MGMT 490: Exam 1 - Chapter PowerPoints

A resource

A productive input or competitive asset that is owned or controlled by a firm (e.g., a fleet of oil tankers) - is a competitive asset that is owned or controlled by a firm.

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.

Internal cash flows

After-tax profits + Depreciation - A rough estimate of the cash a firm'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 firm's business is generating after payment of operating expenses, interest, taxes, dividends, and desirable reinvestments in the business. - The larger a firm'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.

Translating proficient performance of value chain activities into competitive advantage

- A company that does a first-rate job of managing its activities of its value chain relative to competitors stands a good chance of profiting from its competitive advantage. - A company's external value-creating activities in its value can offer a competitive advantage.

Benchmarking

- Involves improving internal activities based on learning from other companies' "best practices" - Assesses whether the cost competitiveness and effectiveness of a company's value chain activities are in line with its competitors' activities - is a potent tool for improving a firm's own internal activities that is based on learning how firms perform them and borrowing their "best practices." - The comparison is often made between companies in the same industry, but benchmarking can also involve comparing how activities are done by companies in other industries. - Benchmarking the costs of a firm's activities against those of rivals provides hard evidence of whether the firm is cost-competitive.

An organizational capability

- Is the intangible but observable capacity of a firm to perform a critical activity proficiently using a related combination (cross-functional bundle) of its resources - Is knowledge-based, residing in people and in a firm's intellectual capital or in its organizational processes and systems, embodying tacit knowledge - are more complex entities than resources; indeed, they are built up through the use of resources and draw on some combination of the firm's resources as they are exercised.

Why a sound, well-communicated strategic vision matters

- It crystallizes senior executives' own views about the firm's long-term direction. - It reduces the risk of rudderless decision making. - It is a tool for winning the support of organization members to help make the vision a reality. - It provides a beacon for lower-level managers in setting departmental objectives and crafting departmental strategies that are in sync with the firm's overall strategy. - It helps an organization prepare for the future. - A well thought-out, forcefully communicated strategic vision pays off in several respects. - When management can demonstrate significant progress in achieving these five benefits, it can count its efforts to create an effective vision for the company as successful.

What do SWOT listings reveal?

- The SWOT analysis process involves more than making four lists. - In crafting a new strategy, it offers a strong foundation for understanding how to position the firm to build on its strengths in seizing new business opportunities and how to mitigate external threats by shoring up its competitive deficiencies. - In assessing the effectiveness of an existing strategy, it can be used to glean insights regarding the firm's overall business situation (thus the name Situational Analysis); and it can help translate these insights into recommended strategic actions.

Stage 5: Evaluating performance and initiating corrective adjustments

- The fifth phase 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. - As long as the company's strategy continues to pass the three tests of a winning strategy, simply fine-tuning the strategic plan and continuing with efforts to improve strategy execution are sufficient.

Strategic options for remedying a cost or value disadvantage

Areas in the total value chain system assess ways to improve efficiency and effectiveness. - Internal activity segments - Suppliers' part of the value chain system - Forward-channel portion of the value chain system - 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

Option 1: Beat rivals by creating more customer value from value chain activities, for a differentiation-based competitive advantage

1. Managers decide to perform value chain activities in ways that drive improvements in quality, features, performance, and other differentiation-enhancing aspects. 2. Competencies gradually emerge in performing value chain activities that drive improvements in quality, features, and performance. 3. Company proficiency in performing some of these differentiation-enhancing activities rises to the level of a core competence. 4. Company proficiency in performing the core competence continues to build and evolves into a distinctive competence. 5. Company gains a competitive advantage based on superior differentiation capabilities.

Types of threats

1. Normal course-of-business 2. Sudden-death (survival)

Industry attractiveness is not the same for all participants

- Industry outsiders may conclude that they have the resources to easily hurdle the barriers to entering an attractive industry while other outsiders may find the same industry unattractive because they do not want to challenge market leaders and have better opportunities elsewhere. - A particular industry's attractiveness depends in large part on whether a company has the resources and capabilities to be competitively successful and profitable in that environment. - The degree to which an industry is attractive or unattractive is not the same for all industry participants and all potential entrants.

An industry value chain includes

- Internal value chain - Value chains of upstream industry suppliers - Value chains of forward channel intermediaries

Cautions about stretch goals

1. Realistic stretch goals - Are definitely reachable, with a strong and coordinated effort on the part of company personnel. 2. Overly ambitious stretch goals - Are usually beyond the organization's capabilities to reach, regardless of the level of effort. - Involve radical expectations and often go unachieved, and run the risk of killing motivation, eroding employee confidence, and damaging both worker and company performance. - Can work as envisioned if: - the company has ample resources and capabilities. - its recent performance is strong. - There is a difference, however, between stretch goals that are clearly reachable, with enough effort, and those that are well beyond the organization's current capabilities, regardless of the level of effort. - Extreme stretch goals, involving radical expectations, usually fail, killing motivation, eroding employee confidence, and damaging both worker and company performance. - Extreme stretch goals can work as envisioned under circumstances where the company is a strong competitor with plentiful resources.

The relationship between a company's strategy and its business model

1. Realized strategy - competitive initiatives - business approaches 2. Business Model - value proposition - profit forumla

Specific indicators of strategic success

1. Trends in the company's sales and earnings growth. 2. Trends in the company's stock price. 3. The company's overall financial strength. 4. The company's customer retention rate. 5. The rate at which new customers are acquired. 6. Evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity.

From analyzing the company's situation to choosing a strategy

1. analyze the company's external and internal environment 2. form a strategic vision of where the company needs to head 3. identify promising strategic options for the company 4. select the best strategy and business model for the company - strategic thinking begins with an appraisal of the company's external and internal environments (as a basis for deciding on a long-term direction and developing a strategic vision), moves toward an evaluation of the most promising alternative strategies and business models, and culminates in choosing a specific strategy.

Steps in the competitive strength assessment process

1.Make a list of the industry's key success factors and measures of competitive strength or weakness. 2.Assign weights to each competitive strength measure based on its perceived importance. 3.Score competitors on each competitive strength measure and multiply by each measure by its corresponding weight. 4.Sum the weighted strength ratings on each factor to get an overall measure of competitive strength for each firm. 5.Use overall strength ratings to draw conclusions about the firm's net competitive advantage or disadvantage and to take specific note of areas of strength and weakness.

Example of strategic visions - Keurig

Become the world's leading personal beverage systems company. 1. effective elements: - focused - flexible - makes good business sense 2. shortcomings - not graphic - lacks specifics - no forward-looking

Competitive pressures associated with the threat of new entrants

Entry threat considerations: - Expected defensive reactions of incumbent firms - Strength of barriers to entry - Attractiveness of a particular market's growth in demand and profit potential - Capabilities and resources of potential entrants - Entry of existing competitors into market segments in which they have no current presence - New entrants into an industry threaten the position of rival firms since they will compete fiercely for market share, add to the number of industry rivals, and add to the industry's production capacity in the process.

A company's strategy and its business model

How the firm will make money: 1. by providing customers with value - the firm's customer value proposition 2. By generating revenues sufficient to cover costs and produce attractive profits - the firm's profit formula - It takes a proven business model—one that yields appealing profitability—to demonstrate viability of a firm's strategy.

Days of inventory

Inventory /Cost of goods sold ÷ 365 Measures inventory management efficiency. - Fewer days of inventory are better.

A resource bundle

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

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.

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.

The fit test

Does it exhibit good fit with the external and internal aspects of the firm's dynamic situation? - To qualify as a winner, a strategy must be well matched to industry and competitive conditions, a company's best market opportunities, and other aspects of the enterprise's external environment.

Example of strategic visions - Nike

NIKE, Inc. fosters a culture of invention. We create products, services and experiences for today's athlete* while solving problems for the next generation. *If you have a body, you are an athlete. 1. effective elements: - forward-looking - flexible 2. shortcomings: - vauge and lacks detail - not focused - generic - not necessarily feasible

Strategy is all about choosing How

Normally, companies have a wide degree of strategic freedom in choosing the "hows" of strategy: - how to position the firm in the marketplace - how to attract customers - how to compete against rivals - how to achieve the firm's performance targets - how to capitalize on opportunities to grow the business - how to respond to changing economic and market conditions

The role of the board of directors in corporate governance

Obligations of the board of directors: 1. Oversee the firm's financial accounting and reporting practices compliance with GAAP principles. 2. Critically appraise the firm's direction, strategy, and business approaches. 3. Evaluate the caliber of senior executives' strategic leadership skills. 4. Institute a compensation plan that rewards top executives for actions and results that serve stakeholder interests—especially shareholders. - Although senior managers have lead responsibility for crafting and executing a company's strategy, it is the duty of the board of directors to exercise strong oversight and see that the five tasks of strategic management are performed in a manner that benefits shareholders, in the case of investor-owned enterprises, or stakeholders, in the case of not-for-profit organizations.

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)

Profits 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% to 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.

Net profit margin (or net return on sales)

Profits after taxes/Sales revenues Shows after-tax profits per dollar of sales.

Competitive advantage

Requires meeting customer needs either more effectively (with products or services that customers value more highly) or more efficiently (by providing products or services at a lower cost to customers)

Competitive assets

Resources and capabilities - They determine competitiveness and the ability to succeed in the marketplace. - A firm's strategy depends on these to develop sustainable competitive advantage over its rivals. - A firm's resources and capabilities are its competitive assets and they 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.

