EES&OR 483 Strategy Primer 3.

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EES&OR483 Strategy and Marketing Primer (version 3.0)
This set of "crib notes" is a review of mareting an! strategy too"s an! conce#ts that yo$ may fin! $sef$"
for yo$r #ro%ect in EES&OR 483. The intention is not to give yo$ more wor or rea!ing materia"& b$t
rather to #rovi!e yo$ with an ai! an! reference in form$"ating an! ana"y'ing yo$r #rob"em.
("" of the conce#ts covere! in "ect$re an! the assigne! rea!ings are reviewe! here. )o$ might fin! the
s$mmaries a he"#f$" remin!er of what the conce#ts are an! how they can be va"$ab"e in yo$r #ro%ect. ("so&
some to#ics fo$n! here are not covere! in "ect$res or assigne! rea!ings *s#ecifica""y& Sections +.+& +.4& an!
,.-.,.,/. These are a!!itiona" to#ics on conce#t$a" *i.e. 01(/ mareting an! strategy. Since "ect$res in
this #ro%ect co$rse are "imite! an! em#hasi'e 2$antitative mo!e"s for strategy& we !o not have the time to
cover a"" the to#ics in c"ass. 3owever& if yo$ are not a"rea!y fami"iar with basic mareting an! strategy
framewors& we want to offer yo$ more e4#os$re to them. )o$ may fin! this broa!er e4#os$re he"#f$" for
severa" reasons5
$n!erstan! the conte4t of what is covere! in "ect$re
#ro#er"y frame yo$r #ro%ect
fin! "ea!s to other conce#ts that may be #artic$"ar"y re"evant to yo$r #ro%ect
CONENS
! "ENER#C SR$E"%& %PES O' COMPE##(E $)($N$"E............................................!
* CONCEP+$, SR$E"% 'R$ME-OR.S& /O- COMPE##(E $)($N$"E #S
CRE$E).......................................................................................................................................................*
+.- PORTER6S , 7OR8ES & 9:;<STR) STR<8T<RE.................................................................................+
+.+ 8ORE 8O0PETE:8E (:; 8(P(19=9T9ES............................................................................................,
+.3 RESO<R8E.1(SE; >9E? O7 T3E 79R0 *R1>/.................................................................................@
+.4 (=TER:(T9>E 7R(0E?ORAS5 E>O=<T9O:(R) 83(:BE (:; 3)PER8O0PET9T9O:........................C
3 $))##ON$, OO,S 'OR SR$E"#C /#N.#N" $N) $N$,%S#S....................................0
3.- B(0E T3EOR)..................................................................................................................................D
3.+ OPT9O:S..........................................................................................................................................-0
3.3 STR(TEB98 S8E:(R9OS...................................................................................................................-+
3.4 OT3ER P(RT98<=(R=) RE=E>(:T EES&OR 8ORE 8O:8EPTS.....................................................-3
4 M$R.E#N" MO)E,S 'OR PRO)+C SR$E"%...............................................................!4
4.- :E? PRO;<8T ;977<S9O: 0O;E=S...............................................................................................-4
4.+ 8O:EO9:T (:(=)S9S.......................................................................................................................-,
1 CONCEP+$, M$R.E#N" 'R$ME-OR.S...........................................................................!8
,.- T3E 7O<R PFS O7 T3E 0(RAET9:B 09G........................................................................................-8
,.+ 0(RAET.OR9E:TE; STR(TEB98 P=(::9:B....................................................................................-8
,.3 0(RAET SEB0E:T(T9O:& T(RBET9:B& (:; POS9T9O:9:B.............................................................+0
,.4 (:(=)H9:B 9:;<STR9ES (:; 8O0PET9TORS.................................................................................++
,., T3E TE83:O=OB) (;OPT9O: =97E 8)8=E5 ;9S8O:T9:<O<S 9::O>(T9O:S.................................+3
0
EES&OR 483 Strategy Primer 3.0
1 Generic Strategy: Types of Competitive Advantage
1asica""y& strategy is abo$t two things5 !eci!ing where yo$ want yo$r b$siness to go& an! !eci!ing how to
get there. ( more com#"ete !efinition is base! on com#etitive a!vantage& the ob%ect of most cor#orate
strategy5
Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm's cost
of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices
than competitors for equivalent benefits or providing unique benefits that more than offset a higher price.
There are two basic types of competitive advantage: cost leadership and differentiation.
.. 0ichae" Porter& Competitive dvantage& -D8,& #.3
The fig$re be"ow !efines the choices of "generic strategy" a firm can fo""ow. ( firm6s re"ative #osition
within an in!$stry is given by its choice of competitive advantage *cost "ea!ershi# vs. !ifferentiation/ an!
its choice of competitive scope. 8om#etitive sco#e !isting$ishes between firms targeting broa! in!$stry
segments an! firms foc$sing on a narrow segment. Beneric strategies are $sef$" beca$se they characteri'e
strategic #ositions at the simplest and broadest level. Porter maintains that achieving com#etitive
a!vantage re2$ires a firm to mae a choice abo$t the ty#e an! sco#e of its com#etitive a!vantage. There
are !ifferent riss inherent in each generic strategy& b$t being "a"" things to a"" #eo#"e" is a s$re reci#e for
me!iocrity . getting "st$c in the mi!!"e".
Treacy an! ?iersema *-DD,/ offer another #o#$"ar generic framewor for gaining com#etitive a!vantage.
9n their framewor& a firm ty#ica""y wi"" choose to em#hasi'e one of three Iva"$e !isci#"ines!: product
leadership, operational excellence, and customer intimacy.
Porter2s "eneri3 Strategies *so$rce5 Porter& -D8,& #.-+/
COMPE##(E $)($N$"E
COMPE##(E
SCOPE
=ower 8ost ;ifferentiation
1roa!
Target
:arrow
Target
-. 8ost =ea!ershi# +. ;ifferentiation
3(. 8ost 7oc$s 31. ;ifferentiation
7oc$s
References5
Porter& 0ichae"& Competitive dvantage& The 7ree Press& :)& -D8,.
Porter& 0ichae"& "?hat is strategyJ" "arvard #usiness $eview vC4& n@ *:ov.;ec& -DD@/5@- *-8
#ages/.
Treacy& 0.& 7. ?iersema& The %iscipline of &ar'et (eaders& (!!ison.?es"ey& -DD,.
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EES&OR 483 Strategy Primer 3.0
2 Conceptual Strategy Frameworks: How Competitive
Advantage is Created
7ramewors vs. 0o!e"s
?e !isting$ish here between strategy framewors an! strategy mo!e"s. Strategy mo!e"s have been $se! in
theory b$i"!ing in economics to $n!erstan! in!$stria" organi'ation. 3owever& the mo!e"s are !iffic$"t to
a##"y to s#ecific com#any sit$ations. 9nstea!& 2$a"itative framewors have been !eve"o#e! with the
s#ecific goa" of better informing b$siness #ractice. 9n another sense& we may a"so ta" abo$t IframeworsK
in this c"ass as referring to the g$i!ing ana"ytica" a##roach yo$ tae to yo$r #ro%ect *i.e. !ecision ana"ysis&
economics& finance& etc./.
Some Pers#ective on Strategy 7ramewors5 9nterna" an! E4terna" 7raming for Strategic ;ecisions
9t may be he"#f$" to thin of strategy framewors as having two com#onents5 interna" an! e4terna" ana"ysis.
The external ana"ysis b$i"!s on an economics #ers#ective of in!$stry str$ct$re& an! how a firm can mae
the most of com#eting in that str$ct$re. 9t em#hasi'es where a com#any sho$"! com#ete& an! what6s
im#ortant when it !oes com#ete there. Porter6s , 7orces an! >a"$e 8hain conce#ts com#rise the main
e4terna""y.base! framewor. The e4terna" view he"#s inform strategic investments an! !ecisions. )nternal
ana"ysis& "ie core com#etence for e4am#"e& is "ess base! on in!$stry str$ct$re an! more in s#ecific
b$siness o#erations an! !ecisions. 9t em#hasi'es how a com#any sho$"! com#ete. The interna" view is
more a##ro#riate for strategic organi'ation an! goa" setting for the firm.
Porter6s foc$s on in!$stry str$ct$re is a #owerf$" means of ana"y'ing com#etitive a!vantage in itse"f& b$t it
has been critici'e! for being too static in an increasing"y fast changing wor"!. The interna" ana"ysis
em#hasi'es b$i"!ing com#etencies& reso$rces& an! !ecision.maing into a firm s$ch that it contin$es to
thrive in a changing environment. Tho$gh some framewors re"y more on one ty#e of ana"ysis than
another& both are im#ortant. 3owever& neither framewor in itse"f is s$fficient to set the strategy of a firm.
The interna" an! e4terna" views most"y frame an! inform the #rob"em. The act$a" firm strategy wi"" have to
tae into acco$nt the #artic$"ar cha""enges facing a com#any& an! wo$"! a!!ress iss$es of financing&
#ro!$ct an! maret& an! #eo#"e an! organi'ation. Some of these strategic !ecisions are event !riven
*#artic$"ar #ro%ects or reorgs res#on!ing to the environment an! o##ort$nity/& whi"e others are the s$b%ect
of #erio!ic strategic reviews.
2.1 Porter's 5 Forces & Industry Structure
?hat is the basis for com#etitive a!vantageJ
)ndustry structure an! positioning within the industry are the basis for mo!e"s of com#etitive strategy
#romote! by 0ichae" Porter. The I7ive 7orcesK !iagram ca#t$res the main i!ea of PorterFs theory of
com#etitive a!vantage. The 7ive 7orces !efine the r$"es of com#etition in any in!$stry. 8om#etitive
strategy m$st grow o$t of a so#histicate! $n!erstan!ing of the r$"es of com#etition that !etermine an
in!$stry6s attractiveness. Porter c"aims& "The $"timate aim of com#etitive strategy is to co#e with an!&
i!ea""y& to change those r$"es in the firm6s behavior." *-D8,& #. 4/ The five forces !etermine in!$stry
#rofitabi"ity& an! some in!$stries may be more attractive than others. The cr$cia" 2$estion in !etermining
#rofitabi"ity is how m$ch va"$e firms can create for their b$yers& an! how m$ch of this va"$e wi"" be
ca#t$re! or com#ete! away. 9n!$stry str$ct$re !etermines who wi"" ca#t$re the va"$e. 1$t a firm is not a
com#"ete #risoner of in!$stry str$ct$re . firms can inf"$ence the five forces thro$gh their own strategies.
The five.forces framewor high"ights what is im#ortant& an! !irects manager6s towar!s those as#ects most
im#ortant to "ong.term a!vantage. #e careful in using this tool5 %$st com#osing a "ong "ist of forces in the
com#etitive environment wi"" not get yo$ very far L itFs $# to yo$ to !o the ana"ysis an! i!entify the few
!riving factors that rea""y !efine the in!$stry. Thin of the 7ive 7orces framewor as sort of a chec"ist for
getting starte!& an! as a remin!er of the many #ossib"e so$rces for what those few !riving forces co$"! be.
