1. CHAPTER 5
Business-Level Strategy: Creating and Sustaining Competitive
Advantages
Copyright Anatoli Styf/Shutterstock
1
Sustaining a Competitive Advantage
Business-level strategies require a choice.
How to overcome the five forces and achieve competitive
advantage?
Suggestion – Use Porter’s three generic strategies.
Overall cost leadership
Differentiation
Focus
©McGraw-Hill Education.
Business-level strategy is a strategy designed for a firm or a
division of the firm that competes within a single business.
Generic strategies = basic types of business level strategies
based on breadth of target market (industrywide versus narrow
market segment) and type of competitive advantage (low -cost

2. versus uniqueness).
2
Three Generic Strategies
(1 of 3)
Exhibit 5.1 Three Generic Strategies
Source: Adapted from Competitive Strategy: Techniques for
Analyzing Industries and Competitors. Michael E Porter, 1980,
1998, Free Press.
Jump to Appendix 1 for long image description.
©McGraw-Hill Education.
The overall cost leadership and differentiation strategies strive
to attain advantages industrywide, while focusers have a narrow
target market in mind. Generic strategies are plotted on two
dimensions: competitive advantage and market served.
3
Three Generic Strategies
(2 of 3)
Overall cost leadership is based on:
Creating a low-cost position relative to a firm’s peers
Managing relationships throughout the entire value chain to
lower costs
Differentiation implies:
Products and/or services that are unique & valued
Emphasis on nonprice attributes for which customers will gladly
pay a premium
A focus strategy requires:
Narrow product lines, buyer segments, or targeted geographic
markets

3. Advantages obtained either through differentiation or cost
leadership
©McGraw-Hill Education.
Overall cost leadership = a firm’s generic strategy based on
appeal to the industrywide market using a competitive
advantage based on low-cost. Differentiation = a firm’s generic
strategy based on creating differences in the firm’s product or
service offering by creating something that is perceived
industrywide as unique and valued by customers. Focus = a
firm’s generic strategy based on appeal to a narrow market
segment within an industry.
4
Three Generic Strategies
(3 of 3)
Exhibit 5.2 Competitive Advantage and Business Performance
ParticularsDifferentiation and
CostDifferentiationCostDifferentiation and FocusCost and
FocusStuck in the MiddleReturn on Investment
(%)35.532.930.217.023.717.8Sales growth
(%)15.113.513.516.417.512.2Gain in market share
(%)5.35.35.56.16.34.4Sample Size12316010014186105
©McGraw-Hill Education.
Both casual observation and research supports the notion that
firms that identify with one or more of the forms of competitive

4. advantage outperform those that do not. According to the above
study, businesses combining multiple forms of competitive
advantage (differentiation and overall cost leadership)
outperformed businesses that used only a single form. The
lowest performers were those that did not identify with any type
of advantage. They were classified as “stuck in the middle.”
5
Overall Low-Cost Leadership
(1 of 2)
Overall cost leadership involves
Aggressive construction of efficient scale facilities
Vigorous pursuit of cost reductions from experience
Tight cost and overhead control
Avoidance of marginal customer accounts
Cost minimization in all activities in the firm’s value chain,
such as R&D, service, sales force, and advertising
©McGraw-Hill Education.
Overall cost leadership = a firm’s generic strategy based on
appeal to the industrywide market using a competitive
advantage based on low-cost. Cost leadership requires a tight
set of interrelated tactics, including close scrutiny of the value
chain. See Exhibit 5.3.
6
Overall Low-Cost Leadership
(2 of 2)
Cost leadership requires learning to lower costs through
experience: the experience curve.
With experience, unit costs of production processes decline as

5. output increases.
This strategy also requires competitive parity.
Being “on par” with competitors with respect to low-cost,
differentiation, or other strategic product characteristics
Permits cost leaders to translate cost advantages directly into
higher profits
©McGraw-Hill Education.
Experience curve = the decline in unit costs of production as
cumulative output increases. A business can learn to lower costs
as it gains experience with production processes. Among the
most common factors producing the experience curve are
workers getting better at what they do, product designs bei ng
simplified as the product matures, and production processes
being automated and streamlined. However experience curve
gains will only be the foundation for a cost advantage if the
firm knows the source of the cost reduction and can keep those
gains proprietary. Competitive parity = a firm’s achievement of
similarity or being “on par” with competitors with respect to
low-cost, differentiation, or other strategic product
characteristics. Competitive parity on the basis of
differentiation permits the cost leader to translate cost
advantages directly into higher profits than competitors. Thus,
the cost leader earns above-average returns. A business that
strives for a low-cost advantage must attain an absolute cost
advantage relative to its rivals. This is typically accomplished
by offering a no-frills product or service to a broad target
market using standardization to derive the greatest benefits
from economies of scale and experience. However such a
strategy may fail if the firm is unable to attain parity on
important dimensions of differentiation such as quick responses

6. to customer requests for services or design changes.
7
Improving Competitive Position vis-à-vis the Five Forces: Cost
Leadership
An overall low-cost position
Protects a firm against rivalry from competitors
Protects the firm against powerful buyers
Provides more flexibility to cope with demands from powerful
suppliers who want to increase input costs
Provides substantial entry barriers due to economies of scale
and cost advantages
Puts the firm in a favorable position with respect to substitute
products
©McGraw-Hill Education.
An overall low cost position enables the firm to achieve above
average returns despite strong competition. It protects a firm
against rivalry from competitors, because lower costs allow a
firm to earn returns even if its competitors eroded their profits
through intense rivalry. Buyers can exert power to drive down
prices only to the level of the next most efficient producer
because there are relatively few competitors that can provide a
comparable cost/value proposition. Because the cost advantage
can be applied across all operations, a low-cost position puts
the firm in a favorable position with respect to substitute
products introduced by new and existing competitors.
8
Pitfalls of Cost Leadership
Too much focus on one or a few value chain activities

