Formulating Strategy

Strategy
Ultimately requires the achievement of fit between the external situation and internal
capability
Seek to leverage the impact of resources by concentrating efforts within a defined zone of
dominance while attempting to anticipate the effects of potentially damaging external
forces
Basic

premises
Clear distinction made between strategy formulation and strategy implementation
Belief that strategy should be explicit
Structure should follow strategy
Strategy emanates from the formal leadership of the organization

Corporate strategy
Pattern of decisions in a company that
determines and reveals
Objectives
Purposes

Goals
produces the principal policies and plans for achieving those goals
defines
range of business the company is to pursue
kind of economic and noneconomic contribution
some unchanging over time but some must change
inseparable from structure, behavior and culture
processes
formulation
implementation

Quality of administrative action and the motivation lending it power cannot be appraised
without knowing its relationship to purpose

Summary statements of strategy

product line and services offered or planned
markets and market segments
channels
means to finance
profit objectives
safety of capital versus level of return
major policy in central functions
intended size, form and climate of the org
Strategy formulation
identifying opportunities and threats
attaching some estimate or risk to the discernible alternatives
strengths and weaknesses of the company
resources on hand and available
actual or potential capacity to take advantage of perceived market needs or to cope with
attendant risks

Economic strategy
strategic alternative at an acceptable level of risk

The extent to which they wish to undertake low or high risk presumably depends on their
profit objectives

Intellectual processes
what a company might do in terms of environmental opportunity
what it can do in terms of ability and power
what the executives of a company want to do
what a company should do (ethics)
Strategy implementation
An organizational structure appropriate for the efficient performance of the required tasks
must be made effective by information systems and relationships permitting coordination
Organizational processes must be directed toward the kind of behavior required by
organizational purpose
Role of personal leadership

Strategy follows structure

Change in the environment of business necessitates continuous monitoring of a companys
definition of its business

Companys environment
Technology
Technological developments are the fastest unfolding but most far-reaching in
extending or contracting opportunity
Ecology
Increase in sensitivity to the impact on the physical environment
Economics
Consequences of world economic trends need to be monitored in much greater detail
for any one industry or company
Industry
Opportunities and risks that reside there are often blurred by familiarity and the
uncritical acceptance of the established relative position of competitors
Society
Societal development
Politics

Changing values will lead to different expectations of the role business should perform
Change threatens all established strategies

Questions that lead to an estimate of opportunity and danger in the present and predicted
company setting
What are the essential economic, technical and physical characteristics are apparent?
What trends suggesting future change in economic and technical characteristics are
apparent?
What is the nature of competition both within the industry and across industries?
What are the requirements for success in competition in the companys industry?
Given the technical, economic, social and political developments that most directly apply,
what is the range of strategy available to any company in this industry?

The first step in validating a tentative choice is to determine whether the organization has the
capacity to prosecute it successfully
Key attributes to be appraised should be identified and consistent criteria established for
judging

Sources of capabilities
Experience
Developing strengths and weaknesses of the individuals comprising the organization
Degree to which individual capability is effectively applied to the common task
Quality of coordination of individual and group effort

Individual and unsupported flashes of strength are not as dependable as the gradually
accumulated product and market-related fruits of experience

Identifying strengths
Examining the orgs current product line
Defining orgs functions it serves in its markets
Definition of product must be the market needs it may fill than the engineering specs
Identifying the skills that underlie whatever success has been achieved
Matching opportunity and competence
To minimize organizational weakness and maximize strength

Opportunism without competence is a path to fairyland

The way in which distinctive competence, organizational resources and organizational values
are combined is or should be unique

Strategy evaluation
Appraisal of how well a business performs
Misses the whole point of strategy
Critical factors determining the quality of current results are often not directly
observable or simply measured
By the time strategic opportunities or threats do directly affect operating results, it
may well be too late
Attempt to look beyond the obvious facts and appraise instead those more fundamental
factors and trends that govern success in the chosen field
Answers the questions
Are the objectives of the business appropriate?
Are the major policies and plans appropriate?
Do the results obtained to date confirm or refuse critical assumptions on which strategy
rests
Major issues
Each business strategy is unique therefore strategy evaluation must rest on a type of
situational logic that does not focus on one best way but which can be tailored to each
problem as it is faced
Strategy is centrally concerned with the selection of goals and objectives
Consequence of training in problem structuring
Arises out of a tendency to confuse values with objectives

Formal systems of strategic review can create explosive conflict situations

Criteria in business evaluation

Consistency
Strategy must not present mutually inconsistent goals and policies
Symptoms of inconsistency
Problems in coordination and planning continue despite changes in personnel and
tend to be issue rather than people based
Success for one organizational department means failure for another
Operating problems continue to be brought to the top for the resolution of policy
issues despite attempts to delegate authority
Must also consider: between organizational objectives and the values of the
management group
Consonance
Strategy must represent an adaptive response to the external environment and to the
critical changes occurring within it
2 different aspects of strategic choice
Basic mission or scope of the business
Analysis is done by looking at changing economic and social conditions over time
Generic strategy
Special competitive position or edge
Analysis focuses on the differences across firms at a given time
Competitive strategy
Focus on generic strategy
Major difficulty is that most of the critical threats to a business are those which come
from without
Advantage
Strategy must provide for the creation and/or maintenance of a competitive advantage
in the selected area of activity
Competitive advantage
Superior resources
Analytical issue is the question of which skills and resources represent
advantages in which competitive arenas
Superior skills
Analytical issue is the question of which skills and resources represent
advantages in which competitive arenas
Superior position
Certain arrangements of ones resources can enhance their combined effectiveness
Positional advantage
Gained by foresight, superior skill and/or resources
Defensible once gained
Returns enough value to warrant its continued maintenance
Would be so costly to capture that rivals are deterred from full0scale attacks on
the core of the business
Tends to be self-sustaining as long as the basic environmental factors that underlie
it remain stable
Principal characteristic
Permits the firm to obtain advantage from policies that would not similarly
benefit rivals without the position
Types
Size or scale
Gestalt strategies
Difficult to either analyze or attack in a piecemeal fashion
Ownership of special raw material sources or long0term supply contracts

