Strategy Core Concepts and Analytical ApproachesArthur A. T.docx

Strategy: Core Concepts and Analytical Approaches
Arthur A. Thompson, The University of Alabama 7th Edition,
2022-2023
An e-book marketed by McGraw Hill Education
Chapter 1
What Is Strategy
and Why Is It Important?
Strategy means making clear-cut choices about how to compete.
—Jack Welch, former CEO, General Electric
Without a strategy the organization is like a ship without a
rudder.
—Joel Ross and Michael Kami
If your firm’s strategy can be applied to any other firm, you
don’t have a very good one.
—David J. Collis and Michael G. Rukstad
In business, strategy is king. Leadership and hard work are all
very well and luck is mighty useful, but it
is strategy that makes or breaks a firm.
—The Economist, a leading publication on economics, business,
and international affairs
Managers of all types of businesses face three central questions:
What’s our company’s present situation?
What should the company’s future direction be and what
performance targets should we set? What’s
our plan for running the company and producing good results?
Arriving at a thoughtful and probing

answer to the question “What’s our company’s present
situation?” prompts managers to evaluate industry
conditions and competitive pressures, the company’s current
market standing, its competitive strengths
and weaknesses, and its future prospects in light of changes
taking place in the business environment. The
question “What should the company’s future direction be and
what performance targets should we set?”
pushes managers to consider what emerging buyer needs to try
to satisfy, which growth opportunities to
pursue most vigorously, which existing markets to de-emphasize
or even abandon, what strategic path to
follow, and what outcomes the company should strive to achieve
with respect to both its financial performance
and its performance in the markets where it competes. The
question “What’s our plan for running the company
and producing good results?” challenges managers to craft a
series of competitive moves and business
approaches—what henceforth will be referred to as the
company’s strategy—for heading the company in the
intended direction, staking out a market position, attracting
customers, and achieving the targeted financial
and market performance.
The role of this chapter is to define the concept of strategy,
identify the kinds of actions that determine what
a company’s strategy is, introduce you to the concept of
competitive advantage, and explore the tight linkage
between a company’s strategy and its quest for competitive
advantage. We will also explain why company
Copyright © 2022 by Arthur A. Thompson. All rights reserved.
Reproduction and distribution of the contents are expressly
prohibited without the author’s written permission

1
Chapter 1 • What Is Strategy and Why Is It Important?
strategies are partly proactive and partly reactive, why they
evolve over time, and the relationship between a
company’s strategy and its business model. We conclude the
chapter with a discussion of what sets a winning
strategy apart from a ho-hum or flawed strategy 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 the
chapter, you will have a 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 over the long term.
WHAT DO WE MEAN BY “STRATEGY”?
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?” A
strategy represents managerial commitment to undertake
one set of actions rather than another in an effort to
compete successfully and achieve good performance
outcomes.1 This commitment incorporates a coherent
collection of choices and decisions about:
• How to attract and please customers.

• How to compete against rivals—and, ideally, gain a
competitive advantage as opposed to being
hamstrung by competitive disadvantage.
• How to position the company in the marketplace vis-à-vis
rivals.
• How to capitalize on opportunities to grow the business.
• How best to respond to changing economic and market
conditions.
• How to manage each functional piece of the business (e.g.,
R&D, supply chain activities, production,
sales and marketing, distribution, finance, and human
resources).
• How to achieve the company’s performance targets.
CORE CONCEPT
A company’s strategy consists of the competitive
moves and business approaches that managers
employ to attract and please customers, compete
successfully, grow the business, respond to
changing market conditions, conduct operations,
and achieve the targeted financial and market
performance.
In effect, when managers craft a company’s strategy, they are
saying, “Among 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

meeting or beating our performance objectives.”
Choosing among the various alternative hows is often tough,
involving difficult trade-offs and sometimes high
risk. But that is no excuse for company managers failing to
decide upon a concrete course of action that spells
out “This is the strategic path we are going to take and here’s
what we are going to do to pursue competitive
success in the marketplace and achieve good business results.”2
In most industries, company managers have considerable leeway
in choosing the hows of strategy. For
example, managers may see a promising opportunity for the
company to compete against rivals by striving
to keep costs low and selling products/services at attractively
low prices. Often, there is room for a company
to pursue competitive success by offering buyers more features,
better performance, longer durability, more
personalized customer service, and/or quicker delivery. Many
companies strive to gain a competitive edge
over rivals via cutting-edge technological features, longer
warranties, clever advertising, better brand-name
recognition, or the development of competencies and
capabilities rivals cannot match. But it is foolhardy to
pursue all of these options simultaneously in an attempt to be
all things to all buyers. Choices of how best
to compete against rivals have to be made in light of the firm’s
resources and capabilities and in light of the
competitive approaches rival companies are employing.
2

Likewise, there are all kinds of market-positioning options.3
Some companies target buyers looking for top quality,
multifeatured products and willing to pay premium prices for
them whereas other companies focus their efforts
on appealing to buyers who prefer good to average products
sold at average or slightly above-average prices,
and still other companies strive to capture the business of
shoppers looking for basic products with attractively low
price tags. Some business enterprises position themselves
to compete in many market segments, endeavoring to
attract many types of buyers with a wide variety of models
and styles sold at different price points; other companies
focus on a single market segment, with product offerings
specifically designed to meet the needs and preferences
of a particular buyer type or buyer demographic. Some
companies position themselves in only one part of the industry’s
chain of production/distribution activities
(preferring to operate only in manufacturing or wholesale
distribution or retailing), whereas others are partially
or fully integrated, with operations ranging from components
production to manufacturing and assembly to
wholesale distribution to retailing. Some companies confine
their operations to local or regional markets;
others opt to compete nationally, internationally (in several
countries), or globally (in all or most of the major
country markets worldwide). Some companies decide to operate
in only one industry, whereas others diversify
broadly or narrowly into related or unrelated industries via
acquisitions, joint ventures, strategic alliances, or
starting up new businesses internally.
There’s no one roadmap or prescription for
running a business in a successful manner. Many

different avenues exist for competing successfully,
staking out a market position, and operating the
different pieces of a business.
Strategy Is About Competing Differently Mimicking the
strategies of successful industry rivals—with
either copycat product offerings or maneuvers to stake out the
same market position—rarely works. The best
performing strategies are aimed at competing differently. This
does not mean that the key elements of a
company’s strategy have to be 100 percent different but rather
that they must differ in at least some important
respects that matter to buyers. A strategy stands a better chance
of succeeding when it is predicated on actions,
business approaches, and competitive moves aimed at
(1) appealing to buyers in ways that set a company apart
from its rivals—particularly when it comes to doing what
rivals don’t do or, even better, doing what they can’t do
and (2) staking out a market position that is not crowded
with strong competitors. Really successful strategies often
contain some distinctive “a-ha!” quality that goes beyond
merely attracting buyer attention but that, more importantly,
delivers what an attractively an large number of buyers perceive
as superior value and converts them into loyal
customers. Indeed, the more a strategy is aimed at competing
differently in ways that deliver superior value to
buyers, the more likely the strategy will produce a valuable
competitive edge over rivals.4
A creative, distinctive strategy that sets a
company apart from rivals and delivers superior
value to customers is a company’s most reliable
ticket for winning a competitive advantage over
rivals.
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 providing a
distinct buyer segment with what segment members
perceive as superior value compared to the offerings of rival
sellers. 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
appealing combination of features, quality, service, and other
attributes at an attractively low price. Five of the
most frequently used and dependable strategic approaches to
setting a company apart from rivals, delivering
superior value, achieving competitive advantage, and converting
buyers into loyal customers are:
1. Striving to be the industry’s low-cost provider, thereby
aiming for a cost-based competitive advantage
over rivals that can then become the basis for charging lower
prices and/or earning higher profits.
Walmart and Southwest Airlines have earned strong market
positions because of the low-cost advantages
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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 approaches to driving costs out of its business.
2. Competing successfully and profitably against rivals based on
differentiating features such as higher
quality, wider product selection, added performance, value-
added services, more attractive styling,
technological superiority, or some other attributes that set a
company’s product offering apart from
those of rivals. Successful adopters of differentiation strategies
include Apple (innovative products),
Johnson & Johnson in baby products (product reliability),
Chanel and Rolex (top-of-the-line prestige),
and Mercedes and BMW (engineering design and performance).
Differentiation strategies can be
powerful as long as a company is sufficiently innovative to
thwart the efforts of clever rivals to copy or
closely imitate its product offering and means of delivering
superior value.
3. Offering more value for the money. Giving customers more
value for their money by meeting or beating
buyers’ expectations regarding key
quality/features/performance/service attributes while beating
their
price expectations is known as a best-cost provider strategy.
This approach is a hybrid strategy that
blends elements of the previous approaches. Toyota employs a
best-cost provider strategy for its Lexus
line of motor vehicles, as does Honda for its Acura line of cars
and SUVs. Many consumers shop at
L.L. Bean because of the good value it delivers: products with

