Strategy and the Questfor Competitive Advantage

Chapter Leaming Obiectives

LOl. Understand the need for having a sound business strategy to success-fully compete in the industry manage the functional areas of the busi-ness, and develop new capabilities and assemble resources tostrengthen 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 andwinning a sustainable competitive advantage.

LO3. Understand why a company's strategy tends to evolve over timebecause of changing circumstances and ongoing management effortsto improve the company's strategy.

LO4. Learn why it is important for a company to have a viable businessmodel that outlines the compan¡/s customer value proposition, itsprofit formula, and the key resources and processes required to createand detiver customer value.

L05. Learn the three tests that distinguish a winning strategy from a so-soor flawed strategy.

Part One: Sect¡on A: Introduction and Overv¡ew

The lmportance of Managing StrategicattyThree questions must be ansn'ered by managers of all types of organizations-small family-owned businesses, rapidly growing entre¡rreneurial firms, not-for-profit organizations, and the world's leading multinational corporations.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 finan-cial performance and market standing, its competitively valuable resources

and capabilities, its competitivc weaknesses, and changing indr-rstry condi-tions 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 futuredirection-rvhat new or different customer groups and customer needs itshould endeavor to satisfy and how it should change its business makcup.The question "How are we going to get there?" challenges managers to craft andexecute 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- trtc goittg to get there?" is the essence of mana¡;ing strate-

tive moves and business approaches manage gically. Rather than relving on the status quo as a road-

ment has developed to attract and please map ancl dealing rt'ith new opportunities or threats as

customers, conduct operations, grow the they emerge, managing strategically involvcs devel-business, and achieve performance ob.jectives. opir-rg a business game plan. Management's game

plan spells out thc competitive moves and business

approaches that managcrs are employing to grow the business, attract andplease customcrs, compete successfullv conduct operations, and achieve tar-geted 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 con-ditions, ft0zu to manage each functional piece of the business, /rozo to developimportant ¡esources and capabilities, hotu to take advantage of growth oppor-tunities, ar¡d how to achieve strategic and financial obiectives.

In this opening chapter, we dcfine the concepts of strategv and competi-til'e advantage . The chapter will explain what makes up a company's strategy,explain why strategies are partly proactive and partly reactive, and discussthe 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 earn-rng above-average profits. The chaptcr concludes bv discussing three tests ofa winning strategy. While therc is no one surefire winning strategy that wilialways work for cvery organization in every situation, all top-notch strategiesarc well-matched to a company's external and internal situation, help build acompetitive 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 competitiveadvantaee.

Chapter I Strategy and the Quest for Competitive Advantage

The Scope of a Compant's Business StrategyThe specific elements that comprise management's answer to the question" How are we going to get there?" define a company/s business strategy. Thecompany/s business strategy lays out how management intends to competein the industry, manage the functional areas of the business, and develop nencapabilities and assemble resources to strengthen the company's prospects forlong-term success. There's virtually no area of a company's operations thatisn't involved in íts business strategy and helps answer the question, "How arewe going to get there? " Management must have deliberate plans for addressingsuch issues as:

. Changing economic and market conditions.o 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 resou¡ces.. Development of internal capabilities, competencies, and competitively

valuable resources.

. Development of alliances and joint ventures to supplernent the company'sresourccs and capabilities.

Of course, business strategy includes planning for topics not included inthe list above. The important thing to recognize is that every activity involvedin delivering a business's product or service should be guided by strategicthinking. There's really no single activity, process, department, or functionalarea that should be left to chance. Figure 1.1 presents a diagram showingactions and approaches that make up a company's business strategy. Concepts& Connections 1..1 describes the various elements of McDonald's strategy inthe quick service restaurant industry. The capsule should make it clear howthe business strategy includes actions related to such wide-ranging issues asits menu selection, supplier relationships, advertising expenditures, expan-sion into foreign markets, restaurant operating policies and practices, andresponses to changing economic and market conditions.

