Chapter 5 Strategic Management

Porter's strategies involve

(1) overall cost leadership, (2) differentiation, and (3) focus on a particular market niche (leading to either focused cost leadership or focused differentiation).

Business Strategy

Focuses on how a given business needs to compete to be effective. How should we compete?

Three of the most widely read books on competitive analysis in the 1980s were

Michael Porter's Competitive Strategy, Competitive Advantage, and Competitive Advantage of Nations.

One of the most well-known frameworks used to analyze industries is

Michael Porter's five forces. Porter's model attempts to analyze the attractiveness of an industry by considering five forces within a market that impact industry profitability. According to Porter, the likelihood of firms making profits in a given industry depends on five factors: (1) barriers to entry and the threat of potential new entrants, (2) buyer power, (3) supplier power, (4) threat from substitutes, and (5) rivalry among industry competitors. [4]

Its competitive scope

Porter suggests that another factor affecting a company's competitive position is

strategic focus

Strategic focus occurs when an organization is very clear about its mission and vision and has a coherent, well-articulated strategy for achieving those strategic elements.

Corporate Strategy

answers strategy questions related to "What business or businesses should we be in?" and "How does our business X help us compete in business Y?" Corporate strategy considers an organization to be a portfolio of businesses, resources, capabilities, or activities.

Tangible resources

are assets that can be seen and quantified. Production equipment, manufacturing plants, and formal reporting structures are examples of tangible resources.

The first three facets of the strategy diamond

arenas, differentiators, and economic logic—are traditional in the sense that they address three longstanding hallmarks of strategizing. Specifically, strategy matches up market needs and opportunities (located in arenas) with unique features of the firm (shown by its differentiators) to yield positive performance (economic logic). While performance is typically viewed in financial terms, it can have social or environmental components as well.

Porter developed generic business-level strategies that

can be used independently or in combination to create a defendable position and to outperform competitors, whether they are within an industry or across nations.

A firm following the focus strategy

concentrates on meeting the specialized needs of its customers

competitive scope

defines the breadth of a company's target market. A company can have a broad (mass market) competitive scope or a narrow (niche market) competitive scope.

strategic focus

is a common characteristic across successful organizations. Strategic focus occurs when an organization is very clear about its mission and vision and has a coherent, well-articulated strategy for achieving those strategic elements.

VRIO Analysis

is an acronym for valuable, rare, inimitable, and organization.

Intended strategy

is strategy as conceived by the top management team. Here, rationality is limited and the intended strategy is the result of a process of negotiation, bargaining, and compromise, involving many individuals and groups within the organization

the purpose of diversification

is to spread out risk and opportunities over a larger set of businesses

value chain

popularized by Michael Porter's book, Competitive Advantage, is a useful tool for taking stock of organizational capabilities. The value chain framework outlines key activities that differentiate the value added capabilities that differentiate some firms from others. In the value chain, some of the activities are deemed to be primary, in the sense that these activities add direct value to the creation of goods and services.

Overall lower cost or cost leadership

refers to the strategy where a firm's competitive advantage is based on the bet that it can develop, manufacture, and distribute products more efficiently than competitors.

Differentiation strategy

refers to the strategy where competitive advantage is based on superior products or service. Superiority arises from factors other than low cost, such as customer service, product quality, or unique style.

realized strategy

the actual strategy that is implemented—is only partly related to that which was intended. Mintzberg suggests only 10%-30% of intended strategies actually become a reality.

emergent strategy

the decisions that emerge from the complex processes in which individual managers interpret the intended strategy and adapt to changing external circumstances

Following a study of the five forces of competition,

the firm can develop the insights required to determine an industry's attractiveness in terms of its potential to earn adequate or superior returns on its invested capital.

Using Porter's analysis firms are likely to generate higher profits if

the industry is difficult to enter, there is limited rivalry, buyers are relatively weak, suppliers are relatively weak, there are few substitutes.

Profits are likely to be low if

the industry is easy to enter, there is a high degree of rivalry between firms within the industry, buyers are strong, suppliers are strong, it is easy to switch to alternatives.

strategy diamond

was developed by strategy researchers Don Hambrick and Jim Fredrickson as a framework for checking and communicating a strategy.