INTERNATIONAL STRATEGIC

MANAGEMENT
Module I

Anila Mathew V.
Assistant Professor,
School of Management Studies
Cochin University of Science and Technology
Strategic Management
Introduction
Strategic Management process
Mission and goals
SWOT Analysis
Scanning the environment
STEP analysis
Analysis of Internal Strengths and Weaknesses
Competitive advantage
Porters Five forces model.
Winners vs. Losers
Differentiator is a cleverly crafted and well
executed strategy
It is an action plan for outperforming its
competitors and achieving superior
profitability
Crafting strategy is an ongoing process
Strategy helps either to deliver superior
value or to deliver value more efficiently
 Strategy
Greek word strategos/ strategia art of the
general
Military origin
An action that managers take to attain one or
more of the organisations goals
One major goal is to achieve superior
performance
If a strategy results in superior performance, it is
said to have achieved competitive advantage
The process by which managers choose a set of
strategies for a company that will allow it to
achieve superior performance is called
strategic management process.
Business Model
How to deliver superior value or to
deliver value more efficiently?
The business model of the firm answers
this question
Business model Customer Value
Proposition + Profit Formula
Categories of Online Business
Models
Activity
Model Revenue
Model

Advertising
Brokerage
Commission
Infomediary
Merchant Margin
Manufacturer Subscription
Direct Many firms use a hybrid model
Affiliate Utility
But one model is often dominant
Community
Business models change over
Content time
Service Making the change can be tricky!

Source: Rappa 2010

Operational Effectiveness vs.
Strategy
Quest for productivity, quality and speed
management tools and techniques: TQM,
benchmarking, BPR
Operational effectiveness is necessary but OE
alone is not sufficient.
Operational effectiveness performing similar
activities better than rivals perform them
Strategic positioning performing similar things
differently or doing different things
OE is pervasive
Productivity frontier is constantly shifting outward
with new technology and best practices
Operational Effectiveness vs.
Strategy
Competition based on OE alone is self
destructive
It leads companies toward imitation and
homogeneity
Japanese companies were ahead of western
companies in OE / on the productivity
frontier
But they seldom have strategies
Strategy
Deliberately choosing a different set of
activities to deliver a unique mix of values
Strategy performing different activities or
performing similar activities in different
ways
Difficult to imitate
Preserve
Eg: Southwest Airline/ Indigo, Ikea
Strategic positioning
Variety based positioning Few needs of
many customers eg. Staples
Need based positioning - Broad needs of
few customers eg. IKEA
Access based positioning - Broad needs of
many customers in a narrow market
Imitations by competitors
Reposition - Reposition itself to match the
superior performer
Straddling seeks to match the benefits
of a successful position while maintaining
its existing position. Eg. Continental airlines
imitating southwest

For sustainable strategic position there

must be trade-offs with other positions
Trade off more of one thing necessitates
less of another
Trade offs : Reasons
Inconsistencies in image or reputation eg.
Donut Factory
Different Activities e. IKEA
Limits on internal coordination and control
Trade - offs

Essential to strategy
Create the need for choice and
purposefully limit what a company
offers.
Essence of strategy is choosing
what not to do
Strategy and Fit
Strategy is about how to combine activities
Activities fit and reinforce others
Fit locks out imitators by creating a strong chain
Strategy is creating fit among companies activities

Seeing strategy in terms of activity system makes

it clear why organizational structure, systems and
processes need to be strategy specific

Types of fit
Simple consistency between each activity and
the overall strategy eg. Southwest
Activities are reinforcing eg, Neutrogena
Fit Southwest Airlines
Rediscovering strategy
Failure due to the thinking that making
trade-offs is a weakness
Wrong understanding of Customer focus
Trade offs and limits appear to constrain
growth
3 tests for a winning strategy
Fit Internal & External as well as Dynamic
Sustainable Competitive Advantage VRIO
The Question ofValue:"Is the firm able to exploit an
opportunity or neutralize an external threat with the
resource/capability?"
The Question ofRarity:"Is control of the
resource/capability in the hands of a relative few?"
The Question ofImitability:"Is it difficult to imitate, and
will there be significant cost disadvantage to a firm trying
to obtain, develop, or duplicate the resource/capability?"
The Question ofOrganization:"Is the firm organized,
ready, and able to exploit the resource/capability?" "Is the
firm organized to capture value?
Performance competitive strength, market standing
and Profitability
5 Ps of strategy
Mintzberg first wrote about the 5 Ps of
Strategy in 1987. Each of the 5 Ps is a
different approach to strategy. They are:
Plan.
Ploy.
Pattern.
Position.
Perspective.
Variety of viewpoints that you should consider
while developing a robust and successful
strategy.
Plan
Consciously intended set of action
Guideline to deal with a situation
Characteristics:
Made in advance of the actions
Developed consciously and purposefully
Ploy
Specific maneuver intended to outwit an
opponent or competitor
Mintzberg says that getting the better of
competitors, by plotting to disrupt,
dissuade, discourage, or otherwise
influence them, can be part of a strategy.
This is where strategy can be a ploy, as
well as a plan.
For example, a grocery chain might
threaten to expand a store, so that a
competitor doesn't move into the same
area
Pattern
Stream of actions
According to this, strategy is consistency in
behaviour, whether or not intended
Realised strategy = Deliberate (Proactive)
+ Emergent (Reactive)
Position
"Position" is another way to define strategy
How you decide to position yourself in the
marketplace.
In this way, strategy helps you explore the fit between
your organization and your environment, and it helps
you develop a sustainable competitive advantage
For example, your strategy might include developing a
niche product to avoid competition, or choosing to
position yourself amongst a variety of competitors,
while looking for ways to differentiate your services.
When you think about your strategic position, it helps
to understand your organization's "bigger picture" in
relation to external factors.
Amazon.com the Internet-retailing portal
Wal-Mart the lowest price place to buy
almost anything
Perspective
The choices an organization makes about its
strategy rely heavily on its culture just as
patterns of behavior can emerge as strategy,
patterns of thinking will shape an organization's
perspective, and the things that it is able to do
well.
For instance, an organization that encourages
risk-taking and innovation from employees might
focus on coming up with innovative products as
the main thrust behind its strategy. By contrast,
an organization that emphasizes the reliable
processing of data may follow a strategy of
offering these services to other organizations
under outsourcing arrangements.
Interrelating the Ps
1. Conventional hierarchy
2. Formalising emergent strategy with a
perspective
3. Pattern(or position) creating a perspective
4. Perspective constraining shift in position
Conventional hierarchy

Perspective
Formalising emergent strategy with a perspective
Perspective

Case of Honda
company in
America
Pattern(or position) creating a perspective

"wool men" "silk men" perspective

Pattern
Perspective constraining shift in position

Egg Mc Muffin syndrome

Two Schools of Strategy

Position School Process School

Emergent
strategy
Deliberate
(Mintzberg / McGill)
strategy
(Porter / Harvard)
Strategy is an
Strategy is the intuitive process
conscious, through which the
analytical organization
development of a evolves by
distinct position in adapting to its
the environment environment
Intuition =immediate insight or understanding without
conscious reasoning.
Relationship to Environment

Position School Process School

Determine,
develop and
defend an
advantageous
position in the Learn and evolve through
ongoing experience within the
environment environment
Dont be afraid to experiment
Be disciplined
about this choice
Organizational Goals

