BUS421 Midterm Exam

objectives

are an organization's performance targets—the specific results management wants to achieve.

A company must guard against outsourcing activities that hollow out the resources and capabilities that it needs to be a master of its own destiny.

- the biggest danger of outsourcing is that a company will farm out the wrong types of activities and thereby hollow out its own capabilities. - Another risk of outsourcing comes from the lack of direct control. It may be difficult to monitor, control, and coordinate the activities of outside parties via contracts and arm's-length transactions alone. Unanticipated problems may arise that cause delays or cost overruns and become hard to resolve amicably.

Before assessing the competitive pressures coming from substitutes, company managers must identify the substitutes, which is less easy than it sounds since it involves

1) determining where the industry boundaries lie and (2) figuring out which other products or services can address the same basic customer needs as those produced by industry members.

In order to chart a company's strategic course wisely, managers must first develop a deep understanding of the company's present situation. Two facets of a company's situation are especially pertinent:

1) its external environment—most notably, the competitive conditions of the industry in which the company operates; and (2) its internal environment—particularly the company's resources and organizational capabilities.

Chapter 2 Key Points

1. Developing a strategic vision of the company's future, a mission statement that defines the company's current purpose, and a set of core values to guide the pursuit of the vision and mission. This stage of strategy making provides direction for the company, motivates and inspires company personnel, aligns and guides actions throughout the organization, and communicates to stakeholders management's aspirations for the company's future. 2. Setting objectives to convert the vision and mission into performance targets that can be used as yardsticks for measuring the company's performance. Objectives need to spell out how much of what kind of performance by when. Two broad types of objectives are required: financial objectives and strategic objectives. A balanced scorecard approach for measuring company performance entails setting both financial objectives and strategic objectives. Stretch objectives spur exceptional performance and help build a firewall against complacency and mediocre performance. A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective. 3. Crafting a strategy to achieve the objectives and move the company along the strategic course that management has charted. Masterful strategies come from doing things differently from competitors where it counts—out-innovating them, being more efficient, being more imaginative, adapting faster—rather than running with the herd. In large diversified companies, the strategy-making hierarchy consists of four levels, each of which involves a corresponding level of management: corporate strategy (multibusiness strategy), business strategy (strategy for individual businesses that compete in a single industry), functional-area strategies within each business (e.g., marketing, R&D, logistics), and operating strategies (for key operating units, such as manufacturing plants). Thus, strategy making is an inclusive collaborative activity involving not only senior company executives but also the heads of major business divisions, functional-area managers, and operating managers on the frontlines. 4. Executing the chosen strategy and converting the strategic plan into action. Management's agenda for executing the chosen strategy emerges from assessing what the company will have to do to achieve the targeted financial and strategic performance. Management's handling of the strategy implementation process can be considered successful if things go smoothly enough that the company meets or beats its strategic and financial performance targets and shows good progress in achieving management's strategic vision. 5. Monitoring developments, evaluating performance, and initiating corrective adjustments in light of actual experience, changing conditions, new ideas, and new opportunities. This stage of the strategy management process is the trigger point for deciding whether to continue or change the company's vision and mission, objectives, strategy, and/or strategy execution methods. The sum of a company's strategic vision, mission, objectives, and strategy constitutes a strategic plan for coping with industry conditions, outcompeting rivals, meeting objectives, and making progress toward aspirational goals. Boards of directors have a duty to shareholders to play a vigilant role in overseeing management's handling of a company's strategy-making, strategy-executing process.page 42 This entails four important obligations: (1) Ensure that the company issues accurate financial reports and has adequate financial controls; (2) critically appraise the company's direction, strategy, and strategy execution; (3) evaluate the caliber of senior executives' strategic leadership skills; and (4) institute a compensation plan for top executives that rewards them for actions and results that serve stakeholder interests, most especially those of shareholders.

Mergers and acquisitions are much-used strategic options to strengthen a company's market position. A merger is the combining of two or more companies into a single corporate entity, with the newly created company often taking on a new name. An acquisition is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired. The difference between a merger and an acquisition relates more to the details of ownership, management control, and financial arrangements than to strategy and competitive advantage. The resources and competitive capabilities of the newly created enterprise end up much the same whether the combination is the result of an acquisition or a merger. Merger and acquisition strategies typically set sights on achieving any of five objectives:

1. Creating a more cost-efficient operation out of the combined companies. When a company acquires another company in the same industry, there's usually enough overlap in operations that less efficient plants can be closed or distribution and sales activities partly combined and downsized. Likewise, it is usually feasible to squeeze out cost savings in administrative activities, again by combining and downsizing such administrative activities as finance and accounting, information technology, human resources, and so on. The combined companies may also be able to reduce supply chain costs because of greater bargaining power over common suppliers and closer collaboration with supply chain partners. By helping consolidate the industry and remove excess capacity, such combinations can also reduce industry rivalry and improve industry profitability. 2. Expanding a company's geographic coverage. One of the best and quickest ways to expand a company's geographic coverage is to acquire rivals with operations in the desired locations. Since a company's size increases with its geographic scope, another benefit is increased bargaining power with the company's suppliers or buyers. Greater geographic coverage can also contribute to product differentiation by enhancing a company's name recognition and brand awareness. Banks like JPMorgan Chase, Wells Fargo, and Bank of America have used acquisition strategies to establish a market presence and gain name recognition in an ever-growing number of states and localities. Food products companies like Nestlé, Kraft, Unilever, and Procter & Gamble have made acquisitions an integral part of their strategies to expand internationally. 3. Extending the company's business into new product categories. Many times a company has gaps in its product line that need to be filled in order to offer customers a more effective product bundle or the benefits of one-stop shopping. For example, customers might prefer to acquire a suite of software applications from a single vendor that can offer more integrated solutions to the company's problems. Acquisition can be a quicker and more potent way to broaden a company's product line than going through the exercise of introducing a company's own new product to fill the gap. Coca-Cola has increased the effectiveness of the product bundle it provides to retailers by acquiring beverage makers Minute Maid, Odwalla, Hi-C, and Glacéau Vitaminwater. 4. Gaining quick access to new technologies or other resources and capabilities. Making acquisitions to bolster a company's technological know-how or to expand its skills and capabilities allows a company to bypass a time-consuming and expensive internal effort to build desirable new resources and capabilities. From 2000 through December 2015, Cisco Systems purchased 128 companies to give it page 161more technological reach and product breadth, thereby enhancing its standing as the world's largest provider of hardware, software, and services for creating and operating Internet networks. 5. Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. In fast-cycle industries or industries whose boundaries are changing, companies can use acquisition strategies to hedge their bets about the direction that an industry will take, to increase their capacity to meet changing demands, and to respond flexibly to changing buyer needs and technological demands. News Corporation has prepared for the convergence of media services with the purchase of satellite TV companies to complement its media holdings in TV broadcasting (the Fox network and TV stations in various countries), cable TV (Fox News, Fox Sports, and FX), filmed entertainment (Twentieth Century Fox and Fox studios), newspapers, magazines, and book publishing.

The Risks of a Focused Low-Cost or Focused Differentiation Strategy

1. One is the chance that competitors outside the niche will find effective ways to match the focused firm's capabilities in serving the target niche—perhaps by coming up with products or brands specifically designed to page 139appeal to buyers in the target niche or by developing expertise and capabilities that offset the focuser's strengths. 2. A second risk of employing a focused strategy is the potential for the preferences and needs of niche members to shift over time toward the product attributes desired by buyers in the mainstream portion of the market. An erosion of the differences across buyer segments lowers entry barriers into a focuser's market niche and provides an open invitation for rivals in adjacent segments to begin competing for the focuser's customers. 3. A third risk is that the segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and splintering segment profits. And there is always the risk for segment growth to slow to such a small rate that a focuser's prospects for future sales and profit gains become unacceptably dim.

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can't—at least in terms of the level of satisfaction. There are four basic routes to achieving this aim.

1. The first route is to incorporate product attributes and user features that lower the buyer's overall costs of using the company's product. - This is the least obvious and most overlooked route to a differentiation advantage. It is a differentiating factor since it can help business buyers be more competitive in their markets and more profitable. Producers of materials and components often win orders for their products by reducing page 133a buyer's raw-material waste (providing cut-to-size components), reducing a buyer's inventory requirements (providing just-in-time deliveries), using online systems to reduce a buyer's procurement and order processing costs, and providing free technical support. 2. A second route is to incorporate tangible features that increase customer satisfaction with the product, such as product specifications, functions, and styling. - This can be accomplished by including attributes that add functionality; enhance the design; save time for the user; are more reliable; or make the product cleaner, safer, quieter, simpler to use, more portable, more convenient, or longer-lasting than rival brands. Smartphone manufacturers are in a race to introduce next-generation devices capable of being used for more purposes and having simpler menu functionality. 3. A third route to a differentiation-based competitive advantage is to incorporate intangible features that enhance buyer satisfaction in noneconomic ways. - Toyota's Prius appeals to environmentally conscious motorists not only because these drivers want to help reduce global carbon dioxide emissions but also because they identify with the image conveyed. Bentley, Ralph Lauren, Louis Vuitton, Burberry, Cartier, and Coach have differentiation-based competitive advantages linked to buyer desires for status, image, prestige, upscale fashion, superior craftsmanship, and the finer things in life. Intangibles that contribute to differentiation can extend beyond product attributes to the reputation of the company and to customer relations or trust. 4. The fourth route is to signal the value of the company's product offering to buyers. - Typical signals of value include a high price (in instances where high price implies high quality and performance), more appealing or fancier packaging than competing products, ad content that emphasizes a product's standout attributes, the quality of brochures and sales presentations, and the luxuriousness and ambience of a seller's facilities (important for high-end retailers and for offices or other facilities frequented by customers). They make potential buyers aware of the professionalism, appearance, and personalities of the seller's employees and/or make potential buyers realize that a company has prestigious customers. Signaling value is particularly important (1) when the nature of differentiation is based on intangible features and is therefore subjective or hard to quantify, (2) when buyers are making a first-time purchase and are unsure what their experience with the product will be, (3) when repurchase is infrequent, and (4) when buyers are unsophisticated. Easy-to-copy differentiating features cannot produce sustainable competitive advantage

Chapter 3 Key Points

1. What are the strategically relevant factors in the macro-environment, and how do they impact an industry and its members? Industries differ significantly as to how they are affected by conditions and developments in the broad macro-environment. Using PESTEL analysis to identify which of these factors is strategically relevant is the first step to understanding how a company is situated in its external environment. 2. What kinds of competitive forces are industry members facing, and how strong is each force? The strength of competition is a composite of five forces: (1) rivalry within the industry, (2) the threat of new entry into the market, (3) inroads being made by the sellers of substitutes, (4) supplier bargaining power, and (5) buyer bargaining power. All five must be examined force by force, and their collective strength evaluated. One strong force, however, can be sufficient to keep average industry profitability low. Working through the five forces model aids strategy makers in assessing how to insulate the company from the strongest forces, identify attractive arenas for expansion, or alter the competitive conditions so that they offer more favorable prospects for profitability. 3. What cooperative forces are present in the industry, and how can a company harness them to its advantage? Interactions among industry participants are not only competitive in nature but cooperative as well. This is particularly the case when complements to the products or services of an industry are important. The value net framework assists managers in sizing up the impact of cooperative as well as competitive interactions on their firm. 4. What factors are driving changes in the industry, and what impact will they have on competitive intensity and industry profitability? Industry and competitive conditions change because certain forces are acting to create incentives or pressures for change. The first step is to identify the three or four most important drivers of change affecting the industry being analyzed (out of a much longer list of potential drivers). Once an industry's change drivers have been identified, the analytic task becomes one of determining whether they are acting, individually and collectively, to make the industry environment more or less attractive. 5. What market positions do industry rivals occupy—who is strongly positioned and who is not? Strategic group mapping is a valuable tool for understanding the similarities, differences, strengths, and weaknesses inherent in the market positions of rival companies. Rivals in the same or nearby strategic groups are close competitors, whereas companies in distant strategic groups usually pose little or no immediate threat. The lesson of strategic group mapping is that some positions on the map are more favorable than others. The profit potential of different strategic groups may not be the same because industry driving forces and competitive forces likely have varying effects on the industry's distinct strategic groups. 6. What strategic moves are rivals likely to make next? Anticipating the actions of rivals can help a company prepare effective countermoves. Using the Framework for Competitor Analysis is helpful in this regard. 7. What are the key factors for competitive success? An industry's key success factors (KSFs) are the particular strategy elements, product attributes, operational approaches, resources, and competitive capabilities that all industry members must have in order to survive and prosper in the industry. For any industry, they can be deduced by answering three basic questions: (1) On what basis do buyers of the industry's product choose between the competing brands of sellers, (2) what resources and competitive capabilities must a company have to be competitively successful, and (3) what shortcomings are almost certain to put a company at a significant competitive disadvantage? 8. Is the industry outlook conducive to good profitability? The last step in industry analysis is summing up the results from applying each of the frameworks employed in answering questions 1 to 6: PESTEL, five forces analysis, driving forces, strategic group mapping, competitor analysis, and key success factors. Applying multiple lenses to the question of what the industry outlook looks like offers a more robust and nuanced answer. If the answers from each framework, seen as a whole, reveal that a company's profit prospects in that industry are above-average, then the industry environment is basically attractive for that company. What may look like an attractive environment for one company may appear to be unattractive from the perspective of a different company.

strategic intent

A company exhibits this when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective.

strategic alliance

A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective. Typically, they involve shared financial responsibility, joint contribution of resources and capabilities, shared risk, shared control, and mutual dependence. They may be characterized by cooperative marketing, sales, or distribution; joint production; design collaboration; or projects to jointly develop new technologies or products. They can vary in terms of their duration and the extent of the collaboration; some are intended as long-term arrangements, involving an extensive set of cooperative activities, while others are designed to accomplish more limited, short-term objectives. Collaborative arrangements may entail a contractual agreement, but they commonly stop short of formal ownership ties between the partners (although sometimes an alliance member will secure minority ownership of another member).

—a condition that makes the task of crafting strategy a work in progress, not a one-time event.

Changing circumstances and ongoing management efforts to improve the strategy cause a company's strategy to evolve over time

Representative Company Value Chain

Primary Activities - supply chain management - operations - distribution - sales and marketing - service - profit margin Support Activities and Costs - Product R&D, Technology, and Systems Development - Human Resource management - general administration page 101

key financial ratios

Profitability ratios - Gross profit margin = (sales revenue - cogs)/sales revenue Shows the percentage of revenues available to cover operating expenses and yield a profit. - Operating profit margin (or return on sales) = (sales revenue - operating expenses)/sales revenue OR operating income/sales revenue Shows the profitability of current operations without regard to interest charges and income taxes. Earnings before interest and taxes is known as EBIT in financial and business accounting. - Net profit margin (or net return on sales) = (profits after taxes)/sales revenue Shows after-tax profits per dollar of sales. - Total return on assets = (profits after taxes + interest)/total assets A measure of the return on total investment in the enterprise. Interest is added to after-tax profits to form the numerator, since total assets are financed by creditors as well as by stockholders. - Net return on total assets (ROA) = profit after taxes/total assets A measure of the return earned by stockholders on the firm's total assets. - Return on stockholders' equity (ROE) = profits after taxes/(total stockholders equity) The return stockholders are earning on their capital investment in the enterprise. A return in the 12%-15% range is average. - Return on invested capital (ROIC)—sometimes referred to as return on capital employed (ROCE) = profits after taxes/(long term debt + total stockholders' equity) A measure of the return that shareholders are earning on the monetary capital invested in the enterprise. A higher return reflects greater bottom-line effectiveness in the use of long-term capital. Liquidity ratios - Current ratio = current assets/current liabilities Shows a firm's ability to pay current liabilities using assets that can be converted to cash in the near term. Ratio should be higher than 1.0. - Working capital = Current assets - Current liabilities​ The cash available for a firm's day-to-day operations. Larger amounts mean the company has more internal funds to (1) pay its current liabilities on a timely basis and (2) finance inventory expansion, additional accounts receivable, and a larger base of operations without resorting to borrowing or raising more equity capital. Leverage ratios - Total debt-to-assets ratio = total debt/total assets Measures the extent to which borrowed funds (both short-term loans and long-term debt) have been used to finance the firm's operations. A low ratio is better—a high fraction indicates overuse of debt and greater risk of bankruptcy. - Long-term debt-to-capital ratio = long term debt/(long term debt + total stockholders' equity) A measure of creditworthiness and balance sheet strength. It indicates the percentage of capital investment that has been financed by both long-term lenders and stockholders. A ratio below 0.25 is preferable since the lower the ratio, the greater the capacity to borrow additional funds. Debt-to-capital ratios above 0.50 indicate an excessive reliance on long-term borrowing, lower creditworthiness, and weak balance sheet strength. - Debt-to-equity ratio = total debt/total stockholders' equity Shows the balance between debt (funds borrowed both short term and long term) and the amount that stockholders have invested in the enterprise. The further the ratio is below 1.0, the greater the firm's ability to borrow additional funds. Ratios above 1.0 put creditors at greater risk, signal weaker balance sheet strength, and often result in lower credit ratings. - Long-term debt-to-equity ratio = long term debt/total stockholders' equity Shows the balance between long-term debt and stockholders' equity in the firm's long-term capital structure. Low ratios indicate a greater capacity to borrow additional funds if needed. - Times-interest-earned (or coverage) ratio = operating income/interest expenses Measures the ability to pay annual interest charges. Lenders usually insist on a minimum ratio of 2.0, but ratios above 3.0 signal progressively better creditworthiness. Activity ratios - Days of inventory = inventory/(cogs/365) Measures inventory management efficiency. Fewer days of inventory are better. - Inventory turnover = cogs/inventory Measures the number of inventory turns per year. Higher is better. - Average collection period = accounts receivable/(total sales/365) OR accounts receivable/avg daily sales Indicates the average length of time the firm must wait after making a sale to receive cash payment. A shorter collection time is better. Other important measures of financial performance - Dividend yield on common stock = annual dividends per share/current market price per share A measure of the return that shareholders receive in the form of dividends. A "typical" dividend yield is 2%-3%. The dividend yield for fast-growth companies is often below 1%; the dividend yield for slow-growth companies can run 4%-5%. - Price-to-earnings (P/E) ratio = current market price per share/earnings per share P/E ratios above 20 indicate strong investor confidence in a firm's outlook and earnings growth; firms whose future earnings are at risk or likely to grow slowly typically have ratios below 12. - Dividend payout ratio = annual dividends per share/earnings per share Indicates the percentage of after-tax profits paid out as dividends. - Internal cash flow = After-tax profits + Depreciation​ A rough estimate of the cash a company's business is generating after payment of operating expenses, interest, and taxes. Such amounts can be used for dividend payments or funding capital expenditures. - Free cash flow = After-tax profits + Depreciation - Capital expenditures - Dividends​ A rough estimate of the cash a company's business is generating after payment of operating expenses, interest, taxes, dividends, and desirable reinvestments in the business. The larger a company's free cash flow, the greater its ability to internally fund new strategic initiatives, repay debt, make new acquisitions, repurchase shares of stock, or increase dividend payments.

Value of strategic group maps

Strategic group maps reveal which companies are close competitors and which are distant competitors.

