Strategic Management

Strategic Management
Strategic Management: an integrative management field that combines analysis,formulation, and implementation in the quest for competitive advantage.

Strategy: a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors
• To achieve superior performance, companies compete for resources:
– New ventures: for financial and human capital
– Existing companies: for profitable growth
– Charities: for donations
– Universities: for the best students and professors
– Sports teams: championships
– Celebrities: media attention

Elements of a Good Strategy
• Analysis
– Diagnosis of the competitive challenge
• Formulation
– Guiding policy to address the competitive challenge
• Implementation
– A set of coherent actions to implement the firm’s guiding policy

Analysis
– Diagnosis of the competitive challenge
– Accomplished through analysis of the firm’s internal and external environments

Example: Twitter
• Competitive challenge: grow its user base
• Become more valuable for online advertisers
• Also: Facebook allows advertisers to target their online ads precisely based on demographic data.

Formulation
– Guiding policy to address the competitive challenge
– Accomplished through strategy formulation, resulting in the firm’s corporate, business, and functional strategies
Example: Twitter
• Rather than formulating a guiding policy to grow active core users, Twitter defined its user base more broadly.
• Defined users into 3 types to compare with Facebook
• User types were hard to track and less valuable to advertisers.

• Implementation
– A set of coherent actions to implement the firm’s guiding policy
– Accomplished through strategy implementation
Elements of a Good Strategy: Implementation

Example: Twitter
• Different user definitions confused management and limited guidance for employees.
• Consequences of the unclear mission:
• Frustration among managers and engineers
• Turnover of key personnel
• Internal turmoil resulted, including management demotions and promotions of CEO friends.

Competitive Advantage: a firm that achieves
superior performance relative to other competitors in the same industry or the industry average.
– Always relative, not absolute
• To assess competitive advantage:
– Compare firm performance to a benchmark
• Performance of other firms in the same industry
• An industry average

Competitive Advantage: Examples
• In digital advertising: Google
– Google has a competitive advantage over Facebook,Twitter, and Yahoo
• In smartphones: Apple
– Apple has achieved a competitive advantage over Samsung, Microsoft, and BlackBerry

Strategy Is About Creating Superior Value
• The rewards of superior value creation and capture are profitability and market share.
– Sam Walton (Walmart): offered lower prices.
– Steve Jobs (Apple): “put a ding in the universe.”
– Mark Zuckerberg (Facebook): made the world open and connected.
– Larry Page and Sergey Brin (Google): made information accessible.

Stakeholders and Competitive Advantage
Value Creation for Society
Companies with good strategy generate value for society.
– Firms compete in their own self-interest.
– Firms obeying the law and acting ethically
• Companies with a good strategy:
– Provide products or services to consumers at an affordable price
– Make a profit
– Benefit both parties
– Make society better

Successful companies create value for the economy:
– Education, public safety, and health care
• Superior performance allows a firm to reinvest some of its profits for growth
– More opportunities for employment
• Example: Google
– Employs 55,000 people
– People rely on Google for information

• Stakeholders:
• Organizations, groups, and individuals
• They can affect or are affected by a firm’s actions.
• Have a vested claim or interest in the performance and continued survival of the firm.
– Internal stakeholders:
• Stockholders, employees (including executives, managers,and workers), and board members
– External stakeholders:
• Customers, suppliers, alliance partners, creditors, unions,media, and governments at various levels

Stakeholders make contributions, and they also receive benefits.
– Employees
– Shareholders
– Communities
• The firm is embedded in an exchange relationship with internal and external stakeholders.

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Stakeholder Strategy
• Managing stakeholders in order to gain and sustain competitive advantage
– Firms analyze and manage stakeholders
– Determine how external and internal stakeholders interact
– Stakeholders can create and trade value
• Exemplifies how managers can act to improve firm performance
– Enhances competitive advantage
– Enhances continued survival
• Example: Target Corporation

Effective Stakeholder Management
Benefits Firm Performance

۱. Cooperation and information availability
۲. Lowered costs by increased trust
۳. Greater organizational adaptability and flexibility
۴. More predictable and stable returns
۵. Stronger reputation

Stakeholder Impact Analysis
• Primary stakeholders: achieve their objectives
– Shareholders and investors
• Other stakeholders: satisfy concerns
– Employees, suppliers, and customers
• Stakeholder impact analysis:
– A decision tool
– Managers recognize, prioritize, and address stakeholder needs

Managers must note three stakeholder attributes:
– Power
– Legitimacy
– Urgency
• A five-step process recognizing stakeholders’ claims.

Step 1: Identify Stakeholders
• Focus on stakeholders that the firm has, or potentially can have
• Identify: powerful internal and external stakeholders and their needs
– For public-stock companies: shareholders and suppliers of capital
– Also: customers, suppliers, and unions
• Example: Boeing
– Its new 787 Dreamliner will be built in its nonunionized South Carolina factory

Step 2: Identify Stakeholder Interests
• Specify and assess the interests and claims of stakeholders.
• Use the power, legitimacy, and urgency criteria.
• Shareholders:
• Legal owners
• Have legitimate claim on a company’s profits
• Employees can be turned into shareholders.
– Coca-Cola, Google, Microsoft, Southwest Airlines,Starbucks, Walmart, and Whole Foods all offer stock ownership plans.
• “Shareholder activists” put public pressure on a company to change its strategy

Step 3: Identify Opportunities and Threats
• Opportunities and threats are two sides of the same coin.
– Example: consumer boycotts can be a credible threat.
• Example: PETA: called for a boycott of McDonald’s due to alleged animal-rights abuses.
• Managers should try to transform threats into opportunities.
– Example: Sony
• Dutch government blocked PlayStation shipments due to a toxic cable.
• Sony’s response included a redesign of its supplier management system.

Step 4: Identify Societal Responsibilities –

• “What economic, legal, ethical, and philanthropic responsibilities do we have to our stakeholders?”
• Corporate Social Responsibility (CSR):
– A framework to recognize and address economic, legal, social, and philanthropic expectations

Step 4: Identify Societal Responsibilities
۲۸-۲
Step 5: Address Stakeholder Concerns
• Managers decide the appropriate actions.
• The attributes of power, legitimacy, and urgency help to prioritize legitimate claims.

ChapterCase 1: Twitter
Overview of Twitter
– Users send short messages of 140 characters.
– Users can follow each other.
– ۳۰۰ million active users worldwide
• Twitter is currently not flying high.
– In 2015, stock was 50% what it was in 2013.
– Departure of CEO who served from 2010-2015
– Turmoil among executive ranks
• Twitter appears constantly in the mass media.
Business model
– Grow user base (individual users pay nothing)
– Advertisers charged for promotion of goods/services.
– Companies pay for promoted tweets.
– Ads can be delivered real time.
• Twitter’s current challenges
– Turnover / reshuffling in management & engineering
– Struggles to grow its user base
• Twitter = 300 million; Facebook = 1.5 billion
• User growth continues to slow
– Could it be taken over?

Chapter 2
Strategic Leadership: Managing the Strategy Process

Vision, Mission, and Values
Vision:
– What do we want to accomplish?
• Mission:
– How do we accomplish our goals?
• Values:
– What commitments do we make?
– What guardrails do we put in place?
– How can we act legally and ethically in pursuit of the vision and mission?

Key Aspects of an Effective Vision
۱. Captures an organization’s aspiration
۲. Identifies what it ultimately wants to accomplish
۳. Motivates employees to aim for a target
۴. Leaves room for contributions

Why Is a Vision Important?
• Employees tend to feel part of something bigger than themselves
• Helps employees find meaning in their work
• Allows employees to experience a greater sense of purpose

Teach for America’s Vision
“One day, all children in this nation will have the opportunity to attain an excellent education.”
•This vision is:
– Effective
– Clear
– Identifies what they ultimately want to accomplish
– An inspiring target

Product-Oriented Vision Statements
• Defines a business in terms of a good or service provided
• Example: “We are in the typewriter business”
– Less flexible

– Is not needs-based
– Can lead to a myopic view
• Railroads:
– Saw themselves in the railroad business
– Cars & jets: redefined long-distance transportation
– Rail companies slow to respond

Customer-Oriented Vision Statements
• Defines a business in terms of providing solutions to customer needs
• Examples:
– Google: “To organize the world’s information and

make it universally accessible and useful.”
– Yahoo: “To make the world’s daily habits more inspiring and entertaining.”
– Facebook: “To give people the power to share and make the world more open and connected”

Visions Can Help Create Competitive
Advantage
• Vision statements and firm performance can be positively associated if:
– The vision is customer-oriented
– Internal stakeholders help define the vision
– Organizational structures align with the vision statement

Mission Statements
• Describe what an organization does
– The products and services it provides
– The markets in which it competes

• Strategic Commitments:
– Actions to achieve the mission that are:
• Costly
• Long-term oriented
• Difficult to reverse.

