Strategic Management and Strategic Competitiveness PDF

LEARNING OBJECTIVE: LEARNING OBJECTIVE: **Strategic Competitiveness** **Competitive Advantage** **Above-average Returns** **Average Returns** **Strategic Management Process** **THE COMPETITIVE LANDSCAPE** **Hypercompetition (*intense competition)*** *--protect your product or invade or gaya...

LEARNING OBJECTIVE: LEARNING OBJECTIVE: **Strategic Competitiveness** **Competitive Advantage** **Above-average Returns** **Average Returns** **Strategic Management Process** **THE COMPETITIVE LANDSCAPE** **Hypercompetition (*intense competition)*** *--protect your product or invade or gayahin the other* **THE GLOBAL ECONOMY** **THE MARCH OF GLOBALIZATION** **TECHNOLOGY AND TECHNOLOGICAL CHANGES** **Technology Diffusion and Disruptive Technologies** **Perpetual innovation** **The Information Age** **Increasing Knowledge Intensity** **Strategic flexibility** **The I/O Model of Above-Average Returns**  CHAPTER 1: STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - CHAPTER 3: ANALYZING THE INTERNAL ENVIRONMENT:RESOURCES, CAPABILITIES, AND CORE COMPETENCE - - - - - - - - - - - - - - - - - - - - 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. **CHAPTER 1: Strategic Management and Strategic Competitiveness** - - - - - - - - - - - - - - - - - - - - - **THE GLOBAL ECONOMY** - - **THE MARCH OF GLOBALIZATION** - - **TECHNOLOGY AND TECHNOLOGICAL CHANGES** - - - - - **Technology Diffusion and Disruptive Technologies** - - - - - - - - **The Information Age** - - **Increasing Knowledge Intensity** - - - - - - **Strategic Flexibility** - - - - **The I/O Model of Above-Average Returns** - - - **Figure 1.2 the I/O Model of Above-average Returns**  **The Resource-Based Model of Above-Average Returns** - - - - - - - - Figure 1.3 ***Resource-based model of above-average returns***  - - - - **Vision** - - - - - - **Mission** - - - - - **Stakeholders** - - - - - These groups are the - - - **Figure 1.4 The three stakeholder groups** - - - - **Because of potential conflicts, each firm must carefully manage its stakeholders.** - - - **Capital Market Stakeholders** - - - **Product Market Stakeholder** - - **Organizational Stakeholders** - - - **Strategic Leaders** - - - **The Work Effective Strategic Leaders** - - - - - - **CHAPTER 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis** **Introduction** Firms understand the external environment by acquiring information about competitors, customers, and other stakeholders to build their own base of knowledge and capabilities. On the basis of the new information, firms take actions, such as building new capabilities and core competencies, in hopes of buffering themselves from any negative environmental effects and to pursue opportunities as the basis for better serving their stakeholders' needs.  **Industry Environment -** It is the set of factors that directly influences a firm and its competitive actions and responses: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among competing firms. **Competitor analysis** \- How companies gather and interpret information about their competitors. \- Understanding the firm's competitor environment complements the insights provided by studying the general and industry environments. **External Environment Analysis** **Figure 2.1 The External Environment** **THE GENERAL, INDUSTRY AND COMPETITOR ENVIROMENT** **General Environment** is composed of dimensions in the broader society that influence an industry and the firms within it. ∙ **[SEVEN ENVIRONMENTAL SEGMENTS:]** demographic, economic, political/legal, sociocultural, technological, global, and sustainable physical. ∙ Firms cannot directly control the general environment's segments. ∙ ***Opportunity*** is a condition in the general environment that, if exploited effectively, helps a company reach strategic competitiveness. ∙ A ***Threat*** is a condition in the general environment that may hinder a company's efforts to achieve strategic competitiveness **SCANNING** ∙ Entails the study of all segments in the general environment. Although challenging, scanning is critically important to the firms' efforts to understand trends in the general environment and to predict their implications. ∙ Through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already under way. ∙ Scanning activities must be aligned with the organizational context; a scanning system designed for a volatile environment is inappropriate for a firm in a stable environment. ∙ Scanning often reveals ambiguous, incomplete, or unconnected data and information that require careful analysis. **MONITORING** ∙ When monitoring, analysts observe environmental changes to see if an important trend is emerging from among those spotted through scanning. ∙ Critical to successful monitoring is the firm's ability to detect meaning in environmental events and trends. ∙ Effective monitoring requires the firm to identify important stakeholders and understand its reputation among these stakeholders as the foundation for serving their unique needs. ∙ Scanning and monitoring are particularly important when a firm competes in an industry with high technological uncertainty. ∙ Scanning and monitoring can provide the firm with information. **FORECASTING** ∙ When forecasting, analysts develop feasible projections of what might happen, and how quickly, as a result of the events and trends detected through scanning and monitoring. ∙ Forecasting events and outcomes accurately is challenging. **ASSESSING** ∙ To determine the timing and significance of the effects of environmental changes and trends that have been identified. ∙ Accurately assessing the trends expected to take place in the segments of a firm's general environment is important. **Segment of the General Environment** The ***general environment*** is composed of segments that are external to the firm. Although the degree of impact varies, these environmental segments affect all industries and the firms competing in them. The **demographic segment** is concerned with a population's size, age structure, geographic distribution, ethnic mix, and income distribution. **THE ECONOMIC SEGMENT** **Economic Environment** ∙ refers to the nature and direction of the economy in which a firm competes or may compete. ∙ In general, firms seek to compete in relatively stable economies with strong growth potential. ∙ It is challenging for firms studying the economic environment to predict economic trends that may occur and their effects on them. **The Political/ Legal Segment** ∙ The political/legal segment is the arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding interactions among nations as well as between firms and various local governmental agencies. ∙ This segment is concerned with how organizations try to influence governments and how they try to understand the influences (current and projected) of those governments on their competitive actions and responses. **The Sociocultural Segment** ∙ The sociocultural segment is concerned with a society's attitudes and cultural values. Because attitudes and values form the cornerstone of a society, they often drive demographic, economic, political/legal, and technological conditions and changes. ∙ Individual societies' attitudes and cultural orientations are anything but stable, meaning that firms must carefully scan, monitor, forecast, and assess them to recognize and study associated opportunities and threats. **The Technological Segment** ∙ The technological segment includes the institutions and activities involved in creating new knowledge and translating that knowledge into new outputs, products, processes, and materials. ∙ Given the rapid pace of technological change and risk of disruption, it is vital for firms to thoroughly study the technological segment. **The Global Segment** ∙ The global segment includes relevant new global markets, existing markets that are changing, important international political events, and critical cultural and institutional characteristics of global markets. ∙ Global focusing often is used by firms with moderate levels of international operations who increase their internationalization by focusing on global niche markets. **The Sustainable Physical Environment Segment** ∙ The sustainable physical environment segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to those changes with the intent of creating a sustainable environment. ∙ Ecological, social, and economic systems interactively influence what happens in this particular segment, and that they are part of an interconnected global society. **INDUSTRY ENVIRONMENTAL ANALYSIS** ∙ **Industry** is a group of firms producing products that are close substitutes. In the course of competition, these firms influence one another. ∙ An industry's structural characteristics influence a firm's choice of strategies. ∙ Compared with the general environment, the industry environment (measured primarily in the form of its characteristics) has a more direct effect on the competitive actions and responses a firm takes to succeed. **Figure 2.2 the five forces of competition model**  **Threats of New Entrants** ∙ Identifying new entrants is important because they can threaten the market share of existing competitors. ∙ One reason new entrants pose such a threat is that they bring additional production capacity. ∙ The likelihood that firms will enter an industry is a function of two factors: barriers to entry and the retaliation expected from current industry participants. **Barriers to Entry** ∙ Firms competing in an industry (and especially those earning above-average returns) try to develop entry barriers to thwart potential competitors. ∙ Companies competing within a particular industry study these barriers to determine the degree to which their competitive position reduces the likelihood of new competitors being able to enter the industry to compete against them. ∙ Economies of Scale ∙ Product Differentiation ∙ Capital Requirements ∙ Switching Costs ∙ Access to Distribution Channels ∙ Cost Disadvantages Independent of Scale ∙ Government Policy **Expected Retaliation** ∙ Companies seeking to enter an industry also anticipate the reactions of firms in the industry. ∙ An expectation of swift and vigorous competitive responses reduces the likelihood of entry. ∙ Vigorous retaliation can be expected when the existing firm has a major stake in the industry (e.g., it has fixed assets with few, if any, alternative uses), when it has substantial resources, and when industry growth is slow or constrained. **Bargaining Power of Suppliers** A supplier group is powerful when: ∙ It is ***dominated*** by a few large companies and is more concentrated than the industry to which it sells. ∙ ***Satisfactory substitute products*** are not available to industry firms. ∙ ***Industry firms*** are not a significant customer for the supplier group ∙ Suppliers' goods are critical to buyers' marketplace success ∙ The effectiveness of suppliers' products has created ***high switching costs*** for industry firms. ∙ It poses a credible