chapter 1

WHAT IS STRATEGY AND

WHY IS IT IMPORTANT?

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LO1 Understand why every company needs a sound strategy
to compete successfully, manage its business
operations, and strengthen its prospects for long-term
success.
LO2 Develop an awareness of the five most dependable
strategic approaches for setting a company apart from
rivals and winning a sustainable competitive advantage.
LO3 Understand that a company’s strategy tends to evolve
over time because of changing circumstances and
ongoing management efforts to improve the company’s
strategy.
LO4 Learn why it is important for a company to have a viable
business model that outlines the company’s customer
value proposition and its profit formula.
LO5 Learn the three tests of a winning strategy.

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 Strategy’s Three Central Questions

 Where are we now?

 Current financial performance
 Market standing
 Competitive resources and capabilities
 Changing industry conditions

 Where do we want to go from here?

 What buyer needs to try to satisfy?
 Which growth opportunities to emphasize?
 How to change the business makeup?

 How are we going to get there?

 Which competitive moves and business
approaches to use as a strategy?

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 What Do We Mean By Strategy?

A firm’s strategy is all about how:

 How to attract and please customers.
 How to compete against rivals.
 How to position the firm in the marketplace to
capitalize on attractive growth opportunities.
 How best to respond to changing economic and
market conditions.
 How to manage each functional piece of the
business.
 How to achieve the firm’s performance targets.

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FIGURE 1.1 Elements of a Company’s Strategy

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  Core Concept 

A company’s strategy consists of the

competitive moves and business
approaches management has developed
to attract and please customers, compete
successfully, capitalize on opportunities to
grow the business, respond to changing
market conditions, conduct operations,
and achieve performance objectives.

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 Strategy and the Quest for
Competitive Advantage

 Gaining
a sustainable competitive
advantage requires:
 Choosing to compete differently by
doing what rivals don’t do or can’t do.
 Appealing to buyers in ways that
set the firm apart from its rivals.
 Staking out a market position that
is not crowded with strong rivals.

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 McDonald’s Strategy in the Quick-Service
Restaurant Industry

Key initiatives of the Plan-to-Win strategy included:

• Improved restaurant operations
• Affordable pricing
• Wide menu variety and beverage choices
• Convenience and expansion of dining
opportunities
• Ongoing restaurant reinvestment and
international expansion

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  Core Concept 

A firm achieves sustainable competitive

advantage when an attractively large
number of buyers develop a durable
preference for its products or services
over the offerings of competitors, despite
the efforts of competitors to overcome or
erode its advantage.

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  Concept to Action 

Mimicking the strategies of successful industry

rivals—with either copycat product offerings or
efforts to stake out the same market position—
rarely works.
A creative, distinctive strategy that sets a firm
apart from rivals and yields a competitive
advantage is a firm’s most reliable ticket for
earning above-average profits.

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 Choosing a Strategic Approach

1. A low-cost provider strategy

2. A broad differentiation strategy
3. A focused low-cost strategy
4. A focused differentiation strategy
5. A best-cost provider strategy

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 Choosing a Strategic Approach

low-cost
provider

broad focused
differentiation low-cost

focused best-cost
differentiation provider

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 Why Strategy Evolves Over Time

A strategy changes over time as:

 Competitors make unexpected moves
 The needs and preferences of buyers change
 New market opportunities emerge
 Managers develop new ideas to improve the strategy
 Evidence mounts that the strategy is not working well

A strategy evolves:
 Incrementally or dramatically
 Proactively and adaptively

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  Concept to Action 

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 onetime event.

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FIGURE 1.2 A Company’s Strategy Is a Blend of Planned Initiatives
and Unplanned Reactive Adjustments

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 The Relationship Between a Firm’s
Strategy and Its Business Model

 Business Model
 Management’s blueprint for delivering a product or
service to customers that will generate revenues
sufficient to cover costs and yield an attractive profit.
 Business Model Elements
 The firm’s customer value proposition for satisfying
buyer wants and needs at a perceived good value.
 The firm’s profit formula sets out how the firm’s cost
structure will allow for acceptable profits given the
pricing tied to its customer value proposition.

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  Core Concept 

A firm’s business model sets forth how

its strategy and operating approaches will
create value for customers, while at the
same time generate ample revenues to
cover costs and realize a profit. The two
elements of a firm’s business model are
(1) its customer value proposition and (2)
its profit formula.

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 Netflix And Redbox:
Two Contrasting Business Models
Netflix
Value Convenient delivery of movies to customers’
Proposition mailboxes or streamed to their PCs, Macs,
or TVs.
Profit Revenue Generation: Monthly subscription
Formula fees from millions of subscribers
Cost structure: Fixed and variable costs
associated with DVD acquisitions, licensing
fees and revenue sharing agreements,
development of movie selection software,
website operation and maintenance, Internet
streaming capabilities, distribution center
operations, and administrative activities.
Profit Margin: Netflix’s profitability was
dependent on attracting a sufficiently large
number of subscribers to cover its costs and
provide for attractive profits.
Redbox
Economical 24-hour movie rentals and
purchases that could be picked up at
conveniently located DVD kiosks.
Revenue Generation: Customers could rent
DVDs and purchase DVDs from Redbox’s
DVD vending machine kiosks.
Cost Structure: Fixed and variable costs
associated with the kiosk purchases and
deployment, DVD acquisitions, licensing
fees and revenue sharing agreements,
website operation and maintenance, kiosk
stocking, and administrative activities.
Profit Margin: Redbox’s profitability was
dependent on generating sufficient revenues
from DVD rentals and sales to cover costs
and provide for a healthy bottom line.
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 The Three Tests of a Winning Strategy

How well does the strategy

Fit
fit the firm’s situation?

Competitive Is the firm achieving sustainable

Advantage competitive advantage?

Is the strategy producing good

Performance
company performance?

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 Concept to Action 

A winning strategy must fit the firm’s

external and internal situation, build
sustainable competitive advantage,
and improve company performance.

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 Measuring the Caliber of a Firm’s
Strategy

 Is the strategy producing good performance?

 Is the firm gaining in profitability
and financial strength?
 Is the firm gaining in competitive strength
and market standing?
 Assessing current and proposed strategies:
 Do they have good fit?
 Do they offer a sustainable competitive advantage?
 Are they capable of contributing to above-average
performance or performance improvements?

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 The Road Ahead

 Strategy
is about asking and
answering a most important question:
 What must managers do, and do well, to make
a company a winner in the marketplace?
 The answer is that doing a good job of managing
requires good strategic thinking and good
management of the strategy-making, strategy-
executing process.

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