CH-1-4 Strategic Management and Strategic Competitiveness – Strategic Management: Concepts and Cases: Competitiveness and Globalization-2 : Book Guide

This Document Contains Chapters 1 to 4 Chapter 1 Strategic Management and Strategic Competitiveness ANSWERS TO REVIEW QUESTIONS 1. What are strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process? Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. A competitive advantage is achieved when a firm’s current and potential competitors either are not able to simultaneously formulate and implement its value-creating strategy, are unable to duplicate the benefits of the strategy, or find the strategy too costly to imitate. Above-average returns are returns that are in excess of what an investor expects to earn from other investments with a similar level or amount of risk. The strategic management process (see Figure 1.1) is the full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns. 2. What are the characteristics of the current competitive landscape? What two factors are the primary drivers of this landscape? In the current competitive landscape, the nature of competition has changed. As a result, managers making strategic decisions must adopt a new mind-set that is global in orientation. Firms must learn to compete in highly chaotic environments that produce disorder and a great deal of uncertainty. The two primary factors that have created the current competitive landscape are globalization of industries and markets and rapid and significant technological change. The implication for business firms is that to be successful, they must be able to meet or exceed global performance standards (in terms of such factors as quality, price, product features, speed to market) and be able to keep up with both the rapid pace of technological change as well as the rapid diffusion of innovation. 3. According to the I/O model, what should a firm do to earn above-average returns? The I/O model suggests that conditions and characteristics of the external environment (the general, industry, and competitive environments) are the primary inputs to and determinants of strategies that firms should formulate and implement to earn above-average returns. Assumptions of the I/O model are that: (1) the external environment imposes pressures and constraints that determine which strategies will result in superior profitability, (2) most firms competing in an industry (or industry segment) control similar strategically relevant resources and pursue similar strategies in light of resource similarity, (3) resources used to implement strategies are highly mobile across firms, and (4) decision makers are assumed to be rational and committed to acting in the firm’s best interests. The I/O model thus challenges firms to seek out the industry (or industry segment) with the greatest profit potential and then learn how to use their resources to implement value-creating strategies given the structural characteristics of the industry. 4. What does the resource-based model suggest a firm should do to earn above-average returns? The resource-based model assumes that each firm is a collection of unique resources and capabilities that provides the basis for its strategy and is the primary source of its profitability. It also assumes that over time, firms acquire different resources and develop unique capabilities. Thus, all firms competing within an industry (or industry segment) may not possess the same strategically relevant resources and capabilities. In addition, resources may not be highly mobile across firms. Thus, the resource-based model challenges firms to formulate and implement strategies that allow the firm to best exploit its core competencies - capabilities that are valuable, rare, costly to imitate, and non-substitutable - relative to opportunities in the external environment. Resources and capabilities that meet the criteria of core competencies then serve as the basis of a firm's sustainable competitive advantage, enabling it to achieve strategic competitiveness and earn above-average returns. 5. What are vision and mission? What is their value for the strategic management process? Vision is a picture of what the firm wants to be, and in broad terms, what it wants to ultimately achieve. Vision is “big picture” thinking with passion that helps people feel what they are supposed to be doing. Strategic mission is externally focused and represents a statement of a firm's unique purpose and the scope of its operations in product and market terms. It provides general descriptions of the products a firm intends to produce and the markets it will serve using its internally based core competencies. The differences between vision and mission are important because of their different focuses. However, they are both highly interdependent and add value to the strategic management process. The externally focused mission provides a sense of purpose for the firm by indicating the products to be provided to specific markets, while the internally set vision indicates what ultimately will be achieved. In other words, taken together, the vision and mission will provide a firm’s managers with the insights needed to effectively formulate and implement the firm’s strategies. 6. What are stakeholders? How do the three primary stakeholder groups influence organizations? Stakeholders are individuals and groups who can affect and are affected by strategic outcomes achieved and who have enforceable claims on a firm's performance. In other words, stakeholders have a stake (or a vested interest) in the actions of the firm. Stakeholders can influence organizations because they have the ability to withhold participation that is essential to a firm's survival, competitiveness, and profitability. The three primary stakeholder groups are: (1) capital market stakeholders, e.g., shareholders, lenders, (2) product market stakeholders, e.g., customers, suppliers, host communities, unions, and (3) organizational stakeholders, e.g., employees, managers, and others. There are many ways that stakeholders can influence organizations. For example, dissatisfied lenders can impose stricter covenants on subsequent borrowing of capital. Dissatisfied stockholders can reflect this sentiment through several means, including selling their stock (which can have a negative effect on its price). Dissatisfied employees can organize for collective bargaining. Dissatisfied community groups could express their disapproval by boycotting the firm’s goods. Stakeholder groups each have ways of bringing their influence to bear on the firm. 7. How would you describe the work of strategic leaders? Strategic leaders are people located in different parts of the firm using the strategic management process to help the firm reach its vision and mission. Regardless of their location in the firm, successful strategic leaders are decisive and committed to nurturing those around them and are committed to helping the firm create value for customers and returns for shareholders and other stakeholders. Strategic leaders can be described as hard working, thorough, honest, questioning, visionary, persuasive, analytical, and decision makers. They also have a penchant for wanting the firm and its people to accomplish more. The work of strategists includes scanning the environment - both internally and externally - to seek out information that will assist the firm in achieving its mission and satisfying its vision. Strategists would think about how the resources and capabilities of the firm could be nurtured and exploited to develop core competencies that would enable the firm to exploit environmental opportunities, achieve strategic competitiveness, and attain a competitive advantage that results in above-average returns. 8. What are the elements of the strategic management process? How are they interrelated? The parts of the strategic management process (illustrated in Figure 1.1) are strategic inputs, strategic actions and strategic outcomes. Strategic inputs are represented by the firm’s vision and mission that result from the assessment of the firm’s resources, capabilities, and competencies and conditions in the external environment. These strategic inputs - vision and mission - drive the firm’s strategic actions or the formulation and implementation of strategy. The strategic outcomes of successfully formulating and implementing value-creating strategies are strategic competitiveness and above-average returns. A feedback loop links strategic outcomes with strategic inputs. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Business success is often tied to effectively managed strategies. Using the Internet, study Starbuck’s current performance. Based on analysis, do you judge Starbucks to be a success? Why or why not? Starbucks continues to demonstrate success through strong global brand recognition, innovation, and steady revenue growth. Its focus on sustainability and digital engagement further solidifies its competitive edge. However, economic fluctuations and labor concerns may challenge its profitability. 2. Choose several firms in your local community with which you are familiar. Describe the twenty-first century competitive landscape to them, and ask for their feedback about how they anticipate that the landscape will affect their operations during the next five years. Local firms may face heightened competition, technological advancements, and globalization. They anticipate needing to adopt innovative strategies, improve digital presence, and prioritize customer experience to sustain operations and growth in the next five years. 3. Select an organization (e.g., school, club, or church) that is important to you. Who are the organization’s stakeholders? What degree of influence do you believe each has over the organization and why? An important organization's stakeholders include members, leaders, donors, and the community. Leaders and donors hold significant influence due to financial support and strategic direction, while members and the community shape operations through engagement and feedback. 4. Are you a stakeholder at your university or college? If so, of what stakeholder group or groups are you a part? Yes, I am a stakeholder in my university as a student. I contribute to its mission through tuition, academic performance, and participation in campus activities, influencing its reputation and decision-making processes. 