What Is Strategy?
• Distinguishing strategy from tactics:
– Strategy is the overall plan for deploying resources to
establish a favorable position.
– Tactic is a scheme for a specific maneuver.
• Characteristics of strategic decisions:
– Important.
– Involve a significant commitment of resources.
– Not easily reversible.
Common Elements in Successful Strategy
Successful
Strategy
EFFECTIVE IMPLEMENTATION
Long-term,
simple and
agreed
objectives
Profound
understanding of
the competitive
environment
Objective
appraisal of
resources
Sources of Superior Profitability
INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT
ABOVE THE
COMPETITIVE
LEVEL
Which industries
should we be in?
CORPORATE
STRATEGY
How do we make
money?
COMPETITIVE
ADVANTAGE
How should we
compete?
BUSINESS
STRATEGY
Resources As the Basis for Superior
Profitability
Barriers to Entry
Industry
Attractiveness
Rate of Profit
in Excess of the
Competitive Level
Monopoly
Patents
Brands
Retaliatory
capability
Market share
Vertical Power
Firm size
Financial resources
Cost
Advantage
Process technology
Plant size
Low-cost inputs
Differentiation
Advantage
Brands
Product technology
Marketing
capabilities
Competitive
Advantage
The Value Chain:
The Mckinsey Business System
TECHNOLOGY
PRODUCT DESIGN
MANUFACTURING
MARKETING
DISTRIBUTION
SERVICE
The Porter Value Chain
SUPPORT
ACTIVITIES
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
MARKETING
LOGISTICS
& SALES
PRIMARY ACTIVITIES
SERVICE
The Rent-earning Potential
of Resources and Capabilities
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED
THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY
Scarcity
Relevance
Durability
SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE
Mobility
Replicability
Property rights
APPROPRIABILITY
Relative bargaining
power
Embeddedness of
resources
The Framework for Analyzing
Resources and Capabilities
4. Select a strategy
3. Appraise the rent-earning
potential of resources/
capabilities
2. Identify capabilities
1. Identify the firm’s resources.
Appraise strengths and
weaknesses
STRATEGY
POTENTIAL FOR
SUSTAINABLE
COMPETITIVE
ADVANTAGE
CAPABILITIES
RESOURCES
5. Identify resource gaps that need
to be filled.
SWOT Analysis
• Acronym derived from Strengths, Weaknesses,
Opportunities, and Threats.
– Used for analyzing industry environments and
firms’ internal strengths and weaknesses.
• Performed in a 2-step process:
– Managers thoroughly evaluate their firm’s internal
strengths and weaknesses and its environmental
(external) opportunities and threats.
– Managers use the evaluation developed in the first
step to place the firm in one of the quadrants of the
SWOT matrix shown in Exhibit 5.
Exhibit 5: SWOT Analysis
Numerous Environmental
Opportunities
Critical
Internal
Weaknesses
Overcome
Weakness
Restructure
Grow
Diversify
Major Environmental
Threats
Substantial
Internal
Strengths
SWOT Analysis (Cont.)
• Advantages of SWOT analysis
– Easy to use.
– Can be helpful framework for getting managers to
think constructively about their firms’ external
environments and internal strengths and
weaknesses.
• Drawbacks of SWOT analysis
– Subjective.
– Biased by managers’ perceptions of their firms’
strengths and weaknesses
SWOT Analysis (Cont.)
• For example, managers of strong firms will likely
view environmental phenomena as opportunities,
while their counterparts in weak companies will
likely view them as threats.
– The use of SWOT analysis is likely to yield few
clear-cut recommendations.
The Emergence of Competitive
Advantage
How does competitive
advantage emerge?
External sources of
change e.g.:
•Changing customer demand
•Changing prices
•Technological change
Resource heterogeneity
among firms means
differential impact
Some firms faster
and more effective
in exploiting change
Internal sources
of change
Some firms
have greater creative
and innovative
capability
Sustaining Competitive Advantage
Against Imitation
REQUIREMENTS FOR IMITATION
Identification
Incentives for imitation
ISOLATING MECHANISMS
- Obscure superior performance
- Deterrence--signal aggressive
intentions to imitators
- Pre-emption--exploit all available
investment opportunities
Diagnosis
- Rely upon multiple sources of
competitive advantage to create
“causal ambiguity”
Resource acquisition
- Base competitive advantage upon
resources and capabilities that are
immobile and difficult to replicate
Sources of Competitive Advantage
COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE