STRATEGY I: BUSINESS-LEVEL STRATEGY

FUNDAMENTALS OF STRATEGIC ANALYSIS

What is Strategy?
Strategy: A strategy is a plan or method aimed at achieving a
goal. Mission &
Tactics: The means used to put a strategy into action and Objectives
achieve a set of objectives.
Strategic management process: A sequence of analyses
Internal External
and choices that helps a firm ensure it’s on the right track. Analysis Analysis
The process is composed of four steps:
Setting the mission and objectives: A company first
determines its main purpose and aspirations. Then it sets Strategic
objectives, or specific performance targets, to determine Choice
how well it’s fulfilling its mission.
Strategic analysis: A company performs an internal Strategy
Implementation
analysis to evaluate their strengths and weaknesses,
and an external analysis to assess the competitive
environment. Competitive
Advantage
Strategic choice: A decision made by a firm in order to
achieve a competitive advantage.
Strategic implementation: The firm implements certain
tactics to carry out its strategy.

Porter’s Five Forces Model

Industry: A group of providers of a product category.
Porter’s five forces model: A framework used to describe
and evaluate the competitive forces at play in an industry. It Bargaining
Power
consists of: of Suppliers

Rivalry among existing firms: The force defined by the

Rivalry
effects of competition between companies. Among
Threat of
Existing Threat of
Threat of new entrants: The force of new entrants New
Firms Substitutes
Entrants
threatening to offer something not easily replicated by
others and reduce profits for the already established firms. Bargaining
Power
Threat of substitutes: The force consisting of the threat of Customers
that products from outside the industry could offer similar
benefits or be used interchangeably.
Bargaining power of suppliers: The force of suppliers
being able to set prices for in-demand items.
Bargaining power of customers: The force created by
customers being able to switch between products or firms
at a low cost and make demands collectively.
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STRATEGY I: BUSINESS-LEVEL STRATEGY

Applying Porter’s Five Forces

Barriers to entry: These prevent new players from being

competitive. As barriers increase, interest in entering the
industry decreases and lowers the threat of new entrants.
Already established companies make it more difficult
for new companies to enter the industry because of the
incumbents brand reputation, supplier relationships,
customer loyalty, and ability to achieve economies of scale.
The bargaining power of customers increases when there
are few buyers and many sellers and when switching
between products is easy for the customer.
The bargaining power of suppliers increases when there are
fewer suppliers, the supplier’s business is important to the
industry, and there are not substitutes readily available.

PESTEL Analysis
Macroenvironment: The external factors that influence the
firm’s choices and performance. Political Social Environmental

Economic Technological Legal

PESTEL analysis: A systematic way to evaluate the most
important macroenvironmental elements that might affect a
firm’s performance. The components of PESTEL are:
Political: Factors concerning governments and government
policies.
Intangible Human
Economic: Factors that impact purchasing power. Resources Resources
Social: Factors that impact market size and customer
needs. Tangible
Capabilities
Resources
Technological: Factors that relate to the rate of
technological change and the overall level of research and
development activity. Competitive Advantage
Competitive Advantage
Environmental: Factors related to weather and the climate.
Legal: Factors concerning laws and legislations.

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STRATEGY I: BUSINESS-LEVEL STRATEGY

The Resource-Based View

Resource-based view (RBV): An inventory of the resources

a firm owns and its existing capabilities for leveraging those
resources into a competitive advantage.
There are three types of resources that the RBV model
examines:
Tangible resources: Any tangible assests that can create
customer value and which can be seen or quantified.
Intangible resources: Any assets that are not explicitly
visible or documented, like brand reputation.
Human resources: The productive efforts, skills, and
expertise of the employees.
Organizational capabilities: The ability of a firm to mobilize
its resources.
VRIO framework: Strategists determine which resources to
Is it…
include in an RBV by using the VRIO tool. It consists of four
questions to ask about a resource or capability. V aluable?
Is it valuable? A valuable resource is one that enables a
firm to enhance its competitive advantage.
R are?
Is it rare? A rare resource is only controlled by a small Costly to I mitate?
number of firms.
Is it costly to imitate? A resource that’s costly to imitate
Exploitable by the O rganization?
means other firms face a cost disadvantage in getting it.
Is the firm organized in a way to exploit it? An appropriately
organized firm can maximize the utility of a resource.

