Chapter 6: Organizational Strategy

Sustainable competitive Advantage

a competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate. Sustainable competitive advantage is not the same as a long-lasting competitive advantage, though companies obviously want a competitive advantage to last a long time. Instead, a competitive advantage is sustained if competitors have tried unsuccessfully to duplicate the advantage and have, for the moment, stopped trying to duplicate it.

Valuable Resources

allow companies to improve their efficiency and effectiveness. Unfortunately, changes in customer demand and preferences, competitors' actions, and technology can make once-valuable resources much less valuable.

Stars

are companies that have a large share of a fast-growing market. To take advantage of a star's fast-growing market and its strength in that market (large share), the corporation must invest substantially in it.

Cash Cows

are companies that have a large share of a slow-growing market. Companies in this situation are often highly profitable, hence the name "cash cow."

Question Marks

are companies that have a small share of a fast-growing market. If the corporation invests in these companies, they may eventually become stars, but their relative weakness in the market (small share) makes investing in question marks riskier than investing in stars.

Dogs

are companies that have a small share of a slow-growing market. As the name suggests, having a small share of a slow-growth market is often not profitable.

Grand Strategy

is a broad strategic plan used to help an organization achieve its strategic goals.* Grand strategies guide the strategic alternatives that managers of individual businesses or subunits may use in deciding what businesses they should be in. There are three kinds of grand strategies: growth, stability, and retrenchment/recovery.

Portfolio Strategy

is a corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines.* Just as a diversification strategy guides an investor who invests in a variety of stocks, portfolio strategy guides the strategic decisions of corporations that compete in a variety of businesses. First, according to portfolio strategy, the more businesses in which a corporation competes, the smaller its overall chances of failing. Managers employing portfolio strategy can either develop new businesses internally or look for acquisitions, that is, other companies to buy. Second, beyond adding new businesses to the corporate portfolio, portfolio strategy predicts that companies can reduce risk even more through unrelated diversification—creating or acquiring companies in completely unrelated businesses (more on the accuracy of this prediction later). Third, investing the profits and cash flows from mature, slow-growth businesses into newer, faster-growing businesses can reduce long-term risk. The best-known portfolio strategy for guiding investment in a corporation's businesses is the Boston Consulting Group (BCG) matrix.*

Treat of New Entrants

is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry. If new companies can enter the industry easily, then competition will increase, and prices and profits will fall.

Character of the Rivalry

is a measure of the intensity of competitive behavior among companies in an industry. Is the competition among firms aggressive and cutthroat, or do competitors focus more on serving customers than on attacking each other? Both industry attractiveness and profitability decrease when rivalry is cutthroat.

BCG Matrix

is a portfolio strategy that managers use to categorize their corporation's businesses by growth rate and relative market share, which helps them decide how to invest corporate funds. Contrary to expectations, the BCG matrix often yields incorrect judgments about a company's potential. In part, this is because the BCG matrix relies on past performance (previous market share and previous market growth), which is a notoriously poor predictor of future company performance.

Stability Strategy

is to continue doing what the company has been doing, just doing it better. Companies following a stability strategy try to improve the way in which they sell the same products or services to the same customers.

Growth Strategy

is to increase profits, revenues, market share, or the number of places (stores, offices, locations) in which the company does business. Companies can grow in several ways. They can grow externally by merging with or acquiring other companies in the same or different businesses.

Retrenchment Strategy

is to turn around very poor company performance by shrinking the size or scope of the business or, if a company is in multiple businesses, by closing or shutting down different lines of the business. The first step of a typical retrenchment strategy might include making significant cost reductions: laying off employees; closing poorly performing stores, offices, or manufacturing plants; or closing or selling entire lines of products or services.

Nonsubstitutable Resources

no other resources can replace them and produce similar value or competitive advantage.

Imperfectly Imitable Resources

those resources that are impossible or extremely costly or difficult to duplicate.

Competitive Advantage

using their resources to provide greater value for customers than competitors can.

Rare Resources

resources that are not controlled or possessed by many competing firms, are necessary to sustain a competitive advantage. For sustained competitive advantage, however, other firms must be unable to imitate or find substitutes for those valuable, rare resources.

Situational Analysis (SWOT Analysis)

strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in an organization's internal environment and the opportunities and threats in its external environment. A SWOT analysis helps a company determine how to increase internal strengths and minimize internal weaknesses while maximizing external opportunities and minimizing external threats. An analysis of an organization's internal environment, that is, a company's strengths and weaknesses, often begins with an assessment of its distinctive competencies and core capabilities.