Unit :1

Strategic Management

Strategy

Strategy (Greek Word) is a general, undetailed plan of action, encompassing a long

period of time, to achieve a complicated goal.

Strategy, as a way of action, becomes necessary in a situation when, for the direct
achievement of the main goal, the available resources are not enough.

The task of strategy is an efficient use of the available resources for the
achievement of the main goal.

Detailing it further, strategy is all about gaining (or being prepared to gain) a
position of advantage over competitors or best exploiting emerging possibilities.

As there is always an element of uncertainty about the future, strategy is more

about a set of options ("strategic choices") than a fixed plan.

Strategy as a pattern in a stream of decisions.

Concepts
Military Science
In military science , strategy is the utilization during both peace and
war, of all of the nation's forces, through large scale, long-range
planning and development, to ensure security and victory.
Game /Competition
In game, a strategy refers to the rules that a player uses to choose
between the available actionable options.
Every player in a important game has a set of possible strategies to
use when choosing what moves to make.
A strategy refers to look ahead and considers what actions can
happen in each contingent state of the game for instance, if the player
takes action 1, then that presents the opponent with a certain situation,
which might be good or bad, whereas if the player takes action 2 then
the opponents will be presented with a different situation, and in each
case the choices they make will determine our own future situation.

Continue..
Strategy based games generally require a player
to think through a sequence of solutions to
determine the best way to defeat the opponent.
Management Science /Business
In management science/business field it is the
determination of the basic long-term goals and
objectives of an enterprise, and the adoption of
courses of action and the allocation of resources
necessary for carrying out these goals.

Continue
Strategy is large-scale, future oriented plans
for interacting with the competitive
environment to achieve company objectives.
It is a companys game plan.
It is a detail plan about how, when, and where
the company should compete against whom
it should compete, and for what purposes it
should compete.

Continue..
Strategic planning/management is defined as the set of
decisions and actions that result in the formulation and
implementation of plans designed to achieve a companys
objectives.
Strategic management is a set of managerial decisions and
actions that determines the long-run performance of a
corporation.
It includes environmental scanning (both external and
internal), strategy formulation (strategic or long-range
planning), strategy implementation, and evaluation and
control.
It emphasizes the monitoring and evaluating of external
opportunities and threats in light of a corporations strengths
and weaknesses.

Session 1
A Comprehensive Strategic Management
Model

Develop
Vision and Mission Statements
Perfor
m
Extern
al
Audit

Perfor
m
Interna
l Audit
Formulatio
n

Implementat
ion

Evaluati
on

Source : Fred R. David, How Companies Define Their Mission, Long Range Planning
(June 1988)

Dimensions of Strategic Decisions

Dimensions of Strategic Decisions refers to
the types of decision that the organizations
make.
It refers to the strategic issues which are
associated with the business organization.
It brings strategic management attention to
the decision making.
The following are the dimensions of strategic
decisions.

Strategic Issues Require Top

Management Decisions
Strategic decisions impact several areas of a
firms 'operation so they require top management
involvement.
Only top management has the perspective needed
to understand the broad implications of such
decisions and power to authorize the necessary
resource allocations.

Strategic Issues Require Large Amounts of

the Firms Resources
Strategic
decisions
involve
substantial
allocations of people, physical assets, or moneys
that either must be redirected from internal
sources or secured from outside the firm.
They also commit the firm to actions over an
extended period.
For these reasons they require substantial
resources.

Strategic Issues Often Affect the Firms Long

Term Prosperity
Strategic decisions generally commit the firm for a long time,
typically five years.
However, the impact of such decisions often lasts much longer.
Once a firm has committed itself to a particular strategy, its
image and competitive advantages usually are tied to that
strategy.
Firms become known in certain markets, for certain products,
with certain technologies.
They would put in risk their previous gains if they shifted from
these markets, products, or technologies by adopting a radically
different strategy.
strategic decisions have enduring effects on firms- for better or
worse.

Strategic Issues Are Future Oriented

Strategic decisions are based on what
managers forecast, rather than on what they
know.
More emphasis is placed on the development
of projections that will enable the firm to
select the most promising strategic options.
In the turbulent and competitive free
enterprise environment, a firm will succeed
only if it takes proactive (anticipatory) stance
toward change.

Strategic Issues Usually Have Multifunctional

and Multi Business Consequences
Strategic decisions have complex implications for
most areas of the firm.
Decisions about such matters as customer mix,
competitive emphasis, or organizational structure
necessarily involve a number of the firms strategic
business units(SBUs),divisions, or program units.
All of these areas will be affected by allocations or
reallocations of responsibilities and resources that
result from these decisions.

Strategic Issues Require Considering

the Firms External Environment
All business firms exist in an open system.
They affect and are affected by external
conditions that are likely beyond their control.
To successfully position a firm in competitive
situations, its strategic managers must look
beyond its operations.
They must consider what relevant others such
as competitors, customers, suppliers, creditors,
governments and labors are likely to do.

Levels of Strategy
Corporate/Business
HRM StrategiesLevel
Single Business Firm

Corporate/
Business
Level
Functional
Level

Multiple Business Firms

Corporate
Business
Marketing
Finance/Accounting
Strategies
I
II
III
StrategiesStrategies
HRM
POM/R&D
Strategies
Strategies

Corporate Level

Business
Level

Functional Level

Levels of Strategy
The decision making hierarchy of a firm typically
contains three levels.
Corporate level
Composed principally of a board of directors and
the chief executive and administrative officers.
They are responsible for the firms financial
performance and for the achievement of
nonfinancial goals such as enhancing the firms
image and fulfilling its social responsibilities.
Primarily corporate unit focus of their concern
with stockholders and society in large.

Continue
In a multi business firm, corporate level
executives determine the businesses in which the
firm should be involved.
They set objectives and formulate strategies that
span the activities and functional areas of
businesses.
Corporate level managers attempt to exploit their
firms distinctive competencies by adopting a
portfolio approach to the management of its
businesses and by developing long term plans,
typically for a three to five year period.

Continue.
Business /Medium Level
Business level will be composed of business and
corporate managers.
These managers translate the statements of direction
and intent generated at the corporate level into concrete
objectives and strategies for individual business
divisions or SBUs.
Business level managers determine how the firm will
compete in the selected product market arena.
They try to find out most secure and promising market
segment from which they can gain the competitive
advantage.

Continue
Functional Level
This level will be composed principally of
managers of product, geographic, and functional
areas.
They develop annual objectives and short term
strategies in such areas such as production,
operations, research and development, finance and
accounting, marketing and human resource
management.
The responsibility of these managers is to
implement or execute the firms strategic plans.

Characteristics of Strategic
Management Decisions
The characteristics of strategic management
decisions vary with the level of strategic
activity considered.

Corporate Level
Decisions

Business Level Decisions

Functional Level
Decisions

More Value oriented

More Concept
Greater risk
High cost
More profit potential
Greater need for flexibility
Longer time horizons
Decisions areas are: choice
of businesses
Dividend policies
Sources of long term
financing
Priorities for growth

Less costly,risky,potentially
profitable than corporate
level decisions
More costly,risky,and
potentially profitable than
functional level decisions
Decisions making areas
are:
Plant location
Market segmentation
Geographic coverage
Distribution channels

Action oriented
Relatively short range
Low risk
Modest costs
Highly flexible
Requires less cooperation
Quantifiable
Decisions areas are:
Generic Vs brand name
labeling
Basic research vs applied
research and development
High vs low inventory
levels
General purpose vs specific
purpose production
equipment
Lose vs close supervision

Formality in Strategic Management

The formality of strategic management systems varies

widely among companies.

Formality refers to the degree to which participants,

responsibilities, authority, and caution in decision making

are specified.
Greater formality is usually positively correlated with the

cost,comprehensiveness,accuracy,and success of planning.

 A number of forces determine how much

formality is needed in strategic management.
1. Size of organization
2. Predominant management styles
3. Complexity of environment
4. Production process
5. Problems

 Formality is associated with the size of the

firm and with its stage of development.
Small Firms
These forms follow the entrepreneurial mode
in strategic management
These firms are basically under the control of
a single individual, and they produce a limited
number of products and services.
In these firms strategic evaluation is informal,
intuitive and limited.

Medium Size Firms

These firms follow adaptive mode in
relatively stable environments.
The identification and evaluation of
alternative strategies are closely related to
existing strategy.
These firms emphasize the incremental
modification
of
existing
competitive
approaches.

Large Firms
These firms follow the planning mode in
strategic management
The
strategic
formality
will
be
comprehensive, and formal planning system.

Role of CEO in Strategic

Management
The Ideal Strategic Management Team Includes
1. Chief executive officer (CEO)
2. Product managers
3. Heads of functional areas
The Strategic Management Team Obtains Input From
4. Planning staff
5. Lower-level management and supervisors
Role of CEO
6. Provides long-term direction
7. Assumes ultimate responsibility for firms success
8. Solicits (seeking) guidance from Board of Directors

Benefits of Strategic Management

1. Enhances the firms ability to prevent problems
2. Emphasizes group-based strategic decisions likely to
be based on best available alternatives
3. Improves employees understanding of the
productivity-reward relationship
4. Reduces gaps/overlaps in activities among
employees as their participation clarifies differences
in roles
5. Resistance to change is reduced

Risks of Strategic Management

1. Time involved may negatively impact
operational responsibilities of managers
2. Lack of involvement of strategy makers in
strategy implementation may result in
shirking of responsibility for strategic
decisions
3. Potential disappointment of employees over
unattained expectations requires managerial
time and training

The End

Unit: 2 Environmental Analysis

32

 The 1st step of the strategy

management process is
environmental analysis. An
organization can only be successful if
it is appropriately matched to its
environment.
ENVIRONMENT ANALYSISis the
study of the organizational
environment to pinpoint
environmental factors that can
significantly influence organizational
33

 MANAGERS commonly perform environmental

analyses to help them understand what is happening
both inside and outside their organizations and to
increase the probability that the organizational
strategies they develop will appropriately reflect the
organizational environment.
In order to perform an environmental analysis
efficiently and effectively, a manager must
thoroughly understand how organizational
environments are structured.

34

 For purposes of environmental analysis, the environment of

an organization is generally divided into 3 distinct levels:
General Environment
Operating Environment
Internal Environment
Managers must be well aware of these 3 organizational
environmental levels, understand how each level affects
organizational performance and then formulate
organizational strategies in response to this understanding.

35

THE GENERAL ENVIRONMENT:

The components normally considered part of
the general environment are:
Economic
Social: Including Demographics and Social
Values
Political
Legal
Technological

36

THE OPERATING ENVIRONMENT:

The operating Environment includes
various components like:
Customer
Competition
Labour
Supplier
International Issues.

37

THE INTERNAL ENVIRONMENT:

The level of an organizations environment
that exists inside the organization and
normally has immediate and specific
implications for managing the organization is
the internal environment.
It includes
marketing
finance and accounting,
planning
organizing
influencing and controlling within the
organization.
38

Purpose of General Environmental

Analysis
Organizations are affected by conditions
in the environment
Managers need to be aware of these
conditions in order to
Take advantage of opportunities that can
lead to higher profits
Reduce the impact of threats that can harm
the organizations future

39

Gathering Information for External

Environmental Analysis
Managers need information in order to know
and develop an understanding about what is
happening in the external environment
Three approaches to information gathering:
1. Scanning: general surveillance of environmental
changes; looking for early signals of changes
2. Monitoring: close attention to specific
developments that could affect the organization
3. Competitive Intelligence: following actions of
competitors
40

Sources of Environmental Data

Internal sources may also be a good source of data on customer needs,
attitudes, and behavior. The organization's own records are the best
source of data on current objectives, performance, and available resources.
The sheer volume of available information on the economy, and business
activities is the major strength of most government data sources.
The articles and research reports that are available in periodicals and
books provide a gamut of information about many organizations,
industries, and nations.
Commercial sources are almost always relevant to a specific issue because
they deal with the actual behaviors of customers in the marketplace.
The best approach to

secondary data collection

is one that

blends data and information from a variety of sources.

If needed secondary data is not available, out of date, inaccurate or
unreliable, or irrelevant to the specific problem at hand, the manager may
have little choice but to collect primary data through marketing research.

41

Overcoming Problems with Data

Collection
One of the most common problems is an incomplete
or inaccurate assessment of the situation for which
data is being gathered to address.
Another common difficulty is the expense of
collecting environmental data.
A third issue is the time it takes to collect
environmental data.
A final challenge is finding a way to organize the
vast amount of data and information that are
collected during the environmental analysis.
3-24

Three Areas for Analysis

1. General Environment
2. Competitive/task/operating
Environment

3. Internal Environment

43

General & Competitive Environments

General Environment

Demographic
s
Competitive
Global

Environment
Threat on new entrants

Political/Leg
al

Bargaining power of
suppliers
Bargaining power of
buyers
Sociocultur
al

Threat of substitute
Technological
products
Competitive rivalry
Macoreconom
ic

44

44

GENERAL Environment
DEMOGRAPHICS
Characteristics of a countrys
population
Size of population and growth rate
Age distribution of population
Education levels
Income distribution
Ethnic diversity
Geographic distribution
45

General Environment
POLITICAL/LEGAL
Political and legal conditions affecting
business
Government policies toward business
Investment policy
Business regulation: labor, environment
Education priorities
Budget conditions and plans

46

General Environment
TECHNOLOGICAL
Technological developments relevant to
a business
Telecommunications
Internet
On-line training
Product and process innovations

47

General Environment
MACROECONOMIC
Impact of the economy on business
Size and change in gross domestic product
Per capita income levels
Inflation rate
Interest rates
Foreign trade deficit or surplus
Unemployment
Rates of saving and investment

48

General Environment
SOCIOCULTURAL
Influence of values, beliefs, and lifestyles
of a country on business
Family relationships
Attitudes about work
Living arrangements
Styles of entertainment
Attitudes toward health

49

General Environment
GLOBAL
International developments that can
impact a business
Rise of China as economic power
Rising global trade and WTO
Intellectual property protection
Important political events: Iraq war
Search for low cost suppliers

50

COMPETITIVE Environment
Managers must understand the
conditions of competition within
their industry
Porter Five-Forces Model of Competition
(determining the attractiveness of an
industry)
Key Success Factors
Competitive Changes During industry
Evolution
Strategic Groups
National Competitive Advantage
51

Porters Five Forces Model of

Competition
Substitute Products
(of firms in
other industries)

Suppliers
of Key
Inputs

Rivalry
Among
Competing
Sellers

Buyers

Potential
New
Entrants
52

Threat of New Entrants

Fundamental question: how easy
is it for another company to enter
the industry?
Factors making easy entry to
industry
Low economies of scale
Low product differentiation
Low capital requirements
No switching costs for buyer
Easy access to distribution channels
53
Little government regulation

Supplier Power
Fundamental question: how badly
does a supplier need your
business?
Factors giving power to supplier:
Supplier industry dominated by few
firms
Suppliers product is important input
to buyers product
Suppliers products have high
switching costs

54

Threat of Substitutes
Fundamental question: what other
products or services could perform
the same function as your products
or services?
Factors indicating high threat of
substitutes:
Customer switching cost are low
Price of substitute lower
quality higher than for your products
55

Buyer Power
Fundamental questions: How badly does a buyer need your
products or services?

Factors contributing to high buyer power:

Few buyers compared to the number of sellers

Buyer switching costs are low

Buyer is price sensitive

Buyer is well-educated regarding the product

Buyer purchases product in high volume

Product is undifferentiated

Substitutes are available

56

Competitive Rivalry
Fundamental question: how
intense(extreme) is competition in the
industry?
Factors leading to high competitive rivalry:
Numerous or equally balanced competitors
Slow industry growth
Lack of differentiation or switching costs
High strategic stakes
High exit barriers
57

Four Basic Types of Competition

1. Brand Competitors: market products that are
similar in features and benefits to the same
customers at similar prices
2. Product Competitors: compete in the same
product class, but with products that are different
in features, benefits, and price
3. Generic Competitors: market very different
products that solve the same problem or satisfy
the same basic need
4. Budget Competitors: compete for the limited
financial resources of the customers.
58

The 6-W Model

1. Who are our current and potential customers?
2. What do our customers do with our products?
3. Where do our customers purchase our products?
4. When do our customers purchase our products?
5. Why do our customers select our products?
6. Why do potential customers not purchase our
products?

59

Unit 4 : Industry and

Competitive Analysis

 Until and unless managers do not understand the companys surroundings

they can not set the ultimate direction of the company.
The industry and competitive environment in which the company
operates and forces acting to reshape the environment.
The companys own market position and competitiveness
resources,strenghts,capabilities and weaknesses, opportunities for growth
as compared to rivals.
The strategic makers key task is to organize diverse of market change,
and what rival companies are doing.
All managers should review all surrounding relevant factors and
influences important enough to make direction, objectives, strategy and
business model.
Competitive pressures from rivals, buyer behavior, supplier related
considerations, actions from rival firms etc. are comes into our
investigation.

Strategy Selection Process

Thinking
Strategically about a
companys external
environment

Thinking
strategically about a
companys internal
environment

From a
strategic
vision of
where the
company
needs to head

Identify
promising
strategic
options for the
company

Select the best

strategy and
business model
for the
company

Methods of Strategy and Competitive Analysis

1.
2.
3.
4.
5.
6.
7.

Industrys dominant economic features

Five forces of competition
Driving forces
Environmental scanning
Strategic group maps
Monitoring competition
Key success factors

Industrys Dominant Economic Features

1. Market Size and Growth Rate
2. Number of Rivals
3. Scope of Competitive Rivalry
4. Number of Buyers
5. Degree of Product Differentiation
6. Product Innovation

Five Forces of Competition

1.
2.
3.
4.
5.

Bargaining power of buyers

Bargaining power of suppliers
Threat of substitute products
Threat of new entrants
Rival among competing sellers

Driving Forces
1. Emerging New Internet Capabilities and
Applications.
. Online buying and selling (e-commerce)
.Voice over the internet protocol(VOIP) (Music
industry-iTunes)
.E-mail service has replaced the fax and postal
service,
.Videoconferencing has replaced the business travel.
.Online education has replaced the traditional
universities education.
.Cloud computing has replaced the huge computing
storage devices.

Technological Change and Manufacturing

Process Innovation
Technological change can produce better and
innovative products at lower costs and open
new industry frontiers.
VOIP-Traditional telephoning
Flat screen PC monitors- Cathode Ray Tube
(CRT) monitors
LED technology-CRT .
MP3 technology-walk man, tape recorder etc.
Satellite radio technology-traditional F.M and
Radio stations.

Environmental Scanning
*Extrapolation
*Brainstorming
*Expert Opinion
*Delphi Technique
*Scenario Writing

Strategic Group Map

Rival firm occupancy.
comparing the market positions of each firm separately.
similar competitive approaches and positions in the
market.
Comparable product line breadth
Emphasize the same distribution channels
identical technological approaches
Sell in the same price/quality range

High

Audi
Polo

Price
Gap
Wal-Mart
Low

Few Locations

Geographic Coverage

Many Locations

Monitoring Competition
concerned with knowing competitors strengths
and weaknesses.
Competitive intelligence is associated with
rivals strategies
window of opportunities

Competitive Analysis has the Following

Outcomes
Which competitor has the best strategy?
Which competitors appear to have flawed
or weak strategies?
Which competitors are poised to gain
market?
Which competitors are likely to rank
among the industry leaders five years from
now?

Key Success Factors

Key success factors are the particular
strategic elements,
product attributes,
resources,
competencies,
competitive capabilities, and

Relevant Examples: Beer Industry

Full utilization of brewing capacity(to keep manufacturing
cost low).
A strong network of wholesale distributers (to get the
companys brand stocked and favorably displayed in retail
outlets where beer is sold)
Clever advertising (to induce beer drinkers to buy the
companys brand and there by pull beer sales through the
established wholesale /retail channels)

Unit 5 :Evaluating Company

Resources and Competitive
Capabilities

 Resources
A companys resource strengths represent
competitive assets and are big determinants of its
competitiveness and ability to succeed in the market
place.
Resources are an organizations assets
They include
Tangible assets -- plant, equipment and location
Human assets in terms of number of the employees,
their skills and motivation.
Intangible assets --patents and copyrights, culture,
and reputation

Valuable Physical Assets

1. State of the art plants and equipment
2. Attractive real estate locations
3. Worldwide distribution facilities
Valuable Human Assets And Intellectual Capital
4. An experienced and capable workforce
5. Talented employees in key areas
6. Cutting edge knowledge in technology or other
important areas of the business
7. Collective learning embedded in the organization.

Valuable Organizational Assets

1. Proven quality control systems
2. Technology
3. Ownership of important natural resources
4. Highly trained customer service representatives
5. A strong network of distributors or retailers
6. A strong balance sheet and credit rating

Valuable Intangible Assets

1. A powerful or well known brand name
2. A reputation for technological leadership
3. Strong buyer loyalty and goodwill
An Achievement or Attribute That Puts The Company in a Position Of Market
Advantage
4. Low overall costs relative to competitors
5. Market share leadership
6. A superior product
7. A wider product line than rivals
8. Wide geographic coverage
9. Award winning customer service

Competitively Valuable Alliances or

Cooperative Ventures
1. Fruitful partnership with suppliers that reduce
costs or enhance product quality and performance
2. Alliances or joint ventures that provide access to
valuable technologies
3. Specialized know-how

Capabilities
Capabilities refer to a corporations ability to exploit its resources

Business processes

routines that manager the interaction among resources to turn inputs into outputs.

The capabilities are functionally based and is resident in a particular function.There are:

marketing capabilities,

manufacturing capabilities and

human resource management capabilities.

When functional capabilities are constantly being changed and reconfigured to make them
more adaptive to an uncertain environment, they are called dynamic capabilities.

For example a companys marketing capability can be based on the interaction among its
marketing specialists, distribution channels and sales people

Competencies
A cluster of related abilities ,commitments, knowledge and
skills that enable a organization to act effectively in job or a
situation

For instance a competency in a new product development in one

division of a corporation may be the consequence of

integrating

management of information system capabilities, marketing capabilities,

R&D capabilities, and production capabilities within the division

Core competency
New product development is a core
competency if it goes beyond one division.
For example a core competency of Avon
products is its expertise in door to door
selling.
FedEx has a core competency in its
application of information technology to all of
its operations.

Distinctive Competencies
When core competencies are superior to those
of the competition, they are called distinctive
competencies.
For example General Electric is well known
for its distinctive competency in management
development.
Its executives are sought out by hiring top
managers

VRIO Framework
The given framework can be applied while evaluating a firms competencies

1.Value
.Does it provide customer value and competitive advantage?

2.Rareness
.Do no other competitors possess it?

3.Imitability
.Is it costly for others to imitate?

4. Organization
.Is the firm organized to exploit the resource?

.If the answer to each of these questions is yes for a particular competency it is
considered to be a strength and thus a distinctive competence.
.This should give the company a competitive advantage and lead to higher performance .

Weakness and Resource Deficiencies

A resource weakness or competitive deficiency
is something a company lacks or does poorly
or a condition that puts it at a disadvantage in
the market place

 The following are the weaknesses and resource deficiencies of the company

No clear strategic direction

A balance sheet
Higher overall cost
Weak product innovation capabilities
Narrow product line
Weaker dealer network
Weak brand image and reputation
Unutilized organizational capacity
Weak R&D etc

Market Opportunities
The market opportunities most relevant to a
company are those that matchup with the
companys financial and organizational
resource capabilities
profitability and potential for competitive
advantage.

 The following factors are associated with

market opportunities
Sharply rising buyers demand
Openings to win market share
Expanding into new geographic market
Online sales
Forward and backward integration etc.

Threats to Future Profitability

These are the unfavorable conditions posed by the different market forces
such as
Emergence of cheaper/better technologies
Introduction of better products by rivals
Entry of lower-cost foreign competitors
Rise in interest rates
Potential of a hostile takeover
Unfavorable demographic shifts
Adverse shifts in foreign exchange rates
Political upheaval in a country

Role of SWOT Analysis in

Crafting a Better Strategy
S W O T analysis involves more than just developing the 4
lists of strengths, weaknesses, opportunities, and threats
The most important part of S W O T analysis is
Using
the
4
lists
to
about a companys overall situation
Acting on the conclusions to

draw

Better
match
a
companys
strategy
resource strengths and market opportunities
Correct the important weaknesses
Defend against external threats

conclusions

to

its

VALUE CHAIN ANALYSIS

A value chain describes a way of looking at a business as a
chain of activities that transform inputs into outputs that
customers value.
Customer value derives from three basic sources:
1.
2.
3.

Activities that differentiate the product

Activities that lower the cost
And activities that meet the customers need quickly

Value chain analysis attempts to understand how a

business creates customer value by examining the
contribution of different activities within the business to
that value

Support Activities

General Administration
Human Resource Management
R&D,Technology and System Development
Procurement

Inbound Logistics

Operations

Outbound
Logistics

Primary Activities

Margin
Marketing and
Service
Sales

CONDUCTING
A
VALUE
CHAIN
ANALYSIS
Identify activities
Allocate costs
Recognize the difficulty in activity-based
cost accounting
Identify the activities that differentiate the
firm
Examine the value chain
Develop meaningful comparisons to use
when evaluating value activities

Competitive Capabilities to Competitive

Advantage

Competitive Advantage
When a firm sustains profits that exceed the
average of its industry the firm is said to
possess a competitive advantage over it rivals.
The goal of much of business strategy is to
achieve a sustainable competitive advantage.
Michael Porter identified two basic types of
competitive advantage
1. Cost Advantage
2. Differentiation Advantage

 A competitive advantage exists when

firm is able to deliver the same benefits as
competitors but at a lower cost (Cost
Advantage),or
deliver benefits that exceed those of competing
products (Differentiation Advantage).

A competitive advantage enables the firm to

create superior value for its customers and
superior profits for itself.
Cost and differentiation advantages are known
as positional advantages since they describe
the firms position in the industry as a leader in
either cost and differentiation.

A Model of Competitive Advantage

Resources

Distinctive
Competencies

Capabilities

Cost Advantage and

Differentiation Advantage

Value
Creation

Resources
Resources are firm specific assets useful for
creating a cost or differentiation advantage
and that few competitors can acquire easily.
The following are some examples of such
resources
1. Patents and trademarks
2. Proprietary know-how
3. Installed customer base
4. Reputation of the firm
5. Brand equity

Capabilities
Capabilities refers to the firms ability to
utilize its resources effectively.
An example of the capability is the ability to
bring a product to market faster than the
competitors.
Such capabilities are embedded in the routines
of the organization and are not easily
documented as procedures and thus are
difficult to competitors to replicate.

Distinctive competencies
The firms resources and capabilities together
form its distinctive competencies
These competencies enable innovation,
efficiency,quality,
and
customer
responsiveness, all of which can be leveraged
to create a cost advantage or differentiation
advantage.