Strategies For Competitive Advantage Lectures

Strategies for Competitive Advantage
Dr. Mohamed Adel Kamel

2
Strategies
for
Competitive Advantage
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
Strategic Management & Competitive
Advantage: Concepts and Cases
• Sixth Edition
• What Is
Strategy and
the Strategic
Management
Process?
Part 1
4
SUCCESS is
20% skills and
80% strategy
By Jim Rohn
HP, led by president and CEO Meg Whitman, is revising its corporate
strategy to reflect significant changes in the marketing environment.
Only a select group of companies have historically stood out as master marketers. These
companies focus on the customer and are organized to respond effectively to changing needs.
7
The 6 Best Business Strategies

by Tom Wright, on Jun 2, 2022
https://www.cascade.app/blog/the-5-best-business-
strategies-ive-ever-seen
8
Lessons for CEOs From Marissa

Mayer’s Struggle to Turnaround Yahoo
11 things other CEOs

could learn from Marissa
Mayer’s struggle to turn
around Yahoo
https://www.businessinsider
.com/lessons-for-ceos-from-
marissa-mayers-struggle-to-
turnaround-yahoo-2016-4
9
Walt Disney Company (1 of 2)
1984 Profits: $242 Million

Theme Park Operations: 77% of profits
Consumer Products: 22% of profits
Filmed Entertainment: 1% of profits
11
Walt Disney Company (2 of 2)

Hired Michael Eisner—1984
1. Increased admission prices at theme parks
1984—$186 m 1989—$787 m
2. Focused on movie studios (character development)
1984—$2.42 m 1994—$845 m
3. Diversified into television (ABC), hotels, retail stores,
sport team, cruise line, publishing, consumer products,
licensing, etc. (Huey & McGowan, 1995)
Market Cap: 1984 = $2 billion 1994 = $28 billion
12
Definition of Strategy
Strategy:
A firm’s strategy is defined as its theory about how to gain
competitive advantages. A good strategy is a strategy that
actually generates such advantages.
Eisner’s theory may have been:

People will pay a premium price for extraordinary/exceptional
entertainment. We have the necessary resources to create
extraordinary entertainment. Therefore, let’s redeploy our
resources in a different way and offer something extraordinary
to people.
13
The Strategic Management Process (1 of 8)
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1. Mission:
• The strategic management process begins when a firm
defines its mission. A firm’s mission is its long-term purpose.
Missions define both what a firm aspires to be in the long run
and what it wants to avoid in the meantime. Missions are often
written down in the form of mission statements.
• Some Missions May Not Affect Firm Performance.
• Some Missions Can Improve Firm Performance.
• Some Missions Can Hurt Firm Performance.
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• If a mission statement does say something unique about a

company, if that mission statement does not influence
behavior throughout an organization, it is unlikely to have
much impact on a firm’s actions.
• These visionary firms earned substantially higher returns
than average firms even though many of their mission
statements suggest that profit maximizing, although an
important corporate objective, is not their primary reason for
existence.
17

2. Objectives:
• Objectives are specific measurable targets a firm can use
to evaluate the extent to which it is realizing its mission.
• The things a firm needs to “do” to achieve its mission.
• Should influence other elements in the strategic
management process.
• SMART:
Specific, Measurable, Achievable, Relevant, and Time.
3. External and Internal Analysis

Systematic Examination of the Environment
External Analysis Internal Analysis

Threats and Opportunity Strength and Weakness
• Competition • Resources and
Capabilities
• Interest rates
• Manufacturing abilities
• Demographics
• Technology
• Social trends
19

4. Strategic Choice
• Armed with a mission, objectives, and completed external
and internal analyses, a firm is ready to make its strategic
choices. That is, a firm is ready to choose its theory of how to
gain competitive advantage. The strategic choices available to
firms fall into two large categories:
1. Business-level strategies are actions firms take to gain
competitive advantages in a single market or industry. (Ex:
Cost of leadership and Product differentiation)
2. Corporate-level strategies are actions firms take to gain
competitive advantages by operating in multiple markets or
industries simultaneously. (Ex: Vertical Integration, Strategic
Alliances, Diversification, and Mergers & Acquisitions)
20

Obviously, the details of choosing specific strategies can be quite
complex, However, the underlying logic of strategic choice is not complex.
Based on the strategic management process, the objective when making a
strategic choice is to choose a strategy that;
(1) Supports the firm’s mission,
(2) Is consistent with a firm’s objectives,
(3) Exploits opportunities in a firm’s environment with a firm’s strengths,
(4) Neutralizes threats in a firm’s environment while avoiding a firm’s
weaknesses.
Assuming that this strategy is implemented—the last step of the strategic
management process—a strategy that meets these four criteria is very
likely to be a source of competitive advantage for a firm.
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22

5. Strategy Implementation
• Occurs when a firm adopts organizational policies and
practices that are consistent with its strategy.
• Three specific organizational policies and practices are
particularly important in implementing a strategy:
1. A firm’s formal organizational structure,
2. Its formal and informal management control systems,
3. Its employee compensation policies.
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5. Strategy Implementation
• How strategies are carried out
• Who will do What
• Organizational structure and control
– Who reports to whom
– How does the firm hire, promote, pay, etc.
• Every strategic choice has strategy implementation
implications.
• Strategy implementation is just as important as strategy
formulation.
A Strategy Is Only As Good As Its Implementation
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• All other elements of the strategic management process

are aimed at achieving competitive advantage.
• Sixth Edition
• What Is
Strategy and
the Strategic
Management
Process?
Part 2
26
The Strategic Management Process

6. Competitive Advantage
Definition: The ability to create more economic value than
competitors.
• All other elements of the strategic management process

are aimed at achieving competitive advantage.
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Competitive Advantage (1 of 11)

The Ability to Create More Economic
Value Than Competitors
• There must be something different about a firm’s offering
vis-à-vis (Face to face) competitors’ offerings.
• If all firms’ strategies were the same, no firm would have a
competitive advantage.
• Competitive advantage is the result of doing something
different and/or better than competitors.
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Two Types of Difference

1. Preference for the firm’s output
• People choose the firm’s output over others’
• People are willing to pay a premium
Example: Nordstrom
2. Cost advantage vis-à-vis competitors
• lower costs of production/distribution
Example: Wal-Mart
30

Identify and exploit differences that may lead to competitive

advantage
Examples: Apple’s iPod, iPad
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Economic Models
Price (P), Quality (Q) Marginal Cost (MC), Average Total Cost (ATC), Marginal
Revenue (MR), Demand (D)
Monolithic Competition
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Temporary & Sustainable
• Competitive advantage typically results in high profits.
• Profits attract competition.
• Competition limits the duration of competitive advantage in
most cases.
Therefore,
• Most of competitive advantage is temporary
– Competitors always imitate/copy the advantage or offer
something better.
33
34

1. Competitive Advantage
Some competitive advantages are sustainable if:
• Competitors are unable to imitate the source of advantage.
• No one conceives/imagine of a better offering.
Of course,
• In time, even sustainable competitive advantage may be
lost.
35

2. Competitive Parity (equality)
• The firm’s offerings are “average”
• People do not have a preference for the firm’s offering.
• The firm does not have a cost advantage over others.
• Some things that may lead to competitive parity may still
be critical to success.
36

3. Competitive Disadvantage
• People may have an aversion/dislike to the firm’s offering.
• The firm may have a cost disadvantage.
• A firm may have outdated technology/equipment.
• A firm may have a negative reputation.
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Measuring Competitive Advantage
• A firm has a competitive advantage when it creates more
economic value than its rivals. Economic value is the
difference between the perceived customer benefits
associated with buying a firm’s products or services and the
full cost of producing and selling these products or
services.
• However, these concepts are not always easy to measure
directly. For example, the benefits of a firm’s products or
services are always a matter of customer perception, and
perceptions are not easy to measure.
39

Superior Economic Performance Is Viewed as Evidence
of Competitive Advantage
• It is rather easy to see the evidence of competitive
advantage.
• Measuring the source of the advantage is typically
impossible.
– It’s difficult to “measure” technology.

