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Strategy and the Quest

for Competitive Advantage

Chapter Leaming Obiectives

LOl.

Understand the need for having a sound business strategy to successfully compete in the industry manage the functional areas of the business, and develop new capabilities and assemble resources to
strengthen the companfs prospects for long-term success.

LOz-

Develop an awareness of the four most frequently used and depend.


able strategic approaches for setting a company apart from rivals and
winning a sustainable competitive advantage.

LO3.

Understand why a company's strategy tends to evolve over time


because of changing circumstances and ongoing management efforts
to improve the company's strategy.

LO4.

Learn why

it is important for a company to have a viable business

model that outlines the compan/s customer value proposition, its


profit formula, and the key resources and processes required to create
and detiver customer value.

L05.

Learn the three tests that distinguish a winning strategy from a so-so
or flawed strategy.

Part

One:

Secton A: Introduction and Overvew

The lmportance of Managing Strategicatty


organizationssmall family-owned businesses, rapidly growing entrerreneurial firms, notfor-profit organizations, and the world's leading multinational corporations.

Three questions must be ansn'ered by managers of all types of

These three critical questions are:

.
.
.

Whera are toe now?

Whcre do ue

uant

to go?

Hotp are zpe goittg to get there?

"Where are zue nozp? " is answered by examining the company's current financial performance and market standing, its competitively valuable resources
and capabilities, its competitivc weaknesses, and changing indr-rstry conditions that might affect the company. The answer to the question "Wlrcre do we
u)nnt to go7" lies within management's vision of the company's future
direction-rvhat new or different customer groups and customer needs it
should endeavor to satisfy and how it should change its business makcup.
The question "How are we going to get there?" challenges managers to craft and
execute a strategy capable of moving the company in the intcnded direction.
Developing clear answers to the question " Hozu ttre
A company's

strategy conststs of the

competi-

manage

trtc goittg to get there?" is the essence of mana;ing strategically. Rather than relving on the status quo as a roadmap ancl dealing rt'ith new opportunities or threats as

tive moves and business approaches


ment has developed to attract and
they emerge, managing strategically involvcs develcustomers, conduct operations, grow
performance
ob.jectives.
business, and achieve
opir-rg a business game plan. Management's game

please
the

plan spells out thc competitive moves and business


approaches that managcrs are employing to grow the business, attract and
please customcrs, compete successfullv conduct operations, and achieve targeted lcvels of performance. Thus, a company's strategy is all about hotu: hotu
to outcompete riv als, ltozt: to respond to changing economic and market conditions, ft0zu to manage each functional piece of the business, /rozo to develop
important esources and capabilities, hotu to take advantage of growth opportunities, ard how to achieve strategic and financial obiectives.
In this opening chapter, we dcfine the concepts of strategv and competitil'e advantage . The chapter will explain what makes up a company's strategy,
explain why strategies are partly proactive and partly reactive, and discuss
the relationship between a company's strategy and its business modcl. The
chapter will also introduce you to the kinds of competitive strategies that can
give a compauv an advantage over rivals in attracting customers and earnrng above-average profits. The chaptcr concludes bv discussing three tests of
a winning strategy. While therc is no one surefire winning strategy that wili
always work for cvery organization in every situation, all top-notch strategies
arc well-matched to a company's external and internal situation, help build a
competitive advantage over rivals, and produce good financial performance.
By the end of this chapter, you rvill have a pretty clear idea of why manag-

ing strategically is always the beginning point in the quest for competitive
advantaee.

Chapter

Strategy and the Quest for Competitive Advantage

The Scope of a Compant's Business Strategy


The specific elements that comprise management's answer to the question
" How are we going to get there?" define a company/s business strategy. The
company/s business strategy lays out how management intends to compete
in the industry, manage the functional areas of the business, and develop nen
capabilities and assemble resources to strengthen the company's prospects for
long-term success. There's virtually no area of a company's operations that
isn't involved in ts business strategy and helps answer the question, "How are
we going to get there? " Management must have deliberate plans for addressing
such issues as:

.
o

Changing economic and market conditions.


