CHAPTER 1 WHAT IS STRATEGY AND WHY IS IT IMPORTANT? McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies, Inc. 1–* WHAT DO WE MEAN BY STRATEGY ?What is our present situation?Business environment and industry conditionsFirm’s financial and competitive capabilitiesWhere do we want to go from here?Creating a vision for the firm’s future directionHow are we going to get there?Crafting an action plan that will get us there 1–* WHAT IS STRATEGY ABOUT?Strategy is all about How:How to outcompete rivals.How to respond to economic and market conditions and growth opportunities.How to manage functional pieces of the business.How to improve the firm’s financial and market performance. 1–* WHY DO STRATEGY ?A firm does strategy:To improve its financial performance.To strengthen its competitive position.To gain a sustainable competitive. advantage over its market rivals.A creative, distinctive strategy:Can yield above-average profits.Makes competition difficult for rivals. 1–* STRATEGY AND COMPETITORSStrategy is about competing differently from rivals—Doing what they don’t do or doing it better!Doing what they can’t do!Doing that which sets the firm apart and attracts customers.Doing what we should or should not do to produce a competitive edge. 1–* 1.1 Identifying a Company’s Strategy—What to Look For 1–* The Quest for Competitive AdvantageCompetitive AdvantageMeeting customer needs more effectively, with products or services that customers value more highly, or more efficiently, at lower cost.Sustainable Competitive AdvantageGiving buyers lasting reasons to prefer a firm’s products or services over those of its competitors. 1–* STRATEGIC APPROACH CHOICES Low-cost provider Differentiation on features Focus on market niche Best-cost provider Building Competitive Advantage 1–* STRATEGIC APPROACHESBuilding a competitive advantage by: Striving to become the industry’s low-cost provider (efficiency). Outcompeting rivals on differentiating features (effectiveness). Focusing on better serving a niche market’s needs (efficiency and\or effectiveness). Offering the lowest (best) prices for differentiated goods (best-cost provider). 1–* GAINING SUSTAINABLE COMPETITIVE ADVANTAGEHow 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–* 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments 1–* THE RELATIONSHIP BETWEEN A FIRM’S STRATEGY AND ITS BUSINESS MODEL Realized Strategy Competitive Initiatives Business Approaches Business Model Value Proposition Profit Formula $$$? 1–* A Company’s Business ModelHow the business will make money :By providing customers with value.The firm’s customer value propositionBy generating revenues suff.

1. CHAPTER 1
WHAT IS STRATEGY AND
WHY IS IT IMPORTANT?
McGraw-Hill/Irwin
Copyright ®2012 The McGraw-Hill Companies, Inc.
1–*
WHAT DO WE MEAN BY STRATEGY ?What is our present
situation?Business environment and industry conditionsFirm’s
financial and competitive capabilitiesWhere do we want to go
from here?Creating a vision for the firm’s future directionHow
are we going to get there?Crafting an action plan that will get
us there
1–*
WHAT IS STRATEGY ABOUT?Strategy is all about How:How
to outcompete rivals.How to respond to economic and market
conditions and growth opportunities.How to manage functional
pieces of the business.How to improve the firm’s financial and
market performance.

2. 1–*
WHY DO STRATEGY ?A firm does strategy:To improve its
financial performance.To strengthen its competitive position.To
gain a sustainable competitive. advantage over its market
rivals.A creative, distinctive strategy:Can yield above-average
profits.Makes competition difficult for rivals.
1–*
STRATEGY AND COMPETITORSStrategy is about competing
differently from rivals—Doing what they don’t do or doing it
better!Doing what they can’t do!Doing that which sets the firm
apart and attracts customers.Doing what we should or should
not do to produce a competitive edge.
1–*
1.1
Identifying a Company’s Strategy—What to Look For

3. 1–*
The Quest for Competitive AdvantageCompetitive
AdvantageMeeting customer needs more effectively, with
products or services that customers value more highly, or more
efficiently, at lower cost.Sustainable Competitive
AdvantageGiving buyers lasting reasons to prefer a firm’s
products or services over those of its competitors.
1–*
STRATEGIC APPROACH CHOICES
Low-cost provider
Differentiation on features
Focus on
market niche
Best-cost provider
Building Competitive Advantage
1–*

4. STRATEGIC APPROACHESBuilding a competitive advantage
by:
Striving to become the industry’s low-cost provider
(efficiency).
Outcompeting rivals on differentiating features (effectiveness).
Focusing on better serving a niche market’s needs (efficiency
andor effectiveness).
Offering the lowest (best) prices for differentiated goods (best-
cost provider).
1–*
GAINING SUSTAINABLE COMPETITIVE ADVANTAGEHow
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–*
1.2
A Company’s Strategy Is a Blend of Proactive Initiatives and
Reactive Adjustments

5. 1–*
THE RELATIONSHIP BETWEEN A FIRM’S STRATEGY
AND ITS BUSINESS MODEL
Realized
Strategy
Competitive Initiatives
Business Approaches
Business Model
Value Proposition
Profit Formula
$$$?
1–*
A Company’s Business ModelHow the business will make
money :By providing customers with value.The firm’s customer
value propositionBy 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.
1–*
Business Model ElementsThe Customer Value
PropositionSatisfying buyer wants and needs at a price

6. 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.
1–*
Business Model Elements (cont’d)The Profit FormulaCreating a
cost structure that allows for acceptable profits, given that
pricing is tied to the customer value proposition.V—the value
provided to customersP—the price charged to customersC—the
firm’s costsThe lower the costs (C) for a given customer value
proposition (V–P), the greater the ability of the business model
to be a moneymaker.
1–*
IS OUR STRATEGY A WINNER?
Winning
Strategy
The Strategic
Fit Test
The Competitive Advantage Test
The Performance
Test

7. 1–*
WHAT MAKES A STRATEGY A WINNER?A winning strategy
must pass three tests:The Fit TestDoes it exhibit dynamic fit
with the external and internal aspects of the firm’s overall
situation?The Competitive Advantage TestCan it help the firm
achieve a significant and sustainable competitive advantage?The
Performance TestCan it produce good performance as measured
by the firm’s profitability, financial and competitive strengths,
and market standing?
1–*
1–*
WHY CRAFTING AND EXECUTING STRATEGY ARE
IMPORTANT TASKSStrategy 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