STUDY GUIDE FOR MODULE NO.

01 The second section discusses the strategic management

process. Here, we present the three processes—analysis,
STRATEGIC MANAGEMENT: CREATING COMPETITIVE formulation, and implementation—that provide the framework
ADVANTAGE for the overall organization.
MODULE OVERVIEW The third section focuses on the vital role of corporate
At the heart of strategic management is the question: “How governance, which is essential to ensuring that the actions of
and why do some firms outperform others?” The challenge to a firm’s management are consistent with the goals of its
managers is to develop and implement strategies that will owners—the shareholders. We also address stakeholder
provide competitive advantages that will be sustainable over management. It must be taken into account throughout the
time. This chapter is divided into five sections. strategic management process. Although the interests of
The first section addresses the broad question: “What is stakeholders may, at times, conflict, we discuss how firms are
strategic management?” Here, we define strategic able to achieve “symbiosis” among stakeholders wherein
management as: “consisting of the analysis, decisions, and various interests are considered interdependent and can be
actions an organization undertakes to create and sustain attained simultaneously. We address the importance of social
competitive advantages.” We also address the four key responsibility, including environmental sustainability. We also
attributes of strategic management: concern with overall introduce the concept of “shared value.”
objectives; involves multiple stakeholders; incorporates short- The fourth section addresses today’s greater need for a
and long-term perspectives; and recognizes tradeoffs strategic management perspective throughout the
between effectiveness and efficiency. We also introduce the organization. With the emergence of the knowledge economy
concept of “ambidextrous behaviors”— the need to combine and globalization, leaders must mobilize people throughout
alignment and adaptability. the organization.
The fifth section discusses the need for organizations to attain order to create and sustain competitive advantages.” We
consistency in their vision, mission, and strategic objectives. believe this definition captures two main elements of the field
Collectively, they form a hierarchy of goals. of strategic management.

First, strategic management entails three on-going processes:

LEARNING CONTENTS (Strategic Management: Creating analysis, decisions, and actions. That is, managers must

Competitive Advantage analyze the internal and external environment as well as their
hierarchy of goals in order to formulate and implement
strategies.
I. What Is Strategic Management? Second, the essence of strategic management is the study of
why some firms outperform others. We draw on Michael
We point out that it is very important for managers to see their
Porter’s work to make the important distinction between
jobs as more than just custodians of the “status quo.” Rather,
strategy and operational effectiveness. Managers must create
they must proactively anticipate change and continually refine
advantages that are sustainable over a period of time, instead
as well as, when necessary, make significant changes to their
of merely temporary. That is: How can we create competitive
strategies. This has become particularly important as
advantages in the marketplace that are not only unique and
competitive environments become characterized by
valuable but also difficult for competitors to copy or substitute?
increasing rates of unpredictable change.

B. Four Key Attributes of Strategic Management

A. Defining Strategic Management
Here, we address four key attributes of strategic
We define strategic management as “consisting of the
management. Strategic management is 1. Directed toward
analysis, decisions, and actions an organization undertakes in
organizational goals and objectives; 2. Includes multiple
stakeholders in decision making; 3. Incorporates both short- Strategy analysis consists of, in effect, the “advance work”
term and long-term perspectives; and, 4. Recognizes that must be done in order to effectively formulate and
tradeoffs between effectiveness and efficiency. implement strategies. Many strategies fail because managers
may want to formulate and implement strategies without a
careful analysis of the overarching goals of the organization,
II. The Strategic Management Process
as well as a thorough analysis of its external and internal
We restate the three on-going processes in strategic environment.
management—analysis, decisions, and actions—that are
typically referred to as analysis, formulation, and B. Strategy Formulation
implementation.
A firm’s strategy is formulated at several levels. First,
Intended Versus Realized Strategies business-level strategy addresses the issue of how firms
Intended strategy compete in an industry to gain competitive advantage.
➢ Decisions are determined only by analysis Second, corporate-level strategy focuses on two issues: (1)
what businesses to compete in, and, (2) how businesses can
Realized Strategy
be managed to achieve synergy, that is, create more value by
➢ Decisions are determined by both analysis and unforeseen working together than if they operated as a stand-alone entity.
environmental developments, unanticipated resource constraints, Third, firms must develop international strategies as they
and/ or changes in managerial preferences. expand beyond their national boundaries. And, fourth,
Three key strategic management processes: managers must develop entrepreneurial strategies and be
aware of the competitive dynamics in their industry.
A. Strategy Analysis
C. Strategy Implementation
Clearly, effective strategies are of little value if they are not In this section we recognize, of course, that there are often
properly implemented. Implementing strategies involves conflicting demands among an organization’s stakeholders.
strategic controls and organizational designs; coordination However, managers need to acknowledge the
and integration among activities within the firm as well as with interdependence among stakeholders and strive to achieve
customers and suppliers; and effective leadership. symbiosis, that is, the recognition that stakeholders are

III. The Role of Corporate Governance and Stakeholder interdependent upon one another for their success and well

Management being.

We discuss three important and related concepts: corporate Three mechanisms that ensure effective corporate

governance, stakeholder management, and social governance:

responsibility. Clearly, these topics (especially corporate ➢ An effective and engaged board of directors
governance) have generated quite a bit of controversy in the ➢ Shared Activism
early 2000’s and the topic should lead to some spirited
➢ Proper managerial rewards and incentive
discussion.
Zero-Sum View
Corporate governance addresses the relationship between
various participants in determining the overall direction and ➢ Stakeholder compete for attention and resources of the
performance of corporations. It consists of three primary organization
participants—shareholders, management, and the board of ➢ Gain of one is a loss to the other
directors. ➢ Rooted in the traditional conflict between workers and
management
A. Alternative Perspectives on Stakeholder
Management Stakeholder symbiosis view
➢ Stakeholders are dependent upon each for their success and well- while simultaneously advancing the economic and social
being ➢ Mutual benefits conditions in which it operates.

Crowdsourcing: Stakeholders Can Fulfill Multiple Roles 3. The Triple Bottom Line: Incorporating Financial as well

Crowdsourcing is one of our new innovative features. We as Environmental and Social Costs

define crowdsourcing as “a practice where the Internet is used Many companies are measuring what they call the “triple
to tap a broad range of individuals and groups to generate bottom line”. Such a technique involves an assessment of
ideas and solve problems.” environmental, social, and financial performance. We state
that environmental sustainability is now a value embraced by
B. Social Responsibility and Environmental most successful corporations.
Sustainability: Moving Beyond the Immediate
Stakeholder
IV. The Strategic Management Perspective: An
Imperative Throughout the Organization

1. Social Responsibility There is an emerging need for empowerment and a strategic

management perspective throughout organizations. This is
Managers must consider the needs of the broader community- primarily due to today’s increasingly complex, interconnected,
at-large and act in a socially responsible manner. Social and ever-changing global economy.
responsibility is the expectation that businesses or individuals All managers and employees must:
will strive to improve the overall welfare of a society.
• Take an integrative, strategic perspective of issues
2. The Concept of “Shared Value” facing the organization. • Assess how functional areas and
Shared value can be defined as policies and operating activities “fit together” to achieve goals and objectives.
practices that enhance the competitiveness of a company Three Types of Leaders
➢ Local line leaders – have significant profit-and-loss An organizational vision has been described as a goal that is
responsibility “massively inspiring, overarching, and long-term.” It should
➢ Executive leaders – champion and guide ideas, create a represent a destination and evoke passion.
learning infrastructure, establish a domain for taking action
B. Mission Statements
➢ Internal networkers – generate power through the conviction
and clarity of their ideas. A company’s mission statement are set of goals that include
both the purpose of the organization, its scope and of
V. Ensuring Coherence in Strategic Direction
operations, and the basis of its competitive advantage.
Successful organizations express priorities through stated
Effective mission statements incorporate the concept of
goals and objectives that form a hierarchy of goals that
stakeholder management, and suggest that organizations
includes its vision, mission, and strategic objectives. On the
must respond to multiple constituencies if they are to survive
other hand, strategic objectives tend to be more specific and
and prosper. They have the greatest impact when they are
provide a more direct means of determining if the organization
used to reflect an organization’s enduring, overarching
is moving toward broader, overall goals.
strategic priorities and competitive positioning.
Organizational goals ranging from, at the top, those that are
less specific yet able to evoke powerful and compelling mental C. Strategic Objectives
images, to, at the bottom, those that are more specific and
Strategic objectives are used to operationalize the mission
measurable.
statement. That is, they help to provide guidance on how the
A. Organizational Vision organization can fulfill or move toward the “higher goals” in the
goal hierarchy—the mission and vision.
They are set of organizational goals that are used actions an organization undertakes to create and sustain
operationalize the mission statement that are specific and competitive advantages.” The issue of how and why some
cover a well-define time frame. firms outperform others in the marketplace is central to the

For objectives to be meaningful, they must satisfy several study of strategic management. Strategic management has

criteria. They must be: four key attributes: it is directed at overall organizational
goals, includes multiple stakeholders, incorporates both short-
Measurable
term and longterm perspectives, and incorporates trade-offs
Specific between efficiency and effectiveness.
Appropriate The second section discussed the strategic management
Realistic process. Here, we paralleled the above definition of strategic
management and focused on three core activities in the
Timely
strategic management process—strategy analysis, strategy
Objectives that satisfy such criteria provide many benefits to
formulation, and strategy implementation. We noted how each
the organization. These include: (1) channel employees
of these activities is highly interrelated to and interdependent
throughout the organization toward common goals, (2)
on one another.
motivate and inspire employees to higher levels of
Next, the two important and interrelated concepts—corporate
commitment and effort, (3) help to resolve conflicts when they
governance and stakeholder management. Corporate
arise, and (4) provide a yardstick for rewards and incentive
governance consists of three primary elements—
management, boards of directors, shareholders (owners) —
SUMMARY which play the key role in determining a corporation’s strategic
This module starts with defining strategic management and direction. Stakeholder management addresses the individuals
articulating some of its key attributes. Strategic management (and organizations) that must be taken into account
is defined as “consisting of the analysis, decisions, and throughout the strategic management process. Several key
stakeholders in all organizations, and the nature of their are much more specific and are vital to ensuring that the
claims were also been identified. Successful firms go beyond organization is striving toward fulfilling its vision and mission.
an overriding focus on satisfying solely the interests of
owners. Rather, they recognize the inherent conflicts that
arise among the demands of the various stakeholders as well Study Guide For Module No. 2
as the need to endeavor to attain “symbiosis”—that is,
Analyzing the External Environment of the Firm
interdependence and mutual benefit—among the various
stakeholder groups. The emerging practice of crowdsourcing MODULE OVERVIEW
wherein the Internet is used to generate ideas and solve
The purpose of this module is to familiarize students with
problems is leading to an evolution in stakeholder roles.
techniques for evaluating a firm’s external environment. It
Environmental sustainability and how the application of “social
focuses on the value managers add when they have a sense
innovation” were also been address that are beneficial to both
of events outside the company. By focusing on external
firms and the society.
events, managers are able to stay a step ahead of
In the fourth section, we discussed the rate of unpredictable competitors by accurately anticipating and promptly
change that managers face today. Managers and employees responding to actions that can impact the organization. The
throughout the organization must have a strategic chapter is organized into three sections.
management perspective and become more empowered.
The environmentally aware organization. Emphasize that
The final section addressed the need for consistency between managers use scanning, monitoring, and competitive
a firm’s vision, mission, and strategic objectives. Collectively, intelligence to develop forecasts. Also, the role of scenario
they form an organization’s hierarchy of goals. Visions should planning is discussed.
evoke powerful and compelling mental images. However, they
are not very specific. Strategic objectives, on the other hand,
The influence of the six broad segments (demographic, Environmental scanning involves surveillance of the firm’s
sociocultural, political/legal, technological, economic, global) external environment to predict environmental changes to
of the general environment of the firm. come and detect changes that are already underway. It
alerts the firm to critical trends before changes have develop
The role of the competitive (also called the task or industry) a discernible pattern and before competitors recognize them.
environment and its analysis through the application of
Porter’s five forces model. We address how industry and 2.Environmental Monitoring
competitive practices are being affected by the internet and Environmental monitoring tracks the evolution of trends,
digital technologies. We also address the concept of strategic events, or streams of activities in the external environment. It
is a firm’s analysis of the external environment that tracks the
groups. Managers use strategic groups to identify who its
evolution of trends, sequences of events.
main competitors are and how a company fits in with the
overall industry in which it competes. How to Spot Hot Trends

I. Creating the Environmentally Aware Organization Listen

We address three important processes— Pay attention
scanning, monitoring, and gathering competitive Follow trends online
intelligence—which managers use to develop Go to old school
environmental forecasts. We
address scenario analysis and its role in How Zara Apparel and Fragrances Spot Opportunities
anticipating future major changes in the external ❖ Zara’s designers, marketing managers and buyers
environment as well as the role of SWOT analysis. work side by side in an open office plan that fosters
A. The Role of Scanning, Monitoring, Competitive frequent discussions and promotes the sharing of
realtime data as well as field observations and
Intelligence, and Forecasting
anecdotes.

