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STRATEGY is defined as the long-term direction of an organization. No strategy is risk-free.

The aim is to help organizations to achieve a sustainable competitive advantage.

The competitive advantage must be difficult for competitors to imitate. No competitive advantage is permanent.

Effective implementation of strategies necessitates the organization to be sufficiently flexible in its organizational

structure and design.

Strategy is not necessarily going step by step → otherwise the firm will never achieve its competitors.

Porter: competitive strategy is about being different.

STRATEGIC MANAGEMENT is the process of bringing about the strategy.

It is about how strategies are formed and how they are implemented in order to achieve strategic competitiveness

and earn above average returns.

Above average returns (in excess of what investors expect to earn from other investments with similar levels of risk)

provide the foundation a firm needs to simultaneously satisfy all of its stakeholders.

Firms without a competitive advantage or that are not in an attractive industry earn average returns.

In the long run, the inability to earn at least average returns results first in decline and then, eventually, failure.

When a failure happens, firms file for bankruptcy or sometimes liquidate their operations.

The nature of competition is changing, due to the current competitive landscape (21st Century).

As a result, those making strategic decisions must adopt a different mindset, that values flexibility, speed,

innovation, integration and the challenges that evolve from constantly changing conditions.

Under conditions of hypercompetition, assumptions of market stability are replaced by notions of instability and

change.

Hypercompetition is a situation in which there is a lot of very strong competition between companies, markets are

changing very quickly, and it is easy to enter a new market so that it is not possible for one company to keep a

competitive advantage for a long time. Main drivers of hypercompetitive environments are:

GLOBAL ECONOMY is one in which goods, services, people, skills, and ideas move freely across geographic borders. The two primary factors contributing to the turbulence of the competitive landscape are:

1. the globalization of industries and their markets, and

2. rapid and significant technological changes.

Globalization increases the range of opportunities for companies competing in the current competitive

landscape. Globalization is not without risks, it may open up new markets, but also increases the

competition on the home market.

TECHNOLOGY AND TECHNOLOGICAL CHANGES

• Technology diffusion is the rate at which new technologies become available and are used.

• Perpetual innovation describes how rapidly and constantly new information-intensive technologies

replace older ones.

• Disruptive innovation can destroy the value of existing technology and create new markets.

INCREASING KNOWLEDGE INTENSITY

• Knowledge (information, intelligence, and expertise) is the basis of technology and its application.

Knowledge is gained through experience, observation, inference and is an intangible resource.

• Strategic flexibility is a set of capabilities used to respond to various demands and opportunities existing in

a dynamic and uncertain competitive environment. It involves coping with uncertainty and its accompanying

risks. Firms should try to develop strategic flexibility in all areas of their operations.

Firms use two major models to help them form their vision and mission and then choose one or more strategies to

use in the pursuit of strategic competitiveness and above-average returns:

• Industry Organization (I/O) model suggests that above-average returns for any firm are largely determined by

characteristics outside the firm. This model focuses on industry structure or attractiveness of the external

environment rather than internal characteristics of the firm.

• The Resource-Based View (RBV) model focusing on internal competencies and capabilities.

THE I/O MODEL OF ABOVE-AVERAGE RETURNS

The I/O model challenges firms to locate the most attractive industry in which to compete.

Four underlying assumptions:

1. The external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns;

2. most firms competing within an industry are assumed to control similar resources and to pursue similar strategies;

3. resources used to implement strategies are assumed to be highly mobile across firms; 4. managers are rational and profit-maximizing

Based on its underlying assumptions, the I/O model prescribes a 5-step process for companies to achieve

above average returns:

Resources are inputs into a firm’s production process, such as capital equipment, the skills of individual employees,

patents, finances, and talented managers.

Capability is the capacity for a set of resources to perform a task or an activity in an integrative manner.

Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals.

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS

The resource-based model assumes that each organization is a collection of unique resources and

capabilities.

The uniqueness of its resources and capabilities is the basis for a firm’s strategy and its ability to earn above-

average returns.

According to the resource-based model, differences in firms’ performances across time are due primarily to their unique resources and capabilities rather than to the industry’s structural characteristics.

This model suggests that the strategy the firm chooses should allow it to use its competitive advantages in an

attractive industry (while the I/O model is used to identify an attractive industry).

Vision and mission are formed in light of the information and insights gained from studying a firm’s internal and

external environments.

-Vision is a picture of what the firm wants to be and what it wants to ultimately achieve. A vision statement tends to

be relatively short, it’s easily remembered.

-Mission specifies the business or businesses in which the firm intends to compete and the customers it intends to

serve. The firm’s mission is more concrete than its vision.

Vision and mission provide direction to the firm and signal important descriptive information to stakeholders.

Strategic leaders are people located in different parts of the firm using the strategic management process to help the firm reach its vision and mission. In the final analysis, though, CEOs are responsible for making certain that their firms properly use the strategic management process. The strategic leader’s work demands decision trade-offs, often among attractive alternatives.

It is important for all strategic leaders, and especially the CEO and other members of the top management team, to work hard, conduct thorough analysis of situations, be brutally and consistently honest, and ask the right questions to the right people at the right time. Strategic leaders must predict the potential outcomes of their strategic decisions. To do so, they must first calculate profit pools in their industry that are linked to value chain activities.

Strategic leaders’ actions

• Organizational culture: consists of a complex set of ideologies, symbols, and core values shared throughout the

firm and influence the way business is conducted.

These shared values have a strong influence on the people in the organization and dictate how they dress, act, and

perform their jobs.

Every organization develops and maintains a unique culture, which provides guidelines and boundaries for the

behavior of the members of the organization.

• Profit pools are the total profits earned at all points along the value chain of an industry.

The Profit Pools method is a strategy model that can be used to help managers or companies focus on profits, rather

than on revenue growth.

The idea behind it is: managers need to look beyond revenues to see the shape of their industry’s profit pool. In this

way, strategies can be created which result in profitable growth.

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The firm’s external environment is challenging and complex, it affects a firm’s strategic actions. For most organizations, the external environment is filled with uncertainty. Firms understand the external environment by acquiring information about competitors, customers, and other stakeholders to build their own base of knowledge and capabilities. EXTERNAL ENVIRONMENT ANALYSIS Most firms face highly turbulent/complex external environments. To increase their understanding of the general environment, firms engage in a process of external environmental analysis. Through environmental analysis, the firm identifies opportunities and threats.

An opportunity is a condition in the general environment that, if exploited, helps a company achieve strategic competitiveness. (e.g. new markets open up, new technologies enable to cut costs).

A threat is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness. (e.g. new competitors entering the market, enduring economic recession causing consumers to look for alternatives).

The external environmental analysis process has four steps: 1. Scanning → Identifying early signals of environmental changes and trends – to have a general idea of the

basic threats; 2. Monitoring →Detecting meaning through ongoing observations of environmental changes and trends – in

order to take action; 3. Forecasting →Developing projections of anticipated outcomes based on monitored changes and trends 4. Assessing →Determining the timing and importance of environmental changes and trends for firms’

strategies and their management → most of the growth is in the emerging market. The external environment has three major parts:

1. The general environment is composed of dimensions in the broader society that influence an industry and the firms within it. We group these dimensions into 7 environmental segments: demographic, economic, political/legal, sociocultural, technological, physical and global. Firms cannot directly control the general environment’s segments and elements.

2. The industry environment is the set of factors that directly influences a firm and its competitive actions and competitive responses. Porter's Five Forces Model of Competition illustrates the industry environment: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes and the intensity of rivalry among competitors. The interactions among these five factors determine an industry’s profit potential. The challenge for a firm is to locate a position within an industry where a firm can favorably influence those factors or where it can successfully defend against their influence.

3. The competitor environment relates to the specific competitors and interpreting information about competitors is called competitor analysis.

1. SEGMENTS OF THE GENERAL ENVIRONMENT The general environment has 7 segments.

For each segment, the firm wants to determine the strategic relevance of environmental changes and

trends.

1. The demographic segment is concerned with a population’s size, age structure, geographic distribution, ethnic mix, and income distribution.

2. The economic environment refers to the nature and direction of the economy in which a firm competes or may compete.

3. The political/legal segment is the arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding the interactions among nations.

4. The sociocultural segment is concerned with a society’s attitudes and cultural values. 5. The technological segment includes the institutions and activities involved with creating new knowledge

and translating that knowledge into new outputs, products, processes, and materials. 6. The global segment includes relevant new global markets, existing markets that are changing, important

international political events, and critical cultural and institutional characteristics of global markets. 7. The physical environment segment refers to potential and actual changes in the physical environment

and business practices that are intended to positively respond to and deal with those changes.

