Chapter 1

Strategic Management: Creating Competitive Advantages

• What is competitive advantages?

• a firm’s resources and capabilities that enable it to overcome the competitive
forces in its industry(ies)
• Two fundamental questions:
How should we compete in order to create competitive advantages in the
marketplace?
How can we create competitive advantages in the marketplace that are
unique, valuable, and difficult for rivals to copy or substitute?
4 Key Attributes of strategic management

• Directs the organization toward overall goals and objectives.

• Includes multiple stakeholders in decision making.
• Needs to incorporate short-term and long-term perspectives.
• Recognizes trade-offs between efficiency and effectiveness.
• Efficiency: performing actions at a low cost relative to a benchmark, or “doing
things right”.
• Effectiveness: tailoring actions to the needs of an organization rather than
wasting effort, or “doing the right thing”.
Formulation
• Formulating business-level strategy: how firms compete and outperform their
rivals and how they achieve and sustain competitive advantages goes to the heart
of strategic management.
• Formulating corporate-level strategy: what business should we compete in? how
can we manage this portfolio of businesses to create synergies among the
businesses?
• Formulating international strategy: when firms enter foreign markets, they face
both opportunities and pitfalls. Why did Walmart fail in Germany? Why did
BestBuy fail in China? Managers must decide not only the most appropriate entry
strategy but also how they will go about attaining competitive advantages in
international markets.
• Entrepreneurial activity aimed at new value creation.
 Implementation
• Strategic Control & Corporate Governance
• Informational control
• Monitor & scan the environment
• Respond effectively to threats & opportunities
• Behavioral control
• Proper balance of rewards & incentives
• Appropriate cultures & boundaries (or constraints)
• Effective corporate governance
• Creating Effective Organizational Designs
• Organizational structures must be consistent with strategy
• Organizational boundaries must be flexible & permeable
• Strategic alliances must capitalize on capabilities of other organizations
• Creating a Learning Organization & an Ethical Organization
• Effective leaders
• Set a direction
• Design the organization
• Develop an organization committed to excellence & ethical behavior
• Create a “learning organization”
• Benefit from individual & collective talents

• Fostering Corporate Entrepreneurship

• Firms must continually improve & grow
• Firms must find new ways to renew themselves
• Entrepreneurship & innovation provide for new opportunities
• Enhance a firm’s innovative capacity
• Allow autonomous entrepreneurial behavior
Porter’s Five-Forces Model of Industry
Competition
• Five force framework enables us to have a more
detailed understanding of the micro business
environment.
• Five force framework helps to identify the trends that
are changing the industry structure and firm
profitability.

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 Porter’s Five-Forces Model of Industry
Competition

Exhibit 2.4 Porter’s Five-Forces Model of Industry Competition

Source: Adapted and reprinted with permission of The Free Press, a division of Simon & Schuster Adult Publishing Group, from Competitive
Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights
2-7 reserved.
The Sociocultural Segment
• Sociocultural forces influence the values, beliefs, and
lifestyles of a society:
• More women in the workforce
• Dual-income families
• Increase in temporary workers
• Greater concern for healthy diets & physical fitness
(increasing levels of obesity)
• Greater concern for the environment
• Postponement of marriage & family formation, having
children

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 Creating the Environmentally Aware
Organization

Exhibit 2.1 Inputs to Forecasting

2-9
 Environmental Scanning & Monitoring
• Environmental scanning involves surveillance of a firm’s
external environment
• Predicts environmental changes to come
• Detects changes already under way
• Allows firm to be proactive
• Environmental monitoring tracks evolution of environmental
trends
• Hard trends – measurable facts/events (it is something that WILL
happen) e.g. the aging of population; decreasing cost of computers.
• Soft trends – estimated, probable events (something that MIGHT
happen). E.g., Continuing budget deficit

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 Competitive Intelligence
• Competitive intelligence
• a firm’s activities of collecting and interpreting data on
competitors, defining and understanding the industry, and
identifying competitors’ strengths and weaknesses.
• Collect data on competitors
• Helps firms avoid surprises
• Anticipate competitors’ moves
• Decrease response time
• Beware of the potential for unethical behavior while gathering
intelligence

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SWOT Analysis
• SWOT analysis is a basic technique for analyzing firm
and industry conditions.
• A framework for analyzing a company’s internal and
external environment
• Firm or internal conditions = Strengths & Weaknesses
• Where the firm excels or where it may be lacking
• Environmental or external conditions = Opportunities &
Threats
• Developments that exist in the general environment
• Activities among firms competing for the same customers

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SWOT Analysis
• SWOT analysis
• Forces managers to consider both internal & external
factors simultaneously
• Makes firms act proactively
• Raises awareness about role of strategy
• A firm’s strategy must build on its strengths,
• Remedy the weaknesses or work around them,
• Take advantage of the opportunities presented by the
environment, and
• Protect the firm from the threats.