appealing quality/performance/features/
styling and attractively low prices. Likewise, Amazon.com has
been highly successful in attracting
customers with its more-value-for-the-money combination of
appealing prices, wide selection, free
shipping, extensive product information and reviews, and online
shopping convenience.
4. 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 that compose
the niche. Prominent companies that
enjoy competitive success in a specialized market niche include
eBay in online auctions, Jiffy Lube
International in quick oil changes, and The Weather Channel in
cable TV.
5. Developing competitively valuable resources and capabilities
that rivals can’t easily imitate or trump
with resources or capabilities of their own. FedEx has superior
capabilities in next-day delivery of
small packages. Walt Disney has hard-to-beat capabilities in
theme park management and family
entertainment. Apple has formidable capabilities in innovative
product design. Ritz-Carlton and
Four Seasons have uniquely strong capabilities in providing
their hotel guests with an array of
personalized services. Hyundai has become the world’s fastest-
growing automaker as a result of its
advanced manufacturing processes and unparalleled quality
control systems. Very often, winning
a durable competitive edge over rivals hinges more on building
competitively valuable resources
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 long period
of time is substantially harder to duplicate and takes much
longer.
Forging a strategy that produces a competitive advantage
has great appeal because it enhances a company’s
financial performance. A company is almost certain
to earn signifi cantly higher profits when it enjoys a
competitive advantage as opposed to when it competes
with no advantage or is hamstrung by competitive
disadvantage. Competitive advantage is the key to above-
average profitability and financial performance because
strong buyer preferences for a company’s products or
services translate into higher sales volumes (Walmart)
and/or the ability to command a higher price (Häagen-
Dazs), which in turn tend to improve earnings, return
on investment, and other important financial outcomes.
Furthermore, if a company’s competitive edge holds
promise for being sustainable (as opposed to just temporary),
then so much the better for both the strategy
CORE CONCEPT
A company achieves competitive advantage
when an attractive number of buyers are drawn
to purchase its products or services rather than
those of competitors. A company achieves
sustainable competitive advantage when the
basis for buyer preferences for its product offering
relative to the offerings of its rivals is durable,
despite competitors’ efforts to nullify or overcome
the appeal of its product offering.
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and the company’s future profitability. What makes a
competitive advantage sustainable (or durable) as
opposed to temporary are actions and elements in the strategy
that cause an attractive number of buyers
to have lasting reasons to purchase a company’s products or
services, despite competitors’ best efforts to
nullify or overcome those reasons.
The tight connection between competitive advantage and
profitability means the quest for sustainable
competitive advantage is typically the foremost consideration in
choosing the central elements of a company’s
strategy. Indeed, the competitive power of a company’s strategy
is governed by one or more differentiating
attributes or strategy elements that act as a magnet to draw
customers and give them strong and often durable
reasons to prefer its products or services. Thus, 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,
which tilts the playing field in the company’s favor and
produces a sustainable competitive advantage over
rivals. The bigger and more sustainable the competitive
advantage, the better a 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 more strategically astute rivals and/or

handcuffed by mediocre sales and uninspiring financial results.
Identifying a Company’s Strategy
The best indicators of a company’s strategy are its actions in the
marketplace and senior managers’ statements
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 consider, the task of identifying a
company’s strategy is mainly one of researching the
company’s actions in the marketplace and its business
approaches. In the case of publicly owned enterprises,
senior executives often openly discuss the strategy in the
company’s annual report and 10-K report, in press
releases and company news (posted on the company’s website),
and in the information provided to investors on
the company’s website. To maintain the confidence of investors
and Wall Street, most public companies are fairly
open about their strategies. Company executives typically lay
out key elements of their strategies in presentations
to securities analysts (portions of which are usually posted in
the investor relations section of the company’s
website), and stories in the business media about the company
often include aspects of the company’s strategy.
Hence, except for some about-to-be-launched moves and
changes that remain under wraps and in the planning
stage, there’s usually nothing secret or undiscoverable about a
company’s present strategy.
FIGURE 1.1 Identifying a Company’s Strategy—What to Look
For
Actions to enter new product
segments or geographic markets

or to exit existing ones
Actions to upgrade, build,
or acquire competitively valuable
resources and capabilities or to
correct competitive weaknesses
Actions to diversify the company’s
revenues and earnings by
entering new businesses
Actions to compete more successfully and profitably by
reducing unit costs below those of rivals and very likely
charging lower prices
Actions to compete more successfully and
profitably by offering buyers more or better
performance features, more appealing
design, higher quality, better customer
service, wider product selection, or other
attributes that enhance buyer appeal
Actions and approaches used
in managing R&D, production,
sales and marketing, finance,
and other key activities
Actions to respond/adjust to
changing market and competitive
conditions or other external factors
Actions to strengthen public image
and reputation via corporate social
responsibility initiatives and environmental
efforts to protect the planet

Actions to capture emerging market
opportunities and defend against external
threats to the company’s business prospects
Actions to strengthen market
standing or competitiveness via
mergers, acquisitions, strategic
alliances, and/or collaborative
partnerships
The Pattern
of Actions and
Business Approaches
that Define a
Company’s
Strategy
5
Why a Company’s Strategy Evolves Over Time
All companies, sooner or later, find it necessary to modify
aspects of their strategy in response to changing
market conditions, advancing technology, the fresh moves of
competitors, shifting buyer needs and preferences,
emerging market opportunities, new ideas for improving
the strategy, and/or mounting evidence that certain aspects

of the present strategy are no longer working well. Most of
the time, a company’s strategy evolves incrementally from
management’s ongoing efforts to fine-tune this or that piece
of the strategy and to adjust certain strategy elements in
response to new learning and unfolding events.5 However,
on occasion, major strategy shifts are called for, such as
when a strategy is clearly failing, market conditions or buyer
preferences suddenly change dramatically, or important
technological breakthroughs occur (as in medical devices,
solar energy, and self-driving vehicles). In some industries,
conditions change at a fairly slow pace, making it
feasible for the major components of a good strategy to remain
in place for long periods. But in industries like
microelectronics and semi-conductors, electric vehicle
manufacture, and genetic engineering where market
conditions and technological capabilities change frequently and
in sometimes dramatic ways, the life cycle
of a given strategy is short. It is not uncommon for companies
in high-velocity environments to overhaul key
elements of their strategies several times a year or even to
“reinvent” how they intend to compete differently
from rivals and deliver superior value to customers.6
CORE CONCEPT
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 or
every-now-and-then event.
Regardless of whether a company’s strategy changes gradually
or swiftly, the important point is that its
present strategy is always temporary and on trial, pending
management’s next round of strategy initiatives, the
emergence of new industry and competitive conditions, and

other unfolding developments that management
believes warrant strategy adjustments. Thus, a company’s
strategy at any given point is fluid, representing the
temporary outcome of an ongoing process that, on the one hand,
involves reasoned and creative management
efforts to craft a competitively effective strategy and, on the
other hand, involves ongoing responses to market
change and constant experimentation and tinkering. 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 and result in an evolving strategy.7
A COMPANY’S STRATEGY IS PARTLY PROACTIVE
AND PARTLY REACTIVE
The evolving nature of a company’s strategy means the typical
company strategy is a blend of (1) proactive
actions to secure a competitive edge and improve the company’s
financial performance and (2) as-needed
reactions to fresh market conditions and other unanticipated
developments—see Figure 1.2.8 The biggest
portion of a company’s current strategy usually consists of a
combination of previously initiated actions and
business approaches that are working well enough to merit
continuation and newly launched initiatives aimed
at boosting competitive success and financial performance.
Typically, managers proactively modify one or
more aspects of their strategy as new learning emerges about
which pieces of the strategy are working well
and which aren’t and as they explore and test new ways to
improve the strategy. This part of management’s
action plan for running the company is deliberate and constitute
its proactive strategy elements.
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FIGURE 1.2 A Company’s Strategy Is a Blend of Proactive
Initiatives and
Reactive Adjustments
Abandoned
strategy elements
Prior
Version
of
Company
Strategy
Latest
Version
of
Company
Strategy
Proactive Strategy Elements
Newly-crafted strategic initiatives
plus ongoing strategy elements
continued from prior periods

