WHAT IS STRATEGY AND WHY IS
IT IMPORTANT?
Chapter 1
MGT 4380
Chapter 1 Outcomes
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.
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?
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.
What Do We Mean By Strategy?
FIGURE 1.1 – Elements of a
Company’s Strategy
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.
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.
McDonald’s Strategy in the QuickService 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
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.
• 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.
Choosing a Strategic Approach
Michael Porter (1980) outlined several major “generic
strategies” to set a company apart from its competitors
1. A low-cost provider strategy (e.g., Wal-Mart, Southwest
Airlines)
2. A broad differentiation strategy (e.g., Johnson &
Johnson (reliability-quality), Apple (innovation))
3. A focused low-cost strategy (e.g., Food Club, Bar-S
Foods)
4. A focused differentiation strategy (e.g., Rolex, Ferrari,
Patagonia)
5. A best-cost provider strategy (e.g., Target, BJ’s)
Porter’s Generic Strategies
Type of Strategy
Scope of Offering
Broad
Low-Cost
Differentiation
Broad
Broad
Differentiation
Low-Cost
Best-Cost
(Or Stuck in the Middle)
Focused
Focused
Focused
Low-Cost
Differentiation
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
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 onetime event.
Deliberate, Emergent, Realized, &
Abandoned Strategies
FIGURE 1.2 – Planned v. Unplanned Strategies
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.
Strategy and a Firm’s 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.
Netflix & Redbox: Two Contrasting
Business Models
Netflix
Redbox
Value
Proposition
Convenient delivery of movies to customers’
mailboxes or streamed to their PCs, Macs, or
TVs.
Economical 24-hour movie rentals and
purchases that could be picked up at
conveniently located DVD kiosks.
Profit
Formula
Revenue Generation: Monthly subscription fees
from millions of subscribers
Revenue Generation: Customers could rent
DVDs and purchase DVDs from Redbox’s DVD
vending machine kiosks.
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.
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.
Three Tests of a Winning Strategy
Fit
How well does the strategy
fit the firm’s situation?
Competitive
Advantage
Is the firm achieving sustainable
competitive advantage?
Performance
Is the strategy producing good
company performance?
A winning strategy must fit the firm’s external and internal
situation, build sustainable competitive advantage, and improve
company performance.
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?