STRATEGY:

Core Concepts and

Analytical Approaches
7th Edition (2022-2023)
Arthur A. Thompson
The University of Alabama

Chapter 1
What Is Strategy
and Why Is It
Important?

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authorized instructors and (2) students or other participants that are duly registered for the ValuePak versions Not for distribution to non-registrants without permission. An e-book published and
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 Strategy means making clear-cut
choices about how to compete.
—Jack Welch, former CEO, General Electric

Without a strategy the organization is

like a ship without a rudder.
—Joel Ross and Michael Kami

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 1–2

 If your firm’s strategy can be applied to any
other firm, you don’t have a very good one.
—David J. Collis and Michael G. Rukstad

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.
—The Economist, a leading publication on economics,
business, and international affairs

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 Learning Objectives
1. Understand the concept of “strategy,” how to identify a firm’s
strategy, and the tight connection between its strategy and its
quest for sustainable competitive advantage.
2. Learn why a firm’s strategy evolves over time and why its
strategy is partly proactive and partly reactive.
3. Understand why a firm’s strategy needs to pass ethical
scrutiny.
4. Understand the “business model” concept, how a firm’s
business model connects to its strategy, and why its business
model is important.
5. Learn three tests that distinguish a winning strategy from a
weak or flawed strategy and why good strategy and good
strategy execution are the most trustworthy signs of good
management.
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 1–4
 Chapter 1 Roadmap

• What Do We Mean by “Strategy”?

• Strategy and the Quest for Competitive Advantage
• Identifying a Firm’s Strategy
• Why a Firm’s Strategy Evolves Over Time
• A Firm’s Strategy Is Partly Proactive and Partly Reactive
• Strategy and Ethics: Passing the Test of Moral Scrutiny
• The Relationship of a Firm’s Strategy to Its Business Model
• What Makes a Strategy a Winner
• Why Crafting and Executing Strategy Are Important Tasks
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Three Strategic Questions All Firms Must Answer

What is What direction to How to run the

the firm’s head and what firm in ways that
present performance produce good
situation? targets to set? results?

• Industry conditions • New buyer needs to • Strategy for competing

• Competitive satisfy successfully
pressures • Growth opportunities to • How to attract
• Market standing pursue customers
vis-à-vis rivals • Markets to deemphasize • Deciding what market
• Competitive or abandon position to stake out
strengths and • How to measure • Actions to achieve
weaknesses success performance targets

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 What Do We Mean by “Strategy”

A firm’s strategy is defined by the specific

market positioning, competitive moves, and
business approaches that form
management’s answer to “What’s our plan for
running the firm and producing good results?”
When managers craft and embrace a strategy, they are
committing to undertake one set of actions rather than
another in endeavoring to make the firm successful in
the marketplace and achieve good business
performance.

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 The Hows That Define a Firm’s Strategy

How to respond to
How to attract, please,
changing economic
and retain customers
and market conditions

A coherent
combination of How to manage
How to compete actions and the functional
against rivals approaches pieces of the firm’s
about how to business
run the firm

How to capitalize on How to achieve the firm’s

growth opportunities performance targets

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 Core Concept
A firm’s strategy consists of the competitive
moves and business approaches that managers
employ to
• Attract and please customers
• Compete successfully
• Capitalize on opportunities to grow the
business
• Respond to changing market conditions
• Conduct operations
• Achieve the targeted financial and market
performance.
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 Choosing the Strategy

In arriving at choices among all the “hows” and

combining them into a coherent strategy for the
company to pursue, management is saying
“Among all the many different ways of
competing we could have chosen, we have
decided to employ this combination of
competitive and operating approaches to move
the firm in the intended direction, strengthen its
market position and competitiveness, and boost
performance.”

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 Thinking Strategically

There is no one roadmap or prescription for

running a firm in a successful manner. Many
different avenues exist for competing successfully,
staking out a market position, and operating the
different pieces of a business.
A creative, distinctive strategy that sets a firm
apart from rivals and delivers superior value to
customers is its most reliable ticket for winning a
competitive advantage over rivals.

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 Strategy Is About Competing Differently

• Crafting a good strategy entails deliberately

choosing to compete differently from rivals by:
• Appealing to buyers in ways that set a firm apart from
rivals and that deliver superior value to buyers—this
requires doing what rivals don’t do or, even better, doing
what rivals can’t do

• Staking out a market position that is not crowded with

other strong competitors

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 Why Bother with Crafting a Strategy?
• A clear, specific, and deliberate action plan:
• Avoids conflicting or inconsistent strategic actions and
decisions within the management hierarchy
• Helps strengthen the firm’s competitive position
• Improves the firm’s financial performance
• A creative, distinctive strategy aimed at competing
differently in ways that deliver superior value to
buyers
• Makes it more likely the strategy will produce a valuable
competitive edge over rivals
• Is a company’s most reliable pathway to above average
profitability
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 Why Competitive Advantage Matters
• A company is almost certain to earn significantly higher
profits when it enjoys a competitive advantage as opposed
to when it competes with no advantage or is hamstrung by
competitive disadvantage.
• A firm with no advantage and certainly one with a
competitive disadvantage risks being outcompeted by
stronger rivals, achieving only mediocre financial
performance, and becoming an industry laggard.