New strategy elements that emerge
as managers react to changing
circumstances
Reactive Strategy Elements
But managers must always be willing to supplement or modify
all the proactive strategy elements with as-
needed reactions to fresh or unexpected developments.
Inevitably, there will be occasions when market and
competitive conditions take an unexpected turn that call for
some kind of strategic reaction or adjustment.
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 and expectations, important
technological developments, newly appearing market
opportunities, a changing political or economic climate,
or other unanticipated happenings in the surrounding
environment. These adaptive strategy adjustments form
the reactive strategy elements.
As shown in Figure 1.2, a company’s strategy evolves from one
version to the next as managers abandon
obsolete or ineffective strategy elements, settle upon a set of
proactive strategy elements, and then—as new
circumstances unfold—make adaptive strategic adjustments, all
of which result in an assortment of reactive
strategy elements. The latest version of a company’s strategy
thus reflects the disappearance of obsolete or
ineffective strategy elements and a modified combination of
proactive and reactive elements.
STRATEGY AND ETHICS: PASSING THE TEST
OF MORAL SCRUTINY

In choosing among strategic alternatives, company mana-
gers are well advised to embrace actions that can pass the
test of moral scrutiny. Just keeping a company’s strategic
actions within the bounds of what is legal does not mean
the strategy is ethical. Ethical and moral standards are
not fully governed by what is legal. Rather, they involve
issues of “right” versus “wrong” and duty—what one
should do. A strategy is ethical only if it does not entail
actions and behaviors that cross the moral line from
“can do” to “should not do.” For example, a company’s
strategy definitely crosses into the should not do
CORE CONCEPT
A strategy cannot be considered ethical just
because it involves actions that are legal. To
meet the standard of being ethical, a strategy
must entail actions and behavior that can pass
moral scrutiny in the sense of not being deceitful,
unfair or harmful to others, disreputable, or
unreasonably damaging to the environment.
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zone and cannot pass moral scrutiny if it entails actions and
behaviors that are deceitful, unfair or harmful
to others, disreputable, or unreasonably damaging to the
environment. A company’s strategic actions or
behavior cross over into the should not do zone and are likely to

be deemed unethical when (1) they reflect
badly on the company or (2) they adversely impact the
legitimate interests and well-being of shareholders,
customers, employees, suppliers, the communities where it
operates, and society at large or (3) they provoke
widespread public outcries about inappropriate or
“irresponsible” actions, behavior, or outcomes.
Admittedly, it is not always easy to categorize a given strategic
behavior as ethical or unethical. Many strategic
actions fall in a gray zone and can be deemed ethical or
unethical depending on how high one sets the bar
for what qualifies as ethical behavior. For example, is it ethical
for advertisers of alcoholic products to place
ads in media having an audience of as much as 50 percent
underage viewers? Is it ethical for an apparel
retailer attempting to keep prices attractively low to source
clothing from manufacturers who pay substandard
wages, use child labor, or subject workers to unsafe working
conditions? Is it ethical for Nike, Under Armour,
and other makers of athletic uniforms and other sports gear to
pay a university athletic department large sums
of money as an “inducement” for the university’s athletic teams
to use their brand of products? Is it ethical for
pharmaceutical manufacturers to charge higher prices for life-
saving drugs in some countries than they charge
in others? Is it ethical for a company to ignore the damage its
operations do to the environment in a particular
country, even though its operations are in compliance with
current environmental regulations in that country?
Senior executives with strong ethical convictions are generally
proactive in linking strategic action and ethics;
they forbid the pursuit of ethically questionable business
opportunities and insist that all aspects of company
strategy are in accord with high ethical standards. They make it

clear that all company personnel are expected
to act with integrity, and they put organizational checks and
balances into place to monitor behavior, enforce
ethical codes of conduct, and provide guidance to employees
regarding any gray areas. Their commitment to
ethical business conduct is genuine, not hypocritical lip service.
The reputational and financial damage that unethical strategies
and behavior can do is substantial. When a
company is put in the public spotlight because certain personnel
are alleged to have engaged in misdeeds,
unethical behavior, fraudulent accounting, or criminal behavior,
its revenues and stock price are usually
hammered hard. Many customers and suppliers shy away from
doing business with a company that engages
in sleazy practices or turns a blind eye to its employees’ illegal
or unethical behavior. They are turned off by
unethical strategies or behavior and, rather than become victims
or get burned themselves, wary customers
take their business elsewhere and wary suppliers tread carefully.
Moreover, employees with character and
integrity do not want to work for a company whose strategies
are shady or whose executives lack character
and integrity. Besides, immoral or unethical actions are just
plain wrong. Consequently, there are solid business
reasons why companies should avoid employing unethical
strategy elements.
THE RELATIONSHIP BETWEEN A COMPANY’S STRATEGY
AND ITS BUSINESS MODEL
Closely related to the concept of strategy is the concept
of a company’s business model. A business model is
manage ment’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.9 The two main components of a company’s business

model are (1) its customer value proposition and (2) its
profit proposition (or “profit formula”).10 The customer value
proposition lays out the company’s approach to satisfying
buyer needs and requirements at a price they will consider
a good value.11 Plainly, from a customer perspective, the
greater the value delivered and the lower the price to
get this value, the more appealing the company’s value
CORE CONCEPT
A company’s business model sets forth how
its strategy and operating approaches will
create value for customers while at the same
time generating ample revenues to cover costs
and realize a profit large enough to please
shareholders. Absent the ability to earn good
profits, a company’s strategy and operating
blueprint are flawed, its business model is not
viable, and its ability to survive is in jeopardy.
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proposition and product offering. From a company perspective,
however, the greater the value delivered and
the higher the price that can be charged, the bigger the margin
for covering the costs associated with its
business approach and realizing an attractive profit and return
on investment.

The profit proposition or profit formula portion of a company’s
business model concerns its business approach
to generating sufficiently large revenues and controlling the
costs of its customer value proposition, such that
the company will be able to simultaneously deliver the intended
value to customers and deliver appealing
profits to shareholders. For a company’s business model to
result in both satisfied customers and satisfied
shareholders, three outcomes are required:
• The revenue stream that is generated must be big enough to
more than cover the costs of delivering
attractive value to customers. The revenues that can be
generated are a function of the volume of
customers attracted at the price being charged.
• There must be adequate ways and means to control the costs of
the value being delivered to
customers. The costs of the company’s business model approach
are dependent on the costs of the
resources and business processes it utilizes and the cost
efficiency of its operating systems.
• The amounts by which revenues exceed the costs incurred
must please shareholders.
The lower a firm’s costs are in relation to its revenues, the
greater its profit potential and the more attractive its
profit proposition.
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 content to readers. Cell-phone

providers, satellite radio companies, and Internet service
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;
profit is realized by generating sufficient
advertising revenues to more than cover programming costs.
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 cheaply and sold at high
profit margins. Printer manufacturers like
Hewlett-Packard, Canon, Dell, and Epson pursue much the same
business model as Gillette—selling printers at
a low (virtually breakeven) price and making large profit
margins on the repeat purchases of ink cartridges and
other printer supplies. 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 designs; ongoing
expenditures for ever-better equipment and
food preparation systems that enable serving hot, good-tasting
food faster and accurately; extensive testing
of new menu items; stringent specifications for ingredients;
detailed operating procedures for each unit; heavy
reliance on advertising and in-store promotions to drive volume;
and sizable investment in human resources
and training.
Amazon.com mainly utilizes an online direct sales business
model whereby it procures merchandise for display
and sale on its web pages, provides an online marketplace for
some 5 million third-party merchants from which
it derives service fees and/or sales commissions, and operates a
growing network of geographically scattered

