What Is Strategy?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

Resources As the Basis for Superior Profitability

Rate of Profitin Excess of the

Competitive Level

Industry Attractiveness

CompetitiveAdvantage

DifferentiationAdvantage

CostAdvantage

Vertical Power

Monopoly

Barriers to Entry

BrandsProduct technologyMarketing capabilities

Process technologyPlant sizeLow-cost inputs

Firm sizeFinancial resources

Market share

PatentsBrandsRetaliatory capability

The Value Chain: The Mckinsey Business System

The Value Chain: The Mckinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

The Porter Value Chain The Porter Value Chain

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY ACTIVITIES

SUPPORTACTIVITIES

The Rent-earning Potential of Resources and Capabilities

Scarcity

Relevance

Durability

Mobility

Replicability

Property rights

Relative bargainingpower

Embeddedness ofresources

THE EXTENT OF THE COMPETITIVE ADVANTAGE

ESTABLISHED

SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE

APPROPRIABILITY

THE PROFITEARNING POTENTIALOF A RESOURCE OR

CAPABILITY

The Framework for Analyzing Resources and Capabilities

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

SWOT Analysis• Acronym derived from Strengths, Weaknesses,

Opportunities, and Threats.– Used for analyzing industry environments and

firms’ internal strengths and weaknesses.

• Performed in a 2-step process:– Managers thoroughly evaluate their firm’s internal

strengths and weaknesses and its environmental(external) opportunities and threats.

– Managers use the evaluation developed in the firststep to place the firm in one of the quadrants of theSWOT matrix shown in Exhibit 5.

Exhibit 5: SWOT Analysis

OvercomeWeakness Grow

DiversifyRestructure

Numerous EnvironmentalOpportunities

Major EnvironmentalThreats

SubstantialInternal

Strengths

CriticalInternal

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

The Emergence of Competitive Advantage

How does competitive advantage emerge?

External sources ofchange 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 firmshave greater creative

and innovativecapability

Sustaining Competitive Advantage Against Imitation

Sustaining Competitive Advantage Against Imitation

REQUIREMENTS FOR IMITATION ISOLATING MECHANISMS

Identification - Obscure superior performance

- Deterrence--signal aggressiveIncentives 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 AdvantageSources of Competitive Advantage

COST ADVANTAGE

COST ADVANTAGE

DIFFERENTIATIONADVANTAGE

DIFFERENTIATIONADVANTAGE

COMPETITIVEADVANTAGE

COMPETITIVEADVANTAGE

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