Being geographically located near key customers where transport costs are high
Being a leader in a service field that permits or requires the building of a unique
experience base
Being a full-line producer in market with heavy trade-up phenomena
Having a wide reputation for providing a needed product or service trait reliable
and dependably
Feasibility
Strategy must neither overtax available resources nor create unsolvable subproblems
Quantify financial resources
Individual and organizational capabilities
Questions to ask
Has the organization demonstrated that it possesses the problem-solving abilities
and/or special competences required by the strategy?
Infeasible or incomplete
Has the organization demonstrated the degree of coordinative and integrative skill
necessary to carry out the strategy?
Does the strategy challenge and motivate key personnel and is it acceptable to
those who must lend their support?
Issues involved are too important and too closely associated with the distribution of power
and authority
Evaluation is a continuing process
Firms ability to maintain its competitive position in a world of rivalry and change may be best
served by managers who can maintain a dual view of strategy and strategy evaluation
Willing and be able to perceive the strategy within the welter of daily activity
Build and maintain structures and systems that make strategic factors the object of
current activity

Competing on Resources
Today
Markets move faster and faster
Strategy has become deeply problematic at the corporate level
New approaches to strategy
Total quality management
Reengineering
Core competence
Competing on capabilities
Learning organization
Resource-based view of the firm
Approach grounded in economics
Explains how a companys resources drive its performance
Combines internal analysis within companies and external analysis of the industry and the
competitive environment
Sees companies as very different collections of physical and intangible assets and
capabilities
Forms
Physical
Intangible
Organizational capability
Competitive advantage

Ownership of a valuable resource that enables the company to perform activities better or
more cheaply than competitors

Superior performance
Based on developing a competitively distinct set of resources and deploying them in a
well-conceived strategy

Resources cannot be evaluated in isolation, because their value is determined in the interplay
with market forces

Market tests for resource value

Inimitability
Is the resource hard to copy?
Characteristics
Physical uniqueness
Path dependency
Unique and therefore scarce because of all that has happened along the path
taken in their accumulation
Built over time in ways that are difficult to accelerate
Causal ambiguity
Impossibility to disentangle either what the valuable resource is or how to recreate it
Often are organizational capabilities
Economic deterrence
When a company preempts a competitor by making a sizable investment in an
asset
Durability
How quickly does this resource depreciate?
The longer lasting, the more valuable
Banking on this is risky because most resources have limited life and will earn only
temporary profits
Appropriability
Who captures the value that the resource creates?
Value is always subject to bargaining among a host of players
Substitutability
Can a unique resource be trumped by a different resource?

Competitive superiority
Whose resource is really better?
Core competence should not be an internal assessment of which activity, of all its
activities, the company performs best
It should be a harsh external assessment of what it does better than competitors

Basing a strategy on resources that are not inextricably bound to the company can make
profits hard to capture
The way to avoid the vacousness of generic statements of core competence is to
disaggregate the corporations resources

Disaggregation
Important in identifying truly distinctive resources
Important in deriving actionable implications

Competitive superiority lies either in the weighted average or in its system-integration

capability

Softer aspects of corporate assets

Culture
Technology
Transformational leader
Strategic implications
Strategy requires managers to look forward and realize that its distinctive competences
value is eroded by time and competition
Investment
Strategy requires continual investment in order to maintain and build valuable
resources
Valuable corporate resources are often supradivisional
Unless someone is managing them on that basis, divisions will underinvest in them
or free ride in them
Investing in core competencies without examining the competitive dynamics that
determine industry attractiveness is dangerous
Upgrade
Continually upgrade the number and quality of their resources
Moving beyond what the company is already good at
Adding new resources
Upgrading to alternative resources that are threatening the companys current
capabilities
Move into a structurally more attractive industry
Leverage
Leverage resources into all the markets in which those resources contribute to
competitive advantage or to compete in new markets
Specialized resources
Often play a critical role in securing competitive advantage
Lose value quickly when they are moved away from their original settings
Highly fungible resources
Transfer well across a wide range of markets
Rarely constitute the key source of competitive advantage
Strategic errors

Managers tend to overestimate the transferability of specific assets and capabilities

Find it difficult to replicate them in new markets
Managers overestimate their ability to compete in highly profitable industries
Assume that leveraging generic resources will be a major source of competitive advantage
in a new market

Institution-Based View as a Third Leg for a Strategy Tripod

Institutions directly determine what arrows a firm has in its quiver as it struggles to formulate
and implement strategy
Roots of institution-based view
Broader new institutionalism movement throughout the social sciences
Institutions
rules of the game
regulative, normative and cognitive structures and activities that provide stability and
meaning to social behavior
dimensions
formal
regulative (coercive)
informal
normative
cognitive

