Strategic Management PPT Summary V2

Red sea University
Faculties of Economics and Management Science
STRATEGIC MANAGEMENT
Mr. Abdirahman M. Salah

RED SEA UNIVERSITY Bosaso, Bari Somalia
Introducing the Concepts Chapter 01
Chapter One Learning Objectives
 Explain why strategic management is important.
 Explain what strategic management is.
 Explain who’s involved with strategic management.
 Discuss the two important factors impacting strategic management today.
Explain Why Strategic Management Is Important
 Despite your job function, everyone in the organization has a role in strategic
management
 It enables understanding how strategic decisions are made
 Establishes an understanding of how work is valued and rewarded
 It makes a difference in how well an organization performs
 Effective organizations use strategy to – Impact on bottom line
 Adapting to changing situations, internal & external
 Coping with uncertainties
 Effectively guides organizational decision makers
Explain what strategic management
– Definition of Strategy
• Strategy is a series of goal-directed plans and actions that align an organization’s skills
and resources with the opportunities and threats in its environment
– Definition of Strategic Management
• This is a process for situation analysis and strategy formulation,
implementation, and evaluation
The Four Characteristics of Strategic Management
• Interdisciplinary
– It focuses on the whole organization, rather than any functional part
• External Focus – interaction of organization with external environment
– Economy
– Competitors
– Market demographics
• Internal Focus
– Understands the resources and capabilities the organization does or does not
have
• Future Direction of the Organization, includes – Decisions

– Planning
– Shifts or changes in products or markets
Mr. Abdirahman M. Salah. MBA, BBA, LLB Red Sea University Lecture Notes © 2021 1 Of 51
The Strategic Management Process
• A process is a series of interrelated and continuous steps that lead to an outcome
• The Strategic Management Process employs its four characteristics to create a set of
strategies used to conduct its business
Situation Analysis
• Situation analysis is required before deciding upon a strategic direction or response and it
involves scanning and evaluating
– The current organizational context – The external
environment
– The organizational environment
Strategy Formulation
• Strategy formulation is developing and choosing appropriate strategies, as guided by the

situation analysis, and includes three main types of strategies
– Functional Strategies (also called operational strategies)
– Competitive Strategies (also called business strategies)
– Corporate Strategies (these are guiding strategies by which all efforts are aligned)
Functional Strategies
• Functional strategies are goal oriented plans and actions of the functional areas of an
organization, they include:
– Production-Operations – Marketing
– Research & Development – Human Resources
– Financial-Accounting
– Information Technology & Support
Competitive Strategies
• Competitive strategies or business strategies are goal directed plans and actions concerned with
how an organization competes in a specific business or industry
– Looks at all aspects of strategies and actions
– Seeks to determine what the company currently can do and what it wants to do
– Focus is on how it might more effectively compete
Corporate Strategy
• Corporate strategies are goal directed plans and actions that are concerned with what business
or businesses a firm wants to be in and what to do with those businesses
Strategy Implementation
• It is not enough to formulate great strategies, they must be implemented
– Strategy implementation is putting the various stages of strategies into action
– How a strategy is implemented must be considered
Strategy Evaluation
• Strategy evaluation involves evaluating both the outcomes of the strategies and how they have
been implemented
– Determine if they produced the expected strategic goals
– Helps with the evaluation of results and, if necessary, any modification of strategies
Strategic Management Process in Action
• The Strategic Management Process is a continual cycle
– It is not a sequential process
– It allows for analysis of the current situation
– Enables adjustments to current strategies as necessary, to pursue and achieve goals
Looking at Strategic Management’s Past
• Strategy’s military roots
– Origin of the word is Greek referring to military commander Strategos
– Historical references to the design of plans and actions to gain an edge on the enemy
– The concept involves analyzing the situation and effecting an appropriate response
Academic Origins of Strategic Management
• Strategic management is a relatively young field. The theoretical foundation is from economics
and organization studies; with emphasis on
– Rationality: that when you make a choice, you will choose the thing you like best
– Predictability: describes the likelihood at which an event is going to occur
– Similarity: a similar features or aspects
Strategic Planning and Strategic Management Emerge
• During the 1960s, organization theorists searched for explanations of organizational differences
in functioning and performance
– Attempts made to determine if there was one best way to manage in all situations
– Contingency approaches emerged when it was determined that each organization was different
and the best way to manage depended on the situation
Explain Who’s Involved with Strategic
• Management
– The Board of Directors
– The Role of Top Management
– Other Managers and Organizational Employees
Strategic management is more than the responsibility of an organization’s top managers
• People at all levels of the organization play a role in strategy
– Developing it
– Implementing it
– Changing it
The Board of Directors
• Usually an elected group that represents a company’s shareholders
– They have a legal obligation to represent and protect the interests of shareholders through
corporate governance
– In the past, board participation was viewed as approving strategies designed by management
– With increasing shareholder activism, boards are more involved in the strategic process
Typical Board Responsibilities
• Review and approve strategic goals and plans
• Review and approve organization’s financial standards and policies
• Ensure the integrity of organization’s financial controls and reporting system
• Approve an organizational philosophy
• Monitor organizational performance and regularly review performance results
Select, and compensate top level managers
• Develop management succession plans
• Review and approve capital allocations and expenditures
• Monitor relations with shareholders and other key stakeholders
The Role of Top Management
• Responsible for every decision and outcome, top management plays a most significant role in
strategic management process
• Top management includes C-Suite level officers, including
– CEO, Chief Executive Officer
– COO, Chief Operating Officer
– CFO, Chief Finance Officer
– CIO, Chief Information Officer
Other Managers and Organizational Employees