Setting stretch objectives

Setting stretch objectives promotes better overall performance because stretch targets because they: - Push a firm to be more inventive. - Increase the urgency for improving financial performance and competitive position. - Cause the firm to be more intentional and focused in its actions. - Create an exciting work environment and attract the best people. - Help prevent internal inertia and contentment with modest gains in performance.

Questions 4: How Do Value Chain Activities Impact a Company's Cost Structure and Its Customer Value Proposition?

Signs of a firm's competitive strength - Its prices and costs are in line with rivals. - Its customer-value proposition is competitive and cost effective. - Its bundled capabilities are yielding a sustainable competitive advantage. - The higher a firm's costs are above those of close rivals, the more competitively vulnerable it becomes. - Conversely, the greater the amount of customer value that a firm can offer profitably relative to close rivals, the less competitively vulnerable the firm becomes.

What to look for in identifying a company's threats, market opportunities, strengths and weaknesses

Sizing up a company's complement of strengths and deficiencies is akin to constructing a strategic balance sheet, where strengths represent competitive assets and weaknesses represent competitive liabilities. Ideally, the company's competitive assets should outweigh its competitive liabilities by an ample margin.

Strategic management principle

Sluggish financial performance and second-rate market accomplishments almost always signal weak strategy, weak execution, or both.

Strategy and the quest for competitive advantage

The heart and soul of any strategy is the actions and moves in the marketplace that managers are taking to improve the company's financial performance, strengthen its long-term competitive position, and gain a competitive edge over rivals. - But sustainability is a relative term, with some advantages lasting longer than others. - And regardless of how sustainable a competitive advantage may appear to be at a given point in time, conditions change. - Even a substantial competitive advantage over rivals may crumble in the face of drastic shifts in market conditions or disruptive innovations.

Current strategy

To succeed in predicting a competitor's next moves, company strategists need to understand each rival's current strategy.

Corporate strategy

Multibusiness strategy—how to gain synergies from managing a portfolio of businesses together rather than as separate businesses - is strategy at the multibusiness level, concerning how to improve company performance or gain competitive advantage by managing a set of businesses simultaneously.

Pulling the strategic vision in place

What needs to be done: - Put the vision in writing and distribute it. - Hold meetings to personally explain the vision and its rationale. - Create a memorable slogan or phrase that effectively expresses the essence of the vision. - Emphasize the positive payoffs for making the vision happen

Communicating the strategic vision

Why communicate the vision? - Fosters employee commitment to the firm's chosen strategic direction - Ensures understanding of its importance - Motivates, informs, and inspires internal and external stakeholders - Demonstrates top management support for the firm's future strategic direction and competitive efforts - An effectively communicated vision is a valuable management tool for enlisting the commitment of company personnel to engage in actions that move the company forward in the intended direction.

Industry dynamics and the forces driving change

are the major underlying causes of change in industry and competitive conditions. Driving forces analysis has three steps. 1. Identifying what the driving forces are 2. Assessing whether the drivers of change are acting to make the industry more or less attractive 3. Determining what strategy changes are needed to prepare for the impact of the driving forces

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.

Brands, company image and reputational assets

brand names, trademarks, product or company image, buyer loyalty and goodwill; company reputation for quality, service, and reliability; reputation with suppliers and partners for fair dealing

Firm's mission

describes the scope and purpose of its present business ("who we are, what we do, and why we are here").

Reactive (emergent) strategy

elements developed on the fly in response to unanticipated developments and fresh market conditions - consists of reactive strategy elements that emerge as changing conditions warrant.

Proactive (deliberate) strategy

elements that include planned initiatives to improve the company's financial performance and secure a competitive edge - consists of proactive strategy elements that are both planned and realized as planned

The business model and the value price cost framework

illustrates the elements of the business model in terms of what is known as the Value-Price-Cost Framework highlighting the relationship between the Customer's Value Proposition (V-P) and the Profit Formula (P-C). 1. Customer value (V) - customer's share (customer value proposition) 2. Product price (P) - firm's share (profit formula) 3. Per-unit cost (c)

Strategic group

is a cluster of industry rivals that have similar competitive approaches and market positions.

Distinctive competence

is a competitively important activity that a firm performs better than its rivals—it represents a competitively superior internal strength.

Strategic group mapping

is a technique for displaying the different market or competitive positions that rival firms occupy in the industry.

Physical resources

land and real estate; manufacturing plants, equipment, or distribution facilities; the locations of stores, plants, or distribution centers, including the overall pattern of their physical locations; ownership of or access rights to natural resources (such as mineral deposits)

Strategic plan

maps out where a company is headed, establishes strategic and financial targets, and outlines the competitive moves and approaches to be used in achieving the desired business results.

Technological assets

patents, copyrights, production technology, innovation technologies, technological processes - are included among tangible resources, by convention, even though some types, such as copyrights and trade secrets, might be more logically categorized as intangible.

The SOAR Framework for competitor analysis

points to four indicators of a rival's likely strategic moves and countermoves. - These include a rival's current strategy, objectives, resources and capabilities, and assumptions - A strategic profile of a rival that provides good clues to its behavioral proclivities can be constructed by characterizing the rival along these four dimensions. 1. current strategy - how the company is competing currently 2. objectives - strategic and performance objectives 2. strategic moves - actions and reactions and outcomes 4. resources and capabilities - key strengths and weaknesses 5. assumption - hold about itself and the industry

Strategic value

portrays a firm's aspirations for its future ("where we are going"). - A strategic vision describes "where we are going"—the course and direction management has charted and the company's future product customer-market technology focus. - A strategic vision has little value unless it's effectively communicated down the line to lower-level managers and employees. - An effectively communicated vision enlists the commitment of personnel to engage in actions that move the company forward in the intended direction. - The task of effectively conveying the vision is assisted when management can capture the vision in a catchy or easily remembered slogan.

Total economic value

produced by a firm is equal to V-C. - It is the difference between the buyer's perceived value (V) regarding a product or service and what it costs (C) the firm to produce it. - Competitively superior resources and capabilities are strategic assets capable of producing a sustainable competitive advantage with far greater profit potential. - A competitive advantage means that you can produce more value (V) for the customer than rivals can, or the same value at lower cost (C). - In other words, your V-C is greater than the V-C of competitors. - V-C is what we call the Total Economic Value produced by a company.

Social complexity

refers to factors in a firm's culture, the interpersonal relationships among managers or R&D teams, its trust-based relations with customers or suppliers that contribute to its competitive advantage.

Strategic objectives

relate to target outcomes that indicate a company is strengthening its market standing, competitive position, and future business prospects. - Are the firm's goals related to market standing and competitive position. - Are focused externally on competition vis-à-vis the firm's rivals.

Financial objectives

relate to the financial performance targets management has established for the organization to achieve. - Communicate top management's goals for financial performance. - Are focused internally on the firm's operations and activities.

Resources and capabilities

represent its competitive assets and are determinants of its competitiveness and ability to succeed in the marketplace. - Resource and capability analysis is a powerful tool for sizing up a firm's competitive assets and determining if they can support a sustainable competitive advantage over market rivals.

Stretch objectives

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

Identifying a firm's strategy - what to look for

shows what to look for in identifying the substance of a company's overall strategy - these are the visible actions taken that signal what strategy the company is pursuing - The pattern of actions and business approaches that define a company's strategy: 1. Actions to gain slaes and market share with lower prices based on lower costs 2. Actions to enter new product or geographic markets or to exit existing ones 3. Actions to capture emerging market opportunities and defend against external threats to the company's business prospects 4. Actions to strengthen market standing and competitiveness by acquiring or merging with other companies 5. Actions to strengthen competitiveness via strategic alliances and collaborative partnerships 6. Actions and approaches used in managing R&D, production, sales and marketing, finances and other key activities 7. Actions to upgrade, build, or acquire competitively important resources and capabilities 8. Actions to strengthen the firm's bargaining position with suppliers, distributors and others 9. Actions to gains ales and markets share via more performance features, more appealing design, better quality or customer service, wider protect selection, or other such actions

Human assets and intellectual capital

the education, experience, knowledge, and talent of the workforce, cumulative learning, and tacit knowledge of employees; collective learning embedded in the organization, the intellectual capital and know-how of specialized teams and work groups; the knowledge of key personnel concerning important business functions; managerial talent and leadership skill; the creativity and innovativeness of certain personnel

A weakness

•Is something a firm lacks or does poorly (in comparison to others) or a condition that puts it at a competitive disadvantage in the marketplace - A firm's weaknesses are shortcomings that constitute competitive liabilities, weakness, or competitive deficiency, and is something a firm lacks or does poorly (in comparison to others) or a condition that puts it at a competitive disadvantage in the marketplace.

Managers of subsidiaries, divisions, geographic regions, plants, and other operating units (and key employees with specialized expertise)

•Utilize on-the-scene familiarity with their business units to orchestrate their specific pieces of the strategy.

Identifying a company's internal strengths

- A firm's strengths represent its competitive assets. - Basing a firm's strategy on its most competitively valuable strengths gives the firm its best chance for market success. - 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 said to have a competence—a true capability, in other words. - If a firm's competence level in some activity domain is superior to that of its rivals it is known as a distinctive competence. - A core competence is a proficiently performed internal activity that is central to a firm'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 firm's strategy and the contribution it makes to the firm's market success and profitability

Functional area strategies

- Add relevant detail to the "hows" of business strategy. - Provide a game plan for managing a particular activity in ways that support the business strategy. - concern the actions related to particular functions or processes within a business.