Institution-based view
due to long-standing criticism of the
industry-based
ignoring histories and institutions
resource-based
little effort to establish appropriate contexts
valuable, rare and hard-to-imitate resources and capabilities in one context may
become non-valuable, plentiful and easy to imitate in other contexts
focuses on the dynamic interaction between institutions and organizations

can add significant insights to the industry-based and resource-based views by specifying
in what contexts and under what circumstances certain capabilities in certain industries
add value
can benefit from the cross-fertilization with the evolutionary perspective whose leading
questions is how do firms co-evolve with their environment?
research on multinational enterprises can be further propelled
adds to the sociologically oriented institutional theory be demonstrating the benefits of
integrating with efficiency-oriented research
holds potential to push the boundaries of the emerging literature on the varieties of
capitalism and corporate social responsibility
variables
institution relatedness
institution distance
legal origins
corruption indexes

Developed economies
market-supporting institutions are almost invisible
corporate effects are more critical in explaining the variation in foreign subsidiary
performance
market-based strategies
Emerging economies
the absence of strong market-supporting institutions is conspicuous
country effects are more salient
relying on informal connections
Core propositions
Managers and firms rationally pursue their interests and make strategic choices within the
formal and informatl constraints in a given institutional framework
Rational (boundedly) choices
Institutions fundamental role is to reduce uncertainty and provide meaning
Compliance or legitimacy occurs through
Expedience
Regulative pillar
Social obligation
Normative pillar
Taken-for-granted basis
Cognitive pillar
While formal and informal institutions combine to govern firm behavior, in situations where
formal constraints are unclear or fail, informal constraints will play a larger role in reducing
uncertainty, providing guidance and conferring legitimacy and rewards to managers and
firms
Formal and informal institutions as compensatory structures
Individuals and firms often find ways of altering the terms of their formal and informal
contracts to avoid the adverse effects of weak contracting institutions
When a firm cannot be a cost, differentiation or focus leader, it can still beat
competition on other grounds nonmarket political areana
Four fundamental questions
Why do firms differ
Firms within one institutional environment tend to be similar

Firms differ across institutional frameworks

Interpersonal networks may serve as informal substitutes
Interpersonal relationships among managers are translated into an interfirm strategy of
relying on networks and alliances, which, in the aggregate, contributes to the growth of
the economy
How do firms behave
Industry-based
Strategic task is mainly to stake out a position that is less vulnerable relative to the
five forces within an industry
Resource-based view
Firm-specific capabilities differentiate successful firms from failing ones
Institution-based
Influences of formal and informal rules of the game
What determines the scope of the firm
Industry-based
Deals primarily with the risks associated with a single-industry strategy and calls for
some moderate diversification for risk reduction
Resource-based
Emphasizes synergy in related industries and products
Both views fail to explain why conglomerate took place
What determines the success and failure of firms around the globe
Focus on performance defines the strategy field
Industry-based
Posits that the degree of competitiveness in an industry largely determines firm
performance
Resource-based
Capabilities drive performance differences
Institution-based
Institutional forces also provide an answer to differences
Internationally and domestically

Institution-based view complements the existing industry-based and resource-based views

Strategy often suffers from a tyranny of the here and now
Field of strategy struggles to develop good theory because it downplays temporal transitivity
and generalizability

Enlightened Experimentation: The New Imperative for Innovation

Experimentation lies at the heart of every companys ability to innovate
New information-based technologies have driven down the marginal costs of experimentation
Increases the opportunities for innovation
Achieving innovation through rapid and frequent experimentation
Rules for enlightened experimentation
Organize for rapid experimentation
Can provide rapid feedback necessary to shape those ideas
Examine and revamp entrenched routines, org boundaries, and incentives
Use small development groups that contain key people
Determine what experiments can be performed in parallel
Fail early and often, but avoid mistakes
Embrace failures that occur early in the development process
Failure can expose important gaps in knowledge
Clear objectives and hypotheses

Anticipate and exploit early information

Recognize the full value of front-loading
Identifying problems upstream
Acknowledge trade-off between cost and fidelity
Experiments of lower fidelity are best suited in early exploratory stages
High-fidelity experiments are best suited later to verify product
Help product developers keep up with customer preferences that might evolve
Combine new and traditional technologies
New and traditional technologies are best used in concert
New technologies emerge and evolve continually

Potential pitfalls of new technologies

Without thorough planning, a new technology might fail to deliver on its promise
Without thorough planning, a new technology may decrease the overall performance of an
R&D org or disrupt its operations
Misaligned objectives
Increased automation of routine experiments will not remove the human element in
innovation
Increased automation of routine experiments will allow people to focus on areas where their
value is greatest
Structural Analysis of Industries
Key aspect of the firms environment is the industry or industries in which it competes
Industry structure has a strong influence in determining the competitive rules as well as the
strategies potentially available to the firm
Competition in an industry is rooted in its underlying economic structure
Collective strength of the forces determines the ultimate profit potential
Not all industries have the same potential
Strength of forces in the industry determines the degree to which this inflow of investment
occurs and drives the return to the free market level
Industry structure can and does shift gradually over time
Competitive forces
Entry
New entrants bring
new capacity
desire to gain market share
substantial resources
Barriers to entry present
Can and do change as the conditions change
Although entry barriers sometimes change for reasons largely outside the firms
control, the firms strategic decisions also can have a major impact
Some firms may possess resources or skills which allow them to overcome entry
barrier into an industry more cheaply than other firms
Economies of scale
Deter entry by forcing the entrant to come in at large scale and risk strong
reaction from existing firms or come in at a small scale and accept a cost
disadvantage
Sharing of operations in a multibusiness firms
Vertical integration
Limits