Competitive Strategy and Advantage over RivalsThe most important aspect of a company's business strategy is its approach tocompeting in the marketplace. It is imperative that a company's strategystrengthen its long-term competitive position and allow it to gain a durablecompetitive edge over rivals. In Concepts & Connections 1.1., it's evident thatMcDonald's has gained a competitive advantage over rivals through its effortsto minimize costs, ensure a high level of foocl quality, add irurovative newmenu items, and keep its prices low. A creative, distinctive strategy such as

Part One: Sectlon A: Introduction and Overview

F IGUlttl l t El€ments of a compant's Bus¡ness Strategy

Act¡ons to gain sales and market share by adjusting pdcing,product features, produrt styting, qual¡ty, customer serv¡ce,product select¡on, or other product or serv¡re attributes

Act¡ons to strenglhen

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

used¡nbnance, 7

and other key activities

Act¡ons to respond to (hangingmarket conditions or otherexternal factors

Act¡ons to capture emergingmarket opportunities anddefend against erternalthreats to the companysbus¡ness prospects

Ad¡ons to enter new geographicor product markets or eritex¡sting ones

Actions to strengthencompetitiveness v¡a strategiIalliances and collaborative

partnersh¡ps

A company achieves sustainable compet¡tiveadvantage when an attractively large number

of buyers develop a long-lasting preference for

its products or services over the offerings of

competitofs.

Actions to strengthen marketstanding and competitivenessby acqu¡ring or merging withother comDanies

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

sustainablc competitive advantage and earning above-average Profits. A sus-

tainable competitive advantage allows a comPany toattract strfficientlv large llumbers of buycrs rvho havea lasting prreference for its products or services overthose offered by rivals. This enduring demancl for a

company/s products or services is the key to a com¡-ra-

ny's ability to earn ongoing above-average Profits.Four of the most frequently used and dependable

stratcgic approaches to setting a company apart from rivals and winning a

sustainable competitive advantage are:

1. Deaeloping n cost-based adatntage. Wal-Mart and Southn'est Airlineshave utilized low-cost provider strategies to earn strong market positionsin their respective indr-rstries. Achieving a cost-based advantage overrivals can produce a durable comPetitive cdgc n hen rivals find it hard tomatch the low-cost leader's approach to driving costs out of the business.

While Unitecl Airlines, Dclta Airlines, US Airrvays, and Northrvest Air-lincs havc moved in and out of bankruptcy, Southu'est Airlines' proficientexecution of its lorv-cost strategv keved to point-to-point loutcs, no-fuillsservice, and efficient gror-urd operations has yíelcled profits for 35 con-secLltlve vears.

2. Crcating a dilferentiation-based adzt antage. A differentiation-basedad'u,antage entails adcling product or service attributcs that offer custom-ers greater tangible or intangible benefits than thc product or service

THE ACfrO¡{SAI{D

APPKTACHES

THAT TTA|(E UP AcofilPAI{Y'5Bt stl{EssSTRATEGY

orp",',,u. Oduuntut. U

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 Un¡ted States. More than 58 million custom-

ers visited one of McDonald's 3z,ooo restaurants in 118

countr¡es each day, which alLowed the company to record

2oo8 revenues and earnings of more than $zl.S biltionand $4 3 billion, respectively. McDonaLd's performance

in the marketplace made it one of only [wo compan¡es

listed on the Dow jones IndustriaIAverage (the other was

Watmart Stores. lnc.) to end zooS with an increase in theprice of its common shares. The company's sales were

holding up well amid the ongoing economic uncertainty

in early zoo9, w¡th systemwide sates as measured in con-

stant 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\ globalrestaurant operations improvement process invotvedemployee training programs ranging from on the-jobtraining for new cTew members to college leveL management courses oflered at the company\ Hamburger Uni-

versity. The company also sent nearly zoo high potentialemployees annually to its McDonald's Leadership Insti-tute to build the leadership skills needed by its nextgeneration of senior managers. McDonald's commitmentlo empLoyee development earned the company a place

on Foftune's list of Top zo Global Companies for Lead-

ers in zoo7. The company also trained its store manag-ers to closely monitor labor, food, and utility costs.