threat to integrate forward into the buyers' industry. ***Credibility*** is enhanced when suppliers have substantial resources and provide a highly differentiated product. **Customers (buyer groups) are powerful when:** ∙ They purchase a large portion of an industry's total output. ∙ The sales of the product being purchased account for a significant portion of the seller's annual revenues. ∙ They could switch to another product at little, if any, cost. ∙ The industry's products are undifferentiated or standardized**,** and the buyers pose a credible threat if they were to integrate backward into the sellers' industry. **Threat of Substitute Product** ∙ Substitute products are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces. ∙ Product substitutes present a strong threat to a firm when customers face few if any switching costs and when the substitute product's price is lower or its quality and performance capabilities are equal to or greater than those of the competing product. **The Intensity of Rivalry among Competitors** The most prominent factors that experience shows affect the intensity of rivalries among firms. **Numerous or Equally Balanced Competitors** - it is common for a few firms to believe they can act without eliciting a response. **Slow Industry Growth** - rivalry in no-growth or slow- growth markets becomes more intense as firms battle to increase their market shares by attracting competitors' customers. **High Fixed Costs or High Storage Cost** - When fixed costs account for a large part of total costs, companies try to maximize the use of their productive capacity. **Lack of Differentiation or Low Switching Costs** - Firms that develop and sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns. **High Strategic Stakes -** Competitive rivalry is likely to be high when it is important for several of the competitors to perform well in the market. \- High strategic stakes can also exist in terms of geographic locations. **High Exit Barriers** Common exit barriers that firms face include the following: ∙ **[Specialized assets]** (assets with values linked to a particular business or location) Fixed costs of exit (such as labor agreements). ∙ **[Strategic interrelationships]** (relationships of mutual dependence, such as those between one business and other parts of a company's operations, including shared facilities and access to financial markets). ∙ Emotional barriers (aversion to economically justified business decisions because of fear for one's own career, loyalty to employees, and so forth) ∙ Government and social restrictions (often based on government concerns for job losses and regional economic effects; more common outside the United States). **Interpreting Data Analysis** ∙ ***Effective industry analyses*** are products of careful study and interpretation of data and information from multiple sources. ∙ ***Analysis of the five forces within a given industry*** allows the firm to determine the industry's attractiveness in terms of the potential to earn average or above-average returns. **Strategic Groups** ∙ A set of firms emphasizing similar strategic dimensions and using a similar strategy is called a strategic group. ∙ The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group. ∙ The notion of strategic groups can be useful for analyzing an industry's competitive structure. Strategic groups have several implications. ∙ First, because firms within a group offer similar products to the same customers, the competitive rivalry among them can be intense. The more intense the rivalry, the greater the threat to each firm's profitability. ∙ Second, the strengths of the five forces differ across strategic groups. ∙ Third, the closer the strategic groups are in terms of their strategies, the greater is the likelihood of rivalry between the groups. **Competitor Analysis** ∙ The competitor environment is the final part of the external environment requiring study. ∙ Competitor analysis focuses on each company against which a firm competes directly. In a competitor analysis, the firm seeks to understand the following: ∙ 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 the industry, as shown by its assumptions. ∙ What the competitor's capabilities are, as shown by its strengths and weaknesses. **Figure 2.3 Competitor Analysis Components** **Competitor Analysis** ∙ Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitors' intentions and the strategic implications resulting from them. ∙ Useful data and information combine to form ***competitor intelligence*** which is the set of data and information the firm gathers to better understand and anticipate competitors' objectives, strategies, assumptions, and capabilities. ∙ **Complementors** are companies or networks of companies that sell complementary goods or services that are compatible with the focal firm's good or service. ∙ When a complementor's good or service contributes to the functionality of a focal firm's good or service, it in turn creates additional value for that firm. **Ethical Considerations** Practices considered both legal and ethical include: ∙ Obtaining publicly available information (e.g., court records, competitors' helpwanted advertisements annual reports, financial reports of publicly hel corporations, and Uniform Commercial Code filings) ∙ Attending trade fairs and shows to obtain competitors' brochures, view their exhibits, and listen to discussions about their products. ∙ certain practices (including blackmail, trespassing, eavesdropping, and stealing