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7 T H
A S I A –

PA C I F I C
E D I T I O N

STUDY HACK #17
Use Google Docs to take notes in

class, then transform these
notes into exam revision.

Sam, student, Adelaide

This book has all the tools for you to
ace this subject. What’s stopping you?

BE AMBITIOUS

Gain a real
understanding

of the strategic
management
process and

how it is used
in the global

economy

Local and
international
case studies
demonstrate

theory put into
practice in

real-life business
situations

Support your
learning with
experiential

exercises that
give you the
opportunity
to put your
knowledge

into practice

Hanson_7e_sb_51116_CVR.indd All Pages 4/6/21 11:46 am

Strategic Management: Competitiveness and Globalisation

7th Edition

Dallas Hanson

Kim Backhouse

David Leaney

Michael A. Hitt

R. Duane Ireland

Robert E. Hoskisson

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Adaptation of Strategic Management: Competitiveness and Globalization,

13th edition by Michael A. Hitt, R. Duane Irelane and Robert F. Hoskisson

[9780357033838], Cengage Learning, 2015.

This seventh edition published in 2022.

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1 2 3 4 5 6 7 25 24 23 22 21

B R I E F C O N T E N T S

1 PART 1 STRATEGIC MANAGEMENT INPUTS 1
1 Strategic management and strategic

competitiveness 2

2 The external environment: opportunities,
threats, industry competition and competitor
analysis 34

3 The internal organisation: resources, capabilities,
core competencies and competitive advantages 72

2 PART 2 STRATEGIC ACTIONS: STRATEGY FORMULATION 101
4 Business-level strategy 102

5 Competitive dynamics 131

6 Corporate-level strategy 161

7 Acquisition and restructuring strategies 189

8 International strategy 218

9 Cooperative strategy 252

3 PART 3 STRATEGIC ACTIONS: STRATEGY
IMPLEMENTATION 283

10 Corporate governance 284

11 Organisational structure and controls 321

12 Strategic leadership 355

13 Strategic entrepreneurship 386

4 PART 4 CASE STUDIES 411
Introduction: A summary of the case analysis process 412

Case 1: JB Hi-Fi Ltd acquisition of The Good Guys 415

Case 2: Challenges at Australia Post 426

Case 3: Nyrstar NV: a case study in a failed vertical
integration strategy 432

Case 4: Pfizer 442

Case 5: Atlassian 454

Case 6: The Sunshine Coast UNESCO Biosphere
Reserve and Smart City: a new governance
opportunity in a post-pandemic world? 458

Case 7: CrossFit at the crossroads 465

Case 8: The movie exhibition industry: 2018
and beyond 482

Case 9: Pacific Drilling: the preferred offshore driller 506

Case 10: The trivago way – growing without
growing up? 522

Case 11: The Volkswagen emissions scandal 539

Case 12: Otis in the global elevator industry 549

Case 13: Dick Smith: the fall of an Aussie icon 555

GLOSSARY 566
NAME INDEX 572
SUBJECT INDEX 580

v

C O N T E N T S
GUIDE TO THE TEXT XII
GUIDE TO THE ONLINE RESOURCES XIV
PREFACE XVI
ABOUT THE AUTHORS XVIII
ACKNOWLEDGEMENTS XXI

1 PART 1 STRATEGIC MANAGEMENT INPUTS 1
1 Strategic management and strategic

competitiveness 2

Opening case study: McDonald’s and brand recognition 3

The strategic management process 4

The competitive landscape 7
The global economy 8

Strategic focus: Starbucks is a new economy
multinational yet has had failures in key markets 9
The march of globalisation 10
Technology and technological changes 11

Strategic focus:
The core of Apple: technology and innovation 14

The I/O model of above-average returns 15

The resource-based model of above-average
returns 17

Vision and mission 19
Vision 19
Mission 20

Stakeholders 21
Classifications of stakeholders 21

Strategic leaders 23
The work of effective strategic leaders 24
Predicting outcomes of strategic decisions 25
Ethical dimensions 25

STUDY TOOLS 27

2 The external environment: opportunities,
threats, industry competition and competitor
analysis 34

Opening case study: Drilling for oil: risks and rewards 35

The general, industry and competitor
environments 38

External environmental analysis 39
Scanning 40
Monitoring 40
Forecasting 41
Assessing 41

Segments of the general environment 41
The demographic segment 42
The economic segment 44
The political/legal segment 46
The sociocultural segment 47
The technological segment 49
The global segment 50
The physical environment segment 51

Strategic focus: Target (Tar-zhey) is trying to navigate in
a new and rapidly changing competitive landscape 52

Industry environment analysis 53
Threat of new entrants 54
Bargaining power of suppliers 57
Bargaining power of buyers 57
Threat of substitute products 58

Strategic focus: German performance/luxury cars: if
you’ve seen one, have you seen them all? 58
Intensity of rivalry among competitors 59
Interpreting industry analyses 61

Strategic groups 61

Competitor analysis 62
Ethical considerations 64

STUDY TOOLS 65

vi

3 The internal organisation: resources, capabilities,
core competencies and competitive advantages 72

Opening case study: Large pharmaceutical companies,
big data analytics, artificial intelligence and core
competencies: a brave new world 73

Analysing the internal organisation 75
The context of internal analysis 75
Creating value 76
The challenge of analysing the internal organisation 77

Resources, capabilities and core competencies 79
Strategic focus: Tangible and intangible resources as the
base for core competencies 80
Resources 80
Capabilities 83
Core competencies 83

Building core competencies 84
Strategic focus: Procter & Gamble: using capabilities and
core competencies to create value for customers 85
The four criteria of sustainable competitive advantage 86
Value chain analysis 89

Competencies, strengths, weaknesses and
strategic decisions 92

STUDY TOOLS 94

2 PART 2 STRATEGIC ACTIONS: STRATEGY FORMULATION 101
4 Business-level strategy 102

Opening case study: Clonakilla Wines in a quality niche
position 103

Customers: their relationship with business-
level strategies 105
Effectively managing relationships with
customers 105
Reach, richness and affiliation 106
Who: determining the customers to serve 107
What: determining which customer needs
to satisfy 107

How: determining core competencies necessary to
satisfy customer needs 108

The purpose of a business-level strategy 109

Business models and their relationship with
business-level strategies 109

Types of business-level strategies 110
Cost leadership strategy 112
Differentiation strategy 115
Focus strategies 119
Integrated cost leadership/differentiation strategy 120

Strategic focus: Apple vs Samsung vs Huawei: the battle
for smart technology 121

STUDY TOOLS 125

5 Competitive dynamics 131

Opening case study: Tesco PLC: a case study in
competitive behaviour 132

A model of competitive rivalry 134

Competitor analysis 135
Market commonality 136

Strategic focus: Competitive rivalry in fast fashion: a
constant stream of actions and responses 137
Resource similarity 138

Drivers of competitive actions and responses 139

Competitive rivalry 141
Strategic and tactical actions 141

Likelihood of attack 142
First-mover incentives 142
Organisational size 144
Quality 144

Likelihood of response 145
Type of competitive action 146
Actor’s reputation 146
Dependence on the market 147

Competitive dynamics 147
Slow-cycle markets 147
Fast-cycle markets 148

viiCONTENTS

Strategic focus: The emergence of competitive rivalry
among battery manufacturers: who will establish the
most attractive market position? 150
Standard-cycle markets 152

STUDY TOOLS 153

6 Corporate-level strategy 161

Opening case study: The quintessential diversified
organisation 162

Purpose of corporate-level strategies 163

Levels of diversification 164
Low levels of diversification 165
Moderate and high levels of diversification 166

Strategic focus: Acciona’s related diversification and
renewable energy growth 166

Reasons for diversification 167

Value-creating diversification: related constrained
and related linked diversification 169
Operational relatedness: sharing activities 170
Corporate relatedness: transferring of core
competencies 170
Market power 171

Strategic focus: Alphabet’s evolution through
diversification 172
Simultaneous operational relatedness and corporate
relatedness 174

Unrelated diversification 174
Efficient internal capital market allocation 174
Restructuring of assets 176

Value-neutral diversification: incentives and
resources 176
Incentives to diversify 177
Resources and diversification 178

Value-reducing diversification: managerial motives
to diversify 179

STUDY TOOLS 182

7 Acquisition and restructuring strategies 189

Opening case study: Strategic acquisitions and a people-
focused integration of those acquisitions are vital
capabilities of Atlassian 190

The popularity of merger and acquisition
strategies 192
Mergers, acquisitions and takeovers: what are the
differences? 192

Reasons for acquisitions 193
Increased market power 193
Overcoming entry barriers 195

Strategic focus: Cross-border acquisitions by
organisations from emerging economies:
leveraging resources to gain a larger global footprint and
market power 196
Cost of new product development and increased speed
to market 198
Lower risk compared to developing new products 199
Increased diversification 199
Reshaping the organisation’s competitive scope 200
Learning and developing new capabilities 200

Problems in achieving acquisition success 201
Integration difficulties 201
Inadequate evaluation of target 202
Large or extraordinary debt 203
Inability to achieve synergy or harvest benefits 203
Too much diversification 204
Managers overly focused on acquisitions 205
Too large 205

Effective acquisitions 206

Restructuring 208
Downsizing 208
Downscoping 209
Leveraged buyouts 209
Restructuring outcomes 209

STUDY TOOLS 211

viii CONTENTS

8 International strategy 218

Opening case study: An international strategy powers
ABB’s future 219

Identifying international opportunities 221
Incentives to use international strategy 221
Three basic benefits of international strategy 222

International strategy types 224
International business-level strategy 225
International corporate-level strategy 227

Environmental trends 230
Liability of foreignness 230
Regionalisation 231

Choice of international entry mode 232
Exporting 232
Licensing 233
Strategic alliances 234
Acquisitions 235
New wholly owned subsidiaries 236
Dynamics of mode of entry 236

Strategic focus: Mondelez International: a global leader in
snack foods 237

Risks in an international environment 238
Political risks 238
Economic risks 239

The challenge of international strategies 240
Managing international strategies: size and complexity 240
Limits to international expansion 241

Strategic focus: Mexico’s FEMSA: building its international
prowess 241

Strategic competitiveness outcomes 242
International diversification and returns 242
Enhanced innovation 243

STUDY TOOLS 244

9 Cooperative strategy 252

Opening case study: Global cars, with a twist 253

Strategic alliances as a primary type of
cooperative strategy 254

Types of major strategic alliances 255

Strategic focus: Samsung Electric is using diversifying
alliances to reduce its dependence on Google’s Android
operating system 256
Reasons organisations develop strategic alliances 258

Strategic focus: Industrial clusters: geographic centres
for collaborative partnering 260

Competition-reducing strategy 263

Business-level cooperative strategy 263
Complementary strategic alliances 264
Competition response strategy 266
Uncertainty-reducing strategy 266
Assessing business-level cooperative strategies 266

Corporate-level cooperative strategy 267
Diversifying strategic alliance 267
Synergistic strategic alliance 268
Franchising 268
Assessing corporate-level cooperative strategies 269

International cooperative strategy 269

Network cooperative strategy 270
Alliance network types 271

Competitive risks with cooperative strategies 272

Managing cooperative strategies 273

STUDY TOOLS 275

3 PART 3 STRATEGIC ACTIONS: STRATEGY
IMPLEMENTATION 283

10 Corporate governance 284

Opening case study: General Electric’s complex
diversification strategy makes evaluation difficult for
board directors 285

Separation of ownership and managerial control 288
Agency relationships 288
Product diversification as an example of an
agency problem 290
Agency costs and governance mechanisms 291

ixCONTENTS

Ownership concentration 292
Ownership structures of companies in Australia 293
The increasing influence of institutional owners 293

Board of directors 293
Board of directors process 296
Enhancing the effectiveness of the board of directors 297
Executive compensation 298
The effectiveness of executive compensation 299

Strategic focus: Has more governance scrutiny made
large CEO compensation packages more reasonable? 300

Market for corporate control 301

International corporate governance 302
Corporate governance in Australia 302
Corporate governance in Germany and Japan 306
Corporate governance in China 307
Corporate governance in Spain 308

Governance mechanisms and ethical behaviour 308
Strategic focus: Rewarding top executives of one of the
most poorly governed banks in the world: Westpac 309
Corporate governance and organisation performance 311
Corporate social responsibility 311

STUDY TOOLS 313

11 Organisational structure and controls 321

Opening case study: Changing McDonald’s organisational
structure and controls: a path to improved performance 322

Organisational structure and controls 323
Organisational structure 324
Organisational controls 325

Relationships between strategy and structure 326

Evolutionary patterns of strategy and
organisational structure 327
Simple structure 328
Functional structure 328
Multi-divisional structure 328
Matches between business-level strategies and the
functional structure 329

Matches between corporate-level strategies and the
multi-divisional structure 332

Strategic focus: Globalisation and beer 333

Strategic focus: General Electric’s decline, new strategy
and reorganisation 339
Matches between international strategies and
worldwide structure 340
Matches between cooperative strategies and network
structures 344

Implementing business-level cooperative
strategies 345

Implementing corporate-level cooperative
strategies 346

Implementing international cooperative
strategies 347

STUDY TOOLS 348

12 Strategic leadership 355

Opening case study: Meg Whitman: a pioneering strategic
leader 356

Strategic leadership and style 358

The role of executive managers 360
Executive management teams 361

Managerial succession 363
Strategic focus: Women in leadership 365

Key strategic leadership actions 366
Determining strategic direction 366
Effectively managing the organisation’s resource
portfolio 368
Sustaining an effective organisational culture 370

Strategic focus: Organisational culture: is it really that
important? 372
Emphasising ethical practices 373
Leadership and corporate social responsibility 374
Establishing balanced organisational controls 375

STUDY TOOLS 378

x CONTENTS

13 Strategic entrepreneurship 386

Opening case study: Today it is gas and diesel: tomorrow
it is likely to be electric vehicles, plug-in hybrids, and
driverless cars and trucks 387

Entrepreneurship and entrepreneurial
opportunities 389

Innovation 389
Product innovation 391

Entrepreneurs 391

International entrepreneurship 392

Internal innovation 393
Incremental and radical innovation 393

Implementing internal innovations 394
Cross-functional product development teams 395
Facilitating integration and innovation 396
Creating value from internal innovation 396

Innovation through cooperative strategies 397
Strategic focus: Social networking websites facilitate
innovation: application software innovation 398

Innovation through acquisitions 399
Strategic focus: Will these acquisitions lead to innovation
success or to strategic failure? 400

Creating value through strategic
entrepreneurship 401

STUDY TOOLS 403

4 PART 4 CASE STUDIES 411
Introduction: A summary of the case analysis process 412

Case 1: JB Hi-Fi Ltd acquisition of The Good Guys 415

Case 2: Challenges at Australia Post 426

Case 3: Nyrstar NV: a case study in a failed vertical
integration strategy 432

Case 4: Pfizer 442

Case 5: Atlassian 454

Case 6: The Sunshine Coast UNESCO Biosphere
Reserve and Smart City: a new governance
opportunity in a post-pandemic world? 458

Case 7: CrossFit at the crossroads 465

Case 8: The movie exhibition industry: 2018
and beyond 482

Case 9: Pacific Drilling: the preferred offshore driller 506

Case 10: The trivago way – growing
without growing up? 522

Case 11: The Volkswagen emissions scandal 539

Case 12: Otis in the global elevator industry 549

Case 13: Dick Smith: the fall of an Aussie icon 555

GLOSSARY 566
NAME INDEX 572
SUBJECT INDEX 580

xiCONTENTS

xii

Strategic management and strategic
competitiveness

CH
AP

TE
R

1
Studying this chapter should provide you with the strategic management knowledge
needed to:
LO1 analyse the components of the strategic management process
LO2 describe the competitive landscape and explain how globalisation and

technological changes shape it
LO3 use the industrial organisation (I/O) model to explain how companies can earn

above-average returns
LO4 use the resource-based model to explain how companies can earn above-

average returns
LO5 describe vision and mission and discuss their value
LO6 define and classify the four major stakeholder groups and describe their ability

to influence organisations
LO7 describe the work of strategic leaders.

Learning Objectives

2

BK-CLA-HANSON_7E-210018-Chp01.indd 2 08/02/21 12:49 PM

McDonald’s in Australia is part of a global empire of fast-
food restaurants. McDonald’s has achieved substantial
international success over the years, with its restaurants
spread widely throughout the world. Brand recognition
is huge: many people know about, and are customers
of, McDonald’s. For example, a recent survey found that
88 per cent of people recognise the golden arches and
associate them with McDonald’s. Each day, about 69
million people eat at a McDonald’s store, which equates

to almost 0.8 per cent of the world’s population. In 2018,
McDonald’s had 37 855 total restaurants globally located
in 120 different countries and 14 155 stores in the US
alone. China has 2223 stores compared with Japan 2975,
the UK 1261, Canada 1443 and Australia 920. Globally,
McDonald’s hires 1.9 million employees, and it hires
approximately one million employees per year in the
USA. In 2018, its annual revenue was $21 billion and its
net income was $5.9 billion.

McDonald’s: Restaurant expansion since 1955.

Source: https://mcdonalds.com.au/about-maccas/maccas-story.

Given that McDonald’s includes a toy in about 20
per cent of its sales, it is considered the world’s largest
distributor of toys. Each year, McDonald’s distributes
1.5 billion toys globally, which is more than Mattel
and Hasbro. McDonald’s decided early to move into
international markets, and now one can find the golden
arches in far-flung locations around the globe.

In Australia, ‘Maccas’ (the locals’ name for the
organisation) is thriving, with flexible offerings, ‘gourmet
coffee’ and fresh-food bars. These have been successful
moves. The UK arm has also been responsive to
consumer demand; for example, it accommodates
consumers who ask what goes into their food, providing
information to staff that allows them to respond, and it
promotes jobs in the chain as upwardly mobile.

China is a promising arena but there are continuing
pressures there, with high levels of rivalry from KFC.
There are now over 2000 McDonald’s outlets in China,
which is approximately one-third the number of KFC
outlets. KFC has around 5919 stores and is presently
considered the most popular fast-food chain in China.

In India, where historically the brand was relatively
small with only 400 stores compared with China, Japan
and Australia, McDonald’s turned a corner when it
announced in May 2019 that it had finally acquired full
ownership of Connaught Plaza Restaurants. This entity
had run the global giant’s operations in north and east
India – from its long-estranged business partner Vikram
Bakshi. The association between Bakshi and McDonald’s
commenced in 1995 when, under a 25-year deal, the

McDonald’s and brand recognition

OPENING CASE STUDY

N
u

m
b

er
o

f
re

st
au

ra
n

ts

0

5000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

1000

1968

45 000

2000

1972

5000

1978 1986

25 000

1999

38 000

2020

9000

CHAPTER 1
STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

3

BK-CLA-HANSON_7E-210018-Chp01.indd 3 2/8/21 7:23 PM

Definitions or
explanations of
important key terms are
located in the margin
for quick reference.

Guide to the text
As you read this text you will find a number of features in every

chapter to enhance your study of strategic management and help
you understand how the theory is applied in the real world.

CHAPTER-OPENING FEATURES

Knowledge objectives
Identify the key concepts
that the chapter will cover
with the learning objectives
that start each chapter.

Opening Case study
Gain an insight into how
strategic management
theories relate to the real
world through the case
study at the beginning of
each chapter.

1

2
1

2

FEATURES WITHIN CHAPTERS

As we can see from t he open ing case, McDonald’s organ isations in Aust ralia, t he U K,
Ch ina, Ind ia, Japan and t he USA a re all in d i fferent compet it ive posit ions. Therefore,
we can conclude that they are not equally competitive (i.e. they are unable to achieve
similar strategic competitiveness). In the USA, the organisation is now using the strategic
management process (see Figure 1.1) as the foundation for changes to the commitments,
decisions and actions it undertook to pursue strategic competitiveness and above-average
terms. It may well succeed, given time.1

The strategic management process
As explained in the opening case, McDonald’s is trying to enrich its traditional approach
globally with more marketing and by making its stores more responsive to local consumers’
needs. A study conducted to identify the factors that contribute to the success of top corporate
performers shows why the organisation is doing this. This study found that the top performers
were entrepreneurial, were market oriented (possessing effective knowledge of the customers’
needs), used valuable competencies and offered innovative products and services.2

The t y pes of behav iou rs ex h ibited by top per for mers l i ke McDona ld’s represent a
strategic management process (see Fig u re 1.1), wh ich is a f u l l set of com m it ments,
decisions and actions required for an organisation to achieve strategic competitiveness
and earn above-average returns. The organisation’s first step in the process is to analyse
its external environment and internal organisation to determine its resources, capabilities
and core competencies – the sources of its ‘strategic inputs’. We will now analyse each of
the different components of the strategic management process.

Strategic competitiveness is achieved when an organisation 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
adva ntage. W hen choosi ng a st rateg y, orga n isat ions ma ke choices a mong compet i ng
alternatives as the pathway for deciding how they will pursue strategic competitiveness. 3

In this sense, the chosen strateg y indicates what the organisation will do as well as
what the organisation will not do. A n organisation’s strateg y also demonstrates how it
differs from its competitors.

strategic management
process
the full set of commitments,
decisions and actions
required for an organisation
to achieve strategic
competitiveness and earn
above-average returns

strategic competitiveness
achieved when an
organisation successfully
formulates and implements a
value-creating strategy

strategy
an integrated and coordinated
set of commitments and
actions designed to exploit
core competencies and gain a
competitive advantage

two partners formed a 50:50 joint venture company –
Connaught Plaza Restaurant – to set up outlets in the
north and the east under the franchisee model. To date,
McDonald’s has two business entities in India. Amit Jatia’s
Hardcastle Restaurants runs the McDonald’s business
in southern and western India. McDonald’s India is
committed to sourcing almost all of its products from
within the country. For this purpose, it has developed
local Indian businesses, which can supply the highest-
quality products required for its Indian operations.

The McDonald’s empire is obviously difficult to control
and constantly presents country-specific challenges.
Clever strategy is important for its continued survival and,

for the company, hopefully, its growth post the Covid-19
pandemic.

Sources: C. Smith, 2020, 50 interesting McDonald’s statistics and facts
2020, DMR Business Statistics, https://expandedramblings.com/index.php/

mcdonalds-statistics, 28 May; R. Darling, 2019, Thanks to the Happy Meal,
McDonald’s is the largest toy manufacturer, http://www.considerable.com,

6 November; 2019, KFC is most popular food chain in China, http://www.
businessinsider.com, 8 March; The Economic Times, 2019, Vikram Bakshi is

finally out, and McDonald’s India is lovin’ it, ET Online, https://economictimes.
indiatimes.com/industry/services/hotels-/-restaurants/vikram-bakshi-is-

finally-out-and-mcdonalds-india-is-lovin-it/articleshow/69309704.cms?utm_
source=contentofinterest&utm_medium=text&utm_campaign=cppst, 14 May; T.

DiChristopher, 2015, McDonald’s new CEO faces many problems, CNBC, http://
www.cnbc.com/2015/01/29/how-mcdonalds-new-ceo-can-turn-around-the-

company.html, 29 January; FT Reporters, 2015, McDonald’s and its challenges
worldwide: A market-by-market look, Financial Times, http://www.ft.com/intl/

cms/s/0/f8ac22fc-a7c1-11e4-8e78-00144feab7de.html#slide0, 29 January.

4 PART 1: STRATEGIC MANAGEMENT INPUTS

BK-CLA-HANSON_7E-210018-Chp01.indd 4 08/02/21 12:49 PM

KEY TERMS WITH MARGIN DEFINITIONS

Examine the ways in which key concepts are applied in
a business context, using real situations and familiar
local and international companies. The Strategic Focus
boxes are categorised to emphasise the focus: general,
ethics, technology, sustainability and globalisation.

STRATEGIC FOCUS BOXES

Strategy Now margin icons highlight companies that
have effectively put a strategic management tool,
concept or technique into practice.

STRATEGY NOW

Increasing knowledge intensity
K nowledge (infor mation, intelligence and exper tise) is the basis of tech nolog y and its
applicat ion. In t he compet it ive la ndscape of t he 21st centu r y, k nowledge is a cr it ical
organisational resource and an increasingly valuable source of competitive advantage.75

Indeed, sta r t ing in t he 1980s, t he basis of compet it ion sh if ted from ha rd assets to
intangible resources; for example, ‘Walmart transformed retailing through its proprietar y
approach to supply chain management and its information rich relationships with customers
and suppliers’.76 Relationships with customers and suppliers are an example of an intangible
resource.

Knowledge is gained through experience, observation and inference, and is an intangible
resource. The value of intangible resources, including knowledge, is growing as a proportion
of tota l sha reholder va lue i n today ’s compet it ive la ndscape.77 In fact, t he Brook i ngs
Institution estimates that intangible resources contribute approximately 85 per cent of
that value.78 The probability of achieving strategic competitiveness is enhanced for the
organisation that develops the ability to capture intelligence, transfor m it into useable
k nowledge a nd d i ff use it rapid ly t h roughout t he compa ny.79 Therefore, orga n isat ions
must develop (e.g. through training programs) and acquire (e.g. by hiring educated and
experienced employees) knowledge, integrate it into the organisation to create capabilities,
and then apply it to gain a competitive advantage.80

Apple retail stores enjoy a steady flow of traffic each day.
More remarkable is that Apple’s stores in China handled
in excess of 40 000 people daily prior to the Covid-19
pandemic. Apple has opened 510 retail stores across 25
countries, with 271 located in the United States alone.
Apple’s newest locations include: Kawasaki and Tokyo,
Japan; Mexico City; Singapore Airport; and Taipei, Taiwan.

Source: Newspix/Alan Pryke

Apple has achieved phenomenal success with
the introduction of innovative products and brand
maintenance. The late Steve Jobs was selected by Fortune
magazine as the CEO of the first decade of the 21st

century, based on the fact that Apple under his leadership
had transformed four industries, three of them in a
decade. In addition, in 2020 Fast Company named Apple in
the World’s Most Innovative Companies list. Apple is one
of the top companies in the world based on almost any
criterion or set of criteria used. Because of this, Apple is
perceived exceptionally well by customers. Apple’s growth
rate has been extraordinary and its financial performance
even more impressive. And the appeal of Apple’s products
is global. For example, Apple’s iPhones now exceed
925 million units globally. Apple also disclosed that there
were 1.4 billion active devices as of January 2019.

Although there are many reasons for its success,
the primary reasons rest with Apple’s new technology
development and innovative new products.

Sources: MacRumors Staff, 2020, Keep track of Apple’s retail stores
worldwide, http://www.macrumors.com, 12 May; Above Avalon, 2019,

http://www.aboveavalon.com, 30 May; Fortune, 2011, World’s most
admired companies, http://www.fortune.com, 3 March; B. Worthen,

2011, With new iPad, Apple tries to stay ahead of wave of tablet rivals,
Wall Street Journal, http://www.online.wsj.com, 3 March; G. A. Fowler &

N. Wingfield, 2011, Apple’s showman takes the stage, Wall Street Journal,
http://www.online.wsj.com, 3 March; Financial Times, 2011, Apple and

the tablets, http://www.ft.com, 1 March; N. Louth, 2011, Finding value in
Apple’s core, Financial Times, http://www.ft.com, 25 February; M. Helft,

2011, After iPad’s head start, rival tablets are poised to flood offices,
New York Times, http://www.nytimes.com, 20 February; L. Chao, 2011,
New Shanghai Apple store will be biggest in China, Wall Street Journal,

http://www.online.wsj.com, 18 February.

STRATEGY NOW

Apple’s drive to innovate

16 PART 1: STRATEGIC MANAGEMENT INPUTS

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xiiiGUIDE TO THE TEXT

Key terms
Review the important terminology from the chapter
margin with the Key terms list.

At the end of each chapter you’ll find several tools to help you to
review, practise and extend your knowledge of the key learning objectives.

STUDy TOOLS
SUMMARY
LO1 The organisation’s external environment is challenging

and complex. The external environment has three
major parts: the general environment (elements in
the broader society that affect industries and their
organisations), the industry environment (factors that
influence an organisation, its competitive actions and
responses, and the industry’s profit potential) and the
competitor environment (in which the organisation
analyses each major competitor’s future objectives,
current strategies, assumptions and capabilities).

LO2 The external environmental analysis process has four
steps: scanning, monitoring, forecasting and assessing.
Through environmental analyses, the organisation
identifies opportunities and threats.

LO3 The general environment has seven segments:
demographic, economic, political/legal, sociocultural,
technological, global and physical. For each segment,
the organisation has to determine the strategic
relevance of environmental changes and trends.

LO4 Compared with the general environment, the
industry environment has a more direct effect on
the organisation’s strategic actions. The five forces

model of competition comprises the threat of
entry, the power of suppliers, the power of buyers,
product substitutes and the intensity of rivalry
among competitors. By studying these forces, the
organisation can find a position in an industry where
it can influence the forces in its favour or where it can
buffer itself against the power of the forces in order
to achieve strategic competitiveness and earn above-
average returns.

LO5 Industries are populated with different strategic
groups. A strategic group is a collection of
organisations following similar strategies along similar
dimensions. Competitive rivalry is greater within a
strategic group than between strategic groups.

LO6 Competitor analysis focuses on each company against
which an organisation directly competes. Critical to
an effective competitor analysis is gathering data and
information that can help the organisation understand
its competitors’ intentions and the strategic implications
resulting from them. Organisations must follow
mandatory laws and regulations as well as ethical
guidelines when gathering competitor intelligence.

KEY TERMS
competitor intelligence

complementors

demographic segment

economic environment

general environment

global segment

industry

industry environment

opportunity

physical environment
segment

political/legal segment

sociocultural segment

strategic group

technological segment

threat

REVIEW QUESTIONS
1. Why is it important for an organisation to study and

understand the external environment?

2. What are the differences between the general
environment and the industry environment? Why are
these differences important?

3. What are the four steps in the external environmental
analysis process? What does the organisation want to
learn when using this process?

4. What are the seven segments of the general
environment? Explain the differences among them. Is
any segment more important than another?

5. How do the five forces of competition in an industry
affect its profit potential? Explain.

6. What is the importance of collecting and interpreting
data and information about competitors? What practices
should an organisation use to gather competitor
intelligence, and why?

CHAPTER 2
THE ExTERnAL EnvIROnmEnT: OPPORTUnITIES, THREATS, InDUSTRy COmPETITIOn AnD COmPETITOR AnALySIS

75

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STUDy TOOLS
SUMMARY
LO1 The organisation’s external environment is challenging

and complex. The external environment has three
major parts: the general environment (elements in
the broader society that affect industries and their
organisations), the industry environment (factors that
influence an organisation, its competitive actions and
responses, and the industry’s profit potential) and the
competitor environment (in which the organisation
analyses each major competitor’s future objectives,
current strategies, assumptions and capabilities).

LO2 The external environmental analysis process has four
steps: scanning, monitoring, forecasting and assessing.
Through environmental analyses, the organisation
identifies opportunities and threats.

LO3 The general environment has seven segments:
demographic, economic, political/legal, sociocultural,
technological, global and physical. For each segment,
the organisation has to determine the strategic
relevance of environmental changes and trends.

LO4 Compared with the general environment, the
industry environment has a more direct effect on
the organisation’s strategic actions. The five forces

model of competition comprises the threat of
entry, the power of suppliers, the power of buyers,
product substitutes and the intensity of rivalry
among competitors. By studying these forces, the
organisation can find a position in an industry where
it can influence the forces in its favour or where it can
buffer itself against the power of the forces in order
to achieve strategic competitiveness and earn above-
average returns.

LO5 Industries are populated with different strategic
groups. A strategic group is a collection of
organisations following similar strategies along similar
dimensions. Competitive rivalry is greater within a
strategic group than between strategic groups.

LO6 Competitor analysis focuses on each company against
which an organisation directly competes. Critical to
an effective competitor analysis is gathering data and
information that can help the organisation understand
its competitors’ intentions and the strategic implications
resulting from them. Organisations must follow
mandatory laws and regulations as well as ethical
guidelines when gathering competitor intelligence.

KEY TERMS
competitor intelligence

complementors

demographic segment

economic environment

general environment

global segment

industry

industry environment

opportunity

physical environment
segment

political/legal segment

sociocultural segment

strategic group

technological segment

threat

REVIEW QUESTIONS
1. Why is it important for an organisation to study and

understand the external environment?

2. What are the differences between the general
environment and the industry environment? Why are
these differences important?

3. What are the four steps in the external environmental
analysis process? What does the organisation want to
learn when using this process?

4. What are the seven segments of the general
environment? Explain the differences among them. Is
any segment more important than another?

5. How do the five forces of competition in an industry
affect its profit potential? Explain.

6. What is the importance of collecting and interpreting
data and information about competitors? What practices
should an organisation use to gather competitor
intelligence, and why?

CHAPTER 2
THE ExTERnAL EnvIROnmEnT: OPPORTUnITIES, THREATS, InDUSTRy COmPETITIOn AnD COmPETITOR AnALySIS

75

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EXPERIENTIAL EXERCISES

Exercise 1: Strategic group mapping
If a given set of organisations emphasise similar strategic
dimensions and use a similar strategy, these organisations
can be said to reside in the same strategic group. Other
common definitions of strategic groups typically argue
that the organisations in a given industry follow similar
strategies, such as pricing, degree of specialisation, research
and development commitment and the like. It is also likely
that organisations operating in a given industry may have
very different profitability profiles, which raises the question:
if one organisation is the most profitable, why don’t all
the others in that industry attempt to move into the same
strategic group as the industry leader?

Part 1
1. Form teams and pick an industry the team finds

interesting. A list of industries and industry leaders may
be found at yahoo! Finance (http://biz.yahoo.com/ic/
ind_index.html).

2. Investigate this industry in order to create a strategic
group map. you must pick the two dimensions for your
map that best represent the key success factors in this
industry (e.g. R&D investments, pricing, geographic reach).

3. For each organisation listed on your map, investigate its
overall financial performance, not only historically, but
also its five-year growth forecast. (This information is
also available at yahoo! Finance and other locations.)

Part 2
Prepare a presentation to the class that discusses your
findings and answers the following key issues or questions:
1. Who are the most direct competitors and on what basis

do they mostly compete? That is, why did you choose
the competitive dimensions that you did?

2. How does profitability stack up between strategic
groups? Which groups are most profitable, and why?

3. What would it take for an organisation to move from
an underperforming (in terms of profitability) strategic
group to a more profitable strategic group? How likely is
it that this could happen?

4. Think about one of the organisations in a particular
strategic group. Are there any opportunities for this
organisation that you see because of your strategic
group mapping?

5. What conclusions can you reach about why some
organisations end up where they do among various
strategic groups?

Exercise 2: What does the future look like?
A critical ingredient in studying the general environment
is identifying opportunities and threats. An opportunity is
a condition in the environment that, if exploited, helps a
company to achieve strategic competitiveness. In order to
identify opportunities, you must be aware of trends that
affect the world around us now or that are projected to do
so in the future.

Thomas Fry, senior futurist at the Davinci Institute,
believes that the chaotic nature of interconnecting trends
and the vast array of possibilities that arise from them are
somewhat akin to watching a spinning compass needle.
From the way we use phones and email and recruit new
workers to organisations, the climate for business is
changing and shifting dramatically, and at rapidly increasing
rates. Sorting out these trends and making sense of them
provides the basis for opportunity decision making. Which
ones will dominate and which ones will fade? Understanding
this is crucial for business success.

your challenge (either individually or as a group) is to
identify a trend, technology, entertainment or design that is
likely to alter the way in which business is conducted in the
future. Once you have identified this, be prepared to discuss
which of the six dimensions of the general environment this
will affect. (There may be more than one.)
• Describe the impact.

