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: CHAPTER 1

Understand Understand what is meant by a company's strategy.

Explain why a company needs a creative, distinctive strategy that sets it

Explain apart from rivals.

Explain why it is important for a company to have a viable business model

Explain that outlines the company’s customer value proposition and its profit formula.

Identify the five most dependable strategic approaches for setting a

Identify company apart from rivals and winning a sustainable competitive advantage.

Understand that a company’s strategy tends to evolve over time because of

Understand changing circumstances and ongoing management efforts to improve the
company’s strategy.

Identify Identify the three tests of a winning strategy.

2
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 Stages
CORE of Strategic Management
CONCEPT

Strategic Strategy Strategy

Strategy
formulation/ implement
Analysis ation
evaluation
planning

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 What Is Strategy?

Strategy involves choosing how to

compete.
How to create products or services CEO of OYO Hotel: Ritesh Argawal
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: Strategic Management and Strategy

Strategic Management:

The art and science of formulating, implementing, and

evaluating cross-functional decisions that enable an
organization to achieve its objectives

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. Elements of the Business

Model.
Management’s produces a blueprint for The customer value proposition defines
delivering a valuable product or service how the firm will satisfy buyer wants and
to customers that will yield an attractive needs at a price buyers will consider a
profit. 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:
a) customer value proposition - company’s approach to
satisfying buyer wants and needs at a price customers will consider
a good value
b) profit formula - company’s approach to determining a cost
structure that will allow for acceptable profits, given the pricing
tied to its customer value proposition.

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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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 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
Profit formula Broadcasters
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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 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

How well does the

Strategic Fit. strategy fit the firm’s
situation?

Is the strategy helping

the firm achieve a
Competitive Advantage. sustainable competitive
advantage?

Is the strategy producing

Performance. 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