1.Environmental Scanning
 ❖ This allows them to break out their silos and develop a
holistic feel for the market, see how their work fits, and 5. Scenario Analysis
sense new opportunities as they arise. Scenario analysis provides a set of tools that enable
managers to imagine threats and opportunities the future may
3. Competitive Intelligence bring. As a general rule, scenarios should be used by
Competitive intelligence helps firms define and businesses whose external environments are prone to
fundamental or sudden change and whose anticipation of
understand their industry and identify rivals’ strengths and
such change is of vital strategic importance.
weaknesses. If it is done properly, competitive intelligence
It is an in-depth approach to environmental forecasting that
helps a company to avoid surprises by effectively anticipating involves experts’ detailed assessments of social trends,
and responding to competitors’ moves. economics, politics, technology, or other dimensions of the
Competitive intelligence also refers to the firm’s activities external environment.
of collecting and interpreting data on competitors, defining It is also important to note that scenario analysis draws on a
wide range of disciplines and interests, among them
and understanding the industry, and identifying competitors’
economics, psychology, sociology, and demographics.
strength and weaknesses.

B. SWOT Analysis
4.Environmental Forecasting
We briefly address SWOT Analysis at this point. SWOT
Environmental scanning, monitoring, and competitive
stands for strengths, weaknesses, opportunities, and threats.
intelligence are important inputs for analyzing the external SWOT analysis provides a framework for analyzing these four
environment. However, they are of little use unless they elements of a company’s internal and external environment.
provide raw material that is accurate enough to help It is important to note that SWOT analysis provides the “raw
managers make accurate forecasts. material”, that is,
Environmental scanning refers to the development of a basic listing of conditions and factors inside and outside of a
plausible projections company.
about the direction, scope, speed and intensity of
environmental change. SWOT Analysis
 ❖ Build on its strength diets and physical fitness, greater interest in the environment,
❖ Remedy the weaknesses or work around them and families postponing having children.
❖ Take advantage of the opportunities presented by the
environment
❖ Protected the firm from threats C. The Political/Legal Segment
Political processes and legislation influence the regulations
II. The General Environment with which industries must comply. Some important elements
The general environment consists of factors that can have a of the political/legal arena include tort reform, the Persons
dramatic effect on a firm’s strategy. Typically, a firm has little with Disabilities (PWD) Act, the Deregulation of utilities and
ability to predict trends and events in the general other industries, and increases in the Labor Law for
environment, and even less ability to control them. mandated minimum wage.
We divide the general environment into six segments:
demographic, sociocultural, political/legal, technological,
economic, and global.
D. The Technological Segment
A. The Demographic Segment Developments in technology lead to new products and
Demographics are the most easily understood and services and improve how they’re produced and delivered to
quantifiable elements of the general environment. the end user. Innovations can create entirely new industries
Demographics include elements such as the aging population, and alter existing industries.
rising or declining affluence, changes in ethnic composition, Students speculate on the impact of the following
geographic distribution of the population, and income level technologies on current Philippine industry setting as well as
disparities. the world industry set up: (1) the Internet, (2) manufacturing
innovations (e.g., robotics), (3) genetic engineering/designer
B. The Sociocultural Segment genes.

Sociocultural forces influence the values, beliefs, and Key implications of the Internet, information technology, and
lifestyles of a society. Examples include a higher percentage nanotechnology has had on industry — in particular has its
of women in the workforce, dual-income families, increases in impact on productivity gains.
the number of temporary workers, greater concern for healthy Fascinating issue: some of the promising future applications
of nanotechnology and how it will impact some industries.
Addressing some of the “downsides” of technology. In of the Internet on the five forces and the strategic groups
addition, Ethical issues on environmental damage, such as concept and its implications for studying rivalry and
the emission of greenhouse gases. competition.

