Essentials of Strategic Management Chapter 1 PDF

CHAPTER 1 Strategy, Business Models, and Competitive Advantage  LEARNING OBJECTIVES 1. Understand what is meant by a company’s strategy. 2. Explain why a company needs a creative, distinctive strategy that sets it apart from rivals. 3. Explain why it is importa...

CHAPTER 1 Strategy, Business Models, and Competitive Advantage  LEARNING OBJECTIVES 1. Understand what is meant by a company’s strategy. 2. Explain why a company needs a creative, distinctive strategy that sets it apart from rivals. 3. Explain why it is important for a company to have a viable business model that outlines the company’s customer value proposition and its profit formula. 4. Identify the five most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage. 5. Understand that a company’s strategy tends to evolve over time because of changing 2  What Is Strategy? Strategy involves choosing how toHow compete. to create products or services that attract and please customers. How to position the company in its industry. How to develop and deploy resources to build valuable competitive capabilities. How each functional piece of the business (research and development, supply chain activities, production, sales and marketing, distribution, finance, and human resources) will be operated. How to achieve the firm’s performance targets. 3  What Is Strategy? The strategy consists of several ‘how’ questions: How to create products or services that meet customer needs and expectations. How to position the company within its industry to establish a competitive advantage. How to develop and deploy resources to build capabilities that give the company an edge over competitors. How each business function (e.g., research and development, supply chain, production, sales, marketing, finance, HR) will be managed and aligned with the overall strategy. How to achieve performance targets, which involves ensuring that the strategy drives measurable results. Each of these points forms the foundation for a company's competitive strategy and long- 4  What Is Strategy? 1. How to Create Products or Services that Attract and Please Customers Customer-Centric Approach: A strategy must prioritize understanding customer needs, preferences, and behaviors. Companies can offer superior products or services by providing unique value that sets them apart from competitors. Innovation: Continual product development and improvement keep a company competitive. This could involve technological innovation, better features, improved customer service, or new product designs. Quality and Pricing: Balancing product quality and cost- effectiveness is crucial. Companies need to decide whether to compete based on premium quality or cost leadership (lower pricing) while maintaining customer satisfaction. 5  What Is Strategy? 1. How to Create Products or Services that Attract and Please Customers Creating products or services that attract customers requires a deep understanding of the market and its demands: Customer Insights: Use data analytics, surveys, and market research to understand what customers value most. This can include product features, pricing, convenience, or brand image. Product Design and Innovation: Focus on constant innovation. Offering a unique selling proposition (USP) through product features or services that are better or different from competitors is key. Customer Experience: Ensure that the customer journey—from product discovery to post-sale support—offers a seamless and satisfying experience, enhancing loyalty. Customization and Personalization: Adapting products and services to individual customer needs or local preferences can be a critical differentiator. For example, Apple creates excitement around product releases with sleek designs, premium features, and an ecosystem that ties customers to its products. This attracts and retains a large and loyal 6  What Is Strategy? 2. How to Position the Company in Its Industry Competitive Positioning: A company must choose how it wants to be perceived relative to competitors. This involves choosing a niche or broader market position, identifying target customer segments, and crafting a brand identity that resonates with those customers. Differentiation or Cost Leadership: Positioning decisions are tied to whether the company focuses on being unique in its offerings (differentiation strategy) or being the lowest-cost provider (cost leadership strategy). Market Dynamics: Positioning also considers industry dynamics such as competitor actions, market trends, and external factors like economic shifts, regulations, and technological changes. 7  What Is Strategy? 2. How to Position the Company in Its Industry Positioning the company involves identifying its unique role in the competitive landscape: Competitive Analysis: Companies should analyze their competitors’ strengths and weaknesses to identify gaps or areas for differentiation. Tools like SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis are useful here. Target Market: Choose whether to focus on a broad market or a niche. A broad market strategy may appeal to a larger audience, while a niche strategy could focus on specialized, underserved segments. Brand Strategy: Define what the brand stands for. A strong brand position communicates a clear message to customers—such as affordability, premium quality, or sustainability—which shapes customer perceptions. Strategic Alliances: Companies can enhance their position by forming partnerships or alliances with other companies, leveraging complementary strengths for mutual benefits. For instance, Tesla positioned itself as a premium electric vehicle 8  What Is Strategy? 3. How to Develop and Deploy Resources to Build Competitive Capabilities Core Competencies: Identifying and enhancing key strengths—like proprietary technology, specialized talent, or unique business processes— can provide long-term competitive advantage. Resource Allocation: Strategy involves determining where to invest resources (money, talent, technology) to develop capabilities that give the company a competitive edge, such as operational efficiency, marketing, or R&D. Sustainability and Scalability: Ensuring that these competitive capabilities are scalable and sustainable over time is crucial to long-term strategy execution. 9  What Is Strategy? 