MKTG (1) 70-Straman

Chapter One
Strategic
Leadership:
Managing the
Strategy-
Making
Process for
Competitive
Advantage
Why do some organizations
succeed while others fail?
Strategy is a set of related actions that managers
take to increase their company’s performance.
 Strategic Leadership
• Task of most effectively managing a
company’s strategy-making process
 Strategy Formulation
• Task of determining and selecting strategies
 Strategy Implementation
• Task of putting strategies into action to improve a
company’s efficiency and effectiveness
Competitive Advantage
Results when a company’s strategies lead to
superior performance compared to competitors
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Superior Performance and
Sustainable Competitive Advantage
 Superior Performance
• One company’s profitability relative to that of other companies in
the same or similar business or industry
• Maximizing shareholder value is the ultimate goal of profit making
companies
ROIC (Profitability) = Return On Invested Capital
• Net profit Net income after tax
ROIC = Capital invested = Equity + Debt to creditors
 Competitive Advantage
• When a company’s profitability is greater than the average of all
other companies in the same industry & competing for the same
customers
Sustainable Competitive Advantage
When a company’s strategies enable it to maintain
above average profitability for a number of years
Determinants of
Shareholder Value
Figure 1.1
To increase shareholder value, managers must

pursue strategies that increase the profitability
of the company and grow the profits.
Company’s Business Model
Management’s model of how strategy will allow
the company to gain competitive advantage
and achieve superior profitability
A business model encompasses how the company will:
• Select its customers • Deliver those goods and
• Define and differentiate services to the market
its product offerings • Organize activities within
• Create value for its the company
customers • Configure its resources
• Acquire and keep • Achieve and sustain a
customers high level of profitability
• Produce goods or • Grow the business over
services time
Differences in Industry
and Company Performance
A Company’s Profitability and
Profit Growth are determined
by two main factors:
The overall performance
of its industry relative
to other industries
Its relative success in its

industry as compared to the
competitors
Return on Invested Capital
in Selected Industries, 1997–2003
Figure 1.2
Data Source: Value Line Investment Survey

Performance in Nonprofit
Enterprises
Nonprofit entities such as government
agencies, universities, and charities:
• Are not in business to make a profit
• Should use their resources efficiently
and effectively
• Set performance goals unique to the
organization
• Set strategies to achieve goals and compete
with other nonprofits for scarce resources
A successful strategy gives potential
donors a compelling message as to
why they should contribute.
Strategic Managers
 Corporate Level Managers
• Oversee the development of strategies for the
whole organization
• The CEO is the principle general manager who
consults with other senior executives
 General Managers
• Responsible for overall company, business
unit, or divisional performance
 Functional Managers
• Responsible for supervising a particular task
or operation
e.g. marketing, operations, accounting, human resources
Levels of Strategic Management
Figure 1.3
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The Five Steps of the
Strategy Making Process
 Select the corporate vision, mission, and values
and the major corporate goals and objectives.
 Analyze the external competitive environment to
identify opportunities and threats.
 Analyze the organization’s internal environment
to identify its strengths and weaknesses.
 Select strategies that:
• Build on the organization’s strengths and correct its
weaknesses – in order to take advantage of external
opportunities and counter external threats
• Are consistent with organization’s vision, mission, and values
and major goals and objectives
• Are congruent and constitute a viable business model
 Implement the strategies.
Figure 1.4 
 
Main
Components
of the 
Strategy-
Making
Process 

 Crafting the Organization’s
Mission Statement
Provides a framework or context within
which strategies are formulated, including:
 Mission –
The reason for existence – what an organization does
 Vision –
A statement of some desired future state
 Values –
A statement of key values that an organization is
committed to
 Major Goals –
The measurable desired future state that an
organization attempts to realize
The Mission
The mission is a statement of a company’s
raison d’etre, its reason for existence today.
 What is it that the company does?
 What is the companies business?
• Who is being satisfied
(what customer groups)?
• What is being satisfied
(what customer needs)?
• How customer needs are being satisfied
(by what skills, knowledge, or distinctive competencies)?
A company’s mission is best approached from
a customer-oriented business definition.
The Mission
Customer-Oriented Examples
The mission of Kodak is to provide “customers
with the solutions they need to capture, store,
process, output, and communicate images –
anywhere, anytime.”
Ford Motor Company describes itself as a

company that is “passionately committed to
providing personal mobility for people around
the world….We anticipate consumer need and
deliver outstanding produces and services that
improve people’s lives.”
Abell’s Framework
for Defining the Business
Figure 1.5
Source: D. F. Abell, Defining the Business: The Starting Point of

Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7.