• List some business opportunities that will come from
this.

• Identify some existing organisations that stand to
benefit.

• What, if any, are the ethical implications?

you should consult a wide variety of sources. For
example, the Gartner Group and mcKinsey & Co. both
produce market research and forecasts for business. There
is also a host of web forecasting tools and addresses.
These include TED (see http://www.ted.com for videos of its
discussions), which hosts an annual conference for path-
breaking new ideas. Similarly, the Davinci Institute, Institute
for Global Futures and a wide range of others have their own
unique visions of tomorrow’s environment.

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CASE STUDIES
INTRODUCTION
A summary of the case
analysis process 466

CASE 1
JB Hi-Fi Ltd acquisition of
The Good Guys 469

CASE 2
Challenges at Australia
Post 480

CASE 3
Nyrstar NV: a case study in
a failed vertical integration
strategy 486

CASE 4
Virgin Australia: a flight to
oblivion? 496

CASE 5
Atlassian 508

CASE 6
The sunshine coast
UNESCO biosphere reserve
and smart city: a new
governance opportunity in
a post-pandemic world? 513

CASE 7
CrossFit at the crossroads 520

CASE 8
The movie exhibition
industry: 2015 and
beyond 538

CASE 9
Pacific drilling: the
preferred offshore driller 565

CASE 10
The trivago way – growing
without growing up? 582

CASE 11
The Volkswagen
emissions scandal 600

CASE 12
Otis in the global elevator
industry 611

CASE 13
Dick Smith: the fall of an
Aussie icon 618

PA R T 4

465

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Summar y
The end-of-chapter summar y lists key points from
the chapter, providing a snapshot of the important
concepts covered.

Case Studies
Apply the case analyses process to in-depth case
studies. Thirteen case studies are provided to
demonstrate theor y in practice.

Each case includes a Case Link identif ying the
relevant chapters where key concepts explored in the
case are introduced in the book.

Review questions
These questions promote the application and critical
analysis of theories and practices as well as encourage
group discussion.

Experiential exercises
These exercises emphasise applied learning, giving
students the opportunity to put knowledge into practice.

END-OF-CHAPTER FEATURES

STUDy TOOLS
SUMMARY
LO1 The organisation’s external environment is challenging

and complex. The external environment has three
major parts: the general environment (elements in
the broader society that affect industries and their
organisations), the industry environment (factors that
influence an organisation, its competitive actions and
responses, and the industry’s profit potential) and the
competitor environment (in which the organisation
analyses each major competitor’s future objectives,
current strategies, assumptions and capabilities).

LO2 The external environmental analysis process has four
steps: scanning, monitoring, forecasting and assessing.
Through environmental analyses, the organisation
identifies opportunities and threats.

LO3 The general environment has seven segments:
demographic, economic, political/legal, sociocultural,
technological, global and physical. For each segment,
the organisation has to determine the strategic
relevance of environmental changes and trends.

LO4 Compared with the general environment, the
industry environment has a more direct effect on
the organisation’s strategic actions. The five forces

model of competition comprises the threat of
entry, the power of suppliers, the power of buyers,
product substitutes and the intensity of rivalry
among competitors. By studying these forces, the
organisation can find a position in an industry where
it can influence the forces in its favour or where it can
buffer itself against the power of the forces in order
to achieve strategic competitiveness and earn above-
average returns.

LO5 Industries are populated with different strategic
groups. A strategic group is a collection of
organisations following similar strategies along similar
dimensions. Competitive rivalry is greater within a
strategic group than between strategic groups.

LO6 Competitor analysis focuses on each company against
which an organisation directly competes. Critical to
an effective competitor analysis is gathering data and
information that can help the organisation understand
its competitors’ intentions and the strategic implications
resulting from them. Organisations must follow
mandatory laws and regulations as well as ethical
guidelines when gathering competitor intelligence.

KEY TERMS
competitor intelligence

complementors

demographic segment

economic environment

general environment

global segment

industry

industry environment

opportunity

physical environment
segment

political/legal segment

sociocultural segment

strategic group

technological segment

threat

REVIEW QUESTIONS
1. Why is it important for an organisation to study and

understand the external environment?

2. What are the differences between the general
environment and the industry environment? Why are
these differences important?

3. What are the four steps in the external environmental
analysis process? What does the organisation want to
learn when using this process?

4. What are the seven segments of the general
environment? Explain the differences among them. Is
any segment more important than another?

5. How do the five forces of competition in an industry
affect its profit potential? Explain.

6. What is the importance of collecting and interpreting
data and information about competitors? What practices
should an organisation use to gather competitor
intelligence, and why?

CHAPTER 2
THE ExTERnAL EnvIROnmEnT: OPPORTUnITIES, THREATS, InDUSTRy COmPETITIOn AnD COmPETITOR AnALySIS

75

BK-CLA-HANSON_7E-210018-Chp02.indd 75 2/9/21 1:13 PM

END-OF-BOOK FEATURES

xiv

Guide to the online resources

INSTRUCTOR’S MANUAL
The Instructor’s Manual includes:
• knowledge objectives
• chapter outlines
• lecture notes
• answers to review questions

• instructor’s notes for experiential exercises
• instructor’s notes for MindTap including What Would

You Do?, You Make the Decision and Video Cases.
• additional questions and exercises.

FOR THE INSTRUCTOR

MINDTAP
Premium online teaching and learning tools are available on the MindTap platform – the personalised eLearning
solution.

MindTap is a flexible and easy-to-use platform that helps build student confidence and gives you a clear picture of
their progress. We partner with you to ease the transition to digital – we’re with you ever y step of the way.

The Cengage Mobile App puts your course directly into students’ hands with course materials available on their
smartphone or tablet. Students can read on the go, complete practice quizzes or participate in interactive real-time
activities.

MindTap for Hanson’s Strategic Management is full of innovative resources to support critical thinking, and help your
students move from memorisation to master y! Includes:
• Hanson’s Strategic Management eBook
• ‘What would you do?’ polling questions
• Video Cases
• ‘You make the decision’ simulation activities.

MindTap is a premium purchasable eLearning tool. Contact your
Cengage learning consultant to find out how MindTap can transform
your course.

Cengage is pleased to provide you with a selection of resources
that will help you prepare your lectures. These teaching tools
are accessible via cengage.com.au/instructors for Australia

or cengage.co.nz/instructors for New Zealand.

CASE STUDY RESOURCES
Case notes for each of the end-of-book case studies, a case analysis rubric and case matrix allow instructors to
assign case studies for analysis. Cases and case notes from the previous editions are also available.

TEST BANK
A bank of questions has been developed in conjunction with the text for creating quizzes, tests and exams for your
students. Create multiple test versions in an instant and deliver tests from your LMS, your classroom, or wherever you
want using Cognero. Cognero test generator is a flexible online system that allows you to import, edit and manipulate
content from the text’s test bank or elsewhere, including your own favourite test questions.

xvGUIDE TO THE ONLINE RESOURCES

FOR THE STUDENT

POWERPOINTâ„¢ PRESENTATIONS
Use the chapter-by-chapter PowerPoint presentations to enhance your lecture presentations and handouts to
reinforce the key principles of your subject.

ARTWORK FROM THE TEXT
Add the digital files of graphs, pictures and flowcharts into your course management system, use them in student
handouts, or copy them into your lecture presentations.

MINDTAP
MindTap is the next-level online learning tool that helps you get better grades!

MindTap gives you the resources you need to study – all in one place and available when you need them. In the
MindTap Reader, you can make notes, highlight text and even find a definition directly from the page.
If your instructor has chosen MindTap for your subject this semester, log in to MindTap to:
• Get better grades
• Save time and get organised
• Connect with your instructor and peers
• Study when and where you want, online and mobile
• Complete assessment tasks as set by your instructor.

When your instructor creates a course using MindTap, they will
let you know your course key so you can access the content.
Please purchase MindTap only when directed by your instructor.
Course length is set by your instructor.

P R E FAC E
This new seventh Asia–Pacific edition of Strategic Management: Competitiveness and Globalisation has been updated
to include new mater ial and cases from Aust ralia, New Zealand and the Asia–Paci fic region. It continues to
integrate ‘cutting edge’ research and content from the US authors Hitt, Ireland and Hoskisson.

Features
• Australian and Asia–Pacific material in all chapters
• chapter opening cases and ‘Strategic focus’ segments
• organisation-specific examples that are integrated with each chapter’s topic
• inclusion of public sector and community organisation examples
• substantial emphasis on use of the internet and e-commerce
• substantial emphasis on corporate governance
• coverage of strategic issues in the 21st-centur y competitive landscape, including a strong emphasis on the

competition created through e-commerce ventures and start-ups
• global coverage with an emphasis on the international context
• new and current research integrated throughout the chapters’ conceptual presentations
• review questions, including application discussion questions and ethics questions at the end of each chapter
• experiential exercises
• a summar y of the case analysis process.
The book emphasises a global outlook with comprehensive coverage of Australian and international concepts

and issues. The book contains a wealth of references. Drawn from the business literature and academic research,
these mater ials are used to present cur rent and accurate descr iptions of how organisations use the strategic
management process. Our goal while preparing this book has been to present you, our readers, with a complete,
accurate and up-to-date explanation of the strategic management process as it is used in the global economy. We
have sought to include enough local content to stimulate interest, and enough international content to reflect the
nature of current strategic management.

The book’s focus
This book is intended for use pr imar ily in strategic management and business policy courses. The mater ials
presented in the 13 chapters have been researched thoroughly. Both the academic, scholarly literature and the
business, practitioner literature were studied and then integrated to prepare this edition. The academic literature
provides the foundation to develop an accurate yet meaningful description of the strategic management process.
The business practitioner literature yields a rich base of current domestic and global examples to show how the
strategic management process’s concepts, tools and techniques are applied in different organisations.

Our discussion of the strategic management process is both traditional and contemporar y. In maintaining
t rad it ion, we exa m i ne i mpor ta nt mater ia ls t hat have h istor ica l ly been a pa r t of u ndersta nd i ng st rateg ic
management. For example, we thoroughly examine how to analyse an organisation’s external environment and
internal environment.

xvi

The strategic advantage
The st rategic management process is cr itical to organisational success. As descr ibed in Chapter 1, st rategic
competitiveness is achieved when an organisation develops and exploits a sustained competitive advantage.
Attaining such an advantage results in the earning of above-average returns; that is, returns that exceed those
an investor could expect from other investments with similar amounts of risk.

The competitive advantage
Success in the 21st-centur y competitive landscape requires specific capabilities, including the abilities to:

1 use scarce resources wisely to maintain the lowest possible costs
2 constantly anticipate frequent changes in customers’ preferences
3 adapt to rapid technological changes
4 identify, emphasise and effectively manage what an organisation does better than its competitors
5 continuously structure an organisation’s operations so objectives can be achieved more efficiently
6 successfully manage and gain commitments from a culturally diverse workforce.

The global advantage
Critical to the approach used in this text is the fact that all organisations face increasing global competition.
Organisations no longer operate in relatively safe domestic markets, as Australian supermarkets have discovered.
In the past, many companies produced large quantities of standardised products. Today, organisations typically
compete in a global economy that is complex, highly uncertain and unpredictable. To a greater degree than in a
primarily domestic economy, the global economy rewards effective performers, whereas poor performers are forced
to restructure significantly to enhance their strategic competitiveness. As noted earlier, increasing globalisation
and the technological revolution have produced a new competitive landscape in the 21st centur y. This landscape
presents a challenging and complex env ironment for organisations, but one that also has oppor tunities. The
importance of developing and using these capabilities should not be underestimated.

Final comment
Organisations face exciting and dy namic competitive challenges in the 21st centur y. These challenges, and
effective responses to them, are explored in Strategic Management: Competitiveness and Globalisation. The strategic
management process conceptualised in this text offers valuable insights and knowledge to those committed to
meeting successfully the challenge of dynamic competition. Thinking strategically – as this book challenges you
to do – increases the likelihood that you will assist your organisation to achieve strategic success. In addition,
continuous practice with strategic thinking and the use of the strategic management process gives you skills and
knowledge that will contribute to career advancement and success. Finally, we want to wish you all the best and
nothing other than complete success in all of your endeavours.

Dallas Hanson
Hobart

xviiPREFACE

A B O U T T H E AU T H O R S
Dallas Hanson
Dallas Hanson lectured in strategic management at the University of Tasmania for many years. He has wide-
ra ng i ng i ntellectua l (a nd scholast ic) i nterests, i nclud i ng bra nd ma nagement, tou r ism, g reen st rateg y a nd
governance. He has won teaching awards for his work in strategy and enjoys the challenge of making strategy
i nterest i ng a nd engag i ng. He now adv ises as a st rateg y consu lta nt, wh ich cont i nua l ly rem i nds h i m t hat
organisation politics matter in the world of strategy, while logic does not always win in the process of strategy
implementation.

Kim Backhouse
Kim Backhouse has lectured in strategic management, law and other business units for the past two decades in
the Faculty of Business and Faculty of Law at the University of Tasmania. Kim has also facilitated units in legal
and risk for the Australian Institute of Company Directors and runs short courses on governance through the Law
School at the University of Tasmania. Kim is passionate about research and teaching in strategic management
and governance and enjoyed being part of Dr Hanson’s teaching team in strategy for many years. Dr Backhouse
has published in a variety of journals on governance and corporate social responsibility. She has won teaching
awards for many years for her work in strategy and organisational behaviour. Dr Backhouse also works in part-time
executive roles outside of the academic landscape and consults regularly to boards on complex governance issues.
Kim has a current practising certificate from the Law Society of Tasmania, Fellow of the Governance Institute
of Australia and is a current board member of the Governance Institute of Australia (Tas). Kim currently sits on
several not-for-profit boards such as ACH AT and has been sitting on various boards for the past two decades.

David Leaney
Dav id Leaney lectures in strategic management at post-graduate level at the Australian National University
(A NU) and the Australian Graduate School of Management (AGSM) at the University of NSW. He also lectures
in marketing and global supply chain management at post-graduate and under-graduate levels. David brings a
practitioner’s perspective, fuelled by his work as a management consultant and his role as the Managing Director
of Strategium – an IT and business strategy consultancy. David is the chair of several private company boards
in professional ser vices and technology, and advises clients in the public sector, defence, utilities, banking and
the retail sector. He is sought as a facilitator for executive workshops and the development of corporate strategy
and organisational change management. David is a Fellow of the Institute of Managers and Leaders (FIML) and
a Certified Management Consultant (CMC).

Michael A. Hitt
Texas A&M University
Michael A. Hitt is a Distinguished Professor and holds the Joe B. Foster Chair in Business Leadership at Texas A&M
University. He received his PhD from the University of Colorado and has more than 260 publications, including
26 co-authored or co-edited books. He has been recognised as one of the 10 most cited scholars in management

xviii

over a 25-year period in an article published in the 2008 volume of the Journal of Management. He is co-editor of
numerous management, organisation, strategy and development books and has ser ved on the editorial review
boards of multiple journals, including the Academy of Management Journal, Academy of Management Executive, Journal
of Applied Psychology, Journal of Management, Journal of World Business and Journal of Applied Behavioral Sciences.

In addition, Professor Hitt has served as Consulting Editor and Editor of the Academy of Management Journal and
is currently a co-editor of the Strategic Entrepreneurship Journal. He is the current past president of the Strategic
Management Society, is a past president of the Academy of Management and is a Fellow in the Academy of
Management and in the Strategic Management Society. He received an honorar y doctorate from the Universidad
Carlos III de Madrid and is an Honorary Professor and Honorary Dean at Xi’an Jiao Tong University. He has received
the Irwin Outstanding Educator Award and the Distinguished Ser vice Award from the Academy of Management
and has received best paper awards for ar ticles published in the Academy of Management Journal, Academy of
Management Executive and Journal of Management.

R. Duane Ireland
University of Richmond
R. Duane Ireland is a Distinguished Professor and holds the Conn Chair in New Ventures Leadership at the Mays
Business School, Texas A& M University, where he previously ser ved as head of the management department.
He teaches st rateg ic management cou rses to u nderg raduate, masters, doctoral and execut ive students and
has more than 175 publications, including more than a dozen books. His research on diversification, cor porate
entrepreneurship and strategic entrepreneurship has been published in Academy of Management Journal, Academy
of Management Executive, Strategic Management Journal, Journal of Management, Strategic Entrepreneurship Journal,
Entrepreneurship Theory and Practice and Journal of Management Studies, among others. He has ser ved on editorial
review boards for the Academy of Management Journal, Journal of Management, Journal of Business Venturing, Journal
of Business Strategy and European Management Journal. He is current editor of the Academy of Management Journal
and has completed ed itor ial ter ms for Academy of Management Journal, Academy of Management Executive and
Entrepreneurship Theory and Practice. He has co-edited special issues of Academy of Management Review, Academy
of Management Executive, Journal of Business Venturing and Organizational Research Methods.

Professor Ireland has received awards for the best article published in Academy of Management Executive and
Academy of Management Journal. He is a Fellow of the Academy of Management and 21st Century Entrepreneurship
Research Scholar, and ser ved a three-year term as Representative-at-Large for the Academy of Management’s
Board of Governors. He received the Award for Outstanding Intellectual Contributions to Competitiveness Research
from the A merican Society for Competitiveness and the USASBE Scholar in Corporate Entrepreneurship Award.

Robert E. Hoskisson
The University of Oklahoma
Robert E. Hoskisson is the George R. Brown Chair of Strategic Management at the Jesse H. Jones Graduate School
of Business, Rice University. He received his PhD from the University of California-Irvine. Dr Hoskisson’s research
topics focus on corporate governance, acquisitions and divestitures, corporate and international diversification

xixABOUT THE AUTHORS

and cooperative strategy. He teaches courses in corporate and international strategic management, cooperative
strategy and strategy consulting. Dr Hoskisson’s research has appeared in more than 120 publications, including
the Academy of Management Journal, Strategic Management Journal, Journal of Management, Journal of International
Business Studies, Journal of Management Studies and the Academy of Management Executive. He has co-authored
26 books, including recent books on business strategic and competitive advantage, and is currently Associate
Editor of the Strategic Management Journal and Consulting Editor for the Journal of International Business Studies. He
also ser ves on the Editorial Review board for the Academy of Management Journal. Professor Hoskisson has ser ved
on editorial boards for the Academy of Management Journal, Journal of Management, Journal of Management Studies
and Entrepreneurship Theory and Practice, among others. He is Special Professor at the University of Nottingham
and Honorar y Professor at X i’an Jiao Tong University.

Professor Hoskisson is also a Fellow of the Strategic Management Society and has received awards from the
A mer ican Society for Competitiveness and the Mar r iott School of Management, Br igham Young University.
He completed three years of ser vice as Representative-at-Large for the Board of Governors of the Academy of
Management and currently ser ves on the Board of Directors of the Strategic Management Society.

xx ABOUT THE AUTHORS

AC K N OW L E D G E M E N T S
To my wonderful wife Meg for supporting me in consulting full-time, running three companies, teaching at two
universities, and adding a textbook to my list of additional interests.

David Leaney

This has been a long journey and a heartfelt thanks to my children who have patiently waited on the sidelines for
me to complete my part and who forfeited many weekends with their mother, in pursuit of academic excellence.
I would like to thank Dallas Hanson for his continued support of my academic career and to my dear friends who
have supported me from afar: Dr Kevin Radecki (USA) and Fran Scherrer (Spain). I hope you enjoy this edition.

Kim Backhouse

Cengage would also like to thank Greg Zooeff and Francis Hartnett for contributing new case studies to this
edition, and would also like to thank the following reviewers for their incisive and helpful feedback:

• Nguyen Viet Ngo – Australian National University
• Elisa Backer – Federation University Australia
• Gar y Mankelow – University of Newcastle
• David Robinson – Holmes Institute
• Fiona Hurd – Auckland University of Technology
• Harsha Sar vaiya – Griffith University
• Austin Norman – Victoria University
• Ralitza Bell – Australian Catholic University, North Sydney
• Lisa Daniel – University of the Sunshine Coast
• Stuart Middleton – University of Queensland
• Georges Baume – University of Adelaide.

Ever y effort has been made to trace and acknowledge copyright. However, if any infringement has occurred,
the publishers tender their apologies and invite the copyright holders to contact them.

xxi

PA R T 1
STRATEGIC MANAGEMENT
INPUTS
1 Strategic management and strategic

competitiveness 2

2 The external environment:
opportunities, threats, industry
competition, and competitor
analysis 34

3 The internal organisation: resources,
capabilities, core competencies,
and competitive advantages 72

1

1

Strategic management and strategic
competitiveness

CH
AP

TE
R

1
Studying this chapter should provide you with the strategic management knowledge
needed to:
LO1 analyse the components of the strategic management process
LO2 describe the competitive landscape and explain how globalisation and

technological changes shape it
LO3 use the industrial organisation (I/O) model to explain how companies can earn

above-average returns
LO4 use the resource-based model to explain how companies can earn above-

average returns
LO5 describe vision and mission and discuss their value
LO6 define and classify the four major stakeholder groups and describe their ability

to influence organisations
LO7 describe the work of strategic leaders.

Learning Objectives

2

McDonald’s in Australia is part of a global empire of fast-
food restaurants. McDonald’s has achieved substantial
international success over the years, with its restaurants
spread widely throughout the world. Brand recognition
is huge: many people know about, and are customers
of, McDonald’s. For example, a recent survey found that
88 per cent of people recognise the golden arches and
associate them with McDonald’s. Each day, about 69
million people eat at a McDonald’s store, which equates

to almost 0.8 per cent of the world’s population. In 2018,
McDonald’s had 37 855 total restaurants globally, located
in 120 different countries and 14 155 stores in the US
alone. China has 2223 stores compared with Japan 2975,
the UK 1261, Canada 1443 and Australia 920. Globally,
McDonald’s hires 1.9 million employees, and it hires
approximately one million employees per year in the
USA. In 2018, its annual revenue was $21 billion and its
net income was $5.9 billion.

McDonald’s: Restaurant expansion since 1955.

Source: https://mcdonalds.com.au/about-maccas/maccas-story.

Given that McDonald’s includes a toy in about 20
per cent of its sales, it is considered the world’s largest
distributor of toys. Each year, McDonald’s distributes
1.5 billion toys globally, which is more than Mattel
and Hasbro. McDonald’s decided early to move into
international markets, and now one can find the golden
arches in far-flung locations around the globe.

In Australia, ‘Maccas’ (the locals’ name for the
organisation) is thriving, with flexible offerings, ‘gourmet
coffee’ and fresh-food bars. These have been successful
moves. The UK arm has also been responsive to
consumer demand; for example, it accommodates
consumers who ask what goes into their food, providing
information to staff that allows them to respond, and it
promotes jobs in the chain as upwardly mobile.

China is a promising arena but there are continuing
pressures there, with high levels of rivalry from KFC.
There are now over 2000 McDonald’s outlets in China,
which is approximately one-third the number of KFC
outlets. KFC has around 5919 stores and is presently
considered the most popular fast-food chain in China.

In India, where historically the brand was relatively
small with only 400 stores compared with China, Japan
and Australia, McDonald’s turned a corner when it
announced in May 2019 that it had finally acquired full
ownership of Connaught Plaza Restaurants. This entity
had run the global giant’s operations in north and east
India – from its long-estranged business partner Vikram
Bakshi. The association between Bakshi and McDonald’s
commenced in 1995 when, under a 25-year deal, the

McDonald’s and brand recognition

OPENING CASE STUDY

N
u

m
b

er
o

f
re

st
au

ra
n

ts

0

5000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

1000

1968

45 000

2000

1972

5000

1978 1986

25 000

1999

38 000

2020

9000

CHAPTER 1
STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

3

As we can see from the opening case, McDonald’s organisations in Australia, the UK, China, India, Japan
and the USA are all in different competitive positions. Therefore, we can conclude that they are not equally
competitive (i.e. they are unable to achieve similar strategic competitiveness). In the USA, the organisation
is now usi ng t he st rateg ic ma nagement process (see Fig u re 1.1) as t he fou ndat ion for cha nges to t he
commitments, decisions and actions it under took to pursue strategic competitiveness and above-average
terms. It may well succeed, given time.1

The strategic management process
As explained in the opening case, McDonald’s is trying to enrich its traditional approach globally with more
marketing and by making its stores more responsive to local consumers’ needs. A study conducted to identify
the factors that contribute to the success of top corporate performers shows why the organisation is doing
this. This study found that the top performers were entrepreneurial, were market oriented (possessing
effective knowledge of the customers’ needs), used valuable competencies and offered innovative products
and services.2

The types of behaviours exhibited by top performers like McDonald’s represent a strategic management
process (see Fig u re 1.1), wh ich is a f u l l set of com m it ments, decisions a nd act ions requ i red for a n
organ isat ion to ach ieve st rategic compet it iveness and ea r n above-average retu r ns. The organ isat ion’s
fi rst step in the process is to analyse its external environment and internal organisation to determine its
resources, capabilities and core competencies – the sources of its ‘strategic inputs’. We will now analyse
each of the different components of the strategic management process.

Strategic competitiveness is achieved when an organisation successfully formulates and implements
a value-creating strateg y. A strategy is an integrated and coordinated set of commitments and actions
desig ned to ex ploit core competencies a nd ga i n a compet it ive adva ntage. W hen choosi ng a st rateg y,
orga n isat ions ma ke choices a mong compet ing alter nat ives as t he pat hway for decid ing how t hey w ill
pursue strategic competitiveness. 3

I n t h is sense, t he chosen st rateg y i nd icates what t he orga n isat ion w i l l do as wel l as what t he
organisation will not do. A n organisation’s strateg y also demonstrates how it differs from its competitors.

A n organ isat ion has a compet it ive advantage when it implements a st rateg y t hat creates super ior
value for customers a nd t hat its compet itors a re u nable to duplicate or fi nd too cost ly to im itate.4 A n
organisation can be confident that its strategy has resulted in one or more useful competitive advantages
only after competitors’ effor ts to duplicate its strategy have ceased or failed. In addition, an organisation
must understand that no competitive advantage is permanent, and this was witnessed in 2020 during the
Covid-19 pandemic.5 The speed with which competitors are able to acquire the skills needed to duplicate

strategic
management process
the full set of
commitments,
decisions and
actions required for
an organisation to
achieve strategic
competitiveness and
earn above-average
returns
strategic
competitiveness
achieved when
an organisation
successfully
formulates and
implements a value-
creating strategy

strategy
an integrated and
coordinated set of
commitments and
actions designed
to exploit core
competencies and
gain a competitive
advantage

two partners formed a 50:50 joint venture company –
Connaught Plaza Restaurant – to set up outlets in the
north and the east under the franchisee model. To date,
McDonald’s has two business entities in India. Amit Jatia’s
Hardcastle Restaurants runs the McDonald’s business
in southern and western India. McDonald’s India is
committed to sourcing almost all of its products from
within the country. For this purpose, it has developed
local Indian businesses, which can supply the highest-
quality products required for its Indian operations.

The McDonald’s empire is obviously difficult to control
and constantly presents country-specific challenges.
Clever strategy is important for its continued survival and,

for the company, hopefully, its growth post the Covid-19
pandemic.

Sources: C. Smith, 2020, 50 interesting McDonald’s statistics and facts
2020, DMR Business Statistics, https://expandedramblings.com/index.php/

mcdonalds-statistics, 28 May; R. Darling, 2019, Thanks to the Happy Meal,
McDonald’s is the largest toy manufacturer, http://www.considerable.com,

6 November; 2019, KFC is most popular food chain in China, http://www.
businessinsider.com, 8 March; The Economic Times, 2019, Vikram Bakshi is

finally out, and McDonald’s India is lovin’ it, ET Online, https://economictimes.
indiatimes.com/industry/services/hotels-/-restaurants/vikram-bakshi-is-

finally-out-and-mcdonalds-india-is-lovin-it/articleshow/69309704.cms?utm_
source=contentofinterest&utm_medium=text&utm_campaign=cppst, 14 May; T.

DiChristopher, 2015, McDonald’s new CEO faces many problems, CNBC, http://
www.cnbc.com/2015/01/29/how-mcdonalds-new-ceo-can-turn-around-the-

company.html, 29 January; FT Reporters, 2015, McDonald’s and its challenges
worldwide: A market-by-market look, Financial Times, http://www.ft.com/intl/

cms/s/0/f8ac22fc-a7c1-11e4-8e78-00144feab7de.html#slide0, 29 January.

4 PART 1: STRATEGIC MANAGEMENT INPUTS

the benefits of an organisation’s value-creating strategy determines how long the competitive advantage
will last.6

Above-average returns are returns in excess of what an investor expects to earn from other investments
with a similar amount of risk. Risk is an investor’s uncertainty about the economic gains or losses that will
result from a par ticular investment.7 The most successful organisations learn how to effectively manage
r isk. Effectively managing r isks reduces investors’ uncer tainty about t he results of t heir invest ment. 8
Retu r ns a re of ten measu red in ter ms of accou nt ing fig u res, such as retu r n on assets, retu r n on equity
or retu r n on sa les. A lter nat ively, retu r ns ca n be measu red on t he basis of stock ma rket retu r ns, such
as mont h ly retu r ns (t he end-of-t he-per iod stock pr ice m inus t he begin n ing stock pr ice, d iv ided by t he
beginning stock price, yielding a percentage return). In smaller, new venture organisations, returns are
sometimes measured in terms of the amount and speed of grow th (e.g. in annual sales) rather than more
traditional profitability measures9 because new ventures require time to earn acceptable returns (in the
form of return on assets and so for th) on investors’ investments.10

Understanding how to exploit a competitive advantage is impor tant for organisations seeking to earn
above-average returns.11 Organisations without a competitive advantage or that are not competing in an

above-average
returns
returns in excess
of what an investor
expects to earn from
other investments
with a similar amount
of risk

risk
an investor’s
uncertainty about the
economic gains or
losses that will result
from a particular
investment

Strategic competitiveness
Above-average returns

Chapter 3
The internal
organisation

Chapter 2
The external
environment

Strategic intent
Strategic mission

Strategy formulation

Feedback

St
ra

te
gi

c
o

u
tc

o
m

es
St

ra
te

gi
c

ac
ti

o
n

s
St

ra
te

gi
c

in
p

u
ts

Chapter 4
Business-level
strategy

Chapter 6
Corporate-level
strategy

Acquisition and
restructuring
strategies

Chapter 8
International
strategy

Chapter 9
Cooperative
strategy

Strategy implementation

Chapter 10
Corporate
governance

Chapter 11
Organisational
structure and
controls

Chapter 12
Strategic
leadership

Chapter 13
Strategic
entrepreneurship

Chapter 5
Competitive
dynamics

Chapter 7

Figure 1.1 The strategic management process

CHAPTER 1
STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

5

attractive industr y earn, at best, average returns. Average returns are returns equal to those an investor
expects to earn from other investments with a similar amount of risk. In the long r un, an inability to earn
at least average returns results fi rst in decline and, eventually, failure. Failure occurs because investors
w it hd raw t heir invest ments from t hose organ isations ear n ing less-t han-average retu r ns. As we noted
above, there are no guarantees of permanent success. Even considering its excellent current performance,
McDonald’s still must be careful not to become overcon fident, and continue its quest to be the leader in its
markets.

With the information gained from external and internal analyses, the organisation develops its vision
and mission and formulates one or more strategies. To implement its strategies, the organisation takes actions
towards achieving strategic competitiveness and above-average returns. Effective strategic actions that take
place in the context of carefully integrated strategy formulation and implementation efforts result in positive
outcomes. This dynamic strategic management process must be maintained as ever-changing markets and
competitive structures are coordinated with an organisation’s continuously evolving strategic inputs.12

In t he remai n i ng chapters of t h is book, we use t he st rateg ic ma nagement process to ex plai n what
organisations do to achieve strategic competitiveness and earn above-average returns. These explanations
demonstrate why some organisations consistently achieve competitive success while others fail to do so.13
As you will see, the reality of global competition is a critical part of the strategic management process and
significantly influences organisations’ performances.14 Indeed, learning how to successfully compete in the
globalised world is one of the most significant challenges for organisations competing in the 21st century.15

Several topics are discussed in this chapter. First, we describe the current competitive landscape. This
challenging landscape has been created primarily by the emergence of a global economy, globalisation
resulting from that economy, rapid technological changes and the Covid-19 pandemic. Next, we examine
t wo models t hat orga n isat ions use to gat her t he i n for mat ion a nd k nowledge requ i red to choose a nd
t hen effect ively i mplement t hei r st rateg ies. The i nsights ga i ned f rom t hese models a lso ser ve as t he
foundation for forming the organisation’s vision and mission. The fi rst model (the industrial organisation
or I/O model) suggests t hat t he exter nal env iron ment is t he pr imar y deter m inant of an organ isation’s
strategic actions. Identifying and then competing successfully in an attractive (i.e. profitable) industr y
or segment of an industr y are the keys to competitive success when using this model.16 The second model
(resource based) suggests that an organisation’s unique resources and capabilities are the critical link to
strategic competitiveness.17 Thus, the fi rst model is concerned primarily with the organisation’s external
environment, while the second model is concerned primarily with the organisation’s internal environment.
A f ter d iscussing v ision and m ission, d irection-setting statements t hat in fluence t he choice and use of
strategies, we describe the stakeholders that organisations serve. The degree to which stakeholders’ needs
can be met increases when organisations achieve strategic competitiveness and earn above-average returns.
Closing the chapter are introductions to strategic leaders and the elements of the strategic management
process.

For ease, t h is book is d iv ided i nto t h ree pa r ts. I n Pa r t 1, we desc r ibe what orga n isat ions do to
analyse t heir ex ter nal env iron ment (Chapter 2) and inter nal organ isation (Chapter  3). These analyses
a re completed to identif y ma rketplace oppor tun ities and t h reats in t he ex ter nal env iron ment (Chapter
2), and to decide how to use the resources, capabilities, core competencies and competitive advantages in
t he organ isation’s inter nal organ isation to pu rsue oppor tun ities and overcome t h reats (Chapter 3). The
analyses explained in Chapters 2 and 3 comprise the well-known SWOT analyses (strengths, weaknesses,
opportunities and threats).18 (In our analysis, the important ‘strengths’ concept is made more sophisticated
by using the ideas of capabilities and core competencies.) With knowledge about its external environment
and inter nal organ isation, t he organ isation for ms its st rateg y consider ing t he organ isation’s v ision and
m ission.

The organisation’s strategic inputs (see Fig ure 1.1) provide the foundation for choosing one or more
strategies and deciding how to implement them. As suggested in Figure 1.1 by the horizontal arrow linking
the two ty pes of strategic actions, for mulation and implementation must be simultaneously integrated

average returns
returns equal to those
an investor expects
to earn from other
investments with a
similar amount of risk

global economy
one in which goods,
services, people, skills
and ideas move freely
across geographic
borders

6 PART 1: STRATEGIC MANAGEMENT INPUTS

to successf u l ly use t he st rateg ic ma nagement process. Integ rat ion happens as decision ma kers t h i n k
about implementation issues when choosing strategies and as they think about possible changes to the
organisation’s strategies while implementing a cur rently chosen strateg y.

