Firms use the strategic management process to achieve strategic competitiveness and earn above-average returns.

Strategic competitiveness is achieved when a firm develops and implements a value-creating strategy. Above-average returns (in excess of what investors expect to earn from other investments with similar levels of risk) provide the foundation needed to simultaneously satisfy all of a firms stakeholders. The fundamental nature of competition is different in the current competitive landscape. As a result, those making strategic decisions must adopt a different mind-set, one that allows them to learn how to compete in highly turbulent and chaotic environments that produce a great deal of uncertainty. The globalization of industries and their markets and rapid and significant technological changes are the two primary factors contributing to the turbulence of the competitive landscape. Firms use two major models to help develop their vision and mission and then choose one or more strategies in pursuit of strategic competitiveness and above-average returns. The core assumption of the I/O model is that the firms external environment has a large influence on the choice of strategies more than do the firms internal resources, capabilities, and core competencies. Thus, the I/O model is used to understand the effects an industrys characteristics can have on a firm when deciding what strategy or strategies with which to compete against rivals. The logic supporting the I/O model suggests that above-average returns are earned when the firm locates an attractive industry or part of an industry and successfully implements the strategy dictated by that industrys characteristics. The core assumption of the resource based model is that the firms unique resources, capabilities, and core competencies have a major influence on selecting and using strategies more than does the firms external environment. Above-average returns are earned when the firm uses its valuable, rare, costly-to-imitate, and non-substitutable resources and capabilities to compete against its rivals in one or more industries. Evidence indicates that both models yield insights that are linked to successfully selecting and using strategies. Thus, firms want to use their unique resources, capabilities, and core competencies as the foundation to engage in one or more strategies that allow them to effectively compete against rivals. Vision and mission are formed to guide the selection of strategies based on the information from the analyses of the firms internal and external environments. Vision is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve. Flowing from the vision, the mission specifies the business or businesses in which the firm intends to compete and the customers it intends to serve. Vision and mission provide direction to the firm and signal important descriptive information to stakeholders. Stakeholders are those who can affect, and are affected by, a firms strategic outcomes. Because a firm is dependent on the continuing support of stakeholders (shareholders, customers, suppliers, employees, host communities, etc.), they have enforceable claims on the companys performance. When earning above-average returns, a firm has the resources it needs to at minimum simultaneously satisfy the interests of all stakeholders. However, when earning only average returns, the firm must carefully manage its stakeholders in order to retain their support. A firm earning below-average returns must minimize the amount of support it loses from unsatisfied stakeholders. Strategic leaders are people located in different areas and levels of the firm using the strategic management process to help the firm achieve its vision and fulfill its mission. In general, CEOs are responsible for making certain that their firms properly use the strategic management process. The effectiveness of the strategic management process is increased when it is grounded in ethical intentions and behaviors. The strategic leaders 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 conduct thorough analyses of conditions facing the firm, be brutally and consistently honest, and work jointly to select and implement the correct strategies. Strategic leaders predict the potential outcomes of their strategic decisions. To do this, they must first calculate profit pools in their industry (and adjacent industries as appropriate) that are linked to value chain activities. Predicting the potential outcomes of their strategic decisions reduces the likelihood of the firm formulating and implementing ineffective strategies. Chapter 2 The firms external environment is challenging and complex. Because of the external environments effect on performance, the firm must develop the skills required to identify opportunities and threats existing in that environment. The external environment has three major parts: (1) the general environment (elements in the broader society that affect industries and their firms), (2) the industry environment (factors that influence a firm, its competitive actions and responses, and the industrys profit potential), and (3) the competitor environment (in which the firm analyzes each major competitors future objectives, current strategies, assumptions, and capabilities). The external environmental analysis process has four steps: scanning, monitoring, forecasting, and assessing. Through environmental analyses, the firm identifies opportunities and threats. The general environment has seven segments: demographic, economic, political/legal, sociocultural, technological, global, and physical. For each segment, the firm has to determine the strategic relevance of environmental changes and trends. Compared with the general environment, the industry environment has a more direct effect on the firms strategic actions. The five forces model of competition includes the threat of entry, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors. By studying these forces, the firm finds a position in an industry where it can influence the forces in its favor or where it can buffer itself from the power of the forces in order to achieve strategic competitiveness and earn above-average returns. Industries are populated with different strategic groups. A strategic group is a collection of firms following similar strategies along similar dimensions. Competitive rivalry is greater within a strategic group than between strategic groups. Competitor analysis informs the firm about the future objectives, current strategies, assumptions, and capabilities of the companies with which it competes directly. A thorough analysis examines complementors that sustain a competitors strategy and major networks or alliances in which competitors participate. When analyzing competitors, the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm.

