CHAPTER 1 Strategic Leadership: Managing the Strategy-Making Process 1 for

Competitive Advantage

Strategy - a set of related actions that managers take to increase their company’s performance.

Strategic leadership
- concerned with managing the strategy-making process to increase the performance of a company,
thereby increasing the value of the enterprise to its owners, its shareholders.
- about how to most effectively manage a company’s strategy-making process to create competitive
advantage.

Strategy formulation - The task of selecting strategies

Strategy implementation
- the task of putting strategies into action, which includes designing, delivering, and supporting products;
improving the efficiency and effectiveness of operations; and designing a company’s organization
structure, control systems, and culture

Superior Performance
Maximizing shareholder value is the ultimate goal of profit-making companies, for two reasons
1. First, shareholders provide a company with the risk capital that enables managers to buy the resources
needed to produce and sell goods and services.
2. Second, shareholders are the legal owners of a corporation, and their shares, therefore, represent a claim
on the profits generated by a company.

Risk capital is capital that cannot be recovered if a company fails and goes bankrupt.

Shareholder value - returns that shareholders earn from purchasing shares in a company

Profit growth - the increase in net profit over time.

Profitability - the return a company makes on the capital invested in the enterprise.

Competitive Advantage
- The achieved advantage over rivals when a company’s profitability is greater than the average
profitability of firms in its industry.

Sustained Competitive Advantage - A company’s strategies enable it to maintain above-average profitability

for a number of years.

Business Model
- is managers’ conception of how the set of strategies their company pursues should work together as a
congruent whole, enabling the company to gain a competitive advantage and achieve superior
profitability and profit growth.
 - In essence, a business model is a kind of mental model, or gestalt, of how the various strategies and
capital investments a company makes should fit together to generate above-average profitability and
profit growth.

INDUSTRY PERFORMANCE - Different industries are characterized by different competitive conditions.

Performance in Nonprofit Enterprises

- The performance goal for a business school might be to get its programs ranked among the best in the
nation. Thus, planning and thinking strategically are as important for managers in the nonprofit sector
as they are for managers in profit-seeking firms.

STRATEGIC MANAGERS
In most companies, there are two primary types of managers:
1. General managers – bear responsibility for the overall performance of the company or for one of its major
self-contained subunits or divisions
2. Functional managers – are responsible for supervising a particular function, that is, a task, activity, or
operation, such as accounting, marketing, research and development (R&D), information technology, or
logistics.

Corporate-Level Managers

- The corporate level of management consists of the chief executive officer (CEO), other senior
executives, and corporate staff.

Business-Level Managers

- A business unit is a self-contained division (with its own functions—e.g., finance, purchasing,
production, and marketing departments) that provides a product or service for a particular market.
- The principal general manager at the business level, or the business-level manager, is the head of the
division.

Functional-Level Managers

- Are responsible for the specific business functions or operations (human resources, purchasing,
product development, customer service, etc.) that constitute a company or one of its divisions.

Multidivisional company
- A company that competes in several different businesses and has created a separate self-contained
division to manage each.

Business unit - a self-contained division that provides a product or service for a particular market.

Vision - The articulation of a company’s desired achievements or future state.

Values - A statement of how employees should conduct themselves and their business to help achieve the
company mission.
SWOT analysis - The comparison of strengths, weaknesses, opportunities, and threats.

Functional-level strategies - directed at improving the effectiveness of operations within a company, such as
manufacturing, marketing, materials management, product development, and customer service.

Business-level strategies - encompasses the business’s overall competitive theme, the way it positions itself
in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in
different industry settings

Global strategies - addresses how to expand operations outside the home country to grow and prosper in a
world where competitive advantage is determined at a global level.

Corporate-level strategies - answer the primary questions: What business or businesses should we be in to
maximize the long-run profitability and profit growth of the organization, and how should we enter and increase
our presence in these businesses to gain a competitive advantage?

Scenario planning
- are based upon what-ifs because we are never certain about the future. This can either be optimistic or
pessimistic because there are many unforeseen contingencies that may occur. This greatly helps
managers to go beyond what is normal and to think outside the box.
Decentralized planning.
- Planning is not exclusive to the top management. It should include all that are part of the organization,
in other words, to decentralized. Strategic planning should encompass managers at all levels of the
corporation.
Cognitive biases
- Systematic errors in human decision making that arise from the way people process information.

● Prior Hypothesis Bias - refers to the fact that decision makers who have strong prior beliefs about the
relationship between two variables tend to make decisions on the basis of these beliefs, even when
presented with evidence that their beliefs are incorrect.
● Escalating Commitment - occurs when decision makers, having already committed significant
resources to a project, commit even more resources even if they receive feedback that the project is
failing. The best thing to do is to abandon the project and move on to better opportunities.
● Reasoning by analogy – use of simple analogies to make sense out of complex problems.
● Representativeness
- A bias rooted in the tendency to generalize from a small sample or even a single vivid anecdote
- This bias violates the statistical law of large numbers, which says that it is inappropriate to generalize
from a small sample, let alone from a single case.
- The Illusion of Control – the tendency to overestimate one’s ability to control events.
○ General or top managers seem to be particularly prone to this bias. They think that having risen
to the top of an organization, they tend to be overconfident about their ability to succeed.
● Availability Error - arises from our predisposition to estimate the probability of an outcome based on
how easy the outcome is to imagine. That is why managers tend to allocate resources to a project with
an outcome that is easier to imagine rather than the one with highest return e.g. Plane crash vs. Car
crash, winning lotto vs working
Three techniques known to enhance strategic thinking and counteract cognitive biases are devil’s advocacy,
dialectic inquiry and outside view.
● Devil’s Advocacy - A technique in which one member of a decision making team identifies all the
considerations that might make a proposal unacceptable.
○ This one member acts as the devil’s advocate, hence the name. He is the one to emphasize all
the reasons that might make the proposal unacceptable.
● Dialectic Inquiry - The generation of a plan (a thesis) and a counterplan (an antithesis) that reflect
plausible but conflicting courses of action.
○ Debate between advocates of the plan and counter-plan and then decide which plan will lead to
higher performance
● Outside View - Identification of past successful or failed strategic initiatives to determine whether those
initiatives will work for the project at hand.

