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Chapter 1 What is strategy?

Strategic management: is the integrative management field that

combines analysis, formation and implementation in the quest for
competitive advantage.
o Mastery of strategic management enables you to view a firm
in its entirety.
Strategy: set of goal-directed actions a firm takes to gain and
sustain superior performance relative to competitors.
o To achieve superior performance, companies compete for
New companies: financial and human capital
Existing companies: profitable growth
What is a good strategy?
o A good strategy consists of 3 elements
Diagnosis: accomplished thru analysis of the firms
external and internal environments (part 1 of AFI)
Guiding policy: accomplished thru strategy formulation,
resulting in the firms corporate, business, and
functional strategies (part 2 of AFI)
Set of coherent actions: accomplished thru strategy
implementation (part 3 of AFI)
o A good strategy needs to start with a clear and critical
diagnosis of the competitive challenge.
o The formulated strategy needs to be consistent, often backed
up with strategic commitments such as sizable investments or
changes to an organizations incentive and reward system
Employees suffer when there is no consistent strategy
o Changing the goalpost of which users to go after not only
confused management, but it is also limited functional
guidance for employees in day-to-day operations.
o Consequences of an unclear mission:
Frustration among managers increased turnover of
key personnel
What is competitive advantage?
o Competitive advantage: superior performance relative to
other competitors in the same industry or the industry
Always relative not absolute
Compare performance to a benchmark
o Sustainable competitive advantage: outperforming
competitors or the industry average over a prolonged period
of time.
o Competitive disadvantage: underperformance relative to
other competitors in the same industry or the industry
o Competitive parity: performance of two or more firms at the
same level.
o Strategy is about creating superior value, while containing the
cost to create it. Managers achieve this thru strategic
o Strategic positioning requires trade-offs.

Grandiose statements
Failure to face competitive challenge
Operational effectiveness, competitive benchmarking
and other tactical tools
Industry V Firm Effects
o Industry effects: describe the underlying economic structure
of the industry.
Elements to all common industries:
Entry and exit barriers
Number and size of the company
Types of products and services.
o Firm effects: firm performance attributed to the actions
managers take.

Stakeholders and Competitive Advantage

o Stakeholders: individuals or groups that have a claim or
interest in the performance and continued survival of the firm.
Make specific contributions for which they expect
rewards in return.
Internal stakeholders: stockholders, employees and
board members
External stakeholders: customers, suppliers, allied
partners, creditors and unions, communities,
governments and the media
Black swan events: incidents that describe highly
improbable but high-impact events
2008 financial crisis
Stakeholder strategy: an integrative approach to
managing a diverse set of stakeholders effectively in
order to gain and sustain competitive advantage.
core of stakeholder strategy is a single-minded
focus on shareholders
o Stakeholder impact analysis: provideds a decision tool with
which managers can recognize, prioritize and address the
needs of different stakeholders
Helps a firm achieve a competitive advantage while
acting as a good corporate citizen.
Managers must pay attention to stakeholder attributes:
A stakeholder has power over a company when it
can get the company to do something that it
would not otherwise do.
A stakeholder has a legitimate claim when it is
perceived to be legally valid or otherwise
A stakeholder has an urgent claim when it
requires a companys immediate attention and
Five step process to stakeholder analysis:
1. Who are our stakeholders?
2. What are our stakeholders interests and claims?
3. What opportunities and threats do out
stakeholders present?
4. What economic, legal, ethical and philanthropic
responsibilities do we have to our stakeholders?
a. Corporate social responsibility: a framework
that helps a firm recognize and address the
economic, legal, social and philanthropic
expectations that society has of the
business enterprise at a given point in time.
i. Economic responsibilities: gain and
sustain competitive advantage
ii. Legal responsibilities: laws and
regulations are societys codified
ethics. Define minimum acceptable
iii. Ethical responsibility: do what is right,
just and fair
iv. Philanthropic responsibility: corporate
5. What should we do to effectively address the
stakeholder concerns?
Chapter 2Strategic Leadership