• Managers and employees at all levels have strategic responsibilities that include:
– Strategy implementation, putting strategies into action
– Strategy evaluation, determining if the strategies are working
– Adjust the strategies to achieve desired ends
The two important factors impacting
• Strategic management today
– The Global Economy and Globalization
– Corporate Governance
The Global Economy and Globalization
• In past twenty-five years, globalization has become a leading focus of company strategies
• Increasing number of companies have revenues coming from outside their country of origin
• Global recession creates strategic challenges – Reduced consumer demand
– Restricted access to capital – Pressures to reduce costs
Global Economy: Key Mechanisms
• World Trade Organization (WTO)
– Helps 153 member countries conduct business • World Bank Group
– Cooperative of 185 member countries that provides financial and technical assistance, to
promote economic development and poverty reduction
• International Monetary Fund (IMF)
– Loans and assistance to establish financial stability
Corporate Governance
• Greater awareness of the governance driven by the past decade value of corporate
financial scandals of
– Destroyed billions of dollars in shareholder value
– Directors of boards failed to find or address organizational problems
What is corporate governance?
– The way the a corporation is governed
– The way the board uses organizational resources
– The manner in which conflicts are resolved among multiple participants in the organization
– The sum of how a corporation uses its resources to protect the interests of shareholders
The Role of Boards of Directors
• The original role of the board of directors was to ensure a group, independent from
management to look out for investors who
• In practice, the boards developed a “cozy” relationship with the CEO and management
– It resulted in reciprocal “care taking”
Guiding Principles of Corporate Governance
1. The primary duty of the board is to select a CEO and oversee the CEO and senior
management in an effort to achieve a competent and ethical operation of the business
2. It is the responsibility of management to operate in an effective and ethical manner to
produce shareholder value
3. It is the responsibility of management to produce in a timely manner financial statements
that fairly represent the financial condition and results of corporate operations
4. It is the responsibility of the board to engage an independent accounting firm to audit the
financial statements, issue an opinion that those statements are in accordance with
Generally Accepted Accounting Principles, and oversee the corporation’s relationship
with the outside auditor
5. It is the responsibility of the board to play a leadership role in shaping corporate
governance
6. It is the responsibility of the board to adopt and oversee implementation of compensation
policies for management and CEO performance
7. It is the responsibility of the board to respond appropriately to shareholder concerns
8. It is the responsibility of the corporation to deal with its employees, customers, suppliers,
and other constituencies in a fair and equitable manner
Financial Reporting
– Certification of the accuracy of financial statements by requiring senior managers to sign off
on them
– Mandated publicly traded firms establish an auditing of internal financial controls through
independent auditors
– These mandates have created compliance costs
Concluding Thought
• Strategic management is a business reality
– No matter where in an organization a person works or what their particular job may be, they
will be involved with and affected in some way by strategic management
The Context of Managing Strategically Chapter 02
Chapter Two Learning Objectives
 Describe the different perspectives on competitive advantage.
 Explain the driving forces, implications, and critical success factors of the business
environment.
 Discuss two organizational elements that guide strategic decision makers in managing
strategically in today’s context.
Describe the Different Perspectives on Competitive
Advantage
• Managing strategically
– Formulating and implementing strategies that allow and organization to develop
and maintain competitive advantage
• Competitive advantage
– Sets a company apart from others in the industry
– Refers to what a company has or can do that others do not or can not
– To possess it can mean survival and long term success
– It is the purpose of strategic management
– Requires understanding and capitalizing on the environment
The I/O View
• Proposes analyzing the external environment
– Developed by Michael Porter
– Focuses on the structural forces within an industry, as a means to determine in
which industry to compete
– Includes the competitive environment of firms and how they influence
competitive advantage
– Weakness is that the view ignores the characteristics of individual companies
Resource Based View (RBV)
• Views firm resources as essential to competitiveness
– Organizations are a collection of assets and capabilities
– Uniqueness is the basis for competitive advantage
– Need to have a match between resources and opportunities offered by the industry
RBV: Organizational Resources
• Financial
– Cash, reserves, debt, equity, earnings
• Physical
– Equipment, buildings, facilities, raw materials
• Human
– Knowledge, skills, experience, competencies
• Intangible
– Brand names, reputation, trademarks, patents
• Structural/cultural
– Organizational history, culture, work systems, policies, trust, relationships, formal
organizational structure
• All organizations have resources
– How they match to the environment and whether they are unique will determine
their effectiveness and whether they can contribute to competitive advantage
What Makes Resources Important?

Value
• Resources are not valuable by themselves, but within the context of the external
environment
– Can they exploit external circumstances to generate revenues?
– Can they neutralize negative external situations to keep revenue flow?
Rare
Mr. Abdirahman M. Salah. MBA, BBA, LLB Red Sea University Lecture Notes © 2021 10 Of
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• Valuable, but uncommon resources
• Not generally possessed by competitors
Hard to Imitate/Substitute
• Resources that do not have easy alternatives
• Examples: culture, trust, reputation
Ability to exploit
• More than mere possession of resources
• Requires opportunity, capabilities
Resources are not static
• RBV focuses on continually building and maintaining resources
Guerrilla View
• Competitive advantage is temporary
– Environment changes continually
– Unpredictable events challenge managers
• Some changes are revolutionary
– Disruptions in technology
– Market instabilities
• Guerrilla view argues success depends on adapting and responding to competition
Which View is best?
• Competitive advantage is important to how a company performs and each view offers a
unique perspective
– I/O looks at the external environment, particularly the industry and competitors
– RBV looks inside the organization for unique resources and capabilities to be
exploited
– Guerrilla View recognizes the dynamic environment makes competitive
advantage temporary
Comparing the I/O, Resource-Based, and Guerrilla Views of Competitive Advantage

I/O RBV Guerrilla View
Competitive Positioning industry Possessing Unique Temporary
advantage organizational assets or
capabilities
Determinant of Characteristics of industry, firm’s Type, Amount and Nature of Ability to change and radically surprise
Profitability position within industry firm’s resource competitors with strategic actions
Focus of Analysis External Internal External and Internal
Major Concerns Competition Resources - Capabilities Continual, Radical, and Chaotic
conditions
Strategic Choices Choosing attractive industry; Developing unique resources Rapidly and repeatedly disrupting
appropriate position and distinctive capabilities current situation and surprising
competitors
Explain the Driving Forces, Implications, and Critical

Success Factors of the Business Environment
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• The business context is different today
– Dynamic, ever-changing environment has altered the way organizations operate
– Even not-for-profit organizations feel impact
– Challenge is to gain access to resources: labor, technology, funding
Drivers of the New Business Environment

• The three critical driving forces in the new business environment are
– The information revolution
– Technology
– Globalization
• These raise questions about what it takes to be successful and the implications for
organizations
The Information Revolution
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• This driver is the most influential and it is accelerating
– All the information being saved in the past year would equal 500,000 libraries the
size of the Library of Congress
– The amount of digital information available is 3 million times are the books ever
written
– The growth rate of digital information is 57 percent a year
• The instant availability of information has radically changed the nature of the business
environment and the context of strategic management
– Information is no longer simply part of the process used to develop goods and
services
– Information is the resource of production
– No longer a way to efficiently use resources, it must be exploited
Technology
• All organizations use some form of technology to do their work
• Technology includes:
– Equipment
– Materials
– Knowledge
– Experience
Globalization
• It has long been recognized that globalization and the global economy impact strategic
management
– Yet, globalization continues to transform the business environment
– Seeking to improve, companies must continue to strategically manage global
issues
Implications of the Three Driving Forces
• There are four major implications of these driving forces
– Continual change
– Reduced need for physical assets
– Vanishing distance and compressed time
– Increased vulnerability
Continual Change
• Change has become the natural order of business
• Environmental change is occurring, both external and internal
• The result is organizational change
– A structured transition in what an organization does and how it does it
Reduced Need for Physical Assets
• The old business environment valued physical assets, such as:
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– Manufacturing facilities
– Office buildings
– Equipment
– inventory
• New measure of value in today’s companies is intangible assets
– Information
– People
– Ideas
– Knowledge
Vanishing Distance and Compressed Time
• Geography no longer limits businesses as it once did
• The result is that new markets and customers can be found anywhere
• Technology has improved the ability to interact and react
• This also means advantages are temporary
Vulnerability
• With technological improvements come vulnerabilities
– Computer viruses
– Terrorist attacks
– Biological attacks
• Strategic managers must protect all forms of assets
– Information, facilities, and people
Critical Success Factors
• Three critical success factors in today’s new business environment
– Ability to embrace change
– Creativity and innovation capabilities
– Being a world-class organization
Ability to Embrace Change
• Change is the essence of today’s business environment and is necessary because of:
– Technological advances
– Resource vulnerability
– Information availability
• To be successful in today’s environment, businesses must:
– Be tolerant of change
– Seek out change
– Be able to exploit the opportunities
Creativity and Innovation Capabilities
• The most critical of factors, it is believe that organizations must “create and innovate or
fail”
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• To complete successfully, companies must
– Create new products and services
– Adopt state-of-art technology
Being a World-Class Organization
• Creating competitive advantage in today’s environment is important
– Ensures success and survival
– A world-class organization is one in which strategic decision makers take actions
designed to make their organization the best in the world at what it does
Organizational Vision and Mission

• Organizations need both a vision and mission
– Viewed as the same, they are very different
Vision
• A broad, comprehensive picture of what a leader wants the organization to become
– It is a single statement of what it stands for, believes in and why it exists
– It contributes to increased levels of effort
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Four Components of an Effective Vision
• Vision is built on the foundation of the organization’s values and beliefs
– Those things that are fundamentally important
– Examples: customer service, emphasis on quality, focus on integrity and ethics
• Vision elaborates a purpose
• Vision explains what the organization does
• Vision specifies goals and guides actions
Organizational Mission
Mission
• A statement of what the organizational units actually do and what they hope to
accomplish
– Each unit within the larger organization can have a mission statement
– Through stated purpose and goals, it provides focus for employees to make and
implement strategic decisions
– Must be aligned with vision statement
CSR and Ethics

CSR is corporate social responsibility
• Is the obligation of organizational decision makers to make decisions and act in ways that
recognize the interrelatedness of business and society
• CSR recognizes the organizations various stakeholders and how they are dealt with
• Traditional view held that corporations existed solely to serve the interests of
shareholders
• It was largely an economic view, with costs and profitability as the key focus
• Most notable proponent, Milton Friedman, argued that the extent of CSR was to
maximize shareholder returns
• The current view of CSR recognizes are larger societal role and broader constituency
• More than just stockholders, understanding and balancing stakeholders has
become the focus
• Demands an understanding of a wider range of needs and conflicting expectations
Stakeholders
• These are individuals or groups that have a stake in or are influenced by the
organization’s decisions and actions
• They can, in turn, influence the organization
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Ethics
• Involves the principles that define right and wrong decisions and behavior
– Refers to both organizations and individuals
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Assessing Opportunities and Threats: Doing an
External Analysis Chapter 03
Chapter Three Learning Objectives
 Describe an external analysis
 Explain how to do an external analysis of an organization’s specific and general
environments
 Discuss the benefits and challenges of doing an external analysis
Describe What an External Analysis
• External analysis is the process of scanning and evaluating an organization’s external
environment
– It is how strategic managers evaluate the threats and opportunities facing their
organization
External Analysis
• Opportunities
– Positive external trends or changes that may help an organization improve
performance
• Threats
– Are negative external trends or changes that may hinder an organization’s
performance
• Understanding the external environment is essential to creating adaptive strategies
Organizations as Open Systems
• Organizations are open systems
– They interact and respond to their environment
– They are interrelated and interdependent, but function as a whole
– Change in one part creates change in another
– Take inputs and process them creating outputs
– Outputs are distributed into the environment
• Organizational interaction with their environment can be summarized from two different
perspectives
– The environment as a source of information
– The environment as a source of resources
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Environment as Information Perspective
• The environment provides organizations with a source of decision making
• Environmental uncertainty is a key element
– This is the amount of change and complexity in an organization’s environment
– The amount of change can be dynamic or stable
– Dynamic environment is changing rapidly
– A stable environment is one that change is slow or minimal
• Example of dynamic changing organizational environment
– Cell phone industry would be considered more dynamic
• Example of slow changing organizational environments
– Oil industry are not as rapid and considered more stable
• Environments can also be simple or complex
• If the number of components in the environment are few, it is simple
• If the number of components are many, it is complex
– The more complex and dynamic the environment, the more uncertain it is;
requiring more information for strategic decision making
– This necessitates greater external analysis
Environment as Source of Resources Perspective
• The environment is viewed as a source of scarce and necessary resources
– The more hostile the environment the scare the resources and the greater the
uncertainty
– Managers are challenged to acquire and control critical resources
– It demands monitoring the environment and making adaptive decisions
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• Managers need to do both an external analysis and identify the opportunities and threats
facing the organization. Based on their analysis of customer and competitor trends,
strategic decision makers have chosen at strategies they hope will exploit the
opportunities and neutralize or avoid the threats in their environment
External Environment Sectors

• The external environmental sectors comprises the specific environment and the general
environment
– The specific environment includes customers, competitors, suppliers, other
industry competitive variables
– The general environment includes economic, demographic, socio-cultural,
political-legal, and technological sectors
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Specific Environment
• Analyzing the specific environment involves looking at industry and competitive
variables
– Requires looking at the industry and competitors
• Industry
– Group or groups of organizations producing similar of identical products
– Competition for customers to purchase their products
– Competition to secure necessary resources
 To assess an organization’s specific environment, we’ll base our approach on Michael
Porter’s model and look at five competitive forces.
Current Rivalry among Existing Firms

