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CHAPTER 1
STRATEGIC LEADERSHIP: MANAGING THE STRATEGY-

MAKING PROCESS FOR COMPETITIVE ADVANTAGE
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LEARNING OBJECTIVES
▪ Explain what is meant by competitive advantage
▪ Discuss the strategic role of managers at
different levels within the organization
▪ Identify the primary steps in a strategic planning
process
▪ Discuss the common pitfalls of planning and how
those pitfalls can be avoided
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
LEARNING OBJECTIVES
▪ Outline the cognitive biases that might lead to
poor strategic decisions, and explain how these
biases can be overcome
▪ Discuss the role strategy leaders play in the
strategy-making process
STRATEGY
▪ Set of related actions that managers take to
increase their company’s performance
▪ Strategic leadership: Creating competitive
advantage through effective management of the
strategy-making process
▪ Strategy formulation: Selecting strategies based on
analysis of an organization’s external and internal
environment
▪ Strategy implementation: Putting strategies into action
FIGURE 1.2 - DETERMINANTS OF
SHAREHOLDER VALUE
SUPERIOR PERFORMANCE
▪ Risk capital: Equity capital for which there is no
guarantee that stockholders will:
▪ Recoup their investment
▪ Earn a decent return
▪ Shareholder value: Returns that shareholders
earn from purchasing shares in a company
▪ Sources
▪ Capital appreciation in the value of a company’s shares
▪ Dividend payments
▪ Profitability: Return a company makes on the
capital invested in the enterprise
▪ Return on invested capital (ROIC) - Net profit over the
capital invested in a firm
▪ Result of how efficiently the capital is used to satisfy
customer needs
▪ Profit growth: Increase in net profit over time,
achieved by:
▪ Selling products in rapidly growing markets
▪ Gaining market share from rivals
▪ Selling more to existing customers
▪ Expanding overseas or diversifying into new businesses
▪ To boost profitability and profit growth,
managers must:
▪ Use strategies to give their company a competitive
advantage over rivals
▪ Deliver high profitability and sustainable profit growth
COMPETITIVE ADVANTAGE
▪ Occurs when a company’s profitability is greater
than the average profitability of firms in its
industry
▪ Sustained competitive advantage: A company’s
strategies enable it to maintain above-average
profitability for a number of years
BUSINESS MODEL
▪ Conception of how strategies should work
together as a whole to enable the company to
achieve competitive advantage
▪ Deals with how a company:
▪ Selects, acquires, and keeps its customers
▪ Defines and differentiates its product offerings
▪ Creates value for its customers
▪ Produces goods or services and delivers to the market
▪ Lowers costs and organizes its resources and activities
▪ Achieves and sustains high profitability and growth
FIGURE 1.3 - RETURN ON INVESTED CAPITAL
(ROIC) IN SELECTED INDUSTRIES, 2002-2011
Source: Value Line Investment Survey.
STRATEGIC MANAGEMENT
General managers
• Bear responsibility for a company’s overall performance

or for one of its major self-contained subunits or
divisions
Functional managers
• Responsible for supervising a particular function, task,

activity, or operation
Multidivisional company
• Competes in several different businesses and has a

separate self-contained division to manage each
FIGURE 1.4 - LEVELS OF STRATEGIC
MANAGEMENT
CORPORATE-LEVEL MANAGERS
▪ Oversee the development of strategies for the entire
organization
▪ Provide a link between people concerned with the
firm’s strategic development and the shareholders
▪ Ensure that business strategies pursued by the
company are consistent with maximizing profitability
and profit growth
BUSINESS-LEVEL MANAGERS
▪ Heads of business units
▪ Business unit: Self-contained division that provides a
product or service for a particular market
▪ Translate statements of intents into concrete
strategies for individual businesses
▪ Are concerned with strategies specific to a
particular business
FUNCTIONAL- LEVEL MANAGERS
▪ Responsible for specific business functions
▪ Develop functional strategies to fulfill the
strategic objectives set by business- and
corporate-level general managers
▪ Provide information that helps formulate realistic
and attainable strategies
STEPS IN A FORMAL STRATEGIC
PLANNING PROCESS
▪ Select the corporate mission and goals
▪ Analyze the organization’s external competitive
environment and internal operating environment
▪ Select strategies that:
▪ Build on the organization’s strengths and correct it’s
weaknesses
▪ Are consistent with the organization’s mission and goals
▪ Are congruent and constitute a viable business model
▪ Implement the strategies
MAIN COMPONENTS OF THE
STRATEGIC PLANNING PROCESS
Feedback
External
Analysis:
Opportunities Designing
and Threats Organization
Structure
Existing Business
Strategies:
Mission, Functional,
Designing
Model
Vision, SWOT Strategic Business, Governance

Organization
Values, and Choice Global, and and Ethics
Culture
Goals Corporate-
Level
Designing
Internal Organization
Analysis: Controls
Strengths and
Weaknesses
Strategic Formulation Strategic Implementation

COMPONENTS OF A MISSION
STATEMENT
Mission
• Purpose of the company, or a statement of what the company strives

to do
Vision
• Articulation of a company’s desired achievements or future state
Values
• Statement of how employees should conduct themselves and their

business to help achieve the company mission
Establishing major goals
• Goal - Precise and measurable desired future state that a company

attempts to realize
FIGURE 1.6 - DEFINING THE BUSINESS
EXTERNAL AND INTERNAL ANALYSIS
▪ External analysis - Identifies strategic
opportunities and threats that will affect how an
organization pursues its mission
▪ Involves examination of the:
▪ Industry environment in which the company operates
▪ Country or national environment
▪ Macroenvironment
▪ Internal analysis - Focuses on reviewing the
resources, capabilities, and competencies of a
company
▪ Goal - Identify the company’s strengths and weaknesses
SWOT ANALYSIS
▪ Comparison of strengths, weaknesses,
opportunities, and threats
▪ Purpose - Identify the strategies to:
▪ Exploit external opportunities
▪ Build on and protect company strengths
▪ Eradicate weaknesses and counter threats
▪ Goal - Affirm a company-specific business model
▪ To align, fit, or match a company’s resources and
capabilities to the demands of its environment
SWOT STRATEGIES
▪ Functional-level strategies - Directed at
improving the effectiveness of operations within
a company
▪ Business-level strategies - Encompass the
business’s overall competitive theme
▪ How it positions itself in the marketplace to gain a
competitive advantage
▪ Different position strategies that can be used in
different industry settings
SWOT STRATEGIES
▪ Global strategies - Address how to expand
operations outside the home country
▪ Since competitive advantage is determined at a global
level
▪ Corporate-level strategies - Determine:
▪ The businesses a company should be in to maximize
profitability and profit growth
▪ How to gain a competitive edge
STRATEGY IMPLEMENTATION AND
FEEDBACK LOOP
▪ Strategy implementation
▪ Taking action at the functional, business, and corporate
levels to execute a strategic plan
▪ Designing the best organization structure, culture, and
control systems to put a chosen strategy into action
▪ Feedback loop - Provide information to the
corporate level on the:
▪ Strategic goals that are being achieved
▪ Degree of competitive advantage being created and
sustained
CRITICISMS OF FORMAL PLANNING
MODELS
▪ Unforeseen circumstances can adversely affect
strategic plans
▪ Excessive importance is attached to the role of
top management
▪ While ignoring lower-level managers
▪ Many successful strategies are a result of
serendipity rather than strategic planning
FIGURE 1.7 - EMERGENT AND
DELIBERATE STRATEGIES
FIGURE 1.8 - SCENARIO PLANNING
SCENARIO PLANNING
▪ Formulating plans that are based on “what-if”
scenarios about the future
▪ Encourages managers to:
▪ Think outside the box and be more flexible
▪ Anticipate probable scenarios
▪ Ivory tower planning - Recognizes that successful
strategic planning encompasses managers at all
levels of the corporation
COGNITIVE BIASES AND STRATEGIC
DECISION MAKING
Cognitive biases
• Systematic errors in human decision making

