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CHAPTER 1

WHAT IS STRATEGY AND


WHY IS IT IMPORTANT?

McGraw-Hill/Irwin
Copyright 2012 The McGraw-Hill Companies, Inc.
1. Understand why every company needs a sound strategy to
compete successfully, manage the conduct of its business, and
strengthen its prospects for long-term success.
2. Develop an awareness of the four most dependable strategic
approaches for setting a company apart from rivals and
winning a sustainable competitive advantage.
3. Understand that a companys strategy tends to evolve over
time because of changing circumstances and ongoing
management efforts to improve the companys strategy.
4. Learn why it is important for a company to have a viable
business model that outlines the companys customer value
proposition and its profit formula.
5. Learn the three tests of a winning strategy.

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WHAT DO WE MEAN BY STRATEGY ?

What is our present situation?


Business environment and industry conditions
Firms financial and competitive capabilities
Where do we want to go from here?
Creating a vision for the firms 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 firms 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 dont do or doing it better!
Doing what they cant 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 Companys StrategyWhat to Look For

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Key initiatives of the Plan-to-Win strategy:
Improved restaurant operations
Affordable pricing
Wide menu variety and beverage choices
Convenience and expansion of dining opportunities
Ongoing restaurant reinvestment and international
expansion

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Follow-up

Which of McDonalds Plan-to-Win strategy


initiatives are associated with meeting
customer needs more effectively?
Which initiatives are focused on more
efficiently delivering products and services?
Which initiatives will likely result in the most
enduring competitive advantage?
Which of the initiatives will competitors likely
attempt to overcome first?

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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
firms products or services over those of its
competitors.

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STRATEGIC APPROACH CHOICES

Building Competitive Advantage

Low-cost Differentiation Focus on Best-cost


provider on features market niche provider

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STRATEGIC APPROACHES

Building a competitive advantage by:


1. Striving to become the industrys low-cost
provider (efficiency).
2. Outcompeting rivals on differentiating
features (effectiveness).
3. Focusing on better serving a niche markets
needs (efficiency and\or effectiveness).
4. 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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Why a Firms 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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The Evolving Nature of a Firms 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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1.2 A Companys Strategy Is a Blend of Proactive Initiatives
and Reactive Adjustments

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THE RELATIONSHIP BETWEEN A
FIRMS STRATEGY AND ITS BUSINESS
MODEL

Realized Business
Strategy $$$? Model
Competitive Value
Initiatives Proposition

Business
Profit Formula
Approaches

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A Companys Business Model

How the business will make money :


By providing customers with value.
The firms customer value proposition

By generating revenues sufficient to cover


costs and produce attractive profits.
The firms profit formula

It takes a proven business modelone that


yields appealing profitabilityto demonstrate
viability of a firms 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 (contd)

The Profit Formula


Creating a cost structure that allows for
acceptable profits, given that pricing is
tied to the customer value proposition.
Vthe value provided to customers
Pthe price charged to customers
Cthe firms costs
The lower the costs (C) for a given customer
value proposition (VP), the greater the ability
of the business model to be a moneymaker.

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IS OUR STRATEGY A WINNER?

The Strategic
Fit Test

The Competitive Winning The Performance


Advantage Test Test
Strategy

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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 firms 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 firms profitability, financial and


competitive strengths, and market standing?

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Follow-up

Who listens to the radio anymore?


Given the shifts in how people listen to music, are
the business models of Sirius XM and over-the-air
broadcasters viable over the long term?
Does Sirus XMs strategy pass the three tests of a
winning strategy? Does the strategy of over-the-air
broadcasters pass the same tests?
What internal and external factors will create
difficulties for either competitor in changing its
strategy or business model?

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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.

Good Strategy + Good Strategy Execution =


Good Management
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THINKING STRATEGICALLY

Googles web browser-based Chrome operating


system and its online applications suite are now
challenging Microsofts long-term dominance of
those marketplace sectors.
What should be Microsofts first response to this
competitive challenge?
How will Microsofts response to this competitors
actions affect its business model?
Which competitors strategy will likely be the eventual
winner in the marketplace?

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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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