CHAPTER 1 What Is Strategy and Why Is It Important? ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or Copyright © McGraw-Hill Education. Permission required for reproduction or display. further distribution permitted without the prior written consent of McGraw-Hill Education. ©alice-photo/Shutterstock.com Learning Objectives This chapter will help you understand: 1. What we mean by a company’s strategy and why it needs to differ from competitors' strategies. 2. The concept of a sustainable competitive advantage. 3. The five most basic strategic approaches for setting a company apart from its rivals. 4. That a company’s strategy tends to evolve. 5. What constitutes a viable business model. 6. The three tests of a winning strategy. © McGraw-Hill Education. What Do We Mean By Strategy ? A company’s strategy is the coordinated set of actions that its managers take in order to outperform the company’s competitors and achieve superior profitability. © McGraw-Hill Education. All Businesses Face Three Central Questions 1. What is our present situation? • Industry conditions and competitive pressures, market standing, competitive strengths and weaknesses, and future prospects in light of changes taking place in the business environment 2. What should the company’s future direction be and what performance targets should we set? • • • What buyer needs to try to satisfy Which growth opportunities to emphasize? Where to head and what outcomes to strive to achieve? 3. What’s our plan for running the company and achieving good results? • Challenges managers to craft a series of competitive moves and business approaches—henceforth called a strategy—for heading the firm in the intended direction, staking out a market position, attracting customers, and achieving the targeted outcomes © McGraw-Hill Education. Strategy Is about Making Choices Strategy is all about choosing How: • How to position the firm in the marketplace • How to attract customers • How to compete against rivals • How to achieve the firm’s performance targets • How to capitalize on opportunities to grow the business • How to respond to changing economic and market conditions © McGraw-Hill Education. Strategy Is about Competing Differently Strategy as a choice: © McGraw-Hill Education. • Is deciding to compete differently from rivals— pressuring rivals by doing what they do not do or, even better, doing what they cannot do. • Guides the company in what it must do and also in knowing what it must not do. • Is successful when its actions, business approaches, and competitive moves appeal to buyers in ways that: • Set it apart from its rivals by either providing products with higher perceived values or efficiently producing at lower costs. • Stake out a market position that is not crowded with strong competitors. FIGURE 1.1 Identifying a Firm’s Strategy–What to Look for Access the text alternative for these images. © McGraw-Hill Education. Copyright © McGraw-Hill Education. Permission required for reproduction or display. Illustration Capsule 1.1 Apple Inc.: Exemplifying a Successful Strategy Key elements of Apple’s successful strategy are: • Designing and developing its own operating systems, hardware, application software and services. • Continuously investing in R&D and frequently introducing products. • Strategically locating its stores and staffing them with knowledgeable personnel. • Maintaining a quality brand image, supported by premium pricing. • Committing to corporate social responsibility and sustainability through supplier relations. • Cultivating a diverse workforce rooted in transparency. © McGraw-Hill Education. Strategy and the Quest for Competitive Advantage Competitive advantage: • Requires meeting customer needs either more effectively (with products or services that customers value more highly) or more efficiently (by providing products or services at a lower cost to customers.) Sustainable competitive advantage requires: • Giving buyers lasting reasons to prefer a firm’s products or services over those of its competitors. • Developing expertise and long-term competitive capabilities that cannot be readily overcome. • Putting the constant quest for sustainable competitive advantage at center stage in crafting your strategy. © McGraw-Hill Education. Basic Strategic Approaches (1 of 2) Strategies for Building Competitive Advantage Low-Cost Provider Focused LowCost Focused Differentiation Broad Differentiation Best-Cost Provider © McGraw-Hill Education. Basic Strategic Approaches (2 of 2) Low-cost provider strategy—achieving a cost-based advantage over rivals Broad differentiation strategy—differentiating the firm’s product or service from rivals in ways that appeal to a broad spectrum of buyers A focused low-cost strategy—concentrating on a narrow buyer segment (or market niche) by having lower costs to serve niche members at a lower price Focused differentiation strategy—concentrating on a narrow buyer segment (or market niche) by offering buyers customized attributes that meet their specialized needs and tastes better than rivals’ products Best-cost provider strategy—giving customers more perceived value for their money by satisfying their expectations on key quality features, performance, and/or service attributes that match or exceed their price expectations © McGraw-Hill Education. Why a Company’s Strategy Evolves over Time Managers modify strategy in response to: • Changing market conditions. • Advancing technology. • Fresh