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WHAT IS STRATEGY and
WHY IS IT IMPORTANT?

1–2
(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
THIS CHAPTER WILL HELP YOU UNDERSTAND:
What we mean by a company’s strategy.
The concept of a sustainable competitive advantage.
The five most basic strategic approaches for setting a
company apart from rivals and winning a sustainable
competitive advantage.
That a company’s strategy tends to evolve because of
changing circumstances and ongoing efforts by
management to improve the strategy.
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.
The three tests of a winning strategy.

CORE CONCEPT
A company’s strategy is the set of
actions that its managers take to
outperform the company’s
competitors and achieve superior
profitability.
1–3

WHAT DO WE MEAN BY STRATEGY ?
 What is our present situation?
● Business environment and industry conditions
● Firm’s financial and competitive capabilities
 Where do we want to go from here?
● Creating a vision for the firm’s future direction
 How are we going to get there?
● 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.
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WHAT IS STRATEGY ABOUT?
 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 opportunities for growth.
● How 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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STRATEGIC MANAGEMENT PRINCIPLE
♦ Strategy is about competing differently from
rivals—doing what competitors don’t do or,
even better, doing what they cannot do!
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Importance of STRATEGY?
 A firm needs a strategy to specify what actions
are going to be taken:
● To improve its financial performance.
● To strengthen its competitive position.
● To gain a sustainable competitive advantage over its
market rivals.
 A creative, distinctive strategy:
● Helps produce above-average profits.
● Increases competitive pressures on rivals.
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STRATEGY AND COMPETITORS
 Strategy is about competing differently
from rivals—
● Doing what they do not do or doing it better!
● Doing what they cannot do!
● Doing things in ways that attract customers
and set a firm apart from its rivals.
● Doing things in a manner calculated to
produce a competitive edge over rivals.
● Knowing what the firm must do and also
what it must not do.
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FIGURE 1.1 Identifying a Company’s Strategy–What to Look For
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ILLUSTRATION
CAPSULE 1.1
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♦ Key elements of Starbucks’s strategy:
● Train “baristas” to serve a wide variety of specialty coffee
drinks that allow customers to satisfy their individual
preferences in a customized way.
● Emphasize store ambience and elevation of the customer
experience at Starbucks stores.
● Purchase and roast only top-quality coffee beans.
● Foster commitment to corporate responsibility.
● Expand the number of Starbucks stores domestically and
internationally.
● Broaden and periodically refresh in-store product offerings.
● Fully exploit the growing power of the Starbucks name and
brand image with out-of-store sales.
Starbucks’s Strategy in
the Coffeehouse Market

What is a Competitive Advantage?
To be specific: “a firm’s ability to create value
in a way its rivals cannot”.
• Put it in another way: firms prefer to be
winner in their respective industries rather
than subpar or even average performers.
• Without a strategy that leads to competitive
advantage, companies risk to be
outcompeted by rivals or locked in mediocre
financial performance.

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 lower cost).
 Sustainable Competitive Advantage
● Requires giving buyers lasting reasons to prefer a
firm’s products or services over those of its
competitors.
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BASIC STRATEGIC APPROACHES
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Low-cost
provider
Broad
differentiation
Focused
differentiationBest-cost
provider
Strategies for Building
Competitive Advantage
Focused
low-cost

STRATEGIC APPROACHES
 Building a competitive advantage by:
● Striving to become the industry’s 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 market’s needs
(efficiency andor effectiveness).
1–14

CORE CONCEPT
♦ A firm achieves a competitive advantage
when it provides buyers with superior value
compared to rival sellers or offers the same
value at a lower cost to the firm.
♦ The firm achieves a sustainable competitive
advantage if its advantage persists despite
the best efforts of competitors to match or
surpass its advantage.
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GAINING SUSTAINABLE COMPETITIVE
ADVANTAGE
 How to create a sustainable competitive advantage:
● Develop valuable expertise and competitive
capabilities over the long-term that rivals cannot
readily copy, match or best.
● Put the constant quest for sustainable competitive
advantage at center stage in crafting your strategy.
1–16