Large-scale may involve trade-offs with other potentially valuable barriers to

entry
Technological change may penalize
Using existing technology may cloud the perception of new technological
possibilities or of other new ways
Product differentiation
Brand identification and customer loyalties
Force entrants to spend heavily to overcome existing customer loyalties
Capital requirements
Need to invest large financial resources in order to compete
Switching costs
One-time costs facing the buyer of switching from one suppliers product to
another
If high, new entrants must offer a major improvement in cost or performance
Access to distribution channels
Must persuade the channels to accept its product through price breaks,
cooperative advertising allowances, etc, which reduces profits
The more limited the wholesale or retail channels for a product are and the
more existing competitors have these tied up, the tougher entry into the
industry
Cost disadvantages independent of scale
Proprietary product technology
Favorable access to raw materials
Favorable locations
Government subsidies
Learning or experience curve
Involves high labor content performing intricate tasks and/or complex
assembly operations
Nearly always the most significant in the early and growth phase of a product
If costs decline with experience in an industry and if the experience can be
kept proprietary by established firm
Decline in cost can be augmented if there are diversified firms in the industry
who share operations or functions subject to such a decline with other units
in the company or where there are related activities in the company from
which incomplete though useful experience can be gained
limits
Copying
Hiring a competitors employees
Purchasing the latest machinery from equipment suppliers or purchasing
know-how from consultants or other firms
Can be nullified by product or process innovations
Leap-frog
Trade-offs with other valuable barriers
If more than one strong company is building its strategy on the experience
curve, the consequences for one or more of them can be nearly fatal
May draw attention away from market developments
Government policy
Can limit or even foreclose entry
Regulated industries
Controls
Increase capital needed
Impose substantial lead times

Raise the capital cost of entry

Give established firms ample notice of impending entry and sometimes
full knowledge of product
reaction from existing competitors
conditions that signal retaliation
history of vigorous retaliation
substantial resources to fight back
great commitment to the industry and highly illiquid assets
slow industry growth
entry deterring price
prevailing structure of prices which just balances the potential rewards from
entry with the expected costs of overcoming structural entry barriers and risking
retaliation
current price > entry deterring price
entry will occur
can be eliminated if they choose or are forced by new entrants to price below
this price
Threat of substitution
The more attractive the price-performance alternative offered by substitutes, the firmer
the lid on industry profits
Searching for other products that can perform the same function
Products that need attention
Subject to trends improving their price-performance tradeoff with the industrys
product
Produced by industries earning high profits
Bargaining power of buyers
Circumstances
It is concentrated or purchases large volumes relative to seller sales
The products it purchases from the industry represent a significant fraction of the
buyers costs or purchases
The product it purchases from the industry are standard or undifferentiated
Faces few switching costs
Earns low profits
Buyers pose a credible threat of backward integration
Tapered integration
Producing some of their needs for a given component in-house and purchase
the rest from outside suppliers
Industrys product is unimportant to the quality of the buyers products or services
Buyer has full information
About demand, actual market prices and supplier costs
Consumers tend to be more price sensitive if they are purchasing products that
are undifferentiated, expensive relative to their incomes or where quality is not
particularly important
Wholesalers and retailers the same _ when they can influence consumers
purchasing decisions
Companys choice of buyer groups to sell to should be viewed as a crucial strategic
decision
Bargaining power of suppliers
Criteria
It is dominated by a few companies and is more concentrated than the industry it
sells to
It is not obliged to contend with other substitute products for sale to the industry

Industry is not an important customer of the supplier group

Suppliers product is an important input to the buyers business
Supplier groups products are differentiated or it has built up switching costs
Supplier group poses a credible threat of forward integration
Labor
Degree of organization
Whether the supply of scarce varieties of labor can expand
Rivalry among current competitors
Firms are mutually dependent
Numerous firms
If they are relatively balanced, creates instability because they may be prone to
fight each other and have the resources for sustained and vigorous retaliation
If there is a dominant, can impose discipline and play a coordinative role
Foreign competitors
Slow industry growth
turns competition into a market share game
High fixed or storage costs
Create strong pressures for all firms to fill capacity
Lead to rapidly escalating price cutting when excess capacity is present
Lack of differentiation or switching costs
Largely based on price and service
Product differentiation
Creates layers of insulation
Capacity augmented in large increments
Where economies of scale dictate that capacity must be added in large increments
Recurring periods of overcapacity and price cutting
Diverse competitors
Strategies
Origins
Personalities
Relationships to their parents
High strategic stakes
High exit barriers
Specialized assets
Low liquidation values
High costs of transfer or conversion
Fixed costs of exit
Strategic interrelationships
Emotional barriers
Government and social restrictions
Shifting rivalry

Structural analysis and competitive strategy

Positioning the firm so that its capabilities provide the best defense
Influencing the balance of forces
Anticipating shifts in the factors underlying the forces and responding to them
Diversification

Structural analysis can be used to predict the eventual profitability of an industry

