitability? Financial strength and credit rating? What s should the company s future direction be and what are our performance targets? Emerging buyer needs to serve? Growth opportunities to pursue? Markets to deemphasize or even abandon? Choosing a strategic path for the company to pursue Deciding how to measure the firm s success What is our plan for running the company and achieving the targeted results? Actions to move the firm in the intended direction Actions to compete against rivals Actions to attract Actions to achieve the targeted financial and market performance 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. 1 7 ~ 8 Core Concept: Strategy How Are Important Strategic Choices Made? A firm s strategy consists of the competitive moves and business approaches that managers employ to attract and please, 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. Trial-and-error organizational learning Ways to Arrive at Strategic Choices Strategic thinking on the part of key executives and their appetite for risktaking Decisions based on analysis of the company s situation The Hows That Comprise a Firm s Strategy Choosing the Strategy How to attract, please, and retain How to compete against rivals How to capitalize on growth opportunities and grow the business A coherent combination of actions and approaches about how to run the company How best to respond to changing economic and market conditions How to manage the functional pieces of the business How to achieve the firm s performance targets 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 Copyright 2014 GLO-BUS Software, Inc. Page 2

3 The Essence of Good Strategy-Making The Importance of Competing Differently 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 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 Copycat strategies rarely work!!! 1 13 ~ 14 Strategy and the Quest for Competitive Advantage Core Concept 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! 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 Strategic Approaches That Set a Firm Apart and Lead to Competitive Advantage Strategic Approaches to Building Sustainable Competitive Advantage Dependable Routes to 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). Becoming the industry s lowest-cost provider Offering unique differentiating features to Focusing on a specific market niche of Developing specialized expertise and resources 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. Page 3

4 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! 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 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 Figure 1.1 Identifying a Company s Strategy What to Look For 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 CORE CONCEPT Strategy Is Partly Proactive and Partly Reactive 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. 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 Copyright 2014 GLO-BUS Software, Inc. Page 4

5 Figure 1.2 A Company s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments 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? Strategy, Ethics, and the Test of Moral Scrutiny CORE CONCEPT 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. 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 The Relationship Between a Firm s Strategy And Its Business Model The Two Crucial Elements of a Company s Business Model Its Customer Value Proposition A Company s Strategy Deals with a company s competitive initiatives and business approaches A Company s Business Model Concerns whether the revenues and costs flowing from the strategy demonstrate the business can be profitable and viable How the firm will satisfy customer needs and requirements at a price will consider to be a good value. The greater the value delivered to and the lower the price, the more attractive the value proposition is to. Its Profit Proposition (or Profit Formula ) How the firm will create and deliver customer value in a costefficient 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 Copyright 2014 GLO-BUS Software, Inc. Page 5

6 CORE CONCEPT A firm s business model is a blueprint for how its strategy and operating approaches will create value for 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. 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 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. 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 inexpensivelyproduced 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 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 and also 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 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 Yield a big enough profit margin to produce attractive profits and return on investment 1 35 ~ 36 Copyright 2014 GLO-BUS Software, Inc. Page 6

7 Proven vs. Unproven Business Models The Three Tests of a Winning Strategy 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 The Competitive Advantage Test Is the strategy resulting in better strategic performance? The Goodness of Fit Test How well does the strategy fit the firm s situation? The Performance Test Is the strategy producing better financial performance? 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. To qualify as a winning strategy, a strategy has to pass all three tests ~ What Makes a Strategy a Winner? Why Crafting and Executing Strategy Are Core Management Tasks 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? 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 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/dayout strategy execution and operating excellence 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 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. Excellent execution of an excellent strategy is the best test of managerial excellence Copyright 2014 GLO-BUS Software, Inc. Page 7

8 The Road Ahead The Road Ahead (cont d) 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! 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 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. 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. Page 8