• Arise from the way people process information
Prior hypothesis bias
• Decisions are made based on prior beliefs, even when evidence proves
that those beliefs are wrong
Escalating commitment
• Decision makers, having committed significant resources to a project,

commit even more, despite receiving feedback that the project is failing
Reasoning analogy
• Use of simple analogies to make sense out of a complex problem
COGNITIVE BIASES AND STRATEGIC
DECISION MAKING
Representativeness
• Tendency to generalize from a small sample or a single

vivid anecdote
• Violates the statistical law of large numbers
Illusion of control
• Tendency to overestimates one’s ability to control events

• General or top managers are more prone to this
Availability error
• Arises from our predisposition to estimate the probability of

an outcome based on how easy it is to imagine it
TECHNIQUES FOR IMPROVING
DECISION MAKING
Devil’s advocacy
• A member of a decision-making team identifies all the

considerations that might make a proposal unacceptable
• Possible perils of recommended courses of action are
brought into light
Dialectic inquiry
• Generation of a plan and a counter-plan that reflect plausible

but conflicting courses of action
• Promotes strategic thinking
Outside view
• Identification of past successful or failed strategic initiatives to

determine if they will work for the current project
CHARACTERISTICS OF GOOD STRATEGIC
LEADERS
▪ Vision, eloquence, and consistency
▪ Articulation of a business model
▪ Commitment
▪ Being well informed
▪ Willingness to delegate and empower
▪ Astute use of power
▪ Emotional intelligence
▪ Self-awareness, self-regulation, and motivation
▪ Empathy and social skills
CHAPTER 2
EXTERNAL ANALYSIS: THE IDENTIFICATION OF
OPPORTUNITIES AND THREATS
LEARNING OBJECTIVES
▪ Review the primary technique used to analyze
competition in an industry environment: the Five
Forces model
▪ Explore the concept of strategic groups and
illustrate the implications for industry analysis
▪ Discuss how industries evolve over time, with
reference to the industry life-cycle model
▪ Show how trends in the macroenvironment can
shape the nature of competition in an industry
OPPORTUNITIES AND THREATS
Opportunities
• Elements in a company’s environment

that allow it to formulate and implement
strategies to become more profitable
Threats
• Elements in the external environment

that could endanger a firm’s integrity
and profitability
DEFINING AN INDUSTRY
▪ Industry: Group of companies offering products
or services that are close substitutes for each
other
▪ Sector: Group of closely related industries
▪ Market segments - Distinct groups of customers
within a market that can be differentiated on the
basis of their:
▪ Individual attributes
▪ Specific demands
FIGURE 2.1 - THE COMPUTER SECTOR:
INDUSTRIES AND SEGMENTS
FIGURE 2.2 - COMPETITIVE FORCES
Source: Based on How Competitive Forces Shape Strategy, by Michael E. Porter, Harvard Business Review, March/April 1979.
RISK OF ENTRY BY POTENTIAL
COMPETITORS
Potential competitors
• Companies that are currently not competing in the

industry but have the potential to do so
Economies of scale
• Reductions in unit costs attributed to a larger output
Brand loyalty
• Preference of consumers for the products of

established companies
RISK OF ENTRY BY POTENTIAL
COMPETITORS
Absolute cost advantage
• Enjoyed by incumbents in an industry and that new

entrants cannot expect to match
Switching costs
• Costs that consumers must bear to switch from the

products offered by one established company to the
products offered by a new entrant
Government regulations
• Falling entry barriers due to government regulation results

