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summary of strategy
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CHAPTER 1: WHAT IS STRATEGY?1.1 What Strategy is: Gaining and Sustaining Competitive Advantage
Strategy1 is a set of goal-directed actions a firm takes to gain and sustain superior performance relative
to competitors. To achieve superior performance, companies compete for resources.
In any competitive situation, a good strategy2 enables a firm to achieve superior performance relative to
its competitors. But what is a good strategy?
1. A diagnosis of the competitive challenge. This element is accomplished through analysis of the firm’s
external and internal environments
2. A guiding policy to address the competitive challenge. This element is accomplished through
strategy formulation, resulting in the firm’s corporate, business, and functional strategies.
3. A set of coherent actions to implement the firm’s guiding policy, this element is accomplished
through strategy implementation.
The Competitive Challenge
A good strategy needs to start with a clear and critical diagnosis of the competitive challenge.
A Guiding Policy
After the diagnosis of the competitive challenge, the firm needs to formulate an effective guiding policy in
response. The formulated strategy needs to be consistent, often backed up with strategic commitments such
as sizable investments or changes to an organization’s incentive and reward system -big changes that cannot
be easily reversed.
Without consistency in a firm’s guiding policy, employees become confused and cannot make effective day-
to-day decisions that support overall strategy. Without consistency in a strategy, moreover, other
stakeholders, including investors, become frustrated.
Coherent Actions
A clear guiding policy needs to be implemented with a set of coherent actions.
Ø In review, to create a good strategy, three steps are crucial. First, a good strategy defines the
competitive challenges facing a company through a critical assessment of the status quo. Second, a
good strategy provides an overarching approach on how to deal with the competitive challenges
identified. The approach needs to be communicated in policies that provide clear guidance for
employees. Last, a good strategy requires effective implementation through a coherent set of
actions.
What is Competitive Advantage?
Competitive advantage is always relative, not absolute. To assess competitive advantage, we compare firm
performance to a benchmark -either the performance of other firms in the same industry or an industry
average.
A firm that achieves superior performance relative to other competitors in the same industry has a
competitive advantage3. A firm that is able to outperform its competitors over a prolonged period has a
sustainable competitive advantage4 . If a firm underperforms its rivals or the industry average, it has a
1
Strategy: the set of goal-directed actions a firm takes to gain and sustain superior performance relative to
competitors.
2
Good strategy: a strategy is good when it enables a firm to achieve superior performance. It consists of three
elements: a diagnosis of the competitive challenge, a guiding policy, a set of coherent decisions to implement the
policy.
3
Competitive advantage: superior performance relative to other competitors in the same industry or the industry
average.
4
Sustainable competitive advantage: outperforming competitors or the industry average over a prolonged period of
time.
1
,competitive disadvantage5. Should two or more firms perform at the same level, they have competitive
parity6.
To gain a competitive advantage, a firm needs to provide either goods or services consumers value more
highly than those of its competitors, or goods and services similar the competitors’ at a lower price. The
rewards of superior value creation and capture are profitability and market share. For many business people,
creating shareholder value and making money is the consequence of filling a need and providing a product,
service, or experience consumers wanted, at a price they could afford.
Strategy is about creating superior value, while containing the cost to create it, or by offering similar value at
a lower cost. Managers achieve these combinations of value and cost through strategic positioning. That is,
they stake out a unique positioning within an industry that allows the firm to provide value to customers,
while controlling costs. The greater the difference between value creation and cost, the greater the firm’s
economic contribution and the more likely it will gain competitive advantage.
Strategic positioning requires trade-offs. The managers make conscious trade-offs that enable each company
to strive for competitive advantage in an industry, using different competitive strategies.
The key to successful strategy is to combine a set of activities to stake out a unique strategic position within
an industry. Competitive advantage has to come from performing different activities or performing the same
activities differently than rivals are doing. These activities should reinforce one another rather than create
trade-offs.