3. How to Develop and Deploy Resources to Build Competitive Capabilities Building the right capabilities requires effective use of resources (financial, human, technological): Technology and Innovation: Investing in cutting-edge technology can create efficiencies, improve product quality, or offer entirely new product categories. Human Capital: The skills and expertise of the workforce are crucial. Investing in training and creating a culture of innovation and learning can lead to greater competitive advantages. Operational Excellence: Streamlining operations and increasing efficiency allows companies to produce goods or services faster, at lower cost, or with higher quality. Flexibility and Scalability: Competitive capabilities should be adaptable. Flexibility in production, marketing, and customer service allows companies to respond to market changes quickly. For example, Amazon’s investments in logistics and supply chain 10  What Is Strategy? 4. How Each Functional Piece of the Business Will be Operated Research & Development (R&D): Innovations and improvements in product design, service offerings, and technology development are vital for remaining competitive. Supply Chain Activities: Optimizing the supply chain for efficiency, reliability, and cost management is key to supporting competitive strategy. Production: Decisions around manufacturing (e.g., in-house vs. outsourcing) and production efficiency are critical to maintaining cost control and product quality. Sales and Marketing: A strategy must outline how to market products effectively, using channels that align with the company’s positioning, and how to manage customer relationships for sustained growth. Distribution: Choosing the right distribution networks—whether direct-to-consumer, through intermediaries, or digital platforms—affects the company’s reach and customer satisfaction. Finance: Financial planning and resource allocation should align with 11  What Is Strategy? 4. How Each Functional Piece of the Business Will be Operated The strategy must integrate all functional areas to work together seamlessly toward common goals: Research & Development (R&D): Focuses on innovation, developing new products, and improving existing offerings. A company must decide how much to invest in R&D and how to manage innovation pipelines. Supply Chain Management: Managing suppliers, inventory, and logistics ensures that products are produced and delivered efficiently. Companies like Toyota are known for their "just-in-time" supply chains that minimize waste and cost. Production: Manufacturing strategies, such as automation or outsourcing, play a role in maintaining cost efficiency while ensuring quality. Sales and Marketing: Marketing strategies should align with customer needs, while sales teams ensure that products reach the right markets. Digital marketing, direct sales, or third-party distributors can all be part of the mix. Distribution: The right distribution network ensures product availability and customer convenience. This can include retail stores, e-commerce, or partnerships with other distributors. Finance: The finance function ensures that the company's growth is sustainable by managing cash flows, investments, and cost controls, aligning these with strategic objectives. Human Resources (HR): Recruiting, retaining, and developing employees with the right skills is crucial. HR must align with strategic goals, whether it’s hiring for innovation or scaling production teams. 12  What Is Strategy? 5. How to Achieve the Firm’s Performance Targets Performance Metrics: Setting clear, measurable goals such as revenue growth, profitability, market share, or customer satisfaction is necessary to track success. Continuous Improvement: Achieving targets requires ongoing monitoring and adjustments. This includes refining strategies, improving processes, and innovating as the company grows. Alignment Across Functions: All functional areas need to be aligned with the overall strategy. Misalignment could lead to inefficiencies and missed targets. Risk Management: Identifying potential risks (economic, market, technological) and having contingency plans is vital for achieving targets consistently. 13  What Is Strategy? 5. How to Achieve the Firm’s Performance Targets Achieving business objectives involves setting the right goals and ensuring that the strategy delivers measurable outcomes: Key Performance Indicators (KPIs): Performance metrics should be clearly defined to measure success. KPIs could include revenue growth, profit margins, customer retention rates, or market share. Performance Management Systems: Using balanced scorecards, dashboards, or other tools to track progress helps ensure that the company is meeting its strategic targets. Continuous Improvement: Regularly reviewing performance and making adjustments as necessary is crucial. This could involve refining products, adjusting marketing tactics, or improving operational efficiency. Risk Management: Identifying potential risks (financial, operational, market-related) and planning for contingencies is important for sustaining performance targets. A proactive risk management strategy enables companies to remain resilient. For example, Walmart achieves its performance targets through rigorous cost controls and operational efficiency, which allows it to 14  What Is Strategy? Conclusion: Creating a Winning Strategy To sum up, successful strategy requires careful consideration of how to compete in each of these areas. Companies need to: Develop products/services that satisfy customer needs. Position themselves distinctively in their industry. Build and deploy resources that enhance their capabilities. Align every business function to support the strategy. Set and track performance targets to ensure long-term success. A well-crafted strategy brings all these elements together cohesively, allowing a company to not only compete but thrive in the market. 15  CORE CONCEPT: Strategy A company’s strategy is the coordinated set of actions that its managers take to outperform the company's competitors and achieve superior profitability. 16  CORE CONCEPT: Strategy Let's dive deeper into the idea that a company’s strategy is the coordinated set of actions that its managers take to outperform competitors and achieve superior profitability. This concept is central to understanding the purpose and function of a strategy in business. 