Features and attributes to be included in the company's products or
services.

.
.
.
.
.
.
.

Pricing of the company's products or servlces.


Distribution channels selected for the company's products.
Reactions to offensive moves by rival sellers.
Allocation of the company's financial resources.
Acquisition of new physical assets and resouces.
Development of internal capabilities, competencies, and competitively
valuable resources.
Development of alliances and joint ventures to supplernent the company's
resourccs and capabilities.

Of course, business strategy includes planning for topics not included in


the list above. The important thing to recognize is that every activity involved
in delivering a business's product or service should be guided by strategic
thinking. There's really no single activity, process, department, or functional
area that should be left to chance. Figure 1.1 presents a diagram showing
actions and approaches that make up a company's business strategy. Concepts
& Connections 1..1 describes the various elements of McDonald's strategy in
the quick service restaurant industry. The capsule should make it clear how
the business strategy includes actions related to such wide-ranging issues as
its menu selection, supplier relationships, advertising expenditures, expansion into foreign markets, restaurant operating policies and practices, and
responses to changing economic and market conditions.

Competitive Strategy and Advantage over Rivals


The most important aspect of a company's business strategy is its approach to

competing in the marketplace. It is imperative that a company's strategy


strengthen its long-term competitive position and allow it to gain a durable
competitive edge over rivals. In Concepts & Connections 1.1., it's evident that
McDonald's has gained a competitive advantage over rivals through its efforts
to minimize costs, ensure a high level of foocl quality, add irurovative new
menu items, and keep its prices low. A creative, distinctive strategy such as

Part

IGUlttl l t

One:

Sectlon A: Introduction and Overview

Elments of a compant's Busness Strategy


Actons to gain sales and market share by adjusting pdcing,
product features, produrt styting, qualty, customer servce,

product selecton, or other product or servre attributes

Actons to strenglhen

:lT'.:fl".:::ffiT,"LT:
weaKnesses

Actons to respond to (hanging

market conditions or other


external factors

a
,

THE ACfrO{S

AI{D

usednb
nance,
and other key activities

APPKTACHES
THAT TTA|(E UP A

cofilPAI{Y'5

Bt stl{Ess

Adons to enter new geographic


or product markets or erit
exsting ones

STRATEGY

Actons to capture emerging


market opportunities and

Actions to strengthen
competitiveness va strategiI
alliances and collaborative
partnershps

defend against erternal


threats to the companys
Actions to strengthen market
standing and competitiveness
by acquring or merging with
other comDanies

busness prospects

that used by McDonald's is a company's most reliable ticket for developing a


sustainablc competitive advantage and earning above-average Profits. A sustainable competitive advantage allows a comPany to
attract strfficientlv large llumbers of buycrs rvho have
A company achieves sustainable compettive
a lasting prreference for its products or services over
advantage when an attractively large number
those offered by rivals. This enduring demancl for a
of buyers develop a long-lasting preference for
company/s products or services is the key to a com-raits products or services over the offerings of
competitofs.
ny's ability to earn ongoing above-average Profits.
Four of the most frequently used and dependable
approaches
to
setting
a company apart from rivals and winning a
stratcgic
sustainable competitive advantage are:

1.

Deaeloping n cost-based adatntage. Wal-Mart and Southn'est Airlines


have utilized low-cost provider strategies to earn strong market positions
in their respective indr-rstries. Achieving a cost-based advantage over
rivals can produce a durable comPetitive cdgc n hen rivals find it hard to
match the low-cost leader's approach to driving costs out of the business.
While Unitecl Airlines, Dclta Airlines, US Airrvays, and Northrvest Airlincs havc moved in and out of bankruptcy, Southu'est Airlines' proficient
execution of its lorv-cost strategv keved to point-to-point loutcs, no-fuills
service, and efficient gror-urd operations has yelcled profits for 35 consecLltlve vears.

2.

Crcating a dilferentiation-based adzt antage. A differentiation-based


ad'u,antage entails adcling product or service attributcs that offer customers greater tangible or intangible benefits than thc product or service

orp",',,u.

Oduuntut.

