STRATEGIC MANAGEMENT – Module 1 20MBA25

Module-1 Introduction
Meaning and Nature of Strategic Management, its Importance and Relevance and.
Characteristics of Strategic Management, The Strategic Management Process. Relationship
Between a Company’s Strategy and its Business Model.
Case Study related to the Module.

What Do We Mean By Strategy? Why it is important?

A company’s strategy is its action plan for outperforming its competitors and achieving superior
profitability. In effect, it represents a managerial commitment to an integrated array of
considered choices about how to compete. The objective of a well-crafted strategy is not merely
temporary competitive success and profits in the short run, but rather the sort of lasting success
that can support growth and secure the company’s future over the long term. These include
choices about:
 How to attract and please customers.
 How to compete against rivals.
 How to position the company in the marketplace.
 How best to respond to changing economic and market conditions.
 How to capitalize on attractive opportunities to grow the business.
 How to achieve the company’s performance targets.

Characteristics of Strategic Management

1. Strategy is about Competing Differently

Every strategy needs a distinctive element that attracts customers and produces a competitive
edge. But there is no shortage of opportunity to fashion a strategy that both tightly fits a
company’s own particular situation and is discernibly different from the strategies of rivals. In
fact, competitive success requires a company’s managers to make strategic choices about the key
building blocks of its strategy that differ from the choices made by competitors— not 100
percent different, but at least different in several important respects. A strategy only stands a
chance of succeeding when it is predicated on actions, business approaches, and competitive
moves aimed at appealing to buyers in ways that set a company apart from rivals. Simply trying
to mimic the strategies of the industry’s successful companies never works. Rather, every
company’s strategy needs to have some distinctive element that draws in customers and produces
a competitive edge. Strategy, at its essence, is about competing differently—doing what rival
firms don’t do or what rival firms can’t do.

2. 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 gain a competitive advantage over rivals. A company achieves a competitive
advantage whenever it has some type of edge over rivals in attracting buyers and coping with
competitive forces. There are many routes to competitive advantage, but they all involve either

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giving buyers what they perceive as superior value compared to the offerings of rival sellers or
giving buyers the same value as others at a lower cost to the firm. Superior value can mean a
good product at a lower price, a superior product that is worth paying more for, or a best-value
offering that represents an attractive combination of price, features, quality, service, and other
appealing attributes.

Four of the most frequently used and dependable strategic approaches to setting a
company apart from rivals, building strong customer loyalty, and winning a competitive
advantage are:

1. Striving to be the industry’s low-cost provider, thereby aiming for a cost-based

competitive advantage over rivals.
2. Outcompeting rivals on the basis of differentiating features, such as higher quality, wider
product selection, added performance, value-added services, more attractive styling, and
technological superiority.
3. Developing an advantage based on offering more value for the money. Giving customers
more value for their money by satisfying buyers’ expectations on key
quality/features/performance/service attributes while beating their price expectations is
known as a best-cost provider strategy.
4. Focusing on a narrow market niche within an industry

Why a Company’s Strategy Evolves over Time

The appeal of a strategy that yields a sustainable competitive advantage is that it offers
the potential for an enduring edge over rivals. However, managers of every company must be
willing and ready to modify the strategy in response to changing market conditions, advancing
technology, unexpected moves by competitors, shifting buyer needs, emerging market
opportunities, and mounting evidence that the strategy is not working well.
Most of the time, a company’s strategy evolves incrementally from management’s ongoing
efforts to fine-tune the strategy and to adjust certain strategy elements in response to new
learning and unfolding events. But in industries where industry and competitive conditions
change frequently and in sometimes dramatic ways, the life cycle of a given strategy is short.
Industry environments characterized by high-velocity change require companies to repeatedly
adapt their strategies. For example, companies in industries with rapid-fire advances in
technology like medical equipment, electronics, and wireless devices often find it essential to
adjust key elements of their strategies several times a year, sometimes even finding it necessary
to ―reinvent‖ their approach to providing value to their customers.
Regardless of whether a company’s strategy changes gradually or swiftly, the important
point is that the task of crafting strategy is not a one-time event but always a work in progress.
Adapting to new conditions and constantly evaluating what is working well enough to continue
and what needs to be improved are normal parts of the strategy-making process, resulting in an
evolving strategy

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A Company’s Strategy is Partly Proactive and Partly Reactive