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EES&OR 483 Strategy Primer 3.0
Porter2s 1 'or3es 4 E5ements o6 #nd7stry Str73t7re *so$rce5 Porter& -D8,& #.@/
Ne8 Entrants
97yers
S7::5iers
S7;stit7tes
#nd7stry
Com:etitors
9ntensity
of Riva"ry
Threat of
S$bstit$tes
Threat of
:ew Entrants
1argaining Power
of S$##"iers
1argaining Power
of 1$yers
)eterminants o6 97yer Po8er
9argaining ,everage
M 1$yer concentration vs.
firm concentration
M 1$yer vo"$me
M 1$yer switching costs
re"ative to firm
switching costs
M 1$yer information
M (bi"ity to bacwar!
integrate
M S$bstit$te #ro!$cts
M P$"".thro$gh
Pri3e Sensitivity
M PriceNtota" #$rchases
M Pro!$ct !ifferences
M 1ran! i!entity
M 9m#act on 2$a"ityN
#erformance
M 1$yer #rofits
M ;ecision maerFs
incentives
)eterminants o6 S7;stit7tion <reat
M Re"ative #rice #erformance of s$bstit$tes
M Switching costs
M 1$yer #ro#ensity to s$bstit$te
Riva5ry )eterminants
M 9n!$stry growth
M 7i4e! *or storage/ costs N va"$e a!!e!
M 9ntermittent overca#acity
M Pro!$ct !ifferences
M 1ran! i!entity
M Switching costs
M 8oncentration an! ba"ance
M 9nformationa" com#"e4ity
M ;iversity of com#etitors
M 8or#orate staes
M E4it barriers
Entry 9arriers
M Economies of sca"e
M Pro#rietary #ro!$ct !ifferences
M 1ran! i!entity
M Switching costs
M 8a#ita" re2$irements
M (ccess to !istrib$tion
M (bso"$te cost a!vantages
Pro#rietary "earning c$rve
(ccess to necessary in#$ts
Pro#rietary "ow.cost #ro!$ct !esign
M Bovernment #o"icy
M E4#ecte! reta"iation
)eterminants o6 S7::5ier Po8er
M ;ifferentiation of in#$ts
M Switching costs of s$##"iers an! firms in the in!$stry
M Presence of s$bstit$te in#$ts
M S$##"ier concentration
M 9m#ortance of vo"$me to s$##"ier
M 8ost re"ative to tota" #$rchases in the in!$stry
M 9m#act of in#$ts on cost or !ifferentiation
M Threat of forwar! integration re"ative to threat of
bacwar! integration by firms in the in!$stry
3ow is com#etitive a!vantage create!J
(t the most f$n!amenta" "eve"& firms create com#etitive a!vantage by #erceiving or !iscovering new an!
better ways to com#ete in an in!$stry an! bringing them to maret& which is $"timate"y an act of
innovation. 9nnovations shift com#etitive a!vantage when riva"s either fai" to #erceive the new way of
com#eting or are $nwi""ing or $nab"e to res#on!. There can be significant a!vantages to ear"y movers
res#on!ing to innovations& #artic$"ar"y in in!$stries with significant economies of sca"e or when c$stomers
are more concerne! abo$t switching s$##"iers. The most ty#ica" ca$ses of innovations that shift
com#etitive a!vantage are the fo""owing5
new techno"ogies
new or shifting b$yer nee!s
the emergence of a new in!$stry segment
shifting in#$t costs or avai"abi"ity
changes in government reg$"ations
3ow is com#etitive a!vantage im#"emente!J
1$t besi!es watching in!$stry tren!s& what can the firm !oJ (t the "eve" of strategy im#"ementation&
com#etitive a!vantage grows o$t of the way firms #erform !iscrete activities . conceiving new ways to
con!$ct activities& em#"oying new #roce!$res& new techno"ogies& or !ifferent in#$ts. The "fit" of !ifferent
strategic activities is a"so vita" to "oc o$t imitators. Porters ">a"$e 8hain" an! "(ctivity 0a##ing"
conce#ts he"# $s thin abo$t how activities b$i"! com#etitive a!vantage.
The value chain is a systematic way of e4amining a"" the activities a firm #erforms an! how they interact.
9t scr$tini'es each of the activities of the firm *e.g. !eve"o#ment& mareting& sa"es& o#erations& etc./ as a
#otentia" so$rce of a!vantage. The va"$e chain ma#s a firm into its strategica""y re"evant activities in or!er
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EES&OR 483 Strategy Primer 3.0
to $n!erstan! the behavior of costs an! the e4isting an! #otentia" so$rces of differentiation. ;ifferentiation
res$"ts& f$n!amenta""y& from the way a firm6s #ro!$ct& associate! services& an! other activities affect its
b$yer6s activities. ("" the activities in the va"$e chain contrib$te to b$yer va"$e& an! the c$m$"ative costs in
the chain wi"" !etermine the !ifference between the b$yer va"$e an! #ro!$cer cost.
( firm gains com#etitive a!vantage by #erforming these strategica""y im#ortant activities more chea#"y or
better than its com#etitors. One of the reasons the va"$e chain framewor is he"#f$" is beca$se it
em#hasi'es that com#etitive a!vantage can come not %$st from great #ro!$cts or services& b$t from
anywhere a"ong the va"$e chain. 9t6s a"so im#ortant to $n!erstan! how a firm fits into the overa"" value
system& which inc"$!es the va"$e chains of its s$##"iers& channe"s& an! b$yers.
?ith the i!ea of activity mapping& Porter *-DD@/ b$i"!s on his i!eas of generic strategy an! the va"$e chain
to !escribe strategy im#"ementation in more !etai". 8om#etitive a!vantage re2$ires that the firm6s va"$e
chain be manage! as a system rather than a co""ection of se#arate #arts. Positioning choices !etermine not
on"y which activities a com#any wi"" #erform an! how it wi"" config$re in!ivi!$a" activities& b$t a"so how
they re"ate to one another. This is cr$cia"& since the essence of im#"ementing strategy is in the activities .
choosing to #erform activities !ifferent"y or to #erform !ifferent activities than riva"s. ( firm is more than
the s$m of its activities. ( firm6s va"$e chain is an inter!e#en!ent system or networ of activities&
connecte! by "inages. =inages occ$r when the way in which one activity is #erforme! affects the cost or
effectiveness of other activities. =inages create tra!eoffs re2$iring o#timi'ation an! coor!ination.
Porter !escribes three choices of strategic #osition that inf"$ence the config$ration of a firm6s activities5
variety*based positioning . base! on #ro!$cing a s$bset of an in!$stry6s #ro!$cts or servicesO invo"ves
choice of #ro!$ct or service varieties rather than c$stomer segments. 0aes economic sense when a
com#any can #ro!$ce #artic$"ar #ro!$cts or services $sing !istinctive sets of activities. *i.e. Eiffy =$be
for a$to "$bricants on"y/
needs*based positioning . simi"ar to tra!itiona" targeting of c$stomer segments. (rises when there are
gro$#s of c$stomers with !iffering nee!s& an! when a tai"ore! set of activities can serve those nee!s
best. *i.e. 9ea to meet a"" the home f$rnishing nee!s of a certain segment of c$stomers/
access*based positioning . segmenting by c$stomers who have the same nee!s& b$t the best
config$ration of activities to reach them is !ifferent. *i.e. 8armie 8inemas for theaters in sma""
towns/
Porter6s ma%or contrib$tion with "activity ma##ing" is to he"# e4#"ain how !ifferent strategies& or #ositions&
can be implemented in #ractice. The ey to s$ccessf$" im#"ementation of strategy& he says& is in combining
activities into a consistent fit with each other. ( com#any6s strategic #osition& then& is containe! within a set
of tai"ore! activities !esigne! to !e"iver it. The activities are tight"y "ine! to each other& as shown by a
re"evance !iagram of sorts. 7it "ocs o$t com#etitors by creating a "chain that is as strong as its strongest
"in." 9f com#etitive a!vantage grows o$t of the entire system of activities& then com#etitors m$st match
each activity to get the benefit of the who"e system.
Porter !efines three ty#es of fit5
sim#"e consistency . first or!er fit between each activity an! the overa"" strategy
reinforcing . secon! or!er fit in which !istinct activities reinforce each other
o#timi'ation of effort . coor!ination an! information e4change across activities to e"iminate
re!$n!ancy an! waste! effort.
3ow is com#etitive a!vantage s$staine!J
Porter *-DD0/ o$t"ines three con!itions for the s$stainabi"ity of com#etitive a!vantage5
"ierarchy of source +durability and imitability, . "ower.or!er a!vantages s$ch as "ow "abor cost may
be easi"y imitate!& whi"e higher or!er a!vantages "ie #ro#rietary techno"ogy& bran! re#$tation& or
c$stomer re"ationshi#s re2$ire s$staine! an! c$m$"ative investment an! are more !iffic$"t to imitate.
-umber of distinct sources . many are har!er to imitate than few.
Constant improvement and upgrading . a firm m$st be "r$nning scare!&" creating new a!vantages at
"east as fast as com#etitors re#"icate o"! ones.
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EES&OR 483 Strategy Primer 3.0
References5
Porter& 0ichae"& Competitive dvantage& The 7ree Press& :)& -D8,.
Porter& 0ichae"& The Competitive dvantage of -ations& The 7ree Press& :)& -DD0.
Porter& 0ichae"& "?hat is strategyJ" "arvard #usiness $eview vC4& n@ *:ov.;ec& -DD@/5@- *-8
#ages/.
2.2 Core Competence and Capabilities
Pro#onents of this framewor em#hasi'e the im#ortance of a !ynamic strategy in to!ay6s more !ynamic
b$siness environment. They arg$e that a strategy base! on a "war of #osition" in in!$stry str$ct$re wors
on"y when marets& regions& #ro!$cts& an! c$stomer nee!s are we"" !efine! an! !$rab"e. (s marets
fragment an! #ro"iferate& an! #ro!$ct "ife cyc"es acce"erate& "owning" any #artic$"ar maret segment
becomes more !iffic$"t an! "ess va"$ab"e. 9n s$ch an environment& the essence of strategy is not the
str$ct$re of a com#any6s #ro!$cts an! marets b$t the !ynamics of its behavior. ( s$ccessf$" com#any wi""
move 2$ic"y in an! o$t of #ro!$cts& marets& an! sometimes even b$siness segments. <n!er"ying it a""&
tho$gh& is a set of core com#etencies or ca#abi"ities that are har! to imitate an! !isting$ish the com#any
from com#etition. These core com#etencies& an! a contin$o$s strategic investment in them& govern the
"ong term !ynamics an! #otentia" of the com#any.
?hat are core com#etencies an! ca#abi"itiesJ
Praha"a! an! 3ame" *-DD0/ s#ea of core competencies as the co""ective "earning in the organi'ation&
es#ecia""y how to coor!inate !iverse #ro!$ction si""s an! integrate m$"ti#"e streams of techno"ogy.
These si""s $n!er"ie a com#any6s vario$s #ro!$ct "ines& an! e4#"ain the ease with which s$ccessf$"
com#etitors are ab"e to enter new an! seeming"y $nre"ate! b$sinesses. Three tests can be a##"ie! to
i!entify core com#etencies5 *-/ #rovi!es #otentia" access to wi!e variety of marets& *+/ maes
significant contrib$tion to en! $ser va"$e& an! *3/ !iffic$"t for com#etitors to imitate.
.xamples of core competence5 Sony in miniat$ri'ation& a""owing it to mae everything from ?a"mans
to vi!eo cameras to noteboo com#$ters. 8anon6s core com#etence in o#tics& imaging& an!
micro#rocessor contro"s have enab"e! it to enter marets as seeming"y !iverse as co#iers& "aser #rinters&
cameras& an! image scanners.
Sta"& Evans& an! Sch$"man *-DD+/ s#ea of capabilities simi"ar"y& b$t !efine! more broa!"y to
encom#ass the entire va"$e chain rather than %$st s#ecific technica" an! #ro!$ction e4#ertise.