MCDONALD'S STRATEGY IN THE QUICK.SERVICE RESTAURANT INDUSTRY


n 2009, l\lcDonald's was setting new sales records despite
a gtobaL economic slowdown and declining consumer con

fldence in lhe Unted States. More than 58 million customers visited one of McDonald's 3z,ooo restaurants in 118
countres each day, which alLowed the company to record
2oo8 revenues and earnings of more than $zl.S biltion
and $4 3 billion, respectively. McDonaLd's performance
in the marketplace made it one of only [wo companes
listed on the Dow jones IndustriaIAverage (the other was
Watmart Stores. lnc.) to end zooS with an increase in the
price of its common shares. The company's sales were
holding up well amid the ongoing economic uncertainty
in early zoo9, wth systemwide sates as measured in constant currencies increasing by more than 6 percent during
January and February. The company's success was a result
of lts well conceved and executed Plan to Win business
strategy that focused on "being better, not just bigger."
Key in tiatives of the Plan to Win strategy included:

lmproved restaurant operations. McDonald\ global


restaurant operations improvement process invotved
employee training programs ranging from on the-job
training for new cTew members to college leveL manage
ment courses oflered at the company\ Hamburger University. The company also sent nearly zoo high potential
employees annually to its McDonald's Leadership Institute to build the leadership skills needed by its next
generation of senior managers. McDonald's commitment
lo empLoyee development earned the company a place
on Foftune's list of Top zo Global Companies for Leaders in zoo7. The company also trained its store managers to closely monitor labor, food, and utility costs.
Affordab(e pricing. In addition to tackling operating
costs in each of its restaurants, McDonatd's kept its
prices low by closely scrutinzng administrative costs
and other corDorate exDenses. McDonald's saw the
poor economy in the United States as opportunty to
renegotiate its advertisng contracts with newspapers
and televison networks in early zoo9. The company
also began to reptace its company-owned vehicles
with more fuel-efflcient models when gasoline prices
escalated dramatically in the Unted States during
zoo8. Howeve fcDonald's did not choose to sacrifice product quality in order to offer lower prices. The
company implemented extensive supplier monitoring
prograrns to ensure that its supplers did not change
producl specitlcations to lower costs. For example,
the company's chicken breasts were routinely checked

for weight when arrving from supplers'production


facilities. The company's broad approach to minimizing
non-vaLue-adding expenses allowed it to offer more
items on its Dollar Menu in the Ljnited States, its Ein
MaL Eins menu in Germany, the 1oo Yen menu in Japan.
Wide menu variety and beverage choces. McDonald's has expanded ts menu beyond the popularsetting Big Mac and Quarler Pounder to include such
new healthy quick service items as grilled chicken
salads, chicken snack wraps, and premium chicken
sandwiches in the tlnited States, Lemon Shrimp
Burgers in Germany, and Ebi shrimp wraps in Japan.
The comoanv has aLso added an extensive [ine of
premium coffees that included espressos, cappuccinos, and Lattes sold ln its Mccafe restaurant locations n the United States, Europe, and Asia/Pacific.
McDonaLd's latte was judged "as good or better"
than lattes sold by Starbucks or Dunkin Donuts n
a review by |he Chicago Tribune's Good Eating and
Dining staff in December 2oo8.
Convenience and expansion of dining opportunities. The addition of Mccafes helped McDonald's
increase same store sates by extending traditional
dining hours. Customers wanting a mid-morning coffee or an afternoon snack helped keep store traffic
high after McDonatd's had sold it last Egg McMuffln,
McGriddle, or chicken biscuit and before the [unch
crowd arrived to order Blg Macs, Quarter Pounders,
chicken sandwiches, or satads. The company also
extended ts drive-thru hours to 24 hours in more
than 25,ooo locations n cities around the world
where consumers tended to eat at all hours of the
day. The company also added double drive-thru
lanes in the United States to get customers served
quickly in high traffic Iocations.
Ongong restaurant renvestment. With more than
14,ooo restaurants in the United States, the focus of
McDonald's expansion of units was in rapidly growing
emerging markets such as Russia and China. The company opened 125 new restaurants in China and 4o
new restaurants in Russia in 2oo8. The comoanv also
refurbished about 1o,ooo of ts locatons in the Unted
States between zoo4 and 2oo8 as a part of its Mccafe
rollout and to make its restaurants a pteasant ptace
for both customers to dine and emolovees to work.
Sources: lanet Adarny, "McDoald3 Seeks Way to Keep 5izzling," The Wall Strce launal Onlne, March ro, aoog; vrious alnual reportsl various (orpary p-ess reieases.