7. Increase in the cost of the inputs on which the advantage is
based
Strategy can be too easily imitated
A lack of parity on differentiation
Reduced flexibility
Obsolescence of the basis of a cost advantage
©McGraw-Hill Education.
Firms need to pay attention to all activities in the value chain.
Managers should explore all value-chain activities, including
relationships among them, as candidates for cost reductions.
Firms can also be vulnerable to price increases in the factors of
production. A firm’s strategy may consist of value-creating
activities that are easy to imitate. Firms striving to attain cost
leadership advantages must obtain a level of parity on
differentiation. Building a low-cost advantage often requires
significant investments in plant and equipment, distribution
systems, and large, economically scaled operations. As result,
firms often find that these investments limit their flexibility. As
a result they have difficulty responding to changes in the
environment. Ultimately, the foundation of the firm’s cost
advantage may become obsolete. In these circumstances, other
firms develop new ways of cutting costs, leaving the old cost-
leaders at a significant disadvantage. See Cases: General
Motors, & Ford.
9
Differentiation
(1 of 2)
A differentiation strategy can take many forms:
Prestige or brand image
Quality

8. Technology
Innovation
Features
Customer service
Dealer network
©McGraw-Hill Education.
Differentiation strategy = a firm’s generic strategy based on
creating differences in the firm’s product or service offering by
creating something that is perceived industrywide as unique and
valued by customers. Firms may differentiate themselves in
both primary and support activities (see Exhibit 5.4). Firms
achieve and sustain differentiation advantages and attain above -
average performance when their price premiums exceed the
extra costs incurred in being unique.
10
Differentiation
(2 of 2)
Differentiation requires:
A level of cost parity relative to competitors
Integration of multiple points along the value chain
Superior material handling operations to minimize damage
Low defect rates to improve quality
Accurate and responsive order processing
Personal relationships with key customers
Rapid response to customer service requests
Differentiation along several different dimensions at once

9. ©McGraw-Hill Education.
Firms achieve and sustain differentiation advantages and attain
above-average performance when their price premiums exceed
the extra costs incurred in being unique, but a differentiator
cannot ignore cost. Differentiators must reduce costs in all areas
that do not affect differentiation.
11
Improving Competitive Position vis-à-vis the Five Forces:
Differentiation
An overall differentiation strategy
Creates higher entry barriers due to customer loyalty
Provides higher margins that enable the firm to deal with
supplier power
Reduces buyer power because buyers lack suitable alternatives
Establishes customer loyalty and hence less threat from
substitutes
©McGraw-Hill Education.
Differentiation provides protection against rivalry since brand
loyalty lowers customer sensitivity to price and raises customer
switching costs, therefore creating higher entry barriers and
reducing the threat from substitutes. The resulting higher
margins and lack of comparable alternatives avoids the need for
a low-cost position.
12
Pitfalls of Differentiation

10. Uniqueness that is not valuable
Too much differentiation
Too high a price premium
Differentiation that is easily imitated
Dilution of brand identification through product line extensions
Perceptions of differentiation may vary between buyers and
sellers
©McGraw-Hill Education.
It’s not enough just to be different. A differentiation strategy
must provide unique bundles of products and/or services that
customers value highly. Firms may also strive for quality of
service that is higher than customers desire, thus they become
vulnerable to competitors who provide an appropriate level of
quality at a lower price. In addition customers may desire the
product but are repelled by the price premium. Differentiation
advantages can be eroded through imitation. Firms may also
erode their quality brand image by adding products or services
with lower prices and less quality, thus confusing the customer.
Companies must also realize that although they may perceive
their products and services as differentiated, their customers
may view them as commodities.
13
Focus
(1 of 2)
A focus strategy is based on the choice of a narrow competitive
scope within an industry.
A firm selects a segment or group of segments (or niche) and
tailors its strategy to serve them.
A firm achieves competitive advantages by dedicating itself to

11. these segments exclusively.
©McGraw-Hill Education.
Focus strategy = a firm’s generic strategy based on appeal to a
narrow market segment within an industry. A firm following
this strategy selects a segment or group of segments and tailors
its strategy to serve them. The essence of focus is the
exploitation of a particular market niche.
14
Focus
(2 of 2)
A focus strategy has two variants.
Cost focus
Creates a cost advantage in its target segment
Exploits differences in cost behavior
Differentiation focus
Differentiates itself in its target market
Exploits the special needs of buyers
©McGraw-Hill Education.
A narrow focus by itself is not sufficient for above average
performance. Firms must choose either a cost or a
differentiation focus. But both variants of the focus strategy
rely on providing better service than broad-based competitors
who are trying to serve the focuser’s target segment. Cost focus

12. exploits differences in cost behavior in some segments, while
differentiation focus exploits the special needs of buyers in
other segments. See Strategy Spotlight 5.3 for the example of a
luxury goods provider.
15
Improving Competitive Position vis-à-vis the Five Forces:
Focus
An overall focus strategy
Creates higher entry barriers due to cost leadership or
differentiation or both
Can provide higher margins that enable the firm to deal with
supplier power
Reduces buyer power because the firm provides specialized
products or services
Focused niches less vulnerable to substitutes
©McGraw-Hill Education.
Focus requires that a firm either have a low cost position with
its strategic target, high differentiation, or both. These positions
provide defenses against each competitive force because of
higher margins or more specialized products or services. Focus
is also used to select niches that are least vulnerable to
substitutes or where competitors are weakest.
16
Pitfalls of Focus
Erosion of cost advantages within the narrow segment
Highly focused products and services still subject to
competition from new entrants and from imitation
Focusers too focused to satisfy buyer needs