. Affordab(e pricing. In addition to tackling operatingcosts in each of its restaurants, McDonatd's kept itsprices low by closely scrutin¡z¡ng administrative costsand other corDorate exDenses. McDonald's saw thepoor economy in the United States as opportun¡ty torenegotiate its advertis¡ng contracts with newspapersand televis¡on networks in early zoo9. The companyalso began to reptace its company-owned vehicleswith more fuel-efflcient models when gasoline prices

escalated dramatically in the Un¡ted States duringzoo8. Howeve¡ fücDonald's did not choose to sacri-fice product quality in order to offer lower prices. The

company implemented extensive supplier monitoringprograrns to ensure that its suppl¡ers did not changeproducl specitlcations to lower costs. For example,the company's chicken breasts were routinely checked

for weight when arr¡ving from suppl¡ers'productionfacilities. The company's broad approach to minimizingnon-vaLue-adding expenses allowed it to offer moreitems 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 cho¡ces. McDon-ald's has expanded ¡ts menu beyond the popular-

setting Big Mac and Quarler Pounder to include suchnew healthy quick service items as grilled chickensalads, chicken snack wraps, and premium chickensandwiches in the tlnited States, Lemon ShrimpBurgers in Germany, and Ebi shrimp wraps in Japan.The comoanv has aLso added an extensive [ine ofpremium coffees that included espressos, cappuc-cinos, and Lattes sold ln its Mccafe restaurant loca-tions ¡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 andDining staff in December 2oo8.

Convenience and expansion of dining opportuni-ties. The addition of Mccafes helped McDonald'sincrease same store sates by extending traditionaldining hours. Customers wanting a mid-morning cof-fee or an afternoon snack helped keep store traffichigh after McDonatd's had sold it last Egg McMuffln,McGriddle, or chicken biscuit and before the [unchcrowd arrived to order Blg Macs, Quarter Pounders,chicken sandwiches, or satads. The company alsoextended ¡ts drive-thru hours to 24 hours in morethan 25,ooo locations ¡n cities around the worldwhere consumers tended to eat at all hours of theday. The company also added double drive-thrulanes in the United States to get customers servedquickly in high traffic Iocations.

Ongo¡ng restaurant re¡nvestment. With more than14,ooo restaurants in the United States, the focus ofMcDonald's expansion of units was in rapidly growing

emerging markets such as Russia and China. The com-pany opened 125 new restaurants in China and 4onew restaurants in Russia in 2oo8. The comoanv alsorefurbished about 1o,ooo of ¡ts locat¡ons in the Un¡ted

States between zoo4 and 2oo8 as a part of its Mccaferollout and to make its restaurants a pteasant ptace

for both customers to dine and emolovees to work.

Sources: lanet Adarny, "McDo¡ald3 Seeks Way to Keep 5iz-zling," The Wall StrceÍ launal Onl¡ne, March ro, aoog; v¿ri-ous alnual reportsl various (orpary p-ess reieases.

Part One: Section A: Introduction and Overview

offerings of low-cost rivals. Successful adopters of differentiationstrategies include Johnson & Johnson in baby products (product reliabil-ity), Harlev-Davidson (outlaw image and distinctive sound), Chanel andRolex (luxury and prestige), Porsche and BMW (engineering design andperformance), and Amazon.com (wide selection and convenience). Com-panies pursuing differentiation strategies must continually seek new iruro-vations, undertake continuing efforts to add to the prestige of a brand, orstrive for higher levels of value-adding services to defend against rivals'attempts to imitate the features of a successful differentiator's Productoffering.

Focusing on a narroxo market niche ztsithin an industry. Many companieshave developed a competitive advantage not only through a strategykeyed to either low costs or differentiation, but also by serving the specialneeds and tastes of only a small segment of an industry's buyers ratherthan attempting to appeal to all buyers in an industry. Prominent compa-nies that enjoy competitive success in a specialized market niche includeCoogle in search-based krternet advertising, eBay in online auctions, Best

Buy in home electronics, McAfee in virus protection software, and TheWeather Channel in cablc TV.

Developing competitirsely aaluable resources and capabilities that riaalscan't easily match, copy, or trump zoith substitute resources. Resource-

based strategies may be used in tandem with any of the three strategicapproaches listed above and are keyed to delivering customer value inways rivals a¡e unable to match. FedEx has developed a resource-basedcompetitive advantage through its superior distribution capabilities thatallow it to promise next-day delivery of small packages within the UnitedStates. Over the years, Toyota has developed a sophisticated productionsystem that allows it to produce reliable, largely defect-free vehicles atlow cost. Ritz Carlton and Four Seasons have uniquely strong capabilitiesin providing their hotel guests with highly personalized services. Veryoften, winning a durable competitive edge over rivals hinges more onbuilding competitively valuable resources and capabilities than it does

on having a distinctive product. Clever rivals can nearly always copy thefeatures of a popular product, but it's much more difficult for rivals tomatch experience, know-how, or specialized resources that a companyhas devcloped and perfected over a long period of time.