The Vision
What would the company like to achieve?
A good vision is meant to stretch a company by
articulating an ambitious but attainable future state.
The vision of Ford is “to become the world’s

leading consumer company for automotive
products and services.”
Nokia is the world’s largest manufacturer of

mobile phones and operates with a simple but
powerful vision: “If it can go mobile, it will!”
Values
The values of a company should state:
 How managers and employees should
conduct themselves
 How they should do business
 What kind of organization they need to build
to help achieve the company’s mission
 Organizational culture
• The set of values, norms, and standards that control how
employees work to achieve an organization’s mission and
goals
• Often seen as an important source of competitive advantage
In high-performance organizations, values

respect the interests of key stakeholders.
Values at Nucor
 “Management is obligated to manage Nucor in such

a way that employees will have the opportunity to
earn according to their productivity.”
 “Employees should be able to feel confident that if
they do their jobs properly, they will have a job
tomorrow.”
 “Employees have the right to be treated fairly and
must believe that they will be.”
 “Employees must have an avenue of appeal when
they believe they are being treated unfairly.”
At Nucor, values emphasizing pay for performance, job
security, and fair treatment for employees help to create
an atmosphere that leads to high employee productivity.
Major Goals
A goal is a precise and measurable desired
future state that a company must realize
if it is to attain its vision or mission.
Key characteristics of well-constructed goals:
1. Precise and measurable – to provide a
yardstick or standard to judge performance
2. Address crucial issues – with a limited
number of key goals that help to maintain focus
3. Challenging but realistic – to provide
employees with incentive for improving
4. Specify a time period – to motivate and
inject a sense of urgency into goal attainment
Focus on long-run performance and
competitiveness.
 External Analysis
Purpose is to identify the strategic opportunities and
threats in the organization’s operating environment
that will affect how it pursues its mission.
External Analysis requires an assessment of:
 Industry environment in which company operates
• Competitive structure of industry
• Competitive position of the company
• Competitiveness and position of major rivals
 The country or national environments
in which company competes
 The wider socioeconomic or macroenvironment
that may affect the company and its industry
• Social • Legal • Technological
• Government • International
 Internal Analysis
Purpose is to pinpoint the strengths and weaknesses
of the organization. Strengths lead to superior
performance and weaknesses to inferior performance.
Internal analysis includes an assessment of:
 Quantity and quality of a
company’s resources and
capabilities
 Ways of building unique
skills and company-specific
or distinctive competencies
Building & sustaining a competitive advantage
requires a company to achieve superior:
• Efficiency • Innovations
• Quality • Responsiveness to customers
 Selecting Strategies: SWOT
Analysis and Business Model
 SWOT analyses help to identify strategies that align
a company’s resources and capabilities to its
environment – in order to create and sustain a
competitive advantage.
 Functional strategies should be consistent with and
support the company’s business level and global
strategies.
• Functional-level strategy – directed at operational effectiveness
• Business-level strategy – businesses’ overall competitive themes
• Global strategy – expand, grow and prosper at a global level
• Corporate-level strategy – to maximize profitability and profit growth
When taken together, the various strategies

pursued by a company must lead to a
viable business model.
 Strategy Implementation
 After choosing a set of congruent strategies to
achieve competitive advantage, managers must
put those strategies into action:
• Implementation and execution of the strategic plans
• Design of the best organization structure
• Consistency of strategy with company culture
• Control systems to measure and monitor progress
• Governance systems for legal and ethical compliance
• Consistency with maximizing profit and profit growth
 The feedback loop – strategic planning is ongoing
• Managers must monitor strategy execution:
» To determine if strategic goals and objectives are being achieved
» To evaluate to what extent competitive advantage is being
created and sustained
• Managers must monitor and reevaluate for the next round of
strategy formulation and implementation
Planned, Deliberate, Emergent
and Realized Strategies
Figure 1.6
Source: Adapted from H. Mintzberg and

A. McGugh, Administrative Science
Quarterly, Vol. 30. No. 2, June 1985.

Intended and Emergent Strategies
 Intended or Planned Strategies
• Strategies an organization plans to put into action
• Typically the result of a formal planning process
• Unrealized strategies are the result of unprecedented
changes and unplanned events after the formal planning is
completed
 Emergent Strategies
• Unplanned responses to unforeseen circumstances
• Serendipitous discoveries and events may emerge that can
open up new unplanned opportunities
• Must assess whether the emergent strategy fits the
company’s needs and capabilities
 Realized Strategies
• The product of whatever intended strategies are actually put
into action and of any emergent strategies that evolve
Strategic Planning in Practice
Recent studies suggest that formal planning does have a
positive impact on company performance – and should
include the current and future competitive environments.
 Scenario Planning
• Recognizes that the future is inherently unpredictable
• Develops strategies for possible future scenarios
 Decentralized Planning
• Involves the functional managers
• Avoids the ivory tower approach
• Perceives procedural justice in the decision making
 Strategic Intent
• Avoids the strategic fit model, which focuses too much on the
current state
• Sets ambitious vision and goals that stretch a company and
then finds ways to build to attain those goals
Strategic Decision Making
In spite of systematic planning, companies may adopt poor
strategies if groupthink or individual cognitive biases are
allowed to intrude into the decision-making process:
 Cognitive biases:
Rules of thumb or heuristics resulting in systematic errors
• Prior hypothesis bias
• Escalating commitment
• Reasoning by analogy
• Representativeness
• Illusion of control
 Groupthink:
Decisionmakers embark on a course of action without
questioning the underlying assumptions
• Group coalesces around a person or policy
• Decisions based on an emotional rather than an objective assessment
of the correct course of action
Processes for Improving
Decision Making
Figure 1.7
To bring out all the Reveals problems with