13. ©McGraw-Hill Education.
The advantages of a cost focus strategy may be fleeting if the
cost advantages are eroded over time. University of Phoenix is
given as an example. Some firms adopting a focus strategy may
enjoy temporary advantages because they select a small niche
with few rivals. However, this strategy can be imitated. Finally,
some firms attempting to attain advantages through a focus
strategy may have too narrow a product or service.
17
Industry Life Cycle Stages
(1 of 2)
The industry life cycle
Introduction
Growth
Maturity
Decline
Generic strategies, functional areas, value-creating activities,
and overall objectives all vary over the course of an industry
life cycle.
©McGraw-Hill Education.
Industry life cycle = the stages of introduction, growth,
maturity, and decline that typically occur over the life of an
industry. Managers must become even more aware of their
firm’s strengths and weaknesses in many areas to attain
competitive advantages. Factors such as generic strategies,

14. market growth rate, intensity of competition, and overall
objectives can change over the course of an industry life cycle.
Managers must strive to emphasize the key functional areas
during each of the four stages and to attain a level of parity in
all functional areas and value-creating activities. Note: products
and services go through many cycles of innovation and renewal.
Typically, only fad products have a single lifecycle. Maturity
stages of an industry can be transformed or followed by the
stage of rapid growth if consumer tastes change, technological
innovations take place, or new developments occur.
18
Industry Life Cycle Stages
(2 of 2)
Exhibit 5.6 Stages of the Industry Life Cycle
FactorIntroductionGrowthMaturityDeclineGeneric
strategiesDifferentiationDifferentiationDifferentiation
Overall cost leadershipOverall cost leadership
FocusMarket growth rateLowVery largeLow to
moderateNegativeNumber of segmentsVery
fewSomeManyFewIntensity of competitionLowIncreasingVery
intenseChangingEmphasis on product designVery highHighLow
to moderateLowEmphasis on process designLowLow to
moderateHighLowMajor functional area(s) of concernResearch
and developmentSales and marketingProductionGeneral
management and financeOverall objectiveIncrease market
awarenessCreate consumer demandDefend market share and
extend product life cyclesConsolidate, maintain, harvest, or exit
©McGraw-Hill Education.
Industry life cycle = the stages of introduction, growth,
maturity, and decline that typically occur over the life of an

15. industry.
19
Strategies in the Introduction Stage
The introduction stage is when:
Products are unfamiliar to consumers.
Market segments are not well-defined.
Product features are not clearly specified.
Competition tends to be limited.
Strategies:
Develop a product and get users to try it.
Generate exposure so the product becomes “standard.”
©McGraw-Hill Education.
Introduction stage = the first stage of the industry life cycle,
characterized by (1) new products that are not known to
customers, (2) poorly defined market segments, (3) unspecified
product features, (4) low sales growth, (5) rapid technological
change, (6) operating losses, and (7) a need for financial
support. Since there are few players and not much growth,
competition tends to be limited. Success requires an emphasis
on research and development and marketing activities to
enhance awareness. The challenge becomes one of developing
the product and finding a way to get users to try it, and
generating enough exposure so the product emerges as the
“standard” by which all other rivals’ products are evaluated.
There’s an advantage to being the “first mover” in a market.
20
Strategies in the Growth Stage
The growth stage is:

16. Characterized by strong increases in sales
Attractive to potential competitors
When firms can build brand recognition
Strategies:
Create branded differentiated products
Stimulate selective demand
Provide financial resources to support value-chain activities
©McGraw-Hill Education.
Growth stage = the second stage of the product life cycle,
characterized by (1) strong increases in sales; (2) growing
competition; (3) developing brand recognition; and (4) a need
for financing complementary value-chain activities such as
marketing, sales, customer service, and research and
development. In the growth stage, the primary key to success is
to build consumer preferences for specific brands. This requires
strong brand recognition, differentiated products, and the
financial resources to support a variety of value chain activities
such as marketing and sales, and research and development.
Efforts in the growth stage are directed towards stimulating
selective demand in which a firm’s products offerings are
chosen instead of a rival’s. Revenues can increase at an
accelerating rate because new consumers are trying the product
and a growing proportion of satisfied consumers are making
repeat purchases.
21
Strategies in the Maturity Stage
The maturity stage is when:
Aggregate industry demand slows
Market becomes saturated, few new adopters

17. Direct competition becomes predominant
Marginal competitors begin to exit
Strategies:
Create efficient manufacturing operations
Lower costs as customers become price-sensitive
Adopt reverse or breakaway positioning
©McGraw-Hill Education.
Maturity stage = the third stage of the product life cycle,
characterized by (1) slowing demand growth, (2) saturated
markets, (3) direct competition, (4) price competition, and (5)
strategic emphasis on efficient operations. As markets become
saturated, there are few new adopters. Rivalry among existing
rivals intensifies because of fierce price competition at the same
time that expenses associated with attracting new buyers are
rising. Advantages based on efficient manufacturing operations
and process engineering become more important for keeping
costs low as customers become more price sensitive. It also
becomes more difficult for firms to differentiate their offerings
because users have a greater understanding of products and
services. Firms can affect consumers’ mental shifts through (A)
reverse positioning = a break in industry tendency to
continuously augment products, characteristics of the product
life cycle, by offering products with fewer product attributes
and lower prices; or (B) breakaway positioning = a break in
industry tendency to incrementally improve products along
specific dimensions, characteristic of the product life cycle, by
offering products that are still in the industry but that are
perceived by customers as being different.
22