Two Classes of Measures:
1. Accounting Measures
ROA, ROS, ROE, etc. that exceed industry averages
2. Economic Measures
Earning a return in excess of the cost of capital.
1. Accounting Measures of Competitive Advantage
A firm’s accounting performance is a measure of its
competitive advantage calculated by using information from
a firm’s published profit and loss and balance sheet
statements. A firm’s profit and loss and balance sheet
statements, in turn, are typically created using widely
accepted accounting standards and principles. The
application of these standards and principles makes it
possible to compare the accounting performance of one
firm to the accounting performance of other firms, even if
those firms are not in the same industry.
2. Economic Measures of Competitive Advantage
• Economic profit was defined as the difference between
the perceived benefit associated with purchasing a firm’s
products or services and the cost of producing and selling
that product or service. However, one important
component of cost typically is not included in most
accounting measures of competitive advantage: the cost
of the capital a firm employs to produce and sell its
products. The cost of capital is the rate of return that a
firm promises to pay its suppliers of capital to induce
them to invest in the firm.
• Compare a firm’s level of return to its cost of capital
instead of to the average level of return in the industry.
43
The Relationship Between Economic and Accounting
Performance Measures
• The correlation between economic and accounting
measures of competitive advantage is high. That is, firms
that perform well using one of these measures usually
perform well using the other. Conversely, firms that do
poorly using one of these measures normally do poorly
using the other. Thus, the relationships among
competitive advantage, accounting performance, and
economic performance depicted in Figure 1.5 generally
hold.
The Relationship Between Economic and Accounting
Performance Measures
• However, it is possible for a firm to have above average
accounting performance and simultaneously have below
normal economic performance. This could happen, for
example, when a firm is not earning its cost of capital but has
above industry average accounting performance. Also, it is
possible for a firm to have below average accounting
performance and above normal economic performance. This
could happen when a firm has a very low cost of capital and is
earning at a rate in excess of this cost, but still below the
industry average.
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47
Competitive Advantage & The

Strategic Management Process
Emergent vs. Intended Strategies

• Emergent strategies are theories of how to gain
competitive advantage in an industry that emerge over
time or that have been radically reshaped once they are
initially implemented.
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49
Competitive Advantage & The

Strategic Management Process
Emergent vs. Intended Strategies

• The strategic management process leads managers to
intended strategies.
However,
• Conditions often change or new information becomes
available.
• Managers respond and adopt emergent strategies.
Example: Honda Motorcycles
50

Summary
• Firms could achieve competitive parity and survive.
• They would face a flat demand curve.
• Their cost structure would be the industry average.
• They would need to adapt their strategy over time just to
survive.
• They would fail if they didn’t adapt their strategy.
51

This course is not about mere survival, it is about
thriving—Achieving competitive advantage
• The strategic management process helps managers
achieve competitive advantage.
• Competitive advantage depends on differences.
• Strategy is about discovering and exploiting these
differences.
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53

Applying Strategy to Your Career
• A solid understanding of strategy concepts will help set you
apart from other job candidates.
• You can use the process to identify and exploit difference
between you and others.
• You can use the process to determine if you want to stay
with a company.
54
The Strategic Management Process &

Strategy Matters!
Strategy is often the difference between:
• Success and failure, between mediocrity and excellence
• A great manager and average managers
• Stumbling through life and moving ahead with purpose
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Business Model!!
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Business Model
• The Strategic Management Process, Revisited
With this description of the strategic management process
now complete, it is possible to redraw the process, to
incorporate the various options a firm faces as it chooses
and implements its strategy. An alternative way of
characterizing the strategic management process—the
business model canvas—is described in the Strategy in
Depth feature.
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Business Model Canvas
4
7
6 2 3
8 1
9 5
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The Business Model Canvas
Source: Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers by Osterwalder,
Alexander; Pigneur, Yves Reproduced with permission of Wiley in the format Book via Copyright ClearanceCenter.
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Think about
1. Who is your Targeted Customer?

2. The value you provide (Product or service)
3. Who are the competitors targeting same targeted
customers with the similar value?
4. How to differentiation you value than competitors:
Competitive Advantages
5. How to keep your differentiation? (Sustainability)
6. How to keep your customer base loyal? (CRM)
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Sixth Edition
Chapter 2
Evaluating a Firm’s
External Environment
Threats
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Why External Analysis?

External analysis allows firms to:
• Discover threats and opportunities
• See if above-normal profits are likely in an industry
• Better understand the nature of competition in an industry
• Make more informed strategic choices
66
Understanding a Firm’s
General Environment
• Any analysis of the threats and opportunities facing a firm must
begin with an understanding of the general environment within
which a firm operates.
• This general environment consists of broad trends in the
context within which a firm operates that can have an impact on
a firm’s strategic choices.
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General Environment
68
General Environment
• Technologies that build on digital information—computers, the
Internet, cell phones, and so forth. Many of us routinely use
digital products or services that did not exist just a few years
ago.
1. Technological change creates both opportunity, as firms
begin to explore how to use technology to create new products
and services, and threats, as technological change forces
firms to rethink their technological strategies.
69
General Environment
2. Demographics is the distribution of individuals in a society in
terms of age, sex, marital status, income, ethnicity, and other
personal attributes that may determine buying patterns.
• Understanding this basic information about a population can
help a firm determine whether its products or services will
appeal to customers and how many potential customers for
these products or services it might have.
70
General Environment
3. Culture is the values, beliefs, and norms that guide behavior
in a society. These values, beliefs, and norms define what is
“right and wrong” in a society, what is acceptable and
unacceptable, what is fashionable and unfashionable.
• Failure to understand changes in culture, or differences
between cultures, can have a very large impact on the ability of
a firm to gain a competitive advantage.
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General Environment
4. The economic climate is the overall health of the economic
systems within which a firm operates. The health of the
economy varies over time in a distinct pattern: Periods of
relative prosperity, when demand for goods and services is
high and unemployment is low, are followed by periods of
relatively low prosperity, when demand for goods and services
is low and unemployment is high. When activity in an economy
is relatively low, the economy is said to be in recession. A
severe recession that lasts for several years is known as a
depression. This alternating pattern of prosperity followed by
recession, followed by prosperity, is called the business
cycle.
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General Environment
5. The Legal and Political Dimensions of an organization’s
general environment are the laws and the legal system’s
impact on business, together with the general nature of the
relationship between government and business.
• These laws and the relationship between business and
government can vary significantly around the world.
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General Environment
6. A final attribute of a firm’s general environment is Specific
International Events. These include events such as civil
wars, political coups, terrorism, wars between countries,
famines, and country or regional economic recessions.
• All of these specific events can have an enormous impact on
the ability of a firm’s strategies to generate competitive
advantage.
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Industry Analysis
Model of Firm Performance
• In the 1930s, a group of economists began developing an
approach for understanding the relationship among a firm’s
environment, behavior, and performance. The original
objective of this work was to describe conditions under which
competition in an industry would not develop. Understanding
when competition was not developing in an industry assisted
government regulators in identifying industries where
competition-enhancing regulations should be implemented.
75
The Structure-Conduct-Performance
Model (SCP Model)
• Theoretical Framework
• Originally developed to spot anticompetitive conditions for
antitrust purposes.
• Came to be used to assess the possibilities for above-
normal profits for firms within an industry.
• Model of environmental threats was developed from this
economic tradition.
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S-C-P Model
• Structure in this model refers to industry structure, measured
by such factors as (1) the number of competitors in an industry,
(2) the heterogeneity of products in an industry, (3) the cost of
entry and exit in an industry, and so forth.
• Conduct refers to the strategies that firms in an industry
implement.
• Performance (1) the performance of individual firms and (2) the
performance of the economy as a whole.
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The Structure-Conduct-Performance Model