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Strategy Implementation
• Implements the formulated strategy
• Ensures proper strategic control systems
• Establishes an appropriate organizational design -
coordinates & integrates activities within the firm
• Coordinates activities with suppliers, customers, alliance
partners
• Leadership ensures organizational commitment to excellence
& ethical behavior
• Promotes learning & continuous improvement
• Acts entrepreneurially in creating new opportunities

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Strategy Implementation cont.
• Strategic Control & Corporate Governance
• Informational control
• Monitor & scan the environment
• Respond effectively to threats & opportunities
• Behavioral control
• Proper balance of rewards & incentives
• Appropriate cultures & boundaries (or constraints)
• Effective corporate governance

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Strategy Implementation cont.
• Creating Effective Organizational Designs
• Organizational structures must be consistent with
strategy
• Organizational boundaries must be flexible & permeable
• Strategic alliances must capitalize on capabilities of
other organizations

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Strategy Implementation cont.
• Creating a Learning Organization & an Ethical
Organization
• Effective leaders
• Set a direction
• Design the organization
• Develop an organization committed to excellence & ethical
behavior
• Create a “learning organization”
• Benefit from individual & collective talents

1-17
Strategy Implementation cont.
• Fostering Corporate Entrepreneurship
• Firms must continually improve & grow
• Firms must find new ways to renew themselves
• Entrepreneurship & innovation provide for new
opportunities
• Enhance a firm’s innovative capacity
• Allow autonomous entrepreneurial behavior

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 Corporate Governance & Stakeholder
Management

• Corporate Governance: the relationship among

various participants in determining the direction and
performance of corporations.
• Primary participants:
• The shareholders
• The management (led by the Chief Executive Officer)
• The Board of Directors (BOD)

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The Value Chain

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Value-Chain Analysis
• Primary activities contribute to the physical creation
of the product or service; the sale & transfer to the
buyer; and service after the sale:
• Inbound logistics
• Operations
• Outbound logistics
• Marketing & sales
• Service

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 Primary Activity: Inbound Logistics

• Inbound logistics is primarily associated with

receiving, storing & distributing inputs to the
product:
• Material handling
• Warehousing
• Inventory control
• Vehicle scheduling
• Returns to suppliers
• Example: Toyota’s Just-in-time inventory systems.

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Primary Activity: Operations
• Operations include all activities associated with
transforming inputs in to the final product form:
• Machining
• Packaging
• Assembly
• Testing or quality control
• Printing
• Facility operations
• Example: incorporation of appropriate process technology, efficient
plant layout and workflow design, degree of automation, extent of
appropriate quality control systems.

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 Primary Activity: Outbound Logistics

• Outbound logistics includes collecting, storing, &

distributing the product or service to buyers:
• Warehousing
• Material handling
• Delivery vehicle operation
• Order processing
• Scheduling & distribution

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Resource-Based View of the Firm
• The resource-based view of the firm (RBV)
• Firms’ competitive advantages are due to their endowment of
strategic resources that are valuable, rare, costly to imitate,
and costly to substitute. Without these unique resources, the
firm can only attain competitive parity.
• Resources can lead to a competitive advantage
 If they are valuable, rare, hard to replicate
 When tangible resources, intangible resources, & organizational
capabilities are combined
 RBV can reveal how core competencies embedded in a firm can help
it exploit new product and market opportunities

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Resource-Based View of the Firm
The resource-based view (RBV) of the firm combines two
perspectives:
• A. the primary and support activities of the firm
• B. the interrelationships among the primary activities of
the firm and corporate management
• C. the internal analysis of the firm and the external
analysis of the industry and competitive environment
• D. the industry and the competitive environment

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Types of Firm Resources
• Organizational capabilities are competencies or skills
that a firm employs to transform inputs into outputs;
the capacity to combine tangible & intangible resources
to attain desired ends
• Outstanding customer service
• Excellent product development capabilities
• Superb innovation processes & flexibility in manufacturing
processes
• Ability to hire, motivate, & retain human capital

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Firm Resources and Sustainable Competitive
Advantages
• Strategic resources have four attributes:
• Valuable in formulating & implementing strategies to
improve efficiency or effectiveness
• Rare or uncommon; difficult to exploit
• Difficult to imitate or copy due to physical
uniqueness, path dependency, causal ambiguity, or
social complexity
• Difficult to substitute with strategically equivalent
resources or capabilities

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The Central Role of Knowledge
• Knowledge management is critical to organizational
success. Knowledge includes:
• Explicit knowledge – codified, documented, easily
reproduced, and widely distributed.
• Tacit knowledge – in the minds of employees, based on
their experiences and backgrounds.

