Strategic Management - Full

Summary 2021
Chapter I: What is Strategy? 3
Chapter II: Strategic Leadership - Managing the Strategy Process 6
Chapter III: External Analysis - Industry Structure, Competitive Forces, & Strategic
Groups 11
Chapter IV: Internal Analysis - Resources, Capabilities, & Core Competencies16
Chapter V: Competitive Advantage, Firm Performance, and Business Models 20
Chapter VI: Business Strategy - Differentiation, Cost Leadership, & Blue Ocean
25
Chapter VII: Business Strategy - Innovation, Entrepreneurship, and Platforms30
Chapter VIII: Corporate Strategy - Vertical Integration and Diversification 35
Chapter IX: Corporate Strategy - Strategy Alliances, Mergers and Acquisitions41
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Chapter I: What is Strategy?
1.1 - What Strategy Is: Gaining and Sustaining Competitive Advantage
- Strategic Management: an integrative management field that combines analysis, formulation,
and implementation in the quest for competitive advantage.
- Strategy: the set of goal-directed actions a firm takes to gain and sustain superior performance
relative to competitors
- Good Strategy: consists of 3 elements
1. The Competitive Challenge
- Clear and critical diagnosis or definition of the competitive challenge
- Analysis of the firm’s external and internal environments
2. A Guiding Policy
- Formulate an effective guiding policy to address the competitive challenge
- Strategy formulation, resulting in the firm’s corporate, business, and functional strategies
- Needs to be consistent and backed with strategic commitments, if this isn’t accomplished,
issues occur with day-to-day decisions that support the overall strategy and affects
stakeholders and investors
3. Coherent Actions
- A guiding policy needs to be implemented with a set of coherent actions
- Accomplished through strategy implementation
What is Competitive Advantage?
- Competitive Advantage: superior performance relative to other competitors in the same
industry or the industry average (relative, not absolute)
- To gain competitive advantage, a firm needs to provide products consumers value more highly
than those if its competitors at a lower price → strategic positioning, staking a unique position
within an industry where a firm provides value to customers while controlling costs
- Sustainable Competitive Advantage: outperforming competitors or the industry average over a
prolonged period of time
- Competitive Disadvantage: underperformance relative to other competitors in the same industry
or the industry average
- Competitive Parity: performance of two or more firms at the same level
- The greater the firm’s economic contribution, the more likely it will gain competitive advantage
- Strategic Profile: product differentiation, cost, and customer service, allows retailers to meet
customer needs. Competition focuses on creating value for customers
- Unique Strategic Position: combining a set of activities differently than rivals are doing, which
requires trade-offs
- What a Strategy Is Not
1. Grandiose statements are not strategy - provide little managerial guidance and lead to goal
conflict and confusion
2. A failure to face a competitive challenge is not strategy - employees don’t have a way of
assessing whether they’re making progress in addressing the competitive challenge
3. Operational effectiveness, competitive benchmarking, or other tactical tools are not strategy
- not sufficient to achieve competitive advantage

1.2 - Stakeholder Strategy and Competitive Advantage

Value Creation
- Value Creation: occurs when companies with a good strategy are able to provide products to
consumers at a price point that they can make profitable returns, both parties benefit from this
trade
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- evident in education, infrastructure, public safety, health care, clean water and air
- major events in the business world differed in their specifics demonstrate that managerial actions
can affect the economics well-being of large numbers or people internationally. Thus, it relates to
stakeholders - organisations, groups, and individuals that can affect or be affected by a firm’s
actions
Stakeholder Strategy
- Internal Stakeholders: employees, stockholders, and board members
- External Stakeholders: customers, suppliers, alliance partners, creditors, unions, communities,
governments, and the media
- Stakeholder Strategy: an integrative approach to managing a diverse set of stakeholders
effectively in order to gain and sustain competitive advantage. Allows firms to analyse and
manage how external and internal stakeholders interact to jointly create and trade value
- Effectiveness of Stakeholder Management:
- Satisfied stakeholders are more cooperative and more likely to reveal information that can
increase value creation or lower costs
- Increased trust lowers the costs for firm’s business transactions
- Management of stakeholders can lead to greater organisational adaptability and flexibility
- Negative outcomes can be reduced, creating more predictable and stable returns
- Build strong reputations that are rewarded in the marketplace by business partners, employees,
and customers
Stakeholder Impact Analysis
- Stakeholder Impact Analysis: provides a decision tool with which strategic leaders can
recognise, prioritised and address the needs of different stakeholders. Takes strategic leaders
through a 5 step process, focusing on power, legitimacy, and urgency
- A stakeholder has power over a company when it can get the company to do something that it
wouldn’t otherwise do
- A stakeholder has a legitimate claim when it’s perceived to be legally valid or otherwise
appropriate
- A stakeholder has an urgent claim when it requires a company’s immediate attention and
response
- Steps of Recognising Stakeholders’ Claim
4. Identify Stakeholders: shareholders have the most legitimate claim on a company’s profits.
Customers, suppliers, and unions, as well as local communities and the media are powerful
stakeholders that affect the smooth operation of the firm
5. Identify Stakeholders’ Interests: need to specify and assess the interests and claims of the
pertinent stakeholders using the power, legitimacy, and urgency criteria. Shareholders have
more power over a firm as they can buy and sell a large number of shares at once
6. Identify Opportunities and Threats: managers transform threats into opportunities
7. Identify Social Responsibilities:
- Corporate Social Responsibility: framework that helps firms recognise and address the
economics, legal, social, and philanthropic expectations that society has of the business
enterprise at a given point in time
a. Economic Responsibilities: return for risk
capital, repay debts, safe products at
appropriate prices and quality, salary
payment, pay taxes, manage natural
resources
b. Legal Responsibilities: laws and regulations
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are adhered to
c. Ethical Responsibilities: beyond legal responsibilities, embodies expectations, norms,
and values or its stakeholders
d. Philanthropic Responsibilities: reflecting the notion of voluntarily giving back to society
8. Address Stakeholder Concern: strategic leaders need to decide the appropriate course of
action for the firm, given all of the preceding factors

1.3 - The AFI Strategy Framework

- AFI Strategy Framework: a model that links 3 interdependent strategic management tasks that
help managers plan and implement a strategy that improves performance and results in
competitive advantage
9. Analyse:
- Strategic Leadership and the Strategy Process: what roles do strategic leaders play, and
how do they help shape a firm’s vision, mission, and values? How does strategy come
about, and what process for creating strategy should strategic leaders put in place?
- External Analysis: what effects do forces in the external environment have on the firm’s
potential to gain and sustain a competitive advantage?
- Internal Analysis: regards internal resources, capabilities, and core competencies
- Competitive Advantage, Firm Performance, and Business Models: how does the firm
make money, and how does that relate to competitive advantage
10. Formulation:
- Business Strategy: how should a firm compete: cost leadership, differentiation, value
innovation
- Corporate Strategy: where should a firm compete: industry, markets, and geography
- Global Strategy: how and where should a firm compete: local, regional, national,
international
11. Implementation:
- Organisational Design: how should a firm organise to turn the formulated strategy into
action?
- Corporate Government and Business Ethics: what type of corporate government is most
effective? How does the firm anchor strategic decisions in business ethics?

1.4 - Implications for Strategic Leaders

- Strategic leaders are mindful of the
organisation’s internal and external
stakeholders, using a stakeholder
strategy approach enables them to
manage a diverse set of stakeholders
effectively to gain competitive
advantage
- A good strategy is more likely to result
when strategic leaders apply the 3 tasks
of the AFI Strategy Framework:
1. Analysis of the external and
internal environments
2. Formulation of an appropriate
business and corporate strategy
3. Implementation of the formulated strategy through structure, culture, and controls

 Chapter II: Strategic Leadership - Managing the Strategy Process
2.1 - Strategic Leadership
- Strategic Leadership: executives’ use of power and influence to direct
the activities of others when pursuing an organisation’s goal
- Power: the strategic leader’s ability to influence the behaviour of
other organisational members to do things
What Do Strategic Leaders Do?
- (refer to the pie chart)
How Do You Become a Strategic Leader?
- Upper-Echelons Theory: a conceptual framework that views
organisational outcomes (strategic choices and performance levels) as
reflections of the values of the members of the top management team
- Strategic leaders interpret situations through the lens of their unique
perspectives, shaped by personal circumstances, values, and
experiences
- Strategic Leaders: The Level-5 Pyramid
1. Highly capable individual who makes productive contributions through motivation, talent,
knowledge, and skills
2. The individual attains the next level by becoming an effective team player, working
effectively with others to achieve common objectives
3. The team player with a high individual skill set turns into an effective manager who can
organise the resources
necessary to accomplish the
organisation’s goals
4. The effective professional
has learned to do the right
things, exerts a high
individual skills set
5. The strategic leader builds
enduring greatness by
combing willpower and
humility, works to help the
organisation succeed and
others to reach their full
potential

The Strategy Process across Levels: Corporate, Business, and Functional Managers
- Strategy Formulation: concerns the choice of strategy in terms of where and how to compete
- Strategy Implementation: concerns the organisation, coordination, and integration of how work
gets done (execution of strategy)
- Corporate Strategy: concerns where to compete as to industry, markets, and geography
- Business Strategy: concerns how to compete (cost leadership, differentiation, value
innovation)
- Strategic Business Units (SBUs): standalone divisions of a larger conglomerate, each with
their own profit-and-loss responsibility
- Functional Strategy: concerns how to implement a chosen business strategy
2.2 - Vision, Mission and Values
Vision
- What do we want to accomplish ultimately?
- Vision: what an organisation ultimately wants to accomplish; captures the company’s aspiration
- Strategic Intent: a stretch goal that pervades the organisation with a sense of winning, which
aims to achieve by building the necessary resources and capabilities through continuous learning
- Product-Oriented Vision Statements
- Defines a business in terms of a good or service provided
- Product-oriented vision statements focus on employees improving existing products and
services without consideration of underlying customer problems to be solved
- Customer-Oriented Vision Statements
- Defines a business in terms of providing solutions to customer needs
- Customer-oriented vision statements allow companies to adapt to changing environments,
focus employees to think about how best to solve a problem for a consumer (tend to be less
flexible)
- These visions identify a critical need but leave open the means of how to meet that need
Mission
- How do we accomplish our goals?
- Mission: description of what an organisation actually does, the products and services it plans to
provide, and the markets in which it will compete
- Vision defines what an organisation wants to be, and what is wants to accomplish ultimately
- Mission describes what an organisation does and how it proposes to accomplish its vision
Values
- What commitments do we make, and what safe guards do we put in place, to act legally and
ethically as we pursue our vision and mission?
- Core Values Statement: statement of principles to guide an organisation as it works to achieve
its vision and fulfil its mission, for both internal conduct and external interactions; it often
includes explicit ethical considerations
- Organisational Core Values: ethical standards and norms that govern the behaviour of
individuals within a firm or organisation. Employees look up to top managers

