STRATEGY FRAMEWORK

Chapter 1&2

The Analysis, Formulation, Implementation (AFI) Strategy Framework (1) explains and
predicts differences in firm performance, and (2) helps managers formulate and implement a
strategy that can result in superior performance.
Analysis → Identify multiple future scenarios
Implementation → Execute Dominant strategic plan
Formulation → Develop strategic plans to address future scenarios
Dominant strategic plan → top managers decide most closely matches the current reality.
SWOT analysis
Strength, Weakness, Opportunities and threats (current position and plan future action)
Pestle Analysis
Political, economic, social, technological, legal, environmental (external changes)
Porter five forces
The bargaining power of buyers: seberapa bisa pembeli mempengaruhi keputusan strategi and
supplier,
Threat of new entrants: capital requirements, banyak yg main blm or demanding or no,
Threat of substitutes; ganti produk fungsi yg sama
Industry rivalry.
Level 5 pyramid: Compare Corporations and Entrepreneurs.
VRIO framework
Valuable, rare, imitable, organized
Bowman’s Strategy clock
Offers eight strategic positions for how firms can position themselves in the market relative to
competitors.
low-cost leadership strategy
Leadership framework- A conceptual framework of leadership progression with five distinct,
sequential levels.
2.2 strategic management
Must contain vision, mission, values
strategic intent which is a stretch goal that pervades the entire organization with a sense of
purpose. This sense of purpose, in turn, helps in creating the required core competencies.
Strategy process
Top-Down strategic planning → Highly regulated and stable industries such as utilities, e.g.,
Georgia Power in Southeast United States or Framatome, state-owned nuclear operator in
France.
Scenario planning → Strategy-planning activity in which top management envisions different
what-if scenarios to anticipate plausible futures in order to plan optimal strategic responses.
Strategy as planned emergence → Blended strategy process in which Organizational
structure and systems allow both top-down vision and Bottom-up Strategic initiatives to emerge
for evaluation and coordination by top management.

Chapter 3: External Analysis: Industry Structure, Competitive Forces, and Strategic

Groups

1. The PESTLE Framework

a. Economic Factors:
● Growth Rates
Growth rates measure the change in the value of goods and services produced by
a nation's economy. The real growth rate adjusts for inflation and indicates
whether an economy is expanding or contracting. In times of expansion,
businesses grow, demand rises, and profits increase. In recessions, demand falls,
but companies offering lowcost solutions may benefit.
● Employment Level
Economic growth impacts employment. During boom periods, unemployment is
low, and skilled labor becomes scarce and expensive, leading firms to invest in
automation. In downturns, unemployment rises, making labor more abundant and
wages fall.
 ● Interest Rates
Interest rates influence borrowing and spending. Lower rates stimulate borrowing
by businesses and consumers, encouraging investment and spending. Higher rates
make borrowing more costly, slowing down consumer demand and business
investment.
● Price Stability
Inflation, a general rise in prices, affects economic growth and purchasing power.
Central banks usually aim for a 2% inflation rate to balance growth and stability.
Deflation, the opposite of inflation, can distort future economic expectations,
leading to reduced investments.
● Currency Exchange Rates
Exchange rates impact international trade. A strong currency makes exports more
expensive and imports cheaper, reducing demand for local goods. A weak
currency has the opposite effect, making exports more competitive and imports
more costly.

b. Sociocultural Factors

Sociocultural factors represent a society’s culture, norms, and values, which influence
how people behave and what they prioritize. These factors are dynamic and vary across
different groups, so businesses must monitor trends to adjust their strategies accordingly.
For example, as more U.S. consumers have become healthconscious, companies like
Chipotle and Whole Foods thrived, while fastfood chains had to adapt by offering
healthier options.

Demographic Trends
Demographic trends, a key part of sociocultural factors, include population characteristics
like age, gender, ethnicity, religion, family size, and socioeconomic class. These trends
create opportunities and threats for businesses. For example, the growing Hispanic
population in the U.S. represents a large and young consumer base, leading to a surge in
Spanishlanguage TV networks and targeted advertising.

Norms, Cultures, and Values

● Norms are informal rules or expectations in society that guide behavior. They can
dictate acceptable dress, communication styles, or workplace behavior.
● Cultures refer to the collective beliefs, customs, and social behavior of a group of
people. Culture shapes lifestyle choices, consumption patterns, and preferences.
● Values are the deeply held principles that influence decisionmaking, such as the
importance of family, education, or sustainability.
 As these factors evolve, companies must align their products and marketing with
changing societal expectations to stay relevant and competitive. For instance, increasing
demand for diversity and inclusion in marketing and business practices reflects shifting
cultural values in many societies today.

c. Technological Factor

Technological factors refer to the use of knowledge to develop new processes and
products that can significantly impact industries. They include innovations in
manufacturing, artificial intelligence (AI), and emerging fields like quantum computing
and nanotechnology. These innovations drive changes in how businesses operate, produce
goods, and interact with consumers.

For example:
● Process Innovations: Techniques like lean manufacturing and Six Sigma improve
efficiency and product quality.
● Product Innovations: New technologies such as drones, wearable devices (like
VR headsets), and electric cars change consumer products and experiences. The
development of mRNA vaccines during the Covid19 pandemic is an example of a
breakthrough in biotechnology.
● Artificial Intelligence & Machine Learning: AI applications like Amazon’s Alexa
and autonomous vehicles are transforming industries. In the future, AI will further
alter how we live and work, impacting areas from transportation to energy
efficiency.
● Internet of Things (IoT): IoT connects devices (cars, home appliances,
manufacturing systems) to enable smarter, datadriven operations, reducing energy
consumption and enabling predictive maintenance.

Norms, Cultures, and Values in Technology

Technological changes also reflect and shape societal norms, cultures, and values. For
instance:

● Norms: Technology influences social norms, such as how we communicate (e.g.,

the widespread use of smartphones and social media), and how businesses engage
with customers (e.g., online shopping and automated customer service).
● Cultures: Different cultures may adopt or adapt to technology differently. For
example, in some regions, digital banking and ecommerce are dominant, while
others may still rely heavily on traditional methods.
 ● Values: The use of technology often reflects societal values, such as convenience,
speed, and sustainability. Increasingly, technological development is driven by
values such as environmental responsibility (e.g., renewable energy technologies)
and inclusivity (e.g., accessible design in tech products).

As technology evolves, its impact on businesses and society deepens, shaping future
norms, cultures, and values across industries and geographies.

d. Ecological Factor
Ecological factors refer to environmental issues like climate change, pollution, and
sustainable economic growth. These factors are increasingly important to businesses, as
companies and the natural environment are closely interconnected. Managing this
relationship responsibly is essential for the sustainability of both human societies and
organizations.

Here’s a summary of key points:

● Environmental Impact: Many businesses contribute to air, water, and land

pollution, as well as the depletion of natural resources. For example, the 2010 BP
oil spill caused widespread environmental damage and severely impacted local
economies dependent on fishing and tourism. The incident cost BP over $50
billion and half its market value.

● Externalities: These are unintended side effects (costs or benefits) of production

or consumption that impact others but are not reflected in the prices of goods or
services. Negative externalities, such as pollution, impose costs on society, while
positive externalities, like ecofriendly buildings, benefit communities. Businesses
are often not required to pay for the negative externalities they create unless
mandated by law.

● Opportunities from Climate Change: Climate change can also create business
opportunities. For example, Tesla addresses environmental concerns by producing
zeroemission electric vehicles and investing in sustainable energy solutions, such
as solar power, to reduce reliance on fossil fuels.

Businesses must increasingly adapt to ecological factors, balancing environmental

responsibilities with economic growth while exploring opportunities for innovation in
sustainability.

e. Legal Factor
 Legal factors encompass the results of political processes, such as laws, regulations,
mandates, and court decisions that directly impact businesses and industries. These legal
outcomes often influence a company's profit potential and competitive environment.

● Regulatory Changes: Legal factors often affect entire industries. For instance,
industries such as airlines, telecom, and energy in the U.S. have experienced
deregulation, changing how companies operate and compete.

● Political Pressure: Governments can exert political pressure and impose legal
sanctions that affect business performance. For example, the European
Commission has targeted major U.S. tech companies (Apple, Alphabet, Amazon,
Meta, and Microsoft) with legal and regulatory scrutiny, especially concerning
taxes and monopoly power. One proposal even aimed to break up Alphabet to
prevent its digital monopoly in search services.

● Data Privacy Laws: The EU enforces strict regulations on data privacy, notably
the General Data Protection Regulation (GDPR) implemented in 2018. GDPR
grants individuals significant control over their personal data, including rights to
access, data portability, and the right to be forgotten. U.S. companies operating in
the EU must comply with these stringent rules. Similar privacy laws have been
enacted in U.S. states like California, Colorado, and Virginia.

Legal factors not only shape how businesses operate but also require them to adapt to
evolving laws and regulations, which can vary across regions and industries. Companies
need to be agile in responding to legal changes to maintain profitability and compliance.

2. Porter Five Forces

Porter’s Five Forces is a strategic tool used to analyze the competitive environment of an
industry and understand the forces that shape the intensity of competition and profitability. These
five forces determine the attractiveness of a market or industry, helping companies strategize
effectively. Here's a detailed explanation of each force, along with examples and relevant data.

a. Threat of New Entrants

The threat of new entrants refers to how easy or difficult it is for new competitors to enter the
industry. High entry barriers reduce the risk of new competitors, while low barriers increase the
threat.

Key Factors:
 ● Capital Requirements
High investment costs deter new entrants. For example, starting a new airline requires
billions in capital for aircraft, infrastructure, and licenses.
● Economies of Scale
Large companies have cost advantages that new entrants find difficult to match. For
instance, Amazon enjoys economies of scale that prevent new ecommerce firms from
easily competing on price.
● Brand Loyalty
Strong customer loyalty can be a significant barrier. Companies like CocaCola have high
brand loyalty, making it hard for new soft drink companies to take market share.
● Regulatory Barriers
Strict regulations and government policies can deter entry. For instance, the
pharmaceutical industry requires new entrants to undergo lengthy clinical trials and FDA
approvals.

Example: The tech industry sees frequent new entrants because of relatively low barriers (such as
low capital investment). However, industries like oil and gas, with high capital requirements and
strict regulations, see fewer new competitors.

Data Example: In the airline industry, capital requirements (aircraft purchase) and regulatory
hurdles (licensing) keep the threat of new entrants low. The cost of purchasing a Boeing 787 can
range from $250 million to $300 million per unit.

b. Bargaining Power of Suppliers

The bargaining power of suppliers refers to how much influence suppliers have over the price of
inputs. When suppliers are powerful, they can drive up costs, which reduces a firm’s profitability.

Key Factors:
Number of Suppliers: Fewer suppliers means higher bargaining power. For instance, Intel and
AMD have significant control over pricing for processors, as they are the dominant players in the
semiconductor industry.
Uniqueness of Input: If suppliers provide unique or highly differentiated products, their
bargaining power increases. For example, specialized components in aerospace manufacturing,
like RollsRoyce’s jet engines, give the company high leverage over airplane manufacturers.
Switching Costs: High switching costs for businesses when changing suppliers increase the
suppliers' bargaining power. For example, companies reliant on specific software systems may
find it expensive to switch suppliers.
Example: In the luxury fashion industry, fabric and raw material suppliers (for leather, wool, etc.)
have considerable power because luxury brands rely on highquality, rare materials, and there are
few alternatives.

Data Example: In the tech industry, semiconductor suppliers like TSMC have high bargaining
power due to the limited number of manufacturers capable of producing advanced chips. In
2023, TSMC held over 50% of the global market share for semiconductor manufacturing, giving
it substantial influence over pricing.

c. Bargaining Power of Buyers

The bargaining power of buyers describes the ability of customers to influence the price and
terms of purchase. When buyers have more power, they can demand lower prices or better
products/services.

Key Factors:
● Buyer Concentration
When a few large buyers dominate a market, they have significant power. For example,
Walmart is known for its ability to negotiate lower prices from suppliers due to its size.
● Price Sensitivity
Buyers who are pricesensitive have more power. For instance, consumers of generic
drugs are highly pricesensitive, which gives them more leverage over pharmaceutical
companies.
● Availability of Alternatives
If there are many alternatives, buyers have more power. In the smartphone market,
consumers can choose between many brands (Apple, Samsung, Google), making them
less reliant on any one company.
● Switching Costs
Low switching costs give buyers more power. For example, the rise of online streaming
services gives consumers the flexibility to cancel and switch between Netflix, Disney+,
and other services.