Different techniques are used to create competitor intelligence: the set of data, information, and knowledge that allows the firm to better understand its competitors and thereby predict their likely strategic and tactical actions. Firms should use only legal and ethical practices to gather intelligence. The Internet enhances firms capabilities to gather insights about competitors and their strategic intentions. Chapter 3: In the current competitive landscape, the most effective organizations recognize that strategic competitiveness and above-average returns result only when core competencies (identified by studying the firms internal organization) are matched with opportunities (determined by studying the firms external environment). No competitive advantage lasts forever. Over time, rivals use their own unique resources, capabilities, and core competencies to form different value-creating propositions that duplicate the focal firms ability to create value for customers. Because competitive advantages are not permanently sustainable, firms must exploit their current advantages while simultaneously using their resources and capabilities to form new advantages that can lead to future competitive success. Effectively managing core competencies requires careful analysis of the firms resources (inputs to the production process) and capabilities (resources that have been purposely integrated to achieve a specific task or set of tasks). The knowledge the firms human capital possesses is among the most significant of an organizations capabilities and ultimately provides the base for most competitive advantages. The firm must create an organizational culture that allows people to integrate their individual knowledge with that held by others so that, collectively, the firm has a significant amount of value-creating organizational knowledge. Capabilities are a more likely source of core competence and subsequently of competitive advantages than are individual resources. How a firm nurtures and supports its capabilities so they can become core competencies is less visible to rivals, making efforts to understand and imitate the focal firms capabilities difficult. Only when a capability is valuable, rare, costly to imitate, and non-substitutable is it a core competence and a source of competitive advantage. Over time, core competencies must be supported, but they cannot be allowed to become core rigidities. Core competencies are a source of competitive advantage only when they allow the firm to create value by exploiting opportunities in its external environment. When this is no longer possible, the company shifts its attention to forming other capabilities that satisfy the four criteria of a sustainable competitive advantage. Value chain analysis is used to identify and evaluate the competitive potential of resources and capabilities. By studying their skills relative to those associated with value chain activities and support functions, firms can understand their cost structure and identify the activities through which they can create value. When the firm cannot create value in either a value chain activity or a support function, outsourcing is considered. Used commonly in the global economy, outsourcing is the purchase of

a value-creating activity from an external supplier. The firm should outsource only to companies possessing a competitive advantage in terms of the particular primary or support activity under consideration. In addition, the firm must continuously verify that it is not outsourcing activities from which it could create value. Chapter 4: A business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. Five business-level strategies (cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation) are examined in the chapter. Customers are the foundation of successful business-level strategies. When considering customers, a firm simultaneously examines three issues: who, what, and how. These issues, respectively, refer to the customer groups to be served, the needs those customers have that the firm seeks to satisfy, and the core competencies the firm will use to satisfy customers needs. Increasing segmentation of markets throughout the global economy creates opportunities for firms to identify more distinctive customer needs they can serve with one of the business-level strategies. Firms seeking competitive advantage through the cost leadership strategy produce no-frills, standardized products for an industrys typical customer. However, these low-cost products must be offered with competitive levels of differentiation. Above-average returns are earned when firms continuously emphasize efficiency such that their costs are lower than those of their competitors, while providing customers with products that have acceptable levels of differentiated features. Competitive risks associated with the cost leadership strategy include (1) a loss of competitive advantage to newer technologies, (2) a failure to detect changes in customers needs, and (3) the ability of competitors to imitate the cost leaders competitive advantage through their own distinct strategic actions. Through the differentiation strategy, firms provide customers with products that have different (and valued) features. Differentiated products must be sold at a cost that customers believe is competitive relative to the products features as compared to the cost/feature combinations available from competitors goods. Because of their distinctiveness, differentiated goods or services are sold at a premium price. Products can be differentiated on any dimension that some customer group values. Firms using this strategy seek to differentiate their products from competitors goods or services on as many dimensions as possible. The less similarity to competitors products, the more buffered a firm is from competition with its rivals. Risks associated with the differentiation strategy include (1) a customer groups decision that the differences between the differentiated product and the cost leaders goods or services