drawings, samples, or documents) are widely viewed as unethical and often are illegal as well. ∙ Some competitive intelligence practices may be legal, but a firm must decide whether they are also ethical, given the image it desires as a corporate citizen. **CHAPTER 3: The Internal Environment: The Internal Environment: Resources, Capabilities And Resources, Capabilities And Core Competence Core Competence** **ANALYZING THE INTERNAL ORGANIZATION** The Context of Internal Analysis The Context of Internal Analysis MGT 406 One of the conditions associated with analyzing a firm's internal organization is the reality that in today's global economy, some of the resources that were traditionally critical to firms' efforts to produce, sell, and distribute their goods or services, such as labor costs, access to financial resources and raw materials, and protected or regulated markets, although still important, are now less likely to be the source of competitive advantages. **The Context of Internal Analysis** ∙ Important reason for this is that an increasing number of firms are using their resources to form core competencies through which they successfully implement an international strategy as a means of overcoming the advantages created by these more traditional resources. ∙ A **global mind-set** is the ability to analyze, understand, and manage an internal organization in ways that are not dependent on the assumptions of a single country, culture, or context. ∙ Using a global mind-set to analyze the internal organization has the potential to significantly help the firm in its efforts **to outperform rivals.** ∙ Analyzing the firm's internal organization requires that evaluators **examine the firm's entire portfolio** of resources and capabilities. *Figure 3.1 Components of an Internal Analysis*  **CREATING VALUE** ∙ **Value** is measured by a product's performance characteristics and by its attributes for which customers are willing to pay. ∙ Firms create value by **innovatively bundling and leveraging their resources** to form capabilities and core competencies. ∙ Firms with **a competitive advantage** create more value for customers than do competitors. ∙ Ultimately, creating value for customers is the **source of above average returns** for a firm. What the firm intends regarding value creation affects its choice of business-level strategy and its organizational structure. ∙ At one time, firms' efforts to create value were largely oriented toward understanding the characteristics of their industry in which they competed and, in light of those characteristics, determining how they should be positioned relative to competitors. **THE CHALLENGE OF ANALYZING THE INTERNAL ORGANIZATION INTERNAL ORGANIZATION** ∙ The strategic decisions managers make about the internal organization are nonroutine, have ethical implications, **and significantly influence the firm's ability** to earn above average returns. ∙ These decisions **involve choices about the resources** the firm needs to collect and how to best manage and leverage them. **The Challenge of Analyzing the Internal Organization** ∙ **Making decisions** involving the firm's assets--- identifying, developing, deploying, and protecting resources, capabilities, and core competencies--- may appear to be relatively easy. ∙ The challenge and difficulty of making effective decisions are implied by **preliminary evidence** suggesting that one-half of organizational decisions fail. ∙ A firm can improve by **studying its mistakes;** in fact, the learning generated by making and correcting mistakes can be important to efforts to create new capabilities and core competencies. One capability that can be learned from failure is when to quit. *FIGURE 3.2 CONDITIONS AFFECTING MANAGERIAL DECISIONS ABOUT RESOURCES, CAPABILITIES, AND RESOURCES, CAPABILITIES, AND CORE COMPETENCIES CORE COMPETENCIES* ∙ **Three conditions---**uncertainty, complexity, and intraorganizational conflict---affect managers as they analyze the internal organization and make decisions about resources. ∙ When studying the internal organization, **managers face uncertainty because of a number of issues,** including those of new proprietary technologies, rapidly changing economic and political trends, transformations in societal values, and shifts in customers' demands. ∙ Additionally, intraorganizational conflict may surface when decisions are made about the core competencies a firm should **develop and nurture.** ∙ In making decisions affected by these three conditions, **judgment is** **required.** Judgment is the capability of making successful decisions when no obviously correct model or rule is available or when relevant data are unreliable or incomplete. ∙ Finding individuals who can make the most successful decisions about using the organization's resources is challenging. Individuals holding these key decision-making positions are called strategic leaders. **Resources, Capabilities, Resources, Capabilities, and Core Competencies and Core Competencies** **Resources** ∙ cover a spectrum of individual, social, and organizational phenomena. ∙ Resources do not allow firms to create value for customers as the foundation for earning above-average returns. Indeed, resources are combined to form capabilities. ∙ Some of a firm's resources are tangible while others are intangible. **Tangible Resources** ∙ Tangible resources are assets that can be observed and quantified. ∙ Production equipment, manufacturing facilities, distribution centers, and formal