Example: In the auto industry, large fleet buyers like rental car companies (e.g., Hertz, Avis) can
negotiate significant discounts with manufacturers because they buy vehicles in bulk.

Data Example: In 2021, Walmart was responsible for 15% of Procter & Gamble’s sales, giving
the retailer strong bargaining power over pricing and product offerings.

d. Threat of Substitutes
The threat of substitutes refers to the likelihood that customers will switch to an alternative
product or service. A high threat of substitutes reduces industry profitability by limiting the
prices firms can charge.

Key Factors:
● Availability of Substitutes: The more substitutes available, the higher the threat. For
example, in the beverage industry, consumers can choose between coffee, tea, energy
drinks, and water.
● Performance of Substitutes: If substitutes offer a better priceperformance ratio, the threat
increases. For example, in transportation, the rise of electric scooters and ridesharing
apps like Uber threatens traditional car ownership.
● Switching Costs: If switching to a substitute is easy and inexpensive, the threat increases.
For example, people switching from cable TV to streaming services like Netflix or Hulu
face minimal costs.

Example: The fastfood industry faces threats from healthier food options. As consumers become
more healthconscious, they may switch from McDonald's to healthier alternatives like Chipotle
or Sweetgreen.

Data Example: In 2023, Uber and Lyft's popularity presented a significant threat to traditional
taxi services in major cities, reducing demand for traditional cab rides by up to 30%.

e. Rivalry Among Existing Competitors

Industry rivalry refers to the degree of competition between existing players in an industry. High
rivalry limits profitability, as firms must compete aggressively on price, product features, or
customer service.

Key Factors:
● Number of Competitors
More competitors increase rivalry. The airline industry, for example, sees high
competition among established players like American, Delta, and United.
● Industry Growth
Slowgrowing or stagnant industries tend to have higher rivalry as firms fight for market
share. The smartphone market, which has matured in recent years, sees intense
competition between Apple, Samsung, and Google.
● Exit Barriers
High exit barriers (costs associated with leaving the market) keep struggling firms in the
industry, increasing rivalry. In industries like steel manufacturing, companies may stay
operational despite low profitability due to high exit costs.
● Product Differentiation
 Low differentiation increases rivalry because competitors must compete primarily on
price. For example, in the airline industry, many companies offer similar services, leading
to price wars.

Example: The fastmoving consumer goods (FMCG) sector, particularly the cola industry
(CocaCola vs. Pepsi), sees intense competition. Both companies spend billions on marketing to
retain customers.

Data Example: In 2023, the smartphone industry was valued at over $500 billion globally, with
key players (Apple, Samsung, Huawei) fiercely competing for market share, often leading to
price cuts and aggressive advertising.

Conclusion (Cheat Sheet):

● Threat of New Entrants: How easy is it for new competitors to enter? High barriers =
low threat.
● Bargaining Power of Suppliers: Do suppliers have control over prices? Fewer suppliers =
more power.
● Bargaining Power of Buyers: Can customers influence prices? More alternatives = more
buyer power.
● Threat of Substitutes: Are there alternative products or services? More substitutes =
higher threat.
● Rivalry Among Competitors: How intense is the competition? More competitors =
higher rivalry.

By applying Porter’s Five Forces, companies can assess their competitive position and devise
strategies to improve their profitability.

3. Entry Choices and Strategic Market Entry (Cheat Sheet)

When a firm considers entering a profitable industry, it's essential to follow a strategic process
that unfolds over time rather than a simple yes/no decision. Here are five critical questions that
strategic leaders must address to increase the probability of successful market entry:

1. Who Are the Players?

Strategic leaders must look beyond direct competitors and consider other key stakeholders such
as:
 ● Suppliers: They can extract value by negotiating better terms, affecting profitability.
● Customers: Their preferences can dictate the market dynamics.
● Regulators and Communities: Aligning incentives with internal (employees) and external
(communities, governments) players is critical.

Example:
In the U.S. mobile phone market, Verizon not only competes with AT&T but must also deal with
smartphone suppliers like Apple and Samsung, along with regulators like the FCC, to ensure
smooth operations.

2. When to Enter?

Timing is key. The industry life cycle consists of five stages:

● Introduction: High growth potential, but risky.

● Growth: Demand is rising fast.
● Shakeout: Growth slows, competition intensifies.
● Maturity: Few strong players remain, and growth is stable.
● Decline: Demand falls, competition dwindles.
Example:
Uber entered the transportation industry during the shakeout phase of traditional taxi services,
where apps and digital platforms were starting to gain traction, but it was still early enough to
disrupt the market.

3. How to Enter?

Strategic leaders have three main options for entry:

● Leverage existing assets: Using current strengths and resources to break into new
markets.
● Example: Circuit City failed as an electronics retailer, but it used its expertise in retail to
launch CarMax, the largest usedcar dealer in the U.S.
● Reconfigure value chains: Using technology to bypass traditional barriers.
Example: Skype and Zoom used Voice over Internet Protocol (VoIP) to compete in the
telecom industry, bypassing traditional infrastructure like telephone lines.
● Establish a niche: Focus on a small market segment before expanding.
Example: Red Bull initially sold in small cans in nightclubs before entering mainstream
grocery chains, effectively building a loyal customer base.

4. What Type of Entry?

Companies need to consider the scope of entry:

● Product Market: Entering specific product markets, e.g., smartphones.

● Value Chain Activity: Participating in parts of the value chain, e.g., R&D or
manufacturing.
● Geography: Deciding whether to enter domestic or international markets.
● Business Model: Deciding on an appropriate business model, such as subscription
services or freemium models.

Example:
Spirit Airlines introduced the ultralowcost carrier model by unbundling services (charging for
checked bags, carryon, etc.), which allowed it to offer cheaper base fares, attracting new
customers and increasing its competitiveness.

5. Where to Enter?

The final decision involves more finetuned aspects of entry, such as:

● Product Positioning: Highend vs. lowend markets.

● Pricing Strategy: Penetration pricing vs. premium pricing.
● Partnerships: Collaborating with local or global partners.

Example:
Tesla initially positioned its Model S as a premium, highperformance electric vehicle before
expanding its product range to include more affordable models like the Model 3.

4. Industry Dynamics

The five forces model is static and doesn’t capture how industries evolve over time. Industry
dynamics refer to how the structure of industries changes due to:

● Consolidation through mergers and acquisitions (M&A): Firms merge to reduce

competition and increase profitability.
Example: The U.S. airline industry saw major mergers such as DeltaNorthwest and
UnitedContinental, reducing competition and increasing profitability.
● Fragmentation: Industries can become fragmented due to external shocks like
deregulation, technological advances, or globalization.
 Example: The stock brokerage industry became fragmented with the rise of online
brokers like ETrade and Robinhood, offering commissionfree trading.
● Industry Convergence: Previously unrelated industries begin to satisfy the same
customer need due to technological advancements.
Example: The media industry experienced convergence as traditional outlets like
newspapers, magazines, and TV started competing with digital platforms like YouTube,
Netflix, and Spotify, blurring the lines between industries.

Case Study: The Esports Industry

The rise of League of Legends (LoL) and Fortnite illustrates how new industries can emerge due
to industry convergence:

LoL started as a niche online multiplayer game and became a billiondollar business with 130
million monthly active users.
Revenue streams include:
● Ingame purchases: Skins and champions sold in LoL's digital store.
● Live esports events: Competitive tournaments attract massive audiences and sponsorships
(e.g., Mastercard).
● Livestreaming: Platforms like Twitch allow players to watch and participate in realtime,
driving additional revenue.
● Merchandise: LoL sells branded products like clothing, tapping into their large fan base.

Fortnite’s ability to offer crossplatform play across mobile, desktop, and consoles helped it
outperform LoL in revenue, generating $2.4 billion in its first year of launch.

Key Takeaways

● Market entry is a strategic process, not a onetime event.

● Timing, method, and understanding of industry dynamics are essential for successful
market entry.
● Industry structures are dynamic and shaped by both internal competition and external
forces like technology and regulations.

4. Performance Differences within the Same Industry: Strategic Groups

Here's a detailed explanation of the passage on strategic groups and their impact on firm
performance within the same industry, focusing on the key concepts, how to use the strategic
group model, and an example drawn from the U.S. airline industry. This explanation can serve
as a cheat sheet for your exam:

Strategic Groups

A strategic group is a cluster of firms within the same industry that follow a similar strategy in
the quest for competitive advantage. Companies in the same strategic group are direct
competitors, and they differ from other groups in significant dimensions such as:

● Cost structure
● Market segments
● Distribution channels
● Product/service differentiation
● Customer service
● R&D expenditure
● Technology adoption

Strategic Group Model

The strategic group model helps analyze competitive behavior and firm performance within an
industry. To create a strategic group map, follow these steps:

1. Identify key strategic dimensions, such as product differentiation or cost structure.

2. Choose two key dimensions to plot on the vertical and horizontal axes. These
dimensions should expose important differences among competitors.
3. Graph firms in the industry, where the size of the bubble represents each firm’s market
share.

Key Insights from Strategic Group Maps:

1. Competitive Rivalry:
○ Firms within the same strategic group experience more intense rivalry because
they have similar business strategies.
○ For example, in the U.S. airline industry, American, Delta, and United (legacy
carriers using the hub-and-spoke system) intensely compete with one another due
to their similar business models, while Southwest, JetBlue, and Spirit (low-cost,
point-to-point carriers) compete among themselves on cost efficiency and regional
routes.
2. Impact of External Environment:
○ External factors like economic downturns affect different strategic groups
differently.
 ○ Low-cost airlines (like Southwest and Spirit) generally benefit during economic
recessions because budget-conscious consumers prefer cheaper flights. In
contrast, legacy carriers like Delta and United struggle to remain profitable on
domestic routes during downturns because of their higher cost structures.
3. Five Forces Model:
○ The five competitive forces (threat of new entrants, supplier power, buyer power,
threat of substitutes, and industry rivalry) impact strategic groups differently.
○ Barriers to entry are higher for legacy carriers with a hub-and-spoke system
(American, Delta, United) due to their global operations and regulations on
international routes.
○ Low-cost airlines face stronger supplier power because they are smaller and
often buy used aircraft from legacy carriers. Additionally, they face higher threats
from substitutes like trains, cars, or buses on regional routes.
4. Mobility Barriers:
○ Mobility barriers are factors that prevent firms from moving between strategic
groups. These barriers are usually industry-specific.
○ In the airline industry, the shift from a point-to-point system to a hub-and-spoke
system requires significant capital investment and operational changes. For
instance, if low-cost airlines like Southwest wanted to expand globally, they
would have to adopt the hub-and-spoke system, secure landing slots at
international airports, and invest in long-range aircraft like the Boeing 787 or
Airbus A-350.

Example: U.S. Airline Industry

The strategic group map of the U.S. airline industry can be split into two main groups:

1. Low-Cost, Point-to-Point Airlines (Group A)

○ Examples: Southwest Airlines, JetBlue, Spirit Airlines
○ Characteristics: These airlines have a low cost structure, serve fewer routes, and
focus on providing low-cost services with minimal frills.
○ Profitability: Historically, this group has been more profitable in the domestic
market due to their cost efficiency. For instance, Southwest offers fewer
amenities but provides high perceived value through reliable on-time flights and
fewer lost bags.
2. Differentiated, Hub-and-Spoke Airlines (Group B)
○ Examples: American Airlines, Delta Airlines, United Airlines
 ○ Characteristics: These legacy carriers offer a full range of services and operate a
hub-and-spoke system, which means they route passengers through central hubs.
They tend to have higher costs but offer more routes and global reach.
○ Profitability: While these airlines struggle with profitability on domestic routes
due to higher costs, they often make substantial profits on international routes,
where they face less competition.

Strategic Group Dynamics

● Over time, strategic groups are dynamic and can evolve. For instance, the low-cost,
point-to-point group in the U.S. airline industry (Group A) has split into two subgroups:
○ Group A1 (Ultra-Low-Cost Carriers like Spirit and Allegiant): These airlines
focus on extremely low costs, often charging extra for amenities such as carry-on
luggage.
○ Group A2 (Traditional Low-Cost Carriers like Southwest and JetBlue): These
airlines offer a broader range of services while maintaining a low-cost structure.
● Example of Strategic Group Dynamics: The potential acquisition of Spirit Airlines by
Frontier Airlinesillustrates how firms can merge within the same strategic group. This
would combine Frontier’s West Coast routes with Spirit’s East Coast presence, creating a
more nationally focused airline with a likely higher cost structure.