Generic Competitive Strategies

Generic Strategies
Overall cost leadership
Requires
aggressive construction of efficient-scale facilities
vigorous pursuit of cost reductions from experience
Tight cost and overhead control
Avoidance of marginal customer accounts
Cost minimization in areas
Reinvesting in modern equipment
Ruthlessly scrapping obsolete assets
Avoiding product line proliferation
Eing alert for technological improvemetns
Low-cost position
Above-average returns
Protects the firm against all five forces
Requires
high relative market share
heavy up-front capital investment
risks
technological change that nullifies past investments or learning
low-cost learning by industry newcomers or followers
inability to see required product or marketing change
inflation costs
Differentiation
Design or brand image
Technology
Features
Customer service
Dealer network
Above-average returns
Requires
Gaining high market share
Perception of exclusivity
Trade-off with cost position
Risks
Cost differential between low-cost competitors and the differentiated firm becomes
too great for differentiation to hold brand loyalty
Buyers need for the differentiating factor falls
Imitation narrows perceived differentiation
Focus

Serving a particular target very well

Premise that firm is thus able to serve its narrow strategic target more effectively or
efficiently than competitors who are competing more broadly
Above-average returns
Limitations on overall market share achievable
Trade-off between profitability and sales volume
Risks
Cost differential between broad-range competitors and the focused firm widens
Differences narrows
Competitors find submarkets within the strategic target and outfocus the focuser
Risks
Failing to attain or sustain the strategy
Value of the strategic advantage provided by the strategy to erode with industry
evolution

No single relationship between profitability and market share

A Framework for Competitor Analysis

Diagnostic Components
Future goals
Knowledge will allow predictions about whether or not each competitor is satisfied with
its present position and financial results
How likely that competitor is to change strategy and the vigor with which it will react to
outside events
Aid in predicting its reactions to strategic changes
Degree of threat will affect the probability of retaliation
Helps interpret the seriousness of initiatives
Help determine whether a corporate parent will seriously support an initiative taken by
one of its business units
Business unit goals
Stated and unstated financial goals
How do they make the trade-offs
Long-run and short-run performance
Profits and growth in revenue
Growth and ability to pay regular dividends
Attitude towards risk
Balance of factors
Profitability
Market position
Rate of growth
Desired level of risk
Economic or noneconomic organizational values or beliefs
Tradition or history of following a particular strategy
Locational preferences
Organizational structure
Provides some indication about the relative status of the various functional areas
and the coordination and emphasis that are deemed strategically important
Allocation of responsibility and power
Where responsibility for decisions is assigned will give clues about the
perspective top management wants to bring to bear on them
Control and incentive systems

Clues about what the competitor believes is important and how its managers will
respond to events in view of their rewards
Accounting system and convention
Policy issues can strongly influence the competitors perceptions of its
performance, what it costs are , the way it sets prices, etc
Kinds of managers
How much apparent unanimity is there among management about future direction
Composition of the board
Clues about the companys orientation, posture toward risk and even preferred
strategic approaches
Contractual commitments that may limit alternatives
Regulatory, antitrust or other governmental or social constraints on the behavior of
the firm
May sensitize a firm so that I foregoes reacting to strategic events unless some
essential element of its business is threatened
Corporate parent and business goals
Current results
Indication of the parents targets
Overall goals of the parent
Parents probable needs from its business unit
Strategic importance the parent attach to the particular business unit
Major influence on the goals it is expected to meet
Where does the business fit into the parents portfolio
Reason of the parent to get into the business
Indication of the way in which the parent views the contribution of the business
and the probable pressure it will place
Economic relationship between the business and others in the parent companys
portfolio
Corporate-wide values or beliefs of top management
Effect on the business unit
Generic strategy that the parent has applied in a number of businesses
Sales targets, hurdles for return on investment and constraints on capital that might
be placed on the competitor unit
Diversification plan
Organizational structure
Clues about actual or probable strategy
How is divisional management controlled and compensated
Kinds of executives rewarded
Indication of the types of strategic behavior reinforced
Time horizons and manner n which they balance risky strategies vs safer ones
Where does the corporate parent recruit from
Antitrust, regulatory or social sensitivities
Emotional attachment to a unit
Signal that disproportionate attention and support will be given to the unit
Indicate exit barriers
Current strategy
Assumptions
Competitors assumptions about itself
Guide the way the firm behaves and the way it reacts to events
Competitors assumptions about the industry and the other companies in it

Can identify biases or blind spots that may creep into the way managers perceive their
environment
Identify moves with a lower probability of immediate retaliation
Identify moves where retaliation, once it comes, is not effective
What does the competitor appear to believe about its relative position
Strong historical or emotional identification with particular products
Cultural, regional or national differences that will affect the way in which competitors
perceive and assign significance
Organizational values or canons which have been strongly institutionalized
What does the competitor appear to believe about future demand for the product and
about the significance of industry trends
What does the competitor appear to believe about the goals and capabilities of its
competitors
Belief in industry conventional wisdom or historic rules of thumb
Capabilities
Strengths and weaknesses can be assessed by examining a competitors position with
respect to the 5 forces
Core capabilities
Capabilities in each of the functional areas
How does it measure up to the tests of the consistency of its strategy
Probable changes in those capabilities
Ability to grow
Will the capabilities increase or diminish as it grows
Capacity for growth in terms of people, skills and plant capacity
Sustainable growth
Quick response
Capacity to respond quickly
Uncommitted cash reserves
Reserve borrowing power
Excess plant capacity
Unintroduced but on-the-shelf new products
Ability to adapt to change
Fixed vs variable costs
Ability to adapt and respond to changed conditions in each functional area
Respond to exogenous events
Exit barriers
Share manufacturing facilities, sales force or other facilities or personnel with other
units
Provide constraints to adaptation and/or may imped cost control
Staying power
Ability of the competitor to sustain a protracted battle

