[Music] in this course we'll define competitive advantage resources are the assets capabilities processes employee time information and knowledge that an organization controls firms use their resources to improve organizational effectiveness and efficiency resources are critical to organizational strategy because they can help companies create and sustain an advantage over others organizations can achieve a competitive advantage providing greater value for customers than competitors can a competitive advantage becomes a sustainable competitive advantage when other companies cannot duplicate the value a firm is providing the customers valuable resources allow companies to improve their efficiency and effectiveness unfortunately changes in customer demand and preferences competitors actions and technology can make once valuable resources much less valuable for sustained competitive advantage valuable resources must also be rare resources think about it how can the company sustain a competitive advantage if all of its competitors have similar resources and capabilities consequently rare resources resources that are not controlled or possessed by many competing firms are necessary to sustain competitive advantage for sustained competitive advantage however other firms must be unable to imitate or find substitutes for those valuable rare resources imperfectly imitatable resources are those resources that are impossible or extremely costly or difficult to duplicate valuable rare or imperfectly imitatable resources can produce sustainable competitive advantage only if there are also non substitutable resources meaning that no other resources can replace them and produce similar value or competitive advantage the external business environment is much more turbulent than it used to be when customers needs constantly grow and change and with competitors working harder faster and smarter to meet those needs the first step in creating strategy is determining the need for strategic change in other words the company should determine whether it needs to change its strategy to sustain competitive advantage determining the need for strategic change might seem easy to do but it's really not there's a great deal of uncertainty in strategic business environments furthermore top-level managers are often slow to recognize the need for strategic change especially its successful companies that have created and sustained competitive advantages because they're actually aware of the strategies that made their companies successful they continue to rely on those strategies even as the competition changes besides being aware of the dangers of competitive inertia what can managers do to improve the speed and accuracy in which they determine the need for strategic change one method is to actively look for signs of strategic dissonance strategic dissonance is a discrepancy between a company's intended strategy and the strategic actions managers take when actually implementing the strategy note however that strategic dissonance is not the same thing when a strategy does not produce the results that it was supposed to a situational analysis can also help managers determine the need for strategic change a situational analysis also called a SWOT analysis for strengths weaknesses opportunities and threats is an assessment of the strengths and weaknesses in an organization's internal environment and the opportunities and threats in its external environment a distinctive competence is something that a company can make do or perform better than its competitors whereas distinctive competencies are tangible for example a product or service is faster cheaper or better the core capabilities that produce distinctive competencies are not core capabilities are less visible internal decision-making routines problem solving processes and organizational cultures that determine how effectively and efficiently inputs can be turned into outputs distinctive competencies cannot be Stane for lawn without superior core capabilities after examining internal strengths and weaknesses the second part of a situational analysis is to look outside the company to assess the opportunities and threats in the external environment in situational analysis however managers use environmental scanning to identify specific opportunities and threats that can either improve or harm the company's ability to sustain its competitive advantage identification of strategic groups information of shadow of strategy task force are two ways of doing this strategic groups are not groups that actually work together they're companies usually competitors that managers closely follow more specifically a strategic group is a group of other companies within an industry against which top managers compare evaluate and benchmark their company's strategic threats and opportunities secondary firms are firms that use strategies related to but somewhat different from those core to the firm after determining the need for strategic change and conducting a situational analysis the last step in the strategy making process is to choose strategic alternatives that will help the company create or maintain a sustainable competitive advantage according to a strategic reference point theory managers choose between two basic alternative strategies they can choose a conservative risk avoiding strategy that aims to protect an existing competitive advantage or they can choose an aggressive risk seeking strategy that aims to extend or create a sustainable competitive advantage the choice to seek risk or avoid risk typically depends on whether top management views the company is falling above or below strategic reference points strategic reference points are the targets that managers use to measure whether a firm has developed the core competencies that it needs to achieve a sustainable competitive advantage in the long run effective organizations will frequently revise their strategic reference points to better focus managers attention on the new challenges and opportunities that occur with ever-changing business environment to formulate effective strategies companies must be able to answer these basic questions what business are we in how should we compete in this industry who are our competitors and how should we respond to them these simple but powerful questions are at the heart of corporate industry in firm level strategies corporate level strategy is the overall organizational strategy that addresses the question what business or businesses should we be