5. Think of an industry in which you want to work. In your opinion, which of the three primary stakeholder groups is the most powerful in that industry today? Why? Which do you expect to be the most powerful group in five years? Why? In the healthcare industry, customers (patients) are the most powerful stakeholder group due to their direct impact on demand. In five years, regulators may dominate due to evolving policies and compliance requirements shaping industry practices. 6. Do you agree or disagree with the following statement? “I think managers have little responsibility for the failure of business firms.” Justify your view. I disagree; managers bear significant responsibility for business failures due to their role in strategy, leadership, and decision-making. Poor management can lead to inefficiencies, low morale, and uncompetitive practices. 7. Do vision and mission have any meaning in your personal life? If so, describe it. Are your current actions being guided by a vision and mission? If not, why not? Yes, vision and mission guide my personal life by providing purpose and direction. My actions align with long-term goals, focusing on personal growth, meaningful relationships, and contributing to my community. Ethics Questions 1. Can a firm achieve a competitive advantage and, thereby, strategic competitiveness without acting ethically? Explain. A firm may achieve short-term competitive advantage without acting ethically, but long-term strategic competitiveness requires ethics to sustain trust, reputation, and stakeholder relationships. Unethical behavior risks legal issues and public backlash. 2. What are a firm’s ethical responsibilities if it earns above-average returns? Firms earning above-average returns have a responsibility to reinvest in stakeholders, such as employees and communities, promote fairness, and support sustainability initiatives, ensuring long-term positive societal impact. 3. What are some of the critical ethical challenges to firms competing in the global economy? Firms in the global economy face challenges such as cultural differences, corruption, labor exploitation, and environmental concerns, requiring adherence to universal ethical standards. 4. How should ethical considerations be included in analyses of a firm’s internal and external environments? Ethical considerations should guide decisions about resource use, stakeholder engagement, compliance, and sustainability in analyzing a firm’s internal strengths and external opportunities. 5. Can ethical issues be integrated into a firm’s vision and mission? Explain. Yes, ethical principles can be embedded into a firm’s vision and mission, reflecting its commitment to integrity, accountability, and positive societal impact, which enhances stakeholder trust. 6. What is the relationship between ethics and stakeholders? Ethics and stakeholders are interconnected; ethical practices build trust and loyalty among stakeholders, while unethical behavior risks alienating them and damaging the firm’s reputation. 7. What is the importance of ethics for organizational strategists? Ethics are crucial for strategists to make decisions that align with organizational values, ensure fairness, and sustain long-term success while avoiding legal and reputational risks. INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR DIRECTED CASE Directed Case exercises are a series of multiple choice questions designed to focus on the concepts from the chapter utilizing the case study analysis steps, such as gaining familiarity, recognizing symptoms, identifying goals, conducting the analysis, making the diagnosis and doing the action planning. In order to prepare an oral/written case presentation, an effective case analysis should include general external environmental issues, issues relative to the firm’s particular industry, and the firm’s direct competitors. This analysis provides the insights needed to identify the firm’s strengths and weaknesses. You must then synthesize information gained from your analysis of the firm’s external environment and internal organization. This allows you to generate alternatives that can resolve significant problems or challenges facing the firm. Equal Exchange Equal Exchange is the largest company in the United States selling fair trade products exclusively. Equal Exchange is unique in its mission which is to pay its producers an above market price for their products out of a desire to provide stable income and to more equitably distribute the proceeds of the final sales. Students will review these concepts: • Developing a Vision and Mission • Define Stakeholder Relationships • Describe the work of Strategic Leaders • Hypercompetition INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES The Heart of Planning: A Non-profit Organization In this student team exercise, students will practice analysis and strategy formulation portion of the strategic management process for a non-profit organization. Students will analyze your organizational stakeholders, develop a mission and vision and consider a strategic initiative. Students will have the opportunity to practice valuable strategic management skills, including research, critical thinking, and teamwork. Students have been asked to assist a local community non-profit organization with the development of a strategic plan. The organization has been operating for a few years supported by individual donors who are passionate about the mission and respect the founder. Most of the work of the organization has been done by volunteers and two full-time employees. The founder/executive director is ready to take it to the next level, and there has been request to extend their work for a greater impact. They believe there may be funding sources to support growth. The founder realizes that it is time to reexamine the organization’s vision, mission and strategic initiatives. The founder and Board of Directors want to be sure they’ve identified all of their stakeholders and developed plans to satisfy their needs and create value for them. Students will be asked to: • Develop a mission and vision • Identify stakeholders • Suggest a strategic initiative • Prepare a strategic plan I the form of a 3-5 page executive summary and present a stakeholder analysis to the class. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Title: Lululemon Athletica RT: 3:07 Topic Key: Strategic Competitiveness, Strategy, Stakeholders, Strategic Leaders Recently there was a takeover attempt of Lululemon Athletica, Inc. by its founder and previous chairman of the board, Chip Wilson. Chip was forced to resign as chairman because of his insensitive remarks aimed at his customers that caused a public outcry. At the time of the video, Chip is attempting to reclaim control over the company. The quiz will reinforce topics learned in this chapter, including stakeholder relationships, hostile takeovers, and board of director duties, while relating the to a real world situation. Suggested Discussion Questions and Answers • Which stakeholder group did the company fail to satisfy? • Primary customers were the least satisfied with this defective product and represent an important constituency among product market stakeholders. Stakeholders: The parties involved with a firm’s operations can be separated into at least three groups. These groups are the capital market stakeholders (shareholders and the major suppliers of a firm’s capital), the product market stakeholders (the firm’s primary customers, suppliers, host communities, and unions representing the workforce), and the organizational stakeholders (all of a firm’s employees, including both nonmanagerial and managerial personnel). • The competitive landscape of the women’s athletic apparel market is widening with Lululemon at the forefront. A hyper-competition is rising in this industry. The current influx could be due to what? • Globalization refers to a product of a large number of firms competing against one another in an increasing number of global economies. Lululemon is facing competition from other apparel and sports companies including Nike to Gap. • Hypercompetition: Under conditions of hypercompetition, assumptions of market stability are replaced by notions of inherent instability and change. Several factors create hypercompetitive environments and influence the nature of the current competitive landscape. The emergence of a global economy and technology, specifically rapid technological change, are the two primary drivers of hypercompetitive environments and the nature of today’s competitive landscape. • The strategic management process at Lululemon has been severely compromised with drops in stocks, negative media stories, and changes in leadership. Which part of the A-S-P process should Lululemon reconsider if it wants to truly understand the root of its challenges and determine the best path to stay ahead of emerging competitors? • Analyses are used to identify strengths and weaknesses in the internal and external company environment. The team should start here to help with developing strategies. Chapter 2 The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis ANSWERS TO REVIEW QUESTIONS 1. Why is it important for a firm to study and understand the external environment? The external environment influences the firm’s strategic options as well as the decisions made in light of them. The firm’s understanding of the external environment is especially useful when it is matched with knowledge about its internal environment. Matching the conditions of the two environments is the foundation the firm needs to form its vision, mission, and to take strategic actions in the pursuit of strategic competitiveness and above-average returns. The importance of understanding the external environment is further underscored by the fact that the environmental conditions facing firms in the global economy of the 21st century differ from those firms faced previously. For example, technological changes and the explosion in information gathering and processing capabilities demand more timely and effective competitive actions and responses. The rapid sociological changes occurring in many countries affect labor practices and the nature of products demanded by increasingly diverse consumers. Governmental policies and laws affect where and how firms choose to compete. Competitive advantage goes to those firms who know their external environment and plan their strategies so they are relevant to these conditions. 