1. Outperforming Competitors: To outperform competitors, a company’s strategy must provide competitive advantage— something that sets it apart in the market and enables it to win more customers, secure better deals, or operate more efficiently. This advantage can come from various sources: 17  CORE CONCEPT: Cost Leadership:Strategy A company may choose to compete by becoming the lowest-cost producer in its industry. By keeping costs lower than competitors, it can either charge lower prices and attract price- sensitive customers or maintain standard prices and achieve higher margins. Example: Walmart’s strategy of leveraging its enormous supply chain, economies of scale, and efficient logistics enables it to offer products at lower prices than competitors. Differentiation: This strategy involves offering unique products or services that stand out in the marketplace. Differentiation can be based on product features, quality, customer service, branding, or technology. Example: Apple differentiates itself through innovative design, cutting-edge technology, and a tightly integrated ecosystem of products and services (iPhones, Macs, Apple Watches, and services like iCloud). Niche Focus: A company can target a specific segment of the market with specialized offerings. This allows it to cater to a particular group of customers better than competitors who are serving broader markets. 18 2. Coordinated Set of Actions: Strategy isn’t just about making broad decisions; it’s about coordinating actions across all areas of the business to achieve the desired competitive advantage. This requires alignment of decisions and processes across different departments and functions: Research and Development (R&D): Developing new products or improving existing ones is a key action in sustaining competitive advantage. R&D ensures that the company is ahead of the curve in innovation, offering customers something fresh and valuable. Example: Google’s heavy investments in R&D allow it to maintain leadership in the tech industry by continually offering new services (such as AI innovations) and improving existing products like Google Search and YouTube. 19 Marketing and Branding: A strong marketing strategy ensures that a company’s products or services reach the right audience with a clear message. Effective branding helps a company establish an emotional connection with customers, increasing loyalty and brand equity. Example: Nike's marketing strategy, with its iconic "Just Do It" campaign, focuses not just on selling sportswear but on promoting a lifestyle, inspiring customers to associate the brand with athletic success and personal achievement. Operations and Supply Chain: Efficient operations and supply chain management ensure that a company can deliver products or services faster, with higher quality, or at lower costs than competitors. Example: Amazon’s streamlined operations, advanced logistics, and warehouse automation allow it to offer same-day or next-day delivery, giving it an edge over other e-commerce companies. 20 Sales and Customer Relationships: A good strategy also coordinates how the sales team approaches customers and builds relationships. Whether it’s through direct sales, partnerships, or e-commerce, aligning the sales strategy with the company’s broader objectives ensures that the business capitalizes on opportunities. Example: Salesforce, a leader in customer relationship management (CRM) software, coordinates its strategy around building strong customer relationships by providing excellent service and continuously updating its software with innovative features. Finance: The financial aspect of strategy ensures that resources are allocated to high-impact areas. Financial discipline helps manage costs while funding key initiatives that will drive competitive advantage. Example: Companies like Berkshire Hathaway are known for strategic investments and careful financial management that maximize profitability and long-term growth potential. 21 3. Achieving Superior Profitability: The ultimate goal of a strategy is superior profitability, meaning not just surviving but thriving by achieving higher profits than competitors. Profitability is influenced by many factors, including: Revenue Growth: Increasing sales is key to profitability. This can come from expanding into new markets, acquiring more customers, or increasing the average value per customer. A successful strategy identifies where growth opportunities exist and how to capitalize on them. Example: Netflix increased its profitability by expanding globally, diversifying its content offerings, and investing in original programming, which attracted millions of new subscribers. 22  Cost Efficiency: As important as revenue is, controlling costs is essential for profitability. A company must ensure it is spending its resources efficiently, cutting waste, and finding ways to operate more effectively than competitors. Example: Toyota’s lean manufacturing system, which minimizes waste and maximizes productivity, has allowed it to be one of the most profitable car manufacturers for decades.  Market Share: Gaining a larger share of the market can lead to economies of scale, which in turn improves profitability. Companies with larger market shares often have stronger bargaining power with suppliers and better brand recognition. Example: Coca-Cola has used its dominance in the soft drink market to maintain its profitability, leveraging its scale to keep production costs low while maintaining premium pricing in many markets.  Sustainable Competitive Advantage: To achieve superior profitability in the long term, a company needs to build capabilities that are difficult for competitors to imitate. This profitability over 2 4. Strategy is a Dynamic Process: Importantly, strategy is not static—it must evolve in response to changing market conditions, technological advancements, and competitive actions. Continuous assessment and adaptation are necessary to maintain competitive advantage and profitability over time. Environmental Scanning: Companies must continually monitor the external environment, including competitors, customer preferences, and technological trends, to adjust their strategy when needed. Example: Microsoft pivoted from focusing primarily on software products (like Windows) to becoming a leader in cloud computing through its Azure platform, allowing it to adapt to new industry trends and maintain its profitability. Agility: An agile strategy allows companies to respond quickly to new opportunities or threats. Whether it's launching a new product in response to market demand or adjusting the supply chain during a global crisis, being able to pivot effectively can safeguard profitability. 