Business Policy and Strategy Test 1

 Chapter 1
Strategy, business models, and competitive advantage

Importance of a Distinctive Strategy and competitive approach

Trying to mimic the strategies of the industry’s successful companies never works. Rather, every
company’s strategy needs to have some distinctive element that draws in customers and produces
a competitive edge.

Strategy, is about competing differently—doing what rival firms don’t do or, better yet, what
rival firms can’t do.

The Relationship between a Company’s Strategy and Business Model

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

Two elements of a company’s business model:

o Customer value preposition: 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.

o Profit formula: approach to determining a cost structure that will allow for acceptable
profits given the pricing tied to its customer value proposition.
Examples:
 Cable television
News and entertainment- viewers find valuable (value preposition)
Secure revenue- subscriptions and adv. to cover operating expenses and allow profits (profit
formula)
 Gillette’s
Economy of scale production, selling razors at an attractive low price (value preposition)
Secure revenue: make money on repeating purchases of razor blades (profit formula)

Five dependable strategic approaches to setting a company apart from rivals and winning a
sustainable competitive advantage:

1. A low-cost provider strategy: achieving a cost-based advantage over rivals. Rivals find it
hard to match lower prices
o Ex. Walmart and Southwest Airlines, strong market position bc of the low cost advantage

i. When to apply this strategy:

1. Price competition among rival sellers is especially vigorous
 2. The products of rival sellers are essentially identical and are
readily available from several sellers
3. There are few ways to achieve product differentiation that have
value to buyers
4. Buyers incur low costs in switching their purchases form one
seller to another
5. The majority of industry sales are made to a few, large volume
buyers
6. Industry newcomers use introductory low prices to attract
buyers and build a customer base

ii. Cons/pitfalls
1. Getting carried away with overly aggressive price cutting and
lowering profitability
2. For price cuts to be effective they must be
3. Cut by less than the size of the cost advantage
4. The added volume is large enough to bring in a bigger total
profit despite lower margins per unit sold
5. Relying on an approach to reduce costs that can be easily
copied by rivals
6. Being too fixated on cost reduction

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.

-Can be powerful so long as a company is sufficiently innovative to combat rivals’ attempts to

copy or closely imitate its product offerings

o Ex. Johnson & Johnson in baby products (product reliability) and Apple (innovative
products)
iii. When
1. Buyer needs and uses of the product are divers
2. Allow industry rivals to set themselves apart with specific
attributes that appeal to that appeal to particular buyers
3. There are many ways to differentiate the product or service that
have value to buyers
4. Industries that allow competitors to add features
5. Few rival firms are following a similar differentiation approach
6. Technological change is fast paced and competition revolves
around rapidly evolving product features
iv. Cons/Pitfalls
1. A differentiation strategy keyed to product or service attributes
that are easily and quickly copied
 2. Buyers see little value in the unique attributes of a company’s
product
3. Overspending on efforts to differentiate is a strategy flaw that
can erode profitability
4. Failing to open up meaningful gaps in or service or
performance features through the products of rivals
5. Over differentiating so that product quality or service levels
exceed buyers needs
6. Trying to charge too high a price premium

3. A focused low-cost strategy: concentrating on a narrow buyer segment (or

market niche) having lower costs than rivals products.
Target market niche
Private store brands
o Ex. Private-label manufacturers of food, health and beauty products, and nutritional
supplements use their low­cost advantage to offer supermarket buyers lower prices.

4. Focused differentiation strategy: concentrating on a market niche by offering customized 

attributes that meet their tastes and requirements better than rivals’ products.
Unique preferences and needs a of a narrow, well­define group of buyers
Usually high­end/premium products 

o Ex. Louis Vuitton, Rolex- advantage focused on affluent customers demanding luxury
and prestige. Whole foods vs. Wegman’s
 When
 the target market niche is big enough to be profitable and offers
good growth potential
 industry leaders have chosen not to compete in the niche
 it is costly or difficult for multisegment competitors to meet the
specialized needs of niche buyers and satisfy the expectations of
mainstream customers
 the industry has many different niches and segments allowing a
focuser to pick a niche suited to its resource strength and
capabilities
 few rivals are attempting to specialize in the same target segment
 Cons/Pitfalls
 the chance that competitors will find effective ways to match the
focused firm’s capabilities in serving the target niche
 the potential for the preferences and needs of niche members to
shift over time toward the product attributes desired by the
majority of buyers
  the segment may become so attractive it is soon inundated with
competitors intensifying rivalry and splintering segment profits