Why a Company's Strategy Evolves over TimeThe appeal of a strategy that yields a sustainable competitive advantage isthat it offers the potential for an enduring edge over rivals. However/ man-agers of every company must be willing and ready to modify the strategy inresponse to thc unexpected moves of competitors, shifting buyer needs andpreferences, emerging market opportunities, new ideas for improving thestrategy, and mounting evidence that the strategy is not working well. Manag-ers should avoid dramatic departures from a proven competitive strategy if atall possible, but it should be expected that the strategy will be fine-tuned and

Chapter I Strategy and the Quest for Competitive Advantage

tn'eaked on a re8ular basis. Therefore, a cornpany'sstratery is not a one-time eoent, but is alzuays a zuorkin progress.

Evcn though it's expected that a company's strategywill evolve incrementally, on occasion, major strategyshifts are called for, such as rvhen a sirategy is clearlyfailing ancl the company faces a financial crisis. In

Changing c¡rcumstances and ongoing manage-

ment efforts to improve the strategy cause a

company's strategy to evolve over time-acondition that makes the task of craft¡ng a

skategy a work in progress, not a onelimeevent.

some industnes, conditions change at a fairly slorv pace, making it feasible fora strategy to ¡emain in place for luany years. But in industrics where indus-try ancl competitive conditions change frequently and in sometimes dramaticrvays, the life cycle of a given strategv is short. Industry environments char-acterized by hi¡¡h-uelocitr¡ chnnge requirc companies to repeatedlv adapt theirstrategies.l For examplc, companies in industries with rapid-fire advances intechnology like mcdical equipment, electronics, and rvireless devices ofteufind it essential to adjust key elements of their strategies several times a year.

Regardlcss of u.hether a companv's strategv changes gradually or swiftlvthe important point is that a company's present strategy is always fluid. Theevolving nature of a company's strategy means that the typical companYstrategy is a blend of (1) proactive moves to improve the company's financialperformance and secure a competitive edge and (2) as-needed resPonscs tounanticipated developrnents and fresh market conditions-see Figure 1.2.'?The

biggest portion of a company's curtcnt strategv flows from ongoing actionsthat have proven thcmsclves in the marketplace and newly launched initia-tives aimcd at building a larger lead over rivals and further boosting financialperformance. This part of management's act.ion plan for runniug the companyis its proactive, deliberate strategy.

At times, components of a company's deüberate strategy r,r'ill fail in thernarketplace and become abandoned strategy elements. Aithough strategyflou,s from an analysis of the irdustry and the company's internal capabili-ties, planned strategies don't alr+'ays play out as cxpected. In these cases, itmakes much nrore sense to abandon a losing plan than to blindly adhere tostrategv elements destincd to fail. Although most elements of the company'sdeliberatc strategy should be expected to survive, some portion of the real-ized strategv wiLI result from unplanned reactions to unar-rticrpated develop-ments. lt should be assumed that there will be occasions when market andcompetitive conclitior-rs take unexpected turns that call for some kind of stra-tegic reaction. Novel strategic mo\¡es on the part of rival firms, unexpectedshifts in customer preferences, fast-changing technological developments, and

'For an excellent treatment of the strategic challenges posed by high veloc¡ty changes, see Shona L.

Brown and Kathleen M. Ersenhardt, Competíng 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. j (Spring 1999), pp. 21 30; Henry Mintzberg and J. A. Waters, "0f Strategies,

Deliberate and Emergent," Str1teq¡c Monogement Journol ó (tq8S), pp. 257-272i Costas Mark¡des,

"strategy as Balance: From'Eitheror'to And,"' Business Strategy Rev¡ew 12, no. 3 (September

zoor), pp. 1-1o; Henry M¡ntzberg, Bruce Ahlstrand, and Joseph Lampel, Strotegy Safori: A Guided

Tour through the W¡lds of strateg¡c Management (New York: Free Press, 1998), Chapters 2, 5,

and 7; and C. K. Prahalad and Gary Hamet, "The Core Competence ofthe Corporation," Harvard

Bus¡ness Rev¡ew 7o, no. 3 (May June r99o), pp.79 93.