in significant new entry, increase in the intensity of industry
competition, and lower industry profit rates
RIVALRY AMONG ESTABLISHED
COMPANIES
▪ Competitive struggle between companies within
an industry to gain market share from each other
▪ Intense rivalry among established companies
constitutes a strong threat to profitability
▪ Factors that impact the intensity of rivalry among
established companies within an industry
▪ Industry competitive structure - number and size
distribution of companies in it
RIVALRY AMONG ESTABLISHED
COMPANIES
▪ Demand conditions - Increasing demand moderates
competition by providing greater scope for companies
to compete for customers
▪ Cost conditions - When fixed costs are high, profitability
is highly leveraged to sales volume
▪ Exit barriers - Economic, strategic, and emotional
factors that prevent companies from leaving an industry
▪High exit barriers - Companies become locked into an
unprofitable industry where overall demand is static or
declining
BARGAINING POWER OF BUYERS
▪ Bargain down prices or raise costs by demanding
better product quality and service
▪ Choose sellers and purchase in large quantities
▪ Supplier industry is dependent on them for a major
portion of sales
▪ With low switching costs and ability to purchase an
input from several companies at once, buyers can pit
companies against each other
▪ Threat of entering the industry and producing the
product
BARGAINING POWER OF SUPPLIERS
▪ Suppliers’ ability to raise input prices or industry
costs through various means
▪ Product has no substitutes and is vital to the buyer
▪ Not dependent on one particular industry for their sales
▪ Companies would incur high switching costs if they
moved to a different supplier
▪ Threat of entering customers’ industry
▪ Knowledge that companies cannot enter the suppliers’
industry
SUBSTITUTE PRODUCTS AND
COMPLEMENTORS
▪ Substitute products - Those of different
businesses that satisfy similar customer needs
▪ Limit the price that companies in an industry can charge
for their product
▪ Complementors - Companies that sell products
that add value to the other products
▪ Strong complementors - Provide a increased
opportunity for creating value
▪ Weak complementors - Slow industry growth and limit
profitability
STRATEGIC GROUPS WITHIN
INDUSTRIES
▪ Companies in an industry differ in the way they
strategically position products in the market
▪ Product positioning is determined by the:
▪ Product quality, distribution channels and market
segments served
▪ Technological leadership and customer service
▪ Pricing and advertising policy
▪ Promotions offered
FIGURE 2.3 - STRATEGIC GROUPS IN THE
COMMERCIAL AEROSPACE INDUSTRY
IMPLICATIONS OF STRATEGIC GROUPS
▪ Since all companies in a strategic group pursue a
similar strategy:
▪ Customers view them as direct substitutes for each
other
▪ Immediate threat to a company are rivals within its own
strategic group
▪ Different strategic groups have different
relationships to each of the competitive forces
MOBILITY BARRIERS
▪ Within-industry factors that inhibit the movement
of companies between strategic groups
▪ Managers must:
▪ Determine if it is cost-effective to overcome mobility
barriers
▪ Realize that companies in other strategic groups become
their competitors if they overcome mobility barriers
FIGURE 2.4 - STAGES IN THE INDUSTRY
LIFE CYCLE
EMBRYONIC INDUSTRY
▪ Development stage
▪ Growth is slow owing to:
▪ Buyer’s unfamiliarity with the product and poor
distribution channels
▪ High prices due to companies’ inability to reap
significant scale economies
▪ Barriers to entry are based on access to
technological expertise
GROWTH INDUSTRY
▪ First-time demand expands rapidly due to new
customers in the market
▪ Prices fall since:
▪ Scale economies have been attained
▪ Distribution channels have developed
▪ Threat from potential competitors is highest at
this stage
▪ Rivalry is low - Companies are able to expand their
revenues without taking market share away from other
companies
INDUSTRY SHAKEOUT
▪ Demand approaches saturation levels
▪ There are fewer potential first-time buyers
▪ Rivalry between companies intensifies
▪ Price war results in bankruptcy of inefficient
companies and deters new entry
FIGURE 2.5 - GROWTH IN DEMAND
AND CAPACITY
MATURE INDUSTRIES
▪ Market is totally saturated, demand is limited to
replacement demand, and growth is low or zero
▪ Barriers to entry increase and threat of entry
from potential competitors decreases
▪ Industries consolidate and become oligopolies
▪ Companies try to avoid price wars
DECLINING INDUSTRIES
▪ Growth becomes negative due to:
▪ Technological substitution
▪ Social changes
▪ Demographics
▪ International competition
▪ Rivalry among established companies increases
▪ Falling demand results in excess capacity
LIMITATIONS OF MODELS
FOR INDUSTRY ANALYSIS
▪ Life-cycle issues
▪ Industries do not always follow the pattern of the
industry life-cycle model
▪ Time span of the stages vary from industry to industry
▪ Innovation
▪ Punctuated equilibrium - Long periods of equilibrium
are punctuated by periods of rapid change
LIMITATIONS OF MODELS
FOR INDUSTRY ANALYSIS
▪ Because competitive forces and strategic group models
are static, they cannot capture periods of rapid change
in the industry environment when value is migrating
▪ Company differences
▪ Overemphasize importance of industry structure as a
determinant of company performance
▪ Underemphasize importance of variations among
companies within a strategic group
FIGURE 2.6 - PUNCTUATED EQUILIBRIUM
AND COMPETITIVE STRUCTURE
FIGURE 2.7 - THE ROLE OF THE
MACROENVIRONMENT
MACROECONOMIC FORCES
Growth rate of
Interest rates
the economy
Currency Inflation or
exchange rates deflation rates
GLOBAL AND TECHNOLOGICAL FORCES
▪ Global forces - Falling barriers to international
trade have enabled:
▪ Domestic markets enter to foreign markets
▪ Foreign enterprises to enter the domestic markets
▪ Technological forces - Technological change can:
▪ Make products obsolete
▪ Create a host of new product possibilities
▪ Impact the height of the barrier to entry and reshape
industry structure
DEMOGRAPHIC, SOCIAL, AND
POLITICAL FORCES
▪ Demographic forces - Outcomes of changes in
the characteristics of a population
▪ Social forces - Way in which changing social
morals and values affect an industry
▪ Political and legal forces - Outcomes of changes
in laws and regulations
CHAPTER 3
INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES,
COMPETITIVE ADVANTAGE, AND PROFITABILITY
LEARNING OBJECTIVE
▪ Discuss the source of competitive advantage
▪ Identify and explore the role of efficiency, quality,
innovation, and customer responsiveness in
building and maintaining a competitive
advantage
▪ Explain the concept of the value chain
▪ Understand the link between competitive
advantage and profitability
▪ Explain what impacts the durability of a
company’s competitive advantage
▪ Exists when a company’s profitability is greater
than the average profitability of all companies in
its industry
▪ Sustained competitive advantage - Exists when a
company maintains its competitive advantage
over a number of years
▪ Primary objective of strategy
DISTINCTIVE COMPETENCIES
▪ Firm-specific strengths that allow a company to
differentiate its products and/or achieve lower
costs than its rivals
▪ Arise from resources and capabilities
▪ Resources: Assets of a company
▪ Tangible resources: Physical entities
▪ Land, buildings, and inventory, and money
▪ Intangible resources: Nonphysical entities created by
managers and other employees
▪ Brand names, company reputation, and intellectual property
▪ Capabilities: Company’s skills at coordinating its
resources and putting them to productive use
▪ Reside in an organization’s rules, routines, and
procedures
▪ Intangible
▪ Lead to sustained competitive advantage if they are
rare and protected from copying
▪ Requirements
▪ Firm-specific and valuable resource, and the capabilities
to take advantage of that resource, or
▪ Firm-specific capability to manage resources
▪ Distinctive competency is strongest when a company
possesses both
FIGURE 3.1 - STRATEGY, RESOURCES,
CAPABILITIES, AND COMPETENCIES
COMPETITIVE ADVANTAGE, VALUE
CREATION, AND PROFITABILITY
▪ Profitability of a company depends on the:
▪ Value customers place on its products
▪ Price it charges for its products
▪ Costs of creating those products
▪ When a company strengthens the value of its
products, it can:
▪ Raise prices to reflect the value
▪ Reduce prices to induce more customers to purchase its
products
COMPETITIVE ADVANTAGE, VALUE
CREATION, AND PROFITABILITY
▪ Point-of-sale price is less than the utility value
placed on the product by many customers, owing
to:
▪ Consumer surplus - Customers capture some of that
utility
▪ Customer’s reservation price - Each individual’s unique
assessment of the value of a product
▪ Competition from rivals
FIGURE 3.2 - VALUE CREATION PER
UNIT
FIGURE 3.3 - VALUE CREATION AND
PRICING OPTIONS
VALUE CREATION AND PRICING
OPTIONS
▪ Managers must understand:
▪ Dynamic relationships among value, pricing, demand,
and costs
▪ To maximize competitive advantage and profitability
▪ How value creation and pricing decisions affect demand
▪ How unit costs change with increases in volume
FIGURE 3.5 - THE VALUE CHAIN
PRIMARY ACTIVITIES
▪ Relate to a product’s design, creation, delivery,
marketing, support, and after-sales service
▪ Research and development
▪ Design of products and production processes
▪ Superior product design increases a product’s
functionality and add value
▪ Production
▪ Creation process of a good or service
▪ Helps lower cost structure and leads to differentiation
PRIMARY ACTIVITIES
▪ Marketing and sales
▪ Brand positioning and advertising - Increase customers’
perceived value of a product
▪ Marketing and sales - Help create value by discovering
customers’ needs
▪ Customer service
▪ Provide after-sales service and support
▪ Create superior utility by solving customer problems
and supporting customers after a purchase
SUPPORT ACTIVITIES
▪ Provide inputs that allow the primary activities to
take place
▪ Materials management
▪ Controls the transmission of physical materials through
the value chain
▪ Lowers cost and creates more profit
▪ Human resources
▪ Ensures value creation by making sure that the
company has the right combination of skilled people
SUPPORT ACTIVITIES
▪ Information systems
▪ Electronic systems to improve efficiency and
effectiveness of a company’s value creation activities
▪ Company infrastructure
▪ Companywide context within which all the other value
creation activities occur
▪ Organizational structure, control system and company culture
FIGURE 3.6 - BUILDING BLOCKS OF
BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE
▪ Efficiency
▪ Measured by the quantity of inputs that it takes to
produce a given output
▪ Employee productivity: Output produced per employee
▪ Helps attain competitive advantage through a lower cost
structure
▪ Quality
▪ Superior quality - Customers’ perception that a
product’s attributes provide them with higher utility
than those sold by rivals
ADVANTAGE
▪ Quality as excellence - Product features and functions,
and level of service associated with its delivery
▪ Quality as reliability - Occurs when a product
consistently performs the function it was designed for,
and seldom breaks down
▪ Innovation
▪ Product innovation: Development of products that are
new to the world or have superior attributes to existing
products
ADVANTAGE
▪ Process innovation: Development of a new process for
producing products and delivering them to customers
▪ Customer responsiveness
▪ Superior responsiveness - Achieved by identifying and
satisfying customer needs better than one’s rivals
▪ Customer response time: Time that it takes for a good
to be delivered or a service to be performed
▪ Other sources - Superior design, service, and after-sales
service and support
FIGURE 3.8 - COMPETITIVE ADVANTAGE
AND THE VALUE CREATION CYCLE
DEFINITIONS OF BASIC ACCOUNTING
TERMS
Term Definition Source
Cost of Goods Sold • Total costs of producing products Income
(COGS) statement
Sales, General, and • Costs associated with selling products and Income
Administrative administering the company statement
Expenses ( SG&A)
R&D Expenses (R&D) • Research and development expenditure Income
statement
Working Capital • Amount of money the company has to work Balance