5. Best-cost provider strategy: (hybrid strategy) mix of low cost provider and differentiation
strategy. Giving customers more value for the money by satisfying buyers’ expectations on key 
quality/features/performance/service attributes.
o Ex. Target offers attractive product lineup and an appealing shopping ambience at low 
prices. 

i. When
7. Markets where product differentiation is the norm
8. attractively large numbers of value conscious buyers
9. company can position itself near the middle of the market
10. medium quality products at a below average price
11. high quality product at an average or slightly higher than
average price
12. work well in recessions
ii. Cons/Pitfalls
13. company without the requisite core competencies and supply
chain efficiencies
14. a company may find itself squeezed between the firms using a
low cost strategy and those using a differentiation strategy

Sustainable competitive advantage when an attractively large number of buyers develop a 
durable preference for its products or services over the offerings of competitors, despite the 
efforts of competitors to overcome or erode its advantage.

The Three tests of a winning strategy

1. How well does the strategy fit the company’s situation?

o Strategy needs to match the company’s external and internal situations

Resources capabilities

2. Is the strategy helping the company achieve a sustainable competitive advantage?

o 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?

 o Performance improvement include
Best indicators of how well a company’s strategy is working
-Gain profitability and financial strength
-Advances in the company’s competitive strength and market standing

 Chapter 2
Strategy formulation, execution, and governance

5 Stages of Crafting and Executing a Company’s Strategy

1. Developing a strategic vision, mission, and values

o Strategic vision: Describes where we are going, the course and direction management
has charted and the company’s future product-customer-market-technology focus
o Mission: Describes the enterprise’s present business scope and purpose
o Values: The beliefs, traits and behavioral norms that company personnel are expected to
display in conducting the company’s business and pursuing its strategic vision and
mission

2. Setting objectives

o An organization’s performance targets, the results management wants to achieve

o Needs to be quantifiable and contain a deadline for achievement

3. Crafting a strategy to achieve the objectives and move the company along the intended path

o Address the series of “how’s”

o Embrace the risks of uncertainty and should be a collaborative team effort which includes
managers in various positions at various levels

4. Executing the strategy

o Most demanding and time-consuming part of the strategic management process

o Necessitates an ongoing analysis of the efficiency and effectiveness of a company’s
internal activities, tech developments, and business process

5. Evaluating and analyzing the external environment and the company’s internal situation to
identify corrective adjustments

o The trigger point for deciding whether to continue or change the company’s vision,
objectives, strategy, or strategy execution strategy
o A company’s direction, objectives and strategy have to be revisited any time external or
internal conditions warrant
 A. Financial and Strategic Objectives

Financial

 Relate to the financial performance targets management has established for the
organization to achieve
 Lagging indicators that reflect the results of past decisions and organizational activities
and do not necessarily indicate the company’s future

Ex. An X percent increase in annual revenues, annual increases in earnings per share, bond and
credit rating of X

Strategic

 Relate to target outcomes that indicate a company is strengthening its market standing,
competitive vitality, and future business prospects
 Leading indicators include strategic outcomes which indicate its future financial
performance and business prospects
 Company must find a balance between financial objectives and strategic objectives

Ex. Win an X percent of market share, achieve customer satisfaction rates of X percent, acquire
X number of new customers

Chapter 3 - Evaluating a Company’s External Environment

Macro-environmental Factors

Encompasses the broad environmental context in which a company is situated and is comprised
of 6 parts, PESTEL Analysis

i. Political factors (political policies and processes), Economic

conditions (general economic climate and specific factors such as
interest rates), Sociocultural forces (societal values, attitudes,
lifestyles), Technological factors (pace of technological change and
developments), Environmental factors (weather, climate, climate
change) and Legal and regulatory conditions (regulations and laws,
labor/consumer/antitrust)
B. Identifying an Industry’s Dominant Economic Features
C. 5 Forces Model of Competition – You don’t need to memorize everything here
but you should know all 5 parts of the model and be able to intelligently talk
about them

