CHAPTER 1: STRATEGY &
IMPORTANCE
Strategy
- Competitive moves, business approaches
- action plan
 Grow the business
 Attract and please customers
 Compete successfully
 Conduct operations
 Achieve target levels of
organizational performance
(Financial & Marketing)
Strategic choices about “how” are based on
 Trial-and-error organizational
learning about what has worked
and what has not worked
 Management’s appetite for taking
risks
 Managerial analysis and strategic
thinking about how best to proceed,
given market conditions and the
company’s circumstances
Key Elements of a Successful Strategy
- Developing a successful strategy hinges on
making competitive moves
- Involves developing a distinctive “aha”
element
 Attract customers
 Produce a competitive edge
Sustainable Competitive Advantage
- attractive number of buyers prefer its
products/services over those of rivals
- basis for this preference can be maintained
over time
Four Best Strategic Approaches to
Building Sustainable Competitive
Advantage
- low-cost provider
- differentiating features
- narrow market niche
- expertise and resource
strengths not easily imitated or matched by
rivals
Why Do Strategies Evolve
 Shifting market conditions
 Technological breakthroughs
 Fresh moves of competitors
 Evolving customer preferences
 Emerging market opportunities
 New ideas to improve strategy
 Crisis situations
Strategy-making Relationship Between
 Studying market trends and Strategy and Business Model
competitors’ actions
 Keen observation of customer needs Strategy - Deals with a company’s competitive
 Scrutinizing business possibilities initiatives and business approaches
based on new technologies Business Model - Concerns whether revenues
 Building firm’s market position via and costs flowing from the strategy
acquisitions or new product demonstrate a business can be amply
introductions profitable and viable
 Pursuing ways to strengthen firm’s
competitive capabilities Tests of a Winning Strategy
 Proactively searching out  GOODNESS OF FIT TEST
opportunities to do new/ existing  How well does strategy fit
things the firm’s situation?
 COMPETITIVE ADVANTAGE TEST
 Does strategy lead to sustainable
Criteria of an ethical strategy
competitive advantage?
 PERFORMANCE TEST
 Does not entail actions and behaviors
 Does strategy boost firm
that cross the line from “should do” to
performance?
“should not do” and “unsavory” or
“shady” and
Other Criteria for Judging
 Allows management to fulfill its ethical
the Merits of a Strategy
duties to all stakeholders
 Internal consistency and unity among all
pieces of the strategy
Firm’s Ethical
 Degree of risk the strategy poses as
Responsibilities to Its Stakeholders
compared to alternative strategies
-Owners/shareholders
-Employees  Degree to which the strategy is flexible
-Customers and adaptable to changing circumstances
-Suppliers
-Community Why Is Strategy Important?
- compelling need exists for managers
Role of Senior Executives: to proactively shape how a firm’s
Linking Strategy with Ethics business will be conducted
- strategy-focused firm is more likely
 Forbid pursuit of ethically questionable
to be a strong bottom-line performer
business opportunities
than one that views strategy as secondary
 Insist all aspects of company strategy
reflect high ethical standards
Excellent execution of an excellent strategy
 Make it clear all employees are
is the best test of managerial excellence –
expected to act with integrity
and the
 Install organizational checks and
most reliable recipe for winning in the
balances to
marketplace!
 Monitor behavior
 Enforce ethical codes of
conduct
 Provide guidance to
employees in gray areas
 Display genuine commitment to conduct
business activities ethically
Business Model
- How do we make money in this business?
- capable of delivering good bottom-line
results
CHAPTER 2: The Managerial Process of
Crafting and Executing Strategy
Phase 1 – developing a strategic vision
Phase 2 – setting objectives
Phase 3 – crafting a strategy to achieve the
objectives and vision
Phase 4 – implementing and executing the
strategy
Phase 5 – monitoring developments,
evaluating performances, making corrective
adjustment
Phase 1 – developing a strategic vision
- route a company intends to take in
developing and strengthening its business
 thinking strategically about
 Future direction of company
 Changes in company’s
product/market/customer
technology to improve
 Current market position
 Future prospects
Key Elements
 Delineates management’s aspirations
for the business
 Provides a panoramic view of “where
we are going”
 Charts a strategic path
 Is distinctive and specific to
a particular organization
 Avoids use of generic
language that is dull
and boring and that could
apply to most
any company
 Captures the emotions of employees
and steers them in a common
direction
 Is challenging and a bit beyond a
company’s immediate reach
Role of a Strategic Vision
 well-conceived and well-communicated
vision functions as a valuable managerial
tool to
 Give the organization a sense of
direction, mold organizational
identity, and create a committed
enterprise
 Inform company personnel and
other stakeholders what
management wants its business to
look like and “where we are going”
 Spur company personnel to action
 Provide managers with a reference
point to
 Make strategic decisions
 Translate the vision into  Types of customers served
hard-edged objectives  Geographic coverage
and strategies  Conveys
 Prepare the company for
the future
 Who we are,
 What we do, and
• A strategic vision exists only as  Why we are here
words and has no organizational
impact unless and until it wins the
Key Elements of a Mission Statement
commitment of company personnel
and energizes them to act in ways  Customer needs being met
that move the company along the What is being satisfied
intended strategic path!
 Customer groups or markets being
served
Characteristics of effectively worded
Who is being satisfied
strategic vision
 What the organization does (in terms of
• Graphic business approaches, technologies used,
• Directional and activities performed) to satisfy the
• Focused target needs of the target customer
groups
• Flexible
How customer needs are satisfied
• Feasible
• Desirable
Mission Elements
• Easy to communicate
• Customers
• Product/services
Common shortcomings in vision statement
• Markets
• Tech
• Vague/incomplete
• Survival/growth/profit
• Not looking forward
• Philosophy
• Too broad
• Self-concept (distinctive competitive
• Bland/uninspiring
adv.)
• Not distinctive
• Public image
• Too reliant on superlatives
• Employees
Strategic Vision vs. Mission
Benefits from a strong mission
Strategic vision
• Unity of purpose
- concerns a firm’s future business path
• Resource allocation
- where we are going
• Organizational climate/atmosphere
 Markets to be pursued
 Future product/market/ • Central point for work structure
customer/technology focus
Mobilizing support for a new vision
 Kind of company management is
trying to create  Reiterating basis for the new direction
 Addressing employee concerns head-on
Strategic mission  Calming fears
- focuses on its present business purpose  Lifting spirits
 Providing updates and progress
- who we are and what we do
reports as events unfold
 Current product and service
 order-of-magnitude change occurs in a
offerings
company’s environment that
 Customer needs being served
 Dramatically alters its future
 Technological
prospects
and business
 Mandates radical revision of
capabilities
its strategic course
 Critical decisions have to be made about
Characteristics of a Mission Statement
where to go from here
 A major new directional path
 Identifies the boundaries of the current may have to be taken
business and highlights
 Present products and services
  A major new strategy may be
needed
 Responding quickly to unfolding
changes in the marketplace lessons a
company’s chances of
 Becoming trapped in a
stagnant business or
 Letting attractive new growth
opportunities slip away
Payoffs of a Clear Strategic Vision
 Crystallizes an organization’s long-term
direction
 Reduces risk of rudderless decision-
making
 Creates a committed enterprise
where organizational members
enthusiastically pursue efforts to
make the vision a reality
 Provides a beacon to keep strategy-
related actions of all managers on
common path
 Helps an organization prepare for the
future
Statement of values
- to guide a company’s pursuit of its vision
and strategy
- paint the white lines for how the
company’s business is to be conducted
- typically contain four to eight beliefs,
traits, and behaviors relating to such
things:
• Integrity
• doing the right thing
• product quality
customer satisfaction
• treatment of people
teamwork
• operating excellence,
giving back to the
community
Phase 2 – setting objectives
Purpose
 Converts vision into specific
performance targets
 Creates yardsticks to track performance
Well-stated objectives
 Quantifiable
 Measurable
 Contain a deadline for achievement
Importance of Setting Stretch Objectives
 Perform at its full potential,
delivering the best possible results
 Push firm to be more inventive
 Exhibit more urgency to improve its
business position
 Be intentional and focused in its actions
Types of Objectives
• Financial - improving financial
performance
• Strategic - improving competitive
vitality and future business position
Good Strategic Performance - the Key to
Better Financial Performance
 meeting or beating strategic performance
targets signals
 Growing competitiveness
 Growing strength in the
marketplace
- Company that is growing competitively
stronger is developing the capability for better
financial performance in the years ahead
Balanced Scorecard Approach
 Setting financial and strategic objectives
 Placing balanced emphasis on achieving
both types of objectives
The surest path to sustained future
profitability year after year
- Relentlessly pursue strategic outcomes
that strengthen a company’s business
position
- give it a growing competitive advantage
over rivals
 Short-term objectives
 Targets to be achieved soon
 Milestones or stair steps for
reaching long-range performance
 Long-term objectives
 Targets to be achieved within
3 to 5 years
 Prompt actions now that will
permit reaching targeted
long-range performance later
Strategic Intent
- relentlessly pursues an ambitious
strategic objective
- concentrating the full
force of its resources
- competitive
actions on achieving that objective
Characteristics of Strategic Intent
• Indicates firm’s intent to making
quantum gains in competing
against key rivals
• Involves establishing a grandiose
performance target
• Signals relentless commitment to
achieving a particular market
position
and competitive standing
Objectives Are Needed at All Levels
(More top-down)
1. First, establish organization-wide objectives
and performance targets
2. Next, set business and product line
objectives
3. Then, establish functional and departmental
objectives
4. Individual objectives are established last
Importance of Top-Down Objectives
 Provides guidelines for objective-setting
and strategy-making in lower-level
organizational units
 Ensures financial and strategic
performance targets for all business
units, divisions, and departments are
directly connected to achieving
company-wide objectives
Advantages of top-down obj.setting
 Leads to cohesive and compatible
objectives
and strategies up and down the
organization
 Helps unify internal efforts to move
company along the chosen strategic
path
Phase 3 – crafting a strategy
 Strategy-making involves
entrepreneurship
 Actively searching for
opportunities to do new things
or
 Actively searching for
opportunities to do
 existing things in new or better
ways
 Strategizing involves
 Developing timely responses to
happenings
in the external environment
and
 Steering company activities in new
directions dictated by shifting
market conditions
What Does Good Strategy Making Entail
 Out-innovating them
 Being more efficient
 Being more imaginative
 Adapting faster
Who Participates in Crafting Strategy?
• CEO
• Senior exec.
• Managers
Why Are Collaborative Efforts
Used in the Strategy-Making Process?
 Many strategic issues are complex or cut
across multiple areas of expertise
 Ideas of people with different expertise
and perspectives strengthen the
strategizing effort
 A team effort in crafting the strategy,
especially a team that includes people
responsible for implementing it,
enhances motivation, commitment,
and accountability in executing the
strategy and making it work
Company’s Strategy-Making Hierarchy
• Corporate strategy
• Business strategy
• Functional area strategies (within
each business)
• Operating strategies (within each
business)
Tasks of Corporate Strategy
 Moves to achieve diversification
 Actions to boost performance of
individual businesses
 Capturing valuable cross-business
synergies to provide 1 + 1 = 3 effects!
 Establishing investment
priorities and steering
corporate resources into the
most attractive businesses
Tasks of Business Strategy
 Initiating approaches to produce
successful performance in a specific
business
 
