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Strategic Management:

Concepts and Cases 9e


Part I: Strategic Management Inputs
Chapter 1: Strategic Management and
Strategic Competitiveness
Chapter 1: Strategic Management
and Strategic Competitiveness
• Overview: Eight content areas
• Nature of Competition
• The Competitive Landscape
• I/O Model of Above-Average Returns (AAR)
• Resource-Based Model of AAR
• Vision and Mission
• Stakeholders
• Strategic Leaders
• The Strategic Management Process
Nature of Competition: McDonald’s
• McDonald’s creates value for customers through:
• Business-level strategies
• Product Innovation
• Upgrading existing restaurants
• Listened to customers – value menu, healthier items, more
convenience
• Purchasing European property for future expansion

• Corporate-level strategies
• Disposed of its interests in other restaurants
Nature of Competition: Basic
concepts
• Strategic Competitiveness
• Achieved when a firm formulate & implements a value-
creating strategy
• Strategy
• Integrated and coordinated set of commitments and actions
designed to exploit core competencies and gain a
competitive advantage
• Competitive Advantage (CA)
• Implemented strategy that competitors are unable to
duplicate or find too costly to imitate
• Above Average Returns
• Returns in excess of what investor expects in comparison to
other investments with similar risk
Nature of Competition: Basic
concepts (Cont’d)
• Risk
• Investor’s uncertainty about economic gains/losses
resulting from a particular investment
• Average Returns
• Returns equal to what investor expects in comparison
to other investments with similar risk
• Strategic Management Process (SMP)
• Full set of commitments, decisions and actions
required for a firm to achieve strategic competitiveness
and earn above average returns
The Strategic Management Process
Chapter 1: Strategic Management
and Strategic Competitiveness
• Overview: Eight content areas
• Nature of Competition
• The Competitive Landscape
• I/O Model of Above-Average Returns (AAR)
• Resource-Based Model of AAR
• Strategic Vision and Mission
• Stakeholders
• Strategic Leaders
• The Strategic Management Process
The Competitive Landscape
• Introduction: The Competitive Landscape (CL)
• Pace of change is rapid
• Industry boundaries are blurring
• Financial capital is more scarce and markets are
increasingly volatile
• Other CL characteristics: Economies of scale,
advertising budgets not as effective as before, change
in managerial mind-set from “traditional” to more
flexible and innovative
The Competitive Landscape (Cont’d)
• Introduction: The Competitive Landscape (CL)
• Hypercompetition – extremely intense rivalry among
competing firms, characterized by
• Escalating & increasingly aggressive competitive moves
• Assumptions of market stability replaced with notion of
INstability and change
• Two primary drivers of the competitive landscape:
• The global economy
• Technology
The Competitive Landscape (Cont’d)
• The Global Economy
• Goods, services, people, skills and ideas move freely
across geographic borders
• Europe, through the European Union (EU) is the world’s
largest single market
• EU vs U.S. GDP: 35% higher
• Emerging major competitive forces: China & India
• In summary: globalization increased economic
interdependence among countries as reflected in the
flow of goods and services, financial capital, and
knowledge across country borders
The Competitive Landscape (Cont’d)
• Technology and Technological Changes
• 3 categories:
• 1. Technology diffusion & disruptive technologies
• 2. The information age
• 3. Increasing knowledge intensity
The Competitive Landscape (Cont’d)
• Technology and Technology Changes (Cont’d)
• Technology diffusion
• Perpetual innovation: describes how new information-
intensive technologies are replacing older forms
• Speed to market may be primary competitive advantage
• 12 – 18 month timeframe to gather info re: competitor R&D
• Disruptive technologies
• Technologies that
• Destroy value of existing technology
• Create new markets
The Competitive Landscape (Cont’d)
• Technology and Technology Changes (Cont’d)
• 1. Technology diffusion & disruptive technologies
• 2. The information age
• 3. Increasing knowledge intensity
The Competitive Landscape (Cont’d)
• Technology and Technology Changes (Cont’d)
• The information age
• Dramatic changes over last several years
• Major technological developments effect how information is
used and disseminated
• Internet provides infrastructure for information anytime,
anywhere
• Increasing knowledge intensity
• Defined as information, intelligence & expertise and is the
basis of technology and its application
• Gained through experience, observations and inferences
• Strategic Flexibility – set of capabilities used to respond to
various demands and opportunities existing in a dynamic and
uncertain competitive environment
Chapter 1: Strategic Management
and Strategic Competitiveness
• Overview: Eight content areas
• Nature of Competition
• The Competitive Landscape
• I/O Model of Above-Average Returns (AAR)
• Resource-Based Model of AAR
• Strategic Vision and Mission
• Stakeholders
• Strategic Leaders
• The Strategic Management Process
Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
• Basic Premise – to explain the dominant influence of the external
environment on a firm's strategic actions and performance
• Underlying Assumptions
• External environment imposes pressures and constraints that determine
the strategies resulting in AAR
• Most firms compete within a particular industry/segment
• Control similar strategically relevant resources
• Pursue similar strategies in light of those resources
• Resources for implementing strategies are highly mobile across firms
• Therefore any resource differences between firms will be short-lived
• Organizational decision makers are rational and committed to acting in the
firm's best interests, as shown by their profit-maximizing behaviors
Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
• Five-Forces Model (Michael Porter)
• The 5 Forces includes
• Suppliers, buyers, competitive rivalry, product substitutes and potential entrants
• Reinforces the importance of economic theory
• Analytical tool previously lacking in the field of strategy
• Determines the nature/level of competition and profit potential in an industry
• Suggests an industry’s profitability is an interaction between these 5 forces
The Resource-Based Model of AAR
The Resource-Based Model of AAR (Cont’d)
• Basic Premise - a firm's unique [internal] resources & capabilities, in
combination, are the basis for firm strategy and AAR
• Each firm’s performance difference across time emerges (vs industry’s
structural characteristics)
• Combined uniqueness should define the firms’ strategic actions
• Resources are tangible and intangible
The Resource-Based Model of AAR (Cont’d)
• Resources
• Inputs into a firm's production process
• Includes capital equipment, employee skills, patents, high-quality managers, financial
condition, etc.
• Basis for competitive advantage: When resources are valuable, rare, costly to
imitate and nonsubstitutable
• Internal/firm-specific resources can be classified into three categories:
• Physical
• Things you can touch/feel = tangible
• Human
• People / employees
• Organizational capital
• Relative to the firm itself
The Resource-Based Model of AAR (Cont’d)
• Capability
• Capacity for a set of resources to perform a task or activity in an integrative
manner
• Core Competency
• A firm’s resources and capabilities that serve as sources of competitive
advantage over its rival
• Summary
• A firm has superior performance because of
• Unique resources and capabilities, and the combination makes them different, and
better, than their competition – driving the competitive advantage
Chapter 1: Strategic Management and Strategic
Competitiveness
• Overview: Eight content areas
• Nature of Competition
• The Competitive Landscape
• I/O Model of Above-Average Returns (AAR)
• Resource-Based Model of AAR
• Vision and Mission
• Stakeholders
• Strategic Leaders
• The Strategic Management Process
Vision and Mission
• Vision
• Picture of what the firm wants to be and, in broad
terms, what it ultimately wants to achieve
• An effective vision statement is the responsibility of the
leader who should work with others to form it
• Foundation for the mission
• Mission
• Specifics business(es) in which firm intends to compete
and customers it intends to serve
• More concrete than the vision
Stakeholders
• Basic Premise – a firm can effectively manage stakeholder relationships
to create a competitive advantage and outperform its competitors
• Stakeholders are both individuals and groups
• They can affect, and are affected by, the strategic outcomes/performance a firm
achieves
• Firms are not equally dependent on all stakeholders
• Classifications of Stakeholders
• Capital Market
• Expect returns commiserate with risk accepted by investments
• Higher the dependency relationship, the more direct and significant firm’s response
• Product Market
• Customers, suppliers, host communities, unions
• Organizational
• The employees
The Three Stakeholder Groups
Chapter 1: Strategic Management
and Strategic Competitiveness
• Overview: Eight content areas
• Nature of Competition
• The Competitive Landscape
• I/O Model of Above-Average Returns (AAR)
• Resource-Based Model of AAR
• Strategic Vision and Mission
• Stakeholders
• Strategic Leaders
• The Strategic Management Process
Strategic Leaders
• People located in different parts of the firm using
the strategic management process to help the firm
reach its vision and mission
• Decisive and committed to nurturing those around
them
• Organizational culture emerges from & sustained by
leaders
• Complex set of ideologies, symbols and core values shared
throughout the firm
• Affects leaders/their work which in-turn shapes culture
• Influences how the firm conducts business
Strategic Leaders (Cont’d)
• The Work of Effective Strategic Leaders
• Hard work, thorough analysis, desire for
accomplishment, tenacity
• Must be able to “think seriously and deeply…about the
purposes of the organizations they head or functions
they perform, about strategies, tactics,…..and
people…and about the important questions … they
need to ask.”
• Predicting Outcomes: Profit Pools (PP)
• Anticipates their decisions relative to the PP
• PP entails the total profits earned in an industry at all
points along the value chain
Strategic Management Process
• Rational approach used by firms to achieve
strategic competitiveness and earn above-average
returns (AAR)
• Figure 1.1 (Diagram of chapter relationships)
• Part 1: Strategic Mgmt Inputs
• Part 2: Strategic Actions: Strategy Formulation
• Part 3: Strategic Actions: Strategy Implementation
• Part 4: Cases
BUSINESS STRATEGY DIAMOND Arenas
• Where will we be active? ( and
with how much emphasis?)
– Which product categories?
– Which channels?
Arenas – Which market segments?
– Which geographic areas?
– Which core technologies
– Which value-creation
Staging strategies?
• What will be our speed and Economic Vehicles
sequence of moves? Staging Vehicles
– Speed of expansion?
logic • How will we get there?
– Sequence of initiatives – Internal development?
– Joint ventures?
– Licensing/franchising?
– Experimentation?
Economic logic
Differentiators – Acquisitions?
• How will returns be obtained?
– Lowest costs through scale Differentiators
advantages?
– Lowest costs through scope and
• How will we win?
– Image?
replication advantages
– Customization?
– Premium prices due to unmatchable
– Price?
service?
– Styling?
– Premium prices due to proprietary
– Product reliability?
product features? 31 – Speed to market?
Strategic Management:
Concepts and Cases 9e