.xamples of capabilities5 ?a".mart in inventory management& 3on!a in !ea"er management an!
#ro!$ct rea"i'ation.
9m#"ications for strategyJ
/ortfolio of competencies. (n essentia" "esson of this framewor is that com#etencies are the roots of
com#etitive a!vantage& an! therefore b$sinesses sho$"! be organi'e! as a #ortfo"io of com#etencies *or
ca#abi"ities/ rather than a #ortfo"io of b$sinesses. Organi'ation of a com#any into a$tonomo$s
strategic b$siness $nits& base! on marets or #ro!$cts& can cri##"e the abi"ity to e4#"oit an! !eve"o#
com#etencies . it $nnecessari"y restricts the ret$rns to sca"e across the organi'ation. 8ore com#etence
is comm$nication& invo"vement& an! a !ee# commitment to woring across organi'ationa" bo$n!aries.
/roducts based on competencies. Pro!$ct #ortfo"ios *at "east in techno"ogy.base! com#anies/ sho$"!
be base! on core com#etencies& with core #ro!$cts being the #hysica" embo!iment of one or more core
com#etencies. Th$s& core com#etence a""ows both foc$s *on a few com#etencies/ an! !iversification
*to whichever marets firm6s ca#abi"ities can a!! va"$e/. To s$stain "ea!ershi# in their chosen core
com#etence areas& com#anies sho$"! see' to maximi0e their world manufacturing share in core
products. This #art"y !etermines the #ace at which com#etencies can be enhance! an! e4ten!e!
*thro$gh a "earning.by.!oing sort of im#rovement/.
Continuous investment in core competencies or capabilities. The costs of "osing a core com#etence
can be on"y #art"y ca"c$"ate! in a!vance . since the embe!!e! si""s are b$i"t thro$gh a #rocess of
contin$o$s im#rovement& it is not something that can be sim#"y bo$ght bac or "rente! in" by
,
EES&OR 483 Strategy Primer 3.0
o$tso$rcing. ?a".mart& for e4am#"e& has investe! heavi"y in its "ogistics infrastr$ct$re& even if the
in!ivi!$a" investments co$"! not be %$stifie! by ROR ana"ysis. They were strategic investments that
enab"e! the com#any6s re"ent"ess foc$s on c$stomer nee!s. ?hi"e ?a".mart was b$i"!ing $# its
com#etencies& A.mart was o$tso$rcing whenever it was chea#est.
Caution: core competencies as core rigidities. 1owen et a". ta" abo$t the "imitations to restricting
#ro!$ct !eve"o#ment to areas in which core com#etencies a"rea!y e4ist& or core rigi!ities. Boo!
com#anies may try to incrementa""y im#rove their com#etencies by bringing in one or two new core
com#etencies with each new ma%or !eve"o#ment #ro%ect they #$rs$e.
References5
1owen& 8"ar& 3o""oway& ?hee"right& Per#et$a" Enter#rise 0achine& O4for! Press& -DD4.
Praha"a!& 8.A. an! Bary 3ame"& "The 8ore 8om#etence of the 8or#oration&" "arvard #usiness
$eview& v@8& n3 *0ay.E$ne& -DD0/5CD *-3 #ages/.
Sta"& B.& Evans& P.& an! =. Sch$"man& "8om#eting on 8a#abi"ities5 the :ew R$"es of 8or#orate
Strategy&" vC0& n+ *0arch.(#ri"& -DD+/5,C *-3 #ages/.
2.3 Resource-ased !ie" o# t$e Firm %R!&
?hat is R1>J
The R1> framewor combines the interna" *core com#etence/ an! e4terna" *in!$stry str$ct$re/
#ers#ectives on strategy. =ie the framewors of core com#etence an! ca#abi"ities& firms have very
!ifferent co""ections of #hysica" an! intangib"e assets an! ca#abi"ities& which R1> ca""s reso$rces.
8om#etitive a!vantage is $"timate"y attrib$te! to the ownershi# of a va"$ab"e reso$rce. Reso$rces are more
broa!"y !efine! to be #hysica" *e.g. #ro#erty rights& ca#ita"/& intangib"e *e.g. bran! names& techno"ogica"
now how/& or organi'ationa" *e.g. ro$tines or #rocesses "ie "ean man$fact$ring/. :o two com#anies have
the same reso$rces beca$se no two com#anies have ha! the same set of e4#erience& ac2$ire! the same
assets an! si""s& or b$i"t the same organi'ationa" c$"t$re. (n! $n"ie the core com#etence an! ca#abi"ities
framewors& tho$gh& the va"$e of the broa!"y.!efine! reso$rces is !etermine! in the inter#"ay with maret
forces. Enter Porter6s , 7orces. 7or a reso$rce to be the basis of an effective strategy& it m$st #ass a
n$mber of external maret tests of its va"$e.
8o""ins an! 0ontgomery *-DD,/ offer a series of five tests for a va"$ab"e reso$rce5
-. )nimitability . how har! is it for com#etitors to co#y the reso$rceJ ( com#any can sta"" imitation if the
reso$rce is *-/ physically unique& *+/ a conse2$ence of path dependent !eve"o#ment activities& *3/
causally ambiguous *com#etitors !on6t now what to imitate/& or *4/ a cost"y asset investment for a
"imite! maret& res$"ting in economic deterrence.
+. %urability . how 2$ic"y !oes the reso$rce !e#reciateJ
3. ppropriability . who ca#t$res the va"$e that the reso$rce creates5 com#any& c$stomers& !istrib$tors&
s$##"iers& or em#"oyeesJ
4. 1ubstitutability . can a $ni2$e reso$rce be tr$m#e! by a !ifferent reso$rceJ
,. Competitive 1uperiority . is the reso$rce rea""y better relative to com#etitorsJ
Simi"ar"y& b$t from a more e4terna"& economics #ers#ective& Peteraf *-DD3/ #ro#oses fo$r theoretica"
con!itions for com#etitive a!vantage to e4ist in an in!$stry5
-. "eterogeneity of resources PQ rents e4ist
( basic ass$m#tion is that reso$rce b$n!"es an! ca#abi"ities are heterogeneo$s across firms. This
!ifference is manifeste! in two ways. 7irst& firms with s$#erior reso$rces can earn Ricar!ian rents
*#rofits/ in com#etitive marets beca$se they #ro!$ce more efficient"y than others. ?hat is ey is that
the s$#erior reso$rce remains in "imite! s$##"y. Secon!& firms with maret #ower can earn mono#o"y
#rofits from their reso$rces by !e"iberate"y restricting o$t#$t. 3eterogeneity in mono#o"y mo!e"s may
res$"t from !ifferentiate! #ro!$cts& intra.in!$stry mobi"ity barriers& or first.mover a!vantages& for
e4am#"e.
@
EES&OR 483 Strategy Primer 3.0
+. .x*post limits to competition PQ rents s$staine!
S$bse2$ent to a firm gaining a s$#erior #osition an! earning rents& there m$st be forces that "imit
com#etition for those rents *imitabi"ity an! s$bstit$tabi"ity/.
3. )mperfect mobility PQ rents s$staine! within the firm
Reso$rces are im#erfect"y mobi"e if they cannot be tra!e!& so they cannot be bi! away from their
em#"oyerO com#etitive a!vantage is s$staine!.
4. .x*ante limits to competition PQ rents not offset by costs
Prior to the firm estab"ishing its s$#erior #osition& there m$st be "imite! com#etition for that #osition.
Otherwise& the cost of getting there wo$"! offset the benefit of the reso$rce or asset.
9m#"ications for strategyJ
0anagers sho$"! b$i"! their strategies on reso$rces that #ass the above tests. 9n !etermining what are
va"$ab"e reso$rces& firms sho$"! "oo both at e4terna" in!$stry con!itions an! at their interna"
ca#abi"ities. Reso$rces can come from anywhere in the va"$e chain an! can be #hysica" assets&
intangib"es& or ro$tines.
8ontin$o$s im#rovement an! $#gra!ing of the reso$rces is essentia" to #ros#ering in a constant"y
changing environment. 7irms sho$"! consi!er in!$stry str$ct$re an! !ynamics when !eci!ing which
reso$rces to invest in.
9n cor#orations with a !ivisiona" str$ct$re& it6s easy to mae the mistae of o#timi'ing !ivisiona" #rofits
an! "etting investment in reso$rces tae a bac seat.
Boo! strategy re2$ires contin$a" rethining of the com#any6s sco#e& to mae s$re it6s maing the most
of its reso$rces an! not getting into marets where it !oes not have a reso$rce a!vantage. R1> can
inform abo$t the riss an! benefits of !iversification strategies.
References5
8o""is& ;avi! E.O 0ontgomery& 8ynthia (. "8om#eting on reso$rces5 strategy in the -DD0s"& "arvard
#usiness $eview& vC3& n4 *E$"y.($g$st& -DD,/5--8 *-- #ages/.
0.(. Peteraf& "The 8ornerstones of 8om#etitive (!vantage5 ( Reso$rce.1ase! >iew&" in 1trategic
&anagement 2ournal -DD3& >o". -4& ##. -CD.-D-.
2.' (lternati)e Frame"or*s+ ,)olutionary C$an-e and .ypercompetition
Recent"y& strategy "iterat$re has foc$se! on managing change as the centra" strategic cha""enge. 8hange&
the story goes& is the striing feat$re of contem#orary b$siness& an! s$ccessf$" firms wi"" be the ones that
!ea" most effective"y with change& not sim#"y those that are goo! at #"anning ahea!. ?hen the !irection of
change is too $ncertain& managers sim#"y cannot #"an effective"y. ?hen in!$stries are ra#i!"y an!
$n#re!ictab"y changing& strategy base! on in!$stry ana"ysis& core ca#abi"ities& an! #"anning may be
ina!e2$ate by themse"ves& an! wo$"! be we"" com#"emente! by an orientation towar!s !ea"ing with change
effective"y an! contin$o$s"y.
Evo"$tionary 8hange
Theories that !raw ana"ogies between bio"ogica" evo"$tion an! economics or b$siness can very satisfying5
they e4#"ain the way things wor in the rea" wor"!& where ana"ysis an! #"anning is often a rarity. 0oreover&
they s$ggest that strategies base! on f"e4ibi"ity& e4#erimentation an! contin$o$s change an! "earning can be
even more im#ortant than rigoro$s ana"ysis an! #"anning. 9n!ee!& over#"anning is a !anger to be avoi!e!.
9n Competing on the .dge& Eisenhar!t *-DD8/ a!vocates a strategy base! on what she ca""s "com#eting on
the e!ge&" combining e"ements of com#"e4ity theory with evo"$tionary theory. 9n s$ch a framewor& firms
!eve"o# a "semi.coherent strategic !irection" of where they want to go. They !o this by having the right
ba"ance between or!er an! chaos . firms can then s$ccessf$""y evo"ve an! a!a#t to their $n#re!ictab"e
environment. 1y com#eting at the "e!ge of chaos&" a firm creates an organi'ation that can change an!
