describe the core concepts and tools of strategic analysis, and examine the ins and outs of crafting and executing strategy. Then, in the accompanying strategy simulation exercise where you will run a company in head-to-head competition with companies run by your classmates, you will have a golden learn-by-doing opportunity to put the chapter content into practice and gain firsthand experience in actually crafting a strategy for your company and figuring out how to execute it cost effectively and profitably. In the process, we hope to convince you that first-rate capabilities in crafting and executing strategy are basic to managing successfully and are skills every manager needs to possess. Identify a company that you feel has a sustainable competitive advantage, what you feel is the nature of their competitive advantage and why it is sustainable

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Identify a company that you feel has a sustainable competitive advantage, what you feel is the nature of their competitive advantage and why it is sustainable

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Resources
(1) Chapter 1 (See the attachment)(2) Check the link to watch the video of Chapter 1
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Chapter 1 What Is Strategy and Why Is It Important? 1
Copyright © 2020 by Arthur A. Thompson. All rights reserved.
Reproduction and distribution of the contents are expressly prohibited without the author’s written permission
Strategy: Core Concepts and Analytical Approaches
An e-book published by McGraw-Hill Education
Arthur A. Thompson, The University of Alabama 6th Edition, 2020-2021
1
chapter 1
What Is Strategy
and Why Is It Important?
Strategy means making clear-cut choices about how to compete.
—Jack Welch, former CEO, General Electric
Without a strategy the organization is like a ship without a rudder.
—Joel Ross and Michael Kami
If your firm’s strategy can be applied to any other firm, you don’t have a very good one.
—David J. Collis and Michael G. Rukstad
Managers of all types of businesses face three central questions: What’s our company’s present situation?
What should the company’s future direction be and what performance targets should we set? What’s
our plan for running the company and producing good results? Arriving at a thoughtful and probing
answer to the question “What’s our company’s present situation?” prompts managers to evaluate industry
conditions and competitive pressures, the company’s current market standing, its competitive strengths and
weaknesses, and its future prospects in light of changes taking place in the business environment. The question
“What should the company’s future direction be and what performance targets should we set?” pushes managers
to consider what emerging buyer needs to try to satisfy, which growth opportunities to emphasize and which
existing markets to de-emphasize or even abandon, where the company should be headed, and what outcomes
the company should strive to achieve with respect to both its financial performance and its performance in
the markets where it competes. The question “What’s our plan for running the company and producing good
results?” challenges managers to craft a series of competitive moves and business approaches—what henceforth
will be referred to as the company’s strategy—for heading the company in the intended direction, staking out a
market position, attracting customers, and achieving the targeted financial and market performance.
The role of this chapter is to define the concept of strategy, identify the kinds of actions that determine what
a company’s strategy is, introduce you to the concept of competitive advantage, and explore the tight linkage
between a company’s strategy and its quest for competitive advantage. We will also explain why company
strategies are partly proactive and partly reactive, why they evolve over time, and the relationship between a
company’s strategy and its business model. We conclude the chapter with a discussion of what sets a winning
Chapter 1 • What Is Strategy and Why Is It Important? 2
strategy apart from a ho-hum or flawed strategy and why the caliber of a company’s strategy determines whether
it will enjoy a competitive advantage or be burdened by competitive disadvantage. By the end of the chapter,
you will have a clear idea of why the tasks of crafting and executing strategy are core management functions and
why excellent execution of an excellent strategy is the most reliable recipe for turning a company into a standout
performer over the long term.
What Do We Mean by “Strategy”?
A company’s strategy is defined by the specific market
positioning, competitive moves, and business approaches
that form management’s answer to “What’s our plan for
running the company and producing good results?” A
strategy represents managerial commitment to undertake
one set of actions rather than another in an effort to compete
successfully and achieve good performance outcomes. This
commitment incorporates a coherent collection of choices
and decisions about:
n How to attract and please customers.
n How to compete against rivals—and, ideally, gain a competitive advantage as opposed to being hamstrung
by competitive disadvantage.
n How to position the company in the marketplace vis-à-vis rivals.
n How to capitalize on opportunities to grow the business.
n How best to respond to changing economic and market conditions.
n How to manage each functional piece of the business (e.g., R&D, supply chain activities, production,
sales and marketing, distribution, finance, and human resources).
n How to achieve the company’s performance targets.
