Strategic Management: Key Concepts and Frameworks

Posted on Jan 10, 2025 in Business Administration and Innovation Management

Strategic Leadership and Management

Strategic Lead: Creating competitive advantage through effective management of the strategy-making process.

Strategic Managers: Bear responsibility for a company’s overall performance or for one of its major self-contained subunits or divisions.

Functional Managers: Responsible for supervising a particular function, task, activity, or operation.

Multidivision Company: Competes in several different businesses and has a separate self-contained division to manage each. (e.g., Walt Disney)

Corporate Level Manager: CEO/oversees the development of strategies for the entire organization/ensures that strategies are consistent with superior profitability and growth/links strategy development and shareholders.

Business Manager: Head of business units (division that provides a product for a particular market)/are concerned with strategies specific to a particular business.

Functional Manager: Responsible for a specific business function/provides information that helps formulate realistic and achievable strategies/develops functional strategies to fulfill the strategic objectives set by the business and corporate level.

SWOT Strategies

Functional Strategy: Directed at improving the effectiveness of operations within a company.

Business Strategy: Encompasses the business’s overall competitive theme/how it positions itself in the marketplace to gain a competitive advantage/different position strategies that can be used in different industry settings.

Global Strategy: Addresses how to expand operations outside the home country; since competitive advantage is at a global level.

Corporate Strategy: Which business a company should be in to maximize profit and growth/how to gain a competitive edge.

Shareholder Value: Returns that shareholders earn from purchasing shares in a company (sources: dividend payments/capital appreciation).

Risk Capital: Equity capital invested with no guarantee that stockholders will recoup their cash or earn a decent return.

Profit: Return a company makes on the capital invested in the enterprise/ROIC (return on invested capital): net profit/capital invested/result of how efficiently and effectively the capital is used to satisfy customer needs.

Profit Growth: Increase in net profit over time. (selling products rapidly, gaining market share, selling more, expanding or diversifying)

Business Model: Conception of how strategies should work together as a whole to enable the company to achieve competitive advantage.

Strategic Implementation: Taking action at the functional, business, and corporate levels to execute a strategic plan/designing the best organizational structure, culture, and control systems to put a chosen strategy into action.

Feedback Loop: Provides information to the corporate level on the strategic goals that are being achieved/degree of competitive advantage being created and sustained.

Scenario Planning: Formulating plans that are based on “what if” scenarios about the future. (encourages thinking outside the box and being more flexible/anticipate probable scenarios)

Ivory Tower Planning: Recognizes that successful strategic planning encompasses managers at all levels of the corporation.

Criticisms of Formal Planning Models

Unpredictability of the real world. (excessive importance is attached to the role of top management, while ignoring the role of lower-level managers./many successful strategies are a result of serendipity rather than rational strategizing.

SWOT: Comparison of strengths, weaknesses, opportunities, and threats. PURPOSE: Identify the strategies to: exploit external opportunities/build on and protect company strengths/eradicate counter threats and weaknesses. GOALS: Create or fine-tune a company-specific business model/to align, fit, or match a company’s resources and capabilities to the demands of its environment.


External Analysis

OPPORTUNITIES: Elements in a company’s environment that allow it to formulate and implement strategies to become more profitable. THREATS: Elements in the external environment that could endanger a firm’s integrity and profitability.

Porter’s Five Forces

1. Risk of Entry by Potential Competitors

Potential Competitors: Companies that are not currently competing in the industry but have the potential to do so.

Economies of Scale: Reduction in unit costs attributed to a larger output.

Brand Loyalty: Preference of customers for the products of established companies.

Absolute Cost Advantage: Enjoyed by incumbents in an industry and that new entrants cannot expect to match.

Switching Costs: Costs that consumers must bear to switch from the products offered by one established company to the products offered by new entrants.

Government Regulations: Falling entry barriers due to government regulations result in significant new entry, an increase in the intensity of industry competition, and lower industry profit rates.

2. Rivalry Among Established Companies

Rivalry: Competitive struggle between companies within an industry to gain market share from each other./Intense rivalry among established companies constitutes a strong threat to profitability.