#ro!$ce a contin$o$s f"ow of com#etitive a!vantages that form the "semi.coherent" !irection. 7irms are
C
EES&OR 483 Strategy Primer 3.0
not hin!ere! by too m$ch #"anning or centra"i'e! contro"& b$t they have eno$gh str$ct$re so that change
can be organi'e! to ha##en. They s$ccessf$""y evo"ve& beca$se they #$rs$e a variety of moves& an! in
!oing so mae some mistaes b$t a"so re"ent"ess"y reinvent the b$siness by !iscovering new growth
o##ort$nities. This strategy is characteri'e! by being $n#re!ictab"e& $ncontro""e!& an! inefficient& b$t it
wors. 9t6s im#ortant to note that firms sho$"! not %$st react we"" to change& b$t m$st a"so !o a goo! %ob of
antici#ating an! "ea!ing change. 9n s$ccessf$" b$sinesses& change is time*paced& or triggere! by the
#assage of time rather than events.
9n #uilt to (ast& 8o""ins an! Porras *-DD4/ o$t"ine habits of "ong.s$ccessf$"& visionary com#anies.
<n!er"ying the habits is an orientation towar!s evo"$tionary change5 try a "ot of st$ff an! ee# what wors.
Evo"$tionary #rocesses can be a #owerf$" way to stim$"ate #rogress. 9m#ortant"y& tho$gh& 8o""ins an!
Porras a"so fin! that s$ccessf$" com#anies each have a core i!eo"ogy that m$st be #reserve! thro$gho$t the
#rogress. There is no one form$"a for the "right" set of core va"$es& b$t it is im#ortant to have them. 9n
strategy.s#ea& it is this core i!eo"ogy that most f$n!amenta""y !ifferentiates the firm from com#etitors&
regar!"ess of which maret segments they get into. They are !ee#"y he"! va"$es that go beyon! "vision
statements" . they are mechanisms an! systems that are b$i"t into the system over time. (ttention to the
core be"iefs may sometimes !efy short.term #rofit incentives or conventiona" b$siness wis!om& b$t it is
im#ortant to maintain them. E4am#"es of core i!eo"ogies are5 3P6s commitment to maing an "origina"
technica" contrib$tion" in every maret they enter& ?a".mart6s "e4cee! c$stomer e4#ectations&" 1oeing6s
"being on the "ea!ing e!ge of aviation&" an! 306s "res#ect for in!ivi!$a" initiative." :otice the "ma4imi'e
shareho"!er wea"th" is not an a!e2$ate core i!eo"ogy . it !oes not ins#ire #eo#"e at a"" "eve"s an! #rovi!es
"itt"e g$i!ance.
9n the conte4t of strategy an! #"anning& this boo offers a co$#"e of im#ortant "essons5
<n#"anne!& evo"$tionary change can be an im#ortant com#onent to s$ccess. Strategy an! #"anning
sho$"! foster an! com#"ement s$ch change& not s$ffocate it.
8ertain core be"iefs are f$n!amenta" to organi'ations& an! sho$"! be #reserve! at a"" costs. :ot
everything abo$t an organi'ation is a can!i!ate for change in consi!ering a"ternative strategies.
3y#ercom#etition
Tra!itiona" a##roaches to strategy stress the creation of a!vantage& b$t the conce#t of hy#ercom#etition
teaches that strategy is a"so the creative !estr$ction of an o##onent a!vantage. This is beca$se in to!ay6s
environment& tra!itiona" so$rces of com#etitive a!vantage ero!e ra#i!"y& an! s$staining a!vantages can be
a !istraction from !eve"o#ing new ones. 8om#etition has intensifie! to mae each of the tra!itiona"
so$rces of a!vantage more v$"nerab"eO the tra!itiona" so$rces are5 #rice & 2$a"ity& timing an! now.how&
creation of strongho"!s *entry barriers have fa""en/& an! !ee# #ocets. The #rimary goa" of this new
a##roach to strategy is !isr$#tion of the stat$s 2$o& to sei'e the initiative thro$gh creating a series of
tem#orary a!vantages. 9t is the s#ee! an! intensity of movement that characteri'es hy#ercom#etition.
There is no e2$i"ibri$m as in #erfect com#etition& an! on"y tem#orary #rofits are #ossib"e in s$ch marets.
S$ccessf$" strategy in hy#ercom#etitive marets is base! on three e"ements5
>ision for how to !isr$#t a maret *setting goa"s& b$i"!ing core com#etencies necessary to create
s#ecific !isr$#tions/
Aey ca#abi"ities enab"ing s#ee! an! s$r#rise in a wi!e range of actions
;isr$#tive tactics i""$minate! by game theory *shifting the r$"es of the game& signa"ing& sim$"taneo$s
an! strategic thr$sts/
8
EES&OR 483 Strategy Primer 3.0
Additional Tools for Strategic T!inking and Analysis
3.1 /ame 0$eory
Bame Theory in Strategy
Bame theory he"#s ana"y'e !ynamic an! se2$entia" !ecisions at the tactica" "eve". The main va"$e of game
theory in strategy is to em#hasi'e the im#ortance of thining ahea!& thining of the a"ternatives& an!
antici#ating the reactions of other #"ayers in yo$r "game." Aey conce#ts re"evant to strategy are the #ayoff
matri4& e4tensive form games& an! the core of a game. (##"ication areas in strategy are5
new #ro!$ct intro!$ction
"icensing vers$s #ro!$ction
#ricing
R&;
a!vertising
reg$"ation
The 9m#ortance of <n!erstan!ing "The Bame"
S$ccessf$" strategy cannot !e#en! %$st on one firm6s #osition in in!$stry& ca#abi"ities& activities& or what
have yo$. 9t !e#en!s on how others react to yo$r moves& an! how others thin yo$ wi"" react to theirs. 1y
f$""y $n!erstan!ing the !ynamic with others& yo$ can recogni'e win.win strategies that mae yo$ better off
in the "ong term& an! signa"ing tactics that avoi! "ose."ose o$tcomes. 0oreover& if yo$ $n!erstan! the
game& yo$ can tae actions to change the r$"es or #"ayers of the game in yo$r favor. 1ran!enb$rger an!
:a"eb$ff *-DD,/ give some goo! e4am#"es of this. One way a com#any can change the game an! ca#t$re
more va"$e is by changing the va"$e other #"ayers can bring to it& as the :inten!o e4am#"e i""$strate!. 9n
s$mmary& com#anies can change their game of b$siness in their favor by changing5
players *">a"$e :et"/ . c$stomers& s$##"iers& s$bstit$tors& an! com#"ementors *not %$st the
com#etitors/
added values . the va"$e that each #"ayer brings to the co""ective game
rules . "aws& c$stoms& contracts& etc. that give a game its str$ct$re
tactics . moves $se! to sha#e the way #"ayers #erceive the game an! hence how they #"ay
scope . bo$n!aries of the game.
Bame theory has been a b$rgeoning branch of economics in recent years. 9t is a com#"e4 s$b%ect that s#ans
games of static *one.time/ an! !ynamic *re#eate!/ nat$re $n!er #erfect or im#erfect information. The
references be"ow wi"" be he"#f$" for those wishing to e4#"ore the theory an! mo!e"ing of game theory in
more !etai". 7or strategy& tho$gh& it can often be a ma%or ste# %$st to recogni'e certain sit$ations as games&
an! thining abo$t how a #"ayer can set o$t to change the game.
References5
9ntro!$ction to game theory in cor#orate strategy
Oster& S.0.& &odern Competitive nalysis& 8ha#ter& -3& O4for! Press& -DD4& ##.+3C.+,0.
1ran!enb$rger& (!am 0.O :a"eb$ff& 1arry E. "The right game5 $se game theory to sha#e strategy"
"arvard #usiness $eview vC3& n4 *E$"y.($g$st& -DD,/5,C.
1asic intro!$ction to game theory conce#ts
(.A. ;i4it an! 1. E. :a"eb$ff& Thin'ing 1trategically: The Competitive .dge in #usiness, /olitics, and
.veryday (ife& ?.?. :orton & 8om#any& ##. 34C.3@C
Bibbons& R.& 3ame Theory for pplied .conomists& Princeton5 Princeton <niversity Press& -DD+.
1inmore& A.& 4un and 3ames: Text on 3ame Theory& =e4ington5 ;.8. 3eath & 8o.& -DD+.
0ore a!vance! economics te4ts on game theory
D
EES&OR 483 Strategy Primer 3.0
7$!enberg& ;. an! E. Tiro"e& 3ame Theory& 8ambri!ge5 09T Press& -DD-.
0yerson& R.& 3ame Theory: n nalysis of Conflict& 8ambri!ge5 3arvar! <niversity Press& -DD-.
3.2 1ptions
O#tions theory has inf"$ence! cor#orate strategy $n"ie any other #ara!igm coming from ?a"" Street. The
Irea" o#tionK is ana"ogo$s to the financia" o#tion in that a com#any with an investment o##ort$nity ho"!s
the right b$t not the ob"igation to #$rchase an asset at some time in the f$t$re. 1$siness schoo"s have
ta$ght managers to ana"y'eNeva"$ate investment !ecisions $sing net #resent va"$e *:P>/& which ass$mes
one of two things5 -/ the investment is reversib"e or +/ if not& it is a now.or.never #ro#osition. 9n fact&
most investment !ecisions are irrevocab"e a""ocations of reso$rces an! ca#ab"e of being !e"aye!. ;i4it an!
Pin!yc *-DD,/ !isc$ss how the o#tions a##roach to ca#ita" investment #rovi!es a richer framewor that
a""ows managers to a!!ress the iss$es of irreversibi"ity& $ncertainty& an! timing more !irect"y.
The o#tions framewor #"aces va"$e on f"e4ibi"ity *ee#ing the investment o#tion a"ive/ an! mo!$"arity
*creating o#tions/5
4lexibility examples: -/ 9nvestments in R&; can create o#tions that a""ow the com#any to $n!ertae other
investments in the f$t$re sho$"! maret con!itions be favorab"e. +/ ( mining faci"ity o#erating at a "oss
given c$rrent #rices may be !e"iberate"y e#t o#en beca$se c"os$re wo$"! inc$r the o##ort$nity cost of
giving $# the o#tion to wait for higher f$t$re #rices.
&odularity examples: -/ ( "an! #$rchase co$"! "ea! to !eve"o#ment of minera" reserves. +/ (n e"ectric
$ti"ity co$"! invest in sma"" a!!itions to ca#acity as nee!e! to meet $ncertain !eman! instea! of b$i"!ing
e4#ensive& "arge.sca"e #"ants.
The o#tion is str$ct$re! s$ch that the com#any can e4ercise it when #rofitab"e an! "et it e4#ire when it is
not& !e#en!ing on how $ncertainty is reso"ve!. (s "ong as there are some contingencies $n!er which the
com#any wo$"! choose not to invest& the o#tion has value. Th$s& o#tions theory ca#t$res the fact that the
greater the $ncertainty& the greater the va"$e of the o##ort$nity an! the greater the incentive to wait an!
ee# the o#tion a"ive rather than e4ercise it.
9m#"ications for strategyJ
The o#tions a##roach is #artic$"ar"y a##ro#riate for com#anies in very vo"ati"e an! $n#re!ictab"e
in!$stries& s$ch as e"ectronics& te"ecomm$nications& biotech& an! #harmace$tica" in!$stries.
?hen raising ca#ita"& greater va"$e sho$"! be #"ace! on investments that create o#tions& com#are! to
those that exercise o#tions.
O#tions are es#ecia""y a##ro#riate for ana"y'ing a series of #hase! investments.
O#tions theory he"#s $s $n!erstan! how tra!itiona" !isco$nte! cash f"ow ana"ysis systematica""y
$n!erestimates the benefits of waiting.
Rea" o#tions a"so #rovi!e a means for eva"$ating !isinvestment& an often over"ooe! o##ort$nity to
avoi! f$t$re "osses *e.g.& c"osing a faci"ity in res#onse to a maret !ownt$rn/.