with in the short term: Current assets – sheet
current liabilities
Property, Plant, and • Value of investments in the property, plant, Balance
Equipment (PPE) and equipment that the company uses to sheet
manufacture and sell its products
• Also known as fixed capital
DEFINITIONS OF BASIC ACCOUNTING
TERMS
Term Definition Source
Return on Sales (ROS) • Net profit expressed as a percentage of sales Ratio
• Measures how effectively the company
converts revenue into profits
Capital Turnover • Revenues divided by invested capital Ratio
• Measures how effectively the company uses
its capitals to generate revenue
Return on Invested • Net profit divided by invested capital Ratio
Capital (ROIC)
Net Profit • Total revenues minus total costs before tax Income
statement
Invested Capital • Interest-bearing debt plus shareholders’ Balance
equity sheet
FIGURE 3.9 - DRIVERS OF PROFITABILITY
BARRIERS TO IMITATION
▪ Make it difficult for a competitor to copy a
company’s distinctive competencies
▪ Greater the barrier, more sustainable a company’s
▪ Imitating resources
▪ Firm-specific and value tangible resources are the
easiest to imitate
▪ Intangible resources
▪ Brand names - Imitating them is prohibited by law
BARRIERS TO IMITATION
▪ Marketing and technical knowhow - Easy to imitate owing to
movement of skilled personnel between companies and
visibility of strategies to competitors
▪ Technological knowhow - Easy to imitate as patents do not
provide complete protection
▪ Imitating capabilities - Difficult as:
▪ They are not visible to outsiders
▪ No one individual has access to all the internal
operating routes and procedures of a company
CAPABILITY OF COMPETITORS AND
INDUSTRY DYNAMISM
▪ Capability of competitors is determined by:
▪ Nature of the competitors’ prior strategic commitments
▪ Strategic commitment - Company’s commitment to a
particular way of doing business
▪ Absorptive capacity - Ability of an enterprise to identify,
value, assimilate, and use new knowledge
▪ Most dynamic industries are those with a very
high rate of product innovation
▪ Where product life cycles and competitive advantages
are short-lived
REASONS FOR FAILURE OF COMPANIES
▪ Inertia - Companies find it difficult to adapt to
changing competitive conditions
▪ Power struggles and hierarchical resistance make
change difficult
▪ Prior strategic commitments - Limit a company’s
ability to imitate rivals
▪ Cause competitive disadvantage
▪ The Icarus paradox - Companies become very
specialized and myopic
▪ Lose sight of market realities
STEPS TO AVOID FAILURE
Focus on the building blocks of competitive advantage
Institute continuous improvement and learning
Track best industrial practice and use benchmarking
Overcome inertia
The role of luck
CHAPTER 4
BUILDING COMPETITIVE ADVANTAGE THROUGH
FUNCTIONAL-LEVEL STRATEGIES
LEARNING OBJECTIVES
▪ Explain how an enterprise can use functional
level strategies to increase its efficiency
level strategies to improve its quality
level strategies to increase its innovation
level strategies to increase its customer
responsiveness
FUNCTIONAL-LEVEL STRATEGIES
▪ Aimed at improving the effectiveness of a
company’s operations and its ability to attain
superior:
▪ Efficiency
▪ Quality
▪ Innovation
▪ Customer responsiveness
FIGURE 4.1 - THE ROOTS OF
EFFICIENCY AND ECONOMIES OF SCALE
▪ Efficiency - Measured by the quantity of inputs
that it takes to produce a given output
▪ Economies of scale: Reductions in unit costs
attributed to a larger output
▪ Ability to spread fixed costs over a large production
volume and produce in large volumes
▪ To achieve greater division of labor and specialization
▪ Diseconomies of scale: Unit cost increases
associated with a large scale of output
FIGURE 4.2 - ECONOMIES AND
DISECONOMIES OF SCALE
LEARNING EFFECTS
▪ Cost savings that come from learning by doing
▪ More significant when a technologically complex
task is repeated, as there is more to learn
▪ Diminish in importance after a period of time
▪ Triggered by changes in a company’s production
system
FIGURE 4.3 - THE IMPACT OF LEARNING AND
SCALE ECONOMIES ON UNIT COSTS
EXPERIENCE CURVE
▪ Systematic lowering of the cost structure, and
consequent unit cost reductions
▪ Occur over the life of a product
▪ A product’s per-unit production costs decline
each time its accumulated output doubles
▪ Accumulated output - Total output of a product since its
introduction
▪ Useful in industries that mass-produce a
standardized output
FIGURE 4.4 - THE EXPERIENCE CURVE
EFFICIENCY AND ECONOMIES OF SCALE
▪ Managers should avoid being complacent about
efficiency-based cost advantages derived from
experience effects as:
▪ Neither learning effects nor economics of scale are
sustained forever
▪ Cost advantages gained from experience effects can be
made obsolete by new technologies
FLEXIBLE PRODUCTION TECHNOLOGY
▪ Reduces setup times for complex equipment
▪ Increases the use of individual machines through
better scheduling
▪ Improves quality control at all stages of the
manufacturing process
▪ Increases efficiency and lower unit costs
▪ Enables better customization of product
offerings
MASS CUSTOMIZATION
▪ Use of flexible manufacturing technology to
reconcile:
▪ Low cost
▪ Differentiation through product customization
FIGURE 4.5 - TRADEOFF BETWEEN
COSTS AND PRODUCT VARIETY
MARKETING AND EFFICIENCY
▪ Marketing strategy: Position of a company with
regard to pricing, promotion, advertising,
product design, and distribution
▪ Impacts efficiency and cost structure
▪ Customer defection: Rate percentage of a firm’s
customers who defect every year to competitors
▪ Lowering customer defection helps achieve a lower cost
structure
FIGURE 4.6 - THE RELATIONSHIP BETWEEN
CUSTOMER LOYALTY AND PROFIT PER CUSTOMER
MATERIALS MANAGEMENT, JUST-IN-
TIME SYSTEMS, AND EFFICIENCY
▪ Materials management - Activities necessary to
get inputs and components:
▪ To a production facility
▪ Through the production process
▪ Out through a distribution system to the end-user
▪ Just-in-time (JIT) inventory system:
▪ Economizes on inventory holding costs by scheduling
components to arrive:
▪ Just in time to enter the production process
▪ As stock is depleted
MATERIALS MANAGEMENT, JUST-IN-
TIME SYSTEMS, AND EFFICIENCY
▪ Cost savings come from increasing inventory turnover