In effect, when managers craft a company’s strategy, they are saying, “Among the many different business
approaches and ways of competing we could have chosen, we have decided to employ this particular combination
of competitive and operating approaches in moving the company in the intended direction, strengthening its
market position and competitiveness, and meeting or beating our performance objectives.” Choosing among
the various alternative hows is often tough, involving difficult trade-offs and sometimes high risk. But that is
no excuse for company managers failing to decide upon a concrete course of action that spells out “This is the
strategic path we are going to take and here’s what we are going to do to pursue competitive success in the
marketplace and achieve good business results.”2
In most industries, company managers have considerable leeway in choosing the hows of strategy. For example,
managers may see a promising opportunity for the company to compete against rivals by striving to keep
costs low and selling products/services at attractively low prices. Often, there is room for a company to pursue
competitive success by offering buyers more features, better performance, longer durability, more personalized
customer service, and/or quicker delivery. Many companies strive to gain a competitive edge over rivals via
cutting-edge technological features, longer warranties, clever advertising, better brand-name recognition, or
the development of competencies and capabilities rivals cannot match. But it is foolhardy to pursue all of these
options simultaneously in an attempt to be all things to all buyers. Choices of how best to compete against rivals
have to be made in light of the firm’s resources and capabilities and in light of the competitive approaches rival
companies are employing.
CORE CONCEPT
A company’s strategy consists of the competitive
moves and business approaches that managers
employ to attract and please customers, compete
successfully, pursue opportunities to grow the
business, respond to changing market conditions,
conduct operations, and achieve the targeted
financial and market performance.
Chapter 1 • What Is Strategy and Why Is It Important? 3
Likewise, there are all kinds of market-positioning options.3
Some companies target the high end of the market,
whereas others go after the middle or low end. Some position themselves to compete in many market segments,
endeavoring to attract many types of buyers with a wide
variety of models and styles; other companies focus on a
single market segment, with product offerings specifically
designed to meet the needs and preferences of a particular
buyer type or buyer demographic. Some companies
position themselves in only one part of the industry’s chain
of production/distribution activities (preferring to be only
in manufacturing or wholesale distribution or retailing),
whereas others are partially or fully integrated, with operations ranging from components production to
manufacturing and assembly to wholesale distribution to retailing. Some companies confine their operations to
local or regional markets; others opt to compete nationally, internationally (in several countries), or globally (in
all or most of the major country markets worldwide). Some companies decide to operate in only one industry,
whereas others diversify broadly or narrowly into related or unrelated industries via acquisitions, joint ventures,
strategic alliances, or starting up new businesses internally.
Strategy Is About Competing Differently Mimicking the strategies of successful industry rivals—with
either copycat product offerings or maneuvers to stake out the same market position—rarely works. The best
performing strategies are aimed at competing differently. This does not mean that the key elements of a company’s
strategy have to be 100 percent different but rather that they
must differ in at least some important respects that matter
to buyers. A strategy stands a better chance of succeeding
when it is predicated on actions, business approaches, and
competitive moves aimed at (1) appealing to buyers in
ways that set a company apart from its rivals—particularly
when it comes to doing what rivals don’t do or, even better,
doing what they can’t do and (2) staking out a market
position that is not crowded with strong competitors. Really successful strategies often contain some distinctive
“a-ha!” quality that goes beyond merely attracting buyer attention but that, more importantly, delivers what
buyers perceive as superior value and converts them into loyal customers. Indeed, the more a strategy is aimed
at competing differently in ways that deliver superior value to buyers, the more likely the strategy will produce
a valuable competitive edge over rivals.
4
Strategy and the Quest for Competitive Advantage
The heart and soul of any strategy are the actions and moves in the marketplace that managers are taking to gain
a competitive advantage over rivals. A company achieves a competitive advantage whenever it has some type
of edge over rivals in attracting buyers and coping with competitive forces. There are many routes to competitive
advantage, but they all involve providing buyers with what they perceive as superior value compared to the
offerings of rival sellers. Superior value can mean a good product at a lower price, a superior product that is
worth paying more for, or a best-value offering that represents an appealing combination of features, quality,
service, and other attributes at an attractively low price. Five of the most frequently used and dependable strategic
approaches to setting a company apart from rivals, delivering superior value, achieving competitive advantage,
and converting buyers into loyal customers are:
1. Striving to be the industry’s low-cost provider, thereby aiming for a cost-based competitive advantage
over rivals that can then become the basis for charging lower prices and/or earning higher profits.
Walmart and Southwest Airlines have earned strong market positions because of the low-cost advantages
they have achieved over their rivals and their consequent ability to underprice competitors. Achieving
lower costs than rivals can produce a durable competitive edge when rivals find it hard to match the
low-cost leader’s approaches to driving costs out of the business.
There’s no one roadmap or prescription for
running a business in a successful manner. Many
different avenues exist for competing successfully,
staking out a market position, and operating the
different pieces of a business.
A creative, distinctive strategy that sets a
company apart from rivals and delivers superior
value to customers is a company’s most reliable
ticket for winning a competitive advantage over
rivals.
