Chapter 1: Creating Competitive Advantages

General Manager Role

1) Assess Performance
2) Set Direction Vision, Mission, Strategy, Policies, Procedures
3) Build Certain Capabilities
4) Implement Change Uncertainty, Complex, Resistance Assess (go to 1)
What is Strategic Management?
- The strategic management of the organization must become both a process and a way of thinking throughout the
organization. At the heart of strategic management, each manager faces the question:
o How can I contribute to make our firm outperform others?
o The challenge to managers is (1) decide on strategies that provide advantages which can be sustained over
time and (2) effectively execute those strategies in the midst of an environment of great turbulence and
uncertainty.
Strategic Management Strategic management consists of the analysis, decisions, and actions an organization undertakes in
order to create and sustain competitive advantages.
Competitive Advantage Is what makes a companys offerings superior to those of its competitors. Superiority comes in
many dimensions, and firms can pursue different avenues of competitive advantage. Can provide products/services of superior
quality that may incorporate unique and valuable features, be customized to address specific customer needs more closely, or
be lower priced.
-

Strategic management and competitive advantage capture two main elements.

o First, the strategic management of an organization entails three ongoing processes: analysis, decisions, and
actions.
Strategic management is concerned with the analysis of strategic goals (vision, mission, and strategic
objectives) along with the analysis of the internal and external environment of the organization.
Next, leaders must make strategic decisions. These decisions, broadly speaking, address two basic
questions: What industries should we compete in? How should we compete in those industries?
Finally, actions that must be taken. Decisions are of little use, of course, unless they are acted on.
Firms must take the necessary actions to implement their strategies. Requires leaders to allocate the
necessary resources and to design the organization to bring the intended strategies to reality.
o Second, the essence of strategic management is the study of why some firms outperform others.
How should we compete in order to create competitive advantages in the marketplace? (Product
differentiation or cost leadership)
How can we create competitive advantages in the marketplace that are not only unique and valuable
but also difficult for competitors to copy or substitute?

Porter argues that sustainable competitive advantage cannot be achieved through operational effectiveness alone.
Operational effectiveness means performing similar activities better than rivals.
Sustainable competitive advantage is possible only through performing different activities from rivals or performing
similar activities in different ways. Trying to do everything that its rivals do eventually leads to mutually destructive
price competition, not long- term advantage.
Ex. Wal-Mart, Canadian Tire, and IKEA have developed unique, internally consistent, and difficult- to- imitate
activity systems that have provided them with sustained competitive advantage.

Four Key Attributes of Strategic Management

1. Strategic management is directed toward overall organizational goals and objectives.
- Effort must be directed at what is best for the total organization, not just a single functional area.
- Organizational versus Individual Rationality.
- Ex. Research and development may over-engineer the product in order to develop a far superior offering, but the
design may make the product so expensive that market demand is minimal.

2. Strategic management includes multiple stakeholders in decision-making.

- Stakeholders are those individuals, groups, and organizations who have a stake in the success of the organization,
including owners (shareholders), employees, customers, suppliers, and the community.
- Ex. Overwhelming emphasis is on generating profits for the owners, employees may become alienated, customer
service may suffer, and the suppliers may become resentful of continual demands for pricing concessions.
3. Strategic management incorporates both short- term and long- term perspectives.
- Considered creative tension since managers must maintain both a vision for the future of the organization as well as
a focus on its present operating needs.
- Ex. Laying off several valuable employees may help to cut costs and improve profits in the short term, but the longterm implications for employee morale and customer relationships may suffer leading to subsequent performance
declines.
4.
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Strategic management involves the recognition of trade- offs between effectiveness and efficiency.
Being aware of the need to strive to act effectively and efficiently as an organization.
Difference between doing the right thing (effectiveness) and doing things right (efficiency).
While managers must allocate and use resources wisely, they must still direct their efforts toward the attainment of
overall organizational objectives.
Ex. Managers who are totally focused on meeting short- term budgets and targets may fail to attain the broader goals
of the organization.

Strategic Management Process

- Ongoing processes (analysis, decisions, and actions, often referred to as strategy analysis [analysis], strategy
formulation [decisions], and strategy implementation [actions]) are highly interdependent.
1. Strategy Analysis (analysis): May be looked upon as the starting point of the strategic management process.
- It consists of the advance work that must be done in order to effectively formulate and implement strategies.
- About understanding what is going on, why situations have unfolded in particular ways, what issues the organization
faces at present and in the future, whether and why the organization has been successful, and what others may be
doing and why.
- About making sense of the elements and the interactions that formed the organizations world in the past and will
continue to be of importance in the future.
- Many strategies fail because managers proceed to formulate and implement strategies without an appreciation of the
overarching goals of the organization and without a careful analysis of its external and internal environment.
- Starts with analyzing organizational goals and objectives. Goals are from developing an understanding of the ever
changing opportunities and threats in the external environment as well as a thorough understanding of the firms
strengths and weaknesses
o External environment Relies critically on extensive use of tools developed in diverse fields such as macro
and microeconomics, political science, marketing, consumer behaviour, operations management, international
business, sociology, and psychology.
o Internal environment What does the firm do? How does it create the products and services it brings to the
market? Why does it do things a certain way? Such analysis helps to identify both strengths and weaknesses
that can, in part, determine how well a firm will succeed in an industry.
- Most important element that contributes to an organizations success of knowledge and skills of its workers as well as
its intellectual assets such as technology, patents, and trademarks. How well the organization creates networks and
relationships among its employees, customers, suppliers, and alliance partners.
2. Strategy Formulation (decision): Overall strategy is developed at several levels.
- First, business-level strategy addresses the issue of how to compete in given business environments to attain
competitive advantage.
o Achieved through cost leadership, differentiation, and by focusing on a narrow or industry- wide market
segment.
o Some advantages can be more sustainable over time, and a firms business- level strategy changes with the
industry life cycle (introduction, growth, maturity, and decline)
- Second, corporate- level strategy focuses on two issues:

(1) which businesses to compete in (2) how businesses can be managed to achieve synergy the creation of
more value by working together rather than operating as stand- alone businesses
o Consider the relative advantages and disadvantages of pursuing strategies of related or unrelated
diversification and make choices regarding the various means they can employ to diversify - internal
development, mergers and acquisitions, and joint ventures and strategic alliances.
Third, a firm must determine the best method for developing international strategies as it ventures beyond its national
boundaries.
o Decide not only on the most appropriate entry strategy but also how they will go about attaining competitive
advantages in inter-national markets.
Fourth, digital technologies, such as the Internet and wireless communications, are changing the way business is
conducted and present both new opportunities and threats for virtually all businesses.
o

3. Strategy Implementation (actions): Encompasses the systems, structures, attitudes and behaviours that make things
happen within organizations. Calls on firms to adopt organizational structures and designs that are consistent with
their strategies.
- Need to have in place an effective corporate governance structure that aligns the interests of managers with those of
the owners of the firm as well as of other stakeholders.
o Involves not only the board of directors and actively engaged shareholders but also proper managerial reward
and incentive systems, along with the strategic control mechanisms that set boundaries on managers
behaviours.
- Is about leadership. Managers are expected to do much more than manage their troops by telling them what to do.
o They are called to provide a vision, inspire, and lead ethically and with integrity.
o Todays successes do not guarantee success in the future.
o Must continuously improve and find new ways to grow and renew.
o Instilling an entrepreneurial attitude and fostering experimentation throughout the organization help identify
new opportunities while specific strategies are being formulated that will enhance the firms innovative
capacity.
o Viable opportunities must be recognized, effective strategies must be implemented, and entrepreneurial
leadership skills are needed to successfully launch and sustain these enterprises.
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Mintzberg proposed an alternative model of strategy development.

Realized strategy and intended strategy usually not the same.

Decisions deriving from analysis constitute the intended strategy of the firm. They rarely survive in its original form
as unforeseen environmental developments, unanticipated resource constraints, or changes in managerial preferences
may result in at least some parts of the intended strategy remaining unrealized.
On the other hand, good managers will want to take advantage of a new opportunity presented by the environment
even if it was not part of the original set of intentions.
New technologies and green solutions to environmental challenges; such strategic moves do not necessarily
constitute parts of the original strategies of firms and can be opportunistic responses to unfolding events, but they are
certainly parts of an emergent strategy.
The final realized strategy of any firm is a combination of deliberate and emergent strategies.

Role of Corporate Governance and Stakeholder Management

- Overall purpose of a corporation is to maximize shareholder value, which is reflected in the long- term return to the
owners or shareholders.
- Define corporate governance as the relationship among various participants in determining the direction and
performance of corporations.

The primary participants are (1) the shareholders, (2) the management (led by the chief executive officer), and
(3) the board of directors.
o Board of directors consists of the elected representatives of the share-holders. They are charged with
overseeing management and ensuring that the interests and motives of management are aligned with those of
the owners (shareholders).
Despite the primacy of generating shareholder value, managers who focus solely on the interests of the owners of the
business will often make poor decisions that lead to negative, unanticipated outcomes.
Ex. Decisions such as mass layoffs to increase profits, ignoring issues related to conservation of the natural
environment to save money, and exerting undue pressure on suppliers to lower prices can certainly harm the firm in
the long run.
Such actions would likely lead to negative outcomes, including alienated employees, increased governmental
oversight and fines, and disloyal suppliers.
o

Stakeholders are affected by what an organization does and can influence, to varying degrees, its performance.
Role of management is to look upon the various stakeholders as competing for the attention and resources of the
organization.
The gain of one individual or group is the loss of another individual or group.
Ex. Employees want higher wages, which drive down profits; suppliers want higher prices for their inputs and slower,
more flexible delivery times, which drive up costs; customers want fast deliveries and higher quality, which drive up
costs; the community at large wants charitable contributions, which take money from company goals.
Although there will always be some conflicting demands placed on the organization by its various stakeholders, there
is value in exploring how the organization can achieve better results through stakeholder symbiosis, which recognizes
that stakeholders are dependent upon each other for their success and well- being.
Corporate Social Responsibility calls on firms to consider the changing relationships between business, society, and
government, and to act in a socially responsible manner.
Social responsibility is the expectation that businesses or individuals will strive to improve the overall welfare of
society.
As social norms and values change, a corporations actions that constitute socially responsible behaviour change as
well.
Ex. Today, in the wake of heightened awareness about climate change, a new kind of priority has arisen the need to
be responsible and protect the environment, reduce emissions, and battle global warming.
To remain viable in the long run, companies increasingly recognize the imperative of measuring both the deployment
and utilization of productive assets, along with the outcomes, more comprehensively than what has been captured by
traditional accounting methods.
Adopted triple bottom line, a technique that involves assessing financial as well as environmental and social
performance.
o The first bottom line presents the financial measures with which all leaders are familiar.
o The second bottom line assesses ecological and material capital.
o The third bottom line measures human and social capital.

Strategic Management Perspectives: An Imperative Throughout the Organization

- Strategic management requires managers to take an integrative view of the organization and assess how all of the
functional areas and activities fit together to help the organization achieve its goals and objectives.
- Driving forces are increasing the need for a strategic perspective and greater involvement throughout the organization.
1. Globalization: The defining feature of the global economy is not the flow of goods, international trade has existed for
centuries, but the flow of capital, people, and information worldwide.
- Time and space is no longer a barrier to making deals anywhere in the world.
- Markets become more open and free trade agreements bring more foreign firms to domestic markets.
- Face new challenges: volatile political situations, difficult trade issues, ever- fluctuating exchange rates, unfamiliar
cultures, and gut- wrenching social problems.
- Requires that organizations increase their ability to learn and collaborate and to manage diversity, complexity, and
ambiguity.
2. Technology: Such developments accentuate the importance of innovation for firms if they are to remain competitive.

Continuous technological development and change shrink product life cycles.

3. Intellectual Capital: Knowledge has become the direct source of competitive advantage for companies selling ideas
and relationships as well as for all companies trying to differentiate from rivals by how they create value for their
customers.
- Creating and applying knowledge to deliver differentiated products and services of superior value for customers
requires the acquisition of superior talent as well as the ability to develop and retain that talent.
- Successful firms create an environment with strong social and professional relationships, and where people feel strong
ties to their colleagues and their organization.
-

To develop and mobilize people and other assets in the organization, leaders are needed throughout the organization.
No longer can organizations be effective if the top does the thinking and the rest of the organization does the
work.
Senge notes the critical need for three types of leaders:
1. Local line leaders who have significant profit and loss responsibility.
2. Executive leaders who champion and guide ideas, create a learning infrastructure, and establish a domain for
taking action.
3. Internal networkers who, although having little positional power and formal authority, generate their power
through the conviction and clarity of their ideas.
To inculcate a strategic management perspective throughout the organization, many large, traditional organizations
often require a major effort in transformational change.
Involves extensive communication, training, and development to strengthen a strategic perspective within the
organization.
Thinking outside the box and questioning the prevailing wisdom can lead to novel ideas and successful outcomes.

