CHAPTER 1 Key Points The tasks of crafting and executing company strategies are the heart and soul of managing a business enterprise and winning in the marketplace. A companys strategy is the game plan management is using to stake out a market position, conduct its operations, attract and please customers, compete successfully, and achieve organizational objectives. The central thrust of a companys strategy is undertaking moves to build and strengthen the companys longterm competitive position and financial performance and, ideally, gain a competitive advantage over rivals that then becomes a companys ticket to aboveaverage profitability. A companys strategy typically evolves over time, emerging from a blend of (1) proactive and purposeful actions on the part of company managers and (2) asneeded reactions to unanticipated developments and fresh market conditions. CHAPTER 2 Key Points The managerial process of crafting and executing a companys strategy consists of five inter related and integrated phases. CHAPTER 3 Key Points Thinking strategically about a companys external situation involves probing for answers to the following seven questions. CHAPTER 4 Key Points There are five key questions to consider in analyzing a companys own particular competitive circumstances and its competitive position visàvis key rivals. Chapter 5 Key Points Early in the process of crafting a strategy, company managers have to decide which of the five basic competitive strategies to employ—overall lowcost, broad differentiation, bestcost, focused lowcost, or focused differentiation. DIVERSIFIED Key Points
CHAPTER - Key Points The tasks of crafting and executing company strategies are the heart and soul of managing a business enterprise and winning in the marketplace A company's strategy is the game plan management is using to stake out a market position, conduct its operations, attract and please customers, compete successfully, and achieve organizational objectives The central thrust of a company's strategy is undertaking moves to build and strengthen the company's long-term competitive position and financial performance and, ideally, gain a competitive advantage over rivals that then becomes a company's ticket to above-average profitability A company's strategy typically evolves over time, emerging from a blend of (1) proactive and purposeful actions on the part of company managers and (2) as-needed reactions to unanticipated developments and fresh market conditions Closely related to the concept of strategy is the concept of a company's business model A company's business model is management's story line for how and why the company's product offerings and competitive approaches will generate a revenue stream and have an associated cost structure that produces attractive earnings and return on investment—in effect, a company's business model sets forth the economic logic for making money in a particular business, given the company's current strategy A winning strategy fits the circumstances of a company's external situation and its internal resource strengths and competitive capabilities, builds competitive advantage, and boosts company performance Crafting and executing strategy are core management functions Whether a company wins or loses in the marketplace is directly attributable to the caliber of that company's strategy and the proficiency with which the strategy is executed CHAPTER - Key Points The managerial process of crafting and executing a company's strategy consists of five interrelated and integrated phases: Developing a strategic vision of where the company needs to head and what its future product/customer/market/technology focus should be This managerial step provides long-term direction, infuses the organization with a sense of purposeful action, and communicates to stakeholders what management's aspirations for the company are Setting objectives and using the targeted results and outcomes as yardsticks for measuring the company's performance and progress Objectives need to spell outhow much of what kind of performance by when, and they need to require a significant amount of organizational stretch Measuring company performance entails setting both financial objectives and strategic objectives A balanced scorecard approach tracks both types of objectives Crafting a strategy to achieve the objectives and move the company along the strategic course that management has charted Crafting strategy is concerned principally with forming responses to changes under way in the external environment, devising competitive moves and market approaches aimed at producing sustainable competitive advantage, building competitively valuable competencies and capabilities, and uniting the strategic actions initiated in various parts of the company The more that a company's operations cut across different products, industries, and geographical areas, the more that strategy making becomes a collaborative effort involving managers and company personnel at many organizational levels The total strategy that emerges in such companies is really a collection of strategic actions and business approaches initiated partly by senior company executives, partly by the heads of major business divisions, partly by functional-area managers, and partly by operating managers on the frontlines The larger and more diverse the operations of an enterprise, the more points of strategic initiative it has and the more managers and employees at more levels of management that have a relevant strategy-making role A single-business enterprise has three levels of strategy—business strategy for the company as a whole, functional-area strategies for each main area within the business, and operating strategies undertaken by lower-echelon managers to flesh out