2. What are the differences between the general environment and the industry environment? Why are these differences important? The general environment represents those elements in the broader society that can influence all (or most) industries and the firms that compete in those industries; it represents elements or segments that firms cannot directly control. The general environment is composed of the following segments: demographic, economic, political/legal, sociocultural, technological, and global. The industry environment is the constellation of factors that directly influences a firm and its competitive actions and responses. Firms are influenced by these factors and should attempt to establish a position in the industry that enables the firm to favorably influence the factors or to successfully defend against the factors’ influence. These factors are: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat from substitute products, and intensity of rivalry among competitors. 3. What is the external environmental analysis process (four parts)? What does the firm want to learn when using this process? The environmental analysis process represents an organized attempt by the firm to better understand turbulent, complex, and global environments. This is achieved by scanning (studying all segments of the general environment to identify existing or potential changes), monitoring (observing the pattern of changes over time in an attempt to detect meaning or identify trends), forecasting (developing feasible projections of what might happen, and how quickly, as a result of changes and trends identified from scanning and monitoring activities) and assessing (determining the timing and significance of environmental changes and trends on the strategic management of the firm). Stated differently, this analysis should examine and process external data on a continuous basis. An important objective of the environmental analysis process is to identify potential threats (conditions that may hinder the firm’s efforts to achieve strategic competitiveness) and opportunities (that may assist or help the firm in its efforts to achieve strategic competitiveness). 4. What are the seven segments of the general environment? Explain the differences among them. The demographic segment is concerned with characteristics of the population or society that makes up the general environment. Characteristics of interest are size, age, structure, geographic distribution, ethnic mix, and income distribution. The economic segment refers to the nature and direction of the economy in which a firm competes or may compete in the future. Important characteristics include inflation and interest rates, trade deficits (or surpluses), budget deficits (or surpluses), individual and business savings and investment rates, and gross domestic product. The political/legal segment is the arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding interactions between nations. In other words, this segment is concerned with how firms and other organizations attempt to influence government and how governmental entities in turn influence them. The sociocultural segment is concerned with the social attitudes and cultural values of different societies. The technological segment is made up of the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, or materials. The global segment includes relevant new global markets and existing ones that are changing, important international political events, and critical cultural and institutional characteristics of relevant global markets. This segment recognizes that firms now compete in a competitive landscape where both competitors and customers are global, due in part to the rapid diffusion of both information and technology. Competitors will no longer be domestic; they can originate from industrialized, newly industrialized, or emerging countries. Customer demands and expectations have changed; they are based on an ever-increasing awareness of global products and services. The physical environment segment refers to potential and actual changes in the physical environment and business practices that are intended to positively respond to and deal with those changes. Ecological, social, and economic systems interact to influence what happens in this segment. Global warming, energy consumption, and sustainability are all examples of issues related to the physical environment. 5. How do the five forces of competition in an industry affect its profit potential? Explain. An industry’s competitive intensity and profit potential can be determined by the relative strengths of five competitive forces. This model of industry competition recognizes that suppliers can influence industry profitability by raising prices or reducing the quality of goods sold if industry participants are unable to recover cost increases through pricing structures. Buyers can influence the profit potential of an industry if the buyer group is able to successfully bargain for higher quality, greater levels of service, and lower prices. Substitute products influence an industry’s profit potential by placing an upper limit on prices that can be charged. New entrants to an industry influence industry profitability because they bring additional production capacity to the industry. Unless product demand is increasing, additional capacity holds down (or reduces) buyers’ costs. This reduces profitability for all firms in the industry. The intensity of rivalry among competitors reflects competitor actions and responses as firms initiate moves to improve their competitive position or when they act in retaliation for competitive pressures brought about by the strategic actions of rival firms. Generally, the greater the intensity of competitive rivalry, the lower the overall profitability of an industry. 6. What is a strategic group? Of what value is knowledge of the firm’s strategic group in formulating that firm’s strategy? A strategic group is a group of firms within an industry that generally follow the same (or a similar) strategy, competing along the same strategic dimensions (such as product quality, pricing policy, distribution channels, or level of customer service). The strategic group concept is valuable to a firm’s strategic decision makers because a firm’s primary competitors are those within its strategic group (all group members are selling similar products to a similar group of customers), the strengths of the five competitive forces varies across strategic groups, and strategic groups that are similar (in terms of strategies followed and competitive dimensions emphasized) increase the possibility of increased competitive rivalry between the groups. The notion of strategic groups can be useful for analyzing an industry’s competitive structure. Such analyses can be helpful in diagnosing competition, positioning, and the profitability of firms within an industry. Strategic group analysis shows which companies are competing similarly in terms of how they use similar strategic dimensions. At the same time, research has found that strategic groups differ in performance, suggesting their importance. Strategic group membership also remains relatively stable over time, making analysis easier and more useful. Strategic groups have several implications. First, because firms within a group offer similar products to the same customers, the competitive rivalry among them can be intense. The more intense the rivalry, the greater the threat to each firm’s profitability. Second, the strengths of the five industry forces (the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors) differ across strategic groups. Third, the closer the strategic groups are in terms of their strategies, the greater is the likelihood of rivalry between the groups. In the end, having a thorough understanding of primary competitors helps a firm formulate and implement an appropriate strategy. 7. What is the importance of collecting and interpreting data and information about competitors? What practices should a firm use to gather competitor intelligence and why? Competitor analysis can help the firm understand and better anticipate competitors’ future objectives, current strategies, assumptions, and capabilities. The firm should gather intelligence about its competitors as well as about public policies in countries across the world, which can serve as an early warning of threats and opportunities emerging from the global public policy environment that may affect the achievement of the company’s strategy. Through effective competitive and public policy intelligence, the firm gains the insights needed to create a competitive advantage and to increase the quality of the strategic decisions it makes when deciding how to compete against its rivals. Firms want to know how competitor intelligence is gathered to determine whether the practices employed are legal and, further, to assess whether these methods are ethical, given the firm’s culture and the image it desires as a corporate citizen. The line between legal and ethical practices can be difficult to ascertain, especially when it comes to electronic transmissions. Often it is difficult for a firm to know how to gather intelligence and how to prevent competitors from gathering competitive intelligence that may threaten its own competitive advantage. Openly discussing intelligence-gathering techniques that the firm employs goes a long way toward assuring that people understand the firm’s convictions about what is ethical and acceptable for use and what is not ethical and is unacceptable for use when gathering competitor intelligence. The firm can frame these practices in terms of respect for the principles of common morality and the right of competitors not to reveal information about their products, operations, and strategic intentions. Despite its importance, evidence suggests that a relatively small percentage of firms use formal processes to study competitors. Beyond this, some firms fail to analyze a competitor’s future objectives when trying to understand its current strategy, assumptions, and capabilities, but it is important to study the present and the future when examining competitors. Failure to do so may lead to incomplete or distorted insights about competitors. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Given the importance of understanding the external environment, why do some firms fail to do so? Students can provide examples of firms that did not understand their external environment. What were the implications of the firm’s failure to understand that environment? Firms fail to understand their external environment due to overconfidence, lack of research, or ignoring market trends. For example, Blockbuster underestimated streaming services, leading to its downfall and Netflix’s dominance. 