STRATEGIC MANAGEMENT (BUSM3309)

FINAL REVISION (S2-2013)

By Nguyen Thi Quynh Tram – Uploaded by RMIT Vietnam Helpdesk Team

Chapter 1 – INTRODUCING STRATEGY – 3 Levels of Strategy in an organization

Question 1 – In an organization, strategies can exist at three main levels. Identify and describe strategies at these
three levels and their purposes. Give example(s) to support your argument.

I. Key concept - DEFINITION OF “STRATEGY”

Strategy is defined as the overall mission, vision and long-term direction of an organization. The objective
of a strategy is to maximize an organization’s strengths and to minimize the strengths of the competitors.
For example, long term direction of Nokia is from mobile phones to mobile computing. Or the long term
direction of Disney is from cartoons to diversified entertainment.
II. Related concept – INDENTIFYING “STRATEGIC DECISIONS”
Strategic decisions are about:
 The long term direction of an organization
 The scope of an organization’s activities
 Gaining advantage over competitors
 Addressing changes in the business environment
 Building on resources and competences (capability)
 Values and expectations of stakeholders.
Therefore they are likely to
Be complex in nature
Be made in situations of uncertainty
Affect operational decisions
Require an integrated approach (both inside and outside an organization)
Involve consideration change.

III. “#3 LEVELS OF STRATEGY FOR AN ORGANIZATION” – EXPLAIN/ EXAMPLE/ PURPOSE

It is believed that strategic decision making is the responsibility of top management. However, it is considered
useful to distinguish between the levels of operation of the strategy. Inside an organization, strategy operates at 3
different levels including corporate level, business level and operational strategy. The three levels of strategy will
be deeply explained and combined with an example of each one as follows

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 1) Corporate-level strategy –
At the corporate level, the strategy focuses on determining which businesses the organization should be in or
wants to be in that is concerned with the overall scope of an organization and how value is added to the
constituent business of the whole organization. This strategy occupies the highest level of strategic decision-making
that top management of the organization such the board of directors and chief executive officer are corporate-
level general managers who concern to span individual business with strategies. The corporate-level strategy sets
the long-term objectives of the firm and the broad constraints and policies within which a SBU operates. The
strategy is used to concentrate geographical scope, diversity of products or services, acquisitions of new business,
and how resources are allocated between the different elements of the organization.
For example - News Corporation, diversifying from print journalism into television and social networking are
corporate-level strategies.
2) Business-level strategy –
At such a level, the strategy focuses on determining how the organization will achieve a competitive advantage
over its rival. Where the businesses are units within a larger organization; each business will be treated as strategic
business unit (SBU). The SBU operates within the defined scope of operations by the corporate level strategy and is
limited by the assignment of resources by the corporate level. These strategies must clearly fit with corporate-level
strategy of the organization and operate within the overall organizational strategies. The strategy sets goals for
performance, evaluates the actions of competitors and specifies actions the company must take to maintain and
improve its competitive advantages – called competitive strategy such as being a low-price leader, differentiation in
quality or other desirable features. Business–level general managers are concerned with the specific strategies to a
particular business that translate the general statement of direction and intent that come from the corporate level
into concrete strategies for individual business
For example - Pepsi Corporation operates in soft drink, snack, water and energy drinks. For each product group, the
nature of market in terms of customers, competition, and marketing channel differs. There-fore, it requires different
strategies for its different product groups (SBUs) in order to make the best use of its resources (its strategic
advantages) given the environment it faces.
3) Operational-level strategies –
The strategy relates to single functional operation and the activities involved therein. This level is at the operating
end of the organization. The operational-level strategy is concerned with how different parts of the organization
like R&D, marketing, finance or manufacturing contribute to the strategy of other levels in term of managing
resources, processes and people. It deals with a relatively restricted plan providing objectives for specific function,
allocation of resources among different operations within the functional area and coordination between them for
achievement of SBU and corporate level objectives. Operational managers play a role to develop operational
strategies in their area that help fulfill the strategic objectives set by business and corporate level general managers.
This manager also closer to customer than general managers, it may generate important ideas.
For example - the marketing strategy of marketing function is divided into operating levels such as marketing
research, pricing strategies, sales promotion or distribution.

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Chapter 2 – EXTERNAL ENVIRO. ANALYSIS (Stra. Position – Competitors & Markets – Stra. Groups)

Question 2 – Describe the concept of strategic group. What are the advantages of undertaking a strategic group
analysis? What criteria can be used for grouping firms within an industry? Give example to support this.