distribution centers that rapidly fill, package, and ship customer
orders for delivery by third-party carriers (FedEx,
UPS, and the U.S. Postal Service). Amazon’s affiliated
merchants can either use Amazon’s order fulfillment
capabilities or perform these activities themselves. Third-party
sellers accounted for 58 percent of total physical
gross merchandise sales on Amazon in 2018, up from just 3
percent in 1999.12 However, Chinese-based Alibaba
has adopted a “platform” business model whereby it operates
online and mobile shopping marketplaces for
consumers, merchants, and third-party service providers to
conduct online retail and wholesale trade; Alibaba’s
revenues come from the commissions and fees it earns on the
hundreds of millions of transactions annually
made by the merchants using its web-based sales platform and
associated services (that includes web-page
display, auction hosting, online money transfer, cloud
computing, and logistics, among others). Beginning in
2019, however, Alibaba did begin to offer procurement services
for foreign firms attempting to enter the Chinese
online marketplace and order fulfillment services for domestic
online sellers on sales made outside China. So
9
far, the strategic elements in Alibaba’s profit formula have
delivered far superior performance compared to
the strategic elements in Amazon’s profit formula. Alibaba

reported fiscal year 2020 operating profits of $12.9
billion on revenues of $72.9 billion (equal to an operating profit
margin of 17.9 percent), whereas in calendar
year 2020, Amazon reported operating profit of $22.9 billion on
sales revenues of $386.1 billion (equal to an
operating profit margin of 5.9 percent).
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 otherwise
running various parts of the business does not automatically
mean the strategy will lead to profitability—it may
or may not. Companies that have been in business for a while
and are making at least reasonably attractive
profits have a “proven” business model—because there is hard
revenue-cost evidence that their strategies
and approaches to operating can yield good profits. Companies
that are in a startup mode or are losing money
have “questionable” business models; their strategies and
operating approaches have yet to produce good
bottom-line results, thus raising doubts about their blueprint for
making money and their viability as business
enterprises. Companies that operate in uncertain, volatile
market environments often have business models
that quickly lose their effectiveness; for such companies to
survive, they have to be adept at spotting the signs
of impending crisis early and then swiftly reinvent their
business model and strategy.13
When a company pioneers a new and obviously successful
business model approach, both its existing rivals
and new entrants usually quickly adopt imitative business
models—the key features of a successful business
model are easy to identify and, often relatively easy to
replicate.14 For example, over the past 15 years, the

business model for online retailing—a functional website,
appealing product offerings, convenient checkout
and payment options, fast delivery (and perhaps even free
shipping), no-hassle merchandise return procedures,
and cost-efficient order fulfillment and inventory management
systems—has been successfully implemented
thousands of times all across the world.
WHAT MAKES A STRATEGY A WINNER?
Three tests can be applied to determine the merits of one
strategy versus another and distinguish a winning
strategy from a so-so or flawed strategy:
1. The Fit Test: How well does the strategy fit the company’s
situation? To qualify as a winner, a strategy
must 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. At the same
time, it must be tailored to the company’s resources and
competitive capabilities and be supported by
a complementary set of operating approaches (as
concerns supply chain management, research and
development, production, sales and marketing,
and financial management). 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 good business 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.15
CORE CONCEPT
A winning strategy must fit the enterprise’s

external and internal situation, help build
sustainable competitive advantage, and improve
company performance.
2. The Competitive Advantage Test: Is the strategy helping the
company achieve a sustainable
competitive advantage? Winning strategies enable a company to
achieve a competitive advantage
that is durable. The bigger and more durable the competitive
edge that a strategy helps build, the
more powerful and appealing it is.
3. The Performance Test: Is the strategy producing good
company performance? To be a winner, a
strategy must have resulted in not just substantially better
company performance but also what is
clearly 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
10
financial strength. Gains in market share, improving
competitiveness vis-à-vis rivals, above-average
profitability, and strong financial performance over the past 2-4
years are all signs of a winning strategy.

Strategies—either existing or proposed—that come up short on
one or more of the tests are plainly less
appealing than strategies passing all three tests with flying
colors. Failing grades on one or more tests should
prompt managers to make immediate changes in an existing
strategy. Likewise, when picking and choosing
among alternative strategic actions, managers should be quick
to discard alternatives that seem ill-suited to
a company’s internal and external situation or that offer little
prospect of producing competitive advantage or
improved performance.
WHY CRAFTING AND EXECUTING STRATEGY
ARE IMPORTANT TASKS
Crafting and executing strategy are top-priority managerial
tasks for two big reasons. First, there is a compelling
need for managers to proactively shape how the company’s
business will be conducted. A clear and reasoned
strategy is management’s prescription for doing business,
its road map to competitive advantage, and its game plan for
pleasing customers and improving financial performance.
High-performing 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 flawed strategies, copycat strategies,
or with strategies built around timid actions to try and do
better.16 And only a handful of companies can boast of
strategies that hit home runs 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—but the good fortunes of such companies are not long-
lasting without subsequent success in crafting
a strategy that capitalizes on their luck and proves capable of
long-term competitive success. So there can be
little argument that a company’s strategy matters—and matters a
lot.

CORE CONCEPT
How well a company 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.
Second, even the best-conceived strategies will result in
performance shortfalls if they are not executed
proficiently. Good day-in/day-out strategy execution and
operating excellence are essential for a company to
perform close to its full potential. There can be no applause for
managers who design a potentially brilliant
strategy and then stumble in their efforts to create an
organization with the skills, resource capabilities,
operating practices, and culture needed to carry out the strategy
in high-caliber fashion. Flawed and/or inept
implementation and execution of a company’s strategy are a
surefire recipe for underachievement, both
financially and in competing against rivals.
Good Strategy + Good Strategy Execution = Good
Management
Crafting and executing strategy are thus core management tasks.
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 and trustworthy signs of
good management. Managers don’t deserve a gold star for
designing a potentially brilliant strategy and then

failing to put the organizational means in place to carry it out in
high-caliber fashion—weak implementation
and execution undermine the strategy’s potential and pave the
way for shortfalls in customer satisfaction and
company performance. Competent execution of a mediocre
strategy scarcely merits 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 compelling:
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
11
marketplace. In stark contrast, a company that has a muddled or
flawed strategy and/or can’t seem to execute its
strategy competently is most likely a company whose financial
performance is subpar, whose competitiveness
in the marketplace is suffering, whose executive leadership
needs to be replaced, and whose business is at
long-term risk of being an underperformer unless it is better
managed.
THE ROAD AHEAD
Throughout the chapters to come, the spotlight is trained on the

foremost question in running a business
enterprise: What must managers do, and do well, to give a
company its best shot for being attractively
profitable and successful in the marketplace? The answer that
emerges, and that becomes the biggest lesson
of the course you are taking, is that doing a good job of
managing inherently requires good strategic thinking
and good management of the strategy-making, strategy-
executing process.
The content of the upcoming chapters focuses squarely on what
every business student and aspiring manager
needs to know about crafting and executing strategy. We will
explore what good strategic thinking entails,
describe the core concepts and tools of strategic analysis, and
examine the ins and outs of crafting and
executing strategy. Then, in the accompanying strategy
simulation exercise where you will run a company
in head-to-head competition with companies run by your
classmates, you will have a golden learn-by-doing
opportunity to put the chapter content into practice and gain
firsthand experience in actually crafting a strategy
for your company and figuring out how to execute it cost
effectively and profitably. In the process, we hope to
convince you that first-rate capabilities in crafting and
executing strategy are basic to managing successfully
and are skills every manager needs to possess.
As you tackle the chapters and undertake the activities of being
a co-manager of your assigned company,
ponder the following observation by the essayist and poet Ralph
Waldo Emerson: “Commerce is a game of skill
which many people play, but which few play well.” If the
chapters and the experience of running your company
help you become a savvy player and better equip you to succeed
in business, the time and energy you spend

here will indeed prove worthwhile.
KEY POINTS
The tasks of crafting and executing company strategies are the
heart and soul of managing a business
enterprise and winning in the marketplace. A company’s
strategy is the game plan management is using to
stake out a market position, conduct its operations, attract and
please customers, compete successfully, and
achieve the desired performance targets. The central thrust of a
company’s strategy is undertaking moves to
build and strengthen the company’s long-term competitive
position and financial performance and, ideally, gain
a competitive advantage over rivals that then becomes a
company’s ticket to above-average profitability. A
company’s strategy typically evolves and reforms over time,
emerging from a blend of (1) company managers’
proactive and purposeful actions and (2) as-needed reactions to
unanticipated developments and fresh market
conditions.
Closely related to the concept of strategy is the concept of a
company’s business model. A company’s
business model is management’s story line for how and why the
company’s product offerings and competitive
approaches will generate a revenue stream and have an
associated cost structure that produces attractive
earnings and return on investment—in effect, a company’s
business model sets forth the economic logic for
making money in a particular business, given the company’s
current strategy.
A winning strategy fits the circumstances of a company’s
external situation and its internal resource strengths
and competitive capabilities, builds competitive advantage, and
boosts company performance.