Ensuring Coherence in Strategic Direction

- To be successful, employees and managers throughout the organization must be striving for common goals and
objectives.
- By specifying desired results, it becomes much easier to move forward.
- Organizations express priorities best through stated goals and objectives that form a hierarchy of goals.
1. Organizational Goal: Described as a goal that is massively inspiring, overarching, and long- term.
- Difficult to accurately measure how well such visions are being achieved, but provide a fundamental statement of an
organizations sense of its own purpose and reflect the collective values of its stakeholders, their aspirations, and their
goals.
- A good vision statement tells everybody, both inside and outside the organization, what it stands for, what inspires its
management and employees, and what gets them going and motivates them to strive to excel.
- Such visions go well beyond narrow financial objectives and strive to capture both the minds and hearts of employees.
- May contain a slogan, diagram, or picture whatever grabs attention.
- Aim is to capture the essence of the more formal parts of the vision in a few words that are easily remembered, yet
evoke the spirit of the entire vision statement.
- Visions fail for many reasons:
o The Walk Doesnt Match the Talk: Employees find that senior managements behaviour is not consistent
with the vision. Include empty platitudes like devotion to the customer, team-work, or total quality that
arent consistently backed by managements action.
o Irrelevance: Vision that is created in a vacuum (unrelated to environmental threats or opportunities or to an
organizations resources and capabilities) can ignore the needs of those who are expected to buy into it. When
the vision is not anchored in reality, employees will reject it.
o Not the Holy Grail: Visions support sound management, but they require everyone to walk the talk and be
accountable for their behaviour. A vision cannot simply be viewed as a magic cure for an organizations
illness.
o An Ideal Future Irreconciled with the Present: People have difficulty identifying with a vision that paints a
rosy picture of the future but either takes no account of the often-hostile environment in which the firm
competes or ignores some of the firms weaknesses.

2. Mission: Encompasses both the purpose of the company as well as the basis of competition and competitive
advantage.
- More specific and focused on the means by which the organization will achieve its vision.
- Includes providing specific avenues that will direct the organizations efforts and identifying key partners, markets,
and services that will make it happen.
- Incorporate the concept of stakeholder management, suggesting that organizations must respond to multiple
constituencies if they are to survive and prosper.
- Employees of organizations or departments are usually the missions most important audience. Should help to build a
common understanding and promote a nurturing of purpose and commitment.
- A good mission statement, thus, must communicate why an organization is special and different.
- The less successful firms focused almost entirely on profitability. In essence, profit is the metaphorical equivalent of
oxygen, food, and water, which the body requires. They are not the point of life, but without them there is no life.
- Tend to be more specific and to address questions concerning the organizations reason for being and the basis of its
intended competitive advantage in the marketplace. It should change when competitive conditions change or the firm
is faced with new threats or opportunities.
3. Strategic Objectives: Used to operationalize the mission statement.
- Help to provide guidance on how the organization can fulfill or move toward the higher goals in the goal hierarchy,
the mission and vision. As a result, they tend to be more specific and cover a more well- defined time frame.
- Objectives are specific and concrete yardsticks that measure the progress toward the organizations mission and
vision. If an objective lacks specificity or measurability, it is not very useful, simply because there is no way of
determining whether it is helping the organization to move forward.
- For an objective to be meaningful, it needs to satisfy several SMART criteria. It must be:
o
o
o
o
o

Specific: Provide a clear message as to what needs to be accomplished (market share, new product
introductions, customer satisfaction scores).
Measurable: Contain indicators that explicitly measure progress toward fulfilling the objective (15 percent
market share; 3 new product launches; 10 percent increase in customer retention).
Appropriate: Connect and be consistent with the vision and mission of the organization.
Realistic: Identify an achievable target given the organizations capabilities and opportunities in the
environment.
Timely: There needs to be a time frame for accomplishing the objective. Unless there is a timeline for
achieving the objective, there is little value in setting goals (3 new product launches every 6 months, market
leadership in 5 years).

When objectives satisfy the above SMART criteria, there are many benefits for the organization:
- Help direct employees throughout the organization toward common goals. This helps to concentrate and conserve
valuable resources in the organization and to work collectively in a timelier manner.
- Help to motivate and inspire employees throughout the organization to higher levels of commitment and effort.
- Always the potential for different parts of an organization to pursue their own goals rather than overall company
goals.
- Provide a yardstick for rewards and incentives. They will lead to higher levels of motivation by employees; will also
help to ensure a greater sense of equity or fairness when rewards are allocated.

Chapter 2: Analyzing the External Environment of the Firm

What Went Wrong with the Canadian Forest Industry?

The industry, as well as the government, missed some key trends. Rather than embracing the shift to new markets, the
deployment of new production technologies, and the creation of new products, firms in the industry stuck with
traditional methods of harvesting and operating because these had been key to past success.
They ignored both the increasing demand for lumber and paper products coming from newer economies such as
China, as well as the rules of the global game. The government and the industry as a whole were preoccupied with the
North American softwood lumber dispute.
Because they were not willing to respond to changing trends, their actions lacked speed and decisiveness. As a result,
they are now lagging in an industry that they once dominated.
To be successful, managers must recognize opportunities and threats in their firms external environment.
They must be aware of whats going on outside their company.
A firms strategy can easily stray away and get out of touch with the evolving realities of the marketplace.
To understand the business environment of a particular firm, managers need to continuously analyze and stay abreast
of both the general environment and the firms industry and competitive environment.
General environment consists of a myriad of elements that an organization finds outside its own boundaries and which
have some bearing on its ability to exist and thrive.
Factors such as government legislation, general economic trends, globalization, advances in technology, national
cultural differences, the general level of education, and an aging population could potentially and critically affect the
fortunes of a particular organization; yet, its managers are largely powerless in any significant attempt to influence
them.
An industry, or a companys competitive environment, is composed of a set of firms that produce similar products or
services, sell to similar customers, and use similar methods of production.
The challenge for managers is to define the industry broadly enough to incorporate the relevant issues but not so
broadly that their focus is rendered meaningless.
Todays peacock is tomorrows feather duster.

Creating the Environmentally Aware Organization

- To become mentally aware, managers use three important processes 1.scanning, 2.monitoring, and 3.gathering
competitive intelligence to understand the environment and develop forecasts.
1. Environmental Scanning: Involves surveillance of a firms external environment to predict future environmental
changes and detect changes already under way.
- Successful environmental scanning alerts the organization to critical trends and events before the changes have
developed a discernible pattern and before competitors recognize them.
- Ex. Key issues in the auto industry include:
o Globalization: Intensified with enormous opportunities opening up in Asia, central/eastern Europe, and Latin
America.
o

Time to Market: Gap still exists between product development cycles in the US and Europe compared to
Japan. This gap persists even though Japanese companies continue to move operations to other countries.

Shifting Roles and Responsibilities: Design responsibility, purchasing, even project management and systems
engineering, are shifting from the original equipment manufacturers to integrators and other suppliers.

2. Environmental Monitoring: Tracks the evolution of environmental trends, sequences of events, or streams of
activities.
- May be trends that the firm came across by accident or were brought to its attention from outside the organization.
- Monitoring enables firms to evaluate how dramatically environmental trends are changing the competitive landscape.
- Ex. Managers should closely monitor sales in Asia, central/eastern Europe, and Latin America. They should observe
how fast Japanese companies and other competitors bring products to market compared with their own firm.
3. Competitive Intelligence: Helps firms better define and understand their industry, also identify rivals
strengths/weaknesses.
- Includes the intelligence gathering associated with the collection of data on competitors and the interpretation of such
data for managerial decision-making.
- Helps a company avoid surprises by anticipating competitors moves and decreasing response time.

Ex. Banks continually track home loan, auto loan, and certificate of deposit interest rates charged by competitors in a
given geographic region. Major airlines change hundreds of fares daily in response to competitors tactics. Car
manufacturers are keenly aware of announced cuts or increases in rivals production volumes, sales, and sales
incentives (rebates and low interest rates on financing).
Use this information to plan their own marketing, pricing, and production strategies. The Internet has dramatically
accelerated the speed at which firms can find competitive intelligence.
Competitive Intelligence Is

Competitive Intelligence Is Not

Firms aggressive efforts to gather competitive intelligence may lead to unethical or illegal behaviours.
Executives must be careful to avoid spending so much time and effort tracking the competitive actions of traditional
competitors that they ignore new competitors.

4. Environmental Forecasting: Involves the development of plausible projections about the direction, scope, speed, and
intensity of environmental change. Environmental forecastings purpose is to predict change.
- Asks, how long will it take a new technology to reach the marketplace? Will the present social concern about an issue
result in new legislation? Are current lifestyle trends likely to continue?
- Ex. Pier 1 Imports is overly optimistic in its forecast of future net disposable income and housing starts, it will order
too much inventory and later be forced to discount merchandise drastically.
- A danger of forecasting is that managers may view uncertainty as black and white and ignore important grey areas.
Either they assume that the world is certain and open to precise predictions, or they assume it is uncertain and
completely unpredictable.
- Under-estimating uncertainty leads to strategies that neither defends against looming threats nor takes advantage of
opportunities.
- If managers assume the world is unpredictable, they may abandon the analytical rigour of their traditional planning
process and base strategic decisions on gut instinct.
- Such a just do it approach may cause executives to place misinformed bets on emerging products or markets that
result in record write-offs.
5. Scenario Analysis: More in-depth approach to forecasting. Draws on a range of disciplines and interests, among them
economics, psychology, sociology, and demographics.
- It usually begins with a discussion of participants thoughts on ways in which societal trends, economics, politics, and
technology may affect the issue under discussion.

One technique that can assist managers in coping with the uncertainty and unpredictability of todays rapidly changing
world, where competition can appear from anywhere at any time and where the rules of the game can change with
little forewarning.
Different from other tools for strategic planning such as trend analysis or high and low forecasts.
Origins of scenario planning lie with the military, which used it during World War II to cope effectively with multiple
challenges, limited resources, and great unpredictability in the unfolding of the war.
Scenario planning helps by considering how trends or forecasts could be upset by unpredictable events.

SWOT Analysis: One of the most widely used if not basic techniques for analyzing firm and industry conditions.
- Stands for Strengths, Weaknesses, Opportunities, and Threats. Provides a framework for analyzing those four
elements of a companys internal and external environment.
- Managers rely on SWOT to stimulate self-reflection and group discussions about how to improve their firm and
position it for success.
- Use it regularly to identify and evaluate the opportunities and threats in the business environment as well as the
strengths/weaknesses of their firms internal environment.
- Strengths/weaknesses portion refers to the areas within the firm where it excels and where its traditional points of
power, ability, and capacity (strengths) lie.
- Ex. Strengths include superior knowledge, strong brands, state- of- the- art facilities, unique access to certain markets,
highly motivated workforce, extensive distribution networks, deep financial pockets, and strong leadership.
- Ex. Weaknesses include difficulties in accessing raw materials, wounded brands, high financial leverage, and pending
lawsuits.
- Opportunities/threats are environmental conditions external to the firm. These could be factors in the general
environment, such as improving economic conditions that cause lower borrowing costs or an aging population that
demands new services for leisure and convenience.
- Ex. Opportunities can arise from technological developments, such as the Internet and telecommunications, or
advances in biotechnology. One can find opportunities almost everywhere, whether identifying new market needs,
new and better ways to respond to existing needs, new ways of delivering products and services, new applications of
technology, easing regulatory conditions, industry consolidation, or technology convergence.
- Ex. Threats, on the other hand, can mount from formidable competitors, new legislation, an aging population, shifts in
tastes and values of consumers, protectionism, terrorism, an oil crisis, increasing commodity prices, or new
technology that threatens to make our products obsolete.
- Opportunities/threats are rather subjective interpretations of what is unfolding in a firms external environment, and
two informed individuals can easily come up with different lists of them. Must consider each area of their general and
competitive environment for specific opportunities as well as for looming threats. Also important not to cast the net
too narrowly.
- Important not to focus too much on one moment in time.
- Not all trends, opportunities, and threats apply equally to all companies within an industry, and one firms SWOT
analysis is not applicable to another.
- Specific trends may benefit some companies while they harm others.
- SWOT analysis is not the unquestionable solution to strategic planning and should not be an end in itself. It is a
framework that allows a manager to classify issues and observations in a meaningful and useful way.
- It does have its limitations. It is simply a starting point for discussion.
- Cannot yield environmental forecasts nor show managers how to achieve a competitive advantage.
- SWOTs value lies in providing a systematic framework to initiate discussion among thoughtful managers who are
contemplating the challenges and opportunities facing their firm.
The General Environment
- Composed of factors that can have dramatic effects on a firms strategy and critically affect its performance.
- Firm has little ability to predict trends and events in the general environment and even less ability to control them.
- Divide the general environment into 6 segments:
1. Demographic/Psychological: Root of many changes in society.
- Demographics include elements such as the aging population, rising or declining affluence, changes in ethnic
composition, geographic distribution of the population, and disparities in income level.
- Psychographics reflect the various attitude and interest differences among individuals and complement the
demographic characteristics of the population. Capture the variance among many different individuals who may

belong to a particular group, such as urban professionals, college students, and stay- home fathers, but vary widely in
their perceptions, priorities, and the ways they interpret and react to external events.
Impact of a demographic trend varies across industries.
Ex. The aging of the Canadian population might have a positive effect on the real estate and consumer industries but a
negative impact on manufacturers of diapers and baby food. Rising levels of affluence in many developed countries
bode well for brokerage services as well as upscale pet stores. Same trends may have an adverse effect on fast- food
chains because people can afford to dine at higher- priced restaurants. Fast- food restaurants depend, for their efficient
operation, on minimum- wage employees, but the competition for labour intensifies as more attractive employment
opportunities become prevalent, thus threatening the employment base for restaurants.
The aging baby boomers, which control an estimated 80 percent of the wealth in Canada, will be reaching retirement
in just a few years. The shift in what constitutes a family, households are smaller.
The baby- boom echo those born during the 1980s to the baby boomers are repeating the buying behaviours of
their parents as they go through college, rent apartments, and form families of their own.

