Watch the video titled “surviving competition” (CLICK THE LINK) and answer the following questions. 1. According to Housenbold, success is to "figure out what you're good at, figure out where you can make money, and focus". How is his remark related to strategic management? 2. What industry is Shutterfly competing in? Use the five forces model to briefly analyze this industry. 3. Define Shutterfly's generic business-level strategy. Who is the targeted customer? What customer need does the company satisfy? How does the company use its competencies to satisfy the need? 4. What challenges do you think Shutterfly currently has? What recommendations do you have? https://ecorner.stanford.edu/video/surviving-competition/ Please make sure to proofread your answers before submission to avoid any spelling and grammar errors. Also make sure they are formatted in a way that is easy for readers to follow. Writing errors and poor format will negatively affect your grade. Each answer should not exceed 350 words. Chapter 4 Business-Level Strategy Business-Level Strategy (Defined) • 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. Customers: Their Relationship with Business-Level Strategies Who will be served? Key Issues in Business-level Strategy What needs will be satisfied? How will those needs be satisfied? From Pet Food to PetSmart What is the industry of PetSmart? What other firms are competing in this industry? What product or service does PetSmart offer? What market segments does PetSmart serve? What strengths does PetSmart have to pursue the current strategy? Customer Needs • Customer needs The desires, wants, or cravings that can be satisfied through product attributes  Customers choose a product based on: 1. The way the product is differentiated from other products of its type 2. The price of the product • Product differentiation Designing products to satisfy customers’ needs in ways that competing products cannot. Customer Groups and Market Segmentation • Market Segmentation The way customers can be grouped based on important differences in their needs or preferences • Main Approaches to Segmenting Markets 1. Ignore differences in customer segments – Make a product for the typical or average customer 2. Recognize differences between customer groups – Make products that meet the needs of all or most customer groups 3. Target specific segments – Choose to focus on and serve just one or two selected segments Identifying Customer Groups and Market Segments Three Approaches to Market Segmentation How: Determining Core Competencies Necessary to Satisfy Customer Needs • Firms must decide: – who to serve, what customer needs to meet, and how to use core competencies to implement value creating strategies that satisfy target customers’ needs. • Only firms with capacity to continuously improve, innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time. Purpose of Business-Level (BL) Strategies • Two types of competitive advantage firms must choose between – Cost (Are we LOWER than others?) – Uniqueness (Are we DIFFERENT? How?) • Two types of ‘competitive scope’ firms must choose between – Broad target – Narrow target • These combine to yield 5 different BL strategies – Generic = can be used in any organization competing in any industry Business Level Strategies Cost Leadership Strategy • 1. Cost Leadership (CL) – Competitive advantage: THE low-cost leader and operates with margins greater than competitors – Competitive scope: Broad – Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors – No-frill, standardized goods – Continuously reduce costs of value chain activities • Inbound/outbound logistics account for significant cost Cost Leadership Strategy: Competitors • Due to cost leader’s advantageous position: – rivals hesitate to compete on basis of price. – lack of price competition leads to greater profits. Rivalry with Existing Competitors Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers Cost Leadership Strategy: Buyers • Can mitigate buyers’ power by: – driving prices far below competitors, causing them to exit, thus shifting power with buyers (customers) back to the firm. Bargaining Power of Buyers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers Cost Leadership Strategy: Suppliers • Can mitigate suppliers’ power by: – being able to absorb cost increases due to low cost position. – being able to make very large purchases, reducing chance of supplier using power. Bargaining Power of Suppliers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers Cost Leadership Strategy: New Entrants The Threat of Potential Entrants Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers • Can frighten off new entrants due to: – their need to enter on a large scale in order to be cost competitive. – the time it takes to move down the industry learning curve. Cost Leadership Strategy: Substitutes Product Substitutes Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers • Cost leader is well positioned to: – lower prices in order to maintain its value position. – make investments to add features unavailable in substitutes. – buy intellectual property and patents developed by potential substitutes. Cost Leadership Strategy (cont’d) • Competitive Risks – Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations. – Too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation. – Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy. Differentiation Strategy • 2. Differentiation – Competitive advantage: Differentiation – Competitive scope: Broad – Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them – Target customers perceive product value – Customized products – differentiating on as many features as possible Differentiation Strategy: Competitors Rivalry with Existing Competitors Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers • Defends against competitors because customer’s brand loyalty to differentiated product offsets price competition. Differentiation Strategy: Buyers Bargaining Power of Buyers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers • Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases. Differentiation Strategy: Suppliers Bargaining Power of Suppliers Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers • Can mitigate suppliers’ power by: – absorbing price increases due to higher margins. – passing along higher supplier prices because buyers are loyal to a differentiated brand. Differentiation Strategy: New Entrants The Threat of Potential Entrants Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers • Can defend against new entrants because: – new products must surpass proven products. – new products must be at least equal to performance of proven products, but offered at lower prices. Differentiation Strategy: Substitutes Product Substitutes Threat of new entrants Rivalry among competing firms Threat of substitute products Bargaining power of suppliers Bargaining power of buyers • Well-positioned relative to substitutes because: – brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands. Competitive Risks of Differentiation • The price differential between the differentiator’s product and the cost leader’s product becomes too large. • Differentiation ceases to provide value for which customers are willing to pay. • Experience narrows customers’ perceptions of the value of differentiated features. • Counterfeit goods replicate the differentiated features of the firm’s products. Focus Strategies • An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. – Particular buyer group—youths or senior citizens – Different segment of a product line—professional craftsmen versus do-it-yourselfers – Different geographic markets—east coast versus west coast Focus Strategies (cont’d) • Types of focused strategies – Focused cost leadership strategy – Focused differentiation strategy • To implement a focus strategy, firms must be able to: – complete various primary and support activities in a competitively superior manner, in order to develop and sustain a competitive advantage and earn aboveaverage returns. A Look at Whole Foods Market • What opportunities or trends in the external environment is Whole Foods trying to capitalize on? • What customer need is the firm trying to satisfy? Is the need consistent with low price or differentiation? • What market segment is the firm serving? • What strengths or core competencies does the firm have to serve the customer needs? • What generic strategy is used by the firm? Integrated Cost Leadership/ Differentiation Strategy • A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: – adapt quickly to environmental changes. – learn new skills and technologies more quickly. – effectively leverage its core competencies while competing against its rivals. Integrated Cost Leadership/ Differentiation Strategy (cont’d) • Commitment to strategic flexibility is necessary for implementation of integrated cost leadership/ differentiation strategy. – Flexible manufacturing systems (FMS) – Information networks (CRM) – Total quality management (TQM) systems • Competitive Risks of Integrated Strategies – Although becoming more popular the RISK is getting ‘stuck in the middle’ – Cost structure is not low enough for attractive pricing of products and products not sufficiently differentiated to create value for target customer – therefore, fail to successfully implement either low cost or differentiation strategy – Result: Don’t earn above-average returns Chapter 3 The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages 故曰：知彼知己，百戰不殆；不知彼而知己，一勝一 負；不知彼，不知己，每戰必殆。 So it is said that if you know your enemies and know yourself, you can win a thousand battles without a single loss. If you only know yourself, but not your opponent, you may win or may lose. If you know neither yourself nor your enemy, you will always endanger yourself. - Sun Tzu © RoyaltyFree/ Stockdisc/ Getty Images Southwest Airlines • What is Southwest’s business model? • What is the airlines industry like? • How does Southwest’s business model help the airlines achieve strategic competitiveness in this industry? • What strengths and weaknesses does Southwest airlines have? Analyzing the External Environment Opportunities and threats By studying the external environment, firms identify what they might choose to do. Analyzing the Internal Organization Unique resources, capabilities, and competencies (required for sustainable competitive advantage) By studying the internal environment, firms identify what they can do. Resources, Capabilities, and Core Competencies • Resources: Competitive Advantage Core Competencies Capabilities Resources • Tangible • Intangible – are the source of a firm’s capabilities. – are broad in scope. – cover a spectrum of individual, social and organizational phenomena. – alone, do not yield a competitive advantage. Resources • Resources – A firm’s assets, including people and the value of its brand name, that represent inputs into a firm’s production process: • • • • • capital equipment skills of employees brand names financial resources talented managers • Types of Resources – Tangible resources: • • • • financial physical technological organizational – Intangible resources: • human • innovation • reputation Resources, Capabilities and Core Competencies Capabilities: Competitive Advantage Core Competencies Capabilities Resources • Tangible • Intangible • represent the capacity to deploy resources that have been purposely integrated to achieve a desired end state. • emerge over time through complex interactions among tangible and intangible resources. Resources, Capabilities and Core Competencies Core Competencies Competitive Advantage Core Competencies Capabilities Resources • Tangible • Intangible • Resources and capabilities that are the sources of a firm’s competitive advantage that: – distinguish a firm competitively and reflect its personality. – emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. Resources, Capabilities and Core Competencies Competitive Advantage Core Competencies Capabilities Resources • Tangible • Intangible Core Competencies (cont’d): • activities that a firm performs especially well compared to competitors. • activities through which the firm adds unique value to its goods or services over a long period of time. Building Core Competencies Sustainable Competitive Advantage Four Criteria of Sustainable Advantages • • • • Valuable Rare Costly to imitate Nonsubstitutable The four criteria of sustainable competitive advantages: • valuable capabilities • rare capabilities • costly to imitate • non-substitutable Superhero Analysis • Wolverine • Spider-Man • Iron Man • Silver Surfer Service Marketing and Sales Procurement Technological Development Human Resource Management Firm Infrastructure The Basic Value Chain Outbound Logistics Operations Inbound Logistics Building Core Competencies: Criteria and Value Chain Analysis • Value Chain Analysis – Primary activities • Involved with product’s physical creation, sales and distribution to buyers, and service after the sale – Service, marketing/sales, outbound/inbound logistics and operations – Support activities • Provide assistance necessary for the primary activities to take place • Includes firm infrastructure, HRM, technologies development and procurement Outsourcing • Definition: Purchase of a value-creating activity from an external supplier – Effective execution includes an increase in flexibility, risk mitigation and capital investment reduction – Trend continues at a rapid pace – Firms must outsource activities where they cannot create value or are at a substantial disadvantage compared to competitors • Can cause concerns – Usually revolves around innovative ability and loss of jobs Outsourcing Decisions Service Marketing and Sales Procurement Technological Development Human Resource Mgmt. Firm Infrastructure Support Activities A firm may outsource all or only part of one or more primary and/or support activities. Outbound Logistics Operations Inbound Logistics Primary Activities Competencies, Strengths, Weaknesses and Strategic Decisions • Firms must identify their strengths and weaknesses • Appropriate resources and capabilities needed to develop desired strategy and create value for customers/other stakeholders • Tools (I.e., outsourcing) can help a firm focus on core competencies as the source for CA • Core competencies have potential to become core rigidities – Competencies emphasized when no longer competitively relevant can become a weakness • External environmental conditions and events impact a firm’s core competencies Chapter 2 The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis “To assure victory, always carefully survey the field before battle.” - Sun Tzu © RoyaltyFree/ Stockdisc/ Getty Images Opportunities and Threats • Opportunity – A condition in the general environment that, if exploited effectively, helps a firm achieve strategic competitiveness. • Threat – A condition in the general environment that may hinder a firm’s efforts to achieve strategic competitiveness. The External Environment General Environment • The broader society dimensions that influence an industry and the firms within it • Grouped into 7 dimensions OR ‘environmental segments’ – – – – – – – Demographic Economic Physical Sociocultural Global Technological Political/Legal Industry Environment • The set of factors directly influencing a firm and its competitive actions and competitive responses: – threat of new entrants – power of suppliers – power of buyers – threat of product substitutes – intensity of rivalry among competitors Competitor Analysis • Gathering and interpreting information about all of the companies that the firm competes against. • Understanding the firm’s competitor environment complements the insights provided by studying the general and industry environments. Industry Environment Analysis: Defining an Industry • Industry – A group of companies offering products or services that are close substitutes for each other and that satisfy the same basic customer needs – Industry boundaries may change as customer needs evolve and technology changes • Sector – A group of closely related industries • Market Segments – Distinct groups of customers within an industry – Can be differentiated from each other with distinct attributes and specific demands The Five Forces of Competition Model How the Five Forces Shape Competition within an Industry The stronger that each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits within their industry. – A weak competitive force • may be viewed as an as it allows company to earn greater profits – A strong competitive force • may be viewed as a industry profits as it depresses – Strength of forces may change as industry conditions change Threat of New Entrants: Barriers to Entry • • • • • • • • Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation Bargaining Power of Suppliers • Supplier power increases when: – suppliers are large and few in number. – suitable substitute products are not available. – individual buyers are not large customers of suppliers and there are many of them. – suppliers’ goods are critical to the buyers’ marketplace success. – suppliers’ products create high switching costs. – suppliers pose a threat to integrate forward into buyers’ industry. Bargaining Power of Buyers • Buyer power increases when: – buyers are large and few in number. – buyers purchase a large portion of an industry’s total output. – buyers’ purchases are a significant portion of a supplier’s annual revenues. – buyers’ switching costs are low. – buyers can pose threat to integrate backward into the sellers’ industry. Threat of Substitute Products • The threat of substitute products increases when: – buyers face few switching costs. – the substitute product’s price is lower. – substitute product’s quality and performance are equal to or greater than the existing product. • Differentiated industry products that are valued by customers reduce this threat Intensity of Rivalry Among Competitors • Industry rivalry increases when: – there are numerous or equally balanced competitors. – industry growth slows or declines. – there are high fixed costs or high storage costs. – there is a lack of differentiation opportunities or low switching costs. – when the strategic stakes are high. – when high exit barriers prevent competitors from leaving the industry. Interpreting Industry Analyses Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors Unattractive industry (Low profit potential) Interpreting Industry Analyses (cont’d) High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors Attractive industry (High profit potential) Complementors • The network of companies that sell complementary products or services or are compatible with the focal firm’s own product or service, e.g. software and hardware. – If a complementor’s product or service adds value to the sale of the focal firm’s product or service, it is likely to create value for the focal firm. – However, if a complementor’s product or service is in a market into which the focal firm intends to expand, the complementor can represent a formidable competitor. Strategic Groups • Strategic Group Defined – A set of firms emphasizing similar strategic dimensions and using similar strategies. – Intra-strategic group competition is more intense than is inter-strategic group competition due to similar: • market positions • products • strategic actions Strategic Groups in the Pharmaceutical Industry Chapter 1 Strategic Management and Strategic Competitiveness Nature of Competition: Basic concepts • Strategy – Integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage • Strategic Competitiveness – Achieved when a firm formulate & implements a value-creating strategy • Competitive Advantage (CA) – Implemented strategy that competitors are unable to duplicate or find too costly to imitate • Above Average Returns – Returns in excess of what investor expects in comparison to other investments with similar risk Nature of Competition: Basic concepts (Cont’d) • Risk – Investor’s uncertainty about economic gains/losses resulting from a particular investment • Average Returns – Returns equal to what investor expects in comparison to other investments with similar risk • Strategic Management Process (SMP) – Full set of commitments, decisions and actions required for a firm to achieve strategic competitiveness and earn above average returns The Industry Organization (I/O) Model of Above-Average Returns Industrial Organizational (I/O) Model of Above-Average Returns (AAR) • Basic Premise – to explain the dominant influence of the external environment on a firm's strategic actions and performance I/O Model Assumptions • The external environment imposes pressures and constraints that determine strategic choices. • Similarity in strategically relevant resources causes competitors to pursue similar strategies. • Resource differences among competitors are short-lived due to resource mobility across firms. • Strategic decision makers are rational and engage in profit-maximizing behaviors. Five Forces Model of Competition Substitutes Suppliers Industry rivalry Potential entrants Buyers The Resource-Based Model of Above-Average Returns The Resource-Based Model of Above-Average Returns Capability Resources An integrated set of resources Physical, human, and organizational capital (tangible and intangible) Core competence A source of competitive advantage Resource-Based Model Assumptions 1. Firms acquire different resources. 2. Firms develop unique capabilities based on how they combine and use resources. 3. Resources and certain capabilities are not highly mobile across firms. 4. Differences in resources and capabilities are the bases of competitive advantage and a firm’s performance rather than its industry’s structural characteristics. Resources As Core Competencies Costly to imitate Rare How resources become core competencies Nonsubstitutable Valuable Strategic Decision Making Industry organization (I/O) model Competitive strategy decision Resource-based model The Five Steps of the Strategic Management Process ① Select the corporate mission and the major corporate goals. ② Analyze the external competitive environment to identify opportunities and threats. ③ Analyze the organization’s internal environment to identify its strengths and weaknesses. ④ Select strategies that: – Build on the organization’s strengths and correct its weaknesses – in order to take advantage of external opportunities and counter external threats – Are consistent with organization’s mission and major goals – Are congruent and constitute a viable business model ⑤ Implement the strategies. Vision and Mission • Mission – Specifics business(es) in which firm intends to compete and customers it intends to serve – More specific than the vision • Vision – Picture of what the firm wants to be – What the firm ultimately wants to achieve – An effective vision statement is the responsibility of the leader who should work with others to form it – Foundation for the mission Values and Goals • The values of a company should state: – How managers and employees should conduct themselves – How they should do business – What kind of organization they need to build to help achieve the company’s mission – Organizational culture • The set of values, norms, and standards that control how employees work to achieve an organization’s mission and goals • A goal is a precise and measurable desired future state that a company must realize if it is to attain its vision or mission. Emergent and Deliberate Strategies Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June 1985. 
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