A Powerful Strategy Leads to
Sustainable Competitive Advantage
 A company achieves sustainable competitive
advantage when
● An attractive number of buyers prefer its
products/services over those of rivals and
● The basis for this preference is durable
 Its nice when a strategy produces
● A temporary competitive edge but
● A sustainable edge over rivals greatly enhances a
company’s prospects for above-average profitability
What separates a powerful strategy from an ordinary
strategy is management’s ability to forge a series of
moves, both in the marketplace and internally, that
! produces sustainable competitive advantage

What Strategy is: Gaining and Sustaining
Competitive Advantage
 What is Competitive Advantage?
● Superior performance relative to competitors
 Examples: Google, Pfizer’s Lipitor (patent
protection to 2010)
 What is Sustainable Competitive Advantage?
● Sustainable competitive advantage occurs when a firm
implements a value-creating strategy of which other
companies are unable to duplicate the benefits or find
it too costly to imitate.
 An important basis for sustainable competitive advantage
is the development of resources and capabilities.
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Strategic Approaches to Building
Sustainable Competitive Advantage
 Be the industry’s low-cost provider
● Achieve a cost-based competitive advantage
 Incorporate differentiating features
● Superior product/service keyed to higher quality, better
performance, wider selection, value-added services, or some
other attribute
 Focus on a narrow market niche
● Win a competitive edge by doing a
better job than rivals of serving the
needs and preferences of buyers in the niche
 Develop expertise and resource strengths
not easily imitated or matched by rivals
● Achieve a capabilities-based competitive

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
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♦ 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 strategy a work in progress, not a
one-time event.
♦ A company’s strategy is shaped partly by
management analysis and choice and partly
by the necessity of adapting and learning by
doing.
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CH2
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THE EVOLVING NATURE OF A FIRM’S STRATEGY
 Realized (current) strategy is a blend of:
● Proactive (deliberate) strategy elements that include
both continued and new initiatives.
● Reactive (emergent) strategy elements that are
required due to unanticipated competitive
developments and fresh market conditions.
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CORE CONCEPT
♦ A company’s deliberate strategy consists of
proactive strategy elements that are both
planned and realized as planned; its
emergent strategy consists of reactive
strategy elements that emerge as changing
conditions warrant.
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Figure 1.2: A Company’s Strategy Is a Blend of Proactive Initiatives and
Reactive Adjustments
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A COMPANY’S STRATEGY
AND ITS BUSINESS MODEL
 How the business 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
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It takes a proven business model—one that
yields appealing profitability—to demonstrate
viability of a firm’s strategy.

CORE CONCEPT
♦ A company’s business model sets forth the
logic for how its strategy will create value for
customers, while at the same time generate
revenues sufficient to cover costs and realize a
profit.
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Relationship Between
Strategy and Business Model
Strategy . . .
Deals with a company’s
competitive initiatives and
business approaches
Business Model . . .
Concerns whether revenues
and costs flowing from the
strategy demonstrate a
business can be profitable
and viable
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$$$?

BUSINESS MODEL ELEMENTS
 The Customer Value Proposition
● Satisfying buyer wants and needs at a price
customers will consider a good value.
 The greater the value provided (V) and the lower
the price (P), the more attractive the value
proposition is to customers.
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BUSINESS MODEL ELEMENTS (CONT’D)
 The Profit Formula
● Creating 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
● 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.
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FIGURE 1.3 The Business Model and the Value-Price-Cost Framework

THINKING STRATEGICALLY
♦ Amazon's continuing lack of profitability has
begun to concern its long-term investors.
● What internal and external factors could be
contributing to the lack of profitability?
● How could the problem be explained in terms of
changes in the value, price, and cost factors
associated with Amazon's business model?
● What must Amazon do now to create a business
model that is sustainable over the long term?
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The Strategy Diamond and the Five
Elements of Strategy
1. Arenas: where will we be active
 Decisions about a firm’s arenas may encompass its
products, channels, market segments, geographic
areas, technologies, and even stages in the value
creation process.
2. Vehicles: how will we get there?
 provide the means for participating in the targeted
arenas (acquisitions, internal development, joint
ventures, etc.)
 Wal-Mart is an example of a firm that has used
different vehicles for expanding internationally
 In some markets, they have chosen to grow
organically (such as Argentina), while in others they
have used acquisitions of existing retailers (such as in
England and Germany).