Chapter 1 • What Is Strategy and Why Is It Important? 4
2. Competing successfully and profitably against rivals based on differentiating features such as higher
quality, wider product selection, added performance, value-added services, more attractive styling,
technological superiority, or some other attributes that set a company’s product offering apart from
those of rivals. Successful adopters of differentiation strategies include Apple (innovative products),
Johnson & Johnson in baby products (product reliability), Chanel and Rolex (top-of-the-line prestige),
and Mercedes and BMW (engineering design and performance). Differentiation strategies can be
powerful as long as a company is sufficiently innovative to thwart the efforts of clever rivals to copy or
closely imitate its product offering and means of delivering superior value.
3. Offering more value for the money. Giving customers more value for their money by meeting or beating
buyers’ expectations regarding key quality/features/performance/service attributes while beating their
price expectations is known as a best-cost provider strategy. This approach is a hybrid strategy that
blends elements of the previous approaches. Toyota employs a best-cost provider strategy for its Lexus
line of motor vehicles, as does Honda for its Acura line of cars and SUVs. Many consumers shop at
L.L. Bean because of the good value it delivers: products with appealing quality/performance/features/
styling and attractively low prices. Likewise, Amazon.com has been highly successful in attracting
customers with its more-value-for-the-money combination of appealing prices, wide selection, free
shipping, extensive product information and reviews, and online shopping convenience.
4. Focusing on a narrow market niche and winning a competitive edge by doing a better job than rivals
of serving the special needs and tastes of buyers that compose the niche. Prominent companies that
enjoy competitive success in a specialized market niche include eBay in online auctions, Jiffy Lube
International in quick oil changes, and The Weather Channel in cable TV.
5. Developing competitively valuable resources and capabilities that rivals can’t easily imitate or trump
with resources or capabilities of their own. FedEx has superior capabilities in next-day delivery of small
packages. Walt Disney has hard-to-beat capabilities in theme park management and family entertainment.
Apple has formidable capabilities in innovative product design. Ritz-Carlton and Four Seasons have
uniquely strong capabilities in providing their hotel guests with an array of personalized services.
Hyundai has become the world’s fastest-growing automaker as a result of its advanced manufacturing
processes and unparalleled quality control systems. 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 attributes of a popular or innovative
product, but for rivals to match experience, know-how, and specialized competitive capabilities that a
company has developed and perfected over a long period of time is substantially harder to duplicate and
takes much longer.
Forging a strategy that produces a competitive advantage has great appeal because it enhances a company’s
financial performance. A company is almost certain to earn significantly higher profits when it enjoys a competitive
advantage as opposed to when it competes with no advantage
or is hamstrung by competitive disadvantage. Competitive
advantage is the key to above-average profitability and
financial performance because strong buyer preferences
for a company’s products or services translate into higher
sales volumes (Walmart) and/or the ability to command a
higher price (Häagen-Dazs), which in turn tend to improve
earnings, return on investment, and other important financial
outcomes. Furthermore, if a company’s competitive edge
holds promise for being sustainable (as opposed to just
temporary), then so much the better for both the strategy and
the company’s future profitability. What makes a competitive
advantage sustainable (or durable) as opposed to temporary
are actions and elements in the strategy that cause an attractive number of buyers to have lasting reasons to purchase
a company’s products or services, despite competitors’ best efforts to nullify or overcome those reasons.
CORE CONCEPT
A company achieves competitive advantage
when an attractive number of buyers are drawn
to purchase its products or services rather than
those of competitors. A company achieves
sustainable competitive advantage when the
basis for buyer preferences for its product offering
relative to the offerings of its rivals is durable,
despite competitors’ efforts to nullify or overcome
the appeal of its product offering.
Chapter 1 • What Is Strategy and Why Is It Important? 5
The tight connection between competitive advantage and profitability means the quest for sustainable competitive
advantage is typically the foremost consideration in choosing the central elements of a company’s strategy.
Indeed, the competitive power of a company’s strategy is governed by one or more differentiating attributes
or strategy elements that act as a magnet to draw customers and give them strong and often durable reasons to
prefer its products or services. Thus, what separates a powerful strategy from a run-of-the-mill or ineffective one
is management’s ability to forge a series of moves, both in the marketplace and internally, which tilts the playing
field in the company’s favor and produces a sustainable competitive advantage over rivals. The bigger and more
sustainable the competitive advantage, the better a company’s prospects for winning in the marketplace and
earning superior long-term profits relative to its rivals. Without a strategy that leads to competitive advantage, a
company risks being outcompeted by more strategically astute rivals and/or handcuffed by mediocre sales and
uninspiring financial results.
Identifying a Company’s Strategy
The best indicators of a company’s strategy are its actions in the marketplace and senior managers’ statements
about the company’s current business approaches, future plans, and efforts to strengthen its competitiveness and
performance. Figure 1.1 shows what to look for in identifying the key elements of a company’s strategy.