8onsi!er whether the c"ient wo$"! be in a better #osition after some $ncertainty is reso"ve!. 9n
framing a"ternatives& consi!er strategies that inc"$!e !ownstream !ecisions. O#tions might be the i!ea"
way to mo!e" s$ch !ecision o##ort$nities.
#ntrod73tory 9ooks on Rea5 O:tions
(mram& 0. an! :. A$"ati"aa& Rea" O#tions 5 0anaging Strategic 9nvestment in an <ncertain ?or"!&
3arvar! 1$siness Schoo" Press& -DD8.
- ta'es the finance approach to real options, much li'e the (uenberger text. 4ocus is on problems in
which ris's are priced by exchange traded securities +mar'et ris's,.
-0
EES&OR 483 Strategy Primer 3.0
Rea" O#tions in 8a#ita" 9nvestment& Trigeorgis& =& e!itor& -DD,.
* collection of articles intended for both academic and professional audience.
Trigeorgis& =.& Rea" O#tions 5 0anageria" 7"e4ibi"ity an! Strategy in Reso$rce (""ocation& 09T Press& -DD@.
* /erhaps the best overall general introduction to real options, without ta'ing a strictly finance or strictly
decision analytic approach. 4eatures a good comparison of various approaches to valuing ris'y
investments. practical approach that is not as academic as %ixit and /indyc'.
$3ademi3 Re6eren3es
;i4it& (vinash A. an! Robert S. Pin!yc& 9nvestment <n!er <ncertainty, Princeton& -DD4.
The boo' to read if you are interested in mathematical formulations of real options problems +i.e. dynamic
programming and stochastic differential equations,
=$enberger& ;.& 9nvestment Science& O4for! <niv. Press& -DDC
(uenberger5s binomial lattice approach is a useful simplification of dynamic programming approaches to
real options. The boo' also includes some powerful finance tools for pricing mar'et ris'.
Smith& Eames E.& IO#tions in the rea" wor"!5 =essons "earne! in eva"$ating oi" an! gas investments&K
O#erations Research& EanN7eb -DDD.
Smith& Eames E. an! Robert :a$& I>a"$ing Risy Pro%ects5 O#tion Pricing Theory an! ;ecision
(na"ysis&K 0anagement Science& >o". 4-& :o. ,& 0ay -DD,.
Smith& Eames E.& I>a"$ing Oi" Pro#erties5 9ntegrating O#tion Pricing an! ;ecision (na"ysis
(##roaches&K O#erations Research& 0arN(#r -DD8.
* 2im 1mith5s wor' has been instrumental in integrating the decision analysis and finance approaches to
ris'y investments. 4ocuses mainly on problems that are at least partly influenced by mar'et*spanning ris's
+i.e. ris's that are priced by exchange traded derivatives, such as oil and gas futures,
Po:75ar 97siness Re6eren3es
( n$mber of recent artic"es have #romote! rea" o#tions to the genera" management a$!ience5
(mram& 0.& :. A$"ati"aa& I;isci#"ine! !ecisions5 ("igning strategy with the financia" marets&K "arvard
#usiness $eview& EanN7eb -DDD.
* a concise summary of the concepts in their boo' +see above,.
;i4it& (vinash A. an! Robert S. Pin!yc& IThe O#tions (##roach to 8a#ita" 9nvestment&K 3arvar! 1$siness
Review& 0ay -DD,.
* a good overview of why flexibility in decision ma'ing is important. 6ritten by the authors who are also
experts in the academic real options literaure. ( goo! starting #oint for those who are a"rea!y fami"iar
with !ecision ana"ysis.
=es"ie& A. an! 0ichae"s& 0. IThe Rea" Power of Rea" O#tions&K 0cAinsey R$arter"y& -DDC :o 3.
* promotes the intuition from analysis of real options as a framewor' for strategic thin'ing.
8o#e"an!& T. an! P. Aeenan& I3ow m$ch is f"e4ibi"ity worth&K 0cAinsey R$arter"y& -DD8 :o +
* general introduction to real options as a means to price mar'et ris', focusing more on the finance
tradition of real options +no arbitrage pricing, than the decision analysis tradition. 7seful if you are
dealing with uncertainties that are trac'ed well by the mar'et +i.e. oil and gas prices, etc.,
=$ehrman& T.& I9nvestment O##ort$nities as Rea" O#tions5 Betting Starte! on the :$mbers&K 3arvar!
1$siness Review& E$"y -DD8.
=$ehrman& T.& IStrategy as a Portfo"io of Rea" O#tions&K 3arvar! 1$siness Review& Se#tember -DD8.
--
EES&OR 483 Strategy Primer 3.0
* try to generali0e the #lac'*1choles basis for real options thin'ing to a genera" a$!ience. ( bit hoy an!
simplistic.
-+
EES&OR 483 Strategy Primer 3.0
3.3 Strate-ic Scenarios
Scenarios are #owerf$" vehic"es for cha""enging o$r menta" mo!e"s of the wor"!. The va"$e is not in
#re!icting the f$t$re& b$t in maing better !ecisions to!ay. The !ecision maers co$"! be in!ivi!$a"s&
b$sinesses& or #o"icy maers. Scenarios are a nice com#"ement to the #rinci#"es of !ecision ana"ysis5 the
;( cyc"e en!s in !ecisions an! insights& whi"e the scenario #rocess en!s in a scenario.
?hy ;eve"o# ScenariosJ . <ncovering the ;ecision
1esi!es #re!icting the f$t$re& scenarios ai! in strategic !ecision maing5
&a'e the decision conscious. The first ste# in the scenario #rocess is maing the !ecision conscio$s.
Peo#"e6s !ecision agen!a is often $nconscio$s& an! #eo#"e sho$"! not avoi! a !ecision %$st beca$se
they fee" #ower"ess.
rticulate current mindsets. Scenarios are "ie stories we can te"" o$rse"ves . they are a #owerf$" way
of s$s#en!ing !isbe"ief an! avoi!ing the !angers of !enia". Often& #eo#"e may ref$se to thin abo$t
#ossibi"ities that are $na##ea"ing to them. The #rocess of scenario b$i"!ing& consi!ering both
o#timistic an! #essimistic an! %$st #"ain !ifferent f$t$res& over"y e4#oses "menta" mo!e"s" an!
ass$m#tions that may be inbre! in the organi'ation.
%evelop insights and solid instincts. 9nsights come from asing the right 2$estions . from having to
consi!er more than one scenario. ("so& scenario b$i"!ing he"#s !eve"o# a g$t fee"ing for a sit$ation&
an! ass$res $s that we6ve been com#rehensive in covering the bases re"evant to o$r !ecision.
3ow to ;eve"o# ScenariosJ
;eve"o#ing scenarios is simi"ar to !eve"o#ing an! #r$ning inf"$ence !iagrams in ;(& b$t the sco#e of
consi!eration is a "itt"e broa!er with scenarios. Sti""& scenario b$i"!ers sho$"! consi!er both narrow
*sit$ation s#ecific/ an! broa! 2$estions. Ty#ica""y& the scenario b$i"!ing e4ercise wi"" res$"t in no more
than fo$r scenarios . any more is too com#"e4 to !raw insights. The set of scenarios sho$"! s#an a range of
o$tcomesO ty#ica""y something "ie "same b$t better&" "worse&" an! "!ifferent b$t better."
Ste#s to !eve"o#ing scenarios are as fo""ows5
-. 9!entify the foca" iss$e or !ecision. *;( ana"og$e5 frame the !ecision/
+. 9!entify the basic !riving forces inf"$encing the o$tcome5 socia"& techno"ogica"& economic& #o"itica"&
environmenta". *;( ana"og$eJ/
3. 9!entify the ey forces in the "oca" environment5 !etermining the #re!etermine! e"ements an! critica"
$ncertainties. *;( ana"og$e5 i!entify the $ncertainties/
4. Ran the $ncertainties in or!er of im#ortance. *;( ana"og$e5 torna!o !iagram/
,. Se"ecting scenario #"ots *"ogics/. Scenario #"ots ty#ica""y r$n accor!ing to certain "ogics& "ie5
winners & "osers& cha""enge & res#onse& evo"$tion& revo"$tion& cyc"es& etc.
@. 7"esh o$t scenarios. Each #"ot wi"" "ea! to a !ifferent !ecision to!ay. 7rom the !ifferent #"ots& narrow
an! combine them to form two or three coherent scenarios.
C. (ssess im#"ications of scenarios on !ecision.
8. 9!entify "ea!ing in!icators an! sign#osts. =earn to notice sym#toms& c$es& an! warning signa"s of
certain #"ots $nrave"ing before yo$.
References5
Schwar'& Peter& The rt of the (ong View: /lanning for the 4uture in an 7ncertain 6orld& ;o$b"e!ay&
:ew )or& -DD-.
Schwart'& Peter& "8om#osing a P"ot for )o$r Scenario&" /lannning $eview +0& no. 3 *-DD+/54-.4@.
0ason& ;avi! 3. "Scenario.base! P"anning5 ;ecison 0o!e" for the =earning Organi'ation,8 /lanning
$eview ++& no. + *-DD4/5@.--. *This a"so intro!$ces the i!ea of organi'ationa" "earning/.
Sim#son& ;anie" B.& "Aey =essons for (!o#ting Scenario P"anning in ;iversifie! 8om#anies&"
/lanning $eview +0& no. 3 *-DD+/5 -0.-C& 4C.48.
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EES&OR 483 Strategy Primer 3.0
3.' 1t$er Particularly Rele)ant ,,S&1R Core Concepts
St$!ents in EES&OR have a host of ana"ytica" too"s avai"ab"e to a!! insight to strategic thining an!
ana"ysis. Some of the more !irect"y re"evant to#ics inc"$!e5
;ecision (na"ysis
. !ecision hierarchy an! framing
. strategy tab"es
. torna!o !iagrams
. ana"ysis of !ecisions $n!er $ncertainty
. va"$e of information
. o#tions in !ecisions
7inance
. investment ana"ysis
. rea" o#tions
Economics
. !eman!.oriente! #ricing *!ynamic& mono#o"istic #ricing/
. game theory
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EES&OR 483 Strategy Primer 3.0
" #arketing #odels for $roduct Strategy
EES&OR 483 teaches two #ro!$ct #"anning metho!o"ogies that may be $se! in!e#en!ent"y or as
com#"ements to each other. They a!! rigor to strategy at the "eve" of #ro!$ct #"anning an! im#"ementation.
(n e4ce""ent reference for these an! other mareting mo!e"s is =i"ien an! Rangasaway *-DD8/.
