TBUS 400 CH Reviews

Assessing the Company's Industry and Competitive Environment Do macro-environmental factors and industry characteristics offer sellers opportunities for growth and attractive profits? What kinds and strengths of competitive forces are present in the industry? How will forces driving change in the industry impact its competitive intensity and profitability? Which rivals are strongly positioned in the market and which are not? What strategic moves are rivals likely to make next? What are the key factors of competitive success? Does the industry outlook offer good prospects for profitability?

Question 1: What Are the Strategically Relevant Components of a Company's Macro-Environment? Relevant Factors: •Play a significant role in shaping management's decisions regarding the company's long-term direction, objectives, strategy, and business model. •Are on the immediate inner ring industry and competitive environment of the company—competitive pressures, the actions of rivals firms, buyer behavior, supplier-related considerations, and so on. 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.

TABLE 4.3 Illustration of a Competitive Strength Assessment

Table 4.3 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.

FIGURE 4.2 Representative Value Chain for an Entire Industry

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.

CORE CONCEPT: Blue Ocean Strategies Blue ocean strategies offer growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand.

Using Defensive Strategies to Protect a Company's Market Position and Competitive Advantage Defensive strategies defend against competitive challenges by: •Lowering the risk of being attacked. •Weakening the impact of any attack that occurs. •Influencing challengers to aim their competitive efforts at other rivals. Good defensive strategies help protect competitive advantage but rarely are the basis for creating it. In a competitive market, all firms are subject to offensive challenges from rivals. The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and induce challengers to aim their efforts at other rivals. While defensive strategies usually don't enhance a firm's competitive advantage, they can definitely help fortify the firm's competitive position, protect its most valuable resources and capabilities from imitation, and defend whatever competitive advantage it might have.

When Do the Five Competitive Forces Result in Attractive Industry Conditions? The ideal competitive environment for earning superior profits occurs when: •Suppliers and customers are in weak bargaining positions. •There are no good substitutes. •High entry barriers deter entry of new competitors. •Internal rivalry produces moderate competitive pressure. When the fire competitive forces are weak in an industry , the opportunity for industry competitors to earn profits increases.

When Do the Five Competitive Forces Result in Unattractive Industry Conditions? An industry is competitively unattractive when all five forces are producing strong competitive pressures. •Internal rivalry among competitors is strong. •Low entry barriers result in entry of new competitors. •Competition from substitutes is intense. •Suppliers and customers are in strong bargaining positions. Profitability is difficult or impossible to achieve when the competitive forces impacting an industry strongly interfere with the strategic actions of industry competitors.

The Danger of an Unsound Best-Cost Provider Strategy Losing at both ends of the market: •Dual vulnerability to both low-cost providers and high-end differentiators in not having: •the requisite core competencies and efficiencies in managing value chain activities to offer significantly differentiating product attributes. •features at attractive lower prices without significantly increasing costs. A company's biggest vulnerability in employing a best-cost strategy is getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies.

Core Concept: Competitive Strategy 2 A company's competitive strategy should be well matched to its internal situation and predicated on leveraging its collection of competitively valuable resources and competencies.

CORE CONCEPT: Low-Cost Leader A low-cost leader's basis for competitive advantage is lower overall costs than competitors. Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing "nonessential" activities and/or outmanaging rivals in performing essential activities.

Translating a Low-Cost Strategy into Attractive Profit Performance Option 1: Use a lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2: Maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold. A company has two options for translating a low-cost advantage over rivals into attractive profit performance.

When Is the Competitive Force of Rivalry Most Intense among Competing Sellers? Rivals can boost market standing and business performance. Competitors are equal in size and capability. Market growth slows or declines and lower demand results in no growth opportunities, excess capacity and inventory. It has become less costly for buyers to switch brands. Products of rival sellers have become more standardized. Industry conditions tempt competitors to use price cuts or other competitive weapons to boost unit volume. Competitors are dissatisfied with their market position. Strong outside firms acquire weak firms in the industry and launch aggressive, well-funded moves to build market share. The strongest of the five competitive forces is often the rivalry for buyer patronage among competing sellers of a product or service.

When Is the Competitive Force of Rivalry Among Competing Sellers Weak? The rivalry among industry competitors is usually weaker in industries where: •The products of industry rivals become more differentiated. •Markets or market segments are expanding and fast-growing. •Markets are comprised of vast numbers of small rivals; likewise, it is often weak when there are fewer than five competitors. The intensity of rivalry among competing sellers within an industry depends on a number of identifiable factors.

FIGURE 5.3 Important Value Drivers Creating a Differentiation Advantage, Text Alternative A figure lists the eight important value in a company's value chain. They are: input quality; innovation and technological advances; product features, design, and performance; production R and D; continuous quality improvement; employee skills and training; marketing and brand building; and customer service.

CHAPTER 6 Strengthening a Company's Competitive Position: Strategic Moves, Timing, and Scope of Operations Chapter 6 discusses that once a company has settled on which of the five generic competitive strategies to employ, attention turns to what other strategic actions it can take to complement its competitive approach and maximize the power of its overall strategy.

Concepts & Connections 6.3 Tesla's Vertical Integration Strategy What are the most important strategic benefits that Tesla derives from its vertical integration strategy? Over the long term, how could the vertical scope of Tesla's operations threaten its competitive position and profitability? Why is a vertical integration strategy more appropriate in some industries than in others? Concepts and Connections 6.3 discusses that, unlike many vehicle manufacturers, Tesla embraces vertical integration from component manufacturing all the way through vehicle sales and servicing. The majority of the company's $11.8 billion in 2017 revenue came from electric vehicle sales and leasing, with the remainder coming from servicing those vehicles and selling residential battery packs and solar energy systems.

CORE CONCEPTS: Backward and Forward Integration Backward integration involves performing industry value chain activities previously performed by suppliers or other enterprises engaged in earlier stages of the industry value chain Forward integration involves performing industry value chain activities closer to the end user.

Principal Offensive Strategy Options 2 Using hit-and-run or guerilla warfare tactics to grab sales and market share from complacent or distracted rivals. Launching a preemptive strike to capture a rare opportunity or secure an industry's limited resources. •Securing the best distributors in a particular geographic region or country. •Securing the most favorable retail locations. •Tying up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or even acquisition.

Choosing Which Rivals to Attack Best Targets for Offensive Attacks: •Market leaders that are vulnerable. •Runner-up firms with weaknesses in areas where the challenger is strong. •Struggling enterprises that are on the verge of going under. •Small local and regional firms with limited capabilities. Offensive-minded firms need to analyze which of their rivals to challenge as well as how to mount the challenge.

Guidelines for Strategic Group Map Construction The variables used as map axes must not be highly correlated. Variables must reflect large differences in how rivals are positioned to offer customer value in their marketplace. Variables can be either quantitative or continuous; can be discrete variables or distinct classes and combinations. Draw circle sizes proportional to combined sales of each strategic group to show the relative sizes of each strategic group. Use various competitive variables as map axes, multiple maps can show different views of competitive positioning in the industry. 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.

Concepts and Connections 3.1 Comparative Market Positions of Selected Firms in the Casual Dining Industry: A Strategic Group Map Example Concepts and Connections 3.1 shows a two-dimensional group mapping diagram for the U.S. casual dining industry.

CORE CONCEPT: Uniqueness Driver A uniqueness driver is a value chain activity or factor that can have a strong effect on customer value and creating differentiation. Easy-to-copy differentiating features cannot produce sustainable competitive advantage; differentiation based on hard-to-copy competencies and capabilities tends to be more sustainable. Differentiation can be based on tangible or intangible features and attributes. A value driver is a factor that can have a strong differentiating effect.

FIGURE 5.3 Important Value Drivers Creating a Differentiation Advantage Figure 5.3 contains a list of important value drivers.

The Value of a SWOT Analysis The value of a SWOT analysis is in: 1.Drawing conclusions from SWOT listings about the firm's overall situation. 2.Translating those conclusions into effective strategic actions that better match the firm's strategy to its strengths and market opportunities, correct problematic weaknesses, and defend against worrisome external threats. A SWOT analysis can help determine whether a strategy has been effective in fending of external threats and positioning the firm to take advantage of market opportunities.

Question 3: Are the Company's Cost Structure and Customer Value Proposition Competitive? Why are both cost structure and value important? •Delivering a profitable customer value proposition that maintains a competitive edge of over rivals requires effectively controlling the costs of differentiating features in industries where price competition is a dominant feature. Useful analytical tools: •Value chain analysis. •Benchmarking. Strategic Management Principle 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.

Blocking the Avenues Open to Challengers Blocking by: •Introducing new features. •Adding new models. •Broadening product line to fill vacant niches. •Maintaining economy-priced models. •Making early announcements about upcoming new products or planned price changes. •Granting volume discounts or better financing terms to dealers and distributors to discourage them from experimenting with other suppliers. Good defensive strategies can help protect a competitive advantage but rarely are the basis for creating one. There are many ways to throw obstacles in the path of would-be challengers. The most frequently employed approach to defending a company's present position involves actions that restrict a challenger's options for initiating a competitive attack.

Signaling Challengers That Retaliation Is Likely Publicly announce management's strong commitment to maintain the firm's present market share. Publicly commit firm to policy of matching rivals' terms or prices. Maintain a war chest of cash reserves and liquid securities. Make occasional strong counter-response to moves of weaker rivals to enhance the firm's image as a tough defender. The goal of signaling challengers that strong retaliation is likely in the event of an attack is either to dissuade challengers from attacking at all or to divert them to less threatening options. To be an effective defensive strategy, signaling needs to be accompanied by a credible commitment to follow through.

CORE CONCEPT: Broad Differentiation Strategy The essence of a broad differentiation strategy is to offer unique product or service attributes that a wide range of buyers find appealing and worth paying for.

Approaches to Differentiation Companies pursuing differentiation: •Unique taste: Red Bull, Doritos. •Multiple features: Microsoft Office, Apple iPhone. •Wide selection and one-stop shopping: Home Depot, Amazon.com. •Superior service: Ritz-Carlton, Nordstrom. •Spare parts availability: Caterpillar. •Engineering design and performance: Mercedes-Benz, BMW. •Luxury and prestige: Rolex, Gucci, Chanel. •Product reliability: Whirlpool and Bosch. •Quality manufacture: Michelin, Toyota and Honda. •Technological leadership: 3M Corporation. •Full range of services: Charles Schwab in stock brokerage. •Complete line of products: Campbell soups, Frito-Lay snack foods.

Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy Overly Aggressive Price Cutting: •Price cutting results in lower margins, no increase in sales volume and lower profitability. Relying on easily imitated cost reductions: •The value of a cost advantage depends on its sustainability. Becoming too fixated on cost reduction: •Buyer interest in additional features might be ignored. •Declining buyer sensitivity to price might be overlooked. •Technological breakthroughs might nullify cost advantages. Reducing price does not lead to higher total profits unless the added gains in unit sales are large enough to bring in a bigger total profit despite lower margins per unit sold. A low-cost producer's product offering must always contain enough attributes to be attractive to prospective buyers. Low price, by itself, is not always appealing to buyers.

Broad Differentiation Strategies Attractive competitive approaches to use whenever buyers' needs and preferences are too diverse to be fully satisfied by a standardized product or service. Successful execution of a differentiation strategy: •Involves offering differentiating features that clearly set the firm's products or services apart from rivals, allowing the firm to command a premium price. •Enhances profitability whenever the extra price the product commands outweighs the added costs of achieving differentiation that is not easily copied or matched by rivals. •Gains buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products). Differentiation enhances profitability whenever a company's product can command a sufficiently higher price or produce sufficiently greater unit sales to more than cover the added costs of achieving the differentiation. The essence of a broad differentiation strategy is to offer unique product attributes that a wide range of buyers find appealing and worth paying for

Question 7: Does the Industry Offer Good Prospects for Attractive Profits? Factors that determine a firm's prospects for attractive future profits in its industry include: •Both the firm's and its industry's growth potential. •Effects of internal industry competition. •Effects of prevailing and future driving forces. •The firm's competitive position in its industry vis-à-vis its rivals. •The firm's competence in performing the industry's key success factors. 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.

CH 4 Evaluating a Company's Resources, Capabilities, and Competitiveness Chapter 4 discusses techniques for evaluating a company's internal situation, including its collection of resources and capabilities and the activities it performs along its value chain. Internal analysis enables managers to determine whether their strategy is likely to give the company a significant competitive edge over rival firms. Combining internal and external analyses facilitates an understanding of how to reposition a firm to take advantage of new opportunities and to cope with emerging competitive threats.

The Relationship Between a Company's Strategy and Business Model Business Model. •Management's produces a blueprint for delivering a valuable product or service to customers that will yield an attractive profit. Elements of the Business Model. •The customer value proposition defines how the firm will satisfy buyer wants and needs at a price buyers will consider a good value. •The profit formula describes its approach to determining a cost structure that allows for acceptable profits given the pricing tied to its customer value proposition. 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. A 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.

CORE CONCEPT: Business Model A company's business model sets forth how its strategy and operating approaches will create value for customers, while at the same time generating ample revenues to cover costs and realizing a profit. The two elements of a company's business model are its customer value proposition and its profit formula. 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.

Competitive Strategies and Market Positioning Competitive Strategy: •Deals exclusively with the specifics of management's game plan for competing successfully in securing a particular competitive advantage over rivals that offers superior value to customers, strengthens its market position, and counters the maneuvers of its rivals. •The two principal factors that distinguish one competitive strategy from another are: •Whether a firm's market target is broad or narrow. •Whether the firm is pursuing a competitive advantage linked to lower costs or differentiation. 1.A company's competitive strategy deals exclusively with the specifics of management's game plan for competing successfully— its specific efforts to please customers, strengthen its market position, counter the maneuvers of rivals, respond to shifting market conditions, and achieve a particular kind of competitive advantage. 2.The biggest and most important differences among competitive strategies boil down to: a.Whether a company's market target is broad or narrow b.Whether the company is pursuing a competitive advantage linked to low costs or product differentiation

CORE CONCEPT: Competitive Strategy 1 A competitive strategy concerns the specifics of management's game plan for competing successfully and securing a competitive advantage over rivals in the marketplace.

The Importance of Dynamic Capabilities in Sustaining Competitive Advantage Management's organization-building challenge has two elements. 1.Attending to ongoing strengthening and recalibration of existing capabilities and resources 2.Casting a watchful eye for opportunities to develop totally new capabilities for delivering better customer value and/or outcompeting rivals 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,

CORE CONCEPT: Dynamic Capability A dynamic capability is the ability to modify, deepen, or reconfigure the company's existing resources and capabilities in response to its changing environment or market opportunities. 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.

Timing a Company's Offensive and Defensive Strategic Moves When to make a strategic move is often as crucial as what move to make. A first-mover can earn an advantage when: •Pioneering builds its reputation and creates strong brand loyalty. •First mover's customers will later face significant switching costs. •Property rights protections thwart rapid imitation of its initial move. •An early lead enables it to move down the learning curve ahead of its rivals. •As first mover, it can set the technical standard for the industry. Because of first-mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made.

CORE CONCEPT: First-Mover Strategies Because of first-mover advantages and disadvantages, competitive advantage can spring from when a move is made as well as from what move is made.

Question 6: What Are the Industry Key Success Factors? Key Success Factors (KSFs) are competitive factors that most affect the ability of all industry firms to prosper. KSFs include: •Specific product attributes. •Necessary resources, competencies, and capabilities. •Specific intangible assets. •Competitive capabilities. An industry's key success factors (KSFs) 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 by their very nature 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.

CORE CONCEPT: Key Success Factors Key success factors are the strategy elements, product attributes, competitive capabilities, or intangible assets with the greatest impact on future success in the marketplace.

CORE CONCEPTS: Social Complexity and Causal 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. 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.

CORE CONCEPT: Resource Bundles Companies that lack a standalone resource that is competitively powerful may nonetheless develop a competitive advantage through resource bundles that enable the superior performance of important cross-functional capabilities. Organizational capabilities 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. 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.

Is the Company Able to Seize Market Opportunities and Nullify External Threats? SWOT represents the first letter in: Strengths, Weaknesses, Opportunities, Threats. A well-conceived strategy is: •Matched to the firm's resource strengths and weaknesses. •Aimed at capturing the firm's best market opportunities. •Positioned to defend against external threats to its well-being. SWOT 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? 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.

CORE CONCEPT: SWOT Analysis SWOT analysis is a simple but powerful tool for sizing up a firm's internal strengths and competitive deficiencies, its market opportunities, and the external threats to its future well-being. 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.

Strengthening a Company's Market Position via Its Scope of Operations Scope of a Firm's Operations: •Describes the breadth and strength of its activities and the extent of its reach into geographic, product and service market segments. Dimensions of a Firm's Scope: •Breadth of its product and service offerings. •Range of activities it performs internally. •Extent of its geographic market presence. •Mix of businesses. The scope of the firm refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses. Scope issues are at the very heart of corporate-level strategy. Horizontal scope is the range of product and service segments that a firm serves within its focal market. Vertical scope is the extent to which a firm's internal activities encompass one, some, many, or all of the activities that make up an industry's entire value chain system, ranging from raw-material production to final sales and service activities.

CORE CONCEPT: Scope of the Firm The scope of the firm refers to the range of activities the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses.

Strategy and the Quest for Sustainable Competitive Advantage Strategic Approaches to a Sustainable Competitive Advantage: 1.A low-cost provider strategy achieves a cost-based advantage over rivals. 2.A broad differentiation strategy differentiates its products or services from rivals' in ways that appeal to a broad spectrum of buyers. 3.A focused low-cost strategy outcompetes rivals in a narrow/niche market by achieving lower costs and offering its products at lower prices. 4.A focused differentiation strategy outcompetes rivals in a narrow/niche market by offering buyers customized and exclusive attributes. 5.A best-cost provider strategy gives customers more value by satisfying their expectations on key attributes, while beating their price expectations. Five of the most frequently used strategic approaches to setting a company apart from rivals and achieving a sustainable competitive advantage are: •Low Cost Provider—Achieving a cost-based advantage over rivals. •Broad Differentiation—Seeking to differentiate the company's product or service from rivals' in ways that will appeal to a broad spectrum of buyers. •Focused Low Cost—Concentrating on a narrow 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 priced. •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. •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.

CORE CONCEPT: Sustainable Competitive Advantage A company achieves sustainable competitive advantage when an attractively large number of buyers develop a durable preference for its products or services over the offerings of competitors, despite the efforts of competitors to overcome or erode is advantage. The heart and soul of any strategy is the actions and moves in the market place 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.