2. Have students select a firm and describe its external environment. What actions do you believe the firm should take, given its external environment, and why? A local retail firm faces competition and digital disruption. It should invest in e-commerce, enhance customer experience, and adapt to local consumer trends to remain competitive. 3. How is it possible that one firm could see a condition in the external environment as an opportunity whereas a second firm sees it as a threat? A condition like new regulations may be an opportunity for an adaptive firm to innovate but a threat to another firm resistant to change or heavily reliant on old practices. 4. Select a firm in the local community. What materials would help one understand the firm’s external environment? How could the Internet be used to complete this activity? Financial reports, industry analysis, and customer feedback help understand a firm’s external environment. The Internet provides access to competitor data, market trends, and regulatory updates. 5. Have students select an industry that is of interest to them. What actions could firms take to erect barriers of entry to this industry? Firms can erect barriers by leveraging patents, economies of scale, customer loyalty programs, and regulatory lobbying to deter new competitors in the industry. 6. What conditions would cause a firm to retaliate aggressively against a new entrant to the industry? Aggressive retaliation may occur when a new entrant threatens market share, pricing, or established customer relationships, prompting actions like price wars or increased marketing. Ethics Questions 1. How can a firm use its “code of ethics” to analyze the external environment? A firm’s code of ethics guides external environment analysis by ensuring compliance with laws, prioritizing sustainability, and avoiding harm to stakeholders, fostering trust and integrity in decision-making. 2. What ethical issues, if any, may be relevant to a firm’s monitoring of its external environment? Does use of the Internet to monitor the environment lead to additional ethical issues? If so, what are they? Ethical issues in monitoring include respecting privacy, avoiding surveillance abuse, and fair data usage. Internet use may raise concerns about unauthorized data collection and misrepresentation. 3. Think of each segment in a firm’s general environment. What is an ethical issue associated with each segment? Are firms across the globe doing enough to deal with the issue? Segments and Issues: Economic: Fair labor practices Sociocultural: Diversity and inclusion Technological: Data privacy Political: Corruption Environmental: Sustainability Many firms struggle to adequately address these globally. 4. What is the importance of using ethical practices between a firm and its suppliers? Ethical practices with suppliers build trust, ensure fair trade, and promote sustainable and socially responsible supply chains, strengthening long-term relationships. 5. In an intense rivalry, especially one that involves competition in the global marketplace, how can the firm gather competitor intelligence ethically while maintaining its competitiveness? Firms can gather competitor intelligence ethically through public data, customer feedback, and market research, avoiding espionage or deceptive tactics. 6. Ask the class what they believe determines whether an intelligence-gathering practice is or is not ethical? Do they see this changing as the world’s economies become more interdependent? If so, why? Do they see this changing because of the Internet? If so, how? Intelligence-gathering is ethical when it respects privacy, laws, and fairness. As economies interconnect and digital tools evolve, ethical boundaries may tighten to prevent misuse of global data networks. INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR BRANCHING EXERCISES Branching Exercises are real-world activities that allow each student to work through challenges by choosing from different decision-making options. These exercises provide students with the opportunity to practice strategic management in a business scenario utilizing company case studies. Students are placed in the role of a decision maker and asked to consider the needs and priorities of stakeholders as they determine strategy recommendations for a company. The Movie Exhibition Industry The movie cinematic industry is not what it once was. Back in the 1940s, a trip out to the theater was a common occurrence. The typical American saw 28 films a year in the theater. Now, that number has dropped dramatically to 4. It is your duty to help turn the movie industry around and return it to the popularity it once was. Hired as consultants for one of the largest movie theater circuits, AMC, students have been charged with developing a plan that will help AMC’s efforts to help revitalize the industry. Your first order of business is to become familiar with the industry and start by identifying early signals of environmental changes and trends. Students will review these concepts: • General environments and industry environments • External environmental analysis process • The five forces of competition The ideal path that earns a perfect score is the following: • Scanning the general environment • While performing the industry analysis, two threats have presented themselves: the threat of substitution and the threat of new entrants. You choose to neutralize the threats • You recommend competing with the threat of substitution • By neutralizing the threat, you recommend theaters leverage their buying power with studios to put limits on the catalog available to streaming services. Correct Answer: Your decisions have given AMC and the industry as a whole a massive bump in revenue. Your first decision was to start with a scan of the external environment. The insights led you to focus on the industry environment. Then, deciding to neutralize threats of substitution was correct because it was a safer route that would give the industry an advantage. Then, deciding to neutralize threats was correct because it was a safer route that would give the industry an advantage. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES Going Back to the Future: Researching the Past to Predict the Future A critical ingredient to studying the general environment is identifying opportunities and threats. An opportunity is a condition in the environment that, if exploited, could help a company achieve strategic competitiveness. In order to identify opportunities, you must be aware of trends that affect the world around you today or that are projected to affect it in the future. The purpose of this exercise is to sort through the opportunities and threats lurking around a business currently and in the future. The evolution of business and the way business is conducted is an ongoing process. Students will discuss an industry that you would like to research and review. Your challenge is to identify trends in an area that will likely alter the way in which business is conducted in the future. Gather with your group and pick an industry from one of the following to serve as your focus: Health and Beauty Products, Manufacturing, Retail. Use the four-step environmental analysis process to help you identify how the segment trends may provide your industry with an opportunity. Detail your conclusions for each of the four steps. You will be preparing a partial environmental analysis for your industry. A full environmental analysis would review all of the seven segments and address all four steps in great detail. For purposes of this project, you are conducting a mini-analysis that will concentrate on just a few of the segments and complete the steps for only your focus environmental factors. Prepare a 15-20 slide presentation of your research findings and the poll results. Use the bold words as your outline and be sure to include the following points: • Which of the seven dimensions of the general environment did you analyze? • Describe the effect on businesses in this industry. • List some business opportunities that may come from these trends. • Identify some existing businesses that stand to benefit from the trends. Present your results and be prepared to discuss your findings with the class. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Title: Craft Beer and Consolidation RT: 2:24 Topic Key: The Industry Environment, External Environmental Analysis, Five Forces of Competition, Craft beer sales have been increasing while domestic beer sales have been declining. This video is an example of how smaller new entrants compete with larger more established brands and the external threats they face, including consolation. Suggested Discussion Questions and Answers 1. Describe the general environment and industry environment in the craft beer market. General Environment: The craft beer market is shaped by sociocultural trends favoring local and artisanal products, economic factors like disposable income, and regulatory policies. Industry Environment: It features intense competition, fragmented market players, and growing consumer demand for innovation in flavors and sustainability. 2. Discuss the set of factors that has a direct influence on a firm and its competitive actions and responses including: the power of suppliers, power of buyers, and the intensity of rivalry among competing firms. When Bill Butcher of Port City Brews discusses shelf space and the way that a merger could increase the leverage of potential of large brewers, he is discussing which competitive force? Factors influencing competitive actions include: • Power of Suppliers: Limited access to unique ingredients can drive costs up. • Power of Buyers: Buyers demand variety and quality, influencing market trends. • Intensity of Rivalry: High due to numerous small breweries and brand loyalty. When discussing shelf space and mergers, Bill Butcher highlights the power of large competitors and distribution channels, which reflects the intensity of rivalry and threat of supplier consolidation. Chapter 3 The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages ANSWERS TO REVIEW QUESTIONS 1. Why is it important for a firm to study and understand its internal organization? As they analyze their internal environment, a manager should think of the firm as a bundle of heterogeneous resources and capabilities that can be used to create an exclusive market position. This means that firms should no longer focus only on the traditional sources of competitive advantage (e.g., labor costs, access to capital, and raw materials) as these advantages can be overcome through an international strategy and the relative free flow of global resources. Instead, firms should seek out those resources and capabilities that other firms do not have, at least not in the same combinations. A firm’s resources are the source of its capabilities, some of which can lead to core competencies that enable a firm to perform value-creating activities better than its competitors or that its competitors cannot duplicate. 