strategically significant aspects for the company's business and functional area strategies In diversified, multibusiness companies, the strategymaking task involves four distinct types or levels of strategy: corporate strategy for the company as a whole, business strategy (one for each business the company has diversified into), functional-area strategies within each business, and operating strategies Typically, the strategy-making task is more top-down than bottom-up, with higher-level strategies serving as the guide for developing lower-level strategies Implementing and executing the chosen strategy efficiently and effectively Managing the implementation and execution of strategy is an operations-oriented, make-things-happen activity aimed at shaping the performance of core business activities in a strategy-supportive manner Management's handling of the strategy implementation process can be considered successful if things go smoothly enough that the company meets or beats its strategic and financial performance targets and shows good progress in achieving management's strategic vision Evaluating performance and initiating corrective adjustments in vision, long-term direction, objectives, strategy, or execution in light of actual experience, changing conditions, new ideas, and new opportunities This phase of the strategy management process is the trigger point for deciding whether to continue or change the company's vision, objectives, strategy, and/or strategy execution methods A company's strategic vision plus its objectives plus its strategy equals a strategic plan for coping with industry and competitive conditions, outcompeting rivals, and addressing the challenges and issues that stand as obstacles to the company's success Successful managers have to several things in leading the drive for good strategy execution and operating excellence First, they stay on top of things They keep a finger on the organization's pulse by spending considerable time outside their offices, listening and talking to organization members, coaching, cheerleading, and picking up important information Second, they are active and visible in putting constructive pressure on the organization to achieve good results Generally, this is best accomplished by promoting an esprit de corps that mobilizes and energizes organizational members to execute strategy in a competent fashion and deliver the targeted results Third, they keep the organization focused on operating excellence by championing innovative ideas for improvement and promoting the use of best practices to ensure value creating activities are performed in a first-rate fashion Fourth, they exert their clout in developing competencies and competitive capabilities that enable better execution Fifth, they serve as a role model in displaying high ethical standards, and they insist that company personnel conduct the company's business ethically and in a socially responsible manner They demonstrate unequivocal and visible commitment to the ethics enforcement process Sixth and finally, when a company's strategy execution effort is not delivering good results and the organization is not making measured progress toward operating excellence, it is the leader's responsibility to step forward and push corrective actions Boards of directors have a duty to shareholders to play a vigilant role in overseeing management's handling of a company's strategy-making, strategy-executing process A company's board is obligated to (1) critically appraise and ultimately approve strategic action plans; (2) evaluate the strategic leadership skills of the CEO and others in line to succeed the incumbent CEO; (3) institute a compensation plan for top executives that rewards them for actions and results that serve stakeholder interests, most especially those of shareholders; and (4) ensure that the company issues accurate financial reports and has adequate financial controls CHAPTER - Key Points Thinking strategically about a company's external situation involves probing for answers to the following seven questions: What are the industry's dominant economic features? Industries differ significantly on such factors as market size and growth rate, the number and relative sizes of both buyers and sellers, the geographic scope of competitive rivalry, the degree of product differentiation, the speed of product innovation, demand–supply conditions, the extent of vertical integration, and the extent of scale economies and experience/learning curve effects In addition to setting the stage for the analysis to come, identifying an industry's economic features also promotes understanding of the kinds of strategic moves that industry members are likely to employ What kinds of competitive forces are industry members facing, and how strong is each force? The strength of competition is a composite of five forces: (1) competitive pressures stemming from the competitive maneuvering among industry rivals, (2) competitive pressures associated with the market inroads being made by the sellers of substitutes, (3) competitive pressures associated with the threat of new entrants into the market, (4) competitive pressures stemming from supplier bargaining power and supplier–seller collaboration, and (5) competitive pressures stemming from buyer bargaining power and seller–buyer collaboration The nature and strength of the competitive pressures associated with these five forces have to be examined force by force to identify the specific competitive pressures they each comprise and to decide whether these pressures constitute a strong or weak competitive force The next step in competition analysis is to evaluate the collective strength of the five forces and determine whether the state of competition is conducive to good profitability