The existing competitors in your industry are your organization’s current competitors that
produce and market products similar to yours. What affects the level of rivalry? Porter listed
eight conditions that contribute to intense rivalry among existing competitors.
1. Numerous or balanced competitors
– With many firms, someone will always be taking action, placing the industry in
constant competitive turmoil
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– If competitors are balanced in size or resources, they will be jockeying for
position
2. Slow industry growth
– When consumer demand has leveled off, for a company to grow they will need to
steal market share from others
– This creates intense competition, as firms seek new strategies to achieve growth
3. High fixed costs
– When costs are fixed, firms seek to operate at capacity, spreading out those costs
over a larger volume
– Intense rivalry is created when firms cut price
– If products are difficult to or costly to store, companies seek to sell their products
more quickly; again, this leads to price cuts
– In both cases, price competition keeps profits low
4. Lack of differentiation or switching costs
– If an industry/s product is or is perceived to be a commodity (not unique), then
customers make purchase decisions largely on price and service
– The restaurant industry is an example of how a company will seek differentiation
through themes or atmosphere, while customers might make purchase decisions
based on price
5. Addition of capacity in large increments
– With increased capacity, in order to remain competitive, firms will cuts prices
– Overcapacity will increase competition and the need to effect price cuts
– The cruise line industry is an example of the intense pressure to keep their boats
filled
6. Diverse competitors
– When competitors differ in their strategic approaches, circumstances, or
philosophy, it is difficult to judge how they will act or react to compete
– This diversity increases the level of rivalry
7. High strategic stakes
– Because rivalry will be high, firms may take actions like sacrificing profit in the
short term
8. High exit barriers
– Exit barriers are economic, strategic, and emotional factors that keep companies
competing in businesses even though they may earn low or negative returns on
investment
– Examples of exit barriers include highly specialized assets that cannot be used in
other ways; or, have low liquidation value
– With high exit barriers, firms may be stuck in the industry and use extreme tactics
to compete
Strategic groups
– This is more than a group of firms competing in a similar industry; it is firms that
have similar strategies, resources, and customers
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– Firms within the same group compete more directly because they have the most
potential to affect the profitability of others
Potential Entrants
The threat of possible competitors depends on the barriers to entry and the reaction by existing
competitors to these entrants. Barriers to entry are obstacles to entering an industry.
When barriers are high or existing competitors can be expected to take significant actions to keep
newcomers out, then the threat of entry is low. A low threat of potential entrants is positive for
an industry because profitability won’t be divided up among more competitors. Porter described
seven major entry barriers.
Barriers to Entry
1. Economies of scale – are cost savings realized from producing more volume, as fixed
costs drive the cost per unit down
2. Cost disadvantages from other than scale – established firms enjoy cost advantages
that cannot be duplicated by new entrants
3. Product differentiation – current competitors have worked hard and spent money to
establish unique product identification
4. Capital requirements – investments to satisfy customer demands may be difficult for
new entrants to make in order to compete
5. Switching costs – one-time costs associated with switching from one product to another;
the costs may be financial or not
6. Access to distribution channels – an established outlet to sell or distribute the product
7. Government policy – laws and regulations (such as licensing, pollution standards,
product safety, product testing, controlling access to raw materials) create barriers that
may require additional resources or expertise that have high costs and create a barrier for
new entrants to overcome
Bargaining Power of Buyers
• Buyers affect profitability if they can force prices down, bargain for higher quality or
more services, or are able to play competitors against one another
• What makes for a powerful buyer?
• Factors that can make a buyer powerful:
– The buyer purchases large volumes of the seller’s goods
– Products purchased represent a significant portion of their costs or purchases
– Products purchased are undifferentiated
– Products require little switching costs
– If the product does not add to the quality of the buyers products or services
– It the product offers low profits
– The buyer has the ability and resources to access the products, they are buying
from other industry sources
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– If they have full information about consumer demand, market prices, and supplier
costs
Bargaining Power of Suppliers
• When industry suppliers have bargaining power, they can raise prices, reduce the number
of services provided or the quality of products offered for purchase
• Suppliers can include any providers of raw materials, equipment, labor or financial
resources
• Suppliers are powerful when:
– Domination by few companies in fragmented industry
– There are few or no substitute products
– The industry is not an important customer
– The product is important to the buyer
– The supplier’s product is differentiated
– The supplier has ability to provide products that your industry provides (expand
into the industry)
Substitute Products
• The last industry force to consider is whether products can be provided by other
industries to satisfy the consumer
– Soft drink substitutes can be provided by fruit and energy drinks, milk or milk
products, bottled water.
General Environment
• The general environment can have a positive (opportunity) or negative (threat) impact on
the industry. It includes the following sectors:
– Economic
– Demographic
– Socio-cultural
– Political-legal
– Technological
Economic
• The economic sector includes macro-economic data that reflect what is happening with
the overall economy
– Current statistics and forecasted trends and changes—that reflect what’s
happening with the overall economy.
– The major economic data that might be important to scan and evaluate include
interest rates; exchange rates and the value of the dollar; budget deficit or surplus;
trade deficit or surplus; inflation rates; gross national product (GNP) or gross
domestic product (GDP) levels and the resulting stage of the economic cycle;
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consumer income, spending, and debt levels; employment-unemployment levels;
consumer confidence levels; and workforce productivity rates
– It provides information of both opportunities and threats
Demographics
• Understanding the trends that affect demographics is essential to benefiting or suffering
from the outcome of the trends
• Included in the demographic sector are current statistical data and trends in population
characteristics
– Gender, age, income levels, ethnic makeup, education, family composition,
geographic location, birth rates, employment status
• Population statistics require interpretive analysis to enable understanding of what trends
might mean for the business:
– Population is increasing
– It is aging, there are more people under 30 than over
– It is becoming more educated
– It is becoming more disabled
– The largest minority is group is Hispanics
Sociocultural
• Refers to a country’s culture and includes:
– Traditions
– Lifestyles
– Values
– Attitudes
– Beliefs
– Tastes
– Patterns of behavior
Political-Legal
• In this sector, various laws, regulations, judicial decisions, and political forces at the
federal, state, and local levels of government are analyzed
• Examples of this sector include:
– Changes in bankruptcy laws that made it tougher for individuals to wipe out debt;
– New Taxation introduced by the government
– Trade agreements between countries
Technological
• The tech sector looks for scientific or technological innovations that create opportunities
and threats
• Two areas most affected by technology are
– Product research
– Development and organizational processes
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Finding Information on the External Environment and evaluating it
• External information can be found using informal and unscientific observations or by
using a more formal, systematic search. A thorough and comprehensive external analysis
requires more of a systematic, deliberate search.
• Finding valuable information and interpreting it is essential to organizational success.
Examples include:
– Data specific to the context
– Statistics
– Analyses
– Trends
– Predictions and forecasts
– Inferences or statements by experts
• In fact, having some type of formal approach is the key to identifying specific
opportunities and threats. An external information system is an information system that
provides managers with needed external information on a regular basis.
Responsibilities for External Analysis at Different Managerial Levels
• In smaller and medium sized companies, all employees should monitor changes in the
specific industry and competitive environment
– In small companies, front line employees have the greatest interaction with
customers and suppliers
– Such interactions provide valuable information for strategic decision makers
• In large organizations, doing a single analysis for the entire organization can be
insufficient
– The large structure, with its many units and functions, creates varying needs for
information
– The value of the information will depend on the organizational level and function
– The role of different level managers will vary based on whether their role is to
gather, disseminate, or utilize the information gathered
Benefits of Doing an External Analysis
• Enables managers to be proactive, not reactive
– Anticipate change
– Create plans for those changes
– Influence the organizational performance
• External analysis is key
– To providing information to use in planning, decision making, and strategy
formulation
• External analysis enables strategies to
– Adapt to opportunities and threats
– Neutralize competitor moves
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– Improve organizational opportunities
• Altering strategies should align the organization based on information about:
– Markets
– Customers
– Technology
• Environment is a source of resource
– The ability to acquire and control needed resources depends on understanding the
environment and taking advantage of the resources available
• Dynamic environment requires awareness of
– Turbulent and fragmented markets
– Changing customer tastes
– Innovative technologies
• Intense global competition makes it imperative to complete an external analysis
• Research shows that firms doing an external analysis have higher performance
– Performance evaluated on financial measures like return on assets or increased
profit
Challenges of Doing an External Analysis
• Rapidly changing environment
– Keeping track of current situation and changing trends can be a challenge
– New technology
– New competitors
– New laws
– New customers
• Doing an external analysis is time consuming
– Key is making the process efficient and effective
– Requires making value judgments about what to monitor and evaluate
• No process of analysis provides perfect information
– Forecasts are not fact
– Analysis that is flexible and open is more likely to be able to create adaptive
strategies
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Assessing Strengths and Weaknesses:
Doing an Internal Analysis Chapter 04
Chapter Four Learning Objectives
 Describe an internal analysis.
 Explain how to do an internal analysis.
 Discuss why an internal analysis is important.
Describe What an Internal Analysis Is

• To formulate appropriate and effective strategies, it is important to know what an
organization can and cannot do particularly well and what assets it does or does not have
– As part of managing strategically, an internal analysis is the process of
evaluating an organization’s resources and capabilities. It provides important
information about an organization’s assets, skills, and work activities—what’s
good and what’s lacking or deficient? The most important part of this analysis
involves evaluating the organization’s resources, capabilities, and core
competencies, all of which we’re going to look at next.
A Quick Review of Organizational Resources

