Crafting and Executing Strategy

The Quest for Competitive Advantage

Chapter 1: What is strategy and why is

it important?

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 INTRODUCTION
Introduction

• Biggest companies?
… but judged by which criterium?
http://beta.fortune.com/global500/list
• Most admired companies? http://fortune.com/worlds-most-
admired-companies/
• Most admired brands:
http://www.rankingthebrands.com/The-Brand-Rankings.aspx
 LEARNING OBJECTIVES

At the end of this session you should be able to:

1. Explain why every organisation needs a sound strategy to
compete successfully, manage the conduct of its business, and
strengthen its prospects for long-term success.
2. Illustrate how an organisation’s strategy tends to evolve over
time because of changing circumstances and on-going
management efforts to improve the organisation’s strategy.
3. Justify why it is important for an organisation to have a viable
business model that outlines the organisation’s customer value
proposition and its profit formula.
4. Explain the tests that are used to identify a good strategy.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 OPENING CASE: APPLE

• Apple’s performance improved dramatically between 1997, when it

faced possible bankruptcy and 2012, when it became the world’s
most valuable firm
• Initially the firm was re-focused on ensuring it met the needs of its
chosen niche of the personal computer market
• Then the launch of a series of well designed and promoted
products with unique features took the firm into the consumer
electronics arena and the music business
• Integration of the products and services offered through the iPod,
iTunes, iPhone and iPad produced a product/service mix which it
was difficult for competitors to copy
• In April 2012 the firm’s share price had risen to $644 (from $3.19 in
1997) and its market capitalisation was $600bn

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 OPENING CASE: APPLE – FOLLOW UP

• What are the key factors underpinning

Apple’s success in the last 15 years?
• Keep the factors you have listed in mind
and see how they relate to the
subsequent ideas in this session

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 WHAT DO WE MEAN BY STRATEGY ?

• What is our present situation? - CONTEXT

- Business environment and industry conditions
- Firm’s financial and competitive capabilities
• Where do we want to go from here? - CONTENT
- Creating a vision for the firm’s future direction
• How are we going to get there? - PROCESS
- Crafting an action plan that will get us there

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 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.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 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.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 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.
● Deciding what we should or should not do to
produce a competitive edge.
● Can be described as adopting a particular position

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 IDENTIFYING A FIRM’S STRATEGY - PATTERN

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 ETHICS…

2 sept 2016

15 sept 2016
 ILLUSTRATION CAPSULE: McDONALD’S

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

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 ILLUSTRATION CAPSULE: McDONALD’S

Follow up:
• Which of McDonald’s 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 are likely to result in the most
enduring competitive advantage?
• Which of the initiatives will competitors be likely to
attempt to overcome first?

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 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.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 STRATEGIC APPROACH CHOICES

Building Competitive Advantage

Differentiation on Focus on
Low-cost provider Best-cost provider
features market niche

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 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.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 IS COMPETITIVE ADVANTAGE SUSTAINABLE IN THE
21ST CENTURY?

• D’Aveni’s theory of hypercompetition suggests that

sustainable advantage is no longer possible in many
industries
• Changes in technology, globalised markets and
deregulation have all led to more frequent disruption
and changes in markets
• This can mean it is difficult or impossible to achieve a
unique position which is long lasting
• Other experts, such as Michael Porter, disagree and
state that managers’ behaviour can cause
hypercompetition if they abandon the quest to seek
long-term advantage
• A variety of studies both support and challenge
D’Aveni’s theory
Crafting and Executing Strategy, European Edition, McGraw-Hill Education
 IS COMPETITIVE ADVANTAGE SUSTAINABLE IN THE
21ST CENTURY? – FOLLOW UP

• Why might some industries be more prone to

hypercompetition than others?
• How do the two examples we have already
considered so far, Apple and McDonalds,
support the two sides of the debate?

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 WHY AN ORGANIZATION’S 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

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 THE EVOLVING NATURE OF AN ORGANIZATIONS
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.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 PROACTIVE AND REACTIVE ELEMENTS

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 THE RELATIONSHIP BETWEEN AN ORGANIZATION’S
STRATEGY AND ITS BUSINESS MODEL

Realized Business Model

Strategy
Competitive
Value Proposition
Initiatives

Business
Profit Formula
Approaches

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 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.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 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.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 BUSINESS MODEL ELEMENTS CONTINUED

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.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

BUSINESS MODEL CANVAS (Osterwalder)
 ILLUSTRATION CAPSULE: ZOPA/FIRST DIRECT

• Many firms have adapted their business models

to the internet
• Two examples of this from the financial services
sector are First Direct, an arm of HSBC, and
Zopa, a peer-to-peer lending site founded in
2005.
• To what extent does each organisation’s
business model have the potential to be a
money-maker?

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 IS OUR STRATEGY LIKELY TO BE SUCCESSFUL?

The Strategic
Fit Test

The Competitive Successful The Performance

Advantage Test Test
Strategy

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 WHAT MAKES A GOOD STRATEGY?

♦ 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?
Crafting and Executing Strategy, European Edition, McGraw-Hill Education
 CURRENT PRACTICE: TESTING STRATEGY

• Will the strategy beat the market?

• Does the strategy tap a true source of advantage?
• Is the strategy granular about where to compete?
• Does the strategy put the firm ahead of trends?
• Does the strategy rest of privileged insights?
• Does the strategy embrace uncertainty?
• Does the strategy balance commitment and flexibility?
• Is the strategy contaminated by bias
• Is there conviction to act on the strategy?
• Has the strategy been translated into an action plan?

Source: Bradley et al. 2011 (McKinsey Quarterly)

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 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

Crafting and Executing Strategy, European Edition, McGraw-Hill Education

 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.

Crafting and Executing Strategy, European Edition, McGraw-Hill Education