Working through the five-forces model step by step not only aids strategy makers in assessing whether the intensity of competition allows good profitability but also promotes sound strategic thinking about how to better match company strategy to the specific competitive character of the marketplace Effectively matching a company's strategy to the particular competitive pressures and competitive conditions that exist has two aspects: (1) pursuing avenues that shield the firm from as many of the prevailing competitive pressures as possible, and (2) initiating actions calculated to produce sustainable competitive advantage, thereby shifting competition in the company's favor, putting added competitive pressure on rivals, and perhaps even defining the business model for the industry What forces are driving changes in the industry, and what impact will these changes have on competitive intensity and industry profitability? Industry and competitive conditions change because forces are in motion that create incentives or pressures for change The first phase is to identify the forces that are driving change in the industry; the most common driving forces include changes in the long-term industry growth rate, globalization of competition in the industry, emerging Internet capabilities and applications, changes in buyer composition, product innovation, technological change and manufacturing process innovation, marketing innovation, entry or exit of major firms, diffusion of technical know-how, changes in cost and efficiency, growing buyer preferences for differentiated versus standardized products (or vice versa), reductions in uncertainty and business risk, regulatory influences and government policy changes, and changing societal and lifestyle factors The second phase of driving-forces analysis is to determine whether the driving forces, taken together, are acting to make the industry environment more or less attractive Are the driving forces causing demand for the industry's product to increase or decrease? Are the driving forces acting to make competition more or less intense? Will the driving forces lead to higher or lower industry profitability? What market positions industry rivals occupy—who is strongly positioned and who is not? Strategic group mapping is a valuable tool for understanding the similarities, differences, strengths, and weaknesses inherent in the market positions of rival companies Rivals in the same or nearby strategic groups are close competitors, whereas companies in distant strategic groups usually pose little or no immediate threat The lesson of strategic group mapping is that some positions on the map are more favorable than others The profit potential of different strategic groups varies due to strengths and weaknesses in each group's market position Often, industry driving forces and competitive pressures favor some strategic groups and hurt others What strategic moves are rivals likely to make next? This analytical step involves identifying competitors' strategies, deciding which rivals are likely to be strong contenders and which are likely to be weak, evaluating rivals' competitive options, and predicting their next moves Scouting competitors well enough to anticipate their actions can help a company prepare effective countermoves (perhaps even beating a rival to the punch) and allows managers to take rivals' probable actions into account in designing their own company's best course of action Managers who fail to study competitors risk being caught unprepared by the strategic moves of rivals What are the key factors for competitive success? An industry's key success factors (KSFs) are the particular strategy elements, product attributes, competitive capabilities, and business outcomes that spell the difference between being a strong competitor and a weak competitor —and sometimes between profit and loss KSFs by their very nature are so important to competitive success that all firms in the industry must pay close attention to them or risk becoming an industry also-ran Correctly diagnosing an industry's KSFs raises a company's chances of crafting a sound strategy The goal of company strategists should be to design a strategy aimed at stacking up well on all of the industry KSFs and trying to be distinctively better than rivals on one (or possibly two) of the KSFs Indeed, using the industry's KSFs as cornerstones for the company's strategy and trying to gain sustainable competitive advantage by excelling at one particular KSF is a fruitful competitive strategy approach Does the outlook for the industry present the company with sufficiently attractive prospects for profitability? If an industry's overall profit prospects are above average, the industry environment is basically attractive; if industry profit prospects are below average, conditions are unattractive Conclusions regarding industry attractive are a major driver of company strategy When a company decides an industry is fundamentally attractive, a strong case can be made that it should invest aggressively to capture the opportunities it sees and to improve its long-term competitive position in the business When a strong competitor concludes an industry is relatively unattractive, it may elect to simply protect its present position, investing cautiously if at all and looking for opportunities in other industries A competitively weak company in an unattractive industry may see its best option as finding a buyer, perhaps a rival, to acquire its business On occasion, an industry that is unattractive overall is still very attractive to a favorably situated company with the skills and resources to take business away from weaker rivals A competently conducted industry and competitive analysis generally tells a clear, easily understood story about the company's external environment Different analysts can have different judgments about competitive intensity, the impacts of driving forces, how industry conditions will evolve, how good the outlook is for industry profitability, and the degree to which the industry environment offers the company an attractive business opportunity However, while no method can guarantee a single conclusive diagnosis about the state of industry and competitive conditions and an industry's future outlook, this doesn't justify shortcutting hard-nosed strategic analysis and relying instead on opinion and casual observation Managers become better strategists when they know what questions to pose and what tools to use This is why this chapter has concentrated on suggesting the right questions to ask, explaining concepts and analytical approaches, and indicating the kinds of things to look for There's no substitute for doing cutting-edge strategic thinking about a company's external situation— anything less weakens managers' ability to craft strategies that are well matched to industry and competitive conditions CHAPTER 4- Key Points There are five key questions to consider in analyzing a company's own particular competitive circumstances and its competitive position vis-à-vis key rivals: How well is the present strategy working? This involves evaluating the strategy from a qualitative standpoint (completeness, internal consistency, rationale, and suitability to the situation) and also from a quantitative standpoint (the strategic and financial results the strategy is producing) The stronger a company's current overall performance, the less likely the need for radical strategy changes The weaker a company's performance and/or the faster the changes in its external situation (which can be gleaned from industry and competitive analysis), the more its current strategy must be questioned What are the company's resource strengths and weaknesses, and its external opportunities and threats? A SWOT analysis provides an overview of a firm's situation and is an essential component of crafting a strategy tightly matched to the company's situation The two most important parts of SWOT analysis are (1) drawing conclusions about what story the compilation of strengths, weaknesses, opportunities, and threats tells about the company's overall situation, and (2) acting on those conclusions to better match the company's strategy, to its resource strengths and market opportunities, to correct the important weaknesses, and to defend against external threats A company's resource strengths, competencies, and competitive capabilities are strategically relevant because they are the most logical and appealing building blocks for strategy; resource weaknesses are important because they may represent vulnerabilities that need correction External opportunities and threats come into play because a good strategy necessarily aims at capturing a company's most attractive opportunities and at defending against threats to its well-being Are the company's prices and costs competitive? One telling sign of whether a company's situation is strong or precarious is whether its prices and costs are competitive with those of industry rivals Value chain analysis and benchmarking are essential tools in determining whether the company is performing particular functions and activities cost-effectively, learning whether its costs are in line with competitors, and deciding which internal activities and business processes need to be scrutinized for improvement Value chain analysis teaches that how competently a company manages its value chain activities relative to rivals is a key to building a competitive advantage based on either better competencies and competitive capabilities or lower costs than rivals 4 the company competitively stronger or weaker than key rivals? The key appraisals here involve how the company matches up against key rivals on industry key success factors and other chief determinants of competitive success and whether and why the company has a competitive advantage or disadvantage Quantitative competitive strength assessments, using the method presented in Table 4.4, indicate where a company is competitively strong and weak, and provide insight into the company's ability to defend or enhance its market position As a rule a company's competitive strategy should be built around its competitive strengths and should aim at shoring up areas where it is competitively vulnerable When a company has important competitive strengths in areas where one or more rivals are weak, it makes sense to consider offensive moves to exploit rivals' competitive weaknesses When a company has important competitive weaknesses in areas where one or more rivals are strong, it makes sense to consider defensive moves to curtail its vulnerability What strategic issues and problems merit front-burner managerial attention? This analytical step zeros in on the strategic issues and problems that stand in the way of the company's success It involves using the results of both industry and competitive analysis and company situation analysis to identify a "worry list" of issues to be resolved for the company to be financially and competitively successful in the years ahead The worry list always centers on such concerns as "how to ," "what to about ," and "whether to "—the purpose of the worry list is to identify the specific issues/problems that management needs to address Actual deciding on a strategy and what specific actions to take is what comes after the list of strategic issues and problems that merit front-burner management attention is developed Good company situation analysis, like good industry and competitive analysis, is a valuable precondition for good strategy making