Vision, Mission and Values

o Strategic management process: method put in place by
strategic leaders to formulate and implement a strategy,
which can lay the foundation for a sustainable competitive
o Strategic leadership: executives use of power and
influence to direct the activities of others when pursuing an
organizations goals.
Visionwhat do we want to accomplish ultimately?
Mission how do we accomplish our goals?
Values what commitments do we make, and what
guardrails do we put in place to act both legally and
ethically as we pursue our vision and mission.
o Vision: captures an organizations aspiration and spells out
what it ultimately wants to accomplish.
An effective vision pervades the organization with a
sense of winning and motivates employees at all levels
to aim for the same target, while leaving room for
individual and team contributions.
o Mission: describes of what an organization actually does
the products and services it plans to provide and the markets
in which it will compete.
o Strategic commitments: actions to achieve the mission
that are costly, long-term oriented and difficult to reverse.
o Core values statement: statement of principles to guide an
organization as it works to achieve its vision and fulfill its
mission for both internal conduct and external interactions; it
often includes explicit ethical considerations.
Provides touchstones for the employees to understand
the company culture.
o Product-oriented vision statements define a business in terms
of a good or service provided.
o Customer-oriented vision statements define business in terms
of providing solutions to customer needs.
Customer-oriented vision statements provide managers
with more strategic flexibility than product-oriented
o To be effective, visions and missions need to be backed up by
hard-to-reverse strategic commitments and tied to economic
o Intended strategy: the outcome of a rational and
structured, top-down strategic plan.
o Realized strategy: combination of intended and emergent
o Emergent strategy: any unplanned strategic initiative
bubbling up from the bottom of the organization.
o Strategic Initiative: any activity a firm pursues to explore
and develop new products and processes, new markets or
new ventures.
Strategic initiative can come from:
Autonomous actions
Resource allocation process
Autonomous actions: strategic initiatives undertaken
by lower-level employees on their own volition and often
in response to unexpected situations.
Starbucks employee- Frappe
Serendipity: random events, pleasant surprises and
accidental happenstances that can have a profound
impact on a firms strategic initiatives.
Planned emergence: strategy process in which
organizational structure and systems allow bottom up
strategic initiatives to emerge and be evaluated and
coordinated by top management.
Chapter 3: External Analysis
A framework that categorizes and analyzes an important set of
external facts that might impinge upon a firm. These factors can create
both opportunities and threats for the firm.
Political: result from the processes and actions of government
bodies that can influence the decisions and behavior of firms
Economic: mostly macroeconomic affecting economy wide
phenomena. There are 5 factors that can affect a firms strategy:
Growth rates
Levels of employment
Interest rates
Price stability
Currency exchange rates
Sociocultural: capture a societys cultures, norms and values.
Demographic trends are also important sociocultural factors
Technological: capture the application of knowledge to create
new processes and products. Major innovations in process technology
include lean manufacturing.
Ecological: involve broad environmental issues such as the
natural environment, global warming, and sustainable economic
Legal: the official outcome of political processes as manifested in
laws, mandate, regulations, and court decisions all of which have a
direct bearing on a firms profit potential.

Porters Five Forces

A framework that identifies five forces that determine the profit
potential of an industry and shape a firms competitive strategy.
Threat of Entry: the risk that potential competitors will enter an
industry. Incumbent firms can benefit from several important sources
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: captures pressures that industry suppliers
can exert on an industrys profit potential.
Ex: Tylenol & metal shavings in the pill
Power of Buyers: buyers are the customers of an industry.
Ex: When Bank of America tried to charge $1 for every
time there was an ATM transaction, resulted in people switching to
other banks
Threat of Substitutes: the idea that products or services available
from outside the given industry will come close to meeting the needs
of current customers.
Ex: This is what Traverse Pie Company thought when
Panera Bread came to Midland
Rivalry Among Existing Competitors: the intensity with which
companies within the same industry jockey for market share and
Ex: Coke & Pepsi or Underarmour & Nike
- Coopetition is when 2 people/ groups are competing at
the same time using cooperation to achieve a strategic

Sixth Force: The Strategic Role of Complements

Complement: a product, or service, of competency that adds value to
the original product offering when the two are combined
Ex: More/ better apps on the IPhone = more IPhone sales