Key characteristics of a good strategic leader.

1.Vision, Eloquence and Consistency
a. Sense of direction, clear and compelling vision
b. Eloquence meaning being able to communicate this vision to others that boost the moral of the people
2. Articulation of the Business Model
a. Ability to articulate a good business model to attain its vision
3. Commitment
a. Strong leaders demonstrate their commitment to their vision and business model by actions and words,
and they often lead by example
4. Being well informed
a. Leaders must develop formal and informal sources who keep them well informed about what is going
on within their company
b. Using informal and unconventional ways to gather information is wise because formal channels can be
captured by special interests within the organization or by gatekeepers—managers who may
misrepresent the true state of affairs to the leader
5. Willingness to delegate and empower
a. High-performance leaders are skilled at delegation
b. If they do not know how to delegate they can quickly become overloaded with responsibilities.
c. They also recognize that empowering subordinates to make decisions is a good motivational tool and
often results in decisions being made by those who must implement them
6. Astute Use of power
a. strategic leaders must often play the power game with skill and attempt to build consensus for their
ideas rather than use their authority to force ideas through
7. Emotional Intelligence
a. a bundle of psychological attributes that many strong and effective leaders exhibit:
I. Self-awareness—the ability to understand one’s own moods, emotions, and drives, as well as their
effect on others.
II. Self-regulation—the ability to control or redirect disruptive impulses or moods, that is, to think before
acting.
III. Motivation—a passion for work that goes beyond money or status and a propensity to pursue goals
with energy and persistence.
IV. Empathy—the ability to understand the feelings and viewpoints of subordinates and to take those
 into account when making decisions.
V. Social skills—friendliness with a purpose.

CHAPTER 2 External Analysis: The Identification of Opportunities and Threats

I. Overview
Strategy formulation begins with an analysis of the forces that shape competition within the industry in
which a company is based. The goal is to understand the opportunities and threats confronting the firm, and to
use this understanding to identify strategies that will enable the company to outperform its rivals.

Opportunities arise when a company can take advantage of conditions in its environment to formulate
and implement strategies that enable it to become more profitable.

Threats arise when conditions in the external environment endanger the integrity and profitability of the
company’s business.

II. Defining an Industry

An industry can be defined as a group of companies offering products or services that are close
substitutes for each other. Close substitutes are products or services that satisfy the same basic consumer
needs.

● Industry and Sector is an important distinction that should be made. A sector is a group of closely
related industries.

● Industry and Market Segments is another important distinction to make. Market segments are distinct
groups of customers within a market that can be differentiated from each other on the basis of their
individual attributes and specific demands.

Figure 2.1: The Computer Sector: Industries and Segments

 ● Changing Industry Boundaries may be necessary over time as customer needs evolve, or as emerging
new technologies enable companies in unrelated industries to satisfy established customer needs in
new ways.

III. Competitive Forces Model

Once boundaries of an industry have been identified, managers face the task of analyzing competitive
forces within the industry environment in order to identify opportunities and threats. “The Five Forces Model,”
devised by Michael Porter, describes forces that shape competition within an industry and help to identify
strategic opportunities and threats.

Figure 2.2: Porter’s Five Forces Model

A. Risk of Entry by Potential Competitors is one of Porter’s five forces. Potential competitors are
companies that are currently not competing in the industry but have the capability to do so if they
choose. Established companies already operating in an industry often attempt to discourage potential
competitors from entering the industry because as more companies enter, it becomes more difficult for
established companies to protect their share of the market and generate profits. A high risk of entry by
potential competitors represents a threat to the profitability of established companies. If the risk of new
entry is low, established companies can take advantage of this opportunity, raise prices, and earn
greater returns. The risk of entry by potential competitors is a function of the height of barriers to entry
or factors that make it costly for companies to enter an industry. The greater the costs potential
competitors must bear to enter an industry, the greater the barriers to entry, and the weaker this
competitive force. High entry barriers may keep potential competitors out of an industry even when
industry profits are high. Important barriers to entry include:

1. Economies of scale arise when unit costs fall as a firm expands its output. Sources of
economies include:

● cost reduction gained through mass-producing a standardized output;

● discounts on bulk purchases of raw material inputs and component parts;
● the advantages gained by spreading fixed production costs over a large
production volume; and
● the cost savings associated with distributing marketing and advertising costs
over a large volume of output.

2. Brand loyalty exists when consumers have a preference for the products of established
companies. A company can create brand loyalty by continuously advertising its brand
name products and company name, patent protection of its products, product innovation
achieved through company research and development programs, an emphasis on high
 quality products, and exceptional after-sales service. Significant brand loyalty makes it
difficult for new entrants to take market share away from established companies.

3. Absolute Cost Advantages, by established companies, means that entrants cannot

expect to match the established companies’ lower cost structure. Potential competitors
expect to match the established companies’ lower cost structure. Absolute cost
advantages arise from three main sources:
1. superior production operations and processes due to accumulated experience,
patents, or trade secrets;
2. control of particular inputs required for production, such as labor, materials,
equipment, or management skills that are limited in their supply; and
3. access to cheaper funds because existing companies represent lower risks than
new entrants.