Clear strategic positioning requires trade-offs. Because resources are limited, managers must carefully
consider their strategic choices in the quest for competitive advantage. Moreover, operational effectiveness,
marketing skills, and other functional expertise all strengthen a unique strategic position. But these
capabilities do not substitute for competitive strategy.
Let’s look at what strategy is not:
1) Grandiose statements are not strategy. Statements of desire are not strategy. They provide little
managerial guidance and often lead to goal conflict and confusion. They also frequently fail to
address economic fundamentals. An effective vision can lay the foundation upon which to craft a
good strategy. This foundation must be backed up, however, by strategic actions that allow a firm to
address a competitive challenge with clear consideration of economic fundamentals (value creation
and cost).
2) A failure to face a competitive challenge is not strategy. If the firm doesn’t define a clear competitive
challenge, employees have no way of assessing whether they are making progress in addressing it.
3) Operational effectiveness, competitive benchmarking, or other tactical tools are not strategy. They
might be a necessary part of a firm’s functional and global initiatives to support its competitive
strategy, but these elements are not sufficient to achieve competitive advantage. We will reserve the
term strategy for describing the firm’s overall efforts to gain and sustain competitive advantage.
1.2 Vision, Mission, and Values
The first step to gain and sustain competitive advantage is to define an organization’s vision, mission and
values. Managers must ask these questions:
• Vision: what do we want to accomplish ultimately?
• Mission: how do we accomplish our goals?
• Values: what commitments do we make, and what guardrails do we put in place, to act both
legally and ethically as we pursue our vision and mission?
The vision is the first principle that needs to be defined because it identifies the primary long-term objective of the
company. Strategic leaders need to begin with an end in mind. Early on strategic success is created twice. Leaders
create the vision in abstract by formulating strategies that enhance the chances of gaining and sustaining competitive
advantage, before any actions of strategy implementation are taken in a second round of strategy creation.
5
Competitive disadvantage: underperformance relative to other competitors or the industry average.
6
Competitive parity: performance of two or more firms at the same level.
2
,Vision
A vision7 captures an organization’s aspiration and spells out what it ultimately wants to accomplish. An
effective vision pervades the organization with a sense of winning and motivates employees to aim for the
same target. Employees in visionary companies tend to feel part of something bigger than themselves. An
inspiring vision helps employees find meaning in their work. It allows them to experience a greater sense of
purpose. People have an intrinsic motivation to make the world a better place through their work activities.
Basing actions on its vision, a firm will build the necessary resources and capabilities through continuous
organizational learning from failure, to translate into reality what begins as a stretch goal or strategic intent8.
To provide meaning for employees in pursuit of the organization’s ultimate goals, vision statements should
be forward-looking and inspiring. Vision statements can be inspiring and motivating both for non-profit and
for-profit organizations. Visionary companies often outperform their competitors over the long run by a
wide margin. A meaningful and inspiring vision is also highly motivating, thus improving financial
performance.
Mission
Building on the vision, organizations establish a mission9 , which describes what an organization actually does
-products and services it plans to provide, and the markets in which it will compete. In the strategy process,
vision and mission differ:
- A vision defines what an organization wants to accomplish ultimately, and thus the goal can be
described by the infinitive form of the verb starting with to.
- A mission describes what an organization does; it defines how the vision is accomplished and is often
introduced with the proposition by.
To be effective, firms need to back up their visions and missions with strategic commitments, in which the
enterprise undertakes credible actions. Such commitments are costly, long-term oriented, and difficult to
reverse. A company needs to make strategic commitments informed by economic fundamentals of value
creation.
Vision Statements and Competitive Advantage
The effectiveness of vision statements differs by type. Customer-oriented vision statements allow companies
to adapt to changing environment. Product-oriented vision statements often constrain this ability. This is
because customer-oriented vision statements focus employees to think about how best to solve a problem
for a consumer. Product-oriented vision statements focus employees on improving existing products and
services without consideration of underlying customer problems to be solved.