24 Conclusion: Strategy as a Holistic, Coordinated Effort A company’s strategy is about coordinating every aspect of the business toward a common goal: outperforming competitors and achieving superior profitability. By aligning actions across departments like marketing, finance, operations, and R&D, a company can build a sustainable competitive advantage. The execution of this strategy must be flexible and adaptable to changing environments, allowing the company to remain ahead in the race for market leadership and profitability. In essence, strategy is the blueprint for success in a competitive marketplace, and every action taken by managers should align with that overarching goal. 25  The Importance of a Distinctive Strategy and Competitive A company’s strategy: Approach Is a distinctive set of creative strategic choices. Manager’s decision. Apart from rivals. Competitive edge. Best fits its unique business situation for competitive advantage. Is intended to allow it to compete differently. Doing what rival firms do not do or, better yet, what rival firms cannot do. 26  The Importance of a Distinctive Strategy and Set 1. A Distinctive Competitive of Creative Strategic Choices Approach Every company’s strategy is unique because it is shaped by its goals, market conditions, customer needs, and internal capabilities. Creative strategic choices refer to the novel ways in which a company decides to position itself, allocate resources, and differentiate its offerings. These choices are essential in establishing a company’s identity in the market, as well as carving out a distinct place in the competitive landscape. Example: 27  The Importance of a Distinctive Strategy 2. Manager’sand Competitive Decision Approach The manager's decision is central to shaping the company’s strategy. These decisions revolve around where to compete, how to compete, and with what resources. Managers must constantly evaluate the business environment, identify opportunities, and mitigate risks to make informed strategic decisions. These decisions also encompass choices on entering new markets, product innovations, partnerships, acquisitions, and resource allocation. Example: Apple’s decision under Steve Jobs to limit its product range and focus on high-quality, premium- priced devices like the iPhone and MacBook was a 28  The Importance of a Distinctive Strategy 3. Apart Fromand Competitive Rivals Approach A company’s strategy differentiates it from rivals by offering products, services, or experiences that are hard for competitors to replicate. The ability to stand apart from competitors is essential because, in most industries, many firms offer similar products or services. What makes a business successful is its ability to innovate or provide a unique value proposition that rivals cannot easily match. Successful differentiation helps the company gain customer loyalty and market share. Example: Southwest Airlines set itself apart from rivals by offering low-cost, no-frills flights and emphasizing 29  The Importance of a Distinctive Strategy and 4. Competitive Competitive Edge A competitiveApproach edge refers to an advantage that allows a company to perform better than its competitors. This advantage can stem from various factors, such as cost efficiency, brand reputation, superior products, or innovation. The goal of a company’s strategy is to develop and sustain this competitive edge to ensure profitability and growth. Competitive edge is not just about being better; it’s about being different in a way that is valuable to customers. Example: Amazon has a competitive edge through its efficient supply chain, vast product selection, and ability to 30  The Importance of a Distinctive Strategy and 5. Best Fits Its Competitive Unique Business Situation for Competitive Approach Advantage A well-crafted strategy should be tailored to the specific context of a company, meaning that a strategy that works for one business might not work for another. The strategy must align with the company's strengths, market conditions, customer preferences, and broader industry trends. Competitive advantage arises when the strategy is the perfect fit for the company’s internal capabilities and external market realities, leading to superior performance. Example: 31  The Importance of a Distinctive Strategy 6. Intended to and Competitive Allow It to Compete Differently One of the coreApproach principles of strategy is competing differently rather than simply trying to be the best at what everyone else is doing. Competing differently involves finding niches, identifying underserved markets, or using disruptive innovations that challenge the traditional business models. A successful company does not necessarily aim to outdo competitors on all fronts, but rather to carve out its own path, making its offering distinct and valuable to the target audience. Example: Uber competed differently by disrupting the traditional taxi industry, offering a platform that connects drivers and riders using mobile technology, 32  The Importance of a Distinctive Strategy 7. Doing Whatand RivalCompetitive Firms Do Not Do or, Better Approach Yet, What Rival Firms Cannot Do Doing what rival firms do not do involves innovating in areas where competitors have not yet ventured. This could mean offering a different customer experience, adopting new technologies, or redefining value in a way competitors haven’t thought of. Even more powerful is doing what rival firms cannot do. This means building capabilities, resources, or technologies that are hard for competitors to imitate, such as proprietary technology, patents, or an exclusive supply chain. Example: Patagonia, the outdoor apparel brand, focuses on environmental sustainability to an extent that many of its rivals do not or cannot match. Patagonia’s commitment to using recycled materials and promoting eco- friendly 33  The Relationship Between a Company’s Strategy and Its Business Model Business model: Management’s blueprint for delivering to customers a valuable product or service that will yield an attractive profit. Elements of the business model: The customer value proposition defines how the firm will satisfy buyer wants and needs at a price buyers will consider a good value. The profit formula describes its approach to determining a cost structure that allows for acceptable profits given the pricing tied to its customer value proposition. 34  The Relationship Between a Company’s Strategy and Its Business Model 1. Customer Value Proposition (CVP) The customer value proposition (CVP) is at the core of the business model. It defines the specific value the company promises to deliver to customers. It explains how the firm will satisfy buyer needs and wants at a price buyers are willing to pay and consider a good value. Key Aspects of CVP: Understanding Customer Needs: The company must clearly identify the needs, desires, and pain points of its target market. Offering Unique Value: The business must deliver something that customers value more than what competitors offer. This could be in the form of better quality, lower prices, convenience, or superior customer service. Pricing: The CVP must align with the pricing strategy, 35  The Relationship Between a Company’s Strategy and Its Business Model Differentiation: A successful CVP helps differentiate the company from competitors by offering unique benefits or features that rivals cannot easily replicate. Examples: Apple: Apple’s CVP revolves around providing high-quality, user-friendly products with sleek designs and a premium customer experience. Buyers are willing to pay a premium price for the perceived value of owning Apple products, such as iPhones and MacBooks. IKEA: IKEA’s value proposition focuses on offering affordable, stylish, and functional furniture that customers can easily assemble themselves. This mix of low cost and modern design has made it a global leader in home furnishings. Why the Customer Value Proposition is Critical: The CVP defines how the company will attract and retain customers by meeting their needs better than competitors. It is the foundation for all marketing and sales efforts, shaping how the company communicates its benefits to customers. 36  The Relationship Between a Company’s Strategy and Its Business Model 2. Profit Formula The profit formula explains how the company will generate profits while delivering on its value proposition. It defines the business’s approach to determining a cost structure that allows for acceptable profits given the pricing tied to the customer value proposition. Key Aspects of the Profit Formula: Revenue Model: This defines how the company will generate revenue. Revenue can come from various sources such as product sales, subscriptions, or services. Cost Structure: The cost structure outlines all the expenses involved in producing, marketing, and delivering the product or service. It includes fixed costs (e.g., rent, salaries) and variable costs (e.g., raw materials, production costs). Profit Margin: The profit margin is determined by the difference between the company’s revenues and its costs. The goal is to ensure that the price charged to customers is high enough to cover the costs of delivering the value proposition and still leave room for profit. Resource Efficiency: A key part of the profit formula is ensuring 37  The Relationship Between a Company’s Strategy and Its Business Model Example: Walmart: Walmart’s profit formula revolves around a high- volume, low-margin strategy. The company keeps its prices low to attract a large customer base while maintaining tight control over its supply chain and operational costs, allowing it to profit from high sales volume even with relatively low margins. Netflix: Netflix generates revenue from subscriptions. Its profit formula is based on maintaining a large library of content, much of it original, and distributing it digitally. This eliminates the costs associated with physical distribution (e.g., DVDs), allowing Netflix to scale globally with lower operating costs. Why the Profit Formula is Critical: A solid profit formula ensures that the company’s operations are financially viable. It balances the cost of delivering value with the need to earn an acceptable profit, ensuring long-term sustainability. It aligns the pricing strategy with cost structures, allowing the company to remain competitive while still making a profit. 38  The Relationship Between a Company’s Strategy and Its Business Model The Interaction Between Customer Value Proposition and Profit Formula The customer value proposition and the profit formula are deeply interconnected. For the business model to work, these two elements must align: CVP drives demand: The better the company’s value proposition, the more likely it is to attract and retain customers. Profit formula sustains operations: The company’s profit formula ensures that the cost of delivering the value proposition allows for healthy margins. Balance between price and cost: The price customers are willing to pay (based on the value proposition) must cover the company’s costs (defined by the profit formula). If the costs are too high relative to the price, the company won’t be profitable; if the value proposition isn’t compelling enough, customers won’t be willing to pay the price. 39  The Relationship Between a Company’s Strategy and Its Business Model Successful Business Models: Key Examples Here are examples of companies with well-aligned business models: 1. Airbnb and Customer Value Proposition: accommodations in locations around Airbnboffers the world, often with more unique travelers local flavor affordable than traditional hotels. Profit Formula: Airbnb operates with a low-cost structure, as it does not own the properties it rents out. Its platform-based model earns revenue by charging service fees on bookings. 40  The Relationship Between a Company’s Strategy and Its Business Model 2.Spotify Customer Value Proposition: Spotify provides users with access to millions of songs and playlists through a subscription-based model or free tier with ads. The ease of use, personalization, and vast selection make Spotify highly valuable to music lovers. Profit Formula: Spotify generates revenue from both its ad- supported free users and its premium subscription users. The subscription model provides recurring revenue, while the free tier increases reach and engagement. 3.Uber Customer Value Proposition: Uber offers convenient, on-demand transportation through its mobile app, providing a better user experience than traditional taxis with features like cashless payments, ride tracking, and ratings. Profit Formula: Uber operates on a platform model, connecting drivers with riders. Uber takes a percentage of the fare from each trip, while minimizing fixed costs by not owning the vehicles. This allows for scalability with relatively low overhead costs. 41  CORE CONCEPT: Business Model 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 both cover costs and earn a profit. The two elements of a company’s business model are its customer value proposition and its profit formula. 42  REC AP A business model serves as the blueprint for how a company delivers value to customers while generating profits. The two key components, the customer value proposition and the profit formula, must work in harmony for the business to be successful. The customer value proposition outlines how the company will meet customer needs in a way that’s perceived as valuable and distinct from competitors. 