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Managers at all companies face 3 central questions in thinking strategically about their companys present
circumstances and prospects:
Crafting an action plan for heading the firm in the intended direction, staking out a market position,
attracting customers, achieving the targeted financial and market performance, and getting the firm
where it wants to go is its strategy.
WHY DO STRATEGY ?
Doing that which sets the firm apart and attracts customers.
- Definition:
A companys strategy is the set of actions that its managers take to outperform the companys competitors and achieve
superior profitability.
Strategy is a game plan - to move from A --> B: the way the company can achieve the goals with the most effective
and efficient way.
*SOMETHING WILL CHANGE IN THE MIDDLE: In todays world, strategic plan can be established for 5
years because of ongoing changes
WHY strategy is CHOICE: a choice that you want to allocate your resources to be successful
Example: Illustration Capsule 1.1 , describing McDonalds strategy in the quick-service restaurant industry
A companys strategy should be aimed either at providing a product or service that is distinctive from what competitors are
offering or at developing competitive capabilities that rivals cannot quite match:
Competitive Advantage
Require meeting customer needs either more effectively (with products or services that customers value more
highly) or more efficiently (by providing products or services at lower cost).
Sustainable Competitive Advantage
Requires giving buyers lasting reasons to prefer a firms products or services over those of its competitors.
4 key criterias: valuable, rare, non-substitute, inimmitated (VRIN)
Example: Disney has sustainable competitive advantage
STRATEGIC APPROACHES
Building a competitive advantage by:
Striving to become the industrys low-cost provider (efficiency).
Outcompeting rivals on differentiating features (effectiveness).
Offering the lowest (best) prices for differentiated goods (best-cost provider).
Focusing on better serving a niche markets needs (efficiency and\or effectiveness).
Example: Starbucks, the companys unparalleled name recognition, its reputation for high-quality specialty
coffees served in a comfortable, inviting atmosphere, and the accessibility of the shops make it difficult for
competitors to weaken or overcome Starbuckss competitive advantage.
STRATEGIC APPROACHES
The five most basic strategic approaches for setting a company apart from rivals, building strong customer loyalty and
winning a sustainable competitive advantage:
(2) Profit formula: describes the companys approach to determining a cost structure that will allow for
acceptable profits, given the pricing tied to its customer value proposition
Value-Price-Cost Framework
- From a customer perspective: the greater the value delivered (V) and the lower the price (P), the more attractive is
the companys value proposition.
- From a company perspective: the lower the costs (C), the greater the ability of the business model to be a
moneymaker.
The profit formula reveals how efficiently a company can meet customer wants and needs and deliver on the value
proposition
Example:
Gillettes business model in razor blades involves selling a master product the razorat 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.
McDonalds invented the business model for fast food providing value to customers in the form of
economical quick-service meals at clean, convenient locations. Its profit formula involves such elements as
standardized cost-efficient store design, stringent specifications for ingredients, operating procedures specified
in detail for each unit, and heavy reliance on advertising and instore promotions to drive volume.
1. The Fit Test: How well does the strategy fit the companys situation?
External fit: To qualify as a winner, a strategy has to be well matched to:
industry and competitive conditions
a companys best market opportunities
other pertinent aspects of the business environment in which the company operates
Internal fit: A winning strategy must be tailored to the companys resources and competitive capabilities
and be supported by a complementary set of functional activities (i.e., activities in the realms of supply chain
management, operations, sales and marketing, and so on).
Dynamic fit: they evolve over time in a manner that maintains close and effective alignment with the
companys situation even as external and internal conditions change.
2. The Competitive Advantage Test: Is the strategy helping the company achieve a sustainable competitive
advantage?
Strategies that fail to achieve a durable competitive advantage over rivals are unlikely to produce superior
performance for more than a brief period of time.
Winning strategies enable a company to achieve a competitive advantage over key rivals that is long-lasting.
The bigger and more durable the competitive advantage, the more powerful it is.
Two kinds of performance indicators tell the most about the caliber of a companys strategy (tm c chin lc):
(1) competitive strength and market standing
(2) profitability and financial strength.
Above-average financial performance or gains in market share, competitive position, or profitability are signs
of a winning strategy.
Only a handful of companies can boast of hitting 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.
Success will not be lasting unless the companies subsequently craft a strategy that capitalizes on
their luck, builds on what is working, and discards the rest.
The processes of crafting and executing strategies must go hand in hand is a company is to be
successful in the long term.
In the main, our competitors are acquainted with the same fundamental concepts and techniques
and approaches that we follow, and they are as free to pursue them as we are. More often than not,
the difference between their level of success and ours lies in the relative thoroughness and self-
discipline with which we and they develop and execute our strategies for the future.