Fimsachieve strategie competitiveness oy formulating and Implementing 3 value creating sategy A strategy ian intersted and coordinated set of Commitments and ations ‘designed to expt coe competencies and gain a Compettive advantage fem hos competitive fsdvantage when by implementing achosen Strategy, cleats superior ‘ale for eustomers and when compettars ae not ale to tate the vale the fis products create o find ‘tteo expensive to attempt {ein forward wi The Honest co be ae ro sets sources 0 outcome 5 p Means of reaching its objective to become an iconic global brand by ee ly and fective products? While commited 0 regaining consumers tw ence by producing products they want to buy, reaching ths objective challenging, aly night ofthe competition the fr faces. On the other hand, some analysts bebe will succeed because the firm has three valuable capabilities (we define capabilites in ucts, and aloyal customer chapter) “tremendous brand equity, innovative and quality product rae Time wll tell f The Honest Co, will be able to execute with these capsabilt ‘that yields competitive success in the form of strategic competitiveness pee ee BB Sieh nc vicnieaat hon owe oe oe arse a her rs ler tiatatecene, wecannaney cm Jane & hc Wher 2018 Sts yn bad Phar hin ach ASE eto the Opening Case achieving strategie competitiveness by implement ing a firms chosen strategy successfully i challenging, Founded as a wellness brand with a grounding in the values of consciousness, community, transparency, and design, Honest is struggling to reach its mission and the founders’ desired level of competitive success, An eco-friendly consumer goods company, Honest seeks to provide customers with unigue products for which they are willing to pay a higher price, compared to the Prices for consumer goods products with relatively standard features and capabilities. Honest’ top management tam including sia Alls using the strategic management? ‘process (see Figure 1.1) as the foundation for the commitments, decisions, and actions the team is taking to pursue strategic competitiveness and above-average returns. Given the firmis challenges, some of its decisions and actions going forward will likely difer from some made previously In this book, we explain the strategic management process ‘The Honest Co. and multiple other firms use to implementa chosen strategy successfully and to achieve strategic competitiveness by doing so, We introduce you to this process in the next few paragraphs. Firms achieve strategie competitiveness by formulating and implementing a value creating strategy. A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage, When choosing a strategy, firms make choices among competing alternatives a the pathway for deciding how they will pursue strategic competitiveness. this sens, the chosen strategy indicates what the firm will do as well as what the firm will not do, A firm has a competitive advantage when by implementing a chosen strategy it re- ates superior value for customers and when competitors are notable to imitate the value the firmis products create or find it too expensive to attempt imitation An organization can be confident that its strategy yields a competitive advantage after competitors effort to duplicate it have ceased or filed. In addition, firms must understand that no compet itive advantage is permanent.*The speed with which competitors are able to acquire the skills needed to duplicate the benefits ofa firm’ value-creating strategy determines how long the competitive advantage will lst.’ The Honest Co. seeks to create a competitive advantage, a do all organizations. We discuss competitive advantages and provide a few firm-specific examples of them in the Strategic Focus. ae a— ‘pte Sate Management an Shae Competes Pecos et abies luigi ta ety rete cea cnr Piecakramenieaeape anions wlciee Fis sm pce ete ok on tn le cei onoeooMgsaii gercongr in ben tuioeey tears ated np deat Oger 2 sce. crn ig a te oy ee ercesntatincamretecene _ohes for which customers are willing to pay Having and exploit! Segacrettieadestage aes hs ces pect ate Sipe pam fcr penne ianegaies eater Sepia cand te ere deren vo reaping etre en die viatenan aap urniee = cavemen or seorrelinioarnidretgmcio anrseiite seacre Pe bends ompean we fern oa efor t deve 3 compettveavarage ts 89 © make the valu products offers customs ales, conde, Insight detent words valve ofthe ther comets oferngs to thee customers The lagers the bap been the ake ims pects creates for cus tomer ad the wlve competion prods ing to ctor the mov scan. fs compete sdiatge The camptine denne whch sable Sen i enor taped pce maybe asouce of compel adartae fs tranagerent (0 fr tht wes oud computing exten, acer ete aA selvin ta ues machine leoring {Dbl comprehen data bused tore poles ely ustme lationship ‘ruil touch pons and uncover addtional les opportunites” Weipa and ein a str rou aces compettive advantage fr fs laieg how 0 expt New developing technolages uy ane success. Neti bul ing compete advantages ters fs gna progr tring and ts customer ineface plain that cestes nie Tiperences users sare aay el tN {san important source of compestive advartage. Ina recent sarvey 2 }up reported tat ‘Unie other online reales 674 fof Amazon customers trust the company to protect thet pvacy and persona data’ Heme Dept ofc cite the fs core dea compette dariage The cure emphaiaes cent tustome seruceaneepreneutl