and reducing the need for working and fixed capital
▪ Drawback - Leaves a company without a buffer stock of
inventory
▪ Supply chain management: Managing the flow
of inputs and components from suppliers into
the company’s production processes to:
▪ Minimize inventory holding
▪ Maximize inventory turnover
TABLE 4.1 - PRIMARY ROLES OF VALUE CREATION
FUNCTIONS IN ACHIEVING SUPERIOR EFFICIENCY
TABLE 4.1 - PRIMARY ROLES OF VALUE CREATION
FUNCTIONS IN ACHIEVING SUPERIOR EFFICIENCY
TOTAL QUALITY MANAGEMENT
▪ Increasing product reliability to perform
consistently as designed and rarely break down
▪ Five-step chain reaction
▪ Improved quality means that costs decrease
▪ As a result, productivity improves
▪ Better quality leads to higher market share, allowing
the company to raise prices
▪ Higher prices increase profitability, allowing the
company to stay in business
▪ Enables the company to create more jobs
TOTAL QUALITY MANAGEMENT
▪ Steps that should be part of a quality
improvement program
▪ Management should strive to eliminate mistakes,
defects, and poor-quality
▪ Improve quality of supervision
▪ Work standard to stress on quality of work
▪ Train employees in new skills to remain informed in
workplace changes
▪ Commitment from every individual in the company to
achieve better quality
TABLE 4.2 - ROLES PLAYED BY DIFFERENT FUNCTIONS IN
IMPLEMENTING RELIABILITY IMPROVING METHODOLOGIES
TABLE 4.2 - ROLES PLAYED BY DIFFERENT FUNCTIONS IN
IMPLEMENTING RELIABILITY IMPROVING METHODOLOGIES
TABLE 4.3 - ATTRIBUTES ASSOCIATED
WITH A PRODUCT OFFERING
IMPROVING QUALITY AS EXCELLENCE
▪ To achieve a perception of high quality of
attributes the company should:
▪ Collect marketing information indicating which
attributes are most important to customers
▪ Design products in such a way that those attributes are
embodied in the product
▪ Decide significant attributes to promote and how best
to position them in the minds of consumers
▪ Recognize that competition is not stationary
ACHIEVING SUPERIOR INNOVATION
▪ Most important source of competitive advantage
▪ Innovative products or processes gives a
company competitive advantage that allows it to:
▪ Differentiate its products and charge a premium price
▪ Lower its cost structure below that of its rivals
▪ Successful new-product launches are catalysts of
superior profitability
REASONS FOR HIGH FAILURE RATE OF
INNOVATION
▪ Demand for innovations is essentially uncertain
▪ Technology is poorly commercialized
▪ Poor positioning strategy
▪ Positioning strategy: Specific set of options adopts
for a product based on price, distribution,
promotion and advertising, and product features
▪ Marketing a technology for which there is
inadequate demand
▪ Slow marketing of products
REDUCING INNOVATION FAILURES
▪ Tight cross-functional integration can help a
company ensure that:
▪ Product development projects are driven by customer
needs
▪ New products are designed for ease of manufacture
▪ Development costs are reduced
▪ The time it takes to develop a product and bring it to
market is minimized
▪ Close integration between R&D and marketing is
achieved
TABLE 4.4 - FUNCTIONAL ROLES FOR
ACHIEVING SUPERIOR INNOVATION
TABLE 4.5 - PRIMARY ROLES OF DIFFERENT FUNCTIONS IN
ACHIEVING SUPERIOR RESPONSIVENESS TO CUSTOMERS
CHAPTER 5
BUSINESS-LEVEL STRATEGY
LEARNING OBJECTIVES
▪ Explain the difference between low-cost and
differentiation strategies
▪ Articulate how the attainment of a differentiated
or low-cost position can give a company a
▪ Explain how a company executes its business-
level strategy through function-level strategies
and organizational arrangements
LEARNING OBJECTIVES
▪ Describe what is meant by the term value
innovation
▪ Discuss the concept of blue ocean strategy, and
explain how innovation in business-level strategy
can change the competitive game in an industry,
giving the innovator a sustained competitive
advantage
BUSINESS-LEVEL STRATEGY
▪ Overall competitive theme of a business
▪ Way a company positions itself in the
marketplace to gain a competitive advantage
▪ Different positioning strategies that can be used
in different industry settings
LOWERING COSTS
▪ Enable a company to:
▪ Gain a competitive advantage in commodity markets
▪ Undercut rivals on price
▪ Gain market share
▪ Maintain or increase profitability
DIFFERENTIATION
▪ Distinguishing oneself from rivals by offering
something that they find hard to match
▪ Product differentiation is achieved through:
▪ Superior reliability, functions, and features
▪ Better design, branding, point-of-sale service, after
sales service, and support
▪ Advantages
▪ Allows a company to charge a premium price
▪ Helps a company to grow overall demand and capture
market share from its rivals
FIGURE 5.1 - OPTIONS FOR EXPLOITING
DIFFERENTIATION
Source: Charles W.L. Hill © Copyright 2013.
FIGURE 5.2 - THE DIFFERENTIATION-
LOW COST TRADEOFF
THE DIFFERENTIATION-LOW COST
TRADEOFF
▪ Efficiency frontier
▪ Shows all the positions a company can adopt with
regard to differentiation and low cost
▪ Has a convex shape because of diminishing returns
▪ Multiple positions on the differentiation-low cost
continuum are viable
▪ Have enough demand to support an offering
THE DIFFERENTIATION-LOW COST
TRADEOFF
▪ To get to the efficiency frontier, a company must:
▪ Pursue the right functional-level strategies
▪ Be properly organized
▪ Ensure its business-level strategy, functional-level
strategy, and organizational arrangement align with
each other
VALUE INNOVATION
▪ Occurs when innovations push out the efficiency
frontier in an industry, enabling greater value to
be offered through superior differentiation
▪ At a lower cost than was thought possible
▪ Enable a company to outperform its rivals for a
long period of time
FIGURE 5.3 - VALUE INNOVATION IN
THE PC INDUSTRY
MARKET SEGMENTATION
▪ Decision of a company to group customers based
on important differences in their needs to gain a
▪ Standardization strategy: Producing a standardized
product for the average customer, ignoring different
segments
▪ Segmentation strategy: Producing different offerings
for different segments, serving many segments or the
entire market
▪ Focus strategy: Serving a limited number of segments
or just one segment
COMPARISON OF MARKET
SEGMENTATION APPROACHES
Standardization Segmentation Focus

strategy strategy strategy
• Associated with • Involves customization • Have a higher cost

lower costs than a of product offerings, structure as:
segmented strategy which drive up costs • New product
• Attempts to attain as: features and
economies of scale • Achieving economies functions need to be
through high sales of scale is difficult added
volume • Production and • Attaining economies
delivery costs tend of scale is difficult
to be high
BUSINESS-LEVEL STRATEGIES
Generic business-level strategy
• Give a company specific form of competitive position and advantage

in relation to its rivals
• Results in above-average profitability
Broad low-cost strategy
• Lowering costs in order to lower prices and still make a profit
Broad differentiation strategy
• When a company differentiates its product in some way
Focus low-cost strategy
• Targeting a certain segment or niche and trying to be the low-cost

player in that niche
BUSINESS-LEVEL STRATEGY, INDUSTRY,
AND COMPETITIVE ADVANTAGE
Low-cost companies Differentiated companies
• Charge low prices and still make • Withstand pricing pressure from
profits powerful buyers and increase
• Absorb cost increases from prices without buyer resistance
suppliers • Absorb price increases from
• Offer deep discount prices for suppliers and pass them to
buyers customers without losing market
share
• Withstand substitute goods, as a
result of brand loyalty
FIGURE 5.5 - STRATEGY IS IMPLEMENTED
THROUGH FUNCTION AND ORGANIZATION
LOWERING COSTS THROUGH FUNCTIONAL
STRATEGY AND ORGANIZATION
▪ Achieve economies of scale and learning effects
▪ Adopt lean production and flexible
manufacturing technologies
▪ Implement quality improvement methodologies
to produce reliable goods
▪ Streamline processes
▪ Use information systems to automate business
process
LOWERING COSTS THROUGH FUNCTIONAL
STRATEGY AND ORGANIZATION
▪ Implement just-in-time inventory control systems
▪ Design products with a focus on reducing costs
▪ Increase customer retention
▪ Ensure that the organization’s structure, systems,
and culture reward actions that lead:
▪ Higher productivity
▪ Greater efficiency
DIFFERENTIATION THROUGH FUNCTIONAL-
LEVEL STRATEGY AND ORGANIZATION
▪ Customize product offering and marketing mix to
different market segments
▪ Design product offerings that have a high
perceived quality regarding their:
▪ Functions
▪ Features
▪ Performance
▪ Reliability
▪ Handle and respond to customer queries and
problems promptly
DIFFERENTIATION THROUGH FUNCTIONAL-
LEVEL STRATEGY AND ORGANIZATION
▪ Focus marketing efforts on:
▪ Brand building
▪ Perceived differentiation from rivals
▪ Ensure employees act in a manner consistent
with the company’s image
▪ Create the right organizational structure,
controls, incentives, and culture
▪ Ensure that the control systems, incentive
systems, and culture align with the strategic
thrust
BLUE OCEAN STRATEGY
▪ Successful companies build their competitive
advantage by redefining their product offering
through value innovation
▪ Creating a new market space
▪ Blue ocean - Wide open market space where a
company can chart its own course
BLUE OCEAN STRATEGY
▪ To redefine its market and create a new
business-level strategy, a company must:
▪ Eliminate factors that rivals take for granted, and
reduce costs
▪ Reduce certain factors below industry standards, and
lower costs
▪ Raise certain factors above industry standards, and
increase value
▪ Create factors that rivals do not offer, and increase
value
CHAPTER 6
BUSINESS-LEVEL STRATEGY AND THE INDUSTRY
ENVIRONMENT
LEARNING OBJECTIVES
▪ Identify the strategies managers can develop to
increase profitability in fragmented industries
▪ Discuss the special problems that exist in
embryonic and growth industries and how
companies can develop strategies to effectively
compete
LEARNING OBJECTIVES
▪ Understand competitive dynamics in mature
industries and discuss the strategies managers
can develop to increase profitability even when
competition is intense
▪ Outline the different strategies that companies in
declining industries can use to support their
business models and profitability
FRAGMENTED INDUSTRY
▪ Composed of a large number of small- and
medium-sized companies
▪ Reasons for fragmentation
▪ Lack of scale economies
▪ Brand loyalty in the industry is primarily local
▪ Low entry barriers due to lack of scale economies and
national brand loyalty
▪ Focus strategy works best for a fragmented
industry
CONSOLIDATING A FRAGMENTED INDUSTRY
THROUGH VALUE INNOVATION
▪ Value innovator - Defines value differently than
established companies
▪ Offers the value at lowered cost through the creation of
scale economies
▪ Chaining: Obtaining the advantages of cost
leadership by establishing a network of linked
merchandising outlets
▪ Interconnected by information technology that
functions as one large company
▪ Aids in building a national brand
CONSOLIDATING A FRAGMENTED INDUSTRY
THROUGH VALUE INNOVATION
▪ Franchising: Strategy in which franchisor grants
the franchisee the right to use the franchisor’s
name, reputation, and business model
▪ In return for a fee and a percentage of the profits
▪ Horizontal mergers - Merging with or acquiring
competitors and combining them into a single
large enterprise
STRATEGIES IN EMBRYONIC AND
GROWTH INDUSTRIES
▪ Limited customer demand for products of an
embryonic industry is due to:
▪ Limited performance and poor quality of the first
products
▪ Customer unfamiliarity with the product
▪ Poorly developed distribution channels
▪ Lack of complementary products
▪ High production costs because of small volumes of
production
STRATEGIES IN EMBRYONIC AND
GROWTH INDUSTRIES
▪ Industry enters the growth stage when a mass
market starts to develop for its products
▪ Mass market: One in which large numbers of customers
enter the market
▪ Occurs when:
▪ Product value increases, due to ongoing technological
progress and development of complementary products
▪ Production cost decreases, resulting in low prices and high
demand
FIGURE 6.1 - MARKET DEVELOPMENT
AND CUSTOMER GROUPS
FIGURE 6.2 - MARKET SHARE OF
DIFFERENT CUSTOMER SEGMENTS
STRATEGIC IMPLICATIONS: CROSSING
THE CHASM
▪ New strategies are required to strengthen a
company’s business model as a market develops
▪ Customers in each segment have very different needs
▪ Competitive chasm - Transition between the
embryonic market and mass market
▪ Failure to do so results in the company going out of
business
STRATEGIC IMPLICATIONS: CROSSING
THE CHASM
Innovators and early
Early majority
adopters
• Technologically sophisticated • Value ease of use and
and willing to tolerate the reliability
limitations of the product
• Require mass-market
• Reached through specialized distribution and mass-media
distribution channels advertising campaigns
• Companies produce small • Require large-scale mass
quantities of product that production to produce high-
are priced high quality product at a low price
FACTORS THAT ACCELERATE CUSTOMER
DEMAND
Relative
Complexity Compatibility
advantage
Viral model
Trialability Observability
of infection
STRATEGIES TO DETER ENTRY IN
MATURE INDUSTRIES
Product proliferation strategy
• Catering to the needs of all market segments to deter entry by

competitors
Limit price strategy
• Charging a price that is lower than that required to maximize

profits in the short run
• Is above the cost structure of potential entrants
Strategic commitments
• Investments that signal an incumbent’s long-term commitment

to a market or a segment of the market
FIGURE 6.4 - LIMIT PRICING
STRATEGIES TO MANAGE RIVALRY
Price Price Non-price

signaling leadership competition
Market Product Market

penetration development development
Product
proliferation
CAPACITY CONTROL
▪ Factors causing excess capacity
▪ New technologies that produce more than the old ones
▪ New entrants in an industry
▪ Economic recession that causes global overcapacity
▪ High growth of and demand in an industry that triggers
rapid expansion
▪ Choosing a strategy
▪ Each company individually must try to preempt its rivals
▪ Companies must collectively coordinate with each to be
aware of the mutual effects of their actions
FIGURE 6.6 - FACTORS THAT DETERMINE THE INTENSITY
OF COMPETITION IN DECLINING INDUSTRIES
CHOOSING A STRATEGY
Leadership strategy
• When a company develops strategies to become the dominant player in a

declining industry
Niche strategy
• When a company focuses on pockets of demand that are declining more

slowly than the industry as a whole to maintain profitability
Harvest strategy
• When a company reduces to a minimum the assets it employs in a

business to reduce its cost structure and extract maximum profits from its
investment
Divestment strategy
• When a company decides to exit an industry by selling off its business

assets to another company
FIGURE 6.7 - STRATEGY SELECTION IN A
DECLINING INDUSTRY
CHAPTER 9
CORPORATE-LEVEL STRATEGY: HORIZONTAL
INTEGRATION, VERTICAL INTEGRATION, AND
STRATEGIC OUTSOURCING
LEARNING OBJECTIVES
▪ Discuss how corporate-level strategy can be used
to strengthen a company’s business model and
business-level strategies
▪ Define horizontal integration and discuss the
primary advantages and disadvantages
associated with this corporate-level strategy
LEARNING OBJECTIVES
▪ Explain the difference between a company’s
internal value chain and the industry value chain
▪ Describe why, and under what conditions,
cooperative relationships such as strategic
alliances and outsourcing may become a
substitute for vertical integration
CORPORATE-LEVEL STRATEGY
AND THE MULTIBUSINESS MODEL
▪ Corporate-level strategies should be chosen to
promote the success of its business-level
strategies
▪ Which allows it to achieve a sustainable competitive
advantage, leading to higher profitability
AND THE MULTIBUSINESS MODEL
▪ Levels of business model
▪ Business model and strategies for each business unit or
division in every industry in which it competes
▪ Higher-level multibusiness model that justifies its entry
into different businesses and industries
HORIZONTAL INTEGRATION
▪ Acquiring or merging with industry competitors
to achieve the competitive advantages that arise
from a large size and scope of operations
▪ Acquisition: Company uses its capital resources
to purchase another company
▪ Merger: Agreement between two companies to
pool their resources and operations and join
together to better compete in a business or
industry
BENEFITS OF HORIZONTAL
INTEGRATION
▪ Lowers the cost structure
▪ Increases product differentiation
▪ Leverages a competitive advantage
▪ Reduces rivalry within the industry
▪ Increases bargaining power over suppliers and
buyers
PROBLEMS WITH HORIZONTAL
INTEGRATION
▪ Difficult to implement
▪ Conflict with the Federal Trade Commission (FTC)
▪ Increase in prices
▪ Abuse of market power
▪ Crushing potential competitors
VERTICAL INTEGRATION
▪ When a company expands its operations either
backward or forward into an industry
▪ Backward vertical integration - Produces inputs for the
company’s products
▪ Forward vertical integration - Uses, distributes, or sells
the company’s products
FIGURE 9.1 - STAGES IN THE RAW-MATERIALS-TO-
CUSTOMER VALUE-ADDED CHAIN
FIGURE 9.2 - THE RAW-MATERIALS-TO-CUSTOMER
VALUE-ADDED CHAIN IN THE PC INDUSTRY
INCREASING PROFITABILITY THROUGH
VERTICAL INTEGRATION
▪ Vertical integration increases product
differentiation, lowers costs, and reduces
industry competition when it:
▪ Facilitates investments in efficiency-enhancing
specialized assets
▪ Protects product quality
▪ Results in improved scheduling
PROBLEMS WITH VERTICAL
INTEGRATION
▪ Increasing cost structure
▪ Disadvantages that arise when technology is
changing fast
▪ Disadvantages that arise when demand is
unpredictable
▪ Vertical disintegration: When a company decides
to exit industries either forward or backward in
the industry value chain to its core industry to
increase profitability
COOPERATIVE RELATIONSHIPS
▪ Quasi integration: Use of long-term
relationships, or investment into some of the
activities normally performed by suppliers or
buyers
▪ In place of full ownership of operations that are
backward or forward in the supply chain
COMPETITIVE BIDDING AND SHORT-
TERM CONTRACTS
▪ Competitive bidding strategy - Independent
component suppliers compete to be chosen to
supply a particular component
▪ Short-term contracts - Last for a year or less
▪ Does not result in specialized investments
▪ Signals a company’s lack of long-term commitment to
its suppliers
STRATEGIC ALLIANCES AND LONG-
TERM CONTRACTING
▪ Strategic alliances: Long-term agreements
between two or more companies to jointly
develop new products or processes
▪ Substitute for vertical integration
▪ Avoids bureaucratic costs
▪ Component suppliers benefit because their
business and profitability grow as the companies
they supply grow
STRATEGIES TO BUILD LONG-TERM
COOPERATIVE RELATIONSHIPS
▪ Hostage taking: Means of exchanging valuable
resources to guarantee that each partner to an
agreement will keep its side of the bargain
▪ Credible commitment: Believable promise or
pledge to support the development of a long-
term relationship between companies
▪ Each company should possess a kind of power to
discipline its partner, if the need arise
STRATEGIC OUTSOURCING
▪ Decision to allow one or more of a company’s
value-chain activities to be performed by
independent, specialist companies
▪ Virtual corporation: Companies pursued
extensive strategic outsourcing to the extent that
they only perform the central value creation
functions that lead to competitive advantage
FIGURE 9.3 - STRATEGIC OUTSOURCING OF
PRIMARY VALUE CREATION FUNCTIONS
BENEFITS OF OUTSOURCING
Lower cost structure
Enhanced differentiation
Focus on the core business
RISKS OF OUTSOURCING
▪ Holdup
▪ Risk that a company will become too dependent upon
the specialist provider of an outsourced activity
▪ Increased competition
▪ Building of an industry-wide resource that lowers the
barriers to entry in that industry
▪ Loss of information and forfeited learning
opportunities
CHAPTER 10
CORPORATE-LEVEL STRATEGY: RELATED AND
UNRELATED DIVERSIFICATION
LEARNING OBJECTIVES
▪ Differentiate between multibusiness models
based on related and unrelated diversification
▪ Explain the five primary ways in which
diversification can increase company profitability
▪ Discuss the conditions that lead managers to
pursue related diversification versus unrelated
diversification and explain why some companies
pursue both strategies
LEARNING OBJECTIVES
▪ Describe the three methods companies use to
enter new industries—internal new venturing,
acquisitions, and joint ventures—and discuss the
advantages and disadvantages associated with
each of these methods
DIVERSIFICATION
▪ Ways in which profitability can be increased
▪ Transfer competencies between business units in
different industries
▪ Leverage competencies to create business units in new
industries
▪ Share resources between business units to realize
synergies or economies of scope
▪ Use product bundling
▪ Utilize general organizational competencies that
increase the performance
TRANSFERRING COMPETENCIES
▪ Taking a distinctive competency developed by a
business unit in one industry and implanting it in
a business unit operating in another industry
▪ Commonality: Skill or competency that when
shared by two or more business units allows
them to operate more effectively and create
more value for customers
TRANSFERRING COMPETENCIES
▪ Increase profitability when they:
▪ Lower the cost structure of one or more of a diversified
company’s business units
▪ Enable one or more of its business units to better
differentiate their products
▪ Distinctive competency being transferred must
have real strategic value
▪ Should involve value-chain activities to increases
profitability
FIGURE 10.1 - TRANSFER OF
COMPETENCIES AT PHILIP MORRIS
LEVERAGING COMPETENCIES
▪ Taking a distinctive competency developed by a
business unit in one industry and using it to
create a new business unit in a different industry
▪ Basis of the model
▪ Company’s competitive advantage in one industry be
applied to create a differentiation
▪ Cost-based competitive advantage for a new business
unit in a different industry
SHARING RESOURCES AND
CAPABILITIES
▪ Economies of scope: Synergies that arise when
one or more of a diversified company’s business
units are able to lower costs or increase
differentiation
▪ More effectively pool, share, and utilize expensive
resources or capabilities
▪ Sources of cost reductions
▪ Sharing lowers the cost structure
▪ Marketing function does the differentiation of products
leading to a higher ROIC
PRODUCT BUNDLING
▪ Providing products that are connected to each
other
▪ Allows companies to expand their range providing
customers a complete package
▪ Goal - Bundle products to offer customers:
▪ Lower prices
▪ Superior set of services
▪ Does not always require joint ownership
▪ Can be achieved through market contracts
GENERAL ORGANIZATIONAL
COMPETENCIES
▪ Help business units within a company perform at
a higher level than it could if it operated as a
separate or independent company
▪ Results from the skills of a company’s top managers
▪ Types
▪ Entrepreneurial capabilities
▪ Organizational design capabilities
▪ Strategic capabilities
ENTREPRENEURIAL CAPABILITIES
▪ Required to take advantage of the free cash flow
▪ To promote entrepreneurship, a company must:
▪ Encourage managers to take risks
▪ Give managers the time and resources to pursue novel
ideas
▪ Not punish managers when a new idea fails
▪ Make sure that the company’s free cash flow is not
wasted in risky ventures that would generate a low
return on investment
CAPABILITIES IN ORGANIZATIONAL
DESIGN
▪ Organizational design skills: Ability of the
managers to create a structure, culture, and
control systems that motivate and coordinate
employees to perform at a high level
▪ Major factor that:
▪ Influences a company’s entrepreneurial capabilities
▪ Determines a company’s ability to create functional
competencies
▪ Determines a diversified company’s ability to profit
from its multibusiness model
SUPERIOR STRATEGIC MANAGEMENT
CAPABILITIES
▪ Required to manage different business units to
perform better than they would if they were
independent companies
▪ Ability to diagnose the underlying source of the
problems of a poorly performing business unit
▪ Turnaround strategy: Managers of a diversified
company identify inefficient and poorly managed
companies in other industries
SUPERIOR STRATEGIC MANAGEMENT
CAPABILITIES
▪ Ways to improve the performance of the
acquired company
▪ Top managers of the acquired company are replaced
with a more aggressive team
▪ New top-management team sells off expensive assets
▪ New management team works to devise new strategies
to improve the performance
▪ Introducing company-wide pay-for-performance bonus
system
▪ Establishing stretch goals for employees at all levels
RELATED DIVERSIFICATION
▪ Corporate-level strategy based on the goal of
establishing a business unit in a new industry
related to a company’s existing business units
▪ By some form of commonality or linkage between their
value-chain functions
▪ Basis of multibusiness model
▪ Taking advantage of strong commonalities that can be
modified to increase the competitive advantage
▪ Allowing a company to use any general organizational
competency it possesses
▪ Corporate-level strategy that uses general
organizational competencies to increase the
performance of all the company’s business units
▪ Companies pursuing this are called conglomerates
▪ Internal capital market: Corporate-level strategy
whereby the firm’s headquarters assesses the
performance of business units and allocates
money across them
▪ Benefits of an internal capital market are limited
by the efficiency of the external capital market
▪ Reasons for efficiency of capital markets in U.S
▪ Reporting requirements mandated by the Securities
and Exchange Commission (SEC)
▪ Large numbers of research analysts
▪ Extremely large and active investment community
▪ Strong communication systems
▪ Strong contract law
DISADVANTAGES OF DIVERSIFICATION
▪ Changes in the industry or company
▪ Management
▪ Technology
▪ Diversification for the wrong reasons
▪ Pooling risks
▪ Entry into a wrong business or at wrong time or for
wrong reasons
DISADVANTAGES OF DIVERSIFICATION
▪ Bureaucratic costs: Costs associated with solving
the transaction difficulties between business
units and corporate headquarters
▪ Factors responsible
▪ Number of business units in a company’s portfolio
▪ Degree to which coordination is required to realize the
advantages of diversification
FIGURE 10.4 - COORDINATION AMONG
RELATED BUSINESS UNITS
RELATED VERSUS UNRELATED
DIVERSIFICATION
Related diversification Unrelated diversification
• Company’s competencies can • Company’s top managers are