(SCP Model)
78
S-C-P Model
• Although both definitions of performance (P) in the S-C-P model
are important, the strategic management process is much more
focused on the performance of individual firms than on the
performance of the economy as a whole.
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Types of Competition and

Expected Firm Performance
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Industry Structure and

Environmental Threats
82
A Model of Environmental Threats

• As a theoretical framework, the S-C-P model has proven to be
very useful in informing both research and government policy.
• However, the model can sometimes be awkward to use to
identify threats in a firm’s local environment.
• Fortunately, several scholars have developed models of
environmental threats based on the S-C-P model that are
highly applicable in identifying threats facing a particular firm.
These models identify the five most common threats.
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Industry Analysis (2 of 2)
The Model of Environmental Threats
85

• To a firm seeking competitive advantages, an environmental
threat is any individual, group, or organization outside a firm
that seeks to reduce the level of that firm’s performance.
• Threats increase a firm’s costs, decrease a firm’s revenues, or
in other ways reduce a firm’s performance.
• In S-C-P terms, environmental threats are forces that tend to
increase the competitiveness of an industry and force firm
performance to competitive parity level.
86

1. Threat from New Competition
• New competitors are firms that have either recently
started operating in an industry or that threaten to begin
operations in an industry soon.
• If firms can easily enter the industry, any above-normal
profits will be bid away quickly.
• Barriers to entry lower the threat of entry.
• Barriers to entry make an industry more attractive.
– This is true whether the focal firm is already in the
industry or thinking about entering.
87

• The threat of new competitors depends on the cost of entry,
and the cost of entry, in turn, depends on the existence and
“height” of barriers to entry.
• Barriers to entry are attributes of an industry’s structure that

increase the cost of entry. The greater the cost of entry, the
greater the height of these barriers. When there are significant
barriers to entry, potential new competitors will not enter into
an industry even if incumbent firms are earning competitive
advantages.
88

Four important barriers to entry have been identified in the S-C-P
and strategy literatures.
These four barriers;

(1) Economies of scale,
(2) Product differentiation,
(3) Cost advantages independent of scale, and
(4) Government regulation of entry.
89

Barriers to Entry:
1. Economies of scale: firm that can’t produce the
minimum efficient scale will be at a disadvantage.
2. Product differentiation: entrants are forced to overcome
customer loyalties to existing products.
3. Cost advantages independent of scale: incumbents
may have learning advantages, and so on.
4. Government policies: governments may impose trade
restrictions and/or grant monopolies.
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Model of Industry Competition

2. Threat from Existing Competitors
• New competitors are an important threat to the ability of
firms to maintain or improve their level of performance, but
they are not the only threat in a firm’s environment.
• Attributes of an industry that increase the threat of direct
competition:
1. Large number of competing firms that are
roughly/almost the same size.
2. Slow or declining industry growth.
3. Lack of product differentiation.
4. Industry capacity added in large increments.
91

2. Threat from Existing Competitors
1. Direct competition tends to be high when there are numerous firms in
an industry and these firms tend to be roughly/almost the same size.
2. Direct competition tends to be high when industry growth is slow.
When industry growth is slow, firms seeking to increase their sales must
often acquire market share from established competitors
3. Direct competition tends to be high when firms are unable to
differentiate their products in an industry. When product differentiation is
not a viable strategic option, firms are often forced to compete only on
the basis of price.
4. Direct competition tends to be high when production capacity is
added in large increments. If, in order to obtain economies of scale,
production capacity must be added in large increments, an industry is
likely to experience periods of oversupply after new capacity comes
online.
92

3. Threat of Substitute Products
• Substitutes meet approximately the same customer needs, but
do so in different ways.
– Coke and Pepsi are rivals; milk is a substitute for both.
• Substitutes create a price ceiling because consumers switch to
the substitute if prices rise.
• Substitutes are playing an increasingly important role in
reducing the profit potential in a variety of industries.
• Substitutes will likely come from outside the industry—be sure
to look.
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4. Threat of Supplier Leverage
• Suppliers make a wide variety of raw materials, labor, and
other critical assets available to firms.
• Suppliers can threaten the performance of firms in an
industry by increasing the price of their supplies or by
reducing the quality of those supplies.
• Powerful suppliers can “squeeze” (lower profits) the focal
firm.
94

4. Threat of Supplier Leverage
Supplier Attitudes that can lead to high levels of threats
1. Suppliers are a greater threat if the suppliers’ industry is dominated by a
small number of firms.
2. Suppliers are a greater threat when what they supply is unique or highly
differentiated.
3. Suppliers are a greater threat to firms in an industry when suppliers are
not threatened by substitutes. When there are no effective substitutes,
suppliers can take advantage of their position to extract economic profits
from firms they supply.
4. Suppliers are a greater threat to firms when they can credibly threaten to
enter into and begin competing in a firm’s industry.
5. Suppliers are a threat to firms when firms are not an important part of
suppliers’ business.
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5. Threat from Buyers Influence
• The final environmental threat is buyers. Buyers purchase a
firm’s products or services.
• Whereas powerful suppliers act to increase a firm’s costs,
powerful buyers act to decrease a firm’s revenues.
• Powerful buyers can “squeeze” (lower profits) the focal firm by
demanding lower prices and/or higher levels of quality and
service.
• Buyers operate in a competitive market—they are not earning
above-normal profits.
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5. Threat from Buyers Influence
Indicators of the Threat of Buyers’ Influence in and Industry
1. Number of buyers is small.
2. Product sold to buyers are undifferentiated and standard.
3. Products sold to buyers are significant percentage of buyer’s final
costs.(In this context, buyers are likely to be very concerned about the
costs of their supplies and constantly on the lookout for cheaper
alternatives.)
4. Buyers are not earning significant economic profits. (In these
circumstances, buyers are likely to be very sensitive to costs and insist
on the lowest possible cost and the highest possible quality from
suppliers.)
5. Buyers threaten backward vertical integration. (In this case, buyers
become both buyers and rivals and lock in a certain percentage of an
industry’s sales)
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Vertical Integration
 Vertical integration: is simply the number of steps in this value chain
that a firm accomplishes within its boundaries
 Backward vertical integration: when it incorporates more stages of

the value chain within its boundaries and those stages bring it closer to
the beginning of the value chain, that is, closer to gaining access to
raw materials.
 Forward Vertical Integration: When it incorporates more stages of the

value chain within its boundaries and those stages bring it closer to the
end of the value chain; that is, closer to interacting directly with final
customers.
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99
Most industries are somewhere between the extremes.
100
Environmental Threats
and Average Industry Performance
The five environmental threats have three important implications
for managers seeking to choose and implement strategies:
1. They describe the most common sources of local
environmental threat in industries.
2. They can be used to characterize the overall level of threat in
an industry.
3. They can be used to anticipate the average level of
performance of firms in an industry.
101
Estimating the Level of Average

Performance in an Industry
102
Five Forces Matrix (1 of 2)