Factors that impact the intensity of rivalry:

  • Industry Competitive Structure: Number and size distribution of companies in it.
  • Industry Demand: Increasing demand moderates competition by providing greater scope for companies to compete for customers.
  • Cost Conditions: When fixed costs are high, profitability is highly leveraged to sales volume.
  • Exit Barriers: Economic, strategic, and emotional factors that prevent companies from leaving an industry. (High exit barriers: companies become locked into an unprofitable industry where overall demand is static or declining)

3. Bargaining Power of Buyers

Buyers’ power to bargain down prices or raise costs by demanding better quality and service. (power includes: buyers can choose sellers and purchase in large quantities, the supplier industry is dependent on buyers, buyers can put companies against each other, buyers can threaten to enter the industry and produce the product)

4. Bargaining Power of Suppliers

Suppliers’ power to raise input prices or industry costs through various means. (power includes: product has few substitutes and is vital to the buyer, the supplier is not dependent on one particular industry, companies would incur high switching costs, suppliers can threaten to enter a customer’s industry, companies cannot enter their supplier’s industry to lower prices.)

5 & 6. Substitute Products and Complementors

Substitutes: Those of different businesses that satisfy similar customer needs./Limit the price that companies in an industry can charge for their product.

Complementors: Companies that sell products that add value to other products/strong complementors provide an increased opportunity for creating value./Weak complementors slow industry growth and limit profitability.

Industry Life Cycle

Embryonic: Development stage/growth is slow due to: buyer’s unfamiliarity with the product and poor distribution channels./Barriers to entry are based on access to technological expertise.

Growth: First-time demand expands rapidly due to new customers in the market./Prices fall since: scale economies have been achieved, distribution channels have developed./The threat from potential competitors is highest at this stage: rivalry is low, companies are able to expand their revenues without taking market share away from other companies.

Shakeout: Demand approaches saturation levels (there are fewer potential first-time buyers)/rivalry between companies intensifies/price wars result in the bankruptcy of inefficient companies and deter new entry.

Mature: The market is totally saturated, demand is limited to replacement demand, and growth is low or zero/barriers to entry increase and the threat of entry from potential competitors decreases./Industries consolidate and become oligopolies./Companies try to avoid price wars.

Declining: Growth becomes negative due to: technological substitution, social changes, demographics, international competition/rivalry among companies increases/falling demand results in excess capacity.

Mobility Barriers: Factors that impede the ability of firms to enter or exit an industry, or to move from one segment of an industry to another. Managers must: determine if it is cost-effective to overcome mobility barriers, realize that companies in other strategic groups become their competitors if they overcome mobility barriers.


Internal Analysis

VRIO: A framework managers use to determine the quality of a company’s resources (value, rarity, inimitability, organization)

Value Chain

Primary Activities: Activities related to a product’s design, creation, delivery, marketing, support, and after-sales service.

  • Research and Development: Design of products and production processes/superior product design increases a product’s functionality and adds value.
  • Production: Creation process of a good or service/helps lower cost structure and leads to differentiation.
  • Marketing and Sales: Brand positioning and advertising increase customers’ perceived value of a product/help create value by discovering customers’ needs.
  • Customer Service: Provides after-sales service and support/creates superior utility by solving customer problems and supporting customers after a purchase.

Support Activities: Provide inputs that allow the primary activities to take place.

  • Materials Management: Controls the transmission of physical materials through the value chain/lowers cost and creates more profit.
  • Human Resources: Ensures value creation by making sure that the company has the right combination of skilled people.
  • Information Systems: Electronic systems to improve the efficiency and effectiveness of a company’s value creation activities.
  • Company Infrastructure: Company-wide context within all the other value creation activities occur (organizational structure, control systems, incentive systems, company culture)

Building Blocks of Competitive Advantage

  • Efficiency: Measured by the quantity of inputs required to produce a given output. (employee productivity: output produced per employee).
  • Quality:
    • Superior Quality: Customer’s perception that a product’s attributes provide them with higher utility than rivals.
    • Quality as Excellence: Product features, functions, and level of service associated with its delivery.
    • Quality as Reliability: When a product consistently performs the function it was designed for and seldom breaks down.
  • Innovation:
    • Product Innovation: Development of products that are new to the world or have superior attributes to existing products.
    • Process Innovation: Development of a new process for producing products and delivering them to customers.
  • Customer Responsiveness:
    • Superior: Achieved by identifying and satisfying customer needs better than rivals.
    • Customer Response Time: Time that it takes for a good or service to be delivered or to be performed.
    • Other Sources: Superior design, service, after-sales service, and support.