Part I: Strategic Management Inputs


Chapter 2: The External Environment:
Opportunities, Threats,
Industry Competition and
Competitor Analysis
The Strategic Management Process
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
• The firm’s external environment
• General and industry environment
• External environment analysis process activities
• General environment segments
• Porter’s 5 Competitive Forces
• Strategic groups: Definition and influence
• Competitor Analysis: Intelligence and ethics
Effects of External Environment: Philip Morris
International (PMI)
• Largest international market share and leading company in 11 of top
30 cigarette markets
• Implementing strategies in anticipation of future external
environmental conditions
• Working with foreign governments on regulatory framework
• Opportunities in emerging markets
• Smokeless tobacco in anticipation of fewer smokers
• Support of sustainable farming
• Waste reduction in manufacturing
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
• The firm’s external environment
• General and industry environment
• External environment analysis process activities
• General environment segments
• Porter’s 5 Competitive Forces
• Strategic groups: Definition and influence
• Competitor Analysis: Intelligence and ethics
External Environment:
General, Industry and Competitor
• Three External Environments include:
• General
• Industry
• Competitor
External Environment:
General, Industry and Competitor (Cont’d)
• The General Environment
• The broader society dimensions that influence an industry and the firms
within it
• Grouped into 7 dimensions OR ‘environmental segments’ Each segment
composed of elements
The External Environment
External Environment:
General, Industry and Competitor (Cont’d)
• Industry Environment
• Set of factors directly influencing
• A firm’s competitive actions/responses
• Relates to Porter’s 5 Forces – see upcoming slides
• Competitor analysis: gather and interpret competitor information
• Competitor Environment
• Gives details about
• A firm’s direct and indirect competitors
• The competitive dynamics expected to impact a firm's efforts to generate above-average
returns
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
• The firm’s external environment
• General and industry environment
• External environment analysis process activities
• General environment segments
• Porter’s 5 Competitive Forces
• Strategic groups: Definition and influence
• Competitor Analysis: Intelligence and ethics
External Environment Analysis
• Opportunity
• General environment condition that, if exploited, helps a company achieve
strategic competitiveness

• Threat
• General environment condition that may hinder a company's efforts to
achieve strategic competitiveness
External Environment Analysis (Cont’d)
• 4 components of External Environment Analysis
• Scanning
• Monitoring
• Forecasting
• Assessing
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
• The firm’s external environment
• General and industry environment
• External environment analysis process activities
• General environment segments
• Porter’s 5 Competitive Forces
• Strategic groups: Definition and influence
• Competitor Analysis: Intelligence and ethics
Segments of the General Environment
• 7 Segments
• Demographic
• Economic
• Political/Legal
• Sociocultural
• Technological
• Global
• Physical Environment
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
• The firm’s external environment
• General and industry environment
• External environment analysis process activities
• General environment segments
• Porter’s 5 Competitive Forces
• Strategic groups: Definition and influence
• Competitor Analysis: Intelligence and ethics
Industry Environment Analysis
• Industry
• Definition: Group of firms producing products that are close substitutes
• Industry environment, in comparison to the general environment, has more
direct effect of firm’s
• Strategic competitiveness and
• Above-average returns
• Intensity of industry competition and industry’s profit potential are a function
of 5 forces (See next slide)
The Five Forces of Competition Model
Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
• 1/5: New entrants
• Can threaten market share of existing competitors
• May bring additional production capacity
• Function of two factors
• 1: Barriers to entry
• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of scale
• Gov’t policy
• 2: Expected retaliation
Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
• 2/5: Bargaining power of suppliers
• They are powerful when …
• 1. Few large companies and more concentrated than the
• industry to which they sell
• 2. No substitutes
• 3. Industry firms not significant customer to supplier gp
• 4. Supplier’s goods are critical to buyer’s success
• 5. High switching costs due to effectiveness of supplier’s products
• 6. Threat of forward integration
Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
• 3/5: Bargaining power of buyers
• They are powerful when …
• 1. Purchase large portion of industry’s total output
• 2. Product sales accounts for significant seller annual revenue
• 3. Low switching costs (to other industry product)
• 4. Industry products are undifferentiated or standardized and
• threat of backward integration

Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
• 4/5: Threat of substitute products
• Goods or services outside of given industry perform same or similar functions at a
competitive price (i.e., plastic has replaced steel in many applications)
• 5/5: Intensity of Rivalry Among Competitors
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed costs or high storage costs
• Lack of differentiation or low switching costs
• High strategic stakes
• High exit barriers
Industry Environment Analysis (Cont’d)
• Porter’s 5 Forces
• 5/5: Intensity of Rivalry Among Competitors
• High exit barriers (Cont’d)
• 1. Specialized assets
• 2. Fixed costs of exit (i.e., labor agreements)
• 3. Strategic interrelationships (i.e., one business depends on another)
• 4. Emotional barriers (i.e., loyalty to employees, etc.)
• 5. Government and social restrictions

Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
• The firm’s external environment
• General and industry environment
• External environment analysis process activities
• General environment segments
• Porter’s 5 Competitive Forces
• Strategic groups: Definition and influence
• Competitor Analysis: Intelligence and ethics
Strategic Groups
• Strategic Groups
• Set of firms emphasizing similar strategic dimensions to use a similar strategy
• Implications
• Because firms within a group compete (offer similar products) rivalry can be intense –
the greater the rivalry the greater the threat to each firm’s profitability
• Strengths of the 5 forces differs across strategic groups
• The closer the strategic groups, in terms of strategy, the greater the likelihood of rivalry
Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
• Overview: Seven content areas
• The firm’s external environment
• General and industry environment
• External environment analysis process activities
• General environment segments
• Porter’s 5 Competitive Forces
• Strategic groups: Definition and influence
• Competitor Analysis: Intelligence and ethics
Competitor Analysis
• Competitor analysis and organization response:
• What drives competitors
• Shown by organization's future objectives
• What the competitor is doing and can do
• Revealed in organization's current strategy
• What the competitor believes about the industry
• Shown in organization's assumptions
• What the competitor’s capabilities are
• Shown by organization's strengths and weaknesses
Competitor Analysis Components
Competitor Analysis (Cont’d)
• Competitor intelligence
• Set of data and information the firm gathers to better understand and
anticipate competitors' objectives, strategies, assumptions, and capabilities
Intelligence Collection (Cont’d)
• Follow ethical practices when gathering competitor intelligence
• Obtain public information
• Attend trade fairs and shows and collect brochures, view exhibits, listen to
their discussions
• Some practices may be legal, but unethical
• Unethical tactics can include
• Blackmail
• Trespassing
• Eavesdropping
• Stealing drawings, samples or documents
Strategic Management:
Concepts and Cases 9e