Industry Convergence: a process whereby formerly unrelated industries

begin to satisfy the same customer need.
Ex: Phone calculator replacing an actual calculator
Chapter 4: Internal Analysis

Core Competencies: Unique strengths, embedded deep within a firm,

that are critical to gaining and sustaining competitive advantage.
Resources: any assets that a firm can draw on when formulating
and implementing a strategy
Capabilities: organizational and managerial skills necessary to
orchestrate a diverse set of resources and deploy them
Activities: distinct and fine grained business processes that
enable firms to add incremental value by transforming inputs
into goods and services

Resource Based View: A model that sees certain types of resources

as key to superior firm performance
Tangible Resources: resources that have physical attributes
and thus are visible
Intangible Resources: resources that do not have physical
attributes and thus are invisible

VRIO Framework:
Valuable: when the resources help a firm exploit an external
opportunity or offset an external threat
Rare: when the number of firms that possess it is less than the
number of firms it would require to reach a state of perfect
Costly to Imitate: the firms that do not possess the resources
are unable to develop or buy the resource at a comparable cost
Organized to Capture Value: the characteristic of having in
place an effective organizational structure, processes, and
systems to fully exploit the competitive potential of the firms
resources, capabilities, and competencies

Isolating Mechanisms: barriers to imitation that prevent rivals from

competing away the advantage a firm may enjoy
Better expectations of future resource value
Path Dependence: a situation in which the options one faces in
the current situation are limited by decisions made in the past
Causal Ambiguity: a situation in which the cause and effect of
the phenomenon are not readily apparent
Social complexity: a situation in which different social and
business systems interact with one another
Intellectual Property Protection: a critical intangible resource
that can provide a strong isolating mechanism and thus help to
sustain a competitive advantage

Core Rigidity: a former core competency that turned into a liability

because the firm failed to one, refine, and upgrade the competency as
the environment changed
Dynamic Capabilities: a firms ability to create, deploy, modify,
reconfigure, upgrade or leverage its resources in its quest for
competitive advantage
Chapter 5 Competitive Advantage, Firm Performance, and Business

Accounting Profitability:
o Helps access competitive advantage:
Accurately assess firm performance.
Compare and benchmark their firms performance to
other competitors in the same industry or against the
industry average.
o Publicly traded firms are required to file a Form 10-K or (10-
K report) annually with the U.S. Securities and Exchange
Commission (SEC).
Exhibit 5.1 page 144

Limitations of Accounting Data

o All acc. Data are historical and thus backward looking.
o Acc. Data do not consider off-balance sheet items, such as:
Pension Obligation
Leasing Obligation
Accounting data focuses mainly on tangible assets which are no
longer the most important.
o Innovation, quality, customer experience are important

Shareholder Value Creation P. 149

o Shareholders
Own one or more stock in a company
The legal owners of public companies
o Risk Capital
Money provided for an equity share in a company
Cannot be recovered if the firms goes bankrupt
o Total Return to Shareholders
Stock price appreciation plus dividend
o Market Capitalization
Total market value of companys outstanding shares
Total number of shares x current share price

Limitations of Shareholder Value Creation P. 150

o Stock prices can be highly volatile
Makes it difficult to assess firm performances
o Macroeconomics factors affect stock prices
Economic growth or contraction
Unemployment, interest, and exchange rates
o Stock prices can reflect the mood of investors
Can be irrational

Economic Value Creation P. 151

o The difference between:
A buyers willingness to pay for a product/service
And the firms total cost to produce it
The difference between V-C
o Competitive advantage can be based on:
Economic value creation because of superior product
A relative cost advantage over rivals
o Exhibit 5.4 P. 152 Firm Bs Comp. Advantages
o Exhibit 5.5 P. 152 Firm Cs Comp. Advantages

Producer & Consumer Surplus

o Producer surplus (also called profit)
The difference between the price charged (P) and the
cost to produce (C) (or min. amount producer is
willing to accept for the good).
o Consumer Surplus
The difference between what you would have been
willing to pay (V) and what you paid (P).
o Both Parties

Limitations of Economic Value Creation

o Based on income, preferences, time, and other factors
o Income NDI
o Preferences Pantone, flavor
o Time Pizza
o To measure firm-level competitive advantage, we must
estimate the economic value created for all products and
service afford by the firm.