Mission Statements Differ from Vision Statements
• Vision statements: what an organization wants to accomplish
– Teach for America’s vision: “to attain an excellent education for all children”
• Mission statements: how the vision will be accomplished
– TFA says it will achieve its vision by “enlisting our nation’s most promising future leaders in the effort”

Values
• Principles to guide behavior
• Employees at all levels can use them
• Helps deal with complexity and conflict
• Provides employees with a moral compass

Core Values Statements
• Guide an organization to achieve its vision and fulfill its mission
• Applies to internal conduct and external interaction
• Can include ethical considerations

Strategy Highlight 2.1
• Merck
– Vision: “to preserve and improve human life”
– Values: “We try to never forget that medicine is for the people. It is not for profits. The profits follow, and if we have remembered that, they have never failed to appear.”
• Merck’s donations helped eradicate river blindness

Strategy Highlight 2.1
• Vioxx
– Painkiller, claimed fewer side effects than aspirin
– Received allegations of more dangerous side effects
• Merck’s reputation was damaged
– Stock fell 30%
– $۲۷ billion in market value was lost
– Lawsuits cost the company $30 billion

Strategic Leadership
What Is Strategic Leadership?
• Successful use of power and influence
• Directing the activities of others
• Pursuing an organization’s goals
• Enabling organizational competitive advantage

How CEO’s Spend Their Days

صصص۲۰
How CEO’s Spend Their Days

Exhibit 2.3: How CEOs Spend Their Days
SOURCE: Data from O. Bandiera, A. Prat, and R. Sadun (2012), “Management capital at the top: evidence from the time use of CEOs,” London School of Economics and Harvard Business School Working Paper.

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Corporate, Business, and Functional Strategy

Strategic Formulation and Implementation across Levels:
Corporate, Business, and Functional Strategy
Exhibit 2.5

Strategic Business Units (SBU’s)
• Standalone divisions of a larger conglomerate
• Has profit-and-loss responsibility
• Receive guidelines from corporate headquarters
• Implement business strategy

• Example:
– Rosalind Brewer, CEO of Sam’s Club
• Reports to Walmart’s CEO, C. Douglas McMillon
• Pursues a different strategy than Walmart
• Offers higher-quality products and brand names

Functions Within Each SBU
• Accounting, finance, human resources, product development, operations, manufacturing,marketing, and customer service
• Functional managers responsible for
– Decisions and actions in a single function
– Contributing to business-level strategy

The Strategic Management Process
Top Down Strategic Planning
• Rational, data-driven strategy process
• Top management attempts to program future success through
– Detailed analysis of:

• Prices
• Costs
• Margins
• Market demand
• Head count
• Production runs
– Five year plans and correlated budgets
– Performance monitoring

۲۷

Shortcomings of the Top-Down Approach
• May not adapt well to change
• Formulation separate from implementation
• Information flows top-down (one-way)
• The leaders’ future vision can be wrong

• Example: Apple
– Steve Jobs predicted customers needs

Scenario Planning
• Uses a top-down approach
• Asks “what if” questions
– Top management envisions different scenarios.
– Then they derive strategic responses.

• Consider optimistic and pessimistic futures
• Examples:
– New laws restrict carbon emissions
– Demographic shifts
– Changing economic conditions
– Technological advances

Formulation & Implementation Using
Scenario Planning
• Formulation Stage
– Identify strategic options.
– Develop contingency plans.
– Use analytical tools.
– Build future options.
• Implementation Stage
– Execute dominant strategic plan.
• The option that best matches the current reality
• Modifications made as needed
– Determine if alternate scenario should be used

Strategy as Planned Emergence
• Top Down and Bottom Up
– Bottom-up strategic initiatives emerge
– Evaluated & coordinated by management
• Relies on data, plus:
– Personal experience
– Deep domain expertise
– Front line employee insights

Chapter Case 2: Yahoo
• Marissa Mayer’s job as CEO: turn it around
– Yahoo was once the go-to Internet leader.
• Web portal: e-mail, finance, sports, social media, and video
– Stock went from $120 per share to as low as $5.
– Mayer is the 5th CEO in 3 years
• Marissa Mayer: before Yahoo.
– Grew up in Wisconsin, went to Stanford
– Began career in Silicon Valley
• Google’s 20th hire and first female engineer
• Helped develop Gmail, images, news, maps
– Deeply involved in Google’s success

• Mayer’s first acts at Yahoo: Culture
– Re-tooled the vision / mission statements
– Withdrew the option to work remotely
– Installed weekly town-hall meetings

• Mayer’s first acts at Yahoo: Cash
– Sold Yahoo’s stake in Alibaba, a Chinese company
– Spent $2 billion acquiring tech ventures
• Filled in product line gaps
• Brought in new engineering talent
• Result: share price has tripled

External Analysis: Industry Structure, Competitive
Forces, and Strategic Groups

The PESTEL Framework

Importance of Analyzing the External Environment
• Managers can mitigate threats.
• Managers can leverage opportunities.
• Gain understanding of potential impacts.
• Understand the source / proximity of factors.