'.1 2e" Product 3i##usion 4odels
The diffusion #rocess is the s#rea! of an i!ea or the #enetration of a maret by a new #ro!$ct from its
so$rce of creation to its $"timate $sers or a!o#ters. :ote that adoption refers to the !ecision to $se an
innovation reg$"ar"y& whereas diffusion is on"y concerne! with initia" tria" of the #ro!$ct. *So$rce5 =i"ien&
Aot"er an! 0oorthy& -DD+& #. 4@-/
There are two ty#es of !iff$sion effects5
)nnovation5 tria" of #ro!$ct ca$se! by a!vertising an! #romotions
)mitation5 tria" of #ro!$ct ca$se! by wor!.of.mo$th recommen!ations an! re#$tation
Prior to 1ass *-D@D/& !iff$sion mo!e"s were either #$re innovative *ass$me !iff$sion on"y ca$se! by
e4terna" forces/ or #$re imitative *ass$me !iff$sion on"y ca$se! by imitation N wor! of mo$th/. The 1ass
mo!e" combines innovative an! imitative behavior into one mo!e"5
// * /* * // * * / * / * t - m t -
m
q
t - m p t - t n + = =

innovation
effect
or
e4terna"
inf"$ence
imitation
effect
or
interna"
inf"$ence
where5
/ * / * t - t n

= P 0agnit$!e of tria" !eman! *P the n$mber of a!o#ters at time t P !erivative of - with
res#ect to t/
/ *t -
P 8$m$"ative n$mber of a!o#ters
m P Potentia" n$mber of $"timate a!o#ters
p
P 9nf"$ence #arameter for innovation
q
P 9nf"$ence #arameter for imitation
This e4#ression can be rewritten for a!!itiona" int$itive $n!erstan!ing $sing the e2$iva"ent re#resentation5
/S * /ST * T / * t 9
m
q
p t - m t - + =

$n#enetrate!
maret si'e
a!o#tive #ress$re
pPinnovative
qPimitative
Terms can be inter#rete! as re#resenting one gro$# of innovators an! one gro$# of imitators& or as
re#resenting both the interna" an! e4terna" inf"$ences on a"" a!o#ters.
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EES&OR 483 Strategy Primer 3.0
9m#ortant B$i!e"ines for 0aret 7orecasting
The mo!e" forecasts total maret #otentia" for a #ro!$ct& not sa"es for a #artic$"ar com#any. 8om#any
sa"es wo$"! !e#en! on maret share of the tota"& which !e#en!s on #artic$"ar #ro!$ct variab"es "ie
2$a"ity& cost& an! #romotion& an! !istrib$tion. ;iff$sion mo!e"s on"y he"# with the big #ict$reO $se
con%oint ana"ysis or other metho!s to forecast maret share.
9n #ractice the act$a" coefficients are $s$a""y estimate! by ana"ogy to #ast #ro!$cts. 8oefficients for
#ast #ro!$cts are genera""y avai"ab"e in tab"es& or may be estimate! by regression.
Remember that !iff$sion mo!e"s on"y re#resent !eman! associate! with the tria" of a #ro!$ct.
(!!itiona" terms nee! to be a!!e! to acco$nt for re#eat #$rchase. ( mo!e" that taes into
consi!eration both tria" an! re#eat #$rchase !eman! wo$"! be a com#"ete sa"es forecast.
The 1ass mo!e" is a #re!ictive mo!e" that is most a##ro#riate for forecasting sa"es of a discontinuous
new techno"ogy or !$rab"e #ro!$ct that has no com#etitors. 9n s$ch sit$ations& the s$ccess of the
#ro!$ct may be #artic$"ar"y $ncertain& an! the 1ass mo!e" forecast may on"y !e#ict one #ossib"e
o$tcome.
?here yo$ are in the #ro!$ct "ife cyc"e !ictates the mareting an! c$stomer segmentation strategy.
?ith !iscontin$o$s innovations !ifferent mareting strategies are ca""e! for at !ifferent stages of the
techno"ogy "ife cyc"e to ens$re that the #ro!$ct reaches a mass maret *see Section ,.,/.
0ore recent research has foc$se! on re"a4ing the ass$m#tions of the 1ass mo!e"5
(""owing maret #otentia" to vary over time
:ot restricting that !iff$sion of an innovation be in!e#en!ent of a"" other innovations
(""owing geogra#hica" bo$n!aries of the system in which !iff$sion taes #"ace to vary over time
9ncor#orating the effect of mareting actions s$ch as #ricing& a!vertising& etc. on the !iff$sion #rocess
8onsi!ering s$##"y restrictions
8onsi!eration of $ncertainty
8onsi!er variations in !iff$sion rates in !ifferent co$ntries
(""ow wor! of mo$th effects to vary over time
The area of mareting #"anning mo!e"ing inc"$!es the incor#oration of fee!bac effects into !iff$sion
mo!e"s to t$rn a!vertising an! #ricing !ecisions over time into o#tima" contro" #rob"ems.
References
=i"ien& Bary =.& Phi"i# Aot"er& an! A. Sri!har 0oorthy& &ar'eting &odels *-DD+/54,C *44 #ages/
=i"ien& Bary& an! (. Rangasaway& &ar'eting .ngineering& (!!ison.?es"ey& -DD8& ##.-D,.+04.
0aha%an&>i%ay& Eitan 0$""er& an! 7ran 0. 1ass& I:ew.Pro!$ct ;iff$sion 0o!e"s&K "andboo's in :$
; &1, v. , *-DD3/5 34D *+3 #ages/.
'.2 Con5oint (nalysis
8on%oint ana"ysis is maret research metho!o"ogy for mo!e"ing the maret. ( 2$antitative& grass.roots
a##roach& con%oint ana"ysis is $se! to #re!ict cons$mer #references for m$"tiattrib$te a"ternatives. 9t is
base! on economic an! #sycho"ogica" research on cons$mer behavior& es#ecia""y at the in!ivi!$a" "eve"&
which is consi!ere! ey to maing acc$rate #re!ictions of the tota" maret. The s$b%ect of a con%oint st$!y
can be either a #hysica" #ro!$ct or a service& an! the maret can inc"$!e both new an! e4isting
#ro!$ctsNservices.
?hat is con%oint ana"ysisJ
Thin of the !ecision #rocess that cons$mers go thro$gh when choosing between com#"e4 a"ternatives.
Pro!$cts vary in terms of their feat$res& #erformance& an! 2$a"ity an! th$s are offere! at vario$s #rices.
8on%oint ana"ysis consi!ers a #ro!$ct in terms of a b$n!"e of attributes& or characteristics. Thro$gh an
interview& !ata are co""ecte! from res#on!ents to ca#t$re the tra!eoffs they mae between attrib$tes. These
!ata are #rocesse! to estimate a utility f$nction that e4#resses each res#on!entFs va"$e for #ro!$ct
attrib$tes. These $ti"ity va"$es are then $se! in a maret mo!e" or sim$"ator to mae #re!ictions abo$t how
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EES&OR 483 Strategy Primer 3.0
cons$mers wo$"! choose among new& mo!ifie!& an! e4isting #ro!$cts. 8on%oint ana"ysis a""ows $s to
ana"y'e f$t$re maret scenarios base! on #rimary maret research. Other techni2$es& s$ch as historica"
ana"ysis& wo$"! be ins$fficient to forecast the maret for new #ro!$cts& whereas con%oint ana"ysis can
mo!e" cons$mersF reaction to hy#othetica" #ro!$cts that may not yet e4ist.
8on%oint ana"ysis is a decompositional mo!e" in that va"$es are !erive! from cons$mersF res#onses to
interview 2$estions& as com#are! to asing cons$mers to !irect"y estimate mo!e" #arameters. 9n !irect
assessment& res#on!ents are ase! how "ie"y they are to b$y a certain #ro!$ct or how m$ch they wo$"! be
wi""ing to #ay for a #ro!$ct with an attrib$te im#rovement. This techni2$e is "imite! in that #ro!$cts are
not shown in a com#etitive conte4t an! these 2$estions !o not genera""y re#resent rea"istic #$rchase
!ecisions. ("ternative"y& con%oint ana"ysis $ses inference& which #rovi!es a more acc$rate #ict$re of
cons$mersF b$ying behavior. 9n the ana"ysis of res#onses to 2$estions abo$t hy#othetica" #ro!$ct
conce#ts& we can infer the va"$e to each res#on!ent of having each attrib$te "eve". Rather than e4#ecting
res#on!ents to #rovi!e !irect assessments& they are ase! to mae a n$mber of !ecisions that are more
rea"istic an! nat$ra". 9n a ty#ica" #airwise com#arison& two #ro!$ct conce#ts are consi!ere! <oint"y. 7or
instance5
-<i3< dr7g treatment 8o75d yo7 :re6er=
0a%or si!e effects
3igh efficacy
0inor si!e effects
0o!erate efficacy
( 1
9m#"ications for strategyJ
The sco#e of #ro!$ct #"anning iss$es a!!resse! with con%oint ana"ysis ranges from the tactica" "eve" to the
strategic "eve". The fo""owing is a "ist of some of the #ro!$ct #"anning !ecisions for which con%oint
ana"ysis is c$rrent"y $se! wor"!wi!e5
Pricing
:ew #ro!$ct !esign
Pro!$ct #ositioning
8om#etitive strategy
0areting strategies
0aret segmentation
9nvestment !ecisions
Sa"es forecasting
8a#acity #"anning
;istrib$tion #"anning
8on%oint ana"ysis is a wi!es#rea!& time.#roven strategic too". To ens$re s$ccess& #ractitioners m$st
caref$""y set c"ient e4#ectations regar!ing what con%oint can an! cannot !o. 8on%oint sim$"ators are
!irectiona" in!icators that can #rovi!e significant insight into the re"ative im#ortance of #ro!$ct feat$res
an! #references for #ro!$ct config$rations. These maret sim$"ators #re!ict preference share& that is
maret share potential. 0any interna" an! e4terna" inf"$ences s$ch as awareness& mareting& sa"es force
effectiveness& an! !istrib$tion !rive maret share in the rea" wor"!. <n"ess these effects are e4#"icit"y
mo!e"e! in& care sho$"! be taen to regar! the mo!e" res$"ts as #reference shares that ass$me #erfect
maret #enetration.
8on%oint ana"ysis is im#"emente! $sing commercia""y avai"ab"e software an! c$stom.#rogramme!
a##"ications. ;escri#tions of #acages avai"ab"e from one of the "ea!ing !eve"o#ers& Sawtooth Software&
are "iste! in the references be"ow.
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EES&OR 483 Strategy Primer 3.0

Re6eren3es *organi'e! by nee!sNinterest an! or!ere! by $sef$"ness/5
( host of references an! g$i!es to choosing software are avai"ab"e at htt#5NNwww.sawtoothsoftware.comN

Betting Starte! with 8on%oint on )o$r Pro%ect
8$rry& Eose#h& I8on%oint (na"ysis5 (fter the 1asicsK
Orme& 1ryan& I?hich 8on%oint 0etho! Sho$"! 9 <seK *-DDC/
8"ient 9nteraction
8$rry& Eose#h& I<n!erstan!ing 8on%oint (na"ysis in -, 0in$tesK
Orme& 1ryan& I3e"#ing 0anagers <n!erstan! the >a"$e of 8on%ointK
Sawtooth Software& I<sing 8hoice.1ase! 8on%oint to (ssess 1ran! Strength an! Price SensitivityK
*-DD@/
8hoosing the (##ro#riate Software
Sawtooth Software& I(8( System L (!a#tive 8on%oint (na"ysis& >ersion 4.0K *-DD-.-DD@/
Sawtooth Software& I8>( L ( 7$"".Profi"e 8on%oint System from Sawtooth Software& >ersion +.0K
Sawtooth Software& IThe 818 System for 8hoice.1ase! 8on%oint (na"ysisK *Ean -DD,/
Str$h"& Steven& I;iscrete 8hoice 0o!e"ing5 <n!erstan!ing a I1etter 8on%oint than 8on%ointK
8on%oint 0etho!o"ogy ;esign an! Research
Breen& Pa$" E. an! (bba 0. Arieger& I8on%oint (na"ysis with Pro!$ct.Positioning (##"ications&K
"andboo's in :$ ; &1, v. , *-DD3/54@C *3, #ages/
=i"ien& Bary& an! (. Rangasaway& &ar'eting .ngineering& (!!ison.?es"ey& -DD8& ##-84.-D4.