2. What is value? Why is it critical for the firm to create value? How does it do so? Value is represented by the bundle of performance characteristics and attributes that a firm provides to customers in the form of goods or services for which customers are willing to pay. Broadly speaking, value can be provided by a product's/service's low cost, highly differentiated features, or a combination of the two (when these strategies are superior to those offered by competitors). Ultimately, it is critical that a firm be able to create customer value since it is the source of a firm's potential to earn above-average returns. Therefore, in the rapidly changing environments of the 21st century competitive landscape, firms must evaluate continuously the degree to which their core competencies create customer value. What the firm intends to do to create value affects its choice of business-level strategy and its organizational structure 3. What are the differences between tangible and intangible resources? Why is it important for decision makers to understand these differences? Are tangible resources more valuable for creating capabilities than are intangible resources, or is the reverse true? Why? ( Tangible resources are represented by assets that can be seen and quantified. They are not only represented by the firm's physical resources (such as plant and equipment), but also by other assets, such as the firm's borrowing capacity, the skills and attributes of its staff, and its technological capacities. Intangible resources (because they are less visible and more embedded in the firm's history) are more difficult for competitors to understand and imitate. These include such resources as scientific capabilities, knowledge within the firm, organizational routines, or the firm's reputation for quality. Resources are the source of a firm's capabilities. Capabilities are the source of a firm's core competencies, which are the basis of competitive advantages. Intangible resources (as compared to tangible resources) are a superior and more potent source of core competencies. In fact, in the global economy, intellectual and systems capabilities are more important to the success of a corporation than are its physical assets, and the capacity to manage human intellect is now a critical executive skill. Intangible resources are less visible and more difficult for competitors to understand, purchase, imitate, or substitute, and thus firms prefer to rely on these resources as the foundation for their capabilities and core competencies. Therefore, unobservable (i.e., intangible) resources provide a better platform for competitive advantage than do tangible resources. And unlike tangible resources, the use of intangible resources can be leveraged for even greater benefits to firm performance. 4. What are capabilities? How do firms create capabilities? Capabilities represent the firm's capacity or ability to successfully integrate sets of firm resources and deploy these resources to achieve some desired end. Capabilities evolve or develop over time through interactions among and between tangible and intangible resources. It is also critical to recognize that capabilities are based on the development, carrying, and exchange of information and knowledge by the firm's human capital. Thus, a firm's capabilities are a reflection of its knowledge base: the skills and knowledge of its employees and (often) their functional expertise. Global business leaders increasingly support the view that the knowledge possessed by human capital is among the most significant of an organization’s capabilities and may ultimately be at the root of all competitive advantages. But firms must also be able to utilize the knowledge that they have and transfer it among their business units. Given this reality, the firm’s challenge is to create an environment that allows people to integrate their individual knowledge with that held by others in the firm so that, collectively, the firm has significant organizational knowledge. 5. What four criteria must capabilities satisfy for them to become core competencies? Why is it important for firms to use these criteria to evaluate their capabilities’ value-creating potential? Capabilities are a firm's core competencies when they satisfy the four criteria of sustainable competitive advantage: they must be valuable, rare, costly to imitate, and nonsubstitutable. A capability is valuable when it helps a firm exploit opportunities or neutralize threats in its external environment. A capability that is rare is possessed by few, if any, current or potential competitors. Capabilities are costly to imitate when other firms cannot develop them except at a cost disadvantage relative to firms that already possess them. (This can be the case when the capabilities derive from unique historical conditions, are causally ambiguous, or socially complex.) Finally, capabilities are non-substitutable when they do not have strategic equivalents. It is important for these criteria to be used because a competitive advantage is sustainable over time only when competitors are unsuccessful at duplicating the benefits of the firm's strategy or when they are unable to imitate the strategy. 6. What is value chain analysis? What does the firm gain by successfully using this tool? The value chain is a template that the firm uses to understand its cost position and to identify the multiple means that might be used to facilitate the implementation of its business-level strategy. Managers would use value chain analysis to examine the firm's resources and capabilities in relationship to the activities performed in the design, manufacture, and distribution of products. Specifically, this framework differentiates primary activities (those involved with a product's physical creation, its sale and distribution to buyers, and its service after the sale) from support activities (which provide the support necessary for the primary activities to take place). Managers should scrutinize and assess activities and capabilities with competitors' capabilities in mind because the firm must be able to either perform an activity in a manner that provides value superior to or better than any competitor or identify and perform value-adding activities that competitors are unable to perform, if these capabilities are to be a source of competitive advantage. Nonetheless, it is important to remember that value chain analysis is a highly subjective process. Just as identifying and valuing a firm's resources and capabilities requires judgment, so does the process of assessing the relative value added by activities performed. Studying the value chain will enable managers to better understand their cost structure and the activities in which they can create and capture value. 7. What is outsourcing? Why do firms outsource? Will outsourcing’s importance grow in the future? If so, why? Outsourcing is the purchase of a value-creating activity from an outside supplier that can provide the greatest value. A firm is likely to engage in outsourcing when it identifies primary and support activities in which its resources and capabilities are neither sources of competence nor of sustainable competitive advantage. In such instances, firms should consider purchasing these activities from firms that can add value to the activity (relative to the firm's competitors). Outsourcing has several advantages for firms but also carries some important risks as well. Outsourcing can potentially reduce costs and increase the quality of the activities outsourced. In this way, it adds value to the product provided to consumers. Thus, outsourcing can contribute to a firm’s competitive advantage and its ability to create value for its stakeholders. However, the risk of the outsourcing partner’s learning the technology and becoming a competitor is very real and should be taken seriously. Outsourcing is important to firms competing in the 21st century landscape because few, if any firms possess all of the resources and capabilities that are necessary for them to achieve competitive superiority in all necessary primary and support activities. By outsourcing activities in which it lacks the competence to create value and by nurturing a few core competencies, a firm increases its probability of developing a sustainable competitive advantage. To maximize value, firms should scan the entire globe to locate the source (supplier or performer) of the to-be-outsourced activity to locate the best producer in the world of the activity that is being outsourced. Given the increasing complexity of products/services offered (e.g., based on combined, sophisticated technologies), firms looking forward should anticipate that even more outsourcing of non-strategic activities is likely to be necessary. 8. How do firms identify internal strengths and weaknesses? Why is it vital that managers have a clear understanding of their firm’s strengths and weaknesses? By completing the internal analysis, firms can (must) identify their strengths and weaknesses in resources, capabilities, and core competencies. For example, if they have weak capabilities or do not have core competencies in areas required to achieve a competitive advantage, they must acquire those resources and build the capabilities and competencies needed. Alternatively, they could decide to outsource a function or activity where they are weak in order to improve the value that they provide to customers. Firms need to have the appropriate resources and capabilities to develop the desired strategy and create value for customers and shareholders as well. Having many resources does not necessarily lead to success. Firms must have the right ones and the capabilities needed to produce superior value to customers. Undoubtedly, having the appropriate and strong capabilities required for achieving a competitive advantage is a primary responsibility of top-level managers. These important leaders must focus on both the firm’s strengths and weaknesses. 