reasons that might definitions, assumptions,
make the proposal & recommended courses
unacceptable of action

Strategic Leadership
Good leaders of the strategy-making process
have a number of key attributes:
 Vision, eloquence, and consistency
 Commitment
 Being well informed
 Willingness to delegate and empower
 The astute use of power
 Emotional intelligence
• Self-awareness
• Self-regulation
• Motivation
• Empathy
• Social skills

Chapter
Two
External
Analysis:
The
Identification of
Opportunities
and Threats
External Analysis
The purpose of external analysis is to identify the strategic
opportunities and threats in the organization's operating
environment that will affect how it pursues its mission.
External Analysis requires an assessment of:
 Industry environment in which company operates
• Competitive structure of industry
• Competitive position of the company
• Competitiveness and position of major rivals
 The country or national environments
in which company competes
 The wider socioeconomic or macro environment that
may affect the company and its industry
• Social • Legal • Technological
• Government • International
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External Analysis:
Opportunities and Threats
Analyzing the dynamics of the industry in which
an organization competes to help identify:
Opportunities Threats
Conditions in the Conditions in the
environment that a environment that
company can take endanger the
advantage of to integrity and
become more profitability of the
profitable company’s business
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Industry Analysis:
Defining an Industry
 Industry
• A group of companies offering products or services that are
close substitutes for each other and that satisfy the same
basic customer needs
• Industry boundaries may change as customer needs evolve
and technology changes
 Sector
• A group of closely related industries
 Market Segments
• Distinct groups of customers within an industry
• Can be differentiated from each other with distinct attributes
and specific demands
Industry analysis begins by focusing on
the overall industry –
Before considering market segment or sector-level issues
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The Computer Sector:
Industries and Market Segments
Figure 2.1
Computer
Computer Hardware Computer Software
Component
Industries Industries
Industries
Supply Provides
Disk Drive Inputs Mainframe compliments
Industry Industry
Personal
Semiconductor Notebook PC
Computer
Industry Market Segment
Industry
Handheld Desktop PC Market

Modem Segment
Computer
Industry
Industry
Server Market
Segment

Porter’s Five Forces Model
Figure 2.2

Risk of Entry by Potential
Competitors
Potential Competitors are companies that are not
currently competing in an industry but have the capability to
do so if they choose. Barriers to new entrants include:
1. Economies of Scale- as firms expand output unit costs fall via:
 Cost reductions- through mass production
 Discounts on bulk purchases- of raw material and standard parts
 Cost advantages- of spreading fixed and marketing costs over large volume
2. Brand Loyalty
 Achieved by creating well-established customer preferences
 Difficult for new entrants to take market share from established brands
3. Absolutes Cost Advantage- Relative to new entrants
 Accumulated experience- in production and key business processes
 Control of particular inputs required for production
 Lower financial risks- access to cheaper funds
4. Customer switching costs for Buyers- where significant
5. Government Regulation
 May be a barrier to enter certain industries

Rivalry Among Established
Companies
Competitive Rivalry refers to the competitive struggle
between companies in the same industry to gain market share
from each other. Intensity of rivalry is a function of:
1. Industry Competitive Structure
 Number and size distribution of companies
 Consolidated versus fragmented industries
2. Demand Conditions
 Growing demand- tends to moderate competition and reduce rivalry
 Declining demand- encourages rivalry for market shares and revenue
3. Cost conditions
 High fixed costs- profitability leveraged by sales volume
 Slow demand and growth- can result in intense rivalry and lower profits
4. Height of Exit Barriers- prevents companies from leaving industry
 Write-off of investment in assets
 High fixed costs of exit
 Economic dependence on industry  Emotional attachment to industry
 Maintain assets- to participate  Bankruptcy regulations- allowing
effectively in a industry unprofitable assets to remain