Crafting competitive moves to build
sustainable competitive advantage
 Developing competitively valuable
competencies and capabilities
 Uniting strategic activities of functional
areas
 Gaining approval of business strategies
by corporate-level officers and directors
Tasks of Functional Strategies
 Game plan for a strategically-relevant
function, activity, or business process
 Detail how key activities
will be managed
 Provide support for
business strategy
 Specify how functional objectives
are to be achieved
Tasks of Operating Strategies
 Concern narrow strategic approaches to
manage key operating units and
strategically-relevant operating activities
 Add detail to business
and functional strategies
 Delegation of responsibility
to frontline managers
Uniting the Company’s Strategy-Making
Effort
 A firm’s strategy is a collection of
initiatives undertaken by managers at all
levels in the organizational hierarchy
 Pieces of strategy should fit
together like the pieces of a puzzle
 Key approaches used to unify all
strategic initiatives into a cohesive,
company-wide action plan
 Effectively communicate
company’s vision, objectives, and
major strategies to all personnel
 Exercise due diligence in
reviewing lower-level strategies for
consistency and support of higher-
level strategies
What Is a Strategic Plan?
• Strategic vision & business mission
• Strategic & financial objectives
• Strategy
Phase 4 – implementing and executing the
strategy
Operations-oriented activity aimed at
performing core business activities in a
strategy-supportive manner
 Tougher and more time-consuming
than crafting strategy
 Key tasks:
 Improving efficiency of strategy
being executed
 Showing measurable progress in
achieving targeted results
What Does Strategy Implementation
Involve?
 Building a capable organization
 Allocating resources to strategy-critical
activities
 Establishing strategy-supportive policies
 Instituting best practices and programs
for
continuous improvement
 Installing information, communication,|
and operating systems
 Motivating people to pursue the target
objectives
 Tying rewards to achievement of results
 Creating a strategy-supportive corporate
culture
 Exerting the leadership necessary to
drive the process forward and keep
improving
Characteristics of Good Strategy
Execution
 Requires diligent pursuit of operating
excellence
 Involves a company’s entire
management team
 Hinges on skills and cooperation
of operating managers who
 Push needed changes in their
organizational units
 Consistently deliver good results
 Success involves
 Meeting or beating performance
targets
 Showing progress in achieving
the strategic vision
Phase 5 – monitoring developments,
evaluating performances, making corrective
adjustment
 Taking actions to adjust to the march of
events tends to result in one or more of
the following
 Altering long-term direction and/or
redefining the mission/vision
 Raising, lowering, or changing
performance objectives
 Modifying the strategy
 Improving strategy execution