Part I: Strategic Management Inputs


Chapter 3: The Internal Organization:
Resources, Capabilities, Core Competencies
and Competitive Advantages
The Strategic Management Process
Innovation in Action: Apple
• Record sales in midst of 2008 global recession
• Attributed to capabilities in innovation across all
product lines
• Laptops
• iPhone
• iPod (Shuffle)
• Marketing capabilities
• Advertising
• Point of sale promotion
• Apple stores
• Potential negatives going forward
• Steve Jobs (health issues)
• Top management talent lured away by other firms
Chapter 3: The Internal Organization:
Resources, Capabilities, Core Competencies and
Competitive Advantages
• Overview: Eight content areas
• Importance of understanding internal organization
• Value: Definition and importance
• Tangible vs intangible resources
• Capabilities: Definition and development
• Core competencies: Criteria
• Value Chain Analysis
• Outsourcing: Definition and “why?”
• Internal organization assessment and strategic
decisions
Analyzing the Internal Organization (IO)
• Context of Internal Analysis
• Creating Value
• The Challenge of Analyzing the IO
Analyzing the Internal Organization (IO) (Cont’d)

• Context of Internal Analysis


• ‘Global mind-set’
• Ability to study an internal environment in ways that do not depend on the assumptions of a
single country, culture, or context
• Analyze firm’s portfolio of resources and bundle heterogeneous resources and
capabilities
• Understand how to leverage these bundles
• An organization's core competencies creates and sustains its competitive advantage
• Creating Value
• The Challenge of Analyzing the IO
Components of Internal Analysis Leading to
Competitive Advantage and Strategic Competitiveness
Analyzing the Internal Organization (IO) (Cont’d)

• Context of Internal Analysis


• Creating Value
• Develop core competencies that lead to competitive
advantage
• Value: measured by a product's performance
characteristics and by its attributes for which customers
are willing to pay
• The Challenge of Analyzing the IO
Analyzing the Internal Organization (IO) (Cont’d)

• Context of Internal Analysis


• Creating Value
• The Challenge of Analyzing the IO
• Strategic decisions are non-routine, have ethical implications and influence the
organization’s above-average returns
• Involves identifying, developing, deploying and protecting firms’ resources, capabilities and
core competencies
• Managers face uncertainty on many fronts --
• Proprietary technologies
• Changes in economic and political trends, societal values and shifts in customer demands
• Environment – increases complexity
• Intraorganizational conflict
• Due to decisions about core competencies and how to nurture them
Conditions Affecting Managerial Decisions About
Resources, Capabilities, and Core Competencies
Chapter 3: The Internal Organization:
Resources, Capabilities, Core Competencies and Competitive
Advantages
• Overview: Eight content areas
• Importance of understanding internal organization
• Value: Definition and importance
• Tangible vs. intangible resources
• Capabilities: Definition and development
• Core competencies: Criteria
• Value Chain Analysis
• Outsourcing: Definition and “why?”
• Internal organization assessment and strategic decisions
Resources, Capabilities and Core Competencies
• Competitive Advantage (CA) foundation includes
• Resources
• Bundled to create organizational capabilities
• Tangible and intangible (As seen in Figure 3.1)
• Capabilities
• Source of a firm’s core competencies and basis for CA
• Purposely integrated to achieve a specific task/set of tasks
• Core Competencies
• Capabilities that serve as a source of CA for a firm over its rivals
• Distinguish a company from its competitors – the personality
Resources, Capabilities and Core Competencies
• Tangible Resources
• Assets that can be seen, touched and quantified
• Examples include equipment, facilities, distribution centers,
formal reporting structures
• Four specific types
• Intangible Resources
• Assets rooted deeply in the firm’s history, accumulated over
time
• In comparison to ‘tangible’ resources, usually can’t be seen
or touched
• Examples include knowledge, trusts, organizational routines,
capabilities, innovation, brand name, reputation
• Three specific types
Chapter 3: The Internal Organization:
Resources, Capabilities, Core Competencies and Competitive
Advantages
• Overview: Eight content areas
• Importance of understanding internal organization
• Value: Definition and importance
• Tangible vs. intangible resources
• Capabilities: Definition and development
• Core competencies: Criteria
• Value Chain Analysis
• Outsourcing: Definition and “why?”
• Internal organization assessment and strategic decisions
Building Core Competencies:
Criteria and Value Chain Analysis
• Two tools firms use to identify and build on their core competencies
• Four specific criteria of Sustainable CA
• Value Chain Analysis
Building Core Competencies:
Criteria and Value Chain Analysis
• Four specific criteria of sustainable competitive advantage – capabilities that
are:
• Valuable
• Rare
• Costly-to-imitate
• Nonsubstitutable capabilities
• Competitive consequences:
• Focus on capabilities that yield competitive parity and either temporary or sustainable
competitive advantage
• Performance implications include:
• Parity = average returns
• Temporary advantage = avg. to above avg. returns
• Sustainable advantage = above average returns
Building Core Competencies:
Criteria and Value Chain Analysis
• Value Chain Analysis
• Primary activities
• Involved with product’s physical creation, sales and distribution to buyers, and service after the
sale
• Service, marketing/sales, outbound/inbound logistics and operations
• Support activities
• Provide assistance necessary for the primary activities to take place
• Includes firm infrastructure, HRM, technologies development and procurement
The Basic Value Chain
Chapter 3: The Internal Organization:
Resources, Capabilities, Core Competencies and Competitive
Advantages
• Overview: Eight content areas
• Importance of understanding internal organization
• Value: Definition and importance
• Tangible vs. intangible resources
• Capabilities: Definition and development
• Core competencies: Criteria
• Value Chain Analysis
• Outsourcing: Definition and “why?”
• Internal organization assessment and strategic decisions
Outsourcing
• Definition: Purchase of a value-creating activity from an external
supplier
• Effective execution includes an increase in flexibility, risk mitigation and capital
investment reduction
• Trend continues at a rapid pace
• Firms must outsource activities where they cannot create value or are at a
substantial disadvantage compared to competitors
• Can cause concerns
• Usually revolves around innovative ability and loss of jobs
Internal Organization Assessment and Strategic
Decisions
• Firms must identify their strengths and weaknesses
• Appropriate resources and capabilities needed to develop desired strategy
and create value for customers/other stakeholders
• Tools (i.e., outsourcing) can help a firm focus on core competencies as the
source for CA
• Core competencies have potential to become core rigidities
• Competencies emphasized when no longer competitively relevant can become a
weakness
• External environmental conditions and events impact a firm’s core
competencies
Ansoff Matrix
Grand Strategy Matrix
Internal-External (IE) Matrix
Internal-External Matrix
Generic Strategy
O
Stability Growth
- Pause/Proceed with caution
- No change strategy
- Profit strategy