In Pa r t 2 of t h is book, we d iscuss t he d i fferent st rateg ies orga n isat ions may choose to use. Fi rst,
we exa m i ne busi ness-level st rateg ies (Chapter 4). A busi ness-level st rateg y descr ibes t he act ions a n
orga n isat ion ta kes to ex ploit its compet it ive adva ntage over r iva ls. A compa ny compet i ng i n a si ngle
product market (e.g. a locally owned grocer y store operating in only one location) has one business-level
strateg y, while a diversified organisation competing in multiple product markets forms a business-level
strateg y for each of its businesses. In Chapter 5, we describe the actions and reactions that occur among
organ isations in marketplace competition. Competitors ty pically respond to and t r y to anticipate each
other’s actions. The dynamics of competition affect the strategies organisations choose, as well as how
they tr y to implement the chosen strategies.19

For the diversified organisation, cor porate-level strateg y (Chapter 6) is concerned with determining
the businesses in which the company intends to compete as well as how to manage its different businesses.
Other topics vital to strategy formulation, particularly in the diversified company, include acquiring other
businesses and, as appropriate, restr ucturing the organisation’s por tfolio of businesses (Chapter 7) and
selecting an inter national st rateg y (Chapter 8). With cooperative st rategies (Chapter 9), organ isations
form a par tnership to share their resources and capabilities in order to develop a competitive advantage.
Cooperative strategies are becoming increasingly impor tant as organisations seek ways to compete in the
global economy’s ar ray of different markets.20

To exa m i ne act ions ta ken to i mplement st rateg ies, we consider severa l topics i n Pa r t 3. Fi rst, we
e xa m i ne t he d i f fe rent mec ha n ism s u sed to gove r n orga n isat ion s (C hapte r 10). W it h dema nd s for
improved cor porate governance being voiced by many stakeholders in the cur rent business environment,
orga n isat ion s a re c ha l lenged to lea r n how to si mu lta neou sly sat isf y t hei r sta keholders’ d i f ferent
interests.21 Finally, the organisational structure and actions needed to control an organisation’s operations
(Chapter 11), t he patter ns of st rategic leadersh ip appropr iate for today ’s organ isations and competitive
environments (Chapter 12), and strategic entrepreneurship (Chapter 13) as a path to continuous innovation
a re add ressed.

The competitive landscape
The fundamental nature of competition in many of the world’s industries is changing. The reality is that
financial capital continues to be scarce and markets are increasingly volatile. 22 Because of this, the pace
of change is relentless and ever-increasing. Even determining the boundaries of an industr y has become
challenging.

Managers must adopt a new m indset t hat values flex ibility, speed, in novat ion, integ rat ion and t he
challenges that evolve from constantly changing conditions.23 The conditions of the competitive landscape
result in a perilous business world, one in which the investments that are required to compete on a global
scale are enormous and the consequences of failure are severe.24 Effective use of the strategic management
process reduces t he li kelihood of failu re for orga n isat ions as t hey encou nter t he cond it ions of today ’s
competitive landscape.

Hypercompetition is a ter m often used to capture the realities of the competitive landscape. Under
cond it ions of hy percompet it ion, assu mpt ions of ma rket stabi l it y a re replaced by not ions of i n herent
instability and change.25 Hy percompetition results from the dynamics of strategic manoeuv ring among
globa l a nd i n novat ive combata nts. I n a hy percompet it ive ma rket, orga n isat ions of ten agg ressively
challenge their competitors in the hopes of improv ing their competitive position and, ultimately, their
performance.26 In recent years, internet giant Tencent Holdings Ltd of China has become one of the world’s
largest technolog y investors. Between 2013 and mid-2018, the organisation took stakes in 277 star t-ups.
A nalysts believe this is a calculated strateg y to crowd out rivals and to increase profits. 27

hypercompetition
a condition where
competitors engage
in intense rivalry,
markets change
quickly and often, and
entry barriers are low

CHAPTER 1
STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

7

Several factors create hy percompetitive env iron ments and in fluence t he natu re of t he competitive
landscape. The emergence of a global economy and technolog y – specifically rapid technological change –
have been the two primary drivers of hypercompetitive environments and the nature of today’s competitive
landscape.

The global economy
A global economy is one in which goods, ser vices, people, skills and ideas move freely across geographic
borders. Relatively unfettered by ar tificial constraints, such as tariffs, the global economy significantly
ex pa nds a nd compl icates a n orga n isat ion’s compet it ive env i ron ment. 2 8 T he globa l economy is u nder
pressu re, weighed dow n by t rade tensions, inequality and geopolit ical u ncer tainty. The world is at an
econom ic ‘t ippi ng poi nt ’ accord i ng to t he 2019 Global Competiveness Report ‘a m id a back lash aga i nst
capitalism and globalization’.29

Interesting opportunities and challenges are associated with the emergence of the global economy.30 For
example, the European Union (EU; composed of 27 countries after the UK exited the EU in 2020) has become
one of the world’s largest markets, with 700 million potential customers, while China has rapidly become
a huge market that was pursued by many organisations prior to the Covid-19 pandemic. Notwithstanding,
China remains an extremely competitive market in which local market-seeking multinational corporations
(MNCs) must fiercely compete against other MNCs, as well as against those local companies that are more
cost-effective and faster in product development. W hile China has been viewed as a countr y from which
to source low-cost goods, many MNCs, such as Procter & Gamble (P&G), are actually net expor ters of local
management talent; they have been dispatching more Chinese abroad than bringing foreign expatriates
to China. 31

The size of par ts of the global economy is an impor tant aspect of studying this competitive landscape.
In 2019, for example, the USA was the world’s largest economy at a value of US$21 trillion. It accounts for
approximately 20 per cent of global output; the economy is still larger than that of China;32 and the services
sectors in the USA are technologically sophisticated. China is the world’s second-largest economy, with a
nominal gross domestic product (GDP) value of US$9.2 trillion, while Japan in 2019 was ranked the third-
largest global economy at US$5.2 trillion. Following Japan were Germany at US$4.2 trillion and the UK at
US$3.2 trillion. These were closely followed by India, which over took the French economy in 2018, and
looks set to move into fifth position in 2021–22. In observing economies’ values in 2018, the World Economic
For um noted that the size of the USA’s economy was ‘larger than the combined economies of numbers four
to 10 on the list. Overall, the global economy (was) worth an estimated $79.98 trillion, meaning the United
States in 2018 accounted for more than one-quar ter of the world total’. 33 Thus, organisations scanning the
global economy for oppor tunities in 2021 might conclude that markets in the USA, China and Japan yield
potentially significant oppor tunities for them.

Of course, such an analysis also must consider entry barriers to various economies in the form of tariffs.
This type of analysis must also be forward-looking in that the World Economic Forum has estimated that the
economies of China and India would exceed the size of the US economy by 2050 and that the economies of
Germany, the UK and France would decline in size by this time as well. Organisations should study carefully
future forecasts when determining the parts of the world in which growth opportunities, as well as threats
to their competitive global positions, may exist in the next decade. US-based Netflix, for example, studies
the global economy to identify oppor tunities in countries and regions in which it may grow. In mid-2018,
Netflix continued adding subscribers, reaching 125 million globally. A nalysts predicted the organisation
would have 360 million subscribers by 2030, and that international markets would be the source of much
of the grow th in subscribers. 34 Informing this prediction was the expectation that Netflix would achieve
reasonable levels of market penetration internationally, including reaching penetration in 35 per cent of
all broadband households worldwide, excluding China.35 In 2018 alone, the organisation allocated $8 billion
to develop or ig inal prog ra m m ing, w it h some of t hose prog ra ms ta rgeted to inter nat ional customers. 36
Netflix was one of the rare organisations that continued to grow during the Covid-19 pandemic, adding

8 PART 1: STRATEGIC MANAGEMENT INPUTS

15.8 million subscribers between March and April 2020, more than double the amount that was predicted
and representing a huge grow th of over 22 per cent during the 12-month period to 2020. Netflix also saw a
quar terly revenue of US$5.76 billion in 2020. 37 According to market research organisation HarrisX, Netflix
is a long way ahead of its compet itors; however, t he organ isat ion is m ind f ul t hat t here a re challenges
ahead, as noted in a recent ar ticle: ‘when you’re number one, it’s always difficult to grow as fast as your
competitors or whoever’s trailing you’. 38

Ind ia, one of the world’s largest democracies, has an economy that also is grow ing rapid ly and now
ranks as the fifth largest in the world, and it has a ver y fast-growing population. 39 Simultaneously, many
orga n isat ions i n emerg i ng econom ies a re mov i ng i nto i nter nat ional ma rkets a nd a re now rega rded as
multinational organisations. Bar riers to entering foreign markets still exist. The statistics detailing the
nature of the global economy reflect the realities of a hypercompetitive business environment and challenge
ind iv idual organ isat ions to t h in k ser iously about t he ma rkets in wh ich t hey w ill compete; t he case of
Netflix is a good example.

Starbucks is a new economy multinational yet has
had failures in key markets

Starbucks is not an ordinary supplier of a cup of coffee.
It is a large and innovative multinational organisation
that engages in major strategic actions to enter new
international and product markets (e.g. acquisitions).
It is a multibillion-dollar organisation with many stores
operating in multiple countries. Starbucks surpassed its
goal set to have at least 12 500 stores in the USA by 2015
to 15 149 US locations in 2020. Starbucks was the largest
global coffeehouse company in 2019 with 31 256 stores
across the globe. Starbucks has become a major player
in Asian markets, which is interesting because it took on
a largely ingrained tea-drinking culture. Starbucks had
1026 stores operating in China in 2015, 1540 in 2017
(which was the expected store numbers for 2015), and in
2019 there were 4123 Starbuck stores in China, with 629
newly opened stores and 27 closures – a major increase
over its 3000 stores since 2015. Starbucks adapted to
local market tastes by developing larger stores where, for
example, people can lounge and meet with friends. It has
products that cater to tea drinkers as well. China ranked
second in front of Japan, which had a total of 1286
locations in 2019, and Starbucks generated more than
US$16 billion in the region.

Starbucks has also entered Vietnam and India with
high expectations. In 2013 it opened its first store
in Vietnam, although in 2019 it had only 46 stores
there. Interestingly, Vietnam is the second-largest
producer of coffee beans in the world, behind Brazil.
Starbucks works with local Vietnamese farmers to grow
a high-quality Arabica coffee bean. In partnership with

the Tata Group, Starbucks also opened its first stores in
India, with plans to expand rapidly there, and in 2019 it
had 132 stores in India, three times that of Vietnam.

In contrast, in Australia the scorecard has been
extremely poor. CNBC reported that while the
Australian café industry was expected to reach more
than A$6 billion in revenue in 2018, in its first seven
years in Australia, Starbucks accumulated A$105
million in losses and 61 locations were forced to close.
Starbucks referred to its efforts in the country as a ‘huge
flop’. Starbucks entered the market hard in 2000 and
had 84 stores at its peak. The problems were obvious
from the start. The organisation charged more than
competitors, had stores in low-traffic locations and,
basically, the well-established coffee culture of Australia
was better than the Starbucks offerings. Melbourne-
style coffee is arguably the world’s best and Starbucks
could not compete on taste in an already thriving coffee
culture, which proved to be a huge challenge for the
US brand. Starbucks has not given up just yet, and in
2021 there were 55 locations (more than Vietnam) in
Australia. With slow growth forecasts into the future, its
Australian goal is to focus more on international tourists
that recognise this global brand.

The experience of Starbucks in Europe has been
more mixed. It has had some success, but has also
encountered another different set of coffee cultures.
At first, it tried to encourage Europeans to adapt
to the Starbucks approach, but this strategy failed.
Now, because of the importance Starbucks places on

Strategic focus | Globalisation

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STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

9

The march of globalisation
Globalisat ion is t he increasing econom ic interdependence a mong cou nt r ies a nd t hei r orga n isat ions as
reflected i n t he flow of goods a nd ser v ices, fi na ncia l capita l a nd k nowledge across cou nt r y borders.4 0
Globalisation is a product of a large number of organisations competing against one another in an increasing
number of global economies.

In globalised markets and industries, financial capital might be obtained in one national market and used
to buy raw materials in another. Manufacturing equipment bought from a third national market can then
be used to produce products that are sold in yet a four th market. Thus, globalisation increases the range of
oppor tunities for companies competing in the cur rent competitive landscape.41 Organisations operating
globally must ma ke cu ltu rally sensit ive decisions when using t he st rateg ic ma nagement process,4 2 as
ev idenced i n Sta rbucks’ operat ions i n Eu ropea n a nd A sia n cou nt r ies. Add it iona l ly, h igh ly globa l ised
organisations should anticipate ever-increasing complexity in their operations as goods, services and people
move freely across geographic borders and throughout different economies.

Overall, it is impor tant to note t hat globalisation has led to h igher per for mance standa rds in many
compet it ive d i mensions, i nclud i ng t hose of qua l it y, cost, product iv it y, product i nt roduct ion t i me a nd
operat ional eff iciency. In add it ion to orga n isat ions compet i ng i n t he global economy, t hese sta nda rds
a f fect orga n isat ions compet i ng on a domest ic-on ly basis. T he reason is t hat customers w i l l pu rchase
from a global competitor rat her t han a domestic organ isation when t he global company ’s good or ser v ice
is super ior. Because workers now f low rat her freely among global econom ies, and because employees a re
a key source of competitive advantage, organisations must understand that, increasingly, ‘the best people
w ill come from … any where’.4 3 Thus, managers have to lea r n how to operate effectively in a ‘multi-pola r ’
world, w it h many impor tant cou nt r ies hav ing u n ique interests and env iron ments.4 4 Organ isations must
lear n how to deal w it h t he reality t hat, in t he competitive landscape of t he 21st centu r y, on ly compan ies

its future in Europe, the company is adapting to the
European café culture. This means that Starbucks is
building larger stores with additional seating to allow
people to meet and spend time in its stores, as it
has done in Asia. It has implemented other practices
and products that adapt even more to local (country)
cultures and tastes (e.g. in France and England).

In addition to Starbucks’ international thrust, it
also engages in significant innovation and strategic
actions to add to its product line. In recent years, it
has introduced Via, an instant coffee, and a single-
cup coffee maker (named the Verismo) that allows
customers to make their own lattes at home. Another
attempt to add to its product line was evidenced by
its acquisition of the tea chain Teavana. In fact, it paid
US$620 million to acquire the Atlanta-based company.
In recent times, it also acquired a juice maker, Evolution
Fresh, and Bay Bread, the operator of La Boulange
bakeries. Starbucks’ variety of beverage and food
companies now includes: Seattle’s Best Coffee, Teavana,
Tazo, Evolution Fresh, Torrefazione Italia Coffee and
Ethos Water.

Sources: S. Lock, 2019, Starbucks stores:
US and international 2005 to 2019, http://www.statista.com;

http://www.financesonline.com, Number of Starbucks
worldwide 2020: facts, statistics, and trends;

L. L. Thomala, 2020, Number of Starbucks stores in China from 2005 to
2019, Statista.com, 27 May; L. MacLellan, 2019, The countries with the

most Starbucks locations, Quartz, http://www.qz.com, 30 January; A.
Turner, 2018, Why there are almost no Starbucks in Australia, CNBC,
http://www.cnbc.com, 25 July; J. Gertner, 2013, For infusing a steady

stream of new ideas to revive its business, Fast Company, http://www.
fastcompany.com; A. Gasparro, 2013, Starbucks enjoys sales jolt from

its US, China stores, Wall Street Journal, http://www.wsj.com, 24 January;
J. Noble, 2013, Starbucks takes on Vietnam coffee culture, Financial
Times, http://www.ft.com, 3 January; A. Gasparro, 2012, Starbucks:

China to become no. 2 market, Wall Street Journal, http://www.wsj.com,
6 December; 2012, A look at Starbucks’ U.S. presence over the years,

Bloomberg Businessweek, http://www.businessweek.com, 5 December; L.
Burkitt, 2012, Starbucks plays to local Chinese tastes, Wall Street Journal,
http://www.wsj.com, 26 November; J. Jargon, 2012, Starbucks CEO: ‘We

will do for tea what we did for coffee’, Wall Street Journal, http://www.
wsj.com, 14 November; V. Bajaj, 2012, Starbucks opens in India with
pomp and tempered ambition, New York Times, http://www.nytimes.

com, 19 October; S. Strom, 2012, Starbucks to introduce single-serve
coffee maker, New York Times, http://www.nytimes.com, 20 September;

L. Alderman, 2012, In Europe, Starbucks adjusts to a café culture, New
York Times, http://www.nytimes.com, 30 March.

10 PART 1: STRATEGIC MANAGEMENT INPUTS

capable of meeting, if not exceeding, global standards ty pically have the capability to earn above-average
retu r ns.

A lthough globalisation offers potential benefits to organisations, it is not without risks. Collectively,
the risks of par ticipating outside of an organisation’s domestic countr y in the global economy are labelled
a ‘liability of foreignness’.45

The increasing oppor tunities available in emerging economies is a major driver of grow th in the size
of the global economy. Impor tant emerging economies include the BR IC countries (Brazil, Russia, India
and China),46 the V ISTA countries ( Vietnam, Indonesia, South A frica, Turkey and A rgentina),47 as well as
Mexico and Thailand. Demonstrating the growth in size of some of these economies was the 2018 prediction
that, by 2050, Indonesia, Brazil, Russia and Mexico would be the four th-, fifth-, sixth- and seventh-largest
economies in the world by size, respectively. If this were to happen, by 2050 the size of these emerging
economies would exceed those of Japan, Germany, the UK and France.48 Emerging economy organisations
now compete i n globa l ma rkets, some w it h i ncreasi ng success.4 9 I ndeed, t he emergence of M NCs i n
international markets forces large M NCs based in developed markets to enrich their own capabilities to
compete effectively in global markets.50

One r isk of enter ing the global market is the amount of time ty pically required for organisations to
lear n how to compete in markets that are new to them. A n organisation’s per for mance can su ffer until
this knowledge is either developed locally or transfer red from the home market to the newly established
global locat ion. 51 Add it ionally, an organ isat ion’s per for mance may su ffer w it h substant ial amou nts of
globalisat ion. In t h is insta nce, a n orga n isat ion may over-d iversif y inter nat ionally a nd t h is may have
strong negative effects on overall performance.

Thus, entry into international markets, even for organisations with substantial experience in the global
economy, requires effective use of the strategic management process. It is also important to note that even
though global markets are an attractive strategic option for some companies, they are not the only source
of strategic competitiveness. In fact, for most organisations – even those capable of competing successfully
in global markets – it is cr itical to remain committed to and strategically competitive in both domestic
and international markets by staying attuned to technological oppor tunities and potential competitive
d isr uptions t hat in novations create. 52 The challenge is also to be responsive to local needs, somet h ing
Starbucks failed to do in Australia. Starbucks is now emphasising both product innovation and international
expansion as means of growing profitably.

Technology and technological changes
Boston Consulting Group analysts describe the impact of technology as follows: ‘No company can afford
to ignore the impact of technolog y on ever y thing from supply chains to customer engagement, and the
advent of even more advanced technologies, such as artificial intelligence (AI) and the Internet of Things,
portends more far-reaching change.’53 There are three categories of technology-related trends and conditions
affecting today’s organisations: technology diffusion and disruptive technologies; the information age; and
increasing knowledge intensity. These categories have a significant effect on the nature of competition in
many industries.

Technology diffusion and disruptive technologies
The rate of technolog y diff usion, which is the speed at which new technologies become available and are
used, has increased substantially over the past 15 to 20 years. Consider the following rates of technolog y
diff usion:

It took the telephone 35 years to get into 25 per cent of all homes in the United States. It
took TV 26 years. It took radio 22 years. It took PCs 16 years. It took the internet 7 years.54

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11

The i mpact of tech nolog ica l cha nges on orga n isat ions a nd i ndust r ies is broad a nd sig n i fica nt. For
example, in the not-too-distant past, people rented movies on videotapes from global retail stores such as
Blockbuster. Blockbuster has just one store that remains open globally, located in Oregon, USA. Fifteen years
earlier there were 9000 stores. Today, customers on a global basis use electronic means almost exclusively
to rent movies (such as via Foxtel) and games (e.g. For tnite). The publishing industr y ( books, jour nals,
magazines and newspapers) is moving rapidly from hard copy to electronic formats. Many organisations in
these industries, operating with a more traditional business model, are suffering. These changes are also
affecting other industries, from tr ucking to mail ser vices.

Pe r pet ua l i n novat ion i s a te r m u sed to desc r ibe how rapid ly a nd con si stent ly new, i n for mat ion-
i nte n sive tec h nolog ies replace olde r ones. T he shor te r produc t l i fe c yc les resu lt i ng f rom t he rapid
d i f f u sion of new tec h nolog ies place a compet it ive prem iu m on bei ng able to qu ic k ly i nt roduce new,
i n novat ive good s a nd ser v ices i nto t he ma rket place. 55

I n fact, when products become somewhat i nd ist i ng u ishable because of t he w idespread a nd rapid
d i ff usion of tech nolog ies, speed to ma rket w it h i n novat ive products may be t he pr i ma r y sou rce of
compet it ive adva ntage (see Chapter 5). 56 Indeed, some a rg ue t hat t he globa l economy is i ncreasi ngly
driven by, or revolves around, constant innovations. Not sur prisingly, such innovations must be derived
from an understanding of global standards and expectations of product functionality.57 A lthough some
arg ue t hat large established organ isations may have t rouble in novating, ev idence suggests t hat today
these organisations are developing radically new technologies that transform old industries or create new
ones. 58 Apple is an excellent example of a large established organ isation capable of rad ical in novation.
A lso, in order to diff use the technolog y and enhance the value of an innovation, additional organisations
need to be i n novat ive i n t hei r use of t he new tech nolog y, bu i ld i ng it i nto t hei r products. 59 A lt hough
matu re orga n isat ions may have t rouble in novat ing, ev idence suggests t hat today t hese orga n isat ions
are developing radically new technologies that transform old industries or create new ones.60 In 2018, for
example, Boston Consulting Group identified the 50 most innovative companies in the world. The first five
organisations on this list are large companies: Apple, Google, Microsoft, A mazon and Samsung.61 Wireless
A irPods, A R K it (the organisation’s augmented-reality framework) and HomePod (an intelligent speaker)
are some of the in novative products Apple has int roduced and for which some recognise it as the most
innovative company in the world.62

A not her i nd icator of rapid tech nolog y d i ff usion is t hat it now may ta ke on ly 12 to 18 mont hs for
orga n isat ions to gat her i n for mat ion about t hei r compet itors’ resea rch a nd development a nd product
decisions.6 3 I n t he globa l economy, compet itors ca n somet i mes i m itate a n orga n isat ion’s successf u l
competitive actions within a few days. In this sense, the rate of technological diff usion has reduced the
competitive benefits of patents. Today, patents may be an effective way of protecting proprietary technology
in a small number of industries such as pharmaceuticals. Indeed, many organisations competing in the
electronics industr y often do not apply for patents, in order to prevent competitors from gaining access to
the technological knowledge included in the patent application.

Disr uptive tech nologies – tech nologies that dest roy the value of an ex isting tech nolog y and create
new markets6 4 – surface frequently in today’s competitive markets. Think of the new markets created by
the technologies underly ing the development of products such as the iPad and A irPods. These ty pes of
products are thought by some to represent rad ical or breakth rough in novations.65 ( We talk more about
radical innovations in Chapter 13.) A disr uptive or radical technology can create what is essentially a new
industr y or it can harm industr y incumbents. However, some incumbents are able to adapt due to their
superior resources, experience and ability to gain access to the new technolog y through multiple sources
(e.g. alliances, acquisitions and ongoing internal research).66 Clearly, Apple has developed and introduced
‘d isr uptive technologies’ such as the iPad and A irPods, and in so doing changed several industr ies. For
example, the iPod and its complementar y iTunes have revolutionised how music is sold to, and used by,
consumers. In conjunction with other complementar y and competitive products (e.g. A mazon’s K indle),

12 PART 1: STRATEGIC MANAGEMENT INPUTS

the iPad has contributed to and sped up major changes in the publishing industry, which, as noted earlier, is
moving more and more from hard copies to electronic books. Apple’s new technologies and products are also
contributing to the new ‘information age’. Thus, Apple provides an example of entrepreneurship through
technolog y emergence across multiple industries.67

The information age
Dramatic changes in information technolog y have occur red in recent years. Personal computers, mobile
phones, ar tificial intelligence, vir tual reality, massive databases and multiple social networking sites are
on ly a few examples of how infor mat ion is used d i fferent ly as a result of tech nolog ical developments.
A n i mpor ta nt outcome of t hese cha nges is t hat t he abi l it y to effect ively a nd efficient ly access a nd
use infor mat ion has become an impor tant sou rce of compet it ive advantage in v i r tually all indust r ies.
Information technology advances have given small organisations more flexibility in competing with large
organisations, if that technolog y can be efficiently used.68

Data and information are vital to organisations’ effor ts to understand customers and their needs and
to implement st rateg ies t hat sat isf y t hose needs as well as t he interests of all ot her sta keholders. For
today’s organisations in vir tually all industries, information technolog y is an impor tant capability that
contributes positively to product innovation efforts and may be a source of competitive advantage as well.
Organisations failing to harness the power of data and information are disadvantaged compared to their
competitors.69 Both the pace of change in information technolog y and its diff usion continue to increase
on a global scale. In 2018, 36 per cent of the world’s population owned a smar tphone. W hile expectations
are that the number of personal computers (PCs) sold annually w ill decline, from 258.8 million in 2017
to 215.8 million in 2023, conversely, technolog y innovations, such as touch-enabled PCs, ultra-slim and
conver tible laptops, and hybrid machines, will stimulate revenue grow th among technolog y companies.70
Technolog y-based innovations also stimulate additional markets. For example, predictions are that the
global video streaming market will reach US$70 billion by 2021. Contributing to this market’s grow th is
the fact that in 2018, the percentage of internet and mobile audiences watching live video continued to
expand.71 Trends such as these inform the work that organisations complete to select and implement their
st rategies in the global economy. The most successf ul organ isations env ision infor mation tech nolog y-
der ived i n novat ions as oppor tu n it ies to ident if y a nd ser ve new ma rkets rat her t ha n as t h reats to t he
markets they ser ve cur rently.72

Bot h t he pace of cha nge i n i n for mat ion tech nolog y a nd its d i ff usion w ill cont i nue to i ncrease. For
instance, the number of personal computers in use globally was recently expected to sur pass 2.3 billion.73
The declining costs of information technologies and the increased access to them are also evident in the
current competitive landscape. The global proliferation of relatively inexpensive computing power and its
linkage on a global scale via computer networks combine to increase the speed and diffusion of information
technologies. Thus, the competitive potential of information technologies is now available to companies
of all sizes throughout the world, including those in emerging economies.74

The inter net is a not her tech nolog ical in novat ion cont r ibut ing to hy percompet it ion. Available to a n
increasing nu mber of people t h roughout t he world, t he inter net prov ides a n inf rast r uctu re t hat allows
t he deliver y of infor mat ion to computers in a ny locat ion. Access to t he inter net on smaller dev ices such
as sma r tphones is hav ing a n ever-g row ing impact on compet it ion in a nu mber of indust r ies. However,
possible cha nges to t he pr ici ng st r uct u res of i nter net ser v ice prov iders ( ISPs) cou ld a f fect t he rate of
g row t h of inter net-based applicat ions. Users dow n load ing or st rea m ing h igh-def in it ion f ilms, play ing
video games online and so for th would be affected the most if ISPs were to base pricing str uctures around
total usage.

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13

The core of Apple: technology and innovation

Apple has transformed industries with the introduction
of new products such as the iPod, iPad, iPhone, Apple
Watch and AirPods. The extent of its dominance of
the smartphone industry is hard to comprehend:
around 1000 companies make smartphones but just
one makes most of the profits in this industry. In 2019,
Apple announced that its revenue totalled US$260
billion for the 2019 financial year. How? It commands
higher prices, does not sell products cheap and never
appears to discount its products, ever. Samsung is the
other profit maker in this highly competitive industry
and it sells many more units than Apple. Going back to
2012, industry profits were 50–50 between Apple and
Samsung, but no longer.

This dominance and good performances from other
arms of the Apple empire have yielded huge profits.

Apple has achieved phenomenal success with
the introduction of innovative products and brand
maintenance. The late Steve Jobs was selected by
Fortune magazine as the CEO of the first decade of the
21st century, based on the fact that Apple under his
leadership had transformed four industries, three of them
in a decade. In addition, in 2020 Fast Company named
Apple in the World’s Most Innovative Companies list.
Apple is one of the top companies in the world based on
almost any criterion or set of criteria used. Because of
this, Apple is perceived exceptionally well by customers.
Apple’s growth rate has been extraordinary and its
financial performance even more impressive. And the
appeal of Apple’s products is global. For example, Apple’s
iPhones now exceed 925 million units globally. Apple also
disclosed that there were 1.4 billion active devices as of
January 2019.

Apple retail stores enjoy a steady flow of traffic each day. More
remarkable is that Apple’s stores in China handled in excess of
40 000 people daily prior to the Covid-19 pandemic. Apple has
opened 510 retail stores across 25 countries, with 271 located
in the United States alone. Apple’s newest locations include:
Kawasaki and Tokyo, Japan; Mexico City; Singapore Airport;
and Taipei, Taiwan.

Source: Newspix/Alan Pryke

Although there are many reasons for its success,
the primary reasons rest with Apple’s new technology
development and innovative new products.

Sources: MacRumors Staff, 2020, Keep track of Apple’s retail stores
worldwide, http://www.macrumors.com, 12 May; Above Avalon, 2019,

http://www.aboveavalon.com, 30 May; Fortune, 2011, World’s most
admired companies, http://www.fortune.com, 3 March; B. Worthen,

2011, With new iPad, Apple tries to stay ahead of wave of tablet rivals,
Wall Street Journal, http://www.online.wsj.com, 3 March; G. A. Fowler &

N. Wingfield, 2011, Apple’s showman takes the stage, Wall Street Journal,
http://www.online.wsj.com, 3 March; Financial Times, 2011, Apple and

the tablets, http://www.ft.com, 1 March; N. Louth, 2011, Finding value in
Apple’s core, Financial Times, http://www.ft.com, 25 February; M. Helft,

2011, After iPad’s head start, rival tablets are poised to flood offices,
New York Times, http://www.nytimes.com, 20 February; L. Chao, 2011,
New Shanghai Apple store will be biggest in China, Wall Street Journal,

http://www.online.wsj.com, 18 February.

Strategic focus |Technology

Increasing knowledge intensity
K nowledge (i n for mat ion, i ntelligence a nd ex per t ise) is t he basis of tech nolog y a nd its applicat ion. In
t he compet it ive la ndscape of t he 21st centu r y, k nowledge is a cr it ica l orga n isat ional resou rce a nd a n
increasingly valuable source of competitive advantage.75

Indeed, starting in the 1980s, the basis of competition shifted from hard assets to intangible resources;
for example, ‘Walmart transformed retailing through its proprietary approach to supply chain management
and its information rich relationships with customers and suppliers’.76 Relationships with customers and
suppliers are an example of an intangible resource.

K nowledge is ga i ned t h rough ex per ience, obser vat ion a nd i n ference, a nd is a n i nta ng ible resou rce.
T he va lue of i nta ng ible resou rces, i nclud i ng k nowledge, is g row i ng as a propor t ion of tota l sha reholder

STRATEGY NOW

Apple’s drive to
innovate

14 PART 1: STRATEGIC MANAGEMENT INPUTS

va lue i n today ’s compet it ive la ndscape.7 7 I n fac t, t he Brook i ngs I nst it ut ion est i mates t hat i nta ng ible
resou rces cont r ibute approx i mately 85 per cent of t hat va lue.78 T he probabi l it y of ach iev i ng st rateg ic
compet it ive ness i s e n ha nced for t he orga n i sat ion t hat develops t he abi l it y to capt u re i ntel l ige nce,
t ra n sfor m it i nto u seable k nowled ge a nd d i f f u se it rapid ly t h roug hout t he compa ny.7 9 T he re fore,
orga n isat ions must develop (e.g. t h rough t ra i n i ng prog ra ms) a nd acqu i re (e.g. by h i r i ng educated a nd
ex per ienced employees) k nowledge, i nteg rate it i nto t he orga n isat ion to create capabi l it ies, a nd t hen
apply it to ga i n a compet it ive adva ntage. 8 0

A st rong k nowledge base is necessar y to create in novations. Organisations lack ing the appropr iate
internal knowledge resources are less likely to invest money in research and development.81 Organisations
must continue to learn ( building their knowledge stock) because knowledge spillovers to competitors are
common. There are several ways in which knowledge spillovers occur, including the hiring of professional
sta ff and managers by compet itors. 82 Because of t he potent ial for spillovers, organ isat ions must move
quick ly to use their k nowledge in productive ways. In add ition, organisations must build routines that
facilitate t he d i ff usion of local k nowledge t h roughout t he organ isat ion for use ever y where t hat it has
va lue. 8 3 Orga n isat ions a re better able to do t hese t h i ngs when t hey have
strategic flexibility.

St rateg ic flex ibi l it y is a set of capabi l it ies used to respond to va r ious
demands and opportunities existing in a dynamic and uncertain competitive
env i ron ment. Thus, st rateg ic flex ibility involves coping w it h u ncer tainty
and its accompanying risks.8 4 Organisations should tr y to develop strategic
flex ibility in all a reas of t hei r operat ions. However, t hose work ing w it h in
orga n isat ions to develop st rateg ic flex ibi l it y shou ld u ndersta nd t hat t he
task is not easy, largely because of iner tia that can build up over time. A n
organisation’s focus and past core competencies may actually slow the rate
of change and its aptitude for strategic flexibility.85

To be st rateg ica l ly f le x ible on a cont i nu i ng basis, a nd to ga i n t he
competitive benefits of such flex ibility, an organisation has to develop the
capacity to learn. Continuous learning provides the organisation with new and
up-to-date skill sets that allow it to adapt to its environment as it encounters
changes.86 Organisations capable of rapidly and broadly applying what they
have lear ned ex hibit the strategic flex ibility and the capacity to change in
ways that will increase the probability of successfully dealing with uncertain,
hy percompetitive environments.

The I/O model of above-average returns
The exter nal env ironment has been v iewed histor ically as the pr imar y deter minant of strategies that
organ isations selected to be successf ul.87 In add ition, lead ing organ isations believe t hat t he exter nal
environment rather than the internal organisation is the strongest influence on the choice of strategy. The
industrial organisation model of above-average retur ns explains the exter nal environment’s dominant
influence on an organisation’s strategic actions. The model specifies that the industr y, or segment of an
industr y, in which a company chooses to compete has a stronger in fluence on performance than do the
choices managers make inside their organ isations. 8 8 The organ isation’s per for mance is believed to be
determined primarily by a range of industr y properties, including economies of scale, barriers to market
ent r y, d iversi fication, product d i fferentiation and t he deg ree of concent ration of organ isations in t he
industry.89 We examine these industry characteristics in Chapter 2.

G rou nded i n econom ics, t he I /O mode l ha s fou r u nde rly i ng a ssu mpt ion s. Fi rst , t he e x te r na l
env i ron ment is assumed to impose pressu res and const raints t hat deter m ine t he st rategies t hat would
result in above-average retu r ns. Second, most organ isations competing w it h in an indust r y or w it h in a

strategic flexibility
a set of capabilities
used to respond to
various demands and
opportunities existing
in a dynamic and
uncertain competitive
environment

The pricing landscape of ISPs evolves based upon the
advent of streaming video and the increased use of
iPads and other tablet and mobile devices.