I. Key concept - DEFINITION OF “STRATEGY MANAGEMENT & STRATEGY MANAGEMENT PROCESS”

Strategic Management - is a way in which strategists set the objectives and proceed about attaining them.
It deals with making and implementing decisions about future direction of an organization. It helps us to
identify the direction in which an organization is moving in order to achieve better performance and a
competitive advantage for their organization. Sometimes strategy typically involves managing people,
relationships and resources that is called “strategic management”
The strategic management process means defining the organization’s strategy by which managers make a
choice of a set of strategies for the organization that will enable it to achieve better performance.
II. Related concept – INDENTIFYING THE “EXPLORING STRATEGY MODEL” & “STRATEGY POSITION”
The 3 main branches of strategy as a subject include: strategy context (internal and external contexts of
organizations), strategy content (strategy options) and strategy process (formation and implementation).
Each of these is important to effective strategy-making, and each is underpinned by research streams
whose characteristic analytical approaches can be applied to practical strategy issues as well.
The exploring strategy model provides a comprehensive and integrated framework that first understanding
the strategic position of an organization (context), then making strategic choices for the future (content)
and finally turning strategy into action (process).
(1) Strategic Position – is concerned with the impact on strategy of the external environment, the
organization’ strategic capability (resources and competences), the organization’s goals and the
organization’s culture. Strategic managers must not only recognize the present state of the environment
and their industry but also be able to predict its future positions. Understanding these 4 factors above will
be beneficial for evaluating future strategy of the organization.
 The External Environment Analysis – is what gives organizations their means of survival. It is important
to analyse the threats and opportunities existing in the organization’s external environment in order
to anticipate and influence environmental change. Through the understanding of it, the organization
can possibly take advantage of the opportunities and minimize the threats. A threat for one
organization may be an opportunity for another. Key frameworks which are provided to help analyse
changing and complex environment - being organized in layers of the business environment (external
environment) such:
 The macro-environment – using PESTEL framework to identify the future issues and reveal threats
and opportunities in political, economic, social-cultural, technological, environmental and legal
factors that might influences on the possible success or failure of particular strategies of an
organization.

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  Industry/ immediate environment – using the Porter five forces framework to identify a rise or fall
in barriers to entry, or opportunities to reduce industry rivalry and determine whether an industry
structure is attractive or not. The analysis includes the threats of entry & barriers to entry, the
threats of substitutes, the bargaining power of buyers, the bargaining power of suppliers and the
extent of rivalry between competitors. These factors not only surface in the more immediate
environment through changes in the competitive forces surrounding organization but also evaluate
the effect of globalization on competition within the industry.
 Competitors and markets (national environment) – using the Strategic Groups for the competitor
differences and the Market Segments for the customer differences to analyse the national
environment. These frameworks help to analyse whether organizations have opportunities to
develop highly distinctive positioning within broader industries or to achieve competitive advantage
in the globalized environment.
 The Internal Environment Analysis –
 Strategic Capabilities – Each organization has its own strategic capabilities which comprise both
resources “what we have” (e.g. physical, financial or human) and competences “what we do well”
(e.g. technical and managerial skills). The strategic capability - “resource-based view” (RBV)
strategy means the capabilities of an organization regard its strengths and weaknesses. It both
contributes to its long-term survival or competitive advantage and helps to understand how the
organizations are different from their rivals in ways. Based on the strategic capabilities, the
organization’s competitive advantage is valuable to customers and its rivals don’t have or have
difficulty in obtaining.
o Ways of identifying and examining the organizational capabilities include:
(1) Benchmarking – a means of understanding how an organization’s relative performance
compares with competitors.
(2) Analysing an organization’s value chain and value network – a basis for understanding which
activities are important to undertake to create and develop customer value (organization
specific/ unique) – non-substitutability. E.g. secret formula of Coca-Cola – not copy or buy
(3) Activity system mapping – a means of identifying more detailed activities which underpin
strategic capabilities.
(4) SWOT analysis – a way of drawing together an understanding of strengths-weakness (internal
environment) and weakness-opportunities (external environment) an organization faces.
o From a RBV of organizations, managers need to consider whether their organization has
strategic capabilities to achieve and sustain competitive advantage. To do so they need to
consider how and to what extent it has capabilities which are
V – Valuable to buyers (do capabilities exist that are valued by customers and provide potential
competitive advantage?)
R – Rare (do capabilities exist that no/ few competitors posses?)
I – Inimitable (are capabilities difficult for competitors to imitate?)

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 N- Non-substitutable (is the risk of capability substitution low?)

III. DESCRIBING THE CONCEPT OF “STRATEGIC GROUP” – THE ADVANTAGES OF A “STRATEGIC GROUP
ANALYSIS” – WHICH CRITERIA USED FOR GROUPING FIRMS WITHIN AN INDUSTRY – EXAMPLE
A “Strategic Group” - is a group of firms within an industry with similar strategic characteristics that
generally following similar strategies and competing on similar bases such as product quality, pricing policy,
distribution channels, or level of customer service.
The “Strategic Group” concept – is valuable to a firm’s strategic decision makers to understand the
similarities and differences in terms of competitors of external environment. Because a firm’s primary
competitors are
 Those within its strategic group - all group members are selling similar products to a similar group of
customers,
 The strengths of the five competitive forces varies across strategic groups,
 And strategic groups that are similar - in terms of strategies followed and competitive dimensions
emphasized - increase the possibility of increased competitive rivalry between the groups
The benefits of “Strategic Groups Analysis” - can be useful for analyzing an industry’s competitive
structure.
 Strategic groupings help a firm identify mobility barriers - obstacles to movements from one strategic
group to another that protect a group from attacks by other groups.
 Understanding competition through strategic group analysis that managers can focuses on their direct
competitors within their particular strategic group rather than the whole industry. They can also
establish the dimensions that distinguish them most from other groups.
 Strategic group maps helps a firm identify the most attractive “strategic spaces” within an industry.
Some spaces on the map may be “white spaces”, relatively under-occupied. However, strategic spaces
should be tested carefully.
Which criteria used for grouping firms within an industry - 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 industry forces (the threats posed by new entrants, the power of
suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors)
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. In the end, having a thorough understanding of primary competitors helps
a firm formulate and implement an appropriate strategy.