Part

One:

Section A: Introduction and Overview

offerings of low-cost rivals. Successful adopters of differentiation


strategies include Johnson & Johnson in baby products (product reliability), Harlev-Davidson (outlaw image and distinctive sound), Chanel and
Rolex (luxury and prestige), Porsche and BMW (engineering design and
performance), and Amazon.com (wide selection and convenience). Companies pursuing differentiation strategies must continually seek new irurovations, undertake continuing efforts to add to the prestige of a brand, or
strive for higher levels of value-adding services to defend against rivals'
attempts to imitate the features of a successful differentiator's Product
offering.
Focusing on a narroxo market niche ztsithin an industry. Many companies
have developed a competitive advantage not only through a strategy
keyed to either low costs or differentiation, but also by serving the special
needs and tastes of only a small segment of an industry's buyers rather
than attempting to appeal to all buyers in an industry. Prominent companies that enjoy competitive success in a specialized market niche include
Coogle in search-based krternet advertising, eBay in online auctions, Best
Buy in home electronics, McAfee in virus protection software, and The
Weather Channel in cablc TV.
Developing competitirsely aaluable resources and capabilities that riaals
can't easily match, copy, or trump zoith substitute resources. Resourcebased strategies may be used in tandem with any of the three strategic
approaches listed above and are keyed to delivering customer value in
ways rivals ae unable to match. FedEx has developed a resource-based
competitive advantage through its superior distribution capabilities that
allow it to promise next-day delivery of small packages within the United
States. Over the years, Toyota has developed a sophisticated production
system that allows it to produce reliable, largely defect-free vehicles at
low cost. Ritz Carlton and Four Seasons have uniquely strong capabilities
in providing their hotel guests with highly personalized services. Very
often, winning a durable competitive edge over rivals hinges more on
building competitively valuable resources and capabilities than it does
on having a distinctive product. Clever rivals can nearly always copy the
features of a popular product, but it's much more difficult for rivals to
match experience, know-how, or specialized resources that a company
has devcloped and perfected over a long period of time.

Why a Company's Strategy Evolves over Time


The appeal of a strategy that yields a sustainable competitive advantage is
that it offers the potential for an enduring edge over rivals. However/ managers of every company must be willing and ready to modify the strategy in
response to thc unexpected moves of competitors, shifting buyer needs and
preferences, emerging market opportunities, new ideas for improving the
strategy, and mounting evidence that the strategy is not working well. Managers should avoid dramatic departures from a proven competitive strategy if at
all possible, but it should be expected that the strategy will be fine-tuned and