• Assign a value to rate the importance of each of the five forces
to the industry on a 1 (not important) to 5 (very important) scale.
Then assign a value to reflect the threat that each force poses
to the industry. Multiply the importance rating in column 2 by the
threat rating in column 3 to produce a weighted score. Add the
weighted scores in column 3 to get a total weighted score. This
score measures the industry’s attractiveness. The matrix is a
useful tool for comparing the attractiveness of different
industries.
• Minimum Score = 5 (Very attractive)
• Maximum Score = 125 (Very unattractive)
103
Five Forces Matrix (2 of 2)

Table 4.1 Five Forces Matrix
Importance (1 to 5) Threat to Industry

(1 = Not Important (1 to 5) (1 = Low Weighted
Force 5 = Very Important) 3 = Medium 5 = High) C Score Col 2 × Col 3
Rivalry among companies
5 2 10
competing in the industry
Bargaining power of
2 2 4
suppliers in the industry
Bargaining power of
2 4 8
buyers
Threat of new entrants to
3 4 12
the industry
Threat of substitute
4 1 4
products or services
Blank Blank Total 38
104

Sixth Edition
Chapter 2
External Environment
Part 2
Opportunities
105
106
Why External Analysis?

External analysis allows firms to:
• Discover threats and opportunities
• See if above-normal profits are likely in an industry
• Better understand the nature of competition in an industry
• Make more informed strategic choices
107

Environmental Opportunities
108

• Identifying environmental threats is only half
the task in accomplishing an external analysis.
Such an analysis must also identify
opportunities.
• Fortunately, the same S-C-P logic that made it
possible to develop tools for the analysis of
environmental threats can also be used to
develop tools for the analysis of environmental
opportunities.
109

• However, instead of identifying the threats
that are common in most industries,
opportunity analysis begins by identifying
several generic industry structures and
then describing the strategic
opportunities that are available in each
of these different kinds of industries.
110

There are many different generic industry structures.
However, four are very common and will be the focus of
opportunity analysis in this book:
The most common Four Categories are:
(1) Fragmented industries,
(2) Emerging industries,
(3) Mature industries, and
(4) Declining industries.
111
Exploiting Industry Structure Opportunities

(1 of 5)
Generic Industry Structures

• At any point in time, the structure of most industries fits
into one of the four generic categories.
• Each industry structure presents opportunities that may be
exploited.
• Firms can choose to exploit an industry structure, continue
business as usual, or exit the industry.
112

1. Fragmented industry
• Fragmented industries are industries in which a large number
of small or medium-sized firms operate and no small set of
firms has dominant market share or creates dominant
technologies.
• The major opportunity facing firms in fragmented industries
is the implementation of strategies that begin to consolidate
the industry into smaller firms.
Exploiting Industry Structure
Opportunities (2 of 5)
1. Fragmented Industry Structure
Industry Characteristics Opportunity
• Large number of small firms Consolidation
• No dominant firms • Buy competitors
• No dominant technology • Begin to generate advantages of
size and dominance
• Commodity-type products
– Increase minimum efficient
• Low barriers to entry scale.
– Increase bargaining power vis-
• Few, if any, economies of scale à-vis suppliers and buyers.
– Possibly differentiate/brand the
product.
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2. Emerging industry
• Emerging industries are newly created, or newly recreated
industries formed by technological innovations, changes in
demand, and the emergence of new customer needs.
• The opportunities that face firms in emerging industries fall into
the general category of first-mover advantages or making
important strategic and technological decisions early in the
development of an industry.
2. Emerging Industry Structure
Industry Characteristics Opportunity
• New industry based on First mover advantages
breakthrough technology or – Technology
product
– Locking-up assets
• No product standard has – Creating switching costs
been reached
• No dominant firm has
emerged
• New customers come from
nonconsumption not from
competitors
116

3. Mature Industries
• Mature industries are those experiencing slowing growth in total
industry demand, the development of experienced repeat
customers, a slowdown in increases in production capacity, a
slow-down in the introduction of new products and services, an
increase in the amount of international competition, and overall
reduction in the profitability of firms in the industry.
3. Mature Industry Structure

Industry Characteristics Opportunities
• Slowing growth in demand • Refine current products
• Technology standard exists • Improve service
• Increasing international • Process innovation
competition
• Industry-wide profits
declining
• Industry exit is beginning
118

4. Declining Industry
• Declining industry is an industry that has experienced an
absolute decline in unit sales over a sustained period of time.
Obviously, firms in a declining industry face more threats than
opportunities. Rivalry in a declining industry is likely to be very
high, as is the threat of buyers, suppliers, and substitutes.
However, even though threats are significant, firms do have
opportunities they can exploit.
• The major strategic options that face firms in this kind of
industry are leadership, niche, harvest and divestment.
4. Declining Industry Structure

Industry Characteristics Opportunities
• Industry sales have • Become a Market
sustained pattern of decline leaders
• Some well-established • Finding a Niche
firms have exited
• Begin a Harvest
• Firms have stopped strategy
investing in maintenance
• Divesting the business
Leadership By becoming the firm with the largest market share

Strategy in that industry.
Niche Strategy Reduces its scope of operations and focuses on

narrow segments of the declining industry.
Harvest Strategy Do not expect to remain in the industry over the

long term. Instead, they engage in a long,
systematic, phased withdrawal, extracting as much
value as possible during the withdrawal period.
Divestment Extract a firm from a declining industry.
Strategy
121

4. Declining Industry Examples:
Such industry can be found in
• DVD, game, Video Rental
• Computer manufacturing
• Recordable media manufacturing
• Fax machines
• Scanner
122
123
Summary
External Analysis:
• Takes time and effort.
• Should include consideration of international markets.
• Helps firms recognize Threats and Opportunities.
• Provides assessment of likely levels of industry profitability
(normal, above, below).
• Can be applied at the individual level to professional and
personal environments.
• Sixth Edition
Chapter 3
Evaluating a Firm’s Internal

Capabilities
RBV
Copyright © 2019 Pearson Education, Inc. All Rights Reserved

125
126
What Does Internal Analysis Tell Us?

Internal analysis provides a comparative look at a firm’s
capabilities.
• What are the firm’s strengths?
• What are the firm’s weaknesses?
• How do these strengths and weaknesses compare to
competitors?
127
Why Does Internal Analysis Matter?

Internal analysis helps a firm:
• Determine if its resources and capabilities are likely
sources of competitive advantage.
• Establish strategies that will exploit any sources of
128
The Theory Behind Internal Analysis

The Resource-Based View (RBV)
• Developed to answer the question: Why do some firms
achieve better economic performance than others?
• Used to help firms achieve competitive advantage and
superior economic performance.
• Assumes that a firm’s resources and capabilities are the
primary drivers of competitive advantage and economic
performance.
129
The Resource-Based View

Resources and Capabilities
Resources:
• Resources are the tangible and intangible assets that a firm
controls, which it can use to conceive of and implement its
strategies.
• Examples of resources include a firm’s factories (a tangible asset), its
products (a tangible asset), its reputation among customers (an
intangible asset).
• eBay’s tangible assets include its Website and associated software. Its
intangible assets include its brand name in the auction business.
130

Capabilities:
• Capabilities are a subset of a firm’s resources and are defined as the
tangible and intangible assets that enable a firm to take full advantage
of the other resources it controls. That is, capabilities alone do not
enable a firm to conceive and implement its strategies, but they enable
a firm to use other resources to conceive and implement such
strategies.
• Examples of capabilities might include a firm’s marketing skills and
teamwork and cooperation among its managers.
• eBay, the cooperation among software developers and marketing
people that made it possible for eBay to dominate the online auction
market is an example of a capability.
131