Building a Competitive Advantage

Competitive advantage: An edge a company holds when it
generates more economic value than rival firms.
Business-level strategy: A set of actions or plan used to gain
and sustain a competitive advantage in a single market or
industry.

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STRATEGY I: BUSINESS-LEVEL STRATEGY

Porter’s generic strategies: A theory that lists three main

ways a company can gain competitive advantage. These are: ADVANTAGE
Low Cost Differentiation
Cost leadership: A business-level strategy that centers on
keeping costs of operation low. Cost

Broad
Differentiation
Leadership
Economies of scale: A strategy that involves scaling up so

SCOPE
the per-unit cost of production drops.
Cost Differentiation

Narrow
Diseconomies of scale: When the per-unit cost of Focus Focus
production increases after scaling up too much.

Differentiation strategy: It is centered on enhancing the

perceived value of a company’s products or services relative
to other firms’ offerings so that customers will pay more.
Technological leadership: Investing in particular
technologies early on. This includes preemptively buying
assets valuable to the new technology and making it costly

PER UNIT COST

for customers to switch to substitute products.
Focus strategy: There are two variants of this strategy: cost
focus and differentiation focus, which apply cost leadership
Economies Diseconomies
and differentiation to niche markets, respectively. of Scale of Scale

Stuck in the middle: When a firm chooses to pursue multiple

strategies and does not excel at any of them. The firm may PRODUCTION VOLUME
still be profitable, but may not outperform its rivals.

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STRATEGY II: CORPORATE-LEVEL STRATEGY

COMPETITIVE CONCEPTS

Value Chain Analysis

Value chain: A sequence of strategically relevant activities
performed to deliver a valuable product or service to market. General Infrastructure

SUPPORT

VA
Human Resources Management

LU
Primary activities: Value chain activities focusing on Technology Development

E
product creation, sales and transfer to buyer, and after-sale Procurement

service. Inbound Operations Outbound Marketing Service

Logistics Logistics and Sales
Support activities: Facilitate primary activities. They focus

EE
LLUU
VVAA
on how the firm is structured and run, the technology the
firm uses, and how talent is hired and trained. PRIMARY

Value chain analysis: Maps out the primary and support

activities across a company.

Vertical Integration
Corporate-level strategies: Theories of how to gain a
competitive advantage by deciding what industries to
compete in and how to operate in multiple businesses at
once.
Vertical integration: The number of activities in the value
chain that are accomplished within a firm. The higher the
number, the more vertically integrated the firm is.
The value of vertical integration depends on three factors:

1. Opportunism happens when a firm is exploited

by another in an exchange. Since the threat of
opportunism increases when a firm needs a specific
transaction, vertical integration decreases the threat. Is it…
2. Integration should only be pursued if a firm already has
VRIO resources in that area.
V aluable?
3. Integration decreases a firm’s flexibility, so it should be
R are?
pursued when it’s certain that the investment will pay off. Costly to I mitate?
Outsourcing, or dis-integrating, can be valuable for
commodity tasks that would require a significant investment
Exploitable by the O rganization?
of resources.
Backward integration: When a firm begins to carry out
additional activities that are associated with the supplier end
of the value chain.
Forward integration: When a firm carries out more activities
at the customer end of the value chain.

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STRATEGY II: CORPORATE-LEVEL STRATEGY

Diversification
A diversification strategy is centered on developing a Low Diversification
product or entering a new market different from its core
business.
Limited
Corporate synergy: When the sum of a firm’s parts performs
better than each part individually. Related-Constrained
For diversification to be economically valuable, there must be
economies of scope among the firm’s multiple businesses, Related-Linked
which involve lowering average costs by producing more
types of products. Unrelated
Operational economies of scope: Exist when there are
shared activities or core competencies between linked High Diversification
businesses.
Four categories of diversification:
Core competencies: The harmonization of knowledge,
Level of
production skills, and technology streams across a firm. Type Diversification Description

70-100% revenue from

Diversification allows firms to use revenue from one business Limited low single business
Products and services
to invest in others, creating an internal capital market where Related-Constrained moderate
are highly linked

the company can essentially loan money to itself. This Related-Linked moderate
Few or disparate links
between businesses
generates financial economies of scope. Unrelated high
No linkages between
businesses

