Chapter 1

A general review of this short chapter dealing with what is strategy all about.

A company’s strategy is the coordinated set of actions that its managers take in order to outperform
the company’s competitors and achieve superior profitability. The objective of a well-crafted strategy
is not merely temporary competitive success and profits in the short run, but rather the sort of lasting
success that can support growth and secure the company’s future over the long term. Achieving this
entails making a managerial commitment to a coherent array of well-considered choices about how to
compete. These include:

• How to position the company in the marketplace.

Strategy is about competing differently from rivals—doing what competitors don’t do or, even better,
doing what they can’t do! Mimicking the strategies of successful industry rivals—with either copycat
product offerings or maneuvers to stake out the same market position—rarely works. Rather, every
company’s strategy needs to have some distinctive element that draws in customers and provides a
competitive edge.

A company’s strategy provides direction and guidance, in terms of not only what the company should
do but also what it should not do. Knowing what not to do can be as important as knowing what to do,
strategically. At best, making the wrong strategic moves will prove a distraction and a waste of company
resources. At worst, it can bring about unintended long-term consequences that put the company’s very
survival at risk.

A company achieves a competitive advantage when it provides buyers with superior value compared
to rival sellers or offers the same value at a lower cost to the firm. The advantage is sustainable if it
persists despite the best efforts of competitors to match or surpass this advantage.

Changing circumstances and ongoing management efforts to improve the strategy cause a company’s
strategy to evolve over time—a condition that makes the task of crafting strategy a work in progress,
not a one-time event.

A company’s strategy is shaped partly by management analysis and choice and partly by the necessity
of adapting and learning by doing.

A company’s deliberate strategy consists of proactive strategy elements that are planned; its
emergent strategy consists of reactive strategy elements that emerge as changing conditions warrant.

A strategy cannot be considered ethical just because it involves actions that are legal. To meet the
standard of being ethical, a strategy must entail actions and behavior that can pass moral scrutiny in
the sense of not being deceitful, unfair or harmful to others, disreputable, or unreasonably damaging
to the environment. Ethical and moral standards are not fully governed by what is legal. Rather, they
involve issues of “right” versus “wrong” and duty—what one should do. A strategy is ethical only if it
does not entail actions that cross the moral line from “can do” to “should not do.”

BUSINESS MODEL
At the core of every sound strategy is the company’s business model. A business model is
management’s blueprint for delivering a valuable product or service to customers in a manner that
will generate revenues sufficient to cover costs and yield an attractive profit. The two elements of a
company’s business model are (1) its customer value proposition and (2) its profit formula.

The customer value proposition lays out the company’s approach to satisfying buyer wants and needs at
a price customers will consider a good value.

The profit formula describes the company’s approach to determining a cost structure that will allow for
acceptable profits, given the pricing tied to its customer value proposition.

A company’s business model sets forth the logic for how its strategy will create value for customers
and at the same time generate revenues sufficient to cover costs and realize a profit.

A winning strategy must pass three tests:

1. The Fit Test: How well does the strategy fit the company’s situation? To qualify as a winner, a
strategy has to be well matched to industry and competitive conditions, a company’s best
market opportunities, and other pertinent aspects of the business environment in which the
company operates.

To pass the fit test, a strategy must exhibit fit along three dimensions: (1) external, (2)
internal, and (3) dynamic.

2. The Competitive Advantage Test: Is the strategy helping the company achieve a competitive
advantage? Is the competitive advantage likely to be sustainable? Strategies that fail to achieve
a competitive advantage over rivals are unlikely to produce superior performance. And unless
the competitive advantage is sustainable, superior performance is unlikely to last for more than
a brief period of time. Winning strategies enable a company to achieve a competitive advantage
over key rivals that is long-lasting.
3. The Performance Test: Is the strategy producing superior company performance? The mark of a
winning strategy is strong company performance. Two kinds of performance indicators tell the
most about the caliber of a company’s strategy: (1) competitive strength and market standing
and (2) profitability and financial strength.

Crafting and executing strategy are top-priority managerial tasks for two big reasons.

First, a clear and reasoned strategy is management’s prescription for doing business, its road map to
competitive advantage, its game plan for pleasing customers, and its formula for improving
performance. High-performing enterprises are nearly always the product of astute, creative, and
proactive strategy making.

Second, even the best-conceived strategies will result in performance shortfalls if they are not executed
proficiently. The processes of crafting and executing strategies must go hand in hand if a company is to
be successful in the long term.

Crafting and executing strategy are thus core management tasks. Among all the things managers do,
nothing affects a company’s ultimate success or failure more fundamentally than how well its
management team charts the company’s direction, develops competitively effective strategic moves,
and pursues what needs to be done internally to produce good day-in, day-out strategy execution and
operating excellence. Indeed, good strategy and good strategy execution are the most telling and
trustworthy signs of good management.

KEY POINTS
1. A company’s strategy is its game plan to attract customers, outperform its competitors,
and achieve superior profitability.

2. The success of a company’s strategy depends upon competing differently from rivals and
gaining a competitive advantage over them.

3. A company achieves a competitive advantage when it provides buyers with superior value
compared to rival sellers or produces its products or services more efficiently. The
advantage is sustainable if it persists despite the best efforts of competitors to match or
surpass this advantage.

4. A company’s strategy typically evolves over time, emerging from a blend of (1) proactive
deliberate actions on the part of company managers to improve the strategy and (2)
reactive emergent responses to unanticipated developments and fresh market conditions.

5. A company’s business model sets forth the logic for how its strategy will create value for
customers and at the same time generate revenues sufficient to cover costs and realize a
profit. Thus, it contains two crucial elements: (1) the customer value proposition—a plan
for satisfying customer wants and needs at a price customers will consider good value,
and (2) the profit formula—a plan for a cost structure that will enable the company to
deliver the customer value proposition profitably. These elements are illustrated by the
value-price-cost framework.
6. A winning strategy will pass three tests: (1) fit (external, internal, and dynamic
consistency), (2) competitive advantage (durable competitive advantage), and (3)
performance (outstanding financial and market performance).

7. Ethical strategies must entail actions and behavior that can pass the test of moral scrutiny
in the sense of not being deceitful, unfair or harmful to others, disreputable, or
unreasonably damaging to the environment.
8. Crafting and executing strategy are core management functions. How well a company
performs and the degree of market success it enjoys are directly attributable to the caliber
of its strategy and the proficiency with which the strategy is executed.