What to look for in identifying a company's strengths

- Ample financial resources to grow the business - Strong brand-name image or company reputation - Cost advantages over rivals - Attractive customer base - Proprietary technology, superior technological skills, important patents - Strong bargaining power over suppliers or buyers -•Superior product quality - Wide geographic coverage or strong global distribution capability - Alliances or joint ventures that provide access to valuable technology competencies, or attractive geographic markets

The industry outlook for profitability

- An industry environment is fundamentally attractive if it presents a company with good opportunity for above-average profitability. - An industry environment is fundamentally unattractive if a firm's profit prospects in the industry are unappealingly low. - Each of the frameworks presented in this chapter—PESTEL, five forces analysis, driving forces, strategy groups, competitor analysis, and key success factors—provides a useful perspective on an industry's outlook for future profitability. - Putting them all together provides an even richer and more nuanced picture. - Thus, the final step in evaluating the industry and competitive environment is to use the results of each of the analyses performed to determine whether the industry presents the company with profit opportunities.

Examples of common 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 investment (ROE) - 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 - •Winning an x percent market share - Achieving lower overall costs than rivals - Overtaking key competitors on product performance or 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

Core values

- Are the beliefs, traits, and behavioral norms that employees are expected to display in conducting the firm's business and in pursuing its strategic vision and mission. - Become an integral part of the firm's culture and what makes it tick when strongly espoused and supported by top management. - Match the firm's vision, mission, and strategy, contributing to the firm's business success.

Key success factors (KSFs)

- Are the strategy elements, product and service attributes, operational approaches, resources, and competitive capabilities that are necessary for competitive success by any and all firms in an industry. - These vary from industry to industry, and over time within the same industry, and in importance as drivers of change and competitive conditions change. - are those competitive factors that most affect industry members' ability to survive and prosper in the marketplace: the particular strategy elements, product attributes, operational approaches, resources, and competitive capabilities that spell the difference between being a strong competitor and a weak competitor—and between profit and loss. - KSFs are so important to competitive success that all firms in the industry must pay close attention to them or risk becoming an industry laggard or failure.

Manage capabilities dynamically

- Attend to the ongoing modification of existing competitive assets. - Take advantage of opportunities to develop totally new kinds of capabilities.

Setting objectives for every organizational level

- Breaks down overall performance targets into targets for each of the organization's separate units - Fosters setting lower-level performance targets or outcomes that support achievement of firm-wide strategic and financial objectives - Extends the top-down objective-setting process to all organizational levels - The ideal situation is a team effort in which each organizational unit strives to produce results that contribute to the achievement of the company's performance targets and strategic vision. - Such consistency signals that organizational units know their strategic role and are on board in helping the company move down the chosen strategic path and produce the desired results.

Competitive pressures that increase rivalry among competing sellers

- Buyer demand is growing slowly or declining. - It is becoming less costly for buyers to switch brands. - Industry products are becoming less differentiated. - There is unused production capacity, or products have high fixed costs or high storage costs. - The number of competitors is increasing, or they are becoming more equal in size and competitive strength. - The diversity of competitors is increasing. - High exit barriers keep firms from exiting the industry. - The strongest of the five competitive forces is often the rivalry for buyer patronage among competing sellers of a product or service. - The intensity of rivalry among competing sellers within an industry depends on several identifiable factors.

Identifying the forces driving industry change

- Changes in the long-term industry growth rate - Increasing globalization - Emerging new Internet capabilities and applications - Shifts in buyer demographics - Technological change and manufacturing process innovation - Product and marketing innovation - Entry or exit of major firms - Diffusion of technical know-how across firms and countries - Changes in cost and efficiency - Reductions in uncertainty and business risk - Regulatory influences and government policy changes - 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 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

Managers modify strategy in response to:

- Changing market conditions - Advancing technology - Fresh moves of competitors - Shifting buyer needs - Emerging market opportunities - New ideas for improving the strategy

Effects of the industry value chain

- Costs and profit margins of suppliers and channel partners can affect prices to end consumers. - Activities of channel partners can affect industry sales volumes and customer satisfaction.

Good strategy + good strategy execution = good management

- Crafting and executing strategy are core management functions. - Among all the things managers do, nothing affects a company's ultimate success or failure more fundamentally than how well its management team charts the company's direction, develops competitively effective strategic moves and business approaches, and pursues what needs to be done internally to produce good day-to-day strategy execution and operating excellence.

Managing the strategy execution process

- Creating a strategy-supporting structure - Staffing the firm with the 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 work effort to achieve best practices - •Installing information and operating systems that enable company personnel to perform essential activities - Motivating people by tying rewards and incentives to the achievement of performance objectives - Creating a company culture conducive to successful strategy execution - Exerting the internal leadership needed to propel implementation forward - Managing the strategy execution process requires constant and consistent attention to its principal aspects. - Good strategy execution requires diligent pursuit of operating excellence, and it is a job for a company's whole management team. - Good strategy execution requires diligent pursuit of operating excellence, and it is a job for a company's whole management team.

Initiating corrective adjustment

- Deciding whether to continue or change the firm's vision and mission, objectives, strategy, and strategy execution methods - Applying lessons based on organizational learning.

Developing a strategic vision

- Delineates management's future aspirations for the firm to its stakeholders. - Provides direction—"where we are going." - Sets out the compelling rationale (strategic soundness) for the firm's direction. - Uses distinctive and specific language to set the firm apart from its rivals. - A strategic vision describes top management's aspirations for the company's future and the course and direction charted to achieve them. - 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. -As a valuable management tool, it must convey what top executives want the business to look like and provide managers at all organizational levels, with a reference point in making strategic decisions and preparing the company for the future

Key elements of apple's successful strategy are:

- Designing and developing its own operating systems, hardware, application software and services. - Continuously investing in R&D and frequently introducing products. - Strategically locating its stores and staffing them with knowledgeable personnel. - Maintaining a quality brand image, supported by premium pricing. - Committing to corporate social responsibility and sustainability through supplier relations. - Cultivating a diverse workforce rooted in transparency. - Apple Inc. is one of the most profitable companies in the world, with revenues of more than $225 billion. - For more than ten consecutive years, it has ranked number one on Fortune's list of the "World's Most Admired Companies." - Given the worldwide popularity of its products and services, along with its reputation for superior technological innovation and design capabilities, this is not surprising.

Enhancing differentiation through activities at the forward end of the value chain system

- Engage in cooperative advertising and promotions with forward-channel allies. - Use exclusive arrangements with downstream sellers or other mechanisms that increase their incentives to enhance delivered customer value. - Create and enforce standards for downstream activities and assist in training channel partners in business practices. - 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. - Performing value chain activities with capabilities that permit the firm to either outmatch rivals on differentiation or beat them on costs will give the firm a competitive advantage.

Strategic priority "Should we" issues

- Expand rapidly or cautiously into foreign markets? - Reposition the firm to move to a different strategic group? - Counter increasing buyer interest in substitute products? - Expand the firm's product line? - Correct the firm's competitive deficiencies by acquiring a rival firm with the missing strengths? - Pinpointing the specific issues that management needs to address sets the agenda for deciding what actions to take next to improve the company's performance and business outlook.

Long term objectives

- Force consideration of what to do now to achieve optimal long-term performance. - Help pose a barrier to overemphasizing achieving just short-term results and postponing/delaying actions needed to achieve long-term performance targets.

Good strategic performance is the key to better financial performance

- Good financial performance is not enough. - Current financial results are lagging indicators and do not assure the development of competitive capabilities for delivering better financial results in the future. - Setting and achieving stretch strategic objectives signal improvements in a firm's competitiveness and strength in the marketplace. - Ongoing good strategic performance is a leading indicator of a firm's increasing capability to deliver improved future financial performance. - 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.

Factors to consider in assessing industry attractiveness

- How the firm is impacted by the state of the macro-environment - Whether strong competitive forces are squeezing industry profitability to subpar levels - Whether the presence of complementors and the possibility of cooperative actions improve the company's prospects - Whether industry profitability will be favorably or unfavorably affected by the prevailing driving forces - Whether the firm occupies a stronger market position than rivals - Whether this is likely to change in the course of competitive interactions - How well the firm's strategy delivers on industry key success factors

Strategic priority "how to" issues

- How to meet challenges of new foreign competitors - How to combat the price discounting of rivals - How to both reduce high costs and prepare for price reductions - How to sustain growth as buyer demand slows - How to adapt to the changing demographics of the firm's customer base - Compiling a "priority list" of problems creates an agenda of strategic issues that merit prompt managerial attention. - Compiling a list of problems and roadblocks creates a strategic agenda of problems that merit prompt managerial attention. - 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.

Business Strategy

- How to strengthen market position and gain competitive advantage - Actions to build competitive capabilities of single businesses - Monitoring and aligning lower-level strategies - is strategy at the single-business level, concerning how to improve the performance or gain a competitive advantage in a particular line of business.

An "ideal" mission statement

- Identifies the company's product or services - Specifies the buyer needs it seeks to satisfy - Identifies the customer groups or markets it is endeavoring to serve - Gives the company its own identity that sets the company firm apart from its rivals - Clarifies the firm's purpose and business makeup to stakeholders

The value chain

- Identifies the primary activities and related support activities that create customer value - Identifies the inner workings of the firm's customer value proposition and business model - Permits a deep look at the firm's cost structure and its ability to profitably offer low prices - Reveals the emphasis that a firm places on activities that enhance differentiation and support higher prices - Every firm'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 firm performs internally combine to form a value chain—so called because the underlying intent of a firm's activities is ultimately to create value for buyers.