Source: iStockphoto/hocus-focus

CHAPTER 1
STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

15

seg ment of t hat indust r y a re assu med to cont rol sim ila r st rategically relevant resou rces and to pu rsue
sim ila r st rategies in light of t hose resou rces. Th ird, resou rces used to implement st rategies a re assumed
to be h ig h ly mobi le ac ross orga n isat ion s, so a ny resou rce d i f ferences t hat m ig ht develop bet ween
organ isations w ill be shor t-lived. Fou r t h, organ isational decision ma kers a re assu med to be rational and
committed to acting in the organisation’s best interests, as shown by their profit-maximising behaviours.90
The I/O model challenges organisations to find the most attractive industr y in which to compete. Because
most orga n isat ions a re assu med to have si m i la r va luable resou rces t hat a re mobi le across compa n ies,
t heir per for mance generally can be increased on ly when t hey operate in t he indust r y w it h t he h ighest
prof it potential and lear n how to use their resources to implement the strateg y required by the industr y’s
st r uctu ral cha racter istics.91

The five forces model of competition is an analy tical tool used to assist organisations find the industr y
that is the most attractive for them. The model (explained in Chapter 2) encompasses several variables and
tries to capture the complexity of competition. The five forces model suggests that an industry’s profitability
(i.e. its rate of return on invested capital relative to its cost of capital) is a function of interactions among
five forces: suppliers, buyers, competitive rivalr y among organisations cur rently in the industr y, product
substitutes, and potential entrants to the industr y.92

Organisations use the f ive forces model to identif y the attractiveness of an industr y (as measured by
its prof itability potential) as well as the most advantageous position for the organisation to take in that
industry, given the industry’s structural characteristics.93 Typically, the model suggests that organisations
may ear n above-average retur ns by producing either standard ised goods or ser v ices at costs below those
of compet itors (a cost leadersh ip st rateg y) or by produci ng d if ferent iated goods or ser v ices for wh ich
customers are w illing to pay a pr ice premium (a d ifferentiation strateg y). (Cost leadership and product
d if ferent iat ion st rateg ies a re d iscussed i n Chapter 4.) Operat i ng i n a n u natt ract ive i ndust r y does not
mean prof its cannot be made. The fact that ‘the fast food industr y is becoming a “zero-sum industr y” as
companies battle for the same pool of customers’94 suggests that fast-food giant McDonald’s is competing
in a relatively unattractive industry. However, by focusing on product innovations and enhancing existing
facilities while buy ing proper ties in d ifferent global markets at attractive pr ices to selectively build new
stores, McDona ld’s is posit ioned i n t he fast-food (or qu ick-ser v ice) restau ra nt i ndust r y to ea r n above-
average retur ns. There may be bumps in the road of prof it, but McDonald’s has demonstrated that it can
change and succeed.

A s show n i n Fig u re 1. 2 , t he I/O model suggests t hat above -average ret u r n s a re ea r ned when
organ isations are able to effectively study the exter nal env iron ment as t he foundation for identif y ing
a n at t ract ive i ndust r y a nd i mplement i ng t he appropr iate st rateg y. For exa mple, i n some i ndust r ies,
organisations can reduce competitive rivalry and erect barriers to entry by forming joint ventures. Because
of these outcomes, the joint ventures increase profitability in the industr y.95 Companies that develop or
acquire the internal skills needed to implement strategies required by the external environment are likely to
succeed, while those that do not are likely to fail.96 Hence, this model suggests that returns are determined
pr i ma r ily by ex ter na l cha racter ist ics rat her t ha n by t he orga n isat ion’s u n ique i nter na l resou rces a nd
capabilities.

Resea rch fi nd i ngs suppor t t he I/O model i n t hat approx i mately 20 per cent of a n orga n isat ion’s
profitability is explained by the industry in which it chooses to compete. However, this research also shows
t hat 36 per cent of t he va r ia nce i n profitability ca n be att r ibuted to t he orga n isat ion’s cha racter ist ics
a nd act ions.97 These fi nd i ngs suggest t hat t he ex ter na l env i ron ment a nd a n orga n isat ion’s resou rces,
capabilities, core competencies and competitive advantages (see Chapter 3) influence its ability to achieve
strategic competitiveness and earn above-average returns.

As shown in Figure 1.2, the I/O model assumes that an organisation’s strategy is a set of commitments
and actions flowing from the characteristics of the industr y in which it has decided to compete.

T he resou rce-based model, d iscussed nex t, ta kes a d i fferent v iew of t he major i n fluences on a n
organisation’s choice of strateg y.

16 PART 1: STRATEGIC MANAGEMENT INPUTS

The resource-based model of above-average
returns
T he resou rce-based model assu mes t hat each orga n isat ion is a col lec t ion of u n ique resou rces a nd
capabilities. The uniqueness of its resources and capabilities is the basis of an organisation’s strateg y and
its ability to earn above-average returns.98

Resources are inputs into an organisation’s production process, such as capital equipment, the skills
of individual employees, patents, finances and talented managers. In general, an organisation’s resources
are classified into three categories: physical, human and organisational capital. Described fully in Chapter
3, resources are either tangible or intangible in nature.

I nd iv idua l resou rces a lone may not y ield a compet it ive adva ntage. 9 9 I n fac t, resou rces have a
greater likelihood of being a source of competitive advantage when they are formed into a capability. A
capability is the capacity for a set of resources to perform a task or an activity in an integrative manner.
Capabilities evolve over time and must be managed dynamically in pursuit of above-average returns.10 0
Core competencies are resources and capabilities that ser ve as a source of competitive advantage for an
organisation over its rivals. Core competencies are often visible in the form of organisational functions.

resources
inputs into an
organisation’s
production process,
such as capital
equipment, the
skills of individual
employees, patents,
finances and talented
managers

capability
the capacity for a
set of resources
to perform a task
or an activity in an
integrative manner

core competencies
capabilities that
serve as a source of
competitive advantage
for an organisation
over its rivals

1 Study the external environment,
especially the industry environment.

2 Locate an industry with high potential
for above-average returns.

3 Identify the strategy called for by the
attractive industry to earn
above-average returns.

4 Develop or acquire assets and skills
needed to implement the strategy.

5 Use the organisation’s strength
(its developed or acquired assets
and skills) to implement the strategy.

The external environment
• The general environment
• The industry environment
• The competitor environment

An attractive industry
An industry whose structural characteristics suggest
above-average returns

Strategy formulation
Selection of a strategy linked with above-average
returns in a particular industry

Strategy implementation
Selection of strategic actions linked with effective
implementation of the chosen strategy

Superior returns
Earning of above-average returns

Assets and skills
Assets and skills required to implement a chosen strategy

Figure 1.2 The I/O model of above-average returns

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17

For example, Apple’s R&D function is one of its core competencies. A mazon’s distribution function is also
considered a core competency. There is little doubt that the ability to produce innovative new products
that are perceived as valuable in the marketplace is a core competence for Apple, as suggested in the earlier
‘Strategic focus’ feature.

According to the resource-based model, differences in an organisation’s performances across time are due
primarily to its unique resources and capabilities rather than the industry’s structural characteristics. This
model also assumes that an organisation acquires different resources and develops unique capabilities based
on how it combines and uses the resources; that resources and cer tain capabilities are not highly mobile
across organisations; and that the differences in resources and capabilities are the basis of competitive
advantage.101 Through continued use, capabilities become stronger and more difficult for competitors to
understand and imitate. As a source of competitive advantage, a capability ‘should be neither so simple
that it is highly imitable, nor so complex that it defies internal steering and control’.102

The resou rce-based model of super ior retu r ns is show n in Fig u re 1.3. Th is model suggests t hat t he
strategy the organisation chooses should allow it to use its competitive advantages in an attractive industry
(the I/O model is used to identify an attractive industr y).

1 Identify the organisation’s resources. Study its
strengths and weaknesses compared with
those of competitors.

2 Determine the organisation’s capabilities.
What do the capabilities allow the organisation
to do better than its competitors?

3 Determine the potential of the organisation’s
resources and capabilities in terms
of a competitive advantage.

4 Locate an attractive industry.

5 Select a strategy that best allows the
organisation to utilise its resources and
capabilities relative to opportunities in the
external environment.

Superior returns
Earning of above-average returns

Strategy formulation and implementation
Strategic actions taken to earn above-average returns

An attractive industry
An industry with opportunities that can be exploited by
the organisation’s resources and capabilities

Competitive advantage
Ability of an organisation to outperform its rivals

Resources
Inputs into an organisation’s production process

Capability
Capacity of an integrated set of resources to integratively
perform a task or activity

Figure 1.3 The resource-based model of above average returns

Not all of an organisation’s resources and capabilities have the potential to be the foundation for a
compet it ive adva ntage. Th is potent ia l is rea lised when resou rces a nd capabi lit ies a re va luable, ra re,
costly to imitate and non-substitutable.103 Resources are valuable when they allow an organisation to take
advantage of opportunities or neutralise threats in its external environment. They are rare when possessed

18 PART 1: STRATEGIC MANAGEMENT INPUTS

by few (if any) current and potential competitors. Resources are costly to imitate when other organisations
either cannot obtain them or are at a cost disadvantage in obtaining them compared with the organisation
that already possesses them. A nd they are non-substitutable when they have no structural equivalents.
Many resources can either be imitated or substituted over time. Therefore, it is d i fficult to achieve and
sustain a competitive advantage based on resources alone.104 Individual resources are often integrated to
produce integrated configurations in order to build capabilities. These capabilities are more likely to have
these four attributes.105 W hen these four criteria are met, however, resources and capabilities become core
competencies.

A s noted prev iously, resea rc h shows t hat bot h t he i ndust r y env i ron ment a nd a n orga n isat ion’s
i nter na l assets a f fect t hat orga n isat ion’s per for ma nce over t i me.10 6 T hus, to for m a v ision a nd m ission,
a nd subsequent ly to select one or more st rateg ies a nd deter m i ne how to i mplement t hem, orga n isat ions
use bot h t he I/O a nd resou rce-based models.107 I n fact, t hese models complement each ot her i n t hat one
(I/O) focuses outside t he orga n isat ion wh i le t he ot her (resou rce-based) focuses i nside t he orga n isat ion.
Ne x t, we d isc u ss t he for m i ng of  t he orga n isat ion’s v ision a nd m ission : t he ac t ion s ta ken a f ter t he
organisation understands the realities of its exter nal env iron ment (Chapter 2) and inter nal organisation
(Chapter 3).

Vision and mission
A f ter st udy i ng t he ex ter na l env i ron ment a nd t he i nter na l env i ron ment, t he orga n isat ion has t he
information it needs to form its vision and mission (see Figure 1.1). Stakeholders (those who affect or are
affected by an organisation’s performance, as explained later in the chapter) learn a great deal about an
organisation by studying its vision and mission. Indeed, a key pur pose of vision and mission statements is
to inform stakeholders of what the organisation is, and what it seeks to accomplish in line with its strategic
direction.

Vision
Vision is a picture of what the organisation wants to be and, in broad terms, what it wants to ultimately
achieve.108 A vision statement ar ticulates the ideal description of an organisation and gives shape to its
intended future. In other words, a vision statement points the organisation in the direction of where it would
like to be in the years to come.109 An effective vision stretches and challenges people as well. Carmine Gallo,
in her book about Steve Jobs, Apple’s phenomenally successful CEO, argues that one of the reasons Apple is
so innovative was Jobs’ vision for the company. She suggests that he thought bigger than, and differently
from, most people – she describes it as ‘putting a dent in the universe’. To be innovative, she explains that
one has to think differently about their products and customers – ‘sell dreams not products’ – and differently
about the story to ‘create great expectations’.110 Interestingly, many new entrepreneurs are highly optimistic
when they develop their ventures.111

It is also impor tant to note that vision statements reflect an organisation’s values and aspirations and
are intended to capture the heart and mind of each employee and, hopefully, many of its other stakeholders.
A n orga n isat ion’s v ision tends to be endu r i ng, wh ile its m ission ca n cha nge w it h new env i ron mental
cond it ions. A v ision statement tends to be relat ively shor t a nd concise, ma k ing it easily remembered.
Examples of vision statements include the following:

Our vision is to be the world’s best quick service restaurant.112

McDonald’s

vision
a picture of what the
organisation wants
to be and, in broad
terms, what it wants
to ultimately achieve

CHAPTER 1
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19

The Red Cross, born of a desire to bring assistance without discrimination to the wounded
on the battlefield, endeavors – in its international and national capacity – to prevent and
alleviate human suffering wherever it may be found. Its purpose is to protect life and
health and to ensure respect for the human being.113

The Red Cross

We aim to be the airline of choice for customers with specific needs, by providing a travel
experience that is comfortable and hassle free, whilst ensuring the safety of passengers
and our staff.114

Qantas

As an organisation’s most important and prominent strategic leader, the CEO is responsible for working
with others to form the organisation’s vision. Experience shows that the most effective vision statement
results when the CEO involves a host of stakeholders (e.g. other top-level managers, employees working
i n d i fferent pa r ts of t he orga n isat ion, suppl iers a nd customers) to develop it. In add it ion, to help t he
organisation reach its desired future state, a vision statement should be clearly tied to the conditions in
the organisation’s external environment and internal organisation. Moreover, the decisions and actions
of those involved with developing the vision, especially the CEO and the other top-level managers, must
be consistent with that vision.

Mission
The vision is the foundation for the organisation’s mission. A mission specifies the business or businesses
in which the organisation intends to compete and the customers it intends to ser ve.115 The organisation’s
m ission is more concrete t han its v ision. However, sim ila r to t he v ision, a m ission should establish an
organisation’s individuality and should be inspiring and relevant to all stakeholders.116 Together, the vision
a nd m ission prov ide t he fou ndat ion t hat t he orga n isat ion needs to choose a nd implement one or more
strategies. The probability of forming an effective mission increases when employees have a strong sense
of the ethical standards that guide their behaviours as they work to help the organisation reach its vision.117
Thus, business ethics are a vital par t of the organisation’s discussions to decide what it wants to become
(its vision) as well as who it intends to ser ve and how it desires to ser ve those individuals and groups (its
mission).118

Even though the final responsibility for forming the organisation’s mission rests with the CEO, they
and other top-level managers often involve more people in developing the mission. The main reason is that
the mission deals more directly with product markets and customers, and middle- and first-level managers
and other employees have more direct contact with customers and the markets in which they are ser ved.
McDonald’s mission statement, for example, flows from its vision of being the world’s best quick-ser vice
restaurant:

Be the best employer for our people in each community around the world; deliver
operational excellence to our customers in each of our restaurants.119

McDonald’s

Some say that v ision and mission statements prov ide little value. One exper t believes: ‘Most v ision
statements are either too vag ue, too broad in scope, or r idd led w ith superlatives’.120 Clearly, v ision and
mission statements that are poorly developed do not provide the direction an organisation needs to take
appropr iate st rateg ic act ions. St i l l, as show n i n Fig u re 1.1, a n orga n isat ion’s v ision a nd m ission a re
critical aspects of the strategic inputs required to engage in strategic actions that help to achieve strategic

mission
specifies the business
or businesses in which
the organisation
intends to compete
and the customers it
intends to serve

STRATEGY NOW

Red Cross’s
sustainability
vision

20 PART 1: STRATEGIC MANAGEMENT INPUTS

competitiveness and earn above-average returns. Therefore, organisations must accept the challenge of
forming effective vision and mission statements.

Stakeholders
Ever y orga n isat ion i nvolves a system of pr i ma r y sta keholder g roups w it h whom it establ ishes a nd
manages relationships.121 Stakeholders are the individuals, groups and organisations who may affect the
organ isation’s v ision and m ission, who are a ffected by t he st rategic outcomes ach ieved, and who have
en forceable clai ms on t he orga n isat ion’s per for ma nce.122 Clai ms on a n orga n isat ion’s per for ma nce a re
enforced through the stakeholders’ ability to withhold participation essential to the organisation’s survival,
competitiveness and profitability.123 Stakeholders continue to support an organisation when its performance
meets or exceeds their expectations.124 A lso, research suggests that organisations that effectively manage
stakeholder relationships outperform those that do not. Stakeholder relationships therefore can be managed
to be a source of competitive advantage.125

A lthough organisations have dependency relationships with their stakeholders, they are not equally
dependent on all stakeholders at all times.126 As a consequence, not ever y stakeholder has the same level
of in fluence.127 The more critical and valued a stakeholder’s par ticipation, the greater an organisation’s
dependence on it. Greater dependence, in tu r n, g ives t he sta keholder more potent ial in fluence over a n
organisation’s commitments, decisions and actions. Managers must find ways to either accommodate or
insulate the organisation from the demands of stakeholders controlling critical resources.128

Classifications of stakeholders
The par ties involved w ith an organisation’s operations can be separated into at least four groups.129 As
show n i n Fig u re 1.4, t here a re t he capita l ma rket sta keholders (sha reholders a nd t he major suppl iers
of a n orga n isat ion’s capita l), t he product ma rket sta keholders (t he orga n isat ion’s pr i ma r y customers,
suppliers, host communities and unions representing the workforce), the organisational stakeholders (all
of an organisation’s employees, including both non-managerial and managerial personnel) and the natural
environment (as represented by activist groups).

stakeholders
the individuals and
groups who can affect
and are affected
by the strategic
outcomes achieved
and who have
enforceable claims
on an organisation’s
performance

People who are affected by an
organisation’s performance and who
have claims on its performance

Capital market
stakeholders
• Shareholders
• Major suppliers of
capital (e.g. banks)

Product market
stakeholders
• Primary customers
• Suppliers
• Host communities
• Unions

Organisational
stakeholders
• Employees
• Managers
• Non-managers

The natural world
• Natural resources
• Climate
• Governments and environmental groups

Stakeholders

Figure 1.4 The four stakeholder groups

Each sta keholder g roup ex pects t hose ma k ing st rategic decisions in an organ isat ion to prov ide t he
leadership through which its valued objectives will be reached.130 The objectives of the various stakeholder
groups often differ from one another, sometimes placing those involved with an organisation’s strategic

CHAPTER 1
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21

management process in situations where trade-offs have to be made. The most obvious stakeholders are
shareholders: individuals and groups who have invested capital in an organisation in the expectation of
earning a positive return on their investments. These stakeholders’ rights are grounded in laws governing
private proper ty and private enter prise.

In contrast to shareholders, another group of stakeholders – the organisation’s customers – prefer that
investors receive a minimum return on their investments. Customers could have their interests maximised
when the quality and reliability of an organisation’s products are improved, but without high prices. High
returns to customers, therefore, might come at the expense of lower returns for capital market stakeholders.

Because of potent ial con fl icts, each organ isat ion must ca ref ully manage its sta keholders. Fi rst, an
organisation must thoroughly identify and understand all important stakeholders. Second, it must prioritise
them in case it cannot satisfy all of them. Power is the most critical criterion in prioritising stakeholders.
Other criteria might include the urgency of satisfying each par ticular stakeholder group and the degree of
impor tance of each to the organisation.131

When the organisation earns above-average returns, the challenge of effectively managing stakeholder
relat ionsh ips is lessened substa nt ia lly. Wit h t he capabilit y a nd flex ibilit y prov ided by above-average
ret u r ns, a n orga n isat ion ca n more easi ly sat isf y mu lt iple sta keholders si mu lta neously. W hen t he
organisation ear ns only average retur ns, it is unable to ma x imise the interests of all stakeholders. The
objective then becomes one of at least minimally satisfying each stakeholder.

Trade-off decisions are made in light of how impor tant the suppor t of each stakeholder group is to the
organisation. For example, environmental groups may be ver y impor tant to organisations in the energ y
industry but less important to professional service organisations.132 An organisation earning below-average
returns does not have the capacity to minimally satisfy all stakeholders. The managerial challenge in this
case is to make trade-offs that minimise the amount of suppor t lost from stakeholders. Societal values
also in fluence the general weightings allocated among the four stakeholder groups shown in Figure 1.4.
A lthough all the groups are ser ved by organisations in the major industrialised nations, the priorities in
their ser vice var y because of cultural differences. Next, we present additional details about each of the
major stakeholder groups.

Capital market stakeholders
Sha reholders a nd lenders bot h ex pect a n orga n isat ion to preser ve a nd en ha nce t he wea lt h t hey have
entr usted to it. The returns they expect are commensurate with the degree of risk accepted with those
investments (i.e. lower returns are expected with low-risk investments while higher returns are expected
w it h h igh-r isk i nvest ments). I nst it ut iona l i nvestors (e.g. supera n nuat ion f u nd s) of ten a re w i l l i ng
to sell their share in the f und if the retur ns are not what they desire, or to take actions to improve the
organisation’s performance, such as pressuring top managers to improve the governance oversight by the
board of d irectors. Some institutions ow ning major shares of an organisation’s sharehold ing may have
con flicting views about the actions needed, which can be challenging for managers. This is because some
may wa nt a n i ncrease i n retu r ns i n t he shor t ter m, wh ile ot hers may desi re a focus on bu ild i ng long-
term competitiveness.133 Managers may have to balance their desires with other shareholders or prioritise
the impor tance of the institutional ow ners w ith d i fferent goals. Clearly, shareholders who hold a large
share parcel (sometimes referred to as large-block shareholders – see Chapter 10 for more explanation) are
influential, especially in the determination of the organisation’s capital structure (i.e. the amount of equity
versus the amount of debt used). Often, large shareholders prefer that the organisation minimise its use of
debt because of the risk, its cost and the possibility that debt holders have fi rst call on the organisation’s
assets in case of default over the shareholders.134

Product market stakeholders
Some might think that product market stakeholders (customers, suppliers and unions) share few common
interests. However, all these groups can benefit as organisations engage in competitive battles. For example,

22 PART 1: STRATEGIC MANAGEMENT INPUTS

depending on product and industr y characteristics, marketplace competition may result in lower product
pr ices bei ng cha rged to a n orga n isat ion’s customers a nd h igher pr ices bei ng pa id to its suppl iers (t he
organisation might be willing to pay higher supplier prices to ensure deliver y of the ty pes of goods and
ser vices that are linked with its competitive success).135

Customers (a lso k now n as ‘clients’ i n ma ny not-for-profit orga n isat ions), as sta keholders, dema nd
reliable products (or ser vices) at the lowest possible prices. Suppliers seek loyal customers who are willing
to pay the highest sustainable prices for the goods and ser vices they receive. A lthough all product market
stakeholders are impor tant, without customers the other product market stakeholders are of little value.
Therefore, the organisation must tr y to learn about and understand cur rent and potential customers.136

Organisational stakeholders
Employees – the organisational stakeholders – expect their place of employ ment to prov ide a dy namic,
stimulating and rewarding work environment. Employees are usually satisfied working for an organisation
that is growing and actively developing their skills, especially those skills required to be effective team
members and to meet or exceed global work standards. Employees who learn how to use new knowledge
productively are cr itical to organ isational success. In a collective sense, the education and sk ills of an
organisation’s workforce are competitive weapons affecting strateg y implementation and organisational
per for ma nce.137 St rateg ic leaders a re u lt i mately responsible for ser v i ng t he needs of orga n isat iona l
sta keholders on a day-to-day basis. In fact, to be successf ul, st rategic leaders must effect ively use t he
organisation’s human capital.138 The impor tance of human capital to their success is possibly why outside
directors are more likely than inside strategic leaders to propose downsizing, with insiders more likely to use
preventative cost-cutting measures and seek to protect incumbent employees.139 A highly important means
of building employee skills for the global competitive landscape is through international assignments. The
process of managing expatriate employees and helping them build knowledge can have significant effects
over time on the organisation’s ability to compete in global markets.140

The natural world and corporate social responsibility (CSR)
The natural world is increasingly impor tant as a stakeholder because of the vital issue of the depletion
of nat u re resu lt i ng f rom hu ma n ac t ions. I n add it ion, t he presence of wel l- orga n ised, wel l-f u nded
environmental groups representing the interests of nature means that organisations should be very careful
about their impact on the environment if they do not want legal challenges and brand damage to occur.
This is clearly evident in resource extraction industries such as coal and iron ore, where great care has to be
taken to respect nature if projects are to proceed; but it is also evident in retailing industries where major
companies such as IK EA are now concerned about ensuring the sustainable sourcing of timber because of
pressure from consumers.

Accenture (a For tune Global 500 company) in 2020 noted that 65 per cent of global CEOs inter viewed
on the topic of seeking responsible leadership agreed that they need to decouple economic growth from the
use of natural resources and that: ‘Organisations have the oppor tunity and the obligation to drive grow th
in tandem with positive social and environmental outcomes. This star ts with redefining what it means to
lead responsibly…’141 In a similar vein, cor porate social responsibility (CSR) has become a major interest
and ver y topical as an issue for many global organisations, and a major factor in cor porate governance,
which we will explore fur ther later in the chapter. The growing interest in working towards a sustainable
society requires a new ty pe of leadership that promotes CSR’s ideals.142 This point provides a natural segue
into the topic of strategic leadership.

Strategic leaders
Strategic leaders are people located in different areas and levels of the organisation using the strategic
management process to select strategic actions that assist the organisation achieve its vision and fulfil

strategic leaders
people located in
different sections
of the organisation
using the strategic
management
process to assist the
organisation reach its
vision and mission

CHAPTER 1
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23

its m ission. Rega rd less of t hei r locat ion i n t he orga n isat ion, successf u l st rateg ic leaders a re decisive,
committed to nur turing those around them14 3 and committed to assisting the organisation create value
for all stakeholder groups.144 In this vein, research evidence suggests that employees who perceive that
their CEO is a visionar y leader also believe that the CEO leads the organisation to operate in ways that
are consistent with the values of all stakeholder groups, rather than emphasising only the maximising of
profits for shareholders. In turn, visionar y leadership helps to obtain extra effor t by employees, thereby
achieving enhanced organisational performance.

W hen identif y ing st rategic leaders, most of us tend to thin k of CEOs and other executives. Clearly,
these individuals are strategic leaders. In the final analysis, CEOs are responsible for making cer tain their
organisation effectively uses the strategic management process. Indeed, the pressure on CEOs to manage
st rategically is st ronger t han ever.14 5 However, many ot her people assist in choosing an organ isation’s
strateg y and then deter mining the actions for successfully implementing it.146 The main reason is that
t he rea l it ies of 21st-cent u r y compet it ion, d iscussed ea rl ier i n t h is chapter (e.g. t he globa l economy,
globa lisat ion, rapid tech nolog ica l cha nge, a nd t he i ncreasi ng i mpor ta nce of k nowledge a nd people as
sources of competitive advantage), are creating a need for those ‘closest to the action’ to make decisions and
determine the actions to be taken.147 The most effective CEOs and executives understand how to delegate
strategic responsibilities to people throughout the organisation who in fluence the use of organisational
resou rces. Delegat ion also helps to avoid too much manager ial hubr is at t he top and t he problems t h is
causes, especially in situations allowing significant managerial discretion.148

Organisational culture a lso a ffec ts st rateg ic leaders a nd t hei r work. I n t u r n, st rateg ic leaders’
decisions and actions shape an organisation’s culture. Organisational culture refers to the complex set of
ideologies, symbols and core values that are shared throughout the organisation and that influence how the
organisation conducts business. It is the social energy that drives – or fails to drive – the organisation.149 For
example, US airline Southwest A irlines is known for having a unique and valuable culture that encourages
employees to work hard but also to have fun while doing so. Moreover, its culture entails respect for others
– employees and customers alike.

Some organisational cultures are a source of disadvantage or dysfunction. For example, the Australian
Pr udent ial Reg ulat ion Aut hor ity (A PR A) released t he Prudential Inquiry into the Commonwealth Bank of
Australia (CBA) Final Report in May 2018, noting that it ‘… found a number of prominent cultural themes such
as a widespread sense of complacency, a reactive stance in dealing with risks, being insular and not learning
from ex per iences and m ista kes, and an overly collegial and collaborat ive work ing env i ron ment wh ich
lessened the opportunity for constructive criticism, timely decision-making and a focus on outcomes…’. The
Panel recommended that ‘cultural change that moves the dial from reactive and complacent to empowered,
challenging and striving for best practice in risk identification and remediation’.150

It is impor tant for strategic leaders to understand, however, that whether the organisation’s culture
is functional or dysfunctional, their effectiveness is in fluenced by that culture. The relationship between
organisational culture and strategic leaders’ work is reciprocal in that the culture shapes the outcomes of
their leadership, while their leadership helps shape an ever-evolving organisational culture.

The work of effective strategic leaders
Perhaps not surprisingly, hard work, thorough analyses, a willingness to be candid, a penchant for wanting
t he orga n isat ion a nd its people to accomplish more, a nd tenacit y a re prerequ isites for a n i nd iv idua l’s
success as a strategic leader.151 In addition, strategic leaders must have a strong strategic orientation while
simultaneously embracing change in the dynamic competitive landscape we have discussed.152 In order to
deal with this change effectively, strategic leaders must be innovative thinkers and promote innovation
i n t hei r orga n isat ion.153 Promot i ng i n novat ion is facilitated by a d iverse execut ive ma nagement tea m
representing different ty pes of exper tise and leveraging relationships with external par ties.154 Strategic
leaders may best leverage partnerships with external parties and organisations when their organisations are
‘ambidextrous’ – that is, the organisations simultaneously promote exploratory learning of new and unique

organisational culture
refers to the complex
set of ideologies,
symbols and core
values that are shared
throughout the
organisation and that
influence how the
organisation conducts
business

24 PART 1: STRATEGIC MANAGEMENT INPUTS

for ms of k nowledge and ex ploitative lear n ing t hat adds incremental k nowledge to ex isting k nowledge
bases, allowing them to better understand and use their existing products.155 In addition, strategic leaders
need to have a global mindset, or what some refer to as an ambicultural approach to management.156

In summary, effective strategic leaders provide a vision as the foundation for the organisation’s mission
and subsequent choice and use of one or more strategies.

Predicting outcomes of strategic decisions
Strategic leaders attempt to predict the outcomes of their decisions before taking efforts to implement them,
which is difficult to do. Many decisions that are a par t of the strategic management process are concerned
with an uncer tain future and the organisation’s place in that future. As such, managers tr y to predict the
effects on the organisation’s profits of strategic decisions that they are considering.157

Mappi ng a n i ndust r y ’s profit pool is somet h i ng st rateg ic leaders ca n do to a nt icipate t he possible
outcomes of different decisions and to focus on grow th in profits rather than strictly grow th in revenues.
A profit pool entails the total profits earned in an industry at all points along the value chain.158 (We explain
the value chain in Chapter 3 and discuss it fur ther in Chapter 4.) A nalysing the profit pool in the industr y
may assist an organisation to see something others are unable to see and to understand the primary sources
of profits in an industr y. There are four steps to identifying profit pools:

1 define the pool’s boundaries
2 estimate the pool’s overall size
3 estimate the size of the value chain activity in the pool
4 reconcile the calculations.
For example, McDonald’s might desire to map the quick-service restaurant industry’s profit pools. First,

McDonald’s would need to define the industr y’s boundaries and, second, estimate its size (which is large,
because McDonald’s operates in markets across the globe). The net result of this is that McDonald’s tries
to take market share away from competitors such as Hungr y Jack’s or K FC, and grow th is more likely to be
in international markets. A rmed with information about its industr y, McDonald’s could then estimate the
amount of profit potential in each part of the value chain (step 3). In the quick-ser vice restaurant industr y,
marketing campaigns and customer service are likely to be more important sources of potential profits than
are inbound logistics activities (see Chapter 3). With an understanding of where the greatest profits are
likely to be earned, McDonald’s would then be ready to select the strateg y to use to be successful where
the largest profit pools are located in the value chain.159 As this brief discussion shows, profit pools are a
potentially usef ul tool to help st rategic leaders recognise the actions to take to increase the likelihood
of i ncreasi ng profits. Of cou rse, profits made by a n orga n isat ion a nd i n a n i ndust r y ca n be pa r t ia l ly
interdependent with the profits earned in adjacent industries.160 For example, profits earned in the energ y
industr y can affect profits in other industries (e.g. airlines). W hen oil prices are high, this can reduce the
profits earned in industries that must use a lot of energ y to provide their goods or ser vices.

Ethical dimensions
It is impor tant to emphasise t hat, pr ima r ily because t hey a re related to how an organ isat ion interacts
w it h its sta keholders, a l most a l l st rateg ic ma nagement process decisions have et h ica l d i mensions.161
Organisational ethics are revealed by an organisation’s culture; that is, an organisation’s decisions are a
product of the core values that are shared by most or all of a company’s managers and employees. Especially
in the turbulent and often ambiguous competitive landscape of the 21st century, those making decisions as
a par t of the strategic management process are challenged to recognise that their decisions affect capital
markets, product markets and organisational stakeholders differently, and to regularly evaluate the ethical
implications of their decisions.162 Decision makers failing to recognise these realities accept the r isk of
placing their organisation at a competitive disadvantage with regard to ethical business practices.163

profit pool
entails the total profits
earned in an industry
at all points along the
value chain

CHAPTER 1
STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

25

As you w ill d iscover, the st rategic management process exam ined in th is book calls for d isciplined
approaches to serve as the foundation for developing a sustainable competitive advantage. These approaches
provide the pathway through which organisations will be able to achieve strategic competitiveness and
earn above-average returns. Mastery of this strategic management process will effectively assist and guide
you and the organisations for which you will choose to work.

26 PART 1: STRATEGIC MANAGEMENT INPUTS

STUDY TOOLS
SUMMARY
LO1 Organisations use the strategic management process

to achieve strategic competitiveness and earn above-
average returns. Strategic competitiveness is achieved
when an organisation develops and implements a
value-creating strategy. Above-average returns (in
excess of what investors expect to earn from other
investments with similar levels of risk) provide the
foundation needed to simultaneously satisfy all of an
organisation’s stakeholders.

LO2 The fundamental nature of competition is different in
the current competitive landscape. As a result, those
making strategic decisions must adopt a different
mindset, one that allows them to learn how to
compete in highly turbulent and chaotic environments
that produce a great deal of uncertainty. The
globalisation of industries and their markets, and rapid
and significant technological changes, are the two
primary factors contributing to the turbulence of the
competitive landscape.

LO3 Organisations use two major models to help develop
their vision and mission and then choose one or more
strategies in pursuit of strategic competitiveness
and above-average returns. The I/O model is used to
understand the effects an industry’s characteristics
can have on an organisation when deciding on what
strategies to use to compete against rivals. The logic
supporting the I/O model suggests that above-average
returns are earned when the organisation locates
an attractive industry, or part of an industry, and
successfully implements the strategy dictated by that
industry’s characteristics.

LO4 The resource-based model is based on the assumption
that the organisation’s unique resources, capabilities
and core competencies have a major influence on
selecting and using strategies more than does the
organisation’s external environment. Above-average

returns are earned when the organisation uses its
valuable, rare, costly-to-imitate and non-substitutable
resources and capabilities to compete against its rivals
in one or more industries.

LO5 Vision and mission are formed to guide the selection
of strategies based on the information from the
analyses of the organisation’s internal and external
environments. Vision is a picture of what the
organisation wants to be and, in broad terms, what it
wants to ultimately achieve. Flowing from the vision,
the mission specifies the business or businesses in
which the organisation intends to compete and the
customers it intends to serve. Vision and mission
provide direction to the organisation and signal
important descriptive information to stakeholders.

LO6 Stakeholders are those who can affect, and are
affected by, an organisation’s strategic outcomes.
Because an organisation is dependent on the
continuing support of stakeholders (e.g. shareholders,
customers, suppliers, employees, host communities,
the natural world), they have enforceable claims on the
organisation’s performance.

LO7 Strategic leaders are people located in different areas
and levels of an organisation using the strategic
management process to help the organisation achieve
its vision and fulfil its mission. In general, the CEO is
responsible for making certain that their organisation
properly uses the strategic management process.
The effectiveness of the process is increased when it
is grounded in ethical intentions and behaviours. It
is important for all strategic leaders – and especially
the CEO and other members of the executive team –
to conduct thorough analyses of conditions facing
the organisation, be candid and consistently honest,
and work jointly to select and implement the correct
strategies.

KEY TERMS
average returns

capability

core competencies

global economy

hypercompetition

mission

organisational culture

profit pool

resources

risk

stakeholders

strategic competitiveness

CHAPTER 1
STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

27

strategic flexibility

strategic leaders

strategic management
process

strategy

vision

REVIEW QUESTIONS
1. What are the main components of the strategic

management process?

