Definitions of Terms for Chapter 1 STRATEGIC MANAGEMENT AND STRATEGIC

COMPETITIVENESS

Strategic Competitiveness- it is achieved when a firm successfully formulates and implements a value
creating strategy.

Strategy- is an integrated and coordinated set of commitments and actions designed to exploit core
competencies and gain a competitive advantage.

Competitive Advantage- when a firm implements a strategy that creates superior value for customers
and that its competitors are unable to duplicate or find too costly to imitate.

Above-average returns-are returns in excess of what an investor expects to earn from other
investments with a similar amount of risk.

Risk-is an investor’s uncertainty about the economic gains or losses that will result from a particular
investment.

Average returns – are returns equal to those an investor expects to earn form other investment with a
similar amount of risk.

Strategic Management Process- is the full set of commitments, decisions, and actions required for a
firm to achieve strategic competitiveness and earn above-average returns.

Hypercompetition-describes competition that is excessive such that it creates inherent instability and
necessitates constant disruptive change for firms in the competitive landscape.

Global economy-is one in which goods, services, people, skills, and ideas move freely across geographic
borders.

Globalization- is the increasing economic interdependence among countries and their organizations as
reflected in the flow of goods and services.

Perpetual Innovation- is a term used to describe how rapidly and consistently new, information-
intensive technologies replace older ones.

Strategic Flexibility-is a set of capabilities used to respond to various demands and opportunities
existing in a dynamic and uncertain competitive environment.

I/O Model-explains the external environment dominant influence on a firm’s strategic actions.

Resources- are inputs into a firm’s production process, such as capital equipment, the skills of individual
and employees, patents, finances, and talented managers.

Capability- is the capacity for a set of resources to perform a task or an activity in an integrative manner.

Core Competencies- are capabilities that serve as a source of competitive advantage for a firm over its
rivals.
Resource-Based Model- assumes that each organization is a collection of unique resources and
capabilities.

Knowledge-( information, intelligence, and expertise) is the basis of technology and its application.

Organizational Culture-refers to the complex set of ideologies, symbols, and core values that are shared
throughout the firm and that influence how the firm conducts business.

Strategic leaders-are people located in different areas and levels of the firm using the strategic
management process to select strategic actions that help the firm achieve its vision and fulfill its
mission.

TWENTY-FIRST CENTURY COMPETITION

TODAY’S COMPETITIVE MARKET:

 GLOBALIZATION
 THE GLOBAL ECONOMY
 RAPID TECHNOLOGICAL CHANGE
 INCREASING IMPORTANCE OF PEOPLE AND KNOWLEDGE

COMPETITVE ADVANTAGE

FORMULATION AND IMPLEMENTATION OF A SUPERIOR VALUE-CREATING STRATEGY

 Commitments and actions to achieve above-average performance and returns

 What the firm will do?
 What the firm will not do?
Outcome: competitive advantage

The global competitive landscape:

Increasing:

 Market volatility and instability due to the rapid pace of change in markets
 Blurring of market boundaries
 Globalized flow of financial capital
 Need for flexibility, speed, innovation, and integration in the use of technology
 Strategic and operational complexity of global-scale competition
 Rising product quality standards

Decreasing:

 Traditional time for adapting to change

 Traditional sources of competitive advantage
 Traditional managerial mindset

Hypercompetition:

Global economy and Technology linked to Strategic options in hypercompetitive environments

Strategic options in hypercompetitive environments:

  Use of price-quality positioning to build market presence
 Creation of know-how and use of first-mover advantage
 Protection or invasion of established geographic or product markets

Competitive Success Factors:

Top corporate members:

 Are market/customer-needs oriented

 Have an entrepreneurial mindset/ opportunistic characteristics
 Make effective use of valuable competencies
 Offer new and innovative products and services

Tehnological and Technology changes:

Technology trends impacting global competitive environment:

 Increasing rate of technology diffusion and the emergence of disruptive technologies

 The information age: Internet and the global proliferation of low-cost computing power
 Increasing knowledge as an intangible source of competitive advantage

STRATEGIC FLEXIBILITY:

 Involves coping with the uncertainty and risks of

hypercompetitive environments.
 Must first overcome built-up organizational
inertia.
 Requires developing the capacity for continuous
learning and applying the new and updated skills
sets and competencies to the firm’s competitive
advantage
The firm’s strategic choices:

 Economies of scale
 Market frictions
 Barriers to market entry
 Industry concentration
 Diversification
 Product differentiation

IO model of Above-average returns

1. Study the external environment, especially the industry environment

External Environment

 The general environment

 The industry environment
 The competitor environment
2. Locate an industry with high potential for above-average returns
 An attractive industry – an industry whose structural characteristics suggest above-average
returns
3. Identify the strategy called for by the attractive industry to earn above-average returns
Strategy Formulation- selection of a strategy linked with above-average returns in a particular
industry.
4. Develop or acquire assets and skills needed to implement a strategy
Assets and skills- required to implement a chosen strategy
5. Use the firm’s strengths (its developed and acquired skills and assets) to implement strategy
Strategy Implementation- selection of strategic actions linked with effective implementation of
the chosen strategy
Superior returns- earning of above average returns

IO Model Assumptions

 The external environment imposes pressures and constraints that determine

strategic choices.
 Similarity in strategically relevant resources causes competitors to pursue
similar strategies.
 Resource differences among competitors are short-lived due to resource
mobility across firms.
 Strategic decision makers are rational and engage in profit-maximizing
behaviors
Five Forces Model of COMPETITION
1. Industry rival (center-most)
2. Substitute (upper of the center-most)
3. Buyers (right-side of the center-most)
4. Suppliers (left-side of the center-most)
5. Potential entrants (lower of the center-most)
Five Forces Model Assumptions
Industry profitability (i.e., rate of return on invested capital
relative cost of capital) is a function of interactions among the
five forces.
Industry attractiveness equates to its profitability potential for
earning above-average returns by:
 producing standardized goods or services at costs
below competitor costs (a cost leadership strategy).
 producing differentiated goods or services for which customers are
willing to pay a price premium (a differentiation strategy)
THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS
BUILDING COMPETITIVE ADVANTAGE
o CORE COMPETENCIES (HIGHEST)- A source of competitive advantage
o CAPABILITY- An integrated set of resources
 o RESOURCES- physical, human and organizational capital (tangible and
intangible)
RESOURCE-BASED MODEL ASSUMPTIONS:
1. Firms acquire different resources.
2. Firms develop unique capabilities based on how they combine and use
resources.
3. Resources and certain capabilities are not highly mobile across firms.
4. Differences in resources and capabilities are the bases of competitive
advantage and a firm’s performance rather than its industry’s
structural characteristics
RESOURCES AS CORE COMPETENCIES
HOW RESOURCES BECOME CORE COMPETENCIES?
1. COSTLY TO IMITATE
2. VALUABLE
3. RARE
4. NONSUBSTITUTABLE

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS

1. Identify the firm’s resources. Study its strengths and weaknesses compared
with those of the competitors.
RESOURCES- inputs into a firm’s production process
2. Determine the firm’s capabilities. What do the capabilities allow the firm to do
better than the competitors?
CAPABILITY- capacity of an integrated set of resources to integratively
perform a task or activity.
3. Determine the potential of the firm’s resources and capabilities in terms of a
competitive advantage
COMPETITIVE ADVANTAGE- ability of the firm to outperform its rivals
4. Locate an attractive industry.
ATTRACTIVE INDUSTRY- an industry with opportunities that can be
exploited by the firm’s resources and capabilities.
5. Select a strategy that best allows the firms to utilize its resources and
capabilities relative to opportunities in the external environment.
STRATEGY FORMULATION AND IMPLEMENTATION- strategic
actions taken to earn above-average returns

STRATEGIC DECISION MAKING

COMPETITIVE STRATEGY DECISION
 INDUSTRY ORGANIZATION (IO) MODEL
 RESOURCE-BASED MODEL

VISION STATEMENT
  A Successful Vision:

 is an enduring word picture of what the firm wants to Be

and expects to achieve in the future.

 stretches and challenges its people.

 reflects the firm’s values and aspirations.

 is most effective when its development includes all

stakeholders.
 recognizes the firm’s internal and external competitive environments.
 is supported by upper management decisions and actions.

MISSION STATEMENT
 An effective Mission:
o specifies the present business or businesses in which the firm
intends to compete and customers it intends to serve
o has a more concrete, near-term focus on current product
markets and customers than the firm’s vision.
o should be inspiring and relevant to all stakeholders

STAKEHOLDERS
 PRIMARY STAKEHOLDERS (individuals, groups, and organizations)
- Can affect development of the firm’s vision and mission
- Are affected by the strategic outcomes achieved by the firm
- Can have enforceable claims on the firm’s performance.
- Are influential when in control of critical or valued resources
CLASSIFICATION OF STAKEHOLDERS
STAKEHOLDERS- People who are affected by a firm’s performance and who
have claims on its performance.

CATEGORIES OF STAKEHOLDERS:
CAPITAL MARKET STAKEHOLDERS
 Shareholders
 Major suppliers of capital (e.g. banks)
Conflicting expectations of shareholders and lenders:
 Preservation of investment
 Risk/return
 Influence
  Enhanced wealth
PRODUCT MARKET STAKEHOLDERS (types of product market
stakeholders):
 Primary customers
 Suppliers
 Host communities
 Unions
ORGANIZATIONAL STAKEHOLDERS
 Employees
 Managers
 Non managers
Responsibilities of strategic leaders for development and effective use of the firm’s
human capital:
 Education and skills of employees
 Organizational culture and ethical work environment
 Strategic goals and global standards
 International assignments

The work of effective strategic leaders:

Strategic Leaders:
 have a strong strategic orientation that relies on thorough analysis when taking
action
 are located at various levels throughout the firm
 want the firm and its people to accomplish more
 are innovative thinkers who promote innovation
 can leverage relationships with external parties while simultaneously
promoting exploratory learning
 have an ambicultural (global mindset) approach to management

THE STRATEGIC MANAGEMENT PROCESS:

 ANALYSES
 C2: THE EXTERNAL ENVIRONMENT
 C3: THE INTERNAL ORGANIZATION
 STRATEGIES
 C4: BUSINESS-LEVEL STRATEGIES
 C5: MARKETPLACE COMPETITION
 C6: CORPORATE-LEVEL STRATEGIES
 C7: DIVERSIFIED PORTFOLIO MANAGEMENT
 C8: INTERNATIONAL STRATEGIES
 C9: COOPERATIVE STRATEGIES
 PERFORMANCE
 C10: GOVERNANCE MECHANISMS
 C11: ORGANIZATIONAL STRUCTURE
  C12: STRATEGIC LEADERSHIP
 C13: STRATEGIC ENTREPRENEURSHIP

CHAPTER 2: THE EXTERNAL ENVIRONMENT: OPPORTUNITIES, THREATS, INDUSTRY COMPETITION AND

COMPETITOR ANALYSIS

INDUSTRY ENVIRONMENT: (THREAT OF NEW ENTRANTS, POWER OF SUPPLIERS, POWER OF BUYERS,

PRODUCT OF SUBSTITUTES, INTENSITY OF RIVALRY) COMPETITOR ENVIRONMENT:

 ECONOMIC
  DEMOGRAPHIC
 SUSTAINABLE PHYSICAL
 SOCIOCULTURAL
 GLOBAL
 TECHNOLOGICAL
 POLITICAL/LEGAL
DIMENSIONS IN THE BROADER SOCIETY THAT INFLUENCE AN INDUSTRY AND THE FIRMS WITHIN IT:
 DEMOGRAPHIC
 ECONOMIC
 POLITICAL/LEGAL
 SOCIOCULTURAL
 TECHNOLOGICAL
 GLOBAL
 PHYSICAL
THE GENERAL ENVIRONMENT: SEGMENTS AND ELEMENTS
Demographic segment
Economic segment
Political/legal segment
Sociocultural segment
Technological segment
Global segment
 Population size
 Age structure
 Geographic
distribution
 Inflation rates
 Interest rates
 Trade deficits or
surpluses
 Budget deficits or
surpluses
 Antitrust laws
 Taxation laws
 Deregulation
philosophies
 Women in the
workforce
 Workforce diversity
 Attitudes about the
quality of work life
 Product innovations
 Applications of
knowledge
 Important political
events
 Critical global markets
 Ethnic mix
 Income distribution
 Personal savings rate
 Business savings rate
 Gross domestic
product
 Labor training laws
 Educational
philosophies and
policies
 Shifts in work and
career preferences
 Shifts in preferences
regarding product and
service characteristics
 Focus of private and
government-supported
R&D expenditures
 New communication
technologies
 Newly industrialized
countries
 Different cultural and
institutional attributes
 Sustainable physical  Energy consumption
environment segment  Practices used to
develop energy
sources
 Renewable energy
efforts
 Minimizing a firm’s
environmental
footprint
 Availability of water as
a resource
 Producing
environmentally
friendly products
 Reacting to natural or
man-made disasters

 The set of factors directly influencing a firm and its competitive actions and competitive
responses:
 Threat of new entrants
 Power of suppliers
 Power of buyers
 Threat of product substitutes
 Intensity of rivalry among competitors
 Gathering and interpreting information about all of the companies that the firm competes
against.
 Understanding the firm’s competitor environment complements the insights provided by
studying the general and industry environments.

 General Environment
o Focused on the future
 Industry Environment
o Focused on factors and conditions influencing a firm’s profitability
within an industry
 Competitor Environment
o Focused on predicting the dynamics of competitors’ actions, responses and
intentions

Components of the external environment analysis

Parts of the external environment analysis:

o SCANNING- identifying early signals of environmental changes and trends

o MONITORING- detecting meaning through ongoing observations of environmental
changes and trends
o FORECASTING- developing projections of anticipated outcomes based on monitored
changes and trends
 o ASSESSING- determining the timing and importance of environmental changes and
trends for firm’s strategies and their management

OPPORTUNITIES AND THREATS

OPPORTUNITIES- A condition in the general environment that, if exploited effectively, helps a firm
achieve strategic competitiveness

THREAT- A condition in the general environment that may hinder a firm’s efforts to achieve strategic
competitiveness

SEGMENTS OF THE GENERAL ENVIRONMENT

DEMOGRAPHIC SEGMENT

 POPULATION SIZE
 INCOME DISTRIBUTION
 AGE STRUCTURE
 GEOGRAPHIC DISTRIBUTION
 ETHNIC MIX

ECONOMIC SEGMENT

 UNCERTAINTY IN:

 market growth rates

 consumer demand
 inflation and interest rates
 trade deficits or surpluses
 budget deficits or surpluses
 personal and business savings rates
 gross domestic product

POLITICAL/LEGAL SEGMENT
 Regulations
 Consumer privacy laws
 Lobbying
 Antitrust, deregulation laws
 Taxation

SOCIOCULTURAL SEGMENT
 CHANGING ATTITUDES AND CULTURAL VALUES
 Attitudes and approaches to health care
 Attitudes about quality of worklife
 Diverse and aging workforce
 Women in the workplace
  Concerns about environment
 Shifts in work and career preferences
 Shifts in product and service preferences

TECHNOLOGICAL SEGMENT
– Product innovations
– Rapid technological change and the risk of disruption
– Knowledge application
– Growth of the Internet
– New communication technologies

GLOBAL FOCUSING:
 Important geopolitical trends
 Growth of informal economy
 Critical global niche markets
 Different cultural and institutional attributes

PHYSICAL ENVIRONMENT SEGMENT

 Emerging trends oriented to sustaining the world’s
physical environment
 Recognition of the interactive influence of ecological,
social, and economic systems
 Growing concerns for sustainable industry
development and increased corporate social
responsibility for the future effects of globalized
operations
INDUSTRY ENVIRONMENT ANALYSIS
 INDUSTRY DEFINED
o A group of firms producing products that are close substitutes
o Competitive strategies to pursue above-average returns when competing
in a particular industry
o An industry’s structural characteristics influence a firm’s choice of
strategies
FIVE FORCES OF COMPETITION MODEL
 Rivalry among competing firms
 Threat of new entrants
 Bargaining power of suppliers
 Bargaining power of buyers
 Threat of substitute products

Threat of new entrants: Barriers to Entry

 Economies of scale
 Product differentiation
 Capital requirements
  Switching costs
 Access to distribution channels
 Cost disadvantages independent of scale
 Government policy
 Expected retaliation

BARRIERS TO ENTRY
 Economies of Scale
 Marginal improvements in efficiency that a firm experiences
as it incrementally increases its size.
 Factors (advantages and disadvantages) related to large and small-scale entry
include:
o flexibility in pricing and market share
o costs related to scale economies competitor retaliation

 Product Differentiation

 Unique products
 Customer loyalty
 Products at competitive price
 Capital Requirements
 Physical facilities
 Inventories
 Marketing activities
 Availability of capital
 Switching Costs

 One-time costs customers incur buying from a different supplier:

 new equipment
 retraining employees
 psychic costs of ending a relationship
 Distribution Channel Access
o Stocking or shelf space
o Price breaks
o Cooperative advertising allowances

 Cost Disadvantages Independent of Scale

– Proprietary product technology

– Favorable access to raw materials
– Desirable locations
  Government Policy

– Licensing and permit requirements

– Deregulation of industries
 Expected Retaliation

–Responses by existing competitors may depend on a firm’s

present stake in the industry (available business options)
BARGAINING POWER OF SUPPLIERS:
 Supplier power increases when:
o suppliers are large and few in number
o suitable substitute products are not available
o individual buyers are not large customers of suppliers and there are many of them
o suppliers’ goods are critical to the buyers’ marketplace success
o suppliers’ products create high switching costs
o suppliers pose a threat to integrate forward into buyers’ industry
BARGAINING POWER OF BUYERS:
 Buyer power increases when:
 buyers are large and few in number
 buyers purchase a large portion of an industry’s total output
 buyers’ purchases are a significant portion of a supplier’s annual revenues
 buyers’ switching costs are low
 buyers can pose threat to integrate backward into the sellers’ industry

 The threat of substitute products increases when:

 buyers face few switching costs.
 the substitute product’s price is lower.
 substitute product’s quality and performance are equal to or greater than the existing
product.
 Differentiated industry products that are valued by customers reduce this
threat
 Industry rivalry increases when:
 there are numerous or equally balanced competitors.
 industry growth slows or declines.
 there are high fixed costs or high storage costs.
 there is a lack of differentiation opportunities or low switching
costs.
 when the strategic stakes are high.
 when high exit barriers prevent competitors from leaving the
industry
INTERPRETING INDUSTRY ANALYSES:
UNATTRACTIVE INDUSTRY: (low profit potential)
 Low entry barriers
  Suppliers and buyers have strong positions
 Strong threats from substitute products
 Intense rivalry among competitors
ATTRACTIVE INDUSTRY (high profit potential):
 High entry barriers
 Suppliers and buyers have weak positions
 Few threats from substitute products
 Moderate rivalry among competitors

 Strategic Group Defined

 A set of firms emphasizing similar strategic

dimensions and using similar strategies.
 Intra-strategic group competition is more
intense than is inter-strategic group
competition due to similar:
 market positions
 products
 Strategic Dimensions
 Extent of technological leadership
 Product quality
 Pricing policies
 Distribution channels
 Customer service strategic actions
 Implications
 Intense competitive rivalry within a group threatens profitability of

all group members

 Strengths of the five forces differ across strategic groups

 The closer the groups are in their strategies, the greater the
rivalry between groups
 Competitor Intelligence

 The ethical gathering of needed information and data

that provides understanding of what:
 drives the competitor, as shown by its future objectives.
 the competitor is doing and can do, as revealed by its current strategy.
 the competitor believes about the industry, as shown by its assumptions.
 the competitor’s capabilities are, as shown by its strengths
and weaknesses
FUTURE OBJECTIVES:
 how do our goals compare with our competitor’s goals?
  Where will be the emphasis placed in the future?
 What is the attitude toward risk?
 How are we currently competing?
CURRENT STRATEGY:
 How are we currently competing?
 Does this strategy support changes in the competitive structure?

ASSUMPTIONS:
 Do we assume the future will be volatile?
 Are we operating under a status quo?
 What assumptions do our competitors hold about the industry and themselves?

RESPONSE:
 What will our competitors do in the future?
 Where do we hold an advantage over our competitors?
 How will this change our relationship with our competitors?

 Complementors
  The network of companies that sell complementary
products or services or are compatible with the focal firm’s
own product or service.
 If a complementor’s product or service adds value to the sale of the focal firm’s
product or service, it is likely to create value for the focal firm.
 However, if a complementor’s product or service is in a market into which the
focal firm intends to expand, the complementor can represent a formidable
competitor

ETHICAL CONSIDERATIONS:
 Practices considered both legal and ethical:
1. Obtaining publicly available information
2. Attending trade fairs and shows to obtain competitors’ brochures, viewing their
exhibits, and listening to discussions about their products

 Practices considered both unethical and illegal:

 Blackmail
 Trespassing
 Eavesdropping
 Stealing drawings, samples, or documents
CHAPTER 3: STRATEGIC MANAGEMENT
COMPETITIVENESS AND GLOBALIZATION
COMPETIVE ADVANTAGE
• Firms achieve strategic competitiveness and earn above-average returns when
their core competencies are effectively:
– acquired
– bundled
– leveraged
Over time, the benefits of any value-creating strategy can be duplicated by competitors
Sustainability of a competitive advantage is a function of the:

– rate of core competence obsolescence because of environmental changes.

– availability of substitutes for the core competence.
– imitability of the core competence

ANALYZING THE EXTERNAL ENVIRONMENT

By studying the external environment, firms identify what they might choose to do.
(STUDY INTERNAL ENVIRONMENT, CHAP 2)

Unique resources, capabilities, and competencies (required for sustainable

competitive advantage)
 By studying the internal environment, firms identify what they can do.

THE CONTEXT OF INTERNAL ANALYSIS

• Global Economy
– Traditional sources of advantages can be overcome by competitors’
international strategies and by the flow of resources throughout the global
economy.
• Global Mind-Set
– The ability to study an internal environment in ways that are not dependent
on the assumptions of a single country, culture, or context.
• Analysis Outcome
– Understanding how to leverage the firm’s bundle of heterogeneous
resources and capabilities.

• By exploiting their core competencies or competitive advantages, firms create

value.

• Value is measured by:

– product performance characteristics.

– product attributes for which customers will pay.
 • Firms create value by innovatively bundling and leveraging their resources and
capabilities.

• Superior value leads to above-average returns.

CREATING COMPETITIVE ADVANTAGE

• Core competencies, in combination with product-market positions, are the firm’s
most important sources of competitive advantage.

Core competencies of a firm, in addition to the analysis of its general, industry, and
competitor environments, should drive its selection of strategies.

THE CHALLENGES OF ANALYZING THE INTERNAL ORGANIZATION

Strategic decisions in terms of the firm’s resources, capabilities, and core
competencies:

– are non-routine.
– have ethical implications.
– significantly influence the firm’s ability to earn above average returns.
• When making strategic decisions, managers as strategic leaders must:

– know when a capability is not a competence.

– learn quickly from failures and mistakes.
– have the maturity of judgment to deal effectively with uncertainty,
complexity, and intra-organizational conflicts in an unbiased manner.
– be willing to take intelligent risks.
CONDITIONS AFFECTING MANAGERIAL DECISIONS

CONDITIONS

 UNCERTAINTY- Exists about the characteristics of the firm’s general and

industry environments and customer’s needs
 COMPLEXITY- results from the interrelationships among conditions shaping a
firm
 INTRAORGANIZATIONAL CONFLICTS- may exist among managers making
decisions as well as among those affected by the decisions

RESOURCES, CAPABILITIES AND CORE COMPETENCIES

Resources:

 are the source of a firm’s capabilities

 are broad in scope.
  cover a spectrum of individual, social and organizational phenomena.
 alone, do not yield a competitive advantage.
 A firm’s assets, including people and the value of its brand name, that represent
inputs into a firm’s production process:
o capital equipment
o skills of employees
o brand names
o financial resources
o talented managers

Types of Resources

Tangible resources:
o financial
o physical
o technological
o organizational

Intangible resources:
o human
o innovation
o reputation

TANGIBLE RESOURCES:
 FINANCIAL RESOURCES
o The firm’s capacity to borrow
o The firm’s ability to generate funds through internal operations
 ORGANIZATIONAL RESOURCES
o Formal reporting structures
 PHYSICAL RESOURCES
o The sophistication of a firm’s plant and equipment and the
attractiveness of its location
o Distribution facilities
o Product inventory
 TECHNOLOGICAL RESOURCES
o Availability of technology-related resources such as copyrights, patents,
trademark, and trade secrets
 HUMAN RESOURCES
o Knowledge
o Trust
o Skills
o Abilities to collaborate with others
  INNOVATION RESOURCES
o Ideas
o Scientific capabilities
o Capacity to innovate
 REPUTATIONAL RESOURCES
o Brand name
o Perceptions of product quality, durability and reliability
o Positive reputation with stakeholders such as suppliers and customers
Capabilities:
o represent the capacity to deploy resources that have been purposely integrated
to achieve a desired end state.
o emerge over time through complex interactions among tangible and intangible
resources.
o often are based on developing, carrying and exchanging information and
knowledge through the firm’s human capital.
o composed of the unique skills and knowledge of a firm’s employees.
o include functional expertise of employees.
o often developed in specific functional areas or as part of a functional area.

Functional areas Capabilities Examples of Firms

Distribution  Effective use of  Walmart
logistics
management
techniques
Human Resource  Motivating,  Microsoft
empowering and
retaining employees
Management Information  Efficient and  Walmart
System effective control of
inventories through
point-of-purchase
data collection
methods
Marketing  Effective promotion  Procter and gamble
of brand-name  Ralph lauren corp.
products  McKinsey & Co.
 Effective customer  Nordstrom Inc
service  Crate & Barrel
 Innovative
merchandising
Management  Ability to envision  Hugo boss
the future of clothing  Zara
Manufacturing  Design and  Komatsu
 production skills  Witt Gas
yielding reliable Technology
products  Sony
 Product and design
quality
 Miniaturization of
components and
products
Research & Development  Innovative  Caterpillar
technology  Otis Elevator Co.
 Development of  Chaparral Steel
sophisticated  Thomson Consumer
elevator control Electronics
solutions
 Rapid
transformation of
technology into new
products and
processes
 Digital technology

The four criteria for determining strategic capabilities:

 Value
 Rarity
 costly-to-imitate
 non-substitutability

Core Competencies
- Resources and capabilities that are the sources of a firm’s competitive advantage
that:
 distinguish a firm competitively and reflect its personality.
 emerge over time through an organizational process of accumulating and
learning how to deploy different resources and capabilities.
 activities that a firm performs especially well compared to competitors.
 activities through which the firm adds unique value to its goods or services
over a long period of time.
The four criteria of sustainable competitive advantages:
 valuable capabilities
 help a firm neutralize threats or exploit opportunities.
 rare capabilities
 are not possessed by many others.
 costly to imitate
 Historical
  A unique and a valuable organizational culture or brand name
 Ambiguous cause
 The causes and uses of a competence are unclear
 Social complexity
 Interpersonal relationships, trust, and friendship among managers,
suppliers, and customers
 non-substitutable capabilities
 No strategic equivalent
 firm-specific knowledge
 organizational culture
 superior execution of the chosen business model
OUTCOMES FROM COMBINATIONS OF THE FOUR CRITERIAS:
VALUABLE? RAR COSTLY NON COMPETITIVE PERFORMANCE
E? TO SUBSTITUTABLE CONSEQUENCES IMPLICATIONS
IMITATE ?
?
NO NO NO NO Competitive Below Average
advantage Returns
YES NO NO YES/NO Competitive Average Returns
Parity
YES YES NO YES/NO Temporary Above Average
Competitive to Average
Advantage Returnshi
YES YES YES YES Sustainable Above Average
Competitive Returns
Advantage

Value Chain Analysis:

- allows a firm to understand the parts of its operations that create value and those
that do not.
- is a template that firms use to:
 understand their cost position.
 identify multiple means that might be used to facilitate implementation of a
chosen business-level strategy.
Primary Activities:
- are involved with:
 a product’s physical creation.
 a product’s sale and distribution to buyers.
 the product’s service after the sale.

Support Activities:
- provide the assistance necessary for the primary activities to take place.
Value Chain shows how a product moves from the raw-material stage to the final
customer.
To be a source of competitive advantage, a resource or capability must allow the firm to
perform:
- an activity in a manner that is superior to the way competitors perform it, or
- a value-creating activity that competitors cannot complete

Supply-Chain Management
- Activities including sourcing, procurement, conversion and logistics management
that are necessary for the firm to receive raw materials and convert them into
final products
Distribution
- Activities related to getting the final product to the customer. Efficiently handling
customer’s orders, choosing the optimal delivery channel and working well with
the finance support function to arrange for customers’ payments for delivered
goods are examples of these activities
Marketing (Including Sales)
- Activities taken for the purpose of segmenting target customers on the basis of
their unique needs, satisfying customers’ needs, retaining customers, and
locating additional customers. Advertising campaigns, developing and managing
product brands, determining appropriate pricing strategies, and training and
supporting a sales force are specific examples of these activities
Follow-up Service
- Activities taken to increase a product’s value for customers. Surveys to receive
feedback about the customer’s satisfaction, offering technical support after the
sale and fully complying with a product’s warranty are examples of these
activities
Operations
 - Activities necessary to efficiently change raw materials into finished products.
Developing employee’s work schedules, designing production processes, and
physical layout of the operation’s facilities, determining production capacity
needs, and selecting and maintaining production equipment are examples of
specific operations activities.
CREATING VALUE THROUGH SUPPORT FUNCTIONS:
Human Resources
- Activities associated with managing the firm’s human capital. Selecting training,
retaining, and compensating human resources in ways that create a capability
and hopefully a core competence are specific examples of these activities.
Management Information System
- Activities taken to obtain and manage information and knowledge throughout the
firm. Identifying and utilizing sophisticated technologies, determining optimal
ways to collect and distribute knowledge, and linking relevant information and
knowledge to organizational functions are activities associated with this support
function.
Finance
- Activities associated with effectively acquiring and managing financial resources.
Securing adequate financial capital, investing in organizational functions in ways
that will support the firm’s efforts to produce and distribute its products in the
short and long term, and managing relationships with those providing financial
capital to the firm are specific examples of these activities
THE VALUE CREATING POTENTIAL OF PRIMARY ACTIVITIES:
 Inbound Logistics
o Activities used to receive, store, and disseminate inputs to a product.
 Operations
o Activities necessary to convert the inputs provided by inbound logistics
into final product form.
 Outbound Logistics
o Activities involved with collecting, storing, and physically distributing the
product to customers.
 Marketing and Sales
o Activities completed to provide the means through which customers can
purchase products and to induce them to do so.
 Service
o Activities designed to enhance or maintain a product’s value.
 Each activity should be examined relative to competitor’s abilities and rated as
superior, equivalent or inferior.
 Procurement
o Activities completed to purchase the inputs needed to produce a firm’s
products.
 Technological Development
 o Activities completed to improve a firm’s product and the processes used to
manufacture it.
 Human Resource Management
o Activities involved with recruiting, hiring, training, developing, and
compensating all personnel.
 Firm Infrastructure
o Activities that support the work of the entire value chain (general
management, planning, finance, accounting, legal, government relations,
etc.).
 Effectively and consistently identify external opportunities and
threats
 Identify resources and capabilities
 Support core competencies
 Each activity should be examined relative to competitor’s abilities and rated as
superior, equivalent or inferior.
OUTSOURCING
 Outsourcing is the purchase of a value-creating activity from an external supplier.
 Few organizations possess the resources and capabilities required to achieve
competitive superiority in all primary and support activities.
 By performing fewer capabilities:
 a firm can concentrate on those areas in which it can create value.
 specialty suppliers can perform outsourced capabilities more efficiently.
OUTSOURCING DECISIONS
A firm may outsource all or only part of one or more primary and/or support activities.

STRATEGIC RATIONALES FOR OUTSOURCING:

Improving business focus helps a firm focus on broader business issues by having
outside experts handle various operational details.
 Provides access to world-class capabilities
 Makes world-class capabilities available to firms in a wide range of applications

Accelerating re-engineering benefits

- achieves re-engineering benefits more quickly by having outsiders - who have
already achieved world-class standards - take over processes.
Sharing risks
- reduces investment requirements and makes firm more flexible, dynamic and
better able to adapt to changing opportunities.

Freeing resources for other purposes

- redirects efforts from non-core activities toward those that serve customers more
effectively.
OUTSOURCING ISSUES
 Seeking greatest value
 Outsource only to firms possessing a core competence in terms of
performing the primary or supporting the outsourced activity.
 Evaluating resources and capabilities
 Do not outsource activities in which the firm itself can create and capture
value.
 Environmental threats and ongoing tasks
 Do not outsource primary and support activities that are used to neutralize
environmental threats or to complete necessary ongoing organizational
tasks.
 Nonstrategic team resources
 Do not outsource capabilities critical to the firm’s success, even though the
capabilities are not actual sources of competitive advantage.
 Firm’s knowledge base
 Do not outsource activities that stimulate the development of new
capabilities and competencies.

COMPETENCIES, STRENGTHS, WEAKNESSES, AND STRATEGIC DECISIONS

 Cautions and Reminders

 Never take for granted that core competencies will continue to provide a
source of competitive advantage.
 All core competencies have the potential to become core rigidities –
former core competencies that now generate inertia and stifle innovation.
 Determining what the firm can do through continuous and effective
analyses of its internal environment will increase the likelihood of long-
term competitive success.

Global Mind-set
the ability to analyze, understand, and manage an internal organization in ways that are
not dependent on the assumptions of a single country, culture, or context
Value
measured by a product's performance characteristics and by its attributes for which
customers are willing to pay
Tangible Resources
are assets that can be observed and quantified (Financial, Organizational, Physical,
Technological)
Intangible Resources
are assets that are rooted deeply in the firm's history, accumulate over time, and are
relatively difficult for competitors to analyze and imitate (HR, Innovation Resources,
Reputational Resources)
Valuable Capabilities
allow the firm to exploit opportunities or neutralize threats in its external environment
Rare Capabilities
are capabilities that few, if any, competitors possess
Costly-to-imitate Capabilities
are capabilities that other firms cannot easily develop
Nonsubstitutable Capabilities
are capabilities that do not have strategic equivalents
Value Chain Activities
are activities or tasks the firm completes in order to produce products and then sell,
distribute, and service those products in ways that create value for customers
Support Functions
include the activities or tasks the firm completes in order to support the work being done
to produce, sell, distribute, and service the products the firm is producing
Outsourcing
the purchase of a value-creating activity or a support function activity from an external
supplier
Why is it important for a firm to study and understand its internal organization?
By studying the internal environment, firms identify what they can do: unique resources,
capabilities, and competencies (required for a sustainable competitive advantage)
What is value? Why is it critical for the firm to create value? How does it do so?
Measured by product performance characteristics and product attributes for which
customers will pay. By exploiting their core competencies or competitive advantages,
firms create value. Firms also create value by innovatively bundling and leveraging their
resources and capabilities. Superior Value = Above-avg returns
What are the differences between tangible and intangible resources? Why is it important
for decision makers to understand these differences? Are tangible resources more
valuable for creating capabilities than are intangible resources, or its the reverse true?
Why?
Tangible resources are observed and quantified. Intangible resources are rooted deeply
in firm's history, accumulate over time, are difficult for competitors to analyze and
imitate. Intangible resources often plays a more significant role than tangible resources:
more valuable because you can leverage them more.
What are capabilities? How do firms create capabilities?
Represent the capacity to deploy resources that have been purposely integrated to
achieve a desired end state, emerge over time through complex interactions among
tangible and intangible resources, often are based on developing, carrying and
exchanging information and knowledge through the firm's human capital. The
foundation of many capabilities lies in the unique skills and knowledge of a firm's
employees and the functional expertise of those employees. Capabilities are often
developed in specific functional area or as a part of a functional area.
What four criteria must capabilities satisfy for them to become core competencies? Why
is it important for firms to use these criteria to evaluate their capabilities' value creating
potential?
Value, Rarity, Costly-to-imitate, and Nonsubstitutability. Capabilities failing to satisfy the
four criteria are not core competencies, meaning that although every core competency
is a capability, not every capability is a core competency.
What is value chain analysis? What does the firm gain by successfully using this tool?
Value chain analysis is used to identify and evaluate the competitive potential of
resources and capabilities. By studying their skills relative to those associated with
value chain activities and support functions, firms can understand their cost structure
and identify the activities through which they are able to create value
What is outsourcing? Why do firms outsource?
The purchase of value-creating activity from an external supplier. When a firm cannot
create value in either a value chain activity or support function, outsourcing is
considered. By performing fewer capabilities a firm can concentrate on those areas in
which it can create value. Specialty suppliers can perform outsourced capabilities more
efficiently
How do firms identify internal strengths and weaknesses? Why is it vital that managers
have a clear understanding of their firm's strengths and weaknesses?
Firms identify their internal strengths and weaknesses by analyzing their internal
business environment. Managers should have a clear understanding of their internal
strengths and weaknesses because of the following reasons:
To be make sure they have the "right" resources and not just lots of resources
If a resource is considered to be right then it can be molded into a core competency
Managers need to fully understand their strengths and weaknesses so they can create
capabilities that create value.
What are core rigidities? What does it mean to say that each core competence could
become a core rigidity?
Core Rigidity is a core competency that is generally too strong or heavy within a
company and when the balance shifts in the external environment it cannot shift with it.
The key for most companies is to not let any resource sit for too long doing any one
particular task. It should be able to multitask or at least serve more than one purpose
within the business role. All core competencies have the potential to become core
rigidities - former core competencies that now generate inertia and stifle innovation