Chapter

Strategy and the Quest for Competitive Advantage

tn'eaked on a re8ular basis. Therefore, a cornpany's


Changing crcumstances and ongoing managestratery is not a one-time eoent, but is alzuays a zuork
ment efforts to improve the strategy cause a
in progress.
company's strategy to evolve over time-a
Evcn though it's expected that a company's strategy
condition that makes the task of craftng a
will evolve incrementally, on occasion, major strategy
skategy a work in progress, not a onelime
shifts are called for, such as rvhen a sirategy is clearly
event.
failing ancl the company faces a financial crisis. In
some industnes, conditions change at a fairly slorv pace, making it feasible for
a strategy to emain in place for luany years. But in industrics where industry ancl competitive conditions change frequently and in sometimes dramatic
rvays, the life cycle of a given strategv is short. Industry environments characterized by hih-uelocitr chnnge requirc companies to repeatedlv adapt their
strategies.l For examplc, companies in industries with rapid-fire advances in
technology like mcdical equipment, electronics, and rvireless devices ofteu
find it essential to adjust key elements of their strategies several times a year.
Regardlcss of u.hether a companv's strategv changes gradually or swiftlv
the important point is that a company's present strategy is always fluid. The
evolving nature of a company's strategy means that the typical companY
strategy is a blend of (1) proactive moves to improve the company's financial
performance and secure a competitive edge and (2) as-needed resPonscs to
unanticipated developrnents and fresh market conditions-see Figure 1.2.'?The
biggest portion of a company's curtcnt strategv flows from ongoing actions
that have proven thcmsclves in the marketplace and newly launched initiatives aimcd at building a larger lead over rivals and further boosting financial
performance. This part of management's act.ion plan for runniug the company
is its proactive, deliberate strategy.
At times, components of a company's deberate strategy r,r'ill fail in the
rnarketplace and become abandoned strategy elements. Aithough strategy
flou,s from an analysis of the irdustry and the company's internal capabilities, planned strategies don't alr+'ays play out as cxpected. In these cases, it
makes much nrore sense to abandon a losing plan than to blindly adhere to
strategv elements destincd to fail. Although most elements of the company's
deliberatc strategy should be expected to survive, some portion of the realized strategv wiLI result from unplanned reactions to unar-rticrpated developments. lt should be assumed that there will be occasions when market and
competitive conclitior-rs take unexpected turns that call for some kind of strategic reaction. Novel strategic mo\es on the part of rival firms, unexpected
shifts in customer preferences, fast-changing technological developments, and
'For an excellent treatment of the strategic challenges posed by high velocty changes, see Shona

L.

Brown and Kathleen M. Ersenhardt, Competng on the Edge: Str1tegy os Sfructured Chdos (Boston,
MA: Harvard Business School Press, 1998), Chapter 1.
'See Henry Mintzberg and Joseph Lampel, "Reflecting on the Strategy Process, Sloon Manage'
ment Review 4o, no. (Spring 1999), pp. 21 30; Henry Mintzberg and J. A. Waters, "0f Strategies,
Deliberate and Emergent," Str1teqc Monogement Journol (tq8S), pp. 257-272i Costas Markdes,
"strategy as Balance: From'Eitheror'to And,"' Business Strategy Revew 12, no. 3 (September
zoor), pp. 1-1o; Henry Mntzberg, Bruce Ahlstrand, and Joseph Lampel, Strotegy Safori: A Guided
Tour through the Wlds of strategc Management (New York: Free Press, 1998), Chapters 2, 5,

and 7; and C. K. Prahalad and Gary Hamet, "The Core Competence ofthe Corporation," Harvard
Busness Revew 7o, no. 3 (May June r99o), pp.79 93.

Part

IGURE 1.2

One:

Section A: lntroduction and Overview

A Company's Strategy ls A Elend Of Ptanned Inlaves And llnplanned Readve Adiusnents

Plannd nct Inltlallvcs ptus


ontong strrtlglc5 connucd
hom pdor pcrlods
Reallzed
Businss

Sbetcsy

ne\r, market opportunities call for unplanned, reactive adiustments that form
the cornpany's emergent strategy. As shown in Figure 1.2, a company's realized strategy tends to be a cotnbinatio of deliberate planned elements and
unplanned, emergent elements.

The Importance of a Companys Business


Model-ls the Strategy a Money-Maker?
Closely related to the concept of strategy is the concept of a company's business model. A companv's 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 vield
an attractive profit. Thc three elements of a company's
A company's business model (1) specilies a
customer value proposition, (2) develops a profit business model are (1) its customer value proposition
(its approach to satisfying buyer wants and needs at a
formula, and (3) identifies key resources and
pocesses required to create and deliver
price customers will consider a good value), (2) the
customer value. Absent a tight frt with otgantzaprofit formula (determining a cost structure that will
tional capabilrtres and the ability to deliver good
aliow for acceptable profits given the pricing tied to its
profitability, the busness model is not viable and
customer value proposition), and (3) identification of
e company's ability to survive is in question.
thc kcy resources and processes that are necessary to
create and deliver valuc to customers.:'
Mobile phone providers, satellite radio companies, and broadband providers
employ a subscription-based business model. The business model of network
TV and radio broadcasters entails providing free programming to audiences
but charging advertising fees based on audience size. Gillette's business model
in razor blades involves achieving economies of scale in the production of its
shaving products, selling razors at an attractively low price, and then making money on repeat purchases of razor bladcs. Printer manufacturers like
r

