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 productsfor an industrys typical customer. However, these low-costproducts must be offered with competitive levels of differentiation.Above-average returns are earned when firms continuouslyemphasize efficiency such that their costs are lowerthan those of their competitors, while providing customerswith products that have acceptable levels of differentiatedfeatures. Competitive risks associated with the cost leadership strategyinclude (1) a loss of competitive advantage to newertechnologies, (2) a failure to detect changes in customersneeds, and (3) the ability of competitors to imitate the costleaders competitive advantage through their own distinctstrategic actions. Through the differentiation strategy, firms provide customerswith products that have different (and valued) features.Differentiated products must be sold at a cost that customersbelieve is competitive relative to the products featuresas compared to the cost/feature combinations available fromcompetitors goods. Because of their distinctiveness, differentiatedgoods or services are sold at a premium price.Products can be differentiated on any dimension that somecustomer group values. Firms using this strategy seek todifferentiate their products from competitors goods orservices on as many dimensions as possible. The less similarityto competitors products, the more buffered a firm is fromcompetition with its rivals. Risks associated with the differentiation strategy include (1) acustomer groups decision that the differences between thedifferentiated product and the cost leaders goods or servicesare no longer worth a premium price, (2) the inability ofa differentiated product to create the type of value for whichcustomers are willing to pay a premium price, (3) the abilityof competitors to provide customers with products that havefeatures similar to those of the differentiated product, butat a lower cost, and (4) the threat of counterfeiting, wherebyfirms produce a cheap imitation of a differentiated good orservice. Through the cost leadership and the differentiated focusstrategies, firms serve the needs of a narrow competitivesegment (e.g., a buyer group, product segment, or geographicarea). This strategy is successful when firms have thecore competencies required to provide value to a specializedmarket segment that exceeds the value available fromfirms serving customers on an industry-wide basis. The competitive risks of focus strategies include (1) a competitorsability to use its core competencies to outfocusthe focuser by serving an even more narrowly defined marketsegment, (2) decisions by industry-wide competitors tofocus on a customer groups specialized needs, and (3) areduction in differences of the needs between customers ina narrow market segment and the industry-wide market. Firms using the integrated cost leadership/differentiationstrategy strive to provide customers with relatively lowcostproducts that also have valued differentiated features.Flexibility is required for firms to learn how to use primaryvalue chain activities and support functions in ways thatallow them to produce differentiated products at relativelylow costs. The primary risk of this strategy is that a firmmight produce products that do not offer sufficient value interms of either low cost or differentiation. In such cases, thecompany becomes stuck in the middle. Firms stuck in themiddle compete at a disadvantage and are unable to earnmore 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 actionsand competitive responses occurring between competitorsas they compete against each other for an advantageousmarket position. The outcomes of competitive rivalry influencethe firms ability to sustain its competitive advantagesas well as the level (average, below average, or above average)of its financial returns. The set of competitive actions and responses that an individualfirm takes while engaged in competitive rivalry is calledcompetitive behavior. Competitive dynamics is the set ofactions and responses taken by all firms that are competitorswithin a particular market. Firms study competitive rivalry in order to predict the competitiveactions and responses that each of their competitors likelywill take. Competitive actions are either strategic or tactical innature. The firm takes competitive actions to defend or buildits competitive advantages or to improve its market position.Competitive responses are taken to counter the effectsof a competitors competitive action. A strategic action or astrategic response requires a significant commitment of organizationalresources, is difficult to successfully implement, andis difficult to reverse. In contrast, a tactical action or a tacticalresponse requires fewer organizational resources and is easierto implement and reverse. For example, for an airline company,entering major new markets is an example of a strategic actionor a strategic response; changing its prices in a particular marketis an example of a tactical action or a tactical response. A competitor analysis is the first step the firm takes to beable to predict its competitors actions and responses. InChapter 2, we discussed what firms do to understand competitors.This discussion was extended in this chapter todescribe what the firm does to predict competitors marketbasedactions. Thus, understanding precedes prediction.Market commonality (the number of markets with whichcompetitors are jointly involved and their importance toeach) and resource similarity (how comparable competitorsresources are in terms of type and amount) are studied tocomplete a competitor analysis. In general, the greater themarket commonality and resource similarity, the more firmsacknowledge that they are direct competitors. Market commonality and resource similarity shape the firmsawareness (the degree to which it and its competitors understandtheir mutual interdependence), motivation (the firmsincentive to attack or respond), and ability (the quality ofthe resources available to the firm to attack and respond).Having knowledge of these characteristics of a competitorincreases the quality of the firms predictions about thatcompetitors actions and responses. In addition to market commonality and resource