Key Takeaways

● Rivalry is strongest within the same strategic group, especially if the firms offer
similar products/services.
● The external environment (economic conditions, oil prices, etc.) can affect strategic
groups differently.
● Mobility barriers prevent firms from easily switching between strategic groups. In the
airline industry, moving from a low-cost to a global carrier model involves significant
strategic commitment and capital investment.
● Profitability varies across strategic groups. In the U.S. airline industry, low-cost
carriers are more profitable on domestic routes due to their cost advantages, while legacy
carriers rely more on international routes for profitability.

5. Implications for Strategic Leaders - Cheat Sheet

Strategic leaders need to conduct a thorough analysis of their firm’s external environment to
identify threats and opportunities. This is crucial in the strategic management process to help
firms position themselves for competitive advantage.

a. Step 1: Apply PESTEL Analysis

- PESTEL is a tool used to scan, monitor, and evaluate the macro-environment in which a firm
operates. It stands for:
- Political
- Economic
- Sociocultural
- Technological
- Ecological
- Legal

Each of these factors influences the external environment and, in turn, the firm’s ability to
compete.

Example:
- Technological trends such as AI or automation can dramatically change the competitive
landscape in many industries. Firms like Tesla have capitalized on AI advancements in
self-driving technology to differentiate from traditional automakers.

b. Step 2: Porter’s Five Forces Model

Porter's model helps strategic leaders assess the profit potential of an industry. The five forces
include:
1. Threat of new entrants: Barriers to entry can limit new competition. For example, in the
pharmaceutical industry, high R&D costs and regulatory approvals act as strong entry barriers.
2. Bargaining power of suppliers: Suppliers with strong power can affect prices or quality.
Example: Jet engine manufacturers like GE and Rolls-Royce hold power over airlines because of
the specialized nature of their products.
3. Bargaining power of buyers: Buyers can influence price and demand. For example, in the
retail sector, large buyers like Walmart often exert pressure on suppliers to lower prices.
4. Threat of substitutes: Alternative products or services that meet the same needs can limit
profit. Netflix as a substitute for traditional TV broadcasting has disrupted the entertainment
industry.
5. Rivalry among existing competitors: High rivalry leads to price wars or aggressive marketing.
For instance, Coca-Cola and Pepsi have been engaged in intense rivalry for decades, impacting
their pricing strategies and marketing investments.

Example:
In the airline industry, the five forces analysis reveals strong supplier power (e.g., Boeing,
Airbus), and intense rivalry, particularly between low-cost airlines like Southwest and legacy
carriers like Delta.

c. Step 3: Strategic Group Mapping

- A strategic group map clusters firms within an industry based on key strategic dimensions, like
cost structure and market segments. Firms within the same group tend to compete more directly
with each other than with firms in other groups.

Example:
In the U.S. airline industry, strategic group mapping separates low-cost airlines like Southwest
(Group A) from legacy carriers like Delta (Group B). The low-cost airlines have lower prices,
fewer frills, and tend to focus on domestic routes, whereas legacy carriers operate international
hub-and-spoke models and offer more services at higher costs.

d. Step 4: Limitations of these Models

- Static Nature: These models provide a snapshot but do not account for rapid changes in the
external environment (e.g., technological disruption, regulatory changes).
- Example: The mobile app industry changes rapidly, with new innovations altering competitive
dynamics frequently.
- Black swan events, like the COVID-19 pandemic, can suddenly disrupt industries, affecting
profitability and strategic positioning.

- Intra-industry Performance Differences: The models don't fully explain why firms in the same
industry perform differently.
- Example: Despite being in the same industry, Apple and Samsung differ in performance due
to their internal resources, capabilities, and strategic focus on branding and innovation.

e. Next Steps: Internal Analysis

- To understand why firms in the same industry perform differently, you need to examine internal
factors such as resources, capabilities, and core competencies. This is explored in the next
chapter.

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Example Data to Use:

1. Airline Industry: The U.S. airline industry exemplifies many key aspects of these frameworks.
Legacy carriers like Delta and United focus on international routes and hub-and-spoke models,
while low-cost carriers like Southwest and Spirit focus on point-to-point domestic travel.
2. Tech Industry: Apple and Samsung both compete in the smartphone industry, but Apple's
focus on product differentiation (branding, software ecosystem) and Samsung's cost-based
competition (mass production of hardware) show differences that aren't captured fully by
external analysis alone.
3. Automotive Industry: Tesla’s strategic advantage in the electric vehicle market can be linked
to both technological trends (PESTEL) and rivalry (Five Forces), as well as internal innovation
capabilities.

By applying PESTEL, Porter’s Five Forces, and Strategic Group Mapping, leaders can better
understand the external environment and improve decision-making processes. However, frequent
analyses are necessary to stay adaptive to changes.

Chapter 4: Internal Analysis, Resources, Capabilities

and Core Competencies

1. External to Internal Analysis

2. Resources and Capabilities

- Resources: cash, buildings, machinery, or intellectual property → tangible/intangible
- Capabilities: organizational and managerial skills → intangible

3. VRIO Framework → Sustainable Competitive Advantage

a. Valuable
i. Resource is valuable if it helps a firm exploit an external opportunity or
offset an external threat
ii. If not = Competitive Disadvantage
b. Rare
i. If not = Competitive Parity
c. Imitation Costly
i. Direct Imitation: A company will copy another company’s competitive
advantage if they can’t protect it (patents, trademarks)
ii. Substitution
iii. Combining Direct Imitation and Substitution
d. Organized to Capture Value
i. Effective organization structure and coordinating systems
 4. SWOT for External and Internal Analysis

Chapter 5: Shared Value and Competitive Advantage

1. Corporate Social Responsibility to Creating Shared Value

CSR:
- Giving back to society (e.g., donating to charity, reducing pollution, or improving
labor condition)
- Does NOT directly benefit their business
- Extra cost and plan on the side
CSV:
- Social impact as their business strategy
- Solve problems (e.g., improving education or environment) -> Company benefits
financially.
- Create value for both SOCIETY and COMPANY at the same time.
- Heart of the company and way to grow business
2. Role of Value, Cost and Price

a. Economic Value Creation = What customer are willing to pay - Cost to produce

● How to create more economic value:

a) Differentiation: Make products that customers value more (willing to
pay more for)
b) Cost Leadership: Produce at a lower cost than competitors
● Consumer Surplus: Value - Price (V - P)
This is the benefit customers get by paying less than they're willing to.
● Producer Surplus (Profit): Price - Cost (P - C)
This is the profit the company makes.
● Total Economic Value Created = Consumer Surplus + Producer Surplus
● Strategy aims to:
a) Create as much economic value as possible
b) Capture as much of that value for the company as possible
● Limitations:
○ Difficult to accurately measure customer value
○ Customer preferences change over time
○ Challenging to assess for companies with many products
b. Balance Scorecard
1) Purpose:
- A tool for managers to measure and improve company
performance
- Helps align business activities with the company’s vision and
strategy
2) 4 Key Perspectives:
- Financial: How do shareholders view us? (e.g., revenue growth,
profit margins)
- Customer: How do customers see us? (e.g., customer satisfaction,
market share)
- Internal Processes: How do we create value? (e.g., product
quality, cycle time)
- Learning and Growth: What core competencies do we need? (e.g.,
employee skill, innovation rate)

c. Triple Bottom Line: A way for businesses to measure their success beyond just
making money
1) Profit (Economic): How much money the company makes
2) Peoople (Social): How the company treats people -> employees,
customers, and communities (fair wages, safe working conditions,
community support)
3) Planet (Environmental): How the company impacts the environment
(reducing pollution, conserving resources, using renewable energy)
 It encourages businesses to think about their overall impact, not just their
financial performance. The goal is to create value for society and the environment while still
being profitable.

Chapter 6 : Business Strategy: Differentiation, Cost Leadership, and Blue Oceans

1. Jetblue Case
JetBlue Airways: En Route to a New Blue Ocean? - Cheat Sheet

JetBlue Airways is the sixth-largest U.S. airline as of 2022, recovering well after the
pandemic and offering over 900 flights daily. However, its competitive strategy, rooted in
a blue ocean strategy, has faced significant challenges over the years. This case study
focuses on how JetBlue tried to differentiate itself while keeping costs low and how this
strategy evolved over time.

Key Concepts and Terminology

1. Blue Ocean Strategy:
- A strategy that combines differentiation and cost leadership to create a market space
free of competition.
- Focuses on value innovation—offering unique value at a low cost.

2. Value Innovation:
- The process of increasing customer value while simultaneously reducing operational
costs.

JetBlue’s Initial Success

● Founder David Neeleman launched JetBlue in 2000 with the aim to combine low costs
and better services than its competitors.
● His previous experience with Morris Air, a low-cost airline that innovated with e-ticketing,
gave him insights into reducing operational costs.
● JetBlue differentiated itself with:
● More comfortable experiences (leather seats, free DirecTV, Wi-Fi)
● Lower costs by using one type of aircraft (Airbus A-320) for easier maintenance and
training.
● A point-to-point model, which contrasts with the hub-and-spoke model of larger airlines,
like American, Delta, and United, helping to reduce costs by avoiding layovers and
increasing efficiency.

Example:
JetBlue’s Cost per Available Seat Mile (CASM) was one of the lowest in the U.S. airline
industry due to its operational efficiency.

JetBlue’s Differentiation Strategy

 - Luxury Services (Mint Class):
● JetBlue introduced its Mint luxury experience, offering:
● Lie-flat beds
● Personal viewing screens
● Free high-speed Wi-Fi (Fly-Fi)
● Gourmet food and complimentary beverages
● This service was unique because U.S. competitors only offered similar amenities
on select routes.

Example:
Mint Class gave JetBlue a competitive edge on transcontinental flights by offering a
high-end product at a competitive price.

- High-Touch, High-Tech:
- Combined customer-focused service ("high-touch") with technological advancements
("high-tech") to reduce costs.
- JetBlue created a highly functional website for bookings, but also employed
U.S.-based work-from-home reservation agents to accommodate customers who
preferred live assistance.

Challenges of a Blue Ocean Strategy

● Trade-offs between cost leadership and differentiation began to affect JetBlue's
operations. While the airline tried to offer superior service, the associated costs
eventually created pressure.
● Public Relations Issues and Operational Failures:
● Between 2007 and 2015, JetBlue faced multiple issues:
● Emergency landings, pilot and crew problems.
● The 2007 snowstorm ("snowmageddon") led to the cancellation of 1,600 flights,
stranding passengers for hours on the tarmac. This severely damaged JetBlue's
reputation.
● As a result, Neeleman was removed as CEO in 2007, replaced by David Barger, but the
company's performance continued to decline.
Example:
By 2014, JetBlue's stock lagged the Dow Jones U.S. Airline Index by over 115
percentage points.

Strategic Adjustments Under Robin Hayes

● - New CEO Robin Hayes (appointed in 2015) aimed to revive JetBlue by doubling
down on its blue ocean strategy, but with more emphasis on cost reduction.
● Cost-saving measures included:
● More seats per plane (reduced legroom to match competitors like Delta).
● Improved aircraft maintenance and crew scheduling.
● Expanded Mint Class to more flights, capitalizing on its unique luxury product
offering.
Alliance with American Airlines:
In 2020, JetBlue entered a strategic alliance with American Airlines, linking their loyalty
programs and cooperating on flights. However, this led to an antitrust lawsuit from the
U.S. Department of Justice in 2021.

- Acquisition of Spirit Airlines:

In 2022, JetBlue agreed to buy Spirit Airlines for $3.8 billion, aiming to prevent a merger
between Spirit and Frontier Airlines. This deal could strengthen JetBlue’s position in the
ultra-low-cost carrier market, though it faces regulatory scrutiny.

JetBlue’s Current Performance

- Declining Operational Performance:
- By 2022, JetBlue ranked last in terms of on-time performance, cancellations, and
mishandled baggage among U.S. airlines.
- This poor performance contrasts with its early years of operational efficiency and
customer satisfaction.

Example:
In 2019, JetBlue ranked last in the Wall Street Journal's airline survey, and in 2022, it
continued to struggle with customer complaints and operational issues post-pandemic.

Lessons Learned
● Balancing Cost Leadership and Differentiation is difficult. JetBlue’s struggle
shows that trade-offs between low costs and high service quality are challenging
to manage as an airline grows.
● Blue ocean strategies are more sustainable in small, focused markets. As
JetBlue expanded, it became harder to execute both cost leadership and
differentiation simultaneously.
● Operational efficiency and customer experience must go hand-in-hand to sustain
competitive advantage in the airline industry.