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 Example – the picture shows strategic groups amongst Indian pharmaceutical companies, with research
and development intensity (R&D spend as a % of sales) and overseas focus (exports and patents registered
overseas) defining the axes of the map. These 2 axes do explain a good deal of the variation in profitability
between groups. The most profitable group is the Emergent Global (11.3% average return on sales), those
with high R&D intensity and high overseas focus. On the other hand, the Exploiter group spend little on
R&D and is focused on domestic markets, and only enjoys 2% average return on sales.

Chapter 3 – VRIN MODEL (Strategic Position – Strategic Capabilities – Value Chain – VRIN)

Question 3 - For a strategic capability in an organization to provide competitive advantages, it should meet four
criteria according to the VRIN model. Describe these four criteria and provide example(s) to support your argument.

I. Key concept - DEFINITION OF “STRATEGIC CAPABILITY”

Strategic Capabilities - means the capabilities of an organization that contribute to its long-long term
survival or competitive advantage.
Each organization has its own strategic capabilities which comprise both resources “what we have” (e.g.
physical, financial or human) and competences “what we do well” (e.g. technical and managerial skills). The
strategic capability - “resource-based view” (RBV) strategy means the capabilities of an organization
regard its strengths and weaknesses. It both contributes to its long-term survival or competitive
advantage and helps to understand how the organizations are different from their rivals in ways. Based on
the strategic capabilities, the organization’s competitive advantage is valuable to customers and its rivals
don’t have or have difficulty in obtaining.

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 II. Related concept - DEFINITION OF “COMPETITIVE ADVANTAGE”
Competitive Advantage: An advantage that firm has over its rivals, allowing it to generate greater sales or
margins and/or retain more customers than its competition. Competitive advantage results from matching
core competences to the opportunities.(Arise when an organization is implementing a value-creating
strategy that is not also being implemented by current or potential competitors).
 Sustained Competitive Advantage: A long-term competitive advantage that is not easily duplicable by
the competitors. The more sustainable the competitive advantage, the more difficult it is for
competitors to neutralize the advantage.
 These competitors are unable to duplicate the benefits of this strategy.
III. DESCRIBING “4 CRITERIA – VRIN MODEL”
From a RBV of organizations, managers need to consider whether their organization has strategic
capabilities to achieve and sustain competitive advantage. To do so they need to consider the 4 key criteria
of VRIN model below. (VRIN Analysis enables Big C managers to recognize their core competencies and key
sources of competitive advantage. VRIN tells Big C what they should do, given the relative strengths and
weaknesses of their resources and capabilities).
 V – Valuable to buyers
 R – Rare
 I – Inimitable
 N- Non-substitutable
V – Value of strategic capabilities – Strategic capabilities are of value when they provide potential
competitive advantage in a market at a cost that allows an organisation to realize acceptable levels of
return (1-2 years). There are 4 components when:
 Take advantage of opportunities and neutralise threats - the capabilities provide the potential to
address the opportunities and threats that arise in the organization’s environment.
 Provide value to customers - the capabilities need to be of value to customers. It means these
capabilities have to meet the customer’s critical success factors (CSFs are those factors that are either
particularly valued by customers or which provide a significant advantage in terms of cost).
 Provide potential competitive advantage - the capabilities need to be capable of delivering a product
or service that competitors do not currently have or do not currently emphasise.
 Cost - the product or service needs to be provided at a cost that still allows the organisation to realize
acceptable levels of return or profitable.

Example – Big C Supermarket, Vietnam - In the particular case of Big C, service is one of the strength
factors that contribute most value for customers such as free bus and delivery home product, free gift
wrapping and voucher for customer’s birthday as well as consultancy service about electronic products for
customer along with exchange and return product within 48 hours. These services both create the
competitive advantages for Big C and other incumbent.

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 R – Rarity - Rare capabilities are those possessed uniquely by one organisation or by a few others only (3-5
years). The extent to which rarity might provide competitive advantage is longer-lasting when:
 Meeting customer need: The resource or capabilities lead to outputs in the form of products or services
that meet customer needs and are therefore of value to them.
 Sustainability: rarity could be temporary. Because if an organisation is successful on the basic of
something distinctive, then competitors will very likely seek to imitate or obtain that distinctiveness.