2. Sociocultural: Influence the values, beliefs, and lifestyles of a society.

- Ex. Higher percentage of women in the workforce, dual- income families, increases in the number of temporary
workers, greater concern for healthy diets and physical fitness, greater interest in the environment, and postponement
of having children.
- Such forces enhance sales of products and services in many industries but depress sales in others.
- Ex. The increased number of women in the workforce has increased the need for business clothing merchandise but
decreased the demand for baking product staples (have less time to cook from scratch). Greater concern for
health/fitness helped industries that manufacture exercise equipment and healthful foods but harmed industries that
produce snack foods and candy.
3. Political/Legal: Define the regulations with which industries must comply.
- Include environmental regulation, occupational health and safety legislation, immigration policies, deregulation of
utilities and other industries, and increases in provincially mandated minimum wages.
- Ex. The U. S. Congress passed the Sarbanes- Oxley Act in 2002, and Canada followed soon with similar provisions,
which greatly increased the accountability of auditors, executives, members of the board of directors, and corporate
lawyers. Those provisions were introduced in response to the widespread perception that existing governance
mechanisms had failed to protect the interests of shareholders, employees, and creditors.
4. Technological: Developments in technology lead to new products and services and improve how they are produced
and delivered to the end user. Innovations can create entirely new industries and alter the boundaries of existing
industries.
- Ex. Genetic engineering, Internet technology, computer- aided design/computer- aided manufacturing, research in
artificial and exotic materials, and, on the downside, pollution and global warming.
- Combination of information technology and the Internet. Internet has reduced the cost of getting information and
increased its availability, boosting company profits.
- There are downsides to technology development. In addition to ethical issues raised by advances in biotechnology,
there are threats to our environment associated with the emission of greenhouse gases.
5. Economic: Economy has an impact on all industries, from suppliers of raw materials to manufacturers of finished
goods and services as well as all organizations in the service, wholesale, retail, government, and non- profit sectors.
- Key economic indicators include interest rates, unemployment rates, the consumer price index, the gross domestic
product, and net disposable income. Other economic indicators are associated with equity markets.
- Ex. The recent unfavourable performance of the stock market and the weakened overall economic conditions in the
United States, as well as in Canada and the rest of the world, have been precipitated by the boom in the housing sector
that was fuelled mainly by a series of interest rate cuts by central banks.
6. Global: Increasing trend for firms to expand their operations and market reach beyond the borders of their home
country.
- Globalization provides opportunities to access larger potential markets and a broader base of factors of production
such as raw materials, labour, skilled managers, and technical professionals.
- Also carry many political, social, and economic risks.
- Ex. Important elements in the global segment include exchange rates, global trade, the economic emergence of China
and India, trade agreements among regional blocs (NAFTA and EU), and the General Agreement on Tariffs and Trade

(GATT). Increases in trade across national boundaries provide benefits to cargo and shipping industries but have a
minimal impact on service industries such as bookkeeping and medical services. The emergence of China as an
economic power has benefited many industries and sectors, including steel, construction, computers, as well as
consumer goods. Negative impact on the clothing sector in North America and has seriously challenged many
manufacturers.
Few industries are as global as the automobile industry.
General Environment: Key Trends and Events

 Relationships Among Elements and the General Environment

- Two demographic trends, the aging of the population and regional population shifts, have important implications for
the economic segment (in terms of tax policies to provide benefits to increasing numbers of older citizens) and the
political segment (in terms of the relative priorities set on the governments agenda).
- Emergence of information technology as a means to increase the rate of productivity gains across many developed
countries. Such use of information technology results in lower inflation (an important element of the economic
segment) and helps offset costs associated with higher labour rates.
- The effects of a trend or event in the general environment vary across industries.
- Ex. Commodity price increases, especially for oil and gas, have boosted the economies of Alberta, Saskatchewan, and
Newfoundland and have increased the value of the Canadian dollar by some 50 percent over the last few years. Had
devastating effects on the manufacturing sector in Ontario and Quebec whose exports to the U. S. have been
hammered by the increasing value of the loonie.
Impact of General Environmental Trends and Events on Various Industries

The Competitive Environment

Managers must also consider the competitive environment, sometimes referred to as the task or industry environment.
Nature of competition in an industry as well as the profitability of a particular firm is more directly influenced by
developments in the competitive environment.
Competitive environment consists of many factors that are predominantly relevant to a firms strategy.
These include existing or potential competitors, customers, and suppliers.
Potential competitors may include a supplier considering forward integration, such as an automobile manufacturer
acquiring a rental car company, or a firm in an entirely new industry introducing a similar product that uses a more
efficient technology.

Porters Five-Forces Model of the Industry Competition

- Porter model has been the most commonly used analytical tool for examining the competitive environment.
- It describes the competitive environment in terms of five basic competitive forces:
1. The threat of new entrants.
- Refers to the possibility that new competitors may erode the profits of established firms in the industry.
- The extent of the threat depends on existing barriers to entry and the combined reactions from existing competitors.
- If entry barriers are high and/or the newcomer can anticipate a sharp retaliation from established competitors, the
threat of entry is low. These circumstances discourage new competitors. There are six major sources of entry barriers:
o A) Economics of Scale:
Refer to spreading the costs of production and other business activities over a large number of units produced.
The per-unit cost of a product typically decreases as the absolute volume produced within a period increases.
Larger facilities, automation, fixed overhead costs, and advertising expenses can be some of the typical
sources of economies of scale for a traditional manufacturer.
Ex. Research and development costs, commercialization expenses, and legal and regulatory compliance give
significant rise to economies of scale in the pharmaceutical industry.
The presence of this deters entry by forcing the firm contemplating entry to come in on a large scale and risk
strong reaction from existing firms or come in on a small scale and accept a cost disadvantage.
o

B) Product Differentiation:
When existing competitors have strong brand identification and customer loyalty, differentiation creates a
barrier to entry by forcing entrants to spend heavily to overcome existing customer loyalties.
Building a brand requires enormous investment, takes time, and is of course fraught with risk.

C) Capital Requirements:
The need to invest large financial resources to compete creates a barrier to entry, especially if the capital is
required for risky or unrecoverable upfront advertising or research and development.

D) Switching Costs:
One- time costs that the buyer faces when switching from one suppliers product or service to another.
Specialized equipment, non-standardized technologies, and unique inputs to a specific production process are
some of the elements that generate switching costs and make it harder for customers to move away from an
established firm to a new entrant.

E) Access to Distribution Channels:

The new entrants need to secure distribution for its product can create a barrier to entry.
Exclusive agreements, restrictive practices, and franchise networks provide preferential access to an
incumbent and preclude newcomers from establishing a foothold into a market.

F) Cost Disadvantages Independent of Scale:

Some existing competitors may have advantages that are independent of size or economies of scale. Derive
from:
proprietary products
favourable access to raw materials
government subsidies
favourable government policies
In an industry where few, or none, of these entry barriers are present, the threat of new entry is high.

If a new firm can launch its business with little capital investment or can operate efficiently despite its small
scale of operation, it is likely to be a serious threat, as new competitors can easily erode the profits of
established firms.
2. The bargaining power of buyers.
- Buyers threaten an industry by forcing down prices, bargaining for higher quality or more services, and playing
competitors against each other. These actions erode industry profitability.
- The power of each large buyer or buyer group depends on attributes of the market situation and the importance of that
groups purchases to the industrys overall business. A buyer is powerful under the following conditions:
o A) It purchases large volumes relative to a sellers sales.
If a single buyer purchases a large percentage of a suppliers sales, the importance of the buyers business to
the supplier increases. Powerful in industries with high fixed cost (automobile manufacturers to the steel
industry).
o

B) The products it purchases from the industry are standard or undifferentiated.

Know they can find alternative suppliers; they play one company against the other, as in commodity grain
products.

C) The buyer faces few switching costs.

Switching costs lock the buyer to particular sellers.
Specialized components force buyers to deal with specific suppliers and largely accept their terms.
When buyers can easily switch between suppliers for their needs, they can play one supplier against another.
The buyers power is further enhanced if the seller faces high switching costs.

D) It earns low profits.

Create incentives to lower purchasing costs. Highly profitable buyers are generally less price sensitive.

E) The buyers pose a credible threat of backward integration.

If buyers are either partially integrated or pose a credible threat of backward integration, they are typically
able to secure concessions.

F) The industrys product is unimportant to the quality of the buyers products or services.
When the quality of the buyers products is not affected by the industrys product, the buyer is more
indifferent to the inputs features and concentrates, instead, on negotiating the lowest price.

3. The bargaining power of suppliers.

- Suppliers can exert bargaining power over participants in an industry by threatening to raise prices, alter the terms of
supply, or even lower the number of features and reduce the quality of goods and services they provide to the industry.
- Powerful suppliers can squeeze the profitability of firms in an industry to the point of taking away all the profits.
- The factors that make suppliers powerful tend to be the mirror opposite of those that make buyers powerful.
- A supplier will be powerful in the following circumstances:
o A) The supplier industry is dominated by a few companies and is more concentrated (few firms dominate the
industry) than the industry it sells to.
Suppliers selling to fragmented industries exert influence over prices, quality, and terms.
o

B) The industry is not an important customer of the supplier.

When suppliers sell to several industries and a particular industry does not represent a significant fraction of
their sales, suppliers are able to exert power.

C) The suppliers product is an important input to the buyers business.

When such inputs are important to the success of the buyers manufacturing process or product quality, the
bargaining power of suppliers is high.

D) The suppliers products are differentiated or it has built up switching costs for the buyer.
Differentiation or switching costs facing the buyers cut off their options to play one supplier against another.

When buyers are unable to substitute among different inputs, their suppliers can exert substantial power in
determining prices and terms. (Conversely, even large suppliers can be affected if they have to compete with
substitutes.)
o
-

E) The supplier group poses a credible threat of forward integration.

This provides a check against the industrys ability to improve the terms by which it purchases.

When considering supplier power, we typically focus on companies that supply raw materials, equipment, machinery,
and associated services. But the supply of labour is also an important input to businesses, and labours power varies
over time and across occupations and industries.
Immigration, de-unionization, and globalization have also diminished the relative bargaining power of those sectors of
the labour market.

4. The threat of substitute products and services.

- All firms within an industry compete with industries producing substitute products and services.
- Substitutes limit the potential returns of an industry by placing a ceiling on the prices that firms in that industry can
charge.
- The more attractive the price/performance ratio of substitute products, the tighter the lid on an industrys profits.
- Identifying substitute products involves searching for other products or services that can perform the same function as
the industrys offerings or satisfy the same needs of its customers.
- Ex. Flowers, greeting cards, and a box of chocolates have few physical characteristics in common, but they are easy
substitutes in the eyes of well- wishing consumers.
- Ex. Airline industry might not consider video cameras much of a threat. But as digital technology has improved and
wireless and other forms of telecommunication have become more efficient, teleconferencing has become a viable
substitute for business travel for many executives.
5. The intensity of rivalry among competitors in an industry.
- Rivalry among existing competitors takes the form of jockeying for position. Firms use tactics like price competition,
advertising battles, product introductions, and increased customer service or warranties.
- Rivalry occurs when competitors sense the pressure or act on an opportunity to improve their position.
- Some forms of competition, such as price competition, are typically highly destabilizing and are likely to erode the
average level of profitability in an industry.
- Rivals easily match price cuts, an action that lowers profits for all firms. Advertising battles expand overall demand or
enhance the level of product differentiation for the benefit of all firms in the industry. Rivalry, of course, differs across
industries.
- Intense rivalry is the result of several interacting factors, including the following:
o A) Numerous or equally balanced competitors.
When there are many firms in an industry, the likelihood of mavericks is great. Some firms believe they can
make moves without being noticed.
Even when there are relatively few firms, and they are nearly equal in size and resources, instability results
from fighting among companies that have the resources for sustained and vigorous retaliation.
o

B) Slow industry growth.

Turns competition into a fight for market share since firms seeking to expand their sales have to earn those
new sales away from their competitors.

C) High fixed costs.

Create strong pressures for all firms to increase capacity. Excess capacity often leads to escalating pricecutting.
o

D) Lack of differentiation or switching costs.

Where the product or service is perceived as a commodity or near commodity, the buyers choice is typically
based on price, service, and well- defined features, resulting in pressures from intense price and ser-vice
competition.
Lack of switching costs has the same effect, as competitors can easily replace each others product offerings.

E) Capacity augmented in large increments.

Where economies of scale require that capacity must be added in large increments, capacity additions can be
very disruptive to the industry supply/ demand balance.

F) High exit barriers.

Exit barriers are economic, strategic, and emotional factors that keep firms competing even though they may
be earning low or negative returns on their investments.
Some exit barriers are specialized assets, fixed costs of exit, strategic interrelationships (relationships between
the business units and others within a company in terms of image, marketing, shared facilities, and so on),
emotional barriers, and government and social pressures (governmental discouragement of exit out of concern
for job loss).
Rivalry between firms is often based solely on price, but it can involve other factors.
o

Each of these forces affects a firms ability to compete in a given market. Together, they determine the profit potential
for a particular industry.
It helps them assess the overall attractiveness of an industry and decide whether their firm should remain in or exit
that industry.
It provides the rationale for increasing or decreasing resource commitments. The model helps assess how to improve a
firms competitive position with regard to each of the five forces.
Ex. Managers can use the five- forces model to create higher entry barriers that discourage new rivals from
competing. May develop strong relationships with their distribution channels to better balance the bargaining power
of their buyers.
Porters Five-Forces Model of Industry Competition

Using Industry Analysis: A Few Caveats

- For industry analysis to be valuable, a company must collect and evaluate a wide variety of information from many
sources.
- As the trend toward globalization accelerates, information on foreign markets as well as on a wider variety of
competitors, suppliers, customers, substitutes, and potential new entrants becomes more critical.
- Industry analysis helps a firm to not only to evaluate the profit potential of an industry but also to consider various
ways to strengthen its position vis- -vis the five forces.
- The five forces analysis implicitly assumes a zero- sum game, determining how a firm can enhance its position
relative to the forces. Such an approach can often be short- sighted; that is, it can overlook the many potential benefits
of developing constructive win- win relationships with suppliers and customers.
- Establishing long- term mutually beneficial relationships with suppliers improves a firms ability to implement just-intime inventory systems, which allow it to manage inventories better and respond faster to market demands.
- Companies that exploits its powerful position against a supplier will likely face reprisal when the balance of power
shifts. By working together as partners, suppliers and manufacturers can provide the greatest value at the lowest
possible cost.

The five forces analysis has also been criticized for being essentially a static analysis. However, this position misses
two critical points that are reflective of the dynamic nature of the five- forces model.
o First, the model should not be used to describe the structure of an industry at a single moment in time.
It might represent how various elements align at a single instant, but it does not convey how they got
there, nor the direction in which they are heading. Five- forces analysis depicts an industry that might
be converging or diverging, where firms are increasing or withdrawing from their involvement in
various activities and where developments are continuous or discontinuous. Requires that managers
elaborate on those issues before conclusions can be drawn.
o Second, both scholars and practitioners recognize that external forces as well as strategies of individual firms
are continually changing the structure of all industries.
Complementors are products/services that have possible impact on the value of a firms own products/services. Those
who produce complements are usually referred to as complementors.
The Value Net

Industry Dynamics
- One of the criticisms often levelled against traditional industry analysis is that it is static, while the competitive
landscape undergoes very rapid changes due to technological developments, shifting customer preferences, changes in
the regulatory environment, as well as competitive moves of the incumbents.
- An industry whose core activities or core assets face obsolescence will follow one of four change paths.
o A) Radical Change (FedEx Delivery): Occurs when core activities and core assets both face the threat of
obsolescence.
Ex. The overnight delivery industry is experiencing this problem. Availability of cheap and instantaneous
document delivery through fax machines and the Internet has made the core assets (delivery trucks, airplanes,
and a central hub) and core activities (document tracking) of firms such as FedEx suddenly less relevant.
o

B) Creative Change (Pharmaceutical Industry): When core assets are threatened but core activities are not.
Ex. Include the film production industry, the pharmaceutical industry, oil and gas exploration, and prepackaged software. There is rapid asset turnover but relatively stable relationships with suppliers and
customers. In the pharmaceutical industry patents for some drugs expire while new drugs are approved, but
the core activities of commercialization and marketing continue to be relevant.

C) Intermediating Change (Car dealership): Occurs when core assets are not threatened but core activities
are.
Ex. Automobile dealerships as customers can get all the information they need online. Second, as the quality
and longevity of cars improve, individual purchases have become less frequent. Car manufacturers are
increasingly sharing the task of customer relations with the dealers, and, in some cases, they have even
completely taken over this function. Finally, inventory management and financing are now subject to
significant economies of scale which only large, integrated companies can take advantage of.

D) Progressive Change: Occurs in industries where neither core assets nor core activities face imminent
threat of obsolescence. Change does occur, but it is within the existing framework of the industry.
Ex. Commercial airline industry and the discount retailing industry. Their suppliers and the customers have
not changed, the core assets and activities have changed only incrementally, but over the last decade both
these industries have experienced significant changes.

Four Evolutionary Trajectories of Industry Change

When faced with radical or intermediating changes, it is wise to aggressively pursue profits in the near term while
avoiding investments that could reduce strategic flexibility in the future.
Another response is forming alliances, often with rivals, to protect common interests and defend against new
competition.
Diversification can also be an effective solution for firms facing radical change.
Firms facing intermediating change must find unconventional ways to extract profits from their core assets.
Firms facing creative change include spreading the risk of new-project development over a portfolio of assets or
outsourcing project management and development tasks.
Successful companies in progressive change industries carve out distinct positions based on technical or marketing
expertise or geography. They might also develop a system of interrelated activities that are a safeguard against
competitors.

Strategic Groups within Industries

- In an industry analysis, two assumptions are unquestionable: (1) no two firms are totally different and (2) no two
firms are exactly the same.
- The analysis can be enhanced by identifying groups of firms that are mostly similar to each other, which are known as
strategic groups.
- Important because rivalry tends to be greater among firms that are alike.
- Ex. Canadian Tire is more concerned about Wal-Mart than Holt Renfrew, Mercedes is more concerned about BMW
than Hyundai, and the Hudsons Bay Company is more concerned about Sears than Club Monaco.
- Classifying an industry into strategic groups involves judgment.
- Dimensions include breadth of product and geographic scope, price/quality, degree of vertical integration, type of
distribution (dealers, mass merchandisers, private label), and so on.
Benefits of Strategic Grouping
1. Mobility barriers are factors that deter the movement of firms from one strategic position to another.
o Strategic groupings help a firm identify barriers to mobility that protects a group from attacks by other
groups.
2. Helps a firm identify groups whose competitive position may be marginal or weak.
3. Help chart the future directions of firms strategies. Arrows emanating from each strategic group can represent the
direction in which the group (or a firm within the group) seems to be moving.
4. Helpful in thinking through the implications of each industry trend.

Chapter 3

Value- chain
- Analysis views the organization as a sequential process of value- creating activities.
- Includes various necessary inputs to create the product offering that the firm brings to the marketplace
- Disaggregates a firm into its various activities in order to understand the ways all inputs are deployed and costs are
incurred in creating a firms products and services.
- This also helps in creating a competitive advantage for the firm

Competitive Advantage
- In compt. Terms, value is the amount that buyers are willing to pay for what a firm provides them
- Value can be measured by total revenue, reflection of price a firms product commands and quantity it can sell
- Firm seen profitable to the extent the value it receives exceeds the costs of production ( producing or creating product
or service)
- If the firm is able to create value which exceeds its costs for the customer, it creates the concept of competitive
advantage
Porter describes two different categories of activities:
1. Primary activities
- Inbound logistics
Operations
Outbound logistics
Marketing and sales
Service contribute to the physical creation of the product or service, its sale and transfer to the buyer, and its
service after the sale.
Inbound Logistics
- Inbound logistics are primarily associated with receiving, storing, and distributing inputs to the product
- Include material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers.
- Just- in- time (JIT) inventory systems, for example, were designed to achieve efficient inbound logistics.
Operations
activities associated with transforming inputs into the final product form, including machining, packaging, assembly,
testing, printing, and facility operations
- Creating environmentally friendly manufacturing is one way a firm can use operations to achieve competitive
advantage.
Outbound Logistics
- Activities of outbound logistics are associated with collecting, storing, and distributing the product or service to
buyers.
- Includes finished goods, ware-housing, material handling, delivery vehicle operation, order processing, and
scheduling

Marketing and sales

- Efforts a firm engages in to gather market intelligence and understand its customers
the activities associated with purchases of products and services by end users
- the inducements used to get them to make purchases
- Include market research, consumer analysis, advertising, promotion, sales force, quoting, channel selection, channel
relations, and pricing
- Not only is to create the best product but it is also important to convince channels partners to carry their product, that
it would be in the best interests for them (you also want them to market the product that aligns with your marketing
strategy)
Service
- Service consists of the range of activities associated with enhancing or maintain the value of the product, such as
installation, maintenance, support, repair, training, parts supply, and product adjustment
- Example: can add value through customer service
2. Support Activities
(Relationships between functional groups)
- procurement
- technology development
- human resource management
Firm infrastructure either adds value by them or add value through important relationships with both primary
activities and other support activities.
Support activities might not directly add value to the creation of the product, but they provide for and facilitate the
primary activities and ensure that they operate efficiently and effectively. ( which broken into four categories as
shown below)
When looking at the firms value chain system it is important to put the organization in the broadest context and
encompass a firms suppliers, customers and strategic alliances
Example: steel producers value chain includes auto parts makers, vehicle assemblers, and car dealers constitute the
automobile value system, and the value chain of one player contributes to the creation of value at another player
Such as Magna, contribute to the value chain of an assembler that is striving to produce an attractive, reasonably
priced car
Understanding how value is created within the organization is, therefore, not enough; managers must become aware
of how value is created for other organizations that are involved in the overall supply chain or distribution channel in
which the firm participates
Procurement
- refers to the function of purchasing inputs to be used in the firms value chain
- Purchased inputs include raw materials, supplies, and other consumable items as well as assets such as machinery,
laboratory equipment, office equipment, and buildings.
- Important to note it is not looking at the items themselves, but the purchasing of the items
- *For example: say you are purchasing inputs from a supplier, if you are able to improve the quality of your suppliers,
this improves your procurement as well
Technology Development
- Every value activity embodies technology
- Technologies employed can be very broad within organizations
- Ranging from technologies used to prepare documents and transport goods to those embodied in processes and
equipment or the product itself
- Technology development related to the product and its features supports the entire value chain
- Other technology development is associated with particular primary or support activities.
- Example Wall-marts use of inventory system technology the supports there inbound activities
Human Resource Management

- Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel
- supports both primary and support activities ( e. g., hiring of engineers and scientists) and the entire value chain ( e. g.,
negotiations with labour unions)
General Administration
- Consists of a number of activities, including general management, planning, finance, accounting, legal and government
affairs, quality management, and information systems. Administration typically supports the entire value chain and
not individual activities.
- Administrative activities can be also viewed as competitive advantage effective information systems can contribute
significantly to cost position, while in some industries, top management plays a vital role in dealing with important
buyers.
Resource base of the firm
- To carry out the basic activities of the value chain, the firm needs resources
- firms resource base comprises all the inputs necessary for the performance of each of the activities, irrespective of who
owns or controls those resources
- firm may sometimes contract for certain resources and other resources they own
Two Perspective to RBV (resource based view)
1. the internal analysis of phenomena within a company
2. an external analysis of the industry and its competitive environment.
- Goes into greater context compared to just a swot analysis. Swot tells you a companys strength but doesnt tell you to
turn it into a competitive advantage
Some benefits of RBV include:
- very useful framework for gaining insights on why some competitors are more profitable than others
- helpful in developing strategies for individual businesses and diversified firms since it reveals how core competencies
embedded in a firm can help it exploit new product and market opportunities
- * RBV explicitly directs managers to integrate the internal and external perspectives and helps them develop strategies
that build on core competencies and enable the firm to achieve sustainable competitive advantages
Resources include all assets, capabilities, organizational processes, information, knowledge, systems, and so forth
controlled by a firm, which enable it to develop and implement value- creating strategies.

3 key Types of Resources Firms Poses

Tangible Resources
- Assets that are relatively easy to identify, measure, and value are called tangible resources
- Include concrete, physical assets such as real estate, cash, production facilities and equipment, raw materials, and
components
- value arises from their physical characteristics such as their location, capacity, and features
Intangible Resources
- Assets that are harder to identify and quantify are called intangible resources
- not concrete and can be elusive; yet, they are potentially invaluable inputs into a firms operations
- include brand names, company reputations, knowledge, technology, patents, copyrights and trademarks, trade secrets,
expertise, and experience
- Intangible resources are much more difficult for competitors (and for a firms own managers) to account for or imitate
since they are typically embedded in unique routines and practices that have evolved and accumulated over time
- Intangible assets are combined with tangible assets to create the firms product offerings
- all the real value, at least what is most desirable to their customers, is created by the intangibles
- e. g., experience and capability of employees, as well as trust in and effectiveness of work teams), innovation resources
(e. g., technical and scientific expertise and ideas), and reputation resources (e. g., brand name, reputation with

suppliers for fairness and with customers for reliability and product quality). A firms culture may also be a resource
that provides competitive advantage
Organizational Capabilities resource
- Organizational capabilities are not specific tangible or intangible assets but the competencies and skills that a firm
employs to transform those assets into outputs
- Examples of organizational capabilities are lean manufacturing, excellent product development capabilities, superb
innovation processes, and flexibility in manufacturing processes
- In some cases, a resource or capability helps a firm to increase its revenues or to lower costs, but the firm derives only a
temporary advantage because competitors quickly imitate or substitute for it
4 criterias for Assessing Resources and capabilities
*Resource or capability must have these attributes in order to provide a sutainable competitve advantage

Is the resource valuable?