Example Data to Use

● Cost per Available Seat Mile (CASM): JetBlue's CASM remained among the
lowest in the industry due to cost-cutting measures like point-to-point routes and
fleet standardization.
● Market Position: As of 2022, JetBlue remains the sixth-largest U.S. airline.
● Mint Class Expansion: JetBlue’s Mint class continues to be a differentiated
product, especially for transcontinental travelers seeking a luxury experience at a
mid-tier price.
2. Business-Level Strategy: How to Compete for Advantage
Business-Level Strategy Overview:

A business-level strategy refers to the goal-directed actions a company takes to achieve

competitive advantage within a single product market. It answers the question, "How
should we compete?" To formulate an effective business strategy, managers must
address four key questions:
1. Who are the customers?
2. What customer needs, wishes, and desires will be satisfied?
3. Why does the firm want to satisfy these needs?
4. How will the firm satisfy them?

Competitive advantage in business-level strategy is determined by both industry effects

(external factors like competition) and firm effects (internal factors like resources and
capabilities). Managers must ensure their strategy aligns with industry forces (using
frameworks like Porter's Five Forces) and firm capabilities.

Strategic Positioning:
A firm’s strategic position is based on the balance between value creation and cost. The
goal is to create as much economic value as possible, represented by the gap between
the value perceived by customers (V) and the firm’s total cost (C). A clear strategic
position is necessary to avoid being "stuck in the middle," which leads to inferior
performance.

Strategic trade-offs must be made between focusing on value creation (offering unique
products at a higher cost) or cost leadership (providing similar products at a lower cost).
A firm that successfully differentiates itself or leads in cost efficiency gains a competitive
advantage. For example, JetBlue faced issues in trying to straddle between cost
leadership and differentiation, leading to a competitive disadvantage as it couldn't
effectively manage the trade-offs between these strategies.

Generic Business Strategies:

There are two generic business strategies:
1. Differentiation Strategy: Aims to create higher value for customers than competitors,
allowing the firm to charge premium prices. Example: Tesla, with its innovative electric
cars, uses a focused differentiation strategy by targeting environmentally conscious
consumers.

2. Cost Leadership Strategy: Seeks to offer the same or similar value to customers at a
lower cost than competitors. Example: Southwest Airlines competes by keeping its
operating costs low, allowing it to offer affordable flights.
These strategies are generic because they apply across industries, whether for-profit or
nonprofit, large or small.

Competitive Scope:
The scope of competition defines the range of the market a firm targets. This can be
narrow (targeting a specific niche) or broad (targeting a wider market). For instance:
- GM pursues a broad strategy with multiple brands (Chevy as cost leader, Cadillac as a
differentiator).
- Tesla initially pursued a narrow focus on high-end electric cars but has since
broadened its market with more affordable models like the Model 3 and Model Y.

Strategic Trade-Offs:
Executives must carefully balance the trade-offs between value creation and cost control
to prevent eroding the firm’s economic value creation. For instance, JetBlue tried to
pursue both differentiation and cost leadership but failed because it couldn’t effectively
manage the inherent trade-offs between these strategies. As a result, JetBlue's financial
performance lagged behind other airlines that had clearer strategies.

Focused Business Strategies:

In addition to broad strategies, firms can pursue focused versions of the generic
strategies:
- Focused Cost Leadership: Targeting a niche market at low cost (e.g., BIC produces
low-cost disposable pens).
- Focused Differentiation: Offering unique products to a specific market segment (e.g.,
Mont Blanc sells luxury pens).

Pitfall: Being "Stuck in the Middle":

When a firm tries to combine different strategic positions without a clear focus, it risks
becoming stuck in the middle. This leads to poor performance. An example is JetBlue,
which struggled because it tried to combine low-cost and differentiation strategies
without excelling at either, unlike its competitors such as Southwest Airlines (broad cost
leadership) and Delta Airlines (broad differentiation).

Examples of Successful Strategies:

1. Southwest Airlines: A clear broad cost leadership strategy, offering affordable flights
by keeping operations simple and costs low.
2. Delta Airlines: A broad differentiation strategy, offering premium services such as
business-class lounges and global networks.
3. Tesla: A focused differentiation strategy initially, targeting environmentally conscious
high-end consumers, then expanding its market to more affordable vehicles with the
Model 3/Y.

Conclusion:
 To build a strong business-level strategy, companies must choose between cost
leadership and differentiation, ensuring their competitive scope is clear. Firms need to
avoid being stuck in the middle by focusing on creating value in one area and
understanding the trade-offs involved. Strategic clarity in cost versus differentiation and
competitive scope (broad vs. narrow) is essential to gaining and sustaining competitive
advantage.

3. Differentiation Strategy: Understanding Value Drivers

Cheat Sheet for Differentiation Strategy: Concepts, Examples, and Data

Key Concepts in Differentiation Strategy:

1. Differentiation Strategy: Focuses on increasing perceived value for customers through unique
product features, customer service, and marketing efforts, allowing the company to charge
premium prices.

- Objective: Create higher economic value (V - C, where V is the value perceived by the
customer, and C is the cost to produce the good/service).
- Value Drivers: Product features, customer service, and complements.

2. Economic Value Creation: A firm gains a competitive advantage if its value creation (V - C)
exceeds that of its competitors. This can occur by offering greater perceived value or controlling
costs while maintaining quality.

Examples from the Text:

1. Premium Bottled Water:
- Brands like Evian and S.Pellegrino differentiate by emphasizing the uniqueness of their
natural sources (French Alps and San Pellegrino Terme, Italy).
- Super-premium brands: Example is Svalbardi, selling water from Norwegian icebergs for
$110 a bottle at Harrods, emphasizing exclusivity and rarity.

2. Marriott Hotels:
- Marriott uses differentiation by offering different hotel lines targeting specific customer
segments:
- Full-service Marriott: For business travelers and conferences.
- Residence Inn: For extended stays.
- Marriott Courtyard: Targeted at business travelers.
- Fairfield Inn: For families seeking budget-friendly options.
- Economies of scale and scope: Marriott benefits by sharing resources across hotel types
while maintaining differentiation, achieving greater economic value.

3. Google Fi:
 - Combines Google’s premium Pixel phones with in-house wireless service via Google Fi.
- Complements include high-speed wireless services with data usage savings (e.g.,
auto-switching to Wi-Fi), which differentiates them from traditional providers like AT&T and
Verizon.
- Network externalities: As more users sign up, Google can invest in better technology (e.g.,
5G) to attract more customers.

Visual Example from Exhibit 6.3:

- Firm A: Produces a generic commodity with no unique brand value.
- Firm B: Offers greater value at the same cost as Firm A (e.g., better product features,
quality).
- Firm C: Has higher costs than Firm A but generates a higher economic value (e.g., through
exclusivity like luxury water brands).
- Firms B and C enjoy competitive advantages over Firm A due to their ability to create greater
perceived value (V - C).

Pricing Strategy:
- Premium Pricing: Firms using differentiation can charge a higher price because consumers
perceive greater value. For example, bottled water brands like Lifewtr target premium markets,
while lower-end brands like Aquafina sell at competitive prices in bulk.
- Alternative Strategy: Some differentiated products are priced similarly to competitors but
offer more perceived value (e.g., Marriott hotels provide better customer service and amenities
without higher prices).

Important Levers in Differentiation:

1. Product Features: Unique attributes, patents, and R&D capabilities that create value (e.g.,
OXO's kitchen utensils with ergonomic, patent-protected designs).
2. Customer Service: Firms like Zappos differentiate by providing superior service (e.g., free
returns and personalized customer interaction).
3. Complements: Products or services that enhance the value of the original product, such as
Google Pixel phones with Google Fi’s wireless service.

Data & Market Insights:

- Bottled Water Market: A $200 billion global industry, with luxury water brands achieving
substantial market share and revenue.
- Growth Rates: Bottled water is growing at 10% annually, with consumption in the U.S.
surpassing carbonated soft drinks for the first time in 2016.

Caution in Differentiation:
- Cost Control: While adding features increases perceived value, rising costs may erode
profits. For instance, JetBlue initially failed to maintain cost discipline, losing its competitive
edge. Later, it introduced cost-saving measures like checked bag fees and increased passenger
capacity to restore profitability.
 Practical Formula:
- Economic Value Creation: \(V - C\) (Value minus Cost).
- A firm succeeds if \(\Delta V > \Delta C\), meaning the increase in perceived value exceeds
the cost to create it.
- Competitive advantage occurs when \(V - C\) is greater than that of competitors (e.g., Firm B
vs. Firm A or C in the exhibit).

Summary for Exam:

- A differentiation strategy enables firms to create unique products that stand out through
features, customer service, and complements, allowing them to charge premium prices or gain
market share while offering more value than competitors.
- Examples: Marriott’s segmented hotels, Google’s Pixel and Fi integration, luxury bottled water
like Svalbardi.
- Key to success: Balancing value creation with cost control.

4. Cost-Leadership Strategy: Understanding Cost Drivers

Cost-Leadership Strategy

- Objective: Reduce costs below competitors while delivering adequate value.

- Focus Areas:
- Optimize value chain activities.
- Maintain acceptable product/service quality.
- Examples: Kia vs. GM; Walmart vs. Kmart.

Competitive Advantage

- Economic Value Creation: Achieved when a firm's (V - C) is greater than competitors'.

- Firm Comparisons:
- Firm A: Vulnerable cost structure.
- Firm B: Lower costs and differentiation parity; competitive advantage over Firm A.
- Firm C: Lower costs but no differentiation parity; competitive advantage over Firm A.

Key Cost Drivers

1. Cost of Input Factors: Access to lower-cost raw materials, labor, and capital.
2. Economies of Scale: Decreased cost per unit as output increases, allowing firms to
spread fixed costs and employ specialized systems.
3. Learning-Curve Effects: Costs decrease as production experience increases;
efficiency improves with repetition.
4. Experience-Curve Effects: Cumulative experience leads to reduced costs over time.

Economies of Scale
 - Definition: Cost advantages gained as output increases.
- Minimum Efficient Scale (MES): Optimal output range for cost competitiveness.
- Diseconomies of Scale: Increased costs when output surpasses optimal levels due to
complexity and bureaucracy.

Learning Curves

- Concept: Costs decrease as cumulative output increases due to improved efficiency

and productivity.
- Example: Tesla's Model S production shows significant cost reductions as volume
increases.

Executive Summary

This cheatsheet summarizes the key concepts of cost-leadership strategy, highlighting

its objective to maintain lower costs while ensuring acceptable value delivery. It outlines
the competitive advantages derived from economic value creation and identifies critical
cost drivers, including input factors, economies of scale, and learning curves. The
importance of achieving a minimum efficient scale for cost competitiveness is
emphasized, alongside the potential pitfalls of diseconomies of scale. The example of
Tesla illustrates how learning curves can significantly reduce production costs,
showcasing the dynamic nature of cost management in competitive industries.

5. Business-Level Strategy and the Five Forces: Benefits and

Risks
This section discusses the benefits and risks of differentiation and cost-leadership
strategies in gaining competitive advantage through the lens of the five forces model.

1. Differentiation Strategy:
- Definition: Creating higher perceived value for customers while controlling costs.
- Benefits:
- Protects against competitive forces like the threat of entry, power of suppliers, and
power of buyers because of intangible advantages like reputation, customer loyalty, and
unique features.
- Protects against substitutes and rivalry as customers prefer differentiated products
for their unique value propositions, enabling firms to charge premium prices.
- Risks:
- Erosion of margins due to the cost of maintaining differentiation.
- Replacement due to innovations or commoditization of once-unique features (e.g.,
smartphones).
 - Overshooting customer needs by adding features that raise costs without increasing
perceived value.

2. Cost-Leadership Strategy:
- Definition: Achieving the lowest cost in the industry while delivering acceptable value.
- Benefits:
- Protects against entry threats, price wars, and substitutes due to the firm’s ability to
absorb lower margins and offer competitive pricing.
- Reduces the impact of supplier power and buyer power since the firm can absorb
cost increases or price cuts due to its low-cost structure.
- Risks:
- Loss of market share if new entrants or competitors achieve even lower costs.
- Difficulty in responding to innovations or shifts in customer preferences towards
non-price attributes.
- Risks of margins erosion and the inability to cover costs if suppliers or buyers exert
excessive pressure.

Both strategies aim to exploit internal strengths and external opportunities while
mitigating threats, and neither is inherently superior. The key to success is aligning the
strategy with the firm's context and capabilities.