 Resources are the assets an organization has for doing whatever it is in business to
 Resources can be financial, physical, human, tangible, intangible, structural-cultural
– Among the financial resources are debt capacity, credit lines, available equity,
cash reserves
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 Other examples of Resources
– Human resources, which include experiences, knowledge, judgment, skills,
accumulated wisdom, competencies of employees
 The value of resources is context dependent; based on it seeks to do to make money
– Resources can be a source of competitive advantage for a company
The strategic role of organizational resource and organizational

capabilities
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From Resources to Organizational Capabilities
 An organization’s resources are the inputs needed to perform its work. For example: A
top chef needs pots, pans, utensils, spices, raw food materials to do their job.
 To reach its goals an organization must generate value from its resources and does so
through capabilities using the same example: A chef needs skills to combine ingredients
to create a quality meal
 Organizational capabilities
– Which are the various routines and processes that transform resources (inputs)
into products/services (outputs)
 Organizational routines and processes
– Are regular, predictable, sequential work activities done by organizational
members
– Complex network of these routines and processes encompass all work activities
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 Employees learn how to best use organizational resources and processes. And do their
work using organizational resources and routines and processes, they learn how best to
capture the value of these resources and turn them into possible core competencies or
distinctive organizational capabilities.
– Capabilities result from learning and are more than the mere possession of
resources
– Some organizations do it better than others; they are unable to develop
capabilities to survive in an increasingly dynamic and competitive marketplace
 The Airlines is an example of a firm that has developed valuable capabilities and
competitive advantages
– Both have organizational resources (planes, logos, employees, customer
information databases, etc.) and
– Organizational routines and processes (loading and unloading planes, making
reservations, doing safety inspections, customer service, etc.), yet Most of the
Airlines has developed valuable capabilities and competitive advantages while
others are struggling.
 Organizational capabilities can change. Just because they were once the source of
competitive advantage doesn’t mean they will continue to be a source of competitive
advantage—that is, they don’t always lead to a sustainable competitive advantage
o Future conditions and competitors change
 Today’s environment demands dynamic capabilities
o The ability to build, integrate, and reconfigure capabilities to address the
rapidly changing environment
From Capabilities to Core Competencies and Distinctive Capabilities
 Core competencies
– Every organization has capabilities that enable it to do what it’s in business to do.
Any major value-creating capabilities organizations have that are essential to their
business are known as core competencies.
– Organizational capabilities are the fundamental building blocks for developing
core competencies. If core competencies are established they can, in turn improve
and enhance other organizational capabilities and contribute to developing
distinctive capabilities is what leads to a competitive advantage.
– Value creating capabilities that an organization possesses that are essential to their
business
– Contribute to improving and enhancing other organizational capabilities
– They are the result of accumulated knowledge and actual work activities
 Distinctive organizational capabilities
– These are special and unique organizational capabilities that distinguish an
organization from its competitors
 Example of distinctive capabilities the Airlines:
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– Has developed distinctive organizational capabilities in organizational processes
and routines such as gate turnaround, ticketing, and employee–customer
interactions.
– Although every airline has these same organizational processes and routines, has
developed them into distinctive capabilities, leading to a sustainable competitive
advantage that has resulted in above-average performance.
– gate turnaround, ticketing, and employee-customer interaction
Characteristics of Distinctive Capabilities
1. Must contribute to superior customer value and offer real benefits to customers
– Being good at what customers value
– Requires adaptiveness
2. Must be difficult for competitors to imitate
– Requires balancing a complex array of employee skills and knowledge
– Harnessing learning in the organization
– Utilizing cross-functional interaction
3. . A distinctive capability should be used in a variety of ways
– Organizational routines and processes developed in one area should be
transferable to other areas
 Example of transferred capabilities Honda:
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– Developed reliable fuel-efficient, reliable, and responsive engines and drive trains
has provided it with access to different markets including automobiles,
motorcycles, lawn mowers, snow blowers, tillers, all-terrain vehicles, power
generators, marine outboard engines, and now small passenger jets.
Competitive Advantage and Performance Results

 Competitive advantage
– AS we know, is what sets an organization apart—its competitive edge. Having a
competitive advantage will affect an organization’s performance results
positively. Although it’s possible for an organization to enjoy strong performance
results in the short run without a significant competitive advantage, there are
limits to how long such results can last. Therefore it’s important, that
organizational decision makers know where the organization’s strengths and
weaknesses are in terms of its resources, capabilities, and competencies.
– Sets the organization apart from competitors
– Must come from unique resources or distinctive capabilities
– Will positively affect performance results
– Benefits may be short or long term
– Demands that decision makers know the strengths and weaknesses of its
resources, capabilities, and competencies
The Role of Strengths and Weaknesses
 Strengths
– These are resources that the organization possesses and capabilities that is has
developed
– These can be exploited and developed into a sustainable competitive advantage
– Not all strengths will lead to competitive advantage, but they can be competitive
weapons if nurtured and reinforced
 Weaknesses
– Are resources and capabilities that are lacking or deficient and prevent the
organization from developing competitive advantage
– Organizational weaknesses must be corrected if they are in critical areas that
prevent the organization from competing effectively
– Organization with limited resources to correct the problem will simply seek to
minimize the impact
 The whole reason for doing an internal analysis is to assess what the organization has or
doesn’t have (resources) and what it can and can’t do (capabilities)—in other words, its
strengths and its weaknesses.
 Organizational members at all levels struggle with strategic questions:
– What strengths and weaknesses are in my area/s of responsibility? (This implies
the need for effective internal analysis to be able to answer the next question)
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– How can I manage these areas strategically to achieve high levels of
performance?
Explain How to Do an Internal Analysis
 This section looks at three different approaches for doing internal analysis
– An effort to understand the work of the business and look at its value creating
activities
– An examination and assessment of all internal areas that goes beyond financial
information
– A focus on developing a profile of the organization’s capabilities
Value Chain Analysis
 Every organization (for profit or not-for-profit) needs “customers” to survive
– The premise is that there is a demand for some type of value in the goods/services
they purchase or obtain
 To assess the ability to provide value it is important that strategic decision makers use a
systematic process to examine organizational activities and how they produce value
 In using the value chain, we’re assessing the organization’s ability to create customer
value through its work activities. In other words, what are the organization’s strengths
and weaknesses in these areas?
 Value chain activities are specific organizational routines and processes that create
varying levels of customer value and organizational costs
o The concern for organizations is that the value created outweighs the cost of
creating that value (often referred to as the margin)
o The effort is to assess the organization’s ability to create value through its work
activities
 In order to assess an organization’s ability to provide value, strategic decision makers can
use an approach developed by Mike Porter called value chain analysis, a systematic way
of examining all the organization’s functional activities and how well they create
customer value.
 Value chain analysis evaluates the internal environment, the organization’s strengths and
weaknesses
 Value chain analysis assesses nine activities —that were important to assess
o Five primary
o Four support
Primary activities – are those activities that create customer value
– Inbound logistics – routines and processes that bring resources into the
organization
– Operations – processing the resources into goods and services
– Outbound logistics – physically distributing these to customers
– Marketing/Sales – appealing to customers
– Customer service – serving customer needs
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Support activities – are those activities that support primary activities and each other
– Procurement – gathering resources
– Technology – provide efficiencies and improve operational efforts
– Human Resources – recruit, select, train, retain employees
– Infrastructure – capabilities to identify external opportunities and threats
 Assessment of both primary and support activities is essential
– The effective or efficient performance of these activities helps create
potential competitive advantage
– This analysis is not easily done because organizational activities do not
always fit nicely and neatly into the analytical framework
Using the Internal Audit
 The internal audit approach starts with the premise that every organization has certain
functions it must perform. In pursuing a sustainable competitive advantage, these
functions may be performed well or performed poorly. An internal audit is a thorough
assessment of an organization’s internal areas. It’s similar to a financial audit although it
obviously focuses on much more than just the financial aspects.
– How well the basic organizational functions are performed determines the
identification of organizational strengths and weaknesses
– A financial audit is simply an examination of an organization’s financial records
and procedures
– An internal audit is a thorough assessment of an organization’s internal functions
 Internal audit
• Strategic decision makers use the internal audit to assess the organization’s
resources and capabilities from the perspective of its different functions and
organizational elements. Are the necessary resources available so that people can
perform their assigned work activities and how well do they perform these work
activities (i.e., what are their capabilities)?
– Focuses on more than the financial aspects
– Used by strategic decision makers to assess the organization’s resources and
capabilities
– Focuses on different functions and organizational elements
– Seeks to determine if the necessary resources are available so people can
perform their work
– Assesses how well work is being performed
 Internal audit looks at six organizational-functional areas
o Production/operations
o Marketing
o Research and development
o Financial/accounting
o Management (includes all general management)
o Information systems
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– This assessment concentrates on the availability or lack of critical resources and the level
of capabilities (i.e., how efficiently and effectively work is being done) in each functional
area.
– In addition to the six organizational-functional areas, internal audit looks at three other
important elements
o Strategic managers
o Organizational structure
o Organizational culture
Identifying Distinctive Organizational capabilities
Capabilities Assessment Profile

