Using your textbook, LIRN-based research, and the Internet, apply the learning outcomes for the week/course and lecture concepts to one of the following scenarios:

• As applied to your current professional career
• As applied to enhancing, improving, or advancing your current professional career
• As applied to management, leadership, or any decision-making position
• As applied to a current or future entrepreneurial endeavor

OR

Using your textbook, LIRN-based research, and the Internet, apply the learning outcomes for the week/course and lecture concepts to a business organization that exhibits and demonstrates these concepts.

You should develop a summary of the organization’s strategy and how they use these concepts to compete.

This is a learning and application exercise designed to give you an opportunity to apply concepts learned in a pragmatic and meaningful way that will enable you to gain valuable and relevant knowledge in an effort to augment your skillset and enhance your professional careers

*****

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LEARNING OBJECTIVES

After reading this chapter, you should be able to:

LO1-1 Understand what is meant by a company’s strategy.

LO1-2 Explain why a company needs a creative, distinctive strategy that sets it apart from rivals.

LO1-3 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.

LO1-4 Identify the five most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.

LO1-5 Understand that a company’s strategy tends to evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy.

LO1-6 Identify the three tests of a winning strategy.

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Strategy, Models, and Competitive Advantage

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According to The Economist, a leading publication on business, economics, and inter- national affairs, “In business, strategy is king. Leadership and hard work are all very well and luck is mighty useful, but it is strategy that makes or breaks a firm.”1 Luck and circumstance can explain why some companies are blessed with initial, short-lived success. But only a well-crafted, well-executed, constantly evolving strategy can explain why an elite set of companies somehow manages to rise to the top and stay there, year after year, pleasing their customers, shareholders, and other stakeholders alike in the process. Companies such as Apple, Samsung, Disney, Emirates Airlines, Microsoft, Alphabet (formerly Google), Berkshire Hathaway, General Electric, and Southwest Airlines come to mind.

In this opening chapter, we define the concept of strategy and describe its many facets. We explain what is meant by a competitive advantage, discuss the relationship between a company’s strategy and its business model, and introduce you to the kinds of competitive strategies that can give a company an advantage over rivals in attracting customers and earning above-average profits. We look at what sets a winning strategy apart from others and why the caliber of a company’s strategy determines whether the company will enjoy a competitive advantage over other firms. By the end of this chap- ter, you will have a clear idea of why the tasks of crafting and executing strategy are core management functions and why excellent execution of an excellent strategy is the most reliable recipe for turning a company into a standout performer over the long term.

Understand what is meant by a company’s strategy.LO1-1

A company’s strategy is the set of actions that its managers take to outperform the company’s competi- tors and achieve superior profitability. The objective of a well-crafted strategy is not merely temporary com- petitive success and profits in the short run, but rather the sort of lasting success that can support growth and

secure the company’s future over the long term. Achieving this entails making a mana- gerial commitment to a coherent array of well-considered choices about how to com- pete.2 These include choices about:

• How to create products or services that attract and please customers.

• How to position the company in the industry.

• How to develop and deploy resources to build valuable competitive capabilities.

• How each functional piece of the business (R&D, supply chain activities, produc- tion, sales and marketing, distribution, finance, and human resources) will be operated.

• How to achieve the company’s performance targets.

In most industries, companies have considerable freedom in choosing the hows of strategy. Thus some rivals strive to create superior value for customers by achieving lower costs than rivals, while others pursue product superiority or personalized cus- tomer service or the development of capabilities that rivals cannot match. Some com- petitors position themselves in only one part of the industry’s chain of production/ distribution activities, while others are partially or fully integrated, with operations

CORE CONCEPT A company’s strategy is the set of actions that its managers take to outperform the company’s competitors and achieve superior profitability.

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ranging from components production to manufacturing and assembly to wholesale dis- tribution or retailing. Some competitors deliberately confine their operations to local or regional markets; others opt to compete nationally, internationally (several countries), or globally. Some companies decide to operate in only one industry, while others diver- sify broadly or narrowly, into related or unrelated industries.

The Importance of a Distinctive Strategy and Competitive Approach

Explain why a company needs a creative, distinctive strategy that sets it apart from rivals.LO1-2

For a company to matter in the minds of customers, its strategy needs a distinctive element that sets it apart from rivals and produces a competitive edge. A strategy must tightly fit a company’s own particular situation, but there is no shortage of opportunity to fashion a strategy that is discernibly different from the strategies of rivals. In fact, com- petitive success requires a company’s managers to make strategic choices about the key building blocks of its strategy that differ from the choices made by competitors—not 100 percent different but at least different in several important respects. A strategy stands a chance of succeeding only when it is predicated on actions, business approaches, and competitive moves aimed at appealing to buyers in ways that set a company apart from rivals. Simply trying to mimic the strategies of the industry’s successful com- panies never works. Rather, every company’s strategy needs to have some distinctive element that draws in customers and produces a competitive edge. Strategy, at its essence, is about competing differently—doing what rival firms don’t do or, better yet, what rival firms can’t do.3

The Relationship Between a Company’s Strategy and Model

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.

LO1-3

Closely related to the concept of strategy is the concept of a company’s business model. While the company’s strategy sets forth an approach to offering superior value, a company’s business model is management’s blueprint for delivering a valuable product or service to customers in a manner that will yield an attractive profit.4 The two elements of a company’s business model are (1) its customer value proposition and (2) its profit formula. The customer value proposition is

Mimicking the strategies of successful industry rivals—with either copycat product offerings or efforts to stake out the same market position— rarely works. A creative, distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a company’s most reli- able ticket for earning above-average profits.

CORE CONCEPT A company’s business model sets forth how its strategy and operating approaches will create value for customers, while at the same time gen- erating ample revenues to cover costs and real- izing a profit. The two elements of a company’s business model are its (1) customer value proposi- tion and (2) its profit formula.

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established by the company’s overall strategy and lays out the company’s approach to satisfying buyer wants and needs at a price customers will consider a good value. The greater the value provided and the lower the price, the more attractive the value proposition is to customers. The profit formula describes the company’s approach to determining a cost structure that will allow for acceptable profits given the pricing tied to its customer value proposition. The lower the costs given the customer value proposition, the greater the ability of the business model to be a moneymaker. The nitty-gritty issue surrounding a company’s business model is whether it can execute its customer value proposition profitably. Just because company managers have crafted a strategy for competing and running the business does not automatically mean the strategy will lead to profitability—it may or it may not.5

Cable television providers utilize a business model, keyed to delivering news and entertainment that viewers will find valuable, to secure sufficient revenues from sub- scriptions and advertising to cover operating expenses and allow for profits. Aircraft engine manufacturer Rolls-Royce employs a “power-by-the-hour” business model that charges airlines leasing fees for engine use, maintenance, and repairs based upon actual hours flown. The company retains ownership of the engines and is able to minimize engine maintenance costs through the use of sophisticated sensors that optimize maintenance and repair schedules. Gillette’s business model in razor blades involves achieving economies of scale in the production of its shaving products, selling razors at an attractively low price, and then making money on repeat purchases of razor blades. Concepts & Connections 1.1 discusses three contrasting business models in radio broadcasting.

Strategy and the Quest for Competitive Advantage

Identify the five most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage.

LO1-4

The heart and soul of any strategy is the actions and moves in the marketplace that managers are taking to gain a competitive edge over rivals.6 Five of the most frequently used and dependable strategic approaches to setting a company apart from rivals and winning a sustainable competitive advantage are:

1. A low-cost provider strategy—achieving a cost-based advantage over rivals. Walmart and Southwest Airlines have earned strong market positions because of the low- cost advantages they have achieved over their rivals. Low-cost provider strategies can produce a durable competitive edge when rivals find it hard to match the low- cost leader’s approach to driving costs out of the business.

2. A broad differentiation strategy—seeking to differentiate the company’s product or service from rivals’ in ways that will appeal to a broad spectrum of buyers. Suc- cessful adopters of broad differentiation strategies include Johnson & Johnson in baby products (product reliability) and Apple (innovative products). Differentia- tion strategies can be powerful so long as a company is sufficiently innovative to thwart rivals’ attempts to copy or closely imitate its product offering.

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PANDORA, SIRIUS XM, AND OVER-THE-AIR BROADCAST RADIO: THREE CONTRASTING BUSINESS MODELS

Pandora Sirius XM Over-the-Air Radio Broadcasters

Customer value proposition

• Through free-of-charge Internet radio service, allowed PC, tablet computer, and smartphone users to create up to 100 personalized music and comedy stations

• Utilized algorithms to generate playlists based on users’ predicted music preferences

• Offered programming interrupted by brief, occasional ads; eliminated advertising for Pandora One subscribers

• For a monthly subscription fee, provided satellite- based music, news, sports, national and regional weather, traffic reports in limited areas, and talk radio programming

• Also offered subscribers streaming Internet channels and the ability to create personalized, commercial-free stations for online and mobile listening

• Offered programming interrupted only by brief, occasional ads

• Provided free-of-charge music, national and local news, local traffic reports, national and local weather, and talk radio programming

• Included frequent programming interruption for ads

Profit Formula Revenue generation: Display, audio, and video ads targeted to different audiences and sold to local and national buyers; subscription revenues generated from an advertising-free option called Pandora One

Cost structure: Fixed costs associated with developing software for computers, tablets, and smartphones

Fixed and variable costs related to operating data centers to sup- port streaming network content royalties, marketing, and support activities

Revenue generation: Monthly subscription fees, sales of satel- lite radio equipment, and adver- tising revenues

Cost structure: Fixed costs associated with operating a satellite-based music delivery service and streaming Internet service

Fixed and variable costs related to programming and content royalties, marketing, and support activities

Revenue generation: Advertis- ing sales to national and local businesses

Cost structure: Fixed costs associated with terrestrial broadcasting operations

Fixed and variable costs related to local news reporting, advertising sales operations, network affiliate fees, programming and content roy- alties, commercial production activi- ties, and support activities

Profit margin: Profitability depen- dent on generating sufficient advertising revenues and sub- scription revenues to cover costs and provide attractive profits

Profit margin: Profitability depen- dent on attracting a sufficiently large number of subscribers to cover costs and provide attractive profits

Profit margin: Profitability dependent on generating sufficient advertising revenues to cover costs and provide attractive profits

Sources: Company documents, 10-Ks, and information posted on their websites.

&Concepts Connections 1.1

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3. A focused low-cost strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus being able to serve niche members at a lower price. Private-label manufacturers of food, health and beauty products, and nutritional supplements use their low-cost advan- tage to offer supermarket buyers lower prices than those demanded by producers of branded products.

4. A focused differentiation strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals’ prod- ucts. Louis Vuitton and Rolex have sustained their advantage in the luxury goods industry through a focus on aff luent consumers demanding luxury and prestige.

5. A best-cost provider strategy—giving customers more value for the money by satisfy- ing buyers’ expectations on key quality/features/performance/service attributes, while beating their price expectations. This approach is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with com- parable differentiating attributes. Target’s best-cost advantage allows it to give dis- count store shoppers more value for the money by offering an attractive product lineup and an appealing shopping ambience at low prices.

In Concepts & Connections 1.2, it is evident that Starbucks has gained a com- petitive advantage over rivals through its efforts to offer the highest quality coffee-

based beverages, create an emotional attachment with customers, expand its global presence, expand the product line, and ensure consistency in store opera- tions. A creative, distinctive strategy such as that used by Starbucks is a company’s most reliable ticket for developing a sustainable competitive advantage and earning above-average profits. A sustainable competi- tive advantage allows a company to attract sufficiently large numbers of buyers who have a lasting preference for its products or services over those offered by rivals,

despite the efforts of competitors to offset that appeal and overcome the company’s advantage. The bigger and more durable the competitive advantage, the better a com- pany’s prospects for winning in the marketplace and earning superior long-term prof- its relative to rivals.

The Importance of Capabilities in Building and Sustaining Competitive Advantage Winning a sustainable competitive edge over rivals with any of the previous five strat- egies generally hinges as much on building competitively valuable capabilities that rivals cannot readily match as it does on having a distinctive product offering. Clever rivals can nearly always copy the attributes of a popular product or service, but it is

CORE CONCEPT A company achieves sustainable competitive advantage when an attractively large number of buyers develop a durable preference for its products or services over the offerings of com- petitors, despite the efforts of competitors to overcome or erode its advantage.

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&

Since its founding in 1985 as a modest nine-store operation in Seattle, Washington, Starbucks had become the premier roaster and retailer of specialty coffees in the world, with nearly 25,000 store locations in 70 countries as of April 2016 and annual sales that exceed $21 billion in fiscal 2016. The key elements of Star- bucks’ strategy in specialty coffees included:

• Train “baristas” to serve a wide variety of specialty coffee drinks that allow customers to satisfy their individual pref- erences in a customized way. Starbucks essentially brought specialty coffees, such as cappuccinos, lattes, and macchiatos, to the mass market in the United States, encouraging custom- ers to personalize their coffee drinking habits. Requests for such items as a “Smoked Butterscotch Latte with Soy Milk” could be served up quickly with consistent quality.

• Emphasis on store ambience and elevating the customer experience at Starbucks stores. Starbucks management viewed each store as a billboard for the company and as a contributor to building the company’s brand and image. Each detail was scrutinized to enhance the mood and ambiance of the store to make sure everything signaled “best-of-class” and reflected the personality of the com- munity and the neighborhood. The thesis was “everything mattered.” The company went to great lengths to make sure the store fixtures, the merchandise displays, the col- ors, the artwork, the banners, the music, and the aromas all blended to create a consistent, inviting, stimulating environ- ment that evoked the romance of coffee, that signaled the company’s passion for coffee, and that rewarded customers with ceremony, stories, and surprise.

• Purchase and roast only top-quality coffee beans. The company purchased only the highest quality arabica beans and carefully roasted coffee to exacting standards of qual- ity and flavor. Starbucks did not use chemicals or artificial flavors when preparing its roasted coffees.

• Commitment to corporate responsibility. Starbucks was protective of the environment and contributed positively to

the communities where Starbucks stores were located. In addition, Starbucks promoted fair trade practices and paid above-market prices for coffee beans to provide its grow- ers/suppliers with sufficient funding to sustain their opera- tions and provide for their families.

• Expansion of the number of Starbucks stores domesti- cally and internationally. Starbucks operated stores in high-traffic, high-visibility locations in the United States and abroad. The company’s ability to vary store size and format made it possible to locate stores in settings such as downtown and suburban shopping areas, office build- ings, and university campuses. Starbucks added 321 new company-owned locations in the United States and another 155 company-owned stores internationally in fiscal 2016. Starbucks also added 330 licensed store locations in the United States and 1,236 licensed stores internationally in 2016. The company planned to open 12,000 new stores globally by fiscal 2021, with 3,400 new units being opened in the United States.

• Broaden and periodically refresh in-store product offer- ings. Noncoffee products offered by Starbucks included teas, fresh pastries and other food items, and coffee mugs and coffee accessories. The company’s new Mercato stores would extend food offerings to include grab-and-go salads and sandwiches and novel health-conscious items such as gluten-free smoked Canadian bacon breakfast sandwiches and Sous Vide Egg Bites.

• Fully exploit the growing power of the Starbucks name and brand image with out-of-store sales. Starbucks consumer packaged goods division included domestic and international sales of Frappuccino, coffee ice creams, and Starbucks coffees.

Sources: Company documents, 10-Ks, and information posted on Starbucks’ website.

STARBUCKS’ STRATEGY IN THE SPECIALTY COFFEE MARKET

Concepts Connections 1.2

substantially more difficult for rivals to match the know-how and specialized capabili- ties a company has developed and perfected over a long period. FedEx, for example, has superior capabilities in next-day delivery of small packages. And Hyundai has become the world’s fastest-growing automaker as a result of its advanced manufacturing pro- cesses and unparalleled quality control system. The capabilities of both of these com- panies have proven difficult for competitors to imitate or best and have allowed each to build and sustain competitive advantage.

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Why a Company’s Strategy Evolves over Time

Understand that a company’s strategy tends to evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy.

LO1-5

The appeal of a strategy that yields a sustainable competitive advantage is that it offers the potential for an enduring edge over rivals. However, managers of every company must be willing and ready to modify the strategy in response to the unexpected moves of competitors, shifting buyer needs and preferences, emerging market opportunities, new ideas for improving the strategy, and mounting evidence that the strategy is not work- ing well. Most of the time, a company’s strategy evolves incrementally as management fine-tunes various pieces of the strategy and adjusts the strategy to respond to unfold- ing events. However, on occasion, major strategy shifts are called for, such as when the strategy is clearly failing or when industry conditions change in dramatic ways.

Regardless of whether a company’s strategy changes gradually or swiftly, the important point is that the task of crafting strategy is not a one-time event but is always a work in prog-

ress.7 The evolving nature of a company’s strategy means the typical company strategy is a blend of (1) proactive moves to improve the company’s financial performance and secure a competitive edge and (2) adaptive reactions to unantici- pated developments and fresh market conditions—see Fig- ure 1.1.8 The biggest portion of a company’s current strategy flows from ongoing actions that have proven themselves in the marketplace and newly launched initiatives aimed at

building a larger lead over rivals and further boosting financial performance. This part of management’s action plan for running the company is its proactive, deliberate strategy.

At times, certain components of a company’s deliberate strategy will fail in the mar- ketplace and become abandoned strategy elements. Also, managers must always be willing to supplement or modify planned, deliberate strategy elements with as-needed

Changing circumstances and ongoing manage- ment efforts to improve the strategy cause a company’s strategy to evolve over time—a con- dition that makes the task of crafting a strategy a work in progress, not a one-time event.

Deliberate Strategy Elements

Emergent Strategy ElementsEmergent Strategy Elements

Planned new initiatives plus ongoing strategies continued

from prior periods

Unplanned reactive responses to changing circumstances

by management

Abandoned strategy elements

Realized Strategy

FIGURE 1.1 A Company’s Strategy Is a Blend of Planned Initiatives

and Unplanned Reactive Adjustments

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reactions to unanticipated developments. Inevitably, there will be occasions when mar- ket and competitive conditions take unexpected turns that call for some kind of strate- gic reaction. Novel strategic moves on the part of rival firms, unexpected shifts in customer preferences, fast- changing technological developments, and new market opportunities call for unplanned, reactive adjustments that form the company’s emergent strategy. As shown in Figure 1.1, a company’s realized strategy tends to be a combination of deliberate planned elements and unplanned, emergent elements.

The Three Tests of a Winning Strategy

Identify the three tests of a winning strategy.LO1-6

Three questions can be used to distinguish a winning strategy from a so-so or flawed strategy:

1. How well does the strategy fit the company’s situ- ation? To qualify as a winner, a strategy has to be well matched to the company’s external and internal situations. The strategy must fit competi- tive conditions in the industry and other aspects of the enterprise’s external environment. At the same time, it should be tailored to the company’s collection of competitively important resources and capabilities. It’s unwise to build a strategy upon the company’s weaknesses or pursue a strategic approach that requires resources that are defi- cient in the company. Unless a strategy exhibits a tight fit with both the external and internal aspects of a company’s overall situation, it is unlikely to produce respectable, first-rate business results.

2. Is the strategy helping the company achieve a sustainable competitive advantage? Strategies that fail to achieve a durable competitive advantage over rivals are unlikely to produce superior performance for more than a brief period of time. Winning strategies enable a company to achieve a competitive advantage over key rivals that is long lasting. The bigger and more durable the competitive edge that the strategy helps build, the more powerful it is.

3. Is the strategy producing good company performance? The mark of a winning strat- egy is strong company performance. Two kinds of performance improvements tell the most about the caliber of a company’s strategy: (1) gains in profitability and financial strength and (2) advances in the company’s competitive strength and market standing.

Strategies that come up short on one or more of these tests are plainly less appealing than strategies passing all three tests with flying colors. Managers should use the same questions when evaluating either proposed or existing strategies. New initiatives that don’t seem to match the company’s internal and external situation should be scrapped before they come to fruition, while existing strategies must be scrutinized on a regular

CORE CONCEPT A company’s realized strategy is a combination deliberate planned elements and unplanned emergent elements. Some components of a com- pany’s deliberate strategy will fail in the market- place and become abandoned strategy elements.

A winning strategy must fit the company’s exter- nal and internal situation, build sustainable competitive advantage, and improve company performance.

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basis to ensure they have a good fit, offer a competitive advantage, and have contributed to above-average performance or performance improvements.

Why Crafting and Executing Strategy Are Important Tasks High-achieving enterprises are nearly always the product of astute, creative, and proac- tive strategy making. Companies don’t get to the top of the industry rankings or stay there with illogical strategies, copycat strategies, or timid attempts to try to do better. Among all the things …