6. Blue Ocean Strategy: Combining Differentiation and Cost

Leadership

Business Strategy Cheat Sheet: Differentiation, Cost Leadership, and Blue

Ocean Strategy

1. Two Primary Strategies to Create Economic Value:

● Firms can create economic value and achieve competitive advantage by:
○ Increasing perceived consumer value while controlling costs.
○ Lowering costs while offering acceptable value.
● Key Insight: Trying to simultaneously pursue both differentiation and low-cost
leadership is generally discouraged. These strategies require different internal
processes and trade-offs, which makes it challenging for managers to reconcile the
conflicting demands.

2. IKEA Example: Successfully Combining Low-Cost and Differentiation

 ● IKEA's approach is an example of how a company can successfully pursue both
strategies by leveraging value innovation. IKEA does this by eliminating, reducing,
raising, and creating elements in its value chain.
● Eliminate (to lower costs):
○ IKEA eliminates traditional salespeople, expensive urban retail locations,
and long delivery times.
○ It doesn’t offer expensive features like high-end custom furniture or long
warranties.
● Reduce (to lower costs):
○ Self-service model: Customers pick up and assemble their own products,
reducing the need for staff and expensive after-sales services.
○ IKEA reduced customization and expensive materials like leather and
hardwood.
● Raise (to increase perceived consumer benefits):
○ IKEA offers a vast product selection: Thousands of products across furniture
and accessories (much more than traditional stores).
○ Its big-box stores provide a showroom experience where customers can
physically interact with products before buying.
○ Products are manufactured in-house, ensuring better control over design,
quality, and cost.
● Create (to increase consumer benefits):
○ IKEA created a unique shopping experience with a self-guided store layout,
where customers can browse, select, and purchase in a simple, flat-pack model.
○ It also introduced a new pricing approach by starting with the retail price and
then working backward to design and manufacture the product.

Example:

IKEA’s office chair pricing strategy starts by setting a target price, like $150. The design and
production process then works backward to meet this price, ensuring cost-efficiency while
maintaining product quality.

3. Blue Ocean Strategy:

● A blue ocean strategy combines differentiation and low-cost leadership by creating

new, uncontested market spaces (blue oceans) where competition is irrelevant.
● Firms adopting this strategy rely on value innovation—simultaneously increasing value
while lowering costs.
● Value Innovation:
○ Eliminate: Factors that competitors take for granted.
○ Reduce: Industry standards to below-average levels.
○ Raise: Key success factors above industry standards.
○ Create: New offerings the industry hasn't provided.

Example:
Trader Joe’s successfully adopted a blue ocean strategy by offering health-conscious,
high-value foods at lower prices than Whole Foods. They did this by eliminating unnecessary
costs, such as extensive branding, while enhancing customer service and product quality.

4. Risk of Failure: Stuck in the Middle

● Trying to combine both strategies can lead to a "stuck in the middle" scenario, where a
firm neither achieves the benefits of cost leadership nor the uniqueness of differentiation.
This often leads to competitive disadvantage.

Example:

JetBlue initially pursued a blue ocean strategy by offering a blend of low-cost services and
premium amenities. However, as it grew, its strategy became unclear, leading to inferior
performance compared to low-cost leaders like Southwest Airlines and premium differentiators
like Delta.

5. Conclusion:

● Successfully reconciling the demands of low-cost leadership and differentiation

requires value innovation, as demonstrated by companies like IKEA and Trader Joe’s.
● However, if companies fail to maintain a clear strategic direction, they risk becoming
stuck in the middle, as seen with JetBlue.

7. Implications for Strategic Leaders

Business Strategy and Blue Ocean Strategy - Cheat Sheet

Key Points:
1. Formulating Business Strategy:
- Developing a strategy is complex, even with limited options like:
- Low cost vs. differentiation
- Broad vs. narrow focus
- Blue ocean strategy (a combination of both low cost and differentiation)
- Effective strategy formulation and execution improve a firm’s chances of achieving superior
performance.
- Strategic positioning requires important trade-offs, where companies choose between
distinct strategies like Walmart (low cost) vs. Supreme (differentiation) in the clothing industry.
Example:
Walmart is known for low-cost leadership with a wide range of affordable products, while
Supreme has created a unique brand identity with highly differentiated products that are
exclusive and premium-priced.

---

2. Changing the Competitive Landscape:

- Rare firms can reshape the market by discovering new areas of competition, making it
possible to break free from the usual trade-offs between cost and value.
- This approach requires balancing both differentiation and low-cost strategies simultaneously,
which is very hard to execute.
- A blue ocean strategy works if a company can create value innovation, allowing them to
increase value while simultaneously lowering costs.

---

3. Value Innovation Example – Toyota:

- Toyota’s introduction of lean manufacturing is a classic example of value innovation:
- Toyota delivered high-quality cars at lower costs, creating a new market space in the
automotive industry.
- The lean manufacturing process allowed Toyota to achieve superior performance for over a
decade, as it reduced waste and improved efficiency.
- However, this competitive advantage eroded once other companies adopted similar
manufacturing practices.

Example:
Toyota’s lean manufacturing helped them become a leader in quality and affordability, but
eventually, competitors learned from their approach, diminishing Toyota's uniqueness.

---

4. JetBlue’s Blue Ocean Strategy:

- JetBlue initially pursued a blue ocean strategy, combining low costs (using cost-saving
models like point-to-point routes) with differentiation (providing enhanced service and amenities
like leather seats and in-flight Wi-Fi).
- However, as JetBlue expanded, it struggled to maintain this dual strategy, resulting in a
"stuck in the middle" position where it could no longer fully capitalize on either cost leadership or
differentiation.
- Eventually, JetBlue lost its competitive advantage, leading to declining performance and
operational difficulties.

Example:
JetBlue was once a standout with low costs and differentiated services like Mint Class, but over
time, the airline's strategy became less defined, leading to underperformance compared to rivals
like Southwest and Delta.

---

Key Takeaways:
- Trade-offs are essential in strategy—companies need to decide whether to focus on cost
leadership or differentiation.
- Firms that successfully combine both (i.e., blue ocean strategy) must rely on value innovation
to make it sustainable, as seen with Toyota’s lean manufacturing.
- JetBlue’s decline serves as a cautionary tale that combining strategies is difficult, especially
when trying to scale.

STUDY CASES FROM BOOKS

1.Chaptercase 1 - Tesla Trillion Dollar Tech Titan

In applying the concepts from Rothaermel's Strategic Management to Tesla's case study, we
can structure the analysis using the AFI (Analysis, Formulation, Implementation) Strategy
Framework, which helps explain Tesla's competitive advantage.

1. Analysis
Tesla's rise from a startup to a trillion-dollar company was driven by its visionary approach and
strategic analysis of market opportunities. The company identified a significant gap in the
electric vehicle (EV) market, particularly in creating high-performance and luxury EVs. This
aligned with changes in consumer preferences towards sustainability, environmental
consciousness, and the demand for innovative technology. Additionally, Tesla recognized the
limitations of existing automakers in transitioning to EVs, giving it a first-mover advantage.

2. Formulation
Elon Musk's four-step "master plan" is a clear example of strategic formulation. Tesla’s focus on:

1. Building a high-end sports car (the Roadster) to demonstrate the capabilities of EVs,
 2. Using profits to fund a more affordable vehicle (Model S, Model 3, and Model Y),
3. Expanding into mass-market products while driving down costs through economies of
scale,
4. Offering zero-emission power generation options through the acquisition of SolarCity,
is a well-formulated strategy that leveraged both product development and vertical
integration to sustain competitive advantage. This formulation follows Rothaermel’s
emphasis on strategic direction to achieve long-term goals, aiming to accelerate the
advent of sustainable energy while addressing new market segments.

3. Implementation
Tesla’s ability to implement its strategy is rooted in superior innovation, cost management, and
scalability. For instance, it revolutionized the car manufacturing process with its Gigafactories,
which significantly ramped up production of batteries and vehicles to meet growing demand.
Additionally, its strategy of selling directly to consumers through Tesla stores and its over-the-air
software updates reflect a strong commitment to maintaining control over the customer
experience.

By vertically integrating energy generation (through solar roofs and Powerwall systems), Tesla
also differentiated itself from traditional automakers, positioning itself as a clean energy
company, not just a car manufacturer. This multifaceted business model aligns with
Rothaermel’s idea of "sustaining competitive advantage" through innovation and diversification.

Competitive Advantage
Tesla’s competitive advantage stems from several key factors:

● Technological Leadership: Tesla leads in battery technology, electric drivetrains, and

software updates.
● Brand Equity: Tesla's brand is synonymous with luxury, sustainability, and innovation,
which appeals to both high-end and mass-market consumers.
● Vertical Integration: Owning its supply chain (batteries, solar panels, and power
storage) enhances its ability to manage costs and maintain control over production.
● First-Mover Advantage: Tesla was the first to market high-performance electric
vehicles, creating a strong brand and customer loyalty before traditional automakers
could catch up.

In conclusion, Tesla's success can be understood through the lens of Rothaermel's strategic
management framework: analyzing market conditions, formulating a long-term master plan, and
implementing through innovation and vertical integration. This systematic approach has helped
Tesla maintain a leading position in the global EV market and secure a competitive advantage
over traditional automakers.
 2.Chaptercase 2 - The Facebook Case
Summary of the Case Study: Facebook Becomes Meta

In 2021, Mark Zuckerberg announced that Facebook would rebrand as Meta, reflecting a
strategic shift toward building the metaverse—an immersive, three-dimensional digital world
where people can interact, work, and live. Meta is expanding beyond social media, with its
Reality Labs division developing augmented and virtual reality hardware (like the Oculus
headset) and software platforms (such as Horizon Worlds). Zuckerberg has committed at least
$10 billion per year to this vision, positioning Meta for the next technological frontier, where the
internet evolves into immersive digital spaces.

The rebranding came amid growing scrutiny of Facebook (now a subsidiary of Meta Platforms)
due to whistleblower revelations and widespread criticism regarding user privacy,
misinformation, and harmful content on the platform. This shift is also seen as a potential
strategy to reduce Meta's reliance on Apple and Google, whose operating systems control the
mobile internet. However, the transition has not been smooth—Meta's market valuation dropped
by 50% (about $550 billion) within six months of the announcement, driven by challenges
including Apple's App Tracking Transparency (ATT), rising competition from TikTok, and
concerns over Meta’s pivot to the metaverse.

Key threats include:

1. Apple’s ATT: Meta’s advertising revenue was hit by Apple's new privacy policies,
leading to a loss of more than $10 billion annually.
2. Competition from TikTok: TikTok’s rapidly growing user base, especially among
younger audiences, presents a significant competitive challenge.
3. Product shift: Meta’s focus on younger users and short-video content (via Reels) is part
of its strategy to counter TikTok’s dominance.

Despite these challenges, Meta’s long-term strategic shift toward the metaverse represents
Zuckerberg's commitment to leading a new phase of technological innovation, even as the
company faces a crisis of trust and user engagement.

Applying Concepts from Strategic Management by Rothaermel:

1. Diagnosis of the Competitive Challenge: Meta’s key challenges include external

threats like Apple’s privacy policies reducing ad effectiveness, competition from TikTok
for younger users, and internal challenges related to managing user trust, privacy, and
content moderation. Meta also faces reputational damage following various
whistleblower revelations.
2. Guiding Policy: Zuckerberg’s strategic pivot toward the metaverse represents Meta’s
guiding policy to overcome its reliance on mobile operating systems controlled by Apple
and Google. Meta aims to create a new digital ecosystem where it controls the platform,
 while also enhancing its content strategy to win back younger users through features like
Reels.
3. Coherent Actions:
○ Investing heavily (at least $10 billion per year) in building the infrastructure for the
metaverse (via Reality Labs, Oculus, and Horizon Worlds).
○ Shifting the focus of Facebook and Instagram toward short-video content to
compete with TikTok.
○ Addressing privacy concerns, though this remains an ongoing challenge.

In Rothaermel’s framework, Meta is working to create long-term value by focusing on emerging

technologies (the metaverse) and addressing immediate threats (competition and privacy
regulations). However, the company’s success will depend on its ability to execute this vision
while managing stakeholder concerns and adapting to regulatory changes.

3.FIVE GUYS CASE

Summary of the Case Study: Five Guys’ Core Competency: “Make the Best
Burger. Don’t Worry about Cost”

Five Guys Burgers and Fries, founded by Jerry Murrell in 1986, has grown from a small
burger joint into a global chain with over 1,700 stores and $2 billion in revenue. The
company’s success stems from its dedication to delivering high-quality, made-to-order
burgers and fries using fresh, never-frozen ingredients. From the outset, Murrell focused
on making the best burgers rather than worrying about costs, opting for premium
ingredients and refusing to compromise on quality.