moves of competitors. • Shifting buyer needs. • Emerging market opportunities. • New ideas for improving the strategy. © McGraw-Hill Education. FIGURE 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments Access the text alternative for these images. © McGraw-Hill Education. Copyright © McGraw-Hill Education. Permission required for reproduction or display. A Company’s Strategy Is Partly Proactive and Partly Reactive Realized (current) strategy is a blend of: • Proactive (deliberate) strategy elements that include planned initiatives to improve the company’s financial performance and secure a competitive edge. • Reactive (emergent) strategy elements developed on the fly in response to unanticipated developments and fresh market conditions. • Abandoned and superseded strategy elements that no longer fit with the company’s ongoing strategy. © McGraw-Hill Education. Just for Fun Using the terms shown in Figure 1.2, explain why U.S. football teams get four downs to make a first down. How does risk affect play selection (reactive strategy) as a team fails to advance on each of its four downs? What would be the risk effect of requiring more than a 10-yard gain for achieving a first down? What rules of play in other sports (e.g., soccer) affect how the basic principles of strategy are applied to game play? © McGraw-Hill Education. A Company’s Strategy and Its Business Model How the firm will make money: • By providing customers with value • • The firm’s customer value proposition By generating revenues sufficient to cover costs and produce attractive profits • The firm’s profit formula It takes a proven business model—one that yields appealing profitability—to demonstrate viability of a firm’s strategy. © McGraw-Hill Education. The Relationship Between a Company’s Strategy and Its Business Model REALIZED STRATEGY Competitive Initiatives Business Approaches © McGraw-Hill Education. BUSINESS MODEL Value Proposition Profit Formula Business Model Elements: The Customer Value Proposition The customer value proposition is: • Satisfying buyer wants and needs at a price customers will consider a good value. • © McGraw-Hill Education. The greater the value provided (V) and the lower the price (P), the more attractive the value proposition is to customers Business Model Elements: The Profit Formula The profit formula: • Creates a cost structure that allows for acceptable profits, given that pricing is tied to the customer value proposition. V – the value provided to customers P – the price charged to customers C – the firm’s costs • © McGraw-Hill Education. The lower the costs (C) for a given customer value proposition (V–P), the greater the ability of the business model to be a moneymaker. FIGURE 1.3 The Business Model and the Value-Price-Cost Framework Access the text alternative for these images. © McGraw-Hill Education. Copyright © McGraw-Hill Education. Permission required for reproduction or display. Is The Company’s Strategy A Winner? THREE TESTS OF A WINNING STRATEGY © McGraw-Hill Education. EXHIBITS GOOD FIT WITH SITUATION RESULTS IN COMPETITIVE ADVANTAGE PROMOTES SUPERIOR PERFORMANCE What Makes a Strategy a Winner? A winning strategy must pass three tests: • The fit test Does it exhibit good fit with the external and internal aspects of the firm’s dynamic situation? • The competitive advantage test Is it likely to result in a sustainable competitive advantage? • The performance test Is it producing superior performance, as indicated by the firm’s profitability, financial and competitive strengths, and market standing? © McGraw-Hill Education. Illustration Capsule 1.2 Pandora, Sirius XM, and Broadcast Radio: Three Contrasting Business Models Who listens to the radio anymore? • How sustainable are the business models of Pandora, Sirius XM and over-the-air broadcasters over the long term? • Given the changes in user listening habits, which competitor’s present strategy best passes the three tests of a winning strategy? • What internal and external factors will create particular difficulties for each competitor in changing its strategy or business model? © McGraw-Hill Education. Why Crafting and Executing Strategy Are Important Tasks Strategy provides: • A prescription for doing business. • A road map to competitive advantage. • A game plan for pleasing customers. • A formula for attaining long-term standout marketplace performance. Good Strategy + Good Strategy Execution = Good Management © McGraw-Hill Education. Applying What You Learned in This Chapter Google’s browser-based Chrome operating system and its online applications suite are challenging Microsoft’s long-term dominance of the office productivity application marketplace sectors. What should be Microsoft’s near-term response to this competitive challenge? How will Microsoft’s long-term response to this competitor’s actions affect its business model? Which competitor’s strategy will likely be the eventual winner in the marketplace? Why? © McGraw-Hill Education. The Road Ahead Strategy is about asking the right questions. • What must managers do, and do well, to make a firm successful in the marketplace? Strategy requires getting the right answers • Good strategic thinking and good management of the strategy-making, strategy-executing process are important. • First-rate capabilities and skills in crafting and executing strategy are essential to managing successfully. Welcome and best wishes for your success! © McGraw-Hill Education.