similarityand awareness, motivation, and ability, three more specificfactors affect the likelihood a competitor will take competitiveactions. The first of these concerns first-mover incentives.First movers, those taking an initial competitive action,often gain loyal customers and earn above-average returnsuntil competitors can successfully respond to their action.Not all firms can be first movers in that they may lack theawareness, motivation, or ability required to engage in thistype of competitive behavior. Moreover, some firms preferto be a second mover (the firm responding to the firstmovers action). One reason for this is that second movers,especially those acting quickly, can successfully competeagainst the first mover. By evaluating the first movers product,customers reactions to it, and the responses of othercompetitors to the first mover, the second mover can avoidthe early entrants mistakes and find ways to improve upon the value created for customers by the first movers good orservice. Late movers (those that respond a long time afterthe original action was taken) commonly are lower performersand are much less competitive. Organizational size, the second factor, tends to reduce thevariety of competitive actions that large firms launch whileit increases the variety of actions undertaken by smallercompetitors. Ideally, the firm would prefer to initiate a largenumber of diverse actions when engaged in competitiverivalry. The third factor, quality, is a base denominator tocompeting successfully in the global economy. It is a necessaryprerequisite to achieving competitive parity. It is a necessarybut insufficient condition for gaining an advantage. The type of action (strategic or tactical) the firm took, thecompetitors reputation for the nature of its competitorbehavior, and that competitors dependence on the marketin which the action was taken are studied to predict acompetitors response to the firms action. In general, thenumber of tactical responses taken exceeds the number ofstrategic responses. Competitors respond more frequentlyto the actions taken by the firm with a reputation for predictableand understandable competitive behavior, especially ifthat firm is a market leader. In general, the firm can predictthat when its competitor is highly dependent for its revenueand profitability in the market in which the firm took a competitiveaction, that competitor is likely to launch a strongresponse. However, firms that are more diversified acrossmarkets are less likely to respond to a particular action thataffects only one of the markets in which they compete. In slow-cycle markets, where competitive advantages canbe maintained for at least a period of time, the competitivedynamics often include firms taking actions and responsesintended to protect, maintain, and extend their proprietaryadvantages. In fast-cycle markets, competition is substantial asfirms concentrate on developing a series of temporary competitiveadvantages. This emphasis is necessary because firmsadvantages in fast-cycle markets arent proprietary and, assuch, are subject to rapid and relatively inexpensive imitation.Standard-cycle markets have a level of competition betweenthat in slow-cycle and fast-cycle markets; firms are moderatelyshielded from competition in these markets as they use capabilitiesthat produce competitive advantages that are moderately sustainable. Competitors in standard-cycle 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 bepreferable to seeking a more diversified strategy, unless a corporationcan develop economies of scope or financialeconomies between businesses, or unless it can obtain marketpower through additional levels of diversification. Economies ofscope and market power are the main sources of value creationwhen the firm diversifies by using a corporate-level strategywith moderate to high levels of diversification. The corporate-level strategy of related diversification helps thefirm to create value by sharing activities or transferring competenciesbetween different businesses in the companys portfolioof businesses. Sharing activities usually involves sharing tangible resourcesbetween businesses. Transferring core competencies involvestransferring core competencies developed in one business toanother one. It also may involve transferring competenciesbetween the corporate headquarters office and a business unit. Sharing activities is usually associated with the related constraineddiversification corporate-level strategy. Activity sharingis costly to implement and coordinate, may create unequal benefitsfor the divisions involved in the sharing, and may lead tofewer managerial risk-taking behaviors. Transferring core competencies is often associated with relatedlinked (or mixed related and unrelated) diversification, althoughfirms pursuing both sharing activities and transferring corecompetencies can also use the related linked strategy. Efficiently allocating resources or restructuring a target firmsassets and placing them under rigorous financial controls aretwo ways to accomplish successful unrelated diversification.Firms using the unrelated diversification strategy focus on creatingfinancial economies to generate value. Diversification is sometimes pursued for value-neutral reasons.Incentives from tax and antitrust government policies, performancedisappointments, or uncertainties about future cash floware examples of value-neutral reasons that firms may choose tobecome more diversified. Managerial motives to diversify (including to increase compensation)can lead to overdiversification and a subsequent reductionin a firms ability to create value. Evidence suggests, however,that certainly the majority of top-level executives seek tobe good stewards of the firms assets and to avoid diversifyingthe firm in ways and amounts that destroy value. Managers need to pay attention to their firms internal environmentand its external environment when making decisions aboutthe optimum level of diversification for their company.Of course,internal resources are important determinants of the directionthat diversification should take. However, conditions in the firmsexternal environment may facilitate additional levels of diversification,as might unexpected threats from competitors.