Position School Process School

Competitive
Advantage Continued Existence

(strategy is) (strategy is)

essential to all things
superior necessary for
performance, the successful
which, after all, functioning of an
is the primary organization as
goal of any an adaptive
enterprise mechanism.
Organizational Capabilities

Position School Process School

Build mutually-
reinforcing fit
among
Encourage experimentation and
organizational variety in activities, from which
potential new strategies may
activities in emerge
tightly focused
support of chosen
strategic position
Implications for
Strategic Management
Position School Process School
Leadership
conceptualizes
strategy based on
analysis and Leadership nurtures a learning,
flexible organization which is
mobilizes the highly responsive and adaptable
to the environment.
organization in
well-coordinated
support of it.
Crafting Strategy
What is our present situation?
Where do we want to go from here?
How are we going to get there?
 Comprehensive strategic management model
External
Audit

Long-Term Generate, Implement Implement Measure &

Vision Objectives Evaluate, Strategies: Strategies: Evaluate
& Select Mgmt Issues Marketing, Performance
Mission Strategies Fin/Acct,
R&D, CIS

Internal
Audit

Ch 1 -35 Copyright 2007 Prentice

Hall
Strategic Management process

Basic Elements of the Strategic Management

Process
Developing a Strategic Vision:

Delineates managements future

aspirations for the business to its
stakeholders.
Provides directionwhere we are
going.
Sets out the compelling rationale
(strategic soundness) for the firms
direction.
Uses distinctive and specific language
to set the firm apart from its rivals.
Importance
Crystallizes senior executives views about
firms long term direction
Reduces risk of rudderless decisions
Tool for gaining org. Members support
Beacon for lower-level managers in setting
objectives
Helps org. Prepare for future
 2.1 Wording a Vision Statementthe Dos and Donts

The Dos The Donts

Be graphic Dont be vague or incomplete

Be forward-looking and directional Dont dwell on the present

Keep it focused Dont use overly broad language

Have some wiggle room Dont state the vision in bland or

uninspiring terms

Be sure the journey is feasible Dont be generic

Indicate why the directional path Dont rely on superlatives only

makes good business sense

Make it memorable Dont run on and on

 To bring innovation and
inspiration to every athlete in
the world
 Vision Statement for Coca-Cola
Our vision serves as the framework for our Roadmap and guides every aspect of our business
by describing what we need to accomplish in order to continue achieving sustainable, quality
growth.

People: Be a great place to work where people are inspired to be the best they can be.
Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy
peoples desires and needs.
Partners: Nurture a winning network of customers and suppliers; together we create mutual,
enduring value.
Planet: Be a responsible citizen that makes a difference by helping build and support
sustainable communities.
Profit: Maximize long-term return to shareowners while being mindful of our overall
responsibilities.
Productivity: Be a highly effective, lean and fast-moving organization.

Effective Elements Shortcomings

Graphic Makes good business sense Long
Focused Flexible Not forward-looking
 Vision Statement for UBS
We are determined to be the best global financial services company. We focus on
wealth and asset management, and on investment banking and securities
businesses. We continually earn recognition and trust from clients, shareholders,
and staff through our ability to anticipate, learn and shape our future. We share a
common ambition to succeed by delivering quality in what we do. Our purpose is to
help our clients make financial decisions with confidence. We use our resources to
develop effective solutions and services for our clients. We foster a distinctive,
meritocratic culture of ambition, performance and learning as this attracts, retains
and develops the best talent for our company. By growing both our client and our
talent franchises, we add sustainable value for our shareholders.

Effective Elements Shortcomings

Focused Not forward-looking
Feasible Bland or uninspiring
Desirable Hard to communicate
 Vision Statement for Walmart

Saving People Money So They Can Live Better

Effective Elements Shortcomings

Focused Dwells on the present
Memorable
Feasible
Makes good business sense
 Communicating the Strategic
Vision

Why Communicate the Vision:

Fosters employee commitment to the
firms chosen strategic direction.
Ensures understanding of its
importance.
Motivates, informs, and inspires internal
and external stakeholders.
Demonstrates top management support
for the firms future strategic direction
and competitive efforts.
Putting the Strategic Vision in
Place
Put the vision in writing and
distribute it.
Hold meetings to personally
explain the vision and its rationale.
Create a memorable slogan that
captures the essence of the vision.
Emphasize the positive payoffs for
making the vision happen.
 Crafting a Mission Statement
The Mission Statement:
Uses specific language to give the
firm its own unique identity.
Describes the firms current business
and purposewho we are, what we
do, and why we are here.
Should focus on describing the
companys business, not on making a
profitearning a profit is an objective
not a mission.
 The Ideal Mission Statement
Identifies the firms product or services.
Specifies the buyer needs it seeks to
satisfy.
Identifies the customer groups or markets
it is endeavoring to serve.
Specifies its approach to pleasing
customers.
Sets the firm apart from its rivals.

Clarifies the firms business to

stakeholders.
Linking Vision and Mission with Core Values

Core Values
Are the beliefs, traits, and behavioral norms
that employees are expected to display in
conducting the firms business and in
pursuing its strategic vision and mission.
Become an integral part of the firms
culture and what makes it tick when
strongly espoused and supported by top
management.
Matched with the firms vision, mission, and
strategy contribute to the firms business
success.
 WOW Philosophy: 10 Core Values
Deliver WOW through Service Build Open and Honest
Relationships With Communication
Embrace and Drive Change
Build a Positive Team and Family
Create Fun and a Little Weirdness
Spirit
Be Adventurous, Creative, and
Open Minded Do More with Less
Be Passionate and Determined
Pursue Growth and Learning
Be Humble.
 Core Values for Amazon
Customer We start with the customer and work backward.
Obsession
Innovation If you dont listen to your customers you will fail. But if you
only listen to your customers you will also fail.
Bias for We live in a time of unheralded revolution and instrumental
Action opportunityprovided we make every minute count.
Ownership Ownership matters when youre building a great company.
Owners think long term, please passionately for their
projects and ideas, and are empowered to respectfully
challenge decisions.
High-Hiring When making a hiring decision we ask ourselves: Will I
Bar admire this person? Will I learn from this person? Is this
person a superstar?
Frugality We spend money on the things that really matter and believe
that frugality breeds resourcefulness, self-sufficiency and
intention.
STAGE 2: SETTING OBJECTIVES

The Purposes of Setting Objectives:

To convert the vision and mission into
specific, measurable, timely performance
targets.
To focus efforts and align actions
throughout the organization.
To serve as yardsticks for tracking a
firms performance and progress.
To provide motivation and inspire
employees to greater levels of effort.
 THE TWO ESSENTIAL KINDS OF OBJECTIVES TO SET

Financial Objectives
Communicate top Strategic Objectives

managements targets Are related to a

for financial firms marketing
performance. standing and
Are focused internally competitive vitality.
on the firms Are focused
operations and externally on
activities. competition vis--vis
the firms rivals.
 SETTING FINANCIAL
OBJECTIVES
Examples of Financial Objectives
An x percent increase in annual revenues
Annual increases in after-tax profits of x percent
Annual increases in earnings per share of x percent
Annual dividend increases of x percent
Profit margins of x percent
An x percent return on capital employed (ROCE) or return on
shareholders equity investment (ROE)
Increased shareholder valuein the form of an upward-trending stock
price
Bond and credit ratings of x
Internal cash flows of x dollars to fund new capital investment
 SETTING STRATEGIC
OBJECTIVES
Examples of Strategic Objectives
Winning an x percent market share
Achieving lower overall costs than rivals
Overtaking key competitors on product performance or quality
or customer service
Deriving x percent of revenues from the sale of new products introduced
within the next five years
Having broader or deeper technological capabilities than rivals
Having a wider product line than rivals
Having a better-known or more powerful brand name than rivals
Having stronger national or global sales and distribution capabilities
than rivals
Consistently getting new or improved products and services to market
ahead of rivals
 Good Strategic Performance Is the Key
to Better Financial Performance
Good financial performance is not enough:
Current financial results are lagging
indicators of past decisions and actions which
does not translate into a stronger competitive
capability for delivering better financial
results in the future.
Setting and achieving stretch strategic
objectives signals a firms growth in both
competitiveness and strength in the
marketplace.
Good strategic performance is a leading
indicator of a firms increasing capability to
deliver improved future financial
performance.
 EMPLOYING A BALANCED SCORECARD

A balanced scorecard measures a firms

optimal performance by:
Placing a balanced emphasis on achieving
both financial and strategic objectives.
Avoiding tracking only financial performance and
overlooking the importance of measuring whether a
firm is strengthening its competitiveness and market
position.