- They are valuable when they contribute to the fulfillment of customers wants at a price the customers are willing to pay
Is the resource rare?
- competitors or potential competitors also possess the same valuable resource, it is not a source of competitive advantage
because all of these firms can potentially exploit that resource in the same way
- For a resource to provide competitive advantages, it must be uncommon that is, rare relative to other competitors
Can resource be imitated easily?
- Inimitability (difficulty in imitating) is a key to value creation because it constrains competition
- If a resource is inimitable, then any advantages generated are more likely to be sustainable
- Having a resource that competitors can easily copy generates only temporary value, managers often fail to apply this
test, and they tend to base long-term strategies on resources that are imitable
Advantage based on inimitability wont last forever either. Competitors will eventually discover a way to copy most valuable
resources
Managers can fore-stall this and sustain profits for a while longer by developing strategies around resources that have
at least one of the following four characteristics
1) Physical uniqueness is inherently difficult to copy. Examples: beautiful resort location, mineral rights, or Merck &
Co.s pharmaceutical patents simply cannot be imitated
2) Path dependency that resources are unique and, therefore, scarce because of all that has happened in the course of
their development and/ or accumulation for example: The Gerber Products Co. brand name for baby food is an

example of a resource that is potentially inimitable. Recreating Gerbers brand loyalty would be a time- consuming
process that competitors could not expedite, even with expensive marketing campaigns
3) Casual ambiguity Inimitability may also arise because it is impossible to disentangle the causes or possible
explanations for either what the valuable resource is or how it can be recreated
- In many cases, causally ambiguous resources are organizational capabilities.
4) Social complexity firms are socially complex making it hard to imitateExamples include interpersonal relations
among the managers of a firm, its culture (ex.zappos), or its reputation with its suppliers and customers
Are substitutes readily available?
- Very different resources can become strategic substitutes online sellers, such as Amazon. ca, diminish the uniqueness
of prime retail locations by substituting bricks- and- mortar locations with the convenience of the Internet
4 factor Employees and Manager can generate a higher profit
1.Employee bargaining power
- If employees are vital to forming a firms unique capability, they will earn disproportionately high wages (for example,
if employees know vital information, they have more power of earning higher wages)
2.Employee replacement costs
- If employees skills are idiosyncratic and rare (a source of resource-based advantage), they should have high bargaining
power, based on the high cost required by the firm to replace them
3.Employee exit costs
- This factor may tend to reduce an employees bargaining power. An individual may face high personal costs when
leaving the organization (other things to take into consideration is that some employee skills may be more applicable
for that job, but other employers may see it as limited value)
4.Manager Bargaining Power
- managers power would be based on how well they create resource-based advantages
- They are generally charged with creating value through the process of organizing, coordinating, and leveraging
employees as well as other forms of capital such as plant, equipment, and financial capital
Evaluating firm performance
- Two approaches to evaluate a firms performance
(1) financial ratio analysis, which, generally speaking, identifies how a firm is performing according to its balance sheet
and income statement
- When performing a financial ratio analysis, managers must take into account the firms performance from a historical
perspective (not just at one point in time) as well as the way in which it compares with industry norms and key
competitors
(2) Broader stakeholder perspective Firms must satisfy a broad range of stakeholders, including employees, customers,
and owners, to ensure their long- term viability
Financial ratio analysis need to analyze 5 different types
1. Short- term solvency or liquidity
2.Long- term solvency measures
3.Asset management (or turnover)
4.Profitability
5. Market value
Financial analysis of ratios must go beyond just looking at the ratios for example you should look a ratios over a time period
to see how ratios are changing
Historical Comparisons
- When managers evaluate a firms financial performance, it is very useful to examine changes in its financial position
over time
- This provides means of evaluating trends

Comparison with industry trends

- A company may compare its financial performance to other firms, but when compared to industry norms you may see
your company performance may not be that great
- By comparing to all firms in an industry, we can calculate relative performance
Comparison with Key competitors
- we can gain valuable insights into a firms financial and competitive position if we make comparisons between a firm
and its most direct competitors
- firms that have similar strategies fall into a strategic group of an industry
The BALANCE SCORECARD (this integrates the financial ratio perspective with broader stakeholder perspective)
- The balanced scorecard enables managers to consider their business from four key perspectives
(1) Customer perspective: How do customers see us?
(2) Internal business perspective: What must we excel at?
(3) Innovation and learning perspective: Can we continue to improve and create value?
(4) Financial perspective: How do we look to shareholders?
Customer perspective
- The way in which a company is performing from its customers perspective is a top priority for management
- balanced scorecard requires that managers translate their general mission statements on customer service into specific
measures that reflect the factors that really matter to customers
- For the balanced scorecard to work, managers must articulate goals for four key categories of customer concerns: time,
quality, performance and service, and cost
Internal Business Perspective
- managers must focus on those critical internal operations that enable them to satisfy customer needs
- Firms also must identify and measure the key resources and capabilities they need to ensure continued strategic success
Innovation and learning perspective
- The customer and internal business process measures on the balanced scorecard identify the parameters that the
company considers most critical to success
- To survive and prosper, managers must make frequent changes to existing products and services as well as introduce
entirely new products with expanded capabilities
- A firms ability to improve, innovate, and learn is tied directly to its value
- (So if the firm is able to create new products, or improve efficiencies, they can penetrate markets, increase revenues
etc.)
Financial Perspective
- Measures of financial performance indicate whether the companys strategy, implementation, and execution are, indeed,
contributing to bottom- line improvement
- Typical financial goals include profitability, growth, and shareholder value.
- Periodic financial statements remind managers that improved quality, response time, productivity, and innovative
products benefit the firm only when they result in improved sales, increased market share, reduced operating
expenses, or higher asset turnover

Chapter 4 Recognizing a firms intellectual assets

Central Role of Intellectual Capital in todays Economy
- More than 50% of GDP of developed economies is knowledge based
(The machine age was a physical world. It consisted of things. Companies made and distributed things (physical products).
Management allocated things (capital budgets); management invested in things (plant and equipment)]
- In the knowledge economy, wealth is increasingly created through the effective management of intellectual assets and
knowledge workers instead of by the efficient control of physical and financial assets
- In essence, paying for a set of talents, capabilities, skills, and ideas intellectual capital not physical and financial
resources

- How do companies create this value in knowledge intensive economy? The answer rests on their ability to manage
their intellectual assets and attract and effectively leverage human capital through mechanisms that create products
and services of value.
Intellectual Capital
- Intellectual capital consists of intangible assets, such as human capital, social capital, intellectual property, and brands
and trademarks, which all contribute to a firms ability to create value through new knowledge and its useful
applications
- Intellectual capital is arguably the only source of sustainable competitive advantage
- Human capital consists of the individual capabilities, knowledge, skills, and experience of the companys
employees and managers.
- This concerns knowledge that is relevant to the task at hand and the capacity to add to the reservoir of knowledge,
skills, and experience through learning
Social Capital
- involves the network of relationships that individuals have throughout the organization
- relationships are critical in sharing and leveraging knowledge and in acquiring resources
- Social capital extends beyond the organizational boundaries to include relationships between the firm and its suppliers,
customers, and alliance partners
Types of Intellectual knowledge

Two Types of Knowledge

(1) Explicit knowledge (rules)
(2) Tactic knowledge (selling strategy)
Explicit Knowledge (rules)
- explicit knowledge that is codified, documented, easily reproduced, and widely distributed
- Examples include engineering drawings, software code, sales collateral, and patents
Tactic Knowledge (selling strategy)
- knowledge that is, in essence, in the minds of employees and is based on their experiences and backgrounds
- Tacit knowledge is shared only with the consent and participation of the individual
Intellectual Property
- Ideas, innovations, and creations contribute to sustainable competitive advantage only when a firm is able to protect its
exclusive right to extract value from them for a long period of time and prevent others from copying or imitating them
for their own benefits
- For example trademarks, copyrights etc.
New knowledge
- is constantly being created in organizations. It involves the continual interaction of explicit and tacit knowledge
- For example, creating a computer code, the computer code in itself is explicit knowledge, however the ideas based on
individuals experience is tacit knowledge. When the code is revised and other details may be added this would be
considered New Knowledge
- new knowledge is created as they make modifications to the existing code

Human Capital: Foundation of intellectual capital

- organizations must recruit talented people employees at all levels with the proper sets of skills and capabilities
coupled with the right values and attitudes
- skills and attitudes must be continually developed, strengthened, and reinforced, and each employee must be motivated
and focused on the organizations goals and objectives
- all three legs of the diagram are significantly interlinked. If one leg breaks the whole chain breaks.

Attracting Human Capital

- attracting and selecting the right person
- Many human resource professionals still approach employee selection from a lock and key mentality that is, fit a
key (a job candidate) into a lock (the job). Whats your genius talk about fitting the right (job) for (the candidate)
- This involves a thorough analysis of the person and the job
- However this precise match process only focuses on motor skills, specific information gathering and processing
capabilities, and communication skills) in the task itself, it does not consider on the broad general knowledge and
experience, social skills, values, beliefs, and attitudes of employees
- Task- specific skills can be learned in relatively short order. (This does not imply, however, that task- specific skills are
unimportant; rather, it suggests that the requisite skill sets must be viewed as a necessary but not sufficient condition)
Hire for Attitude Train for skill
- Organizations are increasingly placing their emphasis on the general knowledge and experience, social skills, values,
beliefs, and attitudes of employees
- Many have argued that the most common and fatal hiring mistake is to select individuals with the right skills but
the wrong mindset on the assumption that we can change them
Sound Recruiting Approaches and Networking
- Hiring people through employee references
- Have a group of experts for recruiting (for example Microsoft does not hire as much as they recruit)
Developing Human Capital
- Hiring is not enough Rather, training and development must take place at all levels of the organization
- In addition to training, the effective development of human capital throughout the organization entails widespread
involvement, monitoring of progress, and continuous evaluation and feedback
Encouraging Widespread Involvement
- The development of human capital requires the active involvement of leaders at all levels throughout the organization
Cascade Approach
Monitoring Progress and tracking development
- tracking individual progress and sharing this knowledge with both the employee and key managers becomes
essential

Evaluating Human Capital

- Individuals must share their knowledge and work together constructively to achieve collective, not just individual, goals
- Using 360 degree evaluation and feedback systems
- In these systems, superiors, direct reports, colleagues, and even internal and external customers rate a persons skills
- The 360- degree feedback system complements teamwork, employee involvement, and organizational flattening.
Moreover, as organizations continue to push responsibility downward, traditional top- down appraisal systems
become insufficient
GE 360 (this a company example the book provided)
- GEs 360 leadership assessment evaluates all managers on 10 distinct characteristics namely, vision, customer/
quality focus, integrity, accountability/ commitment, communication/ influence, shared ownership/ boundary- less,
team building/ empowerment, knowledge/ expertise/ intellect, initiative/ speed, and global mindset
- Each of these characteristics has 4 performance criteria, and those around a manager are asked to rate that person on
those criteria. With respect to vision, for example, the four criteria are
- ( 1) the ability to develop and communicate a clear, simple, customer- focused vision/ direction for the organization
- ( 2) the ability to be forward- thinking, stretch horizons, challenge imaginations
- ( 3) the ability to inspire and energize others to commit to vision, capture minds, and lead by example
- ( 4) as appropriate, the ability to update vision to reflect constant and accelerating change affecting the business
Retaining Human Capital
- Need provide incentives, good work environment, to prevent employee from wanting to leave
- Or have legal settings, binding contracts, now claw contracts etc. that make it harder for employees to leave
- An individuals identification with the organizations mission and values, challenging work and a stimulating
environment, and financial and non- financial rewards and incentives all play a critical role in retaining a firms
human capital
Identifying with organizations MISSION and Values
- People who identify with and are committed to the core mission and values of the organization are less likely to stray or
bolt to the competition
Challenging work and stimulating work environment
- importance of intrinsic motivation: the motivation to work on something because it is interesting, exciting, satisfying, or
personally challenging
- To keep competitors from poaching talent, organizations must keep employees excited about the challenges and
opportunities available
- To keep competitors from poaching talent, organizations must keep employees excited about the challenges and
opportunities available
Financial and Non financial rewards and incentives
- Financial rewards are vital to organizations. Money (whether in the form of cash/stocks/prizes) mean different things to
employees like security, freedom, recognition, etc.
- Most surveys say money is not the main issue why employees leave
- Non- financial rewards even involve accommodating working families with children. Coping with the conflicting
demands of family and work is a problem at some point for virtually all employees
The vital role of social capital
- social capital ( that is, the friendships and working relationships among talented individuals) becomes increasingly
important as it helps tie knowledge workers to a given firm
- Knowledge workers often exhibit greater loyalties to their colleagues and their profession than to their employing
organization (therefore the firm needs create TIES with its knowledge workers)
How social capital and helps attract and retain talent

- Hiring via personal networks is the process where an organization will hire job candidates particularly if they are seen
as having the potential to bring with them a raft of valuable colleagues.
- Leaders must be aware of social relationships among professionals as important recruiting and retention mechanisms
- Social networks can provide an important mechanism for obtaining both resources and information from individuals
and organizations outside the boundary of a firm
- Also, to be a valued member of a social network, one typically has to have the requisite human capital that is,
knowledge and capabilities that can add value to other members of the network
Potential downside of Social capital
- Some companies have been damaged by high social capital that breeds groupthink a tendency not to question
shared beliefs
- When people identify strongly with a group, they sometimes support ideas that are suboptimal or simply wrong
- An excess of warm and fuzzy feelings among group members prevents people from challenging one another with
tough questions and discourages them from engaging in the creative abrasion
Using technology to leverage human capital and knowledge
- Technology can be used to leverage human capital and knowledge within organizations as well as with customers and
suppliers beyond their boundaries
- Examples range from simple applications, including the use of email and networks for product development, to more
sophisticated uses that enhance the competitive position of knowledge- intensive firms in industries such as
consulting, health care, and personal computers, and that help firms retain employees knowledge, even when they
leave
- Another example: Consider email an effective means of communicating a wide variety of information across various
parts of an organization and with suppliers and customers. It is quick, easy, and almost costless.
- The use of technology also enables professionals to work as part of virtual teams to enhance the speed and effectiveness
with which products are developed
Codifying Knowledge for competitive advantage
- One of the challenges of knowledge- intensive organizations is to capture and codify the knowledge and experience
that, in effect, resides in the heads of its employees
- The use of information technology to codify knowledge can also help a firm to integrate its internal value- chain
activities with its customers and suppliers
Retaining knowledge when employees leave
- Information technology can often help employers cope with turnover by saving some tacit knowledge that the firm
would otherwise lose
- Example: Customer relationship software, for example, automates sales and provides salespeople with access to client
histories, including prior orders and complaints. This enables salespeople to quickly become familiar with client
accounts (about which they might otherwise know nothing)

Chapter 5: Business Level Strategy

-

Without competitive advantages, firms are only able to earn, at best, economic profits - the level of normal returns
that they could expect from any investments that have the same level of risk.
Over time, firms that perform below that level will have difficulty attracting and maintaining the level of investments
needed to continue operations, as investors can achieve similar returns by putting their money in the bank or buying
bonds.
Strategy formulation is about the processes and the decisions managers make to address (1) the choices of businesses
in which to compete and (2) how to compete in these businesses.
Business- level strategy is essentially about the particular ways a firm competes in its chosen business. A firm
presumably chooses to compete in certain ways in order to create superior value as compared to competitors. The
superiority is manifested in the market places response to its products and services.
Sustainability usually results from the ongoing relevance and robustness of the competitive advantage against the
assaults of competitors, including their attempts to bypass or imitate it, and the firms ability to continuously outpace
them.