Mark W iohnson, Clayton M. Christensen, and Henning Kagermann, "Reinventing Your Business
Model," Harvard Busness Revew 86, no. rz (December 2oo8), pp. 5z 53 and Joan Magretta, "Why
Business lvlodels Matle" HaNa Busness Revew 8o, no. 5 (May zooz), p- 87.

Chapter

Strategy and the Quest for Competitve Advantage

Hewlett-Packard, Lexmark, and Epson pursue much the same business model
as Gillette-achieving economies of scale in production and selling printers
at a low (virtually break-even) price and making large profit margins on the
repeat purchases of printer supplies, especially ink cartridges.
The nitty-gritty issue surrounding a company's business model is whether
it can execute its customer valuc proposition profitably. fust because company
managers have crafted a strategy for competing and running the business does
not automatically mean that the strategy will lead to profitability-it may or it
may not. The relevance of a company's business model is to clarify (7) how the
busness zuill proaide customers zLtith aalue, (2\ generate rerenues sufficient to coaer
costs and produce nttfttctiae proffs, and (3) identify whatezter resources and processes
are critcal to the customer l1alue propositiotl.
Concepts & Connections 1.2 discusses the contrasting business models of
Sirius XM and over-the-air broaclcast radio stations.

The Three Tests of a Winning Strategy


Three questions can be used to distinguish a winning strategy from a so-so or
flawed strategy:

1.. Does the strategy

the company's situationT To qualify as a winner, a


strategy has to be well matched to thc company's external and internal
situations. The strategy must fit competitive conditions in the industry
and other aspects of the enterprise's externa
environment. At the same time, it should be taiA winning strategy must fit the company,s
lored to the company's collection of competitively external and internal situation, yield a sustainimportant resources and capabilities. It's unwise
able competitive advantage, and produce good
to build a strategy upon the company's weakfinancial performance.
nesses or pursue a strategic approach that requrres
resources that are deficient in the company. Unless a strategy exhibits tight fit with both the external and internal aspects of a company's
overall situation, it is unlikely to produce respectable first-rate business
results.

fit

2.

Has the strategy yielded s sustainable competitiae adaantage? Sfiatcgies that fail to achieve a durable competitive advantage over rivals are
unlikely to produce superior performance 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.

Has the strategy ptoduced good financial pctformance? Il would be difficult to categorize a strategy as a "winning strategy" unless it produces
excellent company performance. Two kinds of performance improvements tell the most about the caliber of a company's shategy: (1) gains
in profitability and financial strength and (2) advances in the company's
competitive strength and market standing.

Strategies that come up short on one or more of the above tests are plainly
less appealing than strategies passing all three tests with flying colors.

10

Part

Onc:

Section A: lntroduction and Overvlew

5IRIU5 XM AND OVER-THE-AIR BROADCAST RADIO:


TWO CONTRASTING BUSINESS MODELS
The strategies of rival companles are often predicated on
strikngty different busness models. Consider, for example,
the business models for over-the-air radio broadcasters

and Sirius XM.


The business model of over-the-ar broadcast radoproviding listeners with programming free-of-charge and

charging advertisers

Cuslomer Value
Proposition

fees-is a proven money-maker.

Sirius XM

Over-the-Air Radio Broadcasters

Digitl nrLrslc, new,s, nlionl antl rcgiona


rveather, traff c reports jn linrited reas,
rnd talk radio rrogramnring prriv ded for
,]1orlhlr -ulr.t rinl ,,n 1C' . P 'lr r',]rnrinS,
was ntcrruptccl onlr, bv br ci, r:ccas onl

ol rh.rrge rrusic, ntion.r .rnrl


locl nervs, ocal tratfic reports,
nati<;n.-rl and local
ancl rr
',r,eather,
radio programmrng Listeners cou l.l
cxPcct frcqucnt programn'rng intcrru l)
tion tirr .r cls.

