CHAPTER 1. WHAT IS STRATEGY AND WHY IS IT IMPORTANT?

1. What we mean by a company’s strategy?

Strategy is the set of actions that its managers take to outperform the company’s competitors and achieve superior
profitability. // Is about to compete differently from rivals doing what they do not do, doing it better, doing what they
cannot do, doing things that attract customers and set a firm apart from its rivals.

2. The concept of a sustainable competitive advantage.

The firm achieves a sustainable competitive advantage if the basis for its advantage persists despite the best efforts of
competitors to match or surpass its advantage.

3. The five most basic strategic approaches for setting a firm apart from rivals and winning a sustainable
competitive advantage.
- Low-cost provider.
- Focused low-cost.
- Best-cost provider.
- Focused differentiation.
- Broad differentiation.
4. That a firm’s strategy tends to evolve because of changing circumstances and ongoing efforts by management to
improve the strategy.

Changing circumstances and ongoing management efforts to improve the strategy cause a firm’s strategy to evolve over
time—a condition that makes the task of crafting strategy a work in progress, not a one-time event.

A firm’s strategy is shaped partly by management analysis and choice and partly by the necessity of adapting and of
learning by doing.

5. Why it is important for a firm to have a viable business model that outlines the firm’s customer value
proposition and its profit formula.

A firm’s business model sets forth the logic for how its strategy will create value for customers, while at the same time
generate sufficient to cover costs and realize a profit.

The profit formula

Creating a cost structure that allows for acceptable profits, given that pricing is tied to the customer value proposition

V – the value provided to customers

P – the price charged to customers

C – the firm’s costs

The lower the costs (C) for a given customer value proposition (V–P), the greater the ability of the business model to be
a moneymaker.

6. The three tests of a winning strategy.

- The competitive asdvantage test.
- The fit test
- The performance test

CONCEPTS:

STRATEGY.- Is the set of actions that its managers take to outperform the company’s competitors and achieve superior
profitability.
COMPETITIVE ADVANTAGE.- A firm achieves a competitive advantage when it provides buyers with superior value
compared to rival sellers or offers buyers the same value as its rivals but at a lower cost to the firm.

SUSTAINABLE COMPETITIVE ADVANTAGE.- The firm achieves a sustainable competitive advantage if the basis for its
advantage persists despite the best efforts of competitors to match or surpass its advantage.

DELIVERATE STRATEGY.- Consists of proactive strategy elements that are both planned and realized as planned.

EMERGENT STRATEGY.- Consists of reactive strategy elements that emerge as changing conditions warrant.

- How the firm will make money:

By providing customers with value

The firm’s customer value proposition

By generating revenues sufficient to cover costs and produce attractive profits

The firm’s profit formula

It takes a proven business model—one that yields appealing profitability—to demonstrate viability of a firm’s strategy.

BUSINESS MODEL.- Sets forth the logic for how its strategy will create value for customers while at the same time
generate revenues sufficient to cover costs and realize a profit.

THE PROFIT FORMULA:

V – THE VALUE PROVIDED TO CUSTOMERS.

P – THE PRICE CHARGED TO CUSTOMEMRS.

C – THE FIRM’S COSTS.

WINNING STRATEGY THREE TESTS:

- THE FIT TEST. Does it exhibit fit with the external and internal aspects of the firm’s dynamic situation.
- THE COMPETITIVE ADVANTAGE TEST. Does it help the firm achieve a sutainable competitive advantage?
- THE PERFORMANCE TEST. Will it produce superior performance as indicated by the firm’s profitability, financial
and competitive strengths, and market share?

DELIVERATE STRATEGY.- (Or proactive strategy elements) includes new planned initiatives plus ongoing strategy
elements continued from prior periods.

EMERGENT STRATEGY.- (or reactive strategy elements) includes new strategy elements that emerge as managers react
adaptively to changing circumstances.

Both of these result in a firm’s current (or realized) strategy.

Prior strategy elements may also be abandoned.