Industry and competitive environment

1. The competitive force of buyer bargaining power

o Do some or many buyers have sufficient bargaining leverage to obtain price concessions
and other favorable terms
o The extent to which buyers are price sensitive
o Large retail chains have significant bargaining leverage
o Buyers can gain a degree of bargaining leverage if
1. Buyers’ costs of switching to competing brands or substitutes
are relatively low
2. The number of buyers is small or if a customer is particularly
important to a seller
3. Buyer demand is weak
4. Creates a buyers market
5. Buyers are well informed about sellers’ products, prices and
costs
6. Buyers pose a credible threat of integrating backward into the
business of sellers

1. The competitive force of substitute products

Companies in one industry are vulnerable to competitive pressure from the actions of companies
in another industry whenever buyers view the products of the two industries as good substitutes.

Ex. Sugar experience competitive pressures from the sales and marketing efforts of the makers of
Splenda, Truvia, and Sweet’N Low.

Producers of eyeglasses and contact lenses face competitive pressures from corrective laser
surgery

Depends on

 The substitutes are readily available and attractively priced

 Whether buyers view the substitutes as comparable or better in terms of quality,
performance and other relevant attributes
 Whether the costs that buyers incur in switching to the substitutes are high or low

2. The competitive force of supplier bargaining power

Depends on the degree to which suppliers have sufficient bargaining power to influence the
terms and conditions of supply in their favor

Depends on

 Suppliers have little or no power whenever industry members have the ability to source
from any several alternative and eager suppliers.
  The ability of industry members to switch their purchases from one supplier to another or
to switch to attractive substitutes
 If certain inputs are in short supply
 If certain suppliers provide a differentiated input that enhances the performance, quality
or image of the industry’s product
 Whether certain suppliers provide equipment or services that deliver cost savings to
industry members in conducting their operations
 The fraction of the costs of the industry’s product accounted for by the cost of particular
input
 If industry members are major customers of suppliers
 Whether it makes good economic sense for industry members to vertically integrate
backward

3. The Competitive force of potential new entrants

The credible threat of entry often prompts industry members to lower their prices and initiate
defensive actions to deter new entrants

How serious a threat is depends on:

 The expected reaction of incumbent firms to new entry

 Barriers to entry
 The barriers that entry candidates must hurdle include
 The presence of sizable economies of scale in production or other areas of operation
 Cost and resource disadvantages not related to scale of operation
 Strong brand preferences and high degrees of customer loyalty
 High capital requirements
 The difficulties of building a network of distributors-retailers and securing adequate
space on retailers’ shelves
 Patents and other forms of intellectual property protection
 Strong “network effects” in customer demand
 Restrictive regulatory policies
 Tariffs and international trade restrictions
 The ability and willingness of industry incumbents to launch vigorous initiatives to block
a newcomers successful entry

4. Competitive force of rivalry among competing sellers to attract customers

o Typically the strongest of the 5 forces

o A market is a competitive battlefield
o Need to have a competitive edge over rivals

Factors that influence the tempo of rivalry among industry competitors include

 Rivalry is stronger in industries when the number of competitors increase and they
become more equal in size and capability
  Rivalry is usually stronger when demand is growing slowly or declining
 Rivalry increases as it becomes less costly for buyers to switch brands
 Rivalry increases when sellers find themselves with excess capacity and/or inventory
 Rivalry increases as the products of rival sellers become less strongly differentiated
 Rivalry becomes more intense as the diversity of competitors increases in terms of long
term directions, objectives, strategies and countries of origin
 Rivalry is stronger when high exit barriers keep unprofitable firms from leaving the
industry
 Rivalry is characterized as cutthroat or brutal when competitors engage in protracted
price wars
 Rivalry can be considered fierce to strong when the profit margins of competitors are
squeezed to almost zero
 Rivalry can be characterized as moderate or normal when the maneuvering among
industry members leads acceptable profits
 Rivalry is weak when most companies in the industry are relatively well satisfied with
their sales growth and market share

