Chapter 1
Strategy, business models, and competitive advantage
Strategy, is about competing differently—doing what rival firms don’t do or, better yet, what
rival firms can’t do.
o Customer value preposition: established by the company’s overall strategy and lays out
the company’s approach to satisfying buyer wants and needs at a price customers will
consider a good value.
o Profit formula: approach to determining a cost structure that will allow for acceptable
profits given the pricing tied to its customer value proposition.
Examples:
Cable television
News and entertainment- viewers find valuable (value preposition)
Secure revenue- subscriptions and adv. to cover operating expenses and allow profits (profit
formula)
Gillette’s
Economy of scale production, selling razors at an attractive low price (value preposition)
Secure revenue: make money on repeating purchases of razor blades (profit formula)
Five dependable strategic approaches to setting a company apart from rivals and winning a
sustainable competitive advantage:
1. A low-cost provider strategy: achieving a cost-based advantage over rivals. Rivals find it
hard to match lower prices
o Ex. Walmart and Southwest Airlines, strong market position bc of the low cost advantage
ii. Cons/pitfalls
1. Getting carried away with overly aggressive price cutting and
lowering profitability
2. For price cuts to be effective they must be
3. Cut by less than the size of the cost advantage
4. The added volume is large enough to bring in a bigger total
profit despite lower margins per unit sold
5. Relying on an approach to reduce costs that can be easily
copied by rivals
6. Being too fixated on cost reduction
o Ex. Johnson & Johnson in baby products (product reliability) and Apple (innovative
products)
iii. When
1. Buyer needs and uses of the product are divers
2. Allow industry rivals to set themselves apart with specific
attributes that appeal to that appeal to particular buyers
3. There are many ways to differentiate the product or service that
have value to buyers
4. Industries that allow competitors to add features
5. Few rival firms are following a similar differentiation approach
6. Technological change is fast paced and competition revolves
around rapidly evolving product features
iv. Cons/Pitfalls
1. A differentiation strategy keyed to product or service attributes
that are easily and quickly copied
2. Buyers see little value in the unique attributes of a company’s
product
3. Overspending on efforts to differentiate is a strategy flaw that
can erode profitability
4. Failing to open up meaningful gaps in or service or
performance features through the products of rivals
5. Over differentiating so that product quality or service levels
exceed buyers needs
6. Trying to charge too high a price premium
o Ex. Louis Vuitton, Rolex- advantage focused on affluent customers demanding luxury
and prestige. Whole foods vs. Wegman’s
When
the target market niche is big enough to be profitable and offers
good growth potential
industry leaders have chosen not to compete in the niche
it is costly or difficult for multisegment competitors to meet the
specialized needs of niche buyers and satisfy the expectations of
mainstream customers
the industry has many different niches and segments allowing a
focuser to pick a niche suited to its resource strength and
capabilities
few rivals are attempting to specialize in the same target segment
Cons/Pitfalls
the chance that competitors will find effective ways to match the
focused firm’s capabilities in serving the target niche
the potential for the preferences and needs of niche members to
shift over time toward the product attributes desired by the
majority of buyers
the segment may become so attractive it is soon inundated with
competitors intensifying rivalry and splintering segment profits
5. Best-cost provider strategy: (hybrid strategy) mix of low cost provider and differentiation
strategy. Giving customers more value for the money by satisfying buyers’ expectations on key
quality/features/performance/service attributes.
o Ex. Target offers attractive product lineup and an appealing shopping ambience at low
prices.
i. When
7. Markets where product differentiation is the norm
8. attractively large numbers of value conscious buyers
9. company can position itself near the middle of the market
10. medium quality products at a below average price
11. high quality product at an average or slightly higher than
average price
12. work well in recessions
ii. Cons/Pitfalls
13. company without the requisite core competencies and supply
chain efficiencies
14. a company may find itself squeezed between the firms using a
low cost strategy and those using a differentiation strategy
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.
