Teaching Note: Chapter 1 – What is Strategy?
Learning Objectives
LO 01-01. Summarize the primary motivations for studying business strategy.
LO 01-02. Explain the Value-Price-Cost framework and its relationship to a business’s strategy.
LO 01-03. Describe the three types of factors that affect a firm’s profitability.
LO 01-04. Summarize the primary origins of strategy.
Topics covered in this document:
1. Overview
2. Case Recommendations
3. Teaching Tips
4. Exercises and links to Video Resources
1. Overview
This chapter is relatively straightforward to teach. We find it helpful to begin with the basics:
Why study strategy? What is it? What is it not? Why should we care? What defines a robust,
defensible strategy? These are simple questions but not necessarily easy to answer. To
emphasize this point, we ask the students to consider an example such as Walmart. The firm
operates in a very unattractive industry (discount retailing); historically, it was able to grow, be
successful and maintain profitability year after year. During the same period, one of its
competitors, Kmart, experienced a decline, significant losses and ultimately had to declare
bankruptcy. Why was Walmart, selling to the same customers, in the same markets, with
roughly the same product able to be successful whereas Kmart was not? We then state that
strategy addresses this question of why some firms are able to outperform others consistently
over time. We also like to emphasize that to understand what strategy is, it is helpful to
understand what it is not. Slide 4 offers some statements that appear to be strategies but they
are tactics, policies or descriptives -- the threads of a strategy.
Next, we introduce the Value-Price-Cost framework and use an example (Starbucks vs.
Dunkin Donuts) to make the concepts more salient to the students (see the Teaching Tip
below). This stylized exercise helps students begin to understand the differences between
Value and Price. Many are familiar with the term “Willingness-to-Pay” (WTP) but not in a
rigorous way; we also find that students often equate WTP or Customer Value with price. It also
is important for students to recognize that a firm’s capabilities and resources underlie the value
and cost drivers that make up the firm’s VPC position. The extent to which this position is
defendable or sustainable is a function of the firm’s ability to retain customers and prevent
imitation. It might also be useful to refer to the Apple iPhone example in the chapter to
illustrate how a firm develops value and cost drivers before and after the launch of a product.
1-1
© 2016 by McGraw-Hill Education.
We conclude this introduction by calling attention to the three core determinants of a firm’s
profitability -- macroeconomic factors, industry factors and firm-specific factors.
We then briefly highlight the origins of strategy; the remainder of the chapter focuses
on the various concepts, themes and topics the course will cover over the term.
2. Case Recommendations (all materials available via HBS Online for Educators)
For additional cases, see the Case Chart that maps chapters and topics to cases and simulations.
3. Teaching Tips
Stylized Exercise: Starbucks vs. Dunkin Donuts (also can be used with Ch. 2)
For instructors who do not have sufficient time on the first day of class to cover a case, a
stylized VPC exercise can be used to help students begin to think about the VPC framework.
Using Starbucks and Dunkin Donuts, list each firm’s prices for an expresso, high maintenance
latte, and a large mocha on the board.
Ask: who are the coffee drinkers in class today?
State: Assume that you cannot purchase coffee from campus but that there is a new Starbucks
within walking distance from the business school; located next to the Starbucks is a Dunkin
Donuts. These are the only two locations where you can buy coffee. What drives you to
purchase coffee from one firm vs. the other?
List the students’ answers as “value drivers” on the board. Some student will state they will go
wherever price is lowest – reiterate that price is not a value driver.
Step back and ask: Is our sample biased? How might we do this more accurately? What
methods might we use to collect data on Value? And so on.
The exercise does not require one to use Starbucks and Dunkin Donuts; a similar set of
competing firms will suffice.
Other tips: Session 1 of any course is often overflowing with many agenda items -- substantive
content as well as syllabus details (expectations, assignments, and the like). We like to engage
students in activities that capture their attention, make them question their assumptions, and
in general, build their curiosity and interest in the material and the course. There are a variety
of approaches for kicking off the course -- a short article/case, an exercise, a brief lecture, etc..
4. Exercises and links to Video Resources
Exercises
Alaska Gold Mine, materials (case, .ppt, teaching note & video) are available at the Carpenter
Strategy Toolbox website: http://carpenterstrategytoolbox.com/2012/10/27/350/
1-2
© 2016 by McGraw-Hill Education.