reporting structures are examples of tangible resources. ∙ As tangible resources, a firm's borrowing capacity and the status of its physical facilities are visible. ∙ The value of many tangible resources can be established through financial statements, but these statements do not account for the value of all of the firm's assets because they disregard some intangible resources. ∙ The value of tangible resources is also constrained because they are hard to leverage---it is difficult to derive additional business or value from a tangible resource. ∙ Although production assets are tangible, many of the processes necessary to use them are intangible. **Intangible Resources** ∙ are assets that are rooted deeply in the firm's history, accumulate over time, and are relatively difficult for competitors to analyze and imitate. Because they are embedded in unique patterns of routines, intangible resources are **difficult for competitors to analyze and imitate.** ∙ Compared to tangible resources, intangible resources are a **superior source** of capabilities and subsequently, core competencies. ∙ Because intangible resources are **less visible and more difficult** for competitors to understand, purchase, imitate, or substitute for, firms prefer to rely on them rather than on tangible resources as the foundation for their capabilities. ∙ Knowledge, trust between managers and employees, managerial capabilities, organizational routines (the unique ways people work together), scientific capabilities, the capacity for innovation, brand name, the firm's reputation for its goods or services and how it interacts with people (such as employees, customers, and suppliers), and organizational culture are intangible resources. ∙ Intangible resources require nurturing to maintain their ability to help firms engage in competitive battles. ∙ Another benefit of intangible resources is that, unlike most tangible resources, their use can be leveraged. *For each analysis, tangible and intangible are grouped into categories. The four primary categories of tangible resources are financial, organizational, physical, and technological.* *Table 3.1 Tangible Resources* *Table 3.2 Intangible Resources* The three primary categories of intangible resources are human, innovation, and reputational. **Capabilities** ∙ The firm combines individual tangible and intangible resources to create capabilities. ∙ In turn, capabilities are **used to complete the organizational tasks** required to produce, distribute, and service the goods or services the firm provides to customers for the purpose of creating value for them. ∙ Capabilities are often based on developing, carrying, and exchanging information and knowledge through the **firm's human capital.** *Table 3.3 Example of Firms Capabilities*  **Core Competencies** ∙ are capabilities that serve as a **source of competitive advantage** for a firm over its rivals. ∙ distinguish a company competitively and reflect its personality. ∙ emerge over time through an organizational process of accumulating and learning how to **deploy different resources and capabilities**. ∙ Core Competencies are **the "crown jewels of a company,"** the activities the company performs especially well compared to competitors and through which the firm adds unique value to the goods or services it sells to customers. **Building Core Building Core Competencies Competencies** The Four Criteria of Sustainable Competitive Advantage ∙ Capabilities that are valuable, rare, costly to imitate, and nonsubstitutable are core competencies. In turn, core competencies can lead to competitive advantages for the firm over its rivals. ∙ Capabilities failing to satisfy the four criteria are not core competencies, meaning that although every core competence is a capability, not every capability is a core competence. ∙ In slightly different words, for a capability to be a core competence, it must be valuable and unique from a customer's point of view. ∙ For a core competence to be a potential source of competitive advantage, it must be inimitable and nonsubstitutable by competitors. *Table 3.4 The Four Criteria of Sustainable Competitive Advantage* **The Four Criteria of Sustainable Competitive Advantage** 1. Valuable 2\. Rare 3\. Costly 4\. Nonsubsitutable *Table 3.5 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage*  **Value Chain Analysis** ∙ Value chain analysis allows the firm to understand **the parts of its operations that create value** and those that do not. ∙ The value chain is **a template** that firms use to analyze their cost position and to identify the multiple means that can be used to facilitate implementation of a chosen strategy ∙ are **activities or tasks the firm completes** in order to produce products and then sell, distribute, and service those products in ways that create value for customers. *Figure 3.3 A Model of Value Chain* **Value Chain Analysis** ∙ Creating value for customers by completing activities that are part of the value chain often requires building effective alliances with suppliers and developing strong positive relationships with customers. ∙ When firms have strong positive relationships with suppliers and customers, they are said to have social capital. **Support Functions** ∙ include the **activities or tasks the firm completes** in order to support the work being done to produce, sell, distribute, and service the products the firm is producing. ∙ A firm can develop a capability and/or a core competence in any of the value chain activities and in