A Representative Value Chain System

Supplier-Related Value Chains - activities costs, and margins of suppliers A COmpany's own value chain - internally performed activities, costs, and margins Forward-channel value chains - activities costs, and margins of forward-channel allies and strategic partners - buyer or end-user value chains

To improve the effectiveness of the company's customer value proposition and enhance differentiation, managers can take several approaches.

They can adopt best practices for quality, marketing, and customer service. They can reallocate resources to activities that address buyers' most important purchase criteria, which will have the biggest impact on the value delivered to the customer. They can adopt new technologies that spur innovation, improve design, and enhance creativity.

customer value proposition

V - P, which is essentially the customers' perception of how much value they are getting for the money.

To profitably employ a best-cost provider strategy:

a company must have the capability to incorporate upscale attributes into its product offering at a lower cost than rivals. When a company can incorporate more appealing features, good to excellent product performance or quality, or more satisfying customer service into its product offering at a lower cost than rivals, then it enjoys "best-cost" status—it is the low-cost provider of a product or service with upscale attributes. A best-cost provider can use its low-cost advantage to underprice rivals whose products or services have similarly upscale attributes and it still earns attractive profits.

cost driver

a factor that has a strong influence on a company's costs.

value drivers

a set of factors—analogous to cost drivers—that are particularly effective in creating differentiation. 1. Create product features and performance attributes that appeal to a wide range of buyers. - The physical and functional features of a product have a big influence on differentiation, including features such as added user safety or enhanced environmental protection. Styling and appearance are big differentiating factors in the apparel and motor vehicle industries. Size and weight matter in binoculars and mobile devices. Most companies employing broad differentiation strategies make a point of incorporating innovative and novel features in their product or service offering, especially those that improve performance and functionality. 2. Improve customer service or add extra services. - Better customer services, in areas such as delivery, returns, and repair, can be as important in creating differentiation as superior product features. Examples include superior technical assistance to buyers, higher-quality maintenance services, more and better product information provided to customers, more and better training materials for end users, better credit terms, quicker order processing, and greater customer convenience. 3. Invest in production-related R&D activities. - Engaging in production R&D may permit custom-order manufacture at an efficient cost, provide wider product variety and selection through product "versioning," or improve product quality. Many manufacturers have developed flexible manufacturing systems that allow different models and product versions to be made on the same assembly line. Being able to provide buyers with made-to-order products can be a potent differentiating capability. 4. Strive for innovation and technological advances. - Successful innovation is the route to more frequent first-on-the-market victories and is a powerful differentiator. If the innovation proves hard to replicate, through patent protection or other means, it can provide a company with a first-mover advantage that is sustainable. 5. Pursue continuous quality improvement. - Quality control processes reduce product defects, prevent premature product failure, extend product life, make it economical to offer longer warranty coverage, improve economy of use, result in more end-user convenience, or enhance product appearance. Companies whose quality management systems meet certification standards, such as the ISO 9001 standards, can enhance their reputation for quality with customers. 6. Increase marketing and brand-building activities. - Marketing and advertising can have a tremendous effect on the value perceived by buyers and therefore their willingness to pay more for the company's offerings. They can create differentiation even when little tangible differentiation exists otherwise. For example, blind taste tests show that even the most loyal Pepsi or Coke drinkers have trouble telling one cola drink from another.4 Brands create customer loyalty, which increases the perceived "cost" of switching to another product. 7. Seek out high-quality inputs. - Input quality can ultimately spill over to affect the performance or quality of the company's end product. Starbucks, for example, gets high ratings on its coffees partly because it has very strict specifications on the coffee beans purchased from suppliers. 8. Emphasize human resource management activities that improve the skills, expertise, and knowledge of company personnel. - A company with high-caliber intellectual capital often has the capacity to generate the kinds of ideas that drive product innovation, technological advances, better product design and product performance, improved production techniques, and higher product quality. Well-designed incentive compensation systems can often unleash the efforts of talented personnel to develop and implement new and effective differentiating attributes.

Balanced Scorecard

a widely used method for combining the use of both strategic and financial objectives, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing. A company's financial performance measures are really lagging indicators that reflect the results of past decisions and organizational activities.5 But a company's past or current financial performance is not a reliable indicator of its future prospects—poor financial performers often turn things around and dopage 29 better, while good financial performers can fall upon hard times. The best and most reliable leading indicators of a company's future financial performance and business prospects are strategic outcomes that indicate whether the company's competitiveness and market position are stronger or weaker. The accomplishment of strategic objectives signals that the company is well positioned to sustain or improve its performance. Consequently, it is important to use a performance measurement system that strikes a balance between financial objectives and strategic objectives.6 The most widely used framework of this sort is known as the Balanced Scorecard.

dynamic capability

an ongoing capacity of a company to modify its existing resources and capabilities or create new ones.

Complementors

are the producers of complementary products, which are products that enhance the value of the focal firm's products when they are used together. Some examples include snorkels and swim fins or shoes and shoelaces.

Key Success Factors (KSFs)

are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are essential to surviving and thriving in the industry.

PESTEL Analysis

can be used to assess the strategic relevance of the six principal components of the macro-environment: Political, Economic, Social, Technological, Environmental, and Legal/Regulatory forces. For example, the strategic opportunities of cigarette producers to grow their businesses are greatly reduced by antismoking ordinances, the decisions of governments to impose higher cigarette taxes, and the growing cultural stigma attached to smoking. Motor vehicle companies must adapt their strategies to customer concerns about high gasoline prices and to environmental concerns about carbon emissions. Companies in the food processing, restaurant, sports, and fitness industries have to pay special attention to changes in lifestyles, eating habits, leisure-time preferences, and attitudes toward nutrition and fitness in fashioning their strategies. Table 3.1 provides a brief description of the components of the macro-environment and some examples of the industries or business situations that they might affect.

Deliberate Strategy

consists of proactive strategy elements that are both planned and realized as planned. The biggest portion of a company's current strategy flows from previously initiated actions that have proven themselves in the marketplace and newly launched initiatives aimed at edging out rivals and boosting financial performance. This part of management's action plan for running the company is its:

Outsourcing

involves contracting out certain value chain activities that are normally performed in-house to outside vendors.

Backward integration

involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain system

forward integration

involves entry into value chain system activities closer to the end user.

resource bundles

is a linked and closely integrated set of competitive assets centered around one or more cross-functional capabilities.

Corporate Strategy

is orchestrated by the CEO and other senior executives and establishes an overall strategy for managing a set of businesses in a diversified, multi-business company. Corporate strategy concerns how to improve the combined performance of the set of businesses the company has diversified into by capturing cross-business synergies and turning them into competitive advantage.

Business Strategy

is primarily concerned with strengthening the company's market position and building competitive advantage in a single-business company or in a single business unit of a diversified multi-business corporation. is concerned with strengthening the market position, building competitive advantage, and improving the performance of a single line of business unit. Business strategy is primarily the responsibility of business unit heads, although corporate-level executives may well exert strong influence; in diversified companies it is not unusual for corporate officers to insist that business-level objectives and strategy conform to corporate-level objectives and strategy themes. The business head has at least two other strategy-related roles: (1) seeing that lower-level strategies are well conceived, consistent, and adequately matched to the overall business strategy; and (2) keeping corporate-level officers (and sometimes the board of directors) informed of emerging strategic issues. A company's strategy is at full power only when its many pieces are united.

strategic group

it consists of those industry members with similar competitive approaches and positions in the market. Companies in the same strategic group can resemble one another in a variety of ways. They may have comparable product-line breadth, sell in the same price/quality range, employ the same distribution channels, depend on identical technological approaches, compete in much the same geographic areas, or offer buyers essentially the same product attributes or similar services and technical assistance how to create strategic group map - Identify the competitive characteristics that delineate strategic approaches used in the industry. Typical variables used in creating strategic group maps are price/quality range (high, medium, low), geographic coverage (local, regional, national, global), product-line breadth (wide, narrow), degree of service offered (no frills, limited, full), use of distribution channels (retail, wholesale, Internet, multiple), degree of vertical integration (none, partial, full), and degree of diversification into other industries (none, some, considerable). - Plot the firms on a two-variable map using pairs of these variables. - Assign firms occupying about the same map location to the same strategic group. - Draw circles around each strategic group, making the circles proportional to the size of the group's share of total industry sales revenues.

components of a company's macro-environment (figure 3.2)

outer layer: macro-environment - economic conditions - sociocultural forces - technological factors - environmental factors - legal/regulatory factors - political factors Inner layer: immediate industry and competitive environment - suppliers - substitute products - buyers - new entrants - rival firms core: company

Resource and capability analysis

provides managers with a powerful tool for sizing up the company's competitive assets and determining whether they can provide the foundation necessary for competitive success in the marketplace. This is a two-step process. The first step is to identify the company's resources and capabilities. The second step is to examine them more closely to ascertain which are the most competitively important and whether they can support a sustainable competitive advantage over rival firms. This second step involves applying the four tests of a resource's competitive power.

Stretch Objectives

set performance targets high enough to stretch an organization to perform at its full potential and deliver the best possible results

Suppliers' value chains are relevant because

suppliers perform activities and incur costs in creating and delivering the purchased inputs utilized in a company's own value-creating activities. The costs, performance features, and quality of these inputs influence a company's own costs and product differentiation capabilities. Anything a company can do to help its suppliers drive down the costs of their value chain activities or improve the quality and performance of the items being supplied can enhance its own competitiveness—a powerful reason for working collaboratively with suppliers in managing supply chain activities.

types of company resources

tangible - physical, - financial, - technological, - organizational, intangible - human assets and intellectual capital, - brands, company image, and reputational assets, - relationships, - company culture and incentive system Virtually all organizational capabilities are knowledge-based, residing in people and in a company's intellectual capital, or in organizational processes and systems, which embody tacit knowledge. For example, Amazon's speedy delivery capabilities rely on the knowledge of its fulfillment center managers, its relationship with the United Postal Service, and the experience of its merchandisers to correctly predict inventory flow.

Being a best-cost provider is different from being a low-cost provider because:

the additional attractive attributes entail additional costs (which a low-cost provider can avoid by offering buyers a basic product with few frills). Moreover, the two strategies aim at a distinguishably different market target. The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (page 141as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

capability or (competence)

the capacity of a firm to perform some internal activity competently. Capabilities or competences also vary in form, quality, and competitive importance, with some being more competitively valuable than others. American Express displays superior capabilities in brand management and marketing; Starbucks's employee management, training, and real estate capabilities are the drivers behind its rapid growth; LinkedIn relies on superior software innovation capabilities to increase new user memberships. Organizational capabilities are developed and enabled through the deployment of a company's resources.

Strategy

the set of actions that its managers take to outperform the company's competitors and achieve superior profitability. Strategy is about competing differently from rivals—doing what competitors don't do or, even better, doing what they can't do! A company's strategy provides direction and guidance, in terms of not only what the company should do but also what it should not do. Knowing what not to do can be as important as knowing what to do, strategically. At best, making the wrong strategic moves will prove a distraction and a waste of company resources. At worst, it can bring about unintended long-term consequences that put the company's very survival at risk.

Social complexity and causal ambiguity

two factors that inhibit the ability of rivals to imitate a firm's most valuable resources and capabilities. Causal ambiguity makes it very hard to figure out how a complex resource contributes to competitive advantage and therefore exactly what to imitate.

SWOT analysis

strengths, weaknesses, opportunities, threats SWOT analysis is a simple but powerful tool for sizing up a company's strengths and weaknesses, its market opportunities, and the external threats to its future well-being. A company is well advised to pass on a particular market opportunity unless it has or can acquire the resources and capabilities needed to capture it. Simply making lists of a company's strengths, weaknesses, opportunities, and threats is not enough; the payoff from SWOT analysis comes from the conclusions about a company's situation and the implications for strategy improvement that flow from the four lists. SWOT analysis involves more than making four lists. The two most important parts of SWOT analysis are drawing conclusions from the SWOT listings about the company's overall situation and translating these conclusions into strategic actions to better match the company's strategy to its internal strengths and market opportunities, to correct important weaknesses, and to defend against external threats.

Vertical scope

is the extent to which a firm's internal activities encompass the range of activities that make up an industry's entire value chain system, from raw-material production to final sales and service activities.

Horizontal scope

is the range of product and service segments that a firm serves within its focal market.

A company's competitive strategy deals exclusively with the specifics of management's game plan for competing successfully

its specific efforts to position itself in the marketplace, please customers, ward off competitive threats, and achieve a particular kind of competitive advantage. The chances are remote that any two companies—even companies in the same industry—will employ competitive strategies that are exactly alike in every detail. However, when one strips away the details to get at the real substance, the two biggest factors that distinguish one competitive strategy from another boil down to (1) whether a company's market target is broad or narrow and (2) whether the company is pursuing a competitive advantage linked to lower costs or differentiation. These two factors give rise to five competitive strategy options, as shown in Figure 5.1 and listed next.

business model

management's blueprint for delivering a valuable product or service to customers in a manner that will generate revenues sufficient to cover costs and yield an attractive profit. sets forth the logic for how its strategy will create value for customers and at the same time generate revenues sufficient to cover costs and realize a profit.

Vertical integration has some substantial drawbacks beyond the potential for channel conflict. The most serious drawbacks to vertical integration include the following concerns:

- Vertical integration raises a firm's capital investment in the industry, thereby increasing business risk (what if industry growth and profitability unexpectedly go sour?). - Vertically integrated companies are often slow to adopt technological advances or more efficient production methods when they are saddled with older technology or facilities. A company that obtains parts and components from outside suppliers can always shop the market for the newest, best, and cheapest parts, whereas a vertically integrated firm with older plants and technology may choose to continue making suboptimal parts rather than face the high costs of writing off undepreciated assets. - Vertical integration can result in less flexibility in accommodating shifting buyer preferences. It is one thing to eliminate use of a component made by a supplier and another to stop using a component being made in-house (which can mean laying off employees and writing off the associated investment in equipment and facilities). Integrating forward or backward locks a firm into relying on its own in-house activities and sources of supply. Most of the world's automakers, page 166despite their manufacturing expertise, have concluded that purchasing a majority of their parts and components from best-in-class suppliers results in greater design flexibility, higher quality, and lower costs than producing parts or components in-house. - Vertical integration may not enable a company to realize economies of scale if its production levels are below the minimum efficient scale. Small companies in particular are likely to suffer a cost disadvantage by producing in-house. - Vertical integration poses all kinds of capacity-matching problems. In motor vehicle manufacturing, for example, the most efficient scale of operation for making axles is different from the most economic volume for radiators, and different yet again for both engines and transmissions. Building the capacity to produce just the right number of axles, radiators, engines, and transmissions in-house—and doing so at the lowest unit costs for each—poses significant challenges and operating complications. - Integration forward or backward typically calls for developing new types of resources and capabilities. Parts and components manufacturing, assembly operations, wholesale distribution and retailing, and direct sales via the Internet represent different kinds of businesses, operating in different types of industries, with different key success factors. Many manufacturers learn the hard way that company-owned wholesale and retail networks require skills that they lack, fit poorly with what they do best, and detract from their overall profit performance. Similarly, a company that tries to produce many components in-house is likely to find itself very hard-pressed to keep up with technological advances and cutting-edge production practices for each component used in making its product.

Keys to Driving Down Company Costs

1. Capturing all available economies of scale. - Economies of scale stem from an ability to lower unit costs by increasing the scale of operation. Economies of scale may be available at different points along the value chain. Often a large plant is more economical to operate than a small one, particularly if it can be operated round the clock robotically. Economies of scale may be available due to a large warehouse operation on the input side or a large distribution center on the output side. In global industries, selling a mostly standard product worldwide tends to lower unit costs as opposed to making separate products for each country market, an approach in which costs are typically higher due to an inability to reach the most economic scale of production for each country. There are economies of scale in advertising as well. For example, Anheuser-Busch could page 124afford to pay the $5 million cost of a 30-second Super Bowl ad in 2016 because the cost could be spread out over the hundreds of millions of units of Budweiser that the company sells. 2. Taking full advantage of experience and learning-curve effects. - The cost of performing an activity can decline over time as the learning and experience of company personnel build. Learning and experience economies can stem from debugging and mastering newly introduced technologies, using the experiences and suggestions of workers to install more efficient plant layouts and assembly procedures, and the added speed and effectiveness that accrues from repeatedly picking sites for and building new plants, distribution centers, or retail outlets. 3. Operating facilities at full capacity. - Whether a company is able to operate at or near full capacity has a big impact on unit costs when its value chain contains activities associated with substantial fixed costs. Higher rates of capacity utilization allow depreciation and other fixed costs to be spread over a larger unit volume, thereby lowering fixed costs per unit. The more capital-intensive the business and the higher the fixed costs as a percentage of total costs, the greater the unit-cost penalty for operating at less than full capacity. 4. Improving supply chain efficiency. - Partnering with suppliers to streamline the ordering and purchasing process, to reduce inventory carrying costs via just-in-time inventory practices, to economize on shipping and materials handling, and to ferret out other cost-saving opportunities is a much-used approach to cost reduction. A company with a distinctive competence in cost-efficient supply chain management, such as BASF (the world's leading chemical company), can sometimes achieve a sizable cost advantage over less adept rivals. 5. Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance. - If the costs of certain raw materials and parts are "too high," a company can switch to using lower-cost items or maybe even design the high-cost components out of the product altogether. 6. Using the company's bargaining power vis-à-vis suppliers or others in the value chain system to gain concessions. - Home Depot, for example, has sufficient bargaining clout with suppliers to win price discounts on large-volume purchases. 7. Using online systems and sophisticated software to achieve operating efficiencies. - For example, sharing data and production schedules with suppliers, coupled with the use of enterprise resource planning (ERP) and manufacturing execution system (MES) software, can reduce parts inventories, trim production times, and lower labor requirements. 8. Improving process design and employing advanced production technology. - Often production costs can be cut by (1) using design for manufacture (DFM) procedures and computer-assisted design (CAD) techniques that enable more integrated and efficient production methods, (2) investing in highly automated robotic production technology, and (3) shifting to a mass-customization production process. Dell's highly automated PC assembly plant in Austin, Texas, is a prime example of the use of advanced product and process technologies. Many companies are ardent users of total quality management (TQM) systems, business process reengineering, Six Sigma methodology, and other business process management techniques that aim at boosting efficiency and reducing costs. 9. Being alert to the cost advantages of outsourcing or vertical integration. - Outsourcing the performance of certain value chain activities can be more economical than performing them in-house if outside specialists, by virtue of their expertise and volume, can perform the activities at lower cost. On the other hand, there can be times when integrating into the activities of either suppliers or distribution-channel allies can lower costs through greater production efficiencies, reduced transaction costs, or a better bargaining position. 10. Motivating employees through incentives and company culture. - A company's incentive system can encourage not only greater worker productivity but also cost-saving innovations that come from worker suggestions. The culture of a company can also spur worker pride in productivity and continuous improvement. Companies that are well known for their cost-reducing incentive systems and culture include Nucor Steel, which characterizes itself as a company of "20,000 teammates," Southwest Airlines, and Walmart.

Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results

Despite many successes, mergers and acquisitions do not always produce the hoped-for outcomes.16 Cost savings may prove smaller than expected. Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at all. Efforts to mesh the corporate cultures can stall due to formidable resistance from organization members. Key employees at the acquired company can quickly become disenchanted and leave; the morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes. Differences in management styles and operating procedures can prove hard to resolve. In addition, the managers appointed to oversee the integration of a newly acquired company can make mistakes in deciding which activities to leave alone and which activities to meld into their own operations and systems. A number of mergers and acquisitions have been notably unsuccessful. Google's $12.5 billion acquisition of struggling smartphone manufacturer Motorola Mobility in 2012 turned out to be minimally beneficial in helping to "supercharge Google's Android ecosystem" (Google's stated reason for making the acquisition). When Google's attempts to rejuvenate Motorola's smartphone business by spending over $1.3 billion on new product R&D and revamping Motorola's product line resulted in disappointing sales and huge operating losses, Google sold Motorola Mobility to China-based PC maker Lenovo for $2.9 billion in 2014 (however, Google retained ownership of Motorola's extensive patent portfolio). The jury is still out on whether Lenovo's acquisition of Motorola will prove to be a moneymaker.

Value chain analysis facilitates a comparison of how rivals, activity by activity, deliver value to customers. Even rivals in the same industry may differ significantly in terms of the activities they perform.

For instance, the "operations" component of the value chain for a manufacturer that makes all of its own parts and components and assembles them into a finished product differs from the "operations" of a rival producer that buys the needed parts and components from outside suppliers and performs only assembly operations. How each activity is performed may affect a company's relative cost position as well as its capacity for differentiation. Thus, even a simple comparison of how the activities of rivals' value chains differ can reveal competitive differences. A company's cost-competitiveness depends not only on the costs of internally performed activities (its own value chain) but also on costs in the value chains of its suppliers and distribution-channel allies.

Strategy Making Involves Managers at All Organizational Levels

In most companies, crafting and executing strategy is a collaborative team effort in which every manager has a role for the area he or she heads; it is rarely something that only high-level managers do. But strategy making is by no means solely a top management function, the exclusive province of owner-entrepreneurs, CEOs, high-ranking executives, and board members. The more a company's operations cut across different products, industries, and geographic areas, the more that headquarters executives have little option but to delegate considerable strategy-making authority to down-the-line managers in charge of particular subsidiaries, divisions, product lines, geographic sales offices, distribution centers, and plants. The larger and more diverse the operations of an enterprise, the more points of strategic initiative it has and the more levels of management that have a significant strategy-making role.

executing the strategy

Managing the implementation of a strategy is easily the most demanding and time-consuming part of the strategy management process. Converting strategic plans into actions and results tests a manager's ability to direct organizational change, motivate company personnel, build and strengthen competitive capabilities, create and nurture a strategy-supportive work climate, and meet or beat performance targets. Initiatives to put the strategy in place and execute it proficiently must be launched and managed on many organizational fronts.

benchamarking

a potent tool for improving a company's own internal activities that is based on learning how other companies perform them and borrowing their "best practices." entails comparing how different companies (both inside and outside the industry) perform various value chain activities—how materials are purchased, how inventories are managed, how products are assembled, how fast the company can get new products to market, how customer orders are filled and shipped—and then making cross-company comparisons of the costs and effectiveness of these activities. The objectives of benchmarking are to identify the best means of performing an activity and to emulate those best practices.

operating strategies

concern the relatively narrow approaches for managing key operating units (e.g., plants, distribution centers, purchasing centers) and specific operating activities with strategic significance (e.g., quality control, materials purchasing, brand management, Internet sales). A plant manager needs a strategy for accomplishing the plant's objectives, carrying out the plant's part of the company's overall manufacturing game plan, and dealing with any strategy-related problems that exist at the plant. A company's advertising manager needs a strategy for getting maximum audience exposure and sales impact from the ad budget. Operating strategies, while of limited scope, add further detail and completeness to functional strategies and to the overall business strategy. Lead responsibility for operating strategies is usually delegated to frontline managers, subject to the review and approval of higher-ranking managers.

What can be learned from the SWOT listings?

conclusions concerning the company's overall business situation: - where on the scale from "alarmingly weak" to "exceptionally strong" does the attractiveness of the company's situation rank? - what are the attractive and unattractive aspects of the company's situation? implications for improving the company strategy: - use company strengths as the foundation for the company's strengths - pursue those market opportunities best suited to company strengths - correct weaknesses and deficiencies that impair pursuit of important market opportunities or heighten vulnerability to external threats - use company strengths to lessen the impact of important external threats

Organizational resources and capabilities that grow stale can impair competitiveness unless they are refreshed, modified, or even phased out and replaced in response to ongoing market changes and shifts in company strategy. Management's challenge in managing the firm's resources and capabilities dynamically has two elements:

(1) attending to the ongoing modification of existing competitive assets, and (2) casting a watchful eye for opportunities to develop totally new kinds of capabilities.

There are three main areas in a company's total value chain system where company managers can try to improve its efficiency and effectiveness in delivering customer value:

(1) a company's own internal activities, (2) suppliers' part of the value chain system, and (3) the forward-channel portion of the value chain system.

Horizontal mergers and acquisitions can strengthen a firm's competitiveness in five ways:

(1) by improving the efficiency of its operations, (2) by heightening its product differentiation, (3) by reducing market rivalry, (4) by increasing the company's bargaining power over suppliers and buyers, and (5) by enhancing its flexibility and dynamic capabilities.

For backward integration to be a cost-saving and profitable strategy, a company must be able to:

(1) achieve the same scale economies as outside suppliers and (2) match or beat suppliers' production efficiency with no drop-off in quality. Neither outcome is easily achieved. To begin with, a company's in-house requirements are often too small to reach the optimum size for low-cost operation. For instance, if it takes a minimum production volume of 1 million units to achieve scale economies and a company's in-house requirements are just 250,000 units, then it falls far short of being able to match the costs of outside suppliers (which may readily find buyers for 1 million or more units).

a strategy stands a better chance of succeeding when it is predicated on actions, business approaches, and competitive moves aimed at:

(1) appealing to buyers in ways that set a company apart from its rivals and (2) staking out a market position that is not crowded with strong competitors.

A well-thought-out, forcefully communicated strategic vision pays off in several respects:

(1) It crystallizes senior executives' own views about the firm's long-term direction; (2) it reduces the risk of rudderless decision making; (3) it is a tool for winning the support of organization members to help make the vision a reality; (4) it provides a beacon for lower-level managers in setting departmental objectives and crafting departmental strategies that are in sync with the company's overall strategy; and (5) it helps an organization prepare for the future. When top executives are able to demonstrate significant progress in achieving these five benefits, the first step in organizational direction setting has been successfully completed.

Concrete, measurable objectives are managerially valuable for three reasons:

(1) They focus organizational attention and align actions throughout the organization, (2) they serve as yardsticks for tracking a company's performance and progress, and (3) they motivate employees to expend greater effort and perform at a high level.

The means to enhancing differentiation through activities at the forward end of the value chain system include

(1) engaging in cooperative advertising and promotions with forward allies (dealers, distributors, retailers, etc.), (2) creating exclusive arrangements with downstream sellers or utilizing other mechanisms that increase their incentives to enhance delivered customer value, and (3) creating and enforcing standards for downstream activities and assisting in training channel partners in business practices. Harley-Davidson, for example, enhances the shopping experience and perceptions of buyers by selling through retailers that sell Harley-Davidson motorcycles exclusively and meet Harley-Davidson standards.

To pass the fit test, a strategy must exhibit fit along three dimensions:

(1) external, (2) internal, and (3) dynamic.

The best offensives tend to incorporate several principles:

(1) focusing relentlessly on building competitive advantage and then striving to convert it into a sustainable advantage, (2) applying resources where rivals are least able to defend themselves, (3) employing the element of surprise as opposed to doing what rivals expect and are prepared for, and (4) displaying a capacity for swift and decisive actions to overwhelm rivals. Sometimes a company's best strategic option is to seize the initiative, go on the attack, and launch a strategic offensive to improve its market position. The best offensives use a company's most powerful resources and capabilities to attack rivals in the areas where they are competitively weakest.

Samsung's five core values (example) & American Express' seven core values:

(1) giving people opportunities to reach their full potential, (2) developing the best products and services on the market, (3) embracing change, (4) operating in an ethical way, and (5) being dedicated to social and environmental responsibility. American Express embraces seven core values: (1) respect for people, (2) commitment to customers, (3) integrity, (4) teamwork, (5) good citizenship, (6) a will to win, and (7) personal accountability.

Mission Statement

(1) identifies the company's products and/or services, (2) specifies the buyer needs that the company seeks to satisfy and the customer groups or markets that it serves, and (3) gives the company its own identity. The mission statements that one finds in company annual reports or posted on company websites are typically quite brief; some do a better job than others of conveying what the enterprise's current business operations and purpose are all about. The defining characteristic of a strategic vision is what it says about the company's future strategic course—"the direction we are headed and the shape of our business in the future." It is aspirational. In contrast, a mission statement describes the enterprise's present business and purpose—"who we are, what we do, and why we are here." It is purely descriptive. To be well worded, a company mission statement must employ language specific enough to distinguish its business makeup and purpose from those of other enterprises and give the company its own identity. The usefulness of a mission statement that cannot convey the essence of a company's business activities and purpose is unclear.

Driving-forces analysis has three steps:

(1) identifying what the driving forces are; (2) assessing whether the drivers of change are, on the whole, acting to make the industry more or less attractive; and (3) determining what strategy changes are needed to prepare for the impact of the driving forces. All three steps merit further discussion.

Every corporation should have a strong independent board of directors that

(1) is well informed about the company's performance, (2) guides and judges the CEO and other top executives, (3) has the courage to curb management actions the board believes are inappropriate or unduly risky, (4) certifies to shareholders that the CEO is doing what the board expects, (5) provides insight and advice to management, and (6) is intensely involved in debating the pros and cons of key decisions and actions.

The evolving nature of a company's strategy means that the typical company strategy is a blend of

(1) proactive, planned initiatives to improve the company's financial performance and secure a competitive edge and (2) reactive responses to unanticipated developments and fresh market conditions.

the value chains of a company's distribution-channel partners are relevant because

(1) the costs and margins of a company's distributors and retail dealers are part of the price the ultimate consumer pays and (2) the activities that distribution allies perform affect sales volumes and customer satisfaction. For these reasons, companies normally work closely with their distribution allies (who are their direct customers) to perform value chain activities in mutually beneficial ways. For instance, motor vehicle manufacturers have a competitive interest in working closely with their automobile dealers to promote higher sales volumes and better customer satisfaction with dealers' repair and maintenance services. As a consequence, accurately assessing a company's competitiveness entails scrutinizing the nature and costs of value chain activities throughout the entire value chain system for delivering its products or services to end-use customers.

Just how serious the threat of entry is in a particular market depends on two classes of factors:

(1) the expected reaction of incumbent firms to new entry and (2) what are known as barriers to entry. The threat of entry is low in industries where incumbent firms are likely to retaliate against new entrants with sharp price discounting and other moves designed to make entry unprofitable (due to the expectation of such retaliation). The threat of entry is also low when entry barriers are high (due to such barriers). Whether an industry's entry barriers ought to be considered high or low depends on the resources and capabilities possessed by the pool of potential entrants. High entry barriers and weak entry threats today do not always translate into high entry barriers and weak entry threats tomorrow.

The key advantages of using strategic alliances rather than arm's-length transactions to manage outsourcing are

(1) the increased ability to exercise control over the partners' activities and (2) a greater willingness for the partners to make relationship-specific investments. Arm's-length transactions discourage such investments since they imply less commitment and do not build trust.

Alliances are more likely to be long-lasting when

(1) they involve collaboration with partners that do not compete directly, such as suppliers or distribution allies; (2) a trusting relationship has been established; and (3) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging.

The three best indicators of how well a company's strategy is working are

(1) whether the company is achieving its stated financial and strategic objectives, (2) whether its financial performance is above the industry average, and (3) whether it is gaining customers and gaining market share. Persistent shortfalls in meeting company performance targets and weak marketplace performance relative to rivals are reliable warning signs that the company has a weak strategy, suffers from poor strategy execution, or both. Specific indicators of how well a company's strategy is working include: Trends in the company's sales and earnings growth. Trends in the company's stock price. The company's overall financial strength. The company's customer retention rate. The rate at which new customers are acquired. Evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity. Sluggish financial performance and second-rate market accomplishments almost always signal weak strategy, weak execution, or both.

Potential External Threats to a Company's Future Profitability

- Increased intensity of competition among industry rivals-may squeeze profit margins - Slowdowns in market growth - Likely entry of potent new competitors - Growing bargaining power of customers or suppliers - A shift in buyer needs and tastes away from the industry's product - Adverse demographic changes that threaten to curtail demand for the industry's product - Adverse economic conditions that threaten critical suppliers or distributors - Changes in technology-particularly disruptive technology that can undermine the company's distinctive competencies - Restrictive foreign trade policies Costly new regulatory requirements - Tight credit conditions - Rising prices on energy or other key inputs

Outsourcing certain value chain activities makes strategic sense whenever:

- An activity can be performed better or more cheaply by outside specialists. A company should generally not perform any value chain activity internally that can be performed more efficiently or effectively by outsiders—the chief exception occurs when a particular activity is strategically crucial and internal control over that activity is deemed essential. Dolce & Gabbana, for example, outsources the manufacture of its brand of sunglasses to Luxottica—a company considered to be the world's best sunglass manufacturing company, known for its Oakley, Oliver Peoples, and Ray-Ban brands. - The activity is not crucial to the firm's ability to achieve sustainable competitive advantage. Outsourcing of support activities such as maintenance services, data processing, data storage, fringe-benefit management, and website operations has become commonplace. Colgate-Palmolive, for instance, has reduced its information technology operational costs by more than 10 percent annually through an outsourcing agreement with IBM. - The outsourcing improves organizational flexibility and speeds time to market. Outsourcing gives a company the flexibility to switch suppliers in the event that its present supplier falls behind competing suppliers. Moreover, seeking out new suppliers with the needed capabilities already in place is frequently quicker, easier, less risky, and cheaper than hurriedly retooling internal operations to replace obsolete capabilities or trying to install and master new technologies. - It reduces the company's risk exposure to changing technology and buyer preferences. When a company outsources certain parts, components, and services, its suppliers must bear the burden of incorporating state-of-the-art technologies and/or undertaking redesigns and upgrades to accommodate a company's plans to introduce next-generation products. If what a supplier provides falls out of favor with buyers, or is rendered unnecessary by technological change, it is the supplier's business that suffers rather than the company's. - It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best. A company is better able to enhance its own capabilities when it concentrates its full resources and energies on performing only those activities. United Colors of Benetton and Sisley, for example, outsource the production of handbags and other leather goods while devoting their energies to the clothing lines for which they are known. Apple outsources production of its iPod, iPhone, and iPad models to Chinese contract manufacturer Foxconn and concentrates in-house on design, marketing, and innovation. Hewlett-Packard and IBM have sold some of their manufacturing plants to outsiders and contracted to repurchase the output instead from the new owners.

Buyer bargaining power is stronger when

- Buyer demand is weak in relation to the available supply. - Industry goods are standardized or differentiation is weak. - Buyers' costs of switching to competing brands or substitutes are relatively low. - Buyers are large and few in number relative to the number of sellers. - Buyers pose a credible threat of integrating backward into the business of sellers. - Buyers are well informed about the product offerings of sellers (product features and quality, prices, buyer reviews) and the cost of production (an indicator of markup). - Buyers have discretion to delay their purchases or perhaps even not make a purchase at all.

Potential Strengths and Competitive Assets

- Competencies that are well matched to industry key success factors - Ample financial resources to grow the business - Strong brand-name image and/or company reputation - Economies of scale and/or learning- and experience-curve advantages over rivals - Other cost advantages over rivals - Attractive customer base - Proprietary technology, superior technological skills, important patents - Strong bargaining power over suppliers or buyers - Resources and capabilities that are valuable and rare - Resources and capabilities that are hard to copy and for which there are no good substitutes - Superior product quality - Wide geographic coverage and/or strong global distribution capability - Alliances and/or joint ventures that provide access to valuable technology, competencies, and/or attractive geographic markets

In most situations, managing the strategy execution process includes the following principal aspects:

- Creating a strategy-supporting structure. - Staffing the organization to obtain needed skills and expertise. - Developing and strengthening strategy-supporting resources and capabilities. - Allocating ample resources to the activities critical to strategic success. - Ensuring that policies and procedures facilitate effective strategy execution. - Organizing the work effort along the lines of best practice. - Installing information and operating systems that enable company personnel to perform essential activities. - Motivating people and tying rewards directly to the achievement of performance objectives. - Creating a company culture conducive to successful strategy execution. - Exerting the internal leadership needed to propel implementation forward.

Supplier bargaining power is stronger when:

- Demand for suppliers' products is high and the products are in short supply. - Suppliers provide differentiated inputs that enhance the performance of the industry's product. - It is difficult or costly for industry members to switch their purchases from one supplier to another. - The supplier industry is dominated by a few large companies and it is more concentrated than the industry it sells to. - Industry members are incapable of integrating backward to self-manufacture items they have been buying from suppliers. - Suppliers provide an item that accounts for no more than a small fraction of the costs of the industry's product. - Good substitutes are not available for the suppliers' products. - Industry members are not major customers of suppliers.

Any company that seeks competitive advantage by being a first mover thus needs to ask some hard questions:

- Does market takeoff depend on the development of complementary products or services that currently are not available? - Is new infrastructure required before buyer demand can surge? - Will buyers need to learn new skills or adopt new behaviors? - Will buyers encounter high switching costs in moving to the newly introduced product or service? - Are there influential competitors in a position to delay or derail the efforts of a first mover? When the answers to any of these questions are yes, then a company must be careful not to pour too many resources into getting ahead of the market opportunity—the race is likely going to be closer to a 10-year marathon than a 2-year sprint. On the other hand, if the market is a winner-take-all type of market, where powerful first-mover advantages insulate early entrants from competition and prevent later movers from making any headway, then it may be best to move quickly despite the risks.

Competitive pressures are stronger when

- Good substitutes are readily available and attractively priced. - Buyers view the substitutes as comparable or better in terms of quality, performance, and other relevant attributes. The costs that buyers incur in switching to the substitutes are low.

An alliance becomes "strategic," as opposed to just a convenient business arrangement, when it serves any of the following purposes:

- It facilitates achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability). - It helps build, strengthen, or sustain a core competence or competitive advantage. - It helps remedy an important resource deficiency or competitive weakness. - It helps defend against a competitive threat, or mitigates a significant risk to a company's business. - It increases bargaining power over suppliers or buyers. - It helps open up important new market opportunities. - It speeds the development of new technologies and/or product innovations. Companies that have formed a host of alliances need to manage their alliances like a portfolio. The best alliances are highly selective, focusing on particular value chain activities and on obtaining a specific competitive benefit. They enable a firm to build on its strengths and to learn.

Offensive-minded firms need to analyze which of their rivals to challenge as well as how to mount the challenge. The following are the best targets for offensive attacks:

- Market leaders that are vulnerable. Offensive attacks make good sense when a company that leads in terms of market share is not a true leader in terms of serving the market well. Signs of leader vulnerability include unhappy buyers, an inferior product line, aging technology or outdated plants and equipment, a preoccupation with diversification into other industries, and financial problems. Caution is well advised in challenging strong market leaders—there's a significant risk of squandering valuable resources in a futile effort or precipitating a fierce and profitless industrywide battle for market share. - Runner-up firms with weaknesses in areas where the challenger is strong. Runner-up firms are an especially attractive target when a challenger's resources and capabilities are well suited to exploiting their weaknesses. - Struggling enterprises that are on the verge of going under. Challenging a hard-pressed rival in ways that further sap its financial strength and competitive position can weaken its resolve and hasten its exit from the market. In this type of situation, it makes sense to attack the rival in the market segments where it makes the most profits, since this will threaten its survival the most. - Small local and regional firms with limited capabilities. Because small firms typically have limited expertise and resources, a challenger with broader and/or deeper capabilities is well positioned to raid their biggest and best customers—particularly those that are growing rapidly, have increasingly sophisticated requirements, and may already be thinking about switching to a supplier with a more full-service capability.