A competently done evaluation of a company's resource capabilities and competitive strengths exposes strong and weak points in the present strategy and how attractive or unattractive the company's competitive position is and why Managers need such understanding to craft a strategy that is well suited to the company's competitive circumstances Chapter - Key Points Early in the process of crafting a strategy, company managers have to decide which of the five basic competitive strategies to employ—overall low-cost, broad differentiation, best-cost, focused low-cost, or focused differentiation In employing a low-cost provider strategy, a company must a better job than rivals of costeffectively managing value chain activities and/or it must find innovative ways to eliminate or bypass cost-producing activities Low-cost provider strategies work particularly well when the products of rival sellers are virtually identical or very weakly differentiated and supplies are readily available from eager sellers, when there are not many ways to differentiate that have value to buyers, when many buyers are price sensitive and shop the market for the lowest price, and when buyer switching costs are low Broad differentiation strategies seek to produce a competitive edge by incorporating attributes and features that set a company's product/service offering apart from rivals in ways that buyers consider valuable and worth paying for Successful differentiation allows a firm to (1) command a premium price for its product, (2) increase unit sales (because additional buyers are won over by the differentiating features), and/or (3) gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products) Differentiation strategies work best in markets with diverse buyer preferences where there are big windows of opportunity to strongly differentiate a company's product offering from those of rival brands, in situations where few other rivals are pursuing a similar differentiation approach, and in circumstances where companies are racing to bring out the most appealing next-generation product A differentiation strategy is doomed when competitors are able to quickly copy most or all of the appealing product attributes a company comes up with, when a company's differentiation efforts meet with a ho-hum or so what market reception, or when a company erodes profitability by overspending on efforts to differentiate its product offering Best-cost provider strategies combine a strategic emphasis on low cost with a strategic emphasis on more than minimal quality, service, features, or performance The aim is to create competitive advantage by giving buyers more value for the money—an approach that entails matching close rivals on key quality/service/features/performance attributes and beating them on the costs of incorporating such attributes into the product or service A best-cost provider strategy works best in markets where buyer diversity makes product differentiation the norm and where many buyers are also sensitive to price and value A focus strategy delivers competitive advantage either by achieving lower costs than rivals in serving buyers comprising the target market niche or by developing specialized ability to offer niche buyers an appealingly differentiated offering than meets their needs better than rival brands A focused strategy based on either low cost or differentiation becomes increasingly attractive when the target market niche is big enough to be profitable and offers good growth potential, when it is costly or difficult for multisegment competitors to put capabilities in place to meet the specialized needs of the target market niche and at the same time satisfy the expectations of their mainstream customers, when there are one or more niches that present a good match with a focuser's resource strengths and capabilities, and when few other rivals are attempting to specialize in the same target segment Deciding which generic strategy to employ is perhaps the most important strategic commitment a company makes—it tends to drive the rest of the strategic actions a company decides to undertake and it sets the whole tone for the pursuit of a competitive advantage over rivals DIVERSIFIED - Key Points The purpose of diversification is to build shareholder value Diversification builds shareholder value when a diversified group of businesses can perform better under the auspices of a single corporate parent than they would as independent, stand-alone businesses—the goal is to achieve not just a + = result but rather to realize important + = performance benefits Whether getting into a new business has potential to enhance shareholder value hinges on whether a company's entry into that business can pass the attractiveness test, the cost-of-entry test, and the better-off test Entry into new businesses can take any of three forms: acquisition, internal startup, or joint venture/strategic partnership Each has its pros and cons, but acquisition is the most frequently used; internal start-up takes the longest to produce home-run results, and joint venture/strategic partnership, though used second most frequently, is the least durable There are two fundamental approaches to diversification—into related businesses and into unrelated businesses The rationale for related diversification is strategic:Diversify into businesses with strategic fits along their respective value chains, capitalize on strategic-fit relationships to gain competitive advantage, and then use competitive advantage to achieve the desired + = impact on shareholder value The basic premise of unrelated diversification is that any business that has good profit prospects and can be acquired on good financial terms is a good business to diversify into Unrelated diversification strategies