Constructing a strategic group map

- Identify the competitive characteristics that delineate strategic approaches used in the industry. - Plot the firms on a two-variable map using pairs of competitive characteristics. - 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. - Evaluating strategy options entails examining what strategic groups exist, identifying the companies within each group, and determining if a competitive "white space" exists where industry competitors can create and capture new demand.

Considering threats

- Identify threats to the firm's future prospects - Evaluate strategic actions to be taken to neutralize or lessen impact - Simply making lists of a firm's strengths, weaknesses, opportunities, and threats is not enough. - The payoff from SWOT analysis comes from the conclusions about a firm's situation and the implications for strategy improvement that flow from the four lists.

Improving internally performed value chain activities

- Implement best practices throughout the firm, particularly for high-value activities. - Redesign products, components and activities to facilitate speedier and more economical manufacture or assembly. - Relocate high-cost activities to external value chains to be performed more cheaply by vendors or contractors. - Reallocate resources to activities that address buyers' most important purchase criteria. - Adopt productivity-enhancing, cost-saving technological improvements that spur innovation, improve design, and enhance creativity. - Pressure suppliers for lower prices. - Switch to lower-priced substitute inputs. - Collaborate closely with suppliers to identify mutual cost-saving opportunities. - Work with suppliers to enhance the firm's differentiation. - Select and retain suppliers who meet higher-quality standards. - Coordinate with suppliers to enhance design or other features desired by customers. - Provide incentives to suppliers to meet higher-quality standards, and assist suppliers in their efforts to improve. - 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. - A firm can enhance its customer value proposition through its supplier relationship by selecting and retaining suppliers that meet higher-quality standards, providing quality-based incentives to suppliers, and integrating suppliers into the design process

What to look for in identifying a company's threats

- Increasing intensity of competition - Slowdowns in market growth - Likely entry of potent new competitions - 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

The value of strategic group maps

- Maps are useful in identifying which industry members are close rivals and which are distant rivals. -Not all map positions are equally attractive 1. Prevailing competitive pressures from the industry's five forces may cause the profit potential of different strategic groups to vary. 2. 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 or because they are more favorably impacted by industry driving forces. - Part of strategic group map analysis always entails drawing conclusions about where on the map is the "best" place to be and why. - Which firms/strategic groups are destined to prosper because of their positions? - Which firms/strategic groups seem destined to struggle? - What accounts for why some parts of the map are better than others?

Sources of benchmarking information

- Market data reports from consulting companies and market analysts, publications of industry trade groups and government agencies, and customers - Visits to benchmark firms

What to look for in identifying a company's market opportunities

- Meet sharply rising buyer demand for the industry's product - Serve additional customer groups or market segments - Expand into new geographic markets - Expand the company's product line to meet a broader range of customer needs - Enter new product lines or new businesses - Take advantage of failing trade barriers in attractive foreign markets - Take advantage of an adverse change in the fortunes of rival firms - Acquire rival firms or companies with attractive technological expertise or competencies - Take advantage of emerging technological developments to innovate - Enter into alliances or other cooperative ventures

Single business strategic action plan components include:

- Moves to respond to changing conditions in the macro-environment or in industry and competitive conditions - Basing competitive advantage on lower costs, better products, superior service of a market niche or specific buyers - Expanding or narrowing geographic coverage - Partnering to build valuable partnerships and strategic alliances with other enterprises in the same industry

Characteristics of market opportunities

- Newly emerging and fast-changing markets may represent "golden opportunities" but are often hidden in "fog of the future." - Opportunities can evolve in mature markets. - Opportunities with market factors aligned with the firm's strengths offer the most potential for the firm to gain competitive advantage. - Depending on the prevailing circumstances, a firm's opportunities can be plentiful or scarce, fleeting or lasting, and can range from wildly attractive to marginally interesting to unsuitable. - A firm is well advised to pass on a particular market opportunity unless it has or can acquire the competencies needed to capture it.

What to look for in identifying a company's weaknesses

- No distinctive core competencies - Lack of attention to customer needs - Weak balance sheet, too much debt - Higher costs than competitors - Too narrow a product line relative to rivals - Weak brand image or reputation - •Lack of adequate distribution capability - Lack of management depth - A plague of internal operating problems or obsolete facilities - Too much underutilized plan capacity

Achieving cost-based competitiveness

- Pressure forward-channel allies to reduce their costs and markups. - Collaborate with forward-channel allies to identify win-win opportunities to reduce costs. - Change to a more economical distribution strategy, including switching to cheaper distribution channels or integrating forward into company-owned retail outlets.

Typical variables used in creating group maps

- Price and quality range (high, medium, low) - Geographic coverage (local, regional, national, global) - Product-line breadth (wide, narrow) - Degree of service offered (no frills, limited, full) - Distribution channels (retail, wholesale, Internet, multiple) - Degree of vertical integration (none, partial, full) - Degree of diversification into other industries (none, some, considerable)

Key functional strategies of the overall business strategy:

- R&D, technology, product design; - supply chain management; - production; - sales, marketing, and distribution; - information technology; - human resources; and - finance.

Threats to resources and capabilities

- Rivals develop better substitutes over time. - Current capabilities decay from benign neglect. - Disruptive changes in the competitive environment.

Managing resources and capabilities dynamically

- Rivals that are initially unable to replicate a key resource may develop better and better substitutes over time. - Resources and capabilities can depreciate like other assets if they are managed with benign neglect. - Disruptive changes in technology, customer preferences, distribution channels, or other competitive factors can also destroy the value of key strategic assets. - Rivals that are initially unable to replicate a key resource may develop better and better substitutes over time. - Resources and capabilities can depreciate like other assets if they are managed with benign neglect. - Disruptive changes in technology, customer preferences, distribution channels, or other competitive factors can also destroy the value of key strategic assets

The value chain analysis process

- Segregates a firm's operations into different types of primary and secondary activities to identify major components of its internal cost structure - Uses activity-based costing to evaluate activities - Same for significant competitors

Market entry barriers facing new entrants

- Sizable economies of scale in production, distribution, advertising, or other activities - Hard-to-replicate learning curve and industry relationship cost advantages of incumbents - Strong brand preferences and high customer loyalty - Patents and other intellectual property protection - Strong "network effects" in customer demand - High capital requirements - Building distributor and/or dealer networks and securing adequate space on retailers' shelves Restrictive regulatory and trade policies - The strength of the threat of entry is governed to a large degree by the height of the industry's entry barriers. - High barriers reduce the threat of potential entry, whereas low barriers enable easier entry. - 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.

Strategic implications of a competitive strength assessment

- The higher a firm's overall weighted strength rating, the stronger its overall competitiveness versus rivals. - The rating score indicates the total net competitive advantage for a firm relative to other firms. - Firms with high competitive strength scores are targets for benchmarking. - The ratings show how a firm compares against rivals, factor by factor (or capability by capability). - Strength scores can be useful in deciding what strategic moves to make. - 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. - A competitively astute company should utilize the strength scores in deciding what strategic moves to make. - 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

Corporate governance failures at volkswagen

- The primary cause is the absence of a strong group of independent directors. - Based upon German corporate law, governance is provided by a Management Board and a Supervisory Board, with employees making up 50% of the Supervisory Board. - This should have allowed for at least 50% of the Supervisory Board to be fully independent. - While staying within the 'letter of the law,' they sidestepped the 'spirit of the law' by cycling recent former senior executives through the Supervisory Board Chairmanship position and other board positions. - This had the effect of removing truly independent oversight.

Benchmarking in the solar industry

- What benchmarks does the solar industry use in comparing costs among industry competitors? - How has SunPower responded to the continued downward pricing pressure in the industry? - Why is the collection of competitive intelligence to accurately benchmark delivered costs of such importance in the solar industry? - As competition grows, benchmarking plays an increasingly critical role in assessing a solar company's relative costs and price positioning compared to other firms. - This is often measured using the all-in installation and production costs per kilowatt hour generated by a solar asset, called the "Levelized Cost of Energy" (LCOE). - Kilowatt hours are the units of electricity that are sold to consumers. - SunPower's quarterly earnings calls highlighted efforts to compete on benchmark prices by simplifying its company structure; divesting from non-core assets; and diversifying beyond the low-cost, large-scale utility solar market and into residential and commercial solar - where it could compete more easily on price. - For solar to play a major role in U.S. power generation, costs must keep falling. - As solar companies race towards lower costs, benchmarking will continue to be a core strategic tool in determining pricing and market positioning.

What should a current competitor decide about its industry?

- When a competitor decides an industry is attractive, it should invest aggressively to capture the opportunities it sees and to improve its long-term competitive position in the business. - When a strong competitor concludes its industry is relatively unattractive and lacking in opportunity, it may elect to protect its present position, investing cautiously, if at all, and looking for opportunities in other industries. - A competitively weak company in an unattractive industry may see its best option as finding a buyer, perhaps a rival, to acquire its business.