The surest path to sustained future profitability year after year is to

relentlessly pursue strategic outcomes that strengthen a firms business
position and give it a growing competitive advantage over rivals!
THE MERITS OF SETTING STRETCH OBJECTIVES

Setting stretch objectives promotes better

company performance because stretch targets:
Push a firm to be more inventive.
Increase the urgency for improving
financial performance and competitive
position.
Cause the firm to be more intentional and
focused in its actions.
Act to prevent complacent coasting and
easy achievement of ho-hum performance
outcomes.
THE NEED FOR SHORT-TERM AND LONG-TERM
OBJECTIVES

Short-Term Objectives:
Focus attention on quarterly and
annual performance improvements to
satisfy near-term shareholder
expectations.
Long-Term Objectives:
Force consideration of what to do now
to achieve optimal long-term
performance.
Stand as a barrier to an undue focus
on short-term results.
THE NEED FOR OBJECTIVES AT ALL ORGANIZATIONAL
LEVELS

Breaks down performance targets

for each of the organizations
separate units.
Fosters setting performance targets
that support achievement of firm-
wide strategic and financial
objectives.
Extends the top-down objective-
setting process to all organizational
levels.
STAGE 3: CRAFTING A
STRATEGY

Strategy Making:
Addresses a series of strategic hows.
Requires choosing among strategic
alternatives.
Promotes actions to do things differently
from competitors rather than running with
the herd.
Is a collaborative team effort that involves
managers in various positions at all
organizational levels.
 Who Is Involved in Strategy
Making?
Chief Executive Officer (CEO)
Has ultimate responsibility for leading the strategy-
making process as strategic visionary and as chief
architect of strategy.
Senior Executives
Fashion the major strategy components involving their
areas of responsibility.
Managers of subsidiaries, divisions, geographic
regions, plants, and other operating units (and
key employees with specialized expertise)
Utilize on-the-scene familiarity with their business units
to orchestrate their specific pieces of the strategy.
 Why Is Strategy-Making Often
a Collaborative Process?

The many complex strategic issues involved and

multiple areas of expertise required can make
the strategy-making task too large for one
person or a small executive group.
When operations involve different products,
industries and geographic areas, strategy-
making authority must be delegated to
functional and operating unit managers such
that all managers have a strategy-making role
ranging from major to minorfor the area they
head!
The Strategy-Making Hierarchy

Multibusiness Strategyhow to gain synergies from

Corporate
managing a portfolio of businesses together rather than as
Strategy
separate businesses

Two-Way Influence
How to strengthen market position and gain competitive
advantage
Business Actions to build competitive capabilities of single
Strategy
businesses
Monitoring and aligning lower-level strategies
Two-Way Influence

Functional Add relevant detail to the hows of the business strategy

Area Provide a game plan for managing a particular activity in
Strategies ways that support the business strategy

Two-Way Influence
Add detail and completeness to business and functional
Operating strategies
Strategies Provide a game plan for managing specific operating
activities with strategic significance
 The Concept of Strategic
Intent
An organization exhibits strategic intent
when it relentlessly pursues an ambitious
strategic objective, concentrating the full
force of its resources and competitive actions
on
achieving that objective!
 Characteristics of Strategic
Intent
Indicates firms intent to making quantum gains
in competing against key rivals and to
establishing itself as a winner in the marketplace,
often against long odds.
Involves establishing a grandiose performance
target out of proportion to immediate capabilities
and market position but then devoting the firms
full resources and energies to achieving the
target over time.
Entails sustained, aggressive actions to take
market share away from rivals and achieve a
much stronger market position.
What Is a Strategic Plan?
Elements of a
Firms Strategic
Plan

Its strategic vision,

business mission, and
core values

Its strategic and

financial objectives

Its chosen strategy

 STAGE 4: EXECUTING THE
STRATEGY

Converting strategic plans into actions

requires:
Directing organizational action.
Motivating people.
Building and strengthening the firms
competencies and competitive capabilities.
Creating and nurturing a strategy-
supportive work climate.
Meeting or beating performance targets.
 Managing the Strategy Execution Process

Staffing the firm with the needed skills and

expertise.
Building and strengthening strategy-supporting
resources and competitive capabilities.
Organizing work effort along the lines of best
practice.
Allocating ample resources to the activities
critical to strategic success.
Ensuring that policies and procedures facilitate
rather than impede effective strategy execution.
 Managing the Strategy Execution Process

Installing information and operating systems that

enable effective and efficient performance.
Motivating people and tying rewards and
incentives directly to the achievement of
performance objectives.
Creating a company culture and work climate
conducive to successful strategy execution.
Exerting the internal leadership needed to propel
implementation forward and drive continuous
improvement of the strategy execution
processes.
 STAGE 5: EVALUATING PERFORMANCE
AND INITIATING CORRECTIVE ADJUSTMENTS

Evaluating Performance:
Deciding whether the enterprise is
passing the three tests of a winning
strategygood fit, competitive
advantage, strong performance.
Initiating Corrective Adjustments:
Deciding whether to continue or change
the firms vision and mission, objectives,
strategy, and/or strategy execution
methods.

Environmental Scanning
Monitoring, evaluation, and
disseminating information from external
and internal environments to key
people in the firm
This helps to determine the strategic
factors that will determine the future of the
corporation
Simplest way of environmental scanning is
through SWOT analysis
Strengths Weaknesses
Internal
Opportunities Threats
Environmental Variables
 LEVELS OF ENVIRONMENT

I. The Macro-environment

II. The Micro-environment

III. Internal Marketing Environment

PESTEL Analysis
Tool or framework for marketers to analyze
and screen the external marketing
environment of the company
 POLITICAL ENVIRONMENT
Includes political policies and
processes and the extent to which
government intervenes in the
economy
Tax Policy
Investor-friendly, liberal open-market economy
Government is focused on improving the
business and investment environment
No licensing required, except in five
sectors
100% FDI permitted in manufacturing
(except atomic energy)
100% FDI permitted in most service
sectors
Investments, dividends, fees are freely
repatriable
Foreign investments allowed in capital
markets
State Government compete for Investor
Source: Reserve Bank of India
Economic Factors