• This approach involves an in-depth evaluation of an organization’s capabilities
– The approach was developed because strategic decision makers had few
guidelines for identifying and evaluating their organization’s distinctive
capabilities
– Assessing capabilities can be complex since they arise from the ways resources
are combined within the basic work processes and routines. They’re not as easily
determined as organizational functions or even the primary and support activities.
• A capabilities assessment consists of two phases
– Identifying distinctive capabilities
– Developing and leveraging these capabilities
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• Remember what makes capabilities distinctive
– They contribute to superior customer value
– They are difficult for competitors to imitate
– They can be used in a variety of ways
Steps in Assessing Organizational Capabilities
1. Preparing a current product-market profile
– Emphasizes organization-customer interactions
– This requires identifying what we are selling, who we sell to, and whether we are
providing superior customer value and benefits
– The effort demands information on for each product-market segment
2. Identifying sources of competitive advantage and disadvantage in main product-market
segments
– We want to know why customers choose our products instead of those of
competitors
– The assessment involves identifying specific cost, product, and service attributes
– This helps identify those attributes customers value in the products
3. Describing organizational capabilities and competencies
– This requires the examination of resources, skills, and abilities of the various
functions within the organization
– This step allows for the uncovering of what resources and capabilities led to a
competitive advantage the firm enjoys
4. Sorting the core capabilities and competencies according to their strategic importance
– Which capabilities are most important for the organization’s future?
– Judging capabilities as most important for building the organization’s future is a
matter of evaluating each according to three specific criteria
5. Identify and agree on the key competencies and capabilities
– Based on rankings of importance, decision makers identify key competencies and
capabilities
– Achieving agreement is essential as it will determine future resource allocation
and support for various departments, units, or divisions
– Without agreement, managing strategically to achieve competitive advantage is
difficult
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Criteria to Judge Organizational Strengths and Weaknesses
Determining Strengths and Weaknesses

 Each internal analysis can be used to identify an organization’s resources and capabilities
– It can be from the perspective of analyzing customer value created by primary and
support activities
– It can be from the perspective of auditing various functional areas
– It can be from the perspective of identifying distinctive capabilities
 Past performance is one way to determine strengths and weaknesses
– This would include such performance measures as financial ratios, operational
efficiency statistics, employee productivity statistics, quality control data, or any
measurable aspects of the operation
– While performance trends show important information, they do not provide
comparative measures to determine if trends are good or not
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 Organizational goals are a second was to determine strengths and weaknesses and they
provide means to measure performance against a desired end
– Every organization needs goals in all functional areas that state what and how
organizational resources and capabilities are used in carrying out the
organizational vision and mission
– This is used to compare against competitors
 By comparing resources and capabilities against competitors, an organization can see
how it stacks up against how competitors are performing
 The effort to obtain information that enables for comparisons with competitors can raise
legal and ethical questions
– There are no easy answers to the ethical dilemmas of competitive intelligence
gathering
 Personal and subjective opinions by strategic decision makers or consultants is the last
criterion for helping judge organizational strengths and weaknesses
– Quantitative measures do not always capture an understanding of what is really
going on in an functional area
– The perspective of those in a functional area can be useful as they see what is
working or not
The Grey Zone
 A key consideration for gathering this information is whether competitive-intelligence
methods are legal and ethical. These difficult decisions about competitive intelligence
arise because often there’s a fine line between what’s considered legal and ethical and
what’s considered legal but unethical.
 Some techniques for gathering competitor information include:
o Pretend to be a journalist writing a story and call competitors and pretend to
interview them
o Dig through competitors trash
o Sit outside the business and count customers
o Get copies of in-house newsletters read them
o Check with the Better Business Bureau for customer complaints
 Do these methods seem ethical or unethical?
 Which ones?
 Why?
 What ethical guidelines might you propose for strategic decision makers when seeking
competitor intelligence?
Discuss Why an Internal Analysis is Important

 Doing an internal analysis is important for two reasons:
– It is the only way to identify an organization’s strengths and weaknesses
– It is needed for making good strategic decisions
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 An internal analysis is a process for identifying and evaluating an organization’s
strengths and weaknesses
 The outcome provides information about resources, skills, work routines and processes
 It answers the critical questions
– What strengths come from the firm’s resources and capabilities?
– What weaknesses do we have?
 With information from the internal analysis, decision makers can make good judgments
– What competitive advantages is might possess
– What might be developed into competitive advantages
– What might be preventing the development of competitive advantages
– Combined with external analysis it is the basis for strategic action
Functional Competitive Strategies Chapter 05

Chapter One Learning Objectives
 Describe the functional strategies an organization needs and explain how those
strategies are implemented and evaluated.
 Explain competitive advantage and what it implies.
 Describe the different competitive strategies.
 Discuss how competitive strategies are implemented and evaluated.
Describe the functional strategies an organization
needs, and explain how those strategies are
Implemented and evaluated
The functional and competitive strategies help move the Organization in the desired
direction toward the established goals. These strategies are developed taking into account
the organization’s overall vision, mission(s), and corporate strategies.
What Happens after SWOT Analysis?
• After completing the SWOT analysis, decision makers have information about the
positive and negative aspects of both the external and internal environments.
– If the organization’s strengths in the various functional units can be
exploited as competitive advantages, particularly in light of any relevant
external opportunities, the organization may well be on its way to
achieving high levels of performance.
– If the SWOT analysis points to threats in any of the organization’s external
areas or weaknesses in the internal areas, changes in functional strategies
might be needed to counteract them.
– Even if corporate or competitive strategies need to be changed, strategists
base their decisions on resources, capabilities, and core competencies
found in functional areas
– The SWOT analysis points to strategic issues organizational decision
makers must address in their pursuit of sustainable competitive advantage
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and high levels of performance. Many strategic issues concern good or bad
performance in the various functional areas.
The Three Functional Concerns of Organizations
What Functional Strategies Does an Organization