Determining the Competitive Power of a Company's Resources and Capabilities VRIN Competitive Power Tests. •Is the resource or capability competitively valuable? •Is the resource or capability rare—something rivals lack? •Is the resource or capability inimitable or hard to copy? •Is the resource or capability nonsubstitutable or is it vulnerable to the threat of substitution from different types of resources and capabilities? The competitive power of a resource or capability is measured by how many of four specific tests it can pass.4 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.

CORE CONCEPT: VRIN Tests for Sustainable Competitive Advantage The VRIN tests for sustainable competitive advantage asks if a resource or capability is valuable, rare, inimitable, and nonsubstitutable. What is most telling about a company's aggregation of resources and capabilities is how powerful they are in the marketplace. The competitive power of a resource or capability is measured by how many of four VIRN tests for sustainable competitive advantage it can pass.

CH 1 Strategy, Business Models, and Competitive Advantage

Chapter 1 defines the concept of strategy and describes its many facets. The chapter explains what is meant by a competitive advantage, discusses the relationship between a company's strategy and its business model, and introduces the student to the kinds of competitive strategies that can give a company an advantage over rivals in attracting customers and earning above-average profits. The chapter examines what sets a winning strategy apart from others and why the caliber of a company's strategy determines whether it will enjoy a competitive advantage over other firms or be burdened by competitive disadvantage. By the end of this chapter, the student will have a clear idea of why the tasks of crafting and executing strategy are core management functions and why excellent execution of an excellent strategy is the most reliable recipe for turning a company into a standout performer over the long term.

Choosing Strategy Actions That Complement a Firm's Competitive Approach 1 Decisions regarding the firm's operating scope and how to best strengthen its market standing must be made: •When should to undertake strategic moves based upon whether it is advantageous to be a first mover or a fast follower or a late mover? •Whether and when to go on the offensive and initiate aggressive strategic moves to improve the firm's market position? If so, when? •Whether and when to employ defensive strategies to protect its market position? If so, when? To maximize the power of a strategy, a company must make choices about its competitive actions, how and when to take those actions, and increasing or decreasing the scope of its operations.

Choosing Strategy Actions That Complement a Firm's Competitive Approach 2 Decisions regarding broadening resources and increasing capabilities, achieving cost efficiencies, or strengthening market position. •Whether to integrate backward or forward into more stages of the industry value chain? •Which value chain activities, if any, should be outsourced? •Whether to enter into strategic alliances or partnership arrangements with other enterprises? •Whether to bolster its market position by merging with or acquiring another company in the same industry? The best offensives use a company's most powerful resources and capabilities to attack rivals in the areas where they are competitively weakest. Strategic offensives are called for when a company spots opportunities to gain profitable market share at its rivals' expense or when a company has no choice but to try to whittle away at a strong rival's competitive advantage

CORE CONCEPT: Value Chain A company's value chain identifies the primary activities that create customer value and related support activities. Value chain analysis facilitates a comparison of how rivals, activity by activity, deliver value to customers. Even rivals in the same industry may differ significantly in terms of the activities they perform. 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.

Concepts & Connections 4.1 The Value Chain for Boll & Branch ITEM COST Raw Cotton $28.16 Spinning/Weaving/Dyeing 12.00 Cutting/Sewing/Finishing 9.50 Material Transportation 3.00 Factory Fee 15.80 Cost of Goods $68.46 Inspection Fees 5.48 Ocean Freight/Insurance 4.55 Import Duties 8.22 Warehouse/Packing 8.50 Packaging 15.15 Customer Shipping 14.00 Promotions/Donations* 30.00 Total Cost $154.38 Boll & Brand Markup About 60% Boll & Brand Retail Price $250.00 Gross Margin** $95.62 Concepts & Connections 4.1 shows representative costs for various activities performed by Boll & Branch, a maker of luxury linens and bedding sold directly to consumers online

Revamping the Value Chain Reengineering the firm's value chain by: •Selling directly to consumers and cutting out the activities and costs of distributors and dealers. •Streamlining operations by eliminating low value-added or unnecessary work steps and activities. •Collaborating with suppliers to improve supply chain efficiency by reducing materials handling, shipping and inventory costs. Dramatic cost advantages can often emerge from redesigning the company's value chain system in ways that eliminate costly work steps and entirely bypass certain cost-producing value chain activities.

Concepts & Connections 5.1 Vanguard's Path to Becoming the Low-Cost Leader in Investment Management Describe Vanguard's business segment. How well are Vanguard's competitive strengths matched to the five forces in its competitive environment? Which of Vanguard's value chain activities would be most easily overcome by rivals? most difficult to overcome? Assume you have been tasked to revamp a rival's value chain activities to better compete with Vanguard. In what order of expected payoff should you attempt to revamp its value chain activities?

When a Focused Low-Cost or Focused Differentiation Strategy Is Viable The target market niche is big enough to be profitable and offers good growth potential. Industry leaders have chosen not to compete in the niche—focusers can avoid battling head-to-head against the biggest and strongest competitors. It is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers. The industry has many different niches and segments, allowing a focuser to pick a niche suited to its strengths and capabilities. Few rivals attempt to specialize in the same target segment. A focused strategy aimed at securing a competitive edge based on either low costs or differentiation becomes increasingly attractive as more of the following favorable conditions listed in the slide are met.

Concepts & Connections 5.3 Canada Goose's Focused Differentiation Strategy Which decisions did CEO Dani Reiss make that launched Canada Goods on its chosen strategic path? Which uniqueness drivers are responsible for the success of Canada Goose? Which of Canada Goose's uniqueness drivers are competitors likely to attempt to copy first? Concepts and Connections 5.3 describes how Canada Goose has been gaining attention with its focused differentiation strategy.

Blue Ocean Strategy—A Special Kind of Offensive A firm seeks a large and lasting competitive advantage by abandoning existing markets and inventing an exclusive new industry or market segment (open competitive space) that makes former competitors irrelevant. By "reinventing the circus," Cirque du Soleil annually attracts an audience of millions of people who typically do not attend circus events. A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand. The "blue ocean" represents wide-open opportunity, offering smooth sailing in uncontested waters for the company first to venture out upon it.

Concepts & Connections 6.1 Etsy's Blue Ocean Strategy in Online Retailing of Homemade Crafts Given the rapidity with which most first-mover advantages based on Internet technologies can be overcome by competitors, what has Etsy done thus far to retain its competitive advantage? Is Etsy's unique focused-differentiation entry into the online craft retailing a sufficiently strong and durable strategic move? What would you predict is the likelihood of long-term success for Etsy in the online craft retailing sector? Blue-ocean strategies provide a company with a great opportunity in the short run. But they don't guarantee a company's long-term success, which depends more on whether a company can protect the market position it opened up and sustain its early advantage.

CORE CONCEPTS: Strategic Group Mapping and Strategic Groups Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry. A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions. Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry. 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 are able to create and capture altogether new demand.

Constructing a Strategic Group Map Identify the competitive characteristics of strategic approaches used in the industry. •Typical variables: the price/quality range, geographic coverage, degree of vertical integration, product-line breadth, distribution channels, and degree of service offered. Plot firms on a two-variable map based upon their strategic approaches. Assign firms occupying the same map location to a common strategic group. Draw circles around each strategic group proportional to the size of the group's share of total industry sales revenues.

Benchmarking: A Tool for Assessing Whether a Company's Value Chain Activities Are Competitive Benchmarking entails comparing how different firms perform various value chain maintenance and then making cross-firm comparisons of the costs and effectiveness of these activities. •How materials are purchased. •How inventories are managed. •How products are assembled. •How customer orders are filled and shipped. •How maintenance is performed. Benchmarking 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 Strategic Management Principle Benchmarking the costs of a firm's activities against those of rivals provides hard evidence of whether the firm is cost-competitive.

Core Concepts: Benchmarking and Best Practices Benchmarking is a potent tool for learning which companies are best at performing particular activities and then using their techniques (or "best practices") to improve the cost and effectiveness of a company's own internal activities. A best practice is a method of performing an activity that consistently delivers superior results compared to other approaches. The objectives of benchmarking are to identify the best practices in performing an activity and to emulate those best practices when they are possessed by others.

The Potential for Late-Mover Advantages or First-Mover Disadvantages Late-mover advantages (or first-mover disadvantages) arise when: •Pioneering leadership is more costly than imitation. •A pioneering innovators' products are primitive, and do not living up to buyer expectations. •Potential buyers are skeptical about the benefits of a first-mover's new technology or product. •Rapid market evolution and technology changes allow fast followers and late movers to leapfrog pioneers with more attractive next-version products. There are six conditions in which first-mover advantages are likely to arise.

Deciding Whether to Be an Early Mover or Late Mover Key Issue: Is the race to market leadership a marathon or a sprint? Deciding to seek first-mover competitive advantage requires asking: •Does market takeoff depend on developing complementary products or services not currently available? •Is new infrastructure required before buyer demand can surge? •Will buyers need to learn new skills or adopt new behaviors? Will buyers encounter high switching costs? •Are there influential competitors in a position to delay or derail the efforts of a first-mover? In weighing the pros and cons of being a first mover versus a fast follower versus a late mover, it matters whether the race to market leadership in a particular industry is a marathon or a sprint. First-mover advantages can be fleeting, and there's ample time for fast followers and sometimes even late movers to catch up.

FIGURE 4.1 A Representative Company Value Chain 2

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.

TABLE 3.3 Common Types of Industry Key Success Factors 3 Skills- and capability-related key success factors Description: •A talented workforce (superior talent is important in professional services such as accounting and investment banking) •National or global distribution capabilities •Product innovation capabilities (important where rivals are racing to be first to market with new product attributes or performance features) •Design expertise (important in fashion and apparel industries) •Short delivery time capability •Supply chain management capabilities •Strong e-commerce capabilities—a user-friendly website and/or skills in using Internet applications to streamline internal operations Other types of key success factors Description: •Overall low costs (not just in manufacturing) to be able to meet low-price expectations of customers •Convenient locations (important in many retailing businesses) •Ability to provide fast, convenient, after-the-sale repairs and service •A strong balance sheet and access to financial capital (important in newly emerging industries with high degrees of business risk and in capital-intensive industries) •Patent protection

Examples of Industry Key Success Factors Expertise in a particular technology. Scale economies. Experience curve benefits. High capacity utilization. Strong network of wholesale distributors. Brand-building skills. Convenient retail locations.

Why Strategy Evolves over Time A strategy changes over time due to: •Unexpected moves of competitors. •Shifting buyer needs and preferences. •Emerging market opportunities. •Managers' new ideas for improving the strategy. •Mounting evidence strategy is not working well. A strategy evolves: •Incremental (minor) adjustments or dramatic (major) shifts. •Proactively and adaptively. 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.

FIGURE 1.1 A Company's Strategy Is a Blend of Planned Initiatives and Unplanned Reactive Adjustments Two elements combine to form the company's Realized Strategy. Figure 1.1, A Company's Strategy is a Blend of Proactive Initiatives and Reactive Adjustments, 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.

FIGURE 4.1 A Representative Company Value Chain 1, Text Alternative A figure shows that a company's value chain consists of two broad categories of activities: the primary activities and costs, and the support activities and costs. The primary activities and costs are: supply chain management; operations; distribution; sales and marketing; service; and profit margin. The support activities and costs are: product R and D, technology, and systems development; human resources management; and general administration.

FIGURE 4.1 A Representative Company Value Chain 2, Text Alternative

FIGURE 5.1 The Five Generic Competitive Strategies, Text Alternative A graphics shows how competitive strategies are differentiated from one another by one, whether a company's market target is broad or limited and two, whether the company is pursuing a competitive advantage linked to lower costs or differentiation. These factors comprise the two axes of the best-cost provider strategy. Aligned with the axes (broader market or limited market; pursuing lower costs or pursuing differentiation) are four text boxes which read: overall low-cost provider (broad market, lower cost); broad differentiation strategy (broad market, differentiating features); focused low-cost strategy (limited market, lower cost); and focused differentiation strategy (limited market, differentiating features).

FIGURE 5.2 Important Cost Drivers in a Firm's Value Chain, Text Alternative A figure lists the important cost drivers in a firm's value chain: labor productivity and compensation costs, economies of scale, learning and experience, capacity utilization, input costs, production technology and design, communication systems and information technology, bargaining power, and outsourcing or vertical integration.

The Competitive Force of Substitute Products The strength of competitive pressures from the sellers of substitute products depends on whether: •Substitutes are readily available and attractively priced. •Buyers view the substitutes as comparable or better in terms of quality, performance, and other relevant attributes. •The costs that buyers incur in switching to the substitutes are high or low. 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.

Figure 3.4 depicts three factors that determine whether the competitive pressures from substitute products are strong or weak. 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.

Cost-Efficient Management of Value Chain Activities Striving to capture all available economies of scale. Taking full advantage of experience and learning curve effects. Trying to operate facilities at full capacity. Substituting lower-cost inputs whenever there is little or no sacrifice in product quality or product performance. Employing advanced production technology and process design to improve overall efficiency. Using communication systems and information technology to achieve operating efficiencies. Using the company's bargaining power vis-à-vis suppliers to gain concessions. Being alert to the cost advantages of outsourcing and vertical integration. Pursuing ways to boost labor productivity and lower overall compensation costs. Particular attention must be paid to a set of factors known as cost drivers that have a strong effect on a company's costs and can be used as levers to lower costs.

Figure 5.2 shows the most important cost drivers

Concepts & Connections 5.2 Clinícas Del Azúcar's Focused Low-cost Strategy Which uniqueness drivers are responsible for the success of Clinícas del Azúcar? Which competitive conditions would mitigate against successful entry of the Clinícas del Azúcar into the U.S. diabetes care market? What part do customer expectations about patient-doctor relationships play in the delivery of health care in the U.S.? Concepts and Connections 5.2 describes how Clinícas del Azúcar's focus on lowering the costs of diabetes care is allowing to address a major health issue in Mexico.

Focused (or Market Niche) Strategies Focused strategies are developed especially for competing in a narrow piece of the total market as defined by geographic uniqueness or special product attributes. Focused strategies are appealing to smaller and medium-sized firms that may lack the breadth and depth of resources to tackle going after a whole market customer base. What sets focused strategies apart from broad low-cost and broad differentiation strategies is their concentrated attention on a narrow piece of the total market.

A Focused Low-Cost Strategy A strategy that aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and a lower price than rival competitors. A strategy that achieves its cost advantage in the same way as for low-cost leadership—by outmanaging rivals in keeping costs low and bypassing or reducing nonessential activities. A focused strategy aimed at securing a competitive edge based on either low costs or differentiation becomes increasingly attractive as more of the following favorable conditions listed in the slide are met

Focused Differentiation Strategy Focused differentiation strategy is keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers (as opposed to a broad differentiation strategy aimed at many buyer groups and market segments). Most markets contain a buyer segment willing to pay a price premium for the very finest items available, thus opening the strategic window for some competitors to pursue differentiation-based focused strategies aimed at the very top of the market pyramid.

CORE CONCEPTS: Horizontal and Vertical Scope Horizontal scope is the range of product and service segments that a firm serves within its focal market. Vertical scope is the extent to which a firm's internal activities encompass one, some, many, or all of the activities that make up an industry's entire value chain system, ranging from raw-material production to final sales and service activities.

Horizontal Merger and Acquisition Strategies Strategic options that can strengthen a firm's market position by: •Achieving operating scale and scope economies. •Gaining complementary competencies. •Extending current and new market and product opportunities. Merger: The combining of two or more firms into a single entity, with the newly created firm often taking on a new name. Acquisition: The combination in which one firm, the acquirer, purchases and absorbs the operations of another, the acquired firm. Mergers and acquisitions are much-used strategic options to strengthen a company's market position. A merger is the combining of two or more companies into a single corporate entity, with the newly created company often taking on a new name. An acquisition is a combination in which one company, the acquirer, purchases and absorbs the operations of another, the acquired.

Improving Value Chain Activities of Forward Channel Allies Combat forward channel cost disadvantages by: •Pressuring dealer-distributors and other forward channel allies to reduce their costs and markups. •Working with forward channel allies to identify win-win opportunities to reduce costs. •Changing to a more economical distribution strategy or integrate forward into company-owned retail outlets. Improve the customer value proposition by use of: •Cooperative advertising and promotions with forward channel allies. •Training programs for dealers, distributors, or retailers to improve the purchasing experience or customer service. •Creating and enforcing operating standards for resellers or franchisees to ensure consistent store operations. Any of three means can be used to achieve better cost-competitiveness in the forward portion of the industry value chain: 1.Pressure distributors, dealers, and other forward-channel allies to reduce their costs and markups. 2.Collaborate with forward channel intermediaries to identify win-win opportunities to reduce costs 3.Change to a more economical distribution strategy, including switching to cheaper distribution channels (selling direct via the Internet) or integrating forward into company-owned retail outlets. 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. Strategic Management Principle 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.

How Value Chain Activities Relate to Resources and Capabilities A company's value-creating activities are enabled by firm-specific resources and capabilities that are: •Valuable, rare and necessary preconditions for competitive advantage. •Effectively deployed in a value-creating activity. Strategic Management Principle 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.

Improving Internally Performed Value Chain Activities Implement the use of best practices throughout the firm. Eliminate cost-producing activities by revamping value chain. Relocate high-cost internal activities to lower-cost areas. Outsource internal activities to vendors or contractors to perform them more cheaply than in-house. Invest in productivity-enhancing, cost-saving technology. Find ways around activities or items where costs are high. Redesign products and/or components to economize on manufacturing or assembly costs. Reduce costs in supplier or forward portions of value chain system to make up for higher internal costs. Strategic approaches to reducing internally performed value chain activity costs that will improve a firm's cost-competitiveness by: •Implementing best practices throughout the firm, particularly for high-cost activities. •Redesigning the product and/or some of its components to eliminate high-cost components or facilitate speedier and more economical manufacture or assembly. •Relocating high-cost activities (such as manufacturing) to geographic areas where they can be performed more cheaply or outsource activities to lower-cost vendors or contractors. •Adopting technologies that spur innovation, improve design, and enhance creativity.

Improving Supplier-Related Value Chain Activities Remedying Supplier-Related Cost Disadvantages: •Pressure suppliers for lower prices. •Switch to lower-priced substitutes. •Collaborate closely with suppliers to identify mutual cost-saving opportunities. •Integrate backward into business of high-cost suppliers. Enhancing the Customer Value Proposition: •Select and retain best-quality performing suppliers. •Provide quality-based incentives to suppliers. •Integrate suppliers into the product design process. 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.