Economic factors are metrics that measure

the health of any economic region.
Some examples of economic factors you
can judge are:
Disposable income of buyers
Credit accessibility
Unemployment rates
Interest rates
Inflation
Sociocultural factors
Assess the mentality of the individuals or
consumers in a given market.
These are also known as demographic factors.
The following are some social factors to focus
on:
Population demographics: (e.g. aging population)
Distribution of Wealth
Changes in lifestyles and trends
Educational levels
 DEMOGRAPHIC ENVIRONMENT
The study of human populations in
terms of size, density, location, age,
gender, race, occupation and other
statistics
Changing age structure of the U.S.
population is the single most
important demographic trend
Baby boomers, Generation X, and
Generation Y are the key groups
 CULTURAL ENVIRONMENT
Is composed of institutions and
other
forces that affect a societys basic
values, perceptions, preferences,
and behaviors.
Culture can influence decision
making.
Core beliefs are persistent;
secondary cultural values change
and shift more easily.
The cultural values of a society are
 TECHNOLOGICAL ENVIRONMENT
The most dramatic force shaping our
destiny
Rapidly changing force which creates
many new marketing opportunities but
also turns many existing products
extinct
Product innovations
Applications of knowledge
Focus of private and government-
supported R&D expenditures
New communication technologies
Environmental Factors
Both consumers and governments penalize
firms for having adverse effect on the
environment.
The consumers are willing to switch brands if
they find a business is ignoring its
environmental duties.
Few common environmental factors are:
Waste disposal laws
Environmental protection laws
Energy consumption regulation
Popular attitude towards the environment
Legal Factors
This step involves learning about the laws
and regulations in your region. It is critical
for avoiding unnecessary legal costs.
Common legal factors that companies focus
on include:
Employment regulations
Competitive regulations
Health and safety regulations
Product regulations
Antitrust laws
Patent infringements
 CUSTOMERS
The five types of customer markets
Consumer
Business
Reseller
Government
International
 COMPETITORS
Conducting competitor
analysis is critical for success
of the firm
A marketer must monitor its
competitors offerings to
create strategic advantage
 PUBLICS
A group that has an actual or potential
interest in or impact on an organization
Seven publics include:
Financial
Media
Government
Citizen-action
Local
General
Internal
 Industry Analysis
Organisations operate within markets and these
markets are within industries.
Understanding the nature of the industry and how it
changes is crucial to understanding the process of
how strategic windows can be opened and closed by
external forces.
Industries and markets are different entities.
Markets can be looked upon as groups of customers
with similar buying needs
Industries are collections of organizations with the
common products and technologies.
Industry analysis is a tool that facilitates a company's
understanding of its position relative to other
companies that produce similar products or services
 Porters Approach to Industry Analysis
Corporation is most concerned with the intensity
of competition within its industry
The intensity is determined by basic competitive
forces
Collective strength of these forces determine the
ultimate profit potential in the industry, where
profit potential is measured in terms of long-run
return on invested capital.
1. Threat of new entrants
2. Bargaining Power of customers
3. Bargaining Power of suppliers
4. Threat of substitute products/services
5. Competitors
Threat of new entrants
Bring in new capacity
Desire for market share
Therefore a threat to an established
corporation
Threat depends on:
Entry barrier and
Reaction from existing competitors
Eg: opening a new car company
Entry barriers
Obstruction that makes it difficult for a
company to enter an industry
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Government policy
Threat of substitutes
Product appears to be different but can
satisfy the same need as another product
Email/ fax
If switching costs are low, substitutes will
have a strong effect on an industry
Substitutes limit the potential returns of an
industry by placing a ceiling on the prices
the firms in an industry can profitably
charge.
Bargaining power of buyers
Buyer purchases large portion of sellers
product
Buyer has potential to integrate backwards
Alternate suppliers are plenty because
product is undifferentiated
Low cost of switching suppliers
Cost sensitive buyer
Bargaining Power of
Suppliers
Few dominant suppliers selling to many
Unique product or service (MS word)
No readily available substitute
Potential for forward integration
Rivalry among existing firms
Eg: telecom
Number of competitors
Rate of industry growth
Product or service characteristics
Amount of fixed costs
Capacity
Height of exit barriers
Diversity of rivals
Rivalry among existing firms
Eg: telecom
Number of competitors
Rate of industry growth
Product or service characteristics
Amount of fixed costs
Capacity
Height of exit barriers
Diversity of rivals
COMPETITIVE PRESSURES THAT INCREASE
RIVALRY AMONG COMPETING SELLERS
Buyer demand is growing slowly or declining.
It is becoming less costly for buyers to switch
brands.
Industry products are becoming less
differentiated.
There is unused production capacity, and\or
products have high fixed costs or high storage
costs.
The number of competitors is increasing and\or
they are becoming more equal in size and
competitive strength.
The diversity of competitors is increasing.
Competitor Analysis
Future Objectives:
How do our goals compare with our
competitors goals?
Where will the emphasis be placed in the
future?
What is the attitude toward risk?
Competitor Analysis
Current Strategy:
How are we currently competing?
Does this strategy support changes in the
competitive structure?
Assumptions:
Do we assume the future will be volatile?
Are we operating under a status quo?
What assumptions do our competitors hold
about the industry and themselves?
 Assumptions:
A competitor's assumptions about its own
situation may or may not be accurate.
Where they are not, this provides an intriguing
strategic lever.
If a competitor believes it has the greatest
customer loyalty in the market and it does not,
for example, a provocative price cut may be a
good way to gain position.
The competitor might well refuse to match the
price cut believing that it will have little impact
on its share, only to find that it loses significant
market position before it recognizes the error in
its assumption.
Competitor Analysis
Response:
Whatwill our competitors do in the future?
Where do we hold an advantage over our
competitors?
How will this change our relationship with our
competitors?
Key success factors
Variables that can significantly affect the
overall competitive position of companies
The primary purpose of industry analysis is
to identify the requirements and trends that
determine the key success factors for the
business.
Strategists should ask themselves 'Why
would customers choose us?'. The
answer is typically a critical success factor.
 Key success factors
These factors encompass
1. Customer requirements
2. Competitive factors that must be met
3. Regulations/industry standards in the business
4. The resource requirements to implement competitive
strategy
5. Technical requirements to build a competitive position
being distinctively better than rivals on one or
more key success factors presents a golden
opportunity for gaining competitive advantage.
Hence, using the industry's KSFs as cornerstones for
the company's strategy and trying to gain sustainable
competitive advantage by excelling at one particular
KSF is a fruitful competitive strategy approach.
1. Customer requirements

Customers are looking for products that

provide some level of value for the price
they pay.
Each buyer segment has different
requirements that affect its key success
factors.
Requirements can include high
performance, durability, special features or
fashion, ease of use, or rapid availability.
2. Competitive factors that must be met

Competing firms often use similar product-

market strategies.
Competition is often based on price, quality, and
delivery.
Depending on their strategic focus, each firm
must develop a set of skills (strategic weapons)
that allow it to perform better than their
competitors on each competitive dimension.
3. Regulations/industry standards in the business

Industry regulations or standards are often

minimum requirements for participation in a
competitive arena.
Government regulations often affect safety issues
for the environment or end users.
Industry standards often determine technical
compatibility, process performance, and interface
issues for network or system products.
Industry standards can be set by a special body,
like the Industry Standards Organization (ISO), or
become ad hoc standards set by leading
competitors, like Intel and Microsoft.
3. The resource requirements to implement competitive strategy

Resource requirements are becoming

increasingly critical as markets become global
and economies of scale become critical for
research and development, manufacturing, and
marketing.
Investments now exceed $1 billion for facilities
in semiconductors, paper making, and steel
production.
In high technology areas, like information
technology, shortages of qualified personnel
are forcing firms to outsource much of their
capabilities
4. Technical requirements to build a competitive position