2. INDUSTRY ENVIRONMENT ANALYSIS An industry is a group of firms producing products that are close substitutes. In the course of competition, these firms influence one another. Compared with the general environment, the industry environment has a more direct effect on the firm’s strategic actions. The five forces model of competition identifies and analyzes five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths, in order to earn above-average returns. These forces are:

1) THREAT OF NEW ENTRANTS

Identifying new entrants is important because the less money and time it costs for a competitor to enter a company's market and be an effective competitor, the more a company's position may be significantly weakened. Entry barriers make it difficult for new firms to enter an industry and often place them at a competitive disadvantage even when they are able to enter. As such, high entry barriers increase the returns for existing firms in the industry and may allow some firms to dominate the industry.

• Barriers to Entry → Existing competitors try to develop barriers to entry. Potential entrants seek markets in which the entry barriers are relatively insignificant. Several kinds of potentially significant entry barriers may discourage competitors. There are several types of entry barriers:

-Economies of Scale is the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are spread out over a larger number of goods. -Product differentiation -Capital requirements -Switching costs -Access to distribution channels -Cost disadvantages independent of scale -Government policy - Expected Retaliation

2) BARGAINING POWER OF SUPPLIERS

Suppliers are those who stock the organization with what is needed to produce the good or service.

This force addresses how easily suppliers can drive up the price of goods and services.

Increasing prices and reducing the quality of their products are potential means used by suppliers to exercise

power over firms competing within an industry.

If a firm is unable to recover cost increases by its suppliers through its own pricing structure, its profitability

is reduced by its suppliers’ actions.

A supplier group is powerful when:

• It is dominated by a few large companies and is more concentrated than the industry to which it sells.

• Satisfactory substitute products are not available to industry firms.

• Industry firms are not a significant customer for the supplier group.

• Suppliers’ goods are critical to buyers’ marketplace success.

• The effectiveness of suppliers’ products has created high switching costs for industry firms.

• It poses a credible threat to integrate forward into the buyers’ industry. Credibility is enhanced when suppliers have

substantial resources and provide a highly differentiated product.

3) BARGAINING POWER OF BUYERS

Buyers are the organization's immediate customers not necessarily the ultimate consumers. This force deals with the ability customers have to drive prices down. It is affected by how many buyers, or customers, a company has, how significant each customer is and how much it would cost a customer to switch from one company to another. The smaller and more powerful a client base, the more power it holds. Customers (buyer groups) are powerful when: •They purchase a large portion of an industry’s total output. •The sales of the product being purchased account for a significant portion of the seller’s annual revenues. • They could switch to another product at little, if any, cost. • The industry’s products are undifferentiated or standardized, and the buyers pose a credible threat if they were to integrate backward into the sellers’ industry.

4) THREAT OF SUBSTITUTE PRODUCTS

Substitute products are goods or services from outside a given industry that perform similarly or the same functions as a product that the industry produces.

The price/performance ratio is critical to substitution threats. Product substitutes present a strong threat to a firm when customers face few, if any, switching costs and when the substitute product’s price is lower or its quality and performance capabilities are equal to or greater than those of the competing product.

5) INTENSITY OF RIVALRY AMONG COMPETITORS

Competitive rivals are organizations with similar products and services aimed at the same customer group.

This force is the major determinant of how competitive and profitable an industry is.

In a competitive industry, firms have to compete aggressively for a market share, which results in low profits.

Rivalry among competitors is intense when:

-There are many competitors;

-Exit barriers are high;

-Industry of growth is slow or negative;

-Products are not differentiated and can be easily substituted;

-Competitors are of equal size;

-Low customer loyalty.

Interpreting Industry Analysis

Analysis of the five forces in the industry allows the firm to determine the industry’s attractiveness in terms of the potential to earn adequate or superior returns. In general, the stronger competitive forces are, the lower the profit potential. An unattractive industry has low entry barriers, suppliers and buyers with strong bargaining positions, strong competitive threats from product substitutes, and intense rivalry among competitors. These industry characteristics make it difficult for firms to achieve strategic competitiveness and earn above-average returns. An attractive industry has high entry barriers, suppliers and buyers with little bargaining power, few competitive threats from product substitutes, and relatively moderate rivalry.

Industries are populated with different strategic groups.

A strategic group is a set of firms emphasizing similar strategic dimensions to use a similar strategy.

The competition between firms within a strategic group is greater than the competition between a member of a

strategic group and companies outside that strategic group.

The strategic groups can be useful for analyzing an industry’s competitive, and diagnosing competition, positioning,

and the profitability of firms within an industry.