E. The Economic Segment A. Porter’s Five Forces Model of Industry Competition

The economy has an impact on all industries, from suppliers Illustrates Porter’s five forces model of industry competition.
of raw materials to manufacturers of finished goods and In introducing this model, it is useful to show how the model
services, as well as all organizations in the service, wholesale, provides insight into an industry’s dynamics and expected
retail, government, and nonprofit sectors of economies. Key profit levels.
indicators include interest rates, unemployment rates, and the It is useful to point out that there can also be very profitable
consumer price index. opportunities to compete in industries that have overall low
profits, overall. For example, in the paint industry, Davies or
F. The Global Segment Boysen has typically been a very successful and highly-
profitable firm because they have found an attractive niche in
Globalization provides both opportunities to access larger the market and developed a differentiated product (through
potential markets and a broad base of factors of production product development and advertising).
such as raw materials, labor, skilled managers, and technical
professionals. However, such endeavors carry many political,
social, and economic risks. Examples of important elements in 1. Threat of New Entrants
the global segment include currency exchange rates, ➢ Indicates a scenario that profits of established firms in the
increasing global trade, the economic emergence of India, industry may be eroded by new companies.
China’s admittance to the World Trade Organization, trade
agreements among regional blocs (e.g., EC), and the GATT Sources of entry barriers:
Agreement (lowering of tariffs). Economies of scale
Product differentiation
III. The Competitive Environment Capital requirements
In this topic, we draw upon a well-known analytic tool, Michael Switching cost
Porter’s five forces model of industry competition. In this
Access for distribution channels
model it tackle examples of each force in address the impact
Cost disadvantages independent
 4. The Threat of Substitute Products and Services
2. Bargaining Power of Buyers This refers viability of a substitute product depends largely on
In this scenario, it indicates that buyers threaten an industry its relative priceperformance trade-off, i.e., more value for the
by: same price or the same value for a lower price. Examples are
the branded medicines of pharmaceutical companies versus
❖ Forcing down prices the efficacy of generic brand medicines.
❖ Bargaining for higher quality or more services It may also refer to a threat of limiting the potential returns of
❖ Playing competitors against each other an industry placing a ceiling on the prices that firms in that
industry can profitably charge without losing too many
3. Bargaining Power of Suppliers customers to substitute products.
This refers to a condition under which a supplier group may
become powerful. The bargaining power of suppliers can be
5. The Intensity among Competitors in an Industry
presented as the mirror opposite of the bargaining power of
suppliers. For example, the relative sizes and concentrations Intense rivalry in an industry, provide an example of an
largely determine the bargaining power of the two parties industry in which competition has recently been intense. For
involved in the transaction. example, most customer are familiar with the recurring price
wars in the airline industry by offering price cuts or promo sale
The products it purchases from the industry are standard or
on air plane seat particular on off peak season.
undifferentiated. The buyer faces new switching cost. It earns
low profit, the buyer pose a credible threat of backward
integration and the industry’s product is unimportant to the B. How the Internet and Digital Technologies Are
quality of the buyer’s product and services. Affecting the Five Competitive Forces
Suppliers can exert power by threatening to raise prices or The changes caused by the Internet economy have made
reduce the quality of goods and services. A supplier group will strategizing more challenging. Strategic analysis, informed
be powerful when the group is dominated by a few companies formulation, and successful implementation may be even
like the power producers, telephone companies (Telco’s), more difficult in the Internet era because of the uncertainty
water service providers, petroleum, gasoline and oil surrounding the new technology. In this section we address
producers/ distributors where their products are very important the impact of the Internet and digital technologies in terms of
inputs to buyer business. Their group are not obliged to Porter’s five-force model of competition.
contend with substitute products for sale to the industry.
1. The Threat of New Entrants power in the hands of a few. In this module, we address two
In most industries, new entrants will be a bigger threat types of buyers: end users and buyer channel intermediaries.
because the Internet lowers barriers to entry. Thus, scale End users are the final customers in a distribution channel.
economies may be less important in an Internet context and Internet sales activity that is labeled “B2C” is concerned with
new entrants can go to market with lower capital costs. end users. Because a large amount of consumer information
is available on the Internet, end users can easily shop for
quality merchandise and bargain for price concessions.
Switching costs are also potentially lower because the cost of
Businesses launched on the Internet may enjoy savings on switching may involve only a few clicks of the mouse to find
traditional expenses such as office rent, salaries, and and view a competing product or service online.
postage. Thus, a new entrant could use the savings to charge Buyer channel intermediaries are the wholesalers and
lower prices and compete on price despite an incumbent distributors who serve as “middlemen” between
competitor’s scale advantages. Alternatively, a new entrant manufacturers and end users. In some industries buyer
may be able to serve a market more effectively, with more channels are dominated by powerful players. The Internet,
personalized services and greater attention to product details. however, makes it easier and less expensive for businesses
Then they could build a reputation in their niche and charge to reach customers directly. Thus, the Internet may increase
premium prices. the power of incumbent firms relative to these traditional buyer
Another potential benefit for Internet-based businesses is channels.
access to distribution channels. Manufacturers or distributors
that can reach potential outlets for their products via the
Internet may be encouraged to enter markets that were 3. The Bargaining Power of Suppliers
previously closed to them. Such access is not guaranteed, The Internet has streamlined and quickened the process of
however. acquiring supplies. But the extent to which the Internet is a
benefit or a detriment to suppliers may depend on where the
supplier is positioned along the supply chain.
2. The Bargaining Power of Buyers
Suppliers provide products or services to other businesses.
The Internet may increase buyer power by providing The term “B2B” is used to refer to businesses that supply or
consumers with more information to make buying decisions sell to other businesses. On the other hand, the Internet
and lowering switching costs. But, by giving buyers new ways makes it possible for suppliers to access more customers at a
to access sellers, the Internet may also suppress the power of relatively lower cost per customer, because buyers can
traditional buyer channels that have concentrated buying
comparatively shop more easily and negotiate prices faster, In general, the threat of substitutes is heightened because the
suppliers may not be able to hold on to them. This is Internet introduces new ways to accomplish the same tasks.
especially damaging to supply chain intermediaries, such as The primary factor that leads to substitution is economic —
product distributors, who may not be able to stop suppliers consumers will use a product or service until a substitute that
from directly accessing other potential business customers. meets the same need becomes available at a lower cost. The
One of the greatest threats to supplier power is that the economies created by Internet technologies have led to the
Internet inhibits a supplier’s ability to offer highly differentiated development of numerous substitutes for traditional ways of
products or unique services. Other factors may, in contrast, doing business. Examples are provided:
contribute to stronger supplier power:
1.The growth of Web-based business in general may create 1. Online conferences by a company called Conferenza
more downstream outlets for suppliers to sell to. particularly this time of the Covid19 Pandemic. Works,
meetings and conferences are conducted at home.
2. Suppliers may be able to create Web-based purchasing 2. Online electronic storage by a company called
arrangements that make purchasing easier and discourages MyDocsOnline, Inc.
their customers from switching.
3. The use of proprietary software that links buyers to a
supplier’s website may create a rapid, low-cost ordering 5. The Intensity of Competitive Rivalry
capability that discourages the buyer from seeking other
Internet provides more tools and means for competing, rivalry
sources of supply.
among competitors is likely to be more intense. The Internet
4. Suppliers will have greater power to the extent that they increases rivalry by making it difficult for firms to differentiate
can reach end users directly without intermediaries. themselves and by shifting customers’ attention to issues of
A process known as disintermediation is removing price.
organizations or business process layers responsible for Technology and a vast array of product choices has made
intermediary steps in the value chain in many industries. The brand loyalty a diminishing factor in marketing.
Internet is also creating an opening for new functions. These
Rivalry is more intense when switching costs are low and
new activities are entering the value chain by a process
product or service differentiation is minimized. The Internet
known as reintermediation, the introduction of new types of
has “commoditized” products that might previously have been
intermediaries. Electronic delivery is an example.
regarded as rare or unique. The Internet also eliminates the
importance of location making products that were previously
4. The Threat of Substitutes
distant readily available online. This makes competitors more The third issue we raise is that the five forces analysis has
equally balanced, thus intensifying rivalry. often been criticized for being a static — rather than a
The problem is made worse for marketers because of dynamic analysis.
shopping infomediaries that search the Web for the best The concept of complementors is often considered to be the
prices. Such infomediary services may be good for single most important contribution of value net analysis.
consumers, but they increase business rivalry by Complements typically are products or services that have a
consolidating the marketing messages that consumers use to potential impact on the value of the firms’ own product and
make purchases to a few key pieces of information that the services. Examples of complements (software and
selling company has little control over. Internet and digital microprocessors) in the personal computer industry and the
technologies are affecting industry structure. video game industry. (Professor Michael Porter would not add
complements to the “five forces” because they don’t have a
direct linear relationship to industry profitability. However, they
C. Using Industry Analyses: A Few Caveats clearly can have an impact on an industry’s profitability.)
This section was written as a “caveat” to address some
limitations of Porters five forces model. First, managers
should not always avoid low profit industries. D. Strategic Groups within Industries
When industry analysis shows that an industry is unattractive, In the automobile industry a strategic grouping of the
there are a few firms that seem to be able to earn high worldwide automobile industry are a very good example.
returns. For example, Cebu Pacific Airlines has been There is an intense competition within strategic groups across
consistently profitable in an otherwise unattractive industry groups.
over the past several years. Does this mean that industry Strategic groupings help a firm identify mobility barriers that
analysis is misleading? You may point out that industry protect a group from attacks by other groups.
analysis is useful to predict an industry’s average profitability, It helps a firm to identify groups whose competitive position
but not necessarily, a single firm’s profitability. This is a good may be marginal or tenuous.
opportunity to introduce the role of the strategist in
outperforming industry norms. It helps chart the future directions of firms’ strategies.
Second is the idea that business is not always a “zero- It helps in thinking through the implications of each industry
sum game”— which is an assumption that is implicit in trend for the strategic group as a whole.
Porter’s five forces model. We discuss how companies can It may be interesting to ask the students what dynamics they
collaborate with each other for mutually beneficial outcomes. envision in the automobile industry, i.e., how membership in
strategic groups may change and if new strategic groups may average expected level of profitability in an industry. A sound
emerge. awareness of such factors, both individually and in
combination, is beneficial not only for deciding what industries
to enter but also for assessing how a firm can improve its
SUMMARY competitive position. We also address how industry and
Managers must analyze the external environment to minimize competitive practices are being affected by Internet
or eliminate threats and exploit opportunities. This involves a technologies. We also addressed some of the limitations of
continuous process of environmental scanning and monitoring Porter’s five forces model, including its “zero-sum perspective”
as well as obtaining competitive intelligence on present and and its omission of the key role of complements. Although we
potential rivals. These activities provide valuable inputs for discussed the general environment and competitive
developing forecasts. In addition, many firms use scenario environment in separate sections, they are quite
planning to anticipate and respond to volatile and disruptive interdependent. A given environmental trend or event, such as
environmental changes. changes in the ethnic composition of a population or a
technological innovation, typically has a much greater impact
We identified two types of environment: the general
on some industries than on others.
environment and the competitive environment. The six
segments of the general environment are demographic, The concept of strategic groups is also very important to the
sociocultural, political/legal, technological, economic, and external environment of a firm. No two organizations are
global. Trends and events occurring in these segments, such completely different nor are they exactly the same. The
as the aging of the population, higher percentages of question is how to group firms in an industry on the basis of
similarities in their resources and strategies. The strategic
women in the workplace, governmental legislation, and
groups concept is valuable for determining mobility barriers
increasing (or decreasing) interest rates, can have a dramatic
across groups, identifying groups with marginal competitive
effect on your firm. A given trend may have a positive impact
positions, charting the future directions of firm strategies, and
on some industries and a negative or neutral impact, or none
assessing the implications of industry trends for the strategic
at all on others.
group as a whole.
The competitive environment consists of industry-related
factors and has a more direct impact than the general
environment. Porter’s five forces model of industry analysis Study Guide For Module No.3
includes the threat of new entrants, buyer power, supplier
power, threat of substitutes, and rivalry among competitors. Assessing the Internal Environment of the Firm
The intensity of these factors determines, in large part, the MODULE OVERVIEW
Overview
The purpose of this module is to help students understand discuss how value can be appropriated by an
the importance of the internal environment of the firm. organization’s stakeholders, such as employees.
Module 2 focused on assessing the external environment; 3. Two approaches to evaluating firm performance: We
we turn our attention in this module to managing value emphasize both the inclusion of the analysis of
creating activities within the company. financial resources as well as the interests of multiple
This module starts by reminding students of the stakeholders. Central to our discussion is Kaplan and
limitations of SWOT analysis mentioned in Module 2. Norton’s concepts of the “balanced scorecard.”
SWOT analysis was suggested as a starting point for 4. In an appendix to this module, we explore how the
analysis, but not an ending destination. This module internet and digital technologies are being used to add
adds value chain analysis, the resource based view of value. Such technology-enhanced capabilities are
the firm, and the balanced scorecard as methods for providing
analyzing the firm’s internal environment. The topic is
new means by which firms can create competitive
organized into three sections.
advantages.

1. Value Chain Analysis: The firm’s activities are divided

I. Value Chain Analysis
into a series of valuecreating steps. Both individual
Value chain analysis views the organization as a sequential
activities as well as the interrelationships among
process of value-creating activities. It is a strategic analysis
activities within the firm—and between the firm and its of an organization that uses value creating activities. Such
suppliers, customers, and alliance partners--add value an approach is very useful for understanding the building
to the firm. blocks of competitive advantage. In competitive terms, value
2. Resource based view of the firm: We analyze the firm is the amount that buyers are willing to pay for what a firm
as a collection of tangible and intangible resources provides for them. A firm is profitable to the extent that the
and organizational capabilities. The key to the value that it receives exceeds the total costs involved in
sustainability of advantages is the creation of bundles creating the product or service.
of activities that satisfy four criteria: rare, valuable,
difficult to imitate, and difficult to substitute. We also
Value chain analysis is described in Michael Porter’s seminal equipment, testing, printing, and facility operations. It also
book, Competitive Advantage, Porter’s illustrate value chain covers the efficient plant operations, incorporation of
appropriate process technology, and efficient plant layout
— which consists of both primary and support activities.
and workflow design.
To point out that when using value chain analysis, one needs
to view the concept in its broadest context, without regard to 3. Outbound Logistics
the boundaries of a given organization. That is to include The activities of outbound logistics are associated with the
suppliers, customers, and alliance partners. collecting, storing, and distributing the product or service to
buyers. They include finished goods warehousing, material
The balance of this section will address primary activities,
handling, delivery vehicle operations, order processing, and
support activities, and the importance of relationships among scheduling. It also considers effective shipping processes to
activities — both inside and outside the boundaries of a firm. provide quick delivery and minimize damages and shipping
of goods in large lot sizes to minimize transportation costs.
A. Primary Activities
4. Marketing and Sales
These activities contribute to the physical creation of the Marketing and sales activities are associated with purchases
product or service, its sale and transfer to the buyer, and its of products and services by end users and the inducements
service after the sale. There are five categories of primary to get them to make purchases. They include advertising,
activities in an organization that is competing within any promotion, sales force, quoting, channel selection, channel
industry. These five primary activities are: relations, and pricing. It also involves innovative approaches
to promotion and advertising and proper identification of
customer segments and needs.
1. Inbound Logistics
Inbound logistics are associated with the receiving, storing, 5. Service
and distributing of inputs to the product. It includes the This includes all activities associated with providing service
location of distribution facilities for material handling, to enhance the value of products such as installation, repair,
warehousing, inventory control, vehicle scheduling, and training, parts supply, and product adjustment. It also
returns to suppliers. considers quick response to customer needs and
emergencies, quality of service personnel and outgoing
2. Operations training.
Operations include all activities associated with transforming
the final product form, such as machining, assembly, B. Support Activities
Support activities in the value chain consist four generic quality retention with trade unions as well as rewards and
categories. These four support activities are: incentive programs to motivate all employees. Innovative
“family friendly” initiative and CEO perspective on effective
1. Procurement human resource management.
Procurement refers to the function of purchasing inputs used
in a firm’s value chain. Procurement of raw materials inputs, 4. General Administration
development of collaborative “win-win” relationships with General Administration consists of a number of activities,
suppliers, and analysis and selection of alternate sources of including general management, planning, finance,
inputs to minimize dependence on one supplier of accounting, legal, government affairs, quality management,
consumable materials, office equipment, building and others. and information systems. General administration (unlike
other support activities) typically supports the entire value
2. Technology Development chain and not individual activities.
Every value activity embodies technology. The array of This section addresses how general administration can be
technologies employed in most firms is very broad, ranging used as a source of competitive advantages — not merely as
from technologies used to prepare documents and transport “overhead expenses.” It provides examples of the symbolic
goods to those embodied in processes and equipment or the leadership of CEO using information systems.
product itself. Technology that is related to the product and An important general administration activity is the legal
its features supports the entire value chain, while other aspect that can generate significant value for companies by
technology development is associated with particular primary addressing how patenting of technological innovations be
or support activities. beneficial to the company. (Clearly, patent attorneys have to
Innovations in products and services also include effective work very closely with scientists and engineers to be
research and development (R&D) activities for process and successful in obtaining valuable patents.)
product initiatives. Positive collaborative relationships
between R&D and other department should also exist within C. Interrelationships among Value Chain Activities within
an organization. Lastly excellent professional qualifications of and Across Organizations
personnel should prevail.
Value chain activities must be addressed separately. Here,
3. Human Resource Management we discuss: (1) interrelationships among activities within the
Human resource management consists of activities involved firm, and, (2) relationships among activities with other
in the recruiting, hiring, training, development, and organizations, such as suppliers and customers.
compensation of all types of personnel. Effective recruiting, We first review the examples of Apple and Samsung mobile
development, and retention mechanisms for employees and phones using tempered glass for their cell phone monitor to
demonstrate interrelationships within the firm and Their approach also includes building social connections
relationships with other organizations such as Huawei, Vivo through digital media and other forms of interactions, i.e.,
and OPPO mobile phones respectively. incorporating the crowdsourcing concept. Here, P&G
Another example is the innovation Sharp smart that require enabled customers to co-design and co-engineer innovations
less accessories provides significant advantages for their in the design of baby diapers. Others companies used social
customers that can maximize its utilization aside viewing it media connections through digital media to gain valuable
also serve as a cordless monitor in holding online meetings, insights from customers.
holding classes both for teachers and the students.
E. Applying the Value Chain to Service Organizations
D. The “Prosumer” Concept: Integrating Customers into Added in this aspect is how to apply the value chain concept
the Value Chain to service organizations in order to help show how it can be
A “prosumer” is considered a customer/producer who is even applied to firms other than manufacturing firms (which is
more extensively integrated into a firm’s value chain. It what Porter’s generic value chain concept can be most
stands in sharp contrast to the traditional marketing directly applied). So Shop Retail and LBC Express Padala
approach in which the customer merely consumes the depicts the key relationships among the primary and support
products and services produced by the company. In addition, activities to create value for these firms.
efforts are made to tie the customer to the company through,
for example, loyalty programs and individualized relationship II. Resource Based View of the Firm
marketing. The resource-based view of the firm (RBV) combines two
perspectives: (1) the internal analysis of phenomena within a
1. How Procter & Gamble Embraced the Prosumer company, and (2) an external analysis of the industry and its
Concept competitive environment. It extends SWOT analysis by
Proctor & Gamble values their customers not just for their combining internal and external perspectives and provides a
money—but also as a rich source of information. In our useful framework for exploring why some firms are more
first example, P&G—with its “customer is boss” successful than others. Resources that firms possess consist
perspective— transformed their fragrance business by of tangible resources, intangible resources, and
focusing on innovations that were meaningful to organizational capabilities.
consumers. This included fresh new scents, distinctive Throughout this section we focus on the importance of
packaging, and proactive marketing. Central to their integrating value-creating activities, i.e., that competitive
approach was clearly identifying target consumers for advantages are created (and sustained) through the bundling
each brand. of several resources in unique combinations.
A. Types of Firm Resources For a firm to earn a sustainable competitive advantage, it
This brief section discusses each of the three types of must have four attributes: valuable, rare, and difficult for
resources — tangible, intangible, and capabilities — and competitors to imitate or substitute.
provides examples from business practice.