any of the support functions. *Figure 3.4 Creating Value through Value Chain Activities* **Supply-Chain Management --** Activities including sourcing, procurement, conversion, and logistics management that are necessary for the firm to receive raw materials and convert them into final products. **Follow-up Services -- a**ctivities taken to increase a products value for customers. Surveys to receive feedback about the customer's satisfaction, offering technical support after the sale, and fully complying with a products warranty are examples of these activities. **Operations-** activities necessary to efficiently change raw materials into finished products. Developing employees' work schedules, designing, production processes and physical layout of the operation' facilities determining production capacity needs, and selecting and maintaining production equipment are examples of specific outcomes. **Marketing(Including Sales**) -- Activities taken for the purpose of segmenting target customers on the basis of their unique needs, satisfying customers, and locating additional customers. Advertising campaigns, developing and managing products brands, determining appropriate pricing strategies, and training and supporting a sales force are specific examples of these activities. **Distribution-** Activities related to getting the final product to the customers. Efficiently handling customers' orders, choosing the optimal delivery channel, and working with the finance support function to arrange for customers' payment for delivered goods are examples of these activities. Center- Customer Value \-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-- *Figure 3. 5 Creating Value through Support Functions* H**uman Resources-** activities associated with managing the firm's human capital. Selecting, training, retaining, and compensating human resources in ways that create a capability and hopefully a core competence are specific examples of these activities. **Management Information System- activities** taken to obtain and manage information and knowledge throughout sophisticated technologies, determining optimal ways to collect and distribute knowledge, linking relevant information and knowledge to organizational functions are activities associates with this support function. **Finance-** Activities associated with effectively acquiring and managing financial resources. Securing adequate financial capital, investing in organizational functions in ways that will support the firms' efforts to produce and distribute its products in the short and long term, and managing relationships with those providing financial capital to the firm are specific examples of these activities. Center- Customer Value To be a core competence and a source of competitive To be a core competence and a source of competitive advantage, a capability must allow the firm to either ; 1. Perform an activity in a manner that provides value superior to that provided by competitors. *2.* Perform a value-creating activity that competitors cannot perform **OUTSOURCING** is the purchase of a value-creating activity or a support function activity from an external supplier. \-\--Firms engaging in effective outsourcing increase their flexibility, mitigate risks, and reduce their capital investments. Two significant concerns associated with outsourcing: Two significant concerns associated with outsourcing: 1\. The potential loss in a firm's ability to innovate and; 2\. The loss of jobs within the focal firm. **OFFSHORING** -deciding to outsource to a foreign supplier. **Competencies, Strengths, Weaknesses, and Strategic Decisions and Strategic Decisions** ∙ **By analyzing the internal organization,** firms identify their strengths and weaknesses as reflected by their resources, capabilities, and core competencies. ∙ In considering the results of examining the firm's internal organization, managers should understand that having a significant quantity of resources is not the same as having the **"right" resources.** ∙ Tools such as **outsourcing** help the firm focus on its core competencies as the source of its competitive advantages. **CHAPTER 4: BUSINESS-LEVEL STRATEGY** **BUSINESS-LEVEL STRATEGY -** An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. **Customers: Customers: Their Their Relationship Relationship with with Business-Level Business-Level Strategies** ∙ Strategic competitiveness results only when the firm satisfies a group of customers by using its competitive advantages as the basis for competing in individual product markets. ∙ The most successful companies try to find new ways to satisfy current customers and/or to meet the needs of new customers. **Effectively Managing Relationships with Customers Relationships with Customers** ∙ The firm's relationships with its customers are strengthened when it delivers superior value to them. ∙ Delivering superior value often results in increased customer satisfaction. ∙ A number of companies have become skilled at the art of managing all aspects of their relationship with their customers. **Reach, Richness, and Affiliation** **Reach** is an especially critical dimension for social networking sites such as Facebook and MySpace in that the value these firms create for users is to connect them with others. **Richness,** the second dimension of firms' relationships with customers, is concerned with the depth and detail of the two-way flow of information between the firm and the customer. **Affiliation,** the third dimension, is concerned with