HW 1

CHAPTER 1

WHAT IS STRATEGY AND
WHY IS IT IMPORTANT?

McGraw-Hill/Irwin

Copyright ®2012 The McGraw-Hill Companies, Inc.

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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 that will get us there

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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.

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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.

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STRATEGY AND COMPETITORS

• Strategy 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.

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1.1

Identifying a Company’s Strategy—What to Look For

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The Quest for Competitive Advantage

• Competitive Advantage
• Meeting customer needs more effectively, with products or services that customers value more highly, or more efficiently, at lower cost.
• Sustainable Competitive Advantage
• Giving buyers lasting reasons to prefer a firm’s products or services over those of its competitors.

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STRATEGIC APPROACH CHOICES

Low-cost provider

Differentiation on features

Focus on
market niche

Best-cost provider

Building Competitive Advantage

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STRATEGIC APPROACHES

• Building 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).

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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.

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1.2

A Company’s Strategy Is a Blend of Proactive Initiatives and Reactive Adjustments

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THE RELATIONSHIP BETWEEN A FIRM’S STRATEGY AND ITS BUSINESS MODEL

Realized
Strategy

Competitive Initiatives

Business Approaches

Business Model

Value Proposition

Profit Formula

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A Company’s 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

It takes a proven business model—one that yields appealing profitability—to demonstrate viability of a firm’s strategy.

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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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IS OUR STRATEGY A WINNER?

Winning
Strategy

The Strategic
Fit Test

The Competitive Advantage Test

The Performance
Test

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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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