The value chain for boll and branch

- Which activities in the value chain are primary activities? Which are secondary activities? - Which activities are linked to the value chain for the entire industry? - Where in the industry activity chain could Boll & Branch possibly reduce cost(s) without reducing its competitive strength? - A company's primary and secondary activities identify the major components of its internal cost structure. - The combined costs of all the various primary and support activities constituting a company's value chain define its internal cost structure. - Evaluating a company's internal and external cost-competitiveness involves using what accountants call activity-based costing to determine the costs of performing each value chain activity.

Question 6: What strategic issues and problems merit front-burner managerial attention?

- Which and how serious are the strategic issues that managers must address—and resolve—for the firm to be more financially and competitively successful in the years ahead. - A good strategy must contain ways to deal with all the strategic issues and obstacles that stand in the way of the firm's financial and competitive success in the years ahead. - The final and most important analytic step is to zero in on exactly what strategic issues company managers need to address—and resolve—for the firm to be more financially and competitively successful in the years ahead. - This step involves drawing on the results of both industry analysis and the evaluations of the company's internal situation. - The task here is to get a clear fix on exactly what strategic and competitive challenges confront the company, which of the company's competitive shortcomings need fixing, and what specific problems merit company managers' front-burner attention. - Pinpointing the specific issues that management needs to address sets the agenda for deciding what actions to take next to improve the company's performance and business outlook.

Operational strategies

- add detail and completeness to business and functional strategies. - Provide a game plan for managing specific operating activities with strategic significance. - concern the relatively narrow strategic initiatives and approaches for managing key operating units.

Sustainable competitive advantage requires:

- giving buyers lasting reasons to prefer a firm's products or services over those it its competitors - developing expertise and long-term competitive capabilities that cannot be readily overcome - putting the constant quest for sustainable competitive advantage at center stage in crafting your strategy

Strategy requires getting the right answers

- good strategic thinking and good management of the strategy-making, strategy- executing process are important - first-rate capabilities and skills in crafting and executing strategy are essential to managing successfully

Four dimensions of a balanced scorecard

1. Financial objectives 2. Strategic objectives that signal greater competitive strength (and thus greater capability to achieve higher levels of financial performance) 3. Internal process objectives relating to productivity and quality 4. Organizational objectives concerning human capital, culture, infrastructure, and innovation

A representative weighted competitive strength assessment

- provides an example of competitive strength assessment in which a hypothetical firm (ABC Company) competes against two rivals. - In the example, relative cost is the most telling measure of competitive strength, and the other strength measures are of lesser importance. - The firm with the highest rating on a given measure has an implied competitive edge on that measure, with the size of its edge reflected in the difference between its weighted rating and rivals' weighted ratings. - The overall competitive strength scores indicate how all the different strength measures add up—whether the firm is at a net overall competitive advantage or disadvantage against each rival. - The higher a firm's overall weighted strength rating, the stronger its overall competitiveness versus rivals.

What should the company's future direction be and what performance targets should we set?

- what buyer needs to try to satisfy - which growth opportunities to emphasize? - where to head and what outcomes to strive to achieve ?

Elements of a firm's strategic plan

-Its strategic vision, business mission, and core values -Its strategic and financial objectives -Its chosen strategy - A company's strategic plan lays out its direction, business model, and performance targets, for some period of time. - 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.

Assessing the impact of the factors driving industry change

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? - Getting a handle on the collective impact of the driving forces requires looking at the likely effects of each factor separately, since the driving forces may not all be pushing change in the same direction.

Wording a vision statement - THE DO'S

1. Be graphic. - Paint a clear picture of where the company is headed and the market position(s) the company is striving to stake out. 2. Be forward-looking and directional. - Describe the strategic course that will help the company prepare for the future. 3. Keep it focused. - Focus on providing managers with guidance in making decisions and allocating resources. 4. Have some wiggle room. - Language that allows some flexibility allows the directional course to be adjusted as market, customer, and technology circumstances change. 5. 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. 6. Indicate why the directional path makes good business sense. - The directional path should be in the long-term interests of stakeholders, especially shareowners, employees, and suppliers. 7. Make it memorable. - To give the organization a sense of direction and purpose, the vision needs to be easily communicated. Ideally, it should be reducible to a few choice lines or a memorable "slogan."

Option 2: Beat rivals by conducting value chain activities more efficiently, for a cost-based competitive advantage

1. Company managers decide to perform value chain activities in the most cost-efficient manner. 2. Competencies gradually emerge in driving down the cost of value chain activities (such as production, inventory management, etc.). 3. Company capabilities in performing certain value chain activities more efficiently rise to the level of a core competence. 4. Company proficiency in performing the core competence continues to build and evolves into a distinctive competence. 5. Company gains a competitive advantage based on superior differentiation capabilities.

The five competitive forces

1. Competition from rival sellers 2. Competition from potential new entrants 3. Competition from producers of substitute products 4. Supplier bargaining power 5. Customer bargaining power - 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.

Competitor Analysis

1. Competitive intelligence - Information about rivals that is useful in anticipating their next strategic moves 2. Signals of the likelihood of strategic moves - Rivals under pressure to improve financial performance - Rivals seeking to increase market standing - Public statements of rivals' intentions - Profiles developed by competitive intelligence units - Studying competitors' past behavior and preferences provides a valuable assist in anticipating what moves rivals are likely to make next and in outmaneuvering them in the marketplace. - The question is where to look for such information since rivals rarely reveal their strategic intentions openly. - If information is not directly available, what are the best indicators?

Wording a vision statement - THE DON'TS

1. 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. 2. Don't dwell on the present. - A vision is not about what a firm once did or does now; it's about "where we are going." 3. Don't use overly broad language. - All-inclusive language that gives the company license to pursue any opportunity must be avoided. 4. 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. 5. 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. 6. Don't rely on superlatives. - Visions that claim the company's strategic course is one of being the "best" or "most successful" usually lack specifics about the path the company is taking to get there. 7. Don't run on and on. - A vision statement that is not short and to the point will tend to lose its audience.

Two kinds of performance improvements tell the most about the caliber of a company's strategy

1. Gains in profitability and financial strength 2. Gains in the company's competitive strength and market standing

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

1. High-performing enterprises are nearly always the product of astute, creative and proactive strategy making 2. Even the best-conceived strategies will result in performance shortfalls if they are not executed proficiently

Types of weaknesses

1. Inferior or unproven skills, expertise, or intellectual capital in competitively important areas of the business 2. Deficiencies in physical, organizational, or intangible assets

Competitive pressures from the sellers of substitute products

1. Substitute products considerations - Readily available and attractively priced? - Comparable or better in terms of quality, performance, and other relevant attributes? - Offer lower switching costs to buyers? 2. Indicators of substitutes' competitive strength - Increasing rate of growth in sales of substitutes - Substitute producers adding new output capacity - Increasing profitability of substitute producers - Companies in one industry are vulnerable to competitive pressure from the actions of companies in a closely adjoining industry whenever buyers view the products of the two industries as good substitutes

Different value chains

1. Supplier-related value chains - activities, costs and margins of suppliers 2. A company's own value chain - internally performed activities, costs and margins 3. Forward-channel value chains - activities, costs and margins of forward-channel allies and strategic partners - buyer or end-user value chains

TOMS Shoes: A mission with a company

1. TOMS's mission statement - With every product you purchase, TOMS will help a person in need. One for One.® 2. TOM's core values - Our mission is ingrained in our one-to-one business model. - Lead with the story: our mission and purpose are the same. - Communicate to ensure that customers know they are doing more than just buying a product. - Extend and adapt the one-for-one model to other product categories to support other causes. - Protect the success of the model when acquiring stakeholders. - TOMS's mission is ingrained in their business model to avoid relying on donors to fund giving to the poor by creating a business that would fund the giving itself. - With the one-for-one model, TOMS built the cost of giving away a pair of shoes into the price of each pair they sold, enabling the company to make a profit while still giving away shoes to the needy.

The two elements of a company's business model are:

1. 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. 2. 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.

Three questions used to test the merits of one strategy versus another and to distinguish a winning strategy from a losing or mediocre strategy:

1. The fit test 2. The competitive advantage test 3. the performance test

Identification of key success factors

1. What crucial product attributes and service characteristics do buyers of the industry's product consider when choosing among competing brands of sellers? 2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a firm have to be competitively successful? 3. What shortcomings are almost certain to put a firm at a significant competitive disadvantage? - Key success factors vary from industry to industry, and even occasionally 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 shown on this slide.

3 central questions businesses face

1. What is our present situation? 2. What should the company's future direction be and what performance targets should we set? 3. What's our plan for running the company and achieving good results?

Examining the comparative market positions of strategic groups in the casual dining industry

1. Which strategic group is located in the least favorable market position? Which group is in the most favorable position? 2. Which strategic group is likely to experience increased intragroup competition? 3. Which groups are most threatened by the likely strategic moves of members of nearby strategic groups? - Strategic group maps using different pairs of variable can be drawn to give different exposures to the competitive positioning relationships present in the industry's structure—there is not necessarily one best map for portraying how competing firms are positioned.