be applied across a greater skilled at raising the
number of industries profitability of poorly run
businesses
• Company has superior
strategic capabilities that • Company’s managers use
allow it to keep bureaucratic their strategic management
costs under close control competencies to:
• Improve the competitive
advantage of their business
units
• Keep bureaucratic costs
under control
FIGURE 10.5 - SONY’S WEB OF
INTERNAL NEW VENTURING
▪ Transferring resources and creating a new
business unit in a new industry to innovate new
kinds of products
▪ Used by companies that are:
▪ Technology-based and pursue related diversification
▪ Venturing to enter a newly emerging industry
▪ Pitfalls
▪ Market entry on too small a scale
▪ Poor commercialization of the new-venture product
▪ Poor corporate management of new-venture division
FIGURE 10.6 - SCALE OF ENTRY AND
PROFITABILITY
GUIDELINES FOR SUCCESSFUL
▪ Understanding and basing new ventures on R&D
▪ Giving funding for research to business unit managers
who can narrow down and then select the best set of
research projects
▪ Work with R&D scientists to continually develop and
improve the business model and strategies
▪ Fostering links between R&D and marketing to the
commercial success of the new product will
GUIDELINES FOR SUCCESSFUL
▪ Fostering links between R&D and manufacturing to
ensure cost-effective manufacturing of the product
▪ Construct efficient-scale manufacturing facilities
and give marketing a large budget
▪ To develop a future product campaign that will build
market presence and brand loyalty quickly
ACQUISITIONS
▪ Principal way companies enter new industries to
pursue vertical integration and diversification
▪ Used by companies to move fast to establish a presence
in an industry
▪ Less risky than internal new ventures
▪ Easy way to enter an industry that is protected by
high barriers to entry
ACQUISITION
Pitfalls
• Integrating the acquired company

• Overestimating economic benefits
• Expense of acquisitions
• Inadequate pre-acquisition screening
Guidelines for success
• Target identification and pre-acquisition screening

• Bidding strategy
• Integration
• Learning from experience
JOINT VENTURES
▪ Two or more companies agree to pool their
resources to create new business
▪ Allows a company to share the risks and costs
associated with establishing a business unit
▪ Resulting problems
▪ Partner with superior skills will have to give away
profits
▪ Different business models or time horizons leading to a
conflict about how to run the joint venture
RESTRUCTURING
▪ Reorganizing and divesting business units and
exiting industries
▪ To refocus upon a company’s core business and rebuild
its distinctive competencies
▪ Reasons
▪ Investors feel these companies no longer have
multibusiness models
RESTRUCTURING
▪ Complexity of the financial statements of highly
diversified enterprises disguises the performance of
individual business units
▪ Response to declining financial performance brought
about by over-diversification
▪ Diminished advantages of vertical integration or
diversification from innovations in strategic
management

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CHAPTER 1

STRATEGIC LEADERSHIP: MANAGING THE STRATEGY-

Source: Value Line Investment Survey.

• Bear responsibility for a company’s overall performance

• Responsible for supervising a particular function, task,

• Competes in several different businesses and has a

Vision, SWOT Strategic Business, Governance

Strategic Formulation Strategic Implementation

• Purpose of the company, or a statement of what the company strives

• Articulation of a company’s desired achievements or future state

• Statement of how employees should conduct themselves and their

Establishing major goals

• Goal - Precise and measurable desired future state that a company

• Systematic errors in human decision making

Prior hypothesis bias

• Decision makers, having committed significant resources to a project,

• Use of simple analogies to make sense out of a complex problem

• Tendency to generalize from a small sample or a single

• Tendency to overestimates one’s ability to control events

• Arises from our predisposition to estimate the probability of

• A member of a decision-making team identifies all the

• Generation of a plan and a counter-plan that reflect plausible

• Identification of past successful or failed strategic initiatives to

• Elements in a company’s environment

• Elements in the external environment

• Companies that are currently not competing in the

• Reductions in unit costs attributed to a larger output

• Preference of consumers for the products of

• Enjoyed by incumbents in an industry and that new

• Costs that consumers must bear to switch from the

• Falling entry barriers due to government regulation results

Working Capital • Amount of money the company has to work Balance

Institute continuous improvement and learning

Track best industrial practice and use benchmarking

The role of luck

Source: Charles W.L. Hill © Copyright 2013.

Source: Charles W.L. Hill © Copyright 2013.

Source: Charles W.L. Hill © Copyright 2013.

Standardization Segmentation Focus

• Associated with • Involves customization • Have a higher cost

• Give a company specific form of competitive position and advantage

Broad low-cost strategy

• Lowering costs in order to lower prices and still make a profit

Broad differentiation strategy

• When a company differentiates its product in some way

Focus low-cost strategy

• Targeting a certain segment or niche and trying to be the low-cost

Low-cost companies Differentiated companies

Source: Charles W.L. Hill © Copyright 2013.

• Catering to the needs of all market segments to deter entry by

Limit price strategy

• Charging a price that is lower than that required to maximize

• Investments that signal an incumbent’s long-term commitment

Price Price Non-price

Market Product Market

• When a company develops strategies to become the dominant player in a

• When a company focuses on pockets of demand that are declining more

• When a company reduces to a minimum the assets it employs in a

• When a company decides to exit an industry by selling off its business

Lower cost structure

Focus on the core business

Related diversification Unrelated diversification

• Company’s competencies can • Company’s top managers are

• Integrating the acquired company