3$ber& Eoe"& I?hat ?e 3ave =earne! from +0 )ears of 8on%oint Research5 ?hen to <se Se"f.
E4#"icate!& Bra!e! Pairs& 7$"" Profi"es or 8hoice E4#erimentsK
0c7a!!en& ;anie" 7.& I8on!itiona" =ogit (na"ysis of R$a"itative 8hoice 1ehavior&K 4rontiers of
.conometrics *-DC3/
Breen& Pa$" an! (bba Arieger& I9n!ivi!$a"i'e! 3ybri! 0o!e"s for 8on%oint (na"ysisK& &anagement
1cience=Vol.>?, -o.@ *E$ne -DD@/
3$ber& Eoe"& ;an (rie"y& an! Bregory 7ischer& IThe (bi"ity of Peo#"e to E4#ress >a"$es with 8hoices&
0atching an! RatingsK *-DD8/
Orme& 1ryan& 0ar ("#ert& an! Ethan 8hristensen& I(ssessing the >a"i!ity of 8on%oint (na"ysis.
8ontin$e!K
3$ber& Eoe"& ;ic ?ittin& an! Richar! Eohnson& I=earning Effects in Preference Tass5 8hoice.1ase!
>ers$s Stan!ar! 8on%ointK *-DD+/
?ittin& ;ic& an! Eoe" 3$ber& Eohn 7ie!"er& an! Richar! 0i""er& IThe 0agnit$!e of an! an
E4#"anationNSo"$tion for the :$mber of =eve"s Effect in 8on%oint (na"ysisK *-DD-/
8ase St$!ies
Page& ("bert an! 3aro"! Rosenba$m& IRe!esigning Pro!$ct =ines with 8on%oint (na"ysis5 3ow
S$nbeam ;oes 9tK *-D8C/
?in!& Eerry& Pa$" Breen& ;o$g"as Shiff"et& an! 0arsha Scarbro$gh& I8o$rtyar! by 0arriott5
;esigning a 3ote" 7aci"ity with 8ons$mer.1ase! 0areting 0o!e"sK *-D8D/
8on%oint 3istory
Breen& Pa$" an! >. Srinivasan & I8on%oint (na"ysis in 0areting5 :ew ;eve"o#ments with
9m#"ications for Research an! PracticeK *#ost.-DC8/
Breen& Pa$" an! >. Srinivasan & I8on%oint (na"ysis in 8ons$mer Research5 9ss$es an! O$t"oo&K
2ournal of Consumer $esearch, Vol. A *-DC8/
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EES&OR 483 Strategy Primer 3.0
=i"ien& Bary& Phi"i# Aot"er& an! A. Sri!har 0oorthy& I;ecision 0o!e"s for Pro!$ct ;esign&K &ar'eting
&odels *-DD+/5+38
% Conceptual #arketing Frameworks
0$ch of the 01( "eve" mareting materia" is not concerne! with %$st sa"es an! services& b$t rather with
iss$es of strategic im#ortance. ?hi"e this materia" is not ta$ght in EES&OR483& it may be he"#f$" to be
aware of some ey themes in mareting. The fo""owing "ists an! !escri#tions #rovi!e an overview of
im#ortant mareting conce#ts. )o$6"" notice that some of the conce#ts over"a# with strategy framewors.
(n e4ce""ent reference te4tboo for mareting framewors5
Aot"er& Phi"i#. &ar'eting &anagement : nalysis, /lanning, )mplementation, and Control & Dth e!. <##er
Sa!!"e River& :E 5 Prentice 3a""& -DDC.
5.1 0$e Four P6s o# t$e 4ar*etin- 4i7
The #hrase Ithe fo$r #FsK is an easy way to remember an! characteri'e the fo$r most im#ortant mareting
!ecision variab"es. The fo$r PFs are #rice& #ro!$ct& #romotion& an! #"ace5
IPriceK variab"es5
(""owances an! !ea"s
;istrib$tion an! retai"er mar$#s
;isco$nt str$ct$re
IPro!$ctKvariab"es5
R$a"ity
0o!e"s an! si'es
Pacaging
1ran!s
Service
IPromotionK variab"es5
(!vertising
Sa"es #romotion
Persona" se""ing
P$b"icity
IP"aceK variab"es5
8hanne"s of !istrib$tion
O$t"et "ocation
Sa"es territories
?areho$sing system
So$rce5 Aot"er& -DDC
5.2 4ar*et-1riented Strate-ic Plannin-
I0aret.oriente! strategic #"anning is the manageria" #rocess of !eve"o#ing an! maintaining a viab"e fit
between the organi'ationFs ob%ectives& si""s& an! reso$rces an! its changing maret o##ort$nities. The aim
of strategic #"anning is to sha#e an! resha#e the com#anyFs b$sinesses an! #ro!$cts so that they yie"!
target #rofits an! growth.K . Aot"er& -DDC
Three ey i!eas5
0anage the com#anyFs b$siness as an investment #ortfo"io.
(ssess the f$t$re #rofit #otentia" of each b$siness by consi!er the maret growth rate an! the
com#anyFs fit.
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EES&OR 483 Strategy Primer 3.0
;eve"o# a strategic game #"an that maes sense in "ight of the com#anyFs in!$stry #osition& ob%ectives&
si""s& an! reso$rces.
The b$siness strategic #"anning #rocess5
1$siness
mission
E4terna"
environmenta"
ana"ysis
9nterna"
environmenta"
ana"ysis
Boa"
form$"ation
Strategy
form$"ation
Program
form$"ation
9m#"ementation
7ee!bac
an! contro"
1oston 8ons$"ting Bro$# Browth.Share 0atri45 I9nvest in the stars& get ri! of the !ogsUK The framewor
#romotes the im#ortance of maret growth rate an! maret share in !etermining the strategic im#ortance of
a #ro!$ct.
Stars
Question
Marks
Cash Cows Dogs
M
a
r
k
e
t

G
r
o
w
t
h

R
a
t
e
0
%









1
0
%








2
0
%
10x 1x .1x
Relative Market Share
("ternative >iews Of The >a"$e 8reation Process5
One tra!itiona" b$siness a##roach ignores the im#act of mareting research on #ro!$ct !esign. <n!er this
framewor& the first ste# is to mae the #ro!$ct& an! then the secon! ste# is to fig$re o$t how an! to whom
it wi"" be so"!. This is sti"" a common #rob"em in many com#anies to!ay. ( more so#histicate! #ara!igm
recogni'es that the cons$mer !eman! sho$"! !rive #ro!$ct !esign. 0areting research& segmentation&
#ositioning& an! con%oint ana"ysis are a"" e4am#"es of this more so#histicate! a##roach. The !iagrams
be"ow i""$strate the two #ara!igms.
Tra!itiona" #hysica" #rocess se2$ence5
0ae the Pro!$ct Se"" the #ro!$ct
;esign
#ro!$ct
Proc$re 0ae Price Se""
(!vertiseN
Promote
;istrib$te Service
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EES&OR 483 Strategy Primer 3.0
The va"$e creation an! !e"ivery se2$ence *0cAinsey/5
8hoose the va"$e 8omm$nicate the va"$e
So$rcing
0aing
;istrib$ting
Servicing
Provi!e the va"$e
8$stomer
segmentation
0aret
se"ectionN
foc$s
>a"$e
Positioning
Pro!$ct
!eve"
Service
!eve"
Pricing Sa"esforce
Sa"es
#romotion
(!vertising
5.3 4ar*et Se-mentation8 0ar-etin-8 and Positionin-
ISTP 0aretingK is one way to characteri'e the mo!ern strategic mareting a##roach. STP stan!s for
1egmenting& Targeting& an! /ositioning. The i!ea is to $se a more !irect Irif"eK a##roach instea! of an
$n!irecte! Ishotg$nK a##roach5
-. 9!entify segmentation
variab"es an! segment the
maret.

+. ;eve"o# #rofi"es of
res$"ting segments.
Market argeting Market Positioning Market Segmentation
-. Eva"$ate the
attractiveness of
each segment.

+. Se"ect the target
segment*s/.
-. 9!entify #ossib"e
#ositioning conce#ts
for each target segment.

+. Se"ect& !eve"o#& an! comm$nicate
the chosen #ositioning conce#t.
(!!itiona" :otes On Segmentation& Targeting (n! Positioning5
The fo""owing set of notes #rovi!es a brief o$t"ine some of the ey i!eas in this area.
("ternative a##roaches to mareting strategy5
0ass mareting5 one #ro!$ct for a"" c$stomers
Pro!$ct.variety mareting5 a variety of #ro!$cts for c$stomers to choose from
Target mareting5 targete! #ro!$cts for s#ecific c$stomer gro$#s
Patterns of maret segmentation5
3omogeneo$s #references
;iff$se! #references
8"$stere! #references
0aret segmentation #roce!$re *one common a##roach/ *Aot"er& -DDC/5
-/ S$rvey Stage5 E4#"oratory interviews an! foc$s gro$#s& fo""owe! by 2$estionnaires to assess5
(ttrib$tes an! their im#ortance ratings
1ran! awareness
Pro!$ct.$sage #atterns
(ttit$!es towar! the #ro!$ct category
;emogra#hics& etc.
+/ (na"ysis Stage5
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EES&OR 483 Strategy Primer 3.0
7actor ana"ysis a##"ie! to remove high"y corre"ate! variab"es.
8"$ster ana"ysis a##"ie! to Icreate a s#ecific n$mber of ma4ima""y !ifferent segmentsK.
3/ Profi"ing Stage5 Each c"$ster is #rofi"e! in terms of its !isting$ishing attit$!es& behavior& V Each
c"$ster is a maret segment.
0aret targeting5 3 criteria for eva"$ating maret segments5
Segment si'e an! growth
Segment str$ct$ra" attractiveness *PorterFs , forces/
8om#any ob%ectives an! reso$rces
7ive #atterns of target maret se"ection *(be""/ *#. +84/5
M
1
M
2
M
3
M
1
M
2
M
3
M
1
M
2
M
3
M
1
M
2
M
3
M
1
M
2
M
3
P
1
P
1
P
1
P
1
P
1
P
2
P
2
P
2
P
2
P
2
P
3
P
3
P
3
P
3
P
3
Singleseg!ent
"on"entration
Singleseg!ent
"on"entration
Market
s#e"iali$ation
Pro%u"t
s#e"iali$ation
&ull "overage
P ' Pro%u"t M ' Market
;eve"o#ing a #ositioning strategy5
IPositioning is the act of !esigning the com#anyFs offer an! image so that it occ$#ies a !istinct an!
va"$e! #"ace in the target c$stomersF min!s.K *Aot"er/
<SP5 <ni2$e Se""ing Position. Promotion of a sing"e benefit to the maret#"ace. Effective strategy
*as o##ose! to to$ting m$"ti#"e benefits/.