Technical requirements are also key to today's

competitive environment.
This is especially important for suppliers, such
as component suppliers for electronics or
automobiles.
As firms reduce their number of suppliers,
suppliers must increasingly add research and
development capabilities to stay in the game.
 Example of KSF
In the beer industry:
full utilization of brewing capacity (to keep manufacturing costs
low)
strong network of wholesale distributors (to gain access to as
many retail outlets as possible)
clever advertising (to induce beer drinkers to buy a particular
brand and thereby pull beer sales through the established
wholesale/retail channels).
In apparel manufacturing:
appealing designs and color combinations (to create buyer
interest)
low-cost manufacturing efficiency (to permit attractive retail
pricing and ample profit margins).
In tin and aluminum cans:
having plants located close to end use customers so that the
plant's output can be marketed within economical shipping dis
tances (because the cost of shipping empty cans is substantial .
Regional market share is far more crucial than national share).
 Strategic Group Analysis
A strategic group is a group of companies
within an industry that have similar business
models or similar combinations of strategies.
For example, the restaurant industry can be
divided into several strategic groups including
fast-food and fine-dining based on variables such
as preparation time, pricing, and presentation.
The number of groups within an industry and
their composition depends on the dimensions
used to define the groups.
Strategic group analysis represents the
intermediate step between industry analysis and
firm analysis.
Strategic Group Analysis
It helps identify who the most direct
competitors are and on what basis they
compete.
It raises the question of how likely or
possible it is for another organization to
move from one strategic group to another.
Strategic Group mapping might also be
used to identify opportunities and can also
help identify strategic problems.
Strategic Type
Category of firms based on a common
strategic orientation and a combination of
structure, culture, and processes consistent
with that strategy.
Prospector - focus on product innovation
and market opportunities
Broad product line
Sales orientation
Eg. 3M
Strategic Type
Defender focus on improving the efficiency of their
existing operations
Limited product line
Cost orientation
Eg. Mrs. Fields Inc. Cookie business

Analyers operate in at least two different product-

market areas, one stable and one variable
analyzers largely pursue a "second-in" strategy
and improve upon the product/service offerings of
their competitors. IBM, therefore, did not innovate
personal computers from scratch but, instead,
imitated the innovations of small personal
computer manufacturers such as Apple Computer.
 Strategic Type
Reactors lack a consistent strategy
structure culture relationship
Strategy Type Definition

Prospector Is innovative and growth oriented, searches

for new markets and new growth
opportunities, encourages risk taking

Defender Protects current markets, maintains stable

growth, serves current customers

Analyzer Maintains current markets and current

customer satisfaction with moderate
emphasis on innovation

Reactor No clear strategy, reacts to changes in the

environment, drifts with events
 Hypercompetition
Rapid and dynamic competition characterized by
unsustainable advantage.
It is the condition of rapid escalation of competition based
on price-quality positioning, competition to protect or
invade established product or geographic markets and
competition based on deep pockets (financial capital) and
the creation of even deeper pocketed alliances
Often a characteristic of new markets and industries,
hypercompetition occurs when technologies or offerings
are so new that standards and rules are in flux, resulting in
competitive advantages and profits resulting from such
competitive advantages cannot be sustained.
Microsoft and cannibalization
Competitive Intelligence
Formal program of gathering information on a
companys competitors.
Check for reliability and correctness
Competitor intelligence is the ethical gathering of
needed information and data about competitors
objectives, strategies, assumptions, and capabilities
what drives the competitor as shown by its future
objectives
what the competitor is doing and can do as revealed by
its current strategy
What the competitor believes about itself and the
industry, as shown by its assumptions
What the competitor may be able to do, as shown by its
capabilities
Sources of competitive
intelligence
A. C. Nielsen
Marketresearch.com

Forecasting Techniques
Extrapolation extension of present trends
into the future
Brainstorming
Delphi technique
 Towards formulating strategy
Define Business
Who is your competitor?
What business are the following in?
IOCL
ONGC
Nokia
LULU
Wonderla
Hollywood
Defining competitor
It involves defining Business
Is business the same as the product or
service you offer?
Business Vs. Product definition
Need Vs. Want definition
Want orientation limits the scope of your
business
Bollywood Movie business limited scope
Entertainment Business
wider scope
Need, Want and Demand
Need, Want and Demand
Need Basic human requirement
Want Need directed at a specific object
Shaped by ones society
Demand Want backed by an ability to pay
Marketing Vs Sales
Sales Marketing

Product oriented Customer oriented

Want based Need based

Movie business Entertainment

Business
Marketing Myopia
A short-sighted and inward looking approach to
marketing that focuses on the needs of the
company instead of defining the company and
its products in terms of the customers' needs
and wants. It results in the failure to see and
adjust to the rapid changes in their markets.

Companies get trapped in this situation

because they omit to ask the vital question,
"What business are we in?
Error of analysis when you are unable to
define bollywood as in the entertainment
business and limits its scope to the movie
business
Shadow of obsolescence the false belief
that there will be no effective substitute
What is a substitute for a mobile phone?
Substitute for petrol?
Substitute for kerosene lamps?

What may be natural monopolies today may

die natural death
Myth of growth industry
Industry life cycle
 Industry life cycle
i. Early Stages Phase - alternative product design and positioning,
establishing the range and boundaries of the industry itself.

ii. Innovation Phase - Product innovation declines, process

innovation begins and a "dominant design" will arrive.

iii. Cost or Shakeout Phase - Companies settle on the "dominant

design"; economies of scale are achieved, forcing smaller players
to be acquired or exit altogether. Barriers to entry become very
high, as large-scale consolidation occurs.

iv. Maturity - Growth is no longer the main focus, market share

and cash flow become the primary goals of the companies left in
the space.

v. Decline - Revenues declining; the industry as a whole may be

supplanted by a new one.
What strategy should be adopted if you are in the growth
industry
do nothing? Produce more and more of the product in efficient
and effective manner?
Every dead and dying growth industry shows a self-
deceiving cycle of bountiful expansion and undetected
decay
4 conditions that leads to this cycle
1. The belief that growth is assured by an
expanding and more affluent population
2. The belief that there is no competitive substitute
for the industrys major product.
3. Too much faith in mass production and in the
advantages of rapidly declining unit costs as
output rises
4. Preoccupation with a product that lends itself to
carefully controlled scientific experimentation,
improvement and manufacturing cost reduction
 Population Myth
Consumers are multiplying more of your products are
being sold future is great
Expanding market stops you from thinking
imaginatively
What is thinking?
An intellectual response to a problem
If your product has an ever increasing market, problem
solved so why think?
Petroleum efforts at improving techniques for extraction
but not to improve the quality of the generic product itself
Idea of indispensability - no guarantee against product
obsolescence. If you dont kill your product, somebody
else will.
Engage in creative destruction
Previous
Production pressure
Mass production generates a great need to move the
product
Focus is on selling than marketing
Marketing oriented firms will focus on creating value added
goods and services that the customers will want to buy
Automobile industry and the lag in Detroit
Sedan vs. Hatch
Objective of consumer research - understand the wants of
your customer
Detroit only did a preference survey of what they already
offered or planned to offer
Secondary importance to servicing needs
Ford and mass production the result or cause of low
price?
Back
Dangers of R & D
By trying to develop a technically superior
product, you are still being product oriented
In order to come up with competitive
substitutes, one has to stop looking at the mirror
and start looking out of the window
Internal Environment
 Discussion Question 1

What different perspectives are

gained from external compared
to internal analyses of the firm?