pt, bling stor ele vorships aking cae of pele. and dir he hg toaays tae cope ence [brople ave the mo The easonforthsis hat 2 We note n Chapter that ro mmpentive advantage i sustainable permanently n some instances, a frm’ advantage no longer cretes value for which customers ate willing to pay In ther cases, compettors wil learn how ta create mare value for customers with respect 02 valued competitive dimension for which they ae wling to py. Thus fli statis eters epetloneiyy so mnaloraunsacjenes cystage Management mpi jor expects to earn from, “Rbove-average Faturad're returns in excess of what an investor expec 19 2% cher investment witha similar amount of risk: Nisan investors uncertainty about om a particular investment. The most the economic guns or losses that wl res fom particilay mesic TY successful companies learn how to manage risk effectively: tncriginy about the outcomes of thie investment. 7 Feri uch a tron ae, and to assess their a ‘ formance in terms of stock market performance. Alternatively, firms can re the: period stock price ‘éven monthly’ returns. (Monthly returns are the end-of-the-pet minus the beginning stock price divided by the beginning stock price, yielding a per- nt a : of the: 8 I jr than mot aon \ profitability measures® because nu ire in t the form of return on assets and so forth) wve advantage is important for firms seeking ' ‘Understanding how to exploit a compe! ' Guan average returns Firms without a competitive advantage or those that do tou ‘hot compete in an attractive industry earn, at best, average returns. are ve returns equal to those an investor expects to earn from other investments possessing a similar amount of risk. Over time, an to earn atleast average returns results first in decline and, eventually, failure’ Failure occurs because investors withdraw their invest- ‘mens from those firms earning less-than-average returns ‘As previously noted, there are no guarantees of permanent success. Companies suc- ‘ceeding ata point in time must not become overconfident. Research suggests that over- confidence can lead to excessive risk taking Used as an example several times in this ‘book, Amazon.com today continues growing and increasing its sales revenue. This firm too though must avoid assuming that success today is a guarantee of success tomorrow. Using the strategic management process effectively facilitates firms efforts to achieve ‘success across time. , ts ‘The strategic management process is the full set of commitments, decisions, and actions firms take to achieve strategic competitiveness and earn above-average returns (see Figure 1.1)" The process involves analysis, strategy, and performance (the A-S-P ‘model—see Figure 1.1). The firms first step in the process is to analyze its external envi- ronment and internal orgenization to identify external opportunities and threats and to, recognize its internal resources, capabilities, and core competencies. The results of these [Abereavereseretur ——analyses influence the selection of the firms strategy or strategies. The strategy portion of Snicesorspeceioeam, the model entails strategy formulation and strategy implementation, from other vestments with With the information gained from external and internal analyses, the firm develops a gmlar amount o risk its vision and mission and formulates one or more strategies. To implement its strategies, Bik ssn cveros the firm takes actions to enact each one with the intent of achieving strategic competi- certanty about the tiveness and above-average returns (performance). Effective actions that take place in the scenic gons fs that context of integrated strategy formulation and implementation efforts result in postive ee performance. Fitms seek to maintain the quality of what is a dynamic strategic manage- ‘ment process asa means of dealing successfully with ever-changing markets and evolving (Beerage ti eS sternal conditions = ‘expects team fom other In the remaining chapters of this book, we use the strategic management process investments possessing & to explain what firms do to achieve strategic competitiveness and earn above-average sinlar amount of returns. We demonstrate why some firms achieve competitive success consistently while The others do not. Today, global competition is a critical part of the strategic management isthe fllset of Process and influences firms’ performances." Indeed, learning how to compete in the Perna eer globalized world is one of the most significant challenges firms face." | Saeco We discuss several topics in this chapter. First, we describe the current competitive fanabove average etums landscape, Several realities, including the emergence of a global economy. globalization a ee eeeay Chapter 5 Chaprer 4 Competitive Business Level | Rivalry and ‘Strategy Competitive Dynamics Chapter 7 cae Meret | iceruonal ‘Acquistion aa Strategies resulting from that economy, and rapid technotogial changes, influence this landscape. Next, we examine two models firms use to gather the information and knowledge required to choose and then effectively implement their strategies. The insights gained from these models also serve asthe foundation for forming the firm’ vision and mission. ‘The first model (industrial organization or 1/0) suggests thatthe external environment is the primary determinant ofa firm's strategic actions. According to this model, ident- fying