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Strategy Chapters 1-4

Chapter 1:
Strategic management: the integrative management field that combines analysis,
formulation, and implementation in the quest for competitive advantage
Strategy: set of goal-directed actions a firm takes to gain and sustain superior
performance relative to competitors
o All about creating superior value
Good strategy: Enables a firm to achieve superior performance, consists of 3 elements
o A diagnosis of the competitive challenge
o A guiding policy to address the competitive challenge
o Set of coherent actions to implement a firm’s guiding policy
o A good strategy defines the competitive challenges facing an organization
through a critical & honest assessment of the status quo, provides an
overarching approach on how to deal with the competitive challenges identified,
& requires effective implementation through coherent actions
Competitive advantage: Superior performance relative to other competitors in the same
industry or the industry average
o Always relative, not absolute
o If able to outperform over a prolonged period  sustainable competitive
o To gain this, firms need to provide goods/services customers value more highly
than those of its competitors or at a lower price than the competition
Competitive parity: Performance of 2 or more firms at the same level
Strategic positioning: Creating superior value while containing cost, or offering similar
value at a lower cost
o Allows firms to provide value to customers while controlling costs
o Has many trade-offs
o Different strategies: cost leadership vs differentiation
Vision: Succinctly identifies the primary long-term objective for the organization… spells
out what they want to accomplish
o Product oriented vision statements: Defines a business in terms of a good or
service provided… less flexibility
o Customer-oriented vision statement: Defines a business in terms of providing
solutions to customer needs… companies can more easily adapt to changing
Strategic intent: Stretch goal that pervades the organization with a sense of winning,
which aims to achieve by building the necessary resources & capabilities through
continuous learning
Mission: Describes what an organization actually does. Defines how the vision is
Core values statement: Provide the organization’s employees with a moral compass
AFI Strategy Framework: Analyze, Formula, & Implement
o Framework explains & predicts differences in firm performance, helps managers
formulate & implement & strategy that can result in superior performance
Chapter 2:
Strategic leadership: Executives’ use of power and influence to direct the activities of
others when pursuing an organization’s goals
o Power: Strategic leader’s ability to influence the behavior of other members to
do things they wouldn’t do otherwise
o Draw on both formal & informal power
Upper-echelons theory: A conceptual framework that views organizational outcomes –
strategic choices & performance levels as reflections of the values of the members of
the top management team
o Favors the idea that effective strategic leadership is the result of both innate
abilities & learning
o Determine a firm’s ability to gain & sustain competitive advantage through the
strategies they pursue
Level-5 Leadership pyramid: states effective strategic leaders go through a natural
progression of 5 levels where each level builds on the previous
Strategy process: Includes strategy formulation & strategy implementation
o Formulation: Where & how to compete
o Implementation: Strategy execution. How does the work get done?
o Corporate strategy: Concerns questions relating to where to compete as to
industry, markets, & geography
o Business strategy: How to compete?  cost leadership, differentiation, or value
Occurs within strategic business units (SBUs): Standalone divisions of a
larger conglomerate, each with their own profit & loss responsibility
o Functional strategy: How to implement a chosen business strategy
Top-down strategic planning: rational process through which executives attempt to
program future success
o Decision-making responsibilities= CEO/upper levels
o Analysis  formulation  implementation
o Assumption= we can predict the future from the past; works best in a nonchanging environment
Scenario planning: Strategy planning activity in which top management envisions
different what-if scenarios to anticipate plausible futures in order to derive strategic
o Starts with a top-down approach but upper levels think of different scenarios to
anticipate plausible futures
o Addresses both optimistic & pessimistic futures
o More flexible, dynamic, & iterative
o In the formulation stage, management develops different strategic plans to
address possible future scenarios
o In the implementation stage managers execute the dominant strategic plan
 The strategic option that top managers decide most closely matches the
current reality & which is then executed
o Circular nature. Interdependence among analysis, formulation, &
Black swan events: Incidents that describe highly improbably but high-impact events
o E. 9/11 terrorist attacks, Brexit, etc.