Tangible resources are assets that are relatively Four criteria of firm’s resources for sustainable
easy to identify, including physical assets, financial, competitive advantages.
organizational resources, technological resources that
an organization uses to create value for its 1. The resource must be valuable?
customers. Example of this is FedEx’s computer- Resources are valuable when they enable a firm to formulate
based job competency tests. and implement strategies that improve its efficiency or
effectiveness. The SWOT framework suggests that firms
Intangible resources are much more difficult for improve their performance only when they either exploit
competitors to identity and account for and are opportunities or neutralize (minimize) threats.
typically embedded in unique routines and practices
including human resources, innovation resources, 2. The resource must be rare
and reputation resources. Example of strong brand If competitors or potential competitors also possess the
image is the case of Apple computers and mobile cell same valuable resource, it is not a source of competitive
phones. advantage because all of these firms have the capability to
exploit the resource in the same way. Common strategies
Organizational capabilities are not specific tangible based on such a resource would give no one firm an
or intangible assets. They are competencies or skills advantage. For a resource to provide a competitive
that a firm employs to transform inputs into outputs. advantage, it must be uncommon, that is, rare among the
Present in this topic the example of Gillette’s firm’s current and potential competitors.
capabilities to combine several technologies in its 3. The resource must be difficult for competitors to imitate.
wetshaving products which composed of tangible, Inimitability is a key to value creation because it constrains
intangible resources, organizational capabilities and competition. If a resource is inimitable, then any profits
strong primary activities. generated are more likely to be sustainable.

B. Firm Resources and Sustainable Competitive For imitation to be avoided, four conditions need to be
Advantages satisfied:
Physical uniqueness. By definition it is inherently difficult to The key point in this section is that even though a firm may
copy. have a source of competitive advantage that appears to
satisfy the four criteria for sustainability, some (or a good
Path Dependency. This means that resources are unique deal) of its profits may be retained (or “appropriated”) by its
and therefore scarce because of all that has happened along employees or managers—instead of going to the owners
the path followed in their development and/or accumulation. (i.e., shareholders).
We address four conditions that explain the extent to which
Causal Ambiguity. This means that would-be competitors managers and employees will be able to extract a
may be impeded because it is impossible to disentangle the proportionately high level of the profits they generate:
causes (or possible explanations) of either what the valuable ● Employee bargaining power
resource is or how it can be created. ● Employee replacement cost
● Employee exit cost
Social Complexity. These include “soft” issues such as ● Manager bargaining power
culture, trust, and leadership. Examples include interpersonal
relations among the employees and managers of a firm, its III. Evaluating Firm Performance: Two Approaches
culture, and its reputation among suppliers and customers.
Although complex physical technology is not included in this Here, we address two major approaches to evaluating firm
category of imperfect inimitability, the exploitation of physical performance. The first is financial ratio analysis in which
technology in a firm typically involves the use of socially we assess how a firm is doing compared to its balance
complex resources. sheet, income statement, historical comparison, comparison
with industry norms, comparison competitors, and market
4. The resource must have no strategically equivalent valuations.
substitutes. Second, we address performance from the perspective of a
The fourth requirement for a firm to be a source of broader stakeholder perspective. Kaplan and Norton’s
sustainable competitive advantage is that there must be no concept of the balanced scorecard.
strategically equivalent valuable resources that are
themselves are rare or inimitable. A. Financial Ratio Analysis
We address five different types of financial ratios:
C. The Generation and Distribution of a Firm’s Profits: ● Short-term solvency or liquidity
Extending the ResourceBased View of the Firm ● Long-term solvency measures
● Asset management
● Profitability
 ● Market value 1. The Balanced Scorecard: Description and Benefits
Next, we address some issues that must be taken into The balanced scorecard helps to provide a meaningful
account in order to make financial analysis more meaningful: integration of many issues that come into play when
historical comparisons, comparisons with industry norms, and evaluating a firm’s performance. It is a set of measures that
comparisons with key competitors. provide top managers with a fast but comprehensive view of
the business. In a nutshell, it includes financial indicators,
1. Historical Comparisons operational measures of customer satisfaction, internal
Comparing a firm’s performance over time helps to provide a processes, and the organization’s innovation and
means of evaluating trends. improvement activities.

2. Comparisons with Industry Norms The balanced scorecard enables managers to consider their
When evaluating a firm’s financial performance, it is important business from four key perspectives:
to compare it with industry norms. That is, a firm’s current ● How do customers see us? (customer perspective)
ratio or profitability may be impressive at first glance. ● What must we excel at? (internal perspective)
However, it may pale when compared to industry averages. ● Can we continue to improve and create value?
(innovation and learning perspective)
3. Comparisons with Key Competitors ● How do we look to our shareholders? (financial
Referring back to Module 2, firms with similar strategies are perspective)
considered members of strategic groups in a given industry.
Furthermore, competition tends to be more intense among Balanced scorecards depict four perspectives.
competitors within groups than across groups. Thus, one can
gain valuable insights into a firm’s financial and competitive a. Customer Perspective
position if comparisons are made between a firm and its Managers must translate their general mission statements on
most direct competitors. Use the example of the customer service into specific measures that reflect the
pharmaceutical industry. Here, large firms such as Pfizer and factors that really matter to customers. There are four
Merck have enormous investments in R&D—which would primary categories of customer concerns: time; quality;
discourage new firms from competing “head to head.” performance and service; and cost.

B. Integrating Financial Analysis and Stakeholder b. Internal Business Perspective

Perspectives: The Balanced Scorecard Customer-based measures are important. However, they
must be translated into indicators of what the firm must do
internally to meet customers’ expectations. The internal
measures should reflect business processes, decisions, addressed by the balanced scorecard—such as learning and
actions coordination and resource capabilities that have the improving the internal culture—are also essential to its
greatest impact on customer satisfaction. This includes successful application.
factors such as cycle time, quality, employee skills, and
productivity. ❖ Lack of a clear strategy
❖ Limited or ineffective executive sponsorship
c. Innovation and Learning Perspective ❖ Too much emphasis on financial measures rather than
Given the rapid rate of change in markets, technologies, and non-financial measures
global competition, the criteria for success are constantly ❖ Poor data on actual performance
changing. Developing new products and services, creating ❖ Inappropriate links to scorecard measures to
greater value for customers, and increasing operating compensation
efficiencies, than a company penetrate new markets, ❖ Inconsistent or inappropriate terminology.
increase revenues, and grow shareholder value.
SUMMARY
d. Financial Perspective In traditional approaches to assessing a firm’s internal
Such measures indicate whether the company’s strategy, environment, a manager’s primary goal would be to
implementation, and execution are, in fact, contributing to determine her firm’s relative strengths and weaknesses.
bottom-line improvement. Typical financial goals include Such is the role of SWOT analysis, wherein a manager
profitability, growth, and shareholder value. Periodic financial analyzes her firm’s Strengths and Weaknesses as well as
statements remind managers that improved quality, the Opportunities and Threats in the external environment.
response time, productivity, and innovative products benefit In this chapter, we discussed why this may be a good
the firm only when they result in improved service, increased starting point but hardly the best approach to performing a
market share, reduced operating expenses, or higher asset sound analysis. There are many limitations of SWOT
turnover. analysis, including its static perspective, its potential to
overemphasize a single dimension of a firm’s strategy, and
2. Potential Limitations of the Balanced Scorecard the likelihood that a firm’ strengths do not necessarily help
One criticism of the balanced scorecard is that executives the firm create value or competitive advantages.
will believe that implementing it provides a “quick fix” to
organizational problems. The balanced scorecard takes time We identified two frameworks that serve to complement
to implement effectively and performance problems can be SWOT analysis in assessing a firm’s internal environment:
linked to poor execution of the system rather than the value chain analysis and the resource-based view of the
balanced scorecard itself. Commitment to improve issues firm. In conducting a value chain analysis, you first divide the
firm into a set of value creating activities. These include how, and intellectual assets — not the traditional
primary activities such as inbound logistics, operations, and factors of production (i.e., labor and capital).
service as well as support activities such as procurement 2. The second section addresses the key resource itself
and human resources management. Then you analyze how — human capital — the foundation for the creation of
each activity adds value as well as how interrelationships intellectual capital. We explore ways in which the
among value activities in the firm and among the firm and its organization can attract, develop, and retain human
customers and suppliers add value. Thus, instead of merely capital as well as the importance of recognizing the
determining a firm’s strengths and weaknesses per se, we interdependence of these three activities. We also
analyze them in the overall context of the firm and its address the value of a diverse work force.
relationships with customers and suppliers, the value 3. Third, we discuss the critical role of social capital, that
system. is, the network of relationships among individuals. We
address both social capital within organizations as well
as across organizations. We also discuss social
Study Guide For Module No. 4 networks – and their implications for knowledge
management and career success.
Recognizing a Firm’s Intellectual Assets: Moving 4. The final section focuses on the role of technology in
beyond a Firm’s Tangible Resources leveraging human capital. This can range from such
MODULE OVERVIEW basic technologies as email to more complex forms
Overview such as sophisticated knowledge management
One of the key trends today is the emergence of the systems. We also discuss how technology can play a
importance of the knowledge worker in today’s economy. It key role in electronic teams (or e-teams) and enhance
is critical for managers to not only recognize the the retention of knowledge in an organization. And, we
importance of top talent but also the need to leverage address the importance of protecting an organization’s
human capital in order to innovate and, in the end, to intellectual assets. Here, the roles of intellectual
develop products and services that create value. property and dynamic capabilities become salient.