W S

- Turnaround - Related
- Captive company - Unrelated
- Sell-out/Divestment
- Bankruptcy/Liquidation

Retrenchment Diversification

T
TOWS Matrix
TOWS Matrix (cont’d)
Strategic Management:
Concepts and Cases 9e
Part II: Strategic Actions:
Strategy Formulation
Chapter 4: Business-Level Strategy
THE STRATEGIC MANAGEMENT PROCESS
Chapter 4: Business-Level Strategy
• Overview: Five content areas
• Defining business-level strategy
• Relationship between customers and strategy
• Differences in business-level strategies
• 5-Forces
• Risks of business-level strategies
Acer Group’s Cost Strategy
• Four PC brands:
• Acer
• Gateway
• Packard Bell
• eMachines
• Elements of Acer’s Low Cost Strategy
• Sales only through retail/other outlets (no direct sales)
• Outsource all manufacturing and assembly
• Tight control of overhead costs
• Acer overhead-8% of sales; HP–15%; Dell–14%
• Focus on consumers and small/mid-size businesses
Chapter 4: Business-Level Strategy
• Overview: Five content areas
• Defining business-level strategy
• Relationship between customers and strategy
• Differences in business-level strategies
• 5-Forces
• Risks of business-level strategies
Introduction
• Strategy: Increasingly important to a firm’s success and concerned
with making choices among two or more alternatives. Choices
dictated by
• External environment
• Internal resources, capabilities and core competencies
• Business level-strategy: Integrated and coordinated set of
commitments and actions the firm uses to gain a competitive
advantage by exploiting core competencies in specific product
markets
Introduction
• Satisfying customers is the foundation of successful business
strategies
• Managing relationships with customers
• Reach, richness, affiliation
• Who will be served
• What needs will be satisfied
• How those needs will be satisfied
• Five (5) generic business level strategies
• Generic = can be used in any organization competing in any industry
• Follows the discussion of customers
Customers: Their Relationship with Business-
Level Strategies
• Strategic competitiveness results when firm can satisfy customers by
using its competitive advantages
• Returns earned are the lifeblood of firm
• Most successful companies satisfy current customers and/or meet
needs of new customers
Customers: Their Relationship with Business-
Level Strategies (Cont’d)

• …Five components in customer relationships


• 1. Effectively managing relationships w/ customers
• Deliver superior value
• Strong interactive relationships is foundation

• 2. Reach, richness and affiliation


• Access and connection to customers
• Depth and detail of two-way flow of information between firm and customer
• Facilitating useful interactions with customers
Customers: Their Relationship with Business-
Level Strategies (Cont’d)

• …Five components in customer relationships


• 3. Who: Determining the customers to serve
• Market segmentation
• Dividing customers into groups based on differences in needs
• Process used to cluster people with similar needs into individual and identifiable groups
• For example, consumer and industrial markets
Customers: Their Relationship with Business-
Level Strategies (Cont’d)