Pandora, Sirius XM, and Broadcast Radio: Three contrasting business models

1. Who listens to the radio anymore? 2. How sustainable are the business models of Pandora, Sirius XM and over-the-air broadcasters over the long term? 3. Given the changes in user listening habits, which competitor's present strategy best passes the three tests of a winning strategy? 4. What internal and external factors will create particular difficulties for each competitor in changing its strategy or business model? - While all three provide the same type of entertainment service, the business models employed by Pandora, Sirius XM, and Over-The-Air Broadcast Radio are completely different. - In the area of value proposition, Sirius XM provides commercial-free entertainment with some local content based upon a monthly fee, while Broadcast Radio provides entertainment with some local content, with interruptions for commercials, without a fee. - Pandora bridges these two methods. - In one mode it operates more like Over-the-Air Broadcast Radio, in that it provides entertainment without a fee that includes targeted advertisements, with the added benefit of allowing the listener to customize the music mix. - In the other mode, listeners can elect to go ad-free for a fee, using Pandora One. - For profit, Sirius XM must attract a large enough customer base in order to cover costs and provide profit, while Broadcast Radio must attract a large enough advertiser base to cover costs and provide profit. - Pandora, once again bridging the two, generates profit by either an advertiser base or through ad-free services.

Intangible resources

1. human assets and intellectual capital 2. brands, company image and reputational assets 3. relationships 4. company culture and incentive system - are harder to discern, but they are often among the most important of a firm's competitive assets. - They include various sorts of human assets and intellectual capital (skills and knowledge), as well as its brands, image, and reputational assets. - While intangible resources have no material existence on their own, they are often embodied in something material. - It is important to remember that it is not exactly how a resource is categorized that matters, rather, that all of the firm's different types of resources are included in the inventory. - The real purpose of using categories in identifying a firm's resources is to ensure that none of a firm's resources go unnoticed when sizing up its competitive assets

Tangible resources

1. physical resources 2. financial resources 3. technological assets 4. organizational resources - are the most easily identified, because tangible resources are those that can be touched or quantified readily. - Obviously, they include various types of physical resources such as manufacturing facilities and mineral resources, but they also include a company's financial resources, technological resources, and organizational resources such as the company's communication and control systems.

Realized (current) strategy is a blend of:

1. proactive (deliberate) strategy 2. Reactive (emergent) strategy 3. abandoned and superseded strategy elements that no longer fit with the company's ongoing strategy - The evolving nature of a firm's strategy means that its strategy is a blend of: (1) proactive - planned initiatives to improve its financial performance and secure a competitive edge (2) reactive - responses to unanticipated developments and fresh market conditions. - in total, these elements combine to form the firm's realized strategy

Two factors that inhibit the ability of rivals to imitate a firm's most valuable resources and capabilities.

1. social complexity 2. casual ambiguity - Social complexity and causal ambiguity are 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.

Two approaches to identifying a firm's capabilities:

1.A complete listing of resources the firm has accumulated considering whether (and to what extent the firm has built up any related capabilities through their use). 2.A functional approach that identifies capabilities related to specific functions that draw on a limited set of resources involving a single department or organizational unit and cross-functional capabilities that are multidimensional—they spring from effective collaboration among people with different types of expertise working in different organizational units.

What does the strategy-making, strategy-executing process entail?

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 achieve its objectives 4.Executing the chosen strategy efficiently and effectively 5.Monitoring developments, evaluating performance, and initiating corrective adjustments - Crafting and executing a company's strategy is an ongoing process that consists of five interrelated stages. - revise as needed in light of the company's actual performance, changing conditions, new opportunities, and new ideas - A company's strategic plan lays out its future direction, performance targets, and strategy. - The first three stages of the strategic management process involve making a strategic plan.

Competitive pressures are stronger when:

1.Good substitutes are readily available and attractively priced. 2.Buyers view the substitutes as comparable or better in terms of quality. performance, and other relevant attributes. 3.The costs that buyers incur in switching to the substitutes are low.

Guidelines for creating group maps

1.Variables selected as map axes should not be highly correlated. 2.Variables should reflect important (sizable) differences among rival approaches. 3.Variables may be quantitative, continuous, discrete, or defined in terms of distinct classes and combinations. 4.Drawing group circles proportional to the combined sales of firms in each group will reflect the relative sizes of each strategic group. 5.Drawing maps using different pairs of variables will show the different competitive positioning relationships present in the industry's structure - Two variables selected as axes for the map should not be highly correlated; if they are, the circles on the map will fall along a diagonal and reveal nothing more about the relative positions of competitors than would be revealed by comparing the rivals on just one of the variables. - Strategic group maps reveal which firms are close competitors and which are distant competitors.

Relationships

alliances, joint ventures, or partnerships that provide access to technologies, specialized know-how, or geographic markets; networks of dealers or distributors; the trust established with various partners

Achieving effective corporate governance

A strong, independent board of directors: 1. Is well informed about the firm's performance. 2. Guides and judges the CEO and other executives. 3. Can curb management actions the board believes are inappropriate or unduly risky. 4. Can certify to shareholders that the CEO is doing what the board expects. 5. Provides insight and advice to top management. 6. Is intensely involved in debating the pros and cons of key strategic decisions and actions. - Effective corporate governance requires the board of directors to oversee the company's strategic direction, evaluate its senior executives, handle executive compensation, and oversee financial reporting practices.

Developing a company mission statement

A well-conceived company mission statement: - Uses specific language to give the firm its own unique identity - Describes the firm's current business and purpose—"who we are, what we do, and why we are here" - Focuses on describing the firm's business, not on "making a profit"—earning a profit is an objective, not a mission

Average collection period

Accounts receivable/Total sales ÷ 365 or Accounts receivable/Average 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.

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).

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% to 3%. The dividend yield for fast-growth firms is often below 1%; the dividend yield for slow-growth firms can run 4% to 5%.

Dividend payout ratio

Annual dividends per share/ Earnings per share - Indicates the percentage of after-tax profits paid out as dividends.

Is the collective strength of the five competitive forces conducive to good profitability?

Answers to three questions are needed: 1. Is the state of competition in the industry stronger than normal? 2. Can industry firms expect to earn decent profits given prevailing competitive forces? 3. Are some of the competitive forces sufficiently powerful to undermine industry profitability? - Even one powerful competitive force may be enough to make the industry unattractive in terms of its profit potential. - The strongest of the five forces determines the extent of the downward pressure on an industry's profitability. Having more than one strong force means that an industry has multiple competitive challenges with which to cope.

Question 5: Is the company competitively stronger or weaker than key rivals?

Assessing overall competitive strength - How does the firm rank relative to competitors on each of the important factors that determine market success? - Does the firm have a net competitive advantage or disadvantage versus major competitors? - Using resource analysis, value chain analysis, and benchmarking to determine a company's competitiveness on value and cost is necessary but not sufficient. - A more comprehensive assessment needs to be made of the firm's overall competitive strength. - The answers to two questions are of particular interest: First, how does the firm rank relative to competitors on each of the important factors that determine market success? - Second, all things considered, does the firm have a net competitive advantage or disadvantage versus major competitors? - 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 balanced scorecard strives to place:

Balanced emphasis on achieving both financial and strategic objectives by tracking measures of both financial performance and the competitiveness of its market position. - 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. - Despite its popularity, the balanced scorecard is not without limitations. - Importantly, it may not capture some of the most important priorities of a particular organization, such as resource acquisition or partnering with other organizations. - Further, its value, as with most strategy tools, depends on implementation and follow-through as much as on substance.

Competitive pressures stemming from buyer bargaining power and price sensitivity

Buyer bargaining power considerations - Strength of buyers' demand for sellers' products - Degree to which industry goods are differentiated - Buyers' costs for switching to competing sellers or substitutes - Number and size of buyers relative to number of sellers - Threat of buyers' integration into sellers' industry - Buyers' knowledge of products, costs and pricing - Buyers' discretion in delaying purchases - Buyers' price sensitivity due to low profits, size of purchase, and consequences of purchase Product quality not at issue price is primary concern -

Strategic management principle

Changing circumstances and ongoing management efforts to improve the strategy cause a firm's strategy to evolve over time—a condition that makes the task of crafting strategy a work in progress, not a one-time event - A firm's strategy is shaped partly by management analysis and choice and partly by the necessity of adapting and of learning by doing. 1. Every company must be willing and ready to modify the strategy in response to changing market conditions, advancing technology, unexpected moves by competitors, shifting buyer needs, emerging market opportunities, and mounting evidence that the strategy is not working well. 2.Most of the time, a company's strategy evolves incrementally from management's ongoing efforts to fine-tune the strategy and to adjust certain strategy elements in response to new learning and unfolding events. 3. Industry environments characterized by high velocity change require companies to repeatedly adapt their strategies

Converting the vision and mission into specific performance targets

Characteristics of well-stated objectives 1. specific 2. quantifiable (measurable) 2. challenging (motivating) 4. Deadline for achievement

Uniting the strategy-making heirachy

Components of a company's strategy up and down the strategy hierarchy should be cohesive and mutually reinforcing. 1. corporate 2. business 3. functional 4. operational - Ideally, the pieces and layers of a company's strategy should fit together like a jigsaw puzzle. - Anything less than a unified collection of strategies weakens company performance. - Achieving unity in strategy making is partly a function of communicating the company's basic strategy theme effectively across the whole organization and establishing clear strategic principles and guidelines for lower-level strategy making.

Focused differentiation

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

Focused low cost

Concentrating on a narrow price-sensitive buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals, and thus, being able to serve niche members at a lower price

Strategic group analysis

Consists of those industry members with similar competitive approaches and positions in the market - Having comparable product-line breadth - Emphasizing the same distribution channels - Depending on identical technological approaches - Offering the same product attributes to buyers - Offering similar services and technical assistance - 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.