9. What are core rigidities? What does it mean to say that each core competence could become a core rigidity? Core rigidities can be viewed as yesterday’s sources of competitive advantage. These are capabilities that the organization does well but that have little current value from a competitive standpoint. When environments shift firms need to deploy resources and capabilities, and develop competencies that lead to competitive advantage. Continuing to invest in or perform activities with low competitive value is both expensive and inefficient. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Several companies use their brand as a competitive advantage. Ask the class, given their knowledge about the global economy, which brands they believe have the strongest likelihood of remaining a source of advantage in the twenty-first century? Why? What effects do they believe the Internet’s capabilities will have on this brand, and what should the owner of the brand do in light of them? Brands Likely to Sustain Advantage: Apple, Amazon, and Google are strong due to innovation and global reach. The Internet amplifies their advantage through global e-commerce, but they must invest in cybersecurity and customer experience to maintain trust and loyalty. 2. Students should visit the manager of a local store to obtain the following information. Using the definition presented in the chapter, define value for the manager. Ask the manager if the definition is consistent with how her or his firm thinks of value. If there is a difference, ask the manager to assess why the difference exists. Value Definition: Managers may define value as customer satisfaction or profitability. If discrepancies arise, they often stem from varying priorities, such as operational efficiency versus customer focus. 3. Have students consider a group (e.g., a fraternity or sorority, Toastmaster’s, or a volunteer organization) in which they hold membership. Using the categories shown in Tables 3.1 and 3.2, list what they perceive as the group’s tangible and intangible resources. Show the list to another member of the group. Does that person agree with your assessment of the group’s resources? If not, what might account for the differences? If differences do exist between you and your colleague, what is the meaning of such differences in terms of trying to form the group’s capabilities? Group Resources: Tangible resources may include meeting spaces and equipment, while intangible resources include leadership skills and networking. Differences in assessments may highlight diverse perspectives on the group’s priorities and potential. 4. Refer to the third question. Ask students if it was easier to list the tangible or the intangible resources? Why? How confident are they with their assessments? Tangible vs. Intangible: Tangible resources are easier to identify due to their physical nature, while intangible resources require subjective judgment, making assessments less certain. 5. What competitive advantage do individual students feel that the university or college possesses? What evidence can they provide to support this opinion? Does the class as a whole agree with the assessments? If not,why not? University’s Competitive Advantage: Examples include academic reputation, industry partnerships, or diverse programs. Disagreement in class may arise due to differing student priorities or experiences. 6. Ask students what effects they believe the Internet will have on the university or college within the next five years as it seeks to develop new competitive advantages. In their view, do the strategic decision makers in your educational institution understand the Internet’s capabilities? If not,why not? Internet Effects: The Internet enables online programs, global outreach, and digital innovation. Strategic leaders may lack understanding if they fail to adapt to digital trends or prioritize traditional methods. 7. Trust is identified in the chapter as a potential source of competitive advantage. Ask students if they have ever been involved in a situation in which trust was instrumental in accomplishing an organization’s goals? If so, what outcomes were made possible because of trust? Trust and Goals: Trust fosters collaboration, innovation, and risk-taking. For example, a trusted team may complete a complex project effectively due to shared confidence and mutual respect. Ethics Questions 1. Can efforts to develop sustainable competitive advantages result in employees using unethical practices? If so, what unethical practices might be used to compare a firm’s core competencies with those held by rivals? How do the Internet’s capabilities affect actions taken to form competitive advantages that will help the firm in its efforts to outperform its rivals? Unethical Practices in Competitive Advantage: Employees might misuse proprietary data, engage in corporate espionage, or manipulate benchmarks to compare competencies. The Internet facilitates such actions by making information more accessible, emphasizing the need for ethical guidelines. 2. Do ethical practices affect a firm’s ability to develop brand as a source of competitive advantage? If so, how does this happen? Can you think of brands that are a source of competitive advantage at least in part because of the firm’s ethical practices? Ethics and Brand Advantage: Ethical practices foster trust, loyalty, and a positive reputation, which strengthen brand value. Brands like Patagonia and Ben & Jerry’s succeed partly due to their commitment to sustainability and social responsibility. 3. What is the difference between exploiting a firm’s human capital and using that capital as a source of competitive advantage? Are there situations in which the exploitation of human capital can be a source of advantage? If so, can you name such a situation? If the exploitation of human capital can be a source of competitive advantage, is this a sustainable advantage? Why or why not? Human Capital: Exploitation involves overworking or undervaluing employees, while using it as an advantage focuses on development and innovation. Exploitation may provide short-term gains, such as in sweatshop labor, but it is unsustainable due to ethical concerns and reputational damage. 4. Are there any ethical dilemmas associated with outsourcing? If so, what are they? How would you deal with outsourcing ethical dilemmas you believe exist? Outsourcing Dilemmas: Issues include unfair wages, poor working conditions, and job displacement. Addressing these requires transparent practices, fair labor standards, and ensuring suppliers align with ethical values. 5. What ethical responsibilities do managers have if they determine that a set of employees has skills that are valuable only to a core competence that is becoming a core rigidity? Managers’ Responsibilities: Managers should reskill or redeploy employees with redundant skills to new roles, ensuring fairness and minimizing harm as competencies evolve. 6. Through the Internet, firms sometimes make a vast array of data, information, and knowledge available to competitors as well as to customers and suppliers. What ethical issues, if any, are involved when the firm finds competitively relevant information on a competitor’s website? Ethical Issues in Data Use: Using competitors’ website information raises privacy and intent concerns. Firms should avoid exploiting unintentional disclosures and adhere to fair competition norms. 7. Firms are aware that competitors read information that is posted on their websites. Given this reality, is it ethical for a firm to include false information, for example, about its sources of competitive advantage on its website in hopes that the information will influence competitors to take certain actions as a result of viewing it? False Information: Posting false information to mislead competitors is unethical, undermines credibility, and risks reputational damage. Ethical competition relies on transparency and integrity. INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR DIRECTED CASE Directed Case exercises are a series of multiple choice questions designed to focus on the concepts from the chapter utilizing the case study analysis steps, such as gaining familiarity, recognizing symptoms, identifying goals, conducting the analysis, making the diagnosis and doing the action planning. In order to prepare an oral/written case presentation, an effective case analysis should include general external environmental issues, issues relative to the firm’s particular industry, and the firm’s direct competitors. This analysis provides the insights needed to identify the firm’s strengths and weaknesses. You must then synthesize information gained from your analysis of the firm’s external environment and internal organization. This allows you to generate alternatives that can resolve significant problems or challenges facing the firm. Columbia Sportswear Columbia Sportswear Company is a leader in the highly competitive active outdoor sportswear apparel market. This case takes students through the company’s humble beginnings as a hat distributor and how its decision to start manufacturing its owns product line was a turning point for the company. Students will learn how Columbia’s culture and business personality helped it grow into a sportswear apparel juggernaut as well as the internal and external factors the company faces today. Threats from competition, production cost factors, weather-related issues, and increasing e-commerce demands highlight many of the strategic management concepts in this chapter. Students will review these concepts: • Sources of Competitive Advantages • Identifying Goals: Future Strategies • Conducting the Analysis: General Environment; Resources • Making the Diagnosis: Prioritize Problems • Doing the Action Planning: Countermeasure • Doing the Action Planning: Action Alternatives • Doing the Action Planning: Prioritize Resources INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES Build a Better Mousetrap: Creating a Competitive Advantage The focus of this chapter is on understanding how a firm’s resources and capabilities serve as the cornerstone for competencies and, ultimately, are a source of competitive advantage. The goal of this exercise is to