in one of the standard strategies for stock market investors is diversification or owning stocks in a variety of companies in different industries the purpose of this strategy is to reduce risk in the overall stock portfolio the entire collection of stocks this basic idea is simple if you invest in 10 companies and in 10 different industries you won't lose your entire investment if one company performs poorly furthermore because they're in different industries one company's losses are likely to be offset by another company's gains portfolio strategy is a corporate level strategy that minimizes risks by diversifying investment among various businesses or lines just as in diversification strategy guides an investor who invests in a variety of stocks portfolio strategy guides the strategic decisions of corporations that compete in a variety of businesses just as investors consider the mix of stocks in their stock portfolio when deciding which stocks to buy or sell managers following portfolio strategy try to acquire companies that fit well with the rest of their corporate portfolio and sell those that don't first according to portfolio strategy the more businesses in which a corporation competes the smaller its overall chances of failing think of a corporation as a stool and its businesses as the legs of the stool the more legs or businesses added to the stool the less likely it is to tip over managers employing portfolio strategy can either develop new business initially or look for acquisitions that is other companies to buy either way the goal is to add legs to the stool second beyond adding new businesses to corporate portfolios portfolio strategy predicts that companies can reduce risk even more through unrelated diversification creating or acquiring companies in completely unrelated businesses more on the accuracy of this prediction later according to portfolio strategy when businesses are unrelated losses in one business or industry should have minimum effect on the performance of other companies in the corporate portfolio third investing in portfolios and cash flows from slow growth businesses into newer faster growing businesses can reduce long-term risk the best-known portfolio strategy for guiding investment in a corporations businesses is the Boston Consulting Group or BGC matrix the BGC matrix is a portfolio strategy that managers use to categorize their corporations businesses by growth rate relative to market share which helps them decide how to invest corporate funds the matrix shown here separates businesses into four categories based on how fast the market is growing high growth or low growth and the size of the businesses share of that market small or large stars are companies that have a large share of a fast-growing market to take advantage of a star's fast-growing market and its strengths in the market a large share the corporation must invest substantially in it the investment is usually worthwhile however because many stars produce sizable future profits question marks are companies that have a small share of a fast-growing market if the corporation invests in these companies they may eventually become stars but their relative weakness in the market small share makes investing in the question mark riskier than investing in stars cash cows are companies that have a large share of a slow growing market companies in this situation are often highly profitable hence the name cash cow finally dogs are companies that have a small share of a slow-growing market as the name suggests having a small share of a slow-growth market is often not profitable in some in contrast to a single under safai business or unrelated diversification related diversification reduces risk because the different businesses can work as a team relying on each other for needed expertise experience and support a grand strategy is a broad strategic plan used to help an organization achieve its strategic goals there are three kinds of grand strategies growth stability and retrenchment or recovery the purpose of the growth strategy is to increase profits revenues market share or the number of places stores offices or locations in which the company does business companies can grow in several ways they can grow externally by merging with or acquiring other companies in the same or different businesses the purpose of a stability strategy is to continue doing what the company has been doing just doing it better the purpose of a retrench mint strategy is to turn around very poor company performance by shrinking the size or scope of the business or if a company is in multiple businesses by closing or shutting down different lines of the business the first step of a typical retrenchment strategy might include making significant cost reductions laying off employees closing poorly performing stores offices or plants or closing or selling entire lines of products or services after cutting costs and reducing a business's size or scope the second step in or a trench Hrant strategy is recovery recovery consists of the strategic actions that a company takes to return to a growth strategy according to Harvard professor Michael Porter five industry forces determine an industry's overall attractiveness and potential for long-term profitability the character of the rivalry the threat of new entrants the threat of substitute products or services the bargaining power of suppliers as well as the bargaining power of buyers the stronger these forces the less attractive the industry becomes to corporate investors because it's more difficult for companies to be profitable Porter's industry forces are illustrated here let's examine how each of these forces are bringing changes to several kinds of industries character of the rivalry is a measure of the intensity of competitive behavior among companies in an industry the threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry the threat of substitute products or services is a measure of the ease in which customers may find substitutes for an industry's product or services bargaining power of suppliers is a measure of the influence that suppliers of parts materials services to firms in an industry have on the prices of these inputs on the flip side the bargaining power of buyers is a measure of influence that customers have an affirms prices if a company sells a popular product or service to multiple buyers then the company has more power to set prices by contrast if a company is dependent on just a few high-volume buyers those buyers will