4. Customer Switching Costs arise when a customer invests time, energy, and money
switching from the products offered by one established company to the products offered by
a new entrant. When switching costs are high, customers can be locked in to the product
offerings of established companies, even if new entrants offer better products.

5. Government regulations creating barriers to entry significantly reduce the level of

competition.

B. Rivalry Among Established Companies is the second of Porter’s five forces. Rivalry refers to the
competitive struggle between companies within an industry in order to gain market share from each other. The
intensity of rivalry among established companies within an industry is largely a function of four factors:

1. Industry Competitive Structure refers to the number and size distribution of companies in
it. Industry structures vary, and different structures have different implications for the
intensity of rivalry. For example, a fragmented industry consists of a large number of small
or medium-sized companies.

a) Many fragmented industries are characterized by low entry barriers and

commodity-type-products that are hard to differentiate. These characteristics tend to
result in boom-and-bust cycles, with a flood of new entrants, excess capacity, and
price wars, leading to low industry profits and exit from the industry. The more
commodity-like an industry’s product, the more vicious the price war. The “bust” part
of the cycle will continue until overall industry capacity is brought into line with
demand (through bankruptcies), at which point prices may stabilize again.

b) Consolidated industries are interdependent, so that the competitive actions of one

company directly affect the profitability of competitors, forcing a response from them.
The consequence can be price wars like those the airline industry has experienced.
Thus interdependence is a major threat. This threat can be reduced when tacit
price-leadership agreements exist within the industry and when companies are
successful in emphasizing nonprice competition.
 2. Industry Demand is the second determinant of the intensity of rivalry among established
companies. Conditions also determine the intensity of rivalry among established
companies. Growing demand moderates competition by providing room for expansion.
Declining demand results in more competition as companies fight to maintain revenues and
market share.

3. Cost Conditions are another determinant of rivalry between firms. High fixed costs lead to a
focus on volume of sales in order to cover these costs. This focus on volume can spark intense
rivalry if demand is weakening and too many firms are involved in providing the same products.

4. Exit Barriers are economic, strategic, and emotional factors that prevent companies from
leaving an industry. If exit barriers are high, companies become locked into an unprofitable
industry where overall demand is static or declining. The result is often excess productive
capacity, leading to even more intense rivalry and price competition as companies cut prices
attempting to obtain the customer orders needed to use their idle capacity and cover their fixed
costs. Common exit barriers include:

a) investments in specialized assets

b) high fixed costs of exit such as severance pay
c) emotional attachments to an industry
d) economic dependence on a single industry
e) the need to maintain expensive assets in order to compete effectively in that
industry
f) bankruptcy relations

C. The Bargaining Power of Buyers is the third factor in Porter’s five forces model. An industry’s buyers
may be the individual customers who consume its products (end- users) or the companies that distribute an
industry’s products to end-users, such as retailers and wholesalers. The bargaining power of buyers refers
to the ability of buyers to bargain down prices charged by companies in the industry, or to raise the costs of
companies in the industry by demanding better product quality and service. Powerful buyers, therefore, should
be viewed as a threat. Buyers are most powerful in the following circumstances:
1. they are in industries where buyers are large and few in number.
2. they purchase in large quantities.
3. supply industry depends on buyers for a large percentage of its total orders.
4. buyers can easily switch to a substitute product which pits the supplying companies against
each other to force down prices.
5. when it is economically feasible for buyers to purchase an input from several companies at
once.
6. buyers can threaten to enter the industry and independently produce the product thus
supplying their own needs.
D. Bargaining Power of Suppliers is the fourth factor of Porter’s five competitive forces.. Suppliers are
organizations that provide inputs into the industry, such as materials, services, and labor (which may be
individuals, organizations such as labor unions, or companies that supply contract labor. The bargaining power
of suppliers refers to the ability of suppliers to raise input prices, or to raise the costs of the industry in other
ways—for example, by providing poor-quality inputs or poor service. Suppliers are a threat when they are able
to force up the price the company must pay for inputs or to reduce the quality of goods supplied. The ability of
suppliers to make demands on a company depends on their power relative to that of the company. Suppliers
are most powerful in these situations:
1. the supplier’s product has few substitutes and is vital to the companies in an industry.
2. the profitability of suppliers is not significantly affected by the purchases of companies in a
particular industry, in other words, when the industry is not an important customer to the
supplier.
3. the company has a switching cost to change suppliers.
4. suppliers can threaten to enter their customers’ industry and use their inputs to produce
products that would compete directly with those of companies already in the industry.
5. the company cannot threaten to enter their suppliers’ industry and make their own inputs as a
tactic for lowering the price of inputs.

E. Substitute Products is the fifth factor in Porter’s model. The existence of close substitutes is a strong
competitive threat because this limits the price that companies in one industry can charge for their product,
which also limits industry profitability.

F. A Sixth Force: Complementors, often ignored, refers to companies that sell products that add value to
(complement) the products of companies in an industry because, when used together, the use of the combined
products better satisfies customer demands. When the number of complementors is increasing and producing
attractive complementary products, demand increases and profits in the industry can broaden opportunities for
creating value. If complementors are weak, and are not producing attractive complementary products, they
can become a threat, slowing industry growth and limiting profitability.

IV. Strategic Groups Within Industries

Companies in an industry often differ significantly from one another with regard to the way they
strategically position their products in the market. Factors such as the distribution channels they use, the
market segments they serve, the quality of their products, technological leadership, customer service,
pricing policy, advertising policy, and promotions affect product position.
A. Implications of Strategic Groups are numerous for the identification of opportunities and threats within an
industry.
1. A company’s immediate competitors are those in its strategic group. Because all companies in
a strategic group are pursuing a similar business model, consumers tend to view the products
of such enterprises as direct substitutes for each other.
2. Different strategic groups can have different relationships to each of the competitive forces.
Each strategic group may face a different set of opportunities and threats.