Stage 4: Executing the strategy

Converting strategic plans into actions requires: 1. Directing organizational action 2. Motivating people 3. Building and strengthening the firm's competencies and competitive capabilities 4. Creating and nurturing a strategy-supportive work climate 5. Meeting or beating performance targets - 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 action, motivate people, build and strengthen competitive capabilities, create and nurture a strategy supportive work climate, and meet or beat performance targets.

Inventory turnover

Cost of goods sold /Inventory - Measures the number of inventory turns per year. Higher is better.

The profit formula:

Creates a cost structure that allows for acceptable profits, given that pricing is tied to the customer value proposition V - the value provided to customers P - the price charged to customers C - the firm's costs - the lower the costs (C) for a given customer value proposition (V-P), the greater the ability of the business model to be a moneymaker - 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

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 firm 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.

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.

Evaluating performances

Deciding whether the enterprise is passing the three tests of a winning strategy—good fit, competitive advantage, strong performance

Broad Differentiation

Differentiating the firm's product offering from rivals' with attributes that appeal to a broad spectrum of buyers

Matching company strategy to competitive conditions

Effectively matching a firm's business strategy to prevailing competitive conditions has two aspects: 1. Pursuing avenues that shield the firm from as many competitive pressures as possible 2. Initiating actions calculated to shift competitive forces in the firm's favor by altering underlying factors driving the five forces - Working through the five forces model step by step aids strategy-makers in assessing whether the intensity of competition allows good profitability and promotes sound strategic thinking about how to better match company strategy to the specific competitive character of the marketplace. - A company's strategy is strengthened when it provides some insulation from competitive pressures, shifts the competitive battle in the company's favor, and positions firms to take advantage of attractive growth opportunities.

Value chain analysis

Facilitates a comparison, activity-by-activity, of how effectively and efficiently a firm delivers value to its customers, relative to its competitors - 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. - 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. - is embedded in a larger system of activities that includes the value chains of its suppliers and the value chains of whatever wholesale distributors and retailers it utilizes in getting its product or service to end users. - This value chain system (sometimes called a vertical chain) has implications that extend far beyond the company's costs. - A firm'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.

Strategies for building competitive advantage

Five of the most frequently used strategic approaches to setting a firm apart from rivals and achieving a sustainable competitive advantage. 1. Low cost provider 2. Broad differentiation 3. Focused low cost 3. Focused differentiation 4. best-cost provider

Short term objectives

Focus attention on quarterly and annual performance improvements to satisfy near-term shareholder expectations.

PESTEL Analysis

Focuses on principal components of strategic significance in the macro-environment 1. Political factors 2. Economic conditions (local to worldwide) 3. Sociocultural forces 4. Technological factors 5. Environmental factors (the natural environment) 6. Legal and regulatory conditions - The macro-environment encompasses the broad environmental context in which a company's industry is situated that includes strategically relevant components over which the firm has no direct control. - 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).

Best cost provider

Giving customers more value for the money by satisfying buyers' expectations on key quality/features/performance/service attributes while beating their price expectations

Applying what you learned in this chapter

Google's browser-based Chrome operating system and its online applications suite are challenging Microsoft's long-term dominance of the office productivity application marketplace sectors. 1. What should be Microsoft's near-term response to this competitive challenge? 2. How will Microsoft's long-term response to this competitor's actions affect its business model? 3. Which competitor's strategy will likely be the eventual winner in the marketplace? Why? - Discussions of how strongly Microsoft will to respond to Google's growth as a competitor in the maturing office productivity applications marketplace is likely to be influenced by the choice of application suites that a respondent uses. - Emphasizing how rapidly technology changes occur in the electronic communications industry should bring an eventual recognition that, no matter how well a strategy performs in the market in its beginning, the changes in the market will eventually overwhelm its success.

Chief executive officer (CEO)

Has ultimate responsibility for leading the strategy-making process as the strategic visionary and chief architect of strategy.

Assumptions

How a rival's top managers think about their strategic situation can have a big impact on how the rival behaves.

Complements and the value net

How the value net differs from the five forces - Focuses on the interactions of industry participants with a particular (focal) company - Defines the category of competitors to include the focal firm's direct competitors, industry rivals, the sellers of substitute products, and potential entrants - Introduces a new category of industry participant—complementors—producers of products that enhance the value of the focal firm's products when they are used together - Not all interactions among industry participants are necessarily competitive in nature. - Some have the potential to be cooperative, as the value net framework demonstrates. - Like the five forces framework, the value net includes an analysis of buyers, suppliers, and substitutors. -But it differs from the five forces framework in several important ways.

Organizational resources

IT and communication systems (satellites, servers, workstations, etc.); other planning, coordination, and control systems; the company's organizational design and reporting structure

Strategy making involves managers at all organizational levels

In most companies, crafting strategy is a collaborative team effort that includes managers in various positions and at various organizational levels. - Crafting strategy is rarely something only high-level executives do.

SOAR Framework for competitors analysis

Indicators of a rival firm's likely strategic moves and countermoves 1. The rival firm's current strategy 2. The rival firm's objectives 3. The rival firm's assumptions about itself and its industry 4. The rival firm's resources and capabilities

What is our present situation?

Industry conditions and competitive pressures, market standing, competitive strengths and weaknesses, and future prospects in light of changes taking place in the business environment

Example of company objectives

Jet Blue, Lululemon Athletica, Inc., General Mills - Which company included the most specific strategic objectives in its listing of objectives? - Which company has the shortest-term focus based on its objectives? Which has the longest-term focus? - Which company's listing of objectives appears to best fit the balanced scorecard concept?

Times-interest-earned 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 increasing creditworthiness.

Existing strategy

SWOT insights into the firm's overall business situation can translate into recommended strategic actions.

New strategy

SWOT is the foundation for positioning the firm to use its strengths to seize opportunities and to shore up its competitive deficiencies to mitigate external threats

Gross profit margin

Sales revenues − Cost of goods sold/Sales revenues - Shows the percentage of revenues available to cover operating expenses and yield a profit.

Operating profit margin (or return on sales)

Sales revenues − Operating expenses/Sales revenues or Operating income/Sales revenues - 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.

The customer value proposition is:

Satisfying buyer wants and needs at a price customers will consider a good value - the greater the value provided (v) and the lower the price (r), the more attractive the value proposition is to customers - recall that any marketplace is simply a place to conduct an exchange of a perceived equality of values and prices for a good or service between a buyer and a seller

Stage 3: Crafting a strategy

Strategy making: 1. Addresses a series of strategic hows. 2. Requires choosing among strategic alternatives. 3. Promotes actions to do things differently from competitors rather than running with the herd. 4. Is a collaborative team effort that involves managers in various positions at all organizational levels. - Strategy is the result of piecing together critical 'how' statements such as how to attract and please customers, how to compete against key rivals, how to position the company in the marketplace, and many more. - Speed and entrepreneurship are key elements in growing in fast-paced markets. Therefore, strategy formulation should involve managers at all organizational levels and relies on innovative thinking.

Why crafting and executing strategy are important tasks

Strategy provides: - a prescription for doing business - a road map to competitive advantage - a game plan for pleasing customers - a formula for attaining long-term standout marketplace performance - Good strategy + good strategy execution = good management - How well a company performs is directly attributable to the caliber of its strategy and the proficiency with which the strategy is executed by its managers.

Competitive pressures stemming from supplier bargaining power

Supplier bargaining power depends on: - Strength of demand for and availability of suppliers' products. - Whether suppliers provide a differentiated input that enhances the performance of the industry's product. - Industry members' costs for switching among suppliers. - Size and number of suppliers relative to industry members. - Possibility of backward integration into suppliers' industry. - Fraction of the cost of the supplier's product relative to the total cost of the industry's product. - Availability of good substitutes for suppliers' products. Whether industry members are major customers of suppliers

A capability

The capacity of a firm to perform some activity proficiently (e.g., superior skills in marketing) - is the capacity of a firm to perform an internal activity competently through deployment of a firm's resources.

Stage 2: Setting objectives

The purposes of setting objectives: - To convert the vision and mission into specific, measurable, challenging yet achievable, deadline performance targets - To focus efforts and align actions throughout the organization - To serve as yardsticks for tracking a firm's performance and progress - To provide motivation and inspire employees to greater levels of effort - Concrete, measurable objectives are managerially valuable for three reasons: (1) They focus efforts 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.

Key financial ratios: how to calculate them and what they mean

The stronger a company's current overall performance, the more likely it has a well-conceived, well-executed strategy. - The weaker a company's financial performance and market standing, the more its current strategy must be questioned and the more likely the need for radical changes.

Question 1: How well is the company's present strategy working?

The three best indicators of how well a company's strategy is working are: 1.Whether it is achieving its stated financial and strategic objectives 2.Whether its financial performance is above the industry average 3.Whether it is gaining customers and gaining market share - Strategic success in a firm's present competitive approach requires asking: 1. Has the firm been successful actions in attracting customers and improving its market position? 2. Has the firm gained a sustainable competitive advantage based on low product costs or better product offerings? 3. Is the firm appropriately concentrating its resources on serving a broad spectrum of customers or a narrow market niche? 4. Are the firm's functional strategies in R&D, production, marketing, finance, human resources, information technology strengthening its competitive position? 5. Has the firm been successful in its efforts to establish alliances with other enterprises? - Persistent shortfalls in meeting its performance targets and weak marketplace performance relative to rivals are reliable warning signs that the firm has a weak strategy, suffers from poor strategy execution, or both.