surrender the competitive advantage potential of strategic fit in return for such advantages as (1) spreading business risk over a variety of industries and (2) providing opportunities for financial gain (if candidate acquisitions have undervalued assets, are bargain-priced and have good upside potential given the right management, or need the backing of a financially strong parent to capitalize on attractive opportunities) However, the greater the number of businesses a company has diversified into and the more diverse these businesses are, the harder it is for corporate executives to select capable managers to run each business, know when the major strategic proposals of business units are sound, or decide on a wise course of recovery when a business unit stumbles Analyzing how good a company's diversification strategy is a six-step process: Step 1: Evaluate the long-term attractiveness of the industries into which the firm has diversified Industry attractiveness needs to be evaluated from three angles: the attractiveness of each industry on its own, the attractiveness of each industry relative to the others, and the attractiveness of all the industries as a group Step 2: Evaluate the relative competitive strength of each of the company's business units Again, quantitative ratings of competitive strength are preferable to subjective judgments The purpose of rating the competitive strength of each business is to gain clear understanding of which businesses are strong contenders in their industries, which are weak contenders, and the underlying reasons for their strength or weakness The conclusions about industry attractiveness can be joined with the conclusions about competitive strength by drawing an industry attractiveness–competitive strength matrix that helps identify the prospects of each business and what priority each business should be given in allocating corporate resources and investment capital Step 3: Check for cross-business strategic fits A business is more attractive strategically when it has value chain relationships with sister business units that offer potential to (1) realize economies of scope or cost-saving efficiencies; (2) transfer technology, skills, know-how, or other resource capabilities from one business to another; (3) leverage use of a well-known and trusted brand name; and (4) to build new or stronger resource strengths and competitive capabilities via cross-business collaboration Cross-business strategic fits represent a significant avenue for producing competitive advantage beyond what any one business can achieve on its own Step 4: Check whether the firm's resource strengths fit the resource requirements of its present business lineup Resource fit exists when (1) businesses add to a company's resource strengths, either financially or strategically, (2) a company has the resources to adequately support the resource requirements of its businesses as a group without spreading itself too thin, and (3) there are close matches between a company's resources and industry key success factors One important test of financial resource fit involves determining whether a company has ample cash cows and not too many cash hogs Step 5: Rank the performance prospects of the businesses from best to worst and - determine what the corporate parent's priority should be in allocating resources to its various businesses The most important considerations in judging business-unit performance are sales growth, profit growth, contribution to company earnings, and the return on capital invested in the business Sometimes, cash flow generation is a big consideration Normally, strong business units in attractive industries have significantly better performance prospects than weak businesses or businesses in unattractive industries Business subsidiaries with the brightest profit and growth prospects and solid strategic and resource fits generally should head the list for corporate resource support Step 6: Crafting new strategic moves to improve overall corporate performance This step entails using the results of the preceding analysis as the basis for devising actions to strengthen existing businesses, make new acquisitions, divest weak- performing and unattractive businesses, restructure the company's business lineup, expand the scope of the company's geographic reach multinationally or globally, and otherwise steer corporate resources into the areas of greatest opportunity Once a company has diversified, corporate management's task is to manage the collection of businesses for maximum long-term performance There are five different strategic paths for improving a diversified company's performance: (1) stick with the existing business lineup, (2) broadening the firm's business base by diversifying into additional businesses, (3) retrenching to a narrower diversification base by divesting some of its present businesses, (4) restructuring the company's business lineup with a combination of divestitures and new acquisitions to put a whole new face on the company's business makeup, and (5) pursuing multinational diversification and striving to globalize the operations of several of the company's business units ... conditions CHAPTER 4- Key Points There are five key questions to consider in analyzing a company's own particular competitive circumstances and its competitive position vis-à-vis key rivals: How well... competitively stronger or weaker than key rivals? The key appraisals here involve how the company matches up against key rivals on industry key success factors and other chief determinants of competitive... that the company issues accurate financial reports and has adequate financial controls CHAPTER - Key Points Thinking strategically about a company's external situation involves probing for answers