18. Strategies in the Decline Stage
The decline stage is when:
Industry sales and profits begin to fall.
Price competition increases.
Industry consolidation occurs.
Strategies:
Maintaining the product position
Harvesting profits and reducing costs
Exiting the market
Consolidating or acquiring surviving firms
©McGraw-Hill Education.
Decline stage = the fourth stage of the product life cycle,
characterized by (1) falling sales and profits, (2) increasing
price competition, and (3) industry consolidation. Firms must
face up to the fundamental strategic choices of either exiting or
staying and attempting to consolidate their position in the
industry. In the decline stage, a firm’s strategic options become
dependent on the actions of rivals. If many competitors leave
the market, sales and profit opportunities increase. On the other
hand, prospects are limited if all competitors remain.
Maintaining refers to keeping a product going without
significantly reducing marketing support, technological
development, or other investments, in the hope that competitors
will eventually exit the market. A harvesting strategy = a
strategy of bringing as much profit as possible out of the
business in the short to medium term by reducing costs. Exiting
the market involves dropping the product from the firm’s
portfolio. A consolidation strategy = a firm’s acquiring or
merging with other firms in an industry in order to enhance
market power and gain valuable assets. Firms can also resurrect

19. old technologies by retreating to more defensible ground, using
the new to improve the old, or improving the price-performance
trade-off.
23
CHAPTER 3
Assessing the Internal Environment of the Firm
Copyright Anatoli Styf/Shutterstock
1
Value-Chain Analysis
Value-chain analysis looks at the sequential process of value-
creating activities.
Value is the amount buyers are willing to pay for what a firm
provides.
How is value created within the organization?
How is value created for other organizations in the overall
supply chain or distribution channel?
The value received must exceed the costs of production.
©McGraw-Hill Education.
SWOT is a good starting point, but it doesn’t give enough
guidance regarding the specific action steps needed to enact
strategic change. For instance, a firm may have a capability that
is a strength, but that, by itself, cannot create or sustain
competitive advantage. It’s too easy to become preoccupied
with a single dimension or element of what is, essentially, a

20. moving target…MORE analysis may be necessary, which is
where the value chain comes in. Value-chain analysis = a
strategic analysis of an organization that uses value-creating
activities. Value is the amount that buyers are willing to pay for
what a firm provides them and is measured by total revenue, a
reflection of the price a firm’s product commands, and the
quantity it can sell. A firm is profitable when the value it
receives exceeds the total costs involved in creating its product
or service. Creating value for buyers that exceeds the costs of
production (i.e. margin) is a key concept used in analyzing a
firm’s competitive position.
2
Value-Chain Analysis Primary Activities
Primary activities contribute to the physical creation of the
product or service; the sale & transfer to the buyer; and service
after the sale.
Inbound logistics
Operations
Outbound logistics
Marketing & sales
Service
©McGraw-Hill Education.
Primary activities = sequential activities of the value chain that
refer to the physical creation of the product or service, its sale
and transfer to the buyer, and its service after sale, including
inbound logistics, operations, outbound logistics, marketing and
sales, and service.
3
Value-Chain Analysis Support Activities
Support activities either add value by themselves or add value
through important relationships with both primary activities &
other support activities.

21. Procurement
Technology development
Human resource management
General administration
©McGraw-Hill Education.
Support activities = activities of the value chain that either add
value by themselves or add value through important
relationships with both primary activities and other support
activities; including procurement, technology development,
human resource management, and general administration.
4
The Value Chain
Exhibit 3.1 The Value Chain: Primary and Support Activities
Adapted from Competitive Advantage: Creating and Sustaining
Superior Performance by Michael E. Porter. Copyright © 1985,
1998 by The Free Press.
Jump to Appendix 1 for long description.
©McGraw-Hill Education.
To get the most out of value-chain analysis, view the concept in
its broadest context, without regard to the boundaries of your
own organization – place your organization within a more
encompassing value chain that includes your firm’s suppliers,
customers, and alliance partners. This helps identify how value
is created for other organizations in the overall supply chain or
distribution channel. For an interesting example, look at Case
General Motors. (Remember the strategic groups discussion
from Chapter 2? What does GM have to do to compete with
other groups in its industry? How important might the value
chain be in this industry?)
5

22. Primary Activity: Inbound Logistics
Inbound logistics are primarily associated with receiving,
storing & distributing inputs to the product.
Material handling
Warehousing
Inventory control
Vehicle scheduling
Returns to suppliers
Factors to consider include:
Location of distribution facilities
Warehouse layout
©McGraw-Hill Education.
Inbound logistics = receiving, storing, and distributing inputs of
a product. Example = Toyota’s just-in-time (JIT) inventory
systems where parts deliveries arrive at the assembly plants
only hours before they are needed. This allows Toyota to fill a
buyer’s new car order in just 5 days. Inbound logistics includes
location of distribution facilities, design of material and
inventory control systems, warehouse layout and design, and
efficient systems to return products to suppliers.
6
Primary Activity: Operations
Operations include all activities associated with transforming
inputs into the final product form.
Machining
Packaging & Assembly
Testing or quality control
Printing
Facility operations
Factors to consider include:
Efficient plant operations & layout
Incorporation of appropriate process technology