Delivering Superior Value via a Differentiation Strategy 1.Include product attributes and user features that lower the buyer's costs. 2.Incorporate tangible features that improve product performance. 3.Incorporate intangible features that enhance buyer satisfaction in noneconomic ways. Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can't—at least in terms of the level of satisfaction. The three basic routes to achieving this aim are listed in the slide content

Perceived Value and the Importance of Signaling Value A differentiation strategy's price premium reflects the value actually delivered to the buyer and the value perceived by the buyer. It is important to signal value when: •The nature of differentiation is subjective. •Buyers are making a first-time purchase. •Repurchase is infrequent. •Buyers are unsophisticated. Differentiation can be based on tangible or intangible attributes. Easy-to-copy differentiating features cannot produce a sustainable competitive advantage. The value of certain differentiating features is rather easy for buyers to detect, but in some instances, buyers may have trouble assessing what their experience with the product will be. Successful differentiators go to great lengths to make buyers knowledgeable about a product's value and employ various signals of value.

When a Differentiation Strategy Works Best 1.Buyer needs and uses of the product are diverse. 2.There are many ways to differentiate the product or service that have value to buyers. 3.Few rival firms are following a similar differentiation approach. 4.Technological change is fast-paced and competition revolves around rapidly evolving product features. Differentiation strategies tend to work best in market circumstances where differentiation yields a longer-lasting and more profitable competitive edge that is based on a well-established brand image, patent-protected product innovation, complex technical superiority, a reputation for superior product quality and reliability, relationship-based customer service, and unique competitive capabilities.

Pitfalls to Avoid in Pursuing a Differentiation Strategy •Pursuing a differentiation strategy keyed to product or service attributes that are easily and quickly copied. •Offering product features or unique attributes in which buyers see little value or are easily copied by rivals. •Overspending on efforts to differentiate that erode profitability. •Not establishing meaningful gaps in quality or service or performance features over the products of rivals. •Over-differentiating so that product quality or service levels exceed buyers' needs. •Trying to charge too high a price premium for the differentiating feature over lesser differentiated products or services. Any differentiating feature that works well is a magnet for imitators. This is why a firm must seek out sources of value creation that are time-consuming or burdensome for rivals to match if it hopes to use differentiation to win a sustainable competitive edge. Overdifferentiating and overcharging are fatal strategy mistakes.

Launching Strategic Offensives to Improve a Company's Market Position Aggressive offensives are called for when a firm: •Spots opportunities to gain profitable market share at the expense of rivals. •Has no choice but to try to whittle away at a strong rival's competitive advantage. •Can reap the benefits of a competitive edge offers—a leading market share, excellent profit margins, and rapid growth. The best offensives use a firm's resource strengths to attack its rivals' weaknesses. Sometimes a company's best strategic option is to seize the initiative, go on the attack, and launch a strategic offensive to improve its market position. No matter which of the five generic competitive strategies a firm employs, there are times when a company should go on the offensive to improve its market position and performance

Principal Offensive Strategy Options 1 Offering an equally good or better product at lower price. Leapfrogging competitors by being the first to market with next-generation technology or products. Pursuing continuous product innovation to draw sales and market share away from less innovative rivals. Pursuing disruptive product innovations to create new markets. Adopting and improving on the good ideas of other firms (rivals or otherwise). How long it takes for an offensive move to improve a company's market standing—and whether the move will prove successful—depends in part on whether market rivals recognize the threat and begin a counter-response. Whether rivals will respond depends on whether they are capable of making an effective response and if they believe that a counterattack is worth the expense and the distraction.

Evaluating a Firm's Internal Situation Question 1 How well is the firm's strategy working? Question 2 What are the firm's competitively important resources and capabilities? Question 3 Are the firm's cost structure and customer value proposition competitive? Question 4 Is the firm competitively stronger or weaker than key rivals? Question 5 What strategic issues and problems merit front-burner managerial attention? The answers to these five questions complete management's understanding of the company's overall situation and position the company for a good strategy-situation fit required by the "The Three Tests of a Winning Strategy"

Question 1: How Well Is the Firm's Strategy Working? The two best indicators of how well a firm's strategy is working are: 1.Whether the firm is recording gains in financial strength and profitability. 2.Whether the firm's competitive strength and market standing is improving. Strategic success in a firm's present competitive approach requires asking: •Has the firm been successful actions in attracting customers and improving its market position? •Has the firm gained a sustainable competitive advantage based on low product costs or better product offerings? •Is the firm appropriately concentrating its resources on serving a broad spectrum of customers or a narrow market niche? •Are the firm's functional strategies in R&D, production, marketing, finance, human resources, information technology strengthening its competitive position? •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.

Other Strategy Performance Indicators Trends in the firm's sales and earnings growth. Trends in the firm's stock price. The firm's overall financial strength. The firm's customer retention rate. The rate at which new customers are acquired. Changes in firm's image and reputation with customers. Evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity. Specific indicators of how well a firm's strategy is working include: •Trends in the company's sales and earnings growth. •Trends in the company's stock price. •The company's overall financial strength. •The company's customer retention rate. •The rate at which new customers are acquired. •Evidence of improvement in internal processes such as defect rate, order fulfillment, delivery times, days of inventory, and employee productivity. Strategic Management PrincipleSluggish financial performance and second-rate market accomplishments almost always signal weak strategy, weak execution, or both.

Question 2: What Are the Company's Competitively Important Resources and Capabilities? A company's strategy and business model: •Must be well matched to its collection of resources and capabilities. •Requires a tight fit with a company's internal situation. •Is strengthened when exploiting resources that are competitively valuable, rare, hard to copy, and not easily trumped to rivals' equivalent substitute resources. A firm's resources and capabilities are its competitive assets and determine whether its competitive power in the marketplace will be impressively strong or disappointingly weak. Companies with second-rate competitive assets nearly always are relegated to a trailing position in the industry. 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.

Common Driving Forces Changes in the long-term industry growth rate. Increasing globalization. Emerging new Internet capabilities and applications. Changes in who buys the product and how they use it. Product innovation. Technological change and manufacturing process innovation. Marketing innovation. Entry or exit of major firms. Diffusion of technical know-how across more companies and more countries. Changes in cost and efficiency. Growing buyer preferences for differentiated products instead of a standardized commodity product (or for standardized products instead of strongly differentiated products). 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

Question 4: How Are Industry Rivals Positioned? Strategic Group Mapping. •It is a useful technique for graphically displaying different market or competitive positions that rival firms occupy in the industry. A Strategic Group. •It is a cluster of industry rivals that have similar competitive approaches and market positions. The best technique for revealing the market positions of industry competitors is strategic group mapping. 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.

Interpreting the Competitive Strength Assessments Show how a firm compares against its rivals, factor by factor or capability by capability. Indicate whether a firm is at net competitive advantage or disadvantage against each rival. Provide guidelines for designing wise offensive and defensive strategies. Point to competitive weaknesses of the firm that will require defensive moves to correct. 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.

Question 5: What Strategic Issues and Problems Must Be Addressed by Management? The final and most important analytical step is to focus management on crucial strategic issues. •Precise pinpointing of problems sets the agenda for actions to take next to improve the firm's performance and business outlook. •Compiling a "worry list" of problems and issues creates an agenda for managerial strategy making. 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. Good company situation analysis, like good industry and competitive analysis, is a valuable precondition for good strategy making.

The Value of Strategic Group Maps The closer groups are to each other on the map, the stronger the cross-group rivalry. •Firms in groups that are far apart hardly compete. Not all map positions are equally attractive. •Some groups are more favorably positioned because they confront weaker competitive forces. •Industry driving forces favor some groups over others. •Competitive pressures cause profit potential differences. 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?

Question 5: What Strategic Moves Are Rivals Likely to Make Next? Framework for Analysis of Rival Competitors •Current Strategy? •Rival's market position, competitive advantage basis, and its investments in infrastructure, technology, or other resources. •Objectives? •Its performance on current financial and strategic objectives. •Capabilities? •Its current set of capabilities and efforts to acquire new capabilities related to future strategic moves. •Assumptions? •Views and beliefs of rival's top managers about their firm's strategic situation can strongly impact their future behaviors. Studying competitors' past behavior and preferences provides a valuable assist in anticipating what moves rivals are likely to make next and 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?

CORE CONCEPTS: Resource and Capability A resource is a competitive asset that is owned or controlled by a firm; a capability is the capacity of a firm to competently perform some internal activity. Capabilities are developed and enabled through the deployment of a firm's resources. A resource is a competitive asset that is owned or controlled by a firm. A capability or competence is the capacity of a firm to perform an internal activity competently through deployment of a firm's resources. A firm's 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.

Resource and Capability Analysis Analyzing the resources and capabilities of a company is a two-step process. 1.Identify the company's most competitively important resources and capabilities. 2.Apply the four tests of competitive power to ascertain which resources and capabilities can support a sustainable competitive advantage over rival firms. Organizational capabilities 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. 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.

Managing the Value Chain in Ways That Enhance Differentiation Activities That Enhance Differentiation. •Seeking out high-quality inputs. •Striving for innovation and technological advances. •Creating superior product features, design, and performance. •Production-related research and development activities. •Pursuing continuous quality improvement. •Emphasizing human resource management activities. •Emphasizing marketing and brand-building activities. •Improving customer service or adding additional services. Differentiation is not something hatched in marketing and advertising departments, nor is it limited to the catchalls of quality and service. Differentiation opportunities can exist in activities all along an industry's value chain. The most systematic approach that managers can take, however, involves focusing on the value drivers, a set of factors—analogous to cost drivers—that are particularly effective in creating differentiation.

Revamping the Value Chain System to Increase Differentiation Approaches to enhancing differentiation through changes in the value chain system. •Coordinating with downstream channel allies to enhance customer value. •Coordinating with upstream suppliers to better address customer needs. Just as pursuing a cost advantage can involve the entire value chain system, the same is true for a differentiation advantage. Activities performed upstream by suppliers or downstream by distributors and retailers can have a meaningful effect on customers' perceptions of a company's offerings and its value proposition

Question 4: What Is the Company's Competitive Strength Relative to Key Rivals? Determining a company's overall competitive position requires answering two questions. 1.How does the company rank relative to competitors on each of the important factors that determine market success? 2.Does the company have a net competitive advantage or disadvantage versus its 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? Strategic Management Principles High-weighted competitive strength ratings signal a strong competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage.

Steps in a Competitive Strength Assessment Step 1 List the industry's key success factors and other measures of competitive strength or weakness (6 to 10 measures). Step 2 Assign a weight to each measure of competitive strength based on its importance in shaping competitive success. (The sum of the weights for each measure must add up to 1.0.) Step 3 Calculate strength ratings by scoring each competitor on each strength measure (use a scale where 1 is weak and 10 is strong) and multiplying the assigned rating by the assigned weight. Step 4 Sum the weighted strength ratings on each factor to get an overall measure of competitive strength for each company being rated. Step 5 Use the overall strength ratings to draw conclusions about the size and extent of the firm's net competitive advantage or disadvantage and to take specific note of areas of strength and weakness.

The Value Chain System for an Entire Industry The value chains of forward channel partners are relevant because: •Costs and margins of the activities of distributors and retail dealers are part of the price the consumer pays and can strongly affect a firm's customer value proposition. •Accurately assessing the competitiveness of a firm's cost structure and value proposition helps its managers understand both an industry's value chain system and its internal value chain. The lesson here is that a company's value chain activities are often closely linked to the value chains of its suppliers and the forward allies.

Strategic Options for Remedying a Cost or Value Disadvantage There are three main areas of a firm's overall value chain where cost differences with rivals can occur. •A firm's own internal activities. •Value chain activities performed by suppliers. •Value chain activities performed by forward channel allies. 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.

CHAPTER 5 The Five Generic Competitive Strategies Chapter 5 describes the five basic competitive strategy options—which of the five to employ is a company's first and foremost choice in crafting overall strategy and beginning its quest for competitive advantage. This chapter describes the five generic competitive strategy options. Each of the five generic strategies represents a distinctly different approach to competing in the marketplace. Each of the five generic strategies represents a distinctly different approach to competing in the marketplace. Which of the five to employ is a company's first and foremost choice in crafting an overall strategy and beginning its quest for competitive advantage.

Strategy and the Value Proposition Competing to successfully gain a competitive advantage involves giving buyers what they perceive as a superior value proposition by offering: •A good product at a lower price. •A superior product that is worth paying more for. •A best-value product that represents an attractive combination of price, features, quality, service, and other appealing attributes.

What Is Strategy?

Strategy involves choosing how to compete. How to create products or services that attract and please customers. How to position the company in its industry. How to develop and deploy resources to build valuable competitive capabilities. How each functional piece of the business (research and development, supply chain activities, production, sales and marketing, distribution, finance, and human resources) will be operated. How to achieve the firm's performance targets. Normally, companies have a wide degree of strategic freedom in choosing the "hows" of strategy: How to create products or services that attract and please customers. How to position the company in its industry. How to develop and deploy resources to build valuable competitive capabilities. How each functional piece of the business (R&D, supply chain activities, production, sales and marketing, distribution, finance, and human resources) will be operated. How to achieve the firm's performance targets.

Successful Competitive Strategies Are Resource Based 1 Low-Cost Providers.. •Must have the resources and capabilities to keep their costs below those of their competitors. •Must have expertise to cost-effectively manage value chain activities better than rivals. Differentiators. •Must have the resources and capabilities to incorporate unique attributes that a broad range of buyers will find appealing and are will paying for. A company's competitive strategy should be well-matched to its internal situation and predicated on leveraging its collection of competitively valuable resources and capabilities. For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

Successful Competitive Strategies Are Resource Based 2 Narrow Segment Focusers. •Must have the capability to do an outstanding job of satisfying the needs and expectations of niche buyers. Best-Cost Providers. •Must have the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals.

Questions to Ask in Identifying Industry Key Success Factors Which crucial product attributes do industry buyers consider when choosing between competing sellers? Which resources and competitive capabilities must a company have to be competitively successful? Which shortcomings are certain to put a company at a significant competitive disadvantage to its rivals? Key success factors vary from industry to industry, and even from time to time within the same industry, as change drivers and competitive conditions change. But regardless of the circumstances, an industry's key success factors can always be deduced by asking the same three questions shown on this slide.

TABLE 3.3 Common Types of Industry Key Success Factors 1 Technology-related key success factors Description: •Expertise in a particular technology or in scientific research (important in pharmaceuticals, Internet applications, mobile communications, and most high-tech industries) •Proven ability to improve production processes (important in industries where advancing technology opens the way for higher manufacturing efficiency and lower production costs) Manufacturing-related key success factors Description: •Expertise in a particular technology or in scientific research (important in pharmaceuticals, Internet applications, mobile communications, and most high-tech industries) •Proven ability to improve production processes (important in industries where advancing technology opens the way for higher manufacturing efficiency and lower production costs)

TABLE 3.3 Common Types of Industry Key Success Factors 2 Distribution-related key success factors Description: •A strong network of wholesale distributors/dealers •Strong direct sales capabilities via the Internet and/or having company-owned retail outlets •Ability to secure favorable display space on retailer shelves Marketing-related key success factors Description: •Breadth of product line and product selection •A well-known and well-respected brand name •Fast, accurate technical assistance •Courteous, personalized customer service •Accurate filling of buyer orders (few back orders or mistakes) •Customer guarantees and warranties (important in mail-order and online retailing, big-ticket purchases, and new-product introductions) •Clever advertising

TABLE 3.3 Common Types of Industry Key Success Factors 2 Distribution-related key success factors Description: •A strong network of wholesale distributors/dealers •Strong direct sales capabilities via the Internet and/or having company-owned retail outlets •Ability to secure favorable display space on retailer shelves Marketing-related key success factors Description: •Breadth of product line and product selection •A well-known and well-respected brand name •Fast, accurate technical assistance •Courteous, personalized customer service •Accurate filling of buyer orders (few back orders or mistakes) •Customer guarantees and warranties (important in mail-order and online retailing, big-ticket purchases, and new-product introductions) •Clever advertising

TABLE 4.1 Common Types of Tangible and Intangible Resources (1 of 2) Tangible Resource and Description: Physical resources: State-of-the-art manufacturing plants and equipment, efficient distribution facilities, attractive real estate locations, or ownership of valuable natural resource deposits Financial resources Cash and cash equivalents, marketable securities, and other financial assets such as a company's credit rating and borrowing capacity Technological assets Patents, copyrights, superior production technology, and technologies that enable activities Organizational resources Information and communication systems (servers, workstations, etc.), proven quality control systems, and strong network of distributors or retail dealers Table 4.1.1 lists the common types of tangible resources that a company may possess.

TABLE 4.1 Common Types of Tangible and Intangible Resources (2 of 2) Intangible Resource and Description: Human assets and intellectual capital: An experienced and capable workforce, talented employees in key areas, collective learning embedded in the organization, or proven managerial know-how Brand, image, and reputational assets Brand names, trademarks, product or company image, buyer loyalty, and reputation for quality, superior service Relationships Alliances or joint ventures that provide access to technologies, specialized know-how, or geographic markets, and trust established with various partners Company culture The norms of behavior, business principles, and ingrained beliefs within the company

TABLE 4.2 Factors to Consider When Identifying a Company's Strengths, Weaknesses, Opportunities, and Threats (3 of 4) Potential Market Opportunities: •Serving additional customer groups or market segments. •Expanding into new geographic markets. •Expanding the firm's product line to meet a broader range of customer needs. •Utilizing existing company skills or technological know-how to enter new product lines or new businesses. •Falling trade barriers in attractive foreign markets. •Acquiring rival firms or companies with attractive technological expertise or capabilities. Table 4.2-3 displays a sampling of potential market opportunities. 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.