2.3 - The Strategic Management Process

- Strategic Management Process: the foundation for
sustainable competitive advantage, which is designed,
formulated, and implemented by strategic leaders
Top-Down Strategic Planning
- Top-Down Strategic Planning: a rational, data-driven
strategy process through which top management attempts to
program future success
- Rests on the assumption that we can predict the future from
the past, which works when the environment is stable
Scenario Planning
- Scenario Planning: strategy planning activity in which top
management envisions different what-if scenarios to
anticipate plausible futures in order to derive strategic
responses
- Goal is to create a number of detailed and executable strategic plans, allowing for flexibility and
effectiveness
- Black Swan Events: incidents that describe highly
improbable but high-impact events
- Dominant Strategic Plan: the strategic option that top
managers decide most closely matches the current reality
and which is then executed
Strategy as Planned Emergence: Top-Down and Bottom-Up
- Critics advise strategic leaders to focus on all types of
information sources, including soft sources for new
insights, personal experience, deep domain expertise, or
insights from front-line employees
- Intended Strategy: the outcome of a
rational and structured top-down strategic
plan
- Realised Strategy: combination of intended
and emergent strategy
- Emergent Strategy: any unplanned
strategic initiative bubbling up form the
bottom of the organisation
- Strategic Initiative: any activity a firm
pushes to explore and develop new products
and processes, new markets, or new
ventures
- Bottom-Up Emergent Strategy:
- Autonomous Actions: strategic
initiatives undertaken by lower-level employees on their own volition and often in response to
unexpected situations
- Serendipity: describes random events, pleasant surprises, and accidental happenstances that
can have a profound impact on a firm’s strategic initiatives. Provides time and resources for
employees to pursue other interests for serendipity to flourish
- Resource-Allocation Process (RAP): the way a firm allocates its resources based on
predetermined policies, which can be critical in shaping its realised strategy
- Planned Emergence: strategy process in which organisational structure and system allow
bottom-up strategic initiatives to emerge and be evaluated and coordinated by top management

2.4 - Strategic Decision Making

- Theory of Bounded Rationality: the core tenet of which posits that rather than to optimise when
faced with decisions, we tend to “satisfice,” satisfy and suffice
- Cognitive Limitations: constraints such as time or the brain’s inability to process large amounts
of data that prevent us from appropriately processing, evaluating, and opting for the best solution
Two Distinct Modes of Decision Making
- Behavioural Economics: blends psychology with economics to provide valuable insights
showing when and why individuals do not act like rational decision makers, as assumed in
neoclassical economics
- System 1: the brain’s default mode
- System 2: logical, analytical, and
deliberate
Cognitive Biases and Decision Making
- Cognitive Bias: obstacles in thinking that lead to systematic errors in our decision making and
interfere with our rational thinking
- Illusion of Control: highlights people’s tendency to overestimate their ability to control events
- Escalating Commitment: an individual or group faces increasingly negative feedback
regarding the likely outcome from a decision, but continues to invest resources and time in that
decision, often exceeding their earlier commitments
- Confirmation Bias: prior hypothesis bias, individuals tend to search for and interpret
information in a way that supports their prior beliefs. Regardless of facts and data presented,
individuals will stick with their prior hypothesis
- Reason By Analogy: individuals use simple analogies to make sense out of complex problems
- Representativeness: conclusions are based on small samples, or even from one memorable
case or anecdote
- Groupthink: a situation in which opinions coalesce around a leader without individuals
critically evaluating and challenging that leader’s opinions and assumptions
How to Improve Strategic Decision Making
- Devil’s Advocacy: decision framework begins
with one team generating a detailed course of
action. The second team (devil’s advocate)
challenges the proposal generated, by carefully
scrutinising a proposed course of action through
questioning and critiquing underlying assumptions
and highlighting potential downsides

-Dialectic
Inquiry:
two teams
each generate a detailed but alternate plan of action (thesis
and anti-thesis). The goal is to achieve a synthesis between
the two plans
Chapter III: External Analysis - Industry Structure, Competitive Forces, & Strategic Groups
3.1 - The PESTEL Framework
- A firm’s external environment consists of all factors outside the
firm that can affect its potential to gain and sustain a competitive
advantage
- External factors in the firm’s general environment are ones that
strategic leaders have little direct influence over
macroeconomics factors
- External factors in the firm’s task environment are ones that
strategic leaders do have some influence over
- PESTEL Model: framework that categorises and analyses an
important set of external factors that might impinge upon a firm,
which can create both opportunities and threats for the firm.
Including: political, economics, sociocultural, technological, ecological, and legal factors
Political Factors:
- Result from the processes and actions of government bodies
- Firms implement non-market strategies through lobbying, public relations, contributions,
litigation, etc. that are favourable to the firm
Economics Factors:
- largely macroeconomic, affecting economy-wide phenomena
- Growth Rates: measures the change in amounts of the products produced by a nation’s economy.
- Real growth rates are used to adjust for inflation.
- During economic booms, businesses expand operations to satisfy demand and are profitable.
Economic booms could lead to asset bubbles.
- During recessions, firms focus on low-cost solutions.
- Levels of Employment: affected by growth rates.
- In boom times, employment tends to be low, and skilled human capital becomes scare and
more expensive.
- For economic downturns, employment rises, and skilled human capital is more abundance and
wages fall.
- Interest Rates: the amount that creditors are paid for use of their money and the amount that
debtors pay for that use, adjusted for inflation.
- Low real interest rates have a direct bearing on consumer demand. During periods of low real
interest rates, firms can borrow money to finance growth, borrowing here reduces the cost of
capital and enhances a firm’s competitiveness
- Price Stability: the change in price levels of goods and services. Companies often have to deal
with changing price levels.
- Inflation occurs when there’s too much money in an economy, which leads to lower economic
growth.
- Deflation describes a decrease in the overall price level, which is a threat to economic growth
because it distorts expectations about the future.
- Currency Exchange Rates: determines how many dollars one must pay for a unit of foreign
currency.
Sociocultural Factors
- Captures a society’s cultures, norms, and values
- Demographic trends are important as they capture population characteristics related to age,
gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class
Technological Factors
- Capture the application of knowledge to create new processes and products
Ecological Factors
- Involve broad environmental issues such as the natural environment, global warming, and
sustainable economic growth. Organisations and the natural environment coexist in an
interdependent relationship
- Firms are responsible to manage this relationship in a responsible and sustainable manner
- Ecological factors can provide business opportunities, evidence for Tesla
Legal Factors
- Include the official outcomes of political processes as manifested in laws, mandates, regulations,
and court decisions
- Legal factors coexist with or result from political will. Governments can directly affect firm
performance by exerting political pressure and legal sanctions

3.2 - Industry Structure and Firm Strategy: The Five Forces Model
Industry vs Firm Effects in Determining Firm Performance
- Industry Effects: firm performance attributed to the
economic structure of the industry in which the firm
competes, such as entry and exit barriers, numbers and size
of companies, and types of products and services offered
- Firm Effects: firm performance attributed to the actions
strategic leaders take
- Industry: a group of incumbent firms facing more or less
the same set of suppliers and buyers. Firms competing in
the same industry offer similar products
- Industry Analysis: identifies an industry’s profit potential
(level of profitability that can be expected for the average firm), and derive implications for one
firm’s strategic position within an industry
- Strategic Position: ability to create value for customers (V) while containing the cost to do so
(C). Competitive advantage leans towards the firm that is able to create the largest gap between
the value the firm’s product generates and the costs required (V - C)
Competition in the Five Forces Model
- Five Forces Model: developed by Michael Porter to help strategic leaders understand the profit
potential of different industries and how they can position their respective firms to gain and
sustain competitive advantage. Two key insights that form the basis of five forces model:
1. Competition Broadly Defined:
- competition must be viewed more broadly to encompass other forces in an industry
(buyers, suppliers, potential need entry of other firms, and the threat of substitutes)
- Addresses how to deal with competition, these forces are viewed as a potential competitor
attempting to extract value from the industry
- Economic Value = Value - Cost = V - C
- Firms must capture a significant share of the
value created to gain and sustain a competitive
advantage
2. Profit Potential:
- a function of threat of entry, power of
suppliers, power of buyers, threat of
substitutes, and rivalry among existing firms
The Threat of Entry
- Threat of Entry: the risk of potential competitors entering the industry, as they can reduce the
industry’s overall profit potential, and increase spending among incumbent firms
- Entry Barriers: obstacles that determine how easily a firm can enter an industry and often
significantly predict industry profit potential, including:
- Economics of Scale: cost advantages that accrue to firms with larger output because they can
spread fixed costs over more units, employ technology more efficiently, benefit from a more
specialised division of labour, and demand better terms for their suppliers
- Network Effects: positive effect that one user of a product has on the value of that product for
other users. Positive Externality occurs when the value of the product increases with the
number of users.
- Customer Switching Costs: incurred by moving from one supplier to another, such as altering
product specifications, retrain employees, and/or modify existing processes (sunk costs)
- Capital Requirements: “price of the entry ticket” into a new industry. How much capital is
required to compete, and which companies are willing and able to make such investments?
- Advantages Independent of Size:
- Brand Loyalty
- Preferential Access, such as access to raw materials and key components for absolute cost
advantages
- Favourable Locations, access to human and venture capital, world-class and engineering
institutions
- Cumulative Learning and Experience:
- Government Policy: government politicise restrict or prevent new entrants. Deregulation in
industries have generated significant new entries.
- Credible Threat of Retaliation:
The Power of Suppliers
- Bargaining power of suppliers captures pressures that industry suppliers can exert on an
industry’s profit potential, which reduces a firm’s ability obtain superior performance because:
- Powerful suppliers can raise the cost of production by demanding higher prices for their inputs
or by reducing the quality of the input factor or service delivered
- Powerful suppliers can reduce the industry’s profit potential by capturing part of the economic
value created
- Relative bargaining power of suppliers is high when:
- The supplier’s industry is more concentrated than the industry it sells to
- Suppliers don’t depend heavily on the industry for a large portion of their revenues
- Incumbent firms face significant switching costs when changing suppliers
- Suppliers offer products that are differentiated
- There are no readily available substitutes for the products that the supplies offer
- Suppliers can credibly threaten to forward-integrate into the industry
The Power of Buyers
- Power of buyers relates to the pressure an industry’s customers can put on the producers’ margins
by demanding a lower or higher product quality. When buyers obtain price discounts, it reduces a
firm’s top line (revenue). When they demand higher quality and more service, it raises
production costs
- Factors that Increase Buyer Power
- There are a few buyers and each buyer purchased large quantities relative to the size of a
single seller
- The industry’s products are standardised or undifferentiated commodities
 - Buyers face low or no switching costs
- Buyers can credibly threaten to backwardly integrate into the industry
* Strategic leaders need to be aware of situations when buyers are especially price sensitive, when
the buyers purchase represents a significant fraction of its cost structure or procurement budget,
buyers earn low profits or are strapped for cash, and the quality (cost) of the buyers’ products is
not affected much by the quality (cost) of their inputs
- Context-Dependencies on Buyer Power
- Relative strengths of the five forces that shape competition are context-dependent
The Threat of Substitutes
- The threat of substitutes is the idea that products available from outside the given industry will
come close to meeting the needs of current customers. This reduces industry profit potential by
limiting the price of the industry’s competitors, especially when substitutes offers: attractive
performance trade-off and ow-switching
costs
Rivalry Among Existing Competitors
- Rivalry among existing competitors
describes the intensity with which
companies within the same industry
compete for market share and
profitability, which is determined by:
- Competitive Industry Structure
- Industry Growth: during periods of
high growth, consumer demand rises,
and price competition among firms
decreases. During slow or negative
industry growth, price discounts, new
product releases with minor
modifications, intense promotional campaigns, and fast retaliation by rivals are tacts indicative
of a slow or negative growth. Based on cutting prices.
- Strategic Commitments: firm actions that are costly, long-term oriented, and difficult to
reverse. Could incorporate large, fixed cost requirements, but also noneconomic considerations
- Exit Barriers: obstacles that determine how easily a firm can leave an industry. Plays
economic and social factors, such as fixed costs that must be paid and emotional attachments
A Sixth Force: The Strategic Role of Complements
- Complement: a product, service, or competency that adds value to the original product offering
when the two are used in tandem. Increase demand for the primary product, thereby enhancing
the profit potential for the industry and firm
- Complementor: a company that provides a good or service that leads customers to value your
firm’s offering more when the two are combined
- Co-Opetition: cooperation by competitors to achieve a strategic
objective
- ex: Samsung and Google cooperate, so that Samsung is more
valuable when Google’s Android mobile is installed