The strengths of the five industry forces differ across strategic groups.

CHANGES IN INDUSTRY STRUCTURE Source: Porter, The five forces that shape the industry, HBR, 2008 The threat of the five forces can evolve over time. Naturally, this will change the profitability of an industry too. Industry structure might change – even drastically – over time:

-Shifting threat of new entry -Changing supplier or buyer power -Shifting threat of substitution -New basis of rivalry

The company should take strategic actions with respect to these changes: -Repositioning the company -Exploiting industry change -Shaping the industry structure

Competitor Analysis informs the firm about competitors’ future objectives, current strategies, assumptions, and

capabilities.

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Analyzing the INTERNAL ORGANIZATION

In the global business environment, traditional factors can still create a competitive advantage (e.g., labor costs and

superior access to financial resources and raw materials). One important reason is that competitors can apply their resources to successfully use an international strategy as a means of overcoming the advantages created by these more traditional sources. Those who analyze their firm’s internal organization should use a global mindset to do so.

A global mindset is the ability to study an internal organization in ways that are not dependent on the assumptions of a single country, culture, or context. By exploiting their core competencies or competitive advantages to at least meet, if not exceed, the demanding

standards of global competition, firms create value for customers.

Value is measured by a product’s performance characteristics and by its attributes for which customers are willing to pay. Firms with a competitive advantage offer value to customers that is superior to the value competitors provide. Firms unable to perform in ways that create value for customers suffer performance declines. Sometimes, it seems that these declines may happen because firms fail to understand what customers value. The STRATEGIC DECISIONS managers make about the components of their firm’s internal organization are non-routine, have ethical implications, and significantly influence the firm’s ability to earn above-average returns. These decisions involve choices about the assets the firm needs to collect and how to best use those assets. → this

task is as challenging and difficult, as any other with which managers are involved.

When a mistake occurs, decision makers must have the confidence to admit it and take corrective actions. → A firm can still grow through well-intended errors; the learning generated by making and correcting mistakes can be important to the creation of new competitive advantages. Difficult managerial decisions concerning resources, capabilities, and core competencies are characterized by 3 conditions:

1. uncertainty, regarding characteristics of the general and the industry environments, competitors’ actions and customers’ preferences.

2. complexity, regarding the interrelated causes shaping a firm’s environments and perceptions of the environments.

3. Intra-organizational conflicts, among people making managerial decisions and those affected by them. In making decisions affected by these three conditions, judgment is required. Judgment is the capability of making successful decisions when no obviously correct model or rule is available or when relevant data are unreliable or incomplete. → when exercising judgment, decision makers often take intelligent risks. DISRUPTIVE INNOVATION AND VALUE Disruptive innovation describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then moves up market, eventually displacing established competitors.

e.g. Disruptor →Cellular phones Disruptee →Fixed line telephone

Disruptive innovation → creates substantial growth by offering a new performance trajectory that, even if initially inferior to the performance of existing technologies, has the potential to become markedly superior. Incumbents can follow two policies to help keep them responsive to potentially disruptive innovations:

-Develop a portfolio for real options -Develop new venture units

Resources, capabilities, and core competencies are the foundation of competitive advantage. RESOURCES → everything I’m using to produce goods and services. Resources are money-derived.

Tangible resources are assets that can be seen and quantified. Production equipment, manufacturing facilities, distribution centers, and formal reporting structures are examples of tangible resources. Financial Resources • The firm’s borrowing capacity

• The firm’s ability to generate internal funds Organizational Resources • The firm’s formal reporting structure and its formal planning, controlling

and coordinating systems Physical Resources • Sophistication and location of a firm’s plant and

equipment • Access to raw materials

Technological Resources • Stock of technology, such as patents, trademarks, copyrights, and trade secrets

Intangible resources are assets that are rooted deeply in the firm’s history and have accumulated over time.

Because they are embedded in unique patterns of routines, intangible resources are relatively difficult for

competitors to analyze and imitate.

Human Resources • Knowledge

• Trust between managers and employees

• Managerial capabilities

• Organizational routines(the unique ways people work together)

Innovation Resources • Ideas

• Scientific capabilities

• Capacity to innovate

Reputational Resources • Reputation with customers

• Brand name

• Perceptions of product quality, durability, and reliability

• Reputation with suppliers

• For efficient, effective, supportive, and mutually beneficial interactions and relationships

CAPABILITIES

Capabilities are developed with time.