The evolving nature of a company’s strategy means that the typical company strategy is a blend
of
(1) Proactive, planned initiatives to improve the company’s financial performance and secure a
competitive edge, and
(2) Reactive responses to unanticipated developments and fresh market conditions.
The biggest portion of a company’s current strategy flows from ongoing actions that have proven
themselves in the marketplace and newly launched initiatives aimed at building a larger lead over
rivals and further boosting financial performance. This part of management’s action plan for
running the company is its deliberate strategy, consisting of proactive strategy elements that are
both planned and realized as planned. But managers must always be willing to supplement or
modify the proactive strategy elements with as-needed reactions to unanticipated conditions.
Inevitably, there will be occasions when market and competitive conditions take an unexpected
turn that calls for some kind of strategic reaction. Hence, a portion of a company’s strategy is
always developed on the fly, coming as a response to fresh strategic maneuvers on the part of
rival firms, unexpected shifts in customer requirements, fast changing technological
developments, newly appearing market opportunities, a changing political or economic climate,
or other unanticipated happenings in the surrounding environment. These unplanned, reactive,
and adaptive strategy adjustments make up the firm’s emergent strategy. A company’s strategy is
thus tends to be a combination of proactive and reactive elements, with certain strategy elements
being abandoned because they have become obsolete or ineffective. A company’s realized
strategy can be observed in the pattern of its actions over time, which is a far better indicator
than any of its strategic plans on paper or any public pronouncements about its strategy.

Fig: A Company’s Strategy is a Blend of Proactive Initiatives and Reactive Adjustments

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A Company’s Strategy and its Business Model

At the center of a company’s strategy is the company’s business model. A business model is
management’s blueprint for delivering a valuable product or service to customers in a manner
that will generate revenues sufficient to cover costs and yield an attractive profit.
The two elements of a company’s business model are:
(1) its customer value proposition and
(2) its profit formula.
The customer value proposition lays out the company’s approach to satisfying buyer wants and
needs at a price customers will consider a good value. Plainly, from a customer perspective, the
greater the value delivered (V) and the lower the price (P), the more attractive is the company’s
value proposition. The profit formula describes the company’s approach to determining a cost
structure that will allow for acceptable profits, given the pricing tied to its customer value
proposition. The lower the costs (C), given the customer value proposition (V – P), the greater
the ability of the business model to be a moneymaker. Thus the profit formula reveals how
efficiently a company can meet customer wants and needs and deliver on the value proposition.
The nitty-gritty issue surrounding a company’s business model is whether it can execute its
customer value proposition profitably. Just because company managers have crafted a strategy
for competing and running the business, this does not automatically mean that the strategy will
lead to profitability—it may or it may not.

Magazines and newspapers employ a business model keyed to delivering information and
entertainment they believe readers will find valuable and a profit formula aimed at securing
sufficient revenues from subscriptions and advertising to more than cover the costs of producing
and delivering their products to readers. Mobile phone providers, satellite radio companies, and
broadband providers also employ a subscription-based business model. The business model of
network TV and radio broadcasters entails providing free programming to audiences but
charging advertising fees based on audience size.
Gillette’s business model in razor blades involves selling a ―master product‖—the razor—at an
attractively low price and then making money on repeat purchases of razor blades that can be
produced very cheaply and sold at high profit margins. Printer manufacturers like Hewlett-
Packard, Lexmark, and Epson pursue much the same business model as Gillette—selling printers
at a low (virtually break-even) price and making large profit margins on the repeat purchases of
printer supplies, especially ink cartridges.
McDonald’s invented the business model for fast food—providing value to customers in the
form of economical quick-service meals at clean convenient locations. Its profit formula involves
such elements as standardized cost-efficient store design, stringent specifications for ingredients,
detailed operating procedures for each unit, and heavy reliance on advertising and in-store
promotions to drive volume.

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What Makes a Strategy a Winner?

Three tests can be applied to determine whether a strategy is a winning strategy:

1. The Fit Test (Strategic Fit): To qualify as a winner, a strategy has to be well matched to
industry and competitive conditions, a company’s best market opportunities, and other
pertinent aspects of the business environment in which the company operates. No
strategy can work well unless it exhibits good external fit and is in sync with prevailing
market conditions. At the same time, a winning strategy must be tailored to the
company’s resources and competitive capabilities and be supported by a complementary
set of functional activities. That is, it must also exhibit internal fit and be compatible with
a company’s ability to execute the strategy in a competent manner. Unless a strategy
exhibits good fit with both the external and internal aspects of a company’s overall
situation, it is likely to be an underperformer and fall short of producing winning results.
Winning strategies also exhibit dynamic fit in the sense that they evolve over time in a
manner that maintains close and effective alignment with the company’s situation even as
external and internal conditions change
2. The Competitive Advantage Test: Strategies that fail to achieve a durable competitive
advantage over rivals are unlikely to produce superior performance for more than a brief
period of time. Winning strategies enable a company to achieve a competitive advantage
over key rivals that is long-lasting. The bigger and more durable the competitive
advantage, the more powerful it is.
3. The Performance Test: The mark of a winning strategy is strong company performance.
Two kinds of performance indicators tell the most about the caliber of a company’s
strategy:
(1) competitive strength and market standing and
(2) profitability and financial strength.
Above-average financial performance or gains in market share, competitive position, or
profitability are signs of a winning strategy. Strategies that come up short on one or more
of the preceding tests are plainly less appealing than strategies passing all three tests with
flying colors. Managers should use the same questions when evaluating either proposed
or existing strategies. New initiatives that don’t seem to match the company’s internal
and external situations should be scrapped before they come to fruition, while existing
strategies must be scrutinized on a regular basis to ensure they have good fit, offer a
competitive advantage, and are contributing to above-average performance or
performance improvements.