2. Is there any one component of the strategic
management process that is more important than
others?

3. What are the characteristics of the current competitive
landscape? What two factors are the primary drivers of
this landscape?

4. According to the I/O model, what should an organisation
do to earn above-average returns?

5. What does the resource-based model suggest an
organisation should do to earn above-average returns?

6. What are vision and mission? Should all organisations
have a vision and mission statement? What is their value
for the strategic management process?

7. What are stakeholders? How many primary stakeholder
groups could influence an organisation’s decision-
making process?

8. What are the three main drivers for strategic leaders?

EXPERIENTIAL EXERCISES

Exercise 1: Stakeholder analysis, strategic
planning and strategic leadership
Every organisation relies on its own unique bundle of
organisational stakeholders. Each one of the relationships
between the organisation and its stakeholders is influential
in its ability to serve its mission and achieve above-average
profits in the for-profit sector, or to create value in the not-
for-profit sector. However, there are many ways in which
stakeholder management differs between the for-profit
and not-for-profit worlds. It is easy to think of a for-profit
organisation that has product market stakeholders, such
as customers, who can add or subtract their support
by their decision about whether or not to purchase the
organisation’s products or services. But who is the customer
for a not-for-profit, and are the categories of product,
market, organisation and capital market stakeholders very
different from the for-profit arena? This exercise challenges
you to uncover some of the more influential ways in which
this is so.

In this exercise, you will be working in teams of
approximately four to five students.
1. Conduct a web search for a not-for-profit organisation.

Decide which not-for-profit organisation you would like
to analyse. Otherwise consider the Red Cross, Amnesty
International, World Wide Fund for Nature (WWF) or
Greenpeace.

2. Determine two or three key strategic initiatives of
this not-for profit organisation. Most not-for-profits,
particularly well-known ones, post their strategic plans
on their websites.

3. Now perform an analysis, such as a macro-
environmental analysis, and list all known or expected
stakeholders for the organisation. You should
place them in the context of product, market and
organisational stakeholders.

NOTES
1. The big issue is competition. They must be

responsive in all markets.
2. K. Matzler, F. Bailom, M. Anschober & S.

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31

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158. O. Gadiesh & J. L. Gilbert, 1998, Profit
pools: A fresh look at strategy, Harvard
Business Review, 76(3): 139–47.

159. C. Zook, 2007, Finding your next core
business, Harvard Business Review, 85(4):
66–75; M. J. Epstein & R. A. Westbrook,
2001, Linking actions to profits in strategic
decision making, Sloan Management Review,
42(3): 39–49.

160. M. J. Lenox, S. F. Rockart & A. Y. Lewin,
2010, Does interdependency affect firm
and industry profitability? An empirical test,
Strategic Management Journal, 31: 121–39.

161. Y. Luo, 2008, Procedural fairness and
interfirm cooperation in strategic
alliances, Strategic Management Journal,
29: 27–46; S. J. Reynolds, F. C. Schultz & D.
R. Hekman, 2006, Stakeholder theory and
managerial decision-making: Constraints
and implications of balancing stakeholder
interests, Journal of Business Ethics, 64: 285–
301; L. K. Trevino & G. R. Weaver, 2003,
Managing Ethics in Business Organizations,
Stanford, CA: Stanford University Press.

162. D. Pastoriza, M. A. Arino & J. E. Ricart,
2008, Ethical managerial behavior as an
antecedent of organizational social capital,
Journal of Business Ethics, 78: 329–41.

163. B. W. Heineman Jr, 2007, Avoiding integrity
land mines, Harvard Business Review, 85(4):
100–8.

CHAPTER 1
STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS

33

34

The external environment:
opportunities, threats, industry
competition and competitor analysis

CH
AP

TE
R

2

Studying this chapter should provide you with the strategic management knowledge
needed to:
LO1 define and describe the general environment, the industry environment and the

competitor environment
LO2 explain the importance of analysing and understanding the organisation’s

external environment, and discuss the four activities of the external
environmental analysis process

LO3 outline and describe the seven segments of the general environment
LO4 identify the five competitive forces and interpret industry analyses to determine

an industry’s profit or surplus potential
LO5 define strategic groups and describe their influence on the organisation
LO6 describe what organisations need to know about their competitors, competitor

analysis and ethical considerations.

Learning Objectives

British Petroleum (BP) has had experience of disasters in
drilling; however, because of the demand for oil and issues
with supply from the Middle East, there is continuing
investigation and exploitation of oil reserves that are
difficult to access. The Deepwater Horizon spill by BP in
the Gulf of Mexico in April 2010 was the largest accidental
offshore spill in history, at 206 million gallons. One of the
main challenges for the organisation’s strategic leadership
was to understand what the external environment’s
effects were on the organisation and to predict how its
future strategic actions might lead to success.

The Gulf disaster has not deterred BP. It still explores in
difficult situations. In 2016, BP was planning to go ahead
with a controversial US$1 billion-plus frontier exploration
campaign in the Great Australian Bight, off the coast of
South Australia, in the face of mounting concern from
environmental groups, and despite a tumbling oil price
that has deterred other explorers around the country
from drilling. US giant Chevron also has a permit to drill in
the region, as does Santos, a local oil company. Following
the Deepwater Horizon accident, BP recovered to grow
as a better-disciplined organisation, one that delivered
consistently for 12 consecutive quarters. BP made a profit
of US$10 billion in 2019 and operating cash flow was
strong at US$26 billion for the year.

BP’s head of exploration for Asia-Pacific, Bryan
Ritchie, said that while the oil company has cut back on
exploration in some regions, it wants to go forward in
Australia because of the large potential oil price on offer.
However, the company is spreading costs, and risk, by
selling a further stake in the venture, intending to cut its
70 per cent holding to 40 or 50 per cent.

The project is aiming to drill 2.5 km underwater. It will
cost US$600 million for four wells, and in addition BP is
having a US$755 million drilling rig built in South Korea.
The financial risks are huge. Peter Owen, the South
Australian director of the Wilderness Society, pointed
to huge community concern about the drilling plans:
‘We don’t need a Gulf of Mexico disaster in the Great
Australian Bight’. The Gulf catastrophe will clearly be easy
to use as part of a media campaign by environmentalists.

In 2020, the Chair of BP, Helge Lund, noted to
shareholders that ‘We enter a new decade with a new

company purpose: to reimagine energy for people and our
planet.’ In 2019, the BP board of directors recommended
that shareholders support a special resolution requisitioned
by Climate Action 100+ on climate change disclosures.

The economic segment of the general environment
will continue to produce demand for energy, especially
with the rise of emerging markets such as China and
India; thus, exploration for hydrocarbon products will
continue, at least while social forces stay favourable to
this. The Global Energy Review 2020 by the International
Energy Association (IEA) noted that the global energy
demand decreased by 3.8 per cent in the first quarter of
2020. Globally, the demand for coal fell by approximately
8 per cent due to three reasons: first, China – a coal-based
economy – was hit the hardest by the Covid-19 pandemic
in the first quarter; second, cheap gas and continued
growth in renewable energy elsewhere challenged
coal; and, third, mild weather also capped coal use. Oil
demand also dropped by 5 per cent and the impact of the
pandemic on gas demand was more moderate, at a 2 per
cent decrease. Despite these factors, demand for energy
will continue and the pressure to use alternative sources
of energy will rise, driven by the sociocultural segment
of the environment because of the carbon emissions
produced by such hydrocarbons. The value to society
of hydrocarbons is that it accelerates development and
deployment of clean technologies for transport, industry
and power according to the IEA. Government policies
could include hydrogen use in national decarbonisation
plans, public research and development funding and
adopt transmission tariff exemptions for electrolysers.

Technology changes have also affected many
companies in this industry. Gas drilling and fracturing
(fracking) have dramatically increased gas reserves
and may provide a substitute for other CO2 emission-
producing resources such as coal. Problems with fracking
include the potential effects on water tables, and thus
farming, so there is widespread opposition to this
technique. The Lock the Gate Alliance in Australia is one
example of such farmer-driven activism.

The Arctic is another frontier for exploration, despite
the enormous environmental risks of drilling in this fragile
ecosystem. BP has worked there in cooperation with the

Drilling for oil: risks and rewards

OPENING CASE STUDY

35CHAPTER 2
THE ExTERnAL EnvIROnmEnT: OPPORTUnITIES, THREATS, InDUSTRy COmPETITIOn AnD COmPETITOR AnALySIS

As described in the opening case, the external environment affects an organisation’s strategic actions.1
For example, BP also sought to expand its oil reser ves by forming joint ventures in Russia with Rosneft
Cor poration and in India with Reliance Industries.2 In addition, it is clear that BP’s strategic actions are
affected by conditions in other segments of its general environment, such as the political/legal, sociocultural
and physical environment segments. As we explain in this chapter, an organisation’s external environment
creates both oppor tunities (e.g. the oppor tunity for BP to enter other global markets) and threats (e.g.
the possibility that additional regulation in its markets will reduce opportunities to extract oil and gas).
Collectively, opportunities and threats affect an organisation’s strategic actions.3

Rega rd less of t he i ndust r y i n wh ich orga n isat ions compete, t he ex ter na l env i ron ment i n fluences
organisations as they seek strategic competitiveness and above-average returns. This chapter focuses on
how organisations analyse their external environment. The understanding of conditions in its external
environment that the organisation gains by analysing that environment is matched with knowledge about

Russian Government–owned company Rosneft. In 2019,
BP reported that it had a 19.75 per cent shareholding in
Rosneft, one of Russia’s largest oil and gas companies,
which has both upstream and downstream operations.

Exxon-Mobil also had a US$700 million deal with
Russia, which was eager to proceed because the country
needs oil. The prospects are enticing – the Kara Sea has
reserves estimated at US$900 billion, exceeding Saudi
Arabia’s reserves. But the Exxon-mobil deal came unstuck
in mid-2015 because of events in the political sphere,
when Western financial sanctions were enacted in
response to Russia’s takeover of the Crimean Peninsula.

As these examples demonstrate, assessing the
influence of various segments of the external environment
is critical in ensuring future success for any organisation.
This is especially true for energy organisations, which are
part of a global integrated process of extracting energy,
refining various products and distributing them around
the world. The economic rise of China and India, coupled
with the rise of Brazil as an energy power, and Russia’s
energy reserves, is a significant influence in world markets.
Balancing this are increasingly high-profile environmental
groups aided by the power and reach of social media.
Understanding how these complex processes work
and how to deal with these segments of the external
environment is critical in formulating successful strategies
to manage global environmental forces.

The external world for oil exploration is especially
complex and very uncertain. many forces are at play:
there is new technology allowing deep well exploration;
there are ever-better-organised environmental
groups; governments are sensitive to environmental
issues; unpredictable international events impact
on permissions; competition is fierce for new areas

to exploit; fracking is now common, and productive;
alternative energy sources are developing quickly; and
there still is a demand for oil albeit at a low price (how
low can it go?). The situation with low prices threatens
the stability of the industry that will remain central to
the functioning of the global economy. Oil companies
still face the challenges of investing to offset natural
production declines and to meet future growth. Global
capital expenditure by exploration and production
companies in 2020 is forecast to drop by 32 per cent,
the lowest level for 13 years. The reduction of financial
resources will undermine the ability of the oil industry
to develop several of the technologies needed for clean
energy transitions around the globe. The strategists in oil
companies must remain very alert indeed.

Sources: BP, 2019, Energy with Purpose: BP Annual Report and Form 20-F
2019, https://www.bp.com/content/dam/bp/business-sites/en/global/

corporate/pdfs/investors/bp-annual-report-and-form-20f-2019.pdf; IEA,
2020, Oil Market Report – April 2020, http://www.iea.org; IEA, 2020, Carbon-

free hydrogen from low cost wind power, stored for use on demand, IEA
Paris, https://www.iea.org/articles/Carbon-free hydrogen from low cost

wind power, stored for use on demand, 3 July; IEA, 2020, Global Energy
Review 2020. The Impact of the Covid-19 Crisis on Global Energy Demand

and CO2 Emissions. Flagship Report – April 2020; m. Galluchi, 2015, Russian
oil giant Rosneft is delaying Arctic drilling plans amid Western sanctions

against Moscow, International Business Times, 30 January; C. Winter, 2015,
Oil and gas companies converge on the Great Australian Bight to explore

reserves, ABC, http://www.abc.net.au/news/2015-01-19/bight-oil-gas-
exploration/6025402, 19 January; A. macdonald-Smith, 2015, BP forges

ahead with $1b Great Australian Bight exploration, Sydney Morning Herald,
20 May; The Economist, 2011, Dancing with bears: BP in Russia, 5 February,

73; J. Ball, 2011, Environment (special report) – lessons from the Gulf:
William Reilly on why the oil spill happened, and where the industry goes
from here, Wall Street Journal, http://www.wsj.com, 7 march, R5; P. Elkind,

D. Whitford & D. Burke, 2011, An accident waiting to happen, Fortune, 7
February, 105–32; P. Hunter & P. Russell, 2011, Capitol Hill views divided

on oil spill report, Engineering News-Record, 7 February, 7; A. Peaple, 2011,
Reshaped BP finds east is no Eden, Wall Street Journal, http://www.wsj.

com, 23 February, C14; R. Gold, 2010, Halliburton faulted over cement job,
Wall Street Journal, http://www.wsj.com, 9 September; J. Weisman, 2010, BP

softens political hit, Wall Street Journal, http://www.wsj.com, 21 June.

36 PART 1: STRATEGIC MANAGEMENT INPUTS

its internal organisation (discussed in the next chapter) as the foundation for forming the organisation’s
vision, developing its mission, and identifying and implementing strategic actions (see Figure 1.1).

As noted in Chapter 1, the environmental conditions in the current global economy differ from historical
conditions. For example, technological changes and the continuing grow th of information gathering and
processing capabilities increase the need for organisations to develop effective competitive actions on a
timely basis;4 in other words, organ isations have little time to cor rect er rors when implementing their
competitive actions. The rapid sociological changes occurring in many countries affect labour practices and
the nature of products demanded by increasingly diverse consumers. Governmental policies and laws also
affect where and how organisations choose to compete.5 In addition, changes to nations’ financial regulatory
systems that were enacted in 2010 and beyond are expected to increase the complexity of organisations’
financial transactions.6

Viewed i n t hei r tota l it y, t he cond it ions t hat a ffec t orga n isat ions today i nd icate t hat, for most
orga n isat ions, t hei r ex ter na l env i ron ment is fi l led w it h u ncer ta i nt y. To successf u l ly dea l w it h t h is
u ncer tainty, and to ach ieve st rateg ic compet it iveness and t h r ive, organ isat ions must be awa re of and
fully understand the different segments of the external environment.7

Orga n isat ions u ndersta nd t he ex ter na l env i ron ment by acqu i r i ng i n for mat ion about compet itors,
customers and other stakeholders to build their own base of knowledge and capabilities.8 On the basis of
the new information, organisations take action, such as building new capabilities and core competencies, in
the hope of buffering themselves against any negative environmental effects and to pursue oppor tunities
as the basis for better serving their stakeholders’ needs.9 An organisation’s strategic actions are influenced
by the conditions in the three par ts of its external environment: the general, industr y and competitor (see
Figure 2.1).

Economic

Technological

Sociocultural

Physical

Political/Legal

Demographic

Industry
environment

Threat of new entrants
Power of suppliers

Power of buyers
Product substitutes
Intensity of rivalry

Competitor
environment

Global

Figure 2.1 The external environment

CHAPTER 2
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37

The general, industry and competitor
environments
The general environment is composed of dimensions in the broader society that influence an industr y and
the organisations within it.10 We group these dimensions into seven environmental segments: demographic,
economic, political/legal, sociocultural, technological, global and physical. Examples of elements analysed
in each of these segments are shown in Table 2.1.

Organisations can not d irectly cont rol the general env iron ment’s segments, as business failure and
ba n k r uptcies i nd icate. Because orga n isat ions ca n not d i rect ly cont rol t he seg ments of t hei r ex ter na l
env i ron ment, successf u l orga n isat ions lea r n how to gat her t he i n for mat ion needed to u ndersta nd a l l
segments and their implications for selecting and implementing the organisation’s strategies.

T he industry environment is t he set of factors t hat d i rect ly i n fluences a n orga n isat ion a nd its
competitive actions and responses: the threat of new entrants, the power of suppliers, the power of buyers,
the threat of product substitutes and the intensity of rivalry among competitors.11 In total, the interactions
among these five factors determine an industr y’s profit potential; in turn, the industr y’s profit potential
influences the choices each organisation makes about its strategic actions. The challenge for an organisation

general environment
composed of
dimensions in the
broader society that
influence an industry
and the organisations
within it

industry environment
the set of factors that
directly influences an
organisation and its
competitive actions
and competitive
response: the threat
of new entrants, the
power of suppliers,
the power of buyers,
the threat of product
substitutes and the
intensity of rivalry
among competitors

The general environment: segments and elements

Segments Elements

Demographic • Population size
• Age structure
• Geographic distribution

• Ethnic mix
• Income distribution

Economic • Inflation rates
• Interest rates
• Trade deficits or surpluses
• Budget deficits or surpluses

• Personal savings rate
• Business savings rates
• Gross domestic product

Political/legal • Taxation laws
• Superannuation laws
• Deregulation philosophies

• Labour training laws
• Educational philosophies and policies

Sociocultural • Women in the workforce
• Workforce diversity
• Attitudes about the quality

of work life

• Shifts in work and career preferences
• Shifts in preferences regarding

product and service characteristics
• vegan activists

Technological • Product innovations
• Applications of knowledge

• Focus of private and government-
supported R&D expenditures

• new communication technologies

Global • Important political events
• Critical global markets
• Pandemic (Covid-19)

• newly industrialised countries
• Different cultural and institutional

attributes

Physical
environment

• Energy consumption
• Practices used to develop

energy sources
• Renewable energy efforts
• Minimising an organisation’s

environmental footprint

• Availability of water as a resource
• Producing environmentally friendly

products
• Reacting to natural or human-made

disasters

Table 2.1

38 PART 1: STRATEGIC MANAGEMENT INPUTS

is to locate a position within an industr y where it can favourably in fluence the five factors or where it can
successfully defend against their influence. The greater an organisation’s capacity to favourably influence
its industry environment, the greater the likelihood that the organisation will earn above-average returns.

How companies gather and interpret information about their competitors is called competitor analysis.
Understanding the organisation’s competitor environment complements the insights provided by studying
the general and industry environments.12 This means, for example, that BP wants to learn as much as it can
about its major competitors – such as Ex xon-Mobil and Royal Dutch Shell plc – while also learning about its
general and industr y environments.

Analysis of the general environment is focused on environmental trends; an analysis of the industry
environment is focused on the factors and conditions influencing an industry’s profitability potential; and an
analysis of competitors is focused on predicting competitors’ actions, responses and intentions. In combination,
the results of these three analyses influence the organisation’s vision, mission and strategic actions. Although we
discuss each analysis separately, performance improves when the organisation integrates the insights provided
by analyses of the general environment, the industry environment and the competitor environment.

External environmental analysis
Most organisations face external environments that are highly turbulent, complex and global: conditions
t hat ma ke i nter pret i ng t hose env i ron ments d i fficu lt.13 To cope w it h of ten a mbig uous a nd i ncomplete
env i ron mental data, and to increase u nderstand ing of t he general env iron ment, organ isat ions engage
in external environmental analysis. This analysis has four par ts: scanning, monitoring, forecasting and
assessing (see Table 2.2). A nalysing the external environment is a difficult, yet significant, activity.14

Identifying oppor tunities and threats is an impor tant objective of studying the general environment.
A n opportunity is a condition in the general environment that, if exploited effectively, helps a company
to achieve strategic competitiveness. For example, market research results suggested to Procter & Gamble
( P&G) af ter its acquisit ion of Gillette, a shav ing products company, t hat an increasing nu mber of men
globally are interested in fragrances and skin-care products. To take advantage of this oppor tunity, P&G
reoriented towards beauty products to better serve both men and women generally. The change constituted
an organisation change focused on combining product categories rather than its typical organisation around
a specific branded product.15

A threat is a condition in the general environment that may hinder an organisation’s efforts to achieve
strategic competitiveness.16 Microsoft is cur rently experiencing a severe external threat as smar tphones
sur passed personal computer (PC) sales. In the second quar ter of 2020, worldwide PC shipments totalled
64.8 million units, according to results by Gar tner. Lenovo and HP shared the number one position in the
worldwide PC market. They accounted for half of PC shipments in the second quar ter of 2020, up from 46.6
per cent in the second quar ter of 2019. A lthough PC grow th will continue to expand, it is not growing at
the rate that smartphones are. Yet, although the top five smartphone vendors reported a decline in the first

opportunity
a condition in the
general environment
that, if exploited,
helps a company
achieve strategic
competitiveness

threat
a condition in the
general environment
that may hinder a
company’s efforts
to achieve strategic
competitiveness

Components of the external environmental analysis

Scanning Identifying early signals of environmental changes and trends

Monitoring Detecting meaning through ongoing observations of environmental
changes and trends

Forecasting Developing projections of anticipated outcomes based on monitored
changes and trends

Assessing Determining the timing and importance of environmental changes
and trends for organisations’ strategies and their management

Table 2.2

CHAPTER 2
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39

quar ter of 2020, sales among them totalled near 300 million smar tphones, which was over four times the
global sales of PCs during the same period. Samsung recorded sales of 51 million smar tphones, Huawei 42
million and, closely following in third spot, Apple sold nearly 41 million smar tphones. W hile Apple is not
as dependent on the China market as Huawei is, it still faced challenges with supply constraints and store
closures due to the Covid-19 pandemic, which negatively impacted global sales. However, the impact of the
pandemic was less significant for Apple compared to its impact on other top vendors. Apple had a strong
star t to 2020 due to its new product lineup.17

Organisations use several sources to analyse the general environment, including a wide variety of printed
materials (such as trade publications, newspapers, business publications and the results of academic research
and public polls), trade shows and suppliers, customers, and employees of public-sector organisations. People
in boundary-spanning positions may obtain a great deal of this type of information. Customer service staff,
sales personnel, purchasing managers, public relations directors and customer service representatives – each
of whom interacts with external constituents – are examples of boundary-spanning positions.

Scanning
Scanning entails the study of all segments in the general environment. Through scanning, organisations
identify early signals of potential changes in the general environment and detect changes that are already
underway.18 Scanning often reveals ambiguous, incomplete or unconnected data and information. Thus,
environmental scanning is challenging but critically important for organisations, especially those competing
in highly volatile environments.19 In addition, scanning activities must be aligned with the organisational
context.

Many organisations use special sof tware to assist them in identif y ing events that are tak ing place
in t he env iron ment and t hat a re an nounced in public sou rces. For example, news event detection uses
information-based systems to categorise text and reduce the trade-off between an important missed event
and false alarm rates.20 The internet provides significant opportunities for scanning. Amazon, for example,
records significant information about individuals visiting its website, par ticularly if a purchase is made.
A mazon then welcomes these customers by name when they revisit the website. The organisation sends
messages to customers about specials and new products similar to those they purchased on previous visits.
Other organisations, such as Netflix, also collect demographic data about their customers in an attempt
to identify their unique preferences (demographics is one of the segments in the general environment).

Philip Morris International (PMI), a manufacturer and retailer of tobacco products, continuously scans
segments of its external environment to detect cur rent conditions and to anticipate changes that might
take place in different segments. For example, PMI studies various nations’ tax policies on cigarettes (these
policies are par t of the political/legal segment), because raising cigarette taxes reduces sales (as it has in
Australia), while lowering these taxes might increase sales.

Monitoring
W hen monitoring, analysts obser ve environmental changes to see if an impor tant trend is emerging from
among those spotted through scanning.21 Critical to successful monitoring is the organisation’s ability to
detect meaning in environmental events and trends. For example, Tesco, the UK’s largest retailer, added
Turkish, Sri Lankan, Latin, Filipino and African and South African cuisine to its food offerings. One analyst
noted: ‘Britain has become one of the most ethnically diverse nations on Ear th, and there is a ver y strong,
growing demand by those who have settled here to buy food from their homelands’.22 Tesco already sells
Asian, oriental, A fro-Caribbean, kosher, Polish and halal foods. Continual monitoring of these trends is
necessar y for a large retailer such as Tesco to maintain the right balance among its products.

Effective monitoring requires the organisation to identify impor tant stakeholders and understand its
reputation among these stakeholders as the foundation for ser ving their unique needs.23 (Stakeholders’
unique needs are described in Chapter 1.) Scanning and monitoring are par ticularly impor tant when an

STRATEGY NOW

Smartphones –
Apple

40 PART 1: STRATEGIC MANAGEMENT INPUTS

organisation competes in an indust r y w ith high tech nological uncer tainty. 24 Scan ning and monitor ing
can provide the organisation with information; they also ser ve as a means of impor ting knowledge about
markets and about how to successfully commercialise new technologies the organisation has developed.25

Forecasting
Scanning and monitoring are concerned with events and trends in the general environment at a point in
time. W hen forecasting, analysts develop feasible projections of what might happen, and how quickly, as
a result of the changes and t rends detected th rough scan n ing and mon itor ing. 26 For example, analysts
might forecast the time that will be required for a new technolog y to reach the marketplace, the length
of time before d i fferent cor porate t rain ing procedu res are required to deal w ith anticipated changes in
the composition of the workforce, or how much time will elapse before changes in governmental taxation
policies affect consumers’ purchasing patterns.

Forecasting events and outcomes accurately is challenging. Forecasting demand for new technological
products is difficult because technolog y trends are continually driving shor ter product life cycles. This is
par ticularly difficult for an organisation like Intel, for example, whose products go into many customers’
tech nolog ica l mercha nd ise t hat a re consistent ly updated. I ncreasi ng t he d i fficu lt y, each new wa fer
fabrication or silicon chip technolog y production plant that Intel invests in becomes significantly more
expensive for each generation of chip products. Having tools that allow better forecasting of electronic
product demand is increasingly impor tant.27

During an economic downturn, forecasting becomes more difficult and more impor tant. For example,
P&G, Unilever and Colgate-Palmolive, which primarily sell branded products, have been pushed by retailers
to lower their prices, while at the same time these retailers (including Coles and Woolwor ths) are selling
lower-priced, private-label goods. Hence, these consumer product companies are forecasting the effects of
the two trends noted as they seek to project demand. For tunately for these consumer product companies,
they are seeing demand increase for branded products as the economy improves.28

Assessing
The object ive of assessing is to deter m i ne t he t i m i ng a nd sig n i fica nce of t he effects of env i ron mental
changes and trends that have been identified.29 The timing of a product release is imperative as it could
result in either positive or negative sales or returns. For instance, in March 2020, executive producers in
the Holly wood film industr y strategically delayed scheduled blockbuster movies due to the impact of the
Covid-19 pandemic. It was determined that releasing these movies when originally scheduled would have
been financially disastrous at the box office, due to the restrictions placed on access to cinemas globally. 30
The James Bond movie, Quiet Place 2, and the most recent Marvel movie were among those due to be released
in April 2020, but were rescheduled to be released from November 2020. Through scanning, monitoring and
forecasting, analysts are able to understand the general environment. Going a step fur ther, the intent of
assessment is to specify the implications of that understanding. Without assessment, the organisation is
left with data that may be interesting but of unknown competitive relevance. Even if formal assessment
is inadequate, the appropriate inter pretation of that information is impor tant.

How accurate senior executives are in assessing their competitive environments may be less important for
strategy and corresponding organisational changes than correctly interpreting environmental trends. Thus,
although gathering and organising information is important, it is paramount to appropriately interpret that
intelligence to determine if an identified trend in the external environment is an opportunity or a threat.31

Segments of the general environment
As noted, t he general env iron ment is composed of segments t hat are exter nal to t he organ isation (see
Table 2.1). A lthough the degree of impact varies, these environmental segments affect all industries and

CHAPTER 2
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41

the organisations competing in them. The challenge to each organisation is to scan, monitor, forecast and
assess the elements in each segment to determine their effects on the organisation. Effective scanning,
mon itor ing, forecast ing and assessing a re v ital to t he organ isat ion’s effor ts to recog n ise and evaluate
oppor tunities and threats.

The demographic segment
The demographic segment is concerned with a population’s size, age str ucture, geographic distribution,
ethnic mi x and income distr ibution. 32 Demographic segments are commonly analysed on a global basis
because of their potential effects across countries’ borders and because many organisations compete in
global markets.

Population size
The world’s population doubled (from three billion to six billion) between 1959 and 1999. In November 2020,
the global population was recorded as 7.8 billion people, according to the World Population Clock.33 Current
projections suggest that population grow th will continue in the 21st centur y, albeit at a slower pace, and
it is projected to be nine billion by 2040. 34 By 2050, India is expected to be the most populous nation in the

world (w it h over 1.8 billion people). Ch i na, t he USA, Indonesia a nd
Pak istan are pred icted to be the next four most-populous nations in
2050. Organisations seeking to find growing markets in which to sell
their goods and ser vices will want to recognise the market potential
that may exist for them in these five nations.

W hile obser ving the population of different nations and regions of
the world, organisations also study changes occurring within different
populations to assess their strategic implications. For example, Japan
is experiencing what is known as a ‘super-ageing’ society. 35 In 2019,
the World Bank repor ted that 28 per cent of Japan’s citizens were aged
65 or older, compared with China at 9 per cent and India at 6 per cent,
and it has been forecast that China will not reach this level until 2036
(Aust ralia w ill reach 25 per cent in 2042). 36 Ageing populat ions a re
a sig n i fica nt problem for cou nt r ies because of t he need for workers
and the burden of funding retirement programs. In Japan, and other
countries, employees are being encouraged to work longer to overcome
t hese problems. Interest i ngly, t he USA has a h igher bi r t h rate a nd
significant immigration, placing it in a better position than Japan and
European nations.

Age structure
As noted earlier, the world’s population is rapidly ageing. In Nor th A merica and Europe, millions of baby
boomers have approached retirement. However, even in developing countries with large numbers of people
under the age of 35, birth rates have declined sharply. In China, for example, by 2040 there will be more than
400 million people over the age of 60. China is a par ticularly interesting case of the power of demography.
With around 1.43 billion people, it has a huge market and labour force. The problem China will face in the
future is that the number of women of childbearing age will fall quickly. 37 The problems in Europe are more
immediate. Low fertility rates in Italy, Spain and Germany mean that the native-born populations of these
countries may be reduced by more than 80 per cent in coming years, although this may be replaced to some
extent by immigration.

The possibility of future declines in wealth based on housing is creating uncertainty for European Union
(EU) baby boomers about how to invest and when they might be able to retire.38 On the other hand, delayed
retirements by baby boomers in Australia, the EU and the USA with value-creating skills may facilitate

demographic
segment
concerned with a
population’s size, age
structure, geographic
distribution, ethnic
mix and income
distribution

many Asian countries have ageing populations of citizens
aged 65 or older. Ageing populations are a significant issue
because of the need to maintain the workforce and the
burden on the government and taxes required to fund
retirement programs.

Source: age-fotostock/imagenavi

42 PART 1: STRATEGIC MANAGEMENT INPUTS

orga n isat ions’ effor ts to successf u l ly i mplement t hei r st rateg ies. Moreover, delayed ret i rements may
allow organisations to think of creative ways for skilled, long-time employees to impart their accumulated
knowledge to younger employees as they work longer than originally anticipated.

Geographic distribution
For decades, the Australian population has been shifting to the coast, while in China there is a move to
urban areas, and in the USA the population has been shifting from the north and east to the south and west.
Organisations should consider the effects of this shift in demographics. 39 For example, in Australia, the
areas with the highest propor tion of people aged over 65 are in mid-Nor th Coast New South Wales (around
Port Macquarie, with around 20 per cent over 60 years of age), the Wimmera in Victoria and Yorke Peninsula
in South Australia.40 Organisations providing goods and ser vices that are targeted to senior citizens might
pay close attention to these areas.

Geographic distribution patterns are not identical throughout the world. For example, in China, 60 per
cent of the population lives in r ural areas; however, the grow th is in urban communities such as Shanghai
(with a cur rent population in excess of 27 million) and Beijing (over 20 million). These data suggest that
organisations seeking to sell their products in China should recognise the grow th in metropolitan areas
rather than in r ural areas. Larger cities are expected to generate more grow th in gross domestic product
(GDP) per person than smaller cities and also attract more human capital – people with talent to produce
economic grow th.41

Ethnic mix
T he et h n ic m i x of most cou nt r ies’ popu lat ions cont i nues to cha nge. For exa mple, H ispa n ics a re now t he
largest eth n ic minor ity (18.5%) in the USA, representing more than 50 million of the total US population
i n 2019 of 328 m i l l ion.4 2 I n fact, t he US H ispa n ic ma rket is t he t h i rd-la rgest ‘ Lat i n A mer ica n’ economy
beh i nd Brazi l a nd Mex ico. Spa n ish is now t he dom i na nt la ng uage i n pa r ts of US states such as Texas,
Ca l ifor n ia, Flor ida a nd New Mex ico. I n Aust ra l ia, Melbou r ne is perhaps t he cou nt r y ’s lead i ng reg ion for
et h n ic d iversit y, w it h 34 per cent of t he popu lat ion bor n overseas. Melbou r ne has now t he 10 t h-la rgest
i m m ig ra nt popu lat ion a mong world met ropol ita n a reas. Given t hese facts, some orga n isat ions m ight
wa nt to assess t he deg ree to wh ich t hei r goods or ser v ices cou ld be adapted to ser ve t he u n ique needs
of t hese consu mers. T h is is pa r t icu la rly appropr iate for compa n ies compet i ng i n consu mer sectors such
as restau ra nts, g rocer ies, f i na ncia l ser v ices a nd clot h i ng.

Income distribution
Understanding how income is distributed within and across populations informs organisations of different
groups’ purchasing power and discretionary income. Studies of income distributions suggest that although
living standards have improved over time, variations exist within and between nations.43 In Australia, for
example, the median household income in the Australian Capital Ter ritor y, home to many public ser vice
workers, represents the highest-paying jurisdiction (A $1825.80 per week), followed by Western Australia
and t he Nor t her n Ter r itor y, whose med ian ea r n ings were A $120 0 per week. The lowest ea r n ings were
Tasma n ia (A $10 0 0 per week) a nd Sout h Aust ralia (A $1010 per week). The m i n i mu m average wage i n
Australia, as of 1 July 2020, was A $753.80 per week. In 2019, the median weekly earnings for an employee
in Australia was A$1100.00, and there was still a marked difference between male employee median weekly
earnings at A $1275.00 compared with female employee earnings at A $950.00. Managers had the highest
incomes, and income in mining was the highest, while retailing and accommodation and food services were
the lowest industr y categories.44

These earnings statistics are interesting to organisations because the average incomes of households
and individuals are related to expenditure: not only how much they spend, but what they spend their money
on. A nother income-based factor is the increase in numbers of dual-career couples, which has a notable
effect on average household incomes.