Five Guys' strategy revolves around a simple menu of burgers, fries, and hot dogs, with
no salads or desserts. The burgers are fully customizable with up to 15 free toppings,
and the fries are hand-cut from Idaho potatoes. While their prices are higher than typical
fast food and fluctuate with ingredient costs, the brand has built a loyal customer base
due to its commitment to quality.

Murrell avoided traditional marketing, instead relying on word-of-mouth promotion. The

company also motivates its employees with weekly bonuses based on third-party audits
to ensure the food and stores maintain consistent quality. Despite facing criticism for
unhealthy menu items, Five Guys remains focused on providing indulgent comfort food.
The company, still family-owned, has expanded internationally, with plans for further
growth.
Applying Strategic Management Concepts from Rothaermel’s Book:

1. Core Competencies: According to Rothaermel, core competencies are unique

strengths that allow a company to differentiate its products from competitors. Five
Guys' core competency lies in offering high-quality, made-to-order burgers and
fries, which distinguishes it from fast-food chains like McDonald’s and even other
“better burger” competitors such as Shake Shack. By focusing on premium
ingredients, such as never-frozen beef and hand-cut fries, Five Guys has been
able to deliver superior value to its customers.
2. Differentiation Strategy: Five Guys pursues a differentiation strategy by offering
a unique product that stands out due to its quality, customization options, and
commitment to fresh ingredients. This creates a higher perceived value, allowing
Five Guys to charge premium prices despite competition from both fast-food
giants and upscale burger chains. Rothaermel emphasizes that differentiation
strategies rely on innovation and uniqueness to sustain competitive advantage,
and Five Guys achieves this by ensuring consistent quality through third-party
audits and employee incentives.
3. Value Creation and Competitive Advantage: Five Guys creates value by
focusing on customer satisfaction through a simple, consistent product offering.
Rothaermel points out that firms gain competitive advantage when they deliver
superior value or manage costs effectively. In this case, while Five Guys does not
compete on price, it manages to deliver superior customer value through its
focus on product quality, which has allowed it to capture 50% of the market share
in the “better burger” segment. This premium offering, coupled with its strong
brand loyalty, gives it a sustainable competitive edge.
4. Sustaining Competitive Advantage: Rothaermel also notes that sustaining a
competitive advantage requires ongoing innovation and adaptation to external
changes. Five Guys has expanded internationally and continues to emphasize
quality over cost, resisting pressure to alter its product in response to
health-conscious trends. However, this commitment to indulgent, high-calorie
food could become a challenge in the future as the market shifts towards
healthier options, which may require adjustments to sustain its competitive
advantage in the long term.

By leveraging its core competencies and maintaining a focused differentiation strategy,

Five Guys has been able to thrive in a highly competitive industry for more than 35
years, expanding both domestically and internationally.
 4.CASE PATAGONIA
The case study on Patagonia demonstrates the company's focus on creating shared
value through its commitment to environmental, social, and governance (ESG)
practices. Founded by Yvon Chouinard, Patagonia has prioritized sustainability and
environmental responsibility over maximizing profits, earning a reputation as a
purpose-driven business. Patagonia is structured as a diversified conglomerate under
Patagonia Works, a certified B Corporation that includes various ventures like
Patagonia Inc. (apparel), Patagonia Provisions (food), and Patagonia Media (books,
films). Chouinard's founding philosophy, centered on preserving the planet, remains
integral to the company's strategy and culture, which encourages employee autonomy
and environmental activism.

Key takeaways from Patagonia's case include:

1. Strong Founder Imprinting and Corporate Culture: Chouinard’s unorthodox

approach to leadership shaped a strong corporate culture, where employees
share his values of environmental responsibility. However, a strong culture can
lead to groupthink, limiting critical evaluation and diversity of thought. While
Patagonia has a cohesive culture, the company could face challenges in
maintaining innovation and critical decision-making if groupthink were to arise.
2. Succession Planning and Leadership Transition: Chouinard’s deep
involvement and influence on Patagonia raise concerns about whether the
company can maintain its purpose-driven mission and strong culture once he is
no longer involved. Like other companies with iconic founders (e.g., Apple,
Microsoft), the challenge will be sustaining momentum and the company’s
mission without Chouinard’s direct leadership.
3. Remaining Private vs. Going Public: Patagonia has deliberately remained
private, which has allowed it to maintain control over its mission and avoid the
growth pressures that publicly traded companies face. While remaining private
limits its ability to scale and compete with larger companies like Nike, it enables
Patagonia to focus on its ESG goals without the constraints of shareholder
demands. Going public could potentially increase its impact, but it might also
compromise its core values by prioritizing profit over sustainability.
4. ESG Goals vs. Core Business Efficiency: Patagonia's commitment to
combating climate change and supporting ESG goals aligns with its core mission,
demonstrating that businesses can create shared value by benefiting society and
the environment while also generating profit. Critics argue that companies should
focus on their core business and leave social and environmental issues to
governments and NGOs. However, Patagonia's success suggests that ESG
 practices can be integrated into the business model to create long-term value for
all stakeholders.

Applying Strategic Management Concepts (Rothaermel):

1. Shared Value Creation: Patagonia exemplifies the concept of shared value,

which Rothaermel discusses as creating economic value while simultaneously
creating value for society by addressing its needs and challenges. Patagonia's
environmental initiatives, such as donating 1% of revenues to environmental
causes and designing products with sustainability in mind, align with
Rothaermel's framework of creating value for both shareholders and society.
2. Stakeholder Capitalism: Rothaermel contrasts shareholder capitalism, where
profits and shareholder returns are the primary focus, with stakeholder
capitalism, where the needs of all stakeholders (customers, employees,
communities, environment) are considered. Patagonia is a clear example of
stakeholder capitalism, as it prioritizes the environment over profits, maintains
employee-friendly policies (e.g., flexible work hours, onsite childcare), and
focuses on long-term societal impact.
3. Strategic Leadership and Competitive Advantage: Patagonia’s differentiation
strategy, which emphasizes environmental responsibility and ethical business
practices, has provided it with a sustainable competitive advantage. This
advantage aligns with Rothaermel’s concept of leveraging unique resources and
capabilities to outperform competitors. Patagonia’s values-based approach
attracts a loyal customer base and strong brand reputation, differentiating it from
competitors that prioritize short-term profits.
4. Corporate Social Responsibility (CSR) to Creating Shared Value (CSV):
Rothaermel discusses the shift from CSR, where companies engage in
philanthropy as an afterthought, to CSV, where societal benefits are integrated
into the core business strategy. Patagonia's evolution from selling climbing gear
to becoming a leader in ESG demonstrates this shift, as its focus on
environmental sustainability is ingrained in every aspect of its operations, from
product design to corporate governance.

In summary, Patagonia’s success stems from its commitment to stakeholder capitalism

and creating shared value, as outlined in Rothaermel’s Strategic Management
framework. The company’s strategy of balancing purpose and profit has allowed it to
build a sustainable competitive advantage while staying true to its mission of saving the
planet. However, challenges such as groupthink and leadership transitions remain risks
that Patagonia must navigate to maintain its unique culture and mission.
 5. JetBlue case
Summary of the JetBlue Case Study

JetBlue Airways, founded in 2000 by David Neeleman, is the sixth-largest airline in the
United States as of 2022. Neeleman aimed to implement a blue ocean strategy by
offering low-cost air travel while providing superior service compared to both low-cost
carriers like Southwest Airlines (SWA) and legacy carriers such as American, Delta, and
United. JetBlue's vision was to "bring humanity back to air travel," focusing on a
combination of high-touch customer service and high-tech innovations to enhance the
flying experience.

Initially, JetBlue achieved a competitive advantage by:

● Utilizing a point-to-point model to lower operating costs.

● Operating a single aircraft model (Airbus A-320) to reduce maintenance and
training expenses.
● Enhancing customer value with amenities like leather seats, free in-flight
entertainment, high-speed Wi-Fi, and exceptional customer service.
● Offering the Mint luxury experience with lie-flat beds and premium services on
select routes.

However, over time, JetBlue faced challenges in sustaining this dual strategy:

● From 2007 to 2015, the airline experienced operational mishaps and public
relations issues.
● Leadership changes occurred, with David Barger replacing Neeleman and later
Robin Hayes taking over as CEO in 2015.
● JetBlue struggled to reconcile the cost of enhanced services with the need to
maintain low operating costs.
● The airline's performance declined, ranking last in customer satisfaction surveys
and operational metrics by 2022.
● Strategic moves such as alliances and attempted acquisitions faced regulatory
hurdles and did not immediately improve performance.

Applying Concepts from Rothaermel’s Strategic Management

1. Blue Ocean Strategy and Value Innovation

JetBlue's initial approach aligns with Rothaermel's concept of a blue ocean
strategy, which involves creating a new market space (a "blue ocean") by
offering unique value propositions that differentiate a company from competitors
while also keeping costs low. JetBlue sought to achieve value innovation by
 simultaneously pursuing differentiation (enhanced customer experience) and cost
leadership (operational efficiencies).
2. Challenges of Combining Differentiation and Cost Leadership
Rothaermel emphasizes that combining differentiation and cost-leadership
strategies is challenging because each requires distinct value chain activities
that may conflict. JetBlue attempted to offer premium services (e.g., Mint class,
free Wi-Fi) while also maintaining low fares. This dual strategy led to increased
operational costs, which eroded their cost leadership position.
3. Trade-offs and Being "Stuck in the Middle"
According to Rothaermel, companies that try to pursue both strategies without
effectively managing the trade-offs risk becoming "stuck in the middle," failing
to achieve either a strong differentiation or a cost leadership position. JetBlue's
struggles reflect this predicament:
○ Increased Costs: Enhancements to customer service and amenities
raised operational expenses.
○ Reduced Cost Advantage: Cost-saving measures like reducing legroom
compromised customer satisfaction without significantly lowering costs.
○ Competitive Disadvantage: The inability to effectively balance the two
strategies led to a decline in performance and market share.
4. Strategic Leadership and Changes in Strategy
Leadership transitions at JetBlue illustrate the importance of strategic
leadership in Rothaermel's framework. Changes in CEOs brought shifts in
strategic focus:
○ David Neeleman aimed for a blue ocean strategy but struggled with
scalability.
○ David Barger attempted to address operational issues but couldn't
reverse the declining trend.
○ Robin Hayes sought to refine the strategy by cutting costs (e.g., adding
more seats) and enhancing value (e.g., expanding Mint service), but the
airline continued to face challenges.
5. Effective strategic leadership requires clear decision-making and the ability to
align the organization's activities with the chosen strategy, which JetBlue
struggled to achieve consistently.
6. Competitive Advantage and Disadvantage
Initially, JetBlue gained a temporary competitive advantage by offering a
unique combination of low costs and high customer value. However, as
Rothaermel notes, sustaining a competitive advantage requires continuous
adaptation and alignment with the firm's strategic position. JetBlue's inability to
manage the inherent trade-offs led to a sustained competitive disadvantage,
as evidenced by declining customer satisfaction and financial performance.
Conclusion

JetBlue's case exemplifies the complexities of implementing a blue ocean strategy in

practice. While the airline successfully identified an opportunity to differentiate itself in
the crowded airline industry, the challenges of simultaneously pursuing cost leadership
and differentiation became increasingly difficult to manage. Applying Rothaermel's
strategic management concepts highlights the critical importance of:

● Recognizing and effectively managing strategic trade-offs.

● Maintaining alignment between the company's activities and its strategic position.
● Ensuring that strategic leadership can adapt and steer the organization to sustain
a competitive advantage.

JetBlue's experience underscores that without careful strategy formulation and

execution, a firm risks being stuck in the middle, leading to competitive disadvantage.
The airline's ongoing efforts to adjust its strategy reflect the necessity of continual
reassessment and realignment with core strategic objectives to achieve long-term
success.

Business Strategy Exam #1 catetan alya

Key Terms Runthrough

Chapter 1
● Analysis, Implementation, Formulation (AFI) framework
● Competitive advantage → superior performance relative to other competitors. Distinct
strategies:
○ Differentiation strategy → provides goods or services that consumers value more,
at similar cost. E.g. Lululemon vs. Under Armour
○ Cost differentiation → provides similar goods or services at a lower cost. E.g.
Walmart
● Competitive disadvantage → underperformance relative to other competitors. E.g.
Blockbuster vs. Netflix
● Competitive parity → performance of two or more firms at the same level. E.g. Coca-Cola
vs. Pepsi
● Corporate Social Responsibility (CSR) → a framework that helps firms recognize and meet
society’s economic, legal, social, and philanthropic expectations; society grants
shareholders the right and privilege to create a publicly traded company, thus the firm
owes something to the community. E.g. Patagonia
● Good strategy → enables a firm to achieve superior performance and sustainable
competitive advantage in any competitive situation.
 ● Stakeholder impact analysis → a decision tool with which managers can recognize,
prioritize, and address the needs of different stakeholders, enabling firms to achieve
competitive advantage while acting good as a corporate citizen.
● Stakeholder strategy → an approach to strategy formulation that considers all the
company’s stakeholder, not just its shareholders; single-minded focus on shareholders
exposes a firm to undue risks.
● Stakeholders → organizations, groups, and individuals that can affect or be affected by a
firm’s actions; vested claim or interest in the firm’s performance and continued survival.

