The quest for competitive advantage
The Three Big Strategic Questions
1. Where are we now?
► Situation analysis (chapters 4 and 5)
2. Where does the company want to go from
►answering this question requires Choosing when there is no right or
3. How should it get there?
► Company’s business strategy
Strategy and the Quest for
The heart and soul of any strategy are the
actions and moves in the marketplace that a
company makes to strengthen its competitive
position and gain a competitive advantage
A company achieves sustainable
competitive advantage when an attractive
number or buyers prefer its products/services
over those of rivals and when the basis for
this preference can be maintained over time
Four Basic Strategic Approaches to
Building Sustainable Competitive
Being the industry’s low-cost provider (a cost-based competitive
Incorporate differentiating features (a “superior product” type of
competitive advantage keyed to higher quality, better
performance, wider selection, value-added services, or some
Focusing on a narrow market niche (winning a competitive
edge by doing a better job than rivals of serving the needs and
preferences of buyers comprising the niche)
Developing expertise and resource strengths not easily imitated
or matched by rivals (a capabilities-based competitive
Strive to be the industry’s low-cost provider
• Southwest Airlines
Outcompete rivals on a key differentiating
• Johnson & Johnson – Reliability in baby products
• Harley-Davidson – King-of-the-road styling
• Rolex – Top-of-the-line prestige
• Mercedes-Benz – Engineering design and performance
• L.L. Bean – Good value
• Amazon.com – Wide selection and convenience
Focus on a narrow market niche
• eBay – Online auctions
• Jiffy Lube International – Quick oil changes
• McAfee – Virus protection auctions
• The Weather Channel – Cable TV
Develop expertise, resource strengths, and
capabilities not easily imitated by rivals
• FedEx – Next-day delivery of small packages
• Walt Disney – Theme park management and family entertainment
• Toyota – Sophisticated production system
• Ritz-Carlton – Personalized customer service
Fig. 1.2: A Company’s Strategy evolves. It is
Partly Proactive and Partly Reactive
What Is a Business Model?
A business model addresses “How do we
make money in this business?”
• Is the strategy capable of delivering
good bottom-line results?
Do the revenue-cost-profit economics
of the strategy make good business sense?
• Look at revenue streams the strategy is expected to produce
• Look at associated cost structure and potential profit margins
• Do resulting earnings streams and ROI indicate the strategy makes
sense and the company has a viable business model for making
Strategy and Business Model
Strategy . . . Business Model . . .
Deals with a company’s Concerns whether
competitive position revenues and costs
flowing from the strategy
demonstrate a business
can make money
Microsoft’s Red Hat’s Business
Business Model Model
Employ skilled programmers to
Rely on volunteer programmers to
develop proprietary code; keep
create the software
source code hidden from users
Sell OS and software packages to Collect and test enhancements and
PC makers and users at prices to new applications for inclusion in
achieve 90% market share Linux
Market to large companies. Charge
Most costs are fixed; variable costs
subscription fee for 24/7 within 1 h.
in 7 languages
Provide modest level of technical Make source code open and
support to users at no cost available to all users
Periodically introduce next- Fee-based training, consulting,
generation inducing PC users to software customization, and
upgrade client-directed engineering
The three tests of a winning strategy
Does the strategy fit the company’s situation?
• Does it fit the competitive conditions in the industry and
• Is it tailored to the company’s resources strengths,
competencies, and competitive capabilities.
Has the strategy yield a sustainable competitive advantage?
• Does is it have a (sustainable) advantage over rivals?
Has the strategy produced good financial performance?
Business model is about developing the most advantageous margin
Margin = Revenues – Cost
Strategy is about affecting this margin equation is a way that is
different from the competition and appreciated by customers.
A successful strategy builds on a sustainable competitive advantage.
What are the ways in which we can influence the margin equation:
• Increase perceived value in a way that permits to . . .
• Increase sales volume and/or
• Increase prices
• Decrease cost. How do we decrease costs?
• Decrease fixed cost (those incurred regardless of how much
we produce and sell.
• Decrease variable cost (those dependent on the amount that
we produce and sell.