Positioning strategies5
(ttrib$te #ositioning
1enefit #ositioning
<seNa##"ication #ositioning
<ser #ositioning
8om#etitor #ositioning
Pro!$ct category #ositioning
R$a"ityN#rice #ositioning
Three ste#s5
-. 9!entify !ifferences
+. 8hoose most im#ortant !ifferences
3. Effective"y signa" !ifferences to the target maret
Economics5 ;ifferentiation #remi$m #ricing
Treacy an! ?iersema5 3 strategies that "ea! to s$ccessf$" !ifferentiation an! maret "ea!ershi#5
O#erationa" e4ce""ence
8$stomer intimacy
Pro!$ct "ea!ershi#
;ifferentiation5
Pro!$ct !ifferentiation5
Service !ifferentiation5
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EES&OR 483 Strategy Primer 3.0
Personne" !ifferentiation5
9mage !ifferentiation5
5.' (naly9in- Industries and Competitors
9n!$stries an! com#etition #"ay a centra" ro"e in strategic ana"ysis. The fo""owing notes reiterate these i!eas
from a mareting #ers#ective.
9n!$stry conce#t of com#etition . factors affecting in!$stry str$ct$re an! com#etition5
:$mber of se""ers an! !egree of !ifferentiation
Entry an! mobi"ity barriers
E4it an! shrinage barriers
8ost str$ct$res
>ertica" integration
B"oba" reach
9n!$stry str$ct$re ty#es5
P$re mono#o"y
P$re o"igo#o"y
;ifferentiate! o"igo#o"y
0ono#o"istic com#etition
P$re com#etition
0aret conce#t of com#etition5 9t may be im#ortant to consi!er com#etitors which mae !ifferent #ro!$cts
b$t which meet simi"ar nee!s. This is !ifferent from an in!$stry #ers#ective when the view of com#etition
is "imite! to those firms offering the same or very simi"ar #ro!$cts.
Pro!$ct segmentation
0aret segmentation
8om#etitive inte""igence5 gathering !ata abo$t com#etitors. 1enchmaring.
Tr$e maret orientation ba"ances cons$mer an! com#etitor consi!erations. 8hanging cons$mer nee!s an!
"atent com#etitors are ey factors an! can be more !evastating than e4isting com#etitor actions.
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EES&OR 483 Strategy Primer 3.0
5.5 0$e 0ec$nolo-y (doption :i#e Cycle+ 3iscontinuous Inno)ations
Some basic mareting conce#ts sho$"! be consi!ere! when thining abo$t maret forecasts an! new
#ro!$ct strategies. 7or instance& thining of the new #ro!$ct !iff$sion cyc"e *1ass mo!e"/ as an inevitab"e
cyc"e of sa"es can be very mis"ea!ing. 7irst of a""& the !iff$sion mo!e" forecasts tota" maret #otentia"& an!
says nothing abo$t the maret share at a #artic$"ar com#any. Secon!& the !ecisions of the firm can
inf"$ence the sa"es. This is fair"y obvio$s when it comes to the inf"$ence of #ro!$ct 2$a"ity an! cost& b$t
mareting strategy is a"so critica""y im#ortant when intro!$cing new #ro!$cts that are !iscontin$o$s
innovations. 9n these cases& the maret is not yet aware of the nee! for the new #ro!$ct& an! an
$n!erstan!ing of how a #ro!$ct moves thro$gh the techno"ogy "ife cyc"e wi"" he"# a #ro!$ct reach its f$""
#otentia" faster an! with higher "ie"ihoo! of s$ccess.
Beoff 0oore& in his boos Crossing the Chasm *-DD-/ an! )nside the Tornado *-DD,/& !raws on mareting
theory an! high.tech e4#erience to !escribe the e"ements of the #ro!$ct "ife cyc"e for techno"ogy
innovations. 3is wor e4amines how comm$nities res#on! to discontinuous innovations . or any new
#ro!$cts or services that re2$ire the en! $ser in the maret#"ace to !ramatica""y change their #ast behavior.
3e !escribes how com#anies m$st #osition their #ro!$cts !ifferent"y thro$gh the cyc"e to reach their f$""
sa"es #otentia" an! become an in!$stry stan!ar! instea! of a nove"ty. 0any new hi.tech #ro!$cts start
a"ong a c"assic new #ro!$ct !iff$sion c$rve& b$t fai" soon thereafter. (nyone !eve"o#ing strategy for
discontinuous innovations sho$"! be fami"iar with the i!eas 0oore writes abo$t. Thro$gh the vario$s
#hases of the techno"ogy a!o#tion "ife cyc"e& very !ifferent strategies for #ro!$ct an! service offering an!
#ositioning are ca""e! for.
The basis of the techno"ogy a!o#tion "ife cyc"e is simi"ar to the basis for !iff$sion mo!e"s5 !ifferent gro$#s
of #otentia" c$stomers react !ifferent"y to innovations& an! a!o#tion #rocee!s from most enth$siastic to
most conservative. 8omm$nities res#on! to !iscontin$o$s innovation . when confronte! with the
o##ort$nity to switch to a new infrastr$ct$re #ara!igm& c$stomers se"f.segregate a"ong an a4is of ris.
aversion. 0oore se#arates c$stomers into five categories& a"ong which the cyc"e of new techno"ogy
a!o#tion #rocee!s5
-. 9nnovators * technology enthusiasts who are f$n!amenta""y committe! to new techno"ogy on the
gro$n!s that sooner or "ater it wi"" im#rove their "ives.
+. Ear"y (!o#ters . visionaries an! entre#rene$rs in b$siness an! government who want to $se the
innovation to mae a brea with the #ast an! start an entire"y new f$t$re
3. Ear"y 0a%ority . pragmatists who mae $# the b$" of a"" techno"ogy infrastr$ct$re #$rchasesO their
#$rchasing behavior is base! on evo"$tion rather than revo"$tion& an! they b$y on"y when there is a
#roven trac recor! of $sef$" #ro!$ctivity im#rovement.
4. =ater 0a%ority . conservatives who are very #rice sensitive an! #essimistic abo$t the a!!e! va"$e of
the #ro!$ctO they b$y on"y when techno"ogy has been sim#"ifie! an! commo!iti'e!.
,. =aggar!s . s'eptics who are not rea""y #otentia" c$stomersO goa" is not to se"" to them& b$t se"" aro$n!
their constant criticism.
The c$stomer segments corres#on! to 'ones in the ""an!sca#e" fig$re be"ow. 9n a!!ition& there is a si4th
'one that 0oore ca""s the "chasm&" se#arating a!o#tion by the ear"y maret c$stomers *-&+/ from a!o#tion
by the ear"y ma%ority *3/. 0oore !escribes the chasm as fo""ows5
?henever tr$"y innovative high.tech #ro!$cts are first bro$ght to maret& they wi"" initia""y en%oy a
warm we"come in an early mar'et ma!e $# of techno"ogy enth$siasts an! visionaries b$t then wi"" fa""
into a chasm& !$ring which sa"es wi"" fa"ter an! often #"$mmet. 9f the #ro!$cts can s$ccessf$""y cross
this chasm& they wi"" gain acce#tance within a mainstream mar'et !ominate! by #ragmatists an!
conservatives. Since for #ro!$ct.oriente! enter#rises virt$a""y a"" high.tech wea"th comes from this
thir! #hase of maret !eve"o#ment& crossing the chasm becomes an organi'ationa" im#erative. *-DD,&
#.-D/
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EES&OR 483 Strategy Primer 3.0
<e ,ands3a:e o6 t<e e3<no5ogy $do:tion ,i6e3y35e *so$rce5 0oore& -DD,& #.+,/
Ear"y 0aret
The
8hasm
The
Torna!o
0ain Street
En! of =ife
The strategy for "crossing the chasm&" as we"" as the strategy for each of the other "'ones"& are very
#artic$"ar to where the #ro!$ct is in the "ife cyc"e.
The fig$re be"ow em#hasi'es the !ifferent va"$e !isci#"ines re2$ire! at !ifferent stages. :ote that the
so$rce of com#etitive a!vantage changes thro$gh the cyc"e . in Porter terms& it !raws on vario$s
combinations of com#eting on cost *o#erationa" e4ce""ence/& !ifferentiation *#ro!$ct "ea!ershi#/& an! foc$s
*c$stomer intimacy/.
(a57e )is3i:5ines and t<e ,i6e Cy35e *so$rce5 0oore& -DD,& #.-C@/
Pro!$ct
=ea!ershi#
on"y
Pro!$ct =ea!ershi#
&
O#erationa" E4ce""ence
Pro!$ct =ea!ershi#
&
8$stomer 9ntimacy
O#erationa" E4ce""ence
&
8$stomer 9ntimacy
0oore *-DD,& #.+,/ characteri'es the 'ones as fo""ows5
The .arly &ar'et
( time of great e4citement when c$stomers are techno"ogy enth$siasts an! visionaries "ooing to be
first to get on boar! with the new #ara!igm. >isionaries are wi""ing to wor thro$gh b$gs an! #$t in
effort themse"ves to mae the so"$tion wor. The #ro!$ct se""s itse"f.
The Chasm
( time of great !es#air& when the ear"y maret6s interest wanes b$t the mainstream maret is sti"" not
comfortab"e with the immat$rity of the so"$tions avai"ab"e. The on"y safe way to cross the chasm is to
#$t a"" yo$r eggs in one baset . target a sing"e beachhea! of #ragmatist c$stomers in a mainstream
maret segment an! acce"erate the formation of -00 #ercent of their who"e #ro!$ct.
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EES&OR 483 Strategy Primer 3.0
The #owling lley
( #erio! of niche.base! a!o#tion in a!vance of the genera" maret#"ace& !riven by com#e""ing
c$stomer nee!s an! the wi""ingness of ven!ors to craft niche.s#ecific who"e #ro!$cts. ( whole
product is the minim$m set of #ro!$cts an! services necessary to ens$re that the target c$stomer wi""
achieve his or her com#e""ing reason to b$y. Pragmatists want a who"e #ro!$ct& with the necessary
$ser infrastr$ct$re an! c$stomer s$##ort. (t this stage& com#anies sho$"! resist the tem#tation to try to
#rovi!e a genera" #$r#ose who"e #ro!$ct an! sim#"ify the who"e #ro!$ct cha""enge. To get c$stomers
on boar!& service content is high& RO9 to en! $ser m$st be high& an! #artnershi#s with other com#anies
may be ca""e! for. S$ccess in the niche can then be "everage! e"sewhere. The two eys to targeting the
right niche c$stomers here are *-/ the segment has a com#e""ing reason to b$y& an! *+/ the segment is
not c$rrent"y we"" serve! by any com#etitor.
The Tornado
(n $g"y an! fren'ie! #erio! of mass.maret a!o#tion& when the genera" maret#"ace *ear"y ma%ority
c$stomers/ switches over to the new infrastr$ct$re #ara!igm. 9t6s a her! menta"ity. Aeys to s$ccess in
this #erio! are to ignore c$stomer nee!s an! #ro!$ct mo!ifications an! <ust ship& ri!ing the wave.
0aret share is critica" at this stage to "oc o$t com#etitors& an! #artners sho$"! be e"iminate!.
8om#anies entering the torna!o sho$"! e4#an! !istrib$tion channe"s& attac the com#etition& an! #rice
to ma4imi'e maret share.
&ain 1treet
( #erio! of aftermaret !eve"o#ment& when the base infrastr$ct$re has been !e#"oye! an! the goa" is
now to f"esh o$t the #otentia". (nother reversa" of strategy is nee!e! bac to niche.base! mareting.
1efore the #ro!$ct becomes obso"ete& there is an o##ort$nity to sett"e into a #rofitab"e #erio! of
!ifferentiating the commo!iti'e! who"e #ro!$ct with e4tensions foc$sing on the en! $ser.
.nd of (ife
?hich comes too soon in high.tech. 8om#anies sho$"! fin! caretaers that can tae over a f$""y
commo!iti'e! #ro!$ct with "ow #rofit margin.
+@