23. ©McGraw-Hill Education.
Operations = all activities associated with transforming inputs
into the final product form. Example = Shaw Industries’ ability
to reduce expenses associated with the disposal of dangerous
chemicals used in the manufacture of floor coverings.
Operations includes assessment of efficiency of plant
operations, incorporation of appropriate process technology,
efficient plant layout and workflow design, degree of
automation, extent of appropriate quality control systems.
7
Primary Activity: Outbound Logistics
Outbound logistics includes collecting, storing, & distributing
the product or service to buyers.
Finished goods & warehousing
Material handling
Delivery vehicle operation
Order processing, scheduling & distribution
Factors to consider include:
Effective shipping processes
Minimizing shipping costs by grouping goods into large lot
sizes
©McGraw-Hill Education.
Outbound logistics = collecting, storing, and distributing the
product or service to buyers. Example = Campbell Soup uses an
electronic network so retailers can inform Campbell of product
needs and inventory levels. This allows Campbell to forecast
future demand and determine which products to replenish,
delivering inventory the same day. The retailer gains efficiency,
and therefore has an incentive to carry a broader line of
Campbell products. Outbound logistics includes effective
shipping processes to provide quick delivery and minimize

24. damages, efficient finished goods warehousing processes, the
ability to ship goods in large lot sizes to minimize
transportation costs, and the use of quality material handling
equipment. (See also Case Campbell Soup.)
8
Primary Activity:
Marketing & Sales
Marketing & sales activities involve purchases of products &
services by end users and includes how to induce buyers to
make those purchases.
Advertising & promotion
Sales force management
Pricing & price quoting
Channel selection & channel relations
Factors to consider include:
Innovative approaches to promotion & advertising
Proper identification of customer segments & needs
©McGraw-Hill Education.
Marketing and sales = activities associated with purchases of
products and services by end users and the inducements used to
get them to make purchases. Example = the Mercedes-Benz
AMG got premiere “product placement” as a fleet of these
showed up to pick up James Bond in the 2016 Spectre movie.
Marketing and sales includes the development of a highly
motivated and competent sales force, innovative approaches to
promotion and advertising, selection of the most appropriate
distribution channels, proper identification of customer
segments and needs, and effective pricing strategies.
9
Primary Activity: Service
Service includes all actions associated with providing service to
enhance or maintain the value of the product.

25. Installation & repair
Training
Parts supply
Product adjustment
Factors to consider include:
Quick response to customer needs
Quality of service personnel, ongoing training
©McGraw-Hill Education.
Service = actions associated with providing service to enhance
or maintain the value of the product. Example = Nordstrom
service reps can take control of the customer’s web browser and
lead her to the specific product she wants. Service includes
effective use of procedures to solicit customer feedback and to
act on information, quick response to customer needs and
emergencies, ability to furnish replacement parts, effective
management of parts and equipment inventory, quality of
service personnel and ongoing training, and warranty and
guarantee policies.
10
Support Activity: Procurement
Procurement involves how the firm purchases inputs used in its
value chain.
Procurement of raw material inputs
Optimizing quality & speed
Minimizing associated costs
Development of collaborative win-win relationships with
suppliers
Analysis & selection of alternative sources of inputs to
minimize dependence on one supplier
©McGraw-Hill Education.
SUPPORT ACTIVITIES are those functions that support the

26. value chain. Each industry might have distinct value activities
that are unique to that industry, but here are some common
ones. Procurement = the function of purchasing inputs used in
the firm’s value chain, including raw materials, supplies, and
other consumable items as well as assets such as machinery,
laboratory equipment, office equipment, and buildings. Example
= Microsoft does formal reviews of its outside suppliers,
including a feedback system that helps clarify expectations. In
addition to the above activities, procurement includes effective
procedures to purchase advertising and media services, and the
ability to make proper lease versus buy decisions.
11
Support Activity: Technology Development
Technology development is related to a wide range of activities.
Effective R&D activities for process & product initiatives
Collaborative relationships between R&D and other departments
State-of-the-art facilities & equipment
Excellent professional qualifications of personnel
Use of data analytics
©McGraw-Hill Education.
Technology development = activities associated with the
development of new knowledge that is applied to the firm’s
operations. The array of technologies employed in most firms is
very broad, ranging from technologies used to prepare
documents and transport goods, to those embodied in processes
and equipment or the product itself. Technology development
related to the product and its features supports the entire value
chain, while other technology development is associated with
particular primary or support activities. Example = the French
firm Techniq is a global leader in the energy industry, focusing
on pipelines. In collaboration with Schlumberger, Techniq has
developed “intelligent” pipes that add significant value for
customers, while increasing Techniq’s margins. Technology

27. development includes activities related to the process as well as
the product, such as enhancing the ability to meet critical
deadlines. Strategy Spotlight 3.2 discusses how Coca-Cola has
used data analytics to meet the taste demands of its global
customers.
12
Support Activity: Human Resource Management
Human resource management consists of activities involved in
recruitment, hiring, training & development, & compensation of
all types of personnel.
Effective employee recruiting, development, & retention
mechanisms
Quality relations with trade unions
Reward & incentive programs to motivate all employees
©McGraw-Hill Education.
Human resource management = activities involved in the
recruiting, hiring, training, development and compensation of
all types of personnel. It supports both individual primary and
support activities such as the hiring of engineers and scientists,
as well as supporting the entire value chain through activities
such as negotiations with labor unions. Example = JetBlue
recruited flight attendants with a one-year contract so they
could travel, meet lots of people, then decide what else they
might like to do. Human resource management includes creating
a quality work environment to maximize overall employee
performance and minimize absenteeism.
13
Support Activity:
General Administration
General administration involves:
Effective planning systems to attain overall goals & objectives
Excellent relations with diverse stakeholder groups