Strategic Alliances
When two or more independent entities develop,
manufacture, or sell offerings together, they’re entering a
strategic alliance. There are three categories of strategic
alliances: Strategic alliances can create
a friendly environment that’s
1. Nonequity alliances: Firms working together make a conducive to tacit collusion,
contractual agreement, but they do not take equity in where firms signal to each
each other’s companies. There are three primary forms: other indirectly that they’re
Licensing agreements: One firm allows the other to willing to cooperate to reduce
use its brand reputation or intellectual property to sell competition.
products.
Supply agreements: One firm agrees to supply the
other.
Distribution agreements: One firm agrees to
distribute the other’s products.
2. Equity alliances: Firms supplement their contracts with
equity holdings.

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STRATEGY II: CORPORATE-LEVEL STRATEGY

3. Joint ventures: Collaborating firms establish a legally

independent company, in which they both invest and
share profits.

Mergers and Acquisitions

Acquisition: When one firm, usually larger, purchases some
or all of another firm’s assets.
Bidding firm: The firm doing the acquiring.
Target firm: The firm being acquired.
Friendly acquisitions: Occur when the target firm’s
management wants the firm to be acquired.
Unfriendly acquisitions (a.k.a.hostile takeovers):
Accomplished without the cooperation of the target firm’s
management.
Tender offer: When a bidding firm announces publicly that
it’s willing to buy the target firm’s shares for more than the
current market price. Current shareholders will then sell
their shares to the bidding firm, giving it a controlling or
majority share.
Merger: When two firms of a similar size combine their
assets.
A common system for categorizing the relatedness of firms
comes from the Federal Trade Commission (FTC), which
monitors consumer protection and anticompetitive business
practices.
Competitive parity: When a firm has the same economic
value as its rivals.
Free cash flow: Cash left over after ongoing business
operations have been funded.

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STRATEGY III: INTERNATIONAL STRATEGY

INTERNATIONAL STRATEGY

Global Business Environment

International strategy: The theory of how to gain European Union (EU): An
economic and political
competitive advantage by operating across national borders.
union between 27 European
Globalization: The worldwide trend of economic integration countries.
across borders. Improvements in technology and elimination
North American Free Trade
of trade barriers have resulted in an increase in globalization.
Agreement (NAFTA): A trade
World Trade Organization (WTO): An international organization agreement that aims to
that provides a structure for negotiations to reduce trade eliminate trade barriers
barriers and settle trade disputes between countries. between the US, Canada, and
Regional trade agreements are formed across nations to Mexico.
lower tariffs and develop similar economic and technological Asia-Pacific Economic
standards. Cooperation (APEC): A forum
for 21 nations bordering the
CAGE Distance Pacific Ocean that promotes
free trade.

CAGE distance framework: Identifies differences (“distances”)

between a firm and foreign markets that can impact entry
strategy either positively or negatively.
C
Cultural
G Geographic

Cultural distance: Differences in religion, race, social

norms, or language.
Administrative/Political distance: Political and historical
A
Administrative

E
Economic

associations. Risks that impact entry strategy:

Geographic distance: Physical distance, climate difference, operation technological
and number of communicative/transportation links. consumer-related financial
Economic distance: Cost or price differences between market-related social
markets.

AAA Framework Failing to adapt effectively

can be a result of using the
AAA framework: Presents three possible strategies a firm self-reference criterion–
can use to manage global differences. unconsciously basing
Adaptation: Modifying business models to improve the decisions on one’s own cultural
local responsiveness of foreign markets. values.
Aggregation: Focusing on similarities between regions Economies of scale: Increasing
to scale up production and decrease costs across a production to lower per-unit
standardized organization, generating economies of scale costs.
or scope.
Economies of scope: Producing
Arbitrage: Exploiting differences between markets to gain
related products with shared
a competitive advantage through outsourcing or offshoring
costs and inputs.
—performing specific business processes overseas.
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STRATEGY III: INTERNATIONAL STRATEGY

Entry Mode Strategies

Entry mode strategies: The options a firm has for entering High FDI
foreign markets. When choosing entry-mode strategies, strategic
firms must decide how important it is to oversee and control alliances
foreign operations. Strategies that expand control usually licensing

Risk
also involve greater risk. direct exporting
indirect exporting
There are four types of entry mode strategies: Low High
Control
Exporting: A strategy in which goods produced in one country are sent to be sold in another country.