Once it is clear what to consider, the task of identifying a company’s strategy is mainly one of researching the
company’s actions in the marketplace and its business approaches. In the case of publicly owned enterprises,
senior executives often openly discuss the strategy in the company’s annual report and 10-K report, in press
releases and company news (posted on the company’s website), and in the information provided to investors
on the company’s website. To maintain the confidence of investors and Wall Street, most public companies
are fairly open about their strategies. Company executives typically lay out key elements of their strategies in
presentations to securities analysts (portions of which are usually posted in the investor relations section of the
company’s website), and stories in the business media about the company often include aspects of the company’s
strategy. Hence, except for some about-to-be-launched moves and changes that remain under wraps and in the
planning stage, there’s usually nothing secret or undiscoverable about a company’s present strategy.
Figure 1.1 Identifying a Company’s Strategy—What to Look For
Actions to upgrade, build,
or acquire competitively
valuable resources and
capabilities or to correct
competitive weaknesses
Actions to diversify the company’s
revenues and earnings by entering new businesses
Actions to compete more successfully and
profitably by reducing unit costs below those of
rivals and very likely charging lower prices
Actions to compete more successfully
and profitably by offering buyers
more or better performance features,
more appealing design, higher
quality, better customer service, wider
product selection, or other attributes
that enhance buyer appeal
Actions and approaches
used in managing R&D,
production, sales and
marketing, finance, and
other key activities
Actions to enter new product
segments or geographic
markets or to exit existing
ones
Actions to respond/adjust
to changing market and
competitive conditions or
other external factors
Actions to capture emerging
market opportunities and
defend against external
threats to the company’s
business prospects
Actions to strengthen market
standing or competitiveness
via mergers, acquisitions,
strategic alliances, and /or
collaborative partnerships
The Pattern
of Actions and
Business Approaches
that Define a
Company’s
Strategy
Chapter 1 • What Is Strategy and Why Is It Important? 6
Why a Company’s Strategy Evolves Over Time
All companies, sooner or later, find it necessary to modify aspects of their strategy in response to changing
market conditions, advancing technology, the fresh moves of competitors, shifting buyer needs and preferences,
emerging market opportunities, new ideas for improving
the strategy, and/or mounting evidence that certain aspects
of the present strategy are no longer working well. Most of
the time, a company’s strategy evolves incrementally from
management’s ongoing efforts to fine-tune this or that piece
of the strategy and to adjust certain strategy elements in
response to new learning and unfolding events. However,
on occasion, major strategy shifts are called for, such as
when a strategy is clearly failing, market conditions or buyer
preferences suddenly change dramatically, or important
technological breakthroughs occur (as in medical devices and shale fracking). In some industries, conditions
change at a fairly slow pace, making it feasible for the major components of a good strategy to remain in place
for long periods. But in industries like smartphones, medical devices, computer chips, and genetic engineering
where market conditions and technology change frequently and in sometimes dramatic ways, the life cycle
of a given strategy is short. It is not uncommon for companies in high-velocity environments to overhaul key
elements of their strategies several times a year or even to “reinvent” how they intend to compete differently
from rivals and deliver superior value to customers.6
Regardless of whether a company’s strategy changes gradually or swiftly, the important point is that its
present strategy is always temporary and on trial, pending management’s next round of strategy initiatives, the
emergence of new industry and competitive conditions, and other unfolding developments that management
believes warrant strategy adjustments. Thus, a company’s strategy at any given point is fluid, representing the
temporary outcome of an ongoing process that, on the one hand, involves reasoned and creative management
efforts to craft a competitively effective strategy and, on the other hand, involves ongoing responses to market
change and constant experimentation and tinkering. Adapting to new conditions and constantly evaluating what
is working well enough to continue and what needs to be improved are normal parts of the strategy-making
process and result in an evolving strategy.7
A Company’s Strategy Is Partly Proactive and Partly Reactive
The evolving nature of a company’s strategy means the typical company strategy is a blend of (1) proactive
actions to secure a competitive edge and improve the company’s financial performance and (2) as-needed
reactions to fresh market conditions and other unanticipated developments—see Figure 1.2. The biggest portion
of a company’s current strategy usually consists of a combination of previously initiated actions and business
approaches that are working well enough to merit continuation and newly launched initiatives aimed at boosting
competitive success and financial performance. Typically, managers proactively modify this or that aspect of
their strategy as new learning emerges about which pieces of the strategy are working well and which aren’t and
as they explore and test new ways to improve the strategy. This part of management’s action plan for running the
company is deliberate and constitute its proactive strategy elements.
Copyright © 2020 by Arthur A. Thompson. All rights reserved.