3.3 - Changes over Time: Entry Choices and Industry

Dynamics
Entry Choices
1. Who are the players? Identifies direct competitors, external
 and internal stakeholders necessary to successfully compete
2. When to enter? Concerns timing of entry, such as the industry life cycle (introduction, growth,
shakeout, maturity, or decline)
3. How to enter?
- Leverage existing assets, considering a new combination of resources and capabilities that
firms already possess, or if they need to form strategic alliances for resources
- Reconfigure value chains
- Establish a niche
4. What type of entry? Refers to the type of entry in terms of product market , value chain activity,
geography, and type of business model
5. Where to enter? Refers to more fine-tuned aspects of entry such as product positioning, pricing
strategy, potential partners, etc.
Industry Dynamics
- Industry Convergence: a process whereby formerly unrelated industries begin to satisfy the
same customer need. Normally due to technological advances

3.4 - Performance Differences within the Same Industry: Strategic Groups

- Strategic Group: a set of companies that pursue a similar strategy within a specific industry in
their quest for competitive advantage. They differ from one another in regards to expenditures on
research and development, technology, product differentiation, product and service offerings,
market segments, distribution channels, and customer service
- Strategic Group Model: clusters different firms into group based on a few key strategic
dimensions. In the same industry, firm performances differ depending on strategic group
membership, where some are more profitable than others.
The Strategic Group Model
- Map the industry competitors into strategic groups:
1. Identifying the most important strategic dimension
(expenditures on research and development, technology,
product differentiation, product and service offerings, market
segments, distribution channels, and customer service)
2. Choosing two key dimensions for the horizontal and vertical
axes, which expose important differences among the
competitors
3. Graphing the firms in the strategic group, indicating each
firm’s market share by the size of the bubble with which it is
represented.
- Insights from strategic group tagging:
- Competitive rivalry is strongest between firms that are within the same strategic group
- The external environment affects strategic groups differently
- The five competitive forces affect strategic groups differently
- Some strategic groups are more profitable than others
Mobility Barriers
- Mobility Barriers: industry-specific factors that separate one strategic group from another
- The dimension to determine a strategic group are mobility barriers, which are strategic
commitments
 Chapter IV: Internal Analysis - Resources, Capabilities, & Core Competencies
4.1 - From External to Internal Analysis
- Companies in the same industry face similar external opportunities
and threats, the source for some of the observable performance
difference must be found inside the firm
- Inside the firm, we analysis its resources, capabilities, and core
competencies to understand their strengths and weaknesses, and later
determine their strategic options
- Firm’s response must be dynamic, where the goal should be to
develop resources, capabilities, and competencies that create a
strategic fit with the firm’s environment

4.2 - Core Competencies

- Core Competencies: unique strengths, embedded deep within a firm, that are critical to gaining
and sustaining competitive advantage.
- Allows a firm to differentiate its products and services from those of its rivals, creating higher
value for the customer or offering products of
comparable value at lower costs
- Expresses through structures, processes, and
routines that strategic leaders put in place
Resources and Capabilities
- Resources: any assets (tangible or intangible), such as
cash, buildings, machinery, or intellectual property that
a firm can utilise when formulating and executing a
strategy
- Capabilities: the organisational and managerial skills
necessary to orchestrate a diverse set of resources and
to deploy them strategically, intangible and found
within a company’s structure, routines, and culture
- Activities: distinct and fine-grained business process
such as order taking, physical delivery of products, or
invoicing customers. Enable firms to add incremental value by transforming inputs into products
- Strategic choices find their expression in a set of specific firm activities, which leverage core
competencies for competitive advantage

4.3 - The Resource-Based View

- Resource: includes any assets as well as any capabilities and competencies that a firm can draw
upon when formulating and implementing strategy
- Resource-Based View: a model that sees certain types of resources as key to superior firm
performance, aids in identifying core competencies
- Tangible Resources: have physical attributes and are visible (labour, capital, land, buildings,
plant, equipment, and supplies)
- Intangible Resources: no physical attributes (firm’s culture, knowledge, brand equity,
reputation, and intellectual property - patents, designs, copyrights, trademarks, trade secrets)
- Competitive advantage is more likely to spring from intangible rather than tangible resources.
Tangible assets can be bough on the open market by anyone who can afford it. However, brand
names and reputation are established over time
Resource Heterogeneity and Resource Immobility
- Two Assumption Critical to the Resource-Based Model:
4. Resource Heterogeneity: from the insight that bundles of resources, capabilities, and
competencies differ across firms. Looks at the resource bundles of firms competing in the
same industry (or strategic group), because each bundle is unique
5. Resource Immobility: describes the insight that resources tend to be “sticky” and don’t
move easily from firm to firm; therefore, the resource differences that exist tend to be
difficult to replicate
The VRIO Framework
- VRIO Framework: a theoretical
framework that explains and
predicts firm-level competitive
advantage
- Valuable Resource: one that
enables a firm to exploit an
external opportunity or offset
an external threat. Enables a
firm to increase its economic
value creation (V - C). Revenue rises if a firm is able to increase perceived value of its product
by offering superior design. Production cost falls if the firm is able to put an efficient
manufacturing process and high supply chain management
- Rare: if only one or a few firms possess it. A resource that is valuable but not rare can lead to
competitive parity at best. A firm is on the path to competitive advantage only if it possesses a
valuable resource that is also rare.
- Imitate: costly to imitate, if firms that do not possess the resource are unable to develop or
buy the resource at a reasonable price. If the firm’s competitors fail to duplicate the strategy
based on the valuable, rare, and costly-to-imitate resource, the the firm can achieve a
temporary competitive advantage
- Direct Imitation: competitive advantage cannot be sustained if the underlying capability can
easily be replicated and can thus be directly imitated
- Substitution: strategic equivalence
- Combining Imitation and Substitution: firms are able to combine direct imitation and
substitution when attempting to mitigate the competitive advantage of a rival
- Organised: organised to capture value, having in place an effective organisational structure,
processes, and systems to fully exploit the competitive potential of the firm’s resources,
capabilities, and competencies
Isolating Mechanisms: How to Sustain a Competitive Advantage
- Isolating Mechanisms: barriers to imitation that prevent rivals form competing away the
advantage a firm may enjoy. Includes:
- Better Expectations of Future Resource Value: lay the foundation for a competitive
advantage alter, when expectations about the future of the resource turn out to be more
accurate than those held by competitors
- Path Dependence: the options one faces in a current situation are limited by decisions made
in the past. Generate long-term consequences due to path dependent and time-compression
diseconomies (trying to achieve the same outcome in less time, tends to lead to inferior results)
- Casual Ambiguity: a situation in which the cause and effect of a phenomenon are not readily
apparent. Managers need to have a hypothesis that proposes an explanation of a phenomenon,
or a theory that explains the what causes what or why.
 - Social Complexity: situations in which different social and business systems interact.
Emerges when two or more systems are combined, where copying the emerging complex
social systems is difficult for competitors because neither direct imitation nor substitution is a
valid approach.
- Intellectual Property Protection: critical intangible resources that can help sustain a
competitive advantage (patents, designs, copyrights, trademarks, trade secrets)

4.4 - The Dynamic Capabilities Perspective

Core Rigidities
- Core Rigidity: a former core competency that turned into a liability because the firm failed to
hone, refine, and upgrade the competency as the environment changed
- Ability to change the competency lies with the firm’s dynamic capabilities perspective
Dynamic Capabilities
- Dynamic Capabilities: describe a firm’s ability to create, deploy, modify, and reconfigure,
upgrade, or leverage its resources over time in its quest for competitive advantage. Any fit
between its internal strengths and the external environment must be dynamic. The goal is to
create a strategic fit
- Dynamic Capabilities Perspective: competitive advantage is the outflow of a firm’s capacity to
modify and leverage its resources base in a way that enables it to gain and sustain competitive
advantage in a constantly changing environment. A firm may create, deploy, modify, reconfigure,
or upgrade resources so as to provide value to customers or
lower costs in a dynamic environment.
Resource Stocks and Resource Flows
- Resource Stocks: firm’s current level of intangible resources
- Resource Flows: the firm’s level of investments to maintain
or build a resource
- Intangible resource stocks are built through investments over
time. Organisational learning also fosters the increase of
intangible resources. Outflows of the tub represent a
reduction in the firm’s intangible resource stocks, this
leakage may occur through employee turnover.

4.5 - The Value Chain and Strategic Activity Systems

The Value Chain
- Value Chain: the internal activities a firm engages in when transforming inputs into outputs.
Each activity the firm performs along the horizontal chain adds incremental value for the end
consumer. Each activity the firm performs along the value chain adds incremental costs.
- Distinct Activities:
- A firm’s core competencies are deployed through
its activities, which is the key internal driver of
performance that adds incremental value at each
step by transforming inputs into goods and
services.
- ex: managing a supply chain, running the
company’s IT system and websites, providing
customer support
- Primary and Support Activities:
- Primary Activities: add value directly as the firm transforms inputs into outputs
- Supply chain management
- Operations
- Distribution
- Marketing and sales
- After-sales services
- Support Activities: add value indirectly
- Research and development
- Information systems
- Human Resources
- Accounting and finance
- Firm infrastructure including processes, policies, and procedures
Strategic Activity Systems
- Strategic Activity System: conceives of a firm as a network of interconnected activities that can
be the foundation of its competitive advantage. Difficult to imitate in its entirety, and this
difficulty enhances a firm’s possibility of developing a sustainable competitive advantage based
on a set of distinct but interconnected activities
- Responding to Changing Environments:
- Strategic activity systems need to evolve over time if a firm is to sustain a competitive
advantage
- Failure to create a dynamic strategic fit leads to a competitive disadvantage, because the
external environment changes and the firm’s competitors get better in developing their own
activity systems and capabilities
- Strategic leaders may need to add new activities, remove activities that aren’t relevant, and
upgrade activities that have become stale or obsolete. This requires changes to the resources
and capabilities involved, which reconfigures the entire strategic activity system

 Chapter V: Competitive Advantage, Firm Performance, and Business Models
5.1 - Competitive Advantage and Firm Performance
1. Accounting Profitability
- When measuring accounting profitability, we use financial data and ratios derived from publicly
available accounting (income statements, balance sheets)
- A firm’s strategic leaders must be able to:
- Assess the performance of their firm accurately
- Compare and benchmark their firm’s performance
to other competitors in the same industry or
against the industry average
- Return on Invested Capital (ROIC)
- ROIC = Net Profits / Invested Capital
- ROIC measures how effectively a company uses
its total invested capital (shareholders’ equity and
interest bearing debt). If ROIC is greater than cost
of capital, it generates value
- ex: comparing Apple and Microsoft: Drivers of
Firm Performance (2018) →
- Return on Revenue (ROR)
- ROR = Net Profits / Revenue, how much of the
firm’s sales is covered into profits
- Three other Revenues Associated with ROR:
- Cost of Goods Sold (COGS) / Revenue:
indicates how efficiently a company can produce a good
- Research & Development (R&D) / Revenue: indicates how much of each dollar that the firm
earns in sales is invested to conduct research and development (a higher % indicates a
stronger focus on innovation and improvement of products)
- Selling, General, & Administrative (SG&A) / Revenue: indicates how much of each dollar
that the firm earns in sales in invested in sales, general, and administrative expensive (a
firm’s focus on marketing and sales to promote its products)
- Working Capital Turnover
- Working Capital / Revenue: indicates how much of its working capital the firm has tied up in
its operations
- Plant, Property, and Equipment (PPE) / Revenue: indicates how much of a firm’s revenues are
dedicated to cover PPE, which are critical assets to a firm’s operations but can’t be liquidated
easily
- Long-Term Assets / Revenue: indicates how much of each dollar a firm earns in revenues is
tied up in long-term assets (PPE, and intangible assets)
- Limitations of Accounting Data
- Accounting data are historical and thus backward-looking
- Accounting data do not consider off-balance items
- Accounting data focus mainly on tangible assets
- Intangibles and The Value of Firms
- Intangible assets that aren’t captured in accounting data are more important in firms’ stock
market valuations
- Book value captures the historical cost of a firm’s assets, whereas market valuation is based on
future expectations for a firm’s growth potential and performance
2. Shareholder Value Creation
- Shareholders: individuals or organisations that own one or more shares of stock in a public
company, legal owners of public companies. They’re most concerned with the return on their
risk capital - the money they provide in return for an equity share, money that they cannot
receiver if the firm goes bankrupt
- Total Return to Shareholders: the return on risk capital, including stock price appreciation and
dividends received over a specific period. External and forward-looking performance metric as it
looks at a firm’s past, current state, and expected future performance
- Market Capitalisation: captures the total dollar market value of a company’s outstanding shares
at any given point in time. Market cap = Number of Outstanding Shares * Share Price
- Limitations of Shareholder Value Creation
- Stock prices can be highly volatile, making it difficult to assess firm performance, particularly
in the short term. This implies that total return to shareholders is a better measure of firm
performance and competitive advantage
- Overall macroeconomic factors (ex: economic growth or contraction, unemployment rate, and
interest and exchange rates) all have a direct bearing on stock prices
- Stock prices frequently reflect the psychological mood of investors, which can be irrational
3. Economic Value Creation
- Economic Value Created: the difference between a buyer’s willingness to pay for a product or
service and the firm’s total cost to produce it
- Reservation Price: the maximum price a consumer is willing to pay for a product or service
based on the total perceived consumer benefits
- Implications for Firm-Level Competitive
Advantage
- ex: Firm B’s Competitive Advantage:
Same Cost as Firm A but Firm B
Creates More Economic Value
- firm B will have a competitive
advantage, because their total
perceived benefits are greater. The
amount of total perceived
consumer benefits = reservation
price
- ex: Firm C’s Competitive Advantage:
Same Total Perceived Consumer
Benefits as Firm D but Firm C Creates
More Economic Value
- Firm C creates greater economic
value (1200 - 300 = 900) than firm D
(1200 - 600 = 600). Firm C’s total
unit cost is lower.
- Value, Price, and Cost
- Value: the dollar amount (V) a
consumer attaches to a product, captures a consumer’s willingness to pay and is determined by
the perceived benefits of a product. Cost to produce the good doesn’t concern the consumer
- The Role of Consumer Surplus and Producer Surplus
- Total Perceived Value = (Value - Costs) + Costs
 - Producer Surplus: profit, difference between the price charged (P) and the cost to produce
(C). Producer Surplus = Price - Cost
- Consumer Surplus: the difference between what a consumer is willing to pay and what
they actually pay. Consumer Surplus = Value - Price
- Economic Value Creation = Consumer Surplus + Firm Profit = (V - P) + (P - C)

- Relationship Between Consumer Surplus and Producer Surplus

- The reason trade happens, both transacting parties capture some of the overall vacuole
created.
- Competitive Advantage and Economic
Value Created
- Competitive advantage goes to the
firm that achieves the largest
economic value created
- Large difference between value and
cost gives the firm two distinct
pricing options: charge higher prices
to reflect higher value for profits, or
it can charge the same price as
competitive and gain market share
- Fixed Costs are independent of
consumer demand
- Variable Costs change with the level
of consumer demand
- Opportunity Costs: capture the value of the best foregone alternative use of the
resources employed
- Limitations of Economic Value Creation
- Determining the value of a good in the eyes of consumers is not simple, by looking at
consumers’ purchasing habits for their reviled preferences will indicate how much each
consumer is willing to pay for a product or service
- The value of a food in the eyes of consumers changes based on income, preferences, time, and
other factors
- To measure firm-level competitive advantage, we must estimate the economic value created
for all product and services offered by the firm
* these three performance dimensions generally correlate. Accounting profitability and economic
value creation is reflected in the firm’s stock price, determining the stock’s market valuation
The Balanced Scorecard
- Balance Scorecard: a framework to help managers achieve their strategic objectives more
effectively. Harnesses multiple internal and external performance metrics in order to balance both
financial and strategic goals. Contains four main questions:
- How do customers view us? Links directly to revenue and profits, as consumers decide their
reservation price. Customer perception leads to improvement (speed, quality, service, and cost)
in products
- How do we create value? Develop strategic objectives that ensure future competitiveness,
innovation and organisational learning
- What core competencies do we need? Focuses managers internally to identify the core
competencies needed to achieve their objectives and the accompanying business process that
support, hone, and leverage those competencies
- How do shareholders view us? Rely on accounting data, and understanding the shareholders’
view of value creation
- Advantages of the Balanced Scorecard
- Communicate and link the strategic vision to responsible parties within the organisation
- Translate the vision into measurable operational goals
- Design and plan business processes
- Implement feedback and organisational learning to modify and adapt strategic goals when
indicated
- Disadvantages of the Balanced Scorecard
- A tool for strategy implementation but not for formulation
- Provides only limited guidance about which metrics to choose
The Triple Bottom Line
- Triple Bottom Line: fundamental to a sustainable strategy, contains three dimensions
- Profits: the economic dimension captures the necessity of businesses to be profitable to survive
- People: the social dimension emphasises the people aspect
- Planet: the ecological dimension emphasises the relationship between business and the natural
environment
- Sustainable Strategy: a strategy that can be pursued over time without detrimental effects on
people or the planet. More integrative and holistic view in assessing a company’s performance
- A triple bottom line approach allows strategic leaders to audit their company’s fulfilment of its
social and ecological obligations to stakeholders

5.2 - Business Models: Putting Strategy into Action

- Business Model: strategy into action, how the firm conducts its business with its buyers,
suppliers, and partners to make revenue
- Business model innovation is considered to be more important than product innovation, as it
takes longer and is more costly to come up with
The Why, What, Who, and How of Business Models Framework
1. Why does the business model create value? (revenue and cost models)
2. What activities need to be performed to create and deliver the offerings to customers?
3. Who are the mains stakeholders performing the activities?
4. How are the offerings to the customers created? (linking of activities)
Popular Business Models
- Razor-Razor-Blades: the initial product is often sold at a loss or given away to drive demand for
complementary goods, the company makes money from the replacement part needed
- Subscription: users pay for access to a product or service whether they use or not during the
payment term
- Pay-As-You-Go: users pay for only the services they consumer
- Freemium: (free + premium), provides the basic features of a product or service free of charge,
but charges the user for premium services such as advanced features or add-ons
- Ultra-Low Cost: basic service is provided at a low cost and extra items are sold at a premium
- Wholesale: companies sell to retailers at a fixed price, while retailers are free to set their own
price on the item and profit from it
- Agency: the producer relies on an agent or retailer to sell the product, at a predetermined
percentage commission
- Bundling: sells products or services for which demand is negatively correlated at a discount, if a
user values one product more than another
Dynamic Nature of Business Models
- Combination: ex telecommunications companies combine the razor-razor-blade model with the
subscription model to keep their churn rate (proportion of subscribers that leave, before the end
of the contractual term) low
- Evolution: the freemium business can be viewed as an evolutionary variation on the razor-razor-
blade model. The base product is provided free, and the producer finds other ways to monetise
the usage
- Disruption: ex Amazon disrupted the traditional wholesale model for publishers
- Response to Disruption: ex book publishers worked with Apple to implement e-books on iOS
applications
- Legal Conflicts: rapid development of business models can lead producers to breach existing
rules of commerce

 Chapter VI: Business Strategy - Differentiation, Cost Leadership, & Blue Ocean
6.1 - Business-Level Strategy: How to Compete for Advantage
- Business-Level Strategy: goal-directed actions
managers take in their quest for competitive
advantage when competing in a single product
market, concerns:
- Who are the customer segments we will serve?
- What customer needs, wishes, and desires will
we satisfy?
- Why do we want to satisfy them?
- How will we satisfy them?
- Competitive advantage is determined jointly by
industry and firm effects
Strategic Position
- Competitive advantage is based economic value created (perceived value (V) - cost (C))
- A firm’s business-level strategy determines its strategic position, where it attempts to stake out a
valuable and unique position that meets customer needs while considering its economic value
creation
- Strategic Trade-Offs: choices between a cost or value position
- A business strategy is more likely to lead to a competitive advantage if a firm has a clear strategic
profile, either as differentiation or a low-cost leader
Generic Business Strategies
- Generic Strategies: can be used by any organisation for competitive advantage, independent of
industry context
- Differentiation Strategy: create higher value for customers than the value that competitors
create, by delivering products with unique features while keeping costs at the same or similar
levels, allowing them to charge higher prices
- Cost-Leadership Strategy: seeks to create the same or similar value for customers by
delivering products at a lower cost than competitors, enabling the firm to offer lower prices
* a business strategy is more likely to lead to a competitive advantage if it allows a firm to either
perform similar activities differently or perform different activities than its rivals that result in
creating more value
- Scope of Competition: the size of the market in which
a firm chooses to compete in. Must be selected when
considering different business strategies
- Focused Strategies: similar to broad generic strategies
except that the scope is narrower
- Focused Cost-Leadership Strategy: same as cost-
leadership strategy except with a narrow focus on a
niche market
- Focused Differentiation Strategy: same as
differentiation strategy except with a narrow focus on
a niche market

6.2 - Differentiation Strategy: Understanding Value Drivers

- Goal of differentiation is to add unique features that’ll increase the perceived value of products,
to increase consumers’ willingness to pay
- Focus of competition in a differentiation strategy looks into unique product features, services,
and new product launches, or on marketing promotion rather than price
- Differentiation Strategy: Achieving Competitive Advantage
- Firm A produces a generic commodity
- Firm B and Firm C represent two efforts at
differentiation
- Firm B not only offers greater value than Firm A< but
also maintains cost parity (same costs as Firm A)
- Either Firm B or C’s economic value creation is greater
than Firm A’s, allowing them to charge a premium price
as it reflects higher value creation
- Firm B has a competitive advantage over Firm C, as it
has lower costs
- Economies of Scale: decreases in cost per unit as output
increases
- Economies of Scope: the savings that come from
producing two (or more) outputs at less cost than
producing each output individually, through the same resources and technology
- Value drivers: product features, customer service, complements
- Different value drivers contribute to competitive advantage only if their increase in value
creation (ΔV) exceeds the increase in costs (ΔC). ΔV > ΔC must be fulfilled if a differentiation
strategy is to strengthen a firm’s strategic position, enhancing its competitive advantage
Product Features
- Adding unique product attributes allows firms to turn commodity products into differentiated
products commanding a premium price.
- R&D capabilities are needed to create superior product features
Customer Service
- Managers can increase the perceived value of their firm’s product through focusing on customer
service
Complements
- Complements add value to a product when they are consumed in tandem
- ex: smartphones and cellular services

6.3 - Cost-Leadership Strategy: Understanding Cost Drivers

- Cost leader: focuses its attention and resources on reducing the cost to manufacture a product or
on lowering the operation cost to deliver a service in order to offer lower prices to customers.
Optimises all of its value chain activities to achieve a low-cost position
- Cost-Leadership Strategy: Achieving Competitive Advantage
- Firm A produces a product with a cost structure vulnerable to competition
- Firm B and C show two different approaches
- Firm B achieves a competitive advantage over Firm A,
since it has lower costs and achieves differentiation
parity (creates the same value as Firm A)
- Firm B’s economic value creation > Firm A
- Firm C represents gaining competitive advantage
since it’s value creation is higher than Firm A (no
differentiation parity, but economic value creation is
still higher)
- Cost drivers: cost of input factors, economies of scale, learning-curve effects, experience-curve
effects
Cost of Input Factors
- Access to lower-cost input factors such as raw materials, capital, labour, and IT services
Economies of Scale
- Economies of Scale: decreases in cost per unit as output
increases. This relationship between unit cost and output
is depicted in the first (left) part: cost per unit falls as
output increase up to point Q1. Causations:
- Spreading their fixed costs over large output: why gains
in market share are often critical to drive down per-unit
cost.
- Employing specialised systems and equipment: larger
output allows firms to invest in more specialised
systems and equipment
- Taking advantage of certain physical properties:
- Cube-Square Rule: the volume of a body increases disproportionately more than its surface.
Companies can stock more merchandise and handle inventory more efficiently
- Minimum Efficient Scale (MES): output range needed to bring down the cost per unit as
much as possible, allowing a firm to stake out the lowest-cost position that is achievable
through economies of scale. Output range between Q1 and Q2, where the returns are
constant
- Diseconomies of Scale: increases in cost as output increases. Firms may get too big, and the
complexity of managing and coordinating the production process rates the costs, negating
any benefits to scale. Beyond Q2
Learning Curve
- learning curves go down, as it takes less and less time to produce the same output as we learn
how to be more efficient, learning by doing drives down cost. Individuals learn from their
cumulative experience
- Gaining Competitive Advantage through Leveraging Learning- and Experience-Curve Effects
- In a 90% learning curve, per-unit cost drops 10%
every time output is doubled
- 80% learning curve indicates a 20% drop every
time output is doubled
- Learning-curve effect is driven by increasing
cumulative output within the existing technology
over time
- The speed of learning determines the slow of the
learning curve, or how steep it is
- By moving further down a given learning curve
than competitors, a firm can gain a competitive
advantage
- Firm B is further down the 90% learning curve than Firm A. Therefore, Firm B leverages
economies of learning due to larger cumulative output to gain an advantage
- Learning effects differ from economies of scale:
- Differences in Timing: learning effects occur over time as output accumulates, while
economies of scale are captured at one point in time
 - Differences in Complexity: in some production processes effects from economies of scale can
be quite significant, while learning effects are minimal. In contrast, some professions (brain
surgery or practice of estate law), learning effects can be substantial, while economies of scale
are minimal
Experience Curve
- Change the underlying technology while holding cumulative output constant
- Process innovation: a new method or technology to produce an existing product may initiate a
new and steeper curve.
- Assume that Firm C, on the same learning curve as Firm B, implements a new production
process. Firm C initiates an entirely new and steeper learning curve, jumping down to the 80%
learning curve, which reflects the new and lower-cost production process. Therefore, Firm C has
a competitive advantage over Firm B, based on lower cost per unit.

6.4 - Business-Level Strategy and the Five Forces: Benefits and Risks

6.5 - Blue Ocean Strategy: Combining Differentiation and Cost Leadership

- Blue Ocean Strategy: business-level strategy that successfully combines differentiation and
cost-leadership activities using value innovation to reconcile the inherent trade-offs. The ocean
denotes market spaces.
- Blue oceans represent untapped market space, the creation of additional demand, and the
resulting opportunities for highly profitable growth
- Red oceans are the known market space of existing industries, and in them the rivalry among
existing firms it cut-throat as the market space is crowded and competitors is a zero-sum game
Value Innovation
- Value Innovation: aligning innovation with total perceived consumer
benefits, price, and cost. Successful value innovation makes
competition irrelevant by providing a leap in value creation, opening
new and uncontested market spaces
- Value Innovation — Lower Costs
- Eliminate. Which of the factors that the industry takes for granted
should be eliminated?
- Reduce. Which of the factors should be reduced well below the
industry’s standard?
- Value Innovation — Increase Perceived Consumer Benefits
- Raise. Which of the factors should be raised well above the
industry’s standard?
- Create. Which factors should be created that the industry has never offered?
Blue Ocean Strategy Gone Bad: “Stuck in the Middle”
- A blue ocean strategy is difficult to implement because it
requires the reconciliation of fundamentally different
strategic positions which require distinct internal value
chain activities
- Stuck in the middle shows the consequence of a blue
ocean strategy gone bad. The firm has neither a clear
differentiation nor a clear cost-leadership profile. Leading
to inferior performance and resulting in a competitive
disadvantage
- The Strategy Canvas
- Value Curve: horizontal connection of
the points of each value on the strategy
canvas that helps strategic leaders
diagnose and determine courses of action
- Strategy Canvas: graphical depiction of
a company’s relative performance vs its
competitors across the industry’s key
success factors
- ex: Strategy Canvas of JetBlue vs Low-
Cost Airlines and Legacy Carriers

 Chapter VII: Business Strategy - Innovation, Entrepreneurship, and Platforms
7.1 - Competition Driven by Innovation
- Competition is a process driven by the “perennial gale of creative destruction”
- Firms should be innovative while avoiding competitors’ imitation attempts
Netflix’s Continued Innovation
- Innovation can be the basis for gaining a competitive advantage, which can lead to a sustainable
competitive advantage
- Netflix introduced an innovative business of video renting, where queuing movies allowed
Netflix to predict future demand. They also created personalised recommendation engines for
each subscriber. They were able to implement the long tail of demand to viewers (with older and
lesser known films)
- Long Tail: a business model in which companies can obtain a large part of their revenues by
selling a small number of units form among almost unlimited choices
The Speed of Innovation
- Rate of technology change has accelerated dramatically, introducing new industries
- causes of speedy innovation:
- Initial innovations (cars, planes, telephones, use of electricity) provided the necessary
infrastructure for newer innovations to diffuse rapidly
- Emergence of new business models that make innovations more accessible
- The speed of technology diffusion has accelerated further with internet, social networking
sites, and viral messages
The Innovation Process
- 4 I’s:
- Idea: presented in abstract concepts or as findings derived from
basic research. Basic research is transformed into applied research
with commercial applications.
- Invention: the transformation of an idea into a new product/process,
or the modification and recombination of existing ones. If an
invention is useful, novel, and non-obvious, it can be patented
- Patent: form of intellectual property, giving exclusive rights to
benefit from commercialising the invention. Provides temporary monopoly and form the
basis of competitive advantage.
- Trade Secrets: valuable proprietary information that is not in the
public domain and where the firm makes every effort to maintain its
secrecy
- Innovation: commercialisation of an invention. The successful
commercialisation of a new product/service allows a firm to extract
temporary monopoly profits.
- First-Mover Advantages: including economies of scale, experience,
and learning-curve effects, as well as network effects
- Imitation: if an innovation is successful in the marketplace, competitors
will attempt to imitate it

7.2 - Strategic and Social Entrepreneurship

- Entrepreneurship: agents (entrepreneurs) undertake economic risk to innovate, create new
products, processes, and potentially organisation. Entrepreneurs innovate by commercialising
ideas and inventions
- Entrepreneurs: agents who introduce change into the competitive system
- Strategic Entrepreneurship: the pursuit of innovation using tools and concepts from strategic
management. Leveraging innovation for competitive advantage
- Social Entrepreneurship: the pursuit of social goals while creating profitable business. Social
entrepreneurs evaluate the performance of their ventures through financial metrics and ecological
and social contribution (profits, planet, and people)

7.3 - Innovation and the Industry Life Cycle

- Industry Life Cycle: the five different stages (introduction,
growth, shakeout, maturity, and decline) that occur in the
evolution of an industry over time. The number and size of
competitors change as the industry life cycle unfolds, and
different types of consumers enter the market at each stage.
Introduction Stage
- When an individual inventor or company launches a
successful innovation, a new industry may emerge
- The innovator’s core competency is R&D, necessary to create
a product category that’ll attract customers
- Capital-intensive process, where the innovator is investing in designing a unique product, also
costly for the innovator
- Innovators may encounter first-mover disadvantages, as they might have to educate potential
customers on their products, finding distribution channels and complementary assets. Thus, they
need to market their product.
- Network Effects: the positive effect that one suer of a product/service has on the value of that
product for other users, occurs when the value of a product/service increases with the number of
users
Growth Stage
- Market growth accelerates, after the initial
innovation has gained some market acceptance,
demand increases rapidly as first-time buyers rush
to enter the market
- Standard: an agreed-upon solution about a
common set of engineering features and design
choices. During growth, standards can emerge
from the bottom up through competition
- Efficient and inefficient firms thrive, due to heavy
demands. Production costs begin to fall, as
standard business processes are put in place
(economies of scale and learning). Distribution
channels expand, and complementary assets become widely available.
- Product Innovations: new or recombined knowledge embodied in new products (ex: jet
airplane, electric vehicle, smartphone, wearables)
- Process Innovations: new ways to produce existing products or to deliver existing services (ex:
AI, internet, lean manufacturing, biotechnology)
- Process innovation is at a minimum in the introductory stage, but after the market accepts a
new product, and a standard for the new technology has emerged, process innovation becomes
more important than product innovation.
Shakeout Stage
- The rate of growth declines, firms begin to compete directly for market share. Therefore, the
weaker firms are forced out of the industry
- Only the strongest competitors survive increasing rivalry as firms begin to cut prices and offer
more services, all in attempt to gain more of a market that grows slowly
- This erodes profitability of all but the most efficient firms in the industry. Winners are often firms
that stake out a strong position as cost leaders, using their manufacturing and process engineering
capabilities that can be used to drive costs down, as process innovation further increases, and
product innovation declines
Maturity Stage
- The industry structure morphs into an oligopoly with only a few large firms. Any additional
market demand is limited.
- Demand consists of replacement or repeat purchases. Therefore, the market has reached its
maximum size and industry growth it likely to be zero or negative. This increases competitive
intensity, so firms attempt to lower costs as much as possible.
Decline Stage
- The size of the market contracts further as demand falls. Innovation efforts cease.
- If a technology/business model breakthrough emerges that opens up a new industry or resets the
industry life cycle.
- Leaders have four strategic options:
- Exit: some firms exit the industry by bankruptcy or liquidation
- Harvest: the firm reduces investments in product support and allocates only a minimum of
human and other resources
- Maintain: continuing to support marketing efforts at a given level despite decline in
consumption
- Consolidate: through buying rivals, possibly approaching monopolistic market power.
Crossing the Chasm
- Crossing-the-Chasm Framework: shows how
each stage of the industry life cycle is dominated
by a different customer group
- Technology Enthusiasts: introductory stage,
often have an engineering mind-set and purse
new technology proactively, frequently
seeking new products before they are
officially introduced in the market
- Early Adopters: growth stage, eager to buy
early into a new technology/product concept. Their demand is driven by recognising and
appreciating the possibilities the new technology can afford them in their professional and
personal lives
- Early Majority: shakeout stage, pragmatists that are mainly concerned with whether adopting
new technological innovation services a practical purpose or not
- Late Majority: maturity stage, less confident about their ability to master new technology.
Will wait until standards have emerged and become firmly entrenched so as to ensure
reduction in uncertainty. Tend to buy from well-established firms with strong brand image.
- Laggards: decline stage, will adopt a new product only if absolutely necessary, generally
don’t want new technology, and are generally not a customer segment worth pursuing
7.4 - Types of Innovation
- Markets-and-Technology Framework: a conceptual
model to categorise innovations along the market
(existing/new) and technology (existing/new)
dimensions
Incremental vs Radical Innovation
- Incremental Innovation: builds on an established
knowledge base and steadily improves an existing
product/service
- Radical Innovation: draws on novel methods/
materials, is derived either from an entirely different
knowledge base or from a recombination of the existing
knowledge bases with a new stream of knowledge. Generally introduced by new entrepreneurial
ventures:
- Economic Incentives: incremental innovations strengthens the incumbent firm’s position and
maintains high entry barriers. Winner-take-all markets where the market leader captures
almost all of the market share
- Organisational Inertia: rely heavily on formalised business processes and structures.
Organisational inertia is the resistance to changes in the status quo, as this reinforces existing
organisational structure and power distribution.
- Innovation Ecosystem: a network of suppliers, buyers, complementers
Architectural vs Disruptive Innovation
- Architectural Innovation: a new product in which known components, based on existing
technologies, are reconfigured in a novel way to attack new markets
- Disruptive Innovation: an innovation that leverages new technologies to attack existing markets
from the bottom up
- To be a disruptive force, this new technology has to
have additional characteristics:
- Begins as a low-cost solution to an existing problem
- Initially, its performance is inferior to the existing
technology, but its rate of technological
improvement is faster than the rate of performance
increases required by different market segments.
The solid upward curve line captures the new
technology’s trajectory, or rate of improvement over
time
- How to respond to disruptive innovation?
- Continue to innovate in order to stay ahead of the competition
- Guard against disruptive innovation by protecting the low end of the market
- Disrupt yourself, rather than wait for others to disrupt you

7.5 - Platforms Strategy

The Platform vs Pipeline Business Models
- Pipeline: traditional system of horizontal business organisation, it captures a linear
transformation with producers at one end and consumers at the other end
- Platform Business: an enterprise that creates value by matching external producers and
consumers in a way that creates value for all participants, and that depends on the infrastructure
or platform that the enterprise manages. Characteristics:
- A platform is a business that enables value-creating interactions between external producers
and consumers
- The platform’s overarching purpose is to consummate matches among users and facilitate the
exchange of goods, services, or social currency, thereby enabling value creation for all
participants
- The platform provides an infrastructure for these interactions and sets governance conditions
for them
The Platform Ecosystem
- Platform Ecosystem: the market environment in
which all players participate relative to the platform
- Advantages of the platform business model:
- Platforms scale more efficiently than pipelines by
eliminating gatekeepers
- Platforms unlock new sources of value creation and
supply
- Platforms benefit form community feedback
-
 Chapter VIII: Corporate Strategy - Vertical Integration and Diversification
8.1 - What is Corporate Strategy?
- Corporate Strategy: the decisions that leaders make and the goal-directed actions they take to
accomplish competitive advantage in several industries and markets simultaneously, answers
where to compete
- Three Dimensions of Corporate Strategy
1. Vertical Integration: in what stages of the industry value chain should the company
participate The industry value chain describes transformation of raw material into finished
goods and services along distinct vertical stages
2. Diversification: what range of products and services should the company offer?
3. Geographic Scope: where should the company compete geographically in terms of regional,
national, or international markets
Why Firms Need to Grow
- Increase profitability: profitable growth allows businesses to provide higher return for their
shareholders, or owners. Revenue and profitability can determine stock market valuation. If firms
fail to achieve their growth target, their stock price often falls, which leads to the risk of a hostile
takeover
- Lower costs: a larger firm may benefit from economies of scale, thus driving down average costs
as their output increases. Firms need to grow to achieve minimum efficient scale, and stake out
the lowest-cost position achievable
- Increase market power: firms might be motivated to achieve growth to increase their market
share and alongside market power. Firms often consolidate industries through horizontal mergers
and acquisitions (buying competitors) to change the industry structure in their favour. Larger
firms have more bargaining power with suppliers and buyers
- Reduce risk: firms might be motivated to grow to diversify their product and service portfolio
through competing in a number of different industries. Falling sales and lower performance in
one sector might be compensated by higher performance in another (economies of scope)
- Motivate management: growing firms afford opportunities and professional development for
employees, they can also pay higher salaries and spend more on benefit. Also benefits
stockholders

8.2 - The Boundaries of the Firm

- Transaction Cost Economics: a theoretical framework in strategic management to explain and
predict the boundaries of the firm, which is central to formulating a corporate strategy that is
more likely to lead to competitive advantage
- Transaction Costs: all internal and external costs associated with economic exchange, whether it
takes place within the boundaries of a firm or in markets
- External Transaction Costs: costs of searching for a
firm/individual with whom to contract, and then
negotiating, monitoring, and enforcing the contract
- Internal Transaction Costs: costs pertaining to
organising an economic exchange within a hierarchy
(administrative costs, associated with coordinating
economic activity between different business units of
the same corporation)
Firms vs Markets: Make or Buy?
- Predictions derived from transaction cost economics guide strategic leaders in deciding which
activities a firm should pursue in-house (make) versus which goods and services to obtain
externally (buy)
- When theists of pursuing an activity in-house are less than the costs of transacting for that
activity in the market (Cin-house < Cmarket), then the firm should vertically integrate by owning
production of necessary inputs or the channels for distribution of outputs
- When firms are more efficient in organising economic activity than are markets, which rely on
contracts among many independent actors, firms should vertically integrate
- Advantages of firms include:
- The ability to make command-and-control
decisions by clear hierarchical lines of authority
- Coordination of highly complex tasks to allow for
specialised division of labour
- Transaction-specific investments (AI or robotics
equipments) that is highly valuable within the
firm, but of little or no use in the external market
- Creation of a community of knowledge, meaning
employees within firms have ongoing
relationships, exchanging ideas and work closely
together
- Disadvantages of organising economic activity
within firms include:
- Administrative costs because of necessary
bureaucracy
- Low-powered incentives, such as hourly wages and
salaries
- Principal-agent problem: arises when an agent performs activities on behalf of the principle
(owner of the firm), pursuing his or her own interests
- Advantages of markets include:
- High-powered incentives of the open market include the entrepreneur’s ability to capture the
venture’s profit to take a new venture through initial public offering (IPO), or to be acquired
by an existing firm
- Increased flexibility, transacting in markets enables those who wish to purchase goods to
compare prices and services among many different providers
- Disadvantages of markets include:
- A firm faceless search costs when it must scour the market to find reliable suppliers from its
competitors
- Opportunism by other parties, characterised y elf-interest seeking with guile
- Incomplete contracting, all contracts are incomplete to some extent, because not all future
contingencies can be anticipated at the time of contracting
- Information Asymmetry: situation in which one party is more informed than another
because of the possession of private information
- Enforcement of contracts, often it is difficult, costly, and time-consuming to enforce legal
contracts
Alternatives on the Make-or-Buy Continuum
- Short-Term Contracts: a firm send out a requests
for proposals (RFPs) to several companies (lasts
 less than a year). Allows a somewhat longer planning period than individual market transactions.
The buying firm can often demand lower prices due to the competitive bidding process. Firms
responding to the RFP have no incentive to make any transaction-specific investments
- Strategic Alliances: voluntary arrangements between firms that involve the sharing of
knowledge, resources, and capabilities with the intent of developing processes, products, or
services. Strategic alliances can facilitate investments in transaction-specific assets without
encountering the internal transaction costs involved in owning firms in various stages of the
industry value chain
- Long-Term Contracts
- Licensing: enables firms to commercialise intellectual property
- Franchising: a franchisor grants a franchisee the rights to use the franchisor’s trademark
and business processes to offer goods and services that carry the franchisor’s brand name
- Equity Alliances: a partnership in which at least one partner takes partial ownership in the
other parent. A partner purchases an ownership share by buying stock or assts (in private
companies, and thus making an equity investment. Equity investing is a credible commitment
(difficult and costly to reverse)
- Joint Ventures: a standalone organisation created and jointly owned by two or more parent
companies
- Parent-Subsidiary Relationship: most-integrated alternative. The corporate parent owns the
subsidiary and can direct it via command and control. Transaction costs that arise are
frequently due to political turf battles, which may include capital budgeting processes and
transfer prices. How centralised or decentralised a subsidiary init is another potential conflict
concerning profitability

8.3 - Vertical Integration along the Industry Value Chain

- Vertical Integration: the firm’s ownership of its production of needed inputs or of the channels
by which it distributes its outputs. Measured by what percentage of a firm’s sales is generated
within the firm’s boundaries. The degrees of vertical integration tends to correspond to the
number of industry value chain stages in which a firm directly participates
- Industry Value Chain: transformation of raw materials into
finished goods and services along distinct vertical stages,
each of which typically represents a distinct industry in
which a number of different firms are competing
Types of Vertical Integration
- Backward Vertical Integration: changes in an industry
value chain that involve moving ownership of activities
upstream to the originating (inputs) point of the value chain
- backward vertical integration is often taken to overcome
the threat of opportunism (self-interesting seeking with
guile) and to secure key raw materials
- Forward Vertical Integration: changes in an industry value
chain that involve moving ownership of activities closer to
the end (customer) point of the value chain
Benefits and Risks of Vertical Integration
- Benefits of Vertical Integration:
- Lowering costs
- Improving quality
- Facilitating scheduling and planning
 - Facilitating investments in specialised assets
- Specialised Assets: unique assets with high opportunity cost, they have significantly more
value in their intended use than in their next-best use. Three types:
- Site Specificity: assets required to be co-located
- Physical-Asset Specificity: assets who’s physical and engineering properties are designed
to satisfy a particular customer
- Human-Asset Specificity: investments made in human capital to acquire unique
knowledge and skills
- Securing critical supplies and distribution channels
- Risks of Vertical Integration:
- Increasing costs: in-house suppliers tend to have higher cost structures because they aren’t
exposed to market competition. Knowing there will always be a buyer for their products
reduces their incentives to lower costs
- Reducing quality: knowledge that there will always be a buyer can reduce the incentive to
increase quality or come up with innovative new products
- Reducing flexibility: when faced with changes in the external environment such as fluctuations
in demand and technological change
- Increasing the potential for legal repercussions: regulators tend to make firms more efficient
and lower costs, which in turn can benefit customers
When Does Vertical Integration Make Sense?
- Vertical Market Failure: occurs when transactions within the industry value chain are too risky,
and alternatives to integration are too costly or difficult to administer. When a company vertically
integrates two or more steps away from its core competency, it fails two-
thirds of the time.
Alternatives to Vertical Integration
- Taper Integration: a way of orchestrating value activities in which a firm
is backwardly integrated but also relies on outside-market firms for some of
its supplies and/or is cowardly integrated but also relies on outside-market
firms for some of its distribution
- Benefits:
- Exposes in-house suppliers and distributors to market competition so
that performance comparisons are possible
- Enhances a firms flexibility
- Firms can combine internal and external knowledge, may lead to
innovation
- Strategic Outsourcing: moving one of more internal value chain activities the firm’s boundaries
to other firms in the industry value chain, a firm will reduce its level of vertical integration.

8.4 - Corporate Diversification: Expanding Beyond a Single Market

- Diversification: an increase in the variety of products and services a firm offers or markets and
the geographic regions in which it competes
- General diversification strategies:
- Product Diversification Strategy: a firm that is active in several different product markets
- Geographic Diversification Strategy: a firm that is active in several different countries
- Product-Market Diversification Strategy: a company that pursues both a product and a
geographic diversification strategy simultaneously
Types of Corporate Diversification
- Single Business: characterised by a low level of diversification, because if derives more than
95% of its revenues from one business. The other 5% of revenue is not (yet) significant to the
firm’s success
- Dominant Business: derives between 70%-95% of its revenues from a single business, but it
pursues at least one other business activity that accounts for the remainder of revenue. The
dominant business shares competencies in products, services, technology or distribution. The
remaining revenue is generally obtained in other strategic business units (SBU) within the firm
- Related Diversification Strategy: a firm derives less than 70% of its revenues from a single
business activity and obtains revenues from other lines of business that are linked to the
primary business activity
- Related-Constrained Diversification Strategy: executives pursue only businesses
where they can apply the resources and core competencies already available in the
primary business
- Related-Linked Diversification Strategy: executives pusher various businesses
opportunities that share only a limited number of linkages
- Unrelated Diversification: The Conglomerate
- Unrelated Diversification Strategy: a firm derives less than 70% of its revenues from
a single business and there are few, if any, linkages among its businesses
- Conglomerate: a company that combines two ore more strategic business units under
one overarching corporation
Leveraging Core Competencies for Corporate Diversification
- Four Options to Formulate Corporate Strategy vs
Core Competencies:
- Leverage existing core competencies to improve
current market position
- Build new core competencies to protect and
extend current market position
- Redeploy and recombine existing core
competencies to compete in markets of the future
- Build new core competencies to create and
compete in markets of the future
Corporate Diversification and Firm Performance
- High and low levels of diversification are generally
associated with lower overall performance, while
moderate levels of diversification are associated with higher
firm performance.
- Companies focusing on single business, and unrelated
diversification, fail to achieve additional value creation.
- Diversification Discount: the stock price of highly
diversified firms is valued at less than the sum of their
individual business units
- Diversification Premium: the stock price of related-
diversification firms is valued at greater than the sum of their individual business units
- For diversification to enhance firm performance, it must do at least one of the following:
- Provide economies of scale, which reduces costs
- Exploit economies of scope, which increases value
- Reduce costs and increase value
- Restructuring
- Boston Consulting Group (BCG) Growth-Share Matrix:
viewed as a portfolio of business units, which are
represented graphically along relative market share
(horizontal axis) and speed of market growth (vertical axis).
SBUs are plotted into four categories (dog, cash cow, star,
and question mark), each warrants a different investment
strategy
- Internal Capital Markets: can be a source of value creation in
a diversification strategy if the conglomerate’s headquarters
does a more efficient job of allocating capital through its budgeting than what could be achieved
in external capital markets. Internal capital markets may allow the company to access capital at a
lower cost

 Chapter IX: Corporate Strategy - Strategy Alliances, Mergers and Acquisitions
9.1 - How Firms Achieve Growth
- How do firms grow?
- Organic growth through internal development
- External growth through alliances
- External growth through acquisitions
The Build-Borrow-Buy Framework
- Build-Borrow-or-Buy Framework:
model that aids firms in deciding whether
to pursue internal development (build),
enter a contractual arrangement or
strategic alliance (borrow), or acquire
new resources, capabilities, and
competencies (buy, you buy the entire
“resource bundle”)
- The resource gap is strategic because
closing this gap can lead to competitive advantage
- In this approach strategic leaders must determine the degree to which certain conditions apply,
either high/low, by responding to up to four questions:
1. Relevancy: how relevant are the firm’s existing internal resources to solving the resource
gap?
2. Tradability: how tradable are the targeted resources that may be available externally?
3. Closeness: how close do you need to be to your external resource partner?
4. Integration: how well can you integrate the targeted firm, should you determine you need to
acquire the resource partner?

9.2 - Strategic Alliances

- Strategic Alliances: voluntary arrangements between firms that involve the sharing of
knowledge, resources, and capabilities with the intent of developing processes, products, or
services
- Relational View of Competitive Advantages: strategic management framework that proposes
that critical resources and capabilities frequently are embedded in strategic alliances that span
firm boundaries
- Applying the VRIO framework, the basis for competitive advantage is formed when a strategic
alliance creates resource combinations that are valuable, rare, and difficult to imitate, as well
as the alliance is organised appropriately to capture value
Why Do Firms Enter Strategic Alliances?
- Strengthen competitive position: strategic alliances can also change the industry structure in their
favour by reducing rivalry, and setting an industry standard
- Enter new markets: either in terms of products and services or geography. Cross-border strategic
alliances have both benefits and risks. While the foreign firm can benefit from local expertise and
contacts, it’s exposed to the risk that some of its propriety may be appropriated by the foreign
partner
- Hedge against uncertainty: strategic alliances allow firms to limit their exposure to uncertainty in
the market.
- Real Options: choices that afford managers the right but not the obligation to make further
investments
 - Real-Options Perspective: approach to strategic decision making that breaks down a larger
investment decision into a set of smaller decisions that are staged sequentially over time
- Access critical complementary assets: successful commercialisation of a new product/service
often requires complimentary assets such as marketing, manufacturing, and after-sale service.
New firms are in need of complementary assets to complete the value chain from upstream
innovation to downstream commercialisation. Strategic alliances allow firms to match
complementary skills and resources to complete the value chain.
- Learn new capabilities: when the collaborating firms are also competitors, co-opetition ensues
- Co-opetition: cooperation by competitors to achieve a strategic objective. They may cooperate
to create a larger pie but then might compete about how the pie should be divided (learning
races: situations in which both partners are motivated to form an alliance for learning, but the
rate at which the firms learn may vary). The firm that learns faster and accomplishes its goal
more quickly has an incentive to exit the alliance or to reduce its knowledge sharing
Governing Strategic Alliances
- Non-Equity Alliances: partnership based on contracts between firms. Such as supply,
distribution, and licensing agreements. These are vertical strategic alliances, connecting different
parts of the industry value chain. Firms tend to share explicit knowledge, knowledge that can be
codified
- Equity Alliances: at least one partner takes ownership in the other partner, often require larger
investments, because they are based on partial ownership rather than contracts. Equity alliances
share tacit knowledge (cannot be codified). Concerns knowing how to do a certain task, which
can be acquired only through actively participating in the process
- Corporate Venture Capital (CVC): equity investments by established firms in
entrepreneurial ventures
- Joint Venture: a standalone organisation created and jointly owned by two or more parent
companies.
Alliance Management Capability
- Alliance Management Capability: a firm’s
ability to effectively among three alliance-
related tasks concurrently
- Partner Selection and Alliance Formation:
expected benefits of the alliance must exceed its costs. The firm must select the best alliance
partner concerning one or more of the five reasons for alliance formation.
- Alliance Design and Governance: decide between non-equity contractual agreement, equity
alliances, or joint venture
- Interorganisational trust is a critical dimensions of
alliance success, all contracts are necessarily
incomplete. Trust between the alliance partners
plays an important role for effective post-
formulation alliance management
- Post-Formation Alliance Management: to be a source
of competitive advantage, the partnership needs to
create resource combinations that obey the VRIO
criteria. This can be done through relation-specific
investments, establish knowledge-sharing routines,
and build interfirm trust.
- Interfirm trust entails the expectation that each
partner will behave in good faith and develop
norms of reciprocity and fairness. Ensures that the
relationship survives and increases the possibility of meeting the intended goals of the
alliance, also important for fast decision making.
- Learning-by-doing approach builds capability through repeated experiences over time
- Dedicated alliance function, led by a vice president or director of alliance management and
endowed with its own resources and support staff. This function should be given the tasks of
coordinating all alliance-related activity in the entire organisation, taking a corporate-level
perspective
- Alliance champion: a senior, corporate-level executive responsible for high-level support
and oversight, also for ensuring that the alliance fits within the firm’s exiting alliance
portfolio and corporate-level strategic
- Alliance leader: the technical expertise and knowledge needed for the specific technical
area and is responsible for day-to-day management of the alliance
- Alliance manager: serves as an alliance process resource and business integrator between
the alliance partners and provides alliance training and development, and diagnostic tools

9.3 - Mergers and Acquisitions (M&A)

- Merger: the joining of two independent companies to form a combined entity
- Acquisition: the purchase or takeover of one company by another; can be friendly/unfriendly
- Hostile Takeover: acquisition in which the target company doesn’t wish to be acquired
Why Do Firms Merge with Competitors?
- Horizontal Integration: the process of merging with a competitor at the same stage of the
industry value chain. Firms should go ahead with horizontal integration if the target firm is more
valuable inside the acquiring
firm than as a continue
standalone company
- Benefits to a Horizontal Integration Strategy
- Reduction in competitive intensity: horizontal integration changes the underlying industry
structure in favour of the surviving firms, so competition tends to decrease
- If this leads to an oligopolistic industry structure and they maintain a focus on non-price
competition, the industry can be profitable, and rivalry would likely decrease
- Lower costs: through economies of scale and to enhance their economic value creation.
Industries that have high fixed costs, achieving economies of scale through large output is
critical in lowering costs
- Increased differentiation: horizontal integration through M&A can help firms strengthen their
competitive positions by increasing the differentiation of their product and service offerings.
This can be done through filling gaps in a firm’s product offering, allowing the combined
entity to offer a complete suit of products and services
Why Do Firms Acquire Other Firms?
- Access to new markets and distribution channels: firms may resort to acquisition when they need
to overcome entry barriers into markets they’re currently not competing in or to access new
distribution channels
- Access to a new capability or competency: firms resort to M&A to obtain new capabilities or
competencies.
- Strategic preemption: related to the reduction in competitive intensity as a motivation to acquire.
The motivation of strategic preemption concerns the integration of potential competitors through
acquisitions, where incumbent firms acquire promising startups that have the potential to be a
competitive threat. Affords two advantages:
- The acquiring from removes a potential competitor
- The acquiring firm preempts existing competitors from buying the startup
M&A and Competitive Advantage
- Principle-agent problems:
- Managerial Hubris: a form of self-delusion
in which managers convince themselves of
their superior skills in the face of clear
evidence to the contrary. Two forms:
- Managers of the acquiring company
convince themselves that they’re able to
manage the business of the target
company more effectively and, therefore, create additional shareholder value (more often
for an unrelated diversification strategy)
- Although most top-level managers are aware that the majority of acquisitions destroy rather
than create shareholder value, they see themselves as the exceptions to the rule
- The desire to overcome competitive advantage: sometimes mergers aren’t motivated by gaining
competitive advantage, but by the attempt to overcome a competitive disadvantage
- Superior acquisition and integration capability: acquisition and integration capabilities aren’t
equally distributed across firms. On average, M&A destroy rather than create shareholder value,
it doesn’t exclude the possibility that some firms are consistently able to identify, acquire, and
integrate target companies to strengthen their competitive positions. Since it is valuable, rare, and
difficult to imitate, a superior acquisition and integration capability, together with past
experience, can leader to competitive advantage

 Chapter X: Global Strategy - Competing Around the World
10.1 - What is Globalisation?
- Globalisation: the process of closer integration and exchange between different countries and
people worldwide, made possible by falling trade and investment barriers, advances in
telecommunications, and reductions in transportation costs. This opens larger markets than any
one home country, which allows companies to source supplies at lower costs, to learn new
competencies, and further differentiate products.
- Multinational Enterprise (MNE): a company that deploys resources and capabilities in the
procurement, production, and distribution of goods and services in at least two countries. MNE
needs an effective global strategy, and they engage in foreign direct investment (FDI, a firm’s
value chain activities abroad)
- Global Strategy: part of a firm’s corporate strategy to gain and sustain a competitive advantage
when competing against other foreign and domestic companies around the world
Stages of Globalisation
- Globalisation 1.0 (1900-1941): all important business functions were located in the home
country. Only sales and distribution operations took place overseas (exporting goods to other
markets). Firms procured raw materials overseas. Strategy formulation and implementation, and
knowledge flow, followed a one-way party from domestic headquarters to international outposts
- Globalisation 2.0 (1945-2000): new focus on growing business, not only to meet the needs that
went unfulfilled during the war but to reconstruct the damage from the war. MNEs created
smaller, self-contained copies of themselves in a few key countries (Western European countries,
Japan, and Australia). Required significant amounts of FDIs.
- Globalisation 3.0 (21st Century): the World Trade Organisation (WTO) is a global organisation
overseeing and administering the rules of trade between 164 member nations, helping companies
conduct their business across borders based on multinational treaties. MNEs freely locate
business functions anywhere based on an optimal mix of costs, capabilities, and PESTEL factors.
MNE reorganises from a multinational company with self-contained operations few selected
counties to a more seamless global enterprise with renters of expertise

10.2 - Going Global: Why?

Advantages of Going Global
- Gain access to a larger market: companies that base their
competitive advantage on economies of scale and economies
of scope have an incentive to gain access to larger markets,
as accessing larger markets reinforces the basis of their
competitive advantage
- Gain access to low-cost input factors: MNEs that base their
competitive advantage eon a low-cost leadership strategy are
attracted to go overseas to gain access to low-cost input factors.
- Develop new competencies: attractive for firms that base their competitive advantage on a
differentiation strategy. They’re making FDI to be part of communities of learning.
- Location Economies: benefits from locating value chain activities in the world’s optimal
geographies for a specific activity, wherever that may be
- Polycentric Innovation Strategy: a strategy in which MNEs draw on multiple, equally
important innovation hubs throughout the world characteristic of Globalisation 3.0
Disadvantages of Going Global
- Liability of foreignness: additional costs of doing business in an unfamiliar cultural and economic
environment, and of coordinating across geographic distances
- Loss of reputation: while cost savings can generally be achieved, globalising a supply chain can
also have united side effects. These can lead to a loss of reputation and diminish the MNE’s
competitiveness, such as low wages, long hours, and poor working and living conditions
- Corporate Social Responsibility (CSR): some host governments are either unwilling or unable
to enforce regulation and safety codes, MNEs need to rise to the challenge
- Loss of intellectual property: the software, movie, and music industries have long lamented
large-scale copyright infringements in many foreign markets. When required to partner with a
foreign host firm, companies may find their IP being siphoned off and reverse-engineered

10.3 - Going Global: Where and How?

Where in the World to Compete? The Cage
Distance Framework
- CAGE Distance Framework: a decision
framework based on the relative distance
between home and a foreign target country
along four dimensions:
- Cultural Distance: cultural disparity
between an internationally expanding
firm’s home country and its targeted
host country. A greater cultural distance
can increase the cost and uncertainty of
conducting business abroad, in other
words increases the liability of
foreignness
- Geert Hofstede defined national
culture, the collective mental and
emotional “programming of the
mind”
- Power distance, individualism, masculinity-femininity, and uncertainty avoidance, long-
term orientation, and indulgence
- Administrative and Political Distance: captured in factors such as the absence or presence of
shared monetary or political associations, political hostilities, and weak or strong legal and
financial institutions. Other administrative barriers include tariffs, trade quotas, FDI
restrictions to protect domestic competitors
- Geographic Distance: the cost to cross-border trade rise with geographic distance. Includes
additional attributes, such as the country’s physical size, the within-country distance to its
borders, the country’s topography, its time zones, and whether the countries are contiguous to
one another or have access to waterways and the ocean, infrastructure also plays a role here
- Economic Distance: the wealth and per capita income of consumers is the most important
determinant here. Rich countries tend to trade with other richer countries, poor countries also
trade more frequently with rich countries than with other poor countries. Companies from
wealthy countries benefit when their competitive advantage is based on economies of
experience, scale, scope, and, standardisation. Wealthy countries also trade with poorer
countries to benefit from economic arbitrage
How Do MNES Enter Foreign Markets?
- Moving left to right, has been suggested as a
stage model of sequential commitment to a foreign
market over time
10.4 - Cost Reduction vs Local Responsiveness: The Integration Responsiveness Framework
- MNEs face two forces when competing globally, cost reductions and local responsiveness
- Cost reductions achieved through a global-standardisation strategy often reinforce a cost-
leadership strategy at the business level
- Local responsiveness increases the differentiation of products and services, reinforcing a
differentiation strategy at the business level
- Globalisation Hypothesis: assumption that consumer needs and preferences throughout the
world are converging and thus becoming increasingly homogeneous
- Local Responsiveness: the need to tailor product and service offerings to fit local consumer
preferences and host-country requirements. Local responsiveness entails higher costs, and
sometimes even outweighs cost advantages from economies of scale and lower-cost input factors
- Integration-Responsiveness Framework: strategy
framework that juxtaposes the pressures an MNE faces
for cost reductions and local responsiveness to derive
four strategies to gain and sustain competitive advantage
when competing globally
- International Strategy: involves leveraging home-
based core competencies by selling the same products
or services in both domestic and foreign markets.
Frequently the first step companies take when
beginning to conduct business abroad.
- When an MNE sells its products in foreign markets
with little/no change, it leaves itself open to the
expropriation of IP
- Multidomestic Strategy: strategy pursued by MNEs
that attempts to maximise local
responsiveness, with the intent that local
consumers will perceive them to be
domestic companies. Common in
consumer products and food industries.
- MNEs generally pursue a
differentiation strategy at the business
level. They face reduced exchange-
rate exposure because the majority of
the value creation takes place in the
host-country business units.
Multidomestic strategy is costly and
inefficient because it requires the
duplication of key business functions
across multiple countries, also risks
IP, codified knowledge embedded in
products
- Global-Standardisation Strategy:
strategy attempting to reap significant
economies of scale and location
economies by pursuing a global division
of labour based on wherever best-of-
class capabilities reside at the lowest
 cost. Their business-level strategy tends to be cost leadership, because there’s little/no
differentiation or local responsiveness because products are standardised
- Transnational Strategy: strategy that attempts to combine the benefits of localisation strategy
(high local responsiveness) with those of global-standardisation strategy (lowest-cost position
attainable). Used by MNEs that pursue a blue ocean strategy by attempting to reconcile
product and/or service differentiations at low cost. This is rather difficult to implement because
of the organisational complexities involved

10.5 - National Competitive Advantage: World Leadership in Specific Industries

- Death-of-Distance Hypothesis: assumption that geographic location alone shouldn’t lead to
firm-level competitive advantage because firms are able to source inputs globally. However, it
turns out that high-performing firms in certain industries are concentrated in specific countries
- National Competitive Advantage: world leadership in specific
industries
Porter’s Diamond Framework
- Why some nations outperform others in specific industries?
- Factor Conditions: describe a country’s endowments in terms of
natural, human, and other resources. Other factors include capital
markets, a supportive institutional framework, research
universities, and public infrastructure.
- Natural resources are often not needed to generate world-
leading companies because competitive advantage is often
based on other factor endowments
- Demand Conditions: specific characteristics of demand in a firm’s
domestic market. A home market made up of customers who hold
companies to a high standard of value creation and cost containment
contributes to national competitive advantage. Demanding customers may also clue firms into
the latest developments in specific fields and push firms to move research from basic findings
to commercial applications
- Competitive Intensity in Focal Industry: companies that face a highly competitive environment
at home tend to outperform global competitors that lack such intense domestic competition
- Related and Supporting Industries/Complementers: leadership in related and supporting
industries can foster world-class competitors in downstream industries. The availability of top-
notch complementers further strengthens national competitive advantage

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