Example - Big C Supermarket, Vietnam - rare capability of Big C is low pricing strategy. Because of the
strong financial and long term experience of leading trademark, Big C accepted to losing the money in the
expanding retail business period which focuses major on cheap price product for customers. Other
Vietnamese local competitors can apply this same strategy but it may create more risk in their financial

I – Inimitability - Inimitable capabilities are those that competitors find difficult to imitate or obtain (30-40
years). There are 2 conditions that need to consider:
 Superior Performance - the capabilities lead to levels of performance of product or service that are
significantly better than competitors
 Linked competences - If the capabilities integrate activities, skills and knowledge both inside and
outside the organisation in distinct and mutually compatible ways. It is then the linkages of the
activities that go to make up capabilities that can be especially significant. This is the way competences
are linked together and integrated in order to make capabilities particularly difficult for competitors to
imitate (complexity – causal ambiguity – culture & history – change).
Example - Big C Supermarket, Vietnam - with the main focus on cost leadership; “cheap price for every
house”, dealing the appropriate price with the suppliers is the most important factor that Big C did
consider carefully. Big C had successful negotiation with their suppliers with the stable price for its product
than other competitors by their own way. This deal helps Big C to save its cost efficiently in order to
enhance the low pricing strategy. This is capability that other competitors find difficult to obtain it.
N - Non-substitutability - Competitive advantage may not be sustainable if providing value to customers
and possess competences are rare and difficult to copy by anyone. There are 2 different forms of
substitution:
 Product or service substitution from a different industry/market. For example, postal services partly
substituted by e-mail.
 Competence substitution – not be at the product/ service level but at the competence level. For
example, a skill substituted by expert systems or IT solutions

Example - Big C Supermarket, Vietnam - it attempts to build friendly environment image in customer’s
mind by opening the Green Square commercial centre: Big C Di An which is the first project installed with
solar battery system for lighting in Viet Nam. Big C spent over VND 11 billion in the 212-kWp solar energy
system on the roof of parking place of supermarket. This will help save energy and reduce carbon dioxide

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 gas emission as well as save 30% of energy consumption at all unit compared to normal shopping centre.
It’s really hard to copy by other competitor because of the expert system.

Question 4 - What is value chain? Explain why having a deep understanding of your value chain and those of your
competitors is important. How does the value chain help inform the choices that managers will make? Give an
example to demonstrate your knowledge.

Value chain describes the categories of activities within an organization, which together, create a product or a
service. And the value network is the set of inter-organizational links and relationships that are necessary to
create a product or service. Both are useful in understanding the strategic position of an organization.
Porter's Value Chain focuses on systems, and how inputs are changed into the outputs purchased by consumers.
Using this viewpoint, Porter described a chain of activities common to all businesses, and he divided them into
primary and support activities.

(1) Primary activities are directly concerned with the creation or delivery of a product or service.
 Inbound logistics: activities like receiving, storing, distributing inputs to the products/service including
materials handling, stock control, transport…
 Operation: transform the inputs into final products/service: machining, packaging, assembly, testing…
 Outbound logistics: collect, store and distribute the product to customers such as warehousing,
distributions.

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  Marketing and sales: provide the means whereby customers/users are made aware of the
product/service and are able to purchase it (including: sales administration, advertising and selling).
 Service: those activities enhance/maintain the value of product/service such as installation, repair, and
training.
(2) Support activities help to improve the effectiveness/efficiency of primary activities
 Procurement: processes that occur in many parts of the organization for acquiring the various
resource inputs to the primary activities.
 Technology: concerned directly with a product (such R&D, product design), with process (process
development) or with a particular resource (raw materials improvement).
 HR management: concerned with recruiting, managing, developing, and rewarding people within the
organization.
 Infrastructure: formal system of planning, finance, quality control, information management, and the
structure of an organization.
I. Why having a deep understanding of your value chain is important?
When the organizations want to achieve competitive advantage by delivering value to customers, managers
need to comprehend which activities their organization under takes are especially important in creating
that value and which are not. Hence, it helps to model the value system of an organization.
The concept of the value chain invites the strategist to think of an organization in term of sets of activities.
A value chain is a set of activities that an organization carries out to create value for its customers.
The more value an organization creates, the more profitable it is likely to be. And when you provide more
value to your customers, you build competitive advantage.
Michael Porter (1998b) states that acquiring competitive advantage can be done through an analysis of the
company’s value chain. A firm’s value chain is “a system of interdependent activities which are connected
by linkages” (p. 78). The value chain is embedded in the company’s larger streams of activities, which are
connected in linkages when one activity affects the effectiveness or costs of the other activities.
Companies can attain competitive advantage when the value chain is optimized by co- coordinating these
activities to create value for its products or services that exceeds the costs of performing the value activities
(Porter 1998b). In other words, a company can create additional value for its products or services (and
increase the prices of the same) without necessarily increasing the amount or costs of producing such
products or services, and the customers are willing to pay for the added value.
What activities a business undertake is directly linked to achieving competitive advantage. For example, a
business, which wishes to outperform its competitors through differentiating itself through higher quality,
will have to perform its value chain activities better than the opposition. By contrast, a strategy based on
seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a
reduction in the total amount of resources used.
II. How the value chain help inform the choices that the managers will make

The value chain helps the manager to understand the strategic position of organization in 3 ways:

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 1. As a generic description of activities:
 The value chain helps the manager understand the discrete activities and how they both contribute to
customers’ benefit and how they add to cost.
 The value chain also prompts manager to think about the role different activities play
 Identified activities where the organization has particular strengths/ weaknesses.
2. Analyzing the competitive position of the organization - Using the VRIN criteria- thus identifying sources of
sustainable competitive advantage
 Value: which value creating activities are especially significant for organization in meeting customer
needs and could they be usefully developed further?
 Rarity: to what extent and how does organization have bases of value creation that are rare? Or
conversely are all elements of their value chain common to their competitors?
 Inimitability: what aspects of value creation are difficult to others to imitate? Perhaps because they
are embedded in activities system of the organization
 Non-substitutability: what aspect of value chain is not vulnerable to substitution?
3. Analyzing the cost and value of activities:
 Identifying sets of value activities - The framework uses to ask:
o Which separate categories of activities best describe the operations of the organization?
o Which of these are most significant in delivering the strategy and achieving advantage over
competitors?