Resources and Capabilities categories
1. Financial Resources
2. Physical Resources
3. Human Resources
4. Organizational Resources
132

1. Financial Resources:
include all money available, from whatever source,
that firm use to convince and implement the
strategies, like:
• Debt,
• Equity,
• Retained earnings,
• etc.
133

2. Physical Resources:
Include all physical technology used in firm like:
• Plant, Factories, Offices,
• Equipment,
• Geographic location,
• Its access to raw materials,
• Machinery,
• Technology.
134

3. Human Resources:
Include the
• Training,
• Experience,
• Judgment,
• Intelligence,
• Relationship, and
• Insight of individual.
135

4. Organizational Resources:
• Formal reporting structures,
• Its formal and informal planning,
• Controlling,
• Reward systems,
• Coordinating systems,
• Culture & reputation,
• Relationships among groups within a firm, etc.
136
The Purpose of categorizing resources

The Purpose of categorizing resources:
1. To demonstrate that anything and everything
may be viewed as a resource.
2. To show later on that different types of resources
may be combined to form the capabilities of the
firm.
137
Critical Assumptions of the

Resource-Based View (RBV) Model
• The resource-based view (RBV) is a model that
sees resources as key to superior firm
performance.
• If a resource exhibits VRIO attributes, the
resource enables the firm to gain and sustain
* VRIO: It’s a framework to examining resources
138
Critical Assumptions of the

Resource-Based View (RBV) Model
• The RBV makes two critical assumptions that set it apart from
the industrial organization economics that preceded it.
• If one firm had a good idea, others would quickly copy it. There
would be no enduring differences between firms.
139

Two Critical Assumptions of the R BV
1. Resource Heterogeneity
2. Resource Immobility
140

1. Resource Heterogeneity
Different firms may possess different resources
and capabilities even if they are competing in the
same industry. This is an explicit recognition that
all firms are not the same.
Apple competes with Samsung in tablets and smartphones markets,
where Apple sells its products at much higher prices and, as a result,
reaps higher profit margins. Why Samsung does not follow the same
strategy?
Simply because Samsung does not have the same brand reputation
or is capable to design user-friendly products like Apple does.
141

2. Resource Immobility
Some resources may not be moved from firm to
firm without substantial cost. It may be more
costly for a firm to acquire a desirable resource
than what the resource is worth to that firm.
Resources are not mobile and do not move from company to
company, at least in short-run. Due to this immobility, companies
cannot replicate rivals’ resources and implement the same
strategies.
Intangible resources, such as brand equity, processes, knowledge or
intellectual property are usually immobile.
142

What do these assumptions really mean?
• If one firm has resources that are valuable and other firms
don’t, and…
• If other firms can’t imitate these resources without incurring
high costs, then…
• The firm possessing the valuable resources will likely gain a
sustained competitive advantage.
• In this way, it will be possible to identify a firm’s internal
strengths and its internal weaknesses.
• The primary tool for accomplishing this internal analysis is
called the VRIO framework.
143
• Sixth Edition
Chapter 3
Evaluating a Firm’s Internal Capabilities
(Part 2)
VRIO Framework

145
146
147
The Internal Analysis Tool

The V R I O Framework
• Is the analysis ‘tool’ of the RBV.
• This framework is a way of examining resources to
determine if a resource is likely to be a source of
• Four criteria must be met if a resource is to lead to
competitive advantage. And these four criteria are
represented by questions in the framework.
• The framework allows us to draw conclusions about
competitive advantage based on answers to the four
questions: Value Rarity Imitability Organization.
148
149
The Internal Analysis Tool

Four Questions
1. Value – Does the resource enable the firm to exploit an
opportunity or neutralize a threat? The evidence of a positive
response to this question is usually that the resource
somehow increases revenue or decreases cost.
2. Rarity – Is the resource rare? Is the resource rare enough that
there is still scarcity in the marketplace for this resource?
3. Imitability – Is the resource costly to imitate? Specifically, is
the resource so costly to imitate that no one would try to
imitate it?
4. Organization – Is the firm organized in such a way that the
resource can be exploited?
150
The VRIO Framework (1 of 4)

If a firm has resources that are:
• Valuable,
• Rare, and
• Costly to Imitate, and…
• The firm is Organized to exploit these resources;
.. Then the firm can reasonably expect to achieve a competitive advantage. Of course,
there will be many resources that meet some but not all of the criteria. The competitive
implication of these resources will be explained as we move along.
151

Applying the Tool
• A resource or bundle of resources are subjected to
each question to determine the competitive implication
of the resource.
• Each question is considered in a comparative sense
(competitive environment).
• The framework is applied on a resource-by-resource
basis and not to the firm as a whole.
152
Applying the V R I O Framework

1. The Question of Value
• This is a straightforward question intended to achieve whether
or not the resource is strategically relevant.
• There is a cost to the firm of carrying any resource and if the
firm does not receive some benefit that outweighs the cost,
then the firm is at a competitive disadvantage.
• If the firm receives a benefit that outweighs the carrying cost of

the resource, then we would conclude that the resource is
valuable, and could, therefore, be a potential source of
153
Applying the V R I O Framework

• For many firms, the answer to the question of value has been
“yes.” That is, many firms have resources and capabilities that
are used to exploit opportunities and neutralize threats, and
the use of these resources and capabilities enables these firms
to increase their net revenues or decrease their net costs.
154
Applying the V R I O Framework (1 of 10)

Using Value Chain Analysis to Identify Potentially Valuable
• One way to identify potentially valuable resources and
capabilities controlled by a firm is to study that firm’s value
chain. A firm’s value chain is the set of business activities in
which it engages to develop, produce, and market its products
or services. Each step in a firm’s value chain requires the
application and integration of different resources and
capabilities.
155
Applying the V R I O Framework (1 of 10)

Using Value Chain Analysis to Identify Potentially Valuable
• Because different firms may make different choices about
which value chain activities they will engage in, they can end
up developing different sets of resources and capabilities. This
can be the case even if these firms are all operating in the
same industry.
• These choices can have implications for a firm’s strategies,
and, as described in the Ethics and Strategy feature, they can
also have implications for society more generally.
156
About the Value Chain Analysis (VCA)

• Value Chain Analysis (VCA) is a process where a firm
identifies its primary and support activities that add value to its
final product and then analyze these activities to reduce costs or
increase differentiation.
• Value Chain represents the internal activities a firm engages in
when transforming inputs into outputs.
• Value chain analysis is a strategy tool used to analyze internal
firm activities. Its goal is to recognize, which activities are the
most valuable (i.e. are the source of cost or differentiation
advantage) to the firm and which ones could be improved to
provide competitive advantage.
157
About the Value Chain Analysis (VCA)
158
159
Applying the VRIO Framework

2. The Question of Rarity
• We are interested in whether a resource is rare
enough that it creates a difference between the focal
firm and its competitors such that the focal firm
realizes some advantage from the difference.
• This question is tied to the assumption of resource
heterogeneity. If there is to be any advantage in
having a resource, it must create differences between
firms.
160

2. The Question of Rarity
• If a resource is not rare, then perfect competition
dynamics are likely to be observed (i.e., no
competitive advantage, no above-normal profits).
• A resource must be rare enough that perfect
competition has not set in.
• Thus, there may be other firms that possess the
resource, but still few enough that there is scarcity.
161

Implications of Value and Rarity
If a firm’s resources are The firm can expect
Not Valuable Competitive Disadvantage
Valuable, but Not Rare Competitive Parity
Valuable and Rare Competitive Advantage