Reproduction and distribution of the contents are expressly prohibited without the author’s written permission
CORE CONCEPT
Changing circumstances and ongoing management efforts to improve the strategy cause a
company’s strategy to evolve over time—
a condition that makes the task of crafting a
strategy a work in progress, not a one-time or
every-now-and-then event.
Chapter 1 • What Is Strategy and Why Is It Important? 7
Figure 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives and
Reactive Adjustments
Abandoned
strategy elements
Prior
Version
of
Company
Strategy
Latest
Version
of
Company
Strategy
Proactive Strategy Elements
Newly-crafted strategic initiatives
plus ongoing strategy elements
continued from prior periods
New strategy elements that emerge
as managers react to changing
circumstances
Reactive Strategy Elements
But managers must always be willing to supplement or modify all the proactive strategy elements with as-needed
reactions to unanticipated developments. Inevitably, there will be occasions when market and competitive
conditions take an unexpected turn that call for some kind of strategic reaction or adjustment. Hence, a portion
of a company’s strategy is always developed on the fly, coming as a response to fresh strategic maneuvers on
the part of rival firms, unexpected shifts in customer requirements and expectations, important technological
developments, newly appearing market opportunities, a changing political or economic climate, or other
unanticipated happenings in the surrounding environment. These adaptive strategy adjustments form the reactive
strategy elements.
As shown in Figure 1.2, a company’s strategy evolves from one version to the next as managers abandon
obsolete or ineffective strategy elements, settle upon a set of proactive strategy elements, and then—as new
circumstances unfold—make adaptive strategic adjustments, which gives rise to reactive strategy elements. The
latest version of a company’s strategy thus reflects the disappearance of obsolete or ineffective strategy elements
and a modified combination of proactive and reactive elements.
Strategy and Ethics: Passing the Test of Moral Scrutiny
In choosing among strategic alternatives, company
managers are well advised to embrace actions that can
pass the test of moral scrutiny. Just keeping a company’s
strategic actions within the bounds of what is legal does not
mean the strategy is ethical. Ethical and moral standards
are not governed by what is legal. Rather, they involve
issues of “right” versus “wrong” and duty—what one
should do. A strategy is ethical only if it does not entail
actions and behaviors that cross the moral line from “can
do” to “should not do.” For example, a company’s strategy
definitely crosses into the should not do zone and cannot
CORE CONCEPT
A strategy cannot be considered ethical just
because it involves actions that are legal. To
meet the standard of being ethical, a strategy
must entail actions and behavior that can pass
moral scrutiny in the sense of not being deceitful,
unfair or harmful to others, disreputable, or
unreasonably damaging to the environment.
Chapter 1 • What Is Strategy and Why Is It Important? 8
pass moral scrutiny if it entails actions and behaviors that are deceitful, unfair or harmful to others, disreputable,
or unreasonably damaging to the environment. A company’s strategic actions or behavior cross over into the
should not do zone and are likely to be deemed unethical when (1) they reflect badly on the company or (2)
they adversely impact the legitimate interests and well-being of shareholders, customers, employees, suppliers,
the communities where it operates, and society at large or (3) they provoke widespread public outcries about
inappropriate or “irresponsible” actions/behavior/outcomes.
Admittedly, it is not always easy to categorize a given strategic behavior as ethical or unethical. Many strategic
actions fall in a gray zone and can be deemed ethical or unethical depending on how high one sets the bar for
what qualifies as ethical behavior. For example, is it ethical for advertisers of alcoholic products to place ads
in media having an audience of as much as 50 percent underage viewers? Is it ethical for an apparel retailer
attempting to keep prices attractively low to source clothing from manufacturers who pay substandard wages,
use child labor, or subject workers to unsafe working conditions? Is it ethical for Nike, Under Armour, and other
makers of athletic uniforms and other sports gear to pay a university athletic department large sums of money as
an “inducement” for the university’s athletic teams to use their brand of products? Is it ethical for pharmaceutical
manufacturers to charge higher prices for life-saving drugs in some countries than they charge in others? Is it
ethical for a company to ignore the damage its operations do to the environment in a particular country, even
though its operations are in compliance with current environmental regulations in that country?
Senior executives with strong ethical convictions are generally proactive in linking strategic action and ethics;
they forbid the pursuit of ethically questionable business opportunities and insist that all aspects of company
strategy are in accord with high ethical standards. They make it clear that all company personnel are expected to
act with integrity, and they put organizational checks and balances into place to monitor behavior, enforce ethical
codes of conduct, and provide guidance to employees regarding any gray areas. Their commitment to ethical
business conduct is genuine, not hypocritical lip service.