facilitating useful interactions with customers. **Who: Determining the Customers to Serve** ∙ Companies divide customers into groups based on differences in the customers' needs (needs are discussed further in the next section) to make this decision. ∙ Dividing customers into groups based on their needs is called market segmentation. ∙ **Market segmentation** is a process used to cluster people with similar needs into individual and identifiable groups. **What: Determining Which Customer Needs to Satisfy** ∙ **Needs (what)** are related to a product's benefits and features. ∙ Having close and frequent interactions with both current and potential customers helps the firm identify those individuals' and groups' current and future needs. ∙ From a **strategic perspective,** a basic need of all customers is to buy products that create value for them. ∙ The most effective firms continuously strive to anticipate changes in customers' needs. **Basis for Customer Segmentation** **[CONSUMER MARKETS ]** ∙ Demographic factors (age, income, sex, etc.) ∙ Socioeconomic factors (social class, stage in the family life cycle) ∙ Geographic factors (cultural, regional, and national differences) ∙ Psychological factors (lifestyle, personality traits) ∙ Consumption patterns (heavy, moderate, and light users) ∙ Perceptual factors (benefit segmentation, perceptual mapping) **[INDUSTRIAL MARKETS]** ∙ End-use segments (identified by Standard Industrial Classification \[SIC\] code) ∙ Product segments (based on technological differences or production economics) ∙ Geographic segments (defined by boundaries between countries or by regional differences within them) ∙ Common buying factor segments (cut across product market and geographic segments) ∙ Customer size segments **How: Determining Core Competencies Necessary to Satisfy Customer Needs** ∙ Firms use core competencies (how) to implement value creating strategies, thereby satisfying customers' needs. ∙ Firms with the capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and hopefully **exceed customers' expectations** across time. ∙ Often these capabilities are difficult for competitors to imitate, partly because they are constantly being upgraded, but also because they are integrated and used as **configurations of capabilities** to perform an important activity (e.g., R&D). **THE PURPOSE OF A BUSINESS-LEVEL STRATEGY STRATEGY** ∙ The purpose of a business-level strategy is to create differences between the firm's position and those of its competitors. ∙ To position itself differently from competitors, a firm must decide whether it intends to perform activities differently or to perform different activities. **TYPES OF BUSINESS-LEVEL STRATEGIES** Firms choose between five business-level strategies to establish and defend their desired strategic position against competitors: ∙ cost leadership ∙ differentiation ∙ focused cost leadership ∙ focused differentiation ∙ integrated cost leadership/differentiation When selecting a business-level strategy, firms evaluate two types of potential competitive advantages: "lower cost than rivals or the ability to differentiate and command a premium price that exceeds the extra cost of doing so." *FIGURE 4.1 FIVE BUSINESS-LEVEL STRATEGIES*  ∙ Two types of target markets are broad market and narrow market segment(s). ∙ Firms serving a **broad market** seek to use their capabilities to create value for customers on an industry-wide basis. ∙ A **narrow market segment** means that the firm intends to serve the needs of a narrow customer group. **COST LEADERSHIP STRATEGY** ∙ The **cost leadership strategy** is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors. ∙ Firms using the cost leadership strategy commonly sell standardized goods or services, but with competitive levels of differentiation, to the industry's most typical customers. FIGURE 4.2 *EXAMPLES OF VALUE CREATING ACTIVITIES ASSOCIATED WITH THE COST LEADERSHIP STRATEGY* **COST LEADERSHIP STRATEGY Rivalry with Existing Competitors** Having the low-cost position is valuable when dealing with rivals. Because of the cost leader's advantageous position, rivals hesitate to compete on the basis of price, especially before evaluating the potential competition. outcomes of such **Bargaining Power of Buyers (Customers)** Powerful customers can force a cost leader to reduce its prices, but not below the level at which the cost leader's next-most efficient industry competitor can earn average returns. **Product Substitutes** When faced with possible substitutes, the cost leader has more flexibility than its competitors. To retain customers, it often can reduce the price of its good or service. With still lower prices and competitive levels of differentiation, the cost leader increases the probability that customers prefer its product rather than a substitute. **Competitive Risks of the Cost Leadership Strategy** The cost leadership strategy is not risk free. One risk is that the processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors' innovations. **DIFFERENTIATION STRATEGY** The **differentiation strategy** is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them. **Product innovation,** which is "the result of bringing to life a new way to solve the customer's problem---through a new product or service development---that benefits both the customer and the sponsoring company," is critical to successful use of the differentiation strategy. Through the differentiation strategy, the firm produces di**stinctive products** for customers