Need?
• Functional Strategies: The Product
– Product design strategies typically involve an organizations R&D
functional area
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– Once products have been designed, they’re ready to be produced, which
involves an organization’s production-operations strategies. Some choices
include how products will be efficiently and effectively get those products
to the customers when, where, and how they want
– Them. In marketing, the main strategic choices are aimed at effectively
and efficiently managing the two “Cs”—customers and competitors.
Strategic choices involve decisions about target market, differentiation,
positioning, marketing mix (commonly known as the 4Ps: product,
pricing, promotion, and place), and gathering market insights.
• Functional Strategies: The People
– High-performance work practices are ones that lead to both high
individual and high organizational performance
– These types of HR practices can improve the knowledge, skills, and
abilities of an organization’s current and potential employees, increase
their motivation, reduce loafing on the job, and help retain quality
employees while encouraging nonperformers to leave the organization.
– Other strategies may address HR issues such as employee relations, job
design, diversity efforts, workplace safety and health, and workplace
misbehavior
– Other strategies may address HR issues such as employee relations, job
design, diversity efforts, workplace safety and health, and workplace
misbehavior
Example of high performance work practices
– Self-managed work teams
– Decentralization decision making
– Flexible Job assignments
– Open communication
– Performance based compensation
– Staffing based on person-job and person-organization fit
– Extensive employee involvement
– Giving employee more control over decision making
• Functional Strategies: The Support Process
– The organization has two main support processes—information systems
and financial/accounting systems. Just like the other functional areas,
these areas also involve certain strategies that help the organization
efficiently and effectively do its work and, it is hoped, contribute to
creating a sustainable competitive advantage.
– Information Systems - strategic decisions include the choice of system
technology and the choice of types of information systems needed.
– Financial Systems - provide strategic decision makers with information
about the organization’s financial transactions, accounts, and standing.
Explain What Competitive Advantage is and what it implies
• The key to strategic management, the challenge is getting and keeping
competitive advantage
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– It is about doing something others cannot or doing it better (distinctive
capability)
– Or, the organization has something others do not (unique resource)
Understanding the Competitive Environment
• What Is Competition? –
– It’s when organizations battle or vie for some desired object or outcome.
For business organizations, that’s typically customers, market share,
survey ranking, or needed resources. Although individuals and teams also
compete for desired objects or outcomes, our primary interest is
competition as it relates to organizations. What competition might an
organization face? We can answer this by looking at who competitors are.
Who Are Competitors?

Three Approaches to defining Competition
• There are three approaches to defining an organization’s competitors let’s look

at each
1. Industry perspective
– The industry perspective identifies competitors as organizations that are
making and selling the same or very similar goods or services. Examples
are the car rental industry, the supermarket industry, the automobile
industry, the credit card industry, or the spa industry
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– These industries can be described according to the number of sellers and
the degree of differentiation, both of which affect the intensity of
competition.
2. The market perspective
– The market perspective says competitors are organizations that satisfy
the same customer need. So, for example, if the customer need is Mobile
Money used, competitors might range from of the MM service
companies to App to usage ways to the local community to their variety
need and test to online app downloading
– The intensity of competition in the market perspective depends on how
well customer needs are understood or defined and how well different
organizations are able to meet those needs
3. The strategic groups concept
– Is based on the idea that there are groups of firms competing in an
industry with similar strategies, resources, and customers
– In a single industry there will be several strategic groups depending on
what is important to the customer
– The strategic factors used to group competitors are not price and quality,
but price and distribution strategy
– However, the dimensions used to group competitors can be different for
every industry and even for different industry segments and some
dimensions that might be used to distinguish strategic groups.
Possible dimensions for Identifying Strategic Groups
o Price o R&D expenditure
o Quality o Market share
o Level of vertical o Profits
integration o Product
o Geographic scope characteristics
o Product line breadth- o Any other relevant
depth strategic factor
The Role of Resources and Distinctive Capabilities
– Organizations develop strategies to exploit their current resources and
capabilities or to vie for needed resources and capabilities so they can get
desired outcomes (customers, market share, resources, etc.). Not every
organization effectively exploits those resources or capabilities or obtains
the resources or capabilities it needs but doesn’t have. Some organizations
are able to put it all together, some are not.
– And other organizations are doing exactly the same thing. Competitive
advantage, by its very nature, implies trying to gain the edge on others. As
organizations fight for competitive advantage, the stage for competition—
intense, moderate, or mild—is set.
From Competitive Advantage to Competitive Strategies
• Organizations attempt to create a sustainable competitive advantage, by using its
competitive strategy, which is based on the competitive advantage(s) that the
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organization has been able to develop. For example, Netflix’s competitive strategy was
based on what it saw as its competitive advantage—its unique DVD rental and
distribution service.
Describe the Different Competitive Strategies
• There may be numerous ways an organization competes
– However, the number of competitive strategies is actually few
– There are the traditional strategies and some contemporary perspectives
Traditional Approaches to Defining Competitive Strategy
 Miles and Snow’s Adaptive Strategies
– Is based on the strategies organizations use to adapt to their uncertain competitive
environments Identified four strategic postures
o Prospector
o Defender
o Analyzer
o Reactor
 Prospector strategy
– Is one in which the organization continually innovates by finding and exploiting
new product and market opportunities
– The competitive strength of this strategy is in the ability understand a wide range
of rapidly changing environmental conditions, trends, and situations and create
new products and services to fit this dynamic environment
– The effort is to continually innovate, develop, and test new products; as they look
for new directions
– This creates uncertainties for a prospector’s competitors, as they never know what
to expect from the prospector
– If the prospector can develop new products the market desires and is willing to
pay for, it will have competitive advantage
 Defender Strategy
– Is used by organizations to protect current market share by emphasizing existing
products and producing a limited product line
– These firms have a well-established business they seek to safeguard and
aggressively prevent competitors from taking market share from them
– A defender succeeds by maintaining a competitive product line and making it
hard for others to compete
 Analyzer Strategy
– This is a strategy of analysis and imitation
– Analyzers watch for and copy the successful ideas of prospectors, thoroughly
analyzing a business before jumping into it
– They will systemically assess and evaluate whether their move is appropriate for
them
 Reactor Strategy
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– Is characterized by the lack of a coherent strategic plan or apparent means of
competing
– Reactors simply react to environmental changes and make adjustments only when
forced to do so by environmental pressures
– Often, reactors are unable to respond quickly to perceived changes in the
environment because they lack or are unable to exploit the resources or
capabilities necessary
Porter’s Generic Competitive Strategies
– Porter suggests it is important for an organization to have an appropriate
competitive strategy. But, what is appropriate?
o Porter suggests it is based on an organization’s competitive advantage that
comes from one of two sources: having the lower costs in the industry or
possessing significant and desirable differences from competitors
– Another strategic factor is the scope of the product market in which the
organization wishes to compete. The mix of these factors provides the basis for
his generic competitive strategies
o Cost leadership
o Differentiation
o Focus (niche)
• Cost leadership strategy