For not- for- profit organizations, the key issues are, again, sustainability, accomplishing objectives, attracting the
support of external constituencies, and generating the resources to pursue the organizations mission.

The business strategy choices available to organizations depend largely on what one views as the important
considerations and how one views the process by which managers choose their strategies.
Different schools of strategic management emphasize different perspectives of strategy and highlight formal or
informal processes, all with different fundamental principles.
The two most dominant schools are arguably the positioning school and the resource-based school.
o Former views business strategy and the corresponding role of managers as identifying and striving to occupy
the most attractive competitive positions in the marketplace. It is an outside- in perspective that emphasizes
the importance of external analysis and alignment of the firms activities in order to pursue a desirable
position against external forces.
o Latter school starts with the resources within the firm, the uniqueness of those resources, and it views the
choices for exploitation of those resources as the firms strategy.
Both perspectives provide invaluable insights for managers and reveal different but largely complementary facets of
business strategies. They also suggest alternative bases of competitive advantage.
Outside-in perspective (positioning school) has two choices: target market and type of competitive advantage.
o The first is essentially about focusing on a narrow strategic target market versus going after the whole
industry, while the second is about pursuing a low-cost strategy versus uniqueness and differentiation. Create
four generic strategies.

Types of Competitive Advantage and Sustainability

- Porter presented three generic strategies that a firm can use to overcome the five forces and achieve competitive
advantage.
1. Over-all Cost Leadership: Based on creating a low- cost position relative to a firms peers.
- Firm must manage the relationships throughout the entire value chain, devoted to lowering costs throughout the entire
chain.
2. Differentiation: Requires a firm to create products/services that are unique and valued as such in the eyes of its
customers.
- Primary emphasis is on non- price attributes for which customers will gladly pay a premium.
3. Focus Strategy: Direct its attention toward narrow product lines, buyer segments, or targeted geographic markets.
- Must attain advantages either through differentiation or a cost leadership approach.
o Overall cost leadership and differentiation strategies strive to attain advantages industry-wide,
o Focusers build their strategy with a narrow target market in mind.
-

Firms that identify with one or more of the forms of competitive advantage that Porter identified, outperform those
that do not.
o The lowest performers were those that did not identify with even a single type of advantage. Classified as
stuck in the middle- that is, unable or unwilling to make choices about how to compete, having tried to do
everything and accomplishing nothing particularly well.
When a firm decides to pursue one type of competitive advantage (low cost), it must attain parity on the basis of the
other competitive advantages (differentiation) relative to competitors.

o
o

*To generate above- average performance, a firm following an overall cost leadership position needs to be
able to stay on par with competitors with respect to differentiated products.
Ex. No Frills or Price Chopper, pursues overall cost leadership positions, still needs to pay attention to
updating and enlarging current stores, offering extended operating hours, improving shoppers convenience,
and experimenting with new ideas such as organics and green products.

1. Overall Cost Leadership: Requires a tight set of interrelated efforts that include the following:
o aggressive construction of efficient- scale facilities
o vigorous pursuit of cost reductions from experience
o tight cost and overhead control
o avoidance of marginal customer accounts
o cost minimization in all activities in the firms value chain, such as R& D, service, sales force, and advertising
Value Chain Activities: Examples of Overall Cost Leadership

Value chain can be used as an analytical tool to identify specific activities and the costs and assets associated with
them.
Porter explains analyzing the behaviour of specific cost drivers and assessing the relative costs of competitors for each
activity can demonstrate areas where a firm can develop sustainable cost advantages.
Two important concepts related to the overall cost leadership strategy:
o Economies of scale: Refer to the decline in per unit costs that usually come with larger production runs, larger
facilities, and allocating fixed costs (marketing and research and development) across more units produced.
o Experience curve: Refers to how a business learns to lower costs as it gains experience with production
processes. In most industries, with experience, unit costs of production decline as output increases.
Process improvements involve identifying the best practices in other industries and adapting them for implementation
in ones own firm. When firms benchmark competitors in their own industry, the end result is often copying and
playing catch- up.

Improving Competitive Position vis- - vis the Five Forces

Enables a firm to achieve above-average returns despite strong competition.
It protects a firm against rivalry from competitors because lower costs allow a firm to earn returns even if its
competitors eroded their profits through intense rivalry.

A low- cost position also protects firms against powerful buyers. Buyers can exert power to drive down prices only to
the level of the next most efficient producer.
Provides more flexibility to cope with demands from powerful suppliers for input cost increases.
The factors that lead to a low- cost position also provide substantial entry barriers from economies of scale and cost
advantages.
Puts the firm in a favourable position with respect to substitute products introduced by new and existing competitors.
Ex. IKEAs close attention to costs helps to protect the firm from both buyer power and intense rivalry of competitors.
They design their own furniture and order in large quantities. Thus, they are able to drive down unit costs and enjoy
relatively strong power over their suppliers.

Potential Pitfalls
- Too much focus on one or a few value- chain activities.
o Firms need to pay attention to all activities in the value chain to manage their overall costs. Too often,
managers make big cuts in operating expenses but dont question year- to- year spending on capital projects.
- A common input or raw material among rivals.
o Firms that compete on overall low- cost strategies are vulnerable to price increases in the factors of
production. Are less able to pass on price increases because customers can easily move to competitors who
have lower prices.
- A strategy that is imitated too easily.
o Firms strategy may consist of value- creating activities that are easy to imitate.
- A lack of equivalence on differentiation.
o Firms endeavouring to attain cost leadership advantages need to obtain a level of equality on differentiation.
- Erosion of cost advantages when the pricing information available to customers increases.
o Becoming a more significant challenge as the Internet dramatically increases the volume of information
available to consumers about pricing and cost structures.
2. Differentiation: Consists of creating differences in the firms product or service offering by creating something that is
perceived industry-wide as unique and valued by customers. Takes many forms:
o Prestige or brand image (BMW).
o Quality (Presidents Choice).
o Technology (Martin guitars).
o Innovation (Medtronic medical equipment/Cirque du Soleil).
o Features (Cannondale bicycles/Honda Goldwing motorcycles).
o Customer Service (Four Seasons Hotels and Resorts).
o Dealer Network (Lexus/Canadian Tire).
Value Chain Activities: Examples of Differentiation

Firms may differentiate themselves along several different dimensions at once.

Firms achieve and sustain differentiation advantages and attain above- average performance when their price
premiums exceed the extra costs incurred in being unique. (ex. Apple)
Differentiators will always seek out ways of distinguishing itself from similar competitors to justify price premiums
greater than the costs incurred for differentiating.
It must attain a level of cost parity relative to competitors. Can do this by reducing costs in all areas that do not affect
differentiation.
Perceptions of product quality (design, engineering, and manufacturing) can be strongly influenced by downstream
activities in the value chain (marketing and sales, service).
Strong relationships among value activities reinforce and strengthen the customers total perception of value.
Ex. Lexus success can be partially explained by its excellence in downstream activities such as customer service, as
well as by its reputation for product excellence.

Improving Competitive Position vis- - vis the Five Forces

- Viable strategy for earning above- average returns by creating a defensible position for overcoming Porters five
forces.
- Provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer
switching costs.
- Reduces buyers power because buyers lack comparable alternatives.
- Higher entry barriers because of customer loyalty and the firms ability to provide uniqueness in its products or
services.
- Provides higher margins that enable a firm to deal with supplier power.
- Supplier power, like buyers power, is decreased because there is a certain amount of prestige associated with being
the supplier to a producer of highly differentiated products and services.
- Will enjoy high customer loyalty and experience less threat from substitutes than its competitors. Loyalty and peace
of mind associated with firms make them less vulnerable to rivalry from other firms or to pressures from substitute.
Potential Pitfalls of Differentiation Strategies
- Uniqueness that is not valuable.
o Must provide unique bundles of products/services that customers value highly. Its not enough just to be
different.
- Too much differentiation.

Firms may strive for quality or service that is higher than customers desire, leaving themselves vulnerable to
competitors who provide an appropriate level of quality at a lower price.
Too high a price premium.
o Customers may desire the product, but be repelled by the price premium compared to that of competitors.
Differentiation that is easily imitated.
o Resources that are easily imitated cannot lead to sustainable advantages. Firms may strive for, and even attain,
a differentiation strategy that is successful for a time; however, the advantages are eroded through imitation.
(Flyer miles and loyalty cards)
Dilution of brand identification through product- line extensions.
o Firms may erode their quality brand image by adding products or services with lower prices and less quality.
Although this can increase short- term revenues, it may be detrimental in the long- run. Can tarnish the
sterling brand.
Perceptions of differentiation that vary between buyers and sellers.
o Companies must realize that although they may perceive their products and services as differentiated, their
customers may view them as commodities.
o

3. Focus: Based on the choice of a narrow competitive scope within an industry. Selects a segment or group of segments
and tailors its strategy to serve them.
o Cost Focus: Strives to create a cost advantage in its target segment and serve customers within that segment
with a lower price than rivals who may either target the whole industry or be unable to match the lower- cost
position.
Exploits differences in cost behaviour in a particular segment and takes advantage of potentially
lower costs that arise from purposefully limiting the firms customer base to a well- defined segment.
Ex. Staples Business Depot, Canadas reigning retailer of office supplies, is deliberately limiting its
selection to shed customers. Has aggressively targeted the small- business and home- office clients by
increasing the number of private label items it carries, offering jumbo- size packs and passing on the
savings of its bulk buying power by cutting prices.
o Differentiating Focus: Seek to differentiate itself within a narrow segment. Aims to provide better service,
prestige, image, or quality to a well- defined segment.
Ex. Keg Steakhouse & Bar has developed a simple operating formula that serves it with a stable
business, and its customers with perfect steaks, every time. Has purposefully limited its menu and has
stayed away from food fashions and fads such as nachos and pizzas; it targets young families and the
aprs- work crowd.

Improving Competitive Position vis- - vis the Five Forces

- Requires that a firm have either a low- cost position with its strategic target, a high differentiation, or both.
- Used to select niches that are the least vulnerable to substitutes or wherein competitors are weakest.
- Ex. Keg and Porsche experienced less rivalry and lower bargaining power among buyers by providing products and
services to a targeted market segment that was less price-sensitive.
- New rivals would have difficulty attracting customers away from these firms based only on lower prices.
- Brand image and quality that these brands evoked heightened the entry barriers for rivals trying to gain market share.
- One could reasonably speculate that these two firms enjoyed some protection against substitute products and services
because of their relatively high reputation, brand image, and customer loyalty.
- Ex. With regard to the strategy of cost focus, Network Appliances, the successful rival to EMC in the computer
storage industry, was better able to absorb pricing increases from suppliers as a result of its lower- cost structure.
Thus, the effects of supplier power were lessened.
Potential Pitfalls
- Erosion of cost advantages within the narrow segment.
o Advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time.
- Possible competition from new entrants and from imitation.
o May enjoy temporary advantages because they select a small niche with few rivals. Advantages may be shortlived as rivals invade their market niche.
o The entry barriers tend to be low, there is little buyer loyalty, and competition becomes intense.
o Marketing strategies and technologies employed by most rivals are largely non- proprietary, imitation is easy.
o Over time, revenues fall, profit margins are squeezed, and only the strongest players survive the shakeout.

Too much focus to satisfy buyer needs.

o May have too narrow a product or service.
o Many specialty ethnic and gourmet food stores may see their sales and profits shrink as large, national
grocers, such as Loblaw, expand their already broad product lines to include similar items. Given the
enormous purchasing power of the national chains, it would be difficult for such specialty retailers to attain
parity on costs.

Combination Strategies: Integrating Overall Low Cost and Differentiation

- Primary benefit to be enjoyed by firms that successfully integrate low-cost and differentiation strategies is that it is
generally harder for competitors to duplicate or imitate.
- An integrated strategy enables a firm to provide 2 types of value to customers: differentiated attributes (high quality,
brand identification, reputation) and lower prices (because of the firms lower costs in value-creating activities).
- The goal becomes one of providing unique value to customers in an efficient manner.
- Superior quality can lead to lower costs because of less need for rework in manufacturing, fewer warranty claims, a
reduced need for customer service personnel to resolve customer complaints, and so forth.
3 Approaches to Combining Overall Low Cost and Differentiation
1. Automated and Flexible Manufacturing Systems:
- Many firms have been able to manufacture unique products in relatively small quantities at lower costs, a concept
known as mass customization.
- Despite its huge investment in time and money, found that the new system has lowered costs, enhanced quality and
variety, and improved its response time to customers.
2. Exploiting the Profit Pool Concept for Competitive Advantage
- Profit pool can be defined as the total profits in an industry at all points along the industrys value chain.
- Potential pool of profits deeper in some segments of the value chain than others, depths vary within individual
segments.
- Segment profitability may vary widely by customer group, product category, geographic market, or distribution
channel.
- Requires looking past its core business and found an untapped source of profit. (U-Haul example in book. They
looked past truck rentals, where margins were low, and focused on accessories where margins were, untapped and
high.
3. Coordinating the Extended Value Chain by Way of Information Technology
- Achieved success by integrating activities throughout the extended value chain and using information technology to
link their own value chain with the value chains of their customers and suppliers.
- Enables a firm to add value through its own value- creating activities and to pass this value to its customers and
suppliers.
- Often necessitates redefining the industrys value chain.

Improving Competitive Position vis- - vis the Five Forces

- Firms that successfully integrate both differentiation and cost advantages create an enviable position relative to
industry forces.
- Ex. Wal-Marts integration of information systems, logistics, and transportation helps it to drive down costs and
provide outstanding product selection.
- Dominant competitive position, along with its excellent reputation, serves to erect high entry barriers to potential
competitors that have neither the financial nor physical resources to compete head- to- head.
- Size provides the chain with enormous bargaining power over suppliers.
- Low pricing and wide selection reduce the power of buyers (its customers) because there are relatively few
competitors that can provide a comparable cost/value proposition. Reduces the possibility of intense head-to-head
rivalry and protracted price wars.
- Overall value proposition makes potential substitute products (Internet competitors) a less viable threat.
Potential Pitfalls
- Failing to attain both strategies and ending up stuck in the middle.
o May become stuck in the middle if they try to attain both cost and differentiation advantages.

Ex. Eatons lost direction in a highly competitive retail market as it tried to achieve differentiation and cost
control at the same time but succeeded in neither. It struggled to fend off discounters such as Wal-Mart on one
front, department stores such as the Bay on another, and the more popular specialty clothing stores such as
Club Monaco, Gap, and Roots on a third.
Underestimating the challenges/expenses associated with coordinating value-creating activities in the extended value
chain.
o Successfully integrating activities across a firms value chain with the value chain of suppliers and customers
involves a significant investment in financial and human resources.
o Managers must not under-estimate the expenses linked to technology investment, managerial time and
commitment, and the involvement and investment required by the firms customers and suppliers.
o Must be confident that it can generate a sufficient scale of operations and revenues to justify all associated
expenses.
Miscalculating sources of revenue and profit pools in the firms industry.
o May fail to accurately assess sources of revenue and profits in their value chain.
Could be as a result of managers bias may be due to his or her functional area background, work
experiences, and educational background.
o

A related problem is directing an overwhelming amount of managerial time, attention, and resources to value- creating
activities that create the greatest margins to the detriment of other important, though less profitable, activities.

Industry Life-Cycle Stages: Strategic Implications

- Life cycle of an industry refers to the stages of introduction/growth/maturity/decline; occur over the life of an
industry.
- Emphasis on various generic strategies, functional areas, value- creating activities, and overall objectives varies over
the course of an industry life cycle.
- Managers must become even more aware of their firms strengths and weaknesses in many areas to attain competitive
advantages. Depend on their research and development activities in the introductory stage of the life cycle.
- During the maturity phase, the functions of the product have been defined, more competitors have entered the market,
and competition is intense.
o Managers then place greater emphasis on production efficiencies and process (as opposed to the product)
engineering in order to lower manufacturing costs.
o Helps to protect the firms market position and extends the product life cycle because the firms lower costs
can be passed on to consumers in the form of lower prices, which make the product more appealing to
price- sensitive customers.
-

Life- cycle idea is clearly analogous to a living organism (birth-growth-maturity-death), the comparison does have
limitations.
Products/services go through many cycles of innovation and renewal. For the most part, only fad products have a
single life cycle. Maturity stages of an industry can be transformed or followed by a stage of rapid growth if
consumer tastes change, techno-logical innovations take place, or new developments occur in the general
environment.
Ex. Cereal industry - when medical research indicated that oat consumption reduced a persons cholesterol, sales of
Quaker Oats increased dramatically.
Stages of the Industry Life Cycle

Strategies in the Different Stages

1. Introduction: Products are unfamiliar to consumers and market segments are not well defined.
- Involves low sales growth, rapid technological change, operating losses, and the need for strong sources to finance
operations.
- Since there are few players and not much growth, competition tends to be limited.
- Success requires an emphasis on research & development and marketing activities to enhance awareness.
- The challenge involves (1) developing the product and finding a way to get users to try it and (2) generating enough
exposure so that the product emerges as the standard by which all other competitors products are evaluated.
o Advantage to being the first mover in a market. (Coca-Cola first soft-drink brand recognizable globally)
o Also be a benefit to being a late mover. As they patiently waited to learn from the mistakes of the first
movers.
- Ex. electric vehicles in the introductory stages of life cycle.
2.
3.
-

Growth: Characterized by strong increases in sales.

The potential for strong sales (and profits) attracts other competitors who also want to benefit.
Primary key to success is to build consumer preferences for specific brands.
Requires strong brand recognition, differentiated products, and the financial resources to support a variety of valuechain activities such as marketing and sales, customer service, and research and development.
Efforts are directed toward stimulating selective demand, demand for a firms product offerings instead of those of its
rivals.
Revenues in the growth stage increase at an accelerating rate because (1) new consumers are trying the product and
(2) a growing proportion of satisfied consumers are making repeat purchases.
As a product moves through its life cycle, the proportion of repeat buyers to new purchasers increases.
New products and services often fail if there are relatively few repeat purchases.
Ex. Digital cameras and Blackberrys.
Maturity: Aggregate industry demand begins to slow.
Since markets are becoming saturated, there are few opportunities to attract new adopters.
Its no longer possible to grow around the competition, so direct competition becomes predominant.
With few attractive prospects, marginal competitors begin to exit the market.
Rivalry among existing competitors intensifies (fierce price competition as expenses associated with attracting new
buyers rise)

Advantages based on efficient manufacturing operations and process engineering become more important for keeping
costs low as customers become more price sensitive.
More difficult for firms to differentiate their offerings once users have a greater understanding of products and
services.
Ex. Beer and automobiles.

4. Decline: Occurs when industry sales and profits begin to fall.

- When difficult choices must be made, and firms must face up to the fundamental strategic choices of either exiting or
staying and attempting to consolidate their position in the industry.
- Changes in the business environment are at the root of an industry or product group entering this stage.
- Changes in consumer tastes or a technological innovation can push a product into decline.
- Product often consumes a large share of management time and financial resources relative to its potential worth.
- As sales and profits decline, competitors may start drastically cutting their prices to raise cash and remain solvent in
the short term. The situation is further aggravated by the wholesale liquidation of assets, including inventory, of some
of the competitors that have failed. This further intensifies price competition.
- Strategic options become dependent on the actions of rivals. If many competitors decide to leave the market, sales and
profit opportunities increase. On the other hand, prospects are limited if all competitors remain.
- If some competitors merge, their increased market power may erode the opportunities for the remaining players.
Managers must carefully monitor the actions and intentions of competitors before deciding on a course of action.
- Ex. Video cassette tapes and typewriters.
- Four basic strategies in the decline phase:
1. Maintaining:
Keeping a product going without significantly reducing marketing support, technological
development, or other investments, in the hope that competitors will eventually exit the market.
If a firm remains in the business and others exit, there may still be the potential for revenues and
profits.
2. Harvesting:
Taking as much profit as possible from the business and making absolutely minimal investments.
It requires that sales volume be maximized and costs be reduced quickly.
3. Existing the Market:
Involves dropping the product from a firms portfolio.
Since a residual core of consumers may still use the product, eliminating it should be considered
carefully.
If the firms exit involves product markets that affect important relationships with other product
markets in the corporations overall portfolio, an exit could have repercussions for the whole
corporation.
May involve the loss of valuable brand names or human capital with a broad variety of expertise in
many value- creating activities such as marketing, technology, and operations.
4. Consolidating:
Involves one firm acquiring a number of its competitors in a declining industry.
The surviving firm enhances its market power and acquires valuable assets.
It retains the best facilities and effectively rationalizes its operations. It takes production capacity out
of the system in an orderly fashion and prevents a bloody price war that could severely hurt its
profits.
Relating Generic Strategies to Stages of the Industry Life Cycle: The Personal Computer Industry
- In the introduction and growth stages, there were many players, such as IBM, Compaq, and others, who endeavoured
to create brand recognition and build loyal followings for their entries. Required well-developed and well- executed
differentiation strategies. Apple was further differentiated because it was the only player to have a graphical user
interface.
- However, well within a decade, the market matured, particularly when the standard (Microsofts Windows operating
system and Intels microprocessor units) was widely adopted.

Consumer awareness and sophistication with personal computers accelerated, and the market became saturated with
similar products. Here, overall low- cost strategies became the dominant form of competition.
Some firms, such as Dell, were still able to make differentiation a key part of their business- level strategy by offering
superior service and rapid fulfillment of customer orders.
Many Web appliances, such as Oracle TalkBack and Intels Dot. Station (each priced at approximately $ 200), may
become viable substitute products. These products provide many features similar to those of personal computers:
Internet access, email delivery, and personal calendars.
Demand for these products may drive the personal computer industry into the decline stage by significantly lowering
aggregate consumer demand.
In response, the personal computer companies will have to intensify their cost- reduction initiatives as well as develop
focus strategies in order to seek out niches in the market that may prove more viable than exiting the industry
altogether.
Some of the early reactions have been Compaqs sale to HP and IBMs departure from the market and sale of its entire
personal- computer business to Lenovo, Chinas biggest PC maker.

Turnaround Strategies
- One problem with the life- cycle analogy is that we tend to think that decline is inevitably followed by death.
- Decline can be reversed by strategies that lead to turnaround and rejuvenation. Such a need for turnaround may occur
at any stage in the life cycle. However, it is more likely to occur during the maturity or decline stage.
- Most successful turnarounds start with a careful analysis of the external and internal environments.
o External analysis is identification of market segments or customer groups that may still find the product
attractive.
o Internal analysis points to opportunities for reduced costs and higher efficiency.
3 strategies to successfully turnaround:
o 1: Asset and cost surgery.
Mature firms tend to have accumulated assets that do not produce any returns.
Outright sales or sale and leaseback of these assets free up considerable cash and improve
returns.
Investment in new plants and equipment can be deferred.
Try to aggressively cut administrative expenses and inventories and speed up collection of
receivables.
Outsourcing production of various inputs for which market prices may be cheaper than in- house
production.

2: Selective product and market pruning.

Have many product lines that are marginally profitable or losing money.
The famous 80- 20 rule usually applies. Firm generally derives 80 percent of its profit from 20
percent of its products clients, and markets.
Discontinue the unsuccessful product lines, cut off the unprofitable and usually difficult clients, and
focus all resources on a few core profitable areas.

3: Piecemeal productivity improvements.

Improving business processes by re-engineering them, benchmarking specific activities against
industry leaders, encouraging employee input to identify excess costs, reducing R& D and marketing
expenses, increasing capacity utilization, and improving employee productivity lead to a significant
overall gain.

Even when an industry is in overall decline, pockets of profitability remain.

Within declining industries, there may still be segments that are either stable or growing.
Every business has the potential for rejuvenation. But it takes creativity, persistence, and, most of all, a clear strategy
to translate that potential into reality.

Chapter 6 - Corporate-Level Strategy: Creating Value through Diversification (pp 146-173)

Chapter 5 focused on business-level strategy that is, how to achieve sustainable advantages in a given business or product
market this chapter addresses corporate-level strategy that is, the choice of businesses a corporation should compete in and how
those businesses should be managed or jointly create more value than if they were free-standing units.
Making Diversification Work: An Overview
Diversification initiatives whether through mergers and acquisitions, strategic alliances, and joint venture, or internal
development must be justified by the creation of value for shareholders

Acquiring firms typically pay high premiums when they acquire a target firm

Synergy working together

Synergy can be achieved in many different ways:

1. A firm may diversify into related businesses here, the primary potential benefits to be derived come from sharing intangible
resources (i.e. sales forces, brand names, technologies) and tangible resources (i.e. production facilities, distribution channels)
across multiple businesses that can utilize the same resources and spread their costs over a larger revenue base

Firms can enhance their market power by increasing dominance in a market, becoming a more critical supplier to their customers
or by increasing their hold on the business through vertical integration firms can simultaneously enjoy multiple benefits from
their related diversification moves, including shared costs and increased market power

2.

A corporation may diversify into unrelated business the primary potential benefits derive largely from value created by corporate
office (i.e. leveraging some of the support activities in the value chain such as information systems or human resource capital)

The benefits derived from related and unrelated relationships are not mutually exclusive

Many firms that diversify into related areas benefit from information technology expertise in the corporate office, and firms
diversifying into unrelated areas often benefit from best practices of sister businesses even though their products, markets, and
technologies may differ dramatically

Related Diversification: Economies of Scope and Revenue Enhancement

Related diversification enables a firm to benefit from relationships across different businesses within the diversified corporation
by leveraging core competencies and sharing activities (i.e. production facilities and distribution facilities) this enables a
corporation to benefit from economies of scope
Economies of scope are cost savings from leveraging core competencies, sharing resources, or sharing related activities among
businesses within the corporation
A firm can also enjoy greater revenues if two businesses, combined, attain higher levels of sales then either company could attain
independently
Leveraging Core Competencies
Core competencies reflect the collective learning of an organization how to coordinate diverse production skills, integrate
multiple streams of technologies, and market and merchandise diverse products and services
For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet
three (3) criteria:
1. The core competence must enhance competitive advantage(s) by creating superior customer value
2. Different businesses in the corporation must be similar in at least one important way related to the core competence
3. The core competence must be difficult for competitors to imitate of find substitutes for
Sharing Activities
Leveraging core competencies involves transferring accumulated skills and expertise across business units in a corporation
Corporations can also achieve synergy by sharing tangible activities across their business units (i.e. value-creating activities such
as common manufacturing facilities, distribution channels, and sales forces)
Sharing activities can potentially provide two (2) primary payoffs:
1. Cost Savings
2. Revenue Enhancement
1.