and then operating electively in an attractive (Le, profitable) industry or segment of an industry are the keys to competitive success! The second model (resource-based) Suggests that a firms unigue resources and capabilities are the critical lnk to strategic competitiveness. Thus, the first model is concerned primarily with the firm’ external tevitonment while the second model is concerned primarily with the firms internal orga nization. After discussing vision and mission, direction-setting statements that influence the choice and use of strategies, we describe the stakeholders that organizations serve.OL ot 1 Seg Mangere seen firms achive ar mt increases be met sing te chapter af noc management proce Te degree to which stakeholders’ needs can be me tegic competitiveness and earn above-average returne tions to strategic leaders and the elements ofthe strate 1-1. The Competitive Landscape “of the workds industries is changing, The fundamental nature of competion in many of NE Wor eo data Digitalization for example, which isthe process of convering Somes or frm. new compte dimes Os bt whee thraughoot the werid. he apple:wnich Gemansravs digialiration &10 7 © ‘capabilities, messaging, and even Internet capabilities ‘a means of competition “The full array of possibilities flowing from digitlization as a mean & ie (ica idence, though. SUBge among companies remain unspecified Recent evidence, hough SEEN te tinderstanding digitization and its capabilities may be anny Headquartered in London, PricewaterhouseCoopers (doing business Tr et atonal profesional services frm. Based on a survey of 1155 manufacturing executes located in 26 countries PwC concluded that "Distinct from Industry 0, which involved the automation of single machines and processes, Industry 4.0 encompasses nd Wey digitization and data integration of the value chain: offering digital proce’ St vices, operating connected physical and virtual assets, transforming and INCE ‘operations and internal activities, building partnerships: and optimizing customer-facing “activities” An analysis ofits survey results found PwC concluding. ‘that firms committed to becoming digital leaders are able to distinguish themselves from competitors by pro- ‘ducing innovative produets that unique groups of customers value. Indeed, a significant benefit of digitalization is that it allows firms to identify specific customer groups and then serve thei personalized and unique needs." ‘The numberof customers intrested in digitalization asa source for product develop ment and subsequent use is huge and increasing. “There are two-and-a-halE billion digital Customers glabally who are under 25 years of age. What characterizes this group isthe fact that they are ‘always on’ and that they show a different usage behavior compared to that of the traditional analog’ consumes” Thus, in today’s competitive landscape, a chal- lenge is for firms to understand the strategic implications associated with digitalization and to integrate digitalization effectively into thei strategies Other characteristics of the current competitive landscape are noteworthy Conventional sources of competitive advantage such as economics of scale and large advertising budgets are not as effective as they once were (eg. because of social me averting) in terms of helping firms earn above-average returns. Moreover, the ts ditional managerial mind-set is unlikely to lead a firm to strategic competitiveness. ‘Managers must adopt a new mind-set that values flexibility, speed, innovation, integra- tion, and the challenges flowing from constantly changing conditions. "The conditions of the competitive landscape result in a perilous business world—a world in which the investments necessary to compete on a global scale are enormous and the consequences of failure are severe.” Effective use of the strategic management process reduces the like- lihood of failure for firms while competing against their rivals. Hypercompetition isa condition where competitors engage in intense rivalry. markets change quickly and often, and entry barriers are low. In these environments, firms find it _perlormance end who have csims on . "a pedormance Capital Market Stakeholders © Shareholders 4 Major supplies of eaptal (eg barks) Product Market Stakeholders 1 Primary customers * Suppliers + Host communities * Unionepo hte 1S Management and Seg Coiettheness isthe most critical criterion in prior asgboiders thal sO wep. the Bader group with whom the firm has the great, et dependence for its commitment hes che treatest amount of power to influence the firms actions."