43  REC AP The profit formula ensures that the company’s cost structure allows for sustainable profitability while delivering on the value proposition. By carefully crafting and aligning these elements, businesses can create sustainable competitive advantages and ensure long-term profitability. 44  REC AP Analysis of the Relationship Between CVP and Profit Formula The customer value proposition and profit formula must work together for a business model to be successful. Alignment: If a company promises low-cost solutions (CVP), its profit formula must accommodate this through a low-cost structure (e.g., operational efficiency, economies of scale). Otherwise, the company will struggle to maintain profitability. Sustainability: A profitable business model needs a CVP that resonates with customers but also makes financial sense. A company with a compelling CVP but a poor profit formula may 45 Concepts and Connections 1.1 Spotify, Sirius XM, and Over the-Air Broadcast Radio: Three Contrasting Business Models Spotify Sirius XM Over-the-Air Radio Broadcasters Custome Provided free-of-charge Internet For a monthly subscription fee, Provided free-of-charge music, r Value audio streaming service that provided satellite-based music, national and local news, local Proposit allowed PC, tablet computer, news, sports, national and regional traffic reports, national and local ion and smartphone users to listen weather, traffic reports in limited weather, and talk radio to its collection of 70 million areas, and talk radio programming programming music tracks and 3 million Also offered subscribers streaming Included frequent programming podcast titles Internet channels and the ability interruption for ads Utilized algorithms to generate to create personalized, playlists based on users’ commercial-free stations for predicted music preferences online and mobile listening Offered programming Offered programming interrupted interrupted by brief, only by brief, occasional ads occasional ads; eliminated advertising for Premium subscribers Profit Revenue generation: Ads Revenue generation: Monthly Revenue generation: Advertising Formula targeted to different subscription fees, sales of satellite sales to audiences and sold to local radio equipment, and advertising national and local businesses and national buyers; revenues Cost structure: Fixed costs subscription revenues Cost structure: Fixed costs associated with terrestrial generated from an associated with operating a broadcasting operations advertising-free Premium satellite-based music delivery Fixed and variable costs related to subscription service and streaming Internet local news reporting, advertising Cost structure: Fixed costs service sales operations, network affiliate associated with developing Fixed and variable costs fees, programming and content software for computers, related to programming and royalties, commercial production tablets, and smartphones content royalties, activities, and support activities Fixed and variable costs marketing, and support Profit margin: Profitability related to operating data activities dependent on generating sufficient centers to support streaming Profit margin: Profitability advertising revenues to cover costs network content royalties, dependent on attracting a and provide attractive profits marketing, and support sufficiently large number of activities subscribers to cover costs and Sources: Company documents, 10-Ks, and information posted on their websites. Profit margin: Profitability provide attractive profits dependent on generating 46 Strategy and the Quest for Sustainable Competitive Advantage Strategic approaches to a sustainable competitive advantage: In business strategy, companies aim to achieve a sustainable competitive advantage—a position in the marketplace that allows them to consistently outperform rivals over time. To do this, companies adopt various strategic approaches based on their market position, industry, customer base, and capabilities. Each approach is designed to give the firm an edge over competitors by either offering more value to customers or achieving lower costs. Let’s explore five major strategic approaches to creating and maintaining a sustainable competitive advantage: 47 Strategy and the Quest for Sustainable Competitive Advantage Strategic approaches to a sustainable competitive advantage: 1. A low-cost provider strategy achieves a cost-based advantage over rivals. 2. A broad differentiation strategy differentiates its products or services from those of its rivals in ways that appeal to a broad spectrum of buyers. 3. A focused low-cost strategy outcompetes rivals in a narrow/niche market by achieving lower costs and offering its products at lower prices. 4. A focused differentiation strategy outcompetes rivals in a narrow/niche market by offering buyers customized and exclusive attributes. 48  Strategy and the Quest for Sustainable Competitive 1. Advantage Low-Cost Provider Strategy A low-cost provider strategy focuses on achieving a cost-based advantage over competitors. By lowering operational costs, the company can offer products or services at a lower price than its rivals, which appeals to cost-conscious customers. Key Features: Economies of scale: The company benefits from producing in large quantities, which reduces the cost per unit. Efficient production: Streamlining operations and using technologies that cut down on waste and inefficiencies. Cost leadership: The company becomes the lowest-cost producer in its industry, allowing it to underprice competitors or achieve higher profit margins at the same price level. Success Factor: A low-cost provider strategy is effective when a large portion of customers is price-sensitive and demand for the product or service is highly elastic. 49  Strategy and the Quest for Sustainable Competitive 2. Advantage Broad Differentiation Strategy A broad differentiation strategy aims to set the company’s products or services apart from those of competitors by offering unique features or qualities that appeal to a wide range of buyers. This allows the company to command premium prices because customers see added value in its offering. Key Features: Unique product attributes: This could be innovation, quality, customer service, design, or branding. Brand loyalty: A strong differentiation can foster loyalty, leading to repeat purchases. Perceived value: The company creates something distinctive enough that customers are willing to pay a premium. Success Factor: Differentiation must be valuable to a broad market segment and difficult for competitors to spectrum of consumers, copy, ensuring even in that customers a highlythe perceive competitive product as superior to 50  Strategy and the Quest for Sustainable 3.Competitive Focused Low-CostAdvantage Strategy A focused low-cost strategy targets a narrow or niche market but applies a low-cost approach similar to that of a low-cost provider strategy. The company seeks to outcompete rivals in a specific segment by offering products at a lower price point, catering to a unique set of customer needs. Key Features: Targeted cost-cutting: The company focuses on minimizing costs within a specific niche rather than across a broad market. Niche focus: By understanding the particular needs of a smaller, well- defined market segment, the company can tailor its products and pricing to meet those needs better than competitors. Competitive pricing: The strategy focuses on underpricing competitors within the niche. Success Factor: A focused low-cost strategy works best when the niche is large enough to be profitable but underserved by larger competitors who might not or baggage want to adjust their cost structure or operations to target it effectively. 51  Strategy and the Quest for Sustainable 4.Competitive Advantage Focused Differentiation Strategy A focused differentiation strategy also targets a narrow or niche market but differentiates the product or service based on exclusive or highly customized attributes that appeal to specific buyer preferences. This strategy allows the company to charge premium prices due to the unique value it offers to this focused segment. Key Features: Customization and exclusivity: The product or service is tailored to meet the specific preferences or needs of the niche market. Customer loyalty: By offering something distinct that resonates with the target market, the company builds strong loyalty. Limited competition: The niche market is often small, with few competitors offering the same level of specialization. Success Factor: The success of this strategy depends on the ability to understand and satisfy the niche market’s unique demands better than any competitor. 5  Strategy and the Quest for Sustainable 5.Competitive Advantage Best-Cost Provider Strategy A best-cost provider strategy aims to offer more value for the money by combining elements of both low-cost and differentiation strategies. The company delivers higher quality or additional features at a lower price than competitors offering similar high-value products, thus appealing to customers who want both quality and affordability. Key Features: Value for money: The company provides a product or service that meets or exceeds customer expectations on key attributes like quality, performance, or service while being competitively priced. Balanced approach: The company balances operational efficiency with superior product quality or service to achieve a cost advantage without compromising value. Target market: Best-cost strategies typically target value-conscious customers who want more than just a low price—they also want quality or other important attributes at a reasonable cost. Success Factor: To succeed with this strategy, a company must control costs tightly while ensuring that it provides features or quality that justify a slightly higher price than basic low-cost competitors. Example: Toyota: Toyota uses a best-cost provider strategy by offering vehicles that 53  CORE CONCEPT: Sustainable Competitive Advantage Conclusion Each of these strategic approaches to achieving a sustainable competitive advantage focuses on either cost leadership, differentiation, or a combination of both. The key to success in each strategy is a deep understanding of the target market’s needs and ensuring that the company can either outperform competitors on price (low-cost strategies) or outperform them on value (differentiation strategies). The low-cost provider strategy is ideal for firms competing primarily on price. The broad differentiation strategy works well for companies offering unique products or services to a large, diverse market. The focused low-cost strategy and focused differentiation strategy are suited for businesses targeting niche markets with highly specific needs. The best-cost provider strategy is optimal for companies aiming to deliver a higher perceived value at a competitive price. Ultimately, whichever strategy a company adopts, the goal is to ensure it can 54  Concepts and Connections 1.2 Apple Inc.’s Strategy and Success in the Marketplace Designing and developing its own operating systems, hardware, application software, and services. Continuously investing in research and development (R&D) and frequently introducing products. Strategically locating its stores and staffing them with knowledgeable personnel. Expanding Apple’s reach domestically and internationally. Sustaining a competitive edge by focusing on its inimitable value proposition and deliberately keeping a price 55 The Importance of Capabilities in Building and Sustaining Competitive Advantage Competitively valuable capabilities: Cannot be easily bested, matched, or imitated by rivals. Represent superior know-how and specialized abilities that require time to fully develop and perfect. Result in a sustainable competitive advantage over rivals. 56  Why a Company’s Strategy Evolves over Time A strategy changes over time due to: Unexpected moves of competitors. Shifting buyer needs and preferences. Emerging market opportunities. Managers’ new ideas for improving the strategy. Mounting evidence strategy is not working well. A strategy evolves: Incremental (minor) adjustments or dramatic (major) shifts. Proactively and adaptively. 57 Figure 1.1 A Company’s Strategy Is a Blend of Planned Initiatives and Unplanned Reactive Adjustments 58  CORE CONCEPT: Realized Strategy A company’s realized strategy is a combination of deliberate planned elements and unplanned emergent elements. Some components of a company’s deliberate strategy will fail in the marketplace and become abandoned strategy elements. 