Strategic Management and its utility
Strategy means making clear-cut choices about how to compete. A strategy is a commitment to undertake one set of actions rather than another.
What do we mean by strategy?
A company’s strategy is management’s action plan for running the business and conducting operations. The crafting of a strategy represents a managerial commitment to pursue a particular set of actions in growing the business, attracting and pleasing customers, competing successfully, conducting operations, and improving the company’s financial and market performance. Thus a company’s strategy is all about haw—how management intends to grow the business, how it will build a loyal clientele and outcompete rivals, how each functional piece of the business (research and development, supply chain activities, production, sales and marketing, distribution, finance, and human resources) will be operated, how performance will be boosted. In choosing a strategy, management is in effect 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 in moving the company in the intended direction, strengthening its market position and competitiveness, and boosting performance.” The strategic choices a company makes are seldom easy decisions, and some of them may turn out to be wrong—but that is not an excuse for not deciding on a concrete course of action.
Strategy and the Quest for Competitive Advantage
The heart and soul of any strategy are the actions and moves in the marketplace that managers are taking to improve the company’s financial performance, strengthen its long-term competitive position, and gain a competitive edge over rivals. A creative, distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a company’s most reliable ticket for earning above-average profits. Competing in the marketplace with a competitive advantage tends to be more profitable than competing with no advantage. And a company is almost- certain to earn significantly higher profits when it enjoys a competitive advantage as opposed to when it is hamstrung by competitive disadvantage. Furthermore, if a company’s competitive edge holds promise for being durable and sustainable (as opposed to just temporary), then so much the better for both the strategy and the company’s future profitability. It’s nice when a company’s strategy produces at least a temporary competitive edge, but a sustainable competitive advantage is plainly much better. What makes a competitive, advantage sustainable as opposed to temporary are actions and elements in the strategy that cause an attractive number of buyers to have a lasting preference for a company’s products or services as compared to the offerings of competitors. Competitive advantage is the key to above-average profitability and financial performance because strong buyer preferences for the company’s product offering translate into higher sales volumes (Wal Mart) and/or the ability to command a higher price (Haagen-Dazs), thus driving up earning, return on investment, and other measures of financial performance.
Four of the most frequently used and dependable strategic approaches to setting a company apart from rivals building strong customer loyalty, and winning a sustainable competitive advantage are.
1) Striving to be the industry’s low-cow-cost provider, thereby aiming for a cost-based competitive advantage over rivals. Wal-Mart and Southwest Airlines have earned strong market positions because of the low-cost advantages they have achieved over their rivals and their consequent ability to underprice competitors. Achieving lower costs than rivals can produce a durable competitive edge when rivals find it hard to match the low-cost leader’s approach to driving costs out of the business. Despite years of trying, discounters like Kmart and Target have struck. out trying to match Wal-Mart’s frugal operating practices, super-efficient distribution systems, and its finely honed supply chain approaches that allow it to obtain merchandise ‘ from manufacturers at super-low prices.
2) Outcompeting rivals based on such differentiating feature as higher quality, wider product selection, added performance, value-added services, more attractive styling, technological superiority, or unusually good the mo»ev7|Successful adopters of differentiation strategies include Johnson & Johnson in baby products (product reliability),Barley-Davidson (bad-boy image and king-of-the-road styling), Chanel and Rolex (top-of-the-line prestige), Mercedes-Benz and BMW (engineering design and performance), L. L. Bean (good value), She Amazon. com (wide selection and convenience). Differentiation strategies can be powerful so long as a company is sufficiently innovative to thwart clever rivals in finding ways to copy or closely imitate the features of a successful differentiator’s product offering.
3) Focusing on a narrow market niche and winning a competitive edge by doing a better job than rivals of serving the special needs and tastes of buyers comprising the niche. Prominent companies that enjoy, competitive success in a spec., market niche include eBay in online auctions .Jiffy Lube International in quick ,-changes, McAfee in virus protection software, Starbucks in premium coffees and coffee drinks, Whole Foods Market in natural and organic foods, CNBC and The Weather Channel in cable TV.