Distinctive Competencies: Firm-specific strengths that allow a company to differentiate its products and/or achieve a lower cost to achieve a competitive advantage. Resources: assets of a company. Resources include:

  • Basic Factors of Production: Labor, land, management, buildings, and equipment.
  • Advanced Factors of Production:
    • Process Knowledge: Knowledge of the internal rules, routines, and procedures of an organization that managers can leverage to achieve organizational objectives.
    • Organizational Architecture: Combination of the organizational structure of a company, its control systems, incentive systems, organizational culture, and its human capital strategy.
    • Intellectual Property: Knowledge, research, and information that is owned by an individual or organization.

Value Creation and Profitability

Profit of a company depends on: value customers place on its products, price it charges, cost of creating. Pricing options a company can pursue: raising prices to reflect the value, reducing prices to induce more customers. Point-of-sale price is less than the value placed on the product by many customers due to:

  • Consumer Surplus: Customers capture some of the value placed on the good or service.
  • Customer Reservation Price: Each individual’s unique assessment of the value of a product.
  • Competition from rivals.

Barriers to Imitation

Make it difficult for a competitor to copy a company’s distinctive competencies. Ability for rivals to copy:

  • Intellectual Property: Depends on the laws of the nation; rivals can reverse engineer products.
  • Process Knowledge: Difficult because it’s partly tacit, hidden from view, and socially complex; difficult to implement within a different organization.
  • Organizational Architecture: Wholesale organizational change is risky and difficult due to existing internal inertia.

Resources and Sustained Competitive Advantage

Long-term sustained competitive advantage results from advanced factors of production and:

  • Rare Resources: Process knowledge and organizational architecture are rare because they are path-dependent through company history. Intellectual property is owned by the company.
  • Barriers to Imitation.

Functional Level Strategy

Actions that improve the efficiency and effectiveness of one or more value creation activities. Used to build valuable resources to attain: efficiency, quality, innovation, customer responsiveness.

Efficiency and Economies of Scale

Efficiency: Measured by the quantity of inputs that it takes to produce a given output. Economies of Scale: Reductions in unit costs attributed to a larger output; ability to spread fixed costs over a large production volume and produce in large volumes. Diseconomies of Scale: Unit cost increases associated with a large scale of output; managers should avoid being complacent about efficiency-based cost advantages derived from experience effects as: neither learning effects nor economies of scale are sustained forever, cost advantages gained from experience effects can be made obsolete by new technologies.

Learning Effects

Cost savings that come from learning by doing; more significant when a technologically complex task is repeated, as there is more to learn; diminish in importance after a period of time; triggered by changes in a company’s production system.

Experience Curve: Systematic lowering of the cost structure and consequent unit cost reductions; occur over the life of a product; a product’s per-unit production costs decline each time its accumulated output doubles; Accumulated Output: Total output of a product since its introduction; is important in industries that mass-produce a standardized output.

Mass Customization: Use of flexible manufacturing technology to reconcile: low cost, different product customization.

Marketing and Efficiency

Marketing Strategy: Position of a company with regard to pricing, promotion, advertising, product design, and distribution; impacts efficiency and cost structure/Customer Defection: Loss of customers; % of a firm’s customers who defect every year to competitors; lowering customer defection helps achieve a lower cost structure/Materials Management and Efficiency: Materials Management: Activities necessary to get inputs and components (production facility, production process, distribution system to end-user); enormous potential for reducing costs.

Just-in-Time Systems and Efficiency

JIT Inventory: Economizes on inventory holding costs by scheduling components to arrive: just in time to enter the production process, as stock is depleted; cost savings come from increasing inventory turnover and reducing the need for working and fixed capital; drawback of leaving a company without a buffer stock of inventory/Supply Chain Management: Managing the flow of inputs and components from suppliers into the company’s production processes to: minimize inventory holding, maximize inventory turnover/Research and development: boosts efficiency by designing products that are easy to manufacture; develops process innovation with a new way that the production process can operate more efficiently/Human Resources and Efficiency: Productive employees lower the costs of generating revenues and increasing return on sales; HR does this through: hiring strategy, employee training, self-managing teams, pay for performance/Information Systems and Infrastructure and Efficiency: Impact on productivity affects all company activities; cost savings by: moving customer service and ordering online, automating customer and supplier interactions, reducing staff, reducing physical stores; Infrastructure: Organizational structure, culture, style of leadership, and control systems; strategic leadership is important in building commitment to efficiency.