F IGURE 1.2 A Company's Strategy ls A Elend Of Ptanned Inlüaüves And llnplanned Readve Adiusünents

Part One: Section A: lntroduction and Overview

ne\r, market opportunities call for unplanned, reactive adiustments that formthe cornpany's emergent strategy. As shown in Figure 1.2, a company's real-ized strategy tends to be a cotnbinatio of deliberate planned elements andunplanned, emergent elements.

The Importance of a Companys BusinessModel-ls the Strategy a Money-Maker?Closely related to the concept of strategy is the concept of a company's busi-ness model. A companv's business model is management's blueprint fordelivering a valuable product or service to customers in a manner that will

generate revenues sufficient to cover costs and vieldan attractive profit. Thc three elements of a company'sbusiness model are (1) its customer value proposition(its approach to satisfying buyer wants and needs at aprice customers will consider a good value), (2) theprofit formula (determining a cost structure that willaliow for acceptable profits given the pricing tied to itscustomer value proposition), and (3) identification ofthc kcy resources and processes that are necessary tocreate and deliver valuc to customers.:'

Mobile phone providers, satellite radio companies, and broadband providersemploy a subscription-based business model. The business model of networkTV and radio broadcasters entails providing free programming to audiencesbut charging advertising fees based on audience size. Gillette's business modelin razor blades involves achieving economies of scale in the production of itsshaving products, selling razors at an attractively low price, and then mak-ing 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 Bus¡ness Rev¡ew 86, no. rz (December 2oo8), pp. 5z 53 and Joan Magretta, "WhyBusiness lvlodels Matleí" HaNañ Bus¡ness Rev¡ew 8o, no. 5 (May zooz), p- 87.

A company's business model (1) specilies a

customer value proposition, (2) develops a profit

formula, and (3) identifies key resources andpocesses required to create and deliver

customer value. Absent a tight frt with otgantza-

tional capabilrtres and the ability to deliver good

profitability, the bus¡ness model is not viable and

üe company's ability to survive is in question.

Plann¡d nct Inltlallvcs ptusonto¡ng strrtlglc5 conünucd

hom pdor pcrlodsReallzedBusin€ssSbetcsy

Chapter I Strategy and the Quest for Competit¡ve Advantage

Hewlett-Packard, Lexmark, and Epson pursue much the same business modelas Gillette-achieving economies of scale in production and selling printersat a low (virtually break-even) price and making large profit margins on therepeat purchases of printer supplies, especially ink cartridges.

The nitty-gritty issue surrounding a company's business model is whetherit can execute its customer valuc proposition profitably. fust because companymanagers have crafted a strategy for competing and running the business doesnot automatically mean that the strategy will lead to profitability-it may or itmay not. The relevance of a company's business model is to clarify (7) how the

busíness zuill proaide customers zLtith aalue, (2\ generate rerenues sufficient to coaer

costs and produce nttfttctiae prof¡fs, and (3) identify whatezter resources and processes

are critícal 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 StrategyThree questions can be used to distinguish a winning strategy from a so-so orflawed strategy:

1.. Does the strategy fit the company's situationT To qualify as a winner, a

strategy has to be well matched to thc company's external and internalsituations. The strategy must fit competitive conditions in the industryand other aspects of the enterprise's externaenvironment. At the same time, it should be tai- A winning strategy must fit the company,slored to the company's collection of competitively external and internal situation, yield a sustain-important resources and capabilities. It's unwise able competitive advantage, and produce good

to build a strategy upon the company's weak- financial performance.

nesses or pursue a strategic approach that requrresresources that are deficient in the company. Unless a strategy exhib-its tight fit with both the external and internal aspects of a company'soverall situation, it is unlikely to produce respectable first-rate businessresults.