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Crafting and Executing Strategy

Crafting and executing strategy are top-priority managerial tasks for a very big reason. A clear
and reasoned strategy is management’s prescription for doing business, its road map to
competitive advantage, its game plan for pleasing customers, and its formula for improving
performance. High-achieving enterprises are nearly always the product of astute, creative, and
proactive strategy making. Companies don’t get to the top of the industry rankings or stay there
with illogical strategies, copy-cat strategies, or timid attempts to try to do better. Only a handful
of companies can boast of achieving success in the marketplace due to lucky breaks or the good
fortune of having stumbled into the right market at the right time with the right product. And
even then, unless they subsequently craft a strategy that capitalizes on their luck, building on
what’s working and discarding the rest, success of this sort will be fleeting. So there can be little
argument that a company’s strategy matters.

Good Strategy + Good Strategy Execution = Good Management

Crafting and executing strategy are thus core management functions. Among all the things
managers do, nothing affects a company’s ultimate success or failure more fundamentally than
how well its management team charts the company’s direction, develops competitively effective
strategic moves and business approaches, and pursues what needs to be done internally to
produce good day-in, day-out strategy execution and operating excellence. Indeed, good strategy
and good strategy execution are the most telling signs of good management. Managers don’t
deserve a gold star for designing a potentially brilliant strategy but failing to put the
organizational means in place to carry it out in high-caliber fashion.
Excellent execution of a bad strategy does not achieve enthusiastic praise for management’s
efforts either. The rationale for using the twin standards of good strategy making and good
strategy execution to determine whether a company is well managed is therefore interesting: The
better conceived a company’s strategy and the more competently it is executed, the more likely
the company will be a standout performer in the marketplace. In stark contrast, a company that
lacks clear-cut direction, has a flawed strategy, or can’t 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.

Strategic Management Process

The managerial process of crafting and executing a company’s strategy consists of five
integrated tasks:
1. Developing a strategic vision that charts the company’s long-term direction, a mission
statement that describes the company’s purpose, and a set of core values to guide the pursuit of
the vision and mission.
2. Setting objectives for measuring the company’s performance and tracking its progress in
moving in the intended long-term direction.
3. Crafting a strategy to move the company along the strategic course that management has
charted and achieve the objectives.
4. Executing the chosen strategy efficiently and effectively.

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5. Monitoring developments, evaluating performance, and initiating corrective adjustments in the

company’s vision and mission statement, objectives, strategy, or approach to strategy execution
in light of actual experience, changing conditions, new ideas, and new opportunities.

Fig: Strategy making and Strategy executing process

1. Task 1- Developing A Strategic Vision, A Mission Statement, And A Set Of Core

Values

Top management’s views and conclusions about the company’s long-term direction and what
product–market–customer mix seems optimal for the road ahead constitute a strategic vision for
the company. A strategic vision describes the management’s aspirations for the business,
providing a panoramic view of ―where we are going‖ and a convincing rationale for why this
makes good business sense for the company. Well-conceived visions are distinctive and specific
to a particular organization; they avoid generic, feel-good statements like ―We will become a
global leader and the first choice of customers in every market we serve‖—which could apply to
hundreds of organizations. For a strategic vision to function as a valuable managerial tool, it
must convey what management wants the business to look like and provide managers with a
reference point in making strategic decisions and preparing the company for the future.

The defining characteristic of a strategic vision is what it says about the company’s future
strategic course—―the direction we are headed and what we want our business to look like in the
future.‖ In contrast, a mission statement describes the enterprise’s present business and
purpose— ―who we are, what we do, and why we are here.‖ It is purely descriptive. Ideally, a
company mission statement identifies the company’s products/services, specifies the buyer needs
that it seeks to satisfy and the customer groups or markets it serves, and gives the company its
own identity.