 CHAPTER 2. CHARTING A COMPANY’S DIRECTION: ITS VISION, MISSION, OBJECTIVES AND STRATEGY.

1. Why it is critical for company managers to have a clear strategic vision of where a company needs to head and
why

Because a strategic vision describes management’s aspirations for the company’s future and the course and direction
charted to achieve them.

2. The importance of setting both strategic and financial objectives

- Financial objectives relate to the financial performance targets management has established for the
organization to achieve.

o Communicate top management’s goals for financial performance.

o Are focused internally on the firm’s operations and activities.

- Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing,
competitive position, and future business prospects.

o Are the firm's goals related to marketing standing and competitive position.

o Are focused externally on competition vis-à-vis the firm’s rivals.

3. Why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve
companywide performance targets

- Breaks down performance targets for each of the organization’s 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.

4. What a company must do to achieve operating excellence and to execute its strategy proficiently

1- Developing a strategic vision, a mission statement, and a set of core values

2- Setting objectives for measuring the firm's performance and tracking its progress
3- Crafting a strategy to move the firm along its strategic course and achieve its objectives
4- Executing the chosen strategy efficiently and effectively
5- Monitoring developments, evaluating performance, and initiating corrective adjustments

5. The role and responsibility of a company’s board of directors in overseeing the strategic management process

 Obligations of the board of directors:

● Oversee the firm’s financial accounting and reporting practices compliance with GAAP principles

● Critically appraise the firm’s direction, strategy, and business approaches

● Evaluate the caliber of senior executives’ strategic leadership skills

● Institute a compensation plan that rewards top executives for actions and results that serve
stakeholder interests—especially shareholders.

CONCEPTS.

A company’s strategic plan lays out its future direction, performance targets, and strategy.

A strategic vision describes management’s aspirations for the company’s future and the course and direction charted to
achieve them.

A strategic vision portrays a firm’s aspirations for its future (“where we are going”).
A firm’s mission describes the scope and purpose of its present business (“who we are, what we do, and why we are
here”).

A firm’s core values are the beliefs, traits, and behavioral norms that the firm’s personnel are expected to display in
conducting the firm’s business and pursuing its strategic vision and mission.

- Patagonia’s core values

● Quality: Pursuit of ever-greater quality in everything we do

● Integrity: Relationships built on integrity and respect

● Environmentalism: Serve as a catalyst for personal and corporate action

Not Bound by Convention: Our success—and much of the fun—lies in developing innovative ways to do things.

Objectives are an organization’s performance targets—the specific results management wants to achieve.

Stretch objectives set performance targets high enough to stretch an organization to reach its full potential and deliver
the best possible results.

A company 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.

 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.

Financial objectives relate to the financial performance targets management has established for the organization to
achieve.

Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive
position, and future business prospects.

The Balanced Scorecard is a widely used method for combining the use of both strategic and financial objectives,
tracking their achievement, and giving management a more complete and balanced view of how well an organization is
performing.

In most firms, crafting and executing strategy is a collaborative team effort in which every manager has a role for the
area he or she heads; it is rarely something that only high-level managers do.

Corporate strategy is strategy at the multi-business level, concerning how to improve company performance or gain
competitive advantage by managing a set of businesses simultaneously.

Business strategy is strategy at the single-business level, concerning how to improve the performance or gain a
competitive advantage in a particular line of business

A company’s strategic plan lays out its future direction, business model, performance targets, and competitive strategy.
 CHAPTER 3. EVALUATING A COMPANY’S EXTERNAL ENVIRONMENT

1. How to recognize the factors in a company’s broad macro-environment that may have strategic significance

The macro-environment encompasses the broad environmental context in which a company’s industry is situated that
includes strategically relevant components over which the firm has no direct control.

2. How to use analytic tools to diagnose the competitive conditions in a company’s industry

3. How to map the market positions of key groups of industry rivals

♦ Maps are useful in identifying which industry members are close rivals and which are distant rivals.