History as indicator of goals and assumptions

Current financial performance and market share compared to the past
Almost always be striving to regain the performance of the recent past
History in the marketplace
Failure or has been beaten
Areas it has starred or succeeded
Reaction to particular strategic moves or industry events in the past
Managerial backgrounds as indicator of goals and assumptions
Functional background

Key measure of its orientation and perception of the business

Types of strategies that have worked or not worked for them personally in their careers
Other businesses they have worked in and what rules of the game and strategic
approaches have been characteristic of those businesses
Major events they have lived through
Affect the perspective of the manager in a wide range of areas and can influence
strategic choices
Writing and speaking, technical background or patent history, other firms they come into
frequent contact with, outside activities
Management consulting firms, advertising firms, investment banks and other advisors the
company uses

Portfolio analysis of the parent will provide clues to what the objectives of the business unit
will be how hard it will fight to maintain its position and performance along dimensions and
how likely it is to attempt to change its strategic position
Has an idea about competitors current strategy and capabilities. Hard to see future goals and
assumptions.
Framework can help a company understand wht conclusions its competitors are likely to draw
about it

Competitors to examine
Existing competitors
Potential competitors
Firms not in the industry but who could overcome entry barriers particularly cheaply
Firms for whom there is obvious synergy from being in the industry
Firms for whom competing in the industry is an obvious extension of the corporate
strategy
Customers of suppliers who may integrate backward or forward
Probable mergers and acquisitions
Competitor response profile
Offensive moves
Satisfaction with current position
Probable moves
Strength and seriousness of moves
Defensive capability
Vulnerability
Provocation
Effectiveness of retaliation
Best battleground
Market segment or dimensions of strategy in which competitors are ill-prepared, least
enthusiastic or most uncomfortable about competing
Mixed motives
Conflicting goals for competitors
Finding moves for which retaliation, though effective, would hurt the competitors broader
position
Market Signals
Market signal

Any action by a competitor that provides a direct or indirect indication of its intentions,
motives, goals or internal situation
Functions
Truthful indications of a competitors motives, intentions or goals
bluffs
Types
Prior announcement of moves
Form, character and timing
Does not necessarily insure that an action will be taken
Preempting other competitors
Can be threats of actions to be taken if a competitor follows through with a planned
move
Tests of competitor sentiments
Communicating pleasure or displeasure
Sequence of actions
Minimizing the provocation of a forthcoming strategic adjustment
Avoid costly simultaneous moves
Communication with the financial community
Coalescing internal support for a move
Preemptive
If there are lasting benefits
Conciliation
If there are few benefits
If the competitor acting in its narrow self-interest could have done better through
a surprise move
Action that is much less damaging
Far advanced
Critical implications for the credibility of future commitments and future
announcements
Trick competitors into expending resources in gearing up to defend against a
nonexistent threat
Announcement of results or actions after the fact
Insuring that other firms know and take note of the data disclosed
Influence their behavior
Public discussions of the industry by competitors
May expose the commenting firms assumptions about the industry
Conscious or unconscious attempt to get other firms to operate under the same
assumptions
Seeking to interpret industry conditions in such a way as to improve its own position
Competitors discussions and explanations of their own moves
Attempt to get other firms to see the logic of a move and hence follow it
Communicate that the move is not to be taken as a provocation
Preemptive gestures
Attempt to communicate commitment
Competitors tactics relative to what they could have done
A competitor behaving in a way inconsistent with its narrowly defined self-interest
may implicitly be signaling conciliation
Manner in which strategic changes are initially implemented
Divergence from past goals
Indication of potential major realignment in goals or assumptions
Divergence from industry precedent

Aggressive signal
Cross-parry
When one firm initiates a move in one area and a competitor responds in a different
area with one that affects the initiating firm
Represents a choice by the defending firm not to counter the initial move directly
but counter it indirectly
If directed toward one of the bread and butter market
Serious warning
If directed toward a minor market
Warning
Hope of not triggering any unsettling or hasty counterresponse
Defender will raise the ante with a more threatening cross-parry later
Fighting brand
Firm threatened or potentially threatened by another can introduce a brand that has
the effect of punishing or threatening to punish the source of the threat
Can be meant as warnings or deterrents or as shock troops to absorb the brunt of a
competitive attack
Private antitrust suits
Signal of displeasure
Signal of harassment
Delaying tactic
Sensitizing the stronger firm so that it will not undertake any aggressive actions
while the suit is outstanding
Smaller to larger
Inflict penalties
Larger to smaller

Studying the historical relationship between a firms announcements and its moves
Searching for signs a competitor may have inadvertently given before making changes in the
past
Too much attention to market signals can be counterproductive distraction
Prerequisite to interpreting signals accurately is to develop a baseline competitor analysis

Strategic Decisions
Having high exit barriers usually leads to disaster
Forced to respond vigorously to moves and will not yield position without a significant
investment
Unless industry structure is very favorable for the decline phase, harvesting strategies
without clear strengths usually collapse
Preparing for decline
Minimize investments that will raise exit barriers
Place strategic emphasis on market segments that will be favorable under decline
conditions
Create switching costs
Competition in Global Industries
Global industry
Strategic positions of competitors in major geographic or national markets are
fundamentally affected by their overall global positions