I. The Central Role of Knowledge in Today’s Economy

This module is divided into four sections. We begin by providing some insights on how wealth
is increasingly dependent on knowledge-based assets
1. The first section focuses on the increasing role of
where in wealth is increasingly created by effective
knowledge as the primary means of wealth generation
management of knowledge workers instead of by the
in today’s economy. After all, in the New Economy a
efficient control of physical and financial assets.
firm’s value is based much more on knowledge, know-
 Intellectual capital includes assets such as reputation, o Values
employee loyalty and commitment, customer o Beliefs
relationships, company values, brand names, and the o Attitudes
experience and skills of employees.
2. Sound Recruiting Approaches and Networking
Sound recruiting approaches firms must take recruiting
We define some of the basic concepts in this module: seriously and select the “best and brightest” in their industry.
● Human capital refers to the “individual capabilities, Challenge becomes having the right job candidates, not the
knowledge, skills, and experience of the company’s greatest number of items.
employees and managers.”
● Social capital can be defined as “the network of B. Developing Human Capital
relationships that individuals have throughout the Organizations must do more than merely hire top-level
organization.” talent and expect the skills and capabilities of those
● Knowledge comes in two different forms: explicit (they employees to remain current throughout their
are codified, documented, easily reproduced, widely employment. Rather, training and development must take
distributed, etc.) and tacit (are in the minds of place at all level.
employees and is based on their experiences and
backgrounds). 1. Encouraging Widespread Involvement
The development of human capital requires the active
II. Human Capital: The Foundation of Intellectual Capital involvement of leaders at all levels.
Organizations must recruit talented people —
employees at all levels with the proper set of skills and 2. Transferring Knowledge
capabilities coupled with the right values. In this section, Some of the challenges associated with transferring
we address the hiring/selection, development, and knowledge in an organization. Companies may develop its
retention processes. human capital by offering valuable courses to new
employees as well as managers from other companies.
A. Attracting Human Capital
3. Monitoring Progress and Tracking Development
1. "Hire for Attitude, Train for Skill” Whether a firm uses on-site formal training, off-site training
Emphasis on: (e.g., universities) or on-the-job training, tracking individual
o General knowledge and experience progress — and sharing this knowledge with both the
o Social skills employee and key managers — becomes essential.
 their place — but should not be the primary means of the
4. Evaluating Human Capital retention of talent.)
The primary issue that this section addresses is the 360- 1. Identifying with an Organization’s Mission and Values
degree evaluation system. Such an evaluation approach is People who identify with and are more committed to the core
becoming more critical given the importance of collaboration mission and values of the organization are less likely to stray
and interdependence in today’s knowledge intensive or bolt to the competition.
organizations. Traditional “top down” evaluation systems
evaluate performance from a single perspective and typically 2. Challenging Work and a Stimulating Environment
do not address the “softer” issues such as social skills, The motivation to work on something because it is interesting,
values, beliefs, and attitudes. exciting, or personally challenging underlies the importance of
intrinsic motivation.
Best Practices to Recruit and Retain Young Talent In addition, some leading-edge firms have kept highly mobile
● Don’t fudge the sales pitch employees motivated and challenged by lowering the
● Let them have a life barriers to an employee’s mobility within a company.
● No time clocks, please
● Give them responsibility 3. Financial and Non-Financial Rewards and Incentives
● Feedback and more feedback Clearly, financial rewards are a vital organizational control
● Giving back matters mechanism. After all, top talent is a highly mobile asset, and
such individuals are likely to always be able to attract
How to Get Hired competing offers — even in relatively tight labor markets.
● It helps to know someone Money may not be the most important reason why people
● Play up volunteer work on your resume take or leave jobs. Exodus of employees can erode a firm’s
● Unleash your inner storyteller competitive advantage.
● No lone rangers need apply
● Be open to learning new things D. Enhancing Human Capital: The Role of Diversity in the
Workforce
C. Retaining Human Capital This section addresses diversity in today’s workforce
Managers have the option of either forcing top talent to today which has become more vital due to demographic
stay with the organization via non-compete clauses, trends and the accelerating globalization of business. We
golden handcuffs, etc. or providing the type of address some of the emerging demographic trends
environment wherein top talent will desire to stay. (We which have created a more diverse society.
recognize, of course, that employment contracts have
 We then address six areas in which a diverse workforce organizations today. A trend evolving to recruit job
can improve an organization’s effectiveness. These are: candidates at the crux of social networks in organizations,
particularly if they are seen as having the potential to bring
1. Cost Argument with them a raft of colleagues. Emigration of talent from an
2. Resource Acquisition Argument organization to start-up ventures. Provision of a mechanism
3. Marketing Argument for obtaining resources and information from outside the
4. Creativity Argument organization.
5. Problem-Solving Argument
6. System Flexibility Argument B. Social Networks: Implications for Knowledge
Management and Career Success
III. The Vital Role of Social Capital We included this section because we feel that it has very
Successful firms are well aware that the attraction, important implications for business school graduates’ career
development, and retention of talent is a necessary but success. Much of their education focuses on developing
not sufficient condition for creating competitive “human capital”, i.e., their skills and competences. However,
advantages. In the knowledge economy, it is not the consistent with the resourcebased view of the firm, success
stock of resources that is important, but rather the extent in the business world depends on how well one can
to which it is combined and leveraged. Thus, the “combine and leverage resources” or “create unique
development of “social capital” — friendships and bundles”—not just the output from one’s individual efforts.
working relationships among talented individuals, helps Social network analysis depicts the pattern of interactions
to tie knowledge workers to a given firm. among individuals and helps to diagnose effective and
Another way to view these perspectives is drawn from ineffective patterns. Group members’ ties within and outside
the resource-based view of the firm. Here, competitive the group affects the extent to which members connect to
advantages that are harder for competitors to duplicate individuals who:
are those that are based on “unique bundles” of ● convey needed resources,
resources — which occurs when individuals are actively ● have the opportunity to exchange information and
collaborating and sharing knowledge. Knowledge worker support,
often more loyal to their colleagues and profession than ● have the motivation to treat each other in positive
to their employer ways, and,
● have time to develop trusting relationships that might
A. How Social Capital Helps to Attract and Retain Talent improve the groups’ effectiveness.
The importance of social ties among talented professionals is
creating an important challenge (and opportunity) for
Social networks depicts informal relationships among Harvard’s Dorothy LeonardBarton — a key means to
individuals which involve communication flows, personal innovative activity.
support, and advice networks. Second, if there are deep rooted mindsets dysfunctional
human resource practices may develop. For example, the
Closure involves a situation in which all members of a social hiring of like-minded people may heighten inertia and erode
network have relationship/ ties to other members in a given innovation.
network. Through closure, members develop a high level of Third, the socialization process whereby individuals are
trust and solidarity. socialized in the norms and values of an organization can be
Bridging relationships, in contrast to closure, stresses the potentially expensive — both in terms of financial resources
importance relationship in a social network that connects and managerial commitment. Such expenses should be
every employee in an organization. People who bridge evaluated in terms of anticipated benefits.
relationships tend to receive timely, diverse information
because of their access to a wide range of heterogeneous IV. Using Technology to Leverage Human Capital and
information flows. Knowledge
Here, we discuss how technology can be used to leverage
Knowledge of Social Networks human capital and knowledge in organizations as well as
Social networks deliver three unique advantages: beyond their boundaries to include customers and suppliers.
● Private information We will address both simple and more complex applications
● Access to diverse skills of technology. We also discuss the challenge of protecting a
● Power firm’s intellectual property and the importance of a firm’s
dynamic capabilities.
C. The Potential Downside of Social Capital
To provide balance to the discussion, it is useful to address A. Using Networks to Share Information
some of the downsides of social capital. There are primarily Clearly, e-mail is a very effective means of communicating a
two issues: wide range of information. It is quick, easy, and almost
First, when people identify strongly with a group they costless. It can, of course, become a problem if it is used
sometimes support ideas that are suboptimal or simply inappropriately but it has its benefit. Technology can play a
wrong. If there are strong social pressures (such as key role in helping a firm develop a knowledge sharing
“groupthink”), people may be hesitant to challenge each network.
other with touch questioning. This prevents them from
engaging in “creative abrasion” — a termed coined by B. Electronic Teams: Using Technology to Enhance
Collaboration
Technology has also enabled professionals to work as part of V. Protecting the Intellectual Assets of the Organization:
virtual teams to enhance the speed and effectiveness with Intellectual Property and Dynamic Capabilities
which products and services are developed. For example, it
helps to accelerate the design and testing of new product or ● The management of intellectual property
service. involves:
We discuss the two main ways in which electronic teams are ● Patents,
different from traditional teams (geographical separation of ● contracts with confidentiality and noncompete
team members; communication by electronic communication clauses,
channels such as faxes, e-mail, etc.). In an electronic team, ● copyrights, and,
individuals complete tasks primarily through e-mail ● development of trademarks.
communication
Two major advantages of electronic teams parallel the first Intellectual Property Rights
two sections of this module. First, it enables the firm to The protection of intellectual rights raises unique
access a broader range of human capital (i.e., skills issues, compared to physical property rights. Much of the
necessary for complex assignments). Second, it’s effective in production of intellectual property is characterized by
generating “social capital” the quality of relationships and the significant development costs and very low marginal
networks that leaders and members form. costs. Indeed, it may take a substantial investment to
The two key challenges of making e-teams effective include: develop a software program. However, once developed,
members must identify with who among them can provide their reproduction and distribution costs may be almost
knowledge and resources; and leaders must be able to know zero—especially if the Internet is used. Effective
how to combine individual contributions. protection of intellectual property is necessary before any
investor will finance such an undertaking, because they
C. Codifying Knowledge for Competitive Advantage are not reliably protected by the state, there will be no
There are two different types of knowledge: tacit (embedded incentive to develop new products and services.
in personal experience) and explicit knowledge (those which
are documented, codified, widely distributed, and easily Dynamic Capabilities
replicated). A challenge of knowledge-intensive Developing dynamic capabilities is the only avenue
organizations is to capture and codify the knowledge and providing firms with the ability to reconfigure their
experience that, in effect, resides in the heads of their knowledge and activities to achieve a sustainable
employees. competitive advantage. Dynamic capabilities include the
ability to challenge the conventional wisdom within a
firm’s industry and market, learning and innovating,
 adapting to a changing world, and adopting new ways to capital, we discussed the need to encourage widespread
serve the evolving needs of the market by using firms involvement throughout the organization, monitor progress
capacity to build and protect a competitive advantage, and track the development of human capital, and evaluate
which rest on knowledge, assets, and technologies. human capital. Among the issues that are widely practiced in
evaluating human capital is the 360-degree evaluation
SUMMARY system. Employees are evaluated by their superiors, peers,
Firms throughout the industrial world are recognizing that the direct reports, and even internal and external customers.
knowledge worker is the key to success in the marketplace. Finally, some mechanisms for retaining human capital are
However, we also recognize that human capital, although employees’ identification with the organization’s mission and
vital, is still only a necessary but not sufficient condition for values, providing challenging work and a stimulating
creating value. We began the first section of the chapter by environment, the importance of financial and nonfinancial
addressing the importance of human capital and how it can rewards and incentives, and providing flexibility and
be attracted, developed, and retained. Then we discussed amenities. A key issue here is that a firm should not
the role of social capital and technology in leveraging human overemphasize financial rewards. After all, if individuals join
capital for competitive success. We pointed out that an organization for money, they also are likely to leave for
intellectual capital — the difference between a firm’s market money. With money as the primary motivator, there is little
share and its book value — has increased significantly over chance that employees will develop firm-specific ties to keep
the past few decades. This is particularly true for firms in them with the organization. We also address the value of a
knowledge-intensive industries, especially where there are diverse workforce.
relatively few tangible assets such as software development.
The third section of the chapter discussed the importance of
The second section of the chapter addressed the attraction, social capital in leveraging human capital. Social capital
development, and retention of human capital. We viewed refers to the network of relationships that individuals have
these three activities as a “three legged stool.” That is, it is throughout the organization as well as with customers and
difficult for firms to be successful if they ignore or are suppliers. Such ties can be critical in obtaining both
unsuccessful in any one of these activities. Among the information and resources. With regard to recruiting, for
issues we discussed in attracting human capital were “hiring example, we saw how some firms are able to hire groups of
for attitude, training for skill” and the value of using social individuals en masse who are part of social networks. Social
networks to attract human capital. In particular, it is relationships can also be very important in the effective
important to attract employees who can collaborate with functioning of groups. We address social network theory and
others given the importance of collective efforts such as point out the relative advantages of two key concepts —
teams and task forces. With regard to developing human closure and brokering relationships. Finally, we discussed
some of the potential downsides of social capital. These In the previous three modules, we have focused on the
include the expenses that firms may bear when promoting analysis of the external (Module 2) and internal (Modules 3
social and working relationships among individuals as well as and 4) of the firm. In this module, the emphasis is on the
the potential for “groupthink”, wherein individuals are formulation of strategies at the business level. Since the
reluctant to express divergent (or opposing) views on an business level is where competition takes place, a firm’s
issue because of social pressures to conform. performance at this level is vital to its overall success. The
module is divided into two major sections:
The fourth section addressed the role of technology in
leveraging human capital. We discussed relatively simple 1. The first section draws on Michael Porter’s framework
means of using technology such as e-mail and networks of generic strategies — overall cost leadership,
where individuals can collaborate by way of personal differentiation, and focus. We describe each of these
computers. We also addressed more sophisticated uses of strategies and provide examples of firms that have
technology such as sophisticated management systems. Here successfully used them to outperform rivals. Then, we
knowledge can be codified and reused at very low cost, as we suggest some of the pitfalls that managers must avoid
provided in the examples of firms in the consulting, health to successfully pursue these strategies. We include a
care, and high technology industries. We discuss how discussion of how firms may combine generic
electronic teams can be effectively used. strategies. We also discuss whether a strategy can be
sustainable—using the example of a manufacturing
The fifth section addresses key differences between the firm. We close with a discussion of how competitive
protection of physical property and intellectual property. The strategies should be revised and redeployed in light of
development of dynamic capabilities is clearly one of the best changes caused by the Internet and digital
ways to ensure that a firm can protect its intellectual technologies.
property. 2. The second section addresses an important
contingency in the effective use of business-level
strategies — industry life cycles. The stages of the life
Study Guide For Module No. 5 cycle — introduction, growth, maturity, and decline —
have important implications for a firm’s relative
Business-Level Strategy: Creating and Sustaining Competitive emphasis on functional capabilities and value-creating
Advantages activities. It also discusses “turnaround strategies”
MODULE OVERVIEW which enable a firm to reposition its competitive
Overview position in an industry and how such strategies can
lead to sustainable advantages.
 It refers to the firm’s achievement of similarly, or being “on
I. Types of Competitive Advantage and Sustainability par” with competitors with respect to low cost, differentiation,
Michael Porter presented three generic strategies that firms or strategic product characteristic.
can use to overcome the five forces and attain competitive
advantage. The first, overall cost leadership, is based on 2. Experience Curve
creating a low-cost position relative to one’s peers. The A company may also make use of their experience based on
second, differentiation, requires that the firm (or business the previous data they have in order to lower the cost for
unit) create products and/or services that are unique and them to gain experience with production processes. Based
valued. Third, firms following a focus strategy must direct on their experience unit cost of production it possibly decline
their attention (or “focus”) toward narrow product lines, buyer as output increase in most industries.
groups or geographical markets. Firms emphasizing a focus
strategy must attain advantages either through differentiation Improving Competitive Position vis-à-vis the Five Forces
or a cost leadership approach. ● Protects a firm against rivalry from competitors
At this point, it is useful to point out that deciding what types ● Protects a firm against powerful buyers
of competitive advantage to select requires the making of ● Provides more flexibility to cope with demands from
hard choices (a point driven home by Michael Porter in his powerful suppliers for input cost increases
1996 Harvard Business Review article: What is strategy?) In
effect, a firm cannot be “all things to all people.” Potential Pitfalls of Overall Cost Leadership Strategies