 Relative importance of activity cost internally - The organization analyses to find:

o Which activities are most significant in terms of the costs of operations?
o Does the significance of the cost align with the significance of the activities
o Which activities most add value to the final product/service (and in turn to the customers) and
which do not?
o Which sets of activities are linked or are dependent on others or are self-standing.
 Relative importance of activities externally - How does value and the cost of a set if activities compare
with the similar activities of competitors?
o Where and how can costs be reduced?

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  Example: Starbuck - The following is Porter’s Generic Competitive strategy. Shown is Starbucks as a
whole in the differentiation strategy as they provide a high quality coffee and unique experience in the
convenience of a large volume of locations, which separates them from their competition. VIA, the
new instant coffee line is straddling differentiation and low cost- leadership. While it will be a low cost
and convenient alternative to Starbucks regular coffee, it is still unique from other products in the
market. The in-store gifts and brewing utensils are in the focused differentiation.

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 CHAPTER 6 – GENERIC STRATEGIES (Strategic Choices – Business Strategy SBU- Generic Strategies)

Question 5 - Describe generic competitive strategies and explain how several differentiation strategies might co-
exist in a particular industry. How would this influence the level of industry rivalry? Give example to support your
argument.

I. Key concept - DEFINITION OF “STRATEGIC CHOICES”

Strategic Choices – involves the options for strategy in terms of both the “directions” in which strategy
might move and the “methods” by which strategy might be pursued.

Example –
An organization might have a range of strategic directions open to it:
 The organization could diversify into new products
 It could enter new international markets
 Or it could transform its existing products and markets through radical innovation.
These various directions could be pursued by different methods:
 The organization could acquire a business already active in the product or market area
 It could form alliances with relevant organizations that might help its new strategy
 It could try to pursue its strategies on its own.
II. Related Concept – “BUSINESS STRATEGY – SBU”
Business Strategy – there are strategic choices in terms of how the organization seeks competitive
advantage in markets at the individual business level rather than corporate level. The fundamental
strategic question is “What strategy should a business unit adopt in its market?” Key dilemmas for business-
level strategy (Strategic Direction) and ways of resolving those (Strategy Methods).
Example –
In a large diversified corporation such as Unilever or Nestlé – each business unit must decide how it should
operate in its own particular market. Like in term of “ice-cream business”, Unilever has to decide how it will
compete against ice-cream business of Nestlé on a range of dimensions: product features, pricing, branding

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 and distribution channels. These kinds of business strategy issues are distinct from “whether Unilever
should own an ice-cream business in the first place”.
Business strategy needs to be considered and defined in terms of strategic business units (SBUs) that
supplies goods and services for a distinct domain of activity. Typically a large diversified corporation is made
of multiple businesses (SBUs) called “divisions or profit centers”. Each SBU will have responsibility for its
own business strategy.
Basic types of strategy considered through business strategy including:
(1) Generic Competitive Strategies can be defined in terms of cost-leadership, differentiation and focus
and consider the “strategy clock”.
(2) Interactive Strategies build on the concept of generic strategies to consider interaction with
competitors, especially in hypercompetitive environments. Then it addresses the option of cooperation
and closes with game theory which helps managers choose between competition and more cooperative
strategies.
III. Describe generic competitive strategies and explain how several differentiation strategies might co-exist in a
particular industry.

Generic Competitive Strategy Strategies is the types of competitive strategy that include cost-leadership,
differentiation and focus consider the “strategy clock”. Competitive strategy is concerned with how a
strategic business unit achieves competitive advantage in its domain of activity while competitive
advantage is about how an SBU creates value for its users both greater than the costs of supplying them
and superior to that of rival SBUs. In three different generic strategies, managers need to consider how
business strategies can be sustained through strategic capabilities and/or the ability to achieve a “lock-in”
position with buyers.
The 3 generic strategies are defined along 2 dimensions (measures): strategic cope and strategic strength.
Strategic cope is a demand-side dimension and looks at the size and composition at the market you intend
to target. And strategic strength is a supply-side dimension and looks at the strength or core competency
of the firm. In particular, Porters identified 2 competencies including Product differentiation and Product
costs (efficiency) are most important.
Three Generic Competitive Strategy Strategies -
1. Cost-leadership strategy involves becoming the lowest-cost organization in a domain of activity. Four
key cost drivers that can help deliver cost leadership:
• Lower input costs. (e.g. servicing call-centers in India or manufacturing in China).
• Economies of scale. (e.g. whenever fixed costs are high – those costs necessary for at level of output
– a pharmaceutical manufacturer typically needs to do comprehensive R&D before it produces a
single pill).
• Experience. (e.g. experience curve – 1 stentry timing into a market; 2 ndmarket share gained and hold;
3rdopportunities for cost reduction)