Potential Market Opportunities

- Meeting sharply rising buyer demand for the industry's product - Serving additional customer groups or market segments - Expanding into new geographic markets - Expanding the company's product line to meet a broader range of customer needs - Utilizing existing company skills or technological know-how to enter new product lines or new businesses - Taking advantage of falling trade barriers in attractive foreign markets - Taking advantage of an adverse change in the fortunes of rival firms - Acquiring rival firms or companies with attractive technological expertise or capabilities - Taking advantage of emerging technological developments to innovate - Entering into alliances or joint ventures to expand the firm's market coverage or boost its competitive capability

Potential Weaknesses and Competitive Deficiencies

- No clear strategic vision - No well-developed or proven core competencies - No distinctive competencies or competitively superior resources - Lack of attention to customer needs - A product or service with features and attributes that are inferior to those of rivals - Weak balance sheet, insufficient financial resources to grow the firm - Too much debt - Higher overall unit costs relative to those of key competitors - Too narrow a product line relative to rivals - Weak brand image or reputation Weaker dealer network than key rivals and/or lack of adequate distribution capability - Lack of management depth - A plague of internal operating problems or obsolete facilities - Too much underutilized plant capacity - Resources that are readily copied or for which there are good substitutes

The second thing to be gleaned from strategic group mapping is that not all positions on the map are equally attractive.7 Two reasons account for why some positions can be more attractive than others:

- Prevailing competitive pressures from the industry's five forces may cause the profit potential of different strategic groups to vary. - Industry driving forces may favor some strategic groups and hurt others. Some strategic groups are more favorably positioned than others because they confront weaker competitive forces and/or because they are more favorably impacted by industry driving forces.

There are many ways to throw obstacles in the path of would-be challengers. The goal of signaling challengers that strong retaliation is likely in the event of an attack is either to dissuade challengers from attacking at all or to divert them to less threatening options. Either goal can be achieved by letting challengers know the battle will cost more than it is worth. Signals to would-be challengers can be given by:

- Publicly announcing management's commitment to maintaining the firm's present market share. - Publicly committing the company to a policy of matching competitors' terms or prices. - Maintaining a war chest of cash and marketable securities. - Making an occasional strong counter-response to the moves of weak competitors to enhance the firm's image as a tough defender. To be an effective defensive strategy, however, signaling needs to be accompanied by a credible commitment to follow through.

Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors:

- They create a system for managing their alliances. Companies need to manage their alliances in a systematic fashion, just as they manage other functions. This means setting up a process for managing the different aspects of alliance management from partner selection to alliance termination procedures. To ensure that the system is followed on a routine basis by all company managers, many companies create a set of explicit procedures, process templates, manuals, or the like. - They build relationships with their partners and establish trust. Establishing strong interpersonal relationships is a critical factor in making strategic alliances work since such relationships facilitate opening up channels of communication, coordinating activity, aligning interests, and building trust. - They protect themselves from the threat of opportunism by setting up safeguards. There are a number of means for preventing a company from being taken advantage of by an untrustworthy partner or unwittingly losing control over key assets. Contractual safeguards, including noncompete clauses, can provide other forms of protection. - They make commitments to their partners and see that their partners do the same. When partners make credible commitments to a joint enterprise, they have stronger incentives for making it work and are less likely to "free-ride" on the efforts of other partners. Because of this, equity-based alliances tend to be more successful than non-equity alliances. - They make learning a routine part of the management process. There are always opportunities for learning from a partner, but organizational learning does not take place automatically. Whatever learning occurs cannot add to a company's knowledge base unless the learning is incorporated systematically into the company's routines and practices.

The principal advantages of strategic alliances over vertical integration or horizontal mergers and acquisitions are threefold:

- They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing. This can be particularly important when investment needs and uncertainty are high, such as when a dominant technology standard has not yet emerged. - They are more flexible organizational forms and allow for a more adaptive response to changing conditions. Flexibility is essential when environmental conditions or technologies are changing rapidly. Moreover, strategic alliances under such circumstances may enable the development of each partner's dynamic capabilities. - They are more rapidly deployed—a critical factor when speed is of the essence. Speed is of the essence when there is a winner-take-all type of competitive situation, such as the race for a dominant technological design or a race down a steep experience curve, where there is a large first-mover advantage.

In some instances there are advantages to being an adept follower rather than a first mover. Late-mover advantages (or first-mover disadvantages) arise in four instances:

- When the costs of pioneering are high relative to the benefits accrued and imitative followers can achieve similar benefits with far lower costs. This is often the case when second movers can learn from a pioneer's experience and avoid making the same costly mistakes as the pioneer. - When an innovator's products are somewhat primitive and do not live up to buyer expectations, thus allowing a follower with better-performing products to win disenchanted buyers away from the leader. - When rapid market evolution (due to fast-paced changes in either technology or buyer needs) gives second movers the opening to leapfrog a first mover's products with more attractive next-version products. - When market uncertainties make it difficult to ascertain what will eventually succeed, allowing late movers to wait until these needs are clarified. - When customer loyalty to the pioneer is low and a first mover's skills, know-how, and actions are easily copied or even surpassed

Rivalry increases and becomes a stronger force when:

- buyer demand is growing slowly - Rapidly expanding buyer demand produces enough new business for all industry members to grow without having to draw customers away from rival enterprises. But in markets where buyer demand is slow-growing or shrinking, companies eager to gain more business are likely to engage in aggressive price discounting, sales promotions, and other tactics to increase their sales volumes at the expense of rivals, sometimes to the point of igniting a fierce battle for market share. - buyer costs to switch brands are low - The less costly it is for buyers to switch their purchases from one seller to another, the easier it is for sellers to steal customers away from rivals. When the cost of switching brands is higher, buyers are less prone to brand switching and sellers have protection from rivalrous moves. Switching costs include not only monetary costs but also the time, inconvenience, and psychological costs involved in switching brands. For example, retailers may not switch to the brands of rival manufacturers because they are hesitant to sever long-standing supplier relationships or incur the additional expense of retraining employees, accessing technical support, or testing the quality and reliability of the new brand. - the products of industry members are commodities or else weakly differentiated - When the offerings of rivals are identical or weakly differentiated, buyers have less reason to be brand-loyal—a condition that makes it easier for rivals to convince buyers to switch to their offerings. Moreover, when the products of different sellers are virtually identical, shoppers will choose on the basis of price, which can result in fierce price competition among sellers. On the other hand, strongly differentiated product offerings among rivals breed high brand loyalty on the part of buyers who view the attributes of certain brands as more appealing or better suited to their needs. - the firms in the industry have excess production capacity and/or inventory - Whenever a market has excess supply (overproduction relative to demand), rivalry intensifies as sellers cut prices in a desperate effort to cope with the unsold inventory. A similar effect occurs when a product is perishable or seasonal, since firms often engage in aggressive price cutting to ensure that everything is sold. Likewise, whenever fixed costs account for a large fraction of total cost so that unit costs are significantly lower at full capacity, firms come under significant pressure to cut prices whenever they are operating below full capacity. Unused capacity imposes a significant cost-increasing penalty because there are fewer units over which to spread fixed costs. The pressure of high fixed or high storage costs can push rival firms into offering price concessions, special discounts, and rebates and employing other volume-boosting competitive tactics. - the firms in the industry have high fixed costs or high storage costs - When there are many competitors in a market, companies eager to increase their meager market share often engage in price-cutting activities to drive sales, leading to intense rivalry. When there are only a few competitors, companies are more wary of how their rivals may react to their attempts to take market share away from them. Fear of retaliation and a descent into a damaging price war leads to restrained competitive moves. Moreover, when rivals are of comparable size and competitive strength, they can usually compete on a fairly equal footing—an evenly matched contest tends to be fiercer than a contest in which one or more industry members have commanding market shares and substantially greater resources than their much smaller rivals. - competitors are numbers or are of roughly equal size and competitive strength - hen there are many competitors in a market, companies eager to increase their meager market share often engage in price-cutting activities to drive sales, leading to intense rivalry. When there are only a few competitors, companies are more wary of how their rivals may react to their attempts to take market share away from them. Fear of retaliation and a descent into a damaging price war leads to restrained competitive moves. Moreover, when rivals are of comparable size and competitive strength, they can usually compete on a fairly equal footing—an evenly matched contest tends to be fiercer than a contest in which one or more industry members have commanding market shares and substantially greater resources than their much smaller rivals. - rivals have diverse objectives, strategies, and/or countries of origin - A diverse group of sellers often contains one or more mavericks willing to try novel or rule-breaking market approaches, thus generating a more volatile and less predictable competitive environment. Globally competitive markets are often more rivalrous, especially when aggressors have lower costs and are intent on gaining a strong foothold in new country markets. - rivals have emotional stakes in the business or face high exit barriers - In industries where the assets cannot easily be sold or transferred to other uses, where workers are entitled to job protection, or where owners are committed to remaining in business for personal reasons, failing firms tend to hold on longer than they might otherwise—even when they are bleeding red ink. Deep price discounting of this sort can destabilize an otherwise attractive industry. rivalry decreases and becomes a weaker force under the opposite conditions

two elements of a company's business model

1) its customer value proposition and (2) its profit formula. The customer value proposition lays out the company's approach to satisfying buyer wants and needs at a price customers will consider a good value. The customer value proposition lays out the company's approach to satisfying buyer wants and needs at a price customers will consider a good value. 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. Figure 1.3 illustrates the elements of the business model in terms of what is known as the value-price-cost framework. Customer Value (V) - customer's share (customer value proposition) Product Price (P) - Firm's share (profit formula) Per-Unit Cost (C)

Chapter 1 Key Points

1. A company's strategy is its game plan to attract customers, outperform its competitors, and achieve superior profitability. 2. The central thrust of a company's strategy is undertaking moves to build and strengthen the company's long-term competitive position and financial performance by competing differently from rivals and gaining a sustainable competitive advantage over them. 3. A company achieves a competitive advantage when it provides buyers with superior value compared to rival sellers or offers the same value at a lower cost to the firm. The advantage is sustainable if it persists despite the best efforts of competitors to match or surpass this advantage. 4. A company's strategy typically evolves over time, emerging from a blend of (1) proactive deliberate actions on the part of company managers to improve the strategy and (2) reactive emergent responses to unanticipated developments and fresh market conditions. 5. A company's business model sets forth the logic for how its strategy will create value for customers and at the same time generate revenues sufficient to cover costs and realize a profit. Thus, it contains two crucial elements: (1) the customer value proposition—a plan for satisfying customer wants and needs at a pricepage 15 customers will consider good value, and (2) the profit formula—a plan for a cost structure that will enable the company to deliver the customer value proposition profitably. These elements are illustrated by the value-price-cost framework. 6. A winning strategy will pass three tests: (1) fit (external, internal, and dynamic consistency), (2) competitive advantage (durable competitive advantage), and (3) performance (outstanding financial and market performance). 7. Crafting and executing strategy are core management functions. How well a company performs and the degree of market success it enjoys are directly attributable to the caliber of its strategy and the proficiency with which the strategy is executed.

Differentiation strategies can fail for any of several reasons.

1. A differentiation strategy keyed to product or service attributes that are easily and quickly copied is always suspect. 2. Differentiation strategies can also falter when buyers see little value in the unique attributes of a company's product. 3. The third big pitfall is overspending on efforts to differentiate the company's product offering, thus eroding profitability. 4. Over-differentiating so that product quality, features, or service levels exceed the needs of most buyers. 5. Charging too high a price premium. Over-differentiating and overcharging are fatal differentiation strategy mistakes. A low-cost provider strategy can defeat a differentiation strategy when buyers are satisfied with a basic product and don't think "extra" attributes are worth a higher price.

The second step in driving-forces analysis is to determine whether the prevailing change drivers, on the whole, are acting to make the industry environment more or less attractive. Three questions need to be answered:

1. Are the driving forces, on balance, acting to cause demand for the industry's product to increase or decrease? 2. Is the collective impact of the driving forces making competition more or less intense? 3. Will the combined impacts of the driving forces lead to higher or lower industry profitability? The real payoff of driving-forces analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the driving forces.

Differentiation strategies tend to work best in market circumstances where:

1. Buyer needs and uses of the product are diverse. - Diverse buyer preferences allow industry rivals to set themselves apart with product attributes that appeal to particular buyers. For instance, the diversity of consumer preferences for menu selection, ambience, pricing, and customer service gives restaurants exceptionally wide latitude in creating a differentiated product offering. Other industries with diverse buyer needs include magazine publishing, automobile manufacturing, footwear, and kitchen appliances. 2. There are many ways to differentiate the product or service that have value to buyers. - Industries in which competitors have opportunities to add features to products and services are well suited to differentiation strategies. For example, hotel chains can differentiate on such features as location, size of room, range of guest services, in-hotel dining, and the quality and luxuriousness of bedding and furnishings. Similarly, cosmetics producers are able to differentiate based on prestige and image, formulations that fight the signs of aging, UV light protection, exclusivity of retail locations, the inclusion of antioxidants and natural ingredients, or prohibitions against animal testing. Basic commodities, such as chemicals, mineral deposits, and agricultural products, provide few opportunities for differentiation. 3. Few rival firms are following a similar differentiation approach. - The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out-differentiate rivals on the very same attributes. When many rivals base their differentiation efforts on the same attributes, the most likely result is weak brand differentiation and "strategy overcrowding"—competitors end up chasing much the same buyers with much the same product offerings. 4. Technological change is fast-paced and competition revolves around rapidly evolving product features. - Rapid product innovation and frequent introductions of next-version products heighten buyer interest and provide space for companies page 135to pursue distinct differentiating paths. In smartphones and wearable Internet devices, drones for hobbyists and commercial use, automobile lane detection sensors, and battery-powered cars, rivals are locked into an ongoing battle to set themselves apart by introducing the best next-generation products. Companies that fail to come up with new and improved products and distinctive performance features quickly lose out in the marketplace.

Successful differentiation allows a firm to do one or more of the following:

1. Command a premium price for its product. 2. Increase unit sales (because additional buyers are won over by the differentiating features). 3. Gain buyer loyalty to its brand (because buyers are strongly attracted to the differentiating features and bond with the company and its products).

just as pursuing a cost advantage can involve the entire value chain system, the same is true for a differentiation advantage. Activities performed upstream by suppliers or downstream by distributors and retailers can have a meaningful effect on customers' perceptions of a company's offerings and its value proposition. Approaches to enhancing differentiation through changes in the value chain system include:

1. Coordinating with channel allies to enhance customer value. - Coordinating with downstream partners such as distributors, dealers, brokers, and retailers can contribute to differentiation in a variety of ways. Methods that companies use to influence the value chain activities of their channel allies include setting standards for downstream partners to follow, providing them with templates to standardize the selling environment or practices, training channel personnel, or cosponsoring promotions and advertising campaigns. Coordinating with retailers is important for enhancing the buying experience and building a company's image. Coordinating with distributors or shippers can mean quicker delivery to customers, more accurate order filling, and/or lower shipping costs. The Coca-Cola Company considers coordination with its bottler-distributors so important that it has at times taken over a troubled bottler to improve its management and upgrade its plant and equipment before releasing it again. 2. Coordinating with suppliers to better address customer needs. - Collaborating with suppliers can also be a powerful route to a more effective differentiation strategy. Coordinating and collaborating with suppliers can improve many dimensions affecting product features and quality. This is particularly true for companies that engage only in assembly operations, such as Dell in PCs and Ducati in motorcycles. Close coordination with suppliers can also enhance differentiation by speeding up new product development cycles or speeding delivery to end customers. Strong relationships with suppliers can also mean that the company's supply requirements are prioritized when industry supply is insufficient to meet overall demand.

A company's strategy-making hierarchy

1. Corporate Strategy - orchestrated by CEO and other senior executives - (for the set of businesses as a whole) - how to gain advantage from managing a set of businesses 2. Business Strategy - orchestrated by the senior executives of each line of business, often with advice from the heads of functional areas within the business and other key people - (one for each business the company has diversified into) - how to gain and sustain a competitive advantage for a single line of business 3. Functional-Area Strategies - orchestrated by the many functional activities within a particular business, often in collaboration with other key people - how to manage a particular activity within a business in ways that support the business strategy 4. Operating Strategies - orchestrated by lower level managers - how to manage activities of strategic significance within each functional area, adding detail and completeness

Chapter 5 Key Points

1. Deciding which of the five generic competitive strategies to employ—overall low cost, broad differentiation, focused low cost, focused differentiation, or best cost—is perhaps the most important strategic commitment a company makes. It tends to drive the remaining strategic actions a company undertakes and sets the whole tone for pursuing a competitive advantage over rivals. 2. In employing a low-cost provider strategy and trying to achieve a low-cost advantage over rivals, a company must do a better job than rivals of cost-effectively managing value chain activities and/or it must find innovative ways to eliminate cost-producing activities. An effective use of cost drivers is key. Low-cost provider strategies work particularly well when price competition is strong and the products of rival sellers are virtually identical, when there are not many ways to differentiate, when buyers are price-sensitive or have the power to bargain down prices, when buyer switching costs are low, and when industry newcomers are likely to use a low introductory price to build market share. 3. Broad differentiation strategies seek to produce a competitive edge by incorporating attributes that set a company's product or service offering apart from rivals in ways that buyers consider valuable and worth paying for. This depends on the appropriate use of value drivers. Successful differentiation allows a firm to (1) command a premium price for its product, (2) increase unit sales (if additional buyers are won over by the differentiating features), and/or (3) gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products). Differentiation strategies work best when buyers have diverse product preferences, when few other rivals are pursuing a similar differentiation approach, and when technological change is fast-paced and competition centers on rapidly evolving product features. A differentiation strategy is doomed when competitors are able to quickly copy the appealing product attributes, when a company's differentiation efforts fail to interest many buyers, and when a company overspends on efforts to differentiate its product offering or tries to overcharge for its differentiating extras. 4. A focused strategy delivers competitive advantage either by achieving lower costs than rivals in serving buyers constituting the target market niche or by developing a specialized ability to offer niche buyers an appealingly differentiated offering that meets their needs better than rival brands do. A focused strategy based on either low cost or differentiation becomes increasingly attractive when the target market niche is big enough to be profitable and offers good growth potential, when it is costly or difficult for multisegment competitors to meet the specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers, when there are one or more niches that present a good match for a focuser's resources and capabilities, and when few other rivals are attempting to specialize in the same target segment. 5. Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate page 146attractive or upscale attributes at a lower cost than rivals. A best-cost provider strategy works best in markets with large numbers of value-conscious buyers desirous of purchasing better products and services for less money. 6. In all cases, competitive advantage depends on having competitively superior resources and capabilities that are a good fit for the chosen generic strategy. A sustainable advantage depends on maintaining that competitive superiority with resources, capabilities, and value chain activities that rivals have trouble matching and for which there are no good substitutes.

