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CHAPTER 1CHAPTER 1

Strategy and the Strategy and the Quest for Quest for

Competitive Competitive AdvantageAdvantage

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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Thinking Strategically:Thinking Strategically:The Three Big Strategic QuestionsThe Three Big Strategic Questions

1. Where are we now?

External and Internal Analysis

2. Where do we want to go?

Vision and Objectives

Business(es) to be in and market positions

Buyer needs and groups

3. How are we going to get there?

This is its strategy

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What Do We Mean By “Strategy”?What Do We Mean By “Strategy”?

Consists of competitive moves and business approaches used by managers to run the company

Management’s “action plan” to

Attract and please customers

Compete successfully

Conduct operations

Achieve target levels oforganizational performance

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Strategy and Sustainable Strategy and Sustainable Competitive AdvantageCompetitive Advantage

A company achieves sustainable competitive advantage when a

sufficiently large number of buyers develop a lastingpreference for its products/services over those offered by rivals

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Four Proven Strategic Approaches toFour Proven Strategic Approaches toWinning a Sustainable Competitive Winning a Sustainable Competitive AdvantageAdvantage

Developing a cost-based advantage

Creating a differentiation-based advantage

Focusing on a narrow market niche within an industry

Developing unmatched resource strengths and competitive capabilities

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Competitive Strategy ExamplesCompetitive Strategy Examples

Strive to be the industry’s low-cost provider

Wal-Mart

Southwest Airlines

Out-compete rivals on a key differentiating feature

Harley-Davidson – Outlaw image and distinctive engine sound

Rolex – Top-of-the-line prestige

Amazon.com – Wide selection and convenience

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Competitive Strategy ExamplesCompetitive Strategy Examples

Focus on a narrow market nicheMcAfee – Virus protection auctionsStarbucks – Premium coffees and coffee

drinksThe Weather Channel – Cable TV

Develop expertise, resource strengths, andcapabilities not easily imitated by rivalsWalt Disney – Theme park management

and family entertainmentRitz-Carlton – Personalized customer

service

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Why Do Strategies Evolve?Why Do Strategies Evolve?

A company’s strategy is a work in progress

Changes may be necessary to react to

Shifting market conditions

Fresh moves of competitors

Evolving customer preferences

Emerging market opportunities

New ideas to improve strategy

Crisis situations

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What Is a Business Model?What Is a Business Model?

A business model addresses “How do we make money in this business?”

Do the revenue-cost-profit economicsof the strategy make good business sense?

Look at revenue streams the strategy is expected to produce

Look at associated cost structure and potential profit margins

Do resulting earnings streams and ROI indicate the strategy makes sense and the company has a viable business model for making money?

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Microsoft’s Business ModelMicrosoft’s Business Model

Employ highly skilled programmers to develop proprietary code; keep source code hidden from users

Sell resulting OS and software packages to PC makers and users at relatively attractive prices to achieve a 90% or more market share

Most costs in developing software are fixed; variable costs are small; once break-even volume is reached, revenues from additional sales are almost pure profit

Provide modest level of technical support to users at no cost

Rejuvenate revenues by periodically introducing next-generation software that prompt PC users to upgrade their operating systems

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Red Hat’s Business ModelRed Hat’s Business Model

Rely on collaborative efforts of volunteer programmers to create the software

Collect and test enhancements and new applications submitted by volunteer programmers for evaluation and inclusion in new releases of Linux

Market upgraded and tested family of Red Hat products to large companies, charging a subscription fee that includes 24/7 support within 1 hour in 7 languages

Make source code open and available to all users

Capitalize on specialized expertise required to use Linux by providing fee-based training, consulting, and software customization

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Tests of a Winning StrategyTests of a Winning Strategy

GOODNESS OF FIT TEST

How well does strategy fitthe firm’s situation?

COMPETITIVE ADVANTAGE TEST

Does strategy lead to sustainable competitive advantage?

PERFORMANCE TEST

Does strategy boost firm performance?