TABLE 4.2 Factors to Consider When Identifying a Company's Strengths, Weaknesses, Opportunities, and Threats (4 of 4) Potential External Threats to a Company's Future Prospects: •Increasing intensity of competition among industry rivals—may squeeze profit margins. •Slowdowns in market growth. •Likely entry of potent new competitors. •Growing bargaining power of customers or suppliers. •Buyer needs and tastes shift away from the industry's product. •Adverse demographic changes that threaten to curtail demand for the industry's product. •Vulnerability to unfavorable industry driving forces. •Restrictive trade policies on the part of foreign governments. •Costly new regulatory requirements. Table 4.2-4 displays a sampling of potential threats. 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

TABLE 4.2 Factors to Consider When Identifying a Company's Strengths, Weaknesses, Opportunities, and Threats 1 Potential Internal Strengths and Competitive Capabilities: •Core competencies. •A strong financial condition; ample financial resources to grow the business. •Strong brand name image/company reputation. •Economies of scale and/or learning and experience curve advantages over rivals. •Proprietary technology/superior technological skills/important patents. •Cost advantages over rivals. •Product innovation capabilities. •Proven capabilities in improving production processes. •Good supply chain management capabilities. •Good customer service capabilities. •Better product quality relative to rivals. •Wide geographic coverage and/or strong global distribution capability. •Alliances/joint ventures with other firms that provide access to valuable technology competencies, and/or attractive geographic markets. Table 4.2-1 lists many of the things to consider in compiling a company's 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

TABLE 4.2 Factors to Consider When Identifying a Company's Strengths, Weaknesses, Opportunities, and Threats 2 Potential Internal Weaknesses and Competitive Deficiencies: •No clear strategic direction. •No well-developed or proven core competencies. •A weak balance sheet; burdened with too much debt. •Higher overall unit costs relative to key competitors. •A product/service with features and attributes inferior to those of rivals. •Too narrow a product line relative to rivals. •Weak brand image or reputation. •Weaker dealer network than key rivals. •Behind on product quality, R&D, and/or technological know-how. •Lack of management depth. •Short on financial resources to grow the business and pursue promising initiatives.

CORE CONCEPT: Vertical Integration A vertically integrated firm is one that performs value chain activities along more than one stage of an industry's overall value chain. A vertical integration strategy has appeal only if it significantly strengthens a firm's competitive position and/or boosts its profitability.

The Advantages of a Vertical Integration Strategy There are two best reasons for vertically integrating into more value chain segments: •Strengthening the firm's competitive position. •Boosting its profitability. Under the right conditions, a vertical integration strategy can add materially to a company's technological capabilities, strengthen the firm's competitive position, and boost its profitability. But it is important to keep in mind that vertical integration has no real payoff strategy-wise or profit-wise unless the extra investment can be justified by compensating improvements in company costs, differentiation, or competitive strength.

Industry Rivalry Cutthroat (Brutal). •Competitors engage in protracted price wars or employ other aggressive tactics mutually destructive to profitability. Fierce (Strong). •A vigorous market share battle reduces the profit margins of most industry rivals to bare-bones levels. Moderate (Normal). •Maneuvering among industry rivals, while lively and healthy, still allows most rivals to earn acceptable profits. Weak. •Industry rivals satisfied with their sales growth and market share rarely undertake offensives against their competitors. The competitive strengths of individual industry rivals and the strengths of the five competitive forces acting on the industry interactively combine to intensify or diminish the competitive nature of the industry.

The Collective Strengths of the Five Competitive Forces and Industry Profitability As a rule, the stronger the collective impact of the five competitive forces, the lower the combined profitability of industry participants. The stronger the forces of competition, the harder it becomes for industry members to earn attractive profits. The five competitive forces are never is a static mode. One or all of the forces are changing, either increasing or decreasing in their individual and collective effects on the potential for competitors to operate at a profit in an industry. Assessing whether each of the five competitive forces gives rise to strong, moderate, or weak competitive pressures sets the stage for evaluating whether, overall, the strength of the five forces is conducive to good profitability. Are any of the competitive forces sufficiently powerful to undermine industry profitability? Can industry firms reasonably expect to earn decent profits in light of the prevailing competitive forces? 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.

The Competitive Force of Supplier Bargaining Power 1 Industry suppliers can exert substantial bargaining power or leverage if: •The supplied item is not a commodity readily available from many suppliers. •Industry members cannot switch their purchases to another supplier or switch to attractive substitutes. •Certain required inputs are in short supply. •Certain suppliers provide a differentiated item that enhances the desired performance, quality, or image of the industry's product. Whether the suppliers of industry members represent a weak or strong competitive force depends on the degree to which suppliers have sufficient bargaining power to influence the terms and conditions of supply in their favor. Suppliers with strong bargaining power are a source of competitive pressure because of their ability to charge industry members higher prices, pass costs on to them, and limit their opportunities to find better deals.

The Competitive Force of Supplier Bargaining Power 2 Industry suppliers can exert substantial bargaining power or leverage when: •They provide specialized equipment or services that yield cost savings to industry members in conducting their operations. •A large fraction of the costs of the buyer industry's product is accounted by the cost of a particular input. •Industry members are not major or large customers of suppliers. •It does not make good economic sense for industry members to vertically integrate backward. Suppliers with strong bargaining power are a source of competitive pressure because of their ability to charge industry members higher prices, pass costs on to them, and limit their opportunities to find better deals.

Chapter 3 presents the concepts and analytical tools for assessing a company's external environment. Attention centers on the competitive arena in which a company operates, together with the technological, societal, regulatory, or demographic influences in the macro-environment that are acting to reshape the company's future market arena. This chapter presents the concepts and analytical tools for zeroing in on a single-business company's external environment.

The First Test of a Winning Strategy: "How well does the current strategy fit the company's situation?" Two facets of the company's situation: •Its external environment— industry and competitive environments in which it operates. •Its internal environment—the company's resources and organizational capabilities. 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.

Question 2: How Strong Are the Industry's Competitive Forces? State of Competition: Where are we now? •The dynamics of competition are not the same from one industry to another. The Five-forces Model of Competition: •It is the most powerful and widely used tool for assessing the strength of the competitive forces that affect an industry's attractiveness. 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.

The Five Competitive Forces Affecting Industry Attractiveness Competitive pressures: •Bargaining power of buyers. •Substitute products of firms in other industries. •Bargaining power of suppliers. •The threat of new entrants into the market. •Rivalry among competing sellers. The character and strength of the competitive forces operating in an industry are never the same from one industry to another. The most powerful and widely used tool for diagnosing the principal competitive pressures in a market is the five forces framework. This five forces framework, depicted in Figure 3.2, holds that competitive pressures on to the industry, (3) potential new entrants companies within an industry come from five sources. These include (1) competition from rival sellers, (2) competition from competition from producers of substitute products, (4) supplier bargaining power, and (5) customer bargaining power.

Concepts and Connections 1.2Apple Inc.'s Strategy and Success in the Marketplace •Designing and developing its own operating systems, hardware, application software, and services. •Continuously investing in research and development (R&D) and frequently introducing products. •Strategically locating its stores and staffing them with knowledgeable personnel. •Expanding Apple's reach domestically and internationally. •Sustaining a competitive edge by focusing on its inimitable value proposition and deliberately keeping a price premium. •Committing to corporate social responsibility and sustainability through supplier relations. •Cultivating a diverse workforce rooted in transparency. Starbucks is focused on enhancing the customer experience in its stores. 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

The Importance of Capabilities in Building and Sustaining Competitive Advantage Competitively Valuable Capabilities: •Cannot be easily bested, matched, or imitated by rivals. •Represent superior know-how and specialized abilities that require time to fully develop and perfect. •Result in a sustainable competitive advantage over rivals. First-rate capabilities and skills are essential to building a competitive advantage that leads to strategic success. Firms with capabilities that are strong and well-matched to the firm, valued by the customer, and costly and/or difficult to for competitors acquire imitate are the basis for creating sustainable competitive advantage

CORE CONCEPT: Strategy A company's strategy is the coordinated set of actions that its managers take to outperform the company's competitors and achieve superior profitability. 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.

The Importance of a Distinctive Strategy and Competitive Approach A Company's Strategy: •Distinctive set of creative strategic choices. •Manager's decision. •Apart from rivals. •Competitive edge. •Fit its own particular situation for competitive advantage. •Compete differently. •Doing what rival firms do not do or, better yet, what rival firms cannot do. 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.

When a Low-Cost Strategy Works Best 1.Price competition among rival sellers is especially vigorous when the majority of industry sales are made to a few, large-volume buyers. 2.The products of rival sellers are essentially identical and are readily available from several sellers. 3.There are few ways to achieve product differentiation that have value to buyers. 4.Buyers incur low costs in switching their purchases from one seller to another and industry newcomers successfully use introductory low prices to attract buyers and build a customer base. A low-cost producer strategy becomes increasingly appealing and competitively powerful when the forces of competition are favorable to a particular competitor's market position.

The Keys to a Successful Low-Cost Strategy Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively by: Spending aggressively on resources and capabilities that promise to drive costs out of the business. Carefully estimating the cost savings of new technologies before investing in them. Constantly reviewing cost-saving resources to ensure they remain competitively superior. Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding ways to perform value chain activities faster, more accurately, and more cost-effectively. A low-cost producer is in the best position to win the business of price-sensitive buyers, set the floor on market price, and still earn a profit.

Concepts & Connections 5.3 Canada Goose's Focused Differentiation Strategy Which decisions did CEO Dani Reiss make that launched Canada Goods on its chosen strategic path? Which uniqueness drivers are responsible for the success of Canada Goose? Which of Canada Goose's uniqueness drivers are competitors likely to attempt to copy first? Concepts and Connections 5.3 describes how Canada Goose has been gaining attention with its focused differentiation strategy.

The Risks of a Focused Low-Cost or Focused Differentiation Strategy Competitors will find effective ways to match a focuser's capabilities in serving the target niche. The preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. The segment may become so attractive it is soon inundated with competitors, intensifying rivalry, and splintering segment profits. There are several inherent risks related to increased attractiveness of the focuser's segment, changes in competitor capabilities and changes in the characteristics of the segment's customers.

Why Crafting and Executing Strategy Are Important Tasks Good strategy and good strategy execution are the most telling indicators of good management. A better-conceived, competently executed strategy makes it more likely that a firm will be a standout performer in the marketplace. How well a firm performs directly reflects the caliber of its strategy and the proficiency of its execution. 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. 1. Crafting and executing strategy are top priority managerial tasks for two big reasons a.High-performing enterprises are nearly always the product of astute, creative, and proactive strategy making b.Even the best-conceived strategies will result in performance shortfalls if they are not executed proficiently. 2. Good Strategy + Good Strategy Execution = Good Management a.Crafting and executing strategy are core management functions. b.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.

The Road Ahead Strategy is about asking and answering a most important question. •What must managers do, and do well, to make a company a winner in the marketplace? •Doing a good job of managing inherently requires good strategic thinking and good management of the strategy-making, strategy-executing process. 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.

Core Concepts: Macro-Environment and PESTEL Analysis The macro-environment encompasses the broad environmental context in which a firm is situated and is comprised of six principal components: political factors, economic conditions, sociocultural forces, technological factors, environmental factors, and legal/regulatory conditions. PESTEL analysis can be used to assess the strategic relevance of the six principal components of the macro-environment: political, economic, social, technological, environmental, and legal forces.

The Six Components of the Macro-Environment Included in a PESTEL Analysis 1.Political factors. 2.Economic conditions. 3.Technological factors. 4.Sociocultural factors. 5.Environmental forces. 6.Legal and regulatory factors. 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).

CORE CONCEPT: Realized Strategy A company's realized strategy is a combination of deliberate planned elements and unplanned emergent elements. Some components of a company's deliberate strategy will fail in the marketplace and become abandoned strategy elements. A firm's deliberate strategy consists of proactive strategy elements that are both planned and realized as planned. Its emergent strategy consists of reactive strategy elements that emerge as changing conditions warrant. 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, and (2) reactive responses to unanticipated developments and fresh market conditions. In total, these two elements combine to form the firm's Realized Strategy.

The Three Tests of a Winning Strategy Strategic Fit. How well does the strategy fit the firm's situation? Competitive Advantage. Is the strategy helping the firm achieve a sustainable competitive advantage? Performance. Is the strategy producing good firm performance? 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: How well does the strategy fit the company's situation? To qualify as a winner, a strategy has to be well matched to industry and competitive conditions, a company's best market opportunities, and other aspects of the enterprise's external environment. 2.The Performance Test: 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). 3.The Competitive Advantage Test: Is the strategy helping the company achieve a sustainable competitive advantage? The bigger and more durable the competitive edge that a strategy helps build, the more powerful and appealing it is.

Concepts & Connections 6.2 Walmart's Expansion into E-commerce via Horizontal Acquisition Which strategic transformation outcomes did Walmart expect to gain through its acquisition strategy? Why did Walmart choose to pursue an acquisition strategy that was ahead of its brick and mortar competitors? How will increasing the horizontal scope of Walmart through acquisitions strengthen its competitive position and profitability? Concepts and Connections 6.2 describes how Walmart is pursuing developed its horizontal acquisition strategy to continue its growth as an omni-channel retailer (i.e. bricks and mortar, online, or mobile).

Vertical Integration Strategies Vertical integration involves extending a firm's competitive and operating scope within the same industry. •Backward into sources of supply. •Forward toward end-users of final product. Vertical integration can take the form of aiming at: •Full integration with the firm participates in all stages of the vertical chain. •Partial integration with the firm building positions in selected stages of the vertical chain. •Tapered integration in which the firm engages in the outsourcing of some activities and in performing other activities internally. A vertically integrated firm is one that performs value chain activities along more than one stage of an industry's value chain system. Vertical integration strategies can aim at full integration (participating in all stages of the vertical chain) or partial integration (building positions in selected stages of the vertical chain). Firms can also engage in tapered integration strategies, which involve a mix of in-house and outsourced activity in any given stage of the vertical chain.

The Competitive Force of Potential New Entrants The threat of entrants into the marketplace presents significant competitive pressure when: •There is a sizable pool of likely entry candidates. •Potential entrants have ample entry resources at their command. •Current industry participants are looking beyond their current markets for growth opportunities. •When the industry is growing, offers attractive profit opportunities, and its barriers to entry are low. 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.

What Are the Barriers to Entry? Sizable economies of scale in production or other areas of operation. Cost and resource disadvantages not related to scale of operation. Strong brand preferences and customer loyalty. High capital requirements. Restrictive regulatory policies. Difficulties in building a network of distributors-retailers and securing space on retailers' shelves. Tariffs and international trade restrictions. Industry incumbents that can launch initiatives to block a successful entry. 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.

Integrating Backward to Achieve Greater Competitiveness For backward integration to boost profitability a firm must be able to: •Achieve the same scale economies as outside suppliers. •Match or beat suppliers' production efficiency with no decline in quality. Backward integration involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain system.

When Backward Vertical Integration Becomes a Consideration Potential situations that create opportunities for cost reduction through backward vertical integration: •When suppliers have large profit margins. •Where the item being supplied is a major cost component. •Where the requisite technological skills are easily mastered or acquired. •When powerful suppliers are inclined to raise prices at every opportunity

The Competitive Force of Buyer Bargaining Power Whether seller-buyer relationships represent a minor or significant competitive force in limiting industry profitability depends on: •Some or many buyers having sufficient bargaining leverage to obtain price concessions and other favorable terms. •The extent to which buyers are price sensitive. Whether buyers are able to exert strong competitive pressures on industry members depends on (1) the degree to which buyers have bargaining power and (2) the extent to which buyers are price-sensitive. Buyers with strong bargaining power can limit industry profitability by demanding price concessions, better payment terms, or additional features and services that increase industry members' costs. Buyer price sensitivity limits the profit potential of industry members by restricting the ability of sellers to raise prices without losing revenue due to lost sales

When Is the Bargaining Power of Buyers Stronger? Buyers gain bargaining leverage when: •Their costs of switching to competing brands or substitutes are relatively low. •Their large size allows them to demand concessions. •They are few in number, control market access or, if a buyer-customer is particularly important to a seller. •Weak buyer demand creates a "buyers' market." •Buyers are well informed about products, prices, and costs. •Buyers can integrate backward into the business of sellers. Whether buyers are able to exert strong competitive pressures on industry members depends on (1) the degree to which buyers have bargaining power and (2) the extent to which buyers are price-sensitive. Buyers with strong bargaining power can limit industry profitability by demanding price concessions, better payment terms, or additional features and services that increase industry members' costs. Buyer price sensitivity limits the profit potential of industry members by restricting the ability of sellers to raise prices without losing revenue due to lost sales.

Employing Best-Cost Strategies Profitable best-cost strategies are contingent on the firm having the capability to deliver attractive or upscale attributes at a lower cost than rivals through: 1.A superior value chain configuration that eliminates or minimizes activities that do not add value. 2.Unmatched efficiency in managing essential value chain activities. 3.Core competencies that allow differentiating attributes to be incorporated at a low cost. When a company can incorporate appealing features, good-to-excellent product performance or quality, or more satisfying customer service into its product offering at a lower cost than that of rivals, then it enjoys "best-cost" status—it is the low-cost provider of a product or service with upscale attributes. A best-cost provider can use its low-cost advantage to underprice rivals whose products or services have similar upscale attributes and still earn attractive profits.

When a Best-Cost Provider Strategy Works Best A best-cost provider strategy works best in markets where: •Product differentiation is the norm. •Large numbers of value-conscious buyers can be induced to purchase economically-priced mid-range products and services, especially during recessionary times. •A provider can offer either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher-than-average price. The target market for a best-cost strategy is value-conscious middle-market buyers who are looking for appealing extras and functionality at a comparatively low price, regardless of whether they represent a broad or more focused segment of the market.

Strategic Objectives of Mergers and Acquisitions Extend the firm's business into new product categories. Create a more cost-efficient operation out of the combined firms. Expand the firm's geographic coverage. Gain quick access to new technologies or complementary resources and capabilities. Lead the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. Merger and acquisition strategies typically set the company's sights on achieving any of five objectives.

Why Mergers and Acquisitions Sometimes Fail to Produce Anticipated Results Cost savings are smaller than expected. Gains in competitive capabilities take much longer to realize or may never materialize. Efforts to mesh the corporate cultures stall because of resistance from organization members. Managers and employees at the acquired continue to do things as they were done prior to the acquisition. Dissatisfied key employees of the acquired firm leave. Mistakes are made in deciding which activities to leave alone and which to meld into the acquiring firm's operations and systems.

Best-Cost Provider Strategies A hybrid of low-cost provider and differentiation strategies that: •Involves giving customers more value for money by satisfying buyer expectations on key quality/features/ performance/service attributes while exceeding customer expectations on price. •Creates a powerful competitive approach with value-conscious buyers looking for a good-to-very-good product or service at an economical price. •Creates a "best-cost" status as the low-cost provider of a product or service with upscale attributes. Best-cost strategies are a hybrid of low cost and differentiation strategies, incorporating features of both simultaneously. They may target either a broad or narrow (focused) base of value-conscious customers.