Illusion of control: Tendency by people to overestimate their ability to control events
Realized strategy is a combination of top-down intended strategy & bottom-up
emergent strategy
o Holistic model of the strategy process that begins with a top-down approach
o Executives design an intended strategy, but then have a realized strategy 
combination of top-down & bottom-up
o Emergent strategy: Describes an unplanned strategic initiative bubbling up from
deep within the organization
o Strategic initiative: Any activity a firm pursues to explore & develop new
products, processes, markets. Can bubble up from deep within a firm through
autonomous actions, serendipity, & resource-allocation process
 Autonomous actions: Strategic initiatives undertaken by lower-level
employees on their own volition & often in response to unexpected
 Serendipity: Random events, pleasant surprises, & accidental
happenstances that can have a profound impact on a firm’s strategic
 Resource-allocation process: The way a firm allocates its resources based
on predetermined policies, which can be critical in shaping its realized
Chapter 3:
PESTEL model: Framework that categorizes & analyzes an important set of external
factors (political, economic, sociocultural, technological, ecological, & legal) that
might impinge upon a firm. These factors can create both opportunities & threats
for the firm
o Political factors: result from the processes & actions of government bodies
that can influence the decisions & behavior of firms… ways firm can
control/influence: nonmarket strategies such as lobbying, PR, &
o Economic factors: Largely macroeconomic, affecting economy as a whole
 Growth rates, levels of employment, interest rates, price stability
(inflation & deflation), currency exchange rates
o Sociocultural factors: capture a society’s cultures, norms, & values
o Technological factors: capture the application of knowledge to create new
processes & products
o Ecological factors: Involve broad environmental issues such as the natural
environment, global warming, & sustainable economic growth
o Legal factors: Include the official outcomes of political processes as
manifested in laws, mandates, regulations, & court decisions
Industry effects: Firm performance attributed to the structure of the industry in
which the firm competes
Firm effects: Attribute firm performance to the actions strategic leaders take…
strategic leaders’ actions tend to be more important in determining firm
performance than the forces exerted on the firm by its external environment
Industry analysis: A method to identify an industry’s profit potential and derive
implications for a firm’s strategic position within an industry
Strategic position: Relates to a firm’s ability to create value for customers while
containing the cost to do so… firms that create largest gap (V-C) are those that
sustain competitive advantage
Five Forces Model: Framework that identifies 5 forces that determine the profit
potential of an industry & shape a firm’s competitive strategy
o Views competition broadly to encompass other forces in an industry: buyers,
suppliers, potential new entry of other firms, & threat of subs
o Profit potential of an industry is a function of 5 forces that shape
competition: threat of entry, power of suppliers, power of buyers, threat of
subs, & rivalry among existing firms
o Economic Value= V-C (want to widen this gap)
o The stronger the 5 forces, the lower the industry’s profit potential, making
the industry less attractive for competitors  reverse is true
o The threat of entry: Describes the risk that potential competitors will enter
the industry
 Can reduce industry profitability because incumbent firms may lower
prices to make entry less attractive to competitors & it may also
cause incumbents to spend more to satisfy existing customers
 Entry barriers: Obstacles that determine how easily a firm can enter
an industry & often significantly predict industry profit potential…
advantageous for incumbent firms
Economies of scale: cost advantages that accrue to firms with
larger output because they can spread fixed costs over more
units or employ technology more efficiently
 Network effects: Describe the positive effect that one user of
a product/service has on the value of that product/service for
other users. Value of product/service increases w/ the number
of users
o Threat of entry is reduced when effects= high
 Customer switching cost: Incurred by moving from one
supplier to another
 Capital requirements: “price of the entry ticket” into a new
 Government policy
 Credible threat of retaliation
o The power of suppliers: Captures pressures that industry suppliers can exert
on an industry’s profit potential
 Can reduce firm’s profitability: powerful suppliers can demand higher
prices or reduce quality & they can also capture some of the EV
 When is power of suppliers high: supplier’s industry is more
concentrated than the industry it sells to, suppliers don’t depend on
you heavily for revenue, incumbents face high switching costs,
products are differentiated, & there are no substitutes
o The power of buyers: Concerns the pressure an industry’s customers can put
on the producers’ margins in the industry by demanding a lower price or
higher quality product
 When is power of buyers high: few buyers & each purchase large
quantities, products are undifferentiated, low/no switching costs
o Threat of subs: Idea that products/services available from outside the given
industry will come close to meeting the needs of current customers
 Threat is high when: Sub offers an attractive price-performance
 Buyer switching cost to sub is low
Rivalry among existing competitors: Intensity with which companies within the same
industry jockey for market share & profitability
o Factors that affect:
o Competitive industry structure: elements & features common to all
industries: number & size of competitors, firm’s degree of pricing power,
type of product, height of entry barriers
 Perfect competition, monopolistic competition, oligopoly, &
Industry growth
Strategic commitments: firm actions that are costly, long-term
oriented, & difficult to reverse
 Exit barriers: The obstacles that determine how easily a firm can leave
the industry
 Can include: Fixed costs, contractual obligations, emotional
attachments to certain geo locations, etc.
 Industry with low exit barriers is more attractive because it
allows low performers to exit more easily
Complement: Product, service, or competency that adds value to the original
product offering when the 2 are used in tandem
o Increase demand for the primary product
o Complementor: A company that provides a good/service that leads
customers to value your firm’s offering more when the 2 are combined
o Co-opetition: Cooperation by competitors to achieve a strategic objective
The more profitable an industry, the more attractive it becomes to competitors
Key questions you must be able to answer:
o When to enter
o How to enter: leverage existing assets, reconfigure value chains, establish a
niche in an existing industry
o What type of entry
o Where to enter
Industry convergence: Process whereby formerly unrelated industries begin to
satisfy the same customer need… brought on by tech advances
Competitive rivalry is strongest between firms that are within the same strategic
Chapter 4:
Core competencies: Unique strengths within a firm. Allow firm to differentiate its
products from rivals, creating higher value for consumers or providing goods at lower
o E.g.: Amazon (superior customer service), Apple (superior marketing & retail
experience), Coke (superior marketing & distribution
Resources: Any assets such as cash, buildings, machinery that a firm can draw on when
crafting & executing a strategy… tangible or intangible
Capabilities: Organizational & managerial skills necessary to orchestrate a diverse set of
resources & deploy them strategically… intangible (structure, routines, & culture)
Resource based view: Model that sees certain types of resources as key to superior firm
performance… identifies core competencies
o Have both tangible & intangible
o 2 critical assumptions: resource heterogeneity & resource immobility
 Resource heterogeneity: Assumption in RBV that a firm is a bundle of
resources & capabilities that differ across firms
 Resource immobility: Assumption in RBV that a firm has resources that
tend to be “sticky” & don’t move easily from firm to firm (harder to
replicate resource differences)
Competitive advantage is more likely to spring from intangible rather than tangible
resources… anyone can buy the computers/buildings
VRIO Framework: Theoretical framework that explains & predicts firm-level competitive
o Valuable: A resource is valuable if it helps a firm exploit an external opportunity
or offset an external threat… allows firm to increase economic value creation (VC)
o Rare: Resource is rare if 1 or a few firms possess it.
o Imitate: A resource is costly to imitate if firms that don’t possess the resource
are unable to develop or buy the resource at a reasonable price
o Organized to capture value