The reputational and financial damage that unethical strategies and behavior can do is substantial. When a
company is put in the public spotlight because certain personnel are alleged to have engaged in misdeeds,
unethical behavior, fraudulent accounting, or criminal behavior, its revenues and stock price are usually
hammered hard. Many customers and suppliers shy away from doing business with a company that engages
in sleazy practices or turns a blind eye to its employees’ illegal or unethical behavior. They are turned off by
unethical strategies or behavior and, rather than become victims or get burned themselves, wary customers take
their business elsewhere and wary suppliers tread carefully. Moreover, employees with character and integrity
do not want to work for a company whose strategies are shady or whose executives lack character and integrity.
Besides, immoral or unethical actions are just plain wrong. Consequently, there are solid business reasons why
companies should avoid employing unethical strategy elements.
The Relationship Between a Company’s Strategy
and Its Business Model
Closely related to the concept of strategy is the concept of
a company’s business model. A 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 yield an attractive profit.9
The
two crucial elements of a company’s business model are (1)
its customer value proposition and (2) its profit proposition
(or “profit formula”).10 The customer value proposition lays
out the company’s approach to satisfying buyer needs and
requirements at a price they will consider a good value.11
Plainly, from a customer perspective, the greater the value
delivered and the lower the price to get this value, the more
CORE CONCEPT
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 realize a profit large enough to please
shareholders. Absent the ability to earn good
profits, a company’s strategy and operating
blueprint are flawed, its business model is not
viable, and its ability to survive is in jeopardy.
Chapter 1 • What Is Strategy and Why Is It Important? 9
appealing the company’s value proposition and product offering. From a company perspective, however, the
greater the value delivered and the higher the price that can be charged, the bigger the margin for covering the
costs associated with its business approach and realizing an attractive profit and return on investment.
The profit proposition or profit formula portion of a company’s business model concerns its business approach
to generating sufficiently large revenues and controlling the costs of its customer value proposition, such that the
company will be able to simultaneously deliver the intended value to customers and deliver appealing profits to
shareholders. For a company’s business model to result in both satisfied customers and satisfied shareholders,
three outcomes are required:
n The revenue stream that is generated must be big enough to more than cover the costs of delivering
attractive value to customers. The revenues that can be generated are a function of the volume of
customers attracted at the price being charged.
n There must be adequate ways and means to control the costs of the value being delivered to customers.
The costs of the company’s business model approach are dependent on the costs of the resources and
business processes it utilizes and the cost efficiency of its operating systems.
n The amounts by which revenues exceed the costs incurred must please shareholders.
The lower a firm’s costs are in relation to its revenues, the greater its profit potential and the more attractive its
profit proposition.
Magazines and newspapers employ a business model keyed to delivering information and entertainment they
believe readers will find valuable and a profit formula aimed at securing sufficient revenues from subscriptions
and advertising to more than cover the costs of producing and delivering their content to readers. Cell-phone
providers, satellite radio companies, and Internet service providers also 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; profit is realized by generating sufficient
advertising revenues to more than cover programming costs. Gillette’s business model in razor blades involves
selling a “master product”—the razor—at an attractively low price and then making money on repeat purchases
of razor blades that can be produced cheaply and sold at high profit margins. Printer manufacturers like HewlettPackard, Canon, Dell, and Epson pursue much the same business model as Gillette—selling printers at a low
(virtually breakeven) price and making large profit margins on the repeat purchases of ink cartridges and other
printer supplies. McDonald’s invented the business model for fast food—providing value to customers in
the form of economical quick-service meals at clean, convenient locations. Its profit formula involves such
elements as standardized cost-efficient store designs; equipment and food preparation systems that provide the
capability to serve hotter, better-tasting food faster and accurately; extensive testing of new menu items; stringent
specifications for ingredients; detailed operating procedures for each unit; heavy reliance on advertising and instore promotions; and sizable investment in human resources and training.
Amazon.com mainly utilizes an online direct sales business model whereby it procures merchandise for display
on its web pages and operates a growing network of geographically scattered distribution centers that rapidly fill,
package, and ship customer orders for delivery by third-party carriers (FedEx, UPS, and the U.S. Postal Service).
Amazon generates revenues by providing an online marketplace for some 2 million third-party merchants from
which it derives service fees and/or sales commissions—affiliated merchants can either use Amazon’s order
fulfillment capabilities or perform these activities themselves. However, Chinese-based Alibaba has adopted
a “platform” business model whereby it operates online and mobile shopping marketplaces for consumers,
merchants, and third-party service providers to conduct retail and wholesale trade; Alibaba’s revenues come from
the commissions and fees it earns on the hundreds of millions of transactions annually made by the merchants
using its web-based sales platform and associated services (that includes web-page display, auction hosting,
online money transfer, cloud computing, and logistics, among others). So far, the strategic elements in Alibaba’s
profit formula have delivered far superior performance compared to the strategic elements in Amazon’s profit
Chapter 1 • What Is Strategy and Why Is It Important? 10
formula. Alibaba reported fiscal year 2018 operating profits of $11.0 billion on revenues of $39.9 billion (equal
to an operating profit margin of 27.6 percent), whereas in calendar year 2018, Amazon reported operating profit
of $12.4 billion on sales revenues of $232.9 billion (equal to an operating profit margin of 5.3 percent).
