1-1 CHAPTER 1 Strategy and the Quest for Competitive Advantage McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

1-2 Thinking Strategically: The Three Big Strategic Questions 1. Where are we now? 2. Where do we want to go? Business(es) to be in and market positions to stake out Buyer needs and groups to serve Direction to head 3. How are we going to get there? A company’s answer to “how will we get there?” is its strategy

1-3 What Do We Mean By “Strategy”?  Consists of competitive moves and business approaches used by managers to run the company  Management’s “action plan” to Attract and please customers Compete successfully Conduct operations Achieve target levels of organizational performance

1-4 Answering the Question, “How Are We Going to Get There?”  How to please customers  How to out-compete rivals  How to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on)  How to respond to changing market conditions  How to achieve targeted levels of performance

1-5 Elements of a Company’s Business Strategy

1-6 Strategy and Sustainable Competitive Advantage  A company achieves sustainable competitive advantage when a sufficiently large number of buyers develop a lasting preference for its products/services over those offered by rivals

1-7 Four Proven Strategic Approaches to Winning a Sustainable Competitive Advantage  Developing a cost-based advantage  Creating a differentiation-based advantage  Focusing on a narrow market niche within an industry  Developing unmatched resource strengths and competitive capabilities

1-8 Competitive Strategy Examples  Strive to be the industry’s low-cost provider Wal-Mart Southwest Airlines  Out-compete rivals on a key differentiating feature Harley-Davidson – Outlaw image and distinctive engine sound Rolex – Top-of-the-line prestige Amazon.com – Wide selection and convenience Amazon.com

1-9 Competitive Strategy Examples  Focus on a narrow market niche McAfee – Virus protection auctions Starbucks – Premium coffees and coffee drinks The Weather Channel – Cable TV  Develop expertise, resource strengths, and capabilities not easily imitated by rivals Walt Disney – Theme park management and family entertainment Ritz-Carlton – Personalized customer service

1-10 Why Do Strategies Evolve?  A company’s strategy is a work in progress  Changes may be necessary to react to Shifting market conditions Fresh moves of competitors Evolving customer preferences Emerging market opportunities New ideas to improve strategy Crisis situations

1-11 A Company’s Strategy Is a Blend of Planned Initiatives and Unplanned Reactive Adjustments

1-12 What Is a Business Model?  A business model addresses “How do we make money in this business?”  Do the revenue-cost-profit economics of the strategy make good business sense? Look at revenue streams the strategy is expected to produce Look at associated cost structure and potential profit margins Do resulting earnings streams and ROI indicate the strategy makes sense and the company has a viable business model for making money?

1-13 Microsoft’s Business Model  Employ highly skilled programmers to develop proprietary code; keep source code hidden from users  Sell resulting OS and software packages to PC makers and users at relatively attractive prices to achieve a 90% or more market share  Most costs in developing software are fixed; variable costs are small; once break-even volume is reached, revenues from additional sales are almost pure profit  Provide modest level of technical support to users at no cost  Rejuvenate revenues by periodically introducing next-generation software that prompt PC users to upgrade their operating systems

1-14 Red Hat’s Business Model  Rely on collaborative efforts of volunteer programmers to create the software  Collect and test enhancements and new applications submitted by volunteer programmers for evaluation and inclusion in new releases of Linux  Market upgraded and tested family of Red Hat products to large companies, charging a subscription fee that includes 24/7 support within 1 hour in 7 languages  Make source code open and available to all users  Capitalize on specialized expertise required to use Linux by providing fee-based training, consulting, and software customization

1-15 Tests of a Winning Strategy  GOODNESS OF FIT TEST How well does strategy fit the firm’s situation?  COMPETITIVE ADVANTAGE TEST Does strategy lead to sustainable competitive advantage?  PERFORMANCE TEST Does strategy boost firm performance?