Types of the three generic strategies: This section addresses five pitfalls of following an overall cost
A. Overall Cost Leadership leadership strategy:
Cost leadership requires a tight set of interrelated tactics ● Too much focus on one or a few value chain activities;
such as: aggressive construction of efficient-scale facilities, ● All rivals share a common input or raw material;
vigorous pursuit of cost reductions from experience, tight ● The strategy is imitated too easily;
cost and overhead control, and cost minimization in all ● A lack of parity on differentiation;
activities in a firm’s value chain. ● Erosion of cost advantages when pricing information
available to customers increases.
Methods used in the application or adaption of Overall
Cost Leadership B. Differentiation
Differentiation consists of creating differences in the firm’s
1. Competitive Parity products or service offerings by creating something that is
perceived industry-wide as being unique and valued by
customers. Differentiation can take many forms such as: ● Focus creates barriers of either cost leadership or
prestige or brand image, technology, innovation, differentiation, or both.
features, customer service, or dealer networks. They are ● It also used select niches that are least vulnerable to
non-price attributes for which customers will pay a premium. substitute or where competitors are weakest.

Differentiation: Improving Competitive Position Potential Pitfalls of Focus Strategies

Differentiation strategy helps a firm to improve its position vis-
à-vis Porter’s five forces through: ● Some of the pitfalls of a focus strategy. These
1. Creates higher entry due to customer loyalty are:
2. Provides higher margin that enable the firm to deal with ● Erosion of cost advantages within the narrow
supplier power segment.
3. Establishes customer loyalty and hence less threat ● Even product and service offerings that are
from substitute highly focused are subject to competition from
new entrants and imitators
Potential Pitfalls of Differentiation Strategies ● Focusers can become too focused to satisfy
● Uniqueness that is not valuable buyer needs.
● Too much differentiation
● Too high a price premium D. Combination Strategies: Integrating Overall Low Cost
● Differentiation that is easily imitated and Differentiation
● Diffusion of brand identification through product-line
extensions
● Perceptions of differentiation may vary between buyers There has been a great deal of evidence — in both
and sellers observation of business practice as well as in research
studies — about the strategic benefits of competitive
C. Focus positioning and resultant performance implications that are
The third generic strategy is based on the choice of a narrow inherent in combining generic strategies.
competitive scope within an industry. Focus attains In general, the key benefit to be enjoyed by firms that
competitive advantages by dedicating itself exclusively to a successfully integrate low cost and differentiation strategies
particular segment or group of segments and tailors its is that it is generally harder for competitors to duplicate or
strategy to serving them. imitate them. An integrated strategy enables a firm to provide
two types of value to customers: differentiated attributes and
Focus: Improving Competitive Position lower prices. Furthermore, the benefits of combining
advantages can be additive, instead of merely involving
tradeoffs. 4. Integrated of Overall Cost Leadership and
Differentiation Strategies using the Internet
Three approaches that combine overall cost leadership
and differentiation. Integrated overall cost leadership and differentiation strategy
using internet helps a firm to improve its position in regard to
1. Automated and Flexible Manufacturing Systems its industry’s five forces. These strategy is highly sustainable
Given the advances in manufacturing technologies such as in terms of:
CAD/CAM as well as information technologies, many firms ● Online bidding and order processing eliminate the need
have been able to manufacture unique products in relatively for sales and minimize sales-force expenses
small quantities at lower costs. This is a concept known as ● Online purchase of orders has made many transactions
“mass customization”. paperless, thus reducing the cost of procurement
● Direct access to progress reports and the ability of
2. Exploiting the Profit Pool Concept for Competitive customers to periodically check work in progress
Advantage minimize rework.
A profit pool can be defined as the total profits in an industry ● Collaborate design efforts using internet technologies
at all points along the industry’s value chain. The potential that link designers, materials suppliers and
pool of profits will be deeper in some segments of the value manufacturers reduce the costs and speed the
chain than in others, and the depths will vary within an processes of new product development
individual segment to focus solely on manufacturing and ● Personalized online access provides customers with
leaving downstream operations to others through their own “site within a site in which their prior orders,
outsourcing. status of current orders, and requests for future orders
are processed directly by the supplier’s website.
3. Coordinating the ‘Extended’ Value Chain via ● Online access to realtime sales and service information
Information Technology Many firms have achieved success is being used to empower the sales force and
by integrating activities throughout the continually update R&D and technology development
“extended value chain” by using information technology to efforts.
link their own value chain with the value chains of their ● Internet-based knowledge management systems that
customers and suppliers. As noted in Chapter 3, this link all parts of the organization are shortening
approach enables a firm not only to add value via its own response times and accelerating organizations
value creating activities, but also for its customers and learning.
suppliers.
 ● Quick online responses to service requests and rapid II. How the Internet and Digital Technologies Are
feedback to customer surveys and product promotions Affecting the Competitive Strategies
are enhancing marketing efforts. To stay competitive, firms must update their strategies to
● Permission marketing techniques are focusing sales reflect the new possibilities and constraints that the Internet
efforts on specific customers who opt to receive and Web-based technologies represent. In this section, we
advertising notices. review the impact of the Internet on overall cost leadership,
● Niche portals that target specific groups are providing differentiation, and focus strategy formulation. We also
advertisers to access viewers with specialized interest. address Internet-related value chain activities that firms can
● Virtual organizing and online “work from home” are implement to enhance their strategic success.
being used to minimize firm infrastructure
requirements. A. Overall Cost Leadership
● Procurement technologies that uses internet software An overall low-cost leadership strategy involves managing
to match buyers and sellers are highlighting specialized costs in every activity of a firm’s value chain and offering no-
buyers and drawing attention to smaller suppliers. frills products that are an exceptional value at the best
possible price. Internet technologies now provide more
opportunities to manage costs and achieve greater
Pitfalls of Integrated Overall Low Cost and Differentiation efficiencies. But these capabilities are available to many
Strategies. firms and may provide only short-lived advantage.
Most analysts agree that the Internet’s ability to lower
Firms that attain both types of competitive advantage enjoy transaction costs will transform business. Transaction costs
high returns. refer to various expenses associated with conducting
However, as with each generic strategy taken individually, business. It applies not just to buy-sell transactions but to the
there are some pitfalls to avoid: costs of interacting with every part of a firm’s value chain,
● Firms that fail to attain both strategies may end up with both within and outside the firm.
neither and become “stuck in the middle.” The process of disintermediation lowers costs. Each time
● Underestimating the challenges associated with intermediaries are used in a transaction; additional costs are
coordinating value creating activities in the extended added. Removing those intermediaries lowers transaction
value chain. costs. The Internet may also reduce the costs of traveling,
● Miscalculating sources of revenue and profit pools in and the cost of maintaining a physical address.
your industry.
Potential Internet-Related Pitfalls for Low Cost Leaders
Internet-related pitfalls include the threat of imitation by uniqueness that customers don’t value. This happened with
competitors who can quickly duplicate capabilities without some personalization and customization software that early
threat of infringement on proprietary information. Other dot-com companies added at great expense. Other problems
pitfalls include the availability of information online that can result from overpricing products and services or
increases buyer power, excessive cost cutting, and offering developing brand extensions that dilute a company’s image
too many free or low-cost products or services. or reputation.