* When earning above-average returns the firm btn Deter podtion to suenege stakeholder relationships effectively. With the capability and flexibility provided by above-average returns, @ firm can satisfy multiple stakeholders more easily. When the firm earns only average returns, iti unable to maximize the interests of ll stakeholders. The objective then becomes that of satisfying each stakeholder groups tmnimal expectations. Stakeholders receive diferent levels of attention in light of how dependent the firm ison their support ata point in time. For example, environmental groups may te very important to firms in the energy industry but less important to professional service firms. firm caring below-average returns lacs the capacity to salisty the minimal expectations of ll stakeholder groups. ‘The managerial challenge in this case isto make trade-offs that minimize the amount of support lost fom stakeholders. Societal values also influence the general weightings Mlocated among the thre stakeholder groups shown in Figure 14; that fs o say that Suftural norms and institutional rues, regulations, and laws inluence how firms inter: Sct with stakeholders indifferent countries and regions ofthe world. Next, we present idditonal details about each ofthe three major stakeholder groups. Capital Market Stakeholders Shareholders and lenders both expecta firm to preserve and enhance the wealth they have entrusted to it.The returns they expect are commensurate with the degree of risk they accept with those investment (.e. lower returns are expected with low-risk invest ments while higher returns are expected with high-risk investments) Dissatisfied lenders may impose stricter covenants on subsequent borrowing of capital. Dissatisfied share holders may reflect their concerns through several means, including selling their stock. Institutional investors too (e» pension funds, mutual funds) may choose to sell their stock if the returns fal to meet their expectations. “Alternatively, as stakeholders, these investors might take actions to improve the firms performance. Communicating clearly their expectations regarding performance to the Frms board of directors and top-level managers is an example of such actions.” Some instittions owning major shares ofa firms stock may have conflicting views ofthe actions needed, which can be challenging forthe firm's managers. This is because some may want an increase in returns inthe short-term while the others desire a focus on building long- term competitiveness" In these inslances, managers may need t balance ther desies with those of other shareholders or prioritize the importance of the institutional owners Wvith diferent goals, Clearly, shareholders who hold a large share of stock (sometimes Teferned to a blockholders, see Chapter 10) are influential, especially in determining the firms capital structure (ic, the amount of equity versus tl the amount of debt used). Large Sd ”i as ? peo ere es its risk its cost, sharehoer often peer thatthe firm mnize ts use of bt BOE aie 10 ar 6 orting needs for and the possibility that debt holders have fist call of the BFR oP ppg holders incase of default Because oftheir importa PP capital market capital, firms typically seck to find ways to better satisfy stakeholders. : i Product Market Stakeholders a, suppliers bost com i Some might think that product market stakeholders (CODE 5g four BrouPs Ce aa eae sana tne ibe exon iesolt FMT ag on proses and rane an ares compaive bles. For exam SPST product prcet t Industry characteristics, marketplace competition may TESUIT OY Ti hy be willing 0 Industry characteristic, manta ori supp (ie BCT 8 competitive goes copie rein ensoe delivery of 8 POSU? success). ossible prices ‘Gantomers; as stakeholders, seek reliable products at the weet ao ay Supplcresek loyal cstomers who are wiling to pay the BIBHES STAT tan, without aor arene AMough al product market stakePOSE TT he firm omer eater prod! markt sakes ate of ile Cy Coe on abeat and understand curren and potential ctston/ Host ‘communities include the national (home and abroad), state/province» govern ns wh ch en nev, Go aera long-term employers and providers of tax revenve WithOu a ing oe lng cme ee Tse seers ab inca he 0) seh da beet, rms mt deal with ws and regulations 6-7" da va stie and loa! vel (the infence is poieeni¢= Ae ein ene) Ths means that os coun fue tems Ee ne ae naa wth powers The nes of won include secure OBS and desirable working conditions for members. ; ae or ona uct market sakeholders are generaly satisfied when 2 firms | prof mig nlc a eat balance between the retro capital market stakehonder® {ues the returns lenders and shareholders will accept and retain thei interests in the firm) and the returns in which they share, Organizational Stakeholders Employees—the firms organizational stakeholders—expect the firm to provide a dynamic, stimulating, and rewarding work environment. Employees generally prefer to work for a company that is growing and in which they can develop their skills, specially those required to be effective team members and to meet or exceed global ‘work standards. Workers who learn how to use new knowledge productively are critical to organizational success. In 2 collective sense, the education and skills of a fens workforce ae competitive weapons affecting strategy implementation and firm ‘Those leading a firm bear responsibility for ser . ling : for serving stakeholders’ needs on a area ree Using the firm's human capital successfully supports leaders’ efforts to do this." International assignments facilitate efforts to help a firms employ understand competition in the global competitive landscape. “Expats” is th Tile given to iat, engaged in an international assignment for thei i a ‘ 1e process of managing expatriate employees s A " return has the potential to enhance the firm’ at knowledge with them w national levels.” the firms performance at the do os jestic and inter-gu 1 Stee Mone a Ste Compt, 1-6 Strategic Leaders strategic | are people located in different areas and levels ofthe firm using the strategic management process to select tctions that help the firm achieve its vision find fulfil its mission, Regardless