"The MGMT Solution," Vocabulary from Chapter 6

Four conditions must be met if a firm’s resources are to be used to achieve a sustainable competitive advantage. The resources must be valuable, rare, imperfectly imitable, and nonsubstitutable.

For sustained competitive advantage, valuable resources must also be rare resources.

For sustained competitive advantage, however, other firms must be unable to imitate or find substitutes for those valuable, rare resources. Imperfectly imitable resources are those resources that are impossible or extremely costly or difficult to duplicate.

In other words, success often leads to competitive inertia—a reluctance to change strategies or competitive practices that have been successful in the past.

Strategic dissonance is a discrepancy between a company’s intended strategy and the strategic actions managers take when actually implementing that strategy.

A situational analysis can also help managers determine the need for strategic change. A situational analysis, also called a SWOT analysis, for strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment.

An analysis of an organization’s internal environment, that is, a company’s strengths and weaknesses, often begins with an assessment of its distinctive competencies and core capabilities. A distinctive competence is something that a company can make, do, or perform better than its competitors.

More specifically, a strategic group is a group of other companies within an industry against which top managers compare, evaluate, and benchmark their company’s strategic threats and opportunities. (Benchmarking involves identifying outstanding practices, processes, and standards at other companies and adapting them to your own company.)

In fact, when scanning the environment for strategic threats and opportunities, managers tend to categorize the different companies in their industries as core, secondary, and transient firms.

Others, however, prefer to examine the internal environment through a shadow-strategy task force. This strategy involves a company actively seeking out its own weaknesses and then thinking like its competitors, trying to determine how they can be exploited for competitive advantage.

The choice to seek risk or avoid risk typically depends on whether top management views the company as falling above or below strategic reference points. Strategic reference points are the targets that managers use to measure whether their firm has developed the core competencies that it needs to achieve a sustainable competitive advantage.

If a company has become complacent after consistently surpassing its strategic reference points, then top management can change from a risk-averse to a risk-taking orientation by raising the standards of performance (i.e., the strategic reference points).

In the long run, effective organizations will frequently revise their strategic reference points to better focus managers’ attention on the new challenges and opportunities that occur in their ever-changing business environments.

To formulate effective strategies, companies must be able to answer these three basic questions:
• What business are we in?
• How should we compete in this industry?
• Who are our competitors, and how should we respond to them?

Portfolio strategy is a corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines. Just as a diversification strategy guides an investor who invests in a variety of stocks, portfolio strategy guides the strategic decisions of corporations that compete in a variety of businesses.

Managers employing portfolio strategy can either develop new businesses internally or look for acquisitions, that is, other companies to buy.

Second, beyond adding new businesses to the corporate portfolio, portfolio strategy predicts that companies can reduce risk even more through unrelated diversification—creating or acquiring companies in completely unrelated businesses

Since the idea is to redirect investment from slow-growing to fast-growing companies, the BCG matrix starts by recommending that while the substantial cash flows from cash cows last, they should be reinvested in stars to help them grow even faster and obtain even more market share.

The key to related diversification is to acquire or create new companies with core capabilities that complement the core capabilities of businesses already in the corporate portfolio.

The purpose of a growth strategy is to increase profits, revenues, market share, or the number of places (stores, offices, locations) in which the company does business.

The purpose of a stability strategy is to continue doing what the company has been doing, just doing it better. Companies following a stability strategy try to improve the way in which they sell the same products or services to the same customers.

The purpose of a retrenchment strategy is to turn around very poor company performance by shrinking the size or scope of the business or, if a company is in multiple businesses, by closing or shutting down different lines of the business. The first step of a typical retrenchment strategy might include making significant cost reductions: laying off employees; closing poorly performing stores, offices, or manufacturing plants; or closing or selling entire lines of products or services.

After cutting costs and reducing a business’s size or scope, the second step in a retrenchment strategy is recovery. Recovery consists of the strategic actions that a company takes to return to a growth strategy.

Both industry attractiveness and profitability decrease when rivalry is cutthroat.

The threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry.

Bargaining power of suppliers is a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs. When companies can buy parts, materials, and services from numerous suppliers, the companies will be able to bargain with the suppliers to keep prices low.

If a company sells a popular product or service to multiple buyers, then the company has more power to set prices. By contrast, if a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices.

Cost leadership means producing a product or service of acceptable quality at consistently lower production costs than competitors so that the firm can offer the product or service at the lowest price in the industry. Cost leadership protects companies from industry forces by deterring new entrants, who will have to match low costs and prices.

Differentiation means making your product or service sufficiently different from competitors’ offerings that customers are willing to pay a premium price for the extra value or performance that it provides.

With a focus strategy, a company uses either cost leadership or differentiation to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment.

Focus strategies typically work in market niches that competitors have overlooked or have difficulty serving.

Whereas the aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage, the purpose of adaptive strategies is to choose an industry-level strategy that is best suited to changes in the organization’s external environment.

Defenders seek moderate, steady growth by offering a limited range of products and services to a well-defined set of customers. In other words, defenders aggressively “defend” their current strategic position by doing the best job they can to hold on to customers in a particular market segment.

Prospectors seek fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market

Analyzers are a blend of the defender and prospector strategies. They seek moderate, steady growth and limited opportunities for fast growth.

Rather than anticipating and preparing for external opportunities and threats, reactors tend to react to changes in their external environment after they occur. Not surprisingly, reactors tend to be poorer performers than defenders, prospectors, or analyzers. A reactor approach is inherently unstable, and firms that fall into this mode of operation must change their approach or face almost certain failure.

Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other’s strategic actions.

Market commonality is the degree to which two companies have overlapping products, services, or customers in multiple markets. The more markets in which there is product, service, or customer overlap, the more intense the direct competition between the two companies.

Whereas market commonality affects the likelihood of an attack or a response to an attack, resource similarity largely affects response capability, that is, how quickly and forcefully a company can respond to an attack.

Consequently, when deciding when, where, and what strategic actions to take against a direct competitor, managers should always consider the possibility of retaliation.