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CHAPTER 1
106
What is Strategy and
Why is It Important?
Chapter Summary
Chapter1denestheconceptofstrategyanddescribesitsmanyfacets.Thechapterexplainswhatismeantby
a competitive advantage, discusses the relationship between a company’s strategy and its business model, and
introduces the student to the kinds of competitive strategies that can give a company an advantage over rivals
inattractingcustomersandearningabove-averageprots.Thechapterexamineswhatsetsawinningstrategy
apart from others and why the caliber of a company’s strategy determines whether it will enjoy a competitive
advantageoverotherrmsorbeburdenedbycompetitivedisadvantage.Bytheendofthischapter,thestudent
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.
Lecture Outline
I. Introduction
Chapter one explores the fundamental concepts surrounding organizational strategy. It begins with an explanation
of the term strategy and discusses why companies need a distinctive strategy in order to compete successfully.
Next,itexploreswhyacompanymusthaveaviablebusinessmodelandthevemostdependablestrategic
approaches for setting a company apart. The chapter wraps up with an illustration of how a company’s strategy
tends to evolve over time due to changing business conditions and the three tests for winning strategies.
II. What Do We Mean by Strategy?
ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.
1. A company’s strategy is the set of actions that its managers take to outperform the company’s competitors
andachievesuperiorprotability.Ineect,itrepresentsamanagerialcommitmenttoanintegratedarray
of considered choices about how to compete.
2. Normally, companies have a wide degree of strategic freedom in choosing the “hows” of strategy:
• How to position the company in the marketplace.
• How to attract customers.
• How to compete against rivals.
• How to achieve the company’s performance targets.
Chapter 1 What is Strategy and Why is It Important?
107
• How to capitalize on opportunities to grow the business.
• How to respond to changing economic and market conditions.
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.
3. Strategy Is about Competing Dierently—A strategy stands a better chance of succeeding when it is
predicated on actions, business approaches, and competitive moves aimed at:
a. appealing to buyers in ways that set a company apart from its rivals and
b. staking out a market position that is not crowded with strong competitors.
4. Figure 1.1—Identifying a Company’s Strategy—What to Look For, shows what to look for in
identifying the substance of a company’s overall strategy. These are the visible actions taken that signal
what strategy the company is pursuing.
ACTIVITY
Consider adding a File Attachment assignment requiring the student to develop a response to this
Illustration Capsule. You can post instructions for the student within the assignment and collect their
attachments for grading.
ILLUSTRATION CAPSULE 1.1
Starbucks’ Strategy in the Specialty Coffee Market
Discussion Question: How did Starbucks develop a sustainable competitive advantage in the
specialty coffee market?
Answer: Starbucks has developed a unique customer experience through their store ambiance
that is difficult and expensive for rivals to match. This experience which includes the product, the
environment it is served in, and the service itself, is intended to create an emotional attachment with
III. Strategy and the Quest for Competitive Advantage
ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.
1. The heart and soul of any strategy is the actions and moves in the market place that managers are taking
Chapter 1 What is Strategy and Why is It Important?
108
2. A company achieves a competitive advantage whenever it has some type of edge over rivals in attracting
buyers and coping with competitive forces.
3. Strategyisaboutcompetingdierentlyfromrivalsordoingwhatcompetitorsdon’tdoor,evenbetter,
competitive edge.
5. Whatmakesacompetitiveadvantagesustainable (or durable), as opposed to temporary, are elements
of the strategy that give buyers lasting reasons to prefer a company’s products or services over those of
4. Five of the most frequently used strategic approaches to setting a company apart from rivals and
achieving a sustainable competitive advantage are:
a. Low Cost Provider—Achieving a cost-based advantage over rivals.
b. BroadDierentiation—Seekingtodierentiatethecompany’sproductorservicefromrivals’in
ways that will appeal to a broad spectrum of buyers.
IV. Why a Company’s Strategy Evolves over Time
ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.