The Balanced Scorecard

o Helps managers achieve their strategic objectives more
o Uses Internal and external performances
o Balances both financial and strategic goals
o (Built to incorporate intangible assets value creation)
o Exhibit 5.8 The Balanced Scorecard
Disadvantages of the Balanced Scorecard
o Focused on strategy implementation
Not formulation
o Limited guidance about which metrics to use
o Only as useful as the managers apply it
o Strategy must be translated into measureable objectives
o Not much guidance on how to get back on track if setbacks
The Triple Bottom Line
o 3 dimensions fundamental to sustainable strategy:
Profits: The economic dimension.
Captures the necessity of business to be
profitable to survive
People: The social dimension
Emphasizes the people aspect, such as
PepsiCos initiative of the whole person at
Planet: Ecological Dimension
Emphasizes the relationship between business
and the natural environment
o Exhibit 5.9 Sustainable Strategy

Business Models
How do we measure and assess Competitive
o Relative to a benchmark
Either using competitions or the industry average
o It is a multi-factual concept
o By measuring acc. Profit, shareholder value, or economic
o The balanced scorecard approach
o The triple bottom line
Ch. 6 Business Strategy: Differentiation, Cost
Leadership, and Blue Ocean
6.1 Business-Level Strategy: How to Compete for Advantage

Business Level Strategy: The goal-directed actions managers take in

their quest for competitive advantage when competing in a single
product market
o Who which customer segments will we serve?
o What customer needs, wishes, and desires will we satisfy?
o Why do we want to satisfy them?
o How will we satisfy our customers needs?
To formulate an effective business strategy, managers need to keep in
mind that competitive advantage is determined jointly by industry and
firm effects
o Exhibit 6.1 page 177

Strategic Position

Competitive advantage is based on the difference between the

perceived value a firm is able to create for consumers (V), captured by
how much consumers are willing to pay for a product or service, and
the total cost (C) the firm incurs to create that value. The greater the
economic value created (V-C), the greater is a firms potential for
competitive advantage.
o To answer the business-level strategy question of how to
compete, managers have two primary competitive levers at
their disposal: value (V) and cost (C)
A firms business-level strategy determines its strategic position its
strategic profile based on value creation and cost- in a specific product
To achieve a desired strategic position, managers must make strategic
trade-offs- choices between a cost or a value position. Such choices are
necessary because higher value creation tends to generate higher
Generic Business Strategies

There are two fundamentally different generic business strategies

differentiation and cost leadership. They can be used in any
organization in quest for competitive advantage, independent from
industry context.
o Differentiation seeks to create higher value for customers
than the value that competitors create, by delivering products or
services with unique features while keeping cost at the same or
similar levels, allowing the firm to charge higher prices to its
o Cost Leadership seeks to create the same or similar value for
customers by delivering products or services at a lower cost
than competitors, enabling the firm to offer lower prices to its
A business strategy, therefore, is more likely to lead to a
competitive advantage if it allows a firms to either
perform similar activities differently or perform different
activities than their rivals that result in creating more
value or offering similar products or services at lower
Scope of competition the size narrow or broad of the market in
which a firm chooses to compete.
Focused cost-leadership Same as the cost leadership strategy
except with a narrow focus on a niche market.
Focused differentiation same as the differentiation strategy except
with a narrow focus on a niche market
Exhibit 6.2 page 179 Strategic Position and Competitive Scope Generic
Business Strategies
6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership

Blue Ocean Strategy successfully combines differentiation and

cost-leadership activities using value innovation to reconcile the
inherent trade-offs.
o Blue oceans represent untapped market space, the creation of
additional demand, and the resulting opportunities for highly
profitable growth
In contrast, red oceans are the known market space of existing
industries. In the red oceans the rivalry among existing firms is cut-
throat because the market space is crowded and competition is a zero-
sum game. Products become commodities, and the competition is
focused mainly on price.
Example: Trader Joes vs Whole Foods (Blue Ocean) Page 194
o Trader Joes has much lower cost than Whole Foods for the same
market of patrons desiring high value and health-conscious food,
and the chain scores exceptionally well in customer service and
other areas.
Example: JCP (Stuck in the middle/Red ocean) Page 198
o JCP tried to change to a blue-ocean strategy, but failed and got
stuck in the middle which turned into the red ocean of bloody-
Value Innovation