are no longer worth a premium price, (2) the inability of a differentiated product to create the type of value for which customers are willing to pay a premium price, (3) the ability of competitors to provide customers with products that have features similar to those of the differentiated product, but at a lower cost, and (4) the threat of counterfeiting, whereby firms produce a cheap imitation of a differentiated good or service. Through the cost leadership and the differentiated focus strategies, firms serve the needs of a narrow competitive segment (e.g., a buyer group, product segment, or geographic area). This strategy is successful when firms have the core competencies required to provide value to a specialized market segment that exceeds the value available from firms serving customers on an industry-wide basis. The competitive risks of focus strategies include (1) a competitors ability to use its core competencies to outfocus the focuser by serving an even more narrowly defined market segment, (2) decisions by industry-wide competitors to focus on a customer groups specialized needs, and (3) a reduction in differences of the needs between customers in a narrow market segment and the industry-wide market. Firms using the integrated cost leadership/differentiation strategy strive to provide customers with relatively lowcost products that also have valued differentiated features. Flexibility is required for firms to learn how to use primary value chain activities and support functions in ways that allow them to produce differentiated products at relatively low costs. The primary risk of this strategy is that a firm might produce products that do not offer sufficient value in terms of either low cost or differentiation. In such cases, the company becomes stuck in the middle. Firms stuck in the middle compete at a disadvantage and are unable to earn more than average returns. Competitors are firms competing in the same market, offering similar products, and targeting similar customers. Competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between competitors as they compete against each other for an advantageous market position. The outcomes of competitive rivalry influence the firms ability to sustain its competitive advantages as well as the level (average, below average, or above average) of its financial returns. The set of competitive actions and responses that an individual firm takes while engaged in competitive rivalry is called competitive behavior. Competitive dynamics is the set of actions and responses taken by all firms that are competitors within a particular market. Firms study competitive rivalry in order to predict the competitive actions and responses that each of their competitors likely will take. Competitive actions are either strategic or tactical in

nature. The firm takes competitive actions to defend or build its competitive advantages or to improve its market position. Competitive responses are taken to counter the effects of a competitors competitive action. A strategic action or a strategic response requires a significant commitment of organizational resources, is difficult to successfully implement, and is difficult to reverse. In contrast, a tactical action or a tactical response requires fewer organizational resources and is easier to implement and reverse. For example, for an airline company, entering major new markets is an example of a strategic action or a strategic response; changing its prices in a particular market is an example of a tactical action or a tactical response. A competitor analysis is the first step the firm takes to be able to predict its competitors actions and responses. In Chapter 2, we discussed what firms do to understand competitors. This discussion was extended in this chapter to describe what the firm does to predict competitors marketbased actions. Thus, understanding precedes prediction. Market commonality (the number of markets with which competitors are jointly involved and their importance to each) and resource similarity (how comparable competitors resources are in terms of type and amount) are studied to complete a competitor analysis. In general, the greater the market commonality and resource similarity, the more firms acknowledge that they are direct competitors. Market commonality and resource similarity shape the firms awareness (the degree to which it and its competitors understand their mutual interdependence), motivation (the firms incentive to attack or respond), and ability (the quality of the resources available to the firm to attack and respond). Having knowledge of these characteristics of a competitor increases the quality of the firms predictions about that competitors actions and responses. In addition to market commonality and resource similarity and awareness, motivation, and ability, three more specific factors affect the likelihood a competitor will take competitive actions. The first of these concerns first-mover incentives. First movers, those taking an initial competitive action, often gain loyal customers and earn above-average returns until competitors can successfully respond to their action. Not all firms can be first movers in that they may lack the awareness, motivation, or ability required to engage in this type of competitive behavior. Moreover, some firms prefer to be a second mover (the firm responding to the first movers action). One reason for this is that second movers, especially those acting quickly, can successfully compete against the first mover. By evaluating the first movers product, customers reactions to it, and the responses of other competitors to the first mover, the second mover can avoid the early entrants mistakes and find ways to improve upon the value created for customers by the first movers good or service. Late movers (those that respond a long time after the original action was taken) commonly are lower performers