learn about how companies use strategies, like outsourcing to gain a competitive advantage in the market. Student teams will create a company and determine how they could engage in effective outsourcing to increase their flexibility, mitigate risks and reduce their capital investments. You should encourage (or maybe provide incentives) that some teams choose non-U.S. based firms to add variety to the assignment. This exercise can also be done on an individual basis. Ask each student team to present their findings to the class. To obtain a variety of in the presentation, ask several questions during the presentation. For instance: Why did you choose the firm you did? What are its core competencies? How has outsourcing helped achieve the company’s competitive advantage? INSTRUCTOR'S NOTES FOR VIDEO EXERCISES The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Title: Mars, Inc.: Increasing Capacity for Competitive Advantage RT: 4:21 Topic Key: Value, Resources, Capabilities, Core Competencies, Sustainable Competitive Advantage To maintain its competitive advantage Mars, Inc. recently opened a new 500,000 square foot manufacturing plant in Topeka, Kansas. Built to increase its capacity for making its two top sellers – Peanut M&Ms and Snickers, the facility cranks out 6 million Snickers bars and 39 million individual Peanut M&Ms everyday. As a private company, they are able to think more long-term than public companies that may be more concerned with short-term profits to appease shareholders. Suggested Discussion Questions and Answers • What are some of Mars Inc.’s competitive advantages? o Long-term thinking private company. o Established premium brands that can command premium prices. • What resources and resulting capabilities and core competencies do you see within the Mars Inc. organization that gives it strategic competitiveness? o Product and design quality. o Costly-to-Imitate Capabilities. • What is an example of Mars Inc.’s quality control capabilities? o The way they inspect the size and quality of every peanut. o The way they make the M&Ms and the placement of the logo. Chapter 4 Business-Level Strategy ANSWERS TO REVIEW QUESTIONS 1. What is a business-level strategy? Business-level strategy (the focus of Chapter 4) is an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Thus, a business-level strategy reflects a firm’s belief about where and how it has an advantage over its rivals, while guiding decisions to choose to perform activities differently or to perform different activities than competitors. Key issues the firm must address when choosing a business-level strategy are the good or service to offer, how to manufacture or create it, and how to distribute it to the marketplace. Once formed, the business-level strategy reflects where and how the firm has an advantage over its rivals. The essence of a firm’s business-level strategy is choosing to perform activities differently or to perform different activities from rivals. 2. What is the relationship between a firm’s customers and its business-level strategy in terms of who, what, and how? Why is this relationship important? The relationship between a firm’s customers and its business-level strategy is that, to survive and achieve strategic competitiveness, firms must create value that satisfies some group of customers’ needs. In other words, successful business-level strategies are founded or based on customers’ needs. Who represents the determination of specific customer groups to be served? The primary focus here is market segmentation. What is concerned with customer needs that will be satisfied? How represents the core competencies of the firm that can be used to satisfy customers’ needs that have been identified. Increasing segmentation of markets throughout the global economy creates opportunities for firms to identify increasingly unique customer needs they can try to serve by using one of the business-level strategies. 3. What are the differences among the cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation business-level strategies? Strategy Source(s) of Competitive Advantage Cost Leadership Lowest cost with a level of product features or characteristics acceptable to the most typical customers in the industry Differentiation Product’s unique attributes and characteristics that are valued by a broad group of customers Focused Cost Leadership Lowest cost with a level of product features or characteristics targeted to a particular customer group or segment in an industry Focused Differentiation Product’s unique attributes and characteristics that are valued by a particular customer group (niche) or segment in an industry Integrated Cost Leadership/ Differentiation Products have attributes of both relatively low cost and unique attributes, characteristics, or features; the level of product differentiation is less than the pure differentiator while cost is higher than that of the low-cost leader 4. How can each one of the business-level strategies be used to position the firm relative to the five forces of competition in a way that helps the firm earn above-average returns? Strategy Dealing with the Five Forces of Competition Cost Leadership Can compete against rivals on price Can price below rivals to interest buyers Can absorb prince increases by suppliers better than rivals Discourages new entrants that can’t endure low profit margins Can reduce prices to maintain attractiveness over substitutes Differentiation Customers are loyal to firms offering differentiated products Uniqueness reduces sensitivity of buyers to price increases High margins shield the firm from losses to powerful suppliers Customer loyalty to differentiated products deters new entrants Unlikely to switch to substitutes when loyal to products Focused Cost Leadership An adaptation of the above Focused Differentiation An adaptation of the above Integrated CL/Differentiation An adaptation and combination of the above 5. What are the specific risks associated with using each business-level strategy? Strategy Risk(s) of Selecting and Implementing Cost Leadership Minimal investment in technology could result in process obsolescence; firm misses change in customers’ needs due to cost-only focus; competitors imitate strategy Differentiation Customers decide price differential between low cost producer and differentiator is too large; too many features offered; product’s means of differentiation no longer provides value to customers; customer learning (experience) may change their perception of the value of differentiation; counterfeit products displace the firm’s offerings Focused Cost Leadership & Focused Differentiation Beyond the general risks noted for the low-cost leader and the differentiator, focus strategies have the following risks: competitor “outfocuses” the focuser by defining a narrower segment; a firm competing on an industry-wide basis may decide that the segment served by the focus strategy firm is attractive and decides to pursue that segment; the needs of customers within the narrow segment may become more similar to all customers in the market, reducing or eliminating the advantages of a focus strategy Integrated Cost Leadership/ Differentiation Product features not sufficiently valued by customers; product is not sufficiently differentiated; product is too expensive to compete with low-cost leader’s products ANSWERS TO MINI CASE DISCUSSION QUESTIONS 1. What strategy was the new CEO at JC Penney seeking to implement given the generic strategies found in Chapter 4? The new CEO primarily employed a strategy of Focused Differentiation by creating a shopping space that had unique attributes (the “store-within-a-store” concept) that aimed to attract new customers to the fledging retailer while maintaining its current customers by offering a “better deal” on all products as opposed to providing special high discounts on selected products. 2. What was the result of change in strategy implemented? The first year of this new strategy appeared to be a failure. Total sales in 2012 were $4.28 billion less than in 2011 and the firm’s stock price declined by 55 percent. Internet sales also declined by 34 percent compared to an increase of 48 percent for its new rival. All of this translated into a net loss for the year of slightly less than $1 billion for JCP. 3. Why was this strategy a disaster for JC Penney? The changes overlooked the firm’s current customers; JCP began competing for customers who normally shopped at Target, Macy’s and Nordstrom, but it seems the executive team at Penney’s thought that they could retain their current customer base while attracting competitors’ customers. However, it appears JCP was not attracting customers from its rivals but rather cannibalizing customers from its old stores, resulting in an overall decline in customers 4. What does it mean to be “stuck in the middle” between two strategies (i.e., between low cost and differentiation strategies)? Being stuck in the middle means that the firm’s cost structure is not low enough to allow it to attractively price its products and that its products are not sufficiently differentiated to create value for the target customer. This appears to be the problem experienced by J.C. Penney. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Students are customers of the university or college. What actions does your school take to recognize and satisfy its students’ needs? Students should be prepared to discuss their views. Recognizing Student Needs: Universities often offer academic support, career services, flexible course schedules, and extracurricular opportunities to meet students' needs. These efforts aim to enhance educational and personal experiences. 2. Students should select a local firm, and based on interactions with this company, determine which business-level strategy they think the firm is implementing. Ask what evidence they can provide to support their opinions. Is the Internet affecting the firm’s strategic actions? If so, how? Business-Level Strategy: Students might identify a cost-leadership or differentiation strategy in a local firm based on pricing, unique offerings, or customer engagement. The Internet impacts actions through online sales, marketing, or customer interaction. 