28. Effective information technology to coordinate & integrate
value-creating activities across the value chain
Ability of top management to anticipate & act on key
environmental trends & events, create strong values, culture &
reputation
©McGraw-Hill Education.
General administration = general management, planning,
finance, accounting, legal and government affairs, quality
management, and information systems; activities that support
the entire value chain and not individual activities. These
activities can be among the most important activities for
competitive advantage. Example = how a telephone operating
company effectively negotiates and maintains ongoing relations
with regulatory bodies. General administration also includes,
for instance, the ability to obtain low-cost funds for capital
expenditures and working capital. Leadership plays a critical
role here as well: Mark Zuckerberg and Jack Ma have been
critical to the success of their respective companies, Facebook
and Alibaba.
14
Interrelationships Among Value-Chain Activities
Managers must not ignore the importance of relationships
among value-chain activities.
What are the interrelationships among activities within the
firm?
What are the relationships among activities within the firm and
with other stakeholders such as customers & suppliers?
Consider integrating customers into the value chain.
Creating individualized products
Soliciting ideas for products & services
©McGraw-Hill Education.

29. Interrelationships = collaborative and strategic exchange
relationships between value-chain activities either (a) within
firms or (b) between firms. Strategic exchange relationships
involve exchange of resources such as information, people,
technology, or money that contribute to the success of the firm.
Example = within the firm, how effective human resource
practices can support the entire value chain. Example = between
the firm and stakeholders, how teaming up with customers
through a “prosumer” or crowdsourcing relationship can help
the firm gain insight into customer needs and leverage the
wisdom of the customer to create value for all. However, be
careful, because customers can use this forum to criticize the
company and its products. Research has shown that
crowdsourcing can backfire half the time.
15
Resource-Based View of the Firm
The resource-based view of the firm (RBV) integrates two
activities.
An internal analysis of phenomena within a company
An external analysis of the industry & its competitive
environment
Resources can lead to a competitive advantage.
If they are valuable, rare, hard to duplicate
If tangible resources, intangible resources, & organizational
capabilities are combined
©McGraw-Hill Education.
A firm’s strengths and capabilities – no matter how unique or
impressive – do NOT necessarily lead to a competitive
advantage. Resource-based view of the firm (RBV) =
perspective that firms’ competitive advantages are due to their
endowment of strategic resources that are valuable, rare, costly
to imitate, and costly to substitute. Without these unique
resources, the firm can only attain competitive parity. RBV goes

30. beyond a SWOT analysis to integrate internal and external
perspectives in a broader competitive context. RBV can reveal
how core competencies embedded in a firm can help it exploit
new product and market opportunities.
16
Types of Tangible Firm Resources
Tangible resources are assets that are relatively easy to identify.
Physical assets: plant & facilities, location, machinery &
equipment
Financial assets: cash & cash equivalents, borrowing capacity,
capacity to raise equity
Technological resources: trade secrets, patents, copyrights,
trademarks, innovative production processes
Organizational resources: effective planning processes,
evaluation & control systems
©McGraw-Hill Education.
Firm resources are all assets, capabilities, organizational
processes, information, knowledge, etc. controlled by a firm –
resources that enable it to develop and implement value-
creating strategies. Tangible resources = organizational assets
that are relatively easy to identify, including physical assets,
financial resources, organizational resources, and technological
resources. These include assets that the firm uses to create value
for its customers: physical resources such as the plant’s
proximity to customers and suppliers; financial resources such
as accounts receivables; organizational resources such as
employee development, evaluation and reward systems;
technological resources such as trade secrets and patents.
17
Types of Intangible Firm Resources
Intangible resources are difficult for competitors to account for
or imitate. They are embedded in unique routines & practices.

31. Human resources: trust, experience & capabilities of employees;
managerial skills & effectiveness of work teams, firm specific
practices & procedures
Innovation resources: technical & scientific expertise & ideas;
innovation capabilities
Reputation resources: brand names, reputation for fairness with
suppliers, non-zero sum relationships; reputation for reliability
& product quality with customers
©McGraw-Hill Education.
Intangible resources = organizational assets that are difficult to
identify and account for, and are typically embedded in unique
routines and practices, including human resources, innovation
resources, and reputation resources. Example = Harley-
Davidson’s strong brand image. A firm’s specific practices and
procedures, and the firm’s culture, may also be resources that
provide competitive advantage.
18
Types of Firm Resources:
Organizational Capabilities
Organizational capabilities are competencies or skills that a
firm employs to transform inputs into outputs. It is the capacity
to combine tangible & intangible resources to attain desired
ends.
Outstanding customer service
Excellent product development capabilities
Superb innovation processes & flexibility in manufacturing
processes
Ability to hire, motivate, & retain human capital
©McGraw-Hill Education.
Organizational capabilities = the competencies and skills that a
firm employs to transform inputs into outputs. Capabilities