B. The Role of Mobility Barriers follows that some strategic groups are more desirable than others because
competitive forces open up greater opportunities and present fewer threats for those groups. Mobility barriers
are within-industry factors that inhibit movement of companies between strategic groups. They include the
barriers to entry into a group and the barriers to exit from a company’s existing group.

V. Industry Life-Cycle Analysis

Changes that take place in an industry over time are an important determinant of the strength of the
competitive forces in the industry (and of the nature of opportunities and threats). The similarities
and differences between companies in an industry often become more pronounced over time, and
its strategic group structure frequently changes. The strength and nature of each of the competitive
forces also change as an industry evolves, particularly the two forces of risk of entry by potential
competitors and rivalry among existing firms.

A. Embryonic Industries refer to an industry just beginning to develop. Growth at this stage is
slow because of factors such as buyers unfamiliarity with the industry’s product, high prices
due to the inability of companies to reap any significant scale economies, and poorly
developed distribution channels. An embryonic industry is one that is just beginning to
develop. Growth is slow because of buyer unfamiliarity with the industry’s products, poor
distribution channels, and high prices stemming from the inability of companies to reap
economies of scale. Barriers to entry at this stage tend to be based on access to key
 technological know-how, rather than cost economies or brand loyalty. Rivalry in embryonic
industries is based on educating customers, opening up distribution channels, and
perfecting the design of the product.

B. Growth Industries is one where demand begins to increase. Typically, demand takes off
when consumers become familiar with the product, prices fall with the attainment of
economies of scale, and distribution channels develop. During an industry’s growth stage,
there tends to be little rivalry. Rapid growth in demand enables companies to expand their
revenues and profits without taking market share away from competitors.

C. Industry Shakeout occurs when the rate of growth slows, and the industry enters the
shakeout stage. In the shakeout stage, demand approaches saturation levels: most of the
demand is limited to replacement because few potential first-time buyers remain. As an
industry enters the shakeout stage, rivalry between companies becomes intense, with
excess productive capacity and severe price discounting. Many firms exit the industry at
this point.

D. Mature Industries are where the shakeout stage ends . The market is totally saturated,
growth is very low or near zero, and demand is limited to replacement demand. The growth
that remains comes from population expansion, bringing new customers into the market or
increasing replacement demand. As an industry enters maturity, barriers to entry increase
and the threat of entry from potential competitor’s decreases. Intense competition for
market share can develop, driving down prices.
 E. Declining Industries occur when growth becomes negative for a variety of reasons,
including technological substitution, social changes, demographics, and international
competition. The degree of rivalry among established companies usually increases and
depending on the speed of the decline and the height of exit barriers, competitive
pressures can become as fierce as in the shakeout stage.

VI. Limitations of Models for Industry Analysis

A. Life-Cycle Issues and life-cycle models constitute very useful ways of thinking about and
analyzing the nature of competition within an industry. However, these models have limitations.
It does not mean the models are useless. It does mean, however, that managers must be
aware of the limitations as they apply these models to their firms.

One important limitation of the life cycle model is that industry life cycles vary considerably,
skipping or repeating stages, moving slowly or rapidly through the stages, or remaining “stuck”
at a particular stage.

B. Innovation and Change are frequent factors in industry evolution and cause a company’s
movement through the industry life-cycle. Over time, innovation in many industries leads to new
products, processes, or strategies that can be very successful and transform the nature of
competition within an industry. Innovation can fragment or consolidate an industry, create new
strategic groups or market segments, speed or slow an industry’s life cycle, and otherwise
disrupt the orderly predictions of all three of the models for industry analysis.

Michael Porter, the originator of the five forces model, has recently shifted focus to
acknowledge the role of innovations as “unfreezing” and “reshaping” industry structure. Porter
describes a model of punctuated equilibrium, in which an innovation triggers a period of
turbulence, followed by a period of stability. The punctuated equilibrium theory allows Porter’s
 five forces model to continue to be somewhat useful, in spite of limitations. This theory asserts
that the five forces model is not a good predictor of the changes that take place in the short time
just after an important innovation, but it is useful in the longer periods of stability that follow the
turbulence.

C. Company Differences are often overlooked as typical industry models overemphasize the
importance of industry structure as a determinant of company performance, whereas, variations
or differences among companies within an industry or a strategic group should be the
emphasis. Studies point to enormous variance in the profit rates of individual companies within
an industry, with industry effects accounting for only 10 to 20% of the variance. These studies
suggest that the individual resources and capabilities of a company are far more important
determinants of that company’s profitability than the industry or the strategic group of which the
company is a member.

VII. The Macroenvironment

The macroenvironment refers to the broader economic, technological, demographic, social, and
political environment within which an industry is embedded. It is apparent that changes in this
macroenvironment can have a direct impact on any one of the five forces in Porter’s model, thereby
altering the relative strength of these forces and, with it, the attractiveness of an industry.

A. Macroeconomic forces include changes in the growth rate of the economy, interest rates,
currency exchange rates, and inflation rates; these are all major determinants of the
overall level of demand. Adverse changes in any of these can threaten profitability in an
industry, whereas positive changes tend to increase profitability.

B. Global forces include globalization of production and markets. Industry boundaries no

longer stop at national borders and competitors can come from other national markets,
increasing rivalry. Globalization can also provide opportunities for new markets for national
firms.
 C. Technological forces are characterized by an accelerated pace of innovation and
change. Technological change can make established products obsolete overnight, but at
the same time, it can create new products and processes. Thus technological change is
both an opportunity and a threat; it is creative and destructive.