Corporate Governance:
Strategic Role of a Board of Directors

 Exercise strong oversight to ensure five

tasks of strategic management are
executed to benefit
 Shareholders or
 Stakeholders

 Make sure executive actions are not only

proper but also aligned with interests of
stakeholders

Obligations of a Board of Directors

 Be inquiring critics and overseers

 Evaluate caliber of senior executives’

strategy-making and strategy-executing
skills
 Institute a compensation plan for
top executives rewarding them for
results that serve interests of
 Stakeholders and
 Shareholders

 Oversee a company’s financial

accounting and reporting practices

Key Roles of a Board of Directors

 Be well informed about a company’s
performance
 Guide and judge CEO and other top
executives
 Exhibit courage to curb inappropriate or
unduly risky management actions
 Certify to shareholders that CEO
is doing what board expects
 Provide insight and advice to
management
 Intensely involved in debating pros and
cons of key actions and decisions
CHAPTER 3: EVALUATING A
COMPANY’S EXTERNAL
ENVIRONMENT
 Diagnosing a company’s situation has
two facets
 Assessing the company’s external
or macro-environment
 Industry and competitive
conditions
 Forces acting to reshape this
environment
 Assessing the company’s internal
or micro-environment
 Market position and
competitiveness
 Competencies, capabilities,
resource strengths
and weaknesses, and
competitiveness
The Components of a Company’s
Macro-environment
Industry & competitive environment
• Suppliers
• Rivals
• New entrants
• Buyers
• Substitute product
Macroenvironment
• General econ. conditions
• Legislation & regulations
• Population demographics
• Societal values & lifestyles
• Tech
1. Industry’s Dominant Economic Traits
 Market size and growth rate
 Number of rivals
 Scope of competitive rivalry
 Buyer needs and requirements
 Degree of product differentiation
 Product innovation
 Supply/demand conditions
 Pace of technological change
 Vertical integration
 Economies of scale
 Learning and experience curve
effects
Learning/experience effects
- company’s unit costs decline ,cumulative
production volume increases because of
 Accumulating production know-how
 Growing mastery of the technology
- bigger the learning or experience curve
effect, the bigger the cost advantage of the
firm with the largest cumulative production
volume
2. Competitive Forces
 Objectives - identify
 Main sources of competitive forces
 Strength of these forces
Five forces model of competition
• Rivals
• Buyers
• Suppliers
• New entrants
• Substitute product
Analyzing the Five Competitive Forces
• Identify the specific competitive
pressures
• Evaluate the strength of each
competitive force
• Determine whether the collective
strength of the five competitive forces
is conducive to earning attractive profits
Competitive Pressures Among Rival
Sellers
 strongest
 Key factor in determining strength of
rivalry
 How aggressively are rivals
using various weapons of
competition to improve their
market positions and
performance?
 Competitive rivalry is a combative
contest
 Offensive actions
 Defensive countermoves
Typical Weapons for Competing
 Lower prices
 More or different performance
features
 Better product performance
 Higher quality
 Stronger brand image and appeal
 Wider selection of models and
styles
 Bigger/better dealer network
 Low interest rate financing
 Higher levels of advertising
 Stronger product innovation
capabilities
 Better customer service
 Stronger capabilities to provide
buyers with custom-made products
What Causes Rivalry to be Stronger?
 Competitors are active in making
fresh moves to improve market
standing and business performance
 Slow market growth
 Number of rivals increases and
rivals are of
equal size and competitive
capability
 Buyer costs to switch brands are
low
 Industry conditions tempt rivals to
use price cuts or other competitive
weapons to boost volume
 A successful strategic move carries
a big payoff
 Diversity of rivals increases in
terms of visions, objectives,
strategies, resources, and countries
of origin
 Outsiders acquire weak firms in the
industry and use their resources to
transform new firms into major
market contenders
What Causes Rivalry to be Weaker?
 Industry rivals move only
infrequently or in a non-aggressive
manner to draw sales from rivals
 Rapid market growth
 Products of rivals are strongly
differentiated and customer loyalty
is high
 Buyer costs to switch brands are
high
 There are fewer than 5 rivals or
there are numerous rivals so any
one firm’s actions has minimal
impact on rivals’ business
Seriousness of threat
 Size of pool of entry candidates
and available resources
 Barriers to entry
 Reaction of existing firms
Evaluating threat of entry
 How formidable entry barriers are
for each type of potential entrant
and
 Attractiveness of growth and profit
prospects
Common Barriers to Entry
 Sizable economies of scale
 Cost and resource disadvantages
independent of size
  Brand preferences and customer
loyalty
 Capital requirements and/or other
specialized resource requirements
 Access to distribution channels
 Regulatory policies
 Tariffs and international trade
restrictions
 Ability of industry incumbents to
launch vigorous initiatives to block
a newcomer’s entry
When Is the Threat of Entry Stronger?
 sizable pool of entry candidates
 low entry barriers
 Industry growth is rapid and profit
potential is high
 Incumbents are unwilling or unable
to contest a newcomer’s entry
efforts
 When existing industry members
have a strong incentive to expand
into new geographic areas or new
product segments where they
currently do not have a market
presence
When Is the Threat of Entry Weaker?
 There’s only a small pool of entry
candidates
 Entry barriers are high
 Existing competitors are struggling
to earn good profits
 Industry’s outlook is risky
 Industry growth is slow or stagnant
 Industry members will strongly
contest
efforts of new entrants to gain a
market foothold
Competitive Pressures from Substitute
Products
- matter when customers are attracted to the
products of firms in other industries
How to Tell Whether Substitute
Products Are a Strong Force
 available and attractively priced
 buyers view substitutes
as being comparable or better
 How much it costs to switch
Competition From Substitutes Stronger
 There are many good substitutes
readily available
 Substitutes are attractively priced
 The higher the quality and
performance of substitutes
 The lower the end user’s switching
costs
 End users grow more comfortable
with using substitutes
Competitive Pressures From Suppliers
and Supplier-Seller Collaboration
Competitive force depends:
 Whether suppliers can exercise
sufficient bargaining leverage to
influence terms of supply in their
favor
 Nature and extent of supplier-seller
collaboration in the industry
Bargaining Power of Suppliers Stronger
 Industry members incur high costs in
switching their purchases to
alternative suppliers
 Needed inputs are in short supply
 Supplier provides a differentiated
input that enhances the quality of
performance of sellers’ products or is
a valuable part of sellers’ production
process
 There are only a few suppliers of a
specific input
 Some suppliers threaten to integrate
forward
Bargaining Power of Suppliers Weaker
 Item being supplied is a commodity
 Seller switching costs to alternative
suppliers are low
 Good substitutes exist or new ones
emerge
 Surge in availability of supplies
occurs
 Industry members account for a big
fraction of suppliers’ total sales
 Industry members threaten to integrate
backward
 Seller collaboration with selected
suppliers provides attractive win-win
opportunities
Competitive Pressures: Collaboration
Between Sellers and Suppliers
Sellers are forging strategic partnerships
with select suppliers to
 Reduce inventory and logistics
costs
 Speed availability of next
generation components
 Enhance quality of parts being
supplied
 Squeeze out cost savings for both
parties
Competitive advantage potential - sellers
doing the best job of managing supply-chain
relationships
Seller-buyer relationships competitive force
depends:
 Whether buyers have sufficient
bargaining leverage to influence
terms of sale in their favor
 Extent and competitive importance
of seller-buyer strategic
partnerships in the industry
Bargaining Power of Buyers Stronger
 Buyer switching costs to competing
brands or substitutes are low
 Buyers are large and can demand
concessions
 Large-volume purchases by buyers
are important to sellers
 Buyer demand is weak or declining
 Only a few buyers exists
 Identity of buyer adds prestige
to seller’s list of customers
 Quantity and quality of information
available to buyers improves
 Buyers have ability to postpone
purchases until later
 Buyers threaten to integrate
backward
Bargaining Power of Buyers Weaker
 Buyers purchase item infrequently
or in small quantities
 Buyer switching costs to competing