The PESTEL Model
• Groups environmental factors into six segments:
– Political
– Economic
– Sociocultural
– Technological
– Ecological
– Legal
• These factors can create:
– Opportunities
– Threats

The Firm within Its External Environment, Industry,and Strategic Group, Subject to PESTEL Factors

Exhibit 3.1

۶

Political Factors
• Processes & actions of government bodies
• Firms can shape this factor through:
– Lobbying
– Public Relations
– Contributions
– Litigation
• Example: Tesla
– Has a build-to-order sales model
– Cuts out dealers
– Dealers are lobbying for new legislation

Economic Factors
• Largely macro-economic
• Examples include:
– Growth rates
– Levels of employment
– Interest rates
– Price stability
– Currency exchange rates

In Periods of Economic Expansion…
• Growth rates:
– Businesses expand, are more profitable.
• Levels of employment
– Unemployment is low.
• Interest rates
– Credit is cheap because interest rates are low.
• Price stability
– Rising prices result in inflation.
• Currency exchange rates
– The dollar can appreciate.

In Periods of Economic Contraction…
• Growth rates:
– Businesses retract, are less profitable.
• Levels of employment
– Unemployment is high.
• Interest rates
– Credit is expensive because interest rates are high.
• Price stability
– Falling prices result in deflation.
• Currency exchange rates
– The dollar can depreciate.

Sociocultural Factors
• Society’s cultures, norms, and values
– Are constantly in flux
– Differ across groups
• Demographic trends
– Present opportunities and threats
– Population characteristics related to age, gender,
family size, ethnicity, sexual orientation, religion, and socioeconomic class

Technological Factors
• Application of knowledge
– To create new processes
– To create new products
• Innovations in process technology:
– Lean manufacturing, Six Sigma quality , and biotechnology
• Innovations in product technology:
– Smartphones, computer tablets, and high-performing electric cars such as the Tesla Model S

Ecological Factors
• Involve environmental issues, such as:
– Natural environment
– Global warming
– Sustainable economic growth
• Also provide business opportunities

Legal Factors
• Official outcomes of political processes:
– Laws
– Mandates
– Regulations
– Court decisions
• Industry deregulations affect multiple industries:
– Airlines, telecom, energy, and trucking
• Governments can achieve desired outcomes:
– To buy zero-emission vehicles, the U.S. governmentoffers a $7,500 federal tax credit

Industry Structure and Firm Strategy:The Five Forces Model

Industry & Industry Analysis
• Industry:
– Group of incumbent companies
– Relatively the same set of suppliers and buyers
– Tend to offer similar products and services
• Industry Analysis, a method to:
– Identify an industry’s profit potential
– Derive implications for a firm’s strategic position

Strategic Positioning
• A firm’s strategic profile
• Based on value creation and cost
• The goal
– Generate a large gap between
• The value the firm’s product or service creates
• The cost required to produce it

The Five Forces Model
The following five forces determine the profit potential of an industry and shape a firm’s competitive strategy:

Exhibit 3.2 18

Threat of Entry
• The risk that potential competitors will enter an industry
• Lowers industry profit potential:
– Incumbents lower prices
• Incumbents spend more to satisfy existing customers.
• Entry barriers:
– Obstacles blocking others from entering
– A significant predictor of industry profit potential

Types of Entry Barriers
• Economies of scale
• Network effects
• Customer switching costs
• Capital requirements
• Advantages independent of size
• Government policy
• Credible threat of retaliation

Power of Suppliers
• Pressures that industry suppliers can exert on an industry’s profit potential
• Lowers industry profit potential if:
– Suppliers demand higher prices for their inputs
– Suppliers reduce quality

Bargaining Power of Suppliers Is High When:
• Concentrated (or limited) supplier industry
• Suppliers not dependent on industry for majority of revenue
• Incumbent firms face supplier switching costs
• Suppliers offer differentiated products
• There are no supplier substitutes.
• Suppliers can forward-integrate into the industry.

Power of Buyers (Customers)
• Pressure customers put on an industry by demanding:
– A lower price or – Higher product quality

Bargaining Power of Buyers Is High When:
• There are a few buyers & each buyer purchases large quantities.
• The industry’s products are standardized or undifferentiated commodities.
• Buyers face low or no switching costs.
• Buyers can backwardly integrate into the industry.

Threat of Substitutes
• Products or services outside an industry meeting the needs of current customers
• Examples:
– H&R Block vs. TurboTax
– Energy drinks vs. coffee
– E-mail vs. express mail
– Wireless telephone vs. VOIP
– Videoconferencing vs. business travel

Threat of Substitutes is High When:
• The substitute offers an attractive priceperformance trade-off.
• The buyer’s cost of switching to the substitute is low.