In order for a blue ocean strategy to be successful, value innovation

must be done.
o Value Innovation- The simultaneous pursuit of differentiation
and low cost in a way that creates a lead in value for both the
firm and the consumers; considered a cornerstone of blue ocean
o Aligning innovation with total perceived consumer benefits, price
and cost
o Lower Costs
Eliminate which of the factors that the industry takes for
granted should be eliminated?
Reduce Which of the factors should be reduced well
below the industrys standard?
o Increased Perceived Consumer Benefits
Raise Which of the factors should be raised well above
the industry standard?
Create Which of the following should be created that the
industry has never offered?
Example: IKEA Page 195/196
o Used value innovation based on the eliminate, reduce, raise,
create framework to initiate its own blue-ocean and to achieve a
sustainable competitive advantage.
Stuck in the middle- when blue ocean strategy goes bad
o It means the firm has neither a clear differentiation nor a clear
cost-leadership profile
o Leads to inferior performance and a resulting competitive
Example: Jet Blue 175/198
o Strategy to provide air travel at even lower costs than
Southwest Airlines with better service and more amenities. A
few reputation damaging incidents damaged their customer
service. They area at a standstill with their competitive
advantage and stuck in the middle
Exhibit 6.9 Value Innovation vs Stuck in the Middle - Page 197
Chapter 7 Business Strategy: Innovation and

7.1 Competition Driven by Innovation

Innovation - the successful introduction of a new product,
process, or business model
o a powerful driver in the competitive process
innovation describes the discovery, development, and
transformation of new knowledge in a four-step process captured
in the four Is: Idea, Invention, Innovation, and Imitation
o the idea is often presented in terms of abstract concepts or
as findings from basic research
o invention the transformation of an idea into a new
product or process, or the modification and recombination
of existing ones
o innovation concerns the commercialization of an invention
o if innovation is successful competitors will attempt to
imitate it
7.3 Innovation and the Industry Life Cycle
Industry life cycle the five stages that occur in the evolution of
an industry over time: introduction, growth, shakeout, maturity,
and decline
Exhibit 7.4 (pg. 218), Exhibit 7.6 (pg. 222)
o Launching a new innovative product
o R&D is a main resource, necessary to creating a new
product category that will attract customers
o Capital intensive process in which the innovator is
investing in designing a unique product, trying new ideas
to attract customers and producing small quantities
o Initial market size is small and growth is slow
o Barriers to entry tend to be high, generally only a few firms
are active in the market
o Emphasis on unique product features
o May encounter first-mover disadvantages introducing the
product to the market
o Large increase in demand
o Size of the market expands
o Companies discover the standards for products or services
that attract the customers
Standard an agreed upon solution about a common
set of engineering features and design choices
o Both inefficient and efficient firms thrive because of the
o Prices begin to fall
o After standards are determined competition moves to
product innovations and process innovations
Product innovation new or recombined knowledge
embodied in new products
Process innovation new ways to produce existing
products or deliver existing services
o The key objective for firms is to stake out a strong strategic
position not easily imitated by rivals
o Rate of growth levels out
o Firms begin to compete directly against each other
o only the strong survive in the industry
o extremely competitive environment
o price becomes a more important competitive weapon
o Close to zero growth and market has reached its maximum
o Usually only a few firms
o Market demand is limited
o Demand now consists of replacement or repeat purchases
o Innovation reaches its maximum
o The firms that survive are usually larger
o Demand falls and market size declines
o Innovation efforts cease
o Four strategic options:
Exit: firms leave the industry by bankruptcy or
Harvest: firm reduces investments in product support
and allocates minimum to human and other
Maintain: continue current support effort
Consolidate: buy rivals, approaching monopolistic
market power
Exhibit 7.9 (pg. 231)