D. Demographic forces consist of any trends related to population, such as the aging of the
U.S. population and the movement of people across national boundaries. Changing
demographics create both opportunities and threats, spawning new industries and
products while eliminating others.

E. Social forces consist of changes in societal preferences and values. New social
movements also create opportunities and threats. For example, the impact of the trend
toward greater health consciousness has been a boon to the fitness equipment and
organic foods industries, while it has hurt the beef and cigarette industries.

F. Political and legal forces are shaped by changing laws and regulations. Factors such as
deregulation, insurance reform, and even the political party makeup of Congress can
create opportunities and threats for companies in many industries.

CHAPTER 3 Internal Analysis: Distinctive Competencies, Competitive Advantage, and

Profitability

I. The roots of Competitive Advantage

Distinctive Competencies - Firm-specific strengths that allow a company to differentiate its products
and/or achieve substantially lower costs to achieve a competitive advantage
● Resources - assets of a company
○ Tangible Resources
○ Intangible Resources
● Capabilities - A company’s skills at coordinating its resources and putting them to productive
use.
● Resources, Capabilities and Competencies
● The Role of Strategy
○ Distinctive competencies shape the strategies that the company pursues, which lead to
competitive advantage and superior profitability. However, it is also very important to
realize that the strategies a company adopts can build new resources and capabilities or
strengthen the existing resources and capabilities of the company, thereby enhancing
the distinctive competencies of the enterprise. Thus, the relationship between distinctive
competencies and strategies is not a linear one; rather, it is a reciprocal one in which
distinctive competencies shape strategies, and strategies help to build and create
distinctive competencies.

Competitive Advantage, Value Creation, and Profitability

Factors:
 ● the value customers place on the company’s products - reflects the utility they get from
a product, or, the happiness or satisfaction gained from consuming or owning the
product.
○ Utility is something that customers receive from a product. It is a function of the
attributes of the product, such as its performance, design, quality, and
point-of-sale and after sale service.
○ A company that strengthens the utility (or value) of its products in the eyes of
customers has more pricing options: it can raise prices to reflect that utility
(value) or hold prices lower to induce more customers to purchase its products,
thereby expanding unit sales volume.

● the price that a company charges for its products

● the costs of creating those products

II. The Value Chain

- the idea that a company is a chain of activities that transforms inputs into outputs that customers value.

Primary Activities - activities related to the design, creation, and delivery of the product, its marketing,
and its support and after-sales service.
Four Functions:
1. Research and Development - refers to the design of products and production processes
2. Production - refers to the creation process of a good or service.
 3. Marketing and Sales - There are several ways in which the marketing and sales
functions of a company can help to create value. Through brand positioning and
advertising, the marketing function can increase the value that customers perceive to be
contained in a company’s product.
4. Customer Service - the role of the service function of an enterprise is to provide after
sales service and support. This function can create superior utility by solving customer
problems and supporting customers after they have purchased the product.
Support Activities - activities of the value chain that provide inputs that allow the primary activities to
take place.
Four Functions :
1. Materials Management (Logistics)
- The materials-management (or logistics) function controls the transmission of physical
materials through the value chain, from procurement through production and into
distribution
2. Human Resources
- This function ensures that the company has the right combination of skilled people to
perform its value creation activities effectively
- Ensures that people are adequately trained, motivated, and compensated to perform
their value creation tasks.
- If the human resources are functioning well, employee productivity rises (which lowers
costs) and customer service improves (which raises utility), thereby enabling the
company to create more value.
3. Information System
- the electronic systems for managing inventory, tracking sales, pricing products, selling
products, dealing with customer service inquiries, and so on.
- Information systems, when coupled with the communications features of the Internet, are
holding out the promise of being able to improve the efficiency and effectiveness with
which a company manages its other value creation activities.
4. Company Infrastructure
- the companywide context within which all the other value creation activities take place:
the organizational structure, control systems, and company culture.

III. The Building Blocks of Competitive Advantage

A. Efficiency
- The simplest measure of efficiency is the quantity of inputs that it takes to produce a given
output, that is, efficiency 5 outputs/inputs. The more efficient a company is, the fewer inputs
required to produce a particular output.
- Employee Productivity- refers to the output produced per employee.
B. Quality as Excellence and Reliability
- A product is said to have superior quality when customers perceive that its attributes provide
them with higher utility than the attributes of products sold by rivals
- When customers evaluate the quality of a product, they commonly measure it against two kinds
of attributes:
1. quality as excellence - the important attributes are things such as a product’s design
and styling, its aesthetic appeal, its features and functions, the level of service
associated with the delivery of the product
 2. quality as reliability- a product can be said to be reliable when it consistently performs
the function it was designed for, performs it well, and rarely, if ever, breaks down.
- Total Quality Management - increasing product reliability so that it consistently performs as it
was designed to and rarely breaks down.

Note: The impact of high product quality on competitive advantage is twofold.17 First, providing
high-quality products increases the utility those products provide to customers, which gives the
company the option of charging a higher price for the products.Second, greater efficiency and
lower unit costs associated with reliable products of high quality impact competitive advantage.
When products are reliable, less employee time is wasted making defective products, or
providing substandard services, and less time has to be spent fixing mistakes—which means
higher employee productivity and lower unit costs. Thus, high product quality not only enables a
company to differentiate its product from that of rivals, but, if the product is reliable, it also
lowers costs.
C. Innovation
- refers to the act of creating new products or processes
- Types of Innovation:
1. Product Innovation
- the development of products that are new to the world or have superior attributes to
existing products.
- creates value by creating new products, or enhanced versions of existing products, that
customers perceive as having more utility, thus increasing the company’s pricing options.