(at least temporarily)
162

3. The Question of Imitability
• The temporary competitive advantage of valuable and
rare resources can be sustained only if competitors
face a cost disadvantage in imitating the resources.
• Intangible resources are usually more costly to

imitate than tangible resources.
163

Costs of Imitation
• If there are high costs of imitation, then the firm may enjoy
a period of sustained competitive advantage.
– A sustained competitive advantage will last only until a
duplicate or substitute emerges.
• If a firm has a competitive advantage, others will

attempt to imitate it.
164
Why Might It Be Costly to Imitate Another

Firm’s Resources or Capabilities?
165

1. Unique Historical Conditions
Firms attempting to imitate resources that came about because of
unique historical conditions may face substantial cost
disadvantages. Two types of cost disadvantages faced by would
be imitators are:
1. First mover advantages – brand loyalty and market share
are difficult to overcome.
2. Path dependency – refers to the fact that the development of
a resource may depend heavily on other resources being in
place before the desired resource.
166

2. Causal Ambiguity
• A firm may face a cost disadvantage in acquiring valuable and
rare resources because it is unclear exactly which resources
need to be imitated in order to get the desired effect.
• Causal links between resources and competitive advantage
may not be understood.
• Bundles of resources fog these causal links.
167

3. Social Complexity
• Social complexity may create a cost disadvantage for a firm
attempting to imitate a valuable and rare resource because the
desired resource may be the result of a set of complex social
relationships.
• Duplicating these relationships may be extremely costly or even
impossible.
• The social relationships entailed in resources may be so
complex that managers cannot really manage them or replicate
them.
168

4. Patents (Copy right)
• Patents help to create cost disadvantages for imitators, but they
are not an ironclad/armored protection for patent holders. One
problem for those seeking a patent is that potentially sensitive
information has to be disclosed to get the patent in the first
place. This information could prove useful to others attempting
to develop a similar product or solution. Another problem for
patent holders is that the patent must be enforced if others
choose to infringe on the patent. For these reasons, some firms
opt for a trade secret instead of a patent. Trade secrets offer a
different level of protection, but there is little, if any, a priori
disclosure requirement.
169

Implications of Value, Rarity and Imitability
If a firm’s resources are The firm can expect
Valuable, Rare, but not Temporary Competitive

Costly to Imitate Advantage
Valuable, Rare, and Costly Sustained
to Imitate Competitive Advantage
(if Organized appropriately)
170

4. The Question of Organization
• A firm’s structure and control mechanisms must be aligned so
as to give people ability and incentive to exploit the firm’s
resources.
• Examples: formal and informal reporting structures,
management controls, compensation policies, relationships,
and so on.
• These structure and control mechanisms complement other
firm resources—taken together, they can help a firm achieve
sustained competitive advantage.
171
The VRIO Framework
172
The VRIO Framework
173
• Sixth Edition
Chapter 3
Internal Capabilities
Competitive Dynamics

175
176
177
178
Imitation and Competitive Dynamics in an

Industry
• Suppose a firm in an industry has conducted an analysis of its
resources and capabilities, concludes that it possesses some
valuable, rare, and costly-to-imitate resources and
capabilities, and uses these to choose a strategy that it
implements with the appropriate organizational structure,
formal and informal management controls, and compensation
policies. The RBV suggests that this firm will gain a
competitive advantage even if it is operating in what an
environmental threat analysis would suggest is a very
unattractive industry.
179
Competitive Dynamics of Resource

Imitation
Imitation and Competitive Dynamics:
• The strategic decisions and actions of firms in response to
the strategic decisions and actions of other firms
180
Competitive Dynamics (1 of 4)
1. “No Action” Response or “No change” Response
EX: Rolex and Casio
A firm may decide to take no action because:
• The other firm is serving a different market.
• A response may hurt its own competitive advantage.
• It does not have the resources and capabilities to mount
an effective response.
• It wants to reduce or manage rivalry in the market through
tacit collusion.
181
2- “Change” Responses or changes in Tactics and
Strategy
Tactics (Tide) Strategy (Monsanto)

HOW? WHAT?
• Specific actions • A fundamental change in a firm’s
– tweaking product characteristics theory
• Usually imitated so quickly that • May be necessary if current
there is no advantage strategy becomes obsolete
• A “leap frog” move may create • A mimetic change may achieve
advantage parity, but not advantage
Imitation will seldom lead to competitive advantage
• Firms should use resources and capabilities to fill unique
competitive space.
Similar strategies may lead to competitive advantage.
• Some firms can achieve competitive advantage even if
they are second movers.
184
Competitive Dynamics
3- Strategy Change
1. Refer to fundamental change in the way a firm approaches its
business. Example: Monsanto changed from being a chemical
company to being a life sciences company focused on genetic
engineering.
2. Mean a firm has altered its theory about how to compete.
3. Usually occur when a firm figures out that its current strategy won’t
even produce competitive parity.
4. Can be expected to produce competitive parity if they simply mimic
what other firms are doing.
5. Can generate competitive advantage if the VRIO criteria are met.
185
1. Not Responding to Another Firm’s

A firm might not respond to another firm’s competitive
advantage for at least three reasons;
First, this firm might have its own competitive advantage. By
responding to another firm’s competitive advantage, it might
destroy, or at least compromise, its own sources of competitive
advantage.
186

Second, a firm may not respond to another firm’s competitive
advantage because it does not have the resources and
capabilities to do so. A firm with insufficient or inappropriate
resources and capabilities—be they physical, financial, human, or
organizational—typically will not be able to imitate a successful
firm’s resources either through direct duplication or substitution.
187

Finally, a firm may not respond to the advantages of a competitor
because it is trying to reduce the level of rivalry in an industry. Any
actions a firm takes that have the effect of reducing the level of
rivalry in an industry and that also do not require firms in an
industry to directly communicate or negotiate with each other can
be thought of as tacit cooperation. Explicit cooperation, where
firms do directly communicate and negotiate with each other.
188
189

• Reducing the level of rivalry in an industry can benefit all firms
operating in that industry. This decision can have the effect of
reducing the quantity of goods and services provided in an
industry to below the competitive level, actions that will have the
effect of increasing the prices of these goods or services. When
tacit cooperation has the effect of reducing supply and
increasing prices, it is known as tacit collusion. Tacit collusion
can be illegal in some settings. However, firms can also tacitly
cooperate along other dimensions besides quantity and price.
These actions can also benefit all the firms in an industry and
typically are not illegal.
Tit for tat is an English saying meaning "equivalent retaliation". It is a highly effective strategy in
game theory. An agent using Copyright
this strategy will 2015,
© 2017, first cooperate, then
2013 Pearson subsequently
Education, replicate
Inc. All Rights an
Reserved
opponent's previous action.
191

Attributes of Industry Structure That Facilitate the
Development of Tacit Cooperation (Explicit Cooperation)
1. Small number of competing firms

2. Homogeneous products and costs
3. Market-share leader
4. High barriers to entry
192
2. Changing Tactics in Response to Another

Firm’s Competitive Advantage
Tactics change
1. Refer to changes in the way an overall strategy is carried out.
Example: changes in product characteristics like size, shape, color,
etc. The product is still hand soap, for example, and it’s still sold in the
same places to the same people.
2. Are typically easy to imitate. When one firm adopts a change in
tactics, others can and will quickly follow.
3. May create temporary advantages until competitors are able to imitate
them.
4. May create an advantage if the firm ‘leap frogs’ the competition, like
Procter & Gamble did with Tide.
5. May be a source of advantage for firms that can do them in rapid
succession and thereby stay ahead of the competition.
193
2. Changing Tactics in Response to Another