B. Differentiation C. Focus
A differentiation strategy involves providing unique, high- A focus strategy involves targeting a narrow market segment
quality products and services that promote a favorable with customized products and/or specialized services. The
reputation and strong brand identity and usually command a Internet has opened up new opportunities for niche players
premium price. Internet technologies are being used to who seek to access small markets in a highly specialized
threaten the position of companies that have traditionally fashion.
maintained the best reputations. Other technologies are
being employed by industry leaders to make their position Focusers face many of the same problems as low cost
stronger. leaders and differentiators. To create focus strategies that
work, firms must use the kind of singlemindedness that is
One way the Internet is creating differentiation advantages is characteristic of a focus strategy throughout every value-
by enabling mass customization. Mass customization is not creating activity.
new, but the Internet has generated a giant leap forward in
the amount of control customers can have in influencing the Focusers can use Internet technologies to achieve cost
process. Many consumers now judge the quality and savings and unique advantages – such as specialized
uniqueness of a product or service by their ability to be knowledge, rapid response, and strong customer service – in
involved in planning and design, combined with factors such niche markets.
as speed of delivery and reliability of results. Such
capabilities are changing the way companies develop unique Potential Internet-Related Pitfalls for Focusers
products and services, make their reputation, preserve their Internet-related pitfalls include focusing on segments that are
brand image, and achieve superior service. too narrow to be profitable or trying to appeal to niches that
are overly broad. When focus strategies become too narrow,
Potential Internet-Related Pitfalls for Differentiators they may have trouble generating enough activity to justify
Internet-related pitfalls include overspending differentiating the expense of operating. Focusers that try to extend to a
features that customers don’t want or creating a sense of broader audience — by offering additional inventory, content,
or services — can lose the cost advantages associated with The life cycle of an industry refers to the stages of
a narrow focus and become vulnerable to imitators or new introduction, growth, maturity, and decline that occur over the
entrants. life of an industry. In considering the industry life cycle, it’s
useful to think in terms of broad product lines such as
D. Are Combination Strategies the Key to E-Business personal computers, photocopiers, or long distance
Success? telephone service.
Many experts agree that the net effect of the Internet is fewer
rather than more opportunities for sustainable advantages. Why is it important to consider industry life cycles? The
Therefore, new strategic combinations that make the best emphasis on various generic strategies, functional areas,
use of the competitive strategies may hold the greatest value creating activities, and overall objectives vary over the
promise for future success. course of the industry life cycle. Managers must become
even more aware of their firm’s strengths and weaknesses in
The Internet has provided all companies with greater tools many areas to attain competitive advantages.
for managing costs. This may be good in general for the Be sure to point out an important caveat regarding the key
efficiency of the economy. But for individual companies, it limitation of the industry life cycle concept. That is, products
may shave profit margins and make creating a sustainable and services go through many cycles of innovation and
advantage more difficult. renewal. And, for the most part, only fad products have a
single life cycle. We provide the example of how the cereal
Many differentiation advantages are diminished by the industry got a boost in sales when medical research
Internet. The ability to comparatively shop, for example, is indicated that oat consumption reduced a person’s
depriving some companies of unique advantages. In the cholesterol.
Internet age, the best approach may be to combine
differentiation with other competitive strategies. The four stages of the industry life cycle

The greatest benefit may be in using the Internet to focus on A. Strategies in the Introduction Stage
a niche. However, an incumbent firm that previously thought In the introduction stage, products are unfamiliar to
a given niche market was not worth the effort may use consumers. Market segments are not well defined and
Internet technologies to enter the segment for a lower cost product features are not clearly specified. The early
than it could in the past. development of an industry typically involves low sales
growth, rapid technological change, operating losses, and
III. Industry Life Cycle Stages: Strategic Implications the need for strong sources of cash to finance operations.
Since there are few players and not much growth, gains in market share. Also, given the slow growth, all gains
competition tends to be limited. are essentially at the rival’s expense, since there are few
unexplored niches to exploit.
B. Strategies in the Growth Stage
The second stage of the industry life cycle, growth, is Two positioning strategies that managers can use in the
characterized by strong increases in sales. The potential for maturity stage include:
strong sales (and profits) attracts other rivals who also want
to benefit. Whereas marketing and sales initiatives were a.) Reverse positioning – a change in industry tendencies to
mainly directed at spurring aggregate demand, that is, continuously improve products by offering products with fewer
demand for all such products in the introduction stage, efforts product attributes and lower prices.
in the growth stage are directed toward stimulating selective
demand, in which a firm’s product offerings are chosen with b.) Breakaway positioning – a break in industry tendencies
those of its rivals. to incrementally improve by offering products that are still in
the industry but are perceived by customers as being
Revenues in the growth stage increase at an accelerating different.
rate because (1) new consumers are trying the product, and
(2) a growing proportion of satisfied consumers are making D. Strategies in the Decline Stage
repeat purchases. In general, new products and services Decisions in the decline phase of the industry life cycle
often fail if there are relatively few repeat purchases. become particularly important. Hard choices must be made
and firms must face up to the fundamental strategic choices
C. Strategies in the Maturity Stage of either exiting or staying and attempting to consolidate the
In the third stage, maturity, aggregate industry demand industry.
begins to slow. Since markets are becoming saturated, there
are few opportunities to attract new adopters. Since it is no There are four basic strategies available in the decline
longer possible to “grow around” competition, direct phase: maintaining, harvesting, exiting, or consolidating.
competition becomes more predominant — and competition
intensifies (often on the basis of price). Maintaining refers to keeping a product going without
significantly reducing marketing support, technological
We address the example of the intense competition between development, or other investments in the hope that
Unilever and Procter and Gamble in the laundry soap competitors will eventually leave the market.
business. This slow growth business in the maturity stage
puts enormous pressure on both players to make even small
Harvesting involves obtaining as much profit as possible began by providing a brief description of each generic
and requires that costs in the decline stage be decreased strategy (or competitive advantage) and furnished examples
quickly. of firms that have successfully implemented these strategies.
Successful generic strategies invariably enhance a firm’s
Exiting the market involves dropping the product from a firm’s position vis-à-vis the five forces of that industry — a point
portfolio. that we stressed and illustrated with examples. However, as
we pointed out, there are pitfalls to each of the generic
Consolidating involves one firm acquiring the best of the strategies. Thus, the sustainability of a firm’s advantage is
surviving firms in an industry at a reasonable price. (We always challenged because of imitation or substitution by
provide the example of Lockheed Martin, the giant in the new or existing rivals. Such competitor moves erode a firm’s
defense industry.) advantage over time.

E. Turnaround Strategies We discussed the viability of combining (or integrating)

Three turnaround strategies: overall cost leadership and differentiation generic strategies.
● Asset and cost surgery; If successful, such integration can enable a firm to enjoy
● Selective product and market superior performance and improve its competitive position.
pruning; However, this is challenging and managers must be aware
● Piecemeal productivity of the potential downside risks associated with such an
improvements. initiative.

The way companies formulate and deploy strategies is also

SUMMARY changing because of the impact of the Internet and digital
How and why firms outperform each other goes to the heart of technologies on many industries. Overall low cost strategies
strategic management. In this chapter, we identified three may be more important as some firms use Internet
generic strategies and discussed how firms are able not only technologies to lower transaction costs and increase the
to attain advantages over competitors, but also to sustain efficiency of their operations. Differentiation strategies may
such advantages over time. Why do some advantages be harder to achieve for many firms because the Internet is
become long-lasting while others are quickly imitated by eroding some of their most unique features. Further, Internet
competitors? technologies are enabling the mass customization
capabilities of greater numbers of competitors. Focus
The three generic strategies — overall cost leadership, strategies are likely to increase in importance because the
differentiation, and focus — form the core of this chapter. We Internet provides highly targeted and lower-cost access to
narrow or specialized markets. These strategies are not that is, more value by working together than if they were free-
without their pitfalls, however, and firms need to understand standing units. This topic is divided into six major sections:
the dangers as well as the potential benefits of Internet- We begin by posing the question why do some corporate
based approaches. level strategic efforts fail and others succeed? We emphasize
the importance of diversification activities that create
The concept of the industry life cycle is a critical contingency shareholder value, whether through mergers and
that managers must take into account in striving to create acquisitions, strategic alliances and joint ventures, or internal
and sustain competitive advantages. We identified the four development.
stages of the industry life cycle — introduction, growth, We address how related diversification can help a firm attain
maturity, and decline — and suggested how these stages economies of scope through either leveraging core
can play a role in decisions that managers must make at the competencies or sharing activities (such as production
business level. These include overall strategies as well as facilities or distribution facilities).
the relative emphasis on functional areas and value creating We discuss how firms can benefit from related diversification
activities. through greater market power. Here, we address pooled
negotiating power and vertical integration.
When a firm’s performance severely erodes, turnaround The fourth section discusses how firms can benefit from
strategies are needed to reverse its situation and enhance unrelated diversification. There are two key means to this
its competitive position. We have discussed three end: corporate parenting and restructuring, as well as
approaches — asset cost surgery, selective product and portfolio management.
market pruning, and piecemeal productivity improvements. The fifth section focuses on the means that firms can use to
achieve diversification. The means include mergers and
acquisitions; strategic alliances and joint ventures; and
Study Guide For Module No.6 internal development. We discuss the advantages and
Corporate-Level Strategy: Creating Value through disadvantages associated with each of these.
Diversification We close the chapter with a section on how managerial
MODULE OVERVIEW motives can erode value creation as firms pursue
Overview diversification initiatives. These include growth for growth’s
Whereas business-level strategy (Lecture 5) deals with the sake, egotism, and anti-takeover tactics (e.g., greenmail,
question of how to compete in a given industry, corporate poison pills).
level strategy addresses two related issues. These are: (1)
what businesses should we compete in, and (2) how can I. Making Diversification Work: An Overview
these businesses be managed in a way to create “synergy,”
Diversification initiatives refers to the process firms expand Such horizontal relationships across businesses enable the
their business by entering new businesses — whether via corporation to benefit from economies of scope which refers
mergers and acquisitions, strategic alliances and joint to cost savings due to the breadth of operations.
ventures, or internal development — must be justified by the Additionally, a firm can enjoy greater revenues if two
creation of value for shareholders. Firms can either diversify businesses attain higher levels of sales growth combined
into related or unrelated businesses. Diversification should than either business could independently.
be synergistic.
Leveraging Core Competencies
With related diversification, the primary benefits are to be We begin with the imagery of a tree to illustrate the concept
derived from horizontal relationships — businesses sharing of core competencies. Core competencies represent the root
intangible resources (i.e., core competencies) and tangible system (not the leaves) and competitors can make a big
resources (e.g., production facilities, distribution channels). mistake if they believe a firm’s strength is in their leaves (by
For example, Procter & Gamble enjoys many synergies from analogy). Core competencies may be considered to be the
having multiple businesses that share distribution resources. “glue” that binds existing businesses together or as the
engine that fuels new business growth.
With unrelated diversification, the primary benefits are
derived largely from vertical relationships, that is, value that Core competencies — to create synergy for a corporation —
is created by the corporate office. This would include must satisfy three conditions:
infrastructure activities such as information systems and ● The core competence must enhance competitive
corporate culture/leadership, sound businesses practices advantage(s) by creating superior customer value.
that have been honed by the corporation over time, and ● Different businesses in the corporation must be similar
human resource practices. in at least one important way to benefit from the core
competence.
II. Related Diversification: Economies of Scope and ● The core competencies must be difficult for competitors
Revenue Enhancement to imitate or find substitutes for.
Related diversification enables a firm to benefit from
horizontal relationships across different businesses in the Sharing Activities
diversified corporation. There are two means for Synergy can also be achieved by sharing tangible activities
accomplishing this: (1) leveraging core competencies, and across business units. These include value-creating activities
(2) sharing activities. such as common manufacturing facilities, distribution
channels, and sales forces.
Sharing activities provide two potential benefits: cost savings potential competitors, suppliers, and customers. We give the
and revenue enhancements. example of how PepsiCo failed to entice McDonald’s as a
1. Deriving Cost Savings through Sharing Activities customer since they had (until recently) competing business
Cost savings come from many sources such as eliminating units.
jobs, facilities, and related expenses that are no longer
needed when functions are consolidated. Vertical Integration
Vertical integration represents an expansion or extension of
2. Enhancing Revenue and Differentiation through the firm by integrating preceding or successive productive
Sharing Activities processes. That is, the firm incorporates more processes
At times, an acquiring firm and its target may attain a higher toward the original source of raw materials (backward
level of sales growth together than either company could do integration) or toward the ultimate consumer (forward
on its own. integration).

III. Related Diversification: Market Power In making decisions associated with vertical integration, five
Here, we address two principal means by which firms attain issues need to be considered:
synergy through market power: pooled negotiating power 1. Is the company satisfied with the quality of the value
and vertical integration. Note that managers have limits on that its present suppliers and distributors are providing?
their ability to use market power for diversification — 2. Are there activities in the industry value chain that are
government regulations can sometimes restrict the ability of presently being outsourced or performed by others
a business to gain very large shares of a particular market. independently that are viable sources of future profits?
3. Is there a high level of stability in the demand for the
Pooled Negotiating Power organization’s products?
Similar businesses working together or the affiliation of a 4. Does the company have the necessary competencies
business with a strong parent can strengthen an to execute the vertical integration strategies?
organization’s bargaining power in relation to suppliers and 5. Will the vertical integration initiative have potential
customers as well as enhance its position vis a vis its negative impacts on the firm’s stakeholders?
competitors. We provide the comparison of an independent
food producer with the situation in which the same business We discuss how vertical integration can be analyzed from the
is part of a giant player such as Nestle. transaction cost perspective.

We also note that managers must evaluate how the We note that every transaction involves transaction costs:
combined business may affect relationships with actual or search costs, negotiating, contracting, monitoring, and
enforcement. Another problem – transaction – specific example of Cooper Industries, whose parenting approach is
investments – occurs when purchasing a specialized input used to improve the performance of the acquired firms
from outside. manufacturing operations; cost accounting systems; and
planning, budgeting and human resource systems.
Vertical integration, on the other hand involves a different set
of costs – administrative. Thus, if transaction costs are higher Restructuring is another means by which the corporate office
than administrative costs, vertical integration should occur. can add substantial value to a business. Here, the corporate
office tries to find either poorly performing firms with
IV. Unrelated Diversification: Financial Synergies and unrealized potential or firms in industries on the threshold of
Parenting significant, positive change. We address three types of
We now address unrelated diversification. Here, unlike restructuring: Asset Restructuring, Capital Restructuring, and
related diversification, there are few benefits to be derived Management Restructuring.
from horizontal relationships, that is, the leveraging of core
competencies or the sharing of activities across business For restructuring strategies to work, corporate management
units in a corporation. must have both the insight to detect undervalued companies
In unrelated diversification, the benefits are to be gained (otherwise the cost of acquisition would be too high), or
from vertical (or hierarchical) relationships, i.e., the creation businesses competing in industries with high potential for
of synergies from the interaction of the corporate office with transformation. Also, they must have the requisite skills and
the individual business units. There are two main sources of resources for turning the businesses around — even if they
such synergies: are new and unfamiliar businesses.
● the corporate office can contribute to “parenting” and
restructuring of (often acquired) businesses, and B. Portfolio Management
● the corporate office can add value by viewing the Here, the key concept is the idea of a balanced portfolio of
entire corporation as a family or “portfolio” of businesses. This consists of businesses whose profitability,
businesses and allocating resources to optimize growth, and cash flow characteristics would complement
corporate goals of profitability, cash flow, and growth. each other, and add up to satisfactory overall corporate
performance.
A. Corporate Parenting and Restructuring
The positive contribution of the corporate office has been Description and Potential Benefits
referred to as the “parenting advantage.” Many parent In using a portfolio strategy approach, a corporation tries to
companies such as BTR, Emerson Electric, and Hanson create synergies and shareholder value in a number of ways.
create value through management expertise. We provide the Since the businesses are unrelated, synergies that develop
are the result of the actions of the corporate office interacting can help an organization to expand its product offerings and
with the individual units, i.e., vertical relationships, instead of services. M&A also can help companies enter new market
across business units, i.e., horizontal relationships. segments.

C. Caveat: Is Risk Reduction a Viable Goal of 1. Motives and Benefits

Diversification? In this section, we address the potential advantages of
In this section we briefly address the issue as to whether or mergers and acquisitions. These include:
not diversification should be undertaken in order to reduce ● Obtaining valuable resources that can help an
risk that is inherent in a firm’s variability in revenues and organization to expand it product offerings and services
profits over time. While it may make sense at “first glance,” ;
there are some limitations to such an approach. First, a firm’s ● Provide the opportunity for firms to attain the three
stockholders can diversify their portfolio at much lower cost bases of synergy — leveraging core competencies,
than a corporation. And, second, economic cycles as well as sharing activities, and building market;
their impact on a given industry (or firm) are very difficult to ● Lead to consolidation within an industry and can force
predict with any degree of accuracy. other players to merge (examples: pharmaceutical,
telecommunications, and software industries);
V. The Means to Achieve Diversification ● Enter new segments (example

In the first three sections of the chapter we addressed the 2. Potential Limitations
types of diversification (i.e., related and unrelated). Now we Here, we discuss some of the possible drawbacks of mergers
address the means to attain diversification. These include: and acquisitions. These include:
● mergers and acquisitions; ● The takeover premium can be very high (examples:
● strategic alliances and joint ventures; Household International’s acquisition of Beneficial an
● internal development. 83 percent premium; and, Conseco paid an 82 percent
premium to acquire Green Tree Financial);
A. Mergers and Acquisitions ● Competing firms can often imitate any advantages
Growth through mergers and acquisitions (M&A) has played realized or copy synergies that result from the M&A;
a critical role in the success of many corporations in a wide ● Managers’ credibility and ego can sometimes get in the
variety of high technology and knowledgeintensive way of sound business decisions;
industries. Here, market and technology changes can occur ● Cultural issues can doom the intended benefits from
very rapidly and unpredictably. In addition to speed, M&A M&A endeavors (example: merger between SmithKline
can also be a valuable means of obtaining resources that and Beecham Group).
 dedicate a major portion of an entire chapter to it (Chapter 12
— which also addresses corporate entrepreneurship).
3. Divestment: The Other Side of the “M&A Coin”
Corporate managers often find it necessary to divest Among the advantages of internal development is the ability to
businesses from their portfolios. Divesting can enhance a capture all of the value of innovative endeavors (as opposed
firm’s competitive position by reducing costs, freeing up to sharing with partners). Generally firms may be able to
resources, enabling management to focus on core business accomplish it at a lower cost than relying on external funding.
activities, and raising cash to fund existing businesses. There are also potential disadvantages such as the time
consuming nature of intrapreneurship — which is particularly
B. Strategic Alliances and Joint Ventures important in fast-changing competitive environments.
Strategic alliances and joint ventures are assuming an
VI. How Managerial Motives Can Erode Value Creation
increasingly prominent role in the strategy of leading firms,
In this section, we address some of the managerial motives
both large and small. Such cooperative relationships have
that can erode, rather than enhance, value creation. These
many potential advantages. Among these are (our text
include “growth for growth’s sake”, excessive egotism, and the
examples are included):
creation of a wide variety of anti-takeover tactics.
Entry into new markets
Reducing manufacturing (or other) costs in the value chain
A. Growth for Growth’s Sake
Developing and diffusing new technologies
There are huge incentives for executives to grow the size of
the firm. These include extra prestige and compensation as
There are also many potential limitations associated with
well as the excitement that is generated by making the “big
strategic alliances and joint ventures. Problems often arise
play.”
when there are not complementary strengths, limited
opportunities for developing synergies, low trust among the
B. Egotism
partners, and minimal attention given to nurturing close
As we all know, a healthy ego makes a leader more confident
working relationships.
and able to cope with change. However, sometimes pride is at
stake, and individuals will go to great lengths to win — or at
C. Internal Development
least not back down. Such behavior is often detrimental to the
Firms can also diversify via corporate entrepreneurship and
firm.
new venture development. In today’s economy, internal
development (or intrapreneurship) is such an important topic
C. Anti-Takeover Tactics
by which companies expand their businesses that we
Anti-takeover tactics are rather common. These are efforts
by management to prevent hostile or unfriendly takeovers
by unwelcome suitors. Often, it is in management’s best business units. Here, synergies are created from vertical
interests to undertake such actions — but typically not in the relationships between the corporate office and the individual
interests of the firm’s shareholders. business units. With unrelated diversification, the primary
ways to create value are corporate restructuring and
SUMMARY parenting, as well as the use of portfolio analysis techniques.
A key challenge of today’s managers is to create “synergy” Corporations have three primary means of diversifying their
when engaging in diversification activities. As we discussed in product-markets. These are mergers and acquisitions, joint
this chapter, corporate managers do not, in general, have a ventures/strategic alliances, and internal development. There
very good track record in creating value in such endeavors are key tradeoffs associated with each of these. For
when it comes to mergers and acquisitions. Among the factors example, mergers and acquisitions are typically the quickest
that serve to erode shareholder values are paying an means to enter new markets and provide the corporation
excessive premium for the target firm, failing to integrate the with a high level of control over the acquired business.
activities of the newly acquired businesses into the corporate However, with the expensive premiums that often need to be
family, and undertaking diversification initiatives that are too paid to shareholders of the target firm and the challenges
easily imitated by the competition. associated with integrating acquisitions, they can also be
quite expensive. Strategic alliances among two or more
We addressed two major types of corporate-level strategy: firms, on the other hand, may be a means of reducing risk
related and unrelated diversification. With related since they involve the sharing and combining of resources.
diversification the corporation strives to enter into areas in But such joint initiatives also provide a firm with less control
which key resources and capabilities of the corporation can (than it would have with an acquisition) since governance is
be shared and leveraged. Synergies come from horizontal shared between two independent entities. Also, there is a
relationships among business units. Cost savings and limit to the potential “upside” for each partner because
enhanced revenues can be derived from two major sources. returns must be shared as well. Finally, with internal
First, economies of scope can be achieved from the development, a firm is able to capture all of the value from its
leveraging of core competencies and sharing of activities. initiatives (as opposed to sharing it with a merger or alliance
Second, market power can be attained from greater, or partner). However, diversification by means of internal
pooled, negotiating power and from vertical integration. development can be very time-consuming — a disadvantage
that becomes even more important in fast-paced competitive
When firms undergo unrelated diversification, they enter environments.
product-markets that are dissimilar to their present
businesses. Thus, there is generally little opportunity to
either leverage core competencies or share activities across
Finally, some managerial behaviors may serve to erode
shareholder returns. Among these are “growth for growth’s
sake,” egotism, and anti-takeover tactics. As we discussed,
some of these issues —particularly anti-takeover tactics —
raise ethical considerations because the managers of the
firm are often not acting in the best interests of the
shareholders.