Profit Formula

On the other hand, the jury is still oul on Srius Xlvl's


business model of charging subscription fees to listen
ers who prefer rarely interrupted digital music, news, or
talk radio programming. As of year-end zoo8, Sirius XM's
number of subscribers had grown to r9 million and its
annual revenues had reached to nearly $2.4 biltion, but
it had had yet to earn a proflt.

cls

Revcnue Cencration: r\'1on th lv subscription


fees. s.rles of
.rclverti

sl

sfel ife radio erluirment.

ng rLrvcn

.rncl

Lrcs

Free

Rcvenue Gcncrtion: Ac[,crtis inp, slcs


to ntiorl .rnd lx.rl bLrs nesse.
Cost Structurc: l rxc'd co,.ts .rssocitccl
ten estri.r I bro.rclc.rstin3 o.rer.r
tions Fired ncl vrilrle L()sls rerreu

Cost

Structure: Flxecl costs .rssocltecl rvith


oper.rLing,r :.rLr'llilr-lrserl nrusic rleliverv

with

silrvtc(].

to lr,t,tl nerls rlPr)rlinq rt[r'r'i.i tl


.,t e. oporJIi, ) tr. r,'1' rL iili. i5

Fixod.rnrl r,ri.rlrle costs rel.rtecl to pfogftrrnmin anrl content rovalties, nrarketing, and
sullf)orf .ratlvrtres.

Progr(rmnrng ancl conlcnt rov.rlt cs,

corrmercil prorlur-tior.r ctivites, and


sLr

Profit Margin: Sirius

X!1's proft.rbility was


clerenrlenl Lrn ttr.lLtn8 a suificierrtly large
number oi subscribers to cover ts costs ncl
provide ior attractive profits,

Pport

.rL Lrv rlrLs.

Profit Margin:Ih e profitbiIit,v ot over.


lfrc-ir r,rrlio stJlons wls (lependent
'

)r)

8('nr.',rrinq.Jll e1l .rrIerli>inq

TCVCT',TUCS

tO COVCr

for ttr .tive prof


Key Resources and
Processes

Prorer tv ancl ecuiprrent, stelI ilc lr.rnsmission capabilities. terreslril rcllcltrs,


digital audio radjo service llcense irom
FCC, programming contrcts. llinces rvith
electron ics nranuiacturcrs, a llianccs r'vith

autonrobi

Le nr

nuta( tur ers. s les .rncl dislr i-

trution.rgrr:cnrcnts lvith cler-lron ic s retllers,


frr.rnd buildin.rncl nr.rrkctine caralrilities,
Source: Company documents, 10 Ks, and information posted on their Web sites.

COSTS

and prOVde

ts.

R.rrlio brolcjc.isl torvers ncl other


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Chapter

Strategy and the Quest for Competitive Advantage

Managers should use the same questions when evaluating either proposed
or existing strategies. New initiatives that don't seem to match the company's
intemal and external situation should be scrapped before they come to ftuition, while existing strategies must be scrutinized on a regular basis to ensure
they have good fit, offer a competitive advantage, and have contributed to
above-average performance.

The Road Ahead


Throughout the chapters to come and the accompanying case collectiory the
spotlight is trained on the foremost question in rururing a business enterprise:
What must managers do, and do well, to make a company a winner in the marketplace? The answer that emerges is that doing a good job of managing inherently
requires good strategic thinking and good management of the strategy-making,
strategy-executin g process.
The mission of this book is to provide a solid overview of what every business student and aspiring manager needs to know about crafting and executing strategy. We will explore what good strategic thinking entails, describe the
core concepts and tools of strategic analysis, and examine the ins and outs of
crafting and executing stategy. The accompanying cases wiJl help build your
skills in both diagnosing how well the strategy-making, strategy-executing
task is being performed and proposing recommendations to improve the
strategic and financial performance of the company profiled in a case. The
strategic management course that you are enrolled in may also include a strategy simulation exercise where you will run a company in head-to-head competition with companies run by your classmates. Your mastery of the strategic
management concepts presented in the following chapters will put you in a
strong position to craft a winning strategy for your company and figure out
how to execute it in a cost-effective and profitable manner. As you progress
through the chapters of the text and the activities assigned during the term,
we hope to convince you that first-rate capabilities in crafting and executing
strategy are essential to good management.