Crafting and executing strategy are core management functions.
How well a company performs and the degree
of market success it enjoys are directly attributable to the
caliber of its strategy and the proficiency with which
the strategy is executed. No company’s management team
deserves a grade of “good” for crafting a run-of-
the-mill strategy and/or for executing a strategy satisfactorily
and, as a consequence, achieving no better than
adequate performance.
12
Chapter 1: What Is Strategy and Why Is It Important?What Do
We Mean by “Strategy”? Strategy and the Quest for Competitive
Advantage A Company’s Strategy is Partly Proactive and Partly
Reactive Strategy and Ethics: Passing the Test of Moral
Scrutiny The Relationship Between a Company’s Strategy and
Its Business Model What Makes a Strategy a Winner? Why
Crafting and Executing Strategy Are Important Tasks The Road
Ahead Key Points
Strategy: Core Concepts and Analytical Approaches
Arthur A. Thompson, The University of Alabama 7th Edition,
2022-2023
An e-book marketed by McGraw Hill Education
Chapter 2
Charting a Company’s Long-Term
Direction: Vision, Mission,
Objectives, and Strategy
If you don’t know where you are going, any road will take you
there.

—Cheshire Cat to Alice
Lewis Carroll, Alice in Wonderland
Good business leaders create a vision, articulate the vision,
passionately own the vision, and relentlessly
drive it to completion.
—Jack Welch, former CEO of General Electric
Purpose must be conceived and chosen, and then pursued.
—Clayton M. Christensen, professor and consultant
It is hard to get better at something if you don’t measure
progress.
—Balanced Scorecard Institute (www.balancedscorecard.org)
A good goal is like a strenuous exercise—it makes you stretch.
—Mary Kay Ash, Founder of Mary Kay Cosmetics
If one is even halfway convinced that crafting and ex ecuting
strategy are critically important managerial
tasks, then understanding exactly what is involved in
developing a strategy and executing it proficiently
becomes essential. What goes into charting a company’s
strategic course and long-term direction? Is any
analysis required? Does a company need a strategic plan? What
are the various components of the strategy-
making, strategy-executing process? Aside from top executives,
to what extent are other senior and mid-
level managers involved in the process?
This chapter presents an overview of the managerial ins and
outs of crafting and executing company
strategies. The focus is on management’s direction-setting
responsibilities—developing a strategic vision
that sets forth where the company is headed and what its

mission will be, setting performance targets, and
choosing a strategy capable of producing the desired outcomes.
There is coverage of why strategy making
is a task for a company’s entire management team and which
kinds of strategic decisions are made at
which levels of management. There is a brief discussion of the
principal managerial tasks associated with
13
Chapter 2 • Charting a Company’s Long-Term Direction:
Vision, Mission, Objectives, and Strategy
implementing and executing strategy and why a company’s
whole managerial team and most company
personnel are involved in the strategy execution process. The
chapter concludes with a look at the roles and
responsibilities of the company’s board of directors in the
strategy-making, strategy-executing process and
how good corporate governance protects shareholder interests
and promotes good management.
WHAT DOES THE STRATEGY-MAKING,
STRATEGY-EXECUTING PROCESS ENTAIL?
Crafting and executing a company’s strategy is an ongoing
process that consists of five interrelated

managerial tasks:
1. Developing a strategic vision that charts the company’s long-
term direction, a mission statement
that describes the company’s business 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 and pursuing the strategic
vision and mission.
3. Crafting a strategy for achieving the performance objectives
and advancing the company along the
path management has charted.
4. Implementing and executing the chosen strategy efficiently
and effectively.
5. Monitoring developments, evaluating performance, and
initiating corrective adjustments in the
company’s long-term direction, objectives, strategy, or
execution in light of actual experience, changing
conditions, newly emerging market opportunities, and fresh
managerial ideas for improvements.
Figure 2.1 displays this five-task process. Let’s examine each
task in some detail, thereby setting the stage
for the forthcoming chapters and giving you a bird’s-eye view
of the book.
FIGURE 2.1 The Strategy-Making, Strategy-Executing Process
Task 1 Task 2 Task 3 Task
4 Task 5

Developing
a strategic
vision,
mission,
and core
values
Setting
Objectives
Crafting a
strategy to
achieve the
objectives and
move along the
chosen path
Implementing
and
executing
the strategy
Monitoring
developments,
evaluating
performance,
and initiating
corrective

adjustments
Revise as needed in light of the company’s
actual performance, changing conditions,
new opportunities, and fresh ideas for improvements
14
TASK 1: DEVELOPING A STRATEGIC VISION, MISSION
STATEMENT, AND SET OF CORE VALUES
Very early in the strategy-making process, a company’s senior
executives must wrestle with the issue of
what directional path the company should take. Can the
company’s prospects be improved by changing its
product offerings, the markets in which it participates, the
customers it caters to, or the business activities in
which it engages? Deciding to commit the company to one path
versus another pushes top-level executives
to draw some carefully reasoned conclusions about whether the
company’s present strategic course offers
attractive opportunities for growth and profitability or whether
major or minor changes of one kind or another
in the company’s strategy and long-term direction are needed.
Some of the most important considerations in
charting a company’s future direction are shown in Table 2.1.

TABLE 2.1 What to Consider in Deciding on a Company’s
Future Direction
External Considerations Internal Considerations
• Does sticking with the company’s present strategic
course present attractive opportunities for growth and
profitability?
• How well is the company faring vis-à-vis key
competitors? Is the company gaining ground or losing
ground, and why?
• Are the winds of change—most especially those
affecting the market and competitive arenas in which
the company competes—acting to enhance or weaken
the company’s prospects?
• Is the company competing in too many markets
or product categories where profits are skimpy or
nonexistent?
• What, if any, new customer groups and/or geographic
markets should the company get in position to serve?
• Does the company have attractively strong resources
and competitive capabilities to grow revenues and
profits in the years ahead?
• Which emerging market opportunities should the
company pursue and which ones should not be
pursued?
• What resource strengths and competitive capabilities
offer good potential for creating competitive

advantage?
• Are there good reasons why the company should
begin to deemphasize or eventually abandon any of
the markets or customer groups it is currently serving?
• Is the company at risk because of specific resource
weaknesses or deficient competitive capabilities or
threats of technological obsolescence?
Top management’s views and conclusions about the company’s
long-term direction and what product-
customer-market-business mix seems optimal for the road ahead
constitute a strategic vision for the company.
A strategic vision delineates management’s aspirations for the
company, providing a panoramic view of
“where we are going” and a convincing rationale for why
this makes good business sense. A strategic vision thus
points an organization in a particular direction, charts a
strategic path for it to follow in preparing for the future,
and molds organizational identity. A forward-looking
and clearly articulated strategic vision communicates
management’s aspirations to stakeholders (shareholders,
employees, suppliers, customers, etc.) and helps steer
the energies of company personnel in a common direction. The
vision of Google cofounders Larry Page and
Sergey Brin “to organize the world’s information and make it
universally accessible and useful” provides a
good example. In serving as the company’s guiding light, it has
captured the imagination of stakeholders and
the public at large, served as the basis for crafting the
company’s strategic actions, and aided internal efforts
to mobilize and direct the company’s resources.
CORE CONCEPT
A strategic vision describes the route a company

intends to take in developing and strengthening
its business. It lays out the company’s strategic
course in preparing for the future.
15
Clear, forward-looking visions are distinctive and
specific to a particular organization; they avoid feel-
good statements like “We will become a global leader
and the first choice of customers in every market we
choose to serve”—which could apply to hundreds of
organizations.1 Likewise, a strategic vision proclaiming
management’s quest “to be the market leader” or “to
be the most innovative” or “to be recognized as the
best company in the industry” offers scant guidance about a
company’s long-term direction or the kind of
company management is striving to build.
A vision statement should clearly set forth a
company’s long-term direction and say something
definitive about what top executives want the
company’s product-market-customer-business
makeup to be in three to five (or more) years.
A surprising number of vision statements found on company
websites and in annual reports are vague and