Firm’s Competitive Advantage
• Tactics are the specific actions a firm takes to implement its
strategies. Examples of tactics include decisions firms make
about various attributes of their products—including size, shape,
color, and price—specific advertising approaches adopted by a
firm, and specific sales and marketing efforts. Generally, firms
change their tactics much more frequently than they change
their strategies
194
3. Changing Strategies in Response to

Another Firm’s Competitive Advantage
• Finally, firms sometimes respond to another firm’s competitive
advantage by changing their strategies. Obviously, this does not
occur very often, and it typically only occurs when another firm’s
strategies usurp a firm’s competitive advantage. In this setting,
a firm will not be able to gain even competitive parity if it
maintains its strategy, even if it implements that strategy very
effectively.
195
Implications of the Resource-Based View

• The RBV and the VRIO framework can be applied to
individual firms to understand ..
– Whether these firms will gain competitive advantages?
– How sustainable these competitive advantages are likely to
be?, and
– What the sources of these competitive advantages are?
In this way, the RBV and the VRIO framework can be
understood as important complements to the threats and
opportunities analyses.
196
RBV has some broader implications for managers

seeking to gain competitive advantages.
197
Broader Implications of the

Resource-Based View (RBV)
1- The responsibility for competitive advantage in a firm:
Competitive advantage is every employee’s responsibility.
2. Competitive parity and competitive advantage:

If all a firm does is what its competition does, it can gain only
competitive parity. In gaining competitive advantage, it is better
for a firm to exploit its own valuable, rare, and costly-to-imitate
resources than to imitate the valuable and rare resources of a
competitor.
198

3. Difficult to implement strategies:
As long as the cost of strategy implementation is less than the
value of strategy implementation, the relative cost of implementing
a strategy is more important for competitive advantage than the
absolute cost of implementing a strategy. Firms can
systematically overestimate and underestimate their uniqueness.
199

4. Socially complex resources:
Not only can employee empowerment, organizational culture, and
teamwork be valuable, they can also be sources of sustained
200

5. The role of the organization:
Organization should support the use of valuable, rare, and costly-
to-imitate resources. If conflicts between these attributes of a firm
arise, change the organization.
201
Internal Analysis (1 of 2)
Assumes:
• Determinates of economic performance are firm-level
characteristics (resources and capabilities).
– Firms may be different (heterogeneity).
– Differences may be enduring (immobility).
• Competitive advantage stems from resources and
capabilities that meet the VRIO criteria.
202
Internal Analysis (2 of 2)
Tells us:
• What the firm should do, given the relative strengths
and weaknesses of resources and capabilities
Managers’ Job:
• Bundle resources and capabilities to achieve
competitive advantage
VRIO Framework Helps Managers Recognize

Sources of Competitive Advantage
203
Competitive Advantage CA will be sustained if:

• Valuable • Other firms’ costs of imitation are
• Rare greater than benefit of imitation
• Costly to Imitate • The firm is organized to exploit

advantages
• Organized to Exploit
• Sixth Edition
• Strategic Choice
• Business Level Strategy
• CH4. Cost Leadership
• CH5. Product Differentiation
• Corporate Level Strategy
• CH8. Vertical Integration
• CH9. Corporate Diversification
• CH11. Strategic Alliances
• Pearson
Copyright © 2019 CH12.Education,
Mergers Inc.
andAll Rights Reserved
Acquisitions
205
206
207
The Business Level Strategies
Two Generic Business Level Strategies
1. Cost Leadership: Generate economic value by having

lower costs than competitors.
Example: Wal-Mart
2. Product Differentiation: Generate economic value by

offering a product that customers prefer over competitors’
product.
Example: Harley-Davidson
208
The Business Level Strategies

Focus Strategy:
• A focus strategy concentrates attention on a special
market segment in the form of a niche customer group,
geographical region, or product or service line.
• The objective is to serve the needs of the segment better

than anyone else.
• Competitive advantage is achieved by combining focus

with either differentiation or cost leadership.
209
1. The Cost of Leadership
• A firm that chooses a cost leadership business

strategy focuses on gaining advantages by reducing its
costs to below those of all its competitors.
• This does not mean that this firm abandons/give-up other
business or corporate strategies.
• Indeed, a single-minded focus on just reducing costs can
lead a firm to make low-cost products that no one wants
to buy.
• However, a firm pursuing/following a cost leadership
strategy focuses much of its effort on keeping its costs
low.
210
Understanding Cost Advantage

Managers need to understand .. who has the cost
advantage in their market?
• It could be the focal firm

– Develop a strategy to exploit the advantage.
• It could be a competitor
– Develop a strategy to either capture the advantage or
compete on some other basis.
211
Summary
1) An understanding of the concept of business level strategy
• the positioning of a single business, even if the firm is
involved in more than one business.
2) An understanding of the benefits of a cost leadership
strategy
• In a competitive market, a cost advantage may be the only
way to achieve above normal economic returns.
• A cost leadership position will allow a firm to enjoy greater
margins.
• A cost leadership position may be a valuable barrier to
competitive threats by other firms.
212
Summary
3) The six sources of cost advantage
– Economies of scale
– Diseconomies of scale
– Learning curve advantages
– Differential low-cost access to inputs
– Technology advantages independent of scale
– Policy choices
4) An understanding of how a cost leadership position allows
a firm to respond to the five industry forces.
213
Summary
5) An appreciation of the fact that a cost leadership position
will lead to competitive advantage only if the cost advantage
is rare and costly to imitate.
6) An understanding that a cost leadership strategy must be
implemented appropriately within the organization.
7) A basic understanding of organizational structure and
control.
214
Summary
215
2. Product Differentiation
A business level strategy is intended to:
• Increase the perceived value of the focal firm’s products
and/or services relative to the value of competitor’s
products and/or services.
• Create a customer preference for the focal firm’s

216
Bases of Differentiation
• The notion/concept of a base of differentiation is important
because it allows a firm to focus its efforts on creating
and exploiting a particular difference between its
products and competitors’ products.
• Managers need to understand their own bases of

differentiation and the bases of differentiation of
competitors so that they can make informed strategic
choices.
A base of differentiation must fill some customer need:

• Image • Beauty • Safety • Furthering a cause
• Hunger • Status • Quality • Reliability in use
• Comfort • Style • Service • Nostalgia
• Cleanliness • Taste • Accuracy • Belonging
A differentiated product
fills one or more needs better than the products of competitors.
218
Almost anything can be a base of differentiation.
• The wide range of customer needs can be filled by a wide
range of bases of differentiation.
– Tangible thing (Product Features, Location, etc.)
– Intangible concept (Reputation, a cause, an ideal, etc.)
– Limited only by managerial creativity
Example: Fred Smith and FedEx (innovation)
219
Business Level Strategy:

Differentiation
Successful product differentiation results in two important
outcomes that generate value for the focal firm.
1. Customers develop preferences for the focal firm’s
2. When customers perceive a benefit to themselves, they
become willing to pay a premium for the differences that
create that benefit. If the benefit is great enough that
customers are willing to pay a price that is above the focal
firm’s average total cost, then we can conclude that the
product differentiation strategy has created value for the
firm.
220
Business Level Strategy:

Differentiation
• The firm whose customers have a preference for its
products and a willingness to pay a premium price for its
products is in an enviable position.
221
Cost Leadership and Product Differentiation
Can a firm pursue both simultaneously?
No Yes
• Use of structure, • Firms can do both
management control, and because some bases of
compensation policies are differentiation also lend
nearly opposites. themselves to low cost.
• Example: Rolex • Structure, controls, and
policies are not opposites.
• Example: Toyota
223
Summary
• Product differentiation creates customer preferences.
• Preferences allow firms to make above-normal profits.
• Almost anything can be a base of differentiation.
• Bases of product differentiation that meet the VRIO criteria
may generate competitive advantage.
• A product differentiation strategy is only as good as its
implementation.
Product differentiation principles can be applied to your

personal and professional lives.
224
225
Corporate Level Strategy

Important Point:
• Corporate level strategy addresses the question: In which
business(es) should the firm operate?
• Managers use corporate level strategy to help ensure
that the corporation is composed of the optimal mix of
businesses.
226
Logic of Corporate Level Strategy

Corporate level strategy should create value:
1. Such that the value of the corporate whole increases.
2. Such that businesses forming the corporate whole are
worth more than they would be under independent
ownership.
3. That equity (Stock) holders cannot create through portfolio
investing;
– A corporate level strategy should create synergies that
are not available in equity markets (Stock Market).
▪ Vertical integration = value chain economies
227
1. Vertical Integration
• Value Chain is that set of activities that must be
accomplished to bring a product or service from raw
materials to the point that it can be sold to a final customer.
• A firm’s level of vertical integration is simply the number
of steps in this value chain that a firm accomplishes within
its boundaries.
228
• Vertical integration is a strategy whereby a company owns
or controls its suppliers, distributors, or retail locations to
control its value or supply chain. Vertical integration
benefits companies by allowing them to control the
process, reduce costs, and improve efficiencies.
• EX: Netflix is a prime example of vertical integration whereby the
company started as a DVD rental company supplying film and TV
content. The company's executive management realized they could
generate more revenue by shifting to original content creation. Today,
Netflix uses its distribution model to promote their original content
alongside films from major studios.
229
230
• Firms that are more vertically integrated accomplish more
stages of the value chain within their boundaries than firms
that are less vertically integrated.
• A more sophisticated approach to measuring the degree of
a firm’s vertical integration is presented in the Strategy in
Depth feature.
231
• A firm engages in backward vertical integration when it
incorporates more stages of the value chain within its
boundaries and those stages bring it closer to the
beginning of the value chain, that is, closer to gaining
access to raw materials.
• Ex: If Dell computers were to open its own factory to
manufacture the LCD televisions it sells at its online store,
this would be an example of: backward vertical integration.
232
• A firm engages in forward vertical integration when it
incorporates more stages of the value chain within its
boundaries and those stages bring it closer to the end of
the value chain; that is, closer to interacting directly with
final customers.
• EX: When Apple, Inc. opened retail stores to sell its
computers and iPods, this was an example of: Forward
vertical integration.
233
What Is Vertical Integration? (1 of 2)

Where your pizza comes from
234
What Is Vertical Integration? (2 of 2)
235
Value Chain Economies

The Logic of Value Chain
Economies
• The focal firm is able to
create synergy with the other
firm(s).
– cost reduction
– revenue enhancement
• The focal firm is able to
capture above-normal
economic returns (avoid
perfect competition).
236
Summary (1 of 2)
Vertical Integration…
• Makes sense when value chain economies can be created
and captured
• May allow a firm to leverage capabilities
• may be a response to the threat of opportunism and
uncertainty
• As a form of exchange per se, is not rare nor costly to
imitate
237
Summary (2 of 2)
• Is an important consideration in the decision to expand
internationally (range of possibilities)
• Makes sense when done for the right reasons, under the
right circumstances
• Can be a costly mistake if done wrong
Ownership is costly—integrate only when the benefits

outweigh the costs of integration!
238
239
Logic of Corporate Level Strategy

1. such that businesses forming the corporate whole are
ownership
2. that equity holders cannot create through portfolio
investing
• Therefore,
‒ A corporate level strategy must create synergies
 economies of scope—diversification
240
2. Diversification
241
Types of Corporate Diversification (1 of 2)

At a general level…
• Product Diversification:
– operating in multiple industries
• Geographic-Market Diversification:
– operating in multiple geographic markets
• Product-Market Diversification:
– operating in multiple industries in multiple geographic
markets
242
Types of Corporate Diversification (2 of 2)

At a more specific level…
• Limited Diversification
– single business: >95% of sales in single business
– dominant business: 70–95% in single business
• Related Diversification
– related constrained: all businesses related on most
dimensions
– related linked: some businesses related on some
dimensions
• Unrelated Diversification
– businesses are not related
243
Product and Geographic Diversification

• Possibilities:
– single business in one geographic area
– single business in multiple geographic areas
– related constrained in one or multiple geographic areas
– related linked in one or multiple geographic areas
– unrelated in one or multiple geographic areas
• Note:
– Relatedness usually refers to products.
– Seemingly unrelated products may be related on other
dimensions.
244
Summary (1 of 2)
• Corporate Strategy: In what businesses should the firm
operate?
– An understanding of diversification helps managers
answer that question.
Two Criteria:
1. economies of scope must exist
2. must create value that outside equity holders cannot
create on their own
245
Summary (2 of 2)
Economies of Scope
– a case of synergy—combined activities generate
greater value than independent activities
– may generate competitive advantage if they meet the V
RIO criteria
Firms should pursue/keep diversification only if careful
analysis shows that competitive advantage is likely!
246
247
3. Strategic Alliances
Strategic Alliance:
• Any cooperative effort between two or more independent
organizations to develop, manufacture, or sell products or
services.
248
Motivation for Alliances (1 of 3)
Create economic value by:

• Accessing complementary resources and capabilities
• Leveraging existing resources and capabilities
An alliance is an organizational form of exchange that:
• Should produce a gain from trade due to some
comparative or absolute advantage.
Implication: Choose partners that are better at something
than you are (complementary resources).
249

Gains from Trade
250

Gains from Trade
251
Types of Alliances
252
Summary (1 of 2)
Successful alliance managers will:
• Create alliances that will produce gains from trade—
complementary resources
• Identify the sources of value creation
• Assess the likelihood of challenges to value creation and
allocation
• Adopt appropriate governance responses to the
challenges to value creation and allocation
253
Summary (2 of 2)
Alliances may generate competitive advantage if:
• Combinations of complementary resources meet the VRIO
criteria
• Governance responses meet the VRIO criteria
The Big Challenge of Strategic Alliances:

• Maximizing gains from trade while minimizing the threat of
cheating
254
255
Logic of Corporate Level Strategy Applies

1. Such that the value of the corporate whole increases
2. Such that businesses forming the corporate whole are
ownership
3. That equity holders cannot create through portfolio
investing
4. Mergers and Acquisitions Defined
Mergers Acquisitions
• Two firms are combined • One firm buys another firm
on a relatively coequal
basis
• The words are often used interchangeably even though

they mean something very different.
• Merger sounds more amicable/likeable, less threatening
Mergers and Acquisitions Defined
Mergers Acquisitions
• Parent stocks are • Can be a controlling
usually retired and new share, a majority, or all of
stock issued the target firm’s stock
• Name may be one of • Can be friendly or hostile
the parents’ or a • Usually done through a
combination tender offer
• One of the parents
usually emerges as the
dominant management
258
259
Mergers and Acquisitions Defined

Types of M&A Activity
Mass
260
Summary
• M&A activity is a mode of entry for vertical integration and
diversification strategies.
• A firm’s M&A strategy should satisfy the logic of corporate
level strategy.
• M&A activity can create economic value at announcement,
but target firms usually capture that value.
• M&A activity can create value over the long term for the
acquiring firm.
261
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