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43

The growth of the economy in China has attracted many organisations, not only for the relatively low-
cost production there, but also because of the large potential demand for products, given its huge population
base. However, it has been repor ted that income inequality in China could expand in 2020 as the negative
effects of the Covid-19 pandemic flow through the economy. It has been repor ted that approximately one-
third of Chinese households earning annual incomes of US$1426 expect their earnings to decrease, while
only 13 per cent of wealthier households earning over US$185 000 believed that the pandemic would affect
their income severely.45 The relationship between China and the world is changing. The 2019 McK insey
Global Institute China-World Exposure Index notes that China’s exposure to the world in trade, technology
and capital has fallen in relat ive ter ms. Conversely, t he world’s ex posu re to Ch ina has increased. Th is
reflects the rebalancing of the Chinese economy towards domestic consumption. In 11 of the 16 quar ters
since 2015, consumption contributed more than 60 per cent of total GDP grow th. Exposure to China varies
significantly among sectors and geographies, according to an analysis of 20 sectors and 73 economies.46

Ind ia also is v iewed by global cor porat ions as one of t he key ma rkets f rom where f utu re g row t h is
likely to emerge. Ind ia now compr ises a huge m idd le class, a relatively la rge a ffluent class and a small
economically disadvantaged class. Despite Covid-19, growth in India’s consumer market is likely still to be
driven primarily by a favourable population composition and increasing disposable income. Per capita GDP
of India is expected to reach US$3273.85 in 2023, up from US$1983.00 in 2012. The maximum consumer
spend ing is  likely to occu r in the food, housing, consumer du rables, and t ranspor t and com mun ication
sectors.47 Figures 2.2 and 2.3 offer some insight into the Indian consumer market.

Indian consumer market size

• Indian appliance and consumer
electronics (ACE) market
reached US$10.93 billion
in 2019.

• Smartphone shipments in India
increased 8 per cent
year-on-year to reach 152.5
million units in 2019, the fastest
growing among the top 20
smartphone markets
in the world.

• The S&P BSE Consumer
Durables Index was up 6.8
per cent in Jan 2020 and gained
32.1 per cent in one year.

• Appliances and consumer
electronics industry is expected
to double to US$21.18 billion
by 2025.

• Electronics hardware
production in the country
increased from US$31.13 billion
in FY14 to US$65.53 billion
in FY19.

• Television industry in India
reached an estimated US$11.26
billion in 2019 and is projected
to reach US$13.66 billion)
by 2021.

Source: India Brand Equity Foundation, 2020, India Consumer Durables Industry Report, Snapshot,
https://www.ibef.org/industry/indian-consumer-market.aspx.

Figure 2.2

As such, many Wester n mult inat ionals a re consider ing enter ing Ind ia as a consu mpt ion ma rket as
its middle class grows. A lthough India has poor infrastr ucture, its middle-class consumers are in a good
position to spend. Furthermore, the urban–rural income difference has been declining in India more rapidly
t han in Ch ina. Because of situations like t hese in Ch ina and Ind ia, pay ing attention to t he d i fferences
between markets based on income distribution can be ver y impor tant for organisations.48

The economic segment
The economic environment refers to the nature and direction of the economy in which an organisation
competes or may compete.49 In general, organisations seek to compete in relatively stable economies with
strong grow th potential. Australia, for example, was more stable during the global financial crisis (GFC;
2008– 09) than either the EU or USA, and therefore attracted strong foreign interest.50 This also appears
to have been the case during the Covid-19 pandemic. In June 2020, the International Monetar y Fund (IMF)

economic
environment
refers to the nature
and direction of the
economy in which an
organisation competes
or may compete

44 PART 1: STRATEGIC MANAGEMENT INPUTS

A snapshot of the Indian consumer market

Growing
demand

Advantage
India

Increasing
investments

Opportunities

Policy support

• Refrigerators and consumer electronics good to witness higher demand in rural markets.
• Demand growth likely to accelerate with rising disposable incomes and easy access to credit.

• Government intends to develop electronics components manufacturing base in India
and encourage export.
• Huge untapped market with substantially lower penetration of consumer appliances
compared to other countries.

• National policy on electronics targets production of one billion mobile handsets
worth US$190 billion by 2025.
• 100 per cent FDI is allowed in the electronic-hardware manufacturing sector under
the automatic route.

• India’s consumer durables sector has attracted significant investment.

Source: India Brand Equity Foundation, 2020, India Consumer Durables Industry Report, 4 September,
https://www.ibef.org/industry/indian-consumer-market.aspx.

Figure 2.3

noted that the economic outlook growth projections for the US for 2020 were negative (-8.0%), but 2021 was
forecast to have positive 4.5 per cent grow th to the economy. The IMF also recorded that Germany grow th
projections were negative (-7.8%), as were those of other European countries such as France (-12.5%), and
Italy and Spain ( both -12.8%). Economic g row th outlook was projected for the U K at -10.2 per cent, for
China at 1.0 per cent and for India at -4.5 per cent. The IM F forecast for 2021 is positive for all countries
(see Table 2.3).51 Because nations are interconnected as a result of the global economy, organisations must
scan, monitor, forecast and assess the health of their host nation and the health of the economies outside
their host nation.

As organisations prepare to compete during the third decade of the 21st centur y, the world’s economic
env i ron ment is u ncer ta i n, w it h cha l leng i ng t i mes a head due to t he i mpact of Cov id-19 on t he world
economy.

In ter ms of speci fic econom ic env i ron ments, orga n isat ions compet ing in Japa n or desi r ing to do so
might continue to carefully evaluate the ongoing economic impact of the radiation leaks at the nuclear
power generation plants in Sendai and Fukushima that occur red in 2011.52 A lthough the crisis in Japan
was countr y specific, its ripple effects were felt at the time around the globe. Because of its acknowledged
econom ic g row t h, a number of compan ies a re evaluat ing t he possibility of enter ing Russia to compete
or, for those already competing in that nation, to expand the scope of their operations. 53 This unique and
somet i mes d i fficu lt-to-u ndersta nd busi ness env i ron ment presents sig n i fica nt r isks. Th is cha l leng i ng
environment can also be an advantage because it serves as an entry barrier to limit the number of companies
willing to enter, learn how to operate effectively and then reap the returns. A nother countr y with grow th
oppor tunities is Vietnam, as organisations across the globe take note of how its government reforms and
economic decentralisation are creating opportunities for investment for sourcing, as well as its developing
consumer market.54

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45

IMF world economic outlook growth projections, June 2020

Projections

(Real GDP, annual per cent change) 2019 2020 2021

World output 2.9 –4.9 5.4

Advanced economies 1.7 –8.0 4.8

United States 2.3 –8.0 4.5

Euro Area 1.3 –10.2 6.0

Germany 0.6 –7.8 5.4

France 1.5 –12.5 7.3

Italy 0.3 –12.8 6.3

Spain 2.0 –12.8 6.3

Japan 0.7 –5.8 2.4

United Kingdom 1.4 –10.2 6.3

Canada 1.7 –8.4 4.9

Other advanced economies 1.7 –4.8 4.2

Emerging markets and developing economies 3.7 –3.0 5.9

Emerging and developing Asia 5.5 –0.8 7.4

China 6.1 1.0 8.2

India 4.2 –4.5 6.0

ASEAn-5 4.9 –2.0 6.2

Emerging and developing Europe 2.1 –5.8 4.3

Russia 1.3 –6.6 4.1

Latin America and the Caribbean 0.1 –9.4 3.7

Brazil 1.1 –9.1 3.6

Mexico –0.3 –10.5 3.3

middle East and Central Asia 1.0 –4.7 3.3

Saudi Arabia 0.3 –6.8 3.1

Sub-Saharan Africa 3.1 –3.2 3.4

nigeria 2.2 –5.4 2.6

South Africa 0.2 –8.0 3.5

Low-income developing countries 5.2 –1.0 5.2
Source: International monetary Fund, 2020, World Economic Outlook Update, June 2020,

https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020.

Table 2.3

The political/legal segment
The political/legal segment is the arena in which organisations and interest groups compete for attention,
resources and a voice in overseeing the body of laws and regulations guiding interactions among nations
as well as between organisations and var ious local gover nmental agencies. 55 Essentially, this segment
represents how organisations tr y to influence governments and how they tr y to understand the influences
(cur rent and projected) of those governments on their strategic actions.

political/legal
segment
the arena in which
organisations and
interest groups
compete for attention,
resources and a
voice in overseeing
the body of laws and
regulations guiding
the interactions
among nations

46 PART 1: STRATEGIC MANAGEMENT INPUTS

W hen reg ulations are for med in response to new legislation, they of ten in fluence an organisation’s
strategic actions. For example, less-restrictive regulations on organisations’ actions are a product of the
global trend towards privatisation of government-owned or government-regulated organisations. Much
privatisation in recent years has been driven by government budget concerns and the desire to raise funds
by selling government-owned organisations to reduce deficits.56 Some believe that the transformation from
state-owned to private organisations that has occurred in multiple nations has substantial implications for
the competitive landscapes in a number of countries and across multiple industries. 57

Organisations must carefully analyse a new political ad ministration’s business-related policies and
philosophies. Competition laws, ta xation laws, industries chosen for deregulation, labour training laws
and the degree of commitment to educational institutions are areas in which an administration’s policies
can a ffect t he operat ions and profitability of indust r ies and ind iv idual organ isat ions across t he globe.
To deal w ith issues such as those we are descr ibing, organisations often develop a political strateg y to
influence governmental policies that might affect them. Some argue that developing an effective political
strateg y was essential to the restr uctured General Motors’ effor ts to achieve strategic competitiveness
during the GFC-related economic downturn. In addition, the effects of global governmental policies (e.g.
those related to organisations in India that are engaging in information technolog y outsourcing work) on
an organisation’s competitive position increase the need for organisations to form an effective political
strateg y.58

Orga n isat ions compet i ng i n t he globa l economy encou nter a n i nterest i ng a r ray of pol it ica l/ lega l
quest ions a nd issues. Key recent developments a ffect i ng doi ng busi ness i n Aust ra lia i nclude cha nges
to foreig n i nvest ment reg u lat ions, cu r rency reg u lat ions a nd i ncent ives, laws reg u lat i ng employ ment
relat ionsh ips, compet it ion law, data protect ion, product l iabi l it y a nd sa fet y, ta xat ion a nd residency,
intellectual proper ty rights over patents, trademarks, registered and unregistered designs.

To restore busi ness con fidence i n Aust ra l ia i n 2019, reg u lator y cha nge fol lowed f rom t he Roya l
Com m ission into M isconduct in t he Ba n k ing, Supera n nuat ion a nd Fina ncial Ser v ices Indust r y, wh ich
concluded in Febr uar y 2019.59 For example, Treasur y laws that came into effect in March 2019 introduced
new ma x imum penalties for cor porate and fi nancial sector m isconduct and ex panded t he civ il penalty
regime for financial ser vices licensees in Australia and cor porates for cer tain contraventions.

Reg u lator y bod ies have i ncreased en forcement matters i n Aust ra l ia, as a resu lt of t he Aust ra l ia n
Transaction Repor ts and A nalysis Centre (AUSTR AC) alleging in late 2019 that one of the four Australian
major banks had turned a blind eye to approximately 23 million transactions and had allegedly breached
counter ter rorism finance laws and anti-money laundering laws.60

Australia and other countr ies also follow United Nations Secur ity Council sanctions w ith regard to
i mposi ng t rade rest r ict ions on cer tai n cou nt r ies. They a re selected by t he Foreig n A ffai rs M i n ister at
a ny g iven t i me a nd i mplemented i n Aust ra l ia u nder t he Autonomous Sanctions Act 2011 (Ct h) a nd t he
Autonomous Sanctions Regulations 2011 (Cth).

The sociocultural segment
The sociocultural segment is concerned with a society’s attitudes and cultural values. Because attitudes
and values form the cornerstone of a society, they often drive demographic, economic, political/legal and
technological conditions and changes.

Societies’ attitudes and cultural values appear to have undergone changes in the second decade of the
21st century. In the USA, attitudes and values about health care are one area in which sociocultural changes
are occurring. Specifically, while the USA has the highest overall health care expenditure as well as the
highest expenditure per capita of any countr y in the world, millions of the nation’s citizens lack health
insurance. National health care spending in the United States is forecast to grow at an average annual
rate of 5.4 per cent from the period 2019 to 2028, which is greater than the average grow th rate of GDP of
4.3 per cent.61 The USA spends 19.7 per cent of GDP on health care while similarly prosperous countries

sociocultural segment
concerned with a
society’s attitudes and
cultural values

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47

such as Germany and the Netherlands spend 11.7 and 13 per cent, respectively; yet Australia spends only
10.3 per cent, and Singapore and Malaysia spend only 4 per cent.62 Most of these countries have quite varied
health insurance systems compared with the USA. Continuing changes to the nature of health care policies
can have a significant effect on business organisations,63 so they must carefully examine trends regarding
health care in order to anticipate the effects on their operations.

A ny national workforce is diverse in its makeup and work patterns. From a population of 25 million,
the Australian workforce in September 2020 was 12.6 million.64 Within it, a range of complex differences
between groups make planning difficult. For example, the labour force participation rate in 2019 was 64.8
per cent, which was an all-time high.65 The 2018–19 figures revealed some other patterns buried in a broad
statistic, such as: for women aged 20 –74, participation was 67.4 per cent, but for males in that age group it
was 78.5 per cent. Furthermore, the labour force participation rate for the 60–64-year-old group increased for
women (51%), compared to men (65.4%).66 For the age bracket 30 to 34 year olds, 76.1 per cent were females
compared to 92.7 per cent males. In Australia in 2018–19, the industries with the highest proportion of women
were health care and social assistance (78.2%) and education and training (72%), whereas men dominated
mining (84%) and construction (88%). Women were more likely to be employed part-time, with 43.4 per cent
of women working part-time.

Growing gender, ethnic and cultural diversity in the workforce creates challenges and oppor tunities,
including combining the best of both men’s and women’s traditional leadership styles. Although diversity in
the workforce has the potential to improve performance, research indicates that management of diversity
in it iat ives is requi red in order to reap t hese organ isat ional benefits. Hu man resou rce pract it ioners a re

trained to successfully manage diversity issues to enhance positive
outcomes.67

O t he r ma rked d i f fe re nces i n re lat ion to ge nde r have bee n
highlighted during the Covid-19 pandemic, with the Workplace Gender
Equa l it y Agenc y ( WGE A) i n Aust ra l ia not i ng t hat t he pa ndem ic
has a ffec ted women a nd men d i fferent ly. T he effec ts on women
include their predominant employment in the health care sector and
responsibility for care work, the gendered division of domestic duties,
as well as issues related to financial security and domestic violence.
Federa l gover n ment data has show n, however, t hat men a re more
likely to die from Covid-19. To date, generally equal numbers of women
and men are con fi rmed to have contracted Covid-19.68

A ma n i festat ion of c ha ng i ng at t it udes towa rd s work is t he
cont i nu i ng g row t h of cont i ngency workers (pa r t-t i me, tempora r y
and contract employees) throughout the global economy. This trend is
significant in several parts of the world, including Canada, Australia,
Japan, Latin A merica, Western Europe and the USA.

Nat iona l cu ltu ra l va lues a ffect behav iou r i n orga n isat ions a nd t hus a lso i n fluence orga n isat iona l
outcomes, such as differences in CEO compensation.69 The average pay for a Chinese CEO is CN Y 2 301 327 a
year (equivalent to AU$500 000) and CN Y 1106 an hour in Beijing. The average salar y range for a CEO is
between CNY 1 412 752 and CNY 3 914 057. On average, a Master’s Degree is the highest level of education for
a CEO.70 In Australia, median cash pay for ASX100 CEOs in 2018 fell 1 per cent from $2.87 million to $2.84
million, while the average salar y fell 4.1 per cent to $2.92 million. Median cash pay for ASX100 CEOs has
been flat for a decade, ranging between $2.79 million (FY20) and $2.95 million (FY11). The five highest-paid
CEOs in the ASX100 on a cash pay basis all received more than $5 million, and three (CSL’s Perreault, Sonic’s
Goldschmidt and A mcor’s Delia) all received more than $5 million in cash pay; while Treasur y’s Clarke and
Macquarie’s Moore both received more than $4.7 million in FY17.71 See Table 2.4.

L i kew ise, nat iona l c u lt u re i n f luences to a la rge e x tent t he i nter nat iona l isat ion st rateg y t hat
orga n isat ions pu rsue relat ive to t hei r home cou nt r y.72 K nowledge sha r i ng is i mpor ta nt for d ispersi ng

Women in the Workplace will create further leadership
opportunities for women in 2021.

Source: iStock.com/gremlin

48 PART 1: STRATEGIC MANAGEMENT INPUTS

Chief executive remuneration September 2019

FY18 FY17 FY13 FY08 One-year
increase

Five-year p.a.
increase

10-year p.a.
increase

Median $2 841 711 $2 871 409 $2 529 885 $2 903 752 −1 per cent 2.4 per cent −0.2 per cent

Average $2 919 156 $3 044 666 $3 005 935 $3 814 687 −4.1 per cent −0.6 per cent −2.6 per cent

Highest $6 236 722 $12 944 540 $11 107 787 $27 894 726

Lowest $750 000 $646 396 $616 972 $198 648

Median
(incumbent)

$2 939 000 $2 920 000

Average
(incumbent)

$2 983 746 $2 952 839

Source: Australian Council of Superannuation Investors, 2019, CEO pay in ASx200 companies: September 2019, melbourne: ACSI, https://acsi.org.au/wp-content/
uploads/2020/02/CEO-Pay-in-ASx200-Companies-September-2019.pdf, p. 27.

Table 2.4

new k nowledge w it h in organ isat ions and increasing t he speed of implement ing in novat ions. Personal
relationships are especially impor tant in China, where guanxi (personal con nections) is a way of doing
business within the countr y and for individuals to advance their careers in what is becoming a more open-
market society. Understanding the importance of guanxi is critical for foreign organisations doing business
in China.73

The technological segment
Pervasive and diversified in scope, technological changes affect many parts of societies. These effects occur
primarily through new products, processes and materials, notwithstanding the significant technological
innovations that have been an outcome of the Covid-19 pandemic. The technological segment includes the
organisations and activities involved in creating new knowledge and translating that knowledge into new
outputs, products, processes and materials. Given the rapid pace of technological change and risk of disruption,
it is vital for organisations to thoroughly study the technological segment.74 The importance of these efforts is
suggested by the finding that early adopters of new technology often achieve higher market shares and earn
higher returns. Thus, both large and small organisations should continuously scan the external environment
to identify potential substitutes for technologies that are in current use, as well as to identify newly emerging
technologies from which their organisation could derive competitive advantage.75

A s a sig n i f ica nt tec h nolog ica l development, t he i nter net has rema rkable capabi l it y to prov ide
infor mat ion easily, quick ly and effect ively to an ever-increasing percentage of t he world’s populat ion.
Organisations continue to study the internet’s capabilities to anticipate how it may allow them to create
more value for customers and staff in the future and to anticipate future trends.

In spite of the internet’s far-reaching effects, wireless communication technology is becoming the next
significant technological oppor tunity for companies to apply when pursuing strategic competitiveness.
Handheld devices and other wireless communications equipment are used to access a variety of network-
based ser vices. The use of handheld computers with wireless network connectivity, web-enabled mobile
phone handsets and other emerging platforms (e.g. consumer internet-access devices such as the iPhone
and iPad) has increased substantially and should soon become the dominant form of communication and
commerce.76 For example, in the first quarter of 2020, global sales totalled nearly 300 million for smartphones
alone. With each new version of mobile devices such as the iPhone, iPad and K indle, amazing additional
functionalities and software applications are added.

technological
segment
the organisations and
activities involved
with creating new
knowledge and
translating that
knowledge into new
outputs, products,
processes and
materials

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The global segment
The global segment includes relevant new global markets, existing markets that are changing, impor tant
international political events, and critical cultural and institutional characteristics of global markets.77
There is little doubt that markets are more global and that consumers, as well as companies throughout the
world, accept this fact. Consider the automobile industr y. The global automobile industr y is one in which
an increasing number of people believe that because ‘we live in a global community’, consumers in multiple
nations are willing to buy cars and tr ucks ‘from whatever area of the world’.78

W hen st udy i ng t he globa l seg ment, orga n isat ions (i nclud i ng automobi le ma nu fact u rers) shou ld
recognise that globalisation of business markets may create oppor tunities to enter new markets as well as
threats that new competitors from other economies may also enter their market. This is both an opportunity
and a threat for the world’s automobile manufacturers: worldwide production capacity is now a potential
threat to all global companies where entering another market to sell a company’s products appears to be
an oppor tunity. In China, the world’s biggest auto market has exper ienced slower car sales since 2015,
although the industr y remains sustainable.

Over t he past decade, Ch i na’s automot ive i ndust r y has been
i n overd r ive, g row i ng approx i mately 15 per cent each yea r, a nd
accounting for 70 per cent of global grow th over this period. By 2012,
China had sur passed the USA as the world’s largest auto market, but
by 2018 China’s cooling economy put the brakes on the auto market,
pushing sales grow th into negative ter ritor y, a trend that persisted
t h rough 2019. Over t he two yea rs up to 2019, Ch ina sales fell from
8.2 per cent to 6 per cent. Accord i ng to t he Ch i na A ssociat ion of
Automobile Manufacturers, 25.8 million vehicles were sold in 2019.79

Fur ther challenges have occur red in the auto industr y since 2020
due to t he globa l econom ic slowdow n resu lt i ng f rom t he Cov id-19
pa ndem ic. Ot her issues a re t hat, i n order to i ncrease sa les, ma ny
ca r compa n ies wa nt to enter foreig n ma rkets a nd t h is has led to
overcapacit y worldw ide. I n Ch i na, labou r u n ions of ten orga n ise
strikes to demand higher wages, fur ther increasing pressures in this
industr y.

McKinsey research highlights that Chinese consumers’ automobile
brand loyalty, measured by their willingness to purchase their existing

brand of car again, increased from 12 per cent in 2017 to 31 per cent in 2019. Companies selling cars in the
mid-price range (100 000 –200 000 R MB) will face particular challenges, with pressure coming from opposite
ends of the price spectr um. At the top, premium brands are making their cars more affordable to appeal to
consumers seeking to trade up. In China, consumers’ acceptance level for autonomous vehicles in 2019 is 80
per cent, double that of Germany and the USA. With the Chinese Government expected to double down on
support for autonomous vehicles, China is likely to be at the forefront of autonomous vehicle development.
‘The considerable costs of keeping pace with these trends is forcing consolidation and collaboration among
rivals. BMW and Mercedes-Benz, for instance, have forged a par tnership focused on the next generation
of mobility. Volkswagen and Ford have also teamed up to develop autonomous and electric vehicles, in a
fur ther example of a trend we expect to see more of in future’.80 A nother change in purchasing vehicles
is likely to occur with the consideration that the days of purchasing cars exclusively through dealers are
numbered. For instance, China’s dealership industry is highly fragmented, with profit margins having been
squeezed in recent years. Electric car sellers Tesla and NIO have attempted to overcome this, for example,
by focusing on selling cars online directly to the consumer, while Daimler launched Mercedes me, a system
that allows drivers to track and control their vehicle remotely.81

global segment
includes relevant
new global
markets, existing
markets that are
changing, important
international
political events
and critical cultural
and institutional
characteristics of
global markets

Elon musk delivers made-in-China Teslas – just one of many
consumer options within the Chinese automotive market.

Source: Getty Images/AFP

50 PART 1: STRATEGIC MANAGEMENT INPUTS

The markets from which organisations generate sales and income are one indication of the degree to
which they are par ticipating in the global economy. For example, H. J. Heinz Company, a large global food
producer, acquired a stake in Coniexpress S.A. Industrias Alimenticias, a leading Brazilian manufacturer of
tomato-based products, condiments and vegetables, in order to target the South A merican market. Heinz’s
sales in emerging economies grew 16.8 per cent while its main Nor th A merican group grew 14.5 per cent.
Thus, much of Heinz’s sales grow th and its profit margins were coming from emerging markets.82 For this
company, and so many others, understanding the conditions of today’s global segment and being able to
predict future conditions is critical to success.

The globa l seg ment presents orga n isat ions w it h bot h oppor tu n it ies a nd t h reats or r isks. Because
of t he t h reats a nd r isks, some orga n isat ions choose to ta ke a more caut ious approach to compet ing in
international markets. These organisations par ticipate in what some refer to as ‘global focusing’. Global
focusing often is used by organisations with moderate levels of international operations that increase their
internationalisation by focusing on global niche markets.83 In this way, they build on and use their special
competencies and resou rces wh ile lim iting t heir r isks w it h in t he n iche market. A not her way in wh ich
organisations limit their risks in international markets is to focus their operations and sales in one region
of the world.8 4 In this way, they can build stronger relationships in, and knowledge of, their markets. As
they build these strengths, rivals find it more difficult to enter their markets and compete successfully.

In all instances, organisations competing in global markets should recognise their sociocultural and
institutional att r ibutes. For example, Korean ideolog y emphasises com munitar ianism, a character istic
of ma ny A sia n cou nt r ies. Korea’s approach d i ffers f rom t hose of Japa n a nd Ch i na, however, i n t hat it
focuses on inhwa, or harmony. Inhwa is based on a respect for hierarchical relationships and obedience to
authority. A lternatively, as noted earlier, the approach in China stresses guanxi – personal relationships
or good con nections – wh ile, in Japan, t he focus is on wa, or g roup ha r mony and social cohesion.85 The
institutional context of China suggests a major emphasis on centralised planning by the government. The
Chinese Government provides incentives to organisations to develop alliances with foreign organisations
that have sophisticated technolog y, in the hope of building knowledge and introducing new technologies
to t he Ch i nese ma rkets over t i me. 86 As such, it is i mpor ta nt to a na lyse t he st rateg ic i ntent of foreig n
organisations when pursuing alliances and joint ventures abroad, especially where the local par tners are
receiving technolog y that in the long r un may reduce the foreign organisations’ advantages.87

The physical environment segment
T he physical environment segment refers to potent ia l a nd act ua l cha nges i n t he physica l (nat u ra l)
env i ron ment a nd busi ness pract ices t hat a re i ntended to posit ively respond to a nd dea l w it h t hose
changes.88 Concerned with trends oriented to sustaining the world’s physical environment, organisations
recog n ise t hat ecolog ica l, socia l a nd econom ic systems i nteract ively i n fluence what happens i n t h is
par ticular segment.89

There are many par ts or att r ibutes of the physical env iron ment that organ isations should consider
as t hey t r y to ident if y t rends i n t h is seg ment.9 0 Ma ny now a rg ue t hat cli mate cha nge is a t rend t hat
organisations and nations should carefully examine in effor ts to predict any potential effects on societies
globally, as well as on their business operations. Investors are seek ing to take advantage of th is t rend
– ca l l i ng it ‘g reen a lpha’ – by look i ng to profit by i ncreasi ng env i ron menta l susta i nabi l it y. 91 Energ y
consumption is another par t of the physical environment that concerns both organisations and nations.

Because of increasing concern about sustaining the quality of the physical environment, a number of
companies are developing environmentally friendly policies. BP has established a new ambition to become
a net zero emissions company by 2050 and to assist the world to achieve net zero emissions. Its ambition is
suppor ted by 10 aims, released in Febr uar y 2020, and these include: net zero across BP’s operations on an
absolute basis by 2050 or sooner; net zero on carbon in BP’s oil and gas production on an absolute basis by
2050 or sooner; a 50 per cent cut in the carbon intensity of products BP sells by 2050 or sooner; to install

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

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51

methane measurement at all BP’s major oil and gas processing sites by 2023 and reduce methane intensity
of operations by 50 per cent; and to increase the propor tion of investment into non-oil and gas businesses
over time. It includes five aims to assist the global community achieve net zero emissions, and these are:
more active advocacy for policies that suppor t net zero, including carbon pricing; to fur ther incentivise
BP’s work force to deliver aims and mobilise t hem to advocate for net zero; to set new ex pectat ions for
relationships with trade associations; to aim to be recognised as a leader for transparency of repor ting,
includ ing suppor ting t he recom mendations of t he Task Force on Climate-related Financial Disclosu res
(TCFD); and launch a new team to help countries, cities and large companies decarbonise. To deliver these
ambitions, BP plans to reorganise to become a more focused and more integrated company.92

As our discussion of the general environment shows, identifying anticipated changes and trends among
external elements is a key objective of analysing the organisation’s general environment. With a focus
on the future, the analysis of the general environment allows organisations to identify oppor tunities and
threats. It is necessar y to have a senior management team with the experience, knowledge and sensitivity
required to effectively analyse this segment of the environment.93 Also critical to an organisation’s choices
of strategic action is an understanding of its industr y environment and its competitors; we consider these
issues next.

Target (Tar-zhey) is trying to navigate in a new and
rapidly changing competitive landscape

Target became known by consumers as Tar-zhey, the
retailer of cheaper but ‘chic’ products. The firm offered
a step up in quality goods at a slightly higher price than
discount retailers such as Walmart, but was targeted
below major, first-line retailers such as macy’s and
nordstrom. Additionally, it promoted its stores to offer
one-stop shopping with clothing, toys, health products
and food goods, among other products. For many
years, Tar-zhey ‘hit the bullseye’ and performed well
serving this large niche in the market. But the company
took its eye off the target and began losing market
share (along with other poor strategic actions).
The first major crack appeared with the
announcement of a massive cyber attack on Target’s
computer system that netted customers’ personal
information. not only was this a public relations
disaster, it drew a focus on Target that identified
other problems. For example, careful analysis showed
that Target was losing customers to established
competitors and new rivals, especially internet
retailers (e.g. Amazon.com).

Target’s marketing chief stated that ‘it’s not that we
became insular. We were insular’. This suggests that
the organisation was not analysing its environment.
By allowing rivals, and especially internet competitors,
to woo the company’s customers, it lost sales, market
share and profits. It obviously did not predict and

prepare for the significant competition from internet
rivals that is now reshaping most retail industries.
Competitors were offering better value to customers
(perhaps more variety and convenience through online
sales). Thus, Target’s reputation and market share were
simultaneously harmed.

Because of all the problems experienced, Target
hired a new CEO, Brian Cornell, in 2014. Cornell made
a number of changes, but the continued revolution in
the industry, largely driven by Amazon, continued to
gnaw away at Target’s annual sales. Target’s annual
sales declined by approximately 5 per cent in 2017
and its stock price suffered as a result. Target was
forced to develop a new strategy, which involved a
major rebranding. It launched four new brands late
in 2017, including A new Day, a fashionable line of
women’s clothes, and Goodfellow & Co, a modern line
of menswear, with the intent to make an emotional
connection with customers. It also plans to remodel 100
of its stores and change in-store displays to improve
customer experiences. It will add 30 small stores that
offer innovative designs and, to compete with Amazon, is
emphasising its digital sales and delivery of products. Up
to now, its digital strategy has not been highly successful,
so it is narrowing its focus to increase its effectiveness.

Target planned to discontinue several major brands
by 2019 and will continue to introduce new brands

Strategic focus |Technology

52 PART 1: STRATEGIC MANAGEMENT INPUTS

As described in the ‘Strategic focus’ feature, Target failed to maintain a good understanding of its industry
and lost market share to internet company rivals and other more established competitors. We conclude that
critical to an organisation’s choices of strategies and their associated competitive actions and responses is
an understanding of its industry environment, its competitors and the general environment of the countries
in which it operates. Next, we discuss the analyses organisations complete to gain such an understanding.94

Industry environment analysis
A n industry is a g roup of organ isations producing products that are close substitutes. In the cou rse of
compet it ion, t hese orga n isat ions i n fluence one a not her. Ty pica l ly, i ndust r ies i nclude a r ich m i x t u re
of compet it ive st rateg ies t hat orga n isat ions use i n pu rsu i ng above-average ret u r ns. I n pa r t, t hese
strategies are chosen because of the influence of an industr y’s
characteristics.95

Compa red w it h t he ge ne ra l e nv i ron me nt , t he i ndu st r y
environment has a more direct effect on the organisation’s
strategic competitiveness and ability to earn above-average
returns.96 A n industr y’s profit potential is a function of five
forces of competition: the threats posed by new entrants, the
power of suppliers, the power of buyers, product substitutes and
the intensity of rivalry among competitors (see Figure 2.4).

The five forces model of compet it ion ex pa nds t he a rena
for compet it ive a na lysis. H istor ica l ly, when st udy i ng t he
compet it ive env i ron ment, orga n isat ion s concent rated on
compa n ies w it h wh ic h t hey competed d i rec t ly. However,
orga n isat ions must now sea rch more broad ly to recog n ise
cu r rent a nd potent ia l compet itors by ident if y i ng potent ia l
customers as wel l as t he orga n isat ions ser v i ng t hem. For
example, the communications industry is now broadly defined
as encompassing media companies, telecoms, enter tainment

industry
a group of
organisations
producing products
that are close
substitutes

Source: ZUmA Wire/TnS/Glen Stubbe

(12 in total are planned). The intent is to increase the
appeal of Target and its products to millennials. These
actions alone suggest the importance of gathering and

analysing data on the market and competitors’ actions.
The next few years will show the fruits of all of Target’s
changes. If they are successful, Target will still face
substantial competition from Amazon and Walmart; if
they are not successful, Target may suffer the same fate
of many other large and formerly successful retailers
that no longer exist.

Sources: A. Pasquarelli, 2017, Our strategy is working: Target plows
into the holidays, AdAge, http://adage.com, 19 October; S. Heller, 2017,

Target’s biggest brands are about to disappear from stores, The Insider,
http://www.theinsider.com, 6 July; 2017, Rebranding its wheel: Target’s
new strategy, Seeking Alpha, http://seekingalpha.com, 4 July; K. Safdar,

2017, Target’s new online strategy: Less is more, Wall Street Journal,
http://www.wsj.com, 15 may; 2015, What your new CEO is reading:

Smell ya later; Target’s new CEO, CIO Journal/Wall Street Journal, http://
www.wsj.com/cio, 6 march; J. Reingold, 2014, Can Target’s new CEO

get the struggling retailer back on target? Fortune, http://www.fortune.
com, 31 July; G. Smith, 2014, Target turns to PepsiCo’s Brian Cornell to

restore its fortunes, Fortune, http://www.fortune.com, 31 July; P. Ziobro,
m. Langley & J. S. Lublin, 2014, Target’s problem: Tar-zhey isn’t working.

Wall Street Journal, http://www.wsj.com, 5 may.

Goodfellow & Co menswear, a new line introduced by
Target in late 2017.

The five forces of competition
model

Threat of
new entrants

Bargaining
power of
suppliers

Bargaining
power of
buyers

Threat of
substitute
products

Rivalry among
competing

organisations

Figure 2.4

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53

companies and companies producing devices such as smartphones.97 In such an environment, organisations
must study many other industries to identify organisations with capabilities (especially technology-based
capabilities) that might be the foundation for producing a good or a ser vice that can compete against what
they are producing. Using this perspective finds organisations focusing on customers and their needs rather
than on specific industr y boundaries to define markets.

W hen st udy i ng t he i ndust r y env i ron ment, orga n isat ions must a lso recog n ise t hat suppl iers ca n
become an organisation’s competitors ( by integrating for ward) as can buyers ( by integrating backward).
For example, several organisations have integrated for ward in the pharmaceutical industr y by acquiring
distributors or wholesalers. In addition, organisations choosing to enter a new market and those producing
products that are adequate substitutes for existing products can become a company’s competitors. Next,
we examine the five forces the organisation analyses to understand the profitability potential within the
industr y (or a segment of an industr y) in which it competes or may choose to compete.

Threat of new entrants
Identifying new entrants is important because they may threaten the market share of existing competitors.98
One reason new entrants pose such a threat is that they bring additional production capacity. Unless the
demand for a good or ser vice is increasing, additional capacity holds consumers’ costs down, resulting in
less revenue and lower returns for competing organisations. Often, new entrants have a keen interest in
gaining a large market share. As a result, new competitors may force existing organisations to be more
efficient and to learn how to compete on new dimensions (e.g. using an internet-based distribution channel).