2. Process Innovation
- the development of a new process for producing products and delivering them to
customers
- allows a company to create more value by lowering production costs.
D. Customer Responsiveness
- To achieve superior responsiveness to customers, a company must be able to do a better job
than competitors of identifying and satisfying its customers’ needs.
- achieving superior quality and innovation is integral to achieving superior responsiveness to
customers.
- Customer Response Time - time that it takes for a good to be delivered or a service to be
performed.

IV. Business Models, The Value Chain, and Generic Distinctive Competencies
Business Model
- a managers’ conception, or gestalt, of how the various strategies that a firm pursues fit
together into a congruent whole, enabling the firm to achieve a competitive advantage.
- represents the way in which managers configure the value chain of the firm through strategy,
as well as the investments they make to support that configuration, so that they can build the distinctive
competencies necessary to attain the efficiency, quality, innovation, and customer responsiveness
required to support the firm’s lowcost or differentiated position, thereby achieving a competitive
advantage and generating superior profitability
V. Analyzing Competitive Advantage and Profitability
● If a company’s managers are to perform a good internal analysis, they must be able to analyze
the financial performance of their company, identifying how its strategies contribute (or not) to
profitability.
● To identify strengths and weaknesses effectively, they must be able to compare, or benchmark,
the performance of their company against competitors, as well as against the historic
performance of the company itself.
● This will help them determine whether they are more or less profitable than competitors and
whether the performance of the company has been improving or deteriorating through time;
whether their company strategies are maximizing the value being created; whether their cost
structure is out of alignment compared to competitors; and whether they are using the resources
of the company to the greatest effect.
● the key measure of a company’s financial performance is its profitability, which captures the
return that a company is generating on its investments
● ROIC - defined as net profit over invested capital, or ROIC 5 net profit/invested capital
● Net profit - calculated by subtracting the total costs of operating the company away from its
total revenues (total revenues total costs). Net profit is what is left over after the government
takes its share in taxes.
● Invested capital - the amount that is invested in the operations of a company: property, plant,
equipment, inventories, and other assets. Invested capital comes from two main sources:
interest-bearing debt and shareholders’ equity. Interest-bearing debt is money the company
borrows from banks and those who purchase its bonds.
● Shareholders’ equity - the money raised from selling shares to the public, plus earnings that the
company has retained in prior years (and which are available to fund current investments
VI. The Durability of Competitive Advantage
Barriers to Imitation
- a primary determinant of the speed of imitation.
- are factors that make it difficult for a competitor to copy a company’s distinctive competencies;
the greater the barriers to imitation, the more sustainable a company’s competitive advantage.
- It differ depending on whether a competitor is trying to imitate resources or capabilities
a. Imitating Resources - the easiest distinctive competencies for prospective rivals to
imitate tend to be those based on possession of firm-specific and valuable tangible
resources, such as buildings, manufacturing plants, and equipment.
b. Imitating Capabilities - Imitating a company’s capabilities tends to be more difficult than
imitating its tangible and intangible resources, chiefly because capabilities are based on
the way in which decisions are made and processes managed deep within a company. It
is hard for outsiders to discern them.

Capability if Competitors
 - A major determinant of the capability of competitors to rapidly imitate a company’s competitive
advantage is the nature of the competitors’ prior strategic commitments.
- Absorptive Capacity - refers to the ability of an enterprise to identify, value, assimilate, and use
new knowledge.
Industry Dynamism
- competition in an industry in Chapter 2 when we discussed the external environment.
- The most dynamic industries tend to be those with a very high rate of product innovation—for
instance, the customer electronics industry and the personal computer industry. In dynamic
industries, the rapid rate of innovation means that product life-cycles are shortening and that
competitive advantage can be fleeting.
- A company that has a competitive advantage today may find its market position outflanked
tomorrow by a rival’s innovation

CHAPTER 4 Building Competitive Advantage Through Functional-Level Strategy

Functional-level Strategies - aimed at improving the effectiveness of a company’s operations and its ability to
attain superior efficiency, quality, innova and customer responsiveness.

Achieving Superior Efficiency

Company - transforming inputs into outputs.
Efficiency = outputs/inputs (quantity of inputs that it takes to produce a given output)

Efficiency and Economies of Scale

Economies of Scale - are unit cost reductions associated
with a large scale of output
Source of Economies of Scale:
1. Ability to spread fixed cost over a large production volume
a. Fixed Cost - costs that must be incurred to produce a product regardless of the level of output.
2. Ability to achieve greater division of labor and specialization
Scale of Economies - as a company increases its output, unit costs decrease
Diseconomies of Scale - unit cost increases associated with a large scale of output. Occur because of
increased bureaucracy

● Learning effects - cost savings that come from learning by doing. Labor productivity increases over
time, and unit costs decrease as individuals learn the most efficient way to perform a particular task

● Experience Curve - systematic lowering of the cost structure, and consequent unit cost reductions, that
have been observed to occur over the life of a product
● Flexible Production Technology - range of technologies designed to reduce setup times for complex
equipment, increase the use of individual machines through better scheduling, and improve quality
control at all stages of the manufacturing process.
 ● Mass Customization - use of flexible manufacturing technology to reconcile two goals that were once
thought to be incompatible: low cost, and differentiation through product customization.
● Marketing Strategy - position that a company takes with regard to pricing, promotion, advertising,
product design, and distribution
● Customer Defection Rates or Churn Rates - percentage of a company’s customers who defect every
year to competitors. determined by customer loyalty

Defection rates and costs - direct relationship ( longer a company retains a customer, the greater the volume
of customer-generated unit sales that can be set against these fixed costs, and the lower the average unit cost
of each sale.)