who value differentiated features more than they value low cost. To maintain success with the differentiation strategy results, the firm **must consistently upgrade differentiated features** that customers value and/or create new valuable features (i.e., innovate) without significant cost increases. *FIGURE 4.3 EXAMPLES OF VALUE CREATING ACTIVITIES ASSOCIATED WITH THE DIFFERENTIATI ON STRATEGY*  **DIFFERENTIATION STRATEGY** **Rivalry with Existing Competitors** Customers tend to be loyal purchasers of products differentiated in ways that are meaningful to them. As their loyalty to a brand increases, customers' sensitivity to price increases is reduced. **Bargaining Power of Buyers (Customers)** The distinctiveness of differentiated goods or services reduces customers' sensitivity to price increases. Customers are willing to accept a price increase when a product still satisfies their unique needs better than a competitor's offering. **Bargaining Power of Suppliers** Because the firm using the differentiation strategy charges a premium price for its products, suppliers must provide high-quality components, driving up the firm's costs. However, the high margins the firm earns in these cases partially insulate it from the influence of suppliers in that higher supplier costs can be paid through these margins. **Potential Entrants** Customer loyalty and the need to overcome the uniqueness of differentiated a product create substantial barriers to potential entrants. **Product Substitutes** Firms selling brand-name goods and services to loyal customers positioned are effectively against substitutes. **Competitive Risks of the Differentiation Strategy** One risk of the differentiation strategy is that customers might decide that the price differential between the differentiator's product and the cost leader's product is too large. Another risk of the differentiation strategy is that a firm's means of differentiation may cease to provide value for which customers are willing to pay. **FOCUS STRATEGIES** The **focus strategy** is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. Examples of specific market segments that can be targeted by a focus strategy include: ∙ a particular buyer group (e.g., youths or senior citizens), ∙ a different segment of a product line (e.g., products for professional painters or the do-it-yourself group), or ∙ a different geographic market (e.g., northern or southern Italy by using a foreign subsidiary) ∙ Firms can create value for customers in specific and unique market segments by using the focused cost leadership strategy or the focused differentiation strategy. ∙ The activities required to use the focused cost leadership strategy are virtually identical to those of the industry-wide cost leadership strategy , and activities required to use the focused differentiation strategy are largely identical to those of the industry-wide differentiation strategy. **DIFFERENTIATION STRATEGY** Competitive Risks of Focus Strategies Focus strategies have three additional risks. ∙ A competitor may be able to focus on a more narrowly defined competitive segment and thereby "out-focus" the focuser. ∙ A company competing on an industry-wide basis may decide that the market segment served by the firm using a focus strategy is attractive and worthy of competitive pursuit. ∙ the needs of customers within a narrow competitive segment may become more similar to those of industry-wide customers as a whole over time. **INTEGRATED COST LEADERSHIP/DIFFERENTIATION STRATEGY** ∙ The **integrated cost leadership/differentiation strategy** involves engaging in primary value-chain activities and support functions that allow a firm to simultaneously pursue low cost and differentiation. ∙ The objective of using this strategy is to efficiently produce products with some differentiated features. Flexible manufacturing systems, information networks, and total quality management systems **are three sources of flexibility that are particularly useful for firms** trying to balance the objectives of continuous cost reductions and continuous enhancements to sources of differentiation as called for by the integrated strategy. **Flexible Manufacturing Systems** A significant technological advance, the FMS is a computer controlled process used to produce a variety of products in moderate, flexible quantities with a minimum intervention. **Information Networks** By linking companies with their suppliers, distributors, and customers information networks provide another source of flexibility. These networks, when used effectively, help the firm satisfy customer expectations in terms of product quality and delivery speed. **Total Quality Management Systems** Total quality management (TQM) is a managerial process that emphasizes an organization's commitment to the customer and to continuous improvement of all processes through problem-solving approaches based on empowerment of employees. Firms develop and use TQM systems to: ∙ increase customer satisfaction, ∙ cut costs, and ∙ reduce the amount of time required to introduce innovative products to the marketplace. **Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy** Firms that fail to perform the value-chain activities and support functions in an optimum manner become "stuck in the middle."115 Being stuck in the middle means that the firm's cost structure is not low enough to allow it to attractively price its products and that its products are not sufficiently differentiated to create value for the target customer.