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 • Product process and design. (e.g. engineers can choose to build a product from cheap standard
components such choosing interactive methods with customers through cheap web-based
methods)
2. Differentiation involves uniqueness along some dimension that is sufficiently valued by customers to
allow a price premium. Two key issues:
 The strategic customer – identify clearly the strategic customers on whose needs the differentiation
is based. (e.g. for a newspaper business, the strategic customers could be readers -who pay a
purchase price; advertisers – who pay for advertising) – A valuable source of differentiation.
 Key competitors – who are the rivals and who may become a rival.
3. A focus strategy targets a narrow segment of domain of an activity and tailors its products or services
to the needs of that specific segment to the exclusion of others. Two types of focus strategy:
 Cost-focus strategy – identify areas where broader cost-based strategies fail due to the added costs
of trying to satisfy a wide range of needs (e.g. in the UK food retail market, Iceland Foods use a
cost-focused strategy on frozen and chilled foods that reducing costs against discount food retailer
with fresh foods and groceries - Aldi).
 Differentiation-focus strategy – focus on specific needs by building specialist knowledge &
technology, increasing commitment to service, improving brand recognition and customer loyalty
(e.g. ARM Holdings dominates the world market for mobile phone chips).
IV. Explain how several differentiation strategies might co-exist in a particular industry. How would this
influence the level of industry rivalry? Give example to support your argument. –
The Influence of Differentiation Strategy
1. Differentiation is aimed at the board market that involves the creation of a product or services that is
perceived throughout its industry at unique. The company or business unit may then charge a
premium for its product. This specialty can be associated with design, brand image, technology,
features, dealers, networking, or customer service.
 Differentiation is a viable strategy for earning above average returns in a specific business because
the resulting brand loyalty lowers customers’ sensitivity to price. Increasing cost can usually be
passed on to the buyers. Buyers loyalty can also serve as the entry barrier new firm must be
develop their own distinctive competence to differentiate their product in some way in order to
compete successfully.
 Example: Hero Honda, Asian Paints, HLL, Nike athletic shoes, Apple Computer and Mercedes-Benz
automobile.
2. A differentiation strategy is appropriate where the target customer segment is not price sensitive,
the market is competitive or saturated, customers have very specific needs which are probably under
serve, and the firm has unique resources and capability which enable to satisfy these needs in way that
difficult to copy. These could include –
 Patents or other Intellectual Property (IP), unique technical expertise (E.g. Apple’s design skills or
Pixar’s animation prowess)

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  Talented personnel (E.g. A sport team’s star players or a brokerage firm’s star traders) or innovative
processes.
 Successful brand manager also results in perceived uniqueness even when physical product is the
same as competitors. This way, Chiquita was able to brand banana, Starbuck could brand the coffee
and Nike could brand sneakers. Fashion brands reply heavily on this form of image differentiation.
Variants on the Differentiation Strategy (Influence the level of the industry rivalry)
1. The shareholder value model holds that the timing of the use of specialized knowledge can create
differentiation advantages as long as the knowledge remains unique. This model suggests that
customers buy products or services from an organization to have access to its unique knowledge. The
advantage is static, rather than dynamic, because the purchase is one time event.
2. The unlimited resources model utilized a large base of resources that allows an organization to
outlast competitors by practicing and differentiation strategy. An organization with greater resources
can manage risk and sustain losses more easily than one with fewer resources. This deep-pocket
strategy provides a short-term advance only. If a firm lacks the capacity for continual innovation, it will
not sustain its competitive position is over time.

CHAPTER 7 – CORPORATE-LEVEL STRATEGY (Stra. Choices – Stra. Direction – Corporate Strategy)

Question 6 - There are three main roles or rationales for corporate parents to add value. Explain these three main
roles and discuss their logic, strategic requirements and organizational requirements. Can more than one rationale
co-exist in a particular corporation? Use example to support your argument.
1. Adding value - Corporate parents do not generally have direct contact with customers or suppliers but instead
their main function is to manage the business units within the organization. The issue for corporate parents is
whether they:
 Add value to the organization and give business units advantages that they would not otherwise have
 Add cost and so destroy the value that the business units have created.
2. Three main rationales for corporate parents to add value: The portfolio manager, synergy manager and
parental developer.
a. The portfolio manager
 are corporate parents effectively acting as agents for financial markets and shareholders to enhance the
value from individual businesses more effectively than the financial markets could
 identify and acquire under-valued businesses and improve them, perhaps by divesting low-performance
businesses or improving the performance of others
 keep the costs of the centre low by minimizing the provision of central services and allowing business units
autonomy whilst using targets and incentives to encourage high performance
 may manage a large number of businesses, which may be unrelated.