The nitty-gritty issue surrounding a company’s business model is whether it can execute its customer value
proposition profitably. Just because company managers have crafted a strategy for competing and otherwise
running various parts of the business does not automatically mean the strategy will lead to profitability—it
may or may not. Companies that have been in business for a while and are making at least reasonably attractive
profits have a “proven” business model—because there is hard revenue-cost evidence that their strategies and
approaches to operating can yield good profits. Companies that are in a startup mode or are losing money have
“questionable” business models; their strategies and operating approaches have yet to produce good bottom-line
results, thus raising doubts about their blueprint for making money and their viability as business enterprises.
Companies that operate in uncertain, volatile market environments often have business models that quickly lose
their effectiveness; for such companies to survive, they have to be adept at spotting the signs of impending crisis
early and then swiftly reinvent their business model and strategy.12
When a company pioneers a new and obviously successful business model approach, new entrants quickly
appear with imitative business models—the key features of a successful business model are easy to identify and,
often relatively easy to replicate.13 For example, over the past 15 years, the business model for online retailing—a
functional website, appealing product offerings, convenient checkout and payment options, fast delivery (and
perhaps even free shipping), no-hassle merchandise return procedures, and cost-efficient order fulfillment and
inventory management systems—has been successfully implemented thousands of times all across the world.
What Makes a Strategy a Winner?
Three tests can be applied to determine the merits of one strategy versus another and distinguish a winning
strategy from a so-so or flawed strategy:
1. The Fit Test: How well does the strategy fit the
company’s situation? To qualify as a winner, a
strategy must be well matched to industry and
competitive conditions, a company’s best market
opportunities, and other pertinent aspects of the
business environment in which the company
operates. At the same time, it must be tailored to the
company’s resources and competitive capabilities
and be supported by a complementary set of operating approaches (as concerns supply chain management,
research and development, production, sales and marketing, and financial management). Unless a strategy
exhibits good fit with both the external and internal aspects of a company’s overall situation, it is likely
to be an underperformer and fall short of producing good business results. Winning strategies also exhibit
dynamic fit in the sense that they evolve over time in a manner that maintains close and effective alignment
with the company’s situation even as external and internal conditions change.14
2. The Competitive Advantage Test: Is the strategy helping the company achieve a sustainable competitive
advantage? Winning strategies enable a company to achieve a competitive advantage that is durable.
The bigger and more durable the competitive edge that a strategy helps build, the more powerful and
appealing it is.
3. The Performance Test: Is the strategy producing good company performance? To be a winner, a
strategy must have resulted in substantially better company performance. Two kinds of performance
indicators tell the most about the caliber of a company’s strategy: (1) competitive strength and market
standing and (2) profitability and financial strength. Gains in market share, improving competitiveness
vis-à-vis rivals, above-average profitability, and strong financial performance over the past 2–4 years are
all signs of a winning strategy.
CORE CONCEPT
A winning strategy must fit the enterprise’s
external and internal situation, help build
sustainable competitive advantage, and
improve company performance.
Chapter 1 • What Is Strategy and Why Is It Important? 11
Strategies—either existing or proposed—that come up short on one or more of the tests are plainly less appealing
than strategies passing all three tests with flying colors. Failing grades on one or more tests should prompt
managers to make immediate changes in an existing strategy. Likewise, when picking and choosing among
alternative strategic actions, managers should be quick to discard alternatives that seem ill-suited to a company’s
internal and external situation or that offer little prospect of producing competitive advantage or improved
performance.
Why Crafting and Executing Strategy Are Important Tasks
Crafting and executing strategy are top-priority managerial tasks for two big reasons. First, there is a compelling
need for managers to proactively shape how the company’s business will be conducted. A clear and reasoned strategy
is management’s prescription for doing business, its road map to competitive advantage, and its game plan for
pleasing customers and improving financial performance.
High-performing enterprises are nearly always the product of astute, creative, and proactive strategy-making.
Companies don’t get to the top of the industry rankings or
stay there with flawed strategies, copycat strategies, or with
strategies built around timid actions to try and do better.
And only a handful of companies can boast of strategies
that hit home runs in the marketplace due to lucky breaks
or the good fortune of having stumbled into the right market at the right time with the right product—but the
good fortunes of such companies are not long-lasting without subsequent success in crafting a strategy capable
of long-term competitive success. So there can be little argument that a company’s strategy matters—and matters
a lot.
