Strategic Management as a low cost advantage

differentiation advantage or both.

or

Business Strategy Competitive Advantage - When a

Chapter 1
firm generates consistently higher
profits compared to its competitors.
Strategy - Greek word strategos,
- Competitive advantage requires
meaning, “the art of the general.”
that a firm consistently
The origin of strategy comes from the outperform its rivals in
art of war, specifically, the role of a generating above-average
general in a war. profits
Above-Average Profits - Returns in
The Art of War that is said to have
excess of what an investor expects
been authored by Sun Tzu, a
from other investments with a similar
legendary Chinese general. In the art
of war, the goal is to win—but that is amount of risk.
not the strategy. His strategy was to Risk - investor’s uncertainty about the
bring hidden strengths against the profits or losses that will result from a
weaknesses of his enemy at the point
particular investment.
of attack
Many organizations, like universities,
hospitals, government agencies, non-
profits, and social enterprises, focus
Business Strategy - A plan to on objectives other than making a
achieve competitive advantage that profit. While they don't measure
involves making four inter-related success by profit, they still use
strategic choices: strategic management tools to
(1) markets to compete in; achieve their goals and contribute
(2) unique value the firm will offer in positively to society.
those markets;
(3) the resources and capabilities The primary source of a company’s
required to offer that unique value competitive advantage can come from
better than competitors; and several areas of its operations
(4) ways to sustain the advantage by
preventing imitation. - De Beers (diamond company)
has their own diamond mines.
- a company’s dynamic plan to
- Biotechnology pioneer
gain and sustain competitive
Genentech’s from research and
advantage in the marketplace.
development that has produced
Market - The industry, customer several successful drugs
segment, or geographic area that a - Toyota from manufacturing
company competes in. operations
- Procter & Gamble from sales and
Unique Value - The reason a firm marketing
wins with customers or the value - Nordstrom from merchandising
proposition it offers to customers, such and service
Strategic Management Process -
The process by which organizations
External Analysis - Examining the
formulate a plan and allocate
forces that influence industry
resources to achieve competitive
attractiveness, including opportunities
advantage that involves making the
and threats that exist in the
four strategic choices.
environment.
Internal Analysis - The analysis of a
firm’s resources and capabilities (its
strength and weaknesses) to assess
how effectively the firm is able to
deliver the unique value (value
proposition) that it hopes to provide to
customers.

The strategic management process for

creating and implementing a strategy
starts with a detailed analysis of the Markets Leaders must choose the
external environment and the industries a company competes in and
company's internal resources and the specific customer segments or
capabilities. After this analysis, needs it will address within those
executives and managers can identify industries. It is also important to select
the best business opportunities and geographic markets to serve.
develop a strategy to gain a
Unique Value This is often referred
competitive advantage. The main goal
to as a company’s value proposition,
of strategy formulation is to outline
or the value that it proposes to offer to
the high-level plan and actions the
customers. Companies typically try to
company will take to achieve this
achieve a competitive advantage by
advantage. Once the strategy is
choosing between one of two generic
developed, the final step is to create a
strategies for offering unique value:
detailed plan to implement the
low cost or differentiation.
strategy effectively through specific
activities.
Cost Advantage - An advantage that ecosystem that make it difficult for
a firm has over its competitors in the competitors to imitate or surpass.
activities associated with producing a
Mission - A company’s primary
product or service, thereby allowing it
purpose that often specifies the
to produce the same product at lower
business or businesses in which the
cost.
firm intends to compete—or the
Differentiation Strategy – customers it intends to serve.
Advantage a firm has over its
External Analysis is critical for
competitors by making a product more
addressing the first strategic choice:
attractive by offering unique qualities
Where should we compete?
in the form of features, reliability, and
convenience that distinguish it from SWOT Analysis - Strategic planning
competing products. method used to evaluate the
strengths, weaknesses, opportunities,
Strategy professor Michael Porter,
and threats involved in a business.
whose five forces analysis will be
introduced later in this chapter, has Industry Analysis - not all industries
cautioned that trying to do both offer the same potential for
simultaneously can result in being profitability, so choosing the right
“stuck in the middle”—meaning that market to compete in is crucial for a
by trying to do both, companies don’t business's success. Some industries,
effectively do the job of either low like software, soft drinks, and
price or differentiation. Some pharmaceuticals, tend to be more
companies have discovered ways to profitable on average, while others,
simultaneously offer both low price like airlines, hotels, and steel, are
and a differentiated product, which generally less profitable. While it's still
turns out to be a powerful source of possible for companies in low-profit
competitive advantage. (Amazon and industries to succeed, it requires
Uber) overcoming greater challenges due to
the overall lower profitability of those
Resources and Capabilities:
industries.
Resources refer to assets that the
Customer Analysis – External
firm accumulates over time, such as
analysis also involves analysis of
plants, equipment, land, brands,
customers or potential customers
patents, cash, and people.
Price Sensitivity - The degree to
Capabilities refer to processes (or
which the price of a product or service
recipes) the firm develops to
affects consumers’ willingness to
coordinate human activity to achieve
purchase the product or service
specific goals.
Segmentation Analysis – Dividing
Sustaining Advantage – The lesson
up customers into groups or segments
is that a company can gain and
based on similar needs or wants.
maintain a competitive advantage by
being the first to innovate, creating
products that keep customers loyal,
and building a strong brand and
Internal Analysis completes the
SWOT by focusing on strengths and
Business Unit Strategy - Decisions
weaknesses.
made at the top level of the strategic
Resource-Based Review of Firm - business unit about how to gain and
Determining the strategic resources sustain advantage, made at the
available to a company. manager level for each standalone
business unit within a company.
- known as the resource-based
model Functional Strategy - Decisions
- was developed to explain why about how to effectively implement
some firms outperform other the business unit strategy within
firms within the same industry functional
- assumes that each company is a areas like finance, product
collection of resources and development, operations, information
capabilities (also referred to as technology, sales and marketing, and
competencies) that are deployed customer service.
to deliver unique value.
Strategy Vehicles for Achieving
How Are Strategies Formulated? Strategic Objectives firms rely on a
few key strategy vehicles to help
Formulating a strategy involves
them enter attractive markets and
selecting which actions the company
build the resources and capabilities
will take to gain and sustain
necessary to deliver unique value.
competitive advantage. Remember,
competitive advantage requires that Strategy Vehicles - Activities and
the company do all of the following: strategic choices—such as make
versus buy, acquisitions, and strategic
 Provide unique value to a set of
alliances—that influence a firm’s
customers in the appropriate
ability to enter particular markets,
markets.
deliver unique value to customers, or
 Develop a set of resources and create barriers to imitating its product.
capabilities that allow the
- These strategy vehicles include
company to deliver that unique
such things as diversification,
value to customers better than
acquisitions, alliances, vertical
competitors.
integration, and international
 Sustain the competitive expansion.
advantage by figuring out how - In some cases, a firm may
to prevent imitation of the choose to grow by diversifying,
chosen strategy. adding to its products or opening
a new line of business.
Corporate Strategy - Decisions
- Acquisition is a strategy vehicle
made by senior corporate executives
used for growth and
about what markets to compete in,
diversification or to acquire key
made by executives at the corporate
resources.
level of an organization
- Sometimes companies decide to
access new resources and
capabilities through a strategic
 alliance—an exclusive 1. The functional strategies
relationship with another firm— within the company—
rather than through acquisition. research and development,
- operations, sales and
marketing, human resource
management—are well
aligned with delivering the
unique value identified in the
overall strategy.
Implementation is generally
more successful when a
company can measure how
effectively functional
activities are being performed
to support the overall
strategy.
2. The organization’s structure,
systems, staff (people), skills
(processor capabilities), style,
and shared values (culture)
- Vertical integration, or the are designed to facilitate the
make–buy decision, is also a execution of the strategy.
vehicle for achieving objectives This is the McKinsey 7 S
- companies may use framework, which is useful for
international expansion as a creating the alignment
vehicle to achieve economies of necessary to ensure effective
scale, access key resources, or implementation.
learn new skills
Strategy Implementation is the Who Is Responsible for Business
final step in the strategic management Strategy?
process to implement the strategy
that was chosen. Strategic Leader - Organizational
leaders charged with formulating,
Strategy Implementation - The explaining in a way that employees
translation of a chosen strategy into will understand, and implementing a
organizational action so as to strategy with the objective of ensuring
effectively implement the activities the survival and success of an
required to achieve strategic goals and organization.
objectives.
Deliberate Strategy – A plan
- occurs when a company adopts or pattern of action that is formulated
a set of organizational processes through a deliberate planning process
that enable it to effectively carry that is then carried out to achieve the
out its strategy. Effective mission or goals of an organization.
implementation typically
requires the following: - are implemented as a result of
careful analysis of markets,
 customers, competitors, and a
firm’s resources and capabilities.
Emergent Strategy - A plan or
pattern of action that develops and
emerges over time in an organization
despite a mission or goals.
- Not intended in the original plan
Who Benefits from a Good
Business Strategy?
Every organization has a set of
stakeholders to whom it is
accountable—and who therefore can
influence business strategy.
Organizations have four primary
stakeholder groups:
1. Capital market stakeholders
(shareholders, banks, etc.)
2. Product market stakeholders
(customers, suppliers)
3. Organizational stakeholders
(employees)
4. Community stakeholders
(communities, government
bodies, community activists)
Stakeholders - Those who have a
share or an interest in the activities
and performance of an organization.
Shareholders – Owners of a company
The chief executive officer and vice
presidents of the different business
functions are ultimately responsible
for a company’s strategy. They are
often assisted by a VP of strategic
planning (chief strategy officer), who
may lead a planning staff, or in some
cases by a management-consulting
firm. Good strategic leaders, however,
will seek information and ideas from
anyone in the company.