brands are high
 Surge in buyer demand creates a
“sellers’ market”
 Seller’s brand reputation is
important to buyer
 A specific seller’s product delivers
quality
or performance that is very
important to buyer
 Buyer collaboration with selected
sellers provides attractive win-win
opportunities
Competitive environment is unattractive:
 Rivalry is vigorous
 Entry barriers are low
and entry is likely
  Competition from
substitutes is strong
 Suppliers and customers have
considerable bargaining power
Competitive environment is ideal:
 Rivalry is moderate
 Entry barriers are high
and no firm is likely to enter
 Good substitutes
do not exist
 Suppliers and customers are
in a weak bargaining position
Coping With the Five Competitive Forces
Objective - craft a strategy to:
 Insulate firm from
competitive pressures
 Initiate actions to produce
sustainable competitive advantage
 Allow firm to be the industry’s
“mover and shaker” with the “most
powerful” strategy that defines the
business model for the industry
3. What Factors Are Driving Industry
Change and What Impacts Will They
Have?
Driving forces originate
 Outer ring of macroenvironment
 Inner ring of macroenvironment
Analyzing Driving Forces: Three Key
Steps
• Identify forces likely to exert
greatest influence over next 1 - 3
years
• Assess impact
• Determine what strategy changes
are needed to prepare for impacts
of driving forces
Types of Driving Forces
 Emerging new Internet capabilities
and applications
 Increasing globalization of industry
 Changes in long-term industry
growth rate
 Changes in who buys the product
and how they use it
 Product innovation
 Technological change/process
innovation
 Marketing innovation
 Entry or exit of major firms
 Diffusion of technical knowledge
 Changes in cost and efficiency
 Consumer preferences shift from
standardized to differentiated
products (or vice versa)
 Changes in degree of uncertainty
and risk
 Regulatory policies / government
legislation
 Changing societal concerns,
attitudes, and lifestyles
4. What Market Positions Do Rivals
Occupy?
Technique to reveal different competitive
positions of industry rivals:
- strategic group mapping
Strategic group
- a cluster of firms in an industry
- similar competitive
approaches and market positions
Strategic Group Mapping
- Firms in same strategic group have two or
more competitive characteristics in common
 Have comparable product line breadth
 Sell in same price/quality range
 Emphasize same distribution channels
 Use same product attributes to appeal
to similar types of buyers
 Use identical technological approaches
 Offer buyers similar services
 Cover same geographic areas
Procedure for Constructing a Strategic
Group Map
• Identify competitive characteristics that
differentiate firms in an industry from
one another
• Plot firms on a two-variable map using
pairs of these differentiating
characteristics
• Assign firms that fall in about the same
strategy space to same strategic group
• Draw circles around each group, making
circles proportional to size of group’s
respective share of total industry sales
Guidelines
 Variables selected as axes should not be
highly correlated
 Variables chosen as axes should expose
big differences in how rivals compete
 Variables do not have to be either
quantitative or continuous
 Drawing sizes of circles proportional to
combined sales of firms in each strategic
group allows map to reflect relative sizes
of each strategic group
 If more than two good competitive
variables can be used, several maps can
be drawn
Interpreting Strategic Group Maps
- closer strategic groups are on the map, the
stronger the cross-group competitive rivalry
tends to be
- Not all positions on the map are equally
attractive
 Driving forces and competitive
pressures often favor some
strategic groups and hurt others
 Profit potential of different
strategic groups varies due to
strengths and weaknesses in
each group’s market position
5. What Strategic Moves Are Rivals
Likely to Make Next?
Best strategic moves are affected by:
 Current strategies of competitors
 Future actions of competitors
Profiling key rivals involves gathering
competitive intelligence about:
 Current strategies
 Most recent actions and public
announcements
 Resource strengths and weaknesses
 Efforts being made to improve their
situation
 Thinking and leadership styles of
top executives
Competitor Analysis
Sizing up strategies and competitive strengths
and weaknesses of rivals involves assessing
 Which rival has the best strategy?
Which
rivals appear to have weak strategies?
 Which firms are poised to gain
market share, and which ones
seen destined to lose ground?
 Which rivals are likely to rank among
the industry leaders five years from
now? Do any up-and-coming rivals
have strategies and the resources to
overtake the current industry leader?
Things to Consider in
Predicting Moves of Rivals
 Which rivals need to increase their
unit sales and market share? What
strategies are rivals most likely to
pursue?
 Which rivals have a strong incentive,
along with resources, to make major
strategic changes?
 Which rivals are good candidates to
be acquired? Which rivals have the
resources to acquire others?
 Which rivals are likely to enter new
geographic markets?
 Which rivals are likely to expand their
product offerings and enter new
product segments?
6: What Are the Key Factors for
Competitive Success?
KSFs - competitive factors most affecting
every industry member’s ability to prosper
 KSFs concern
 Specific strategy elements
 Product attributes
 Resources
 Competencies
 Competitive capabilities
 KSFs are attributes that spell the
difference between
 Profit and loss
 Competitive success or failure
 Pinpointing KSFs involves determining
 On what basis do customers
choose
between competing brands of
sellers?
 What resources and
competitive capabilities does
a seller need to have to be
competitively successful?
 What does it take for sellers
 Whether firm has sufficient
to achieve a sustainable
resources to defend against
competitive advantage?
unattractive industry factors
 KSFs consist of the major determinants
for success
 5 - 6 factors
Core Concept: Assessing Industry
 truly key to the future
Attractiveness
financial and competitive
success of industry members
• The degree to which an industry is
Common KSF Types attractive or unattractive is not the
• Tech-related same for all industry participants
• Manufacturing-related or potential entrants.
• Distribution-related • The opportunities an industry
• Marketing-related presents depend partly on a
• Skills & capability related company’s ability to capture them.
• Others
7. Does the Outlook for the Industry
Present an Attractive Opportunity?
• Involves assessing whether the
industry and competitive
environment is attractive
or unattractive for earning good
profits
• Firm uniquely
well-situated in an otherwise
unattractive industry can still earn
unusually good profits
o Attractiveness is
relative, not absolute
o Conclusions about
attractiveness have
to be drawn from the
perspective of a
particular company
Factors to Consider in
Assessing Industry Attractiveness
 Industry’s market size and growth
potential
 Whether competitive forces are
conducive to rising/falling industry
profitability
 Whether industry profitability will
be favorably or unfavorably
impacted by driving forces
 Degree of risk and uncertainty in
industry’s future
 Severity of problems facing
industry
 Firm’s competitive position in
industry vis-à-vis rivals
 Firm’s potential to capitalize on
vulnerabilities of weaker rivals
CHAPTER 4: EVALUATING A
COMPANY’S RESOURCES &
COMPETITIVE POSITION
 Question 1: How Well Is the Company’s
Present Strategy Working?
 Question 2: What Are the Company’s
Resource Strengths and Weaknesses and
Its External Opportunities and Threats?
 Question 3: Are the Company’s Prices
and Costs Competitive?
 Question 4: Is the Company
Competitively Stronger or Weaker than
Key Rivals?
 Question 5: What Strategic Issues and
Problems Merit Front-Burner Managerial
Attention?
1. How Well Is the Company’s Present
Strategy Working?
Key Considerations
 Must begin by understanding what the
strategy is
 Identify competitive approach
 Low-cost leadership
 Differentiation
 Focus on a particular
market niche
 Determine competitive scope
 Broad or narrow
geographic market
coverage?
 In how many stages of
industry’s
production/distribution
chain does the company
operate?
 Examine recent strategic moves
 Identify functional strategies
Approaches to Assess How Well
the Present Strategy Is Working
 Qualitative assessment –
Is the strategy well-conceived?
 Quantitative assessment –
 What are the results?
Key Indicators
 Trend in sales and market share
 Acquiring and/or retaining
customers
 Trend in profit margins
 Trend in net profits, ROI, and EVA
 Overall financial strength and
credit ranking
 Efforts at continuous improvement
activities
Trend in stock price and

stockholder value
 Image and reputation with
customers
 Leadership role(s) – Technology,
quality, innovation, e-
commerce, etc.
2. What Are the Company’s Strengths,
Weaknesses, Opportunities and Threats ?
For a company’s strategy to be well-
conceived:
 Matched to its resource strengths
and weaknesses
 Aimed at capturing its best market
opportunities and erecting defenses
against external threats to its well-
being
Strength
- something a firm does well
- an attribute enhances its competitiveness
- Resource strengths, competitive
capabilities are competitive assets
Competencies vs. Core Competencies vs.
Distinctive Competencies
 A competence
• product of organizational learning
and experience and
• represents real proficiency in
performing an internal activity
 A core competence
• a well-performed internal activity
• central (not peripheral or
incidental) to a company’s
competitiveness and profitability
 A distinctive competence
• competitively valuable activity a
company performs better than its
rivals
Core Competencies –
A Valuable Company Resource
A competence becomes a core competence
- when the well-performed activity is central
to a company’s competitiveness and
profitability
- core competence is knowledge-based,
residing in people, not in assets on a balance
sheet
- gives a company a potentially valuable
competitive capability and represents a
definite competitive asset
Distinctive Competence –
A Competitively Superior Resource
 competitively potent resource source
because
 Gives a company a competitively
valuable
capability unmatched by rivals
 Can underpin and add real punch
to a company’s strategy
 basis for sustainable competitive
advantage
Determining the Competitive
Power of a Company Resource
 basis for sustainable competitive
advantage, a “resource” must pass 4
tests:
• Is the resource hard to copy?
• Is the resource durable – does
it have staying power?
• Is the resource really
competitively superior?
• Can the resource be trumped
by the different capabilities of
rivals?
Identifying Resource Weaknesses
and Competitive Deficiencies
Weakness is
- something a firm lacks,
- does poorly
- condition placing it at a disadvantage
 Resource weaknesses
 Inferior or unproven skills,
expertise, or intellectual
capital
 Lack of important physical,
organizational, or intangible
assets
 Missing capabilities in key
areas
Resource weaknesses and deficiencies
are competitive liabilities!
Identifying a Company’s Market
Opportunities
 Good match with its financial and
organizational resource capabilities
 Best prospects for profitable
long-term growth
 Potential for competitive
advantage
Identifying External Threats
 Emergence of cheaper/better
technologies
 Introduction of better products by
rivals
 Entry of lower-cost foreign
competitors
 Onerous regulations
 Rise in interest rates
 Potential of a hostile takeover
 Unfavorable demographic shifts
 Adverse shifts in foreign exchange
rates
 Political upheaval in a country
Role of SWOT Analysis in Crafting a
Better Strategy
 The most important part of S W O T
analysis is
 Using the 4 lists to draw
conclusions
about a company’s overall
situation
 Acting on the conclusions to
 Better match a
company’s strategy to
its
resource strengths and
market opportunities
 Correct the important
weaknesses
 Defend against external
threats
3. Are the Company’s
Prices and Costs Competitive?
Assessing whether a firm’s costs are
competitive with those of rivals
 Key analytical tools
 Value chain analysis
 Benchmarking
Concept: Company Value Chain
Business - all activities undertaken in
designing, producing, marketing, delivering,
and supporting its product or service
Value chain
• Activities that a company performs
internally
• Do things that ultimately create value
for buyers
Two types
 Primary activities
(Where most of the value for customers is
created)
 Support activities
(Facilitate performance of the primary
activities)
Characteristics of Value Chain Analysis
 Combined costs of all activities in a
company’s value chain define the
company’s internal cost structure
 Compares a firm’s costs activity
by activity against costs of key rivals
 From raw materials purchase
 Price paid by ultimate
customer
 Pinpoints which internal activities are
a source of cost advantage or
disadvantage
Value
Chains of Rivals Differ:
 Different strategies
 Different operating practices
 Different technologies
 Different degrees of vertical
integration
 Some companies may perform
particular activities internally while
others outsource them
The Value Chain System
for an Entire Industry
Assessing a company’s cost competitiveness
involves comparing costs all along the
industry’s value chain
 Suppliers’ value chains are relevant
 Costs, performance features, and
quality of inputs
provided by suppliers influence
a firm’s own costs
and product performance
 Value chains of distributors and
retailers are relevant
 Their costs and profit margins
represent “value added” and are
part of the price paid by ultimate
end-user
 The activities they perform
affect end-user satisfaction
Developing Data to Measure a
Company’s Cost Competitiveness
Determining costs of performing specific
value chain activities
- using activity-based costing
 degree of disaggregation depends on
 Economics of activities
 Value of comparing narrowly
defined versus broadly defined
activities