o The bigger and more durable the competitive edge that the strategy helps build, the more
powerful it is
Chapter 2
Strategy formulation, execution, and governance
o Strategic vision: Describes where we are going, the course and direction management
has charted and the company’s future product-customer-market-technology focus
o Mission: Describes the enterprise’s present business scope and purpose
o Values: The beliefs, traits and behavioral norms that company personnel are expected to
display in conducting the company’s business and pursuing its strategic vision and
mission
2. Setting objectives
3. Crafting a strategy to achieve the objectives and move the company along the intended path
5. Evaluating and analyzing the external environment and the company’s internal situation to
identify corrective adjustments
o The trigger point for deciding whether to continue or change the company’s vision,
objectives, strategy, or strategy execution strategy
o A company’s direction, objectives and strategy have to be revisited any time external or
internal conditions warrant
A. Financial and Strategic Objectives
Financial
Relate to the financial performance targets management has established for the
organization to achieve
Lagging indicators that reflect the results of past decisions and organizational activities
and do not necessarily indicate the company’s future
Ex. An X percent increase in annual revenues, annual increases in earnings per share, bond and
credit rating of X
Strategic
Relate to target outcomes that indicate a company is strengthening its market standing,
competitive vitality, and future business prospects
Leading indicators include strategic outcomes which indicate its future financial
performance and business prospects
Company must find a balance between financial objectives and strategic objectives
Ex. Win an X percent of market share, achieve customer satisfaction rates of X percent, acquire
X number of new customers
Macro-environmental Factors
Encompasses the broad environmental context in which a company is situated and is comprised
of 6 parts, PESTEL Analysis
o Do some or many buyers have sufficient bargaining leverage to obtain price concessions
and other favorable terms
o The extent to which buyers are price sensitive
o Large retail chains have significant bargaining leverage
o Buyers can gain a degree of bargaining leverage if
1. Buyers’ costs of switching to competing brands or substitutes
are relatively low
2. The number of buyers is small or if a customer is particularly
important to a seller
3. Buyer demand is weak
4. Creates a buyers market
5. Buyers are well informed about sellers’ products, prices and
costs
6. Buyers pose a credible threat of integrating backward into the
business of sellers
Companies in one industry are vulnerable to competitive pressure from the actions of companies
in another industry whenever buyers view the products of the two industries as good substitutes.
Ex. Sugar experience competitive pressures from the sales and marketing efforts of the makers of
Splenda, Truvia, and Sweet’N Low.
Producers of eyeglasses and contact lenses face competitive pressures from corrective laser
surgery
Depends on
Depends on the degree to which suppliers have sufficient bargaining power to influence the
terms and conditions of supply in their favor
Depends on
Suppliers have little or no power whenever industry members have the ability to source
from any several alternative and eager suppliers.
The ability of industry members to switch their purchases from one supplier to another or
to switch to attractive substitutes
If certain inputs are in short supply
If certain suppliers provide a differentiated input that enhances the performance, quality
or image of the industry’s product
Whether certain suppliers provide equipment or services that deliver cost savings to
industry members in conducting their operations
The fraction of the costs of the industry’s product accounted for by the cost of particular
input
If industry members are major customers of suppliers
Whether it makes good economic sense for industry members to vertically integrate
backward
The credible threat of entry often prompts industry members to lower their prices and initiate
defensive actions to deter new entrants
Factors that influence the tempo of rivalry among industry competitors include
Rivalry is stronger in industries when the number of competitors increase and they
become more equal in size and capability
Rivalry is usually stronger when demand is growing slowly or declining
Rivalry increases as it becomes less costly for buyers to switch brands
Rivalry increases when sellers find themselves with excess capacity and/or inventory
Rivalry increases as the products of rival sellers become less strongly differentiated
Rivalry becomes more intense as the diversity of competitors increases in terms of long
term directions, objectives, strategies and countries of origin
Rivalry is stronger when high exit barriers keep unprofitable firms from leaving the
industry
Rivalry is characterized as cutthroat or brutal when competitors engage in protracted
price wars
Rivalry can be considered fierce to strong when the profit margins of competitors are
squeezed to almost zero
Rivalry can be characterized as moderate or normal when the maneuvering among
industry members leads acceptable profits
Rivalry is weak when most companies in the industry are relatively well satisfied with
their sales growth and market share
The stronger the collective impact of the forces, the lower the combined five forces, the
lower the combined profitability of industry participants
Driving forces:
May originate in the outer ring of the company’s macro environment but must originate in the
company’s immediate industry and competitive environment
Core/Distinctive Competencies
Very few firms have resources and capabilities that can pass all four tests, but those that do enjoy
a sustainable competitive advantage with far greater profit potential
o dynamic capability
o The ability to modify, deepen, or reconfigure the company’s existing resources and
capabilities in response to its changing environment or market opportunities
3. SWOT Analysis
Sizing up a company’s internal strengths and competitive deficiencies, its market opportunities
and the external threats to its future well being
The value of a SWOT analysis
Drawing conclusions from the SWOT listings about the company’s overall situation
Translating these conclusions into strategic actions to make strengths match market
opportunities, correct problematic weaknesses and defend against