32. involve an organization’s capacity to deploy tangible and
intangible resources over time and generally in combination,
and to leverage those capabilities to bring about a desired end.
Example = Apple’s ability to combine and package
technological components in new and innovative ways while
also seeking to integrate the value chain. See Case Apple.
19
Firm Resources and Sustainable Competitive Advantages
Strategic resources have four attributes.
Valuable in formulating & implementing strategies to improve
efficiency or effectiveness
Rare or uncommon; difficult to exploit
Difficult to imitate or copy due to physical uniqueness, path
dependency, causal ambiguity, or social complexity
Difficult to substitute with strategically equivalent resources or
capabilities
©McGraw-Hill Education.
Strategic resources (also firm resources or organizational
resources) = firms’ capabilities that are valuable, rare, costly to
imitate, and costly to substitute. Firm attributes must be
valuable in order to be considered resources and potential
sources of competitive advantage. These valuable resources
enable a firm to formulate and implement strategies that
improve its efficiency or effectiveness. If competitors or
potential competitors also possessed the same valuable
resource, it is not a source of competitive advantage unless it is
uncommon or rare. Inimitability or being difficult to imitate is
the key to value creation because it constrains competition.
Having a resource that competitors can easily copy generates
only temporary value. Non-substitutability means there is no
strategically equivalent valuable resources that are themselves
not rare or inimitable. However, even though a company cannot
exactly imitate someone else’s resource, it may be able to

33. develop an equivalent resource from another source, such as
Amazon internet capabilities allows it to compete against prime
brick-and-mortar Barnes & Noble locations.
20
Sources of Inimitability
Physical uniqueness are resources that are physically unique,
therefore impossible to duplicate.
Path dependency: hard to duplicate because of all that has
happened along the path followed in the development and/or
accumulation of resources.
Causal ambiguity: impossible to explain what caused a resource
to exist or how to re-create it.
Social complexity: resources that result from social engineering
such as interpersonal relations, culture.
©McGraw-Hill Education.
Physical uniqueness = a beautiful resort location, mineral
rights, or patents. Path dependency = a characteristic of
resources that is developed and or accumulated through a
unique series of events. See Strategy Spotlight 3.4 for an
example. Causal ambiguity = a characteristic of the firm’s
resources that is costly to imitate because a competitor cannot
determine what the resource is and/or how it can be re-created.
Google is given as an example. Social complexity = a
characteristic of a firm’s resources that is costly to imitate
because the social engineering required is beyond the capability
of competitors, including interpersonal relations among
managers, organizational culture, and reputation with suppliers
and customers.
21
Criteria for Sustainable Competitive Advantage
Is a resource or capability . . .Valuable?Rare?Difficult to
Imitate?Without Substitutes?Implications for

34. Competitiveness?NoNoNoNoCompetitive
disadvantageYesNoNoNoCompetitive
parityYesYesNoNoTemporary competitive
advantageYesYesYesYesSustainable competitive advantage
Exhibit 3.7 Criteria for Sustainable Competitive Advantage and
Strategic Implications
Source: Adapted from Barney, J.B. 1991. Firm Resources and
Sustained Competitive Advantage. Journal of Management,
17:99 – 120.
©McGraw-Hill Education.
Resources and capabilities must be rare and valuable as well as
difficult to imitate or substitute in order for a firm to attain
competitive advantages that are sustainable over time. If
resources and capabilities do not meet any of the four criteria it
would be difficult to develop any type of competitive advantage
in the short or long run. If resources and capabilities are not
difficult for competitors to imitate or substitute firms could
attain some level of competitive parity. Only when all four
criteria are satisfied will competitive advantages be sustained
over time.
22
Evaluating Firm Performance
Balanced Scorecard Analysis
Employees
Owners
Customer satisfaction
Internal processes
Innovation, learning & improvement activities
Financial perspectives

35. ©McGraw-Hill Education.
Financial ratio analysis = a technique for measuring the
performance of a firm according to its balance sheet, income
statement, and market valuation. When performing a financial
ratio analysis, you must take into account the firm’s
performance from a historical perspective (not just at one point
in time) as well as how it compares with both industry norms
and key competitors. Balanced scorecard = a method of
evaluating a firm’s performance using performance measures
from the customers’ perspectives, as well as internal, innovation
and learning, and financial perspectives.
23
The Balanced Scorecard
A meaningful integration of many issues that come into
evaluating performance
Four key perspectives:
How do customers see us? (customer perspective)
What must we excel at? (internal perspective)
Can we continue to improve and create value? (innovation &
learning perspective)
How do we look to shareholders? (financial perspective)
©McGraw-Hill Education.
Balanced scorecard = a method of evaluating a firm’s
performance using performance measures from the customers’
perspectives, as well as internal, innovation and learning, and
financial perspectives. It includes financial measures that
reflect the results of actions already taken, but it complements
these indicators with measures of customer satisfaction, internal
processes, and the organization’s innovation and improvement
activities – operational measures that drive future financial
performance. The balanced scorecard approach recognizes how
the interests of a variety of stakeholders can be interrelated.

36. 24
Customer Perspective vs. Internal Business Perspective
Managers articulate goals for customer concerns.
Time versus Quality
Performance and service versus Cost
Then focus on those critical internal operations that enable them
to satisfy customer needs.
Business processes
Cycle time, quality, employee skills, productivity
Decisions
Coordinated actions
Key resources and capabilities
©McGraw-Hill Education.
Customer perspective = measures of firm performance that
indicate how well firms are satisfying customers’ expectations.
Managers must translate their general mission statements on
customer service into specific measures that reflect the factors
that really matter to customers. Internal business perspective =
measures of firm performance that indicate how well a firm’s
internal processes, decisions, and actions are contributing to
customer satisfaction. Customer-based measures are important,
however they must be translated into indicators of what the firm
must do internally to meet customer’s expectations. The internal
measures should reflect business processes that have the
greatest impact on customer satisfaction.
25
Innovation and Learning Perspective
Managers must make frequent changes to existing products &
services as well as introduce entirely new products with
extended capabilities. This requires:
Human capital (skills, talent, knowledge)
Information capital (information systems, networks)