2. Has the strategy yielded s sustainable competitiae adaantage? Sfiatc-gies that fail to achieve a durable competitive advantage over rivals areunlikely to produce superior performance for more than a brief periodof time. Winning strategies enable a company to achieve a competitiveadvantage over key rivals that is long lasting

3. Has the strategy ptoduced good financial pctformance? Il would be dif-ficult to categorize a strategy as a "winning strategy" unless it producesexcellent company performance. Two kinds of performance improve-ments tell the most about the caliber of a company's shategy: (1) gainsin profitability and financial strength and (2) advances in the company'scompetitive strength and market standing.

Strategies that come up short on one or more of the above tests are plainlyless 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

strik¡ngty different busíness models. Consider, for example,

the business models for over-the-air radio broadcasters

and Sirius XM.

The business model of over-the-a¡r broadcast rad¡o-providing listeners with programming free-of-charge and

charging advertisers fees-is a proven money-maker.

On the other hand, the jury is still oul on S¡rius 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.

Cuslomer ValueProposition

Profit Formula

Key Resources andProcesses

Sirius XM

Digit¿l nrLrslc, new,s, n¡lion¿l antl rcgionarveather, 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 on¿l.¡ cls

Revcnue Cencration: r\'1on th lv subscriptionfees. s.rles of s¡fel ife radio erlui¡rment. .rncl

.rclverti sl ng rLrvcn Lrcs

Cost Structure: Flxecl costs .rssocl¿tecl rvithoper.rLing,r :.rLr'llilr-lr¡serl nrusic rlelivervsilrvtc(].

Fixod.rnrl r,¿ri.rlrle costs rel.rtecl to pfogftrrn-min¡¡ anrl content rovalties, nrarketing, andsullf)orf .ratlvrtres.

Profit Margin: Sirius X¡!1's prof¡t.rbility wascle¡renrlenl Lrn ¿ttr.lLt¡n8 a suificierrtly largenumber oi subscribers to cover ¡ts costs ¡nclprovide ior attractive profits,

Pro¡rer tv ancl ec¡uiprrent, s¡telI ilc lr.rns-mission capabilities. terreslri¿l rcllc¿ltrs,digital audio radjo service llcense iromFCC, programming contr¡cts. ¡lli¡nces rvithelectron ics nranuiacturcrs, a llianccs r'vithautonrobi Le nr¿ nuta( tur ers. s¡ les .rncl dislr i-trution.rgrr:cnrcnts lvith cler-lron ic s ret¿llers,frr.rnd buildin¡¡.rncl nr.rrkctine ca¡ralrilities,

Over-the-Air Radio Broadcasters

Free ol rh.rrge rrusic, n¿tion.r .rnrlloc¿l nervs, ocal tratfic reports,nati<;n.-rl and local

',r,eather, ancl ¡¡rr

radio programmrng Listeners cou l.lcxPcct frcqucnt programn'r¡ng intcrru l)tion tirr .r cls.

Rcvenue Gcncr¿tion: Ac[,crtis inp, s¿lcs

to n¿tior¡¿l .rnd l¡x.rl bLrs nesse.

Cost Structurc: l rxc'd co,.ts .rssoci¿tcclwith ten estri.r I bro.rclc.rstin¡3 o¡.rer.r

tions Fired ¿ncl v¡ri¿lrle L()sls rer¡reuto lr,t,tl nerls rlPr)rlinq rt[r'r'i.i tl.,t e. oporJIi, ) tr. ¡r,¡'1' r¡L ¡¡iili.¡¡¡ i¡¡5

Progr(rmnr¡ng ancl conlcnt rov.rlt cs,corrmerci¡l prorlur-tior.r ¡ctivit¡es, andsLr Pport .rL Lrv rlrLs.

Profit Margin:Ih e profit¡biIit,v ot over.lfrc-¿ir r,rrlio stJl¡ons wls (lependent

' )r) 8('nr.',rrinq.Jll¡¡ ¡e1l .rrIerli>inqTCVCT',TUCS tO COVCr COSTS and prOV¡defor ¡ttr ¡.tive prof i ts.

R.rrlio bro¿lcjc.isl torvers ¿ncl otheri.rci ities, sales ¡lersonne. expertrse rn

developing progranrnr inq to incre.lseaudience size and rndepenclent rat

i|rgs, infornration systcnrs c.lPablc oloptinrizing colurerci.r| ¡rric ing .rnrfirrr*lllo'r, IC( li, ell-e. lILri,t,r'|l|!rit F

conIracIS.

Source: Company documents, 10 Ks, and information posted on their Web sites.

Chapter I Strategy and the Quest for Competitive Advantage

Managers should use the same questions when evaluating either proposedor existing strategies. New initiatives that don't seem to match the company'sintemal and external situation should be scrapped before they come to ftui-tion, while existing strategies must be scrutinized on a regular basis to ensurethey have good fit, offer a competitive advantage, and have contributed toabove-average performance.

The Road AheadThroughout the chapters to come and the accompanying case collectiory thespotlight 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 market-place? The answer that emerges is that doing a good job of managing inherentlyrequires 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 busi-ness student and aspiring manager needs to know about crafting and execut-ing strategy. We will explore what good strategic thinking entails, describe thecore concepts and tools of strategic analysis, and examine the ins and outs ofcrafting and executing stategy. The accompanying cases wiJl help build yourskills in both diagnosing how well the strategy-making, strategy-executingtask is being performed and proposing recommendations to improve thestrategic and financial performance of the company profiled in a case. Thestrategic management course that you are enrolled in may also include a strat-egy simulation exercise where you will run a company in head-to-head com-petition with companies run by your classmates. Your mastery of the strategicmanagement concepts presented in the following chapters will put you in a

strong position to craft a winning strategy for your company and figure outhow to execute it in a cost-effective and profitable manner. As you progressthrough the chapters of the text and the activities assigned during the term,we hope to convince you that first-rate capabilities in crafting and executingstrategy are essential to good management.

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Kev PointsA company's strategy is management's game plan to stake out a market position,conduct its operatioris, attract and please customers, compete successfully, andachieve organizational objectives.

The central thrust of a company's strategy is undertaking moves to build andstrengthen the company's long-term competitive position and financial per-formance. Ideally, this results in a competitive advantage over rivals that thenbecomes the company's ticket to above-average profitability.

Assuranceof LearningExercises

Exercises for

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A company's strategy lvpically evolves over time, arising from a blencl of (1) pro-active and deliberate actions on the part of companv managers and (2) as-neecled

cmcrgcnt responses to unanticipated developments and fresh market conditions.

Closely relatecl to the concept of strategy is the concept of a company's businessmodel. A company's business model (1) specifies a customer va'lue proposi-tion, (2) develops a profit formula, ancl (3) identifies key resources and pro-cesses required to create anc'l cleliver customer va1ue. Absent a tight fit withorganizational capabilities and the ability to deliver good profitability, the busi-ness model is not viable and the company's ability to survive is in question.

A winnir.rg strategy fits the circumstanccs of a company's external situation andits internal resource stren€!ths and compctiti\.c capabilities, builds competitiveadvantage, and boosts companv performancc.

Go to www.bestbuy.com, click on the investor relations section and explore Besi LO1Buy's latest annual reports and 10-K filings to see if you can identify the key ele- LOzments of Best Buy's süategy. Use the framework provided in Figure 1.1 to helpidentify the key elements of Best Buy's strategy. What type of competitive advan-tage does Best Buy seem to be pursuing?

Based on what you know about the quick-service restaurant industry does L01McDonald's strategy as described in Concepts & Corurections 1.1 seem to be LOzwell-matched to industry and competitive conditions? Does the strategy seem tobe keyed to a cost-based advantage, differentiating features, serving the uniqueneeds of a niche, or developing resource strengths and competitive capabili-ties rivals can't imitate or trump (or a mixture of these)? What rs there aboutMcDonald's strategy that can lead to sustainable competitive advantage?

Go to www. nytco.com/investo rs and check whether the N¿tu York Times' recent LO4financial reports indicate that its business model is working. Does the company'sbusiness model remain sound as mo¡e consumers go to the lnternet to find gen-eral information and stay ab¡east of current events and news stories? ls its rev-enue 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 com-pany possess the necessary key resources and process capabilities to support a

change in its business model?

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

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"1. VVhere are we now? (Is your company in a good, average. or weaktion vis-á-vis rival companies? Does your company appear to be incondition? I y'hat problems does your company have that ri€ed 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 ofmance outcomes will signal that you and your co-man¿rgers arecompanv in a successful manner?)

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