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CHAPTER 1
Strategy, Business Models,
and Competitive Advantage

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 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:
Is a distinctive set of creative strategic choices.
• Manager’s decision.
• Apart from rivals.
• Competitive edge.
Best fits its unique business situation for competitive advantage.
Is intended to allow it to 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 Its Business Model

Business model:
• Management’s blueprint for delivering to customers a valuable product or
service 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 both cover costs and
earn 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 Spotify, Sirius XM, and Over
the-Air Broadcast Radio: Three Contrasting Business Models
Spotify
Customer • Provided free-of-charge Internet audio
Value streaming service that allowed PC,
Proposition tablet computer, and smartphone users
to listen to its collection of 70 million
music tracks and 3 million podcast titles
• Utilized algorithms to generate playlists
based on users’ predicted music
preferences
• Offered programming interrupted by
brief, occasional ads; eliminated
advertising for Premium subscribers
Profit • Revenue generation: Ads targeted to
Formula different audiences and sold to local
and national buyers; subscription
revenues generated from an
advertising-free Premium subscription
• Cost structure: Fixed costs associated
with developing software for
computers, tablets, and smartphones
• Fixed and variable costs related to
operating data centers to support
streaming network content royalties,
marketing, and support activities
• Profit margin: Profitability dependent
on generating sufficient advertising
revenues and subscription revenues to
cover costs and provide attractive
profits
Sources: Company documents, 10-Ks, and information posted on their websites.
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Sirius XM
• For a monthly subscription fee, provided
satellite-based music, news, sports, national
and regional weather, traffic reports in
limited areas, and talk radio programming
• Also offered subscribers streaming Internet
channels and the ability to create
personalized, commercial-free stations for
online and mobile listening
• Offered programming interrupted only by
brief, occasional ads
• Revenue generation: Monthly subscription
fees, sales of satellite radio equipment, and
advertising revenues
• Cost structure: Fixed costs associated with
operating a satellite-based music delivery
service and streaming Internet service
• Fixed and variable costs related to
programming and content royalties,
marketing, and support activities
• Profit margin: Profitability dependent on
attracting a sufficiently large number of
subscribers to cover costs and provide
attractive profits
Over-the-Air Radio Broadcasters
• Provided free-of-charge music, national and
local news, local traffic reports, national and
local weather, and talk radio programming
• Included frequent programming interruption
for ads
• Revenue generation: Advertising sales to
national and local businesses
• Cost structure: Fixed costs associated with
terrestrial broadcasting operations
• Fixed and variable costs related to local news
reporting, advertising sales operations,
network affiliate fees, programming and
content royalties, commercial production
activities, and support activities
• Profit margin: Profitability dependent on
generating sufficient advertising revenues to
cover costs and provide 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
those of its 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 its
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 a Company’s 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

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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 with which the strategy is executed.

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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 and
strategy-executing process.
Best wishes for success in the class!

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© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.