Piggyback exporting: When a firm that already exports to a One type of intermediaries
Two types intermediary for
for
foreign market (the “carrier”) sells both its own products and those indirect exporting
indirect exporting
of another, usually smaller firm (the “rider”). Export management company (EMC):
Specializes by product and/or region,
Indirect exporting: Intermediaries provide the firm with the Export management company
with established foreign distributors.
knowledge and contacts necessary to sell in foreign markets. (EMC): Specializes by product
Export trading company (ETC):
Direct exporting: Firms directly contact companies in foreign and/or region, with established
Usually buys goods from the exporter,
markets in order to export goods. foreign
then distributors.
resells them overseas.

International licensing: A contractual agreement in which a licensor permits a foreign licensee to use
its intellectual property and/or manufacture its products.
International franchising: A foreign licensee agrees to a
comprehensive licensing agreement to use the licensor’s business
model, including patents, trademarks, and training.
Contract manufacturing: A licensor contracts with a foreign
licensee to manufacture its products under the licensor’s brand.
Technology licensing: Licensor allows the licensee to use, modify,
and/or resell technological intellectual property under the
licensee’s brand in exchange for compensation.

International strategic alliances: Agreements between two or more entities from different countries to
develop, manufacture, or sell services or products together.

International cooperative alliances (ICAs) require contracts

specifying each party’s expected contribution.
Turnkey projects: A firm makes a project fully operational before
handing it over to the foreign firm who will own it.
International joint ventures (IJV): Collaborating firms from
different countries establish a legally independent company.

Foreign direct investment (FDI): When a firm owns part or all of an operation in a foreign country.

Companies can acquire existing firms or make a greenfield

investment—creating a subsidiary from scratch in another country.

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THE BALANCED SCORECARD

CREATING A BALANCED STRATEGY

The Balanced Scorecard: An Overview

Balanced scorecard (BSC): A planning and management The Balanced Scorecard
tool that helps businesses develop, implement, and track a
well-rounded strategy.
A BSC typically includes four sections:
1. Strategy map
2. Key performance indicators
3. Targets
A balanced scorecard may also
4. Initiatives
include the company’s mission,
Sections are divided into perspectives, which are points of vision, values, and goals.
view used to evaluate the business. Perspectives include:
Before writing a BSC, a business
1. Financial, or how shareholders see the business
owner must first conduct an
2. Customer, or how customers perceive the business analysis of the current state of
3. Internal processes, or activities the business must his or her business.
excel at to provide value
Remember: Each perspective
4. Organizational capacity, or the culture, technology,
should focus on one to five
tools, and infrastructure that help a business absorb
strategic goals, drawn from
change
analysis of the company.

The Strategy Map

The strategy map describes an organization’s strategic
objectives and their relationships with each other. To show
relationships, try: The Strategy Map
• grouping objectives together into themes F.
increase reduce
profits costs
• using arrows to show causation between different
improve appeal to
objectives C. customer new
experience markets
Remember: the perspectives on the BSC are carefully improve improve
I.P. internal product
ordered so that each perspective tends to influence the efficiency variety
perspectives above it. improve increase improve
O.C. technology personnel thought
diversity leadership

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THE BALANCED SCORECARD

Key Performance Indicators and Targets

Key performance indicators (KPIs): Quantifiable measures
used to evaluate whether a business is meeting its Pro tip: Track one or two KPIs
objectives. per strategic objective.

Leading indicators predict goal achievement.

Lagging indicators measure goal accomplishment.

A well-chosen set of KPIs will:

• provide objective evidence
• measure relevant information
Targets not only inspire future
• show change over time performance, but help evaluate
• have a balance of leading and lagging indicators past performance and guide one
target. revisions to the overall
Targets are specific, time-bound goals.
strategy.
Each KPI should have at least one target.

Strategic Initiatives Po

Strategic initiative: A plan that aims to close the gap Unlike a strategic objective, a
between the current state of a business and its desired state. strategic initiative has a scope,
budget, and completion date.
Initiatives can be developed in five steps:

1. Setting criteria

2. Taking inventory of all initiatives Pro tip: Initiatives should align

with at least one strategic
3. Brainstorming objective.
4. Evaluating

5. Prioritizing

Re

T
Re

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