In successful companies, the quest for a

competitive edge ranks center stage in crafting a
strategy!

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 Core Concept

• A company achieves competitive advantage

when an attractive number of buyers are drawn
to purchase its products or services rather than
those of competitors.
• A company achieves sustainable competitive
advantage when the basis for buyer
preferences for its product offering relative to the
offerings of its rivals is durable, despite
competitors’ efforts to nullify or overcome the
appeal of its product offering.

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 Strategy and the Quest for Sustainable
Competitive Advantage
• A strategy that produces a sustainable long-term
competitive advantage is most desirable.
• A strategy that produces only a short-lived or
nondurable competitive advantage has little appeal
whenever competitors can rather quickly institute
ways to offset or overcome a company’s
competitive advantage.
• A company’s strategy to achieve a sustainable
competitive advantage must be based on elements
that cannot quickly or inexpensively be copied or
overcome by rivals.
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 Strategic Approaches to Building
Sustainable Competitive Advantage
• Becoming the low-cost provider by achieving
cost-based competitive advantages over rivals
• Offering differentiating features that set the firm’s
products apart from rivals
• Offering customers more value for the money
• Focusing on better serving the unique needs and
tastes of buyers in a niche market
• Developing expertise, resources, and capabilities
that are competitively valuable and that rivals
cannot easily overcome
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FIGURE 1.1 Identifying a Company’s Strategy—What to Look For

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 Why a Firm’s Strategy Evolves Over Time

• It is advisable, if not necessary, for a firm to modify

its strategy in response to:
• Changing market conditions
• Advancing technology
• Fresh moves of competitors
• Shifting buyer needs and preferences
• Emerging market opportunities
• New ideas for improving the strategy
• Evidence that the current strategy is not working well
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 Core Concept

Changing circumstances and ongoing

management efforts to improve the strategy
cause a firm’s strategy to evolve over
time—a condition that makes the task of
crafting a strategy a work in progress, not a
one-time event.

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 A Firm’s Strategy Is Partly Proactive
and Partly Reactive
A firm’s current strategy is typically a blend of:
• Deliberate and proactive management actions to secure a
competitive edge and improve its financial performance.
• Previous proactive strategy elements working well are continued,
with the remainder freshly crafted or entirely new.

• Strategic reactions to unforeseen events and fresh market

conditions—emerge on an as-needed basis.
• A firm’s latest version of its strategy reflects the deletion
of obsolete or ineffective strategy elements and its current
combination of proactive and reactive elements.

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 FIGURE 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives and
Reactive Adjustments

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 Strategy and Ethics: Passing the Test of
Moral Scrutiny
• A strategy is ethical only if it passes the test of
moral scrutiny.
• To pass the test of moral scrutiny and qualify as
ethical, a firm’s actions and behaviors cannot cross
the line from “should do” to “should not do”
• A firm’s strategy definitely crosses into the should not do
zone and cannot pass moral scrutiny if it entails actions
and behaviors that are deceitful, unfair or harmful to
others, disreputable, or unreasonably damaging to the
environment.

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 Core Concept

A strategy cannot be considered ethical just

because it involves actions that are legal.
To meet the standard of being ethical, a strategy
must entail actions that can pass moral scrutiny
in the sense of not being
• Morally objectionable
• Deceitful
• Unfair or harmful to others
• Disreputable or
• Unreasonably damaging to the environment.
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 Strategy—Distinguishing Between
What Is Legal and What Is Ethical
• A legal strategic action or business approach does
not mean it is ethical or morally acceptable.
• Ethical standards are about
• “Right” versus “wrong”, “moral” versus” immoral”
• Not crossing the line from “should do” to “should not do”
• “Within the bounds of acceptability” versus “outside the
bounds of acceptability”
• Many strategic actions fall in a gray zone and can be
deemed ethical or unethical depending on how high one
sets the bar for what qualifies as ethical behavior.
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 Question for Discussion

What business behaviors can you

identify that are legal but not
ethical or morally acceptable?

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 The Relationship Between a Firm’s Strategy
and Its Business Model

A Firm’s A Firm’s
Strategy Business Model

Deals with the Concerns whether

firm’s competitive the revenues and
initiatives and its costs flowing from
business the strategy show
approaches that the firm can be
profitable and viable

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 Core Concept

A firm’s business model sets forth how its

strategy and operating approaches will create
value for customers while also generating ample
revenues to cover costs and realize a profit.
Absent the ability to earn good profits, a firm’s
strategy and operating blueprint are flawed, its
business model is not viable, and its ability to
survive is in jeopardy.

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The Two Crucial Elements of a Firm’s Business Model

• Its Customer Value Proposition

• How the firm will satisfy customer needs and requirements at a price
customers will consider to be a good value.
• From a customer perspective, the greater the value delivered and the
lower the price, the more attractive the firm’s value proposition is to
customers.
• From a firm’s perspective, however, the greater the value delivered and
the higher the price that can be charged, the bigger the margin for
covering the costs associated with its business approach and realizing
an attractive profit and return on investment
• Its Profit Proposition (or “Profit Formula”)
• How the firm intends to generate a revenue stream that covers the costs of
delivering attractive value to customers.
• How it will control the costs of the value being delivered.
• How the proposition will yield attractive profits for shareholders.
The lower a firm’s costs are in relation to revenues, the greater its profit
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 1–29
potential and the more attractive its profit proposition.
 Testing a Firm’s Profit Proposition

• Can the firm can create and deliver the intended

customer value in a cost-efficient manner?
• Can a profitable price be charged for the value it
provides to customers?
• Revenues generated are a function of the volume of
customers attracted at the price being charged
• The costs of the firm’s business model approach depend
on the resources and business processes utilized and the
cost efficiency of its operating systems
• Lower costs in relation to revenues increase the profit
potential and the attractiveness of the firm’s profit
proposition to shareholders
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Proven versus Unproven Business Models
• Firms in business for a while and making at least
reasonable profits have a “proven” business model—there
is hard revenue-cost evidence that their strategies and
approaches to operating can yield good profits.
• Start-up firms and unprofitable firms have “questionable” or
“unproven” business models because their strategies and
operating approaches have yet to produce good bottom-line
results, raising doubts about their blueprint for profitability
and their viability as business enterprises.
• Firms operating in uncertain, volatile markets often have
business models that can quickly lose their effectiveness; to
survive, these firms must be alert to early signs of
impending crisis and then swiftly reinvent their business
model and strategy.
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 The Business Model of Network TV
and Radio Broadcasters

• The Customer Value Proposition

• Provide audiences with free and appealing broadcast
programming content.

• The Profit Proposition

• Charge program sponsors advertising fees (based on
demographics and size of viewing audiences) that exceed
the full costs of providing program content.

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 Gillette’s Business Model in Razor Blades
• The Customer Value Proposition
• To provide a close comfortable shave using a razor (a
one-time purchase) and razor blades (repeat purchases).
• The Profit Proposition
• To sell a “master product”—the razor—at an attractively
low price and then make money on repeat purchases of
inexpensively-produced razor blades priced to yield high
profit margins.
• Printer manufacturers pursue much the same business
model—selling printers at low-to-breakeven prices to
capture large profit margins on repeat purchases of ink
cartridges.
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 The Business Model of Newspapers and
Magazines
• The Customer Value Proposition
• Delivering valuable or interesting information and
entertainment to a broad range of readers.

• The Profit Proposition

• Securing sufficient revenues from advertising fees and
reader subscriptions to more than cover the costs of
producing and delivering their products to readers.
Is this business model in danger of becoming
obsolete and failing?

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 The Business Model of an Online Direct Sales
Firm Like Amazon

• The Customer Value Proposition

• Provides a vast online marketplace for goods that it purchases from
manufacturers and displays for sale to site visitors plus goods that it
displays on behalf of third-party merchants from which it derives sales
commissions and also service fees that many merchants opt to pay
the firm to stock their goods and then pack and ship the orders of
those customers buying the merchandise of the third-party merchant

• The Profit Proposition

• Securing sufficient profits on the sales of the firm’s goods purchased
by online shoppers
• Securing profits earned from the revenues (sales commissions and
service fees) collected from the millions of third-party merchants
displaying their merchandise on the firm’s online marketplace
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 What Makes a Strategy a Winner?

• Testing the merits of one strategy versus another

to distinguish a winning strategy from a flawed or
weak strategy requires asking:
1. How well does the strategy fit the firm’s situation?
2. Is the strategy helping the firm achieve a sustainable
competitive advantage?
3. Is the strategy producing good financial performance?

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 The Three Tests of a Winning Strategy

The Goodness The Competitive The Performance

of Fit Test Advantage Test Test
Is the strategy Is the strategy helping Is the strategy
well-matched to the company achieve producing
the company’s a sustainable good company
internal and external competitive performance?
situation? advantage?