Rivalry Among Competitors
• The intensity with which companies in the same industry jockey for market share and profitability
• Other 4 forces put pressure on this rivalry
– The stronger the forces, the higher the intensity.
• Intensity determined by:
۱. Competitive industry structure
۲. Industry growth
۳. Strategic commitments
۴. Exit barriers

Competitive Industry Structure
• The number and size of its competitors
• The firms’ degree of pricing power
• The type of product or service (in terms of differentiation)
• The height of entry barriers

۴ Main Competitive Industry Structures
۱. Perfect competition
۲. Monopolistic competition
۳. Oligopoly
۴. Monopoly

۳۰

Industry Competitive Structures
۳۰
Exhibit 3.3

Perfect Competition
• Many small firms
• Firms are price-takers
• Offer commodity products
• Low entry barriers
• Resulting industry: profitability is typically low

Monopolistic Competition
• Many firms
• Some pricing power
• Differentiated product
• Medium entry barriers
• Resulting industry: niches are established

Oligopoly
• Few (large) firms
• Some pricing power
• Differentiated product
• High entry barriers
• Firms are interdependent
• Resulting industry: firm actions often coordinated

Monopoly
• One firm
• Considerable pricing power
• Unique product
• Very high entry barriers
• Resulting industry: profit extracted

Industry Growth
• Affects intensity of rivalry among competitors
• During periods of high growth:
– Consumer demand rises
– Price competition among firms decreases
• They focus on capturing new customers
• They are not focused on taking profitability away from each other
• During periods of negative growth:
– Rivalry is fierce
– Rivals can only gain at the expense of one another

Strategic Commitments
• Affects intensity of rivalry among competitors
• Firm actions that are:
– Costly
– Long-term oriented
– Difficult to reverse
• Example: airline industry
– Hub and spoke model requires significant investment

Exit Barriers
• Affects intensity of rivalry among competitors
• Obstacles that determine how easily a firm can leave that industry
• Examples:
– Contractual obligations
– Emotional attachments

A Sixth Force: Complements
• A product, service, or competency
• Adds value when used with the original product
• Complementor:
– A company that provides a good or service that leads customers to value your firm’s offering more when the two are combined

Performance Differences within the Same Industry: Strategic Groups

Strategic Groups
• Strategic groups are:
– A set of companies
– That pursue a similar strategy
– In a specific industry
• The strategic group model (framework):
– Clusters different firms into groups
– Is based on key strategic dimensions

Strategic Groups Differ From Other Strategic Groups In Terms Of…
• R&D expenditures
• Technology
• Product differentiation
• Product and service offerings
• Pricing
• Market segments
• Distribution channels
• Customer service

How to Create a Strategic Group Map
۱. Identify important strategic dimensions.
۲. Choose two key dimensions
– For horizontal and vertical axes
– Not highly correlated
۳. Graph the firms in the strategic group.
– Each firm’s market share indicated by the size of the bubble

Example of a Strategic Group: The Airline Industry
۴۳
Exhibit 3.5

۴۳

Insights from Strategic Group Mapping
۱. Competitive rivalry:
– Strongest between firms in the same strategic group
۲. External environment:
– Affects strategic groups differently
۳. Five competitive forces:
– Affect strategic groups differently
۴. Profitability:
– Some strategic groups are more profitable than others

Chapter 4
Internal Analysis: Resources, Capabilities , and Core Competencies
Core Competencies

What Are Core Competencies?
• Unique strengths
• Embedded deep within a firm
• Allow a firm to differentiate its products and services from those of its rivals
• Results in:
– Creating higher value for the customer or – Offering products and services at lower cost

Examples of Core Competencies
• IKEA
– Superior in designing modern functional home furnishings at low cost
• Beats Electronics
– Superior marketing: perception of coolness
• Facebook
– Superior algorithms to offer targeted online ads
• General Electric
– Superior expertise in industrial engineering, designing and implementing efficient management processes, and developing and training leaders

Resources, Capabilities and Activities
Help Deliver Core Competencies
• Resources:
– Any assets that a firm can draw on • Capabilities:
– Organizational and managerial skills
• Activities:
– Distinct and fine-grained business processes

Links to Competitive Advantage and Superior Firm Performance
Exhibit 4.3
۱۱۹

The Resource-Based View
What is the Resource Based View(RBV)?
۱۲۱

Tangible and Intangible Resources
Exhibit 4.4
۱۲۲

Example Google Headquarters
• Tangible Resource
– Googleplex: land + futuristic building
• Intangible Resource
– Location: heart of Silicon Valley
• Large & computer savvy workforce
• Largest concentration of venture capitalists in the U.S.

The VRIO Decision Tree
Exhibit 4.5
۱۲۴

A Resource is Valuable If…
• It enables the firm to exploit an opportunity.
• It enables the firm to offset a threat.
• It enables a firm to increase its economic value creation (V – C).
• Example: Beats Electronics:
– Design and marketing of premium headphones
• Production = ~$15
• Retail = $150 – $450

A Resource is Rare If…
• Only one or a few firms possess it
• Example: Beats Electronics:
– Product placement
– Vast celebrity endorsement

A Resource Is Costly to Imitate If…
• Firms that do not possess the resource are unable to develop or buy the resource at a reasonable price.
• Example: Beats Electronics:
– Dr. Dre relies on gut instinct in making decisions rather than market research.
– The social capital of Dr. Dre and Jimmy Lovine might be impossible to replicate.