♦ Not all map positions are equally attractive

1. Prevailing competitive pressures from the industry’s five forces may cause the profit potential of
different strategic groups to vary.

2. Industry driving forces may favor some strategic groups and hurt others.

4. How to use multiple frameworks to determine whether an industry’s outlook presents a company with
sufficiently attractive opportunities for growth and profitability

 Entry threat considerations

o Expected defensive reactions of incumbent firms

 o Strength of barriers to entry

o Attractiveness of a particular market’s growth

in demand and profit potential

o Capabilities and resources of potential entrants

o Entry of existing competitors into market segments

in which they have no current presence

A company’s strategy is increasingly effective the more it provides some insulation from competitive pressures, shifts
the competitive battle in the company’s favor, and positions firms to take advantage of attractive growth opportunities.

CONCEPTS.

PESTEL analysis focuses on the six principal components of strategic significance in the macro-environment.

 Political

 Economic

 Social

 Technological

 Environmental

 Legal

The five competitive forces

 Competition from rival sellers

 Competition from potential new entrants

 Competition from producers of substitute products

 Supplier bargaining power

 Customer bargaining power

Complementors are the producers of complementary products, which are products that enhance the value of the focal
firm’s products when they are used together.

Driving forces are the major underlying causes of change in industry and competitive conditions.

A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions.

Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms
occupy in the industry.
 CHAPTER 4. Evaluating a Company’s Resources, Capabilities, and Competitiveness.
- Sluggish financial performance and second-rate market accomplishments almost always signal weak strategy,
weak execution, or both.
- A resource is a competitive asset that is owned or controlled by a firm.
- A capability or competence is the capacity of a firm to perform an internal activity competently through
deployment of a firm’s resources.
- A firm’s resources and capabilities represent its competitive assets and are determinants of its competitiveness
and ability to succeed in the marketplace.
- A resource. Is a productive input or competitive asset that is owned or controlled by a firm (e.g., a fleet of oil
tankers)
- A capability. Is the capacity of a firm to perform some activity proficiently
- Resource and capability analysis is a powerful tool for sizing up a firm’s competitive assets and determining if
they can support a sustainable competitive advantage over market rivals.

- An organizational capability is the intangible but observable capacity of a firm to perform a critical activity
proficiently using a related combination (cross-functional bundle) of its resources is knowledge-based, residing
in people and in a firm’s intellectual capital or in its organizational processes and systems, embodying tacit
knowledge.
- A resource bundle is a linked and closely integrated set of competitive assets centered around one or more
cross-functional capabilities.
- The VRIN Test for sustainable competitive advantage asks if a resource is Valuable, Rare, Inimitable, and Non-
substitutable.
- Social complexity (company culture, interpersonal relationships among managers or R&D teams, trust-based
relations with customers or suppliers) and causal ambiguity are two factors that inhibit the ability of rivals to
imitate a firm’s most valuable resources and capabilities.
- Causal ambiguity makes it very hard to figure out how a complex resource contributes to competitive advantage
and therefore exactly what to imitate.
- A dynamic capability is the ongoing capacity of a firm to modify its existing resources and capabilities or create
new ones by:

o Improving existing resources and capabilities incrementally

o Adding new resources and capabilities

to the firm’s competitive asset portfolio
 - SWOT analysis is a simple but powerful tool for sizing up a company’s strengths and weaknesses, its market
opportunities, and the external threats to its future well-being.
- A competence is an activity that a firm has learned to perform with proficiency—a capability, in other words.
- A core competence is an activity that a firm performs proficiently and that is also central to its strategy and
competitive success.
- A distinctive competence is a competitively important activity that a firm performs better than its rivals—it thus
represents a competitively superior internal strength.
- The value chain. A company’s value chain identifies the primary activities and related support activities that
create customer value.
o Identifies the inner workings of the firm's customer value proposition and business model
o Permits a deep look at the firm’s cost structure and its ability to profitably offer low prices
o Reveals the emphasis that a firm places on activities that enhance differentiation and support higher
prices
- Benchmarking is a potent tool for improving a company’s own internal activities that is based on learning how
other companies perform them and borrowing their “best practices.”
o Involves improving a firm’s internal activities based on learning from other firms’ “best practices”
o Assesses whether the cost competitiveness and effectiveness of a firm’s value chain activities are in line
with its competitors’ activities.

