Chapter 1: What Is Strategy and the Strategic Management Process

A - Defining Strategy

A firm's strategy is its approach to gaining competitive advantages, rooted in assumptions about
industry competition. These theories guide profit-seeking methods. Accurate assumptions
increase the likelihood of competitive advantage.

B - The Strategic Management Process

The strategic management process is a sequential set of analyses and choices that can
increase the likelihood that a firm will
choose a good strategy; that is, a strategy that generates competitive advantages.

1- A Firm’s Mission

A firm's strategic management process begins with defining its mission, representing its
long-term purpose and aspirations. Mission statements, although common, may not influence
organizational behavior, rendering them ineffective. Some firms, like 3M, IBM, Hewlett-Packard,
and Disney, have successfully integrated their mission into their operations, leading to prolonged
high performance. These visionary firms emphasize values and beliefs in decision-making.
However, missions can also harm a firm's performance if they are inwardly focused,
disconnected from economic realities, or lack alignment with strategic objectives.

2- Objectives

A firm's mission conveys its purpose and values, while objectives are specific, measurable
targets used to assess mission realization. High-quality objectives are closely linked to the
mission, quantifiable, and easily measurable over time. In contrast, low-quality objectives lack
connection to the mission, are non-quantitative, or are hard to measure, rendering them
ineffective for evaluating mission achievement.

3- External and Internal Analysis

The strategic process involves simultaneous external and internal analyses. External analysis
identifies threats, opportunities, and competitive trends. Internal analysis uncovers
organizational strengths, weaknesses, and key resources for potential competitive advantage.
Strategic Choice
After defining its mission, objectives, and conducting external and internal analyses, a firm
selects its strategic choices for competitive advantage. These choices fall into two main
categories: business-level strategies (focused on single markets or industries) and
corporate-level strategies (operating in multiple markets). The objective is to choose a strategy
aligned with the mission, objectives, and environment, leveraging strengths, exploiting
opportunities, and neutralizing threats. Implementing a strategy meeting these criteria can lead
to a significant competitive advantage.

4- Strategy Implementation

Strategy implementation occurs when a firm adopts organizational policies and practices that
are consistent with its strategy.
Three specific organizational policies and practices are particularly important in implementing a
strategy: (1) a firm’s formal
organizational structure; (2) its formal and informal management control systems; and (3) its
employee compensation policies.

Chapter 2: Evaluating a Firm’s External Environment

A MODEL OF ENVIRONMENTAL THREATS

A - Threat from Buyers’ Influence

Powerful buyers pose threats to firms by reducing revenues. Factors contributing to buyer threat
include few buyers, undifferentiated products, supplies as a significant portion of costs, low
buyer profits, and potential backward vertical integration. Buyers can become direct
competitors, impacting an industry. Barriers to entry can limit buyer integration, mitigating their
threat to firms.

1- Environmental Threats and Average Industry Performance

The five environmental threats serve as common sources of local environmental threat in
industries and help characterize the overall threat level in an industry. According to S-C-P logic,
industry threat level is linked to average firm performance. While all threats may not be equally
potent simultaneously, the key question for managers is whether any threat in an industry is
powerful enough to capture most profits. If yes, average performance will be low; if not,
performance will be high.
B- Opportunities in Declining Industries: Leadership, Niche, Harvest, and
Divestment

A declining industry experiences a continuous decrease in unit sales, posing more threats than
opportunities for firms. High rivalry, threats from buyers, suppliers, and substitutes prevail.
Despite challenges, firms in such industries can pursue strategic opportunities like leadership,
niche markets, harvesting, or divestment.

1- Market Leadership

In declining industries, overcapacity and reduced demand lead to a shakeout period until supply
aligns with demand. After the shakeout, a few focused firms may thrive in a less threatening
environment. Firms facing decline may wait for better conditions and can increase survival
chances by becoming market leaders. Market leaders facilitate exit for competitors through
strategic actions like purchasing competitors' product lines, retiring their manufacturing
capacity, and sending clear signals of their intent to remain dominant in the industry.

2- Market Niche

In a declining industry, a firm adopting a leadership strategy helps competitors exit, while a
niche strategy involves narrowing operations to focus on specific segments. If few firms choose
a niche, they can have a competitive advantage despite overall industry decline.

3- Harvest

Leadership and niche strategies in declining industries involve firms intending to stay despite
industry decline. In contrast, a harvest strategy signifies a phased withdrawal, focusing on
extracting maximum value before exiting. Firms employing this strategy must have enjoyed
profits before the industry declined. Implementing harvest involves reducing products,
distribution, customers, quality, and services. Despite its simplicity in principle, the harvest
strategy poses management challenges as firms must abandon long-standing sources of pride.

4- Divestment

Divestment, like a harvest strategy, aims to remove a firm from a declining industry. Unlike
harvest, divestment occurs swiftly, especially for firms lacking competitive advantages. Rapid
divestment allows firms to exit declining industries and pursue more promising sectors.
Divestment can also occur for various reasons such as focusing efforts, raising capital, or
simplifying operations, reflecting a firm's diversification strategy.
Chapter 3: Evaluating a Firm’s Internal Capabilities

A- THE RESOURCE-BASED VIEW OF THE FIRM

The Resource-Based View (RBV) emphasizes a firm's resources and capabilities as key factors
for gaining competitive advantage

1- What Are Resources and Capabilities?

In the Resource-Based View (RBV), resources refer to tangible and intangible assets a firm
controls to devise and implement strategies (e.g., factories, products, reputation, teamwork).
Capabilities, a subset of resources, enable a firm to leverage its assets for strategy
implementation (e.g., marketing skills, teamwork). Resources and capabilities fall into four
categories: financial (money sources), physical (technology, location, raw materials access),
human (skills, experience), and organizational (formal structure, planning systems, culture).
These elements are crucial for a firm's competitive advantage.

2- Critical Assumptions of the Resource-Based View

The Resource-Based View (RBV) is based on two key assumptions. First, firms can have
different sets of resources and capabilities even within the same industry, indicating firm
resource heterogeneity. Some firms excel in specific activities, such as Toyota's manufacturing
expertise compared to Fiat Chrysler. Second, these differences can be long-lasting due to the
high costs associated with developing or acquiring certain resources, known as resource
immobility. When a firm possesses unique and valuable resources that others struggle to
imitate, it can attain a sustained competitive advantage.