unrevealing, conveying nothing meaningful about the
company’s future direction. Some could apply to most
any company in any industry. Many read like a public relations
statement, full of high-sounding words and
phrases that someone came up with because it is fashionable for
companies to have a vision statement.2
An example is Hilton Hotel’s vision “to fill the earth with light
and the warmth of hospitality,” which borders
on the incredulous and certainly bears little resemblance to a
purposeful and valuable vision statement that
informs stakeholders about Hilton Hotel’s long-term direction
and management’s aspirations for the future
of the company’s hotel business?
For a strategic vision statement to serve as a managerially
valuable tool for instilling a strong sense of
long-term direction, it cannot be just a bunch of nice words with
no specifics or forward-looking content.
Rather, it must convey something definitive about where the
company needs to be headed and address what
changes in the company’s current product-market-
customer-business mix and business operations
are needed to better position the company in the
light of technological developments, the actions of
rivals, changing buyer needs and expectations, and
assorted other factors that affect the company’s long-
term business prospects. Vision statements that use
revealing language to paint a picture of where the
company is going and the changes needed in its business make-
up are particularly useful in helping gain
the commitment of company personnel to make these changes
and in providing guidance to managers at all
organizational levels about the kinds of actions they should take
in their areas of responsibility to assist the
company in moving expeditiously along the charted directional
path. Table 2.2 provides some dos and don’ts

in composing a clear and effectively worded vision statement.
A well-communicated vision is a valuable managerial
tool for enlisting the commitment of company
personnel to actions that will move the company
more quickly along the directional path top
executives have charted.
TABLE 2.2 Wording a Vision Statement—The Do’s and Don’ts
The Do’s The Don’ts
Be graphic—Paint a clear and straight-to-the-point
picture of where the company is headed and the market
position(s) the company is striving to stake out.
Don’t dwell on the present—a vision is not about what a
company once did or does now; it’s about the future and
“where we are going.”
Be forward-looking and directional—Describe the
strategic course management has charted and the kinds
of product-market-customer-business changes that will
help prepare the company for the future.
Don’t be vague or incomplete—Never skimp on
specifics about where the company is headed or how
the company intends to prepare for the future.
Keep it focused—Include enough specifics and details
to provide managers with guidance in making decisions,
initiating needed changes, and allocating resources.
Don’t use overly broad language—Avoid all-inclusive
language that gives the company license to head in
most any direction, pursue most any opportunity, or
enter most any business.

16
Have some wiggle room—Language that allows some
flexibility enables the strategic course to be fine-
tuned as the company’s circumstances and external
environment change—significantly modifying the vision
statement frequently undercuts the whole concept of
establishing a long-term direction for the company.
Don’t state the vision in bland or uninspiring terms—
The best vision statements are worded in a manner
that motivate and inspire company personnel and
shareholders about the company’s future and the merits
or value of what it is trying to accomplish.
Be sure the journey is feasible—The path and direction
should be within the realm of what the company can
realistically pursue; over time, a company should be
able to demonstrate measurable progress in achieving
the vision.
Don’t be generic—A vision statement that could apply
to companies in any of several industries (or to any of
several companies in the same industry) is incapable of
giving a company its own unique identity or providing
useful decision-making guidance.

Indicate why the directional path makes good
business sense—The directional path should be in
the long-term interests of stakeholders (especially
shareholders, employees, and customers).
Don’t rely on superlatives—Visions that claim the
company’s strategic course is one of being the “best” or
“the most successful” or “a global leader” usually lack
revealing specifics about the path the company intends
to take to get there.
Make it memorable—A well-stated vision is short, easily
communicated, and memorable. Ideally, it should be
reducible to a few choice lines or a one-phrase “slogan.”
Don’t run on and on—A viision statement that is not
concise and to the point will tend to lose its audience.
Sources: John P. Kotter, Leading Change (Boston: Harvard
Business School Press, 1996), p. 72; Hugh Davidson, The
Committed Enterprise (Oxford: Butterworth Heinemann, 2002,
Chapter 2; and Michel Robert, Strategy Pure and Simple II
(New
York: McGraw-Hill, 1992), Chapters 2, 3, and 6.
Communicating the Strategic Vision
How effectively top executives communicate the strategic
vision to all company personnel is as important as
the strategic soundness of the long-term direction they have
chosen. A vision cannot provide direction for
middle or lower-level managers or inspire and energize
employees unless everyone in the company is familiar
with it and can observe top executives’ commitment to the
vision. It is particularly important for executives to

provide a compelling rationale for a dramatically new strategic
vision and company direction. When company
personnel don’t understand or accept the need for redirecting
organizational efforts, they are prone to resist
or be indifferent to the changes that management wants to make.
Hence, explaining the basis for the new
direction, addressing employee concerns head-on, calming
fears, lifting spirits, and providing updates and
progress reports as events unfold all become part of the task in
mobilizing support for the vision and winning
commitment to needed actions.
Winning the support of organization members for the vision
nearly always requires putting “where we
are going and why” in writing, distributing the statement across
the organization, and having executives
personally explain the vision and its rationale to as
many people as feasible. A strategic vision can usually
be adequately stated in less than a page (often in one
to two paragraphs), and managers should be able to
explain it to company personnel and outsiders in five to
ten minutes. Ideally, executives should present their vision
for the company in a manner that reaches out and grabs
people. An engaging and convincing strategic vision has
enormous motivational value—for the same reason that a
stone mason is more inspired by building a great cathedral for
the ages than simply laying stones to create
floors and walls. When managers articulate a vivid and
compelling case for where the company is headed,
organization members begin to say, “This is interesting and has
a lot of merit. I want to be involved and do
my part to help make it happen.” The more a vision evokes
positive support and excitement, the greater its
impact in terms of arousing a committed organizational effort
and getting company personnel to move in a
common direction.3 Thus, executive ability to paint a

convincing and inspiring picture of a company’s journey
and destination is an important element of effective strategic
leadership.
CORE CONCEPT
An effectively communicated vision is a valuable
tool for managers to use in enlisting the
commitment of company personnel to actions
that get the company moving in the intended
direction.
17
Expressing the Essence of the Vision in a Slogan The task of
effectively conveying the vision to
company personnel is assisted when the vision of where to head
is expressed in an easily remembered
phrase or catchy slogan. For instance, Nike aspires to exhibit “a
passion for serving athletes by developing
the most innovative products and services to help them reach
their full potential.” Disney’s overarching
vision for its five business groups—parks and resorts, movie
studios, television channels, consumer products
(toys, books, and licensed Disney products), and interactive
media entertainment—is to “create happiness
by providing the finest in entertainment for people of all ages,
everywhere.” The Mayo Clinic’s vision is “to

inspire hope and contribute to health and well-being by
providing the best care to every patient through
integrated clinical practice, education and research” while
Habitat for Humanity’s aspirational vision is “A
world where everyone has a decent place to live.” Scotland
Yard’s vision is vividly captured in the slogan “to
make London the safest major city in the world.” Walmart’s
visionary slogan is “saving people money so they
can live better”—often shortened to the tag line “Save Money.
Live Better.” Creating a phrase or short slogan
to illuminate an organization’s direction and purpose and then
using it repeatedly as a reminder of “where we
are headed and why” helps rally organization members to
maintain their focus and hurdle whatever obstacles
lie in the company’s path.
Why a Sound, Well-Communicated Strategic Vision Matters A
well-thought-out, forcefully
communicated strategic vision pays off in several respects: (1)
it crystallizes top executives’ own views about
the firm’s long-term direction; (2) it reduces the risk of
rudderless decision making; (3) it is a tool for winning
the support of organizational members for changes that will
help move the company along the chosen
strategic path; (4) it prompts lower-level managers to pursue
actions and operating practices that promote
achievement of the vision; and (5) it provides a rational for why
the whole organization should promptly take
steps to begin its journey into the future. When top executives
can see evidence of progress in achieving
these five benefits, the first step in organizational direction
setting has been successfully completed.
Developing a Company Mission Statement
The defining characteristic of a well-conceived strategic vision
is what it says about the company’s future

strategic course—“the direction we are headed and what market
position(s) we intend to stake out.” The role
of a company’s mission statement, however, is to describe
the enterprise’s present business and purpose—“who we
are, what we do, and why we are here.” Ideally, a company
mission statement (1) identifies the company’s products/
services, (2) specifies the buyer needs that it seeks to
satisfy and the customer groups or markets it serves,
and (3) gives the company its own identity. The mission
statements that one finds in company annual reports or
posted on company websites typically are quite brief;
some do a better job than others of conveying what the
enterprise’s current business operations and purpose are all
about.
The distinction between a strategic vision and a
mission statement is fairly clear-cut: A strategic
vision sets forth a company’s future direction
(“where we are going”), whereas a company’s
mission statement describes the scope and
purpose of its present business (“who we are,
what we do, and why we are here”).
The following mission statements provide reasonably
informative specifics about “who we are, what we do,
and why we are here:”
• Trader Joe’s (a specialty grocery chain): “The mission of
Trader Joe’s is to give our customers the
best food and beverage values that they can find anywhere and
to provide them with the information
required for informed buying decisions. We provide these with a
dedication to the highest quality
of customer satisfaction delivered with a sense of warmth,
friendliness, fun, individual pride, and
company spirit.