A Resource Is Organized to Capture Value If…
• It has an effective organizational structure.
• It has coordinating systems.
• Example: Xerox Palo Alto Research Center:
– Developed the first word-processing application Graphical User Interface (GUI), Ethernet, Mouse, Personal Computer
– These innovations did not fit within the Xerox focus.
– Management was busy pursuing innovations in the photocopier business.

The Dynamic Capabilities Perspective

Dynamic Capabilities
• A firm’s ability to:
– Create, deploy, modify, reconfigure, upgrade , and leverage its resources over time
• Helps prevent a core rigidity
– A former core competency that turned into a liability as the environment changed

Resource Stocks and Flows
• Resource stocks
– The firm’s current level of intangible resources
• Resource flows
– The firm’s level of investments to maintain or build a resource

The Value Chain Analysis
What Is the Value Chain?
• Internal activities a firm engages in when transforming inputs into outputs
• Each activity adds incremental value
– Primary activities directly add value
– Support activities add value indirectly
• Example: Beats Electronics:
– Headphones designed by Dr. Dre
– Packaging: premium unboxing experience
– Superb displays in Apple stores

The Value Chain
Exhibit 4.8
۱۳۶

Primary Activities
• Firm activities that add value directly
• Transform inputs into outputs as the firm moves a product or service horizontally along the internal value chain.
• Examples:
– Supply chain management
– Operations
– Distribution
– Marketing and sales
– After-sales service

Support Activities
• Firm activities that add value indirectly
• Necessary to sustain primary activities
– Research and development (R&D)
– Information systems
– Human resources
– Accounting and finance
– Firm infrastructure including processes, policies , and procedures

SWOT Matrix
SWOT Analysis
• A framework that allows managers to synthesize insights obtained from an internal and external analysis to derive strategic implications
• Internal Analysis
– Strengths
– Weaknesses
• External Analysis
– Opportunities
– Threats

Strategic SWOT Questions
• How can the firm use strengths to take advantage of opportunities?
• How can the firm use strengths to reduce the likelihood and impact of threats?
• How can the firm overcome weaknesses that prevent the firm from taking advantage of opportunities?
• How can the firm overcome weaknesses that will make threats a reality?

Chapter 5
Competitive Advantage, Firm Performance,and Business Models
Competitive Advantage and Firm Performance

An Overview of Frameworks Discussed
• To measure and assess firm performance:
– Accounting profitability
– Shareholder value creation
– Economic value creation
• Integrative frameworks, combining quantitative data with qualitative assessments:
– The balanced scorecard
– The triple bottom line

Accounting Profitability
• Helps assess competitive advantage:
– Accurately assess firm performance
– Compare firm performance to competitors/the industry average
• Standardized accounting metrics
• Form 10-K statements
• Profitability ratios
– Return on invested capital (ROIC), return on equity (ROE), return on assets (ROA), and return on revenue (ROR)

Limitations of Accounting Data
• All accounting data are historical and thus backward-looking.
• Accounting data do not consider off–balance sheet items, such as:
– Pension obligations
– Leasing obligations
• Accounting data focus mainly on tangible assets,which are no longer the most important.
– Innovation, quality, customer experience are important.

Shareholder Value Creation
• Shareholders
– Own one or more shares of stock in a company
– The legal owners of public companies
• Risk Capital
– Money provided for an equity share in a company
– Cannot be recovered if the firm goes bankrupt
• Total Return to Shareholders
– Stock price appreciation plus dividends
• Market Capitalization
– Dollar value of total shares outstanding
– Number of outstanding shares x share price

Limitations of Shareholder Value Creation
• Stock prices can be highly volatile
– Makes it difficult to assess firm performance
• Macroeconomic factors affect stock prices.
– Economic growth or contraction
– Unemployment, interest and exchange rates
• Stock prices can reflect the mood of investors.
– Can be irrational

Economic Value Creation
• The difference between:
– A buyer’s willingness to pay for a product / service
– And the firm’s total cost to produce it
– The difference between value (V) and cost (C)
• Competitive advantage can be based on:
– Economic value creation because of superior product differentiation
– A relative cost advantage over rivals

Producer & Consumer Surplus
• Producer surplus (also called profit)
– The difference between the price charged (P) and the cost to produce (C)
• Consumer surplus
– The difference between what you would have been willing to pay (V) and what you paid (P)
• Both parties capture some of the value created

Limitations of Economic Value Creation
• Determining value for consumers is not simple
• The value of a good in the eyes of consumers changes.
– Based on income, preferences, time, and other factors
• To measure firm-level competitive advantage,we must estimate the economic value created for all products and services offered by the firm.