59  The Three Tests of a Winning Strategy When evaluating the strength of a company’s strategy, it’s crucial to assess whether the strategy is effective, sustainable, and aligned with the company’s goals and market realities. Three key tests—The Fit Test, The Competitive Advantage Test, and The Performance Test—help distinguish a winning strategy from a mediocre or failing one. These tests ensure that the strategy is well-suited for the company’s situation, gives it a competitive edge, and drives strong performance. Strategic fit: How well does the strategy fit the firm’s situation? Competitive advantage: Is the strategy helping the firm achieve a sustainable competitive 60  The Three Tests of a Winning Strategy 1. The Fit Test Question: How well does the strategy fit the company’s situation? The Fit Test evaluates whether the strategy is a good match for the company’s internal and external environments, including industry conditions, competitive landscape, market opportunities, and internal capabilities. A winning strategy must align with the company’s overall mission, strengths, and market position. Key Areas of Fit: External Fit: The strategy must be well-matched to the industry’s competitive conditions, trends, and economic realities. This includes understanding customer preferences, regulatory issues, and technology shifts. Internal Fit: The strategy should leverage the company’s internal strengths, such as resources, capabilities, and core competencies. environment If the strategy requires skills or resources the 6  The Three Tests of a Winning Strategy Why It Matters: A strategy that doesn’t fit the company’s external environment (market conditions, competitive dynamics) or internal capabilities (resources, skills) is unlikely to succeed, even if it appears theoretically sound. Example: Netflix: When Netflix transitioned from DVD rentals to streaming, its strategy was a perfect fit for the rise of high-speed internet and the growing demand for on- demand entertainment. This external fit helped Netflix successfully outcompete traditional media companies. 6  The Three Tests of a 2. The Competitive WinningAdvantage Strategy Test Question: Does the strategy lead to a sustainable competitive advantage? The Competitive Advantage Test evaluates whether the strategy gives the company a distinctive edge over competitors. A winning strategy must create value for customers in a way that competitors cannot easily replicate, ensuring the company has a lasting advantage in the market. Key Aspects: Uniqueness: The strategy should lead to the creation of unique value for customers, whether through innovation, better customer service, cost leadership, or superior products. Sustainability: It’s essential that the competitive advantage can be sustained over time. This means that the company’s differentiating factors—such as proprietary 6  The Three Tests of a Winning Strategy Why It Matters: A strategy that does not deliver a sustainable competitive advantage will struggle to maintain long- term profitability. It might generate short- term success but will be quickly undermined by rivals unless it creates durable barriers to competition. Example: Apple: Apple’s competitive advantage comes from its ecosystem of products and services, superior design, brand loyalty, and strong innovation pipeline. These factors provide a lasting advantage that rivals like Samsung have found difficult to match completely. 6  The Three Tests of a 3. The Performance Winning Test Strategy Question: Is the strategy producing good company performance? The Performance Test assesses whether the strategy is delivering the desired results in terms of the company’s financial and competitive performance. A successful strategy should lead to improvements in profitability, market share, and overall business health. Key Performance Indicators: Profitability: One of the clearest signs of a winning strategy is sustained profitability. This includes metrics such as profit margins, return on investment (ROI), and earnings growth. Market Share: Growing or maintaining market share is a key indicator of competitive success, signaling that the company financial is performing well in its market relative to 6 Performance Challenges: External Factors: Be cautious when evaluating performance metrics that could be influenced by external factors beyond the company’s control, such as economic downturnsManipulation: Internal or sudden industry shifts. Metrics like high sales figures can sometimes be misleading if they don’t translate to strong profitability. For example, high sales with low margins may indicate a short-term success that undermines long-term profitability. Why It Matters: If a strategy isn’t producing tangible results—increased profits, improved market position, or stronger financial performance—it’s likely not effective. A strategy’s ultimate goal is to deliver superior performance compared to competitors. Example: Amazon: Amazon's strategy has consistently passed the performance test by leading to increasing market share, 6  The Three Tests of a Winning Strategy How the Three Tests Work Together A winning strategy must pass all three tests simultaneously: Fit Test: The strategy must fit with the company’s internal strengths and external opportunities. Without fit, the strategy may be misaligned, making execution difficult. Competitive Advantage Test: The strategy must provide a unique, sustainable competitive edge. Without this advantage, even a well- aligned strategy won’t create lasting success. Performance Test: The strategy must deliver strong performance, including profitability, market growth, and financial health. If it doesn't, the strategy is ineffective 67  The Three Tests of a Winning Strategy Conclusion To evaluate the effectiveness of any business strategy, companies should apply The Fit Test, The Competitive Advantage Test, and The Performance Test. Together, these tests help businesses ensure that their strategies are well-aligned with market realities, capable of generating long-term competitive advantage, and ultimately, delivering strong business performance. The Fit Test ensures that the strategy is appropriate for the company’s market position and internal capabilities. The Competitive Advantage Test confirms that the strategy gives the company a meaningful edge over its rivals. The Performance Test assesses whether the strategy is delivering the expected financial and competitive 68 Why Crafting and Executing Strategy Are Important Tasks Good strategy and good strategy execution are the most telling indicators of good management. A better-conceived, competently executed strategy makes it more likely that a firm will be a standout performer in the marketplace. How well a firm performs directly reflects the caliber of its strategy and the proficiency with which the strategy is executed. 69  The Road Ahead Strategy is about asking and answering a most important question: What must managers do, and do well, to make a company a winner in the marketplace? Doing a good job of managing inherently requires good strategic thinking and good management of the strategy-making and strategy- executing process. 70 THANK YOU