and are much less competitive. Organizational size, the second factor, tends to reduce the variety of competitive actions that large firms launch while it increases the variety of actions undertaken by smaller competitors. Ideally, the firm would prefer to initiate a large number of diverse actions when engaged in competitive rivalry. The third factor, quality, is a base denominator to competing successfully in the global economy. It is a necessary prerequisite to achieving competitive parity. It is a necessary but insufficient condition for gaining an advantage. The type of action (strategic or tactical) the firm took, the competitors reputation for the nature of its competitor behavior, and that competitors dependence on the market in which the action was taken are studied to predict a competitors response to the firms action. In general, the number of tactical responses taken exceeds the number of strategic responses. Competitors respond more frequently to the actions taken by the firm with a reputation for predictable and understandable competitive behavior, especially if that firm is a market leader. In general, the firm can predict that when its competitor is highly dependent for its revenue and profitability in the market in which the firm took a competitive action, that competitor is likely to launch a strong response. However, firms that are more diversified across markets are less likely to respond to a particular action that affects only one of the markets in which they compete. In slow-cycle markets, where competitive advantages can be maintained for at least a period of time, the competitive dynamics often include firms taking actions and responses intended to protect, maintain, and extend their proprietary advantages. In fast-cycle markets, competition is substantial as firms concentrate on developing a series of temporary competitive advantages. This emphasis is necessary because firms advantages in fast-cycle markets arent proprietary and, as such, are subject to rapid and relatively inexpensive imitation. Standard-cycle markets have a level of competition between that in slow-cycle and fast-cycle markets; firms are moderately shielded from competition in these markets as they use capabilities that produce competitive advantages that are moderately sustainable. Competitors in standardcycle markets serve mass markets and try to develop economies of scale to enhance their profitability. Innovation is vital to competitive success in each of the three types of markets. Companies should recognize that the set of competitive actions and responses taken by all firms differs by type of market.

Chapter 6: The primary reason a firm uses a corporate-level strategy to become more diversified is to create additional value. Using a single- or dominant-business corporate-level strategy may be preferable to seeking a more diversified strategy, unless a corporation can develop economies of scope or financial economies between businesses, or unless it can obtain market

power through additional levels of diversification. Economies of scope and market power are the main sources of value creation when the firm diversifies by using a corporate-level strategy with moderate to high levels of diversification. The corporate-level strategy of related diversification helps the firm to create value by sharing activities or transferring competencies between different businesses in the companys portfolio of businesses. Sharing activities usually involves sharing tangible resources between businesses. Transferring core competencies involves transferring core competencies developed in one business to another one. It also may involve transferring competencies between the corporate headquarters office and a business unit. Sharing activities is usually associated with the related constrained diversification corporate-level strategy. Activity sharing is costly to implement and coordinate, may create unequal benefits for the divisions involved in the sharing, and may lead to fewer managerial risk-taking behaviors. Transferring core competencies is often associated with related linked (or mixed related and unrelated) diversification, although firms pursuing both sharing activities and transferring core competencies can also use the related linked strategy. Efficiently allocating resources or restructuring a target firms assets and placing them under rigorous financial controls are two ways to accomplish successful unrelated diversification. Firms using the unrelated diversification strategy focus on creating financial economies to generate value. Diversification is sometimes pursued for value-neutral reasons. Incentives from tax and antitrust government policies, performance disappointments, or uncertainties about future cash flow are examples of value-neutral reasons that firms may choose to become more diversified. Managerial motives to diversify (including to increase compensation) can lead to overdiversification and a subsequent reduction in a firms ability to create value. Evidence suggests, however, that certainly the majority of top-level executives seek to be good stewards of the firms assets and to avoid diversifying the firm in ways and amounts that destroy value. Managers need to pay attention to their firms internal environment and its external environment when making decisions about the optimum level of diversification for their company.Of course, internal resources are important determinants of the direction that diversification should take. However, conditions in the firms external environment may facilitate additional levels of diversification, as might unexpected threats from competitors.