The Balanced Scorecard
• Helps managers achieve their strategic objectives more effectively
• Uses internal and external performance metrics
• Balances both financial and strategic goals

Examples of Metrics for Each of the Four
Balanced Scorecard Questions
• How do customers view us?
– Revenue, profit, customer satisfaction
• How do we create value?
– Competitiveness, innovation, organizational learning
• What core competencies do we need?
– Core competencies, supporting business processes
• How do shareholders view us?
– Cash flow, operating income, ROIC, ROE, total returns to shareholders

Advantages of the Balanced Scorecard
Managers can:
• Link the strategic vision to responsible parties
• Translate the vision into measureable goals
• Design and plan business processes
• Implement feedback and organizational learning
– Modify and adapt strategic goals

Disadvantages of the Balanced Scorecard
• Focused on strategy implementation
– Not formulation
• Limited guidance about which metrics to use
• Only as useful as the managers apply it
• Strategy must be translated into measurable objectives
• Not much guidance on how to get back on track if setbacks occur

The Triple Bottom Line
• Three dimensions fundamental to sustainable strategy:
– Profits: The economic dimension
• The business must be profitable to survive.
– People: The social dimension
• Emphasizes the people aspect
– Planet: The ecological dimension
• Emphasizes the relationship between business and the natural environment

Strategy Highlight 5.1
Interface: The World’s First Sustainable Company
•World’s largest manufacturer of modular carpet
•This industry typically has heavy reliance on fossil fuels and chemicals.
•In 1994, they set a goal for 2020:
– No petroleum-based raw materials
– No oil-related energy
•Between 1996 and 2008
– Saved over $400 million due to its energy efficiency and use of recycled materials

Business Models:Putting Strategy into Action
What Is a Business Model?
• Details the competitive tactics and initiatives
• Explains how the firm intends to make money
• Stipulates how the firm conducts its business
– Buyers, suppliers, and partners

Strategy Highlight 5.2
Airbnb: Tapping the Value of Unused Space
• ۲ San Francisco friends
– Rented out space on the mattresses
– Served guests breakfast
• First mover in the peer-to-peer rental industry
• Unique accommodation offerings
• Spring 2015: valued at $20 billion

Popular Business Models
• Razor-razorblades
• Subscription
• Pay as you go
• Freemium
• Wholesale
• Agency
• Bundling

The Razor – Razorblade Model
• Initial product is often:
– Sold at a loss or – Given away for free
• Helps drive demand for complementary goods
• Money made primarily on replacement parts
• Example: HP
– Charges little for its laser printers
– Imposes high prices for replacement toner cartridges

The Subscription Model
• Traditionally used for (print) magazines and newspapers
• Users pay for access to a product or service
• Examples:
– Cable television
– Satellite radio
– Health clubs

The Pay-as-You-Go Model
• Users pay for only the services they consume
• Examples:
– Utilities providing power and water
– Cell phone service plans

The Freemium Model
• Free + premium business model
• Provides the basic features free of charge
• Users pay for premium services
– Such as advanced features or add-ons
• Examples:
– Software trials with an option to buy

The Wholesale Model
• The traditional model in retail
• Products sold at a fixed price to retailers
• Retailers mark up the prices to make a profit
• Example:
– Books are originally purchased from a publisher
– Re-sold at 50% markup from a retailer

The Agency Model
• Producer relies on an agent or retailer to sell the product.
– At a predetermined percentage commission
• Producer may also control the retail price.
• Example:
– Entertainment industry
• Agents place artists or artistic properties.
• They then receive a commission.

The Bundling Model
• Products or services for which demand is negatively correlated at a discount
• Example:
– The Microsoft Office Suite
• Instead of selling Word and Excel $120 each,
• Microsoft bundles them at a discount, say $180

Chapter 6
Business Strategy: Differentiation, Cost Leadership,and Blue Oceans

Business-Level Strategy:
How to Compete for Advantage
What Is Business Level Strategy?
• Goal-directed actions managers take
– To achieve competitive advantage
– In a single product market
• “How will we compete to gain & sustain

competitive advantage?”
– Who: which customer segments will we serve?
– What: customer needs, wishes, and desires will we
satisfy?
– Why: do we want to satisfy them?
– How: will we satisfy our customers’ needs?
Generic Business Strategies
• Differentiation
– Seeks to create higher value than competitors
– Offers products or services with unique features
– Keeps the firm’s cost structure as low as possible

– Charges higher prices
• Cost Leadership
– Seeks to create similar value than competitors
– Products or services delivered at lower cost
– Charges lower prices
Focused Business Strategies
• Focus on a narrower competitive scope
• Scope of competition:
– The size (narrow or broad) of the market in which a firm chooses to compete

• Types:
– Focused Differentiation
• Ex: Mont Blanc: exquisite pens at several hundred dollars
– Focused Cost Leadership
• Ex: BIC: disposable pens and lighters at low cost
Strategic Position and Competitive Scope: Generic Business Strategies