the strategy-making, strategy executing process

1. Developing a strategic vision, a mission statement, and a set of core values. 2. Setting objectives for measuring the firm's performance and tracking its progress. 3. Crafting a strategy to move the firm along its strategic course and to achieve its objectives. 4. Executing the chosen strategy efficiently and effectively. 5. Monitoring developments, evaluating performance, and initiating corrective adjustments. Stage 5 can revise as needed in light of the company's actual performance, changing, conditions, new opportunities, and new ideas

Chapter 4 Key Points

1. How well is the present strategy working? This involves evaluating the strategy in terms of the company's financial performance and market standing. The stronger a company's current overall performance, the less likely the need for radical strategy changes. The weaker a company's performance and/or the faster the changes in its external situation (which can be gleaned from PESTEL and industry analysis), the more its current strategy must be questioned. 2. What are the company's most important resources and capabilities and can they give the company a sustainable advantage over competitors? A company's resources can be identified using the tangible/intangible typology presented in this chapter. Its capabilities can be identified either by starting with its resources to look for related capabilities or looking for them within the company's different functional domains. - The answer to the second part of the question comes from conducting the four tests of a resource's competitive power—the VRIN tests. If a company has resources and capabilities that are competitively valuable and rare, the firm will have a competitive advantage over market rivals. If its resources and capabilities are also hard to copy (inimitable), with no good substitutes (nonsubstitutable), then the firm may be able to sustain this advantage even in the face of active efforts by rivals to overcome it. 3. Is the company able to seize market opportunities and overcome external threats to its future well-being? The answer to this question comes from performing a SWOT analysis. The two most important parts of SWOT analysis are (1) drawing conclusions about what strengths, weaknesses, opportunities, and threats tell about the company's overall situation; and (2) acting on the conclusions to better match the company's strategy to its internal strengths and market opportunities, to correct the important internal weaknesses, and to defend against external threats. A company's strengths and competitive assets are strategically relevant because they are the most logical and appealing building blocks for strategy; internal weaknesses are important because they may represent vulnerabilities that need correction. External opportunities and threats come into play because a good strategy necessarily aims at capturing a company's most attractive opportunities and at defending against threats to its well-being. 4. Are the company's cost structure and value proposition competitive? One telling sign of whether a company's situation is strong or precarious is whether its costs are competitive with those of industry rivals. Another sign is how the company compares with rivals in terms of differentiation—how effectively it delivers on its customer value proposition. Value chain analysis and benchmarking are essential tools in determining whether the company is performing particular functions and activities well, whether its costs are in line with those of competitors, whether it is differentiating in ways that really enhance customer value, and whether particular internal activities and business processes need improvement. They complement resource and capability analysis by providing data at the level of individual activities that provide more objective evidence of whether individual resources and capabilities, or bundles of resources and linked activity sets, are competitively superior. 5. On an overall basis, is the company competitively stronger or weaker than key rivals? The key appraisals here involve how the company matches up against key rivals on industry key success factors and other chief determinants of competitive success and whether and why the company has a net competitive advantage or disadvantage. Quantitative competitive strength assessments, using the method presented in Table 4.4, indicate where a company is competitively strong and weak and provide insight into the company's ability to defend or enhance its market position. As a rule, a company's competitive strategy should be built around its competitive strengths and should aim at shoring up areas where it is competitively vulnerable. When a company has important competitive strengths in areas where one or more rivals are weak, it makes sense to consider offensive moves to exploit rivals' competitive weaknesses. When a company has important competitive weaknesses in areas where one or more rivals are strong, it makes sense to consider defensive moves to curtail its vulnerability. 6. What strategic issues and problems merit front-burner managerial attention? This analytic step zeros in on the strategic issues and problems that stand in the way of the company's success. It involves using the results of industry analysis as well as resource and value chain analysis of the company's competitive situation to identify a "priority list" of issues to be resolved for the company to be financially and competitively successful in the years ahead. Actually deciding on a strategy and what specific actions to take is what comes after developing the list of strategic issues and problems that merit front-burner management attention.

Ignoring the need to tie a strategic offensive to a company's competitive strengths and what it does best is like going to war with a popgun—the prospects for success are dim. For instance, it is foolish for a company with relatively high costs to employ a price-cutting offensive. Likewise, it is ill-advised to pursue a product innovation offensive without having proven expertise in R&D and new product development. The principal offensive strategy options include the following:

1. Offering an equally good or better product at a lower price. Lower prices can produce market share gains if competitors don't respond with price cuts of their own and if the challenger convinces buyers that its product is just as good or better. However, such a strategy increases total profits only if the gains in additional unit sales are enough to offset the impact of thinner margins per unit sold. Price-cutting offensives should be initiated only by companies that have first achieved a cost advantage.4 British airline EasyJet used this strategy successfully against rivals such as British Air, Alitalia, and Air France by first cutting costs to the bone and then targeting leisure passengers who care more about low price than in-flight amenities and service. 2. Leapfrogging competitors by being first to market with next-generation products. In technology-based industries, the opportune time to overtake an entrenched competitor is when there is a shift to the next generation of the technology. Microsoft page 151got its next-generation Xbox 360 to market a full 12 months ahead of Sony's PlayStation 3 and Nintendo's Wii, helping it build a sizable market share on the basis of cutting-edge innovation in the video game industry. Sony was careful to avoid a repeat, releasing its PlayStation 4 in November 2013 just as Microsoft released its Xbox One. With better graphical performance than Xbox One, along with some other advantages, the PS4 was able to boost Sony back into the lead position. 3. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals. Ongoing introductions of new and improved products can put rivals under tremendous competitive pressure, especially when rivals' new product development capabilities are weak. But such offensives can be sustained only if a company can keep its pipeline full with new product offerings that spark buyer enthusiasm. 4. Pursuing disruptive product innovations to create new markets. While this strategy can be riskier and more costly than a strategy of continuous innovation, it can be a game changer if successful. Disruptive innovation involves perfecting a new product with a few trial users and then quickly rolling it out to the whole market in an attempt to get many buyers to embrace an altogether new and better value proposition quickly. Examples include online universities, Bumble (dating site), Venmo (digital wallet), Apple Music, CampusBookRentals, and Amazon's Kindle. 5. Adopting and improving on the good ideas of other companies (rivals or otherwise). The idea of warehouse-type home improvement centers did not originate with Home Depot cofounders Arthur Blank and Bernie Marcus; they got the "big-box" concept from their former employer, Handy Dan Home Improvement. But they were quick to improve on Handy Dan's business model and take Home Depot to the next plateau in terms of product-line breadth and customer service. Offensive-minded companies are often quick to adopt any good idea (not nailed down by a patent or other legal protection) and build on it to create competitive advantage for themselves. 6. Using hit-and-run or guerrilla warfare tactics to grab market share from complacent or distracted rivals. Options for "guerrilla offensives" include occasionally lowballing on price (to win a big order or steal a key account from a rival), surprising rivals with sporadic but intense bursts of promotional activity (offering a discounted trial offer to draw customers away from rival brands), or undertaking special campaigns to attract the customers of rivals plagued with a strike or problems in meeting buyer demand. Guerrilla offensives are particularly well suited to small challengers that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders. 7. Launching a preemptive strike to secure an industry's limited resources or capture a rare opportunity.What makes a move preemptive is its one-of-a-kind nature—whoever strikes first stands to acquire competitive assets that rivals can't readily match. Examples of preemptive moves include (1) securing the best distributors in a particular geographic region or country; (2) obtaining the most favorable site at a new interchange or intersection, in a new shopping mall, and so on; (3) tying up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or acquisition; and (4) moving swiftly to acquire the assets of distressed rivals at bargain prices. To be successful, a preemptive move doesn't have to totally block rivals from following; it merely needs to give a firm a prime position that is not easily circumvented.

Key success factors vary from industry to industry, and even from time to time within the same industry, as change drivers and competitive conditions change. But regardless of the circumstances, an industry's key success factors can always be deduced by asking the same three questions:

1. On what basis do buyers of the industry's product choose between the competing brands of sellers? That is, what product attributes and service characteristics are crucial? 2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a company have to be competitively successful? 3. What shortcomings are almost certain to put a company at a significant competitive disadvantage?

Chapter 6 Key Points - Strengthening A company's competitive position (strategic moves, timing, and scope of operations)

1. Once a company has settled on which of the five generic competitive strategies to employ, attention turns to how strategic choices regarding (1) competitive actions, (2) timing of those actions, and (3) scope of operations can complement its competitive approach and maximize the power of its overall strategy. 2. Strategic offensives should, as a general rule, be grounded in a company's strategic assets and employ a company's strengths to attack rivals in the competitive areas where they are weakest. 3. Companies have a number of offensive strategy options for improving their market positions: using a cost-based advantage to attack competitors on the basis of price or value, leapfrogging competitors with next-generation technologies, pursuing continuous product innovation, adopting and improving the best ideas of others, using hit-and-run tactics to steal sales away from unsuspecting rivals, and launching preemptive strikes. A blue-ocean type of offensive strategy seeks to gain a dramatic new competitive advantage by inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand. 4. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and influence challengers to aim their efforts at other rivals. Defensive strategies to protect a company's position usually take one of two forms: (1) actions to block challengers or (2) actions to signal the likelihood of strong retaliation. 5. The timing of strategic moves also has relevance in the quest for competitive advantage. Company managers are obligated to carefully consider the advantages or disadvantages that attach to being a first mover versus a fast follower versus a late mover. 6. Decisions concerning the scope of a company's operations—which activities a firm will perform internally and which it will not—can also affect the strength of a company's market position. The scope of the firm refers to the range of its activities, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses. Companies can expand their scope horizontally (more broadly within their focal market) or vertically (up or down the industry value chain system that starts with raw-material production and ends with sales and service to the end consumer). 7. Horizontal mergers and acquisitions (combinations of market rivals) provide a means for a company to expand its horizontal scope. Vertical integration expands a firm's vertical scope. Horizontal mergers and acquisitions typically have any of five objectives: lowering costs, expanding geographic coverage, adding product categories, gaining new technologies or other resources and capabilities, and preparing for the convergence of industries. They can strengthen a firm's competitiveness in five ways: (1) by improving the efficiency of its operations, (2) by heightening its product differentiation, (3) by reducing market rivalry, (4) by increasing the company's bargaining power over suppliers and buyers, and (5) by enhancing its flexibility and dynamic capabilities. 8. Vertical integration, forward or backward, makes most strategic sense if it strengthens a company's position via either cost reduction or creation of a differentiation-based advantage. Otherwise, the drawbacks of vertical integration (increased investment, greater business risk, increased vulnerability to technological changes, less flexibility in making product changes, and the potential for channel conflict) are likely to outweigh any advantages. 9. Outsourcing involves contracting out pieces of the value chain formerly performed in-house to outside vendors, thereby narrowing the scope of the firm. Outsourcing can enhance a company's competitiveness whenever (1) an activity can be performed better or more cheaply by outside specialists; (2) the activity is not crucial to the firm's ability to achieve sustainable competitive advantage; (3) the page 176outsourcing improves organizational flexibility, speeds decision making, and cuts cycle time; (4) it reduces the company's risk exposure; and (5) it permits a company to concentrate on its core business and focus on what it does best. 10. Strategic alliances and cooperative partnerships provide one way to gain some of the benefits offered by vertical integration, outsourcing, and horizontal mergers and acquisitions while minimizing the associated problems. They serve as an alternative to vertical integration and mergers and acquisitions, and as a supplement to outsourcing, allowing more control relative to outsourcing via arm's-length transactions. 11. Companies that manage their alliances well generally (1) create a system for managing their alliances, (2) build relationships with their partners and establish trust, (3) protect themselves from the threat of opportunism by setting up safeguards, (4) make commitments to their partners and see that their partners do the same, and (5) make learning a routine part of the management process.

Although senior managers have the lead responsibility for crafting and executing a company's strategy, it is the duty of a company's board of directors to exercise strong oversight and see that management performs the various tasks involved in each of the five stages of the strategy-making, strategy-executing process in a manner that best serves the interests of shareholders and other stakeholders. A company's board of directors has four important obligations to fulfill:

1. Oversee the company's financial accounting and financial reporting practices. While top executives, particularly the company's CEO and CFO (chief financial officer), are primarily responsible for seeing that the company's financial statements fairly and accurately report the results of the company's operations, board members have a legal obligation to warrant the accuracy of the company's financial reports and protect shareholders. It is their job to ensure that generally accepted accounting principles (GAAP) are used properly in preparing the company's financial statements and that proper financial controls are in place to prevent fraud and misuse of funds. Virtually all boards of directors have an audit committee, always composed entirely of outside directors (inside directors hold management positions in the company and either directly or indirectly report to the CEO). The members of the audit committee have the lead responsibility for overseeing the decisions of the company's financial officers and consulting with both internal and external auditors to ensure accurate financial reporting and adequate financial controls. 2. Critically appraise the company's direction, strategy, and business approaches. Board members are also expected to guide management in choosing a strategic direction and to make independent judgments about the validity and wisdom of management's proposed strategic actions. This aspect of their duties takes on heightened importance when the company's strategy is failing or is plagued with faulty execution, and certainly when there is a precipitous collapse in profitability. But under more normal circumstances, many boards have found that meeting agendas become consumed by compliance matters with little time left to discuss matters of strategic importance. The board of directors and management at Philips Electronics hold annual two- to three-day retreats devoted exclusively to evaluating the company's long-term direction and various strategic proposals. The company's exit from the semiconductor business and its increased focus on medical technology and home health care resulted from management-board discussions during such retreats. 3. Evaluate the caliber of senior executives' strategic leadership skills. The board is always responsible for determining whether the current CEO is doing a good job of strategic leadership (as a basis for awarding salary increases and bonuses and deciding on retention or removal). Boards must also exercise due diligence in evaluating the strategic leadership skills of other senior executives in line to succeed the CEO. When the incumbent CEO steps down or leaves for a position elsewhere, the board must elect a successor, either going with an insider or deciding that an outsider is needed to perhaps radically change the company's strategic course. Often, the outside directors on a board visit company facilities and talk with company personnel personally to evaluate whether the strategy is on track, how well the strategy is being executed, and how well issues and problems are being addressed by various managers. For example, independent board members at GE visit operating executives at each major business unit once a year to assess the company's talent pool and stay abreast of emerging strategic and operating issues affecting the company's divisions. Home Depot board members visit a store once per quarter to determine the health of the company's operations. 4. Institute a compensation plan for top executives that rewards them for actions and results that serve stakeholder interests, and most especially those of shareholders. A basic principle of corporate governance is that the owners of a corporation (the shareholders) delegate operating authority and managerial control to top management in return for compensation. In their role as agents of shareholders, top executives have a clear and unequivocal duty to make decisions and operate the company in accord with shareholder interests. (This does not mean disregarding the interests of other stakeholders—employees, suppliers, the communities in which the company operates, and society at large.) Most boards of directors have a compensation committee, composed entirely of directors from outside the company, to develop a salary and incentive compensation plan that rewards senior executives for boosting the company's long-term performance on behalf of shareholders. The compensation committee's recommendations are presented to the full board for approval. But during the past 10 to 15 years, many boards of directors have done a poor job of ensuring that executive salary increases, bonuses, and stock option awards are tied tightly to performance measures that are truly in the long-term interests of shareholders. Rather, compensation packages at many companies have increasingly rewarded executives for short-term performance improvements—most notably, for achieving quarterly and annual earnings targets and boosting the stock price by specified percentages. This has had the perverse effect of causing company managers to become preoccupied with actions to improve a company's near-term performance, often motivating them to take unwise business risks to boost short-term earnings by amounts sufficient to qualify for multimillion-dollar compensation packages (that many see as obscenely large). The focus on short-term performance has proved damaging to long-term company performance and shareholder interests—witness the huge loss of shareholder wealth that occurred at many financial institutions in 2008-2009 because of executive risk taking in subprime loans, credit default swaps, and collateralized mortgage securities. As a consequence, the need to overhaul and reform executive compensation has become a hot topic in both public circles and corporate boardrooms. Illustration Capsule 2.4 discusses how weak governance at Volkswagen contributed to the 2015 emissions cheating scandal, which cost the company billions of dollars and the trust of its stakeholders.

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy

1. Perhaps the biggest mistake a low-cost provider can make is getting carried away with overly aggressive price cutting. - Higher unit sales and market shares do not automatically translate into higher profits. Reducing price results in earning a lower profit margin on each unit sold. Thus reducing price improves profitability only if the lower price increases unit sales enough to offset the loss in revenues due to the lower per unit profit margin. - A simple numerical example tells the story: Suppose a firm selling 1,000 units at a price of $10, a cost of $9, and a profit margin of $1 opts to cut price 5 percent to $9.50—which reduces the firm's profit margin to $0.50 per unit sold. If unit costs remain at $9, then it takes a 100 percent sales increase to 2,000 units just to offset the narrower profit margin and get back to total profits of $1,000. Hence, whether a price cut will result in higher or lower profitability depends on how big the resulting sales gains will be and how much, if any, unit costs will fall as sales volumes increase. Reducing price does not lead to higher total profits unless the added gains in unit sales are large enough to offset the loss in revenues due to lower margins per unit sold. 2. A second pitfall is relying on cost reduction approaches that can be easily copied by rivals. If rivals find it relatively easy or inexpensive to imitate the leader's low-cost methods, then the leader's advantage will be too short-lived to yield a valuable edge in the marketplace. 3. A low-cost provider's product offering must always contain enough attributes to be attractive to prospective buyers—low price, by itself, is not always appealing to buyers. - A third pitfall is becoming too fixated on cost reduction. Low costs cannot be pursued so zealously that a firm's offering ends up being too feature-poor to generate buyer appeal. - Furthermore, a company driving hard to push down its costs has to guard against ignoring declining buyer sensitivity to price, increased buyer interest in added features or service, or new developments that alter how buyers use the product. Otherwise, it risks losing market ground if buyers start opting for more upscale or feature-rich products.

Most Common Drivers of Industry Change

1. changes in the long-term industry growth rate 2. increasing globalization 3. emerging new internet capabilities and applications 4. changes in who buys the product and how they use it 5. technological change and manufacturing process innovation 6. product and marketing innovation 7. entry or exit of major firms 8. diffusion of technical know-how across firms and countries 9. changes in cost and efficiency 10. reductions in uncertainty and business risk 11. regulatory influences and government policy changes 12. changing societal concerns, attitudes, and lifestyles The most important part of driving-forces analysis is to determine whether the collective impact of the driving forces will increase or decrease market demand, make competition more or less intense, and lead to higher or lower industry profitability.

The extent to which companies benefit from entering into alliances and partnerships seems to be a function of six factors:

1. Picking a good partner. A good partner must bring complementary strengths to the relationship. To the extent that alliance members have nonoverlapping strengths, there is greater potential for synergy and less potential for coordination problems and conflict. In addition, a good partner needs to share the company's vision about the overall purpose of the alliance and to have specific goals that either match or complement those of the company. Strong partnerships also depend on good chemistry among key personnel and compatible views about how the alliance should be structured and managed. 2. Being sensitive to cultural differences. Cultural differences among companies can make it difficult for their personnel to work together effectively. Cultural differences can be problematic among companies from the same country, but when the partners have different national origins, the problems are often magnified. Unless there is respect among all the parties for cultural differences, including those stemming from different local cultures and local business practices, productive working relationships are unlikely to emerge. 3. Recognizing that the alliance must benefit both sides. Information must be shared as well as gained, and the relationship must remain forthright and trustful. If either page 172partner plays games with information or tries to take advantage of the other, the resulting friction can quickly erode the value of further collaboration. Open, trustworthy behavior on both sides is essential for fruitful collaboration. 4. Ensuring that both parties live up to their commitments. Both parties have to deliver on their commitments for the alliance to produce the intended benefits. The division of work has to be perceived as fairly apportioned, and the caliber of the benefits received on both sides has to be perceived as adequate. 5. Structuring the decision-making process so that actions can be taken swiftly when needed. In many instances, the fast pace of technological and competitive changes dictates an equally fast decision-making process. If the parties get bogged down in discussions or in gaining internal approval from higher-ups, the alliance can turn into an anchor of delay and inaction. 6. Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances. One of the keys to long-lasting success is adapting the nature and structure of the alliance to be responsive to shifting market conditions, emerging technologies, and changing customer requirements. Wise allies are quick to recognize the merit of an evolving collaborative arrangement, where adjustments are made to accommodate changing conditions and to overcome whatever problems arise in establishing an effective working relationship.