● Strategic management → an integrative management field that combines analysis,

formulation, and implementation in the quest for competitive advantage.
● Strategy → a set of goal directed and integrated actions a firm takes to gain and sustain
superior performance relative to competitors; outcome of the strategic management
process; compete for resources and profitable growth.
● Sustainable competitive advantage → outperforming competitors or the industry average
over a prolonged period of time. E.g. Google vs, other search engine platforms
● Value creation → occurs when companies with a good strategy are able to provide
products or services to consumers at a price point that they can afford while keeping their
costs in check, thus making profit at the same time. Both parties benefit from the trade as
each captures a part of the value created.
E.g. Amazon offers a vast selection of goods at affordable prices while using its advanced
logistics network to keep costs low, benefiting both company and customers

Implications for Strategic Manager

● Strategy as success or failure: The difference between success and failure is defined by
an organization’s strategy, which should include a clear competitive challenge, guiding
policy, and coherent actions.
● Good strategy: Enhances chances of competitive advantage and superior performance.
It deals with competition effectively.
● Stakeholder strategy: Strategic leaders must manage internal and external stakeholders
effectively, ensuring they align with the organization’s performance and survival goals.
 ● Strategic management principles apply to all organizations (large, small, for-profit,
nonprofit, public, private, developed, and emerging economies); universal application.
● AFI Strategy Framework: Strategic leaders follow three key tasks:
○ Analysis of external and internal environments.
○ Formulation of business and corporate strategy.
○ Implementation through structure, culture, and controls.
● Strategic leaders make decisions in complex, uncertain conditions, constantly monitoring
progress and fine-tuning strategies as necessary.

Chapter 2

● Autonomous actions → strategic initiatives undertaken by lower-level employees on their

own volition and often in response to unexpected situations.
E.g. At 3M, lower-level engineers were encouraged to spend 15% of their time working on
projects of their own choice. This led to the creation of Post-it Notes, an autonomous
action that responded to a need for easy-to-remove bookmarks in offices, ultimately
becoming a highly successful product.
● Behavioral economics → field of study that blends research findings from psychology with
economics to provide valuable insights showing when and why individuals do not act like
rational decision makers, as assumed in neoclassical economics. E.g. People tend to
overspend on credit cards because the pain of payment is delayed.
● Black swan events → incidents that describe highly improbable but high-impact events.
E.g. 9/11, COVID-19
● Cognitive biases → obstacles in thinking that lead to systematic errors in our decision
making and interfere with our rational thinking. E.g. A gambler believes they can predict
roulette outcomes because they recall wins more than losses.
● Cognitive limitations → constraints such as time or the brain’s inability to process large
amounts of data that prevent us from appropriately processing and evaluating each piece
of information we encounter.
 E.g. A shopper can't evaluate all brands of a product, so they stick with familiar ones.
● Confirmation bias → tendency of individuals to search for information that supports their
prior beliefs. Regardless of facts and data presented, individuals will stick with their prior
hypothesis.
E.g. A person believes in a specific health remedy and only reads studies supporting its
benefits, ignoring contrary evidence.
● Core values statement → statement of principles to guide an organization as it works to
achieve its vision and fulfill its mission, for both internal conduct and external interactions;
often includes explicit ethical considerations.
E.g. Patagonia's values include environmental sustainability, guiding decisions like using
eco-friendly materials
● Devil’s advocacy → a separate team/individual carefully scrutinizes a proposed course of
action by questioning and critiquing underlying assumptions and highlighting potential
downsides.
E.g. A company proposes entering a risky market, and a separate team argues against it to
highlight risks.

● Dialectic inquiry → two teams each generate a detailed but alternate plan of action (thesis
and antithesis); achieve a synthesis between the two plans.
E.g. One team proposes expanding a product line, while another suggests focusing on core
products. A blended approach emerges.
● Dominant strategic plan → strategic option that top managers decide most closely
matches the current reality and which is then executed.
● Emergent strategy → unplanned strategic initiative bubbling up from the bottom of the
organization.
E.g. An employee suggests a new app feature, which becomes central to the company's
growth despite not being part of the original plan.
● Escalating commitment → individual/group faces increasingly negative feedback
regarding the likely outcome from a decision, but nevertheless continues to invest
resources and time in that decision, often exceeding the earlier commitments.
E.g. A company keeps investing in a failing product because they’ve already spent so much
money on it.
● Groupthink → opinions coalesce around a leader without individuals critically evaluating
and challenging that leader’s opinions and assumptions.
E.g. A CEO proposes a plan, and no one on the team challenges it, even though they have
concerns.
● Illusion of control → people's tendency to overestimate their ability to control events.
E.g. A CEO believes they can perfectly predict market trends based on past successes.
● Intended strategy → the outcome of a rational and structured top-down strategic plan.
● Level-5 leadership pyramid → framework of leadership progression with distinct
sequential levels.
● Realized strategy → combination of intended and emergent strategy.
● Reason by analogy → tendency to use simple analogies to make sense out of complex
problems.
E.g. A company assumes success in the U.S. will guarantee success in Europe without
accounting for cultural differences.
● Representativeness → conclusions are based on small samples or memorable cases or
anecdotes.
E.g. A firm hires based on one high-performing employee from a particular school,
assuming all graduates from there are equally good.
● Resource-allocation process (RAP) → the way a firm allocates its resources based on
predetermined policies, which can be critical in shaping its realized strategy.
● Scenario planning → top management envisions different what-if scenarios to anticipate
plausible futures in order to derive strategic responses.
● Serendipity → random events, pleasant surprises, or accidental happentances that can
have profound impact on a firm’s strategic initiatives.
E.g. A lab discovers a profitable drug accidentally while researching something unrelated.
● Strategic business unit (SBU) → standalone divisions of a larger conglomerate, each with
their own profit-loss responsibility.
E.g. GE’s healthcare division operates independently with its own profit goals.
● Strategic initiative → any activity a firm pursues to explore and develop new products and
processes, new markets, or new ventures.
E.g. Google invests in autonomous driving technology, exploring a new market.
● Strategic intent → A stretch goal that pervades the entire organization with a sense of
purpose.
● Strategic leadership → use of power and influence to direct the activities of others when
pursuing an organization’s goals.
● Strategic management process → method put in place by strategic leaders to formulate
and implement a strategy, which can lay the foundation of a sustainable competitive
advantage.
● Strategy formulation → the choice of strategy in terms of where to play and how to win.
● Strategy implementation → organization, coordination, and integration of how work gets
done; strategy execution.
● System 1 → Brain’s default mode; automatic, fast, efficient, requiring little energy and
attention. Prone to cognitive biases that can lead to systematic errors in decision making.
Cognitive biases → obstacles in thinking that lead to systematic errors in our decision
making and interfere with our rational thinking.
E.g. Quickly deciding to buy a candy bar at checkout without much thought.
● System 2 → Applies rationality and relies on analytical and logical reasoning. Effortful,
slow, and deliberate way of thinking.
E.g. Carefully analyzing mortgage options before deciding which loan to take.

● Theory of bounded rationality → when individuals face decisions, their rationality is

confined by cognitive limitations and the time available to make decisions; tendency to
satisfy rather than optimize.
E.g. A consumer picks the first satisfactory pair of shoes rather than searching for the
"perfect" pair due to time constraints.
● Top-down strategic planning → rational, data driven strategy process through which top
management attempts to program future success.
● Upper-echelons theory → views organizational outcomes–strategic choices and
performance levels–as reflections of the values of members of the top management team.
E.g. A company's culture reflects the CEO's focus on innovation and risk-taking.
● Vision → a statement that captures an organization’s purpose and aspiration; spells out
what the organization ultimately wants to accomplish.
E.g. Disney’s vision is to create happiness through magical experiences.
Implications for Strategic Manager
● Strategic leadership: Executives who enable their organizations to achieve competitive
advantage through vision, decisions, and influence.
● Vision and mission: Crafting a purpose-driven vision and mission with ethical core values
is critical to strategic management.
● Customer-oriented vision statements correlate with long-term firm success, allowing
strategic flexibility.
● Employee commitment: Employees should feel invested in the firm's vision and purpose.
Companies may involve employees in reviewing values or assessing success.
● Strategy processes: Strategic leaders have three tools for strategy formulation and
implementation:
● Top-down strategic planning (best in slow-moving environments, e.g., nuclear power).
● Scenario planning (useful for black swan events like nuclear accidents).
● Strategy as planned emergence (suitable for fast-moving environments, e.g.,
internet-based companies).
● Strategic inflection points: All businesses face moments of fundamental change where
decisions impact whether a firm capitalizes on opportunities or declines.
● Bounded rationality: Strategic leaders are limited in their ability to process information
and are susceptible to cognitive biases.
● Safeguards like devil’s advocacy and dialectic inquiry help improve decision-making.
Chapter 3

● Competitive industry structure → elements and features common to all industries:

number and size of competitors, the firms’ degree of pricing power, type of product
offered, and the entry barriers.
E.g. Airline industry with a few dominant players like Delta and American Airlines.
● Complement → product, service, or competency that adds value to the original product
offering when the two are used in tandem. E.g. cars and gasoline.
● Complementor → a company that provides a good or service that leads customers to value
your firm’s offering more when the two are combined.
E.g. Intel processors complement Microsoft Windows.
● Co-opetition → cooperation by competitors to achieve a strategic objective.
E.g. Two competing airlines might cooperate by sharing flight codes or routes to offer
better services to customers while maintaining their individual competitive identities. This
helps them achieve strategic objectives, like expanding their flight networks without
incurring significant new costs.
● Entry barriers → obstacles that discourage or prevent entry into an industry.
E.g.
● Exit barriers → the obstacles that interfere with a firm’s ability to leave the industry.
● Firm effects → firm performance attributed to the actions strategic leaders take.
E.g. Apple's introduction of the iPhone in 2007 was a strategic decision that revolutionized
the mobile phone industry and dramatically increased Apple's market share and
profitability.
● Five forces model → identifies five forces that determine the profit potential of an
industry and shape a firm's competitive strategy.
○ Threat of entry → the risk that potential competitors will enter an industry.
○ Power of suppliers → suppliers with strong bargaining power can exert pressure on
an industry’s profit potential; raise the cost of production by demanding higher
 prices or reducing the quality of input factors, threaten firms because they reduce
the industry’s profit potential by capturing a part of the economic value created.
○ Power of buyers → is high when there are only a few buyers that purchase large
quantities, focal industry’s products are standardized or undifferentiated, buyers
face low or no switching costs, buyers can integrate into the industry backwardly.
○ Threat of substitutes
○ Rivalry among existing competitors
● Industry → a group of incumbent firms with more or less the same set of suppliers and
buyers.
● Industry analysis → a method to: identify an industry’s profit potential, derive implications
for a firm’s strategic position within an industry.
● Industry convergence → a process whereby formerly unrelated industries begin to satisfy
the same customer need.
E.g. Apple and Netflix illustrate industry convergence as technology (hardware) and
entertainment (streaming content) have merged to satisfy similar consumer needs.
● Industry effects → firm performance attributed to the structure of the industry in which
the firm competes.
E.g. The semiconductor industry, with high demand for microchips across sectors, boosts
the performance of companies like Nvidia and TSMC due to industry-wide growth.
● Mobility barriers → industry-specific factors that separate one strategic group from
another.
E.g. A budget airline finds it difficult to transition to a premium service provider due to
brand perception and cost structure differences; JetBlue, primarily a low-cost carrier,
faces mobility barriers in competing directly with premium airlines like Delta in the
business-class market.
● Network effects → the positive impacts that one user of a product or service has on other
users of that product or service. E.g. Airdrop feature for Apple users.
● Nonmarket strategy → strategic leaders’ activities outside market exchanges to influence
a firm’s general environment through lobbying, public relations, contributions, and
litigation that will lead to favorable outcomes for the firm.
● PESTEL model → categorizes and analyzes an important set of external factors that might
impinge upon a firm. These factors create opportunities and threats for the firm.
● Strategic commitments → decisions that are costly, have a long-term impact, and are
difficult to reverse.
E.g. A company invests in building new factories to expand production capacity, a decision
that is costly and difficult to reverse.
● Strategic group → set of companies that pursue a similar strategy within a specific
industry.
E.g. BMW, Mercedes-Benz, and Audi form a strategic group within the automotive industry
by pursuing a similar strategy of targeting the luxury car segment.
● Strategic group model → explains differences in firm performance within the same
industry.
 E.g. In the hotel industry, Marriott and Hilton compete in the premium hotel segment,
while Motel 6 and Super 8 are part of a budget-focused strategic group.