Necessary to examine industry economics and competitors in the various geographic or

national markets jointly
Require a firm
Compete on a worldwide, coordinated basis
Subsidiaries are autonomous
Competitive balance is country-by-country basis

Industries with multinational competitors are not necessarily global industries

Differences in competing internationally vs nationally

Cost differences among countries
Differing circumstances in foreign markets
Different roles of foreign governments
Differences in goals, resources, and ability to monitor foreign competitors

Structural factors and market forces operating in global industries are the same

How to go global
Licensing
First foray overseas
Export
Present in industries where competition is truly global
First foray overseas
Foreign direct investment
Present in industries where competition is truly global
Sources of global competitive advantage
Conventional comparative advantage
Production economies of scale
Cost advantage through centralized production and global competition
Vertical integration
Efficient scale of the vertically integrated system is greater than the size of national
markets
Implies movement of exports among countries
Global experience
In technologies subject to significant cost declines due to proprietary experience
Global competition can allow faster learning, even if the learning curve flattens at
cumulative volumes
Logistical economies of scale
If international logistics involves fixed costs that can be spread by supplying many
national markets
Ability to use more specialized systems
Marketing economies of scale
Common sales force
Proprietary marketing techniques
Knowledge gained from one market can be used at no cost in other markets
Some brand names have carryover among geographic markets
Some brand names develop recognition internationally through trade press, technical
literature, cultural prominence
Economies of scale in purchasing
Result of bargaining power or lower suppliers cost in producing long runs

Most probable when the volumes purchased by the industry are moderate compared to
the size of the industry producing the raw materials or components
Product differentiation
Edge in reputation and credibility
Proprietary product technology
Ability to apply proprietary technology in several national markets
Tap into technological developments worldwide
Mobility of production
Fixed costs of creating and maintaining an organization and developing proprietary
technology can be readily spread over operations in many national markets
Invest in skilled people and mobile equipment

Significance of each source of global advantage depends on

How significant to total cost is the aspect of the business subject to global economies
How significant to competition is the aspect of the business in which the global competitor
has an edge
All sources of advantage also imply the presence of mobility barriers for global firms
Impediments to global competition
Economic
Transportation and storage costs
Offset economies of centralized production
Offset efficiency
Competition is on a market-by-market basis
Differing product needs
When national markets demand different product varieties
Depends on the cost of altering products
Established distribution channels
When customers are numerous and individual purchase amounts are small
Foreign firm to penetrate entrenched distribution channels
Little incentive to substitute a foreign firms line for a domestic one
Less well-established because the industry is new or in flux
Sales force
Product requires a local manufacturers direct sales force
If national competitors sales forces sell a wide line of products
Local repair
Offer local manufacturers repair
Sensitivity to lead times
Short fashion cycles
Rapidly moving technology
Lead time required to physically transport
If local product needs differ
Complex segmentation within geographic markets
Increases the need for product lines with many varieties
Increase the need for the ability to produce custom products
Lack of world demand
Demand does not exist in a significant number of major countries
Only fit the needs of an unusual customer group which is present only in a few
national markets
Managerial impediments
Differing marketing tasks

Marketing task can vary geographically

Nature of distribution channels, marketing media and cost effective means of
reaching the buyer
Customer bias toward dealing with local firm
Intensive local services
Intensive localized marketing, service or other customer interaction is required
Rapidly changing technology
Frequent product and process redesign
Institutional impediments
Governmental
Tariffs and duties
Quotas
Preferential procurement
Governmental insistence on local R&D or requiring locally produced components
in the product
Preferential tax treatment, labor policies, etc
Bribery laws, tax laws or other policies that are disadvantageous to their firms in
international operations
Can either aid locally owned firms or else require production in the country
Can force the sale of product varieties peculiar to the country
Perceptual or resource impediments
Information and search costs

Environmental triggers to globalization

Increased scale economies
Decreased transportation or storage costs
Rationalized or changed distribution channels
Changed factor costs
Narrowed national economic and social circumstances
Reduced government constraints
Strategic innovations stimulating globalization
Product redefinition
National product differences erode naturally as the industry matures
Indentification of market segments
Segments of the market that are common to many countries and that are being poorly
served
Segments of the market less subject to impediments to global competition
Reduced costs of adaptations
Create ways of lowering the cost of altering basic products to meet these local needs
Any innovation that modularizes a product for easy adaptation or increases its range of
compatibility
Design changes
Leading to more standardized components
Deintegration of production
Government constraints requiring local production can be circumvented by assembling
locally while producing some or all components centrally
Elimination of constraints from resources or perception
Entry of new firms can eliminate resource constraints
New entrants may be able to start fresh with new strategies unencumbered

Foreign firms have sometimes been better able to perceive possible product
redefinitions because they have had experience competing this way in their home
markets