typically have enough bargaining power to decrease prices to formulate effective strategies companies must be able to answer three basic questions what business are we in how should we compete in this industry who are our competitors and how should we respond to them corporate level strategy is the overall organizational strategy that addresses the question what business or businesses are we in or should we be in one of the standard strategies for stock market investors is diversification or owning stocks in a variety of companies in different industries portfolio strategy is a corporate level strategy that Mises risks by diversifying investment among various businesses or lines the BGC matrix is a portfolio strategy that managers use to categorize their corporations business growth rate and relative market share which helps them decide how to invest corporate funds in some in contrast to a single under versified business or unrelated diversification related diversification reduces risk because the different businesses can work as a team relying on each other for needed expertise experience and support industry level strategy addresses the question how should we compete in this industry according to Harvard professor Michael Porter five industry forces determine an industry's overall attractiveness and potential for long-term profitability the character of the rivalry the threat of new entrants the threat of substitute products or services the bargaining power of suppliers and the bargaining power of buyers after analyzing the forces the next step an industry level strategy is to protect your company from the negative effects of industry-wide competition and create a sustainable competitive advantage according to Porter there are three positioning strategies cost leadership differentiation and focus cost leadership means producing a product or service of acceptable quality that consistently lower production costs than competitors so the firm can offer the product or service at the lowest price in the industry cost leadership protects companies from industry forces by deterring new entrants who will have to match lower prices and costs differentiation means making your product or service substantially different from competitors offerings that customers are willing to pay a premium price for the extra value or performance it provides differentiation protects company from industry forces by reducing the threat of substitute products with a focus strategy a company uses either cost leadership or differentiation to produce a specialized product or service for a limited specially targeted group of customers in a particular geographic region or market segment focus strategies typically work in market niches that competitors have overlooked or have difficulty serving adaptive strategies are another set of industry level strategies where is the aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage the purpose of adaptive strategies is to choose an industry level strategy that's best suited to changes in the organization's external environment there are four kinds of adapted strategies defenders prospectors analyzers and reactors defenders seek moderate steady growth by offering a limited range of products and services to a well-defined set of customers in other words defenders aggressively defend their current strategic position by doing the best job they can to hold on to customers in a particular market segment prospectors seek fast growth by searching for new market opportunities encouraging risk-taking and being the first to bring innovative new products to market analyzers are the blend of the defender and prospector strategies they seek moderate steady growth and limited opportunities for fast growth analyzers are rarely first to market with new products or services instead they try to simultaneously minimize risk and maximize profits by following or imitating the proven successes of prospectors finally unlike defenders prospectors or analyzers reactors do not follow a consistent strategy rather than anticipating and preparing for external opportunities and threats reactors tend to react to changes in their external environment after they occur a reactor approach is inherently unstable and firms that fall into this mode of operation must change their approach or face almost certain failure firm level strategy addresses the question how should we compete against a particular firm although Porter's five industry forces indicate the overall level of competition in an industry most companies do not come directly with all firms in their industry instead of competing with an entire industry most firms compete directly with just a few companies within it direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other strategic actions two factors determine the extent to which firms will be in direct competition with each other market commonality and resource similarity market commonality is the degree to which two companies have overlapping products services or customers in multiple markets the more markets in which there is product service or customer overlap the more intense and direct competition between the two companies resource similarity is the extent to which a competitor has similar amounts and kinds of resources that is similar assets capabilities processes information and knowledge use to create and sustain an advantage over competitors while corporate level strategies help managers decide what business to be in and industry level strategies help them determine how to compete within an industry firm level strategies help managers determine when where and what strategic actions should be taken against a direct competitor firms and direct competition can make two basic strategic moves attack in response these moves occur all the time in virtually every industry but they are most noticeable in industries where multiple large competitors are pursuing customers in the same market space an attack is a competitive move designed to reduce a rivals market share or profits a response is a counter move prompted by a rivals attack that is designed to defend or improve a company's market share or profit there are two kinds of responses the first is to match or mere your competitors move the second kind of response however is to respond along a different dimension from your competitors move or attack when deciding when where and what strategic actions to take against a direct competitor managers should always consider the possibility of retaliation [Music]