 Guideline – Develop separate cost
estimates for activities
 Having different economics
 Representing a significant or
growing proportion of costs
 Determining whether a company’s costs
are in line with those of rivals requires
 Measuring how a company’s
costs compare with those of
rivals activity-by-activity
 Requires having accounting data to
measure cost of each value chain activity
 Activity-based costing entails
 Defining expense categories
according
to specific activities performed
and
 Assigning costs to the activity
responsible for creating the cost
Benchmarking Costs of
Key Value Chain Activities
Focuses on cross-company comparisons
• How certain activities are performed
• Costs associated with these activities
Objectives of Benchmarking
 Identify best and most efficient
means of performing various value
chain activities
 Learn what is the “best” way to
perform a particular activity from
 those companies who have
demonstrated that they are “best-in-
industry” or “best-in-world” at
performing the activity
 Learn what other firms do to
perform an activity at lower cost
 Figure out what actions to take to
improve a company’s own cost
competitiveness
Ethical Principles in Benchmarking
 Avoid actions implying an interest
in
 Restraint of trade
 Market and/or customer
allocation schemes
 Price fixing
 Bribery
 Refrain from acquiring trade
secrets by any means viewed as
improper
 Be willing to provide same type of
information to a benchmarking
partner
 Communicate early to clarify
expectations and avoid
misunderstandings
 Be honest and complete
 Treat benchmarking interchange as
confidential
 Use information obtained only for
stated purposes
 Respect corporate culture of partner
companies
 Use benchmarking contacts
designated by partner company
 Be fully prepared for each
exchange
 Provide partners with agenda and
questionnaire prior to exchange
 Follow through with commitments
to partner in a timely manner
 Understand how partner wants
information provided used
What Determines If a
Company Is Cost Competitive?
- depends on how well a company manages its
value chain
- relative to how well competitors manage
their value chains
- company’s costs are out-of-line, the activities
responsible for the higher costs may be due to
any of three parts of industry value chain
• Activities performed by suppliers
• A company’s own internal
activities
• Activities performed by forward
channel allies
Options to Correct
Internal Cost Disadvantages
 Implement use of best practices
throughout company
 Eliminate some cost-producing
activities altogether by revamping
value chain system
 Relocate high-cost activities to lower-
cost geographic areas
 See if high-cost activities can be
performed
cheaper by outside vendors/suppliers
 Invest in cost-saving technology
 Innovate around troublesome cost
components
 Simplify product design
 Make up difference by achieving
savings in backward or forward
portions of value chain system
Options to Correct a
Supplier-Related Cost Disadvantage
 Pressure suppliers for lower prices
 Switch to lower-priced substitutes
 Collaborate closely with suppliers to
identify mutual cost-saving
opportunities
 Arrange for just-in-time deliveries
from suppliers to lower inventory and
internal logistics costs
 Integrate backward into business
of high-cost suppliers
Options to Correct a Cost Disadvantage
Associated With Activities of Forward
Channel Allies
 Pressure dealer-distributors and other
forward channel allies to reduce their
costs to make the final price to buyers
more competitive with prices of rivals
 Work closely with forward channel
allies to identify win-win
opportunities to reduce costs
 Change to a more economical
distribution strategy
 Switch to cheaper
distribution channels
 Integrate forward into
company-owned retail
outlets
Translating Performance of Value Chain
Activities into Competitive Advantage
Option 1: Develop competencies and
capabilities that rivals don’t have or can’t
match
Option 2: Do an overall better job than rivals
of lowering combined costs of performing
all the value chain activities
4. Is the Company Stronger
or Weaker than Key Rivals?
 How does a company rank relative
to competitors on each important
factor that determines market success?
 Does a company have a net
competitive advantage or
disadvantage
vis-à-vis major competitors?
Assessing a Company’s
Competitive Strength vs. Key Rivals
• List industry key success factors and
other relevant measures of
competitive strength
• Rate firm and key rivals on each
factor using rating scale of 1 to 10 (1
= very weak; 5 = average; 10 = very
strong)
• Decide whether to use a weighted or
unweighted rating system (a weighted
system is superior because chosen
strength measures are unlikely to be
equally important)
• Sum individual ratings to get an
overall measure of competitive
strength for each rival
• Based on overall strength ratings,
determine overall competitive position
of firm
Why Do a Competitive Strength
Assessment ?
 Reveals strength of firm’s competitive
position vis-à-vis key rivals
 Shows how firm stacks up against
rivals, measure-by-measure –
pinpoints firm’s competitive strengths
and competitive weaknesses
 Indicates whether firm is at a
competitive advantage / disadvantage
against each rival
 Identifies possible offensive attacks
(pit company strengths against rivals’
weaknesses)
 Identifies possible defensive actions (a
need to correct competitive
weaknesses)
5. What Strategic Issues
Merit Managerial Attention?
 Requires thinking strategically about