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 b. The synergy manager
 enhance value by sharing resources and activity, such as distribution systems offices or brand names

 may however bring substantial costs as managing integration across businesses can be expensive

 may have difficulty in bringing synergy as cultures and systems in different business units may not be

compatible
 may need to be very hands-on and intervene at the business unit level to ensure that synergy is actually

achieved.
c. The parental developer
 use their own central competences to add value to the businesses by applying specific skills required by

business units for a particular purpose, such as financial management or research and development
 need to have a clear understanding of the value-adding capabilities of the parent and the needs of the

business units in order to identify how these can be used to add value to business units
 need to ensure that they are able to add value to all businesses or be prepared to divest those to which

they can offer no advantages.

CHAPTER 7 – DIVERSIFICATION (Strategic Choices – Strategic Direction – Diversification)

Question 7 - Explain what is meant by ‘diversification’. What are main types of diversification? Why does having an
understanding of this concept matter to managers? Discuss, using example, how the selection of different
diversification strategies will have an impact on the way a business is managed.

1. Definition diversification

 Diversification is a business development strategy allowing a company to enter additional lines of business
that are different from the current products, services and markets.
 Reason for diversification - general environment become unattractive, industry’s competitive
environment becomes unattractive, surplus capabilities or capabilities gaps
 A firm should consider diversifying when:
 It can expand into businesses whose technologies and products complement its present business
 Its resources and capabilities can be used as valuable competitive assets in other businesses.
2. Advantages and disadvantages of diversification

Advantages Disadvantages

 Efficient capital allocation  May not align with shareholder risk profile

 Trains general managers  Easier to hide poorly performing business

 Good control system  Shareholders have no say in capital

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  Spread risks allocation process

3. Types of diversification - Diversification is a strategic approach adopting different forms. Depending on the
applied criteria, there are different classifications. Depending on the direction of company diversification, the
different types are:

 Horizontal Diversification - acquiring or developing new products or offering new services that could appeal

to the company´s current customer groups. In this case the company relies on sales and technological
relations to the existing product lines. For example a dairy, producing cheese adds a new type of cheese to
its products.

 Vertical Diversification - occurs when the company goes back to previous stages of its production cycle or

moves forward to subsequent stages of the same cycle - production of raw materials or distribution of the
final product. For example, if you have a company that does reconstruction of houses and offices and you
start selling paints and other construction materials for use in this business. This kind of diversification may
also guarantee a regular supply of materials with better quality and lower prices.

 Concentric Diversification - enlarging the production portfolio by adding new products with the aim of fully

utilizing the potential of the existing technologies and marketing system. The concentric diversification can
be a lot more financially efficient as a strategy, since the business may benefit from some synergies in this
diversification model. It may enforce some investments related to modernizing or upgrading the existing
processes or systems. This type of diversification is often used by small producers of consumer goods, e.g.
a bakery starts producing pastries or dough products.

 Heterogeneous (conglomerate) diversification - is moving to new products or services that have no

technological or commercial relation with current products, equipment, distribution channels, but which
may appeal to new groups of customers. The major motive behind this kind of diversification is the high
return on investments in the new industry. Furthermore, the decision to go for this kind of diversification
can lead to additional opportunities indirectly related to further developing the main company business -
access to new technologies, opportunities for strategic partnerships, etc.

 Corporate Diversification - involves production of unrelated but definitely profitable goods. It is often tied to

large investments where there may also be high returns.

4. Related Diversification is the most popular distinction between the different types of diversification and is
made with regard to how close the field of diversification is to the field of the existing business activities.
 Related Diversification occurs when the company adds to or expands its existing line of production or
markets. In these cases, the company starts manufacturing a new product or penetrates a new market
related to its business activity. Under related diversification the company makes easier the consumption of
its products by producing complementing goods or offering complementing services. For example, a shoe

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 producer starts a line of purses and other leather accessories; an electronics repair shop adds to its
portfolio of services the renting of appliances to the customers for temporary use until their own are
repaired.

 Advantages of related diversification -

 Spreading the risk by way of producing similar and/or related goods, offering similar or complementing
services, or penetrating similar markets;
 In the majority of cases the companies use existing, available resources and experience;
 If the company starts producing part of the raw materials (components) for its main production line, it
guarantees better quality, lower prices and regular supplies;
5. Unrelated Diversification is a form of diversification when the business adds new or unrelated product lines
and penetrates new markets. For example, if the shoe producer enters the business of clothing manufacturing.
In this case there is no direct connection with the company´s existing business - this diversification is classified
as unrelated.
 Advantaged of unrelated diversification
 The unrelated diversification which is carefully developed and undertaken only after thorough analysis
of the environment and the company´s own resources usually brings very good financial results.
However, in all cases it should be a low risk investment with a potential for high returns.
 In some cases of company acquisition, this diversification can secure funds on hand during a seasonal
slowdown, adding to the cash flow for the main business activity.
 Spreading the risk through different sectors of the economy. It is very important to identify industries in
which the business activity slowdown does not coincide with the slowdowns in the main business of the
company.
 Disadvantages of unrelated diversification
 Achieving successful unrelated diversification requires good management skills, closely following each
of the business activities and timely identifying and solving even the smallest problems. The greater the
number of business activities, the more difficult is the total management task.
 In many instances the overall performance of the unrelated business activities does not exceed the
individual ones. Sometimes it is even worse, unless the managers are exceptionally talented and
focused.
 As a rule, the implementation of unrelated diversification strategy requires allocation of significant
financial and human resources and there is always the risk of harming the main company business.