• The American Red Cross: “To prevent and alleviate human
suffering in the face of emergencies by
mobilizing the power of volunteers and the generosity of
donors.”
• eBay: “To provide a global trading platform where practically
everyone can trade practically anything.”
• Honest Tea: “To create and promote great-tasting, healthy,
organic beverages.”
• Nordstrom: “To give customers the most compelling shopping
experience possible.”
18
• Amazon.com: “To build a place where people can come to find
and discover anything they might
want to buy online.”
• Warby Parker: “To offer designer eyewear at a revolutionary
price, while leading the way for socially
conscious businesses.”
But some companies have used vague or imprecise wording in
their mission statements, effectively obscuring

the industry (or industries) in which they operate and the real
substance of their business purpose. For
instance, Microsoft’s mission statement—“to help people
and businesses throughout the world realize their full
potential”—reveals nothing about its products or business
make-up and is so non-specific it could apply to thousands
of companies in hundreds of industries. European airline
company JetBlue’s mission statement “To inspire humanity
in the air and on the ground” conceals everything about
its operations and business makeup. Avery Dennison’s
mission statement is “To help make every brand more inspiring,
and the world more intelligent;” one would
never guess its product is stick-on labels. Similarly, one well-
known company says its mission is “To be a
company that inspires and fulfills your curiosity;” a second
well-known company’s mission statement is “To
refresh the world in mind, body, and spirit…To inspire moments
of optimism and happiness through our
brands and actions…To create value and make a difference.”
But neither of these two mission statements
would enable someone to correctly identify the first of these
companies as Sony and the second (which
markets over 500 beverage brands in more than 200 countries)
as Coca-Cola. The usefulness of a mission
statement that is largely a “collection of high-sounding words
and phrases” and which fails to convey the
essence of a company’s business activities and purpose is
unclear.
To be well worded, a company mission statement
must employ language specific enough to
distinguish its business make-up and purpose
from those of other enterprises and give the
company its own identity.
Occasionally, companies say their mission is to “make a profit”

or to “maximize shareholder value.” Such
statements are likewise flawed. Making a profit on behalf of
shareholders is more correctly an objective
and a result of what a company does. Moreover, earning a profit
is the obvious intent of every commercial
enterprise. Such companies as BMW, Netflix, Shell Oil, Visa,
Google, and McDonald’s are each striving to
earn a profit for shareholders; but plainly the fundamentals of
their businesses are substantially different
when it comes to “who we are and what we do.” It is
management’s answer to “make a profit doing what and
for whom?” that reveals the substance of a company’s mission
and business purpose.
Linking the Strategic Vision and Mission with Company Values
Companies commonly develop a set of values to guide the
actions and behavior of company personnel
in conducting the company’s business and pursuing its
strategic vision and mission. By values (or core values,
as they are often called), we are referring to certain
designated beliefs, traits, and ways of doing things—
actions and behaviors that are widely viewed as “good”
or “desirable” or maybe even “noble” and that are
intended to guide company personnel in the course of
conducting the company’s business and pursuing its
vision and mission. Values relate to such things as fair
treatment, honor and integrity, ethical behavior, innovativeness,
teamwork, accountability, a passion for top-
notch quality or superior customer service, social responsibility,
and community citizenship.
CORE CONCEPT
A company’s values or core values are the
beliefs, traits, and behavioral norms that
company personnel are expected to display
in conducting the company’s business and

pursuing its strategic vision and mission.
Values-conscious companies normally have four to eight core
values that company personnel are expected
to display and that are supposed to be mirrored in how the
company conducts its business. At American
Express, the core values are respect for people, customer
commitment (building and developing relationships
that make a positive impact on the lives of our customers),
integrity, teamwork (working together to fill the
needs of all customers), good citizenship, a strong will to win in
the marketplace and every aspect of the
business, products and unsurpassed service that deliver premium
value to our customers, and personal
19
accountability for delivering on commitments. At Disney, “cast
members” are expected to share the values
of honesty, integrity, respect, courage, openness, diversity, and
balance; these values are demonstrated
through such traits and behaviors as making guests happy,
caring about fellow cast members, working as
a team, delivering quality, fostering creativity, paying attention
to every detail, and having an emotional
commitment to Disney. Rackspace, a provider of server hosting
and managed cloud computing services for

some 200,000 businesses in 150 countries, the core values are
fanatical support in all we do, a commitment
to greatness, full disclosure and transparency, a passion for our
work, treatment of fellow Rackers like
friends and family, and results first, substance over flash.4
Zappos expects its employees to practice 10
core values: deliver WOW through service; embrace and drive
change; create fun and a little weirdness; be
adventurous, creative, and openminded; pursue growth and
learning; build open and honest relationships
with communication; build a positive team and family spirit; do
more with less; be passionate and determined;
and be humble.5
Do companies practice what they preach when it comes to their
professed values? Sometimes yes,
sometimes no—it runs the gamut. At one extreme are companies
whose executives are committed to
grounding company operations on sound values and principled
ways of doing business. Senior executives at
these companies deliberately seek to ingrain the designated core
values in the corporate culture—the core
values thus become an integral part of the company’s DNA and
what makes it tick. At such values-driven
companies, executives “walk the talk” and company personnel
are held accountable for displaying the stated
values. At the other extreme are companies that tolerate, maybe
even condone, unethical behavior on the
part of company personnel, engage in deliberately dishonest
dealings with others, have willful disregard
for employee safety, knowingly falsify their financial reports,
and flagrantly disregard rules and regulations
against environmental pollution. Prime examples include:
• Volkswagen, with its deliberate efforts to falsify its
compliance with vehicle emission standards.

• Wells Fargo’s scheme to dress up its operating performance by
knowingly allowing bank employees
to create over 3.5 million fake customer accounts and charging
800,000 car loan customers for auto
insurance they did not need or even know about.
• Luckin Coffee, which intentionally inflated its sales revenues
by over $310 million in 2019 in the
course of an unprecedented 2018–2019 campaign to open 4,500
retail locations, boost customer
traffic with 50 percent discounts, and overtake Starbucks as the
leading coffee retailer in China by
early 2000.
In-between these extremes are companies with window-dressing
values; their so-called values are given lip
service by top executives but have little discernible impact on
either how company personnel behave or how
the company operates. Such companies have values statements
because they are in vogue and help make
the company look good to unsuspecting outsiders.
At companies where the stated values are real rather than
cosmetic, managers connect values to the pursuit
of the strategic vision and mission in one of two ways. In
companies with longstanding values that are deeply
entrenched in the corporate culture, senior managers are careful
to craft a vision, a mission, a strategy, and
a set of operating practices that match established values, and
they repeatedly emphasize how the values-
based behavioral norms contribute to the company’s business
success. If the company changes to a different
vision or strategy, executives make a point of explaining how
and why the core values continue to be relevant.
Few companies with sincere commitment to established core

values ever undertake strategic moves that
conflict with ingrained values. In new companies or those with
unspecified values, top management has to
consider what values, behaviors, and business conduct should
characterize the company and then draft a
values statement to circulate among managers and employees
for discussion and possible modification. A
final values statement that incorporates the desired behaviors
and traits and connects to the vision/mission
is then officially adopted. Some companies combine their
strategic vision, mission, and values into a single
statement or document, circulate it to all organization members,
and in many instances post the vision/
mission and values statement on the company’s website.
20
TASK 2: SETTING OBJECTIVES
The managerial purpose of setting objectives is to convert the
strategic vision and mission into specific
performance targets. Objectives represent a managerial
commitment to achieving particular results and
outcomes. Well-stated objectives must be specific, quantifiable
or measurable, challenging, and contain
a deadline for achievement. As Bill Hewlett, cofounder
of Hewlett-Packard, shrewdly observed, “You cannot
manage what you cannot measure. And what gets