 + and - in the industry
and competitive situation
 Company’s resource strengths and
weaknesses and attractiveness of its
competitive position
Stating the Issues Clearly and Precisely
 “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
Identifying the Strategic Issues: Some
Possibilities
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 acquire a rival firm?
 Whether to expand into foreign
markets rapidly or cautiously?
 What to do about aging
demographics of a company’s
customer base?
CHAPTER 5: 5 GENERIC
COMPETITIVE STRATEGIES
Strategy and Competitive Advantage
 Competitive advantage
 Attracting customers
 Defending against competitive
forces
Key to Gaining a Competitive Advantage
 firm’s product / service offers superior
value
 A good product at a low price
 A superior product worth paying
more for
 A best-value product
What Is Competitive Strategy?
- Company’s business plans to compete
successfully
- Narrower in scope than business strategy
 Specific efforts to please customers
 Offensive and defensive moves
to counter maneuvers of rivals
 Responses to prevailing market
conditions
 Initiatives to strengthen its market
position
5 generic competitive strategies
• Low cost
• Differentiation
• Best cost
• Niche low cost
• Niche differentiation
Low-Cost Provider Strategies
 Make achievement of meaningful
lower costs than rivals
 Include features and services in
product offering that buyers
consider essential
 Find approaches to achieve a cost
advantage in ways difficult for
rivals to copy or match
Low-Cost Advantage into Higher Profits:
Option 1: Use lower-cost edge to
under-price competitors and attract
price-sensitive buyers in 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,
thereby increasing total profits
Approaches to Securing a Cost
Advantage
• Do a better job than rivals of
performing value chain activities
efficiently and cost effectively
• Revamp value chain to bypass
cost-producing activities that add
little value from the buyer’s
perspective
Approach 1: Controlling the Cost Drivers
 Capture scale economies; avoid
scale diseconomies
 Capture learning and experience
curve effects
 Control percentage of capacity
utilization
 Pursue efforts to boost sales and
spread costs such as R&D and
advertising over more units
 Improve supply chain efficiency
 Substitute use of low-cost for high-
cost raw materials
 Use online systems and
sophisticated software to achieve
operating efficiencies
 Adopt labor-saving operating
methods
 Use bargaining power to gain
concessions from suppliers
 Compare vertical integration vs.
outsourcing
Approach 2: Revamping the Value Chain
 Use direct-to-end-user
sales/marketing methods
 Make greater use of online
technology applications
 Streamline operations by
eliminating low-value-added or
unnecessary work steps
 Relocate facilities closer to
suppliers or customers
 Offer basic, no-frills
product/service
 Offer a limited product/service as
opposed to a full product/service
line
Keys to Success in Achieving
Low-Cost Leadership
 Scrutinize each cost-creating
activity, identifying cost drivers
Use knowledge about cost drivers

to manage
costs of each activity down year
after year
 Find ways to restructure value
chain to eliminate
nonessential work steps and low-
value activities
 Work diligently to create cost-
conscious corporate cultures
 Feature broad employee
participation in continuous
 cost-improvement efforts and
limited perks for executives
 Strive to operate with
exceptionally small corporate
staffs
 Aggressively pursue investments in
resources and capabilities that
promise to drive costs out of the
business
Characteristics of a Low-Cost Provider
 Cost conscious corporate culture
 Employee participation in cost-
control efforts
 Ongoing efforts to benchmark costs
 Intensive scrutiny of budget
requests
 Programs promoting continuous
cost improvement
When Does a Low-Cost Strategy Work
Best?
 Price competition is vigorous
 Product is standardized or readily
available
from many suppliers
 There are few ways to achieve
differentiation that have value to
buyers
 Most buyers use product in same
ways
 Buyers incur low switching costs
 Buyers are large and have
significant bargaining power
 Industry newcomers use
introductory low prices to attract
buyers and build customer base
Pitfalls of Low-Cost Strategies
 Being overly aggressive in cutting
price
 Low cost methods are easily
imitated by rivals
 Becoming too fixated on reducing
costs
and ignoring
 Buyer interest in
additional features
 Declining buyer
sensitivity to price
 Changes in how the
product is used
 Technological breakthroughs open
up cost reductions for rivals
Differentiation Strategies
Objective
 Incorporate differentiating
features
 cause buyers to prefer firm’s
product or service over brands of
rivals
Keys to Success
 Find ways to differentiate
 create value for buyers
 not easily matched or
cheaply copied by rivals
 Not spending more to achieve
differentiation than the price
premium that can be charged
Benefits of Successful Differentiation
 Command a premium price
 Increase unit sales and/or

Build brand loyalty = Competitive
Advantage
Keys to Competitive Advantage
 Most appealing approaches to
differentiation
 Those hardest for rivals to
match or imitate
 Those buyers will find most
appealing
 Best choices to gain a longer-lasting,
more profitable competitive edge
 New product innovation
 Technical superiority
 Product quality and reliability
 Comprehensive customer
service
 Unique competitive capabilities
Where to Find Differentiation
Opportunities in the Value Chain
 Purchasing and procurement
activities
 Product R&D and product design
activities
 Production process / technology-
related activities
 Manufacturing / production
activities
 Distribution-related activities
 Marketing, sales, and customer
service activities
How to Achieve a
Differentiation-Based Advantage
• Lower buyer’s overall costs
• Raise the performance a buyer gets
• Enhance buyer satisfaction
• Superior capabilities
Importance of Perceived Value
 Buyers seldom pay for value that is not
perceived
 Price premium of a differentiation
strategy reflects
 Value actually delivered to
the buyer
 Value perceived by the buyer
 Actual and perceived value can
differ when buyers are unable to
assess their experience with a
product
Signaling Value as Well as Delivering
Value
 Incomplete knowledge of buyers causes
them to
judge value based on such signals as
 Price
 Attractive packaging
 Extensive ad campaigns
 Ad content and image
 Seller facilities or
professionalism and
personality of employees
 Having a list of prestigious
customers
 Signals of value may be as important as
actual value when
 Nature of differentiation is
hard to quantify
 Buyers are making first-time
purchases
 Repurchase is infrequent
 Buyers are unsophisticated
When Does a Differentiation Strategy
Work Best?
 There are many ways to differentiate a
product that have value and please
customers
 Buyer needs and uses are diverse
 Few rivals are following a similar
differentiation approach
 Technological change and
product innovation are fast-paced
Pitfalls of Differentiation Strategies
 Appealing product features are easily
copied by rivals
 Buyers see little value in unique
attributes of product
 Overspending on efforts to differentiate
the product offering, thus eroding
profitability
 Over-differentiating such that product
features exceed buyers’ needs
 Charging a price premium
buyers perceive is too high
 Not striving to open up meaningful gaps
in quality, service, or performance
features vis-à-vis rivals’ products
Best-Cost Provider Strategies
Strategic emphasis on low-cost + strategic
emphasis on differentiation
Objectives
 Deliver superior value by
• meeting or exceeding buyer
expectations
• beating price expectations
 Be the low-cost provider of a product
with good-to-excellent product attributes
• use cost advantage to underprice
comparable brands
Competitive Strength of a Best-Cost
Provider Strategy
competitive advantage - its capability to
include upscale attributes at a lower cost than
rivals’ comparable products
To achieve competitive advantage
 Incorporate attractive features at a
lower cost than rivals
 Manufacture a good-to-excellent
quality product at a lower cost than
rivals
 Develop a product that delivers
good-to-excellent performance at a
lower cost than rivals
 Provide attractive customer
service at a lower cost than rivals
When Does a Best-Cost
Provider Strategy Work Best?
 Where buyer diversity makes
product differentiation the norm
 Where many buyers are also  Not crucial to success of industry
sensitive to price and value leaders
 Costly or difficult for multi-segment
competitors
to meet specialized needs of niche
members
 Focuser has resources and capabilities
to effectively serve an attractive niche
 Few other rivals are specializing in
same niche
Risk of a Best-Cost Provider Strategy  Focuser can defend against
- may get squeezed between strategies of firms challengers via superior ability to
using low-cost and differentiation strategies serve niche members
 Low-cost leaders may be able to Risks of a Focus Strategy
siphon
customers away with a lower price  Competitors find effective ways to
match
 High-end differentiators may be
a focuser’s capabilities in serving
able to niche
steal customers away with better
 Niche buyers’ preferences shift
product attributes
towards product attributes desired by
majority of buyers – niche
Focus / Niche Strategies
becomes part of overall market
 Segment becomes so attractive it
- concentrated attention on a narrow piece of
becomes crowded with rivals, causing
the total market
segment profits to be splintered
Objective
Deciding Which Generic
Serve niche buyers better than rivals
Competitive Strategy to Use
Keys to Success
 Each positions a company differently
 Choose a market niche where buyers
in its market and competitive
have distinctive preferences, special
environment
requirements, or unique needs
 Develop unique capabilities to serve
 Each establishes a central theme for
how a company will endeavor to
needs of target buyer segment
outcompete rivals
 Each creates some boundaries for
Approaches to Defining a Market Niche
maneuvering as market circumstances
unfold
 Geographic uniqueness
 Each points to different ways of
 Specialized requirements in
experimenting with the basics of the
using product/service
strategy
 Special product attributes
 Each entails differences in product
appealing only to niche buyers
line, production emphasis, marketing
emphasis, and means to sustain the
Focus / Niche Strategies
strategy
and Competitive Advantage
Approach 1:
Focused low cost – lower cost than rivals in
well defined buyer segment
Approach 2:
Focused differentiation – offer product
appealing to unique preferences of well
defined buyer segments
What Makes a Niche Attractive for
Focusing?
 Big enough to be profitable and offers
good growth potential