Achieving Superior Reliability

Total Quality Management: Increasing product reliability to perform consistently as designed and rarely break down; five factors of TQM: improved quality means that costs decrease, as a result, productivity improves, better quality leads to higher market share, allowing the company to raise prices, higher prices increase profitability, allowing the company to stay in business, enables the company to create more jobs; steps in quality improvement programs: management should strive to eliminate mistakes, defects, and poor-quality, supervision quality should be improved, employees should not fear reporting problems or suggesting improvements, work standards should stress the quality of work, employees should be trained in new skills to remain informed of workplace changes, everyone in the company should commit to achieving better quality.

Improving Quality as Excellence

To achieve a perception of high quality of attributes the company should: collect marketing information indicating which attributes are most important to customers, design products so that those attributes are embodied in the product, decide significant attributes to promote and how best to position them in the minds of consumers, recognize that competition is not stationary.

Achieving Superior Innovation

Most important source of competitive advantage; innovative products or processes give a company a competitive advantage that allows it to: differentiate its products and charge a premium price, lower its cost structure below that of its rivals. Reasons for the high failure rate of innovation: demand for innovation is essentially uncertain, technology is poorly commercialized, poor positioning strategy; Positioning Strategy: Specific set of options adopted for a product based on price, distribution, promotion, and advertising, and product features; marketing a technology for which there is inadequate demand; slow marketing of products.

Business Level Strategy

Overall competitive theme of a business: way a company positions itself in the marketplace to gain a competitive advantage; different positioning strategies that can be used in different industry settings.

Generic Business Strategies

Gives a company a specific form of competitive position and advantage in relation to its rivals.

  • Broad Low-Cost Strategy: Lowers costs to lower prices and still make a profit. (e.g., Walmart)
  • Broad Differentiation Strategy: Differentiates a company’s product in some way. (e.g., Toyota)
  • Focus Low-Cost Strategy: Targets a niche and tries to be the low-cost player in that niche. (e.g., Costco)
  • Focus Differentiation Strategy: Targets a niche and customizes offerings with features and functions. (e.g., Nordstrom)

Market Segmentation

Decision of a company to group customers, based on important differences in their needs, to gain a competitive advantage.

  • Standardization Strategy: Producing a standardized product for the average customer, ignoring different segments.
  • Segmentation Strategy: Producing different offerings for different segments, serving many segments or the entire market.
  • Focus Strategy: Serving a limited number of segments or just one segment.

Blue Ocean Strategy: Successful companies build their competitive advantage by redefining their product offering through value innovation; wide-open market space where a company can chart its own course: to redefine its market and create a new business-level strategy, a company must: eliminate factors that rivals take for granted, and reduce costs, reduce certain factors below industry standards, and lower costs, raise certain factors above industry standards, and increase value; create factors that rivals do not offer, and increase value.

Efficiency Frontier

(The Differentiation-Low Cost Trade-Off): Shows all the positions a company can adopt with regard to differentiation and low cost; has a convex shape because of diminishing returns; multiple positions on the differentiation-low cost are viable; to get to the efficiency frontier, a company must: pursue the right functional strategies, be properly organized, ensure its business strategy, functional strategies, and organizational arrangements align with each other.

Value Innovation

Occurs when innovations push out the efficiency frontier in an industry, allowing for greater value to be offered through superior differentiation at a lower cost than was thought possible; enables a company to outperform its rivals for a long period of time.

Differentiation Through Functional Strategies and Organization

Customize product offerings and marketing mix to different market segments; design product offerings that have a high perceived quality regarding their: functions, features, performance, reliability; handle and respond to customer queries and problems promptly; focus marketing efforts on: brand building, perceived differentiation from rivals; ensure employees act in a manner consistent with the company image; create the right organizational structure, controls, incentives, and culture; ensure that the control systems, incentive systems, and culture align with the strategic thrust.

Lowering Costs

Enables a company to: gain a competitive advantage in commodity markets, undercut rivals on price, gain market share, maintain or increase profitability.

Differentiation

Distinguishing oneself from rivals by offering something that they find hard to match; product differentiation is achieved through: superior reliability, functions, and features, better design, branding, point-of-sale service, after-sales service, and support. Advantages: allows a company to charge a premium price; helps a company to grow overall demand and capture market share from its rivals.