139
 External and Internal
Analyses
Environment By studying the external
Sociocultural environment, firms identify
what they might choose to do
l
hic
m o e ra

Ge alomic
Ec
Industry
ap
n

on
ne
gr

Environment
Ge

r
De

on gal
nt me Opportunities and threats
Le
En nt
Gl onm

Competitor
En cal/
ob
vir

Environment
al

liti
vir
Po

Technological
e

General

140
 External
Externaland
andInternal
Internal
Analyses
Analyses
By studying the internal
environment, firms identify
what they can do

Strengths & Weakness

Unique resources,
capabilities, and core
competencies
The Firm (sustainable competitive
advantage)

141
 Components of Value Creation
Internal Analysis
Competitive
Core Discovering Core Advantage
Competencies Competencies

Capabilities

Four Criteria Value

Resources of Sustainable Chain
Tangible
Intangible Advantages Analysis

Valuable Outsource
Rare
Costly to Imitate
Nonsubstitutable
142
 Challenge of Internal Analysis
How do we effectively manage current
core competencies while simultaneously
developing new ones?
How do we assemble bundles of
resources, capabilities and core
competencies to create value for
customers?
How do we learn to change rapidly?

143
 Discussion Question 2

What is the difference between

tangible and intangible resources?
What is the difference between
resources and capabilities?

144
 Discovering Core
Competencies Resources
Tangible
Intangible

Productive
input or
competitive
asset owned by
the firm Resources represent inputs into a
firms production process... such
Resources are what a as capital equipment, skills of
firm has to work with-- employees, brand names,
finances and talented managers
its assets--including its
people and the value of
its brand name
145
 Discovering Core
Competencies

Resources
Tangible
Intangible

Tangible Resources Intangible Resources

Financial Human
Organizational Innovation
Physical Reputation
Technological

146
 Capabilities
Discovering Core
Competencies

Capability is the capacity of a firm to perform some internal

activity competently
Capabilities are what a firm does, and represent the firms
capacity to deploy resources that have been purposely
integrated to achieve a desired end state
Capabilities become important when they are combined in
unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage
Eg. Apple Innovation
Pepsi - Marketing
147
Resources vs capabilities
Capabilities are harder to categorize than
resources
Resources provide clues to the type of
capabilities a firm has.

A resource bundle is a linked and closely

integrated set of competitive assets
centred around one or more cross
functional capabilities.
 Discussion Question 3

What are the criteria to determine

core competence?
What is sustainable competitive
advantage?

149
 Discovering Core
Competencies

Core
Competencies

Core competencies are resources and capabilities that serve as

a source of competitive advantage over rivals
Core competencies distinguish a company competitively and
make it distinctive
McKinsey and Co. recommends using three to four
competencies when framing strategic actions

150
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

Valuable
Rare
Costly to Imitate
Nonsubstitutable
Valuable: Capabilities that help a firm neutralize threats or
exploit opportunities

151
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

Valuable
Rare
Costly to Imitate
Nonsubstitutable
Rare: Capabilities that are not possessed by many others

152
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

Valuable
Rare
Costly to Imitate
Nonsubstitutable
Costly to imitate: capabilities that other firms cannot develop
easily, usually due to
Unique historical conditions
Causal ambiguity
Social complexity

153
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

Valuable
Rare
Costly to Imitate
Nonsubstitutable
Nonsubstitutable: capabilities that do not have strategic
equivalents
Invisible to competitors
Firm specific knowledge
Trust-based working relationships between managers
and nonmanagerial personnel

154
 Core Competence as a Strategic
Capability
Resources Core Competence
Inputs to a firms A strategic
production process capability

Yes
Does it satisfy
Capability the criteria of
An integration of a
The source of sustainable
team of resources
competitive No
advantage?

Capability
A nonstrategic
team or resource
155
 Three Tests to identify core competence
Provides access to a wide variety of
markets
Significant Perceived customer benefits of
end products
Difficult for Competitor to imitate

156
 Sustainability of a Competitive
Advantage
Sustainability of a competitive
advantage is a function of:
the rate of core-competence obsolescence
due to environmental changes
the availability of substitutes for the core
competence
the imitability of the core competence

157
 Conditions Affecting Managerial Decisions About
Resources, Capabilities, and Core Competencies
Uncertainty regarding characteristics of the
general and the industry environments,
competitors actions, and customers
preferences
Complexity regarding the interrelated causes
shaping a firms environments and perceptions
of the environments
Intraorganizational Conflicts among people
making managerial decisions and those
affected by them

158
Value Chain
Value Chain Analysis A systematic way of
examining all the activities a firm performs
and how they interact, for analysing the
sources of competitive advantage.
Disaggregates the firm into strategically
relevant activities to understand the
behaviour of costs and existing and
potential sources of differentiation
Value system: firms value chain is
embedded in a larger stream of activities
Value Chain: collection of activities that are
performed to design, produce, market,
deliver and support its product.
Differences among competitor value chains
are a key source of competitive advantage.
Value activities physically and
technologically distinct activities that a firm
performs
Margin difference between total value and
the collective cost of performing the value
activities
The Basic
Value Chain M
rgin ar
g in
a
M

Technological Development
Human Resource Mgmt. Service
Support Activities

Firm Infrastructure

Marketing & Sales

Procurement
Outbound Logistics

Operations

Inbound Logistics
Click
Her Return to Discussion
e Questions Primary Activities
162
Capstone Value Chain
Activities
Firm Infrastructure
Human Resource ManagementMA
R
Technological Development G
IN
Procurement

M Service
Operations

Outbound

Marketing
Logistics

Logistics
Inbound

& Sales

IN
G
R
A
 Inbound
Raw
Raw materials
materials and
and
Logistics components
components
receiving
receiving

Warehousing
Warehousing

Materials
Materials handling
handling
Logistics
Inbound
 Capacity
Capacity and
and
Productio production
production levels
levels

n Firm Infrastructure
Production
Production schedule
schedule
Relatively Few
Management
Layers to Reduce
Overhead
Effective Training
Human Resource Management Automation
to Improve levels
Automation
Programs
Worker Efficiency and
levels
Effectiveness
Investments in Technology
Technological Development Labor
Labor
in order force
force
to Reduce
Associatedutilization
Costs
utilization levels
with levels
Manufacturing Processes

Procurement Frequent Evaluation

Processes to Monitor
Improve
Improve efficiency
efficiency
Suppliers Performances

Service
Efficient Delivery Small, Highly
Operations

Plant Scale Outbound

Schedule Trained Sales
Logistics
Inbound

Logistics
to Minimize that Reduces Force
Manufacturin Costs
g Costs Selection of Products
Timing of Low Cost Priced to
Asset Transport Generate
Purchases Carriers Sales Volume
Policy Choice Efficient
of Plant Order Sizes
Technology
Organizational
Learning
Outbound
Packaging
Packaging
Logistics
Warehousing
Warehousing
Firm Infrastructure
Inventory
Inventory
Human Resource Management
management
management

Technological Development
Shipping
Shipping and
and
distribution distribution

Procurement
Frequent Evaluation
Processes to Monitor
SuppliersPerformances

Service
Delivery Small, Highly Effective
Outbound
Outbound
Schedule Trained Sales Product