Our environments are ever-changing and sometimes chaotic. The increased strategic flexibility afforded by
customer-oriented vision statements can provide companies with a competitive advantage.
Product-oriented vision statements
A product-oriented vision statement defines a business in terms of a good or service provided. It tends to
force managers to take a more myopic view of the competitive landscape.
Customer-oriented vision statements
A customer-oriented vision defines a business in terms of providing solutions to customer needs. Companies
with customer-oriented visions can more easily adapt to changing environments. In contrast, companies
based on product-oriented statements tend to be less flexible and thus more likely to fail. The lack of
inspiring needs-based vision can cause the long-range problem of failing to adapt to a changing
environment.
7
Vision: a statement about what an organization ultimately wants to accomplish; it captures the company’s
aspiration.
8
Strategic intent: a stretch goal that pervades the firm with a sense of winning, which aims to achieve by building the
necessary resources and capabilities through continuous learning.
9
Mission: description of what an organization actually does.
3
, Customer-oriented visions identify a critical need but leave open the means of how to meet that need.
Customer needs may change, and the means of meeting those needs may change with it. Christensen
recommends that strategic leaders think hard about how the means of getting a job done have changed over
time and ask themselves if there’s a better way to get a thing done.
It is critical that an organization’s vision should be flexible to allow for change and adaptation.
Moving from product-oriented to customer-oriented vision statements
In some cases, product-oriented vision statements don’t interfere with the firm’s success in achieving
superior performance and competitive advantage. An example is provided by Intel: it went from “to be the
preeminent building-block supplier of the PC industry” (product-oriented) and “to be the preeminent
building-block supplier to the internet economy” (also product-oriented) to “to delight our customers by
delivering technology advancements” (consumer-oriented).
Note that customer-oriented visions also frequently change over time.
Taken together, empirical research shows that sometimes vision statements and firm performance are
associated with one another. A positive relationship between vision statements and firm performance is
more likely to exist under certain circumstances:
- The visions are customer-oriented
- Internal stakeholders are invested in defining the vision
- Organizational structures such as compensation systems align with the firm’s vision statements.
Ø An effective vision statement can lay the foundation upon which to craft a strategy that creates
competitive advantage.
Values
While many companies have powerful vision and mission statements, they are not enough. An organization’s
values also need to be clearly articulated in the strategy process. A core values statement10 matters because
it provides touchstones for the employees to understand the company culture. It offers bedrock principles
that employees at all levels can use to deal with complexity and to resolve conflict. It provides a moral
compass.
Much of unethical behaviour may not be illegal. However, a firm that fails to establish extra-legal ethical
standards will be more prone to behaviours that can threaten its very existence. Over time, a culture with no
ethical rules could result in a bad reputation due to unethical behaviours.
Organizational core values11 are the ethical standards and norms that govern the behaviour of individuals
within a firm or organization. Strong ethical values have two important functions. First, they underlay the
vision statement and provide stability to the strategy, thus laying the groundwork for long-term success.
Second, once the company is pursuing its vision and mission in its quest for competitive advantage, they
serve as guardrails to keep the company on track.
The values espoused by a company provide answers to the question, how do we accomplish our goals? They
help individuals make choices that are both ethical and effective in advancing the company’s goals.
Without commitment and involvement from top managers, any statement of values remains merely a public
relations exercise. Employees tend to follow values practiced by strategic leaders. Organizational core values
must be lived with integrity, especially by the top management team. It is imperative that strategic leaders
set an example of ethical behaviour by living the core values. Strategic leaders have a strong influence in
setting an organization’s vision, mission, and values.
1.3 The AFI Strategy Framework
A successful strategy details a set of actions that managers take to gain and sustain competitive
advantage. Managing the strategy process is the result of three broad tasks:
10
Core value statement: statement of principles to guide an organization as it works to achieve its vision and fulfil its
mission for both internal conduct and external interactions; it often includes explicit ethical considerations.
11
Organizational core values: are the ethical standards and norms that govern the behaviour of individuals within a
firm or organization.
4
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