Access to the US market

Globalization has hinged critically on foreign firms having access to the US market
US firms have sometimes felt less pressure to design truly global methods of competition
Issues that must be confronted by global competitors
Industrial policy and competitive behavior
Firms and their home government must be regarded together
Can shape companies goals
Provide R&D funds
Influence their position in global competition
Can help negotiate for the firm
Help finance sales through central banks
Apply political leverage
Barriers to exit may increase
Political and economic relations of the home government vis--vis governments in
major world markets
Relationships with host governments in major markets
Can block global competition
Create a number of different strategic groups
Firms competing globally on a coordinated basis
Multinational companies that follow a strategy of local responsiveness
Escape many government impediments
Local firms
Degree of responsiveness to host government concerns becomes a key strategic
variable
Systemic competition
Partial overloap in served markets, geographic location, etc
Difficulty in competitor analysis
Because of prevalence of foreign firms and need to analyze systemic relationships
Data on foreign firms less available
Institutional considerations
Strategic alternatives in global industries
Broad line global competition
Competing worldwide in the full product line
Requires substantial resources and long time horizon
Global focus
Targets a particular segment in which the firm competes on a worldwide basis
National focus
Takes advantage of national market differences to create a focused approach to a
particular national market
Protected niche
Seeks out countries where governmental restraints exclude global competitors
In some global industries, strategies of national focus or seeking a protected niche are
unavailable because there are no impediments to global competition
Transnational coalitions
Cooperative agreements between firms in the industry of different home countries

Trends affecting global competition

Reduction in differences among countries
Reduces impediments to world competition
More aggressive industrial policy
Stimulate industry in carefully selected sectors
Abandonment of sectors deemed less desirable
National recognition and protection of distinctive assets
Free flow of technology
Gradual emergence of new large-scale markets
If china and Russia control access to their markets, their firms may become major
global powers
Gaining access to one or both may become a crucial strategic variable in the future
NDC competition
Industries vulnerable to NDC
Rapidly changing technology that can be kept proprietary
Highly skilled labor
Sensitivity to lead times
Complex distribution and service
High consumer marketing content
Complex, technical selling task

Some degree of maturity is necessary for global competition to be present

Strategic Analysis of Vertical Integration

Vertical integration
Combination of technologically distinct production, distribution, etc, within the confines of
a single firm
Utilize internal or administrative transactions
Believed to be cheaper, less risky or easier to coordinate
Build an inefficiently small facility that meets only its needs
Builds and efficient facility and must bear the possible risk of sales or purchases on the
open market
Benefits
Depend on the volume of products the firm purchases or sells to the adjacent stage
relative to the size of the efficient production facility
Economies of integration
Economies of combined operations
Economies of internal control and coordination
Tapered integration
Producing some of its own requirements internally and contracting for the rest
Quasi-integration
Use of debt or equity investments and other means to create alliances
Strategic innovation at the Base of the Pyramid
Innovation in developing markets
has less to do with finding new customers
addressing issues of product acceptability, affordability, availability and awareness

companies that develop new strategies to attack competitors and enter new markets often
accomplish by introducing architectural or business-model breakthroughs
new products
new services
new customers
new ways of promoting, producing or distributing

Innovation in developing markets differences

not finding new whos
not about creating new product features but adapting existing products to customers who
have fewer resources or a different cultural background
less about creating new business models or differentiating how you compete than
establishing basic market ingredients
Framework for strategic innovation
affordability
degree to which a companys goods or services are affordable to consumers at the low
end of the market
acceptability
extent to which consumers and others in the value chain are willing to consume,
distribute or sell a product or service
cultural
societal
religious
political
availability
extent to which customers are able to acquire and use a product or service
establishing distribution channels when none exist
awareness
refers to what customers know about the products or services you sell
learning how to generate market demand
how to reach potential customers who may not be familiar with their products and who
cant be contacted with conventional advertising

Sometimes meeting the needs of customers requires broadening the definition of what the
product can do

The Four Things a Service Business Must Get Right

As the world economies have matured, they have become dominated by service-focused
businesses
Elements
Offering
Must effectively meet the needs and desires
Focus on the experiences customers want to have
Service excellence can be defined as what a business chooses what not to do
Determine which attributes to target for excellence and which to target for inferior
performance
Discover the relative importance customers place on attributes
Identify customer segments in terms of attributes preferences
Funding mechanism
Pricing is not transaction based but involves the bundling of various elements of value
or entails some kind of subscription

Forms
Having the customer pay
Charge the customer in a palatable way
Form of payment that is less objectionable
Create a win-win between operational savings and value-added services
Enhance the customer experience even while spending less
Temporary competitive advantage
Cover the cost of excellence with operational savings
Spend now to save later
Make operational investments that will pay off eventually by reducing
customers needs for auxiliary services
Have the customer do the work
Self-service
Best thought out as thoroughly as possible prior to the launch
Employee management system
People intensive
Decisions made in this areas should reflect the service attributes the company aims to
be known for
What makes our employees reasonably able to achieve excellence
What makes our employees reasonably motivated to achieve excellence
Employee sacrifice is a rarely sustainable resource
Design a system where average employees can thrive
Customer management system
Input influences their experiences and other customers
Customers are not as easy to train as employees
Customers have a great deal of discretion in their operational activities
There is no such thing as a good idea in isolation
There is only a good idea in the context of a specific service model
It is folly to attempt to be all things to all customers
Companies that attempt to be all things to all people begin to struggle when upstart
competitors start picking off profitable niches

Multifocused
Various service models under one umbrella
Challenge is to use knowledge gained in one service model to strengthen the performance
of the others
Directive leadership
Accommodates different personalities but always relies on senior managers who are
able and willing to exert strong influence on subordinates
Reactions of incumbents
Dismissal
Sadness
Relief
Dread