CHAPTER 1

Strategy and the

Quest for
Competitive
Advantage

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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Thinking Strategically:
The Three Big Strategic Questions

1. Where are we now?

2. Where do we want to go?
 Business(es) to be in
and market positions to stake
out
 Buyer needs and groups to serve
 Direction to head

3. How are we going to get there?

 A company’s answer to “how
will we get there?” is its strategy

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What Do We Mean By “Strategy”?

 Consists of competitive moves and

business approaches used by
managers to run the company
 Management’s “action plan” to
 Attract and please customers
 Compete successfully
 Conduct operations
 Achieve target levels of
organizational performance

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Answering the Question, “How Are
We Going to Get There?”

 How to please customers

 How to out-compete rivals
 How to manage each
functional piece of the
business (R&D, production,
marketing, HR, finance,
and so on)
 How to respond to changing market conditions
 How to achieve targeted levels of performance

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Elements of a Company’s Business
Strategy

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Strategy and Sustainable
Competitive Advantage

 A company achieves sustainable

competitive advantage when a
sufficiently large
number of buyers
develop a lasting
preference for its
products/services over
those offered by rivals

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Four Proven Strategic Approaches to
Winning a Sustainable Competitive
Advantage

 Developing a cost-based advantage

 Creating a differentiation-based
advantage
 Focusing on a narrow market niche
within an industry
 Developing
unmatched resource
strengths and
competitive capabilities

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Competitive Strategy Examples

 Strive to be the industry’s low-cost provider

 Wal-Mart
 Southwest Airlines
 Out-compete rivals on a key differentiating
feature
 Harley-Davidson – Outlaw image and
distinctive engine sound
 Rolex – Top-of-the-line prestige
 Amazon.com – Wide selection and
convenience

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Competitive Strategy Examples

 Focus on a narrow market niche

 McAfee – Virus protection auctions
 Starbucks – Premium coffees and coffee
drinks
 The Weather Channel – Cable TV
 Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
 Walt Disney – Theme park management
and family entertainment
 Ritz-Carlton – Personalized customer
service

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Why Do Strategies Evolve?

 A company’s strategy is a work in progress

 Changes may be necessary to react to
 Shifting market conditions
 Fresh moves of competitors
 Evolving customer preferences
 Emerging market opportunities
 New ideas to improve strategy
 Crisis situations

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

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What Is a Business Model?

 A business model addresses “How do

we make money in this business?”
 Do the revenue-cost-profit economics
of the strategy make good business
sense?
 Look at revenue streams the strategy is
expected to produce
 Look at associated cost structure and
potential profit margins
 Do resulting earnings streams and ROI
indicate the strategy makes sense and the
company has a viable business model for
making money?

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Microsoft’s Business Model

 Employ highly skilled programmers to develop

proprietary code; keep source code hidden from
users
 Sell resulting OS and software packages to PC
makers and users at relatively attractive prices to
achieve a 90% or more market share
 Most costs in developing software are fixed; variable
costs are small; once break-even volume is reached,
revenues from additional sales are almost pure profit
 Provide modest level of technical support to users at
no cost
 Rejuvenate revenues by periodically introducing
next-generation software that prompt PC users to
upgrade their operating systems

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Red Hat’s Business Model

 Rely on collaborative efforts of volunteer

programmers to create the software
 Collect and test enhancements and new
applications submitted by volunteer programmers
for evaluation and inclusion in new releases of
Linux
 Market upgraded and tested family of Red Hat
products to large companies, charging a
subscription fee that includes 24/7 support within 1
hour in 7 languages
 Make source code open and available to all users
 Capitalize on specialized expertise required to use
Linux by providing fee-based training, consulting,
and software customization

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Tests of a Winning Strategy

 GOODNESS OF FIT TEST

 How well does strategy fit
the firm’s situation?
 COMPETITIVE ADVANTAGE TEST
 Does strategy lead to
sustainable competitive
advantage?
 PERFORMANCE TEST
 Does strategy boost firm
performance?

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