● Materials Management - encompasses the activities necessary to get inputs and components to a
production facility, through the production process, and out through a distribution system to the end
user.
● Just-in-time inventory system - designed to economize on inventory holding costs by scheduling
components to arrive at a manufacturing plant just in time to enter the production process, or to have
goods arrive at a retail store only when stock is almost depleted.
● Supply-chain management - task of managing the flow of inputs and components from suppliers into
the company’s production processes to minimize inventory holding and maximize inventory turnover.
● Research and development - help a company achieve a greater efficiency and a lower cost structure.
(1) designing products that are easy to manufacture and (2) pioneering process innovations.
● Human Resource Strategy - employee productivity
○ Hiring Strategy - consistent with own internal organization, culture, & strategic priorities.
 ○ Employee Training -
○ Self-Managing Teams - members coordinate their own activities and make their own hiring,
training, work, and reward decisions, has been spreading rapidly
○ Pay for Performance - incentive pay systems

Achieving Superior Quality

2 Dimensions of QUALITY:
a. Quality as RELIABILITY - Six Sigma quality improvement methodology
b. Quality as EXCELLENCE

Five-step Chain Reaction: (philosophy underlying TQM by Deming)

1. Improved quality means that costs decrease
2. Productivity improves
3. Better quality leads to higher market share and raise prices
4. Higher prices increase profitability
5. Company creates more jobs

Product Attributes (define product excellence)

1. Form
2. Features
3. Performance
4. Durability
5. Reliability
6. Style

Achieving Superior Innovation

High Failure Rate of Innovation - 5 explanations
1. Demand for innovations is inherently uncertain.
2. New products fail because technology is poorly commercialized
3. Poor Positioning Strategy
a. Positioning Strategy - specific set of options a company adopts for a product based upon four
main dimensions of marketing: price, distribution, promotion and advertising, and product
features.
4. Mistakes of marketing a technology
5. Products are slowly marketed

Reducing Innovation Failure

Tight cross-functional integration can help a company ensure that
1. Product development projects are driven by customer needs.
2. New products are designed for ease of manufacture.
3. Development costs are reduced.
4. The time it takes to develop a product and bring it to market is minimized.
5. Close integration between R&D and marketing is achieved to ensure that product development projects are
driven by the needs of customers.

Achieving Superior Responsiveness to Customers

A company must give customers what they want, when they want it, and at a price they are willing to pay—so
long as the company’s long-term profitability is not compromised in the process

Focusing on the Customers

● Demonstrating Leadership - customer focus must begin at the top of the organization.
● Shaping Employee Attitudes - All employees must see the customer as the focus of their activity, and
be trained to focus on the customer.
● Knowing Customer Needs -

Satisfying Customer Needs

● Customization - varying the features of a good or service to tailor it to the unique needs or tastes of
customers.
● Response Time -

CHAPTER 5 Building Competitive Advantage Through Business-Level Strategy

Formulating the Business Model:

● Customer needs - desires, wants, or cravings that can be satisfied by means of the attributes
or characteristics of a product
● Product differentiation - process of designing products to satisfy customers’ needs.
● Customer groups - the sets of people who share a similar need for a particular product.
● Market segmentation - group of customers who share a similar or specific need for a product
○ Three Approaches to Market Segmentation

Implementing the Business Model:

Building Distinctive Competencies - resulting in a competitive advantage based on
superior efficiency, quality, innovation, and/or responsiveness to customers.

Competitive Positioning: Generic Business-Level Strategies

Generic Business-Level Strategies - gives a company a specific form of competitive position and
advantage in relation to its rivals, which results in above-average profitability.
 ● Cost Leadership - chooses strategies that do everything possible to lower its cost structure to
sell goods at a lower cost than its competitors.
Advantages:
1. because the company has lower costs, it will be more profitable than its closest
competitors.
2. gains a competitive advantage because it is able to charge a lower price than its
competitors due to lower cost structure.
○ Competitive Positioning Decisions - cost leader chooses a low-to-moderate level of
product differentiation relative to its competitors.
○ Competitive Advantages and Disadvantages
● Focused Cost Leadership - A business model based on using cost leadership to compete for
customers by offering low-priced products to only one, or a few, market segments.
● Differentiation - A business model that pursues business-level strategies that allow it to create
a unique product, one that customers perceive as different or distinct in some important way.
● Focused Differentiation - A business model based on using differentiation to focus on
competing customers by making unique to customized products for only one, or a few, market
segments.

The Dynamics of Competitive Positioning

● Broad Differentiation - Companies that have developed business-level strategies to better
differentiate their products and lower their cost structures simultaneously to offer customers the
most value.
● Strategic Groups - set of companies that pursue a similar business model and compete for the
same group of customers.
●

CHAPTER 6 Business-Level Strategy and the Industry Environment

Strategies in Fragmented Industry

Fragmented industry
Industry composed of a large number of small and medium sized companies.

Why industry consist of many small companies rather than few large one:
1. Low Barriers - lack economies of scale
2. Diseconomies of scale -
3. Low Entry Barriers that permit new companies
4. Specialized customer needs

Strategies for consolidating a fragmented industry:

1. Chaining
Strategy designed to obtain the advantages of cost leadership by establishing a network of linked
merchandising outlets interconnected by IT that functions as one large company.
2. Franchising
Strategy in which the franchisor grants to its franchisees the right to use the franchisor’s name,
reputation.
3. Horizontal Merger
4. IT and the Internet

Strategies in Embryonic and Growth Industries

Embryonic industry
One that is just beginning to develop.

Growth industry
One in which first-time demand is rapidly expanding as many new customers enter the market.