The stronger the collective impact of the forces, the lower the combined five forces, the
lower the combined profitability of industry participants

4. Identifying an Industry’s Driving Forces – be able to discuss intelligently things that

may be affecting an industry

Driving forces:

The major underlying causes of change in industry and competitive conditions

May originate in the outer ring of the company’s macro environment but must originate in the
company’s immediate industry and competitive environment

1. changes in an industry’s long term growth rate

a. increase or decrease in demand
2. increased globalization
3. changes in who buys the product and how they use it
4. product innovation
5. technological change and manufacturing process innovation
6. marketing innovation
7. entry or exit of major firms
8. diffusion of technical know how across more companies and more
countries
9. changes in cost and efficiency
10. shifts in costs of competitors
11. growing buyer preferences for differentiated products instead of a
commodity product/or for a more standardized product instead of
strongly differentiated products
 12. regulatory influences and government policy changes
13. changing societal concerns, attitudes and lifestyles
5. Strategic Group Mapping

a. Put competing companies in an industry into strategic groups with diverse

price/quality ranges, different distribution channels, varying product features, and
geographic coverages
b. Strategic group
i. Consists of those industry members with similar competitive approaches
and positions in the market
ii. A cluster of industry rivals that have similar competitive approaches and
market positions
iii. May have comparable product line breadth, sell in the same price/quality
range, emphasize the same distribution channels
c. Procedure for constructing a strategic group map
i. Identify the competitive characteristics that delineate strategic approaches
used in the industry
ii. Plot firms on two variable map based on their strategic approaches
iii. Assign firms occupying the same map location to a common strategic
group
iv. Draw circles around each strategic group, making the circles proportional
to the size of the group’s share of total industry sales revenues

Chapter 4 – Evaluating a Company’s Resources, Cost Position, and

Competitiveness

Core/Distinctive Competencies

1. Capabilities are developed and enabled through the deployment of a company’s

resources

Consider if the resource/capability is valuable, rare, inimitable, and non substitutable?

Very few firms have resources and capabilities that can pass all four tests, but those that do enjoy
a sustainable competitive advantage with far greater profit potential

o dynamic capability
o The ability to modify, deepen, or reconfigure the company’s existing resources and
capabilities in response to its changing environment or market opportunities

3. SWOT Analysis

Sizing up a company’s internal strengths and competitive deficiencies, its market opportunities
and the external threats to its future well being
The value of a SWOT analysis

Drawing conclusions from the SWOT listings about the company’s overall situation

Translating these conclusions into strategic actions to make strengths match market
opportunities, correct problematic weaknesses and defend against

4. Value Chain – What is it and why is it important

Identifies the primary activities that create customer value and related support activities; focuses
on value creating activities and is an idea tool for examining how a company delivers on its
customer value customer proposition

Consists of two broad categories of activities that drive costs and create customer value: primary
activities and secondary activities

 Primary: supply chain management, operations, distribution, sales and marketing, service
 Support: Product R&D, technology, systems development, human resources
management, general administration
 Also includes a profit margin component to compensate the shareholder

Allows for a comprehensive analysis of delivery on customer value proposition and profit
formula to ensure a sound business model

Chapter 5 – The Five Generic Competitive Strategies

A. Know all 5 and be able to discuss them relative to a company you may be given
to analyze. You should be able to discuss when the strategies work best.