2. Task 2- Setting Objectives

The managerial purpose of setting objectives is to convert the vision and mission into specific
performance targets. Objectives reflect management’s aspirations for company performance in
light of the industry’s prevailing economic and competitive conditions and the company’s

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internal capabilities. Two very distinct types of performance targets are required: those relating
to financial performance and those relating to strategic performance.
Financial objectives communicate management’s goals for financial performance.
Strategic objectives are goals concerning a company’s marketing standing and competitive
position.
Company objectives need to be broken down into performance targets for each of the
organization’s separate businesses, product lines, functional departments, and individual work
units. Employees within various functional areas and operating levels will be guided much better
by narrow objectives relating directly to their departmental activities than broad organizational
level goals.

3. Task 3- Crafting A Strategy

Masterful strategies come from doing things differently from competitors where it counts—out-
innovating them, being more efficient, being more imaginative, adapting faster—rather than
running with the herd. A company’s senior executives obviously have lead strategy-making roles
and responsibilities. The chief executive officer as a captain of the ship, he is the chief setter,
chief strategy maker, chief strategy implementer for the total enterprise. In most companies,
crafting and executing strategy is a collaborative team effort in which every manager has a role
for the area he or she heads; it is rarely something that only high-level managers do.

4. Task 4- Executing The Strategy

Managing the implementation of a strategy is easily the most demanding and time consuming
part of the strategy management process. Management’s action agenda for executing the chosen
strategy emerges from assessing what the company will have to do to achieve the targeted
financial and strategic performance. Each company manager has to think through the answer to
―What has to be done in my area to execute my piece of the strategic plan, and what actions
should I take to get the process under way?‖ How much internal change is needed depends on
how much of the strategy is new, how far internal practices and competencies deviate from what
the strategy requires, and how well the present work culture supports good strategy execution.

5. Task 5- Evaluating Performance And Initiating Corrective Adjustments

The fifth component of the strategy management process—monitoring new external

developments, evaluating the company’s progress, and making corrective adjustments—is the
trigger point for deciding whether to continue or change the company’s vision and mission,
objectives, strategy, and/or strategy execution methods. As long as the company’s strategy
continues to pass the three tests of a winning strategy - good fit, competitive advantage, strong
performance- company executives may well decide to keep the strategy. A company’s vision and
mission, as well as its objectives, strategy, and approach to strategy execution are never final;
managing strategy is an ongoing process.

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CASE

The Store Concept - A Complete Furniture Showroom

The IKEA store concept had been in use since the early days of the company, reinforcing the
idea that attention to detail within the stores was fundamental. The concept was owned by Inter
IKEA and could only be altered by a store manager via written request. The standard concept
benefited the company in several ways as customers visiting newly opened stores had already
been 'socialized' as to what to expect. Store operations were often compared to best practices. To
ensure that the concept was adhered to, a Commercial Review audit team regularly conducted
checks of all the relevant parts of the store to ensure they conformed to best practice.

The concept dictated that stores were always on major access roads on edge-of-town suburban
sites with plenty of car parking space. There was usually a garage for petrol and a van rental area
where customers could hire large vehicles to transport their larger goods back home. At the
entrance to the store was a crèche for smaller children, allowing parents to shop in peace, trolleys
and large blue plastic bags with which to pick up smaller items as customers moved round the
store.

The furniture showroom space had a pre-set order, always starting with living rooms, then
bedrooms, kitchens, bathrooms, and children's rooms. Furniture was showcased using actual
'rooms' in different dimensions and at different price points, so that customers could visualise
what their home could look like with a particular set of furniture. Customers could note down the
location of larger items within the warehouse; pencils, notebooks and paper measures were
available throughout the showroom. At the end of the furniture showroom was the children's
room area, which included traditional toys and children's bed linen. Located there was a
restaurant serving traditional Småland food, the region where the founder of IKEA Kamprad
came from, particularly meatballs, which IKEA had become famous for.

After the restaurant, customers were led through areas with kitchen equipment, carpets and rugs,
curtains, bed linen and towels, mirrors, art and posters, items for smaller storage, indoor plants
and vases. At this point, there was a large warehouse area with pallets and heavy loading trolleys
for customers to help themselves to their flat-pack furniture. After this came the checkout area,
and beyond that a small café serving drinks and snacks and a 'Sweden store' selling Swedish
delicacies. This model was replicated in every store, reinforcing the brand recognition.

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Important Questions:

1. What is Strategic management?

2. Explain two characteristics of Strategic management?
3. What do you mean by Strategic Fit?
4. Explain the Strategic Management Process.
5. What you do mean by crafting and executing strategy?

Book referred: Arthur A. Thompson - Crafting & executing strategy (The quest for competitive
advantage) Concepts and Cases 19th Edition.

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