• …Five components of customer relationships


• 4. What: Determining which customer needs to satisfy
• What = Needs
• Related to a product’s benefits and features
• Must anticipate and be prepared: (I.e., High-quality? Low price?)
• Translate into features and performance capabilities of products
• 5. How: Determining core competencies necessary to satisfy customer needs
• Core competencies: resources and capabilities that serve as source of competitive
advantage for firm over its rivals
• How = core competencies
Chapter 4: Business-Level Strategy
• Overview: Five content areas
• Defining business-level strategy
• Relationship between customers and strategy
• Differences in business-level strategies
• 5-Forces
• Risks of business-level strategies
Purpose of Business-Level (BL) Strategies
• Purpose: To create differences between position of a firm and its
competitors
• Firm must make a deliberate choice to
• Perform activities differently
• Perform different activities
• Activity map exemplifies a firm’s
• Activities
• How they are integrated
• Southwest Airline’s activity map: Note the primary (N=6) and secondary
nodes/activities and the ‘connectedness’ or fit
• Fit is key to the sustainability of competitive advantage
Southwest Airlines’ Activity System
Purpose of Business-Level (BL) Strategies (con’t)

• Two types of competitive advantage firms must choose between


• Cost (Are we LOWER than others?)
• Uniqueness (Are we DIFFERENT? How?)
• Two types of ‘competitive scope’ firms must choose between
• Broad target
• Narrow target
• These combine to yield 5 different BL strategies
Five Business-Level Strategies
Types of Business-Level Strategies
• 1. Cost Leadership (CL)
• Competitive advantage: THE low-cost leader and operates with margins
greater than competitors
• Competitive scope: Broad
• Integrated set of actions designed to produce or deliver goods or services
with features that are acceptable to customers at the lowest cost, relative to
competitors
• No-frill, standardized goods
• Continuously reduce costs of value chain activities
• Inbound/outbound logistics account for significant cost
• Low-cost position is a valuable defense against rivals
Types of Business-Level Strategies (Cont’d)

1. Cost Leadership (CL) (Cont’d)

• Cost leaders are in a position to


• Absorb supplier price increases and relationship demands
• Force suppliers to hold down their prices
• Continuously improving levels of efficiency and cost reduction
• Can be difficult to replicate and
• serve as significant entry barriers to potential competitors
• Cost leaders hold an attractive position in terms of product substitutes, with
the flexibility to lower prices to retain customers
• Examples: Greyhound Bus, Big Lots Inc., Wal-Mart
Examples of Value-Creating Activities
Associated with the Cost Leadership Strategy
Types of Business-Level Strategies (Cont’d)

1. Cost Leadership (CL) (Cont’d)

• In relationship to the 5 Forces:


• Rivalry against existing competitors: Rivals hesitate to compete on the basis of price
• Bargaining Power of Buyers (Customers)
• Bargaining Power of Suppliers
• Potential Entrants
• Product Substitutes
Types of Business-Level Strategies (Cont’d)

• Competitive Risks of the cost leadership strategy


• Source of cost advantage becomes obsolete
• Focus on cost may cause the firm to overlook important customer
preferences
• Imitation
Types of Business-Level Strategies (Cont’d)

2. Differentiation
• Competitive advantage: Differentiation
• Competitive scope: Broad
• Integrated set of actions designed by a firm to produce or deliver goods or
services at an acceptable cost that customers perceive as being different in
ways that are important to them
• Target customers perceive product value
• Customized products – differentiating on as many features as possible
• Examples: Apple’s iPod
Examples of Value-Creating Activities
Associated with the Differentiation Strategy
Types of Business-Level Strategies (Cont’d)

2. Differentiation (Cont’d)

• In relationship to the 5 Forces:


• Rivalry against existing competitors
• Customers are loyal purchasers of differentiated products
• I.e., Bose
• Bargaining Power of Buyers (Customers)
• Inverse relationship between loyalty/product: As loyalty increases, price sensitivity decreases
• I.e., Callaway golf clubs
• Bargaining Power of Suppliers
• Provide high quality components, driving up firm’s costs
• Cost may be passed on to customer
• Potential Entrants
• Substantial barriers (see above) and would require significant resource investment
• Product Substitutes
• Customer loyalty effectively positions firm against product substitutes
Types of Business-Level Strategies (Cont’d)

• Competitive Risks of the differentiation strategy


• Customers determine that the cost of differentiation is too great
• The means of differentiation may cease to provide value for which customers
are willing to pay
• Experience can narrow customers’ perceptions of the value of a product’s
differentiated features
• Counterfeiting
Types of Business-Level Strategies (Cont’d)

• There are two “Focus” strategies


• In general, the firms’ core competencies used to serve the need of a
particular industry segment or niche to the exclusion of others.
• May lack resources to compete in the broader market
• May be able to more effectively serve a narrow market segment than larger industry-
wide competitors
• Firms may direct resources to certain value chain activities to build competitive
advantage
• Large firms may overlook small niches
Types of Business-Level Strategies (Cont’d)

• Focus strategy examples


• Buyer groups
• Youths/senior citizens
• Product line segments
• Professional painter groups
• Geographic markets
• West vs. East coast
Types of Business-Level Strategies (Cont’d)

3. Focused Cost Leadership


• Competitive advantage: Low-cost
• Competitive scope: Narrow industry segment
Types of Business-Level Strategies (Cont’d)

4. Focused Differentiation
• Competitive advantage: Differentiation
• Competitive scope: Narrow industry segment
• i.e., in the outdoor recreation business a firm that caters to fly fishing is following a
focused differentiation strategy (as opposed to discount stores that carry general fishing
gear)
• High quality equipment
• Knowledgeable personnel
• Guided tours
• Fly tying classes
Types of Business-Level Strategies (Cont’d)