● Strategic position →
● Threat of entry → the risk that potential competitors will enter an industry.
E.g. Netflix faced the threat of entry from Disney+, which entered the streaming market
with a massive content library and strong brand recognition.

Implications for Strategic Manager

● Strategic leaders must start by conducting an external analysis to identify threats and
opportunities.
● The PESTEL analysis helps scan, monitor, and evaluate trends in the macroenvironment
across political, economic, sociocultural, technological, ecological, and legal factors.
● Porter’s five forces model helps determine industry profit potential and develop a
strategic position for competitive advantage. Key steps:
○ Define the relevant industry.
○ Identify key players in each of the five forces and group them into categories.
○ Determine the underlying drivers of each force, assessing their strength.
○ Assess the overall industry structure and its profit potential.
● Strategic group mapping helps explain performance differences within the industry by
comparing groups of firms with similar strategies.
● Together, PESTEL, Porter’s five forces, and strategic group mapping help assess external
factors that influence a firm’s performance.
● Limitations of the models:
○ They are static and do not account for dynamic changes in the industry, such as
innovation or deregulation.
○ These models don’t fully explain why firms in the same industry or strategic
group perform differently.
● To overcome limitations, leaders must conduct external analysis at different points in
 time to capture industry dynamics.
● Internal analysis of a firm's resources, capabilities, and core competencies is needed to
understand performance differences, covered in the next chapter.

Chapter 4

● Activities → distinct and fine-grained business processes that enable firms to add
incremental value by transforming inputs into goods and services.
● Capabilities → organizational and managerial capabilities
E.g. Amazon's capability to manage complex logistics and supply chains, particularly its
next-day delivery service, demonstrates its superior organizational capabilities.
● Causal ambiguity → cause and effect of a phenomenon are not readily apparent.
E.g. A company experiences higher employee productivity but cannot identify whether it’s
due to a new training program, changes in management, or external factors like economic
conditions.
● Core competencies → unique strengths, embedded deep within a firm, that are critical to
gaining and sustaining competitive advantage.
E.g. Google's search algorithm is a core competency that has allowed it to dominate the
internet search market for decades.
● Core rigidity → a former core competency that turned into a liability because the firm
failed to hone, refine, and upgrade the competency as the environment changed.
E.g. Kodak’s initial core competency in film photography turned into a core rigidity when it
failed to adapt to the rise of digital photography.
● Costly-to-imitate resource → firms that do not possess the resource are unable to
develop or buy the resource at a comparable cost.
 E.g. Coca-Cola's brand reputation and secret formula are costly-to-imitate resources that
competitors cannot easily replicate.
● Dynamic capabilities → ability to create, deploy, modify, reconfigure, upgrade, or leverage
firm’s resources in its quest for competitive advantage.
E.g. Netflix demonstrated dynamic capabilities by shifting from DVD rentals to streaming,
then producing its own original content, adapting to changes in the entertainment
industry.
● Dynamic capabilities perspective → emphasizes firm’s capability to modify and leverage
its resource base in a way that enables it to gain and sustain competitive advantage in a
constantly changing environment.
E.g. Microsoft continuously upgrades its software platform to maintain a competitive
advantage in a fast-evolving tech landscape.

● Intangible resources → dynamic capabilities, new product development, engineering

expertise, innovation capability, reputation for quality, supplier relationships, employee
loyalty, corporate culture, goodwill, know-how, patents, trademarks, etc.
● Intellectual property (IP) protection → a strong isolating mechanism that helps sustain a
competitive advantage.
● Isolating mechanisms → barriers to imitation that prevent rivals from competing away the
advantage a firm may enjoy. E.g. A company holds exclusive contracts with suppliers,
making it difficult for competitors to replicate its supply chain advantages.
● Organized to capture value → having an effective organizational structure, processes, and
systems to fully exploit the competitive potential of the firm’s resources, capabilities, and
competencies.
E.g. Walmart is organized to capture value by having a streamlined supply chain and
logistical processes that maximize efficiency and minimize costs.
● Path dependence → the options one faces in the current situation are limited by decisions
made in the past.
 E.g. IBM's early commitment to mainframe computing created path dependence that made
it difficult to transition quickly to the personal computing market.
● Primary activities → activities that add value directly by transforming inputs into outputs
as the firm moves a product or service horizontally along the internal value chain.
● Resource → resource-based view of the firm, any asset, capability, or competency that a
firm can draw upon when formulating and implementing strategy.
● Resource-based view → sees certain types of resources as key to superior firm
performance.
● Resource flows → level of investments to maintain or build an intangible resource.
● Resource heterogeneity → a firm is a bundle of resources and capabilities that differ
across firms.
E.g. Apple and Samsung operate in the smartphone industry, but Apple’s design expertise
and ecosystem differentiate its resources from Samsung’s.
● Resource immobility → a firm has resources that tend to be “sticky” and that do not move
easily from firm to firm.
E.g. Disney's intellectual property (e.g., Mickey Mouse) and creative culture are resources
that remain firmly embedded within the company, making them immobile.
● Resource stocks → firm’s current level of intangible resources.
● Social complexity → different social and business systems interact with one another.
● Strategic activity system → a firm as a network of interconnected activities.
● Support activities → activities that add value indirectly, but are necessary to sustain
primary activities.
● SWOT analysis → internal analysis of strength and weakness; external analysis of
opportunities and threats.
● Tangible resources
● Valuable resource → a resource that helps a firm exploit an external opportunity or offset
an external threat.
● Value chain → internal activities a firm engages when transforming inputs into outputs;
each activity adds incremental value.

Implications for Strategic Manager

● Strategic fit: Leveraging internal strengths to exploit external opportunities while
mitigating weaknesses and threats increases the likelihood of competitive advantage.
● Dynamic strategic fit: Sustaining competitive advantage over time.
● SWOT analysis: Synthesizes internal strengths/weaknesses and external
opportunities/threats to evaluate a firm's current situation and future prospects.
● Internal factors: Strengths and weaknesses involve resources, capabilities, and
competencies, determined using the VRIO framework.
 ○ Valuable: YETI's high-quality, durable products (coolers, drinkware) are highly
valued by outdoor enthusiasts for their superior performance.
○ Rare: The brand's strong reputation and premium pricing create rarity in its
market segment, differentiating it from mass-market alternatives.
○ Imitable: YETI's product quality is hard to replicate due to proprietary
technology and manufacturing processes, but competition is growing.
○ Organization: YETI is well-structured with strong marketing, distribution, and
customer loyalty programs, allowing it to fully exploit its competitive advantages.
● External factors: Opportunities and threats come from the general environment,
analyzed using PESTEL and Porter’s five forces.
○ Attractive industry = opportunity.
○ Stricter regulations = threat.
● SWOT matrix helps generate strategic alternatives by linking internal and external
factors:

○ Strengths–Opportunities: Offensive strategies—use strengths to exploit

opportunities.
○ Weaknesses–Threats: Defensive strategies—reduce weaknesses to mitigate
threats.
○ Strengths–Threats: Use strengths to minimize external threats.
○ Weaknesses–Opportunities: Improve weaknesses to seize opportunities.
● Caveats: Strengths can also be weaknesses, and opportunities can also be threats
depending on the context.
○ Example: Alphabet’s location in Silicon Valley—strength (talent pool) vs.
weakness (high costs, earthquake risks).
○ Example: Climate change—threat (higher taxes) vs. opportunity (innovating
 zero-emission vehicles).

Chapter 5–6
Buzz Words
● Blue ocean strategy → combines differentiation and cost-leadership activities using value
innovation to reconcile the inherent trade-offs.
E.g. Trader Joe’s has lower costs than Whole Foods for the same market of shoppers
desiring high-value and health-conscious foods, coupled with exceptional customer
service; Cirque du Soleil reinvented the traditional circus by eliminating animals and
focusing on theatrical performances, creating a new market space (blue ocean) that
attracted adults who wouldn’t usually attend traditional circuses.
● Blue oceans → untapped market space that is ripe for creation of additional demand.
● Red oceans → known market space of existing industries, where the rivalry among existing
firms is cutthroat because the space is crowded and competition is a zero-sum game.
● Business-level strategy → goal-directed actions managers take in their quest for
competitive advantage when competing in a single product market.
E.g. Ryanair focuses on a cost-leadership strategy in the budget airline market by offering
basic air travel at the lowest possible cost, with add-ons like seat selection or baggage
charged separately.
● Cost-leadership strategy → seeks to create the same or similar value for customers at a
lower cost.
E.g. Walmart vs. Dollar General Store, Amazon vs. Barnes & Noble, Best Buy, the Home
Depot.
● Differentiation strategy → seeks to create higher value for customers than the value that
competitors create, while containing costs. E.g. Apple in 2007 before the share is largely
occupied by Androids,
● Diseconomies of scale → increases in cost per unit when output increases.
● Economies of scale → decreases in cost per unit as output increases.
● Economies of scope → savings that come from producing two or more outputs at less cost
than producing each output individually, despite using the same resources or technology.
E.g. Procter & Gamble reduces costs by producing both shampoo and conditioner in the
same factories, benefiting from shared marketing, distribution, and production resources.
● Focused cost-leadership strategy →
● Focused differentiation strategy → Rolex targets high-income consumers with luxury
watches known for craftsmanship and prestige, focusing on a niche market that values
exclusivity and status.
● Minimum efficient scale (MES) → output range needed to bring down the cost per unit as
much as possible, allowing a firm to stake out the lowest-cost position that is achievable
through economies of scale.
E.g. Toyota achieved MES by optimizing production processes and implementing
just-in-time manufacturing, reducing waste and costs as production volumes increased to
an efficient scale.
 ● Strategic trade-offs → choices between cost position or value position. Higher value
creation tends to generate higher cost.
E.g. Netflix initially chose a value position by offering a vast library of content for a
subscription price, but this came at the cost of heavy content acquisition expenses and
licensing fees.
● Strategy canvas → graphical depiction of a company’s relative performance vis-a-vis its
competitors across the industry’s key success factors.
● Value curve → horizontal connection of the points of each value on the strategy canvas
that helps strategic leaders diagnose and determine courses of action.

● Value innovation → simultaneous pursuit of differentiation and low cost in a way that
creates a leap in value for both the firm and the consumers; cornerstone of blue ocean
strategy.
E.g. IKEA eliminated salespeople, expensive but small outlets in prime urban locations, a
long wait after ordering furniture, and after-sales services, high degree or customization,
etc.

Implications for Strategic Manager

Chapter 5
● Shareholder capitalism faces growing demands to address environmental, social, and
governance (ESG) issues. Shift from corporate social responsibility (CSR) to creating
shared value (CSV), where ESG is integrated into strategy from the start.
● Strategy focuses on gaining and sustaining competitive advantage.
● Traditional methods for assessing competitive advantage: accounting profitability,
shareholder value creation, and economic value creation.
● Conceptual frameworks: Balanced Scorecard and Triple Bottom Line for a holistic view
of competitive advantage.
● Key implications for strategic leaders:
○ No single "best" strategy—only strategies better relative to competitors and
industry averages.
○ The goal is to align and integrate business functions for superior performance at
both the business unit and corporate levels.
○ Competitive advantage is best measured by overall business unit performance,
not individual department metrics.
○ Both quantitative and qualitative performance metrics are essential for
 assessing strategy effectiveness.
○ Leaders must use a holistic perspective, measuring different dimensions over
time to avoid being misled by focusing on a single metric.

Chapter 6
● Strategic formulation requires deep understanding of the firm, industry, and
opportunities.
● Firms must make trade-offs between low cost, differentiation, and market focus (broad
or narrow).
● A well-formulated strategy enhances a firm's chances of superior performance.
● Blue ocean strategy creates new market space through value innovation; successful blue
ocean strategies reconcile value increase with cost reduction. Examples: (1) Toyota's
lean manufacturing: delivering higher quality at lower cost provided competitive
advantage; (2) JetBlue's decline: initially successful, but lost strategic clarity and faced
competitive disadvantage.