How to take stock of how well a company’s strategy is working

The three best indicators of how well a company’s strategy is working are:

1. Whether the company is achieving its stated financial and strategic objectives

2. Whether its financial performance is above the industry average

3. Whether it is gaining customers and increasing its market share

Why a company’s resources and capabilities are centrally important in giving the company a competitive edge over
rivals

A firm’s resources and capabilities represent its competitive assets and are determinants of its competitiveness and
ability to succeed in the marketplace.

How to assess the company’s strengths and weaknesses in light of market opportunities and external threats.

How a
company’s
value chain
activities can
affect the
company’s
cost structure
and customer
value
proposition

Facilitates a
comparison, activity-by-activity, of how effectively and efficiently a firm delivers value to its customers, relative to its
competitors

How a comprehensive evaluation of a company’s competitive situation can assist managers in making critical
decisions about their next strategic moves

A company’s competitive strength scores pinpoint its strengths and weaknesses against rivals and point directly to the
kinds of offensive and defensive actions it can use to exploit its competitive strengths and reduce its competitive
vulnerabilities.
 CHAPTER 5. The Five Generic Competitive Strategies.

- A low-cost provider’s basis for competitive advantage is lower overall costs than competitors.
- Successful low-cost leaders, who have the lowest industry costs, are exceptionally good at finding ways to drive
costs out of their businesses and still provide a product or service that buyers find acceptable.
- A cost driver is a factor that has a strong influence on a firm’s costs.
- Differentiation enhances profitability whenever a company’s product can command a sufficiently higher price or
produce sufficiently greater unit sales to more than cover the added costs of achieving the differentiation.
- The essence of a broad differentiation strategy is to offer unique product attributes that a wide range of buyers
find appealing and worth paying for.
- A uniqueness driver is a factor that can have a strong differentiating effect.
- Differentiation that is difficult for rivals to duplicate or imitate
o Company reputation
o Long-standing relationships with buyers
o A unique product or service image
- Differentiation that creates substantial switching costs that lock in buyers
o Patent-protected product innovation
o Relationship-based customer service
- Best-cost provider strategies are a hybrid of low-cost provider and differentiation strategies that aim at
providing more desirable attributes (quality, features, performance, service) while beating rivals on price.

What distinguishes each of the five generic strategies

and why some of these strategies work better in
certain kinds of competitive conditions than in others.

A firm’s competitive strategy deals exclusively with the specifics of its efforts to position itself in the market-place,
please customers, ward off competitive threats, and achieve a particular kind of competitive advantage.

The major avenues for achieving a competitive advantage based on lower costs
The major avenues to a competitive advantage based on differentiating a company’s product or service offering from
the offerings of rivals

♦ Effective low-cost approaches

● Pursue cost savings that are difficult to imitate

● Avoid reducing product quality to unacceptable levels

♦ Competitive advantages and risks

● Greater total profits and increased market share gained from underpricing competitors

● Larger profit margins when selling products at prices comparable to and competitive with rivals

● Low pricing does not attract enough new buyers

● Rival’s retaliatory price-cutting sets off a price war

The attributes of a best-cost provider strategy—a hybrid of low-cost provider and differentiation strategies

♦ A low-cost provider’s basis for competitive advantage is lower overall costs than competitors.

♦ Successful low-cost leaders, who have the lowest industry costs, are exceptionally good at finding ways to drive
costs out of their businesses and still provide a product or service that buyers find acceptable.

♦ A cost driver is a factor that has a strong influence on a firm’s costs.