V

The value provided to customers

Assessing the company's industry and competitive environment

Thinking strategically about the competitive environment requires managers to use some well validated concepts and analytical tools. 1. Five forces framework 2. The value net 3. Driving forces 4. Strategic groups 5. Competitor analysis 6. 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.

Is the company's strategy a winner?

Three test of a winning strategy: 1. exhibits good fit with situation 2. results in competitive advantage 3. promotes superior performance - Three questions above can be asked to test the merits of one strategy versus another and distinguish a winning strategy from a losing or mediocre strategy.

the road ahead

Throughout the remaining chapters and the accompanying case collection, the spotlight is trained on the foremost question in running a business enterprise: - What must managers do, and do well, to make a company a winner in the marketplace? - The mission of this book is to provide a solid overview of what every business student and aspiring manager needs to know about crafting and executing strategy.

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.

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.

Strategy is about asking the right questions

What must managers do, and do well, to make a firm a winner in the marketplace?

A company's strategy is a blend of proactive initiative and reactive adjustments

Two elements combine to form the company's Realized Strategy. - is a Blend of Proactive Initiatives and Reactive Adjustments, and illustrates the elements of strategy that become the Realized Strategy. - Strategy elements that prove unsuccessful are abandoned to be replaced by newly developed planned initiatives or reactive strategy elements in the current realized strategy. 1. Deliberate strategy (proactive strategy elements) - new planned initiative plus ongoing strategy elements continued from prior periods - they can abandon strategy elements here too 2. Emergent strategy (reactive strategy elements) - new strategy elements that emerge as managers react adaptively to changing circumstances - both of these achieve - A company's current or realized strategy

Adjusting strategy to prepare for the impacts of driving forces

What strategy adjustments will be needed to deal with the impacts of the driving forces? - What adjustments must be made immediately? - What actions currently being taken should be halted or abandoned? - What can we do now to prepare for adjustments we anticipate making in the future? - The third step in the strategic analysis of industry dynamics—where the real payoff for strategy making comes—is for managers to draw some conclusions about what strategy adjustments will be needed to deal with the impacts of the driving forces. - But taking the "right" kinds of actions to prepare for the industry and competitive changes being wrought by the driving forces first requires accurate diagnosis of the forces driving industry change and the impacts these forces will have on both the industry environment and the company's business.

The need for short term and long term objectives

When trade-offs must 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).

Examples of strategic visions statements - Whole Foods Market

Whole Foods Market is a dynamic leader in the quality food business. We are a mission-driven company that aims to set the standards of excellence for food retailers. We are building a business in which high standards permeate all aspects of our company. Quality is a state of mind at Whole Foods Market. Our motto—Whole Foods, Whole People, Whole Planet—emphasizes that our vision reaches far beyond just being a food retailer. Our success in fulfilling our vision is measured by customer satisfaction, team member happiness and excellence, return on capital investment, improvement in the state of the environment and local and larger community support. Our ability to instill a clear sense of interdependence among our various stakeholders (the people who are interested and benefit from the success of our company) is contingent upon our efforts to communicate more often, more openly, and more compassionately. Better communication equals better understanding and more trust. 1. effective elements: - forward-looking - graphic - focused - makes good business sense 2. shortcomings - too long - not memorable

A representative company value chain

a company's value chain consists of two broad categories of activities: - the primary activities foremost in creating value for customers and the requisite support activities that facilitate and enhance the performance of the primary activities. - The kinds of primary and secondary activities that constitute a company's value chain vary according to the specifics of a company's business; hence, the listing of the primary and support activities 1. Primary activities and costs: - supply chain management - operations - distribution - sales and marketing - service - profit margin 2. Support activities and costs - product R&D, technology and system development - human resources management - general administration

Casual ambiguity

about the how the firm uses its resources and relationships puts competitors at a loss in understanding how to imitate these complex resources.

Low cost provider

achieving a cost-based advantage over rivals

Financial resources

cash and cash equivalents; marketable securities; other financial assets such as a company's credit rating and borrowing capacity

What's our plan for running the company and achieving good results?

challenges managers to craft a series of competitive moves and business approaches - henceforth called a strategy - for heading the firm in the intended direction, staking out a market position, attracting customers, and achieving the targeted outcomes

VRIN Test

for sustainable competitive advantage asks if a resource or capability is Valuable, Rare, Inimitable, and Non-substitutable. 1. V: Is the resource (or capability) competitively valuable? 2. R: Is it rare—is it something rivals lack? 3. I: Is it hard to copy (inimitable)? 4. N: Is it invulnerable to the threat of substitution of different types of resources and capabilities (non-substitutable)? - The competitive power of a resource or capability is measured by how many of four specific tests it can pass. - These tests are referred to as the VRIN tests for sustainable competitive advantage—VRIN is a shorthand reminder standing for Valuable, Rare, Inimitable, and Nonsubstitutable. - 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. - Resources can contribute to a sustainable competitive advantage only when resource substitutes aren't on the horizon.

SWOT analysis

is a tool for identifying situational reasons underlying a firm's performance 1. Internal strengths (the basis for strategy) 2. Internal weaknesses (deficient capabilities) 3. Market opportunities (strategic objectives) 4. External threats (strategic defenses) - can help explain why a strategy is working well (or not) by taking a close look a company's strengths in relation to its weaknesses and in relation to the strengths and weaknesses of competitors. - Are the firm's strengths enough to make up for its weaknesses? - Has the firm's strategy built on these strengths and shielded the firm from its weaknesses? - Do the firm's strengths exceed those of its rivals? - Similarly, a SWOT analysis can help determine whether a strategy has been effective in fending off external threats and positioning the firm to take advantage of market opportunities. - SWOT analysis is a widely used diagnostic tool popular for its ease of use, also because it can be used to evaluate the efficacy of a strategy and as the basis for crafting a strategy from the outset to determine whether the firm is positioned to pursue new market opportunities and to defend against emerging threats to its future well-being. - Connect Activity Consider adding a LearnSmart assignment requiring the student to review this section of the chapter as an interactive question and answer review. The assignment can be graded and posted automatically.

Competence

is an activity that a firm has learned to perform with proficiency and at an acceptable cost—a true capability, in other words.

Core competence

is an activity that a firm performs proficiently and that is also central to its strategy and competitive success.

Firm's strategy

is at full power only when the many pieces of its strategy are united. - Anything less than a unified collection of strategies weakens the overall strategy and is likely to impair company performance. - four strategies impact each other

Strategy as a choice:

is deciding to compete differently from rivals - pressuring rivals by doing what they do not do or, even better doing what they cannot do - guides the company in what it must do and also in knowing what it must not do - is successful when its actions, business approaches and competitive moves appeal to buyers in ways that: 1. set it apart from its rivals by either providing products with higher perceived values or efficiently producing at lower costs 2. stake out a market position that is not crowded with strong competitors

the competitive advantage test

is it likely to result in a sustainable competitive advantage? - The bigger and more durable the competitive edge that a strategy helps build, the more powerful and appealing it is

The performance test

is it producing superior performance, as indicated by the firm's profitability, financial and competitive strengths, and market standing? - Is the strategy producing good company performance? - Which measures are reliable indicators of good strategic performance? - Be careful of measures that can be influenced by external factors or manipulated by internal actions (high sales with low margins).

Business Model

is management's plan 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. - A firm's business model sets forth the logic for how its strategy will create value for customers, while at the same time generate revenues sufficient to cover costs and realize a profit.

Strategy

is the coordinated set of actions that its managers take in order to outperform the company's competitors and achieve superior profitability - Understanding what is meant by strategy is essential to grasping the entirety of the strategy-making and implementation process. - Managers must eventually achieve success to continue as managers. - Success in strategic management requires a firm foundation of business knowledge, independent initiative, a broad-ranging intellect, strong intuitive and critical forward thinking, coordinated and sustained competitive effort (tasks are larger than individuals), and, most importantly, unimpeachable ethics and personal integrity.

The roles of dynamic capabilities

is the ongoing capacity of a firm to modify its existing resources and capabilities or create new ones. - Improve on existing resources and capabilities incrementally. - Add new resources and capabilities to the firm's competitive asset portfolio. - To sustain its competitiveness and help drive improvements in its performance, a firm requires a dynamically evolving portfolio of resources and capabilities. - Companies that know the importance of recalibrating and upgrading their most valuable resources and capabilities ensure that these activities are done on a continual basis. - By incorporating these activities into their routine managerial functions, they gain the experience necessary to be able to do them consistently well. - At that point, their ability to freshen and renew their competitive assets becomes a capability in itself—a dynamic capability.

C

the firm's costs

The value net

the firms 'value net' which includes suppliers, distributors and competitors whose interactions can enhance total industry profits and the profits of each member of the net

Company culture and incentive system

the norms of behavior, business principles, and ingrained beliefs within the company; the attachment of personnel to the company's ideals; the compensation system and the motivation level of company personnel

P

the price charged to customers

Using the five-forces model of competition

to determine the nature and strength of competitive pressures in a given industry involves three steps: Step 1: For each of the five forces, identify the different parties involved, along with the specific factors that bring about competitive pressures. Step 2: Evaluate how strong the pressures stemming from each of the five forces are (strong, moderate, or weak). Step 3: Determine whether the five forces, overall, are supportive of high industry profitability.

Senior executives

•Fashion the major strategy components involving their areas of responsibility.