Capabilities exist when resources have been purposely integrated to achieve a specific task or set of tasks. These

tasks range from human resource selection to product marketing and research and development activities.

CORE COMPETENCIES → something that people is claiming, something that creates value.

Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals.

Core competencies distinguish a company competitively and reflect its personality.

They allow the company to be unique and competitive in the market.

Core competencies emerge over time through an organizational process of accumulating and learning how to deploy

different resources and capabilities.

To be a source of competitive advantage, a resource or capability must allow the firm:

1. to perform an activity in a manner that provides value superior to that provided by competitors, or 2. to perform a value-creating activity that competitors cannot perform.

Only under these conditions does a firm create value for customers and have opportunities to capture that value. BUILDING CORE COMPETENCIES Two tools help firms identify and build their core competencies:

1. FOUR CRITERIA OF SUSTAINABLE COMPETITIVE ADVANTAGE: to determine those capabilities that are core

competencies.

Not all of a firm’s resources and capabilities have the potential to be the basis for competitive advantage.

This potential is realized when resources and capabilities are:

-valuable, when they allow a firm to take advantage of opportunities or neutralize threats in its external

environment.

-rare, when possessed by few, if any, current and potential competitors.

-costly to imitate, are capabilities that other firms cannot easily develop

-nonsubstitutable, are capabilities that do not have strategic equivalents.

When these 4 criteria are met → resources and capabilities become core competencies.

2. VALUE CHAIN ANALYSIS to select the value-creating competencies that should be maintained, upgraded, or

developed and those that should be outsourced.

Value chain analysis allows the firm to understand the parts of its operations that create value and those

that do not. → IMPORTANT →the firm earns above average returns only when the value it creates it’s greater

than the costs incurred to create that value.

A firm’s value chain is segmented into primary and support activities.

Primary activities are involved with a product’s physical creation, its sale and distribution to buyers, and its

service after the sale. (are the ones that are creating value)

• Inbound Logistics: such as materials handling, warehousing, and inventory control, used to receive, store, and disseminate inputs to a product.

• Operations: such as machining, packaging, assembly, and equipment maintenance are examples of operations activities. • Outbound Logistics: such as finished goods warehousing, materials handling, and order processing. • Marketing and Sales: such as advertising and promotional campaigns, select appropriate distribution channels, and select, develop, and support their sales force. • Service: such as installation, repair, training, and adjustment

• Support activities provide the assistance necessary for the primary activities to take place. • Procurement: Activities completed to purchase the inputs needed to produce a firm’s products. Purchased inputs include items fully consumed during the manufacture of products (e.g., raw materials and supplies, machinery, laboratory equipment, office equipment, and buildings). • Technological Development: Activities completed to improve a firm’s product and the processes used to manufacture it. Technological development takes many forms, such as process equipment, basic research and product design, and servicing procedures. • Human Resource Management: Activities involved with recruiting, hiring, training, developing, and compensating all personnel. • Firm Infrastructure: Includes activities such as general management, planning, finance, accounting, legal support, and governmental relations that are required to support the work of the entire value chain.

OUTSOURCING

Outsourcing is the purchase of a value-creating activity from an external supplier.

By outsourcing activities in which it lacks competence, the firm can fully concentrate on those areas in which it can

create value.

Outsourcing services include: payroll, human resources (HR), accounting, customer/call center relations, emergency

hotlines, claims management, help desks, data management, document processing and storage, financial services,

auditing, travel management systems, various logistics and information systems services.

REASONS FOR OUTSOURCING/BPO Outsourcing is expected to contribute as to:

• Costs cost reduction (even more fixed cost reduction), focus on the core business, CapEx reduction

• Flexibility Increase in service flexibility, effective peak-load management

• Innovation Improvement in the service quality, speed in new services introduction, access to new

competencies/technologies

RISKS IN OUTSOURCING/BPO Outsourcing can be risky due:

• Strategic/operational risks Loss of core competencies, loss of control on the management of the business process, unreliability of the selected partner, lack of true cost advantages • Stakeholder Negotiation Problems in re-training or re-allocating employees, labor law rigidities, trade unions reactions • Organization readiness Lack of standards in internal business processes, lack of experience with outsourcing contracts, lack of managerial competencies to manage outsourcing.

COMPETENCIES, STRENGTHS, WEAKNESSES, AND STRATEGIC DECISIONS Firms must identify their strengths and weaknesses in resources, capabilities, and core competencies.

Having a significant quantity of resources is not the same as having the “right” resources.