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Developing Human Capital
• 360-degree evaluation and feedback superiors, direct
reports, colleagues, and even external and internal
customers rate a person’s performance
• 360-degree feedback systems complement teamwork,
employee involvement, and organizational flattening.

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 Cost Leadership
• Overall cost leadership is based on:
• Creating a low-cost position relative to a firm’s
peers
• Firms can achieve cost reduction from both
primary and support activities.
• E.g., lower the cost of production, lower the cost of
distribution…

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 Cost Leadership
• Protects a firm against rivalry
from competitors
• Protects the firm against
powerful buyers
• Provides more flexibility to
cope with demands from
powerful suppliers who want
to increase input costs
5-32
• Provides substantial entry
barriers due to economies of
scale and cost advantages
• Puts the firm in a favorable
position with respect to
substitute products
Differentiation
• A differentiation strategy: a firm’s generic strategy based
on creating differences in the firm’s product or service
offering by creating something that is perceived
industrywide as unique and valued by customers
• Prestige or brand image
• Technology
• Innovation
• Features
• Customer service

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 Differentiation

• Creates higher entry • Reduces buyer power

barriers due to customer because buyers lack
loyalty suitable alternatives
• Provides higher margins • Establishes customer
that enable the firm to loyalty and hence less
deal with supplier power threat from substitutes

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 Focus Strategy
• A focus strategy:
• Generic strategy based on appeal to a narrow market
segment within an industry.
• Requires narrow product lines, buyer segments, or
targeted geographic markets
• Advantages obtained either through differentiation or
cost leadership—cost focus and differentiation-focus
• Cost focus: create a cost advantage in its target market.
• Differentiation focus: differentiate in its target market.

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Focus Strategy
• A firm selects a segment or group of segments (or niche)
and tailors its strategy to serve them
• A firm achieves competitive advantages by dedicating
itself to these segments exclusively
• Example: LinkedIn

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Industry Life Cycle Stages

5-37 Exhibit 5.7 Stages of the Industry Life Cycle

Diversification
• A business diversifies by participating in new industries, or finding
multiple uses for its products.
• For example, Apple enters the mp3 player (iPod), smartphone, and
online music business (iTunes)—related diversification
• Other firms like Coca cola extends into wine businesses and
filmmaking industries-unrelated
• Firms can either enter into related or unrelated industries

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 Making Diversification Work
A firm may diversify into related businesses
Related businesses are those that share resources (similar
product lines).
Requires core competencies reflects the unique
strength embedded deep within a firm.
Core competencies allow a firm to differentiate its
products and services from those of its rivals, creating
higher value for customers or offering products and
services of comparable value at lower costs.

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Related Diversification
Primary benefits derive from horizontal relationships, that is
intangible and tangible resources.
Sharing intangible resources such as core competencies in marketing or
reputation (leverage core competencies) (e.g.,
AmazonZappos/shopbop)
Sharing tangible resources such as production facilities (reduce costs and
enhance revenue by sharing related activities) (e.g., P&G
toothpastes shampoo/conditioners)

#-40
Unrelated Diversification
A firm may diversify into unrelated businesses
Unrelated diversification: a firm entering a different
business that has little horizontal interaction with
other businesses of a firm. (few similarities in
products or industries)
Unrelated businesses have few similarities in
products or industries, however the corporate office
can add value through such activities as robust
information systems or superb human resource
practices

#-41
Unrelated Diversification
Unlike related diversification, few benefits are derived from
horizontal relationships, which is leveraging the core competencies
within a corporation.
Instead, potential benefits can be gained from the creation of
synergies from the interaction of the corporate office with the
individual business units.

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Unrelated Diversification
Benefits derive from
• Value creation derived from the corporate office
• Leveraging support activities in the value chain
• Example: Berkshire Hathaway
• Not only it invests in insurance, but also it sells furniture, energy, underwear,
and private jets.
• Clayton homes, Duracell, GEICO, See’s candy, Net Jets

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Unrelated Diversification
• First, the corporate office can contribute to parenting and
restructuring of businesses.
• Second, the corporate office can add value by viewing the entire
corporation as a family or portfolio of businesses and allocating
resources to optimize corporate goals of profitability, cash flow, and
growth.

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