Marketing
Logistics
Logistics
that Reduces Force Installations to

& Sales
Costs Reduce
Selection of Products Frequency and
Low Cost Priced to Severity
Transport Generate of Recalls
Carriers Sales Volume
Efficient National
Order Sizes Scale
Advertisin
Interrelations g
hips with
Sister Units
Marketing Sales
Sales forecasting
forecasting

Firm Infrastructure Pricing

Pricing strategy
strategy

Human Resource ManagementMarketingM

Marketing strategy
strategy
A
and
and budget
budgetR
Technological Development G
Sales force
IN
Sales force
management
management
Procurement

Service
Operations

Outbound

Marketing
Logistics

Logistics

& Sales
Marketi
Inbound

Sales
ng &
Service

Customer
Customer relations
relations
Firm InfrastructureWarrantees,
Warrantees,
guarantees
guarantees
Human Resource Management
Spare
Spare parts
parts
Tech
Tech help
help
Technological Development
Repair
Repair

Procurement

Service
Service
Operations

Outbound

Marketing
Logistics

Logistics
Inbound

& Sales
Procureme
nt Firm Infrastructure
Human Resource Management
Technological Development
Procurement
Procurement

Service
Operations

Outbound

Marketing
Logistics

Logistics
Inbound

& Sales
Purchasing
Purchasing Business
Business services
services outsourcing
outsourcing

Vendor
Vendor relations
relations
R&D

Firm Infrastructure
Human Resource Management
Technological Development
Procurement

Service
Establish
Establish the
the specification
specification of
of the
Operations

the
Outbound
Create
Create new
new products
products to
to meet
meet the
the

Marketing
products
products to
to meet
meet customer
Logistics

customer
Logistics
Inbound

changing
changing marketplace

& Sales
demand marketplace
demand
Build
Build the
the quality
quality and
and reliability
reliability
(MTBF)
(MTBF) into
into the
the products
products Manage
Manage new
new product
product cycle
cycle times
times
The Value Chain
Identifies the primary internal activities that
create and deliver customer value and the
requisite related support activities.
Permits a deep look at the firms cost structure
and ability to offer low prices.
Reveals the emphasis that a firm places on
activities that enhance differentiation and support
higher prices.
A firms cost competitiveness depends not only on the
costs of internally performed activities (its own value
chain) but also on costs in the value chains of its
suppliers and distribution channel allies.
Comparing the Value Chains of Rival Firms
Value Chain Analysis
Facilitates a comparison, activity-by-activity, of how
effectively and efficiently a company delivers value
to its customers, relative to its competitors.
The Value Chain Analysis Process:
Segregate the firms operations into different types
of primary and secondary activities to identify the
major components of its internal cost structure.
Use activity-based costing to evaluate the activities.
Do the same for significant competitors.
Benchmarking and Value Chain Activities

Benchmarking:
Involves improving a firms internal
activities based on learning other
companies best practices.
Assesses whether the cost competitiveness
and effectiveness of a firms value chain
activities are in line with its competitors
activities.
Sources of Benchmarking Information
Reports, trade groups, analysts and
customers
Visits to benchmark companies
Data from consulting firms
 Strategic Options for Remedying a Disadvantage
in Costs or Effectiveness

There are three places in the total value

chain system for a company to look for ways
to improve its efficiency and effectiveness:
The firms own activity segments
The suppliers part of the overall value chain
The distribution channel portion of the chain.
Options for Improving the Efficiency and Effectiveness of
Internal Value Chain Activities

Implement best practices throughout the company,

particularly for high-cost activities.
Redesign products to eliminate high-cost components
or facilitate speedier and more economical assembly or
manufacture.
Relocate high-cost activities to areas where they can
be performed more cheaply.
Outsource activities that can be performed by
contractors more cheaply than in-house.
Shift to lower-cost technologies and/or invest in
productivity-enhancing, cost-saving technological
improvements.
Stop performing activities that add little or no
customer value.
Ways to Improve the Effectiveness of the Customer Value
Proposition and Enhance Differentiation

Implement best practices throughout the company,

particularly for high-cost activities.
Adopt best practices and technologies that spur
innovation, improve design, and enhance creativity.
Implement the best practices in providing customer
service.
Reallocate resources to devote more to activities that
will have the biggest impact on the value delivered to
the customer and that address buyers most important
purchase criteria.
For intermediate buyers, gain an understanding of how
the activities the firm performs impact the buyers value
chain.
Adopt best practices for signaling the value of the
product and for enhancing customer perceptions.
 Ways to Improve the Efficiency and Effectiveness
of Supplier-Related Value Chain Activities

Pressure suppliers for lower prices.

Switch to lower-priced substitute inputs.
Collaborate closely with suppliers to identify mutual
cost-saving opportunities.
Work with suppliers to enhance the firms differentiation.
Select and retain suppliers who meet higher-quality
standards.
Coordinate with suppliers to enhance design or other
features desired by customers.
Provide incentives to suppliers to meet higher-quality
standards, and assist suppliers in their efforts to
improve.
 Ways to Improve the Efficiency and Effectiveness
of Distribution-Related Value Chain Activities

Achieving Cost-Based Competitiveness:

Pressure forward channel allies to reduce
their costs and markups so as to make the
final price to buyers more competitive.
Collaborate with forward channel allies to
identify win-win opportunities to reduce
costs.
Change to a more economical distribution
strategy, including switching to cheaper
distribution channels.
 Ways to Improve the Efficiency and Effectiveness
of Distribution-Related Value Chain Activities

Enhancing Differentiation:
Engage in cooperative advertising and
promotions with forward channel allies
Use exclusive arrangements with
downstream sellers or other mechanisms
that increase their incentives to enhance
delivered customer value
Create and enforce standards for
downstream activities and assist in training
channel partners in business practices.
4.5 Translating Company Performance of Value Chain
Activities into Competitive Advantage
4.5 Translating Company Performance of Value Chain
Activities into Competitive Advantage (contd)
Outsourcing
Purchase of value creating activity from an
external supplier
Helps increase flexibility, mitigate risks and
reduce capital investments
Four managerial skills required:
Strategic thinking
Deal making
Partnership governance
Change management
 Authors
Graduate of Harvard School of Business
Professor at Univ. of Michigan School of Business
Advocate of Core Competency Focus for Businesses
Business Consultant
HBR-He was one of the foremost business thinkers
of our time

Coimbatore K. Prahalad
1941-2010
Graduate of University of Michigan School of
Business
Visiting Professor of London Business School
Ranked as the Worlds most influential business
thinker by the Wall Street Journal
Business Consultant and Media Contributor

Gary Hamel
1954 - Present
 Background
A turbulent time:
1987 stock market crash
1989 Berlin Wall fell
1990 dissolution of the Soviet Union
1970s- 1980s: unchecked growth in corporations
Becoming large, inefficient conglomerates
Acquired what they needed: strategic business units
(SBUs)
US Corporate (philosophical) Growth
1980s- SBUs
1990s-Core Competence
2001-Networking
 Rethinking the Corporation

The critical task for management is to create

an organization capable of infusing products
with irresistible functionality or, better yet,
creating products that customers but have not
yet even imagined. (P&H-p.80)
 GTE vs. NEC Example