Kev Points
1

A company's strategy is management's game plan to stake out a market position,


conduct its operatioris, attract and please customers, compete successfully, and
achieve organizational objectives.
The central thrust of a company's strategy is undertaking moves to build and
strengthen the company's long-term competitive position and financial per-

formance. Ideally, this results in a competitive advantage over rivals that then
becomes the company's ticket to above-average profitability.

'

Assurance
of Learning
Exercises

''

i:

i ,:t.. I "..

3.

A company's strategy lvpically evolves over time, arising from a blencl of (1) proactive and deliberate actions on the part of companv managers and (2) as-neecled
cmcrgcnt responses to unanticipated developments and fresh market conditions.

4.

Closely relatecl to the concept of strategy is the concept of a company's business


model. A company's business model (1) specifies a customer va'lue proposition, (2) develops a profit formula, ancl (3) identifies key resources and processes required to create anc'l cleliver customer va1ue. Absent a tight fit with
organizational capabilities and the ability to deliver good profitability, the business model is not viable and the company's ability to survive is in question.

5.

A winnir.rg strategy fits the circumstanccs of a company's external situation and


its internal resource stren!ths and compctiti\.c capabilities, builds competitive
advantage, and boosts companv performancc.

1.

3.

Exercises for
n

rll

Go to www.bestbuy.com, click on the investor relations section and explore Besi


Buy's latest annual reports and 10-K filings to see if you can identify the key elements of Best Buy's sategy. Use the framework provided in Figure 1.1 to help
identify the key elements of Best Buy's strategy. What type of competitive advantage does Best Buy seem to be pursuing?

LO1

LOz

Based on what you know about the quick-service restaurant industry does
McDonald's strategy as described in Concepts & Corurections 1.1 seem to be
well-matched to industry and competitive conditions? Does the strategy seem to
be keyed to a cost-based advantage, differentiating features, serving the unique
needs of a niche, or developing resource strengths and competitive capabilities rivals can't imitate or trump (or a mixture of these)? What rs there about
McDonald's strategy that can lead to sustainable competitive advantage?

L01
LOz

Go to www. nytco.com/investo rs and check whether the Ntu York Times' recent
financial reports indicate that its business model is working. Does the company's
business model remain sound as moe consumers go to the lnternet to find general information and stay abeast of current events and news stories? ls its revenue stream from advertisements growing or declining? Are its subscription fees
and circulation increasing or declining? Read the company's Iatest press releases.
Is there evidence that the company's business model is evolving? Does the company possess the necessary key resources and process capabilities to support a
change in its business model?

LO4

This chapter discusses tfuee questions that must be answered by managers of orga- LOl
nizations of all sizes. After you have read the player's manual for the strategy simulation exerrise that you will participate in during this academic term, you and your
cG-managers should come up with brief 1- or 2-paragraph answers to the following
three questions prior to entering your first set of decisions. \A/hile your ans$'ers to
the first of the three questions can be developed from your reading of the manual, the
second and thid questions will require a collaborative discussion among the members
of your company's management team about how you intend to manage the company
you have been assigned to run.

"1.

VVhere are we now? (Is your company in a good, average. or weak


tion vis--vis rival companies? Does your company appear to be in

condition? I y'hat problems does your company have that ried to be


Where do we want to go? (Where would you like your company to br
first five decision rounds? By how much would you like to increase h
of the company by the end of the simulation exercise? What kinds of
mance outcomes will signal that you and your co-manrgers are
companv in a successful manner?)

How are we going to get there? (Which of the basic strategic and
approaches discussed in Chapter 1 do you think makes the most
What kind of competitive advantage over rivals do you intend to try