CORE CONCEPT: Best-Cost Provider Strategies Best-cost provider strategies are a hybrid of low-cost provider and differentiation strategies that aim at satisfying buyer expectations on key quality, features, performance, and service attributes while beating customer expectations on price. Best-cost strategies are a hybrid of low cost and differentiation strategies, incorporating features of both simultaneously. They may target either a broad or narrow (focused) base of value-conscious customers

The Two Major Avenues for Achieving Low-Cost Leadership 1.Performing essential value chain activities more cost-effectively than rivals. 2.Revamping the firm's overall value chain to eliminate or bypass some cost-producing activities altogether. A company has two options for translating a low-cost advantage over rivals into attractive profit performance.

CORE CONCEPT: Cost Driver A cost driver is a factor having a strong effect on the cost of a company's value chain activities and cost structure.

Question 3: What Are the Industry's Driving Forces of Change and What Impact Will They Have? Driving forces analysis has three steps: 1.Identifying the present driving forces, as only 3 to 4 factors qualify as real drivers of change. 2.Assessing whether the drivers of change are, individually or collectively, 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. Driving forces 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, on the whole, acting to make the industry more or less attractive; and (3) determining what strategy changes are needed to prepare for the impact of the driving forces.

CORE CONCEPT: Driving Forces Driving forces are the major underlying causes of change in industry and competitive conditions. Some driving forces originate in the outer ring of the company's macro-environment but most originate in the company's more immediate industry and competitive environment.

External View (Outside-in)

>Diagnosis starts with the external environment>Competitive advantage comes from a firm's position in its industry relative to its competitors.>Considerations:-Does sticking with the company's present strategic course present attractive opportunities for growth and profitability?-What kind of competitive forces are industry members facing and are they acting to enhance or weaken the company's prospects for growth and profitability?-What factors are driving industry change, and what impact on the company's prospects will they have?-How are industry rivals positioned, and what strategic moves are they likely to make next?-What are the key factors of future competitive success, and does the industry offer good prospects for attractive profits for companies possessing those capabilities?

External Analyses

All Approaches to Strategy Must Consider:

Examples: UnderAmour, iRobot or Northwest Group

Group 1 - iRobotGroup 2 - Rajeev's company - Jack in the BoxWhat examples do you see of offensive and defensive moves and other competitive dynamics (connect to Ch. 6 learning objectives)?What has happened to each firm's competitive advantage?

Why Care about Strategy? •Average returns (profits) among industries vary•Returns among companies within industries vary even more •Returns for individual companies vary over time•Why are some firms more successful than others?•How do we increase the chances that our firm is more successful than others?

Historical Profitability of Industries (2010-2014)

CORE CONCEPT: Internal Capital Market A strong internal capital market allows a diversified company to add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential.

Determining Financial Resource Fit Use a portfolio approach to determine the firm's internal capital market requirements. •Which businesses are cash hogs in need of additional funds to maintain growth and expansion? •Which businesses are cash cows with cash flow surpluses available to fund growth and reinvestment? Assess the portfolio's overall condition. •Which businesses are (or not) capable of contributing to achieving companywide performance targets? •Does the firm have the financial strength to fund all of its businesses and maintain a healthy credit rating? A portfolio approach to ensuring financial fit among a firm's businesses is based on the fact that different businesses have different cash flow and investment characteristics. A cash cow business generates cash flows over and above its internal requirements, thus providing a corporate parent with funds for investing in cash hog businesses, financing new acquisitions, or paying dividends. A cash hog business generates cash flows that are too small to fully fund its operations and growth and requires cash infusions to provide additional working capital and finance new capital investment.

Crafting a Diversified Firm's Overall Corporate Strategy 1.Pick new industries to enter and deciding on the means of entry. 2.Pursue opportunities to leverage cross-business value chain relationships into competitive advantage. 3.Establish investment priorities and steering corporate resources into the most attractive business units. 4.Initiate actions to boost the combined performance of the corporation's collection of businesses. The decision to diversify presents wide-ranging possibilities. A company can diversify into closely related businesses or into totally unrelated businesses. It can diversify its present revenue and earnings base to a small or major extent. It can move into one or two large new businesses or a greater number of small ones. It can achieve diversification by acquiring an existing company, starting up a new business from scratch, or forming a joint venture with one or more companies to enter new businesses. In every case, however, the decision to diversify must start with a strong economic justification for doing so.

Diversification by Acquisition of an Existing Business Quick and effective way to hurdle target market entry barriers related to: •Acquiring technological know-how. •Establishing supplier relationships. •Achieving scale economies. •Building brand awareness. •Securing adequate distribution access. The big dilemma is whether to pay a premium price to buy a successful firm or to buy a struggling firm at a bargain price. Acquisition is a popular means of diversifying into another industry. Not only is it quicker than trying to launch a new operation, but it also offers an effective way to hurdle such entry barriers An acquisition premium, or control premium, is the amount by which the price offered exceeds the pre-acquisition market value of the target company.

Figure 8.2 illustrates the range of opportunities to share and/or transfer specialized resources and capabilities among the value chain activities of related businesses. It is important to recognize that even though general resources and capabilities may be shared by multiple business units, such resource sharing alone cannot form the backbone of a strategy keyed to related diversification. The resources and capabilities that are leveraged in related diversification are specialized resources and capabilities that have very specific applications; their use is restricted to a limited range of business contexts in which these applications are competitively relevant. Because they are adapted for particular applications, specialized resources and capabilities must be utilized by particular types of businesses operating in specific kinds of industries to have value; they have limited utility outside this designated range of industry and business applications. This is in contrast to general resources and capabilities (such as general management capabilities, human resource management capabilities, and general accounting services), which can be applied usefully across a wide range of industry and business types.

FIGURE 8.2 Related Diversification Is Built upon Competitively Valuable Strategic Fit in Value Chain Activities

Broadly Restructuring the Business Lineup Through a Mix of Divestitures and New Acquisitions Radical surgery on the business lineup is necessary when: •There is a serious mismatch between the firm's resources and capabilities and the type of diversification that it has pursued. •Too many businesses are in slow-growth, declining, low-margin, or otherwise unattractive industries. •There are too many competitively weak businesses. •New technologies threaten the survival of important businesses. •There are ongoing declines in the market shares of one or more major business units that are falling prey to more market-savvy competitors. •An excessive debt burden with interest costs eats deeply into profitability. •Ill-chosen acquisitions have not lived up to expectations. Diversified companies need to divest low-performing businesses or businesses that do not fit in order to concentrate on expanding existing businesses and entering new ones where opportunities are more promising

FIGURE 8.1 Strategic Themes of Multibusiness Corporation, Text Alternative A figure illustrating three diversification strategy options available to a multibusiness corporation: one, diversify into related businesses; two, diversify into unrelated businesses; and three, diversify into both related and unrelated businesses. 1. Diversify into related businesses. Enhance shareholder value by capturing cross-business strategic fits. Transfer skills and capabilities from one business to another. Share facilities or resources to reduce costs. Leverage use of a common brand name. Combine resources to create new strengths and capabilities. 2. Diversify into unrelated businesses. Spread risks across completely different businesses. Build shareholder value by doing a superior job of choosing businesses to diversity into and of managing the whole collection of businesses in the company's portfolio. 3. Diversify into both related and unrelated businesses.

FIGURE 8.2 Related Diversification Is Built upon Competitively Valuable Strategic Fit in Value Chain Activities, Text Alternative A figure demonstrates the representative value chain activities for two businesses. Both follow the same types of support activities: supply chain activities, technology, operations, sales and marketing, distribution, and customer service. Competitively valuable opportunities for technology or skills transfer, cost reduction, common brand name usage, and cross-business collaboration exist at one or more points along the value chains of Business A and Business B.

FIGURE 8.3 A Nine-Cell Industry Attractiveness-Competitive Strength Matrix, Text Alternative The image contains a grid that portrays the strategic positions of each business in a diversified company. Industry attractiveness of each firm is plotted on the vertical axis and competitive strength of that firm on the horizontal axis. A nine-cell grid emerges from dividing the vertical axis into three regions (high, medium, and low attractiveness) and the horizontal axis into three regions (strong, average, and weak competitive strength). A circle labeled Business A in Industry A is positioned in the upper left of the nine-cell grid (high industry attractiveness and strong competitive strength and or market position). This business is in the high priority for resource allocation area. A circle labeled Business B in Industry B is shown in the upper right of the nine-cell grid (high industry attractiveness and weak competitive strength and or market position). It is in the medium priority for resource allocation area. A circle labeled Business C in Industry C is shown in the center of the nine-cell grid (medium industry attractiveness and average competitive strength and or market position). It is in the medium priority for resource allocation area. A circle labeled Business D in Industry D is shown in the lower right of the nine-cell grid (borders medium and low industry attractiveness and average to weak competitive strength and or market position). This business in the low priority for resource allocation area. Note: Each circle's size is scaled to reflect the percentage of companywide revenues generated by the business unit. Business C is the largest, and Business B is the smallest. Business A and D fit in between these two sizes.

The Macro Environment Affects the Industry Environment

Understanding changes in the PESTEL elements helps you to identify factors that might change industry structure and profitability and/or affect your firm directly. What effects has Covid-19 had on:•The restaurant industry?•The travel industry?

Each Generic Strategy

>Positions the firm differently in its market. >Establishes a central theme for how the firm intends to outcompete rivals >Creates boundaries or guidelines for strategic change as market circumstances unfold. >Entails different ways and means of maintaining the basic strategy >Provides a good but different defense against unfavorable industry conditions

CHAPTER 8 Corporate Strategy: Diversification and the Multibusiness Company

1.Understand when and how business diversification can enhance shareholder value. 2.Explain how related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage. 3.Recognize the merits and risks of corporate strategies keyed to unrelated diversification. 4.Evaluate a company's diversification strategy. 5.Understand a diversified company's four main corporate strategy options for solidifying its diversification strategy and improving company performance. In the first portion of this chapter, we describe what crafting a diversification strategy entails, when and why diversification makes good strategic sense, the various approaches to diversifying a company's business lineup, and the pros and cons of related versus unrelated diversification strategies. The second part of the chapter looks at how to evaluate the attractiveness of a diversified company's business lineup, how to decide whether it has a good diversification strategy, and the strategic options for improving a diversified company's future performance.

Ch. 6 - Competitive Dynamics: Moves to Make in Response to Issues

1.Understand whether and when to pursue offensive or defensive strategic moves to improve a firm's market position. 2.Recognize when being a first mover or a fast follower or a late mover can lead to competitive advantage. 3.Identify the strategic benefits and risks of expanding a company's horizontal scope through merger and acquisitions. 4.Explain the advantages and disadvantages of extending a firm's scope of operations via vertical integration. 5.Describe the conditions that favor farming out certain value chain activities to outside parties. 6.Explain how strategic alliances and collaborative partnerships can bolster a firm's collection of resources and capabilities.

5. Recommendation & 6. Implementation

5. Recommendation: > Choose one option and make your recommendation > Make sure you address how you'd actually implement your recommendation. --- What would it take to implement? --- How feasible is that? How realistic? 6. Implementation: Implement recommendation through planned organizational changes.

Tasks

> Where / how to get high quality information on your company? --- Business Librarian can HELP --- Example of sources: >>>>> Company website - look for investor relations to find most recent annual report >>>>> Edgar SEC Filings - 10Q 10K>Searching news for high quality information (newspapers, magazines) >Begin analysis --- don't wait until the last minute! E.g., try to complete one row in the table every few days... or several a week

CORE CONCEPT: Business Model

> A company's business model sets forth how its strategy and operating approaches will create value for customers, while at the same time generating ample revenues to cover costs and realizing a profit. > The two elements of a company's business model are its customer value proposition (CVP) and its profit formula (PF). --- CVP: approach to satisfying buyer wants and needs at a price customers will consider a good value --- PF: approach to determining a cost structure that will allow for acceptable profits, given the pricing tied to the customer value proposition

Internal View (Inside out)

> A firm's resources and capabilities are most important in getting and keeping competitive advantage > Considerations: --- Does the company have an appealing customer value proposition? --- What are the company's competitively important resources and capabilities, and are they potent enough to produce a sustainable competitive advantage? --- Does the company have sufficient business and competitive strength to seize market opportunities and nullify external threats? --- Are the company's costs competitive with those of key rivals? --- Is the company competitively stronger or weaker than key rivals?

Examples

> Articles in Canvas via Files/Current articles about strategy > Same industry, different strategy --- Group 1: Xiaomi and Apple phones --- Group 2: Spirit Airlines and Emirates Airlines --- Group 3: Planet Fitness and Life Time Fitness(http://news.lifetime.life/about-lifetime) > Under Armour update (if time) --- What has happened to UA's competitive advantage?

Which View Is Best?

> Competitive advantage determines how well a company performs > Each view offers a unique perspective --- External: Emphasizes the external environment, particularly the company's position in the industry and relative to competitors --- Internal: Looks inside the organization for resources and capabilities and how they create unique value that can be exploited --- Dynamic: recognizes how an organization's internal resources & capabilities need to be able to respond to a dynamic environment that makes competitive advantage temporary

Dynamic View (Schumpeter - Creative Destruction)

> Competitive advantage is temporary --- no firm is safe --- Environment changes continually --- Unpredictable events challenge managers --- Competitors mount moves that erode your competitive advantage > Some changes are revolutionary, e.g., --- Disruptions in technology --- Market instabilities > Competitive advantage and success depends on a company's ability to adapt and respond to competition and changing circumstances

4. Options

> Develop options to address the identified issues --- In complex situations, there are almost always multiple options that should be developed and considered --- Need true alternatives / choices to be made --- Not the same as steps or a list of things to do > Evaluate each option --- Articulate both pros and cons of each option by drawing on what you know from the internal and external situation.

Pointers on Doing a Five Forces Analysis

> Remember to decide on the industry definition (how broad or narrow). > Recognize this is a snapshot analysis (the industry at one point in time). > Be consistent in your industry definition as you discuss each force. > Keep your analysis at the industry level (describe conditions from the perspective of all incumbents in the industry not the conditions facing any one firm). > Remember that supplier groups supply to the industry, that buyer groups buy from the industry and that substitutes come from outside the industry...

Focus or Market Niche Strategy

> Value proposition rooted in low cost leadership, differentiation or dual/best cost > Niche based on: --- Geography --- Type of customer --- Product line scope >Niche is big enough to be profitable and offers good growth potential. >Industry leaders chose not to compete in the niche —-- focusers avoid competing against strong competitors >It is costly or difficult for multi --- segment competitors to meet the specialized needs of niche buyers. >The industry has many different niches and segments. >Rivals have little or no interest in the target segment.

CORE CONCEPT: Sustainable Competitive Advantage

>A firm's ability to create value in a way rival firms cannot (for as long as possible - sustainable, durable)>Three perspectives: External, Dynamic & Internal

Diagnosis - Assess the Situation and Identify Issues

>Use tools/analyses to understand the firm and it's situation > Provides the basis for diagnosis and issue development, but... --- Unlike analytical reasoning, you won't have all the information --- You must leap to accurate conclusions without having accurate information --- You need to be able to fill in the gaps in order to make conclusions >Two Kinds of Issues: --- About strategy formulation/choice, e.g., Is our current "realized" strategy a good choice? Are our internal activities and business model internally consistent and do they fit with the environment? --- About implementation/execution, e.g., Is our planned strategy reasonable but not well implemented? (Gets into organizational change)

Low Price / Cost Leadership

A 3rd version not shown in a bar chart:•Prices way below industry average, costs below industry average. •Results in a thinner than average wedge/margin but greater overall returns to the firm due to high volume of sales.

Competitive Advantage

A firm has a competitive advantage if it has driven a wide wedge between the amount its customers are willing to pay and the costs it incurs - a wider wedge than the average industry competitor (or a given competitor)

FIGURE 4.2 Representative Value Chain for an Entire Industry, Text Alternative

A graphic depicts a value chain, consisting of: activities, costs, and margins of suppliers; internally performed activities, costs, and margins, activities, costs, and margins of forward channel allies and strategic partners; and buyer or end-user value chains. This chain can be applied to a supplier-related value chain, a company's own value chain, and a forward channel value chain.

FIGURE 8.3 A Nine-Cell Industry Attractiveness-Competitive Strength Matrix

A nine-cell grid is divides the vertical axis into three regions (high, medium, and low attractiveness) and the horizontal axis into three regions (strong, average, and weak competitive strength). As shown in Figure 8.3, scores of 6.7 or greater on a rating scale of 1 to 10 denote high industry attractiveness, scores of 3.3 to 6.7 denote medium attractiveness, and scores below 3.3 signal low attractiveness. Likewise, high competitive strength is defined as scores greater than 6.7, average strength as scores of 3.3 to 6.7, and low strength as scores below 3.3. Each business unit is plotted on the nine-cell matrix according to its overall attractiveness score and strength score, and then it is shown as a "bubble." The size of each bubble is scaled to the percentage of revenues the business generates relative to total corporate revenues. The bubbles in Figure 8.3 were located on the grid using the three industry-attractiveness scores from Table 8.1 and the strength scores for the three business units in Table 8.2.

Internal Development and Start-up of a Foreign Subsidiary An internal start-up strategy is appealing when: •The parent firm has the experience, competencies, and resources required to develop and operate foreign subsidiaries. •Creating an internal start-up is cheaper than making an acquisition in a foreign market. •Adding new production capacity will not adversely impact the supply-demand balance in the local market. •The start-up subsidiary can gain access to local distribution networks (perhaps due to the firm's recognized brand name). •A start-up subsidiary will have the size, cost structure, and resources to compete head-to-head against local rivals. A greenfield venture is a subsidiary business that is established by setting up the entire operation from the ground up. Entering a new foreign country via a greenfield venture makes sense when a company already operates in a number of countries, has experience in establishing new subsidiaries and overseeing their operations, and has a sufficiently large pool of resources and capabilities to rapidly equip a new subsidiary.

Alliance and Joint Venture Strategies 1 Mutual benefits of cross-border alliances: •Strengthens a firm's competitiveness in world markets. •Facilitates host country approval of entry into local markets. •Captures economies of scale in production and marketing. •Fills gaps in technical expertise and local market knowledge. •Promotes sharing of distribution facilities, dealer networks, and mutual access to customers. •Assists in coordination of attacks on mutual rivals and the provision of mutual support. •Builds working relationships with local political and host-country governmental entities. •Fosters agreements on technical and process standards. Collaborative strategies involving alliances or joint ventures with foreign partners are a popular way for companies to edge their way into the markets of foreign countries. Cross-border alliances enable a growth-minded firm to widen its geographic coverage and strengthen its competitiveness in foreign markets; at the same time, they offer flexibility and allow a firm to retain some degree of autonomy and operating control.