SOURCE: Adapted from M.E. Porter (1980), Competitive Strategy. Techniques
for Analyzing Industries and Competitors (New York: Free Press).
Exhibit 6.2

۱۹۰

Differentiation Strategy:
Understanding Value Drivers
Differentiation Strategy
• Unique features that increase value of goods and services
• Consumers are willing to pay a higher price.
• The focus of competition:
– Unique product features
– Service
– New product launches
– Marketing and promotion
• Competitive advantage achieved when:
– Value – Cost > competitors
Achieving Competitive Advantage with a Differentiation Strategy
• Competitive advantage achieved as long as economic value created (V – C) is greater than competitors

Exhibit 6.3

Three Drivers That Can Increase Value
• Product features
• Customer service
• Complements

Product Features
• Increases perceived value
• Turns commodity products into differentiated products
• Strong R&D and Marketing capabilities are often needed Customer Service
• Increases perceived value
• Example: Zappo’s
– Offers free shipping both ways
– They do not outsource customer service
– Don’t use pre-determined scripts for service
• Example: Trader Joe’s:
– Stores stock local products as requested by the community
Complements
• Increases perceived value
• Consumed in tandem
• Example: AT&T U-verse
– Bundles Internet access, phone, and TV services

• Example: DVR
– Enables pause & recording of TV shows
Differentiation Strategies:
• Add value to products and services
• Are responsive to customer preferences
• Can increase costs
– Additional R&D is needed
– Innovation is needed
– But customers are willing to pay a premium

Cost-Leadership Strategy:Understanding Cost Drivers
Cost Leadership Strategy
• Goal:
– Reduce the firm’s cost below its competitors
– Offer adequate value
• Resources are focused on:
– Reducing cost
• To manufacture a product
• To offer a service
– Reducing prices for customers
– Optimizing the value chain to achieve low-cost
Achieving Competitive Advantage with a Cost Leadership Strategy
• Firms that keep their costs low while offering acceptable value gain a competitive advantage

Exhibit 6.4
Four Cost Drivers That Help
Keep Costs Low
• Cost of input factors
• Economies of scale
• Learning-curve effects
• Experience-curve effects

Cost of Input Factors
• Input factors such as:
– Raw materials
– Capital
– Labor
– IT services
• Example: the airline industry
– Access to cheaper fuel
– Interest-free government loans
– Access to nighttime takeoffs and landings
Economies of Scale
• Decreases in per unit costs as output increases

Exhibit 6.5
۲۸

Economies of Scale Allows Firms To:
• Spread fixed costs over a larger output
– Ex: Microsoft spent $25 billion on R&D for Windows 7 before a single copy was sold
• Employ specialized systems and equipment
– Ex: Demand for Tesla’s Model S sedan allowed it to employ cutting-edge robotics
• Take advantage of certain physical properties
– Ex: Big box stores can stock more merchandise and handle inventory efficiently
Learning Curve Effects
• Learning drives down costs
– It takes less time to produce the same output.
– We learn how to be more efficient
• People learn from cumulative experience:
– Writing computer code
– Developing new medicines
– Building submarines
• First noted during WWII:
– When production doubled, per-unit cost dropped 20%
Experience Curve Effects
• In the learning curve just discussed, we assumed the underlying technology remained constant, while only cumulative output increased.
• In the experience curve, in contrast, we now change the underlying technology while holding
cumulative output constant
• Examples:
– A new production process
– Implementing lean manufacturing
Cost Leadership Strategies
• Appeal to the bargain-conscious buyer
• Offer lower prices than competitors
• Attract an increased volume of sales
• Can be profitable over a long period of time

Blue Ocean Strategy: Combining
Differentiation and Cost Leadership
What Is Blue Ocean Strategy?
• Successfully combining differentiation and costleadership activities
• Uses value innovation to reconcile trade-offs
• The metaphor of blue ocean means:

– Untapped market space
– The creation of additional demand
– The opportunity for highly profitable growth
Example of a Successful Blue Ocean
Strategy: Trader Joe’s
• A regional grocer
• Offers high value and health conscious foods
• Offers much lower costs than Whole Foods

To Achieve Successful Value Innovation,
Answer These Questions
• Lowering costs
– Eliminate: Which of the factors that the industry takesfor granted should be eliminated?
– Reduce: Which of the factors should be reduced well below the industry’s standard?

• Increasing perceived consumer benefits
– Raise: Which of the factors should be raised well above the industry’s standard?
– Create: Which factors should be created that the industry has never offered?
Blue Ocean: How IKEA Did It
• Eliminate
– Sales people
– After sales service
• Reduce

– Warranties
• Raise
– Offers tens of thousands of home furnishing items
• Create
– New way to shop for furniture
A Blue Ocean Strategy is Difficult to Implement