1. Every company must be willing and ready to modify the strategy in response to changing market
2. Mostofthetime,acompany’sstrategyevolvesincrementallyfrommanagement’songoingeortsto
Chapter 1 What is Strategy and Why is It Important?
109
4 The important point is that the task of crafting strategy is not a one-time event but always a work in
progress.
V. A Company’s Strategy Is Partly Proactive and Partly Reactive
ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.
1. The evolving nature of a company’s strategy means that the typical company strategy is a blend of (1)
proactive, plannedinitiativestoimprovethecompany’snancialperformanceandsecureacompetitive
edge, and (2) reactive responses to unanticipated developments and fresh market conditions.
CORE CONCEPT
A company’s deliberate strategy consists of proactive strategy elements that are both
planned and realized as planned; its emergent strategy consists of reactive strategy
elements that emerge as changing conditions warrant.
2. The biggest portion of a company’s current strategy ows from ongoing actions that have proven
themselves in the marketplace and newly launched initiatives aimed at building a larger lead over rivals
andfurtherboostingnancialperformance.—DeliberateStrategy
3. Managers must always be willing to supplement or modify the proactive strategy elements with as-
needed reactions to unanticipated conditions.—Emergent Strategy
4. In total, these two elements combine to form the company’s Realized Strategy. Figure 1.2, A Company’s
Strategy is a Blend of Proactive Initiatives and Reactive Adjustments, illustrates the elements of
strategy that become the Realized Strategy.
VI. A Company’s Strategy and its Business Model
ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.
CORE CONCEPT
A company’s business model sets forth the logic for how its strategy will create value
for customers, while at the same time generate revenues sufficient to cover costs and
realize a profit.
1. A business model is management’s blueprint for delivering a valuable product or service to customers
2. Thetwoelementsofacompany’sbusinessmodelare(1)itscustomervaluepropositionand(2)itsprot
Chapter 1 What is Strategy and Why is It Important?
110
4. Theprotformuladescribesthecompany’sapproachtodeterminingacoststructurethatwillallowfor
acceptableprots,giventhepricingtiedtoitscustomervalueproposition.
5. Figure1.3illustratestheelementsofthebusinessmodelintermsofwhatisknownastheValue-Price-
Cost Framework highlighting the relationship between the Customer’s Value Proposition (V-P) and the
ProtFormula(P-C).
ILLUSTRATION CAPSULE 1.2
Pandora, Sirius XM, and Over-the-Air Broadcast Radio:
Three Contrasting Business Models
Discussion Question 1: What is the prominent difference between the business models of these
three organizations?
Answer: While all three provide essentially the same type of entertainment service, the business
models employed by Pandora, Sirius XM, and Over-The-Air Broadcast Radio are completely
different. In the area of value proposition (what the customer sees), Sirius XM provides commercial
VII. What Makes a Strategy a Winner?
ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.
1. Three questions can be used to test the merits of one strategy versus another and distinguish a winning
strategy from a losing or mediocre strategy:
a. TheFitTest: Howwell does thestrategy t thecompany’ssituation?To qualifyas a winner,a
strategy has to be well matched to industry and competitive conditions, a company’s best market
Chapter 1 What is Strategy and Why is It Important?
111
2. Strategies that come up short on one or more of the above questions are plainly less appealing than
strategiespassingallthreetestquestionswithyingcolors.
VIII. Why are Crafting and Executing Strategy Important?
ACTIVITY
Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as
an interactive question and answer review. The assignment can be graded and posted automatically.
1. Crafting and executing strategy are top priority managerial tasks for two big reasons
2. Good Strategy + Good Strategy Execution = Good Management
IX. The Road Ahead
1. Throughout the remaining chapters and the accompanying case collection, the spotlight is trained on
the foremost question in running a business enterprise: What must managers do, and do well, to make a
ACTIVITY
Use the Question Bank to build a quiz for the chapter to measure and reinforce learning. Consider
using the questions you select to build a comprehensive mid-term and final exam for the course. The
assignment can be graded and posted automatically.