of their focation in the firm, successful strategic Jeadets are decisive, committed to nurturing those around them and committed to help ing the firm create value forall stakeholder groups." I this vein, research evidence sug gests that employees who perceive that their CEO is a visionary leader also believe that the CEO leads the firm to operate in ways that are consistent with the values of all stakeholder groups rather than emphasiz- ing only maximizing profits for sharehold- cers In turn, visionary leadership motivates employees to expend extra effort, thereby helping to increase firm performance. When identifying strategic leaders, most of us tend to think of CEOs and other top- level managers. Clearly, these people are strategic leader. In the final analysis, CEOs are responsible for making certain their firm uses the strategic management process success- fully. The pressure on CEOs today to manage strategically s stronger than ever." However, ‘many others help choose firm’ strategy and the actions to implement i The reason for this that the realities of tventy-fist century competition mentioned earlier in this chap- ter (eg. the global economy, globalization, rapid technological change, and the increasing Importance of knowledge and people as sources of competitive advantage) create @ need for those “closest to the action” to play a role in choosing and implementing the firms strategy Infact, all managers (as strategic leaders) must think globally and act locally" Thus the most effective CEOs and top-level managers understand how to delegate strate zie esponsibilities to people throughout the firm who influence the use of organizational fesources. Delegation also helps to avoid managerial hubris at the top and the problems it causes, expecially in situations allowing significant managerial discretion" ‘Organizational culture also affects strategic leaders and their work. In turn strategic leaders decisions and actions shape a firms culture. Organizational culture refers to the complex set af ideologies, sybos, and core values that individuals throughout the firm share and that influence how the firm conducts business. Organizational culture is the social energy that drives—or fails to drive—the organization. For example, many beliove that the culture at Southwest Aisines is unique and valuable. Its culture encour 10 work hard but also to have fun while doing so. Moreover, its culture ind customers alike, The firm also places a pre 105 (Positively Outrageous ages employees t tetas respect for others—employees a mum on service, as suggested by its commitment to provide Pt Service o each customer. 16a The Work of Effective Strategic Leaders -k, thorough analyses, a willingness to be brutally firm and its people to achieve success, and tenac- asa strategic leader, Individuals become yuman capital and Perhaps not surprisingly, bard wor honest, a penchant for wanting the ity are prerequisites to an individuals success top-level leaders because of their capabilities (their accumulation off Strategic lenders fem using the sateok management roc Organizational culture throughout te frm share eee eR ER ee ,a a Ee ™ Strategic Leaders’ Successfully with Their Challenges ‘The raps pace cf cho ern in toaay’ gh ng fing companies and those eadg blvd business environment ta recuring analy ofthe strategic mi ace of change organizations throughout ‘ody frp, he the nature of such olsings with 14 brands and more than menites, bigger, hipper ke For Hin strategic leaders th tobe the pace of change and the hanges such as these topevelsategk thai fs form strategic actions are mses. For many ofthese strategic leades, 8 bal mind set and a passion for meeting peoples needs Defined ane discussed in Chapter 5, states actions and responses find frms tying to autcompete raisin markesplace moeitions. Strategic actions and responses equie significant coratments of ergantatonal esources 1 are decisions that ae dificult for firms to reverse once fe Uted. The siategc actions Hon is taking to respond to changes nc 19 ol brands ana estab tng new ones such as Tu, which emnphasies communal space hose of efies isumer-goods gant Procter & Gamble (P&C s facing fundamental challenges i ts home US, market, including fs i consume preferences, etales pushing for lower prices, and the avaabity of paivate label alternates for ‘onsuimers In response P&G's top level strategic leaders decided recenty to aequre the consume health busines Ff Germany/s Merck K 2 iw This unt’ product portfolio includes an aay of specially dietary supplements as is acu + in P&G's organic sales growth and ints. ounteriigsaling revenue growth, Paes ticlidig those of spinning of ts consumer health bus ‘hich sells products such as Adv pain pill. ChapStick po sete MaNAGEMERE o Decisions as a Path to Firms’ Efforts to Deal the company, arn, 079 isa pen an Cera tari agen AG ard Holdings: are Recently, the Orucker institute founded in 2007 10 advance managerial deals 5 espoused by Peter Drucker deni ies Ar 8 Spot with Apole, Google parent Alphabet BM, Miciosot, and Cisco round ‘mast effectively managed US, comps on held the Ing out the top ormance relative to other com: five areas Drucker said are crt porate success —cu panies inte et satfaction, employee engage- Financial svength-—esined them the including rs, rend d decisions regarding Salege actions and esponses that contibuted gon