Identifies the primary activities that create customer value and related support activities; focuses
on value creating activities and is an idea tool for examining how a company delivers on its
customer value customer proposition
Consists of two broad categories of activities that drive costs and create customer value: primary
activities and secondary activities
Primary: supply chain management, operations, distribution, sales and marketing, service
Support: Product R&D, technology, systems development, human resources
management, general administration
Also includes a profit margin component to compensate the shareholder
Allows for a comprehensive analysis of delivery on customer value proposition and profit
formula to ensure a sound business model
Cosco
Founded 1976
Ranked as the 4th largest retailer in terms of retail sales
Strategy components
1. Pricing
a. Low cost provider
Setting a certain price for a product in order to maximize sales revenue
Selling products at the lowest price possible to increase sales volume
-14% mark up cap on brand name products
-15% mark up cap on Kirkland Signature products
Can sell products at low cost because of a membership based business model
2. Product Selection
a. Limited number of active items
3. Treasure Hunt Merchandising
a. Carry big ticket items for one off purchases
20-25% of Costco’s active items are constantly changing
-Creates customer excitement for new products and an urgency for consumers to buy current
products because it may be their only chance
- Legally source items from the gray market, rather than directly from high-end manufacturers
● What is the major driving force in the retail and warehouse club retail space? Driving
forces are the major underlying causes of change in industry and competitive conditions
● According to Forbes, E-Commerce accounts for 10% of all retail sales
○ Emerging twin problems
■ What to do with too many brick and mortar retail stores for declining
physical business
■ Not enough points of distribution for growing online sales
Self-distribution
Allowed in some states, limited to 100 mile radius of brewery
Local market: most important and easiest to get recognition “Local appeal”
Suppliers to breweries
Main suppliers in industry are companies who supply grain and hops
Hops acreage in the U.S grew over 70% from 2011-2016. Correlates with the increasing demand,
number of breweries were increasing too
o Many craft brewers obtained startup capital through their own savings or solicited
investments from friends and family
o Brewery tours and visits have to be done in order to gain exposure
o Social media websites also offered significant exposure for free, allowing craft
brewers to reach the craft beer consumer, who tended to seek out and follow new
an upcoming breweries.
o Mobile phone applications specific to the craft beer industry that helped a startup
gain exposure
o Participating in craft beer festivals, where local and regional breweries were able
to offer samples to attendees to gain more exposure.
o Might host events at local restaurants, such a tap takeovers, where several of its
beers are featured on draft. If enough consumers were engaged, local restaurants
were enticed to purchase more beer from the distributor of the brewery
2. Lack of employees
o Normally, craft brewery start ups have a small staff of two or three
o Poses a problem for bottling and labelling and sometimes have to solicit
volunteers through social media
3. Lack of equipment to produce large amounts of beer
o Also ties into the fact that many small craft breweries do not have sufficient capital. The
vast majority of craft breweries produce only enough beer for the local population in their
area.
4. Price fluctuations of raw materials
o Larger macro-breweries and regional craft breweries were seizing the opportunity
to acquire other breweries as a method of obtaining distribution and branding
synergies, while also mitigating the amount of direct competition. This resulted in
price fluctuations of raw materials, which in turn might impact the industry’s
growth and affect the production stability of breweries, especially the craft
breweries which do not have the capacity to purchase in bulk or outbid larger
competitors.
5. Competition with macro-breweries
o What differentiates macro-breweries from craft breweries is essentially size and capital,
and also incorporates everything previously stated. They have more employees, more
capital/funding for advertising/marketing and have better equipment and are able to meet
demand.
6. Finding the target market
o In such a crowded market, it is difficult to differentiate from other breweries and thus
find a target market.
Lululemon
Strategy sales and distribution
Originally franchised stores until 2011
Owns 5 distribution centers across the globe
Provide certain yoga studios and fitness centers with wholesale products
Direct to customer sales through e-commerce site
Short-cycle limited inventories to encourage buying
Typically takes 8-10 months, however, it has the capability to bring products to market in
2 months
Community-based marketing approach through word-of-mouth
Culture- strategy
Community-based marketing approach
Promotes local fitness practitioners to be ambassadors for the bran
Each store hosts a weekly yoga session to emphasize community culture
Store layouts are to promote a local apparel boutique esthetic
Retail employees are called “educators” and customers are referred to as “guests”
Employees are thoroughly trained about healthy lifestyles, product designs and features and
about local information on fitness classes, instructors and events
Value Proposition:
Quality of products
Profit Formula:
Gap
Generic competitive strategy
Offer people opportunity of being cool and stylish
Issues with maintaining generic strategy
Best cost provider or broad differentiation
Hybrid: Old Navy: low cost
Banana Republic: Premium products, higher price
Traditional approach
● In-house designers
● Use of current trends, and try to anticipate customers’ demands
● Purchasing of inventory in bulk for the whole season
● Discounts at the end of season
Fast fashion
● Shortening of the production-to-sales logistics
● Internal designers observed consumer preferences and demands, and change products
mid-season
● “Disposable commodity”
Strenghts
● Well known Brand
● Several product lines
● Iconic Products
Weaknesses
● Varied Profitability
● Crossing brands
● Loss of trendy customers
Opportunities
● Brand consolidation
● More fast fashion investment
● Celebrity Endorsement
Threats
● Increasing production costs
● Favored differentiated stores
● Increased brand divorce