Any of three means can be used to achieve better cost-competitiveness in the forward portion of the industry value chain:

1. Pressure distributors, dealers, and other forward-channel allies to reduce their costs and markups. 2. Collaborate with them to identify win-win opportunities to reduce costs—for example, a chocolate manufacturer learned that by shipping its bulk chocolate in liquid form in tank cars instead of as 10-pound molded bars, it could not only save its candy bar manufacturing customers the costs associated with unpacking and melting but also eliminate its own costs of molding bars and packing them. 3. Change to a more economical distribution strategy, including switching to cheaper distribution channels (selling direct via the Internet) or integrating forward into company-owned retail outlets.

A low-cost provider strategy becomes increasingly appealing and competitively powerful when:

1. Price competition among rival sellers is vigorous. - Low-cost providers are in the best position to compete offensively on the basis of price, to gain market share at the expense of rivals, to win the business of price-sensitive buyers, to remain profitable despite strong price competition, and to survive price wars. 2. The products of rival sellers are essentially identical and readily available from many eager sellers. - Look-alike products and/or overabundant product supply set the stage for lively price competition; in such markets, it is the less efficient, higher-cost companies whose profits get squeezed the most. 3. It is difficult to achieve product differentiation in ways that have value to buyers. - When the differences between product attributes or brands do not matter much to buyers, buyers are nearly always sensitive to price differences, and industry-leading companies tend to be those with the lowest-priced brands. 4. Most buyers use the product in the same ways. - With common user requirements, a standardized product can satisfy the needs of buyers, in which case low price, not features or quality, becomes the dominant factor in causing buyers to choose one seller's product over another's. 5. Buyers incur low costs in switching their purchases from one seller to another. - Low switching costs give buyers the flexibility to shift purchases to lower-priced sellers having equally good products or to attractively priced substitute products. A low-cost leader is well positioned to use low price to induce potential customers to switch to its brand. A low-cost provider is in the best position to win the business of price-sensitive buyers, set the floor on market price, and still earn a profit.

Dramatic cost advantages can often emerge from redesigning the company's value chain system in ways that eliminate costly work steps and entirely bypass certain cost-producing value chain activities. Such value chain revamping can include:

1. Selling direct to consumers and bypassing the activities and costs of distributors and dealers. - To circumvent the need for distributors and dealers, a company can (1) create its own direct sales force (which adds the costs of maintaining and page 126supporting a sales force but which may well be cheaper than using independent distributors and dealers to access buyers) and/or (2) conduct sales operations at the company's website (incurring costs for website operations and shipping may be a substantially cheaper way to make sales than going through distributor-dealer channels). Costs in the wholesale and retail portions of the value chain frequently represent 35 to 50 percent of the final price consumers pay, so establishing a direct sales force or selling online may offer big cost savings. 2. Streamlining operations by eliminating low-value-added or unnecessary work steps and activities. - At Walmart, some items supplied by manufacturers are delivered directly to retail stores rather than being routed through Walmart's distribution centers and delivered by Walmart trucks. In other instances, Walmart unloads incoming shipments from manufacturers' trucks arriving at its distribution centers and loads them directly onto outgoing Walmart trucks headed to particular stores without ever moving the goods into the distribution center. Many supermarket chains have greatly reduced in-store meat butchering and cutting activities by shifting to meats that are cut and packaged at the meatpacking plant and then delivered to their stores in ready-to-sell form. 3. Reducing materials handling and shipping costs by having suppliers locate their plants or warehouses close to the company's own facilities. - Having suppliers locate their plants or warehouses close to a company's own plant facilitates just-in-time deliveries of parts and components to the exact workstation where they will be used in assembling the company's product. This not only lowers incoming shipping costs but also curbs or eliminates the company's need to build and operate storerooms for incoming parts and components and to have plant personnel move the inventories to the workstations as needed for assembly.

Three tests of a winning strategy

1. The Fit Test: How well does the strategy fit the company's situation? To qualify as a winner, a strategy has to be well matched to industry and competitive conditions, a company's best market opportunities, and other pertinent aspects of the business environment in which the company operates. No strategy can work well unless it exhibits good external fit with respect to prevailing market conditions. At the same time, a winning strategy must be tailored to the company's resources and competitive capabilities and be supported by a complementary set of functional activities (i.e., activities in the realms of supply chain management, operations, sales and marketing, and so on). That is, it must also exhibit internal fit and be compatible with a company's ability to execute the strategy in a competent manner. Unless a strategy exhibits good fit with both the external and internal aspects of a company's overall situation, it is likely to be an under-performer and fall short of producing winning results. Winning strategies also exhibit dynamic fit in the sense that they evolve over time in a manner that maintains close and effective alignment with the company's situation even as external and internal conditions change. 2. The Competitive Advantage Test: Is the strategy helping the company achieve a sustainable competitive advantage? Strategies that fail to achieve a persistent 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 advantage, the more powerful it is. 3. The Performance Test: Is the strategy producing superior company performance? The mark of a winning strategy is strong company performance. Two kinds of performance indicators tell the most about the caliber of a company's strategy: (1) competitive strength and market standing and (2) profitability and financial strength. Above-average financial performance or gains in market share, competitive position, or profitability are signs of a winning strategy.

A focused strategy aimed at securing a competitive edge based on either low costs or differentiation becomes increasingly attractive as more of the following conditions are met:

1. The target market niche is big enough to be profitable and offers good growth potential. 2. Industry leaders have chosen not to compete in the niche—in which case focusers can avoid battling head to head against the industry's biggest and strongest competitors. 3. It is costly or difficult for multisegment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of their mainstream customers. 4. The industry has many different niches and segments, thereby allowing a focuser to pick the niche best suited to its resources and capabilities. Also, with more niches there is room for focusers to concentrate on different market segments and avoid competing in the same niche for the same customers. 5. Few if any rivals are attempting to specialize in the same target segment—a condition that reduces the risk of segment overcrowding.

A company that does a first-rate job of managing its value chain activities relative to competitors stands a good chance of profiting from its competitive advantage. A company's value-creating activities can offer a competitive advantage in one of two ways (or both):

1. They can contribute to greater efficiency and lower costs relative to competitors. 2. They can provide a basis for differentiation, so customers are willing to pay relatively more for the company's goods and services. Performing value chain activities with capabilities that permit the company to either outmatch rivals on differentiation or beat them on costs will give the company a competitive advantage.

There are five such conditions in which first-mover advantages are most likely to arise:

1. When pioneering helps build a firm's reputation and creates strong brand loyalty. Customer loyalty to an early mover's brand can create a tie that binds, limiting the page 156success of later entrants' attempts to poach from the early mover's customer base and steal market share. 2. When a first mover's customers will thereafter face significant switching costs. Switching costs can protect first movers when consumers make large investments in learning how to use a specific company's product or in purchasing complementary products that are also brand-specific. Switching costs can also arise from loyalty programs or long-term contracts that give customers incentives to remain with an initial provider. 3. When property rights protections thwart rapid imitation of the initial move. In certain types of industries, property rights protections in the form of patents, copyrights, and trademarks prevent the ready imitation of an early mover's initial moves. First-mover advantages in pharmaceuticals, for example, are heavily dependent on patent protections, and patent races in this industry are common. In other industries, however, patents provide limited protection and can frequently be circumvented. Property rights protections also vary among nations, since they are dependent on a country's legal institutions and enforcement mechanisms. 4. When an early lead enables the first mover to move down the learning curve ahead of rivals. When there is a steep learning curve and when learning can be kept proprietary, a first mover can benefit from volume-based cost advantages that grow ever larger as its experience accumulates and its scale of operations increases. This type of first-mover advantage is self-reinforcing and, as such, can preserve a first mover's competitive advantage over long periods of time. Honda's advantage in small multi-use motorcycles has been attributed to such an effect. 5. When a first mover can set the technical standard for the industry. In many technology-based industries, the market will converge around a single technical standard. By establishing the industry standard, a first mover can gain a powerful advantage that, like experience-based advantages, builds over time. The lure of such an advantage, however, can result in standard wars among early movers, as each strives to set the industry standard. The key to winning such wars is to enter early on the basis of strong fast-cycle product development capabilities, gain the support of key customers and suppliers, employ penetration pricing, and make allies of the producers of complementary products.

The pattern of actions and business approaches that define a company's strategy:

1. actions to strengthen the firm's bargaining position with suppliers, distributors, and others 2. actions to gain sales and market share via more performance features, more appealing design, better quality or customer service, wider product selection, or other such actions 3. actions to gain sales and market share with lower prices based on lower costs 4. actions to enter new product or geographic markets or to exit existing ones 5. actions to capture emerging opportunities and defend against external threats to the company's business prospects 6. actions to strengthen marketing standing and competitiveness by acquiring or merging with other companies 7. actions to strengthen competitiveness via strategic alliances and collaborative partnerships 8. actions and approaches used in managing, R&D, production, sales and marketing, finance, and other key activities 9. actions to upgrade, build or acquire competitively important resources and capabilities

five most basic strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage

1. 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 that of rivals in ways that will appeal to a broad spectrum of buyers. Successful adopters of differentiation strategies include Apple (innovative products), Johnson & Johnson in baby products (product reliability), LVMH (luxury and prestige), and BMW (engineering design and performance). One way to sustain this type of competitive advantage is to be sufficiently innovative to thwart the efforts of clever rivals to copy or closely imitate the product offering. 3. A focused low-cost strategy —concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs 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 advantage 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 buyers customized attributes that meet their specialized needs and tastes better than rivals' products. Lululemon, for example, specializes in high-quality yoga clothing and the like, attracting a devoted set of buyers in the process. Jiffy Lube International in quick oil changes, McAfee in virus protection software, and The Weather Channel in cable TV provide some other examples of this strategy. 5. A best-cost provider strategy —giving customers more value for the money by satisfying their expectations on key quality features, performance, and/or 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 lower costs than rivals while simultaneously offering better differentiating attributes. Target is an example of a company that is known for its hip product design (a reputation it built by featuring limited edition lines by designers such as Jason Wu), as well as a more appealing shopping ambience for discount store shoppers. Its dual focus on low costs as well as differentiation shows how a best-cost provider strategy can offer customers great value for the money.

Types of Competitive Advantage

1. low-cost provider strategy - striving to achieve lower overall costs than rivals on comparable products that attract a broad spectrum of buyers, usually by underpricing rivals. 2. broad differentiation strategy - seeking to differentiate the company's product offering from rivals' with attributes that will appeal to a broad spectrum of buyers. 3. focused low-cost strategy - concentrating on the needs and requirements of a narrow buyer segment (or market niche) and striving to meet these needs at lower costs than rivals (thereby being able to serve niche members at a lower price). 4. 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' products. 5. best-cost provider - striving to incorporate upscale product attributes at a lower cost than rivals. Being the "best-cost" producer of an upscale, multifeatured product allows a company to give customers more value for their money by underpricing rivals whose products have similar upscale, multifeatured attributes. This competitive approach is a hybrid strategy that blends elements of the previous four options in a unique and often effective way.

strategic plan

A Strategic Vision + Mission + Objectives + Strategy = A Strategic Plan A company's strategic plan lays out its future direction, business model, performance targets, and competitive strategy. Developing a strategic vision and mission, setting objectives, and crafting a strategy are basic direction-setting tasks. They map out where a company is headed, delineate its strategic and financial targets, articulate the basic business model, and outline the competitive moves and operating approaches to be used in achieving the desired business results. Together, these elements constitute a strategic plan for coping with industry conditions, competing against rivals, meeting objectives, and making progress along the chosen strategic course.

When a Best-Cost Provider Strategy Works Best

A best-cost provider strategy works best in markets where product differentiation is the norm and an attractively large number of value-conscious buyers can be induced to purchase midrange products rather than cheap, basic products or expensive, top-of-the-line products. A best-cost provider needs to position itself near the middle of the market with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price. Best-cost provider strategies also work well in recessionary times, when masses of buyers become value-conscious and are attracted to economically priced products and services with more appealing attributes. But unless a company has the resources, know-how, and capabilities to incorporate upscale product or service attributes at a lower cost than rivals, adopting a best-cost strategy is ill-advised.

competitive advantage

A company achieves a competitive advantage when it provides buyers with superior value compared to rival sellers or offers the same value at a lower cost to the firm. a company achieves this whenever it has some type of edge over rivals in attracting buyers and coping with competitive forces.

Low-cost leadership

A company achieves low-cost leadership when it becomes the industry's lowest-cost provider rather than just being one of perhaps several competitors with comparatively low costs. A low-cost provider's foremost strategic objective is meaningfully lower costs than rivals—but not necessarily the absolutely lowest possible cost. A low-cost provider's basis for competitive advantage is lower overall costs than competitors. Successful low-cost leaders, who have the lowest industry costs, are exceptionally good at finding ways to drive costs out of their businesses and still provide a product or service that buyers find acceptable. A low-cost advantage over rivals can translate into better profitability than rivals attain. Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively.

The Risk of a Best-Cost Provider Strategy

A company's biggest vulnerability in employing a best-cost provider strategy is getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies. Low-cost providers may be able to siphon customers away with the appeal of a lower price (despite less appealing product attributes). High-end differentiators may be able to steal customers away with the appeal of better product attributes (even though their products carry a higher price tag). Thus, to be successful, a best-cost provider must achieve significantly lower costs in providing upscale features so that it can outcompete high-end differentiators on the basis of a significantly lower price. Likewise, it must offer buyers significantly better product attributes to justify a price above what low-cost leaders are charging. In other words, it must offer buyers a more attractive customer value proposition.

Distinguishing Features of the Five Generic Competitive Strategies

A company's competitive strategy should be well matched to its internal situation and predicated on leveraging its collection of competitively valuable resources and capabilities. Low-Cost Provider 1. Strategic target - A broad cross-section of the market. 2. Basis of competitive strategy - Lower overall costs than competitors 3. Product line - A good basic product with few frills (acceptable quality and limited selection). 4. Production emphasis - A continuous search for cost reduction without sacrificing acceptable quality and essential features 5. Marketing emphasis - Low prices, good value. Try to make a virtue out of product features that lead to low cost 6. Keys to maintaining the strategy - Economical prices, good value. Strive to manage costs down, year after year, in every area of the business 7. Resources and capabilities required - Capabilities for driving costs out of the value chain system. Examples: large-scale automated plants, an efficiency-oriented culture, bargaining power. Broad Differentiation Focused Low-Cost Provider Focused Differentiation Best-Cost Provider page 145

A creative, distinctive strategy

A company's most reliable method for developing a competitive advantage over its rivals. sets a company apart from rivals and that gives it a sustainable competitive advantage

An essential element of deciding whether a company's overall situation is fundamentally healthy or unhealthy entails examining the attractiveness of its resources and capabilities.

A company's resources and capabilities are its competitive assets and determine whether its competitive power in the marketplace will be impressively strong or disappointingly weak. Companies with second-rate competitive assets nearly always are relegated to a trailing position in the industry.

Competitive Assets

A company's resources and capabilities represent its competitive assets and are determinants of its competitiveness and ability to succeed in the marketplace.

A Focused Low-Cost Strategy

A focused low-cost strategy aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment. The avenues to achieving a cost advantage over rivals also serving the target market niche are the same as those for low-cost leadership—use the cost drivers to perform value chain activities more efficiently than rivals and search for innovative ways to bypass non-essential value chain activities. The only real difference between a low-cost provider strategy and a focused low-cost strategy is the size of the buyer group to which a company is appealing—the former involves a product offering that appeals broadly to almost all buyer groups and market segments, whereas the latter aims at just meeting the needs of buyers in a narrow market segment.

joint venture

A joint venture is a partnership involving the establishment of an independent corporate entity that the partners own and control jointly, sharing in its revenues and expenses. A special type of strategic alliance involving ownership ties is the joint venture. A joint venture entails forming a new corporate entity that is jointly owned by two or more companies that agree to share in the revenues, expenses, and control of the newly formed entity. Since joint ventures involve setting up a mutually owned business, they tend to be more durable but also riskier than other arrangements. In other types of strategic alliances, the collaboration between the partners involves a much less rigid structure in which the partners retain their independence from one another. If a strategic alliance is not working out, a partner can choose to simply walk away or reduce its commitment to collaborating at any time.

communicating the strategic vision

A strategic vision has little value to the organization unless it's effectively communicated down the line to lower-level managers and employees. A vision cannot provide direction for middle managers or inspire and energize employees unless everyone in the company is familiar with it and can observe senior management's commitment to the vision. It is particularly important for executives to provide a compelling rationale for a dramatically new strategic vision and company direction. When company personnel don't understand or accept the need for redirecting organizational efforts, they are prone to resist change. Hence, explaining the basis for the new direction, addressing employee concerns head-on, calming fears, lifting spirits, and providing updates and progress reports as events unfold all become part of the task in mobilizing support for the vision and winning commitment to needed actions.

The distinction between a strategic vision and a mission statement is fairly clear-cut:

A strategic vision portrays a company's aspirations for its future ("where we are going"), whereas a company's mission describes the scope and purpose of its present business ("who we are, what we do, and why we are here").

vertically integrated firm

A vertically integrated firm is one that performs value chain activities along more than one stage of an industry's value chain system. Expanding the firm's vertical scope by means of a vertical integration strategy provides another possible way to strengthen the company's position in its core market. A vertically integrated firm is one that participates in multiple stages of an industry's value chain system. Thus, if a manufacturer invests in facilities to produce component parts that it had formerly purchased from suppliers, or if it opens its own chain of retail stores to bypass its former distributors, it is engaging in vertical integration. A good example of a vertically integrated firm is Maple Leaf Foods, a major Canadian producer of fresh and processed meats whose best-selling brands include Maple Leaf and Schneiders. Maple Leaf Foods participates in hog and poultry production, with company-owned hog and poultry farms; it has its own meat-processing and rendering facilities; it packages its products and distributes them from company-owned distribution centers; and it conducts marketing, sales, and customer service activities

SWOT: Weaknesses

A weakness, or competitive deficiency, is something a company lacks or does poorly (in comparison to others) or a condition that puts it at a disadvantage in the marketplace. A company's internal weaknesses can relate to: (1) inferior or unproven skills, expertise, or intellectual capital in competitively important areas of the business; (2) deficiencies in competitively important physical, organizational, or intangible assets; or (3) missing or competitively inferior capabilities in key areas. Company weaknesses are thus internal shortcomings that constitute competitive liabilities. Nearly all companies have competitive liabilities of one kind or another. Whether a company's internal weaknesses make it competitively vulnerable depends on how much they matter in the marketplace and whether they are offset by the company's strengths.