37. Organization capital (culture, leadership)
©McGraw-Hill Education.
Innovation and learning perspective = measures of firm
performance that indicate how well firms are changing their
product and service offerings to adapt to changes in the internal
and external environments. A firm’s ability to improve,
innovate, and learn is tied directly to its value. Simply put, only
by developing new products and services, creating greater value
for customers, and increasing operational efficiencies can a
company penetrate new markets, increase revenues and margins,
and enhance shareholder value. A firm’s ability to do well from
an innovation and learning perspective is more dependent on its
intangible than tangible assets.
26
Financial Perspective
Managers must measure how the firm’s strategy,
implementation, and execution are indeed contributing to
bottom line improvement. Financial goals include:
Profitability, growth, shareholder value
This should lead to:
Improved sales
Increased market share
Reduced operating expenses
Higher asset turnover
©McGraw-Hill Education.
Financial perspective = measures of firms financial performance
that indicate how well strategy, implementation and execution
are contributing to bottom-line improvement. Periodic financial
statements remind managers that improved quality, response
time, productivity, and innovative products benefit the firm
only when they result in improved sales, increased market

38. share, reduced operating expenses, or higher asset turnover.
27
Limitations of the Balanced Scorecard
Not a “quick fix” – needs proper execution
Needs a commitment to learning
Needs employee involvement in continuous process
improvement
Needs cultural change
Needs a focus on nonfinancial rather than financial measures
Needs data on actual performance
©McGraw-Hill Education.
There is general agreement that there is nothing inherently
wrong with the concept of the balanced scorecard. The key
limitation is that some executives may view it as a “quick fix”
that can be easily installed. Implementing a balanced metrics
system is an evolutionary process. It is not a one-time task that
can be quickly checked off as completed. If managers do not
recognize this from the beginning and fail to commit to it long-
term, the organization will be disappointed. Poor execution
becomes the cause of such performance outcomes. And
organizational scorecards must be aligned with individuals’
scorecards to turn the balanced scorecards into a powerful tool
for sustained performance. (For a variation on the balanced
scorecard concept, see the Malcolm Baldrige National Quality
Award at https://www.nist.gov/baldrige/baldrige-criteria-
commentary. This award encourages organizations to focus on
critical aspects of managing and performing as an organization,
using an integrated performance management framework that
addresses innovation management, intelligent risk, and strategic
priorities; social media; operational effectiveness; and work
systems and core competencies. Through a self-study process,
organizations can submit their findings for the award in
business/non profit, education, and healthcare categories.)

39. 28
Homework Topic overview: Strategic Analysis for an
Organization:
Strategy tools are vital for business and competitive analysis.
These tools vary in terms of the level of analysis as some are
found to be more suitable for analyzing the internal
environment while others are more practical for the external
environment analysis. How useful these strategic tools and
models in helping decision-makers at organizations to make a
better decision is a noteworthy question for investigation.
-This TMA is meant to assess the student’s ability in
understanding, and application of the course materials and ideas
from external sources, as well as to student’s reflection and
critical thinking. It is also intended to test the student’s ability
to argue relevantly and to justify a point of view besides,
constructing, defending and evaluating an argument, using
relevant evidence and giving reasons for conclusions.
Homework Topic
Renewable and Clean Energy in Automotive industry
Today, we are seeing an interest in clean energy procurement
pop up in industries ranging from mining to manufacturing, as a
result of a variety of motivators. In the beginning, the corporate
renewables revolution was confined to the most environmentally
progressive companies looking to meet sustainability goals. The
increasingly competitive price of renewable energy is now
inviting new industries to explore opportunities in the market.
One of the most intriguing participants in the long-term
renewable energy marketplace is the automotive industry.
Renewable and clean energy is powering the future of the
automobile industry. Gasoline and diesel may be the reigning
champs, but it looks like they’ve got some competition. With
growing concerns of the automotive industry’s impact on the

40. environment through carbon emissions, where car owners are
seeking alternative energy solutions that offer greater
sustainability. Consumer demand for higher environmental
consciousness is leading to a rise in sustainable mobility.
Automobile manufacturers are witnessing a shift in the energy
buying landscape.
You should answer the following four questions:
Question one: Critically discuss the key factors and forces in
the general and industry environments that affect the demand
for renewable and clean energy automobiles. (650 words)
Question two: Choose any manufacturer from automotive
industry and based on your findings in Q one, discuss how these
factors and forces affect your chosen manufacturer’s demand for
their products and consequently their market position in this
emerging industry. (350 words)
Question three: Discuss whether chosen manufacturer’s present
and future market position is supported by its value chain and
other key internal resources. Identify problems you think they
are facing to meet these new upcoming challenges in this new
emerging industry (650 words)
Question four: Critically discuss your chosen Business–Level-
strategy. What are the challenges they might face to continue
delivering its promises and stay ahead of competitors? Suggest
ways by which they may sustain their worldwide market
competitive position in future in this emerging industry. (350
words)
INSTRUCTIONS:
· Homework must be written in ESSAY (discussion) format for
the introduction and conclusion, the question most be on bullet

41. points and numbering.
· Word count should be exact with 10% (More/less) tolerance.
· You must acknowledge all sources of information using
Harvard Style Referencing (In-text referencing plus list of
references at the end). Minimum of three references are
required. Wikipedia is not recommended as a reference.