Cosco
Founded 1976
Ranked as the 4th largest retailer in terms of retail sales

Customer value proposition

 Fee paying members
 Low prices on a limited selection
 Nationally branded and private label products
 Broad range of merchandise categories
Profit formula
 High sales volumes and rapid inventory turnover
 Operate at low gross margins
 Leverage early payment options from vendors
 Membership fees boost overall profitability

Strategy components

1. Pricing
 a. Low cost provider
Setting a certain price for a product in order to maximize sales revenue
Selling products at the lowest price possible to increase sales volume
-14% mark up cap on brand name products
-15% mark up cap on Kirkland Signature products
Can sell products at low cost because of a membership based business model

2. Product Selection
a. Limited number of active items
3. Treasure Hunt Merchandising
a. Carry big ticket items for one off purchases
20-25% of Costco’s active items are constantly changing
-Creates customer excitement for new products and an urgency for consumers to buy current
products because it may be their only chance
- Legally source items from the gray market, rather than directly from high-end manufacturers

4. Low Cost Emphasis

a. Keeping operating cost to a minimum via store design and layout
5. Growth strategy
a. Increase sales at existing stores by 5% and open additional warehouses

Strategy: execution and logisitcs

● Marketing and advertising

○ Limited campaign efforts because of high customer loyalty, already low prices,
and treasure hunt merchandising
● Supply chain and distribution
○ Most merchandise is bought directly from manufacturers
○ Limited supplier power
■ No one manufacturer supplies a majority of Costco products
■ May switch its purchases to alternative manufacturers with relative ease
● Warehouse management
Managers function as entrepreneurs running their own retail operations

● What is the major driving force in the retail and warehouse club retail space? Driving
forces are the major underlying causes of change in industry and competitive conditions
● According to Forbes, E-Commerce accounts for 10% of all retail sales
○ Emerging twin problems
■ What to do with too many brick and mortar retail stores for declining
physical business
■ Not enough points of distribution for growing online sales

Craft brewing industry

By definition craft breweries are: Small
Production of 6 million barrels (bbls) or less per year
Independent
Less than 25% of company is owned and controlled by an alcoholic beverage industry member
Traditional: Flavors derived from traditional or innovative brewing ingredients and their
fermentation
Trends and Statistics
6.7% annual growth in beer industry in the U.S. between 2011 and 2016
Production of U.S. craft breweries more than doubled since 2011
11.5 million bbls to 24.6 million bbls
Slowing of growth in the industry in 2017
2018: 5% mid year growth
2018 is expected to see the largest number of openings and closings of craft breweries
Openings expected to far outweigh closings
2016: 826 Openings, 97 Closings
Craft brewery beverages are denoted by a seal of an upside down beer bottle

Self-distribution
Allowed in some states, limited to 100 mile radius of brewery

Local market: most important and easiest to get recognition “Local appeal”

Advantage: hands-on selling Disadvantages: time, resources

Suppliers to breweries

Main suppliers in industry are companies who supply grain and hops

Growers sell directly to breweries or distribute through wholesalers

Recipes: grains (including rye), wheat, corn

Definition of craft changed

Hops acreage in the U.S grew over 70% from 2011-2016. Correlates with the increasing demand,
number of breweries were increasing too

Suppliers: must provide manufacturing and distribution of brewing equipment

Refrigeration, purification, testing tools, fermentation tanks
Economic implications: beer production processes heavily reliant on raw materials
Any sort of crop failure would heavily impact the availability of goods and therefore the price of
production
Materials are substitutes, so they tend to rise an fall together
Barriers of entry- somewhat low
Over one million people pursuing home brewing in 2016

 Profitability in the market is limited

o A certain level of production volume is necessary to breakeven
o Harder for microbreweries to be successful
o Nanobreweries might focus more on niche markets and variety whereas macro-
breweries will focus on economies of scale and mass produce

Economies of scale- utilized for profit maximization

o Buyer Bargaining Power

Low brand loyalty due to constant switching in brands. Can be due to tastes changing with the
seasons: lighter beers were consumed in hotter months, while heavier beers were consumed in
the colder months. Additionally, consumers might associate beer types with the time of year or
season. Oktoberfest and German-style beers are associated with fall and also on a fun night you
may just choose a beer to drink instead of being brewery or brand loyal.
o Barriers to entry: low
Material costs for hops, barley and water are low.
o Threat of substitutes
There are many other products which can be used for similar use such as wine or imported beers.