CHAPTER 10 – DIVERSIFICATION (Strategic Choices – Strategic Direction – Diversification)

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Question 8 - Strategic alliance and acquisitions are two different methods of strategic development. Compare and
contrast the motives of these two development methods. Discuss factors that can influence the success of
acquisition.

1. An acquisition involves one firm taking over the ownership (‘equity’) of another, hence the alternative term
‘takeover’. Most acquisitions are ultimately friendly, where the acquirer and the target firm agree the terms
together, and the target’s management recommends acceptance to its shareholders.
 Example:
2. Strategic Alliance (Merge) is where two or more organizations share resources and activities to pursue a
strategy. Type of strategic alliance -

(a) Equity alliance: involve the creation of a new entity that is owned separately by the partners involved.

 The most common form of equity alliance is the joint venture, where two organizations remain
independent but set up a new organization jointly owned by a parent. Example: General Motors and
Toyota have operated the Nummi joint venture to producing car in California.

 A consortium alliance involves several partners setting up a venture together. Example: IBM, Hewlett,
Packard, Toshiba and Samsung are partner in the Sematech research consortium.

(b) Non-equity alliances: are typically looser, without the commitment implied by ownership.

 Non-equity alliances are often based on contracts.

 Three common forms of non—equity alliance/ or form of contractual alliance

 Franchising: one organization give another organization the right to sell the franchisor’s products or
services in a particular location in return for fee or royalty. (MC Donald’s restaurant)
 Licensing: is a similar kind of contractual alliance, allow partner to use intellectual property such as
patents or brand in return for a fee.
 Long-term subcontracting: agreements are another form of loose non-equity alliance, common in
automobile supply. (the Canadian subcontractor Magna has long term contract to assemble the bodies
& frames for car companies such as Ford, Honda and Mercedes)
3. Compare and contrast the motives of these two development methods
(a) Similarity - Strategic motive
 Extension – merger and acquisition can be used to extend the reach of firms in term of geography,
products and markets.
 International reach – acquisition can be speedy ways of extending international reach. Acquisition can
be also an effective way of extending into a new market, as in diversification.
 Consolidation – bringing together two competitors can have at least three beneficial effects. It
increases the market power by reducing the competition. The combination of two competitors can
increase efficiency through reducing surplus capacity or sharing resources. Finally, the greater scale of

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 the combined operations may increase production efficiency or increase bargaining power with
suppliers, forcing them to reduce their price.
 Capabilities – enhancing technological knowhow (other competence).
 Gap filling: each company fills-in strategic gap that are essential for long term survival.
 Positioning – taking advantage of future opportunities that can be exploited then the two companies
are combined.
 Organizational Competencies - Acquiring human resources and intellectual capital can help improve
innovative thinking and development within the company.

Example: high-tech Company such as Cisco and Microsoft regard acquisitions of entrepreneurial technology
companies as a part of their R&D effort. Instead of researching a new technology from scratch, they allow
entrepreneurial start-up to prove the idea, and then take over these companies in order to incorporate the
technological capability within their own portfolio.

(b) Differences -

Strategic Alliance ( Merge)

 Scale alliances: here the organizations combine in order to achieve necessary scale. Capability of each
partner might be quite similar, but together they can achieve advantage that they could not easily
manage on their own.

 Combining provides economic of scale in the production of output (product or service)

 Combining provide economic of scale in term of input (reducing purchasing cost of raw material or
service)

 Combining allow sharing risk as well. (partner can help other partner find a resource that could
avoid failure)

 Access alliances: partners provide needed capabilities. Organization B seeks licensing alliance in order
to access input from organization A, for example technology or brands. Here organization A is critical
to organization B’s ability to produce or market its products and services.

• Complementary alliances: bringing together complementary strengths to offset the other partner’s
weaknesses.
• Collusive alliances – to increase market power. Usually kept secret to evade competition
regulations.
 Collective strategy is about how the whole network of alliances of which an organization is a
member competes against rival networks of alliances. (Practitioners of alliance strategy need to
think about strategy in term of collective success of their networks as well as their individual org’
self-interest).
 Collaborative advantage is about managing alliances better than competitors. (The success

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 involve collaborating as well as competing)

4. Factor that can influence the success of acquisition:

 Strategic fit: refers to the extent to which the target firm strengthens and complements the acquiring
firm’s strategy. Strategic fit will relate to the original strategic motives for the acquisition: extension,
consolidation and capabilities.
 Organizational fit: refer to the match between the management practices, cultural practices and staff
characteristics between the target and the acquiring firms. (because of lack of control, organization fit
issues are liable to be even harder to manage in alliance than acquisitions because acquisition is about
having the ownership right and also have some managerial authority)
 Valuation: Pay too much and the acquisition is unlikely to make a profit net of the original acquisition
price. (‘The winner’s curse’).
 Divesture: of acquired units. Divestures are typically one-off transactions with purchaser, with few
consequences for future relationships.

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