Because learning changes everything.

CHAPTER 1
Strategy, Business Models,
and Competitive Advantage

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 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 (research and
development, 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 coordinated 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 generating ample revenues to cover costs and realizing
a profit.
The two elements of a company’s business model are its customer
value proposition and its profit formula.

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 Concepts and Connections 1.1
Pandora, Sirius XM, and Over-the-Air Broadcast Radio:
Three Contrasting Business Models
Customer value Over-the-Air Radio
proposition or Pandora Sirius XM Broadcasters
Profit formula
Customer value Offers free-of-charge Internet Monthly subscription users get Provides free-of-charge music,
proposition radio, smartphone users can satellite-based music, news, news, traffic reports, weather, and
create playlists of music and sports, weather, traffic reports, talk radio.
comedy stations. and talk radio.
Ads frequently interrupt
Programming has brief ads; no Streaming is interrupted by brief, programming.
ads for subscribers. occasional ads.
Profit formula Revenues come from ads Revenues come from monthly Revenues come from advertising
targeted to different audiences subscription fees, sales of satellite sales to national and local
and advertising-free radio equipment, and advertising businesses.
subscriptions. revenues.
Cost structure Cost structure is comprised of Cost structure is comprised of Cost structure is comprised of fixed
the fixed and variable costs of fixed costs of a satellite-based and variable costs of terrestrial
developing user software, music and streaming service. operations for news and advertising
operating data centers Fixed and variable costs relate to sales operations, affiliate fees,
supporting streaming network, programming and content royalties, commercial production
royalties, and marketing. royalties, marketing, and support. and support activities.
Profit margin 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
provide profits. costs and provide profits. attractive profits.

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 Strategy and the Quest for Sustainable Competitive
Advantage
Strategic Approaches to a Sustainable Competitive Advantage:
1. A low-cost provider strategy achieves a cost-based advantage over rivals.
2. A broad differentiation strategy differentiates its products or services from
rivals’ in ways that appeal to a broad spectrum of buyers.
3. A focused low-cost strategy outcompetes rivals in a narrow/niche market
by achieving lower costs and offering its products at lower prices.
4. A focused differentiation strategy outcompetes rivals in a narrow/niche
market by offering buyers customized and exclusive attributes.
5. 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
Apple Inc.’s Strategy and Success in the Marketplace

• Designing and developing its own operating systems, hardware,

application software, and services.
• Continuously investing in research and development (R&D) and
frequently introducing products.
• Strategically locating its stores and staffing them with
knowledgeable personnel.
• Expanding Apple’s reach domestically and internationally.
• Sustaining a competitive edge by focusing on its inimitable
value proposition and deliberately keeping a price premium.
• Committing to corporate social responsibility and sustainability
through supplier relations.
• Cultivating a diverse workforce rooted in transparency.

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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

Access the text alternative for slide images.

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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 firm’s situation?
Competitive Advantage.
Is the strategy helping the firm achieve a sustainable
competitive advantage?
Performance.
Is the strategy producing good firm 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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 End of Main Content.

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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
© McGraw Hill