Deriving Cost Savings through Sharing Activities

Cost savings come from many sources, including, elimination of jobs, facilities, and related expenses that are no longer
required when functions are consolidated, or from economies of scale in purchasing
Cost savings are generally highest when one company acquires another from the same industry in the same country

Sharing activities inevitably entails costs that the benefits must outweigh

One often overlooked cost is that involved in the coordination required to manage a shared activity even more
important is the need to compromise the design or performance of an activity so that it can be shared

If the compromise erodes the units effectiveness, then sharing may reduce rather than enhance competitive
advantage
2. Enhancing Revenue and Differentiation through Shared Activities
Often two (2) businesses may achieve a higher level of sales growth together than either one could on its own
A target companys distribution channel can be used to escalate the sales of an acquiring companys product
Firms can also enhance the effectiveness of their differentiation strategies by means of sharing activities among business
units (i.e. a shared order-processing system may permit new features and services that a buyer will value)
Also, sharing can reduce the cost of differentiation
Sharing activities among businesses in a corporation can have a negative effect on a given businesss differentiation
Market Power
Similar businesses working together or the affiliation of a business with a strong parent can strengthen an organizations
bargaining position in relation to suppliers and customers as well as enhance its position vis--vis competitors
Consolidating an industry can also increase a firms market power
When acquiring a related business, a firms potential for pooled negotiating power vis--vis its customers and suppliers can be
very enticing
Mangers must carefully evaluate how the combined businesses may affect relationships with actual and potential customers,
suppliers, and competitors
Although acquiring related businesses can enhance a corporations bargaining power. It must be aware of the potential for
retaliation by others
Managers need to be aware of the strategic advantages of market power and be aware of regulations and legislation
Vertical Integration
Vertical integration represents an expansion or extension of the firm by integrating preceding or successive productive processes
that is, the firm incorporates more processes toward the original source of raw materials (backward integration) or toward the
ultimate consumer (forward integration)

Vertical integration is a means for an organization to reduce its dependence on suppliers or its channels of distribution to end
users

Vertical integration can be a viable strategy for many firms

Benefits and Risks of Vertical Integration

Benefits
1. A secure source of raw materials or distribution channels that cannot be held hostage to external markets where costs can
fluctuate over time
2.

Protection and control over assets ands services required to produce and deliver valuable products and services

3.

Access to new business opportunities and new forms of technologies

4.

Improved coordination of activities across the value chain

1.

The costs associated with increased overhead and capital expenditures to provide facilities, raw material inputs, and
distribution channels inside the organization

2.

A loss of flexibility resulting from the inability to respond quickly to changes in the external environment, as the huge
investments in the vertical integration activities are generally not as easily deployed elsewhere

3.

Problems associated with unbalances capacities or unfilled demand along the value chain

4.

Additional administrative costs associated with managing a more complex set of activities

Risks

Four (4) questions should be considered in making decisions about vertical integration:
1.

Is the value provided by present suppliers and distributors satisfactory?

2.

Are there activities in the industry value chain presently being outsourced or performed independently by others that are a viable
source of future profits?

3.

Is there relative stability in the demand for the organizations products?

4.

Is there a source of core competence in the activity that is considered for outsourcing or vertical integration?

Analyzing Vertical Integration: The Transaction Cost Perspective

The transaction cost perspective is another approach in understanding vertical integration
Transaction cost perspective,
1. Every market transaction involves some search costs (i.e. the cost to find where it is available, the level of quality, etc)

2.

There are costs associated with negotiating

3.

A contract needs to be written, spelling out future possible contingencies

4.

Parties in a contract have to monitor each other

5.

If a party does not comply with the terms of the contract, there are enforcement costs

Many of these transaction costs can be avoided by internalizing the activity in other words, y producing the input in-house

Related problems with purchasing a specialized input from outside

1. Issue of transaction-specific investments
2.

Vertical integration also gives rise to administrative costs

Decisions about vertical integration are, therefore, based on a comparison of transaction costs and administrative costs

If transaction costs are lower than administrative costs, it is best to resort to market transactions and avoid vertical integration

If transaction costs are higher than administrative costs, vertical integration becomes an attractive strategy

Vertical Integration: Further Considerations

Managers must carefully consider the impact that vertical integration may have on existing and future customers, suppliers and
competitors

Unrelated Diversification: Financial Synergies and Parenting

With unrelated diversification, potential benefits can be gained from the creation of synergies from the interaction of the corporate
office with the individual business units
There are two (2) main sources of such synergies:
1. The corporate office can contribute to parenting and restructuring of (often acquired) businesses
2.

The corporate office can add value by viewing the entire corporation as a family or portfolio of businesses and allocating
resources to optimize corporate goals of profitability, cash flow, and growth the corporate office enhances value by establishing
appropriate human resource practices and financial controls for each of its business units

Corporate Parenting and Restructuring

The positive contributions of the corporate office have been referred to as the parenting advantage

Parent companies create value through management expertise they improve plans and budgets and provide competent central
functions such as legal, financial, human resource management, procurement, and the like.

They help subsidiaries to make wise choice in their own acquisitions, divestures, and new internal development decision such
contributions often help business units to substantially increase their revenues and profits.

Restructuring is another means by which the corporate office can add substantial value to a business -Here, the corporate office
tries to find either poorly performing firms with unrealized potential or firms in industries on the threshold of signature, positive
change

When the restructuring is complete, the firm an either sell high: and capture the added value or keep the business in the corporate
family and enjoy the financial and competitive benefits of the enhanced performance

For the restructuring strategy to work, the corporate management must have the insight to detect undervalued companies
(otherwise the cost of acquisition would be too high) or businesses competing in industries with a high potential for
transformation

Corporate management must also have requisite skills and resources to turn the business around, even if they may be in new
unfamiliar industries

Restructuring can involve changes in,

o Assets restructuring
o

Capital structure,

or Management restructuring

Asset restructuring involves the sale of unproductive assets or even whole lines of businesses that are peripheral -in some cases, it
may involve acquisitions that strengthen the core business

Capital restructuring involves changing the debt-equity mix, or the mix between different classes of debt and equity

Management restructuring typically involves changes in the composition of the top management team, organizational structure,
and reporting relationships.

Tight financial control, reward based strictly on meeting short-to-medium-team performance goals, and reduction in the
number of middle-level managers are common steps in management restructuring

Portfolio Management
The key purpose of portfolio models was to assist a firm in achieving a balanced portfolio of businesses

This consisted of businesses whose profitability, growth, and cash flow characteristics would complement each other and add up
to a satisfactory overall corporate performance

Imbalance could be caused either by excessive cash generation with too few growth opportunities or by insufficient cash
generation to fund the growth requirements in the portfolio

The Boston Consulting Groups (BCG) growth/share matrix is among the best known of portfolio planning approaches
In the BCG approach, each of the firms strategic business units (SBUs) is plotted on a two-dimensional grid in which the axes are relative
market share and industry growth rate
The grid is broken into four quadrants (See Exhibit 6.1 pp 160)
Each circle represents one of the corporations business units. The size of the circle represents the relative size of the business
unity in terms of revenues

Relative market share, measured by the ratio of the business units size to that of its largest competitor, is plotted along the
horizontal axis

Market share is central to the BCG matrix. This is because high relative market share leads to unit cost reduction (due to
experience and learning curve effects) and, consequently, superior competitive position

Each of the four quadrants of the grid has different implications for the SBUs that fall into that diction or category:
Stars SBUs competing in high-growth industries with relatively high market shares. These firms have long-term growth
potential and should continue to receive substantial investment funding

Question Marks SBUs competing in high-growth industries but having relatively weak market shares. Resources should
be invested in them to enhance their competitive positions and hep them increase their relative market share to become
stars, otherwise, they are destined to become dogs and should be divested when the industry matures

Cash Cows SBUs with high market shares in low-growth industries. These units have limited long-run potential but
represent a source of current cash flows into fund investments in stars and question marks

Dogs SBUS with weak market shares in low-growth industries. Because they have weak positions and limited potential,
most analysts recommend that they be divested

In using portfolio strategy approaches, a corporation tries to create synergies and shareholder value in a number of ways

Since the businesses are unrelated, synergies that develop are those that result from the actions of the corporate office with the individual
units instead of among business units

First, portfolio analysis provides a snapshot of the businesses in a corporations portfolio; the corporation is in a better
position to allocate resources among the business units according to prescribed criteria (i.e. the use of cash flows from the
cash cows to fund promising stars)

Second, the expertise and analytical resources in the corporate office provide guidance in determining what firms may be
attractive (or unattractive) acquisitions.

Third, the corporate office is able to provide financial resources to the business units on favourable terms that reflect the
corporations overall ability to raise funds

Fourth, the corporate office can provide high-quality review and coaching for the individual businesses

Fifth, portfolio analysis provides a basis for developing strategic goals and reward/evaluation systems for business mangers

Cash cows would, understandably, be rewarded more on the basis of their cash that their businesses generated than would mangers
of star businesses

Similarly, managers of a Star businesses would be held to high standards for revenue growth than managers of cash cow business

Risks of Portfolio Models

1. They only compare SBUs on only two (2) dimensions, making the implicit but erroneous assumption that
1.

Those are the only factors that really matter

2.

That every unit can be accurately compared on that basis

3.

The approach views each SBU as a stand-alone entity, ignoring common core business practices and value-creating activities that
may hold promise for synergies across business units

4.

Portfolio models do not explicitly incorporate an SBUs core competencies in the analysis, and they ignore the importance of
nurturing and protecting those for the long-term viability and success of a business

5.

Unless care is exercised, the process can become largely mechanical, substituting an oversimplified graphical model for important
contributions of the CEOs (and other corporate managers) experience and judgment

6.

Strict reliance on the rules regarding resource allocation across SBUs can be detrimental to a firms long-term viability

Caveat: Is Risk Reduction a Viable Goal of Diversification?

One of the purposes of diversification is to reduce the risk that is inherent in a firms variability in revenues and profits
over time

Risk reduction in and of itself is rarely a viable way to create shareholder value

It must be undertaken with a view of a firms overall diversification strategy

The Means to Achieve Diversification

There are three (3) Means to achieve Diversification:
1. Through mergers and acquisitions (M&A) corporations can directly acquire the assets and competencies of other firms

2. Corporations may agree to pool the resources of other companies with their resource base commonly known as the strategic
alliance or joint venture approach

3. Corporations may diversify into new products, markets, and technologies through internal development commonly known as
corporate entrepreneurship, greenfield, or organic growth involves the leveraging and combining of a firms own resources and
competencies to create synergies and enhance shareholder value
1. Mergers and Acquisitions (M&A)

Motives and Benefits

Speed speed to market, speed to positioning, and speed to becoming a viable company is critical in some industries

Acquiring is much faster than building

Mergers and acquisitions (M&As) can be means of obtaining valuable resources that can help an organization expand its product
offerings and services

M&As can also lead to consolidation within an industry and give firms instant scale to respond to external pressures

Corporations can also enter new markets and new market segments by way of acquisitions

Enable a firm to quickly enter new product markets and acquire ne skills and competencies as well as a wide variety of valuecreating activities through sales forces, distribution channels, and manufacturing operations

Potential Limitations
Expensive premiums are frequently paid to acquire a business

The acquiring firm must create enough value to recoup the investment

If the acquisition does not perform as planned, managers who pushed for the deal find their reputation at stake

Cultural issues

2. Strategic Alliances and Joint Ventures

Motives and Benefits
Entering new markets

Reducing purchasing and manufacturing, and other costs in the value chain

Developing and diffusing new technologies

Potential Limitations
Without the proper partner, an alliance can be unproductive, even if formed for the best reasons
3. Internal Development

Firms can also diversify by means of corporate entrepreneurship and new venture development

Motives and Benefits

Firms can engage in internal development are able to capture the value created by their own innovative activities without having
to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of
several companies or merging corporate cultures

Firms can often develop new products or services at a relatively low cost and, thereby, rely on their own resources rather than
turning to external funding

Potential Limitations
Internal development may be time consuming; thus, firms may forfeit the benefits of speed that growth through mergers and
acquisitions or strategic alliances can provide
How Managerial Motives Can Erode Value Creation
Managerial Motives that Erode Value Creation:
Managers may act it their own self-interest. Below, we address some managerial motives that can serve to erode value creations.

Growth for Growths Sake too focused on only revenue growth and not worrying about profits

There are hugh incentives for executives to increase the size of their firms, and many of these incentives are hardly consistent
with increasing shareholder wealth.
Top managers, including the CEO, of larger firms typically enjoy more prestige, higher rankings for their companies on
various corporate lists (which are based on revenue, not the profits or cash flow)
Executives overemphasis on growth can result in a plethora of ethical lapses, which can have disastrous outcomes for their
companies.

Egoism there is nothing wrong with ego in a CEO as it often helps shape a leader. But too much egoism can lead to greed and
hurt the company
Healthy ego helps make a leader confident, clear-headed, and able to cope with change.
Few executives are immune to the potential dangers of too much ego.
Anti-takeover Tactics
Examples of anti-takeover tactics include (See pp 172-173),

Poison pills

Greenmail

Controlling Shareholders

Staggered boards

Lock-up Agreements

White knights

Golden Parachutes

Unfriendly or hostile takeovers can occur when a companys stock becomes undervalued.

A competing organization can buy the outstanding stock of a takeover candidate in sufficient quantity to become a large shareholder
it then makes a tender offer to gain full control of the company

Chapter 8: