chapter 1

What Is
Strategy and
Why Is
It Important?

PART 1 Concepts and Techniques

for Crafting and Executing Strategy

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 Learning Objectives

After reading this chapter, you should be able to:

1. Understand what is meant by a company’s strategy and
why it needs to differ from competitors’ strategies.
2. Grasp the concept of a sustainable competitive advantage.
3. Identify the five most basic strategic approaches for setting
a company apart from its rivals.
4. Understand why a company’s strategy tends to evolve.
5. Identify what constitutes a viable business model.
6. Identify the three tests of a winning strategy.

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 What Do We Mean By Strategy ?

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.

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 All Businesses Face Three Central Questions
1. What is our present situation?
• Industry conditions and competitive pressures, market standing,
competitive strengths and weaknesses, and future prospects in light of
changes taking place in the business environment.
2. What should the company’s future direction be and what performance targets
should we set?
• What buyer needs to try to satisfy.
• Which growth opportunities to emphasize.
• Where to head and what outcomes to strive to achieve.
3. What’s our plan for running the firm and achieving good results?
• Challenges managers to craft a series of competitive moves and business
approaches—henceforth called a strategy—for heading the firm in the
intended direction, staking out a market position, attracting customers, and
achieving the targeted outcomes.

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 Strategy Is about Making Choices

Strategy is all about choosing How:

• How to position the firm in the marketplace.

• How to attract customers.

• How to compete against rivals.

• How to achieve the firm’s performance targets.

• How to capitalize on opportunities to grow the business.

• How to respond to changing economic and market

conditions.

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 Strategy Is about Competing Differently

Strategy as a choice:
• Is deciding to compete differently from rivals—pressuring
rivals by doing what they do not do or, even better, doing
what they cannot do.
• Guides the company in what it must do and also in
knowing what it must not do.
• Is successful when its actions, business approaches, and
competitive moves appeal to buyers in ways that:
• Set it apart from its rivals by either providing products with higher
perceived values or efficiently producing at lower costs.
• Stake out a market position that is not crowded with strong
competitors.

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 FIGURE 1.1 Identifying a Firm’s Strategy–What to Look For

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 Illustration Capsule 1.1 Apple Inc.: Exemplifying a Successful Strategy

Key elements of Apple’s successful strategy are:

• Designing and developing its own operating systems, hardware,
application software and services.
• Continuously investing in R&D and frequently introducing products.
• Strategically locating its stores and staffing them with knowledgeable
personnel.
• Maintaining a quality brand image, supported by premium pricing.
• Committing to corporate social responsibility and sustainability
through supplier relations.
• Cultivating a diverse workforce rooted in transparency.

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 Strategy and the Quest for
Competitive Advantage

Competitive advantage:
• Requires meeting customer needs either more effectively
(with products or services that customers value more
highly) or more efficiently (by providing products or
services at a lower cost to customers).
Sustainable competitive advantage requires:
• Giving buyers lasting reasons to prefer a firm’s products or
services over those of its competitors.
• Developing expertise and long-term competitive
capabilities that cannot be readily overcome.
• Putting the constant quest for sustainable competitive
advantage at center stage in crafting your strategy.
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 Basic Strategic Approaches 1

Strategies for Building Competitive Advantage

Low-Cost Focused
Provider Differentiation

Focused Broad
Low-Cost Differentiation

Best-Cost Provider

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 Basic Strategic Approaches 2

Low-cost provider strategy— Focused differentiation strategy

achieving a cost-based advantage —concentrating on a narrow
over rivals. buyer segment (or market niche)
by offering buyers customized
Broad differentiation strategy—
attributes that meet their
differentiating the firm’s product or
specialized needs and tastes
service from rivals in ways that
better than rivals’ products.
appeal to a broad spectrum of
buyers. Best-cost provider strategy—
giving customers more perceived
A focused low-cost strategy—
value for their money by satisfying
concentrating on a narrow buyer
their expectations on key quality
segment (or market niche) by
features, performance, and/or
having lower costs to serve niche
service attributes that match or
members at a lower price.
exceed their price expectations.

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 Why a Company’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.

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 FIGURE 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives
and Reactive Adjustments

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 A Company’s Strategy Is Partly Proactive and
Partly Reactive

Realized (current) strategy is a blend of:

• Proactive (deliberate) strategy elements that include
planned initiatives to improve the company’s financial
performance and secure a competitive edge.
• Reactive (emergent) strategy elements developed on the
fly in response to unanticipated developments and fresh
market conditions.
• Abandoned and superseded strategy elements that no
longer fit with the company’s ongoing strategy.

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 Just for Fun

Using the strategic terminology shown in Figure 1.2,

explain why U.S. football teams get four downs to
make a first down.
How does risk affect play selection (reactive
strategy) as a team fails to advance on each of its
four downs? What would be the risk effect of
requiring more than a 10-yard gain for achieving a
first down?
What rules of play in other sports (e.g., soccer)
affect how the basic principles of strategy are
applied to game play?

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 A Company’s Strategy and Its Business Model

How the firm 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.

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 The Relationship Between a Company’s Strategy
and Its Business Model

REALIZED BUSINESS
STRATEGY: MODEL:
Competitive Value
Initiatives. Proposition.
Business Profit
Approaches. Formula.

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 Business Model Elements:
The Customer Value Proposition

The customer value proposition is:

• 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: The Profit Formula

The profit formula:

• Creates 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.

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 FIGURE 1.3 The Business Model and the Value-Price-
Cost Framework

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 Is the Company’s Strategy a Winner?

Three tests of a winning strategy:

• Exhibits good fit with situation.
• Results in competitive advantage.
• Promotes superior performance.

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 What Makes a Strategy a Winner?

A winning strategy must pass three tests:

1. The fit test.
• Does it exhibit good fit with the external and internal aspects of
the firm’s dynamic situation?
2. The competitive advantage test.
• Is it likely to result in a sustainable competitive advantage?

3. The performance test.

• Is it producing superior performance, as indicated by the firm’s
profitability, financial and competitive strengths, and market
standing?

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 Illustration Capsule 1.2 Pandora, Sirius XM, and Broadcast Radio:
Three Contrasting Business Models

Who listens to the radio anymore?

• How sustainable are the business models of Pandora,
Sirius XM and over-the-air broadcasters over the long
term?

• Given the changes in user listening habits, which

competitor’s present strategy best passes the three tests
of a winning strategy?

• What internal and external factors will create particular

difficulties for each 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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 Applying What You Learned in This Chapter

Google’s browser-based Chrome operating system

and its online applications suite are challenging
Microsoft’s long-term dominance of the office
productivity application marketplace sectors.
• What should be Microsoft’s near-term response to this
competitive challenge?
• How will Microsoft’s long-term response to this
competitor’s actions affect its business model?
• Which competitor’s strategy will likely be the eventual
winner in the marketplace? Why?

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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 successful in the marketplace?
Strategy requires getting the right answers.
• Good strategic thinking and good management of the
strategy-making, strategy-executing process are
important.
• 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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