GTE NEC

Industry Sales $9.98B, Net Cash Flow $1.73B Sales $3.8 B

Position Well positioned to become major Comparable technological base and
1980 player in information technology computer business
industry No experience in
Active in telecommunications telecommunications
Managemen No strategic intent or architecture Strategic Focus to bridge gap
t Concepts Senior Managers continued to between telecommunications and
function as individual business units office automation
Core Competency -
Semiconductors
C&C Computing and
Communications Committee
Business Divested Sylvania TV and Telenet Consolidated position in mainframe
Moves Joint Ventures for switching, computers
transmission and digital PABX Moved beyond switching and
Closed down semiconductors transmission to include mobile
phones, fax machines
Execution Increasingly dependent on outsiders Used collaborative arrangements
for critical skills (strategic alliances) to build
knowledge
 Roots of Competitive Advantage

The diversified corporation is a large tree.... The root

system that provides nourishment, sustenance, and
stability is the core competence. (P&H-p. 82)
Companies using competencies experience rapid
growth:
Canon, Honda outpaced rivals
Sony, Casio, Yamaha invented new devices
Competitiveness on the basis of products cannot be a
source of differential advantage
Consolidating corporate-wide technologies and
resources into competencies is the key to success
Diversified corporation as a large
tree

Leaves, Flowers and Fruit = End Products

Trunk and Major Limbs = Core Products

Root System = Core Competency

provides nourishment, sustenance and stability
The Root of Competitiveness
Core Competence
Core competence is.
the collective learning in the organization
a bundle of skills integrated to make a company
unique
the organizational culture based on people, their
skills and knowledge make a company competitive
the engine for new business development created
from the coordination, integration and
harmonization of diverse skills and multiple
streams of technologies
communication, involvement, and working across
organizational boundaries
Unlike physical assets, competencies do not
deteriorate as they are applied and shared. They
 How Not to Think of Competence
Companies consider themselves as bundles of
product making businesses (remember
Marketing Myopia!) and is focused on
price/performance attributes of current products
Building core competencies is different from
integrating vertically.have no detailed plan on
what, where, how to build an organization
Battle to build world class competencies is
invisible to people.
Cultivating core competence does not mean
outspending rivals on R&D or getting
businesses to become more vertically
Identifying Core CompetenciesAnd
Losing Them
At least three tests can be applied to identify
core competencies in a company. They are:
core competencies provide potential access to a
variety of markets
make a significant contribution to perceived
customer benefits of the end product
should be difficult for competitors to imitate
Core competency can be lost
through outsourcing (Honda vs. Chrysler)
by giving up opportunities to establish competencies
of existing businesses (color television perceived as
a mature product)
Cost of losing core competence can only be partly
From Core Competencies to Core
Products
Smartphones Laptops Gaming TVs Cameras

End Products
 The Tyranny of the SBU
What is a Strategic Business Unit (SBU)?
US Corporate (philosophical) Growth
1980s- SBUs
1990s-Core Competence
2000s-Networking
Ineffectiveness of SBU model
Underinvestment in developing core
competencies or core products
Imprisoned Resources
Bounded Innovation
SBU vs. Core Competence
 Developing Strategic Architecture
A strategic architecture is a road map of the future
that identifies core competencies to build and their
constituent technologies. A strategic architecture
should aim at building competencies.
Training helps.
Create a managerial culture of team work,
capacity to change, and willingness to share
resources
Protect proprietary skills, offers consistency in
resource allocation and allows us to think long
term around that
Reduce the investment needed to secure future
market leadership

 Strategic Architecture
The
Strategic
Architectur
e should
make
resource
allocation
priorities
transparent
to the
whole
organizatio
n
 Redeploying to Exploit
Competencies
Identify competencies and the projects and people
connected with them.
Recognize that core competencies are corporate
recourses and may be reallocated as needed.
Divisional managers come together and decide the
needed investment to build each competency.
Cooperative SBU managers must be recognized for
their team work.
Expose people by using a rotation program.
End goal: Strong feeling of community and
customer focus.
Core Competencies at Canon
 Discussion Questions
What is a core competence of a corporation?
Why core competencies do not diminish in an
organization?
What do the authors mean by the tyranny of
the SBU? In what ways the two concepts of the
corporation, SBU and core competence, differ?
Explain.
Core Competence of the corporation

In the age of internet, what is

going to be the underlying
source of competitive
advantage for companies?
Changing Business Landscape
Companies will lose their competitiveness if they deny
four current trends and how the convergence of these
trends is changing the way we think about innovation
and value creation
1. Connectivity Core issue that will change the
competitive landscape for all of us, whether its
through PCs or cell phones.
2. The cost of digitization is going down, so the cost of
technology is not going to be a limiting factor for
deploying it across the world.
3. Convergence of technology. Is your cell phone a
telephone, a computer, a camera, a watch or all of the
above? And industry boundaries are breaking down like
technology boundaries.
4. Emergence of social networks.
Changing Business Landscape
Years ago, the firm had significantly more influence
than the consumers. Now consumers can have as much
influence and, in some cases, more influence than the firm.
Firm does not have to own the resources but must
have the capacity to access the resources.
Eg. Google does not create firm content. The content is
sourced from a large number of suppliers around the world,
none of whom Google owns, but to whom Google has privileged
access.
Treat each consumers experience as unique
Co-creation of a personalized experience
There cannot be a predetermined sequence or positioning of
activities and vendors.
Instead of a predetermined supply chain as you would use for
creating products, you will now need to create a web with
various elements that can be articulated depending on the
consumer experience you want to create.
How will companies migrate into this new
business model of co-created experiences?
Build fundamentally new capabilities in the
organizations social architecture: the
values, skills, attitudes, strengths, training,
and performance measurement.
Re-think the technical architecture of
your business and how ICT can become a
strategic asset.
Emergency Management System minus the
ambulance
 New house of innovation
Two pillars of co-created experiences and equal
demand/access to global resources.
The basement of the house is the technical
architecture of the firm the information and
communication technology backbone.
The social architecture of the firm is the values, skills,
attitudes of all managers and people in the company
form the roof.
But the thing that holds everything together, the glue,
is the IT architecture, which is the flexible and
resilient business processes and focused analytics.
Value creation becomes understanding and managing
tensions and frictions across all these parts.
The nature of advantage, I believe fundamentally,
is access to capital, raw materials, technology,
and resilient processes and analytics. And new
value creation and innovation depends on
rethinking technical architecture of your firm.
 Core Competencies: Cautions and
Reminders
Never take for granted that core
competencies will continue to provide a
source of competitive advantage
All core competencies have the potential
to become core rigidities
Core rigidities are former core
competencies that now generate inertia
and stifle innovation

208
Judo Strategy
Judo Strategy
Turn the opponents resources, strength,
and size against them
Judo strategy is based on three elements
Rapid movement
Flexibility
Leverage
Judo Strategy
move to new products that redefine the
competitive space.
move to new pricing models that competitors are
unable to emulate.
move to new testing and distribution models that
avoid competitors strengths.
embrace and extend rivals smart moves.
mesh flexibility and tactical adjustments with
long-term strategic plans.
turn your opponents strategic commitments and
investments to your advantage.
cooperate with others who are threatened by
your opponents success.
Industry Scenario
Forecasted description of a particular industrys likely
future
Examine possible shifts in the natural environment and in
societal variables
Identify uncertainties in each of the 5 forces of the task
environment
Make a range of plausible assumptions about future trends
Combine assumptions about individual trends into
internally consistent scenario
Analyse the industry situation that would prevail under
each scenario
Determine the sources of competitive advantage under
each scenario
Predict competitors behaviour under each scenario
Select scenarios that are most likely to occur. Use these
scenarios in strategy formulation