3. Differentiators: how will we win in the marketplace?
 are features and attributes of a company’s product or
services that help it beat its competitors in the marketplace.
 Two critical factors in selecting differentiators are:
(1) Make decisions early
(2) Identifying and executing successful differentiators means
making tough choices – namely tradeoffs
 The earlier and more consistent the firm is at defining and
driving these differentiators, the greater the likelihood that
customers will recognize them.

4. Staging: what will be our speed and sequence of
moves?
 These staging choices depend on available resources,
including cash, human capital, and knowledge
 Staging decisions should be driven by several factors:
resources, urgency, credibility, and need for early wins.
 Opportunities must be matched with available resources.
 In addition, not all opportunities to enter new arenas are
permanent; some have only brief windows.
 In these cases, early wins and the credibility of certain key
stakeholders may be necessary to implement a strategy.

5. Economic logic: how will we obtain our returns?
 This reflects the firm’s ability to generate positive returns
above the firm’s cost of capital.
 Both costs and revenues are considered. Sometimes
economic logic resides primarily on the cost side of the
equation. (?)
 Other times, economic logic may rest on the firm’s ability to
increase the customer’s willingness to pay premium prices
for products.

BUSINESS STRATEGY DIAMOND
37
Staging
Differentiators
Economic
logic
Vehicles
Arenas
• What will be our speed and
sequence of moves?
– Speed of expansion?
– Sequence of initiatives
Staging
• How will returns be obtained?
– Lowest costs through scale
advantages?
– Lowest costs through scope and
replication advantages
– Premium prices due to
unmatchable service?
– Premium prices due to proprietary
product features?
Economic logic
• How will we get there?
– Internal development?
– Joint ventures?
– Licensing/franchising?
– Experimentation?
– Acquisitions?
Vehicles
• How will we win?
– Image?
– Customization?
– Price?
– Styling?
– Product reliability?
– Speed to market?
Differentiators
• Where will we be active? ( and
with how much emphasis?)
– Which product categories?
– Which channels?
– Which market segments?
– Which geographic areas?
– Which core technologies
– Which value-creation
strategies?
Arenas

ILLUSTRATION
CAPSULE 1.2
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♦ Who listens to the radio anymore?
●Given the changes in how people listen to music,
are the business models of Pandora, Sirius XM
and over-the-air broadcasters viable over the
long term?
●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?
Pandora, Sirius XM, and Over-the-Air
Broadcast Radio: Three Contrasting
Business Models

IS OUR STRATEGY A WINNER?
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Winning
Strategy
The Strategic
Fit Test
The Competitive
Advantage Test
The Performance
Test

WHAT MAKES A STRATEGY A WINNER?
 A winning strategy must pass three tests:
● The Fit Test
 Does it exhibit dynamic fit with the external and
internal aspects of the firm’s overall situation?
● The Competitive Advantage Test
 Can it help the firm achieve a significant and
sustainable competitive advantage?
● The Performance Test
 Can it produce good performance as measured by
the firm’s profitability, financial and competitive
strengths, and market standing?
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CH3
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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.
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Good Strategy + Good Strategy Execution =
Good Management

♦ How well a company performs is directly
attributable to the caliber of its strategy and the
proficiency with which the strategy is executed.
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THINKING STRATEGICALLY
♦ Google’s web browser-based Chrome
operating system and its online applications
suite are now challenging Microsoft’s long-term
dominance of those marketplace sectors.
♦ What should be Microsoft’s first response to
this competitive challenge?
♦ How will Microsoft’s response to this
competitor’s actions affect its business model?
♦ Which competitor’s strategy will likely be the
eventual winner in the marketplace? Why?
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THE ROAD AHEAD
 Strategy is about asking the right questions:
● What must managers do, and do well, to make
a firm a winner in the marketplace?
 Strategy requires getting the right answers:
● Good strategic thinking and good management of
the strategy-making, strategy-executing process.
● First-rate capabilities and skills in crafting and
executing strategy are essential to managing
successfully.
 Welcome and best wishes for your success!
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