• Risk of using “Focus” strategies


• A competitor may be able to focus on a more narrowly defined competitive
segment and "outfocus” the focuser
• A company competing on an industry-wide basis may decide that the market
segment served by the focus strategy firm is attractive and worthy of
competitive pursuit
• Customer needs within a narrow competitive segment may become more
similar to those of industry-wide customers as a whole
Types of Business-Level Strategies (Cont’d)

5. Integrated CL/Differentiation
• Efficiently produce products with differentiated attributes
• Efficiency: Sources of low cost
• Differentiation: Source of unique value
• Can adapt to new technology and rapid changes in external environment
• Simultaneously concentrate on TWO sources of competitive advantage: cost
and differentiation – consequently…
• …must be competent in many of the primary and support activities
• Three sources of flexibility useful for this strategy
Types of Business-Level Strategies (Cont’d)

• Three flexible sources include


• Flexible manufacturing systems (FMS)
• Computer controlled process used to produce a variety of products in moderate, flexible
quantities with a minimum of manual intervention
• Goal: eliminate ‘low cost vs. product variety, tradeoff inherent in traditional
manufacturing technologies
• Information networks
• Using technology to link suppliers, distributors and customers
• Total Quality Management (TQM) systems
• Emphasizes firm’s total commitment to the customer and continuous improvement of
every process through data-driven, problem-solving approaches based on empowering
employees
Types of Business-Level Strategies (Cont’d)

• Competitive Risks of Integrated Strategies


• Although becoming more popular the RISK is getting ‘stuck in the middle’
• Cost structure is not low enough for attractive pricing of products and products not
sufficiently differentiated to create value for target customer – therefore, fail to
successfully implement either low cost or differentiation strategy
• Result: Don’t earn above-average returns
Figure 6.1: Model of Consumer Behavior

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Figure 6.2: Maslow Hierarchy of Needs

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Figure 6.4: Five-Stage Model of the
Consumer Buying Process

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Figure 6.5: Successive Sets Involved in
Consumer Decision Making

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Figure 6.6: Steps Between Evaluation
of Alternatives and a Purchase Decision

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The Business Market versus the Consumer
Market
1. Fewer, larger buyers—The business marketer normally deals with far fewer, much larger buyers than
the consumer marketer does.
2. Close supplier-customer relationship—Because of the smaller customer base and the importance and
power of the larger customers, suppliers are frequently expected to customize their offerings to
individual business customer needs.
3. Professional purchasing—Business goods are often purchased by trained purchasing agents, who must
follow their organization’s purchasing policies, constraints, and requirements.
4. Multiple buying influences—More people typically influence business buying decisions. Buying
committees consisting of technical experts and even senior management are common.
5. Multiple sales calls—Because more people are involved in the selling process, it takes multiple sales
calls to win most business orders, and some sales cycles can take years.
6. Derived demand—The demand for business goods is ultimately derived from the demand for
consumer goods. Thus, the business marketer must closely monitor the buying patterns of ultimate
consumers.

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The Business Market versus the Consumer
Market
7. Inelastic demand—The total demand for many business goods and
services is inelastic—that is, not much affected by price changes. Demand
is also inelastic for business goods that represent a small percentage of
the item’s total cost.
8. Fluctuating demand—The demand for business goods and services tends
to be more volatile than that for consumer goods and services.
9. Geographically concentrated buyers—Business buyers tend to be
concentrated in certain regions. The geographical concentration of
producers helps to reduce selling costs.
10. Direct purchasing—Business buyers often buy directly from
manufacturers rather than through intermediaries.

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Buying Situation: Straight Rebuy
• In a straight rebuy, the purchasing department re-orders on a routine basis and chooses from suppliers
on an approved list.

• The suppliers make an effort to maintain product and service quality and often propose automatic re-
ordering systems to save time.

• “Out-suppliers” attempt to offer something new or to exploit dissatisfaction with a current supplier.

• Out-suppliers try to get a small order and then enlarge their purchase share over time.

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Buying Situation: Modified Rebuy
• The buyer wants to modify product specifications, prices, delivery
requirements, or other terms.

• The modified rebuy usually involves additional participants on both sides.

• The in-suppliers become nervous and have to protect the account.

• The out-suppliers see an opportunity to propose a better offer to gain


some business.

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Buying Situation: New Task
• A purchaser buys a product or service for the first time (e.g., office
building, new security system).

• The greater the cost or risk, the larger the number of participants and
the greater their information gathering—and therefore the longer the
time needed to make a decision.

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Seven Roles in a Buying Center
1.Initiators—Users or others in the organization who request that something be
purchased.
2.Users—Those who will use the product or service. In many cases, the users
initiate the buying proposal and help define the product requirements.
3.Influencers—People who influence the buying decision. They often help define
specifications and also provide information for evaluating alternatives. Technical
personnel are particularly important influencers.
4.Deciders—People who decide on product requirements or on suppliers.
5.Approvers—People who authorize the proposed actions of deciders or buyers.
6.Buyers—People who have formal authority to select the supplier and arrange the
purchase terms. Buyers may help shape product specifications, but they play
their major role in selecting vendors and negotiating.
7.Gatekeepers—People who have the power to prevent sellers or information from
reaching members of the buying center.
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The Buyphase Stages
a.Problem recognition
b.General need description
c.Product specification
d.Supplier search
e.Proposal solicitation
f.Supplier selection
g.Order-routine specification
h.Performance review

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Table 8.1: Major Segment Variables for
Consumer Markets

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Table 8.1 Major Segment Variables for
Consumer Markets (cont’d)

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Table 8.2: Major Segmentation Variables for
Business Markets