Second, even the best-conceived strategies will result in performance shortfalls if they are not executed proficiently.
Good day-in/day-out strategy execution and operating excellence are essential for a company to perform close
to its full potential. There can be no applause for managers who design a potentially brilliant strategy and
then stumble in their efforts to create an organization with the skills, resource capabilities, operating practices,
and culture needed to carry out the strategy in high-caliber fashion. Flawed and/or inept implementation and
execution of a company’s strategy are a surefire recipe for underachievement, both financially and in competing
against rivals.
Good Strategy + Good Strategy Execution = Good Management
Crafting and executing strategy are thus core management tasks. Among all the things managers do, nothing
affects a company’s ultimate success or failure more fundamentally than how well its management team
charts the company’s direction, develops competitively effective strategic moves and business approaches,
and pursues what needs to be done internally to produce good day-in/day-out strategy execution and operating
excellence. Indeed, good strategy and good strategy execution are the most telling and trustworthy signs of
good management. Managers don’t deserve a gold star for designing a potentially brilliant strategy and then
failing to put the organizational means in place to carry it out in high-caliber fashion—weak implementation
and execution undermine the strategy’s potential and pave the way for shortfalls in customer satisfaction and
company performance. Competent execution of a mediocre strategy scarcely merits enthusiastic praise for
management’s efforts either.
The rationale for using the twin standards of good strategy making and good strategy execution to determine
whether a company is well-managed is therefore compelling: The better conceived a company’s strategy and the
more competently it is executed, the more likely the company will be a standout performer in the marketplace.
In stark contrast, a company that has a muddled or flawed strategy and/or can’t seem to execute its strategy
competently is most likely an underperformer and in need of better management.
CORE CONCEPT
How well a company performs and the degree
of market success it achieves are directly
attributable to the caliber of its strategy and the
proficiency with which the strategy is executed.
Chapter 1 • What Is Strategy and Why Is It Important? 12
The Road Ahead
Throughout the chapters to come, the spotlight is trained on the foremost question in running a business
enterprise: What must managers do, and do well, to give a company its best shot for being attractively profitable
and successful in the marketplace? The answer that emerges, and that becomes the biggest lesson of the course
you are taking, is that doing a good job of managing inherently requires good strategic thinking and good
management of the strategy-making, strategy-executing process.
The content of the upcoming chapters focuses squarely on 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
strategy. Then, in the accompanying strategy simulation exercise where you will run a company in head-to-head
competition with companies run by your classmates, you will have a golden learn-by-doing opportunity to put
the chapter content into practice and gain firsthand experience in actually crafting a strategy for your company
and figuring out how to execute it cost effectively and profitably. In the process, we hope to convince you that
first-rate capabilities in crafting and executing strategy are basic to managing successfully and are skills every
manager needs to possess.
As you tackle the chapters and undertake the activities of being a co-manager of your assigned company, ponder
the following observation by the essayist and poet Ralph Waldo Emerson: “Commerce is a game of skill which
many people play, but which few play well.” If the chapters and the experience of running your company help
you become a savvy player and better equip you to succeed in business, the time and energy you spend here will
indeed prove worthwhile.
Key Points
The tasks of crafting and executing company strategies are the heart and soul of managing a business enterprise
and winning in the marketplace. A company’s strategy is the game plan management is using to stake out a market
position, conduct its operations, attract and please customers, compete successfully, and achieve the desired
performance targets. The central thrust of a company’s strategy is undertaking moves to build and strengthen the
company’s long-term competitive position and financial performance and, ideally, gain a competitive advantage
over rivals that then becomes a company’s ticket to above-average profitability. A company’s strategy typically
evolves and reforms over time, emerging from a blend of (1) company managers’ proactive and purposeful
actions and (2) as-needed reactions to unanticipated developments and fresh market conditions.
Closely related to the concept of strategy is the concept of a company’s business model. A company’s business
model is management’s story line for how and why the company’s product offerings and competitive approaches
will generate a revenue stream and have an associated cost structure that produces attractive earnings and return
on investment—in effect, a company’s business model sets forth the economic logic for making money in a
particular business, given the company’s current strategy.
A winning strategy fits the circumstances of a company’s external situation and its internal resource strengths
and competitive capabilities, builds competitive advantage, and boosts company performance.
Crafting and executing strategy are core management functions. How well a company performs and the degree
of market success it enjoys are directly attributable to the caliber of its strategy and the proficiency with which
the strategy is executed. No company’s management team deserves a grade of “good” for crafting a run-ofthe-mill strategy and/or for executing a strategy satisfactorily and, as a consequence, achieving no better than
adequate performance.