Modern Competitive Strategy 3 rd Edition Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reservedMcGraw-Hill/Irwin

Chapter 1 What Is Strategy? 1-2

What is a Successful Strategy? Successful firms achieve a sustainable competitive advantage Businesses achieve competitive advantage by emphasizing cost, value to the customer, or both. A firm’s strategy is found in its investments in resources and capabilities that Determine its market position Defend this position from competitors 1-3

Market Positioning Attention to the transaction with customers is central to understanding strategy In fact, without a customer, the firm produces nothing of value at all Two parts of a transaction Value to the customer minus price – which is what determines demand for the product Price minus cost to the firm – which defines the firm’s profit 1-4

The Transaction with the Customer Value that the product offers the customer Product price The firm’s cost to produce and sell the product The benefit the customer receives from buying the product (Value minus Price) The benefit the customer receives from buying the product (Value minus Price) The profit the firm receives from producing and selling the product (Price minus Cost) The profit the firm receives from producing and selling the product (Price minus Cost) 1-5

Protecting the Firm’s Market Position from Competitors The firm’s market position is defended by Retaining customers through High switching costs Preventing imitation of the firm’s key resources and capabilities Property rights, e.g., patents Dedicated assets, e.g., a specialized supplier Sunk costs, e.g., investments in R & D Causal ambiguity, i.e., the difficulty of copying a key process 1-6

What Determines Firm Profitability? Characteristics of the business Market position Value offered to customers Cost to produce that value Isolating mechanisms Customer retention Prevention of imitation Adaptability to changing market conditions Macroeconomic factors National and global fiscal and regulatory policies Industry factors Competition Entry barriers Buyer power and tastes Supplier power Substitute technologies 1-7

Origins of Strategy Origins of strategy include: Industrial and evolutionary economics Case studies of exemplary companies Business and industry histories Economic and organizational sociology Strategic planning tools Institutional economics 1-8

Firm evolution Industry evolution Evolutionary economics Strategic planning Game theory Structure/Conduct/ Performance Paradigm Industrial economics Business cases Business history Institutional economics Economic and organizational sociology Industry history The firm and its immediate business context The overall market or industry Focus of analysis Not necessarily rationally Rationally Assumption about how managers make decisions Business cases Business history Institutional economics Economic and organizational sociology Industry history The Origins of Strategy 1-9

Strategic Planning Details the process for developing business strategies and links them to operational programs and investments Details the logic behind cash flow forecasts Provides process for: Development of the firm’s mission Goal setting Identification of strategic initiatives Program development, scheduling and accountability Problem solving and innovation Not the same as strategy execution Firms can be successful without a strategic plan 1-10

Strategy Execution Entails continuous development and improvement of resources and capabilities Elements of execution: Task design Incentives and compensation Control and coordination systems Degree of consistency among a firm’s activities Firm’s culture and human resource systems Effective execution requires each element to reinforce the others Not the same as strategic planning Firms cannot be successful without effective strategy execution 1-11

Industry Analysis A firm’s profits are effected by five industry forces: Competition Stronger competition drives prices down Buyers Strong buyers demand higher value and lower prices Suppliers Strong suppliers lower the value delivered and raise prices Entry Easy entry into the industry typically drives prices down Technological substitutes Strong substitutes force firms to raise value and lower prices Complements are also important (e.g., skis and ski resorts) Powerful complements raise the product’s value 1-12

Strategy Over Time: Growth and Innovation Firms must adapt to achieve success or remain successful Adaptation involves investment in innovations to improve and defend the firm’s market position Larger firms generally have more resources to make these innovations in productivity Almost all industries go through a life cycle in four stages Growth Shakeout Maturity Disruption and either decline or rejuvenation 1-13

Other Global Auto Firms Toyota GM Relative Productivity Toyota vs. Other Auto Companies Quality Over Cost Ratio 1-14

Vertical Integration, Outsourcing and Strategic Alliances A firm vertically integrates when it decides to produce a product or service that an outside supplier currently makes Outsourcing is the reverse process – shifting production from the firm to an outside supplier A strategic alliance is a type of relationship between a firm and one of its suppliers in which the firm has more control than it would in a standard market relationship These decisions and their implementation are central to how the firm executes its strategy 1-15

Global Strategy Global firms rely on both country-specific and firm- specific strengths Examples of country strengths are U.S. dominance in media content and production values Japanese dominance in automobiles Italian dominance in high-end fashion Dominant global firms that transcend their home countries include IBM, Seimens, Philips, Procter & Gamble, and Sony Sometimes regions within countries are important Think of Silicon Valley 1-16

Strategy in Single Business Firms Offense and Defense Offense Develop a strong market position Value to the customer Cost to produce that value Defense Build isolating mechanisms against powerful buyers and competitors Increase customer retention Prevent imitation of key resources and capabilities 1-17

Strategy in Multibusiness Firms Multibusiness strategy Manage a portfolio of businesses so that they perform better together than independently Provide resources and capabilities—capital, technology, materials, know how Contribute management or entrepreneurial skills to the units Establish and oversee inter-unit transfers Centralize activities, e.g., distribution, logistics Build a corporate infrastructure that supports the business units Initiate programs that enhance business unit market positions, e.g., process improvements focused on quality 1-18

Corporate Governance Focus on board of directors Two major regulatory concerns Policies that limit shareholder influence on the firm Policies that set senior management compensation Boards have the following general responsibilities Compliance - financial and compensation reporting Succession – CEO and board directors Self management – charters, principles of corporate governance, by-laws Advice and counsel to top management Executive and director compensation 1-19

Outline of the Book Chapter 2:Strategic Planning and Decision Making Chapter 3: Competitive Advantage Chapter 4: Industry Analysis Chapter 5: Competing over Time Chapter 6: Strategy Execution Chapter 7: Vertical Integration and Outsourcing Chapter 8: Partnering Chapter 9: Global Strategy Chapter 10: New Business Development Chapter 11: Managing the Multi-business Firm Chapter 12: Corporate Governance 1-20