Strategic issues confronting craft breweries

1. Lack of capital for marketing and advertising

Insanely difficult to stand out in a crowded market

o Many craft brewers obtained startup capital through their own savings or solicited
investments from friends and family
o Brewery tours and visits have to be done in order to gain exposure
o Social media websites also offered significant exposure for free, allowing craft
brewers to reach the craft beer consumer, who tended to seek out and follow new
an upcoming breweries.
o Mobile phone applications specific to the craft beer industry that helped a startup
gain exposure
o Participating in craft beer festivals, where local and regional breweries were able
to offer samples to attendees to gain more exposure.
 o Might host events at local restaurants, such a tap takeovers, where several of its
beers are featured on draft. If enough consumers were engaged, local restaurants
were enticed to purchase more beer from the distributor of the brewery
2. Lack of employees
o Normally, craft brewery start ups have a small staff of two or three
o Poses a problem for bottling and labelling and sometimes have to solicit
volunteers through social media
3. Lack of equipment to produce large amounts of beer
o Also ties into the fact that many small craft breweries do not have sufficient capital. The
vast majority of craft breweries produce only enough beer for the local population in their
area.
4. Price fluctuations of raw materials
o Larger macro-breweries and regional craft breweries were seizing the opportunity
to acquire other breweries as a method of obtaining distribution and branding
synergies, while also mitigating the amount of direct competition. This resulted in
price fluctuations of raw materials, which in turn might impact the industry’s
growth and affect the production stability of breweries, especially the craft
breweries which do not have the capacity to purchase in bulk or outbid larger
competitors.
5. Competition with macro-breweries
o What differentiates macro-breweries from craft breweries is essentially size and capital,
and also incorporates everything previously stated. They have more employees, more
capital/funding for advertising/marketing and have better equipment and are able to meet
demand.
6. Finding the target market
o In such a crowded market, it is difficult to differentiate from other breweries and thus
find a target market.

Lululemon
Strategy sales and distribution
 Originally franchised stores until 2011
 Owns 5 distribution centers across the globe
 Provide certain yoga studios and fitness centers with wholesale products
 Direct to customer sales through e-commerce site
 Short-cycle limited inventories to encourage buying
 Typically takes 8-10 months, however, it has the capability to bring products to market in
2 months
 Community-based marketing approach through word-of-mouth

Culture- strategy
Community-based marketing approach
Promotes local fitness practitioners to be ambassadors for the bran
Each store hosts a weekly yoga session to emphasize community culture
Store layouts are to promote a local apparel boutique esthetic
Retail employees are called “educators” and customers are referred to as “guests”
Employees are thoroughly trained about healthy lifestyles, product designs and features and
about local information on fitness classes, instructors and events
Value Proposition:

Quality of products

Status of the brand

Customer shopping experience

Profit Formula:

Sell products at premium prices

Rarely sell on discounts

Quick turnover on product lines to improve shopper frequency

Small barriers of entry, which lead to major competitors in the market

5 porters forces Athletic apparel

• Competition in the industry is high
• Potential of new entrants into an industry is high
• Power of suppliers is relatively low
• Customers in industry have high purchasing power
• Threat of substitutes is relatively low

Gap
Generic competitive strategy
Offer people opportunity of being cool and stylish
Issues with maintaining generic strategy
Best cost provider or broad differentiation
Hybrid: Old Navy: low cost
Banana Republic: Premium products, higher price

Supplier Bargaining power: low, 1000 suppliers

Not dependent on any supplier
Threat of new entrants: low, large scale capital, economies of scale
Consumers buying both online and brick-and-mortar
Increase in online sales and decline in malls
Consumers are more informed, internet

Traditional approach
● In-house designers
● Use of current trends, and try to anticipate customers’ demands
● Purchasing of inventory in bulk for the whole season
● Discounts at the end of season
Fast fashion
● Shortening of the production-to-sales logistics
● Internal designers observed consumer preferences and demands, and change products
mid-season
● “Disposable commodity”

Strenghts
● Well known Brand
● Several product lines
● Iconic Products
Weaknesses
● Varied Profitability
● Crossing brands
● Loss of trendy customers
Opportunities
● Brand consolidation
● More fast fashion investment
● Celebrity Endorsement
Threats
● Increasing production costs
● Favored differentiated stores
● Increased brand divorce