How to determine whether an industry's outlook presents a company with sufficiently attractive opportunities for growth and profitability.

As a general proposition, the anticipated industry environment is fundamentally attractive if it presents a company with good opportunity for above-average profitability; the industry outlook is fundamentally unattractive if a company's profit prospects are unappealingly low. The degree to which an industry is attractive or unattractive is not the same for all industry participants and all potential entrants However, it is a mistake to think of a particular industry as being equally attractive or unattractive to all industry participants and all potential entrants.8 Attractiveness is relative, not absolute, and conclusions one way or the other have to be drawn from the perspective of a particular company. For instance, a favorably positioned competitor may see ample opportunity to capitalize on the vulnerabilities of weaker rivals even though industry conditions are otherwise somewhat dismal. At the same time, industries attractive to insiders may be unattractive to outsiders because of the difficulty of challenging current market leaders or because they have more attractive opportunities elsewhere.

The strongest of the five forces determines the extent of the downward pressure on an industry's profitability.

As a rule, the strongest competitive forces determine the extent of the competitive pressure on industry profitability. Thus, in evaluating the strength of the five forces overall and their effect on industry profitability, managers should look to the strongest forces. Having more than one strong force will not worsen the effect on industry profitability, but it does mean that the industry has multiple competitive challenges with which to cope. In that sense, an industry with three to five strong forces is even more "unattractive" as a place to compete. Especially intense competitive conditions seem to be the norm in tire manufacturing, apparel, and commercial airlines, three industries where profit margins have historically been thin. In contrast, when the overall impact of the five competitive forces is moderate to weak, an industry is "attractive" in the sense that the average industry member can reasonably expect to earn good profits and a nice return on investment. The ideal competitive environment for earning superior profits is one in which both suppliers and customers are in weak bargaining positions, there are no good substitutes, high barriers block further entry, and rivalry among present sellers is muted. Weak competition is the best of all possible worlds for also-ran companies because even they can usually eke out a decent profit—if a company can't make a decent profit when competition is weak, then its business outlook is indeed grim.

first-mover advantages and disadvantages

Because of first-mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made. When to make a strategic move is often as crucial as what move to make. Timing is especially important when first-mover advantages and disadvantages exist. Under certain conditions, being first to initiate a strategic move can have a high payoff in the form of a competitive advantage that later movers can't dislodge. Moving first is no guarantee of success, however, since first movers also face some significant disadvantages. Indeed, there are circumstances in which it is more advantageous to be a fast follower or even a late mover. Because the timing of strategic moves can be consequential, it is important for company strategists to be aware of the nature of first-mover advantages and disadvantages and the conditions favoring each type of move.

identifying the components of a single-business company's strategy

Business strategy (core) - moves to attract customers and outcompete rivals via improved product design, better features, higher quality, wider selection, lower prices, and so on - moves to respond to changing conditions in the macro-environment or in industry and competitive conditions - initiatives to build competitive advantage based on: - lower costs relative to rivals? - a better product offering? - superior ability to serve a market niche or a specific group of buyers - efforts to expand or narrow geographic coverage - efforts to build competitively valuable partnerships with other enterprises within its industry Key function strategies: - R&D technology, product design strategy - supply chain management strategy - production strategy - sales, marketing, and distribution strategies - human resources strategy - finance strategy

The following factors increase buyer price sensitivity and result in greater competitive pressures on the industry as a result:

Buyer price sensitivity increases when buyers are earning low profits or have low income. - Price is a critical factor in the purchase decisions of low-income consumers and companies that are barely scraping by. In such cases, their high price sensitivity limits the ability of sellers to charge high prices. Buyers are more price-sensitive if the product represents a large fraction of their total purchases. - When a purchase eats up a large portion of a buyer's budget or represents a significant part of his or her cost structure, the buyer cares more about price than might otherwise be the case It is important to recognize that not all buyers of an industry's product have equal degrees of bargaining power with sellers, and some may be less sensitive than others to price, quality, or service differences. For example, apparel manufacturers confront significant bargaining power when selling to big retailers like Nordstrom, Macy's, or Bloomingdale's, but they can command much better prices selling to small owner-managed apparel boutiques.

Michael Porter's Framework for Competitor Analysis

Current Strategy - To succeed in predicting a competitor's next moves, company strategists need to have a good understanding of each rival's current strategy, as an indicator of its pattern of behavior and best strategic options. Questions to consider include: How is the competitor positioned in the market? What is the basis for its competitive advantage (if any)? What kinds of investments is it making (as an indicator of its growth trajectory)? Objectives - An appraisal of a rival's objectives should include not only its financial performance objectives but strategic ones as well (such as those concerning market share). What is even more important is to consider the extent to which the rival is meeting these objectives and whether it is under pressure to improve. Rivals with good financial performance are likely to continue their present strategy with only minor fine-tuning. Poorly performing rivals are virtually certain to make fresh strategic moves. Resources and Capabilities - A rival's strategic moves and countermoves are both enabled and constrained by the set of resources and capabilities the rival has at hand. Thus a rival's resources and capabilities (and efforts to acquire new resources and capabilities) serve as a strong signal of future strategic actions (and reactions to your company's moves). Assessing a rival's resources and capabilities involves sizing up not only its strengths in this respect but its weaknesses as well. Assumptions - How a rival's top managers think about their strategic situation can have a big impact on how the rival behaves. Banks that believe they are "too big to fail," for example, may take on more risk than is financially prudent. Assessing a rival's assumptions entails considering its assumptions about itself as well as about the industry it participates in.

Common "weapons" for competing with rivals

Discounting prices, holding clearance sales - Lowers price (P), increases total sales volume and market share, lowers profits if price cuts are not offset by large increases in sales volume Offering coupons, advertising items on sale - Increases sales volume and total revenues, lowers price (P), increases unit costs (C), may lower profit margins per unit sold (P − C) Advertising product or service characteristics, using ads to enhance a company's image - Boosts buyer demand, increases product differentiation and perceived value (V), increases total sales volume and market share, but may increase unit costs (C) and lower profit margins per unit sold Innovating to improve product performance and quality - Increases product differentiation and value (V), boosts buyer demand, boosts total sales volume, likely to increase unit costs (C) Introducing new or improved features, increasing the number of styles to provide greater product selection - Increases product differentiation and value (V), strengthens buyer demand, boosts total sales volume and market share, likely to increase unit costs (C) Increasing customization of product or service - Increases product differentiation and value (V), increases buyer switching costs, boosts total sales volume, often increases unit costs (C) Building a bigger, better dealer network - Broadens access to buyers, boosts total sales volume and market share, may increase unit costs (C) Improving warranties, offering low-interest financing - Increases product differentiation and value (V), increases unit costs (C), increases buyer switching costs, boosts total sales volume and market share

Wording a Vision Statement- Do's and Don'ts

Do's: Be graphic. Paint a clear picture of where the company is headed and the market position(s) the company is striving to stake out. Be forward-looking and directional. Describe the strategic course that will help the company prepare for the future. Keep it focused. Focus on providing managers with guidance in making decisions and allocating resources. Have some wiggle room. Language that allows some flexibility allows the directional course to be adjusted as market, customer, and technology circumstances change. Be sure the journey is feasible. The path and direction should be within the realm of what the company can accomplish; over time, a company should be able to demonstrate measurable progress in achieving the vision. Indicate why the directional path makes good business sense. The directional path should be in the long-term interests of stakeholders (especially shareholders, employees, and suppliers). Make it memorable. A well-stated vision is short, easily communicated, and memorable. Ideally, it should be reducible to a few choice lines or a one-phrase slogan. Don'ts: Don't be vague or incomplete. Never skimp on specifics about where the company is headed or how the company intends to prepare for the future. Don't dwell on the present. A vision is not about what a company once did or does now; it's about "where we are going." Don't use overly broad language. Avoid all-inclusive language that gives the company license to pursue any opportunity. Don't state the vision in bland or uninspiring terms. The best vision statements have the power to motivate company personnel and inspire shareholder confidence about the company's future. Don't be generic. A vision statement that could apply to companies in any of several industries (or to any of several companies in the same industry) is not specific enough to provide any guidance. Don't rely on superlatives. Visions that claim the company's strategic course is the "best" or "most successful" usually lack specifics about the path the company is taking to get there. Don't run on and on. A vision statement that is not concise and to the point will tend to lose its audience.

Macro environment

Every company operates in a broad "macro-environment" that comprises six principal components: political factors; economic conditions in the firm's general environment (local, country, regional, worldwide); sociocultural forces; technological factors; environmental factors (concerning the natural environment); and legal/regulatory conditions. Each of these components has the potential to affect the firm's more immediate industry and competitive environment, although some are likely to have a more important effect than others (see Figure 3.2). An analysis of the impact of these factors is often referred to as PESTEL analysis, an acronym that serves as a reminder of the six components involved (political, economic, sociocultural, technological, environmental, legal/regulatory). The macro-environment encompasses the broad environmental context in which a company's industry is situated.

value chain

Every company's business consists of a collection of activities undertaken in the course of producing, marketing, delivering, and supporting its product or service. All the various activities that a company performs internally combine to form a value chain—so called because the underlying intent of a company's activities is ultimately to create value for buyers. A company's value chain identifies the primary activities and related support activities that create customer value.

common financial and strategic objectives

Financial Objectives: - An x percent increase in annual revenues - Annual increases in after-tax profits of x percent - Annual increases in earnings per share of x percent - Annual dividend increases of x percent - Profit margins of x percent - An x percent return on capital employed (ROCE) or return on shareholders' equity (ROE) investment - Increased shareholder value in the form of an upward-trending stock price - Bond and credit ratings of x - Internal cash flows of x dollars to fund new capital investment Strategic Objectives: - Winning an x percent market share - Achieving lower overall costs than rivals - Overtaking key competitors on product performance, quality, or customer service - Deriving x percent of revenues from the sale of new products introduced within the past five years - Having broader or deeper technological capabilities than rivals Having a wider product line than rivals - Having a better-known or more powerful brand name than rivals Having stronger national or global sales and distribution capabilities than rivals - Consistently getting new or improved products to market ahead of rivals

Crafting and executing strategy are top-priority managerial tasks for two big reasons.

First, a clear and reasoned strategy is management's prescription for doing business, its road map to competitive advantage, its game plan for pleasing customers, and its formula for improving performance. High-performing enterprises are nearly always the product of astute, creative, and proactive strategy making. Companies don't get to the top of the industry rankings or stay there with flawed strategies, copycat strategies, or timid attempts to try to do better. Only a handful of companies can boast of hitting home runs in the marketplace due to lucky breaks or the good fortune of having stumbled into the right market at the right time with the right product. Even if this is the case, success will not be lasting unless the companies subsequently craft a strategy that capitalizes on their luck, builds on what is working, and discards the rest. So there can be little argument that the process of crafting a company's strategy matters—and matters a lot. Second, even the best-conceived strategies will result in performance shortfalls if they are not executed proficiently. The processes of crafting and executing strategies must go hand in hand if a company is to be successful in the long term. The chief executive officer of one successful company put it well when he said:

A Focused Differentiation Strategy

Focused differentiation strategies involve offering superior products or services tailored to the unique preferences and needs of a narrow, well-defined group of buyers. Successful use of a focused differentiation strategy depends on (1) the existence of a buyer segment that is looking for special product attributes or seller capabilities and (2) a firm's ability to create a product or service offering that stands apart from that of rivals competing in the same target market niche.

Supplier-related cost disadvantages can be attacked by pressuring suppliers for lower prices, switching to lower-priced substitute inputs, and collaborating closely with suppliers to identify mutual cost-saving opportunities.

For example, just-in-time deliveries from suppliers can lower a company's inventory and internal logistics costs and may also allow suppliers to economize on their warehousing, shipping, and production scheduling costs—a win-win outcome for both. In a few instances, companies may find that it is cheaper to integrate backward into the business of high-cost suppliers and make the item in-house instead of buying it from outsiders.

Chapter 4 questions/topics

How well is the company's present strategy working? What are the company's most important resources and capabilities, and will they give the company a lasting competitive advantage over rival companies? What are the company's strengths and weaknesses in relation to the market opportunities and external threats? How do a company's value chain activities impact its cost structure and customer value proposition? Is the company competitively stronger or weaker than key rivals? What strategic issues and problems merit front-burner managerial attention? In probing for answers to these questions, five analytic tools—resource and capability analysis, SWOT analysis, value chain analysis, benchmarking, and competitive strength assessment—will be used. All five are valuable techniques for revealing a company's competitiveness and for helping company managers match their strategy to the company's particular circumstances.

VRIN: Inimitable

Is the resource or capability Inimitable—is it hard to copy? The more difficult and more costly it is for competitors to imitate a company's resource or capability, the more likely that it can also provide a sustainable competitive advantage. Resources and capabilities tend to be difficult to copy when they are unique (a fantastic real estate location, patent-protected technology, an unusually talented and motivated labor force), when they must be built over time in ways that are difficult to imitate (a well-known brand name, mastery of a complex process technology, years of cumulative experience and learning), and when they entail financial outlays or large-scale operations that few industry members can undertake (a global network of dealers and distributors). Imitation is also difficult for resources and capabilities that reflect a high level of social complexity (company culture, interpersonal relationships among the managers or R&D teams, trust-based relations with customers or suppliers) and causal ambiguity, a term that signifies the hard-to-disentangle nature of the complex resources, such as a web of intricate processes enabling new drug discovery. Hard-to-copy resources and capabilities are important competitive assets, contributing to the longevity of a company's market position and offering the potential for sustained profitability.

VRIN - Non-substitutable

Is the resource or capability Non-substitutable—is it invulnerable to the threat of substitution from different types of resources and capabilities? Even resources that are competitively valuable, rare, and costly to imitate may lose much of their ability to offer competitive advantage if rivals possess equivalent substitute resources. For example, manufacturers relying on automation to gain a cost-based advantage in production activities may find their technology-based advantage nullified by rivals' use of low-wage offshore manufacturing. Resources can contribute to a sustainable competitive advantage only when resource substitutes aren't on the horizon.

VRIN: Rare

Is the resource or capability Rare—is it something rivals lack? Resources and capabilities that are common among firms and widely available cannot be a source of competitive advantage. All makers of branded cereals have valuable marketing capabilities and brands, since the key success factors in the ready-to-eat cereal industry demand this. They are not rare. However, the brand strength of Oreo cookies is uncommon and has provided Kraft Foods with greater market share as well as the opportunity to benefit from brand extensions such as Double Stuff Oreos and Mini Oreos. A resource or capability is considered rare if it is held by only a small number of firms in an industry or specific competitive domain. Thus, while general management capabilities are not rare in an absolute sense, they are relatively rare in some of the less developed regions of the world and in some business domains.

VRIN: Valuable

Is the resource or capability competitively Valuable? To be competitively valuable, a resource or capability must be directly relevant to the company's strategy, making the company a more effective competitor. Unless the resource or capability contributes to the effectiveness of the company's strategy, it cannot pass this first test. An indicator of its effectiveness is whether the resource enables the company to strengthen its business model by improving its customer value proposition and/or profit formula (see Chapter 1). Companies have to guard against contending that something they do well is necessarily competitively valuable. Apple's OS X operating system for its personal computers by some accounts is superior to Microsoft's Windows 10, but Apple has failed in converting its resources devoted to operating system design into anything more than moderate competitive success in the global PC market.

Value Net

Like the five forces framework, the value net includes an analysis of buyers, suppliers, and substitutors (see Figure 3.9). But it differs from the five forces framework in several important ways. First, the analysis focuses on the interactions of industry participants with a particular company. Thus it places that firm in the center of the framework, as Figure 3.9 shows. Second, the category of "competitors" is defined to include not only the focal firm's direct competitors or industry rivals but also the sellers of substitute products and potential entrants. Third, the value net framework introduces a new category of industry participant that is not found in the five forces framework—that of "complementors."

setting objectives for every organizational level

Objective setting should not stop with top management's establishing companywide performance targets. Company objectives need to be broken down into performance targets for each of the organization's separate businesses, product lines, functional departments, and individual work units. Employees within various functional areas and operating levels will be guided much better by specific objectives relating directly to their departmental activities than broad organizational-level goals. Objective setting is thus a top-down process that must extend to the lowest organizational levels. This means that each organizational unit must take care to set performance targets that support—rather than conflict with or negate—the achievement of companywide strategic and financial objectives.

A company has two options for translating a low-cost advantage over rivals into attractive profit performance:

Option 1 is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2 is to maintain the present price, be content with the present market share, and use the lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm's total profits and overall return on investment. While many companies are inclined to exploit a low-cost advantage by using option 1 (attacking rivals with lower prices), this strategy can backfire if rivals respond with retaliatory price cuts (in order to protect their customer base and defend against a loss of sales). A rush to cut prices can often trigger a price war that lowers the profits of all price discounters. The bigger the risk that rivals will respond with matching price cuts, the more appealing it becomes to employ the second option for using a low-cost advantage to achieve higher profitability.

profit formula, on a per-unit basis, can be expressed as

P - C Plainly, from a customer perspective, the greater the value delivered (V) and the lower the price (P), the more attractive is the company's value proposition. On the other hand, the lower the costs (C), given the customer value proposition (V - P), the greater the ability of the business model to be a moneymaker. Thus the profit formula reveals how efficiently a company can meet customer wants and needs and deliver on the value proposition.

To achieve a low-cost edge over rivals, a firm's cumulative costs across its overall value chain must be lower than competitors' cumulative costs. There are two major avenues for accomplishing this:

Perform value chain activities more cost-effectively than rivals. Revamp the firm's overall value chain to eliminate or bypass some cost-producing activities.

six components of the macro-environment

Political factors - Pertinent political factors include matters such as tax policy, fiscal policy, tariffs, the political climate, and the strength of institutions such as the federal banking system. Some political policies affect certain types of industries more than others. An example is energy policy, which clearly affects energy producers and heavy users of energy more than other types of businesses. Economic conditions - Economic conditions include the general economic climate and specific factors such as interest rates, exchange rates, the inflation rate, the unemployment rate, the rate of economic growth, trade deficits or surpluses, savings rates, and per-capita domestic product. Some industries, such as construction, are particularly vulnerable to economic downturns but are positively affected by factors such as low interest rates. Others, such as discount retailing, benefit when general economic conditions weaken, as consumers become more price-conscious. Sociocultural forces - Sociocultural forces include the societal values, attitudes, cultural influences, and lifestyles that impact demand for particular goods and services, as well as demographic factors such as the population size, growth rate, and age distribution. Sociocultural forces vary by locale and change over time. An example is the trend toward healthier lifestyles, which can shift spending toward exercise equipment and health clubs and away from alcohol and snack foods. The demographic effect of people living longer is having a huge impact on the health care, nursing homes, travel, hospitality, and entertainment industries. Technological factors - Technological factors include the pace of technological change and technical developments that have the potential for wide-ranging effects on society, such as genetic engineering, nanotechnology, and solar energy technology. They include institutions involved in creating new knowledge and controlling the use of technology, such as R&D consortia, university-sponsored technology incubators, patent and copyright laws, and government control over the Internet. Technological change can encourage the birth of new industries, such as the connected wearable devices, and disrupt others, such as the recording industry. Environmental forces - These include ecological and environmental forces such as weather, climate, climate change, and associated factors like water shortages. These factors can directly impact industries such as insurance, farming, energy production, and tourism. They may have an indirect but substantial effect on other industries such as transportation and utilities. Legal and regulatory factors - These factors include the regulations and laws with which companies must comply, such as consumer laws, labor laws, antitrust laws, and occupational health and safety regulation. Some factors, such as financial services regulation, are industry-specific. Others, such as minimum wage legislation, affect certain types of industries (low-wage, labor-intensive industries) more than others.