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Table 8.2: Major Segmentation Variables for
Business Markets (cont’d)

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Table 8.3: Steps in the Segmentation Process

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Cluster Analysis
• Cluster analysis is a class of techniques used to classify objects or cases into
relatively homogeneous groups called clusters. Objects in each cluster tend to be
similar to each other and dissimilar to objects in the other clusters. Cluster
analysis is also called classification analysis, or numerical taxonomy.
• Both cluster analysis and discriminant analysis are concerned with classification.
However, discriminant analysis requires prior knowledge of the cluster or group
membership for each object or case included, to develop the classification rule. In
contrast, in cluster analysis there is no a priori information about the group or
cluster membership for any of the objects. Groups or clusters are suggested by
the data, not defined a priori.
An Ideal Clustering Situation Fig. 20.1

Variable 1

Variable 2
Dendrogram Using Ward’s Method
Fig. 20.8
What is a Brand Equity?
• Perhaps the most distinctive skill of professional marketers is their ability to create, maintain, enhance,
and protect brands.

• The American Marketing Association defines a brand as “a name, term, sign, symbol, or design, or a
combination of them, intended to identify the goods or services of one seller or group of sellers and to
differentiate them from those of competitors.”

• A brand is thus a product or service whose dimensions differentiate it in some way from other
products or services designed to satisfy the same need.

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Brand Equity
• Brand equity is the added value endowed to products and services.

• It may be reflected in the way consumers think, feel, and act with
respect to the brand, as well as in the prices, market share, and
profitability the brand commands.

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Brands Perform Valuable Functions for the
Firm
1. A credible brand signals a certain level of quality so that satisfied buyers can easily choose the product
again.

2. Brand loyalty provides predictability and security of demand for the firm and creates barriers to entry
for other firms.

3. Branding can be a powerful means to secure a competitive advantage.

4. To firms, brands represent enormously valuable pieces of legal property that can influence consumer
behavior, be bought and sold, and provide their owner the security of sustained future revenues.

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Figure 9.4: Brand Resonance Pyramid

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The Six Choice Criteria
1.Memorable—How easily is the brand element recalled? How easily
recognized? Is this true at both purchase and consumption. Moreover, the
brand name should also look distinctive to be memorable in Asia.
2.Meaningful—To what extent is the brand element credible and suggestive
of the corresponding category? Does it suggest something about a product
ingredient or the type of person who might use the brand?
3.Likeable—How aesthetically appealing do consumers find the brand
element? Is it inherently likeable visually, verbally, and in other ways?
4.Transferable—Can the brand element be used to introduce new products
in the same or different categories? To what extent does the brand
element add to brand equity across geographic boundaries and market
segments?

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The Six Choice Criteria
5. Adaptable—How adaptable and updatable is the brand element? As
many Asian brands modernize, their elements need to be adaptable
and yet retain the traditional values of the brand.

6. Protectable—How legally protectable is the brand element? How


competitively protectable? Can it be easily copied? It is important
that names that become synonymous with product categories—
such as Kleenex, Scotch Tape, and Xerox—retain their trademark
rights and not become generic.

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Figure 9.5: Secondary Sources of Brand Knowledge

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Brand Value Chain

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Brand Reinforcement
• As the company’s major enduring asset, a brand needs to be carefully
managed so that its value does not depreciate.

• Long-lived Asian brands include Mikimoto pearls, Poh Chai pills, and
San Miguel beer.

San Miguel Corporation, which


produces the best-selling beer around
the world, was founded in 1890 in the
Philippines.

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Brand Reinforcement
• As the company’s major enduring asset, a brand needs to be carefully
managed so that its value does not depreciate.

• Marketers can reinforce brand equity by consistently conveying the


brand’s meaning in terms of:
a. What products it represents?
b. What products the brand represents?
c. What core benefits it supplies?
d. What needs it satisfies?
e. How the brand makes products superior?
f. Which strong, favorable, and unique brand associations should exist in consumers’ minds?

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Brand Extensions
Brand extensions fall into two general categories:

1.In a line extension, the parent brand covers a new product within a
product category it currently serves.

2.In a category extension, marketers use the parent brand to enter a


different product category.

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Brand Line Extension – Frito-Lay

• Frito-Lay extends its potato chip line by introducing flavors that adapt to Asian tastes.
Flavors include Peking duck, kimchi, and chili crab.

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Brand Portfolios
• Some reasons to introduce multiple brands in a category include:
i. To increase shelf presence and retailer dependence in the store

ii. To attract consumers seeking variety who may otherwise have switched to another brand

iii. To increase internal competition within the firm

iv. To yield economies of scale in advertising, sales, merchandising, and physical distribution

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Levels of Diversification
1. Low Levels
• Single Business Strategy
• Corporate-level strategy in which the firm generates 95% or more of its sales revenue from its core business
area
• Dominant Business Diversification Strategy
• Corporate-level strategy whereby firm generates 70-95% of total sales revenue within a single business area
2. Moderate to High Levels
• Related Constrained Diversification Strategy
• Less than 70% of revenue comes from the dominant business
• Direct links (i.e., share products, technology and distribution linkages) between the firm's businesses
• Related Linked Diversification Strategy (Mixed related and unrelated)
• Less than 70% of revenue comes from the dominant business
• Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related
constrained, above), concentrating on the transfer of knowledge and competencies among the businesses
3. Very High Levels: Unrelated
• Less than 70% of revenue comes from dominant business
• No relationships between businesses
Levels and Types of Diversification