The likelihood that organisations will enter an industr y is a function of two factors: bar riers to entr y
and the retaliation expected from cur rent industr y par ticipants. Entr y barriers make it difficult for new
organisations to enter an industr y and often place them at a competitive disadvantage even when they
are able to enter. As such, high entr y barriers tend to increase the returns for existing organisations in the
industr y and may allow some organisations to dominate the industr y.99 Thus, organisations competing
successfully in an industry want to maintain high entry barriers in order to discourage potential competitors
from deciding to enter the industr y.

Barriers to entry
Orga n isat ions compet i ng i n a n i ndust r y (a nd especia l ly t hose ea r n i ng above-average retu r ns) t r y to
develop entry barriers to thwart potential competitors. For example, the server market is hypercompetitive
and dominated by IBM, Hewlett-Packard and Dell. Historically, the scale economies these organisations
have developed by operating efficiently and effectively have created significant entr y bar riers, causing
potential competitors to think ver y carefully about entering the ser ver market to compete against them.
Oracle, primarily a software-oriented company, acquired Sun Microsystems, which is primarily a ser ver
hardware company, to overcome the barriers to entry that exist in this industry. Oracle intended to preload
Oracle software into its new ser ver line: ‘Hardware makers such as Dell and HP are getting into software,
and software companies like Oracle are getting into hardware’ because these ‘companies want to create
the integrated hardware and software systems that can satisfy a cor porate customer’s ever y IT need’.10 0
The degree of success Oracle might achieve as a result of its decision to enter the ser ver market v ia an
acquisition remained uncertain. By mid-2015, Oracle’s ser ver operation was part of a ‘floundering division’
that competed in a crowded marketplace. However, things turned around in 2020 with Oracle’s Gen2 Cloud
Infrastr ucture, which added more customers and growing revenue at a rate of over 100 per cent per year
once the bar riers to entr y into the marketplace were overcome.101

S eve r a l k i nd s of p ote nt ia l ly s ig n i f ic a nt e nt r y ba r r ie r s m ay d i scou r a ge comp e t itor s f r om
entering a market.

54 PART 1: STRATEGIC MANAGEMENT INPUTS

Economies of scale
Econom ies of sca le a re der ived f rom i ncrementa l efficiency i mprovements t h rough ex per ience as a n
organisation grows larger. Therefore, the cost of producing each unit declines as the quantity of a product
produced during a given period increases. This is the case for IBM, Hewlett-Packard and Dell in the ser ver
market, as previously described.

Economies of scale may be developed in most business functions, such as marketing, manufacturing,
research and development, and purchasing.102 Increasing economies of scale enhances an organisation’s
flexibility. For example, an organisation may choose to reduce its price and capture a greater share of the
market. A lternatively, it may keep its price constant to increase profits. In so doing, it likely will increase
its free cash flow, which is ver y helpful during financially challenging times.

New entrants face a dilemma when confronting current competitors’ scale economies.
Small-scale entry places them at a cost disadvantage. Given the size of Sun Microsystems
relative to the three major competitors in the ser ver market, Oracle has found it easier to
compete against its scale-advantaged competitors in 2020.103 Additionally, large-scale
entry through such an acquisition, in which the new entrant manufactures large volumes
of a product to gain economies of scale, risks strong competitive retaliation.

Some compet it ive cond it ions reduce t he ability of econom ies of scale to create an
ent r y ba r r ier. Ma ny compa n ies now custom ise t hei r products for la rge nu mbers of
sma l l customer g roups. Custom ised products a re not ma nu fact u red i n t he volu mes
necessa r y to ach ieve econom ies of sca le. Custom isat ion is made possible by flex ible
manufacturing systems (this point is discussed fur ther in Chapter 4). In fact, the new
manufactu r ing tech nolog y facilitated by advanced infor mat ion systems has allowed
the development of mass customisation in an increasing number of industries. A lthough
it is not appropr iate for a l l products, a nd i mplement i ng it ca n be cha l leng i ng, mass
customisation has become increasingly common in manufacturing products.104 Online
ordering has enhanced the ability of customers to obtain customised products. Companies
manufacturing customised products learn how to respond quickly to customers’ needs
in lieu of developing scale economies.

Product differentiation
Over time, customers may come to believe that an organisation’s product is unique. This belief can result
from the organisation’s service to the customer, effective advertising campaigns or being the first to market
a good or ser vice. The Coca-Cola Company and PepsiCo have established strong brands in the soft drink
market and now control the carbonated soft drink industry (CSD) globally. Since 2004, Coca-Cola Company
has been the market leader, according to Statista. However, in 2020 PepsiCo had a market cap of US$188.6
billion compared with Coca-Cola of US$185.8 billion. These brands compete with each other worldwide,
with Coca-Cola owning 500 brands. Because each has used a great deal of resources building their brands,
customer loyalty is strong. These companies battle each other for market leadership, which has changed
back and for th over the years. W hen considering entr y into the soft drink market, an organisation needs
to pause to examine how one can overcome the brand image and consumer loyalty to these two giants in
this global industry. One needs significant resources to capture market share, although many organisations
that have the resources to produce private label products, such as Woolwor ths and Coles, are doing so.

Companies such as P&G and Colgate-Palmolive spend a great deal of money on advertising and product
development to convince potential customers of their products’ distinctiveness and the value their brands
provide. Customers valuing a product’s uniqueness tend to become loyal to both the product and the company
producing it. In turn, customer loyalty is an entry barrier for organisations thinking of entering an industry
and competing against the likes of P&G and Colgate-Palmolive. To compete against organisations offering
differentiated products to individuals who have become loyal customers, new entrants often allocate many

Many organisations like Woolworths
produce private label products like tissues
in an effort to capture market share.

Source: Dreamstime.com/Richard van Der Spuy

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resources. To combat the perception of uniqueness, new entrants frequently offer products at lower prices.
This decision, however, may result in lower profits or even losses.

Capital requirements
Competing in a new industr y requires an organisation to have resources to invest. In addition to physical
facilities, capital is needed for inventories, marketing activities and other critical business functions. Even
when a new industr y is attractive, the capital required for successful market entr y may not be available
to pursue the market oppor tunity.105 For example, defence industries are difficult to enter because of the
substantial resource investments required to be competitive. In addition, because of the high knowledge
requirements of the defence industr y, an organisation might acquire an existing company as a means of
entering this industr y, but it must have access to the capital necessar y to do this.

Switching costs
Switching costs are the one-time costs customers incur when they buy from a different supplier. The costs
of buying new ancillary equipment and of retraining employees, and even the psychological costs of ending
a relationship, may be incurred in switching to a new supplier. In some cases, switching costs are low, such
as when the consumer switches to a different brand of soft drink. Switching costs can vary as a function of
time. For example, in terms of credit hours towards graduation, the cost to a student to transfer from one
university to another in their first year is much lower than it is when the student is entering their final year.

Occasionally, a decision made by manufactu rers to produce a new, in novative product creates h igh
switching costs for the final consumer. Customer loyalty programs, such as airlines’ frequent flyer points,
are intended to increase the customer’s switching costs. If switching costs are high, a new entrant must
offer eit her a substa nt ia l ly lower pr ice or a much better product to att ract buyers. Usua l ly, t he more
established the relationships between par ties, the greater the switching costs.

Access to distribution channels
Over t i me, i ndust r y pa r t icipa nts t y pica l ly develop effect ive mea ns of d ist r ibut i ng products. Once a
relationship with its distributors has been built, an organisation will nur ture it, thus creating switching
costs for the distributors. Access to distribution channels can be a strong entr y bar rier for new entrants,
par ticularly in consumer non-durable goods industries (e.g. in grocer y stores where shelf space is limited)
a nd i n i nter nat iona l ma rkets. New ent ra nts have to persuade d ist r ibutors to ca r r y t hei r produc ts,
either in addition to or in place of those cur rently distributed. Price breaks and cooperative adver tising
allowances may be used for this purpose; however, those practices reduce the new entrant’s profit potential.
Interestingly, access to distribution is less of a bar rier for products that can be sold on the internet.

Cost disadvantages independent of scale
Sometimes, established competitors have cost advantages that new entrants cannot duplicate. Proprietary
product technolog y, favourable access to raw materials, desirable locations and government subsidies are
examples. Successful competition requires new entrants to reduce the strategic relevance of these factors.
Deliver ing purchases d irectly to the buyer can counter the advantage of a desirable location; new food
establishments in an undesirable location often follow this practice.

Government policy
Through licensing and permit requirements, governments can also control entr y into an industr y. Liquor
retailing, rad io and telev ision broadcasting, ban k ing and tr uck ing are examples of industr ies in which
government decisions and actions affect entr y possibilities. A lso, governments often restrict entr y into
some industries because of the need to provide quality ser vice or the need to protect jobs. A lternatively,
dereg ulation of industr ies, exempli fied by the airline industr ies in Australia and the USA, allows more
organisations to enter.106

56 PART 1: STRATEGIC MANAGEMENT INPUTS

Expected retaliation
Compan ies seek ing to enter an indust r y also anticipate t he reactions of organ isations in t he indust r y.
A n ex pectat ion of sw if t a nd v igorous compet it ive responses reduces t he li kelihood of ent r y. Vigorous
retaliation can be expected when the existing organisation has a major stake in the industr y (e.g. it has
fixed assets with few, if any, alternative uses), when it has substantial resources and when industry growth
is slow or constrained. For example, any organisation attempting to enter the airline industr y can expect
significant retaliation from existing competitors due to overcapacity.

Locating market niches not being served by incumbents allows the new entrant to avoid entry barriers.
Sma l l ent repreneu r ia l orga n isat ions a re genera l ly best su ited for ident i f y i ng a nd ser v i ng neglected
market segments. W hen Honda fi rst entered the US motorcycle market, it concentrated on small-engine
motorcycles, a market that organisations such as Harley-Davidson had ignored. By targeting this neglected
n iche, Honda avoided compet it ion. A f ter consolidat i ng its posit ion, Honda used its st reng t h to attack
rivals by introducing larger motorcycles and competing in the broader market. Competitive actions and
compet it ive responses between organ isat ions such as Honda and Ha rley-Dav idson a re d iscussed more
fully in Chapter 5.

Bargaining power of suppliers
Increasing prices and reducing the quality of their products are potential means suppliers use to exert power
over organisations competing within an industr y. If an organisation is unable to recover cost increases
by its suppliers through its own pricing str ucture, its profitability is reduced by its suppliers’ actions. A
supplier group is powerful when:

• it is dominated by a few large companies and is more concentrated than the industr y to which it sells
• satisfactor y substitute products are not available to industr y organisations
• industr y organisations are not a significant customer for the supplier group
• suppliers’ goods are critical to buyers’ marketplace success
• the effectiveness of suppliers’ products has created high switching costs for industr y organisations
• it poses a credible threat to integrate forward into the buyers’ industr y. Credibility is enhanced when

suppliers have substantial resources and provide a highly differentiated product.
The airline industr y is one in which suppliers’ bargaining power is changing. Though the number of

suppliers is low, the demand for major aircraft is also relatively low. Boeing and Airbus aggressively compete
for orders of major aircraft, creating more power for buyers in the process. W hen a large airline signals
that it might place a ‘significant’ order for wide-body airliners that either A irbus or Boeing might produce,
both companies are likely to battle for the business and include a financing arrangement, highlighting the
buyer’s power in the potential transaction.

Bargaining power of buyers
Organ isations seek to ma x im ise the retu r n on their invested capital. Conversely, buyers (customers of
an industr y or an organisation) want to buy products at the lowest possible price – the point at which the
industr y earns the lowest acceptable rate of return on its invested capital. To reduce their costs, buyers
ba rga i n for h igher qua l it y, g reater levels of ser v ice a nd lower pr ices.107 These outcomes a re ach ieved
by encou raging competitive battles among the indust r y’s organisations. Customers ( buyer g roups) are
powerful when:

• they purchase a large por tion of an industr y’s total output
• t he sa les of t he product bei ng pu rchased accou nt for a sig n i fica nt por t ion of t he sel ler ’s a n nua l

revenues
• they could switch to another product at little, if any, cost

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• the industr y’s products are undifferentiated or standardised, and the buyers pose a credible threat if
they were to integrate backward into the sellers’ industr y.

Consumers armed with greater amounts of information about the manufacturer’s costs and the power of
the internet as a shopping and distribution alternative have increased bargaining power in many industries.
One reason for this shift is that individual buyers incur vir tually no switching costs when they decide to
purchase from one manufacturer rather than another, or from one dealer as opposed to any other.

Threat of substitute products
Substitute products are goods or ser vices from outside a given industr y that perform similar or the same
f unctions as a product that the indust r y produces. For example, as a sugar substitute, NutraSweet and
other sugar substitutes place an upper limit on sugar manufacturers’ prices; NutraSweet and sugar perform
the same function, though with different characteristics. Other product substitutes include email instead
of overnight mail deliver y, plastic containers rather than glass jars, and tea instead of coffee. Newspaper
organisations have experienced significant circulation declines over the past decade or more. The declines
are due to substitute outlets for news, including internet sources, cable television news channels, and email
and mobile phone alerts. Likewise, satellite television and cable and telecommunication companies provide
substitute ser vices for basic media ser vices such as television, the internet and the telephone. However,
the possible switching is becoming more complicated as consumer demand for content is changing through
increasing use of mobile devices, such as tablets and smar tphones.108

In general, product substitutes present a strong threat to an organisation when customers face few,
if any, sw itching costs and when the substitute product’s pr ice is lower or its quality and per for mance
capabilities are equal to or greater than those of the competing product. Differentiating a product along
dimensions that customers value (such as quality, service after the sale and location) reduces a substitute’s
attractiveness.

German performance/luxury cars: if you’ve seen
one, have you seen them all?

Audi, BmW and mercedes-Benz (mercedes) have long
competed against each other in the performance/
luxury segment of the car industry. Given that they
implement similar strategies in many of the same
markets throughout the world and emphasise similar
dimensions to do so, these organisations form a
strategic group. This means that the rivalry within
the group is more intense than is the rivalry between
members of this group and companies offering
products that are intended to functionally serve and
satisfy a mass-market appeal among large customer
groups. One could even argue that three sub-strategic
groups exist for these organisations in that each offers
products in the large, mid-size and small parts of
the performance/luxury segment. (Think of the Audi
S8 versus the BmW 7 series versus the S mercedes
series as products through which these organisations
compete against each other in terms of large
performance/luxury cars.)

The similarities among these organisations as they
compete are extensive. The Chinese and US markets
are critical to their success. With respect to China, an
analyst noted that ‘BmW, Audi and Daimler’s mercedes-
Benz units have benefited as China’s fast-growing
wealthy population has flocked to high-end cars in
recent years’. A new generation of younger, more eco-
minded and female consumers is driving innovation
in the luxury car industry. In response to this shift in
demand for their products, all three organisations are
investing billions of dollars to expand production and
their sales operations in China.

These organisations are emphasising similar
dimensions or product features to produce new
models as well as some existing ones. For example,
diesel engines are important to the companies and
their efforts to sell more cars in China and the USA. To
better serve the needs of younger consumers, all three
companies are ‘re-thinking everything from dashboard

Strategic focus | Globalisation

58 PART 1: STRATEGIC MANAGEMENT INPUTS

Intensity of rivalry among competitors
Because an industr y’s organisations are mutually dependent, actions taken by one organisation usually
inv ite competitive responses. In many industr ies, organisations actively compete against one another.
Competitive rivalr y intensifies when an organisation is challenged by a competitor’s actions or when a
company recognises an oppor tunity to improve its market position.

Organisations within industries are rarely homogeneous: they differ in resources and capabilities and
seek to differentiate themselves from competitors.109 Ty pically, organisations seek to differentiate their
products from competitors’ offerings in ways that customers value and in which the organisations have
a competitive advantage. Common dimensions on which rivalr y is based include price, ser vice after the
sale and innovation.

Ne x t, we d isc uss t he most prom i nent fac tors t hat e x per ience shows to a f fec t t he i ntensit y of
organisations’ rivalries.

Numerous or equally balanced competitors
Intense rivalries are common in industries with many companies. With multiple competitors, it is common
for a few organisations to believe they can act without eliciting a response. However, the evidence suggests
that other organisations generally are aware of competitors’ actions and often choose to respond to them. At
the other extreme, industries with only a few organisations of equivalent size and power also tend to have
strong rivalries. The large and often similar-sized resource bases of these organisations permit vigorous

entertainment systems to the relative importance of
mileage over horsepower to fundamental marketing
strategies’. An initial outcome from these evaluation
processes was a decision to include smartly presented,
smartphone-driven multimedia systems in models.

As is often the case with strategic groups, the
rivalry and strategic moves among Audi, BMW and
mercedes have remained stable over the years. As
such, we can anticipate that the rivalry among them
will remain intense as they rely on similar strategic
dimensions to implement similar strategies. yet there
is more rivalry to commence with other players in
the market, such as Jaguar with its E and F Pace, and
Tesla, to name a few. This industry also faces fresh
competition from manufacturers specialising in all-
electric cars that are encroaching in the sector; with
lower barriers to entry, electric cars appear easier to
design and build than traditional cars. As demographics
shift, car manufacturers are becoming nimbler and
taking greater risks to remain competitive. Chris Craft,
Bentley’s Head of Sales and marketing, noted that new
luxury car buyers won’t associate with brands they don’t
feel have their values. For example, in 2016 Rolls-Royce
launched its Black Badge range designed to appeal to
a hip-hop and clubbing culture, rather than to its cars’
traditional owners.

Globally, the age of luxury car buyers varies
dramatically. For example, in the EU, Japan and the
UK, typical luxury car purchasers will be in their 50s.
In California, the typical age is 35 and in China it
as young as 20. These fresh-faced customers bring
with them different demands, including the latest
technological innovations. In addition, regardless
of the gender of buyers, sales of high-end SUvs are
increasing. For example, 60 per cent of Lamborghini
sales in the first half of 2019 were the Urus SUv, and
the company reported that buyers were trading in
Range Rovers to purchase the Urus. Aston martin has
strategically forecast its upcoming DBx (an SUv) will
be a success.

Sources: P. Campbell, 2019, Luxury car makers are battling to
cater to the changing needs of the super-rich, Financial Times,

http://www.ft.com, 31 August; B. Laban, 2003, The Mini: Making
of a Modern Icon, Singapore: Collins; C. Carroll, 2013, Audi

plans to attract more U.S. buyers with diesels, Wall Street Journal,
http://www.wsj.com, 8 February; v. Fuhrmans, 2013, Europe bets U.S.

auto demand to stay high, Wall Street Journal, http://www.wsj.com,
16 January; v. Fuhrmans, 2013, German auto makers to shake up l
uxury market, Wall Street Journal, http://www.wsj.com, 14 January;

v. Fuhrmans & F. Geiger, 2013, vW to bolster its output in China,
Wall Street Journal, http://www.wsj.com, 14 march; F. Geiger, 2013,

Daimler boosts investment in China, Wall Street Journal,
http://www.wsj.com, 1 February; J. W. White, 2013,

Beyond boomer buyers: Car makers seek younger crop
of customers, Wall Street Journal, http://www.wsj.com, 16 January.

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actions and responses. The competitive battles between A irbus and Boeing mentioned earlier exemplify
intense rivalry between relatively equal competitors. Coca-Cola and PepsiCo have a strong rivalry in drink
products as consumers demand not only great taste but real health benefits.110

Slow industry growth
W hen a market is growing, organisations tr y to effectively use resources to ser ve an expanding customer
base. Grow i ng ma rkets reduce t he pressu re to ta ke customers f rom compet itors. However, r iva l r y i n
no-growth or slow-growth markets (slow change) becomes more intense as organisations battle to increase
their market shares by attracting competitors’ customers. For example, there is a growing trend globally of
competition in the health care of baby boomers, who are now aged 65 or older. Competition is also increasing
in in-home health care; however, as regulation becomes more prominent in this industry (e.g. resulting from
recommendations released in Febr uar y 2021 by Australia’s Royal Commission into Aged Care Quality and
Safety), grow th is likely to slow and rivalr y will increase.111

Ty pically, battles to protect market share are fierce. As indicated, this has been the case in the airline
industr y, as well as in the fast-food industr y as McDonald’s, Hungr y Jack’s and K FC tr y to win each other’s
customers, and in the highly competitive sports footwear segment between Nike, Adidas and Reebok. The
instability in markets that results from these competitive engagements may reduce the profitability for all
organisations engaging in such battles.

High fixed costs or high storage costs
W hen fi xed costs account for a large par t of total costs, organ isations t r y to ma x im ise the use of their
product ive capacity. Doing so allows an organ isat ion to spread costs across a la rger volu me of output.
However, when many organ isations attempt to ma x im ise t heir productive capacity, excess capacity is
created on a n i ndust r y-w ide basis. To t hen reduce i nventor ies, i nd iv idua l orga n isat ions t y pica lly cut
t he pr ice of t hei r products a nd offer rebates a nd ot her special d iscou nts to customers. However, t hese
practices, such as have been common in the car manufacturing industr y, often intensify competition. The
pattern of excess capacity at the industr y level, followed by intense rivalr y at the organisation level, is
obser ved frequently in industries with high storage costs. Perishable products, for example, rapidly lose
their value with the passage of time. As their inventories grow, producers of perishable goods often use
pricing strategies to sell products quickly.

Lack of differentiation or low switching costs
W hen buyers find a differentiated product that satisfies their needs, they frequently purchase the product
loyally over time. Industries with many companies that have successfully differentiated their products have
less rivalr y, resulting in lower competition for individual organisations. Organisations that develop and
sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns.
However, when buyers v iew products as commod ities (i.e. as products w ith few d ifferentiated features
or capabilities), rivalr y intensifies. In these instances, buyers’ purchasing decisions are based primarily
on price and, to a lesser degree, ser vice. Personal computers are a commodity product. Thus, the rivalr y
between Dell, Hewlett-Packard, Lenovo and other computer manufacturers is strong and these companies
are always trying to find ways to differentiate their offerings (Hewlett-Packard now pursues product design
as a means of differentiation). Apple has been able to maintain a differentiation strateg y through ease of
use of its superb brand, products, software applications and integration capabilities with other software
platforms.

High strategic stakes
Competitive rivalr y is likely to be high when it is impor tant for several of the competitors to perform well
in the market. For example, although it is diversified and is a market leader in other businesses, Samsung
has targeted market leadership in the consumer electronics market and is doing quite well. This market

60 PART 1: STRATEGIC MANAGEMENT INPUTS

is also impor tant to Sony and other major competitors, such as Hitachi, Matsushita, NEC and Mitsubishi,
suggesting that rivalr y among these competitors will remain strong.

High strategic stakes can also exist in terms of geographic locations. For example, Japanese automobile
manufactu rers a re com m itted to a sig n i ficant presence in t he US ma rketplace because it is t he world’s
largest single market for cars and trucks. Due to the high stakes involved in the USA for both Japanese and
US manufacturers, rivalr y among the global organisations from these two countries is intense. With the
excess capacity in this industr y we mentioned earlier in this chapter, there is ever y reason to believe that
the rivalr y among global car manufacturers will remain intense in the foreseeable future.

High exit barriers
Sometimes companies continue competing in an industry even though the returns on their invested capital
are low or negative. Organisations making this choice likely face high exit barriers, which include economic,
strategic and emotional factors that cause them to remain in an industr y when the profitability of doing
so is questionable. Exit barriers are especially high in the airline industr y. A lthough earning even average
returns is difficult for these organisations, they face substantial exit bar riers, such as their ownership of
specialised assets (e.g. large aircraft).112 Common exit bar riers include the following:

• specialised assets (assets with values linked to a par ticular business or location)
• fi xed costs of exit (such as labour agreements)
• strategic interrelationships (relationships of mutual dependence, such as those between one business

and other parts of a company’s operations, including shared facilities and access to financial markets)
• emotional bar r iers (aversion to economically justified business decisions because of fear for one’s

own career, loyalty to employees and so for th)
• government and social restrictions (often based on government concerns for job losses and regional

economic effects).

Interpreting industry analyses
Effective industr y analyses are products of careful study and inter pretation of data and information from
multiple sources. A wealth of industr y-specific data is available to be analysed by individual companies
and, because of globalisation, international markets and rivalries must be included in the organisation’s
analyses. Research shows that in some industries, international variables are more important than domestic
ones as deter minants of st rategic competitiveness. Fur ther more, because of the development of global
markets, a countr y’s borders no longer restrict industr y str uctures. In fact, movement into international
markets enhances the chances of success for new ventures as well as more established organisations.113

A na lysis of t he five forces i n t he i ndust r y a l lows t he orga n isat ion to deter m i ne t he i ndust r y ’s
att ract iveness i n ter ms of t he potent ia l to ea r n adequate or super ior retu r ns. In general, t he st ronger
competitive forces are, the lower the profit potential is for an industr y’s organisations. A n unattractive
industry has low entry barriers, suppliers and buyers with strong bargaining positions, strong competitive
threats from product substitutes and intense rivalr y among competitors. These industr y characteristics
make it difficult for organisations to achieve strategic competitiveness and earn above-average returns.
Conversely, an att ractive indust r y has high ent r y bar r iers, suppliers and buyers w ith little bargaining
power, few competitive threats from product substitutes and relatively moderate rivalry.114 Next, we explain
strategic groups as an aspect of industr y competition.

Strategic groups
A set of organisations that emphasise similar strategic dimensions and use a similar strategy is called a
strategic group.115 For example, the budget airline group in the Australian domestic airline industry includes

strategic group
a set of organisations
that emphasise similar
strategic dimensions
and use a similar
strategy

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Virgin Australia and Jetstar. It does not include Qantas. The competition between organisations within
a strategic group is greater than the competition between a member of a strategic group and companies
outside that strategic group. Therefore, intra-strategic group competition is more intense than is inter-
strategic group competition. In fact, more heterogeneity is evident in the performance of organisations
within strategic groups than across the groups. The performance leaders within groups are able to follow
strategies similar to those of other organisations in the group and yet maintain strategic distinctiveness to
gain and sustain a competitive advantage.116

The ex tent of tech nolog ical leadersh ip, product quality, pr icing policies, d ist r ibut ion chan nels and
customer ser vice are examples of strategic dimensions that organisations in a strategic group may treat
sim ilarly. Thus, membersh ip in a par ticular st rategic g roup defi nes the essential character istics of the
organisation’s strateg y.117

The notion of strategic groups can be useful for analysing an industr y’s competitive str ucture. Such
analyses can be helpful in diagnosing competition, positioning and the profitability of organisations within
an industr y.118 High mobility bar riers, high rivalr y and low resources among the organisations within an
industry limit the formation of strategic groups.119 Research suggests that after strategic groups are formed,
their membersh ip remains relatively stable over time, although some research has also exam ined how
change occurs.120 Using strategic groups to understand an industr y’s competitive str ucture requires the
organisation to plot companies’ competitive actions and competitive responses along strategic dimensions
such as pricing decisions, product quality, distribution channels and so for th. This ty pe of analysis shows
the organisation how certain companies are competing similarly in terms of how they use similar strategic
dimensions.

Strategic groups have several implications. First, because organisations within a group offer similar
products to the same customers, the competitive rivalr y among them can be intense. The more intense
the rivalr y, the greater the threat is to each organisation’s profitability. Second, the strengths of the five
industr y forces differ across strategic groups. Third, the closer the strategic groups are in terms of their
strategies, the greater is the likelihood of rivalr y between the groups.

Competitor analysis
The competitor env iron ment is the fi nal par t of t he exter nal env iron ment requir ing study. Competitor
analysis focuses on each company against which an organisation directly competes. For example, Coca-Cola
and PepsiCo, Woolwor ths and Coles, and Boeing and A irbus are keenly interested in understanding each
other’s objectives, strategies, assumptions and capabilities. Indeed, intense rivalr y creates a strong need
to understand competitors.121 In a competitor analysis, the organisation seeks to understand the following:

• what drives the competitor, as shown by its future objectives
• what the competitor is doing and can do, as revealed by its cur rent strateg y
• what the competitor believes about the industr y, as shown by its assumptions
• what the competitor’s capabilities are, as shown by its strengths and weaknesses.122

Information about these four dimensions assists the organisation to prepare an anticipated response
profi le for each compet itor (see Fig u re 2.5). T he resu lts of a n effect ive compet itor a na lysis help a n
organisation to understand, inter pret and predict its competitors’ actions and responses. Understanding
the actions of competitors clearly contributes to the organisation’s ability to compete successfully within
the industr y.123 Interestingly, research suggests that executives often fail to analyse competitors’ possible
react ions to compet it ive act ions t hei r orga n isat ion ta kes,12 4 placi ng t hei r orga n isat ion at a potent ia l
competitive disadvantage as a result.

Cr it ica l to a n effect ive compet itor a na lysis is gat her i ng data a nd i n for mat ion t hat ca n help t he
organisation understand its competitors’ intentions and the strategic implications resulting from them.125

62 PART 1: STRATEGIC MANAGEMENT INPUTS

Competitor analysis components

Response
• What will our competitors do in
the future?
• Where do we hold an advantage
over our competitors?
• How will this change our relationship
with our competitors?

Future objectives
• How do our goals compare with our
competitors’ goals?
• Where will emphasis be placed in the
future?
• What is the attitude towards risk?

Current strategy
• How are we currently competing?
• Does this strategy support changes in
the competitive structure?

Assumptions
• Do we assume the future will be volatile?
• Are we operating under a status quo?
• What assumptions do our competitors
hold about the industry and themselves?

Capabilities
• What are our strengths and weaknesses?
• How do we rate compared to our
competitors?

Figure 2.5

Usef ul data and infor mation combine to for m competitor intelligence, t he set of data and infor mation
t he orga n isat ion gat hers to bet ter u ndersta nd a nd a nt ic ipate compet itors’ objec t ives, st rateg ies,
assumptions and capabilities. In competitor analysis, the organisation gathers intelligence not only about
its competitors but also regarding public policies in countries around the world. Such intelligence facilitates
an understanding of the strategic posture of foreign competitors. Through effective competitive and public
policy intelligence, the organisation gains the insights needed to make effective strategic decisions on how
to compete against its rivals.

When asked to describe competitive intelligence, it seems that a number of people respond with phrases
such as ‘competitive spy ing’ and ‘cor porate espionage’. These ph rases denote the fact that competitive
intelligence is an activity that appears to involve trade-offs.126 According to some, the reason for this is that
‘what is ethical in one country is different from what is ethical in other countries’. This position implies that
the rules of engagement to follow when gathering competitive intelligence change in different contexts.127
However, organisations avoid the possibility of legal entanglements and ethical quandaries only when their
competitive intelligence gathering methods are governed by a strict set of legal and ethical guidelines.128
This means that ethical behaviour and actions, as well as the mandates of relevant laws and regulations,
should be the foundation on which an organisation’s competitive intelligence-gathering process is formed.
We address this matter in greater detail in the next section.

W hen gathering competitive intelligence, organisations must also pay attention to the complementors
of its produc ts a nd st rateg y.12 9 Complementors a re compa n ies or net work s of compa n ies t hat sel l
complementar y goods or ser vices that are compatible with the focal organisation’s good or ser vice. W hen
a complementor’s good or service adds value to the sale of the focal organisation’s good or service, it is likely
to create value for the focal organisation.

competitor
intelligence
the set of data and
information the
organisation gathers
to better understand
and better anticipate
competitors’
objectives, strategies,
assumptions and
capabilities

complementors
companies or
networks of
companies that sell
complementary goods
or services that are
compatible with the
focal organisation’s
good or service

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T here a re ma ny exa mples of orga n isat ions whose good or ser v ice complements ot her compa n ies’
of fer i ngs. For e xa mple, orga n isat ion s ma nu fac t u r i ng a f fordable home photo pr i nters complement
ot her compa n ies’ ef for ts to sel l d ig ita l ca meras. I ntel a nd M ic rosof t a re perhaps t he most w idely
recog n ised complementors. The M icrosof t slogan ‘Intel Inside’ demonst rates t he relat ionsh ip between
two organisations that do not d irectly buy from or sell to each other but whose products have a strong
complementar y relationship. A lliances among airline operations (e.g. the Star A lliance and the SkyTeam
A lliance) find these companies sharing their route str uctures and customer loyalty programs as a means
of complementing each other’s operations – each alliance is a network of complementors.

As our discussion shows, complementors expand the set of competitors organisations must evaluate
when completing a competitor analysis. For example, sometimes complementors change, as in the purchase
of Sun Microsystems by Oracle. A fter the acquisition, Oracle was no longer a complementor of Dell and HP
but a competitor. Similarly, Intel and Microsoft analyse each other’s actions in that those actions might
either help each organisation gain a competitive advantage or damage each organisation’s ability to exploit
a competitive advantage.

Ethical considerations
Organisations must follow relevant laws and regulations as well as carefully articulated ethical guidelines
when gathering competitor intelligence. Industr y associations often develop lists of these practices that
organisations can adopt. Practices considered both legal and ethical include: obtaining publicly available
infor mation (e.g. cour t records, competitors’ help-wanted adver tisements, annual repor ts and fi nancial
reports of publicly held corporations); and attending trade fairs and shows to obtain competitors’ brochures,
view their exhibits and listen to discussions about their products. By contrast, certain practices (including
blackmail, trespassing, hawking, eavesdropping, and stealing drawings, samples or documents) are widely
viewed as unethical and often are illegal.

Some competitor intelligence practices may be legal, although an organisation must decide whether
they are also ethical, given the image it desires as a corporate citizen (which is generally achieved through
its own cor porate social responsibility policies and procedures). Especially with electronic transmissions,
the line between legal and ethical practices can be difficult to deter mine. For example, an organisation
may develop website addresses that are similar to those of its competitors and thus occasionally receive
email transmissions that were intended for those competitors. This shows the challenges companies face in
deciding how to gather intelligence about competitors, while simultaneously determining how to prevent
compet itors f rom lea r n i ng too much about t hem. To dea l w it h t hese cha llenges, orga n isat ions shou ld
establish principles and take actions that are consistent with them.

Open d iscussions of i ntel l igence-gat her i ng tech n iques may assist a n orga n isat ion to ensu re t hat
employees, customers, suppl iers a nd even potent ia l compet itors u ndersta nd its conv ict ion to fol low
ethical practices for gathering competitor intelligence. An appropriate guideline for competitor intelligence
practices is to respect the principles of common morality and the right of competitors not to reveal cer tain
information about their products, operations and strategic intentions.130

64 PART 1: STRATEGIC MANAGEMENT INPUTS

STUDy TOOLS
SUMMARY
LO1 The organisation’s external environment is challenging

and complex. The external environment has three
major parts: the general environment (elements in
the broader society that affect industries and their
organisations), the industry environment (factors that
influence an organisation, its competitive actions and
responses, and the industry’s profit potential) and the
competitor environment (in which the organisation
analyses each major competitor’s future objectives,
current strategies, assumptions and capabilities).

LO2 The external environmental analysis process has four
steps: scanning, monitoring, forecasting and assessing.
Through environmental analyses, the organisation
identifies opportunities and threats.

LO3 The general environment has seven segments:
demographic, economic, political/legal, sociocultural,
technological, global and physical. For each segment,
the organisation has to determine the strategic
relevance of environmental changes and trends.

LO4 Compared with the general environment, the
industry environment has a more direct effect on
the organisation’s strategic actions. The five forces

model of competition comprises the threat of
entry, the power of suppliers, the power of buyers,
product substitutes and the intensity of rivalry
among competitors. By studying these forces, the
organisation can find a position in an industry where
it can influence the forces in its favour or where it can
buffer itself against the power of the forces in order
to achieve strategic competitiveness and earn above-
average returns.

LO5 Industries are populated with different strategic
groups. A strategic group is a collection of
organisations following similar strategies along similar
dimensions. Competitive rivalry is greater within a
strategic group than between strategic groups.