FIGURE 4.1 A Representative Company Value Chain 1

As shown in Figure 4.1, 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 in Figure 4.3 is illustrative rather than definitive.

CORE CONCEPTS: Cash Hog and Cash Cow A cash hog generates operating cash flows that are too small to fully fund its operations and growth; a cash hog must receive cash infusions from outside sources to cover its working capital and investment requirements. A cash cow generates operating cash flows over and above its internal requirements, thereby providing financial resources that may be used to invest in cash hogs, finance new acquisitions, fund share buyback programs, or pay dividends.

Assessing Cash Hogs Reasons for not divesting a cash hog business: •It has highly valuable strategic fit with other business units. •Capital infusions needed from the corporate parent are modest relative to the funds available. •There's a decent chance of growing the cash hog into a solid bottom-line contributor.

Sticking Closely with the Existing Business Lineup Choosing not to expand beyond the current lineup of businesses makes sense when the firm's present businesses: •Offer attractive growth opportunities, good earnings, and cash flows. •Are in a good position for the future and have good strategic and resource fits. •Have resources that management can steer into areas of the greatest potential and profitability.

Broadening the Diversification Base Multi-business firms may consider adding to the diversification base when: •There are sluggish revenues and profit growth. •They are vulnerable to seasonality or recessionary influences. •There is potential for transfer resources and capabilities to related businesses. •Unfavorable driving forces are facing its core businesses. •Acquisition of related businesses will strengthen the market positions of one or more of its businesses. Companywide restructuring (corporate restructuring) involves making major changes in a diversified company by divesting some businesses or acquiring others, so as to put a whole new face on the company's business lineup.

When Business Diversification Becomes a Consideration Diversification is called for when: •There are diminishing growth prospects in the present business. •An expansion opportunity exists in an industry whose technologies and products complement the present business. •Existing competencies and capabilities can be leveraged by expanding into an industry requires similar resource strengths. •Costs can be reduced by diversifying into closely related businesses. •A powerful brand name can be transferred to the products of other businesses. In every case, however, the decision to diversify must start with a strong economic justification for doing so.

Building Shareholder Value: The Ultimate Justification for Business Diversification Diversification may result in added shareholder value if it passes three tests. 1.Industry Attractiveness Test. The target industry offers equal or better profit and return on investment opportunities. 2.Cost of Entry Test. The cost to enter the target industry does not erode its long-term profit potential. 3.Better-Off Test. The firm's businesses will perform better together than as stand-alone firms, producing a synergistic 1 + 1 = 3 effect on shareholder value. Diversification must do more for a company than simply spread its business risk across various industries. In principle, diversification cannot be considered wise or justifiable unless it results in added long-term economic value for shareholders— value that shareholders cannot capture on their own by purchasing stock in companies in different industries or investing in mutual funds to spread their investments across several industries. A move to diversify into a new business stands little chance of building shareholder value without passing the three Tests of Corporate Advantage.

The Economics of Porter's Forces Framework

Business competition is about the struggle for profits!Unit Profit Margin = Price - Cost Each force in an industry can either benefit or detract from industry profit margins

Strategic Fit and Economies of Scope Scope-related cost savings stemming from the strategic fit of the value chains of related businesses: •Operating businesses under same corporate umbrella. •Taking shared advantage of the inter-relationships anywhere along the value chains of different businesses. Advantage: •The greater the cross-business economies associated with cost-saving strategic fit, the greater the potential for a related diversification strategy to yield a competitive advantage based on lower costs than rivals. The greater the cross-business economies associated with resource sharing and transfer, the greater the potential for a related diversification strategy to give individual businesses of a multibusiness enterprise a cost advantage over their rivals.

CORE CONCEPT: Economies of Scope and Economies for Scale Economies of scope are cost reductions stemming from strategic fit along the value chains of related businesses (thereby, a larger scope of operations), whereas economies of scale accrue from a larger operation.

Multidomestic Strategy—A Think Local, Act Local Approach to Strategy Making Think Local, Act Local. •A firm varies its product offerings and basic competitive strategy from country to country. Useful when: •Significant country-to-country differences exist in customer preferences, buying habits, distribution channels, or marketing methods. •Host governments enact local content requirements or trade restrictions that preclude a uniform, coordinated worldwide market approach. A multidomestic strategy is one in which a company varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions.

CORE CONCEPT: Multidomestic Strategy A multidomestic strategy calls for varying a company's product offering and competitive approach from country to country in an effort to be responsive to significant cross-country differences in customer preferences, buyer purchasing habits, distribution channels, or marketing methods. Think local, act local strategy-making approaches are also essential when host-government regulations or trade policies preclude a uniform, coordinated worldwide market approach.

Disadvantages of a Vertical Integration Strategy Increases a firm's capital investments in its industry. Increases a firm's overall business risk if industry growth and profitability sour. Slows adoption of new ways as vertically integrated firms persist in using aging technologies and facilities. Results in less flexibility in accommodating shifting buyer preferences when a new product design does not include parts and components that the firm makes in-house. Creates capacity-matching problems among integrated in-house component manufacturing units. Requires development of new and different skills and business capabilities. Vertical integration has some substantial drawbacks beyond the potential for channel conflict. The most serious drawbacks to vertical integration include the following concerns are listed on this slide.

CORE CONCEPT: Outsourcing Outsourcing involves contracting out certain value chain activities to outside specialists and strategic allies. A firm should guard against outsourcing activities that hollow out the resources and capabilities that it needs to be a master of its own destiny.

Step 4: Evaluating Resource Fit A diversified firm's lineup of businesses exhibit good resource fit when: •Each of its businesses, individually, strengthen the firm's overall mix of resources and capabilities. •The firm has sufficient resources that add customer value to support its entire group of businesses without spreading itself too thin. The businesses in a diversified company's lineup need to exhibit good resource fit. In firms with a related diversification strategy, good resource fit exists when the firm's businesses have well-matched specialized resource requirements at points along their value chains that are critical for the businesses' market success. Matching resource requirements are important in related diversification because they facilitate resource sharing and low-cost resource transfer.

CORE CONCEPT: Resource Fit A diversified company exhibits resource fit when its businesses add to a company's overall mix of resources and capabilities and when the parent company has sufficient resources to support its entire group of businesses without spreading itself too thin.

Diversifying into Related Businesses Strategic Fit •Exists whenever one or more activities comprising the value chains of different businesses are sufficiently similar to present opportunities for: •Transferring competitively valuable resources, expertise, technological know-how, or other capabilities from one business to another. •Cost sharing between separate businesses where value chain activities can be combined. •Brand sharing between business units that have common customers or that draw upon common core competencies. Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar in present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities.

CORE CONCEPT: Strategic Fit Strategic fit exists when the value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand sharing. Capturing the benefits of strategic fit along the value chains of its related businesses gives a diversified company a clear path to achieving competitive advantage over undiversified competitors and competitors whose own diversification efforts don't offer equivalent strategic-fit benefits.11 Such competitive advantage potential provides a company with a dependable basis for earning profits and a return on investment that exceeds what the company's businesses could earn as stand-alone enterprises

Divesting Businesses and Retrenching to a Narrower Diversification Base Retrenchment to focus resources on building strength in fewer businesses requires divesting or eliminating the following: •Once-attractive businesses in deteriorating markets. •Businesses that will have a poor strategic or resource fit in the firm's future portfolio. •Cash hog businesses with poor long-term investment returns potential. •Weakly positioned businesses with little prospect for earning a decent return on investment. A spinoff is an independent company created when a corporate parent divests a business either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent.

CORE CONCEPTS: Corporate Restructuring and Spinoffs Corporate restructuring involves radically altering the business lineup by divesting businesses that lack strategic fit or are poor performers and acquiring new businesses that offer better promise for enhancing shareholder value. A spin-off is an independent company created when a corporate parent divests a business either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent.

Choosing the Diversification Path: Related Versus Unrelated Businesses Related Businesses •Have value chains with competitively valuable cross-business relationships that present opportunities for the businesses to perform better operating under the same corporate umbrella than they could as stand-alone entities. Unrelated Businesses •Have value chains and resource requirements that are so dissimilar no competitively valuable cross-business relationships are present. Once a company decides to diversify, it faces the choice of whether to diversify into related businesses, unrelated businesses, or some mix of both Related businesses possess competitively valuable cross-business value chain and resource matchups. Unrelated businesses have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level.

CORE CONCEPTS: Related and Unrelated Businesses Related businesses possess competitively valuable cross-business value chain and resource matchups; unrelated businesses have dissimilar value chains and resources requirements, with no competitively important cross-business value chain relationships.

Strategic Alliances and Partnerships Strategic alliance Is a formal contractual agreement in which two or more firms collaborate to achieve mutually beneficial strategic outcomes based on: •Strategically relevant collaboration. •Joint contribution of resources. •Shared risk. •Shared control. •Mutual dependence. Strategic alliances allow firms to complementarily bundle resources and competencies to increase their competitive effects and value. Strategic alliances and cooperative partnerships provide a way to gain benefits offered by vertical integration, outsourcing, and horizontal mergers and acquisitions while minimizing the associated problems. Strategic alliances and cooperative arrangements are now a common means of narrowing a company's scope of operations as well, serving as a useful way to manage outsourcing. If a strategic alliance is not working out, a partner can choose to simply walk away or reduce its commitment to collaborating at any time.

CORE CONCEPTS: Strategic Alliance and Joint Venture A strategic alliance is a formal agreement between two or more companies to work cooperatively toward some common objective. A joint venture is a type of strategic alliance that involves the establishment of an independent corporate entity that is jointly owned and controlled by the two partners.

Alliance and Joint Venture Strategies 2 Individual partner benefits of alliances: •Preservation of each partner firm's independence. •Avoidance of the firm's use of scarce financial resources to fund acquisitions. •Retention of the firm's flexibility to readily disengage once the purpose of the alliance has been served. •Option to withdraw from the alliance if its benefits prove elusive, unlike the more permanent arrangement required by an acquisition.

Concepts & Connections 7.1 Walgreens Boots Alliance, Inc.: Entering Foreign Markets Via Alliance Followed By Merger Did industry consolidation provoke Walgreens to make its strategic international acquisition? What strategic advantages does the alliance between Walgreens and Alliance Boots bring to both partners? What internal challenges could the merger create for Walgreens as it strives to integrate and adjust to the risks of entry into international markets? Alliances may also be used to pave the way for an intended merger; they offer a way to test the value and viability of a cooperative arrangement with a foreign partner before making a more permanent commitment. Concepts & Connections 7.1 shows how Walgreens pursued this strategy with Alliance Boots in order to facilitate its expansion abroad.

CORE CONCEPT: Transnational Strategy A transnational strategy is a think global, act local approach to strategy making that involves employing essentially the same strategic theme (low-cost, differentiation, focused, best-cost) in all country markets, while allowing some country-to-country customization to fit local market conditions.

Concepts & Connections 7.2 Four Seasons Hotels: Local Character, Global Service Why has Four Seasons Hotels been so successful in expanding its hospitality operations into a broad diversity of countries? How should local hotel competitors respond to Four Seasons Hotels' continued expansion into their markets? Why would a global economic slowdown likely not dampen demand for the Four Seasons luxury hotel offerings? Concepts & Connections 7.2 explains how Four Seasons Hotels has been able to compete successfully on the basis of a transnational strategy.

The Ability of Related Diversification to Deliver Competitive Advantage and Gains in Shareholder Value Cross-business strategic fit. •Builds shareholder value in ways that shareholders cannot replicate by simply owning a diversified portfolio of stocks. •Captures benefits that are possible only through related diversification. •Does not automatically result in benefits; must be pursued by management in order to capture the greater profitability of cross-business benefits. Diversifying into related businesses where competitively valuable strategic-fit benefits can be captured puts a firm's businesses in position to perform better financially as part of the firm than they could have performed as independent enterprises, thus providing a clear avenue for boosting shareholder value and satisfying the better-off test.

Concepts and Connections 8.1 The Kraft-Heinz Merger: Pursuing the Benefits of Cross-Business Strategic Fit Why did Kraft choose to seek a merger with Heinz rather than starting its own food products subsidiary? What are the anticipated results of the merger? To what extent is decentralization required when seeking cross-business strategic fit? What should Kraft-Heinz do to ensure the continued success of its related diversification strategy? Concepts and Connections 8.1 describes the merger of Kraft Foods Group, Inc. with the H. J. Heinz Holding Corporation, in pursuit of the strategic-fit benefits of a related diversification strategy.

Factors That Shape Strategy Choices in International Markets Factors: •Degree to which there are important cross-country differences in demographic, cultural, market conditions. •Whether opportunities exist to gain a location-based advantage based on wage rates, worker productivity, inflation rates, energy costs, tax rates, and other factors that impact cost structure. •Risks of adverse shifts in currency exchange rates. •Extent to which governmental policies affect the local business climate. Four important factors shape a company's strategic approach to competing in foreign markets.

Cross-Country Differences in Demographic, Cultural, and Market Conditions Adjustments to local buyer tastes: •Raise manufacturing and distribution costs. •Reduce scale economies and increase learning curve effects. Differences in market growth potential: •Reflect wide variances in the demographics, income levels, and cultural attitudes in emerging markets. •Can result from a lack of infrastructure, reliable distribution systems, and existing retail networks. •Indicate local variations in the intensity of competition. The tension between the market pressures to localize a company's product offerings country by country and the competitive pressures to lower costs is one of the big strategic issues that participants in foreign markets have to resolve.

Misguided Reasons for Pursuing Unrelated Diversification Misguided reasons for diversifying: •Risk reduction. •Growth. •Earnings stabilization. •Managerial motives. Companies sometimes pursue unrelated diversification for reasons that are entirely misguided. Because unrelated diversification strategies at their best have only a limited potential for creating long-term economic value for shareholders, it is essential that managers not compound this problem by taking a misguided approach toward unrelated diversification, in pursuit of objectives that are more likely to destroy shareholder value than create it.

Diversifying into Both Related and Unrelated Businesses Dominant-business firms: •One major core business accounting for 50% to 80% of total revenues and a collection of small related or unrelated businesses accounts for the remainder. Narrowly-diversified firms: •Diversification into a few (2-5) related or unrelated businesses. Broadly-diversified firms: •Diversification includes a wide collection of either related or unrelated businesses or a mixture of both. Multibusiness enterprises: •Diversification into several unrelated groups of related businesses. Combination related-unrelated diversification strategies have particular appeal for companies with a mix of valuable competitive assets, covering the spectrum from general to specialized resources and capabilities. There's ample room for companies to customize their diversification strategies to incorporate elements of both related and unrelated diversification, as may suit their own competitive asset profile and strategic vision. Combination related-unrelated diversification strategies have particular appeal for companies with a mix of valuable competitive assets, covering the spectrum from general to specialized resources and capabilities.

Strategy Options for Competing in Developing-Country Markets Prepare to compete on the basis of low price. Modify aspects of the firm's business model or strategy to accommodate local circumstances. Try to change the local market to better match the way the firm does business elsewhere. Avoid emerging markets where it is impractical or uneconomical to modify the firm's business model to accommodate local circumstances. Be patient, work within the system to improve the infrastructure, and lay the foundation for generating sizable revenues and profits once conditions are ripe for market take-off. There are several options for tailoring a company's strategy to fit the sometimes unusual or challenging circumstances presented in developing-country markets.

FIGURE 7.1 A Company's Three Principal Strategic Options for Competing Internationally, Text Alternative A figure lists a company's three strategic options for competing internationally: multidomestic strategy (think local, act local), global strategy (think global, act global), and transnational strategy (think global, act local). For each strategy, several ways are listed to deal with national variations in buyer preferences and market conditions. Multidomestic strategy (think local, act local): employ localized strategies, one for each country market. •Tailor the company's competitive approach and product offering to fit specific market conditions and buyer preferences in each host country. •Delegate strategy making to local managers with firsthand knowledge of local conditions. Global strategy (think global, act global): employ same strategy worldwide. •Pursue the same basic competitive strategy theme (low-cost differentiation, best-cost, or focused) in all country markets, a global strategy. •Office the same products worldwide, with only very minor deviations from one country to another when local market conditions so dictate. •Utilize the same capabilities, distribution, channels, and marketing approaches worldwide. •Coordinate strategic actions from central headquarters. Transnational strategy (think global, act local): employ a combination global-local strategy. •Employ essentially the same basic competitive strategy theme (low-cost, differentiation, best-cost, or focused) in all country markets. •Develop the capability to customize product offerings and sell different product versions in different countries (perhaps even under different brand names). •Give local managers the latitude to adapt the global approach as needed to accommodate local buyers' preferences and be responsive to local market and competitive conditions.

Figure 8.1 shows the range of alternatives for companies pursuing diversification.

FIGURE 8.1 Strategic Themes of Multibusiness Corporation

Figure 3.5 shows a variety of factors that determine the strength of suppliers' bargaining power.

Figure 3.5 shows a variety of factors that determine the strength of suppliers' bargaining power.

Figure 3.7 summarizes these factors affecting rivalry in the industry, identifying those that intensify or weaken rivalry among direct competitors in an industry.

Figure 3.7 summarizes these factors affecting rivalry in the industry, identifying those that intensify or weaken rivalry among direct competitors in an industry.

CORE CONCEPT: International Strategy A company's international strategy is its strategy for competing in two or more countries simultaneously.

Figure 7.1 shows a company's three options for resolving this issue: choosing a multidomestic, global, or transnational strategy. A multidomestic strategy is one in which a company varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions. A transnational strategy is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies. A global strategy is one in which a company employs the same basic competitive approach in all countries where it operates, sells standardized products globally, strives to build global brands, and coordinates its actions worldwide with strong headquarters control. It represents a think-global, act-global approach.

Franchising Strategies Franchising strategies are often better suited to the global expansion efforts of service and retailing enterprises. Advantages: •Franchisee bears many of the costs and risks of establishing foreign locations. •Franchisor must expend only the resources to recruit, train, and support franchisees. Disadvantages: •Maintaining quality control in franchisee operations. •Allowing franchisees discretion in adapting product offerings to local tastes and expectations. While licensing works well for manufacturers and owners of proprietary technology, franchising is often better suited to the international expansion efforts of service and retailing enterprises.

Foreign Subsidiary Strategies Foreign subsidiary strategies allow for direct control over all aspects of operating in a foreign market. Options for developing a subsidiary: •Acquiring either a struggling or successful foreign local firm is the quickest, least risky, and most cost-efficient path to hurdling local market entry barriers. •Establishing a foreign subsidiary from the ground up via internal development relies heavily on the firm's prior experience with foreign market operations. Companies that want to participate directly in the performance of all essential value chain activities typically establish a wholly owned subsidiary, either by acquiring a local company or by establishing its own new operating organization from the ground up.

