What Is Strategy? Distinguishing strategy from tactics: –Strategy is the overall plan for deploying resources to establish a favorable position. –Tactic is a scheme for a specific maneuver. Characteristics of strategic decisions: –Important. –Involve a significant commitment of resources. –Not easily reversible.

Successful Strategy Long-term, simple and agreed objectives Profound understanding of the competitive environment Objective appraisal of resources Common Elements in Successful Strategy EFFECTIVE IMPLEMENTATION

Sources of Superior Profitability RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL How do we make money? INDUSTRY ATTRACTIVENESS Which industries should we be in? COMPETITIVE ADVANTAGE How should we compete? CORPORATE STRATEGY BUSINESS STRATEGY

Resources As the Basis for Superior Profitability Rate of Profit in Excess of the Competitive Level Industry Attractiveness Competitive Advantage Differentiation Advantage Cost Advantage Vertical Power Monopoly Barriers to Entry Brands Product technology Marketing capabilities Process technology Plant size Low-cost inputs Firm size Financial resources Market share Patents Brands Retaliatory capability

The Value Chain: The Mckinsey Business System TECHNOLOGYPRODUCT DESIGNMANUFACTURINGMARKETINGDISTRIBUTIONSERVICE

The Porter Value Chain FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUNDOPERATIONSOUTBOUNDMARKETINGSERVICE LOGISTICSLOGISTICS& SALES PRIMARY ACTIVITIES SUPPORT ACTIVITIES

The Rent-earning Potential of Resources and Capabilities Scarcity Relevance Durability Mobility Replicability Property rights Relative bargaining power Embeddedness of resources THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE APPROPRIABILITY THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY

The Framework for Analyzing Resources and Capabilities 5. Identify resource gaps that need to be filled. 4. Select a strategy 3. Appraise the rent-earning potential of resources/ capabilities 2. Identify capabilities 1. Identify the firm’s resources. Appraise strengths and weaknesses STRATEGY CAPABILITIES RESOURCES POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE

Exhibit 5: SWOT Analysis Overcome Weakness Grow DiversifyRestructure Numerous Environmental Opportunities Major Environmental Threats Substantial Internal Strengths Critical Internal Weaknesses

SWOT Analysis (Cont.) Advantages of SWOT analysis –Easy to use. –Can be helpful framework for getting managers to think constructively about their firms’ external environments and internal strengths and weaknesses. Drawbacks of SWOT analysis –Subjective. –Biased by managers’ perceptions of their firms’ strengths and weaknesses

SWOT Analysis (Cont.) For example, managers of strong firms will likely view environmental phenomena as opportunities, while their counterparts in weak companies will likely view them as threats. –The use of SWOT analysis is likely to yield few clear-cut recommendations.

The Emergence of Competitive Advantage How does competitive advantage emerge? External sources of change e.g.: Changing customer demand Changing prices Technological change Internal sources of change Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change Some firms have greater creative and innovative capability

Sustaining Competitive Advantage Against Imitation REQUIREMENTS FOR IMITATIONISOLATING MECHANISMS Identification- Obscure superior performance - Deterrence--signal aggressive Incentives for imitation intentions to imitators - Pre-emption--exploit all available investment opportunities - Rely upon multiple sources of Diagnosis competitive advantage to create “causal ambiguity” - Base competitive advantage upon Resource acquisition resources and capabilities that are immobile and difficult to replicate

Sources of Competitive Advantage COST ADVANTAGE COST ADVANTAGE DIFFERENTIATION ADVANTAGE DIFFERENTIATION ADVANTAGE COMPETITIVE ADVANTAGE COMPETITIVE ADVANTAGE Similar product at lower cost Price premium from unique product