Business Models: CVP and Profit Formula

Chapter 1: Strategy, Business Models, and Competitive Advantage

• Essentials of Strategic Management is an 8th edition textbook.
• The book is written by John E. Gamble, Margaret A. Peteraf, and Arthur A. Thompson.
• The learning objectives cover understanding strategy, the need for a distinctive strategy, the importance of a viable business model, identifying strategic approaches, and strategy evolution.

Learning Objectives

• Understanding a company's strategy
• Explaining why a company needs a creative, distinctive approach
• Explaining why a business model is important for outlining the profit formula and customer value proposition
• Identifying five dependable strategic approaches to differentiate companies and compete
• Understanding that strategies evolve over time due to changes

What is Strategy?

• Strategy involves choosing how to compete
• Strategy involves attracting and pleasing customers
• Companies need to position themselves in their industries to build valuable competitive capabilities.
• Each functional area of a business should be operated in a way that supports the overall strategy
• Strategies are about achieving the firm's performance goals.

How to Create Products or Services to Attract Customers

• Customer-centric approach - prioritzing customer needs
• Innovation - continuous product development and improvements
• Quality and Pricing - balancing product quality and cost-effectiveness
• Consider product features, pricing, convenience, and brand image when understanding customer needs

How to Position the Company in Its Industry

• Competitive Positioning involves choosing a niche or broader position, and identifying target customer segments
• Differentiation or Cost Leadership - decisions are tied to being unique in offerings (differentiation strategy) or lowest-cost provider (cost leadership strategy)
• Market Dynamics considers industry dynamics like competitors, trends, and external factors like economics, regulations and technological advances

How to Develop & Deploy Resources

• Core Competencies - enhancing key strengths to give long-term competitive advantage
• Resource Allocation- determine where to invest money, talent, technology to develop capabilities.
• Examples are operational efficiency, marketing or R&D
• Sustainability and Scalability- ensuring competitive capabilities can be scalable and sustainable long-term
• Effective use of resources like technology, human capital
• Invest in cutting-edge technology to improve product quality
• Improve workforce skills, leading to better competitive advantage
• Streamlining operations to produce goods or services more efficiently, at a lower cost, or with higher quality

Operations and Functions

• Research & Development (R&D) - innovations and improvements in product design, service offerings, and technology are key
• Supply Chain - streamlining is key to supporting competitive strategy
• Production- decisions around manufacturing (in-house or outsourcing) and efficiency in production are critical in maintaining cost control and product quality
• Sales & Marketing - strategy must detail how to market products successfully, align with company positioning, and manage customer relationships for growth
• Distribution- choosing the right distribution network (direct-to-consumer, intermediaries, or digital) impacts reach and customer satisfaction
• Finance- financial planning and resource allocation should align to support strategy, manage costs, and fund key initiatives to drive competitive advantage

How to Achieve Performance Targets

• Setting metrics for tracking success (revenue growth, profitability, market share, or customer satisfaction)
• Continuous improvement is needed through ongoing monitoring and adjustments and innovating as the company grows
• All functional areas must be aligned with the overall strategy
• Risk management- identifying potential risks (economic, market, or technological) and having contingency plans is critical
• Performance management- using dashboards or other tools to track the company achieving its strategic targets
• Continuous improvement - regularly reviewing, making adjustments, refining products, adjusting marketing tactics or improving operational efficiency

Creating a Winning Strategy

• Developing products/services that meet customer needs
• Positioning the business in a distinctive way in the industry
• Resource deployment and capability building
• Aligning business functions to support the strategy
• Setting and tracking performance targets to ensure long-term success
• A well-crafted strategy brings elements together for successful competition and growth in the market

Core Concept: Companies Outperforming Competitors

• A company's strategy is the coordinated set of actions to achieve superior profitability
• Outperforming competitors requires a competitive advantage, setting a company apart and enabling it to win more customers or operate more efficiently (from various sources)
• Examples of competitive advantages include cost leadership and differentiation

Core Concept: Cost Leadership/Differentiation/Niche Focus

• Cost Leadership- competing by becoming the lowest-cost producer
• Differentiation (unique products or services)- offering unique products or services that differentiate in the marketplace
• Niche Focus- targeting a specific segment of the market with specialized products and services

Core Concept: Realized Strategy

• Realized strategy is a combination of deliberate planned elements and unplanned emergent elements
• Some deliberate elements may fail in the marketplace and become abandoned
• Important to combine and build on deliberate elements and adapt the strategy based on emerging components

Core Concept: Business Model

• A business model describes how a company delivers value to customers and how it generates profits
• Two core elements of the business model are the customer value proposition and the profit formula

Creating and Sustaining a Competitive Advantage

• Sustainable competitive advantages are difficult to imitate and allow a company to maintain a position that outperforms rivals over time
• Five approaches to creating a competitive advantage, are Low-Cost Provider, Broad Differentiation, Focused Low-Cost, Focused Differentiation, and Best-Cost Provider.
• Different strategies are suitable for different situations

The Three Tests of a Winning Strategy

• The Fit Test evaluates if the strategy matches the company's internal capabilities and external environments
• The Competitive Advantage Test determines if the strategy provides a unique and lasting edge over competitors
• The Performance Test evaluates if the strategy is producing successful results such as profitability, market share, or overall business health

Why Crafting and Executing Strategy are Important

• Good strategy is a good indicator of good management practices.
• A better-conceived and competently executed strategy makes the firm in the market a standout performer
• How the strategy is created and executed directly reflects a company's strategic capabilities

The Road Ahead

• Strategy involves answering the most important question: What must managers do to make a company win in the marketplace?

Key Concepts and Connections

• Examples of companies (Apple, Netflix, Amazon, Spotify, Uber, Walmart) are provided to illustrate strategic choices and principles.