Bargaining Power of Buyers
Industry Buyers may be the customer or end-users who
ultimately use the product or intermediaries that distribute or
retail the products. These buyers are most powerful when:
1. Buyers are dominant
 Buyers are large and few in number
 The industry supplying the product is composed of many small companies
2. Buyers purchase in large quantities.
 Buyers have purchasing power as leverage for price reductions
3. The industry is dependent on buyers
 Buyers purchase a large percentage of the company’s total orders
4. Switching costs for buyers are low
 Buyers can play off the supplying companies against each other
5. Buyers can purchase from several supplying companies at once.
6. Buyers can threaten to enter the industry themselves.
 Buyers produce themselves and supply their own product
 Buyers can use threat of entry as a tactic to drive prices down

Bargaining power of Suppliers
Suppliers are organizations that provide inputs such as
material and labor into the industry. These suppliers are most
powerful when:
1. The product supplied is vital to the industry and has few
substitutes
2. The industry is not an important customer to suppliers.
 Suppliers are not significant affected by the industry
3. Switching costs for companies in the industry are
significant
 Companies in the industry cannot play suppliers against each other
4. Suppliers can threaten to enter their customers’ industry
 Suppliers can use their inputs to produce and compete with companies
already in the industry
5. Companies in the industry cannot threaten to enter
suppliers’ industry.
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Substitute Products
Substitute products are the products from different
business or industries that can satisfy similar customer
needs.
1. The existence of close substitutes is a
strong competitive threat
 Substitutes limit the price that companies
can charge for their product
2. Substitutes are weak competitive
force if an industry's products have few
close substitutes
 Other things being equal, companies in the
industry have the opportunity to raise
prices and learn additional profits

Strategic Groups
Within Industries
Strategic Groups are groups of companies that follow
a business model similar to other companies within their
strategic group- but are different from that of the other
companies in other strategic groups.
The basic differences between business models in
different strategic groups can be captured by a relatively
small number of strategic factors.
 Implications of Strategic Groups –
1. The closest competitors are within the same strategic group and
may be viewed by customers as substitutes for each other.
2. Each Strategic Group can have different competitive forces and
may face a different set of opportunities and threats.
 Mobility Barriers – factors within an industry that inhibit the
movement of companies between strategic groups
• Include barriers to enter another group or exit existing group
Strategic Groups in the
Pharmaceutical Industry
Figure 2.3
High
Proprietary Group
• Merck
Prices Charged
• Pfizer
• Eli Lilly
Generic Group
• Forest Labs
• Mylan Labs
Low
• Watson
Low High

Industry Life Cycle Analysis
Industry Life Cycle Model analyzes the affects of
industry evolution on competitive forces over time and
is characterized by five distinct life cycle stages:
1. Embryonic – industry just beginning to develop
 Rivalry based on perfecting products, educating customers, and
opening up distribution channels
2. Growth – first time demand takes-off with new customers
 Low rivalry as focus is on keeping up with high industry growth
3. Shakeout – demand approaches saturation, replacements
 Rivalry intensifies with emergence of excess productive capacity
4. Mature – market totally saturated with low to no growth
 Industry consolidation based on market share, driving down price
5. Decline – industry growth becomes negative
 Rivalry further intensifies based on rate of decline and exit barriers

2 / 14
Stages in the Industry Life Cylcle
Strength and nature of five forces change as industry evolves Figure 2.4

Growth in Demand and Capacity
Figure 2.5
Anticipate how forces will change and formulate appropriate strategy

Limitations of Models
for Industry Analysis
 Life Cycle Issues
• Industry cycles do not always follow the life cycle generalization
• In rapid growth situations embryonic stage is sometimes skipped
• Industry growth revitalized through innovation or social change
• The time span of the stages can vary from industry to industry
 Innovations and Change
• Punctuated Equilibrium occurs when an industry’s long term stable
structure is punctuated with periods of rapid change by innovation
• Hypercompetitive industries are characterized by permanent and ongoing
innovation and competitive change
 Company Differences
• There can be significant variances in the profit rates of individual companies
within an industry
• In addiction to the industry attractiveness, company resources and
capabilities are also important determinants of its profitability
Models Provide useful ways of thinking about competition
within an industry – but be aware of their limitations
Punctuated Equilibrium
and Competitive Structure
Figure 2.6

The Role of the
Macroenvironment
Demographic Forces
Figure 2.7
Political and
Legal Forces Global Forces
Changes in the forces in

the macro-environment
can directly impact:
• The five forces
• Relative strengths
• Industry
attractiveness
Macroeconomic Technological
Forces Forces
Social Forces

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Chapter One

To increase shareholder value, managers must

Its relative success in its

Data Source: Value Line Investment Survey

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Ford Motor Company describes itself as a

Source: D. F. Abell, Defining the Business: The Starting Point of

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The vision of Ford is “to become the world’s

Nokia is the world’s largest manufacturer of

In high-performance organizations, values

 “Management is obligated to manage Nucor in such

When taken together, the various strategies

Source: Adapted from H. Mintzberg and

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To bring out all the Reveals problems with

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Handheld Desktop PC Market

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Changes in the forces in

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