4) Developing expertise and resource strengths that give the company competitive ‘capabilities that rival can’t easily imitate’ or trump with capabilities of their own. FedEx has superior capabilities in next-day delivery of small packages. WjdtJDlsney has hard-to-beat capabilities in theme park management and family entertainment. Over the years, Toyota has developed a sophisticated production system that allows it to produce reliable, largely defect-free vehicles at low cost. IBM has wide-ranging expertise in helping corporate customers develop and install cutting-edge information systems. Ritz-Carlton and Four Seasons have uniquely strong capabilities in providing their hotel guests with an array of personalized services. Very often, winning a durable competitive edge over rivals hinges more on building competitively valuable expertise and capabilities than it does on having a distinctive product. Clever rivals can nearly always copy the attributes of a popular or innovative product, but for rivals to match experience, know-how, and specialized competitive capabilities that a company has developed and perfected over a Ion period of time is substantially harder to duplicate and takes much longer.”
The tight conception between (Competitive advantage and portability, means that the values for sustainable competitive advantage always rank center stage in crafting a strategy. The key to successful strategy making is to come up with one or more differentiating strategy elements that act as a magnet to draw customers and yield a lasting competitive edge. Indeed, what separates a powerful strategy from a run-of-the-mill or ineffective one is management’s ability to forge a series of moves, both in the marketplace and internally, that sets the company apart from its rivals, tilts the playing field in the company’s favor by giving buyers reason to prefer its products or services, and produces a sustainable competitive advantage over rivals. The bigger and more sustainable the competitive advantage, the better the company’s prospects for winning in the marketplace and earning superior long-term profits relative to its rivals. Without a strategy that leads to competitive advantage, a company risks being outcompeted by stronger rivals and/or locked in to mediocre financial performance. Hence, company managers deserve no gold stars for coming up with a ho-hum strategy that results in no-hum financial performance and a ho-hum industry standing.
Identifying a Company’s Strategy
The best indicators of a company’s strategy are its actions in the marketplace and the statements of senior managers about the company’s current. business approaches, future plans, and efforts to strengthen its competitiveness and performance. Figure 1.1 shows what to look for in identifying the key elements of a company’s strategy.
Once it is clear what to look for, the task of identifying a company s strategy is mainly one of researching information about the company’s actions in the marketplace and business approaches. In the case of publicly owned enterprises, the strategy is often openly discussed by senior executives in the company’s annual report and 10-K report, in press releases and company news (posted on the company’s Web site), and in the information provided to investors at the company’s Web site. To maintain the confidence of investors and Wall Street, most public companies have to be fairly open about their strategies. Company executives typically lay out key elements of their strategies.
Managers face three central questions in evaluating their company’s business prospects: What’s the company’s present situation? Where does the company need to go from here? How should it get there? Arriving at a probing answer to the question “What’s the company’s present situation?” prompts managers to evaluate industry conditions and competitive pressures, the company’s current performance and market standing, its resource strengths and capabilities, and its competitive weaknesses. The question “Where does the company need to go from here?” pushes managers to make choices about the direction .the company should be headed—what new or different customer groups and customer needs it should endeavor to satisfy, what market positions it should be staking out, what changes-in its business makeup are needed. The question “How should it get there?” challenges managers to craft and execute a strategy capable of moving the company in the intended direction, growing its business, and improving its financial and market performance.
In this opening chapter, we define the concept of strategy and describe its many facets. We shall indicate the kinds of actions that determine what a company’s strategy is, why strategies are partly proactive and partly reactive, and why company strategies tend to evolve over time. We will look at what sets a winning strategy apart from ho-hum or flawed strategies and why the caliber of a company’s strategy determines whether it will enjoy a competitive advantage or be burdened by competitive disadvantage. By the end of this chapter, you will have a pretty clear idea of why the tasks of crafting and executing strategy are core management functions and why excellent execution of an excellent strategy is the most reliable recipe for turning a company into a standout performer.
In the main, out competitors are acquainted with the same fundamental concepts and techniques and approaches that we follow, and they are as free to pursuer them as we are. More often than not, the difference between their level of success and ours lies in the relative thoroughness and self-discipline with which we and they develop and execute our strategies for the future.
1) Macdonald, J., “Service is different”, The TCM Magazine, vol. 6, no. 1, 2005, p.6;. Reproduced with permission from Emeraid Publishing Group Limited.
2) Lynch. R. Corporate Strategy, Fourth Edition, Financial Times Practice Hall (2006), p.64. Reported with permission of person education ltd.
3) http://tutor2u.net/business/production/pom_introduction.htm (retrieve date)