Reasons for slow growth in market demand include:

(1) the limited performance and poor quality of the first products;
(2) customer unfamiliarity with what the new product can do for them;
(3) poorly developed distribution channels to get the product to customers;
(4) a lack of complementary products to increase the value of the product for customers; and
(5) high production costs because of small volumes of production

Mass markets start to develop when three things happen:

(1) ongoing technological progress makes a product easier to use, and increases its value for the average
customer;
(2) complementary products are developed that also increase its value; and
(3) companies in the industry work to find ways to reduce the costs of making the new products so they
can lower their prices and stimulate high demand
The Changing Nature of Market Demand

Market Development and Customer Groups

Market Share of Different Customer Segments

Strategic Implications: Crossing the Chasm

The Chasm: AOL and Prodigy

Strategic Implications of Market Growth Rates
Strategic managers must understand a final important issue in embryonic and growth industries: “different
markets develop at different rates.”

Factors affecting market growth rates:

➔ Relative advantage
The degree to which a new product is perceived as better at satisfying customer needs than the
product it supersedes.

➔ Compatibility
The degree to which a new product is perceived as being consistent with the current needs or existing
values of potential adopters.

➔ Complexity
The degree to which a new product is perceived as difficult to understand and use.

➔ Trialability
The degree to which potential customers can experiment with a new product during a hands-on trial
basis.

➔ Observability
The degree to which the results of using and enjoying a new product can be seen and appreciated by
other people.

Navigating Through the Life Cycle to Maturity

Investment strategy
Determines the amount and type of resources and capital—human, functional, and financial—that must be
spent to configure a company’s value chain so that it can successfully pursue a business model over time.

Two factors are crucial in choosing an investment strategy:

(1) the competitive advantage a company’s business model gives it in an industry relative to its
competitors; and
(2) the stage of the industry’s life cycle in which the company is competing.

Embryonic Strategies
➔ Share-building strategy
The aim is to build market share by developing a stable and distinct competitive advantage to
attract customers who have no knowledge of the company’s products.

Growth Strategies
➔ Market Concentration
 They seek to specialize in some way and adopt a focus business model to reduce their
investment needs. If these companies are very weak, they may also choose to exit the industry
and sell out to a stronger competitor.

Shakeout Strategies
➔ Share-increasing strategy
To attract customers from weak companies exiting the market. In other words, companies
attempt to maintain and increase market share despite fierce competition.

➔ Harvest strategy
Must limit or decrease its investment in a business and extract or “milk” its investment as much
as it can.

Maturity Strategies
➔ Hold-and-maintain strategy
They expend resources to develop their distinctive competency to remain the market leaders.

Strategy in Mature Industries

A. Strategies for Deterring Entry of Rivals

Companies can use three main methods to deter entry by potential rivals:
1. Product Proliferation
To reduce the threat of entry, existing companies ensure that they are offering a product targeted at
every segment in the market.

Strategy of “filling the niches,” or catering to the needs of customers in all market segments to deter
entry

2. Price Cutting
One entry-deterring strategy is to cut prices every time a new company enters the industry or, even
better, cut prices every time a potential entrant is contemplating entry, and then raise prices once the
new or potential entrant has withdrawn.
 A second price-cutting strategy involves initially charging a high price for a product and seizing
short-term profits, but then aggressively cutting prices to build market share and simultaneously deter
potential entrants.

3. Maintaining Excess Capacity

Maintaining the physical capability to produce more product than customers currently demand.

B. Strategies for Managing Industry Rivalry

Several strategies are available to companies to manage industry rivalry:

1. Price Signaling
Price signaling is the process by which companies increase or decrease product prices to convey their
intentions to other companies and influence the way other companies price their products.

2. Price Leadership
When one company assumes the responsibility for setting the pricing option that maximizes industry
profitability, they assume the position as price leader.

3. Nonprice Competition
The use of strategies to try to prevent costly price cutting and price wars does not preclude competition
by product differentiation.

3.1 Product Differentiation

Allows industry rivals to compete for market share by offering products with different or superior
features.

3.2 Four Nonprice Competitive Strategies

 3.2.1 Market Penetration
When a company concentrates on expanding market share in its existing product markets, it is
engaging in a strategy of market penetration. Market penetration involves heavy advertising to promote
and build product differentiation.

3.2.2 Product Development

Product development is the creation of new or improved products to replace existing ones.

3.2.3 Market Development

Market development finds new market segments for a company’s products. A company pursuing this
strategy wants to capitalize on the brand name it has developed in one market segment by locating
new market segments in which to compete

3.2.4 Product Proliferation

Product proliferation can be used to manage rivalry within an industry and also to deter entry. The
strategy of product proliferation generally means that large companies in an industry all have a product
in each market segment (or niche) and compete head-to-head for customers.

4. Capacity Control
Controlling the available capacity to ensure that resources are used optimally.

Strategies in Declining Industries

A. Severity of Decline
When the size of the total market is shrinking, competition tends to intensify in a
declining industry, and profit rates tend to fall.

Factors that Determine the Intensity of Competition in Declining Industries

 B. Strategy Selection in Declining Industries

Four (4) main strategies that companies can adopt to deal with decline:
1. Leadership Strategy
A leadership strategy aims at growing in a declining industry by picking up the market share of
companies that are leaving the industry.

2. Niche Strategy
A niche strategy focuses on pockets of demand in the industry in which demand is stable, or declining
less rapidly than the industry as a whole.

3. Harvest Strategy
A harvest strategy requires the company to halt all new investments in capital equipment, advertising,
R&D, etc.

4. Divestment Strategy
A divestment strategy rests on the idea that a company can recover most of its investment in an
underperforming business by selling it early, before the industry has entered into a steep decline.