CHAPTER 1

Strategy and the

Quest for
Competitive
Advantage

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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Thinking Strategically:
The Three Big Strategic Questions

1. Where are we now?

External and Internal Analysis

2. Where do we want to go?

✔Vision and Objectives
✔Business(es) to be in and market positions
✔Buyer needs and groups

3. How are we going to get there?

✔This is its strategy
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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

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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

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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

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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

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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

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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

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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?

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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

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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

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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?

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Three tests can be used to evaluate the merits of one
strategy over another and to gauge how good a strategy is:
The Goodness of Fit Test
A good strategy is well matched to the company's situation –
both internal and external factors and its own capabilities
and aspirations.
The Competitive Advantage Test
A good strategy leads to sustainable competitive advantage.
The bigger the competitive edge that a strategy helps
build, the more powerful and effective it is.
The Performance Test
A good strategy boosts company performance. Two kinds of
performance improvements are the most telling: gains in
profitability and gains in the company's long-term
business strength and competitive position.
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