3. Assuming that students have decided to establish and operate a restaurant in your local community, ask them what market segment would they intend to serve? What needs do these customers have that the students could satisfy with their restaurant? How would they satisfy those needs? They should be prepared to discuss their responses. Restaurant Market Segment: Students may target health-conscious customers, providing fresh, organic meals. Needs could be satisfied through a diverse menu, eco-friendly packaging, and nutritional transparency. 4. What business-level strategy do students think your school is implementing? What core competencies are being used to implement this strategy? School Strategy: Schools often use a differentiation strategy by offering specialized programs, expert faculty, and robust student support systems, leveraging academic and technological core competencies. 5. Propose the following statement to the class: “It is impossible for a firm to produce a relatively low-cost, yet somewhat highly differentiated product.” Is this statement true or false? Ask students for their reasoning behind their answer. Low-Cost Yet Differentiated Products: The statement is false. Firms like IKEA and Southwest Airlines combine cost-efficiency with unique attributes, showing that cost leadership and differentiation can coexist. 6. Do students feel the Internet is potentially of more value for firms implementing either the differentiation strategy or the focused differentiation strategy than for those using either the cost leadership or focused cost leadership strategy? If so, why? Internet and Differentiation Strategies: The Internet is more valuable for differentiation, enhancing customization, branding, and targeted marketing, especially in niche or focused markets. 7. Is it possible for a traditional firm to become too reliant on the Internet? If so, why? If not, why not? Over-Reliance on the Internet: Yes, firms can become too reliant, risking disruptions due to outages, cyber threats, or losing personal touch with customers critical in traditional sectors. Ethics Questions 1. Can a commitment to ethical conduct on issues such as the environment, product quality, and fulfilling contractual agreements affect a firm’s competitive advantage? If so, how? Ethical Conduct and Competitive Advantage: Ethical practices in environmental care, product quality, and honoring contracts enhance trust and loyalty, creating a positive brand image and long-term competitive advantage. 2. Is there more incentive for differentiators or cost leaders to pursue stronger ethical conduct? Think of an example to support your answer. Differentiators vs. Cost Leaders: Differentiators may have greater incentive to uphold ethical standards, as unique value often involves quality and trust. For instance, Patagonia's environmental ethics boost its brand image. 3. Can an overemphasis on cost leadership or differentiation lead to ethical challenges (such as poor product design and manufacturing) that create costly problems (e.g., product liability lawsuits)? Cost Leadership and Ethical Challenges: Overemphasis on cost-cutting can result in poor-quality products and ethical lapses, as seen in past product recalls due to defective designs in cost-focused firms. 4. Reexamine the assumptions about effective TQM systems presented in the chapter. Do these assumptions urge top-level managers to maintain higher ethical standards than they now have? If so, how? TQM and Ethics: TQM systems encourage ethical practices by emphasizing accountability, transparency, and a commitment to continuous improvement in quality and decision-making. 5. As discussed in Chapter 3, a brand image is one way a firm can differentiate its good or service. However, many questions are now being raised about the effect brand images have on consumer behavior. For example, considerable concern has arisen about brand images that are managed by tobacco firms and their effect on teenage smoking habits. Should firms be concerned about how they form and use brand images? Why or why not? Brand Image Concerns: Firms should be cautious, as brand images can influence societal behaviors (e.g., tobacco and teenage smoking). Ethical branding aligns with long-term sustainability and societal trust. 6. What ethical issues do you believe are associated with use of the Internet to implement the firm’s business-level strategy? Internet and Ethics: Issues include privacy breaches, misleading advertising, and unfair competitive practices, all of which can undermine trust and credibility in a firm’s strategy. 7. If ethical issues do exist regarding Internet use, who do you believe should be responsible for addressing them: governments or companies themselves? Why? Responsibility for Internet Ethics: Both governments and companies should address ethical concerns. Governments enforce regulations, while firms ensure ethical internal practices to build trust and avoid penalties. INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES Hitting the Target: Understanding Customer Needs With Market Segmentation By asking students to identify business-level strategy of various companies, this exercise provides the opportunity for students to identify how market segmentation is used by firms to craft advertising campaigns that target a specific customer base. The instructor should encourage students to clearly identify the strategy employed by the brand, and how the poster is a visual representation of that strategy at work. The instructor may also challenge the students to discuss how to build brand loyalty using different business-level strategies. INSTRUCTOR'S NOTES FOR BRANCHING EXERCISE Branching Exercises are real-world activities that allow each student to work through challenges by choosing from different decision-making options. These exercises provide students with the opportunity to practice strategic management in a business scenario utilizing company case studies. Students are placed in the role of a decision maker and asked to consider the needs and priorities of stakeholders as they determine strategy recommendations for a company. TESLA MOTORS Tesla is a 10-year-old company that specializes in electric power technology. The firm sells its powertrain components to other car companies. At the same time, it is selling a high-performance electric Roadster and the Model S and Model X luxury cars. The company is serving two customers at the same time, both with a Focused Differentiation Strategy. However, Tesla Motors founder Elon Musk believes that electric cars should be available for everyone. Students will be shown how this is a potential conflict of interest, and must make a decision which strategy the company should pursue moving forward to align itself with the founder’s beliefs. Students will be asked to analyze the situation, then decide whether they, as members of the company, should make the decision to sell only cars to end-user consumers, or to continue selling both cars and their technology to competitors. After the initial decision is made, students will be presented with several more opportunities to make decisions that will include identifying and handling different types of competitive forces and choosing a business-level strategy based on the effects of competitive forces. Students will review these concepts: • Types of business-level strategies • Risks associated with each type of business-level strategy • Relationship between customers and business-level strategy • Supplier bargaining power • Customer bargaining power The ideal path that earns a perfect score is the following: • Choose to continue selling both cars and the technology to competitors • Continue in our Differentiation Strategy. We need to continue to invest in R&D to make our batteries even better, extending our mileage range, so that the car manufacturers have to choose our batteries and equipment to satisfy their customers’ needs. • Customer Bargaining Power • Our focus must be on extending the range of our batteries. We have the best equipment and that’s the only way we can justify the premium price. The manufacturers will have to come back to us if we have the only battery that truly meets drivers’ needs. • Correct Answer: Components: We stayed focused on our R&D for electric cars, and proved that we can build the best EV components in the business. With our differentiation of longer battery usage and efficiency, we’ve been able to justify a premium price for our components. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Title: Differentiation Strategy: Value Creation At Burberry RT: 3:34 Topic Key: Business-Level Strategy, Managing Relationships with Customers, Market Segmentation, Differentiation Strategy, Five Forces of Competition The video opens with a short survey of differing opinions of the clothing company Burberry. Immediately, two distinct opinions emerge: • Burberry is the height of luxury • Burberry is only for ‘chavs’, a British term suggesting the brand is often worn by less-than-upstanding people Due to an unexpected change in price and loss of control of its image, Burberry has, in recent years, been striving to recreate its former brand image of absolute luxury. In order to do this, the company hired a new head designer and began holding regular fashion shows featuring their newest designs. Burberry has also been updating their image by holding events attended by celebrities who proudly wear and support the company’s clothing. This has helped to change the image of the company over the last few years, as it is once again seen as the luxury brand it once was and wishes to be. Suggested Discussion Questions and Answers 1. Describe Burberry’s business-level strategy. Burberry has implemented a differentiation strategy by redefining their brand image to more subtly incorporate their iconic ‘check’ clothing pattern. 2. How is Burberry managing its relationship with customers? Burberry holds fashion shows to showcase their newest clothing, and hosts events attended by celebrities who both wear Burberry clothing and share with the media their favorable opinions of the company. 3. Is the differentiation strategy appropriate for Burberry? Why or why not? Now or in the future? Providing high luxury clothing products at luxury prices has worked well for Burberry in the past; it helped to build the company’s brand image that is now in the process of being restored. At the moment, the strategy seems to be working for the company, as it did in the past. In the future, an economic downturn may result in a steep drop in Burberry clothing prices, once again resulting in the clothing being sold at low costs, tarnishing the brand’s luxury image. Solution Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838