To qualify as
a winning strategy,
a strategy must pass all
three tests

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 Core Concept

To qualify as a winning strategy, a company’s

strategy must be well-suited to the company’s
external and internal situation, help build a
sustainable competitive advantage, and improve
the firm’s performance.

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 Why Crafting and Executing Strategy
Are Important Tasks
• There is a compelling need for company
managers to proactively shape how the firm’s
business will be conducted.
• A clear and reasoned strategy is management’s
prescription for doing business, its road map to
competitive advantage, and its game plan for pleasing
customers and improving financial performance.
• High-performing enterprises are the product of astute,
creative, and proactive strategy-making. Firms don’t get
to the top of industry rankings or stay there with flawed
or copycat strategies, or with strategies built around
timid actions to try to do better
Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 1–39
 Why Crafting and Executing Strategy
Are Important Tasks (continued)
• Even the best-conceived strategies will result in
performance shortfalls if they are not executed
proficiently.
• Good day-in/day-out strategy execution and
operating excellence are essential for a firm to
perform close to its full potential.
• Flawed and/or inept implementation and
execution of a firm’s strategy are a surefire recipe
for underachievement, both financially and in
competing against rivals.
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 Good Strategy + Good Strategy Execution =
Good Management

• The better conceived and more competently a

firm’s strategy is executed, the more likely the firm
will be a standout performer financially in the
marketplace.
• A firm with a muddled or flawed strategy and/or that
can’t execute its strategy competently is likely an
underperformer in need of better management.
• Weak implementation and execution undermine a
strategy’s potential and pave the way for shortfalls
in customer satisfaction and financial performance.
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 Core Concept

How well a firm performs and the degree of market

success it achieves are directly attributable to the
caliber of its strategy and the proficiency with
which the strategy is executed.
Good strategy and good strategy execution are
the most telling and trustworthy signs of good
management.

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 The Road Ahead

• Every business student and aspiring manager

needs to know the answer to the following
question:
• What must managers do, and do well, to give a firm its
best chance to be attractively profitable and successful in
the marketplace?
• The answer will become the biggest lesson of this
course—doing a good job of managing requires good
strategic thinking, good strategy-making, and good
strategy execution.
Welcome and best wishes for your success!
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 The Road Ahead (continued)

• The coming chapters explore strategic thinking,

core concepts and tools of strategic analysis, and
processes of crafting and executing strategy.
• In the strategy simulation exercise you will manage
a firm in competition with firms managed by
classmates, and have an excellent learn-by-doing
opportunity to:
• Apply what you have read about in the chapters.
• Gain experience in crafting and executing strategy and
being held accountable for how well your firm performs.

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 What You Can Expect to Learn
Lesson 1:
• First-rate capabilities in successfully crafting and
executing strategy are basic skills every manager must
possess.
Lesson 2:
• Managers don’t deserve applause for coming up with a
weak strategy that results in weak (or worse) financial
performance and a weak (or worse) industry standing for
their firm.

Copyright © 2022 by Arthur A. Thompson and Glo-Bus Software, Inc. 1–45

 Commerce is a game of skill which
many people play, but which few
play well.”
Ralph Waldo Emerson,
poet and essayist

If the understanding you gain from the chapters, the

experience of running your simulation company, and
other course-related assignments help you to become
a savvy competitor and better equip you to succeed in
business, then your time and energy spent in this
course will prove worthwhile.

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Accessibility Content: Text Alternative for Images

1–47
 Figure 1.1 Identifying a Company’s Strategy—What to Look For,
Text Alternative
The actions to look for are:
• Strengthening of its bargaining position with suppliers, distributors, and others.
• Gaining sales and market share via more performance features, more
appealing design, better quality or customer service, wider product selection,
or other such actions.
• Gains in sales and market share with lower prices based on lower costs.
• Entering into or exiting from new or existing product lines or geographic
markets.
• Using new approaches in managing R&D, production, sales and marketing,
finance, and other key activities.
• Upgrading, building, or acquiring competitively important resources and
capabilities.
• Capturing emerging market opportunities and defending against external
threats to the firm’s business prospects.
• Strengthening market standing and competitiveness by acquiring or merging
with other firms.
• Strengthening competitiveness via strategic alliances and collaborative
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partnerships.
Figure 1.2 A Company’s Strategy Is a Blend of Proactive Initiatives
and Reactive Adjustments, Text Alternative

A company’s proactive strategy elements include newly

crafted strategic initiatives, plus ongoing strategy
elements continued from prior periods. It’s reactive
strategy elements include new strategy elements that
emerge as managers react to changing circumstances.
To get to the new strategy, a company must abandon the
prior strategy’s elements.

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