measured gets done.”6 Concrete, measurable, and
challenging objectives are managerially valuable for three
reasons: (1) they focus organizational attention on what
to accomplish and help align the actions and decisions
throughout the organization, (2) they serve as yardsticks
for tracking company performance, and (3) they motivate
organizational members to perform at a high level
and deliver the best possible results. Indeed, the experiences of
countless companies and managers teach
that precisely spelling out how much of what kind of
performance by when and then pressing forward with
actions and incentives calculated to help achieve the targeted
outcomes greatly improve a company’s actual
performance.
CORE CONCEPT
Objectives are an organization’s performance
targets—the results and outcomes management
wants to achieve. They function as yardsticks for
measuring how well the organization is doing.
Setting Stretch Objectives Spurs the Achievement of
Exceptional Performance The experiences
of countless companies teach that one of the best ways to
promote outstanding company performance is for
managers to deliberately set performance targets high enough to
stretch an organization to perform at its
full potential and deliver the best possible results. Challenging
company personnel to go all out and deliver
“stretch” gains in performance pushes an enterprise to be
more inventive, to exhibit more urgency in improving both
its financial performance and its business position, and to
be more intentional and focused in its actions to achieve
challenging performance targets. Employing stretch
objectives, especially if they entail achieving inspirational
outcomes, often has the added effect of creating a more

exciting work environment where it is easier to recruit and
retain talented employees who relish stimulating
work assignments and being part of a high-performing
organization. But the most easily realized benefit
of setting stretch objectives is to erect a firewall against
contentment with modest gains in organizational
performance. As Mitchell Leibovitz, former CEO of the auto
parts and service retailer Pep Boys, once said, “If
you want to have ho-hum results, have ho-hum objectives.”
There’s no better way to avoid ho-hum results
than by setting stretch objectives and motivating
organization members to perform at full potential
and deliver the best possible results.
How Not to Handle the Task of Setting Objectives The
following three approaches to objective-
setting should be scrupulously avoided:
• Setting unspecific targets like “maximize profits,” “reduce
costs,” “become more efficient,” or
“increase revenues.” For instance, an objective to reduce costs
is technically achieved if a company’s
total costs go down by $100 or if unit costs fall by a fraction of
a penny—neither outcome is likely to
matter. Likewise, an objective to increase revenues is realized if
total revenues climb by a trivial one
percent by the end of 2020. This is why setting stretch
objectives and always specifying how much
by when are important.
• Setting targets for the upcoming year that, if achieved, would
represent only “average” performance
(because the targets are slightly higher than the most recent
year’s actual performance and can
be reached with only minimal or modest effort). Objectives that

promote or enable organizational
coasting provide little or no managerial impetus for improved
performance.
• Setting targets that carry no adverse consequences for
organizational members if actual
performance falls short of targeted performance. Organizational
members understandably attach
little importance to the objectives that managers announce when
it has been top management
practice in times past to find excuses to justify weak
performance (like blaming “outside forces
beyond our control”), not hold any company personnel
accountable for subpar outcomes, and award
21
bonuses and compensation increases despite failure to achieve
announced objectives. Objectives—
even challenging ones—are incapable of motivating company
personnel to exert their best efforts
to achieve stretch performance targets if they can expect to
receive bonuses, pay raises, and/or
promotions even if the performance targets are not reached.
All three ways of handling the task of setting objectives
undercut the drive for superior performance.

What Kinds of Objectives to Set—A Balanced Scorecard
Works Best
Two distinct types of performance yardsticks are required:
those relating to financial performance and those relating
to strategic performance. Efforts to compete successfully
against rivals and achieve a sustainable competitive
advantage.
CORE CONCEPT
Financial objectives relate to the financial perfor-
mance targets management have established for
the organization to achieve. Strategic objectives
relate to target outcomes that indicate whether
a company’s market standing with buyers and its
ability to compete successfully against rivals are
growing stronger, remaining steady, or eroding.
Among some of the most common types of financial and
strategic objectives are the following:
Financial Objectives Strategic 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)
• Increased 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 new capital
investment
• Winning an x percent market share
• Achieving lower overall costs per unit sold than rivals
• Overtaking key competitors on product performance or
quality or customer service
• Deriving x percent of revenues from the sale of new
products introduced within the past five years
• Having broader or deeper technological capabilities
than rivals
• Having a wider product line than rivals
• Having a better-known or more powerful brand name
than rivals
• Having stronger national or global sales and distribution
capabilities than rivals
• Consistently getting new or improved products to
market ahead of rivals
Both Short-Term and Long-Term Objectives Are Needed A
company’s set of financial and strategic
objectives should include both near-term and longer-term
performance targets. Short-term (quarterly or
annual) objectives focus managerial attention on actions to
deliver near-term performance improvements
and satisfy shareholder expectations for progress on a variety of
fronts. Longer-term targets (three to five
years) prompt managers to consider what to do now to put the

company in position to perform better later.
The seeds for achieving long-term objectives typically must be
planted well in advance of the period when
the long-term targets have to be reached. For example, a
company that wants to grow its revenues by 20
percent in three years cannot wait until the end of the second
year to begin its revenue growth initiatives.
Indeed, active managerial pursuit of long-term performance
targets is critical for sustaining a company’s
performance at attractively high levels over the long term, thus,
posing a barrier to nearsighted management
and undue focus on short-term results. Managers who
concentrate their energies on hitting next quarter’s
(or the current year’s) targets, while neglecting or postponing
needed actions to achieve long-term targets,
frequently fail to do the very things today that it takes to grow
the business and produce good performance
22
year after year. When trade-offs must be made between
achieving long-run objectives and short-run
objectives, long-run objectives should take precedence (unless
the achievement of one or more short-run
performance targets have unique importance).
Balanced Emphasis on Achieving Financial and Strategic

Performance Targets Are Essential
Achieving acceptable financial results is a must. Without
adequate profitability and financial strength, a
company’s ability to muster the resources needed to
keep pace with rivals, invest in improved technology,
and make needed capital improvements are jeopardized.
Furthermore, subpar earnings and a weak balance sheet
alarm shareholders and creditors, put the jobs of senior
executives at risk, and begin to raise questions about
the company’s ultimate survival. However, good financial
performance, by itself, is not enough. Of equal or greater
importance is a company’s strategic performance—
outcomes that indicate whether a company’s market position
and competitive strengths are deteriorating,
holding steady, or improving. Establishing and pursuing
strategic objectives are important because a
stronger market standing with buyers and improved competitive
strength to combat rivals—especially when
these result in a bigger competitive advantage—is what enables
and empowers a company to improve its
financial performance in upcoming periods.
CORE CONCEPT
A company that pursues and achieves strategic
outcomes that boost its competitiveness and
strength in the marketplace vis-à-vis rivals
is better able to improve its future financial
performance.
Moreover, a company’s financial performance measures are
really lagging indicators that reflect the results
of past decisions and organizational activities.7 But a
company’s past or current financial performance is not
a reliable indicator of its future prospects—poor financial
performers often turn things around and do better,
whereas good financial performers can fall upon hard times. The

best and most reliable leading indicators
of a company’s future financial performance and business
prospects are strategic outcomes that indicate
whether the company’s competitive strength and buyer appeal
for its products/services are eroding, holding
steady, or improving. For instance, if a company has set
aggressive strategic objectives and is achieving
them—such that its competitive strength and market position are
on the rise—then there’s reason to project
that its future financial performance will be better than its
current or past performance. If a company is
losing ground to competitors and its market standing with
buyers is slipping—outcomes that reflect weak
strategic performance (and, very likely, failure to achieve its
strategic objectives)—then its ability to maintain
its present profitability is highly suspect. Hence, the degree to
which a company’s managers set, pursue, and
achieve stretch strategic objectives tends to be a reliable
leading indicator of whether its future financial
performance will improve or stall or erode.
Consequently, it is important to use a performance measurement
system that strikes a balance between
the pursuit and achievement of financial objectives and strategic
objectives.8 Focusing only on how well a
company is performing financially overlooks the fact that what
ultimately enables and empowers a company
to deliver better financial results from its operations is the
achievement of strategic objectives that improve
its ability to compete successfully against rivals and its market
strength in attracting and retaining customers.
Indeed, the surest path to boosting company profitability quarter
after quarter and year after year is to
relentlessly pursue strategic outcomes that strengthen the
company’s market position with buyers and,
ideally, produce a growing competitive advantage over rivals.

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