 CHAPTER 6. Strengthening a Company’s Competitive Position: Strategic Moves, Timing,

- A blue-ocean strategy offers growth in revenues and profits by discovering or inventing new industry segments
that create altogether new demand.
- To be an effective defensive strategy, signaling needs to be accompanied by a credible commitment to follow
through.
- Because of first-mover advantages and disadvantages, competitive advantage can spring from when a move is
made as well as from what move is made.
- The scope of the firm refers to the range of activities that the firm performs internally, the breadth of its
product and service offerings, the extent of its geographic market presence, and its mix of businesses.
- Scope issues are at the very heart of corporate-level strategy.
- Horizontal scope is the range of product and service segments that a firm serves within its focal market.
- Vertical scope is the extent to which a firm’s internal activities encompass one, some, many, or all of the
activities that make up an industry’s entire value chain system, ranging from raw-material production to final
sales and service activities.
- Merger. Is the combining of two or more firms into a single corporate entity that often takes on a new name
- Acquisition. Is a combination in which one firm, the "acquirer," purchases and absorbs the operations of
another firm, the "acquired"
- Strategic issues
o Cost savings may prove smaller than expected.
o Gains in competitive capabilities take longer to realize or never materialize at all.
- Organizational issues
o Cultures, operating systems and management styles fail to mesh due to resistance to change from
organization members.
o Key employees at the acquired firm are lost.
o Managers overseeing integration make mistakes in melding the acquired firm into their own.
- A vertically integrated firm is one that performs value chain activities along more than one stage of an
industry’s value chain system.
- Vertically integrated firm. One that participates in multiple segments or stages of an industry’s overall value
chain
- Vertical integration strategy. Can expand the firm’s range of activities backward into its sources of supply or
forward toward end users of its products
- Full integration. A firm participates in all stages of the vertical activity chain.
- Partial integration. A firm builds positions only in selected stages of the vertical chain.
- Tapered integration. A firm uses a mix of in-house and outsourced activity in any stage of the vertical chain.
- Backward integration involves entry into activities previously performed by suppliers or other enterprises
positioned along earlier stages of the industry value chain system.
- Forward integration involves entry into value chain system activities closer to the end user.
- Outsourcing involves contracting out certain value chain activities that are normally performed in-house to
outside vendors.
- A strategic alliance is a formal agreement between two or more separate companies in which they agree to
work cooperatively toward some common objective.
- A joint venture is a partnership involving the establishment of an independent corporate entity that the
partners own and control jointly, sharing in its revenues and expenses.

Whether and when to pursue offensive or defensive strategic moves to improve a firm’s market position

♦ Strategic offensive principles

 1. Focusing relentlessly on building competitive advantage and then striving to convert it into
sustainable advantage

2. Applying resources where rivals are least able to defend themselves

3. Employing the element of surprise as opposed to doing what rivals expect and are prepared for

4. Displaying a capacity for swift, decisive, and overwhelming actions to overpower rivals

♦ Defensive strategies can take either of two forms

1. Actions to block challengers

2. Actions to signal the likelihood of strong retaliation

When being a first mover or a fast follower or a late mover is most advantageous

Because of first-mover advantages and disadvantages, competitive advantage can spring from when a move is made as
well as from what move is made.

The strategic benefits and risks of expanding a firm’s horizontal scope through mergers and acquisitions

♦ Increasing a firm’s horizontal scope strengthens its business and increases its profitability by:

● Improving the efficiency of its operations

● Heightening its product differentiation

● Reducing market rivalry

● Increasing the firm’s bargaining power over

suppliers and buyers

● Enhancing its flexibility and dynamic capabilities

The conditions that favor outsourcing certain value chain activities to outside parties

A company must guard against outsourcing activities that hollow out the resources and capabilities that it needs to be a
master of its own destiny.

When and how strategic alliances can substitute for horizontal mergers and acquisitions or vertical integration and
how they can facilitate outsourcing

Formal agreement between two or more separate companies in which they agree to work cooperatively toward some
common objective.

A joint venture is a partnership involving the establishment of an independent corporate entity that the partners own
and control jointly, sharing in its revenues and expenses.