Integrating Forward to Enhance Competitiveness Vertical integration into forward stages of the industry value chain allows manufacturers to: •Gain better access to end users. •Improve market visibility. •Include the purchasing experience as a differentiating feature. Forward integration involves entry into value chain system activities closer to the end user.

Forward Vertical Integration and Internet Retailing Direct selling and Internet retailing is appealing when: •It lowers distribution costs. •It produces a relative cost advantage over rivals. •It produces higher profit margins. •It allows lower prices to be charged to end users. •Numbers of buyers prefer to make online purchases. However, competing against directly against distribution allies can create channel conflict and signal a weak commitment to dealers.

Stating the Issues Clearly and Precisely > A well-stated issue involves such phrases as --- "How to .......?" --- "Whether to .......?" --- "What should be done about .......?" > Issues need to be precise, specific, and "cut straight to the chase" > Issues on the "the worry list" raise questions about --- What actions need to be considered --- What to think about doing Stating the Issues Clearly and Precisely > A well-stated issue involves such phrases as --- "How to .......?" --- "Whether to .......?" --- "What should be done about .......?" > Issues need to be precise, specific, and "cut straight to the chase" > Issue

Generic Outline for Framing Problems & Issues > Start Big: Identify the firm's goals/objectives and strategy. > Assess the organization's performance relative to it's goals/objectives. How well is the company's strategy working to achieve the goals/objectives? Does it have sensible goals/objectives? --- If performance is pretty good, briefly state why and what should be on your worry list for the future? What could go wrong? --- If performance is bad, why? > Consider two main categories of issues: --- Problems from strategy formulation or choice: Right strategy for the environment and/or that fits or builds on internal capabilities? --- Problems of execution: Right strategy but not well implemented? > Drill down to flesh out the issues using the analytical tools and concepts. Ask why that problem exists several times to get beyond the symptoms to root causes

Think Local, Act Local Strategies: Two Big Drawbacks These strategies can hinder the transfer of competencies and resources across country boundaries because the strategies in different host countries can be grounded in varying competencies and capabilities. They do not promote building a single, unified competitive advantage, especially one based on low-cost leadership.

Global Strategy—A Think Global, Act Global Approach to Strategy Making Think Global, Act Global Strategy. •Integrates and coordinates the firm's strategic moves worldwide. •Promotes establishing an identifiably uniform brand image and reputation from country to country. •Focuses the firm's full resources on securing a sustainable low-cost or differentiation-based competitive advantage over both domestic rivals and global rivals. A global strategy is one in which a company employs the same basic competitive approach in all countries where it operates, sells standardized products globally, strives to build global brands, and coordinates its actions worldwide with strong headquarters control. It represents a think-global, act-global approach.

What Strategic Issues Merit Managerial Attention? > Based on the results of both external (industry and competitive analysis) and internal (an evaluation of a company's competitiveness) analyses, what items should be on the company's "worry list"? > Requires thinking strategically about --- Pluses and minuses in the industry and competitive situation --- Company's capabilities (strengths and weaknesses) and attractiveness of its competitive position A "good" strategy must address "what to do" about each and every strategic issue

Identifying the Strategic Issues >How to stave off market challenges from new foreign competitors? >How to combat price discounting of rivals? >How to reduce a company's high costs? >How to sustain a company's present growth in light of slowing buyer demand? >Whether to expand a company's product line? >Whether to expand into foreign markets rapidly or cautiously? >What to do about aging demographics of a company's customer base?

TABLE 8.1 Calculating Weighted Industry-Attractiveness Scores

Industry Attractiveness Measure Importance Weight Industry A Rating/Score Industry B Rating/Score Industry C Rating/Score Industry D Rating/Score Market size and projected growth rate 0.10 8/0.80 5/0.50 2/0.20 3/0.30 Intensity of competition 0.25 8/2.00 7/1.75 3/0.75 2/0.50 Emerging opportunities and threats 0.10 2/0.20 9/0.90 4/0.40 5/0.50 Cross-industry strategic fit 0.20 8/1.60 4/0.80 8/1.60 2/0.40 Resource requirements 0.10 9/0.90 7/0.70 5/0.50 5/0.50 Seasonal and cyclical influences 0.05 9/0.45 8/0.40 10/0.50 5/0.25 Societal, political, regulatory, and environmental factors 0.05 10/0.50 7/0.35 7/0.35 3/0.15 Industry profitability 0.10 5/0.50 10/1.00 3/0.30 3/0.30 Industry uncertainty and business risk 0.05 5/0.25 7/0.35 10/0.50 1/0.05 Sum of the assigned weights 1.00 Overall weighted industry attractiveness scores. Rating scale: 1 = Very weak; 10 = very strong 7.20 6.75 5.10 2.95 The sum of the weighted scores for all the attractiveness measures provides an overall industry-attractiveness score. The importance weights must add up to 1. This procedure is illustrated in Table 8.1. Keep in mind here that the more intensely competitive an industry is, the lower the attractiveness rating for that industry.

The Risks of Strategic Alliances with Foreign Partners Pitfalls to the success of alliances: •Language and cultural barriers. •Diversity in ethical standards, partner values and objectives, corporate strategies, and operating practices. •Development of trust, coordination, and effective communications between partners. •Interpersonal conflict among partners' managers. •Overdependence on foreign partners for essential expertise and competitive capabilities. Alliances and joint ventures with foreign partners have their pitfalls, however. One of the lessons about cross-border partnerships is that they are more effective in helping a company establish a beachhead of new opportunity in world markets than they are in enabling a company to achieve and sustain global market leadership.

International Strategy: Three Principal Options Choosing between localized multicountry strategies or a global strategy: •Deciding upon the degree to vary a firm's competitive approach country by country to fit the specific market conditions and buyer preferences in each host country when operating in two or more foreign markets. Options for tailoring a firm's international strategy: •Multidomestic strategy (think local, act local). •Transnational strategy (think global, act local). •Global strategy (think global, act global). An international strategy is a strategy choice to attempt competing in two or more countries simultaneously

Export Strategies Exporting involves using domestic plants as a production base for exporting to foreign markets. Advantages: •Conservative way to test international waters. •Minimizes both risk and capital investment requirements. An export strategy is vulnerable when: •Home country manufacturing costs are higher than in foreign countries where rivals have plants. •Product transportation costs to distant markets are relatively high. •Adverse shifts can occur in currency exchange rates. Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial strategy for pursuing international sales. It is a conservative way to test the international waters. Unless an exporter can keep its production and shipping costs competitive with rivals' costs, secure adequate local distribution and marketing support of its products, and effectively hedge against unfavorable changes in currency exchange rates, its success will be limited.

Licensing Strategies Licensing makes sense when a firm: •Has valuable technical know-how or a patented product but has neither the internal capabilities nor resources to enter foreign markets. •Wants to avoid risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky. •Seeks to generate income from potential royalties. Disadvantage of licensing: •Difficulty in maintaining control over the use of technical know-how provided to foreign firms. Using a licensing strategy as a mode of entry makes sense when a firm with valuable technical know-how, an appealing brand, or a unique patented product has neither the internal organizational capability nor the resources to enter foreign markets.

The Five Generic Competitive Strategies 1.A low-cost provider strategy—striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals. 2.A broad differentiation strategy—seeking to differentiate the firm's product or service from rivals' in ways that will appeal to a broad spectrum of buyers. 3.A focused low-cost strategy—concentrating on a narrow 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. 4.A focused differentiation strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals' products. 5.A best-cost provider strategy—giving customers more value for the money by satisfying buyers' expectations on key quality/features/performance/service attributes while beating their price expectations. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with comparable differentiating attributes.

Low-Cost Provider Strategies A powerful competitive approach with price-sensitive buyers when a firm's offering: •Has meaningfully lower costs than rivals—but not necessarily the absolutely lowest possible cost. •Includes features and services that buyers consider essential. •Is viewed by buyers as offering equivalent or higher value even if priced lower than competing products. A low-cost producer's basis for competitive advantage is lower overall costs than competitors. Successful low-cost leaders, who have the lowest industry costs, are exceptionally good at finding ways to drive costs out of their businesses and still provide a product or service that buyers find acceptable.

Diagnosis - Identify Realized Strategy & Evaluate Performance

Mission/Vision/Objectives - Where are we going, what are we trying to do? (Growth, market share, being the leader, profitability?)Scope: Where do we compete? Industries, product markets, geographic areas, etc. Competitive Advantage: How do we compete? What unique value do we bring? Why do customers pick our products or services over our competitors'? How do we make money (business model)? Evaluation: How well is the strategy working? Is our firm an above-average industry performer? (Investopedia Tutorial)

How Markets Demographics Differ from Country to Country Differences: •Demographic differences. •Consumer tastes and preferences. •Consumer purchasing power. •Consumer buying habits. •Distribution channel emphasis. •Demands for localized products. •Strength of local competitive rivalry. Companies operating in a global marketplace must wrestle with whether and how much to customize their offerings in each different country market to match the tastes and preferences of local buyers or whether to pursue a strategy of offering a mostly standardized product worldwide

Opportunities for Location-Based Cost Advantages A firm's costs and profitability are impacted by the location of its activities due to: •Wage rates. •Worker productivity. •Energy costs. •Environmental regulations. •Tax rates. •Inflation rates. •Access to resources. Increasingly, companies are locating different value chain activities in different parts of the world to exploit location-based advantages that vary from country to country. Differences in wage rates, worker productivity, energy costs, and the like create sizable variations in manufacturing costs from country to country.

Outsourcing Strategies: Narrowing the Scope of Operations 1 Outsourcing an activity should be considered when: •It can be performed better or more cheaply by outside specialists. •It is not crucial to achieving a sustainable competitive advantage and won't hollow out capabilities, core competencies, or technical know-how of the firm. •It improves organizational flexibility and speeds time to market. •It reduces a firm's risk exposure to changing technology and/or buyer preferences. •It allows a firm to concentrate on its core business, leverage its key resources and core competencies, and do even better what it already does best. Outsourcing involves contracting out certain value chain activities that are normally performed in-house to outside vendors. The conditions that favor farming out certain value chain activities to outside parties are listed on this slide.

Outsourcing Strategies: Narrowing the Scope of Operations 2 The Big Risk of an Outsourcing Strategy: Farming out the wrong types of activities and, thereby, hollowing out strategically important capabilities that ultimately leads to reduction of the firm's strategic competitiveness and long-run success in the marketplace is a big risk and the firm is no longer a master of its own destiny. A company must guard against outsourcing activities that hollow out the resources and capabilities, leads to loss of control of key activities, and discourages investment in the company.

When to Concentrate Internal Processes in a Few Locations Circumstances favor concentrating activities and processes in a few countries when: •The costs of manufacturing or other activities are significantly lower in some locations than in others. •Significant scale economies can be achieved by concentrating on particular activities. •There is a steep learning curve associated with performing an activity. •Certain locations offer superior resources, allow better coordination of related activities, or offer other advantages. It is advantageous for a company to concentrate its activities in a limited number of locations for the reason of costs, scale, learning and experience, and availability of resources.

Processes Dispersing activities and processes is advantageous when: •Buyer-related activities must take place close to buyers. •High transportation costs, diseconomies of large size, and trade barriers make it too expensive to operate from a central location. •Dispersing activities reduces the risks of fluctuating exchange rates and adverse political developments. In some instances, dispersing activities across locations is more advantageous than concentrating them when costs and business risks can be lowered through localization of activities.

Review of Questions and Analyses > How well is the firm's strategy working? --- Ratio analysis - review of homework question #1 on Macy's > What are the firm's competitively important resources & capabilities? --- Identify resources/capabilities & use the VRIN test to see which ones matter --- VRIN vs. VRIO and how does SWOT fit in? > Are the firm's cost structure and customer value proposition competitive? --- Assessing activities via value chains and doing a "relative cost analysis" --- Benchmarking > Is the firm competitively stronger or weaker than key rivals? --- Use KSFs and do a comparative analysis of your firm vs. others

Q 2: What are the firm's competitively important resources & capabilities? VRIN and/or VRIO >Want firm-specific resources and capabilities that are VRIN - OR - VRIO. >VRIO lumps Imitation and substitutability together and adds Organized >Both are trying to explain a sustained ability to create value

Reasons for Firms to Enter Into Strategic Alliances Reasons: •To expedite development of new technologies or products. •To overcome technical or manufacturing expertise deficits. •To bring together personnel of each partner to create new skill sets and capabilities. •To improve supply chain efficiency. •To gain production and/or marketing economies of scale. •To acquire or improve market access through joint marketing agreements. Companies that have formed a host of alliances need to manage their alliances like a portfolio.

Reasons for Firms to Continue In Strategic Alliances Alliances are likely to be long-lasting when: •They involve collaboration with partners that do not compete directly. •A trusting relationship has been established. •Both parties conclude that continued collaboration is in their mutual interest. Experience indicates that: •Alliances may help in reducing a firm's competitive disadvantage but seldom result in a firm attaining a durable competitive edge over its rivals. Alliances are more likely to be long-lasting when (1) they involve collaboration with partners that do not compete directly, such as suppliers or distribution allies; (2) a trusting relationship has been established; and (3) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging.

Diagnosis - Assessing the Situation

Situation Analysis External Analyses / Questions: 1. What are the strategically relevant components of the macro-environment? 2.How strong are the industry's competitive forces? 3.What are the industry's driving forces of change and what impact will they have? 4.How are industry rivals positioned (maps) 5.What strategic moves are rivals likely to make next? 6.What are the industry's KSFs? 7.Does the industry offer good prospects for attractive pro Internal Analyses / Questions: 1. How well is the firm's strategy working? (Quant analysis) 2.What are the firm's competitively important resources & capabilities? 3.Are the firm's cost structure and customer value proposition competitive? 4.Is the firm competitively stronger or weaker than key rivals?

Evaluating the Strategy of a Diversified Company Step 1: Assess the attractiveness of the industries the company has diversified into. Step 2: Assess the competitive strength of the company's business units. Step 3: Evaluate the extent of cross-business strategic fit along the value chains of the company's various business units. Step 4: Check whether the company's resources fit the requirements of its present business lineup. Step 5: Rank the performance of the businesses from best to worst and determine a priority for allocating resources. Step 6: Craft new strategic moves to improve overall corporate performance. Strategic analysis of diversified companies builds on the concepts and methods used for single-business companies. The procedure for evaluating the pluses and minuses of a diversified company's strategy and deciding what actions to take to improve the company's performance involves six steps.

Step 1: Evaluating Industry Attractiveness Industry attractiveness measures: •Market size and projected growth rate. •Intensity of competition. •Emerging opportunities and threats. •Presence of cross-industry strategic fit. •Resource requirements. •Seasonal and cyclical factors. •Social, political, regulatory, and environmental factors. •Industry profitability. •Industry uncertainty and business risk. A principal consideration in evaluating the caliber of a diversified company's strategy is the attractiveness of the key measures of industries in which it has business operations The more attractive the industries (both individually and as a group) that a diversified company is in, the better its prospects for good long-term performance. The more one industry's value chain and resource requirements match up well with the value chain activities of other industries in which the company has operations, the more attractive the industry is to a firm pursuing related diversification. However, cross-industry strategic fit is not something that a company committed to a strategy of unrelated diversification considers when it is evaluating industry attractiveness.

Strategy Implications of the Attractiveness/Strength Matrix Businesses in the upper-left corner: •Receive top investment priority. •Strategic prescription: grow and build. Businesses in the three diagonal cells: •Given medium investment priority. •Brighter or dimmer prospects than others. Businesses in the lower-right corner: •Candidates for divestiture or to be harvested to take cash out of the business. The industry-attractiveness and business-strength scores can be used to portray the strategic positions of each business in a diversified company. Industry attractiveness is plotted on the vertical axis and competitive strength on the horizontal axis. A nine-cell grid emerges from dividing the vertical axis into three regions (high, medium, and low attractiveness) and the horizontal axis into three regions (strong, average, and weak competitive strength).

Step 3: Determining the Competitive Value of Strategic Fit in Multibusiness Companies Value chain matchups provide competitive advantage when there are opportunities to: 1.Combine performance of certain activities, thereby reducing costs and capturing economies of scope. 2.Transfer skills, technology, or intellectual capital from one business to another. 3.Share a respected brand name across multiple product and/or service categories. The greater the value of cross-business strategic fit in enhancing a firm's performance in the marketplace or on the bottom line, the more competitively powerful is its strategy of related diversification. Without significant cross-business strategic fit and dedicated company efforts to capture the benefits, one has to be skeptical about the potential for a diversified company's businesses to perform better together than apart.

Examining a Diversified Company's Nonfinancial Resource Fit A diversified firm must ensure that it can meet the nonfinancial resource needs of its portfolio of businesses. •Does the firm have or can it develop the specific resources and capabilities needed to be successful in each of its businesses? •Are the firm's resources being stretched too thinly by the requirements of one or more of its original businesses or a recent acquisition? Matching resource requirements are important in related diversification because they facilitate resource sharing and low-cost resource transfer.

Step 5: Ranking Business Units and Setting a Priority for Resource Allocation Factors to consider in judging business-unit performance: •Sales growth. •Profit growth. •Earnings contribution. •Return on investment. •Cash flow generation. Once a diversified company's strategy has been evaluated from the perspective of industry attractiveness, competitive strength, strategic fit, and resource fit, the next step is to use this information to rank the performance prospects of the businesses from best to worst. Such ranking helps top-level executives assign each business a priority for resource support and capital investment.

FIGURE 8.4 The Chief Strategic and Financial Options for Allocating a Diversified Company's Financial Resources Strategic Options for Allocating Company Financial Resources: •Invest in ways to strengthen or grow existing business. •Make acquisitions to establish positions in new industries or to complement existing businesses. •Fund long-range R&D ventures aimed at opening market opportunities in new or existing businesses. Financial Options for Allocating Company Financial Resources: •Pay off existing long-term or short-term debt. •Increase dividend payments to shareholders. •Repurchase shares of the company's common stock. •Build cash reserves; invest in short-term securities. As a rule, business subsidiaries with the brightest profit and growth prospects, attractive positions in the nine-cell matrix, and solid strategic and resource fit should receive top priority for allocation of corporate resources. However, in ranking the prospects of the different businesses from best to worst, it is usually wise to also take into account each business's past performance in regard to sales growth, profit growth, contribution to company earnings, return on capital invested in the business, and cash flow from operations. While past performance is not always a reliable predictor of future performance, it does signal whether a business is already performing well or has problems to overcome.

Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance 1.Sticking closely with existing business lineup and pursue opportunities it presents. 2.Broadening the firm's business scope by making acquisitions in new industries. 3.Divesting some businesses and retrench to a narrower base of business operations. 4.Restructuring the firm's business lineup to put a new face on its business makeup. The conclusions flowing from the five preceding analytic steps set the agenda for crafting strategic moves to improve a diversified company's overall performance. The strategic options boil down to four broad categories of actions.

Approaches to Diversifying the Business Lineup Options for entering new industries and lines of business: •Diversification by acquisition of an existing business. •Entering a new line of business through internal development. •Using joint ventures to achieve diversification. The means of entering new businesses can take any of three forms: acquisition, internal startup, or joint ventures with other companies.

Strategic Options for Diversified Corporations Stick with the existing business lineup and pursuing opportunities presented by these businesses. Broaden the scope of diversification by entering additional industries. Retrench to a narrower scope of diversification by divesting poorly performing businesses. Broadly restructure the business lineup with multiple divestitures and/or acquisitions. The demanding and time-consuming nature of these four tasks explains why corporate executives generally refrain from becoming immersed in the details of crafting and executing business-level strategies. Rather, the normal procedure is to delegate lead responsibility for business strategy to the heads of each business, giving them the latitude to develop strategies suited to the particular industry environment in which their business operates and holding them accountable for producing good financial and strategic results.

Using Cross-Border Coordination to Build Competitive Advantage Multinational and global competitors coordinate activities across borders to achieve competitive advantage by: •Sharing product knowledge, operating skills, and supply chain efficiencies across their markets. •Shifting production between plants in different countries to take advantage of changes in exchange rates, energy costs, or in tariffs and quotas. •Shifting production to locations having excess capacity or underutilized personnel. When a company has competitively valuable resources and capabilities, it may be able to leverage them further by expanding internationally. If its resources retain their value in foreign contexts, then entering new foreign markets can extend the company's resource-based competitive advantage over a broader domain. haring and transferring resources and capabilities across country borders may also contribute to the development of broader or deeper competencies and capabilities— helping a company achieve dominating depth in some competitively valuable area.

Strategies for Competing in Developing Country Markets Developing-Economy Markets: •China, India, Brazil, Indonesia, Thailand, Poland, Russia, and Mexico—where business risks are considerable but opportunities for growth are huge as their economies develop and living standards climb toward those of the industrialized world. Tailoring products to fit conditions in emerging markets often involves: •Making more than minor product adaptations. •Becoming more familiar with local cultures and habits. •Rethinking pricing, packaging and product features. Companies racing for global leadership have to consider competing in developing-economy markets like China, India, Brazil, Indonesia, Thailand, Poland, Mexico, and Russia—countries where the business risks are considerable but where the opportunities for growth are huge, especially as their economies develop and living standards climb toward levels in the industrialized world.

Choosing a Company All Team members use the same company>"First come, first served" on firms chosen (two teams cannot do the same company)>Look for a firm that has done an Initial Public Offering (IPO) in the last year or two-NYSE Recent IPOs (look at Priced IPOs and largest IPOs): https://www.nyse.com/ipo-center/recent-ipo-NASDAQ (looked for Priced IPOs - by month/year at the top): https://www.nasdaq.com/market-activity/ipos>Recommendations:-Find a company where you can easily understand the industry and what the firm does, normally B to C (not B to B)-Avoid pharmaceuticals, (financial) real estate, finance, acquisition corps, and holding corps.

Strategy Is:

Strategy Options for Entering Foreign Markets

Strategy Options for Entering Foreign Markets 1.Maintain a national (one-country) production base and export goods to foreign markets. 2.License foreign firms to produce and distribute the company's products abroad. 3.Employ a franchising strategy. 4.Establish a subsidiary in a foreign market via acquisition or internal development. 5.Rely on strategic alliances or joint ventures with foreign partners to enter new country markets. Once a company decides to expand beyond its domestic borders, it must consider the question of how to enter foreign markets. There are five primary modes of entry. The modes vary considerably regarding the level of investment required and the associated risks—but higher levels of investment and risk generally provide the firm with the benefits of greater ownership and control.

Step 2: Evaluating Business-Unit Competitive Strength Competitive strength factors: •Relative market share. •Costs relative to competitors' costs. •Products or services that satisfy buyer expectations. •Benefits from its strategic fit with sibling businesses. •Strategic alliances and collaborative partnerships. •Brand image and reputation. •Competitively valuable capabilities. •Profitability relative to competitors. Relative market share is the ratio of a business unit's market share to the market share of its largest industry rival as measured in unit volumes, not dollars. Using relative market share to measure competitive strength is analytically superior to using straight-percentage market share. A simple and reliable analytic tool for gauging industry attractiveness involves calculating quantitative industry-attractiveness scores based on these measures.

TABLE 8.2 Calculating Weighted Competitive Strength Scores for a Diversified Company's Business Units Competitive Strength Measure Importance Weight Business A in Industry A Rating/Score Business B in Industry B Rating/Score Business C in Industry C Rating/Score Business D in Industry D Rating/Score Relative market share 0.15 10/1.50 1/0.15 6/0.90 2/0.30 Costs relative to competitors' costs 0.20 7/1.40 2/0.40 5/1.00 3/0.60 Ability to match or beat rivals on key product attributes 0.05 9/0.45 4/0.20 8/0.40 4/0.20 Ability to benefit from strategic fit with sister businesses 0.20 8/1.60 4/0.80 4/0.80 2/0.60 Bargaining leverage with suppliers/ buyers; caliber of alliances 0.05 9/0.45 3/0.15 6/0.30 2/0.10 Brand image and reputation 0.10 9/0.90 2/0.20 7/0.70 5/0.50 Competitively valuable capabilities 0.15 7/1.05 2/0.30 5/0.75 3/0.45 Profitability relative to competitors 0.10 5/0.50 1/0.10 4/0.40 4/0.40 Sum of assigned weights 1.00 Overall weighted competitive strength scoresRating scale: 1 = Very weak; 10 = Very strong 7.85 2.30 5.25 3.15 After settling on a set of competitive-strength measures that are well matched to the circumstances of the various business units, the company needs to assign weights indicating each measure's importance. As in the assignment of weights to industry-attractiveness measures, the importance weights must add up to 1. Each business unit is then rated on each of the chosen strength measures, using a rating scale of 1 to 10 (where a high rating signifies competitive strength, and a low rating signifies competitive weakness). In the event that the available information is too limited to confidently assign a rating value to a business unit on a particular strength measure, it is usually best to use a score of 5—this avoids biasing the overall score either up or down. Weighted strength ratings are calculated by multiplying the business unit's rating on each strength measure by the assigned weight. For example, a strength score of 6 times a weight of 0.15 gives a weighted strength rating of 0.90. The sum of the weighted ratings across all the strength measures provides a quantitative measure of a business unit's overall competitive strength. Table 8.2 provides sample calculations of competitive-strength ratings for three businesses.

The Positive Impact of Host Country Government Policies on the Business Climate Host government policies that create a business climate favorable to foreign firms agreeing to construct or expand production and distribution facilities in the host country include: •Reduced taxes. •Low-cost loans. •Site-development assistance. Cross-country variations in government policies and economic conditions affect both the opportunities available to a foreign entrant and the risks of operating within the host country.

The Negative Impact of Host Country Government Policies on the Business Climate Host government policies that negatively affect foreign-based firms include: •Environmental regulations. •Customs requirements, tariffs, and quotas. •Local content requirements. •Requiring prior approval of capital spending projects. •Limits on repatriation of local funds. •Local ownership or partner requirements. •Subsidies for domestic companies. Political risks stem from instability or weaknesses in national governments and hostility to foreign business. Economic risks stem from the stability of a country's monetary system, economic and regulatory policies, the lack of property rights protections.

Building Shareholder Value Through Unrelated Diversification Corporate executives must: •Do a superior job of identifying and acquiring new businesses that can produce consistently good earnings and returns on investment. •Do an excellent job of negotiating favorable acquisition prices. •Do such a good job of overseeing and parenting the firm's businesses that they perform at a higher level than they would otherwise be able to do through their own efforts alone. For a strategy of unrelated diversification to produce companywide financial results above and beyond what the businesses could generate operating as stand-alone entities, corporate executives must do three things to pass the three tests of corporate advantage: 1.Diversify into industries where the businesses can produce consistently good earnings and returns on investment (to satisfy the industry-attractiveness test). 2.Negotiate favorable acquisition prices (to satisfy the cost of entry test). 3.Do a superior job of corporate parenting via high-level managerial oversight and resource sharing, financial resource allocation and portfolio management, and/or the restructuring of underperforming businesses (to satisfy the better-off test).

The Pitfalls of Unrelated Diversification (1 of 2) Demanding managerial requirements: 1.Staying abreast of what is happening in each industry and each subsidiary. 2.Picking business-unit heads having the requisite combination of managerial skills and know-how to drive gains in performance. 3.Telling the difference between those strategic proposals of business-unit managers that are prudent and those that are risky or unlikely to succeed. 4.Knowing what to do if a business unit stumbles and its results suddenly head downhill. The Pitfalls of Unrelated Diversification (2 of 2) Limited competitive advantage potential: •Unrelated strategy offers limited competitive advantage beyond what each individual business can generate on its own. •Without strategic fit, consolidated performance of an unrelated group of businesses is unlikely to be better than the sum of what the individual business units could achieve independently.

Industry Cluster Knowledge Sharing Opportunities Advantages to operating in a location containing a cluster of related industries: •Closer collaboration with key suppliers that results in greater efficiency and innovativeness. •Opportunities for greater knowledge sharing relationships among firms participating in same value chain cluster . The advantage to firms that develop as part of a related-industry cluster comes from the close collaboration with key suppliers and the greater knowledge sharing throughout the cluster, resulting in greater efficiency and innovativeness.

The Risks of Adverse Exchange Rate Shifts An exporter gains in competitiveness when the currency of the country in which exported goods are manufactured is weak relative to the currency of the country to which the goods will be exported. An exporter is at a disadvantage when the currency of the country where exported goods are manufactured grows stronger relative to the country to which the goods will be exported. When companies produce and market their products and services in many different countries, they are subject to the impacts of sometimes favorable and sometimes unfavorable changes in currency exchange rates.

Failed Strategic Alliances and Cooperative Partnerships Common causes for the failure of 60 to 70% of alliances each year: •Diverging objectives and priorities. •An inability to work well together. •Changing conditions that make the purpose of the alliance obsolete. •The emergence of more attractive technological paths. •Marketplace rivalry between one or more allies. While strategic alliances provide a way of obtaining the benefits of vertical integration, mergers and acquisitions, and outsourcing, they also suffer from some of the same drawbacks.

The Strategic Dangers of Relying on Alliances for Essential Resources and Capabilities The Achilles' heel of alliances and cooperative partnerships is becoming dependent on other companies for essential expertise and capabilities. Ultimately, a firm must develop its own resources and capabilities to protect its competitiveness and capabilities to build and maintain its competitive advantage. While strategic alliances provide a way of obtaining the benefits of vertical integration, mergers and acquisitions, and outsourcing, they also suffer from some of the same drawbacks.

Concepts and Connections 1.1 Pandora, Sirius XM, and Over-the-Air Broadcast Radio: Three Contrasting Business Models

The table presents comparison of the major competitors in the broadcast radio markets. A competitor's customer value proposition is affected by the product price which impacts its profit formula. These values in turn affect and are affected by the competitor's per-unit cost structure and its profit margin.

The Industry Environment: Porter's Forces Model

These elements of the industry "structure" predict the overall attractiveness and profitability of an industry.Understanding changes in these forces can help you to identify potential Driving Forces for Change (and then strategic ISSUES.) Competitive strategies allow firms to position themselves in the industry in ways that buffer them from or take advantage of one or more of the five forces.

CORE CONCEPTS: Political and Economic Risks Political risks stem from instability or weakness in national governments and hostility to foreign business; economic risks stem from the instability of a country's monetary system, changes in economic and regulatory policies, and the lack of property rights protections.

Thinking Strategically Instructors may want to discuss the current and collateral effects of tariffs on international trade relationships between and among EU members and other major trading countries (e.g., the United States and China).

Analyzing The Macro Environment: PESTEL

This is an example of one way to generate a visual for a PESTEL analysis. Note that there can be more than one thing happening within a PESTEL category. The ones with the longest arrows are candidates for Driving Forces.

CORE CONCEPT: Global Strategies Global strategies employ the same basic competitive approach in all countries where a company operates and are best suited to industries that are globally standardized in terms of customer preferences, buyer purchasing habits, distribution channels, or marketing methods. This is the think global, act global strategic theme.

Transnational Strategy—A Think Global, Act Local Approach to Strategy Making A middle-ground approach that entails: •Utilizing the same basic competitive theme (low-cost, differentiation, or focused) in each country but allows local managers the latitude to: •Incorporate whatever country-specific variations in product attributes are needed to best satisfy local buyers. •Make whatever adjustments in production, distribution, and marketing are needed to respond to local market conditions and compete successfully against local rivals. A transnational strategy is a think-global, act-local approach that incorporates elements of both multidomestic and global strategies.

Diversifying into Unrelated Businesses Strategic approach: •Growth through acquisition into any industry where potential exists for enhancing shareholder value through upward-trending corporate revenues and earnings and/or a stock price that rises yearly. •While industry attractiveness and cost-of-entry tests important, better-off test secondary. Involves diversifying into businesses with: •No strategic fit. •No meaningful value chain relationships. •No unifying strategic theme. Achieving cross-business strategic fit is not a motivation for unrelated diversification. Companies that pursue a strategy of unrelated diversification often exhibit a willingness to diversify into any business in any industry where senior managers see an opportunity to realize consistently good financial results. With an unrelated diversification strategy, company managers spend much time and effort screening acquisition candidates and evaluating the pros and cons of keeping or divesting existing businesses using the criteria listed in this slide

Types of Acquisition Candidates in Unrelated Diversification Strategies Candidates for acquisition: •Firms with bright growth prospects but short on investment capital. •Undervalued firms that can be acquired at a bargain price. •Struggling firms that can be turned around with parent firm's financial resources and managerial know-how. Unrelated diversification strategies require careful consideration of acquisition candidates as they usually involve putting at risk valuable resources of capital and managerial resources.

Entering a New Line of Business Through Internal Development Is more attractive when: •The parent firm already has the in-house skills and resources needed to compete effectively. •There is ample time to launch a new business. •Start-up cost is lower than cost of entry via acquisition. •The start-up will not compete against powerful rivals. •Adding capacity will not adversely impact supply-demand balance in industry. •Incumbent firms are likely to be slow or ineffective in responding to an entrant's efforts to crack the market. Achieving diversification through internal development involves starting a new business subsidiary from scratch. Internal development has become an increasingly important way for companies to diversify. Corporate venturing, or new venture development, is the process of developing new businesses as an outgrowth of a firm's established business operations. It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial-like qualities within a larger enterprise. Generally, internal development of a new business has appeal only when (1) the parent company already has in-house most of the resources and capabilities it needs to piece together a new business and compete effectively; (2) there is ample time to launch the business; (3) the internal cost of entry is lower than the cost of entry via acquisition; (4) adding new production capacity will not adversely impact the supply- demand balance in the industry; and (5) incumbent firms are likely to be slow or ineffective in responding to a new entrant's efforts to crack the market.

Using Joint Ventures to Achieve Diversification Situations call for a joint venture when: •Pursuing the expansion opportunity is too complex, uneconomical, or risky to go it alone. •The opportunities in a new industry require a broader range of competencies and know-how than an expansion-minded firm can marshal. Drawbacks: •Potential for conflicting objectives. •Operational and control disagreements. •Culture clashes. Entering a new business via a joint venture can be useful in at least three types of situations. First, a joint venture is a good vehicle for pursuing an opportunity that is too complex, uneconomical, or risky for one company to pursue alone. Second, joint ventures make sense when the opportunities in a new industry require a broader range of competencies and know-how than a company can marshal on its own. Third, companies sometimes use joint ventures to diversify into a new industry when the diversification move entails having operations in a foreign country. However, partnering with another company has significant drawbacks due to the potential for conflicting objectives, disagreements over how to best operate the venture, culture clashes, and so on. Joint ventures are generally the least durable of the entry options, usually lasting only until the partners decide to go their own ways

Using International Operations to Improve Overall Competitiveness A firm can gain competitive advantage by expanding outside its domestic market in two important ways. 1.Use location to lower costs or help achieve greater product differentiation. 2.Transfer competitively valuable resources and capabilities from one country to another or share them across international borders to extend its competitive advantages. 3.Use cross-border coordination in ways that a domestic-only competitor cannot. There are three important ways in which a firm can gain competitive advantage (or offset domestic disadvantages) by expanding outside its domestic market. First, it can use location to lower costs or achieve greater product differentiation. Second, it can transfer competitively valuable resources and capabilities from one country to another or share them across international borders to extend its competitive advantages. And third, it can benefit from cross-border coordination opportunities that are not open to domestic-only competitors.

Using Location to Build Competitive Advantage Multinational firms attempting to gain location-based competitive advantage should consider: •Whether to concentrate activities in a few countries or disperse performance of each process to many countries. •Which countries offer the best locational advantage for each activity. Companies that compete internationally can pursue competitive advantage in world markets by locating their value chain activities in whatever nations prove most advantageous.

CHAPTER 7 Strategies for Competing in International Markets The forces of globalization are changing the competitive landscape in many industries, offering companies attractive new opportunities but at the same time introducing new competitive threats. Companies in industries where these forces are greatest are under considerable pressure to develop strategies for competing successfully in international markets. This chapter focuses on strategy options for expanding beyond domestic boundaries and competing in the markets of either a few or many countries. We will discuss the factors that shape the choice of strategy in international markets and the specific market circumstances that support the adoption of multidomestic, transnational, and global strategies. The chapter also includes sections on strategy options for entering foreign markets; how international operations may be used to improve overall competitiveness; and the special circumstances of competing in such emerging markets as China, India, Brazil, Russia, and Eastern Europe.

Why Companies Expand Into International Markets To gain access to new customers. To achieve lower costs through economies of scale, experience, and increased purchasing power. To gain access to low-cost inputs of production. To further exploit its core competencies. To gain access to resources and capabilities located in foreign markets. To retain their position as a key supply chain partner to major customers. A company may opt to expand outside its domestic market for any of five major reasons.