Effectively matching a company's business strategy to prevailing competitive conditions has two aspects:

Pursuing avenues that shield the firm from as many of the different competitive pressures as possible. Initiating actions calculated to shift the competitive forces in the company's favor by altering the underlying factors driving the five forces. A company's strategy is increasingly effective the more it provides some insulation from competitive pressures, shifts the competitive battle in the company's favor, and positions the firm to take advantage of attractive growth opportunities.

When and how strategic alliances can substitute for horizontal mergers and acquisitions or vertical integration and how they can facilitate outsourcing.

Strategic alliances and cooperative partnerships provide one way to gain some of the benefits offered by vertical integration, outsourcing, and horizontal mergers and acquisitions while minimizing the associated problems. Companies frequently engage in cooperative strategies as an alternative to vertical integration or horizontal mergers and acquisitions. Increasingly, companies are also employing strategic alliances and partnerships to extend their scope of operations via international expansion and diversification strategies, as we describe in Chapters 7 and 8. Strategic alliances and cooperative arrangements are now a common means of narrowing a company's scope of operations as well, serving as a useful way to manage outsourcing (in lieu of traditional, purely price-oriented contracts).

Compiling a "priority list" of problems creates an agenda of strategic issues that merit prompt managerial attention.

The "priority list" of issues and problems that have to be wrestled with can include such things as how to stave off market challenges from new foreign competitors, how to combat the price discounting of rivals, how to reduce the company's high costs, how to sustain the company's present rate of growth in light of slowing buyer demand, whether to correct the company's competitive deficiencies by acquiring a rival company with the missing strengths, whether to expand into foreign markets, whether to reposition the company and move to a different strategic group, what to do about growing buyer interest in substitute products, and what to do to combat the aging demographics of the company's customer base. The priority list thus always centers on such concerns as "how to . . . ," "what to do about . . . ," and "whether to . . ." The purpose of the priority list is to identify the specific issues and problems that management needs to address, not to figure out what specific actions to take. Deciding what to do—which strategic actions to take and which strategic moves to make—comes later (when it is time to craft the strategy and choose among the various strategic alternatives). A good strategy must contain ways to deal with all the strategic issues and obstacles that stand in the way of the company's financial and competitive success in the years ahead.

what makes a company advantage sustainable, as opposed to temporary?

The advantage is sustainable if it persists despite the best efforts of competitors to match or surpass this advantage. elements of the strategy that give buyers lasting reasons to prefer a company's products or services over those of competitors—reasons that competitors are unable to nullify or overcome despite their best efforts.

Five Forces Framework

The character and strength of the competitive forces operating in an industry are never the same from one industry to another. The most powerful and widely used tool for diagnosing the principal competitive pressures in a market is the five forces framework. This framework, depicted in Figure 3.3, holds that competitive pressures on companies within an industry come from five sources. These include (1) competition from rival sellers, (2) competition from potential new entrants to the industry, (3) competition from producers of substitute products, (4) supplier bargaining power, and (5) customer bargaining power.

VRIN tests for sustainable competitive advantage

The competitive power of a resource or capability is measured by how many of four specific tests it can pass. VRIN is a shorthand reminder standing for Valuable, Rare, Inimitable, and Non-substitutable. The first two tests determine whether a resource or capability can support a competitive advantage. The last two determine whether the competitive advantage can be sustained.

broad differentiation strategy

The essence of a broad differentiation strategy is to offer unique product attributes that a wide range of buyers find appealing and worth paying more for. Differentiation enhances profitability whenever a company's product can command a sufficiently higher price or generate sufficiently bigger unit sales to more than cover the added costs of achieving the differentiation. Company differentiation strategies fail when buyers don't place much value on the brand's uniqueness and/or when a company's differentiating features are easily matched by its rivals. examples: Companies can pursue differentiation from many angles: a unique taste (Red Bull, Listerine); multiple features (Microsoft Office, Apple Watch); wide selection and one-stop shopping (Home Depot, Alibaba.com); superior service (Ritz-Carlton, Nordstrom); spare parts availability (John Deere; Morgan Motors); engineering design and performance (Mercedes, BMW); high fashion design (Prada, Gucci); product reliability (Whirlpool and Bosch in large home appliances); quality manufacture (Michelin); technological leadership (3M Corporation in bonding and coating products); a full range of services (Charles Schwab in stock brokerage); and wide product selection (Campbell's soups).

evaluating performance and initiating corrective adjustments

The fifth component of the strategy management process—monitoring new external developments, evaluating the company's progress, and making corrective adjustments—is the trigger point for deciding whether to continue or change the company's vision and mission, objectives, strategy, and/or strategy execution methods.15 As long as the company's strategy continues to pass the three tests of a winning strategy discussed in Chapter 1 (good fit, competitive advantage, strong performance), company executives may decide to stay the course. Simply fine-tuning the strategic plan and continuing with efforts to improve strategy execution are sufficient. A company's vision, mission, objectives, strategy, and approach to strategy execution are never final; reviewing whether and when to make revisions is an ongoing process.

How a company's value chain activities can affect the company's cost structure and customer value proposition.

The higher a company's costs are above those of close rivals, the more competitively vulnerable the company becomes. The value provided to the customer depends on how well a customer's needs are met for the price paid. How well customer needs are met depends on the perceived quality of a product or service as well as on other, more tangible attributes. The greater the amount of customer value that the company can offer profitably compared to its rivals, the less vulnerable it will be to competitive attack. For managers, the key is to keep close track of how cost-effectively the company can deliver value to customers relative to its competitors. If it can deliver the same amount of value with lower expenditures (or more value at the same cost), it will maintain a competitive edge. The greater the amount of customer value that a company can offer profitably relative to close rivals, the less competitively vulnerable the company becomes. Two analytic tools are particularly useful in determining whether a company's costs and customer value proposition are competitive: value chain analysis and benchmarking.

Strategic Vision

The long-term direction and strategic intent of a company. Provides a perspective on where the organization is headed and what it can become. A strategic vision thus points an organization in a particular direction, charts a strategic path for it to follow, builds commitment to the future course of action, and molds organizational identity. A clearly articulated strategic vision communicates management's aspirations to stakeholders (customers, employees, stockholders, suppliers, etc.) and helps steer the energies of company personnel in a common direction. Well-conceived visions are distinctive and specific to a particular organization; they avoid generic, feel-good statements like "We will become a global leader and the first choice of customers in every market we serve." Likewise, a strategic vision proclaiming management's quest "to be the market leader" or "to be the most innovative" or "to be recognized as the best company in the industry" offers scant guidance about a company's long-term direction or the kind of company that management is striving to build.

importance of setting objectives

The managerial purpose of setting objectives is to convert the vision and mission into specific performance targets. Objectives reflect management's aspirations for company performance in light of the industry's prevailing economic and competitive conditions and the company's internal capabilities. Well-stated objectives must be specific, quantifiable or measurable, and challenging and must contain a deadline for achievement. As Bill Hewlett, cofounder of Hewlett-Packard, shrewdly observed, "You cannot manage what you cannot measure. . . . And what gets measured gets done."4

scope of the firm

The scope of the firm refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses. Apart from considerations of competitive moves and their timing, there is another set of managerial decisions that can affect the strength of a company's market position. These decisions concern the scope of a company's operations—the breadth of its activities and the extent of its market reach. Decisions regarding the scope of the firm focus on which activities a firm will perform internally and which it will not.

Weighing the Pros and Cons of Vertical Integration

The tip of the scales depends on (1) whether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, protect proprietary know-how, or increase differentiation; (2) what impact vertical integration will have on investment costs, flexibility, and response times; (3) what administrative costs will be incurred by coordinating operations across more vertical chain activities; and (4) how difficult it will be for the company to acquire the set of skills and capabilities needed to operate in another stage of the vertical chain. Vertical integration strategies have merit according to which capabilities and value-adding activities truly need to be performed in-house and which can be performed better or cheaper by outsiders. Absent solid benefits, integrating forward or backward is not likely to be an attractive strategy option.

Entry barriers are high under the following conditions:

There are sizable economies of scale in production, distribution, advertising, or other activities. Incumbents have other hard to replicate cost advantages over new entrants. Customers have strong brand preferences and high degrees of loyalty to seller. Patents and other forms of intellectual property protection are in place. There are strong "network effects" in customer demand Capital requirements are high. here are difficulties in building a network of distributors/dealers or in securing adequate space on retailers' shelves. There are restrictive regulatory policies. There are restrictive trade policies.

How Value Chain Activities Relate to Resources and Capabilities

There is a close relationship between the value-creating activities that a company performs and its resources and capabilities. An organizational capability or competence implies a capacity for action; in contrast, a value-creating activity initiates the action. With respect to resources and capabilities, activities are "where the rubber hits the road." When companies engage in a value-creating activity, they do so by drawing on specific company resources and capabilities that underlie and enable the activity. Because of this correspondence between activities and supporting resources and capabilities, value chain analysis can complement resource and capability analysis as another tool for assessing a company's competitive advantage. Resources and capabilities that are both valuable and rare provide a company with what it takes for competitive advantage. For a company with competitive assets of this sort, the potential is there.

How to use analytic tools to diagnose the competitive conditions in a company's industry.

Thinking strategically about a company's industry and competitive environment entails using some well-validated concepts and analytic tools. These include the five forces framework, the value net, driving forces, strategic groups, competitor analysis, and key success factors. Proper use of these analytic tools can provide managers with the understanding needed to craft a strategy that fits the company's situation within their industry environment. The remainder of this chapter is devoted to describing how managers can use these tools to inform and improve their strategic choices.

sustainable competitive advantage

When a company has competitive assets that are central to its strategy and superior to those of rival firms, they can support a competitive advantage, as defined in Chapter 1. If this advantage proves durable despite the best efforts of competitors to overcome it, then the company is said to have a sustainable competitive advantage. While it may be difficult for a company to achieve a sustainable competitive advantage, it is an important strategic objective because it imparts a potential for attractive and long-lived profitability. A company requires a dynamically evolving portfolio of resources and capabilities to sustain its competitiveness and help drive improvements in its performance.

competence

When a company's proficiency rises from that of mere ability to perform an activity to the point of being able to perform it consistently well and at acceptable cost, it is page 95 said to have a competence—a true capability, in other words.

best practices

a method of performing an activity that consistently delivers superior results compared to other approaches. To qualify as a legitimate best practice, the method must have been employed by at least one enterprise and shown to be consistently more effective in lowering costs, improving quality or performance, shortening time requirements, enhancing safety, or achieving some other highly positive operating outcome. Best practices thus identify a path to operating excellence with respect to value chain activities. Benchmarking the costs of company activities against those of rivals provides hard evidence of whether a company is cost-competitive.

best-cost provider strategy

a middle ground between pursuing a low-cost advantage and a differentiation advantage and between appealing to the broad market as a whole and a narrow market niche. - This permits companies to aim squarely at the sometimes great mass of value-conscious buyers looking for a better product or service at an economical price. Value-conscious buyers frequently shy away from both cheap low-end products and expensive high-end products, but they are quite willing to pay a "fair" price for extra features and functionality they find appealing and useful. The essence of a best-cost provider strategy is giving customers more value for the money by satisfying buyer desires for appealing features and charging a lower price for these attributes compared to rivals with similar-caliber product offerings. From a competitive-positioning standpoint, best-cost strategies are thus a hybrid, balancing a strategic emphasis on low cost against a strategic emphasis on differentiation (desirable features delivered at a relatively low price).

resource

a productive input or competitive asset that is owned or controlled by the firm. Firms have many different types of resources at their disposal that vary not only in kind but in quality as well. Some are of a higher quality than others, and some are more competitively valuable, having greater potential to give a firm a competitive advantage over its rivals. For example, a company's brand is a resource, as is an R&D team—yet some brands such as Coca-Cola and Xerox are well known, with enduring value, while others have little more name recognition than generic products.

core competence

a proficiently performed internal activity that is central to a company's strategy and is typically distinctive as well. A core competence is a more competitively valuable strength than a competence because of the activity's key role in the company's strategy and the contribution it makes to the company's market success and profitability. Often, core competencies can be leveraged to create new markets or new product demand, as the engine behind a company's growth. Procter and Gamble has a core competence in brand management, which has led to an ever increasing portfolio of market-leading consumer products, including Charmin, Tide, Crest, Tampax, Olay, Febreze, Luvs, Pampers, and Swiffer. Nike has a core competence in designing and marketing innovative athletic footwear and sports apparel. Kellogg has a core competence in developing, producing, and marketing breakfast cereals.

Strategic Group Mapping

a technique for displaying the different market or competitive positions that rival firms occupy in the industry. Within an industry, companies commonly sell in different price/quality ranges, appeal to different types of buyers, have different geographic coverage, and so on. Some are more attractively positioned than others. Understanding which companies are strongly positioned and which are weakly positioned is an integral part of analyzing an industry's competitive structure. The best technique for revealing the market positions of industry competitors is strategic group mapping.

competitive strength analysis

addresses the question "how does the company rank relative to competitors?"; develops strength ratings for the competitors on each industry key success factor Step 1 in doing a competitive strength assessment is to make a list of the industry's key success factors and other telling measures of competitive strength or weakness (6 to 10 measures usually suffice). Step 2 is to assign weights to each of the measures of competitive strength based on their perceived importance. (The sum of the weights for each measure must add up to 1.) Step 3 is to calculate weighted strength ratings by scoring each competitor on each strength measure (using a 1-to-10 rating scale, where 1 is very weak and 10 is very strong) and multiplying the assigned rating by the assigned weight. Step 4 is to sum the weighted strength ratings on each factor to get an overall measure of competitive strength for each company being rated. Step 5 is to use the overall strength ratings to draw conclusions about the size and extent of the company's net competitive advantage or disadvantage and to take specific note of areas of strength and weakness. High-weighted competitive strength ratings signal a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage. A company's competitive strength scores pinpoint its strengths and weaknesses against rivals and point directly to the kinds of offensive and defensive actions it can use to exploit its competitive strengths and reduce its competitive vulnerabilities.

Strategic Offensives

are called for when a company spots opportunities to gain profitable market share at its rivals' expense or when a company has no choice but to try to whittle away at a strong rival's competitive advantage. No matter which of the five generic competitive strategies a firm employs, there are times when a company should go on the offensive to improve its market position and performance. Companies like AutoNation, Amazon, Apple, and Google play hardball, aggressively pursuing competitive advantage and trying to reap the benefits a competitive edge offers—a leading market share, excellent profit margins, and rapid growth.

driving forces

are the major underlying causes of change in industry and competitive conditions. Industry and competitive conditions change because forces are enticing or pressuring certain industry participants (competitors, customers, suppliers, complementors) to alter their actions in important ways. The most powerful of the change agents are called driving forces because they have the biggest influences in reshaping the industry landscape and altering competitive conditions. Some driving forces originate in the outer ring of the company's macro-environment (see Figure 3.2), but most originate in the company's more immediate industry and competitive environment.

functional-area strategies

concern the approaches employed in managing particular functions within a business—like research and development (R&D), production, procurement of inputs, sales and marketing, distribution, customer service, and finance. A company's marketing strategy, for example, represents the managerial game plan for running the sales and marketing part of the business. A company's product development strategy represents the game plan for keeping the company's product lineup in tune with what buyers are looking for.

Emergent Strategy

consists of reactive strategy elements that emerge as changing conditions warrant. Inevitably, there will be occasions when market and competitive conditions take an unexpected turn that calls for some kind of strategic reaction. Hence, a portion of a company's strategy is always developed on the fly, coming as a response to fresh strategic maneuvers on the part of rival firms, unexpected shifts in customer requirements, fast-changing technological developments, newly appearing market opportunities, a changing political or economic climate, or other unanticipated happenings in the surrounding environment. These adaptive strategy adjustments make up the firm's: A company's strategy in toto (its realized strategy) thus tends to be a combination of proactive and reactive elements, with certain strategy elements being abandoned because they have become obsolete or ineffective. A company's realized strategy can be observed in the pattern of its actions over time, which is a far better indicator than any of its strategic plans on paper or any public pronouncements about its strategy.

Thinking Strategically about a company's external environment & internal environment

form a strategic vision of where the company needs to head --> identify promising strategic options for the company --> select the best strategy and business model for the company

Like backward integration, forward integration can

lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users, improve market visibility, and enhance brand name awareness. For example, Harley's company-owned retail stores are essentially little museums, filled with iconography, that provide an environment conducive to selling not only motorcycles and gear but also memorabilia, clothing, and other items featuring the brand. Insurance companies and brokerages like Allstate and Edward Jones have the ability to make consumers' interactions with local agents and office personnel a differentiating feature by focusing on building relationships.

blue-ocean strategy

offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand. A blue-ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new market segment that renders existing competitors irrelevant and allows a company to create and capture altogether new demand. This strategy views the business universe as consisting of two distinct types of market space. One is where industry boundaries are well defined, the competitive rules of the game are understood, and companies try to outperform rivals by capturing a bigger share of existing demand. In such markets, intense competition constrains a company's prospects for rapid growth and superior profitability since rivals move quickly to either imitate or counter the successes of competitors. The second type of market space is a "blue ocean," where the industry does not really exist yet, is untainted by competition, and offers wide-open opportunity for profitable and rapid growth if a company can create new demand with a new type of product offering. Blue-ocean strategies provide a company with a great opportunity in the short run. But they don't guarantee a company's long-term success, which depends more on whether a company can protect the market position it opened up and sustain its early advantage.

SWOT: Strengths

something a company is good at doing or an attribute that enhances its competitiveness in the marketplace. A company's strengths depend on the quality of its resources and capabilities. Resource and capability analysis provides a way for managers to assess the quality objectively. While resources and capabilities that pass the VRIN tests of sustainable competitive advantage are among the company's greatest strengths, other types can be counted among the company's strengths as well. Basing a company's strategy on its most competitively valuable strengths gives the company its best chance for market success.

Two distinct types of performance targets are required:

those relating to financial performance and those relating to strategic performance. Financial objectives communicate management's goals for financial performance. Strategic objectives are goals concerning a company's marketing standing and competitive position. A company's set of financial and strategic objectives should include both near-term and longer-term performance targets. Short-term (quarterly or annual) objectives focus attention on delivering performance improvements in the current period and satisfy shareholder expectations for near-term progress. Longer-term targets (three to five years off) force managers to consider what to do now to put the company in position to perform better later. Long-term objectives are critical for achieving optimal long-term performance and stand as a barrier to a nearsighted management philosophy and an undue focus on short-term results. When trade-offs have to be made between achieving long-term objectives and achieving short-term objectives, long-term objectives should take precedence (unless the achievement of one or more short-term performance targets has unique importance).

Values or Core Values

we mean certain designated beliefs, traits, and behavioral norms that management has determined should guide the pursuit of its vision and mission. Values relate to such things as fair treatment, honor and integrity, ethical behavior, innovativeness, teamwork, a passion for top-notch quality or superior customer service, social responsibility, and community citizenship.

distinctive competence

what a company can make, do, or perform better than its competitors If a company's competence level in some activity domain is superior to that of its rivals it is known as a distinctive competence.