– Is low cost strategy, it is when a company strives to have the lowest costs in the
industry and produces products for a broad customer base
– The main goal is to have the lowest costs, not necessarily the lowest prices; so the
effort is to have the lowest total unit costs in the industry
– With the lowest costs, the leader can charge the lowest prices and still earn
profits. If competition heats up and a price war breaks out, the cost leader is in a
better position to withstand the fight and still earn profits
– Because the cost leader seeks to keep costs low, efficiency in all areas is critical
and resources, distinctive capabilities, and functional strategies are directed at that
effort
• Drawbacks of cost leadership strategy
– Lowering costs too much and taking away its advantage
– Competitors are easily able to imitate what the cost leader is doing
– The focus on cost causes a failure to recognize changing customer tastes and
needs
– If what is done to reduce costs to produce or market a product fails to get
customers to buy it
• Differentiation Strategy
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– This is when a company competes by providing unique (different) products with
features the customers value as different and are willing to pay a premium price
for them
– The main goal of the differentiator is to compete by providing goods or services
that are truly unique and different in the eyes of the customers. If successful, the
firm can charge a premium price
– The premium price provides the profit incentive to compete on the basis of
differentiation
– To differentiate successfully, all capabilities, resources, and functional strategies
must be aimed at isolating and understanding market segments and developing
product features that are valued by customers in those segments
– The differentiator will have broad and wide product lines – many models,
features, price ranges – that enables the customer to perceive as unique and worth
the extra price
– This can be expensive and requires that costs are controlled to protect the price,
but not to the extent it loses its value; competition is on the basis of difference and
perceived value, not price
– This strategy seeks to differentiate in as many market segments as possible
– It also focuses on brand loyalty, which creates repeat purchases
– Marketing and R&D are essential to this strategy, requiring resources and
distinctive capabilities
• Drawbacks of differentiation strategy
– The need to remain unique to customers may be difficult if competitors are able to
imitate and copy the successful features that have served to differentiate the
product or services
– If customers become price sensitive; which makes being unique no longer as
valuable
• Focus Strategy
– Is when an organization pursues either a cost or differentiation advantage but within
a limited (narrow) customer group or segment
– A focuser concentrates on serving a specific market niche. There are three broad
ways to segment specialized market niches: (1) geographical, (2) type of customer,
or (3) product line segment
– Involves the application of a cost or differentiation strategy within a limited/narrow
group or segment
– A focuser concentrates on serving a specific market niche
– A Market niche can be segmented geographically, by type of customer, or product
line
– A geographic niche may be defined by region or locale and the focus is on
building a substantial and loyal customer base
– A customer niche focuses on a specific group of customers and providing them
with products tailored to their unique needs
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– A product line niche focuses on a specific and specialized product line
– A cost focuser competes on having lower costs than the overall industry cost
leader, but only in specific and narrow niches
– Cost focus can be successful if an organization can produce complex or custom
built products that do not lend themselves to easy imitation by the industry’s
overall cost leaders
– A differentiation focuser can use whatever forms of differentiation they wish –
product features, innovations, quality, customer responsiveness
– The differentiation focuser is specializing in one or few segments, rather than in
all market segments
– The advantages of a focus strategy include knowing the niche well, being able to
get close to the customers and respond to their needs, and develop brand loyalty
by providing something other competitors cannot or will not
– The drawbacks include operating on a small scale makes it difficult to lower costs
significantly, needs of niche customers might change quickly, success might
cause competitors to enter the market
• Stuck in the middle
– This happens when an organization has not developed the ability to provide a low
cost or differentiation advantage
– In this situation, costs are too high to compete with low cost provider or products
are not differentiated enough to compete with the differentiator
– Firms stuck in the middle are not in a good place
Contemporary Views on Competitive Strategy

– Instead of having to pursue either low cost or differentiation, is it possible that
organizations could pursue both strategies simultaneously and successfully?
Strategy research evidence has shown that organizations can successfully pursue
an integrated low cost–differentiation strategy, a strategy that involves
simultaneously achieving low costs and high levels of differentiation.
– This is not an easy strategy, as it requires being good at everything it does.
McDonald’s, Google, Toyota are examples of companies that have successfully
integrated low cost and differentiation
Mintzberg’s Generic Competitive Strategies
• Six possible strategies from which to choose
– Henry Mintzberg has developed an alternative typology of competitive strategies
he felt better reflected the increasing complexity of the competitive environment.
He proposed six possible competitive strategies
– Differentiation by price is a modification of Porter’s cost leadership strategy.
Mintzberg argued that having the lowest costs didn’t provide a competitive
advantage by itself, but that the advantage came because it allowed the
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organization to charge below-average market prices. Therefore, an organization
pursuing this strategy was instead differentiating on the basis of price
– Differentiation by marketing is an attempt to create a certain image in customers
minds and uses that image as a competitive weapon
– Differentiation by product design is an attempt to compete on the basis of
providing desirable product features and design configurations
– Differentiation by quality is an effort to deliver higher reliability and performance
at a comparable price
– Differentiation by product support emphasizes customer support services through
an all-encompassing bundle of services
– Undifferentiated strategy that sees a company follow a copycat approach
 Mintzberg’s approach has value
– It captures the essence of today’s complex and dynamic competitive climate
Mintzberg’s Generic Competitive Strategy
51
The Dual Role of Functional Strategies
– The challenge in implementing competitive strategy is to create and exploit a
sustainable competitive advantage.
– Competitive advantage comes from an organization’s ability to use its resources
to develop capabilities that, in turn, may become distinctive. All of this happens
through the functional strategies being used.
– An appropriate competitive strategy depends on the organizational resources and
capabilities currently available or being acquired and developed through the
functional strategies.
– Once the organization’s competitive strategy is determined, the resources,
capabilities, and competencies found in the various functional areas are how the
competitive strategy is implemented.
Competitive Actions
• Competitive strategy is implemented through specific functional decisions and actions
– Offensive moves are an organization’s attempts to exploit and strengthen its
competitive position through attacks on a competitor’s position.
– Defensive moves attempt to protect competitive advantage and turf. And don’t
increase an organization’s competitive advantage but can make that competitive
advantage more sustainable.
51
Evaluating and Changing Competitive Strategy
• The organization’s functional strategy implementation must be monitored and evaluated
for effectiveness and efficiency
• The questions to ask when evaluating strategy include:
– What are the results of the various strategies?
– Are they having the intended effect?
– Are we successfully exploiting our competitive advantage? Why or why not?
These are the types of questions to be asked when evaluating the competitive
strategy.
• Most organizational competitive strategies are targeted at increasing sales revenues,
market share, or profitability
– Data on performance in these particular areas are needed to assess the impact of
the strategies
– Any organization, including not-for-profit organizations, must assess the results
of their competitive strategies
• Because Most organizational competitive strategies are targeted at increasing sales
revenues, market share, or profitability
– Data on performance in these particular areas are needed to assess the impact of
the strategies
– Likewise, not-for-profit organizations should assess the results of their
competitive strategies even though they’re not focused on revenues, market share,
or profitability.
51

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Red sea University

Faculties of Economics and Management Science

Mr. Abdirahman M. Salah

• Future Direction of the Organization, includes – Decisions

• Strategy formulation is developing and choosing appropriate strategies, as guided by the

Other Managers and Organizational Employees

What Makes Resources Important?

Comparing the I/O, Resource-Based, and Guerrilla Views of Competitive Advantage

Explain the Driving Forces, Implications, and Critical

Drivers of the New Business Environment

Organizational Vision and Mission

CSR and Ethics

External Environment Sectors

Current Rivalry among Existing Firms

Describe What an Internal Analysis Is

A Quick Review of Organizational Resources

The strategic role of organizational resource and organizational

Characteristics of Distinctive Capabilities

Competitive Advantage and Performance Results

Capabilities Assessment Profile

Determining Strengths and Weaknesses

Discuss Why an Internal Analysis is Important

Functional Competitive Strategies Chapter 05

The Three Functional Concerns of Organizations

What Functional Strategies Does an Organization

Who Are Competitors?

• There are three approaches to defining an organization’s competitors let’s look

• Cost leadership strategy

Contemporary Views on Competitive Strategy

Mintzberg’s Generic Competitive Strategy

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