Market Development and Customer Groups

  • Innovators: First to purchase and experiment with a product based on new technology.
  • Early Adopters: Understand that the technology may have important future applications; a form of testing a product in the early stages; a person who tries a product before most others.
  • Early Majority: Practical and understand the value of new technology; a stage in the diffusion of a new technology that represents the first stable segment of a population to adopt the innovation.
  • Late Majority: Purchase a new technology only when it is obvious that it has great utility and is here to stay; the large group of customers who buy or use new products only after others have tried them first.
  • Laggards: Unappreciative of the uses of new technology; a person who makes slow progress and falls behind others.

Factors That Accelerate Customer Demand

  • Relative Advantage: Degree to which a new product is perceived as better at satisfying customer needs than the product it supersedes. (e.g., introduction of smartphones)
  • Complexity: Products perceived as complex and difficult to use will diffuse more slowly than those that are easy to use.
  • Compatibility: Degree to which a new product is perceived as being consistent with the current needs or existing values of potential adopters.
  • Trialability: How easily potential customers can explore your innovation; degree to which potential customers can experiment with a new product during a hands-on trial basis.
  • Observability: Degree to which the results of using and enjoying a new product can be seen and appreciated by other people.
  • Viral Diffusion: Identify and aggressively court opinion leaders in a market; opinion leaders help develop the technology and recommend it.

Choosing a Strategy in Declining Industries

  • Leader Strategy: When a company develops strategies to become the dominant player in a declining industry.
  • Niche Strategy: When a company focuses on pockets of demand that are declining more slowly than the industry as a whole to maintain profitability.
  • Harvest Strategy: When a company reduces to a minimum the assets it employs in a business to reduce its cost structure and extract maximum profits from its investment.
  • Divestment Strategy: When a company exits an industry by selling off its business assets to another company.

Strategies to Manage Rivalry

  • Price Signaling: Companies increase or decrease product prices to: convey their intentions to other companies, influence the price of an industry’s products.
  • Price Leadership: When one company assumes the responsibility for determining the pricing strategy that maximizes industry profitability; the leading firm usually sets the price in the market (e.g., airline industry).
  • Non-Price Competition (Advertising): Use of product differentiation strategies to deter potential entrants and manage rivalry within an industry; attract customers and increase sales other than a change in the price.
  • Market Penetration: Occurs when a company concentrates on expanding market share in its existing product markets.
  • Product Development: Creation of new or improved products to replace existing products.
  • Market Development: When a company searches for new market segments for its existing products to increase sales.
  • Product Proliferation: Large companies in an industry have a product in each market segment.

Mass Market

One in which a large number of customers enter the market; an industry enters the growth stage when a mass market starts to develop for its products; occurs when: product value increases, due to ongoing technological progress, complementary products are developed, production costs decrease, resulting in low prices and high demand.

Fragmented Industries

Composed of a large number of small- and medium-sized companies; reasons for fragmentation: lack of scale economies, brand loyalty in the industry is primarily local, low entry barriers due to a lack of scale economies and national brand loyalty; a focus strategy works best for a fragmented industry.

Consolidating a Fragmented Industry Through Value Innovation

Value Innovation: Defines value differently than established companies; offers the value at a lowered cost through the creation of scale economies. (e.g., Staples – office supplier business)

  • Chaining: Obtaining the advantages of cost leadership by establishing a network of linked merchandising outlets; interconnected by information technology that functions as one large company, aids in building a national brand.
  • Franchising: A strategy in which a franchisor grants the franchisee the right to use the franchisor’s name, reputation, and business model; in return for a fee and a percentage of the profits; advantages: finances the growth of the system, resulting in rapid expansion, franchisees have a strong incentive to ensure that the operations are run efficiently, new offerings developed by a franchisee can be used to improve the performance of the entire system; disadvantages: tight control of operations is not possible, a major portion of the profit goes to the franchisee, when franchisees face a higher cost of capital, it raises system costs and lowers profitability.
  • Horizontal Mergers: Merging with or acquiring competitors and combining them into a single large enterprise.

Strategic Implications: Crossing the Chasm

Competitive Chasm: Transition between the embryonic market and mass market; successful managers must: identify the needs of early adopters, adjust their business model by redesigning products, distribution channels, and marketing campaigns, sell at a reasonable price, abandon outdated business models.