CHAPTER 1

Strategy,
Business
Models, and
Competitive
Advantage

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 LEARNING OBJECTIVES
1. Understand what is meant by a company's strategy.
2. Explain why a company needs a creative, distinctive strategy
that sets it apart from rivals.
3. Explain 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.
4. Identify the five most dependable strategic approaches for
setting a company apart from rivals and winning a
sustainable competitive advantage.
5. 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.
6. Identify the three tests of a winning strategy.
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 What Is Strategy?
Strategy involves choosing how to compete.
How to create products or services that attract and please
customers.
How to position the company in its industry.
How to develop and deploy resources to build valuable
competitive capabilities.
How each functional piece of the business (R&D, supply chain
activities, production, sales and marketing, distribution,
finance, and human resources) will be operated.
How to achieve the firm’s performance targets

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

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 The Importance of a Distinctive Strategy and
Competitive Approach
A Company’s Strategy
• Distinctive set of creative strategic choices
• Manager’s decision
• Apart from rivals
• Competitive edge
• Fit its own particular situation for competitive advantage
• Compete differently
• Doing what rival firms do not do or, better yet, what rival firms
cannot do

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 The Relationship Between a
Company's Strategy and Business Model
Business Model
Management’s produces a blueprint for delivering a valuable
product or service to customers that will yield an attractive
profit.
Elements of the Business Model
The customer value proposition defines how the firm will
satisfy buyer wants and needs at a price buyers will consider
a good value.
The profit formula describes its approach to determining a
cost structure that allows for acceptable profits given the
pricing tied to its customer value proposition.
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 CORE CONCEPT: Business Model
A company’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 company’s business model are
its (1) customer value proposition and (2) its profit
formula.

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 CONCEPTS and CONNECTIONS 1.1
Customer value proposition or Pandora Sirius XM Over-the-Air Radio Broadcasters
Profit formula
Customer value proposition Offers free-of-charge Internet Monthly subscription users get Provides free-of-charge music,
radio, smartphone users can satellite-based music, news, news, traffic reports, weather,
create playlists of music and sports, weather, traffic reports, and talk radio.
comedy stations. and talk radio.
Ads frequently interrupt
Programming has brief ads; no Streaming is interrupted by programming.
ads for subscribers. brief, occasional ads.

Profit formula Revenues come from ads Revenues come from monthly Revenues come from advertising
targeted to different audiences subscription fees, sales of sales to national and local
and advertising-free satellite radio equipment, and businesses.
subscriptions. advertising revenues.
Profit formula Cost structure is comprised of Cost structure is comprised of Cost structure is comprised of
the fixed and variable costs of fixed costs of a satellite-based fixed and variable costs of
developing user software, music and streaming service. terrestrial operations for news
operating data centers Fixed and variable costs relate to and advertising sales operations,
supporting streaming network, programming and content affiliate fees, royalties,
royalties, and marketing. royalties, marketing, and commercial production and
support. support activities.
Profit formula Profit margin depends on Profit margin depends on Profit margin depends on
advertising and subscription attracting a sufficiently large generating sufficient advertising
revenues to cover costs and number of subscribers to cover revenues to cover costs and
provide profits. costs and provide profits. provide attractive profits.

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 Strategy and the Quest for
Sustainable Competitive Advantage
Strategic Approaches to a Sustainable Competitive Advantage
• A low-cost provider strategy achieves a cost-based advantage over rivals.
• A broad differentiation strategy differentiates its products or services
from rivals’ in ways that appeal to a broad spectrum of buyers.
• A focused low-cost strategy outcompetes rivals in a narrow/niche market
by achieving lower costs and offering its products at lower prices.
• A focused differentiation strategy outcompetes rivals in a narrow/niche
market by offering buyers customized and exclusive attributes.
• A best-cost provider strategy gives customers more value by satisfying
their expectations on key attributes, while beating their price expectations.

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 CORE CONCEPT: Sustainable Competitive
Advantage
A company 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 is
advantage.

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 CONCEPTS and CONNECTIONS 1.2

STARBUCKS’ STRATEGY IN THE SPECIALTY COFFEE MARKET

Train “baristas” to serve a variety of specialty coffee drinks to satisfy individual
customer preferences in a customized way.
Emphasize store ambience and elevating customer experience at its stores.
Purchase and roast only top-quality coffee beans.
Commit to corporate responsibility.
Expand the number of its 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.

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 The Importance of Capabilities in Building
and Sustaining Competitive Advantage
Competitively Valuable Capabilities
• Cannot be easily bested, matched, or imitated by rivals
• Represent superior know-how and specialized abilities that
require time to fully develop and perfect
• Result in a sustainable competitive advantage over rivals

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 Why Strategy Evolves over Time
A strategy changes over time due to:
• Unexpected moves of competitors
• Shifting buyer needs and preferences
• Emerging market opportunities
• Managers’ new ideas for improving the strategy
• Mounting evidence strategy is not working well
A strategy evolves:
• Incremental (minor) adjustments or dramatic (major)
shifts
• Proactively and adaptively

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FIGURE 1.1 A Company’s Strategy Is a Blend of Planned Initiatives and
Unplanned Reactive Adjustments

Jump to Appendix 1 for long image description

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 CORE CONCEPT: Realized Strategy
A company’s realized strategy is a combination of
deliberate planned elements and unplanned emergent
elements. Some components of a company’s
deliberate strategy will fail in the marketplace and
become abandoned strategy elements.

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 The Three Tests of a Winning Strategy
Strategic Fit
How well does the strategy fit the company’s situation?
Competitive Advantage
Is the strategy helping the company achieve a sustainable
competitive advantage?
Performance
Is the strategy producing good company performance?

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 Why Crafting and Executing Strategy
Are Important Tasks
Good strategy and good strategy execution are the most
telling indicators of good management.

A better-conceived, competently executed strategy

makes it more likely that a firm will be a standout
performer in the marketplace.

How well a firm performs directly reflects the caliber of

its strategy and the proficiency of its execution.

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 The Road Ahead
Strategy is about asking and answering a most
important question.
What must managers do, and do well, to make
a company a winner in the marketplace?

Doing a good job of managing inherently requires good

strategic thinking and good management of the strategy-
making, strategy-executing process.

Best wishes for success in the class!!

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