LO6 Competitor analysis focuses on each company against
which an organisation directly competes. Critical to
an effective competitor analysis is gathering data and
information that can help the organisation understand
its competitors’ intentions and the strategic implications
resulting from them. Organisations must follow
mandatory laws and regulations as well as ethical
guidelines when gathering competitor intelligence.

KEY TERMS
competitor intelligence

complementors

demographic segment

economic environment

general environment

global segment

industry

industry environment

opportunity

physical environment
segment

political/legal segment

sociocultural segment

strategic group

technological segment

threat

REVIEW QUESTIONS
1. Why is it important for an organisation to study and

understand the external environment?

2. What are the differences between the general
environment and the industry environment? Why are
these differences important?

3. What are the four steps in the external environmental
analysis process? What does the organisation want to
learn when using this process?

4. What are the seven segments of the general
environment? Explain the differences among them. Is
any segment more important than another?

5. How do the five forces of competition in an industry
affect its profit potential? Explain.

6. What is the importance of collecting and interpreting
data and information about competitors? What practices
should an organisation use to gather competitor
intelligence, and why?

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65

EXPERIENTIAL EXERCISES

Exercise 1: Strategic group mapping
If a given set of organisations emphasise similar strategic
dimensions and use a similar strategy, these organisations
can be said to reside in the same strategic group. Other
common definitions of strategic groups typically argue
that the organisations in a given industry follow similar
strategies, such as pricing, degree of specialisation, research
and development commitment and the like. It is also likely
that organisations operating in a given industry may have
very different profitability profiles, which raises the question:
if one organisation is the most profitable, why don’t all
the others in that industry attempt to move into the same
strategic group as the industry leader?

Part 1
1. Form teams and pick an industry the team finds

interesting. A list of industries and industry leaders may
be found at yahoo! Finance (http://biz.yahoo.com/ic/
ind_index.html).

2. Investigate this industry in order to create a strategic
group map. you must pick the two dimensions for your
map that best represent the key success factors in this
industry (e.g. R&D investments, pricing, geographic reach).

3. For each organisation listed on your map, investigate its
overall financial performance, not only historically, but
also its five-year growth forecast. (This information is
also available at yahoo! Finance and other locations.)

Part 2
Prepare a presentation to the class that discusses your
findings and answers the following key issues or questions:
1. Who are the most direct competitors and on what basis

do they mostly compete? That is, why did you choose
the competitive dimensions that you did?

2. How does profitability stack up between strategic
groups? Which groups are most profitable, and why?

3. What would it take for an organisation to move from
an underperforming (in terms of profitability) strategic
group to a more profitable strategic group? How likely is
it that this could happen?

4. Think about one of the organisations in a particular
strategic group. Are there any opportunities for this
organisation that you see because of your strategic
group mapping?

5. What conclusions can you reach about why some
organisations end up where they do among various
strategic groups?

Exercise 2: What does the future look like?
A critical ingredient in studying the general environment
is identifying opportunities and threats. An opportunity is
a condition in the environment that, if exploited, helps a
company to achieve strategic competitiveness. In order to
identify opportunities, you must be aware of trends that
affect the world around us now or that are projected to do
so in the future.

Thomas Fry, senior futurist at the Davinci Institute,
believes that the chaotic nature of interconnecting trends
and the vast array of possibilities that arise from them are
somewhat akin to watching a spinning compass needle.
From the way we use phones and email and recruit new
workers to organisations, the climate for business is
changing and shifting dramatically, and at rapidly increasing
rates. Sorting out these trends and making sense of them
provides the basis for opportunity decision making. Which
ones will dominate and which ones will fade? Understanding
this is crucial for business success.

your challenge (either individually or as a group) is to
identify a trend, technology, entertainment or design that is
likely to alter the way in which business is conducted in the
future. Once you have identified this, be prepared to discuss
which of the six dimensions of the general environment this
will affect. (There may be more than one.)
• Describe the impact.

• List some business opportunities that will come from
this.

• Identify some existing organisations that stand to
benefit.

• What, if any, are the ethical implications?

you should consult a wide variety of sources. For
example, the Gartner Group and mcKinsey & Co. both
produce market research and forecasts for business. There
is also a host of web forecasting tools and addresses.
These include TED (see http://www.ted.com for videos of its
discussions), which hosts an annual conference for path-
breaking new ideas. Similarly, the Davinci Institute, Institute
for Global Futures and a wide range of others have their own
unique visions of tomorrow’s environment.

66 PART 1: STRATEGIC MANAGEMENT INPUTS

NOTES
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67

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69

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71

3 The internal organisation: resources, capabilities, core competencies and
competitive advantages

CH
AP

TE
R

Studying this chapter should provide you with the strategic management knowledge
needed to:
LO1 explain why organisations need to study and understand their internal

organisation
LO2 define value and discuss its importance
LO3 describe the differences between tangible and intangible resources
LO4 define capabilities and discuss their development
LO5 describe four criteria of sustainable competitive advantage used to determine

whether resources and capabilities are core competencies
LO6 explain how organisations analyse the support functions and activities of the

value chain for determining where they can create value for customers.

Learning Objectives

72

To date, and perhaps surprisingly, the idea of using
data strategically remains somewhat novel in some
organisations. However, the reality of ‘big data’ and ‘big
data analytics’ (which is ‘the process of examining big
data to uncover hidden patterns, unknown correlations,
and other useful information that can be used to make
better decisions’) is becoming increasingly popular in
business. Indeed, in the current competitive landscape,
most businesses must use big data analytics (BDA) across
all customer channels (mobile, web, email and physical
stores) throughout their supply chain to help them
become more innovative.

This is the situation for large pharmaceutical
companies (the organisations often called ‘big pharma’)
in that many have been working to develop a core
competence in BDA. (We define and discuss core
competencies in this chapter.) There are several reasons
they are doing this. In addition to the vast increases
in the amounts of data that must be studied and
interpreted for competitive purposes, ‘health care reform
and the changing landscape of health care delivery’
systems throughout the world are influencing these
organisations to think about developing BDA as a core
competence. Many benefits can accrue to big pharma

organisations that develop BDA as a core competence.
For example, having BDA as a core competence can
help an organisation quickly identify trial candidates and
accelerate its recruitment, develop improved inclusion
and exclusion criteria to use in clinical trials, and uncover
unintended uses and indications for products. In terms
of customer functionality, superior products can be
provided at a faster pace as a foundation for helping
patients live better and healthier lives. In developing their
BDA capabilities, many of the big pharma companies
are investing in artificial intelligence (AI). AI provides the
capability to analyse many different sets of information.
For example, AI can help analyse data on clinical trials,
health records, genetic profiles and preclinical studies. AI
can analyse and integrate these data to identify patterns
in the data and suggest hypotheses about relationships.
A new drug generally requires a decade of research and
$2.6 billion of investment. And only about 5 per cent of
the drugs that enter experimental research make it to
the market and are successful. Eventually, it is expected
that the use of AI could reduce the early research
development time from four to six years to one year, not
only greatly reducing the time of development but also
the costs.

As we discuss in this chapter, capabilities are the
foundation for developing core competencies. There
are several capabilities big pharma companies need for
BDA to be a core competence. Supportive architecture,
the proper mix of data scientists, and ‘technology that
integrates and manages new types and sources of data
flexibility and scalability while maintaining the highest
standards of data governance, data quality, and data
security’ are examples of capabilities that big pharma
need if they wish to develop BDA as a core competence.
Of course, using artificial intelligence provides strong
support for the application of BDA.

Having a strong BDA competence could be critical for
pharmaceutical organisations in the future. Most Chinese
pharmaceutical companies are medium-sized and sell
generic drugs and therapeutic medicines, investing in
R&D at only about 25 per cent of the amount invested
by big pharma in developed countries. However, China

Large pharmaceutical companies, big data analytics, artificial
intelligence and core competencies: a brave new world

OPENING CASE STUDY

AI can help analyse data on clinical trials, health records,
genetic profiles and preclinical studies. China has a goal to
become the world leader in AI.

Source: Shutterstock.com/Creativa Images

73CHAPTER 3
THE INTERNAL ORGANISATION: RESOURCES, CAPABILITIES, CORE COMPETENCIES AND COMPETITIVE ADVANTAGES

has a plan to develop large, competitive pharmaceutical
organisations by 2025. In 2017, for example, China’s
second-largest class of investments was biopharma.
Interestingly, the largest Chinese investment that year
was in information systems, including AI. China has a goal
to become the world leader in AI.

In recent years, big pharma has been earning mediocre
returns of about 3 per cent ROI, down from 10 per cent a
decade earlier. Thus, big pharma executives feel pressure,
especially with the initial costs of developing BDA and
AI. They hope soon to be able to reduce their costs and
experience higher rates of success in the development of
new drugs. Until then, however, analysts are predicting
record numbers of mergers and acquisitions in the
pharmaceutical industry, with big pharma acquiring

successful medium-sized pharmaceuticals and
biotechnology businesses.

Sources: S. Mukherjee, 2018, How big pharma is using AI to make
better drugs, Fortune, http://fortune.com, 19 March; Z. Torrey, 2018,

China prepares for big pharma, http://thediplomat.com, 14 March; E.
Corbett, 2018, European mid-sized pharma companies-biotechs and big

pharma? The Pharmaletter, http://www.thepharmaletter.com, 9 March; M.
Jewel, 2018, Signs that 2018 will be a record year for pharma M&A, The

Pharmaletter, http://www.thepharmaletter.com, 1 March; B. Nelson, 2018,
Why big pharma and biotech are betting big on AI, NBC News, http://www.

nbc.news, 1 March; Big data analytics: What it is & why it matters, 2015,
SAS, http://www.sas.com, 2 April; Big data for the pharmaceutical industry,

Informatica, http://www.informatica.com, 17 March; B. Atkins, 2015, Big
data and the board, Wall Street Journal Online, http://www.wsj.com, 16

April; S. F. DeAngelis, 2014, Pharmaceutical big data analytics promises
a healthier future, Enterrasolutions, http://www.enterrasolutions.com, 5
June; T. Wolfram, 2014, Data analytics has big pharma rethinking its core

competencies, Forbes Online, http://www.forbes.com, 22 December.

As discussed in the first two chapters, several factors in the global economy, including the rapid
development of the internet’s capabilities1 and globalisation in general, have made it increasingly difficult
for organisations to find ways to develop sustainable competitive advantages.2 Increasingly, innovation
appears to be a vital path to efforts to develop competitive advantages, particularly sustainable ones.
Innovative actions are required by big pharma companies, and they need to develop new drugs more quickly
and at lower costs while improving the success of the drugs that they develop. As the opening case shows,
they are tr ying to use A I to help develop capabilities in big data analy tics that hopefully can become core
competencies.

As is the case for big pharma companies, innovation is critical to most organisations’ success. This
means that many organisations seek to develop innovation as a core competence. We define and discuss
core competencies in this chapter and explain how organisations use their resources and capabilities to
form them. As a core competence, innovation has long been critical to Boeing’s success, for example. Today,
however, the organisation is focusing on incremental innovations as well as developing new technologies
that are linked to major innovations and the projects they spawn, such as the 787 Dreamliner. The first
delivery of the 787-10 Dreamliner was made to Singapore Airlines on 26 March 2018. Boeing believes its
incremental innovations enable the organisation to deliver reliable products to customers more quickly
and at a lower cost. 3

To identify and successfully use resources over time, leading organisations need to think constantly about
how to manage resources for the purpose of increasing the value their goods or services create for customers,
as compared with the value rivals’ products create. As this chapter shows, organisations achieve strategic
competitiveness and earn above-average returns by acquiring, bundling and leveraging their resources for
the purpose of taking advantage of opportunities in the external environment in ways that create value for
customers.4

Even if t he orga n isat ion develops a nd ma nages resou rces i n ways t hat create core competencies
and competitive advantages, competitors will eventually learn how to duplicate the benefits of any
organisation’s value-creating strategy; thus, all competitive advantages have a limited life.5 Because of
this, the question of duplication of a competitive advantage is not if it will happen, but when. In general,
a compet it ive adva ntage’s susta i nabi l it y is a f u nct ion of t h ree factors: t he rate of core competence
obsolescence because of environmental changes; the availability of substitutes for the core competence;
and the imitability of the core competence.6 For all organisations, the challenge is to effectively manage
current core competencies while simultaneously developing new ones.7 Only when organisations are able

value
measured by a
product’s performance
characteristics and by
its attributes for which
customers are willing
to pay

74 PART 1: STRATEGIC MANAGEMENT INPUTS

to do this can they expect to achieve strategic competitiveness, earn above-average returns and remain
ahead of competitors (see Chapter 5).

We studied the general, industry and competitor environments in Chapter 2. Armed with knowledge
about the realities and conditions of their external environment, organisations have a better understanding
of ma rketplace oppor tu n it ies a nd t he cha racter ist ics of t he compet it ive env i ron ment i n wh ich t hose
opportunities exist. In this chapter, we focus on the organisation itself. By analysing its internal
organisation, an organisation determines what it can do. Matching what an organisation can do (a function
of its resources, capabilities and core competencies in the internal organisation) with what it might do (a
function of oppor tunities and threats in the external environment) is a process that yields insights the
organisation requires to select its strategies.

We begin this chapter by briefly describing conditions associated with analysing the organisation’s
i nter na l orga n isat ion. We t hen d isc uss t he roles of resou rces a nd capabi l it ies i n developi ng core
competencies, which are the sources of the organisation’s competitive advantages. Included in this
discussion are the techniques organisations use to identify and evaluate resources and capabilities, and
the criteria for identifying core competencies from among them. Resources by themselves ty pically are
not competitive advantages; in fact, resources create value when the organisation uses them to form
capabilities, some of which become core competencies, and hopefully competitive advantages. Because of
the relationship among resources, capabilities and core competencies, we also discuss the value chain and
examine four criteria that organisations use to determine if their capabilities are core competencies and, as
such, sources of competitive advantage.8 The chapter closes with cautionary comments about outsourcing
and the need for organisations to prevent their core competencies from becoming core rigidities. The
existence of core rigidities indicates that the organisation is too anchored to its past, which prevents it
from continuously developing new capabilities and core competencies.

Analysing the internal organisation
The context of internal analysis
One of the conditions associated with analysing the internal organisation is the reality that, in today’s global
economy, some of the resources that were traditionally critical to organisations’ efforts to produce, sell and
distribute their goods or services – such as labour costs, access to financial resources and raw materials, and
protected or regulated markets – are still important; however, it is now less likely that these resources will
become core competencies and possibly competitive advantages.9 An important reason for this is that an
increasing number of organisations are using their resources to form core competencies through which they
successfully implement an international strategy (discussed in Chapter 8) as a means of overcoming the
advantages created by these more traditional resources.

The Volkswagen Group has established a ‘Together 2025 + Group Strategy’, replacing its ‘Strategy 2018’
as its international strategy. This organisation sells its products in over 150 countries, employs (including
its Chinese joint venture) around 667 748 people worldwide to operate over 60 production plants located
in 15 countries. In 2019, the Volkswagen Group delivered close to 11 million vehicles to customers, which
exceeded the previous year’s figures by 1.3 per cent and set a new organisational record.10

Increasingly, those analysing their organisation’s internal organisation use a global mindset to do so. A
global mindset is the ability to analyse, understand and manage an internal organisation in ways that are
not dependent on the assumptions of a single country, culture or context.11 Because they are able to span
artificial boundaries, those with a global mindset recognise that their organisations must possess resources
and capabilities that allow understanding of, and appropriate responses to, competitive situations that are
influenced by country-specific factors and unique cultures. Using a global mindset to analyse the internal
organisation has the potential to significantly help the organisation in its efforts to outperform rivals.12

outsourcing
the purchase of a
value-creating activity
from an external
supplier

global mindset
the ability to study an
internal environment
in ways that are not
dependent on the
assumptions of a
single country, culture
or context

75CHAPTER 3
THE INTERNAL ORGANISATION: RESOURCES, CAPABILITIES, CORE COMPETENCIES AND COMPETITIVE ADVANTAGES

Finally, analysing internal organisation requires that evaluators examine
the organisation’s entire portfolio of resources and capabilities. This
perspect ive suggests t hat i nd iv idua l orga n isat ions possess at least some
resources and capabilities that other companies do not – at least not in the same
combination. Resources are the source of capabilities, some of which lead to the
development of core competencies; in turn, some core competencies may lead to
a competitive advantage for the organisation.13 Understanding how to leverage
the organisation’s unique bundle of resources and capabilities is a key outcome
decision makers seek when analysing the internal organisation.14 Figure 3.1
illustrates the relationships among resources, capabilities, core competencies
and competitive advantages, and shows how their integrated use can lead to
strategic competitiveness. As we discuss next, organisations use the assets
in their internal organisation to create value for customers.

Creating value
Organ isations use t heir resou rces as t he fou ndation for producing goods or
ser vices that will create value for customers.15 Organisations create value by
innovatively bundling and leveraging their resources to form capabilities and
core competencies.16

O rga n isat ion s w it h a compet it ive adva ntage c reate more va lue for
customers than do their competitors.17 Big W, Kmart and Target have used their
‘everyday low price’ approach to doing business (an approach that is grounded
in the organisations’ core competencies, such as lower priced products and

d ist r ibut ion cha n nels) to create value for t hose seek ing to buy products at a low pr ice compa red w it h
competitors’ prices for those products.18 Australian mattress manufacturer Koala creates value for customers

This Volkswagen technician is one of nearly 700 000
people Volkswagen employs to operate its 62
production plants located in 15 European countries
and China by way of a joint venture.

Source: Alamy Stock Photo/dpa picture alliance

Resources
• Tangible
• Intangible

• Valuable
• Rare
• Costly to imitate
• Non-substitutable

• Outsource

Capabilities

Core
competencies

Competitive
advantage

Strategic
competitiveness

Discovering
core

competencies

Four criteria
of sustainable

advantage

Value chain
analysis

Figure 3.1 Components of an internal analysis

76 PART 1: STRATEGIC MANAGEMENT INPUTS

interested in buying what the organisation promotes as ‘a better sleep starts with Koala’ and is now rated
as Australia’s highest-rated mattress brand. The organisation has diversified its single product range of
selling mattresses to making furniture for the digital age. Koala states that it has replaced negative and
unattractive industry practices, such as overpricing and showrooms, with a complete experience from high-
tech design through to instant deliver y. Combining furniture with the internet is likely to prove a source
of competitive advantage for Koala into the future.19 The stronger such organisations’ core competencies,
the greater the amount of value they are able to create for their customers.20

Ultimately, creating value for customers is the source of above-average returns for an organisation.
What the organisation intends regarding value creation affects its choice of business-level strategy (see
Chapter 4) and its organisational structure (see Chapter 11).21 In the discussion of business-level strategies
in Chapter 4, we note that value is created by a product’s low cost, by its highly differentiated features or
by a combination of low cost and high differentiation, compared with competitors’ offerings. A business-
level strategy is effective only when it is grounded in exploiting the organisation’s capabilities and core
competencies. Thus, the successful organisation continuously examines the effectiveness of current
capabilities and core competencies while thinking about the capabilities and competencies it will require
for future success.22

At one time, the organisation’s efforts to create value were largely oriented to understanding the
characteristics of the industry in which it competed and, in light of those characteristics, determining
how it should be positioned relative to competitors. This emphasis on industry characteristics and
competitive strategy underestimated the role of the organisation’s resources and capabilities in developing
core competencies as the source of competitive advantages. In fact, core competencies, in combination
with product-market positions, are the organisation’s most important sources of competitive advantage.23
An organisation’s core competencies, integrated with an understanding of the results of studying the
conditions in the external environment, should drive the selection of strategies.24 As Clay ton Christensen
noted, ‘Successful strategists need to cultivate a deep understanding of the processes of competition and
progress and of the factors that undergird each advantage. Only thus w ill they be able to see when old
advantages are poised to disappear and how new advantages can be built in their stead’.25 By emphasising
core competencies when selecting and implementing strategies, companies learn to compete primarily
on the basis of organisation-specific differences. However, while doing so, they must be simultaneously
aware of how things are changing in the exter nal env iron ment.26

The challenge of analysing the internal organisation
The strategic decisions managers make about their organisation’s internal organisation are non-routine,27
have ethical implications28 and significantly influence the organisation’s ability to earn above-average
returns. 29 These decisions involve choices about the resources the organisation needs to collect and how
to best manage them.

Making decisions involving the organisation’s assets – identifying, developing, deploying and protecting
resources, capabilities and core competencies – may appear to be relatively easy. However, this task is as
challenging and difficult as any other with which managers are involved; moreover, it is a task that is being
increasingly inter nationalised.30 Some believe t hat t he pressu re on managers to pu rsue on ly decisions
that assist the organisation meet the quarterly earnings expected by market analysts makes it difficult to
accurately examine the organisation’s internal organisation. 31

The challenge and difficulty of making effective decisions is implied by preliminary evidence suggesting
that one-half of organisational decisions fail.32 Sometimes, mistakes are made as the organisation analyses
conditions in its internal organisation.33 Managers might, for example, think a capability is a core competence
when it is not. This may have been the case at Polaroid Corporation when decision makers continued to believe
that the capabilities it used to build its instant film cameras were highly relevant at the time its competitors were
developing and using the capabilities required to introduce digital cameras. In this instance, Polaroid’s decision
makers may have concluded that superior manufacturing was a core competence, as was the organisation’s

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ability to innovate in terms of creating value-adding features for its instant cameras. If
a mistake is made when analysing and managing an organisation’s resources, such as
appears to have been the case at Polaroid, decision makers must have the confidence to
admit it and take corrective actions.34

An organisation may improve by studying its mistakes; in fact, the learning
generated by making and correcting mistakes can be important to efforts to create new
capabilities and core competencies. 35 A study by the Australian Centre for Business
Growth, which examined the failure of Australian business leaders, linked lack of
leadership and management, lack of planning and execution as the key reasons.36

As we discuss next, three conditions – uncertainty, complexity and intra-
organisational conflict – affect managers as they analyse the internal organisation and
make decisions about resources (see Figure 3.2).37

Managers face uncertainty because of a number of issues, including those of new
proprietary technologies, rapidly changing economic environments such as those
experienced during the Covid-19 pandemic, and political trends, transformations
in societal values and sh if ts in customers’ demands.38 Env i ron mental u ncer tainty
increases the complexity and range of issues to examine when studying the internal
environment.39 For example, consider the way uncertainty affects how to use resources
at Peabody.

Peabody is the world’s largest private-sector coal company listed on the New York
Stock Exchange. The organisation’s coal products fuel approximately 11 per cent of
all US electricity generation and 2 per cent of worldwide electricity. It conducts its

operations in both the USA and Australia and has over 6600 employees across its global operations. Its
mission is to create superior value for shareholders as the leading global supplier of coal to enable economic
prosperity and a better quality of life. However, in 2011, the organisation faced a loss in market share to
companies operating cost-efficient surface mining operations. Today it still continues to face a great deal
of uncer tainty with respect to how it might best use its resources to prepare for the future. One reason for

At one time, Polaroid’s cameras created a
significant amount of value for customers.
Poor decisions may have contributed to the
organisation’s subsequent inability to create
value and its initial filing for bankruptcy in
2001.

Source: Getty Images/claudio.arnese

Condition Uncertainty
regarding characteristics of the general and
the industry environments, competitors’
actions and customers’ preferences

Condition Complexity
regarding the interrelated causes shaping
an organisation’s environments and
perceptions of the environments

Condition Intraorganisational conflicts
among people making managerial decisions
and those affected by them

 Conditions affecting managerial decisions about resources,
capabilities and core competencies

Source: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organizational rent, Strategic
Management Journal, 14: 33.

Figure 3.2

78 PART 1: STRATEGIC MANAGEMENT INPUTS

this is that, for many, coal is thought of as a ‘dirty fuel’. Partly to reduce the uncertainty the organisation
faces because of this, Peabody is using some of its resources to build a ‘clean’ coal-fired plant and has signed
two agreements to develop clean coal in China (where air purity is a hot topic). As a proponent of strong
emissions standards, Peabody’s leaders argue for more use of ‘clean coal’. One of these agreements calls
for Peabody and its partners to develop a green coal energy campus, including a 1200-megawatt power
plant that will capture carbon dioxide and conver t it into green building materials.40 The complexity of
the decisions Peabody is making to reduce uncertainty (such as working with partners in China) is quite
significant. In 2016, Peabody experienced greater uncertainty when it filed for Chapter 11 bankruptcy
protection. A year later, the organisation had recovered from bankruptcy and started to trade on the New
York Stock Exchange in 2017. Peabody was ranked number 582 on the Fortune 500 list released in 2020.41

Biases about how to cope with uncertainty affect decisions made about how to manage the organisation’s
resou rces a nd capabilit ies to for m core competencies.4 2 For example, Peabody’s CEO strongly believes
in coal’s future, suggesting that automobiles capable of burning coal could be built. Finally, intra-
organisational conflict may surface when decisions are made about the core competencies an organisation
should develop and nurture. Conflict might surface in Peabody about the degree to which resources and
capabilities should be used to form core competencies to suppor t current coal technologies relative to the
building of core competencies to support newer ‘clean technologies’.

Environmental uncertainty (including the Covid-19 pandemic) increases the complexity and range
of issues to examine when studying the internal environment. The pandemic current forecast for the
last quarter of 2020 includes a 13–32 per cent decline in merchandise trade, a 30–40 per cent decrease in
foreign direct investment and an 80 per cent drop in international airline passengers in 2020. It is forecast
also that trade flows will undo globalisation future considerations, including researching global growth
patterns, supply chain examinations and technological shifts.4 3 In making decisions affected by these
three conditions, judgement is required. Judgement is the capability of making successful decisions when
no obviously correct model or r ule is available or when relevant data are unreliable or incomplete. In such
situations, decision makers must be aware of possible cognitive biases, such as overconfidence. Individuals
who are too confident in the decisions they make about how to use the organisation’s resources may fail to
fully evaluate contingencies that could affect those decisions.44

When exercising judgement, decision makers often take intelligent risks. In the current competitive
landscape, executive judgement can become a valuable capability. One reason is that, over time, effective
judgement allows an organisation to build a strong reputation and retain the loyalty of stakeholders whose
support is linked to above-average returns.45

Finding individuals who can make the most successful decisions about using the organisation’s resources
is challenging. Being able to do this is important because the quality of leaders’ decisions regarding resources
and their management affect an organisation’s ability to achieve strategic competitiveness. Individuals
holding these key decision-making positions are called strategic leaders. This is discussed fully in Chapter
12, but for our purposes in this chapter we can think of strategic leaders as individuals with an ability to
make effective decisions when examining the organisation’s resources, capabilities and core competencies
for the purpose of making choices about their use.

Next, we consider the relationships among an organisation’s resources, capabilities and core
competencies. While reading these sections, keep in mind that organisations have more resources than
capabilities, and more capabilities than core competencies.

Resources, capabilities and core
competencies
Resources, capabilities and core competencies are the foundation of competitive advantage. Resources are
bundled to create organisational capabilities. In turn, capabilities are the source of an organisation’s core

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Tangible and intangible resources as the base for core
competencies

While tangible resources are important, intangible
resources are perhaps even more important in the
development of an organisation’s core competencies.
Understandably, most professional service
organisations have few tangible resources, but they
can have high market value primarily because of their
intangible resources. For example, Herbert Smith
Freehills is a premier commercial law firm located in
Melbourne, Australia, and is one of the world’s leading
professional service businesses. Its aim is to provide
superior legal services to its clients. Within this broad
framework, however, there is a core competence.
The organisation provides legal advice and support
for commercial business, and corporate transactions
for large institutions, high-net-worth individuals and
privately owned businesses. For example, in 2019 it
provided the legal services to represent AustralianSuper
on its US$1 billion investment in India’s national
investment and infrastructure fund. This complex
transaction required lengthy negotiations with a multi-
level corporate legal team.

It is important to note that organisations’ reputations
are often significant intangible assets; for example,
professional service organisations must be considered
not only highly knowledgeable in the areas in which
they compete, but also must be considered honest and
highly trustworthy. Organisations can also enhance
intangible assets, such as their reputation, through
use of their core competencies. For example, in the
aftermath of the Australian bushfires in 2019–20,
Andrew ‘Twiggy’ Forrest pledged A$70 million to
bushfire recovery efforts and stated that leading by

Generous corporate philanthropy benefits Australian
bushfire victims.

Source: AAP Image/Richard Wainwright

example is more important than preaching to people.
Other significant contributors to the bushfire recovery
included NewsCorp, Crown, National Australia Bank,
Earth Alliance, the Australian Football League and BHP.
Such contributions assist organisations in strengthening
their local brand and demonstrate that they are
practising corporate social responsibility within their
community.

Sources: Herbert Smith Freehills, 2020, Herbert Smith Freehills
named as one of the top international law firms for India for

India-related work for the 12th consecutive year, http://www.
Herbertsmithfreehills.com, 27 August; D. Taylor & L. Mottram, 2020,
Australian bushfire donations from big business worth millions but

charities warn long term assistance needed, ABC News online, PM,
10 January, updated 11 January.

Strategic focus |General

competencies, which are the basis of establishing competitive advantages.46 We show these relationships
in Figure 3.1. Here, we define and provide examples of these building blocks of competitive advantage.

Resources
Broad in scope, resources cover a spectrum of individual, social and organisational phenomena.47 By
themselves, resources do not allow organisations to create value for customers as the foundation for earning
above-average returns. Indeed, resources are combined to form capabilities.48 The fast-food company
Subway links its fresh ingredients with several other resources, including the continuous training it
provides to those running the organisation’s units, as the foundation for customer service as a capability.
As its sole distribution channel, the internet is a resource for Amazon. The organisation uses the internet
to sell goods at prices that typically are lower than those offered by competitors selling the same goods

80 PART 1: STRATEGIC MANAGEMENT INPUTS

through what are more costly bricks-and-mortar shopfronts. By combining other resources (such as access
to a wide product inventory), Amazon has developed a reputation for excellent customer service. Amazon’s
capability in terms of customer service is a core competence as well, in that the organisation creates unique
value for customers through the services it provides to them. Amazon was ranked in 2020 as being in the
top five recognisable brands globally. The brand itself has become a core competency. Amazon also uses its
technological core competence to offer AWS (Amazon Web Services), through which businesses can rent
computing power from Amazon at a cost of cents per hour. In the words of the leader of this effort, ‘AWS
makes it possible for anyone with an internet connection and a credit card to access the same kind of world-
class computing systems that Amazon uses to run its multi-billion-a-year operation’.49 In January 2020,
Amazon reported a profit of US$87.4 billion in the fourth quarter 2019, and a net income of US$3 billion.
AWS was up 34 per cent, and subscriptions had increased 32 per cent.50

Some of an organisation’s resources (defined in Chapter 1 as inputs to the organisation’s production
process) are tangible, while others are intangible. Tangible resources are assets that can be obser ved and
quantified. Production equipment, manufacturing facilities, distribution centres and formal reporting
structures are examples of tangible resources; for example, Peabody’s factories, location and coal are
tangible resources. Intangible resources are assets that are rooted deeply in the organisation’s histor y
and have accumulated over time. Because they are embedded in unique patterns of routines, intangible
resources are difficult for competitors to analyse and imitate. Knowledge, trust between managers and
employees, managerial capabilities, organisational routines (the unique ways people work together),
scientific capabilities, the capacity for innovation, brand name, the organisation’s reputation for its goods
or services, how it interacts with people (such as employees, customers and suppliers) and organisational
cu ltu re a re i nta ng ible resou rces. 51 The reputation for reliability of Amazon or Apple is an example of
an intangible resource. The four primary categories of tangible resources are financial, organisational,
physical and technological (see Table 3.1). The three primary categories of intangible resources are human,
innovation and reputational (see Table 3.2).

tangible resources
assets that can be
seen and quantified

intangible resources
assets that generally
are rooted deeply
in the organisation’s
history and have
accumulated over
time

Tangible resources

Financial resources • The organisation’s capacity to borrow
• The organisation’s ability to generate funds through internal

operations

Organisational
resources

• Formal reporting structures

Physical resources • The sophistication of an organisation’s plant and equipment and
the attractiveness of its location

• Distribution facilities
• Product inventory

Technological
resources

• Availability of technology-related resources such as trade secrets

Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage,
Journal of Management, 17: 101; R. M. Grant, 1991,Contemporary Strategy Analysis, Cambridge,

UK: Blackwell Business, 100–2.

Table 3.1

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Intangible resources

Human resources • Knowledge
• Trust
• Skills
• Abilities to collaborate with others

Innovation resources • Ideas
• Scientific capabilities
• Capacity to innovate

Reputational
resources

• Brand name
• Perceptions of product quality, durability and reliability
• Positive reputation with stakeholders such as suppliers and

customers

Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources,
Strategic Management Journal, 13: 136–9; R. M. Grant, 1991,Contemporary Strategy Analysis,

Cambridge, UK: Blackwell Business, 101–4.

Table 3.2

Tangible resources
As tangible resources, an organisation’s borrowing capacity and the status of its physical facilities are
visible. The value of many tangible resources can be established through financial statements; however,
these statements do not account for the value of all the organisation’s assets because they disregard some
intangible resources.52 The value of tangible resources is also constrained because they are hard to leverage;
that is, it is difficult to derive additional business or value from a tangible resource.

Although production assets are tangible, many of the processes necessary to use these assets, such as
human capital, are intangible. Thus, the learning and potential proprietary processes associated with a
tangible resource, such as manufacturing facilities, can have unique intangible attributes, such as quality
control processes, manufacturing processes and technologies that develop over time.53

Intangible resources
Compared to tangible resources, intangible resources are a superior source of capabilities and, subsequently,
core competencies.54 In fact, in the global economy, ‘the success of a corporation lies more in its intellectual
and systems capabilities than in its physical assets. [Moreover], the capacity to manage human intellect –
and to convert it into useful products and services – is fast becoming the critical executive skill of the age’.55

Because intangible resources are less visible and more difficult for competitors to understand, purchase,
imitate or substitute for, organisations prefer to rely on them rather than on tangible resources as the
foundation for their capabilities. In fact, the more unobservable (i.e. intangible) a resource is, the more
valuable that resource is to create capabilities.56 Another benefit of intangible resources is that, unlike most
tangible resources, their use can be leveraged. For instance, sharing knowledge among employees does not
diminish its value for any one person. To the contrary, two people sharing their individualised knowledge
sets often can be leveraged to create additional knowledge that, although new to each individual, contributes
to performance improvements for the organisation.

Reputational resources (see Table 3.2) are important sources of an organisation’s capabilities and
core competencies. Indeed, some argue that a positive reputation can even be a source of competitive
advantage, as it is for Apple.57 Earned through the organisation’s actions as well as its words, a value-
creating reputation is a product of years of superior marketplace competence as perceived by stakeholders.58
A reputation indicates the level of awareness an organisation has been able to develop among stakeholders
and the degree to which they hold the organisation in high esteem. 59

82 PART 1: STRATEGIC MANAGEMENT INPUTS

A well-known and highly valued brand name is a specific reputational resource.60 A cont i nu i ng
commitment to innovation and aggressive advertising facilitates organisations’ efforts to take advantage of
the reputation associated with their brands.61 Harley-Davidson has a reputation for producing and servicing
high-quality motorcycles with unique designs. The company also produces a wide range of accessory
items that it sells on the basis of its reputation for offering unique products with high quality. Sunglasses,
jewellery, belts, wallets, shirts, slacks and hats are just a few of the accessories customers can purchase
from a Harley-Davidson dealer or from its online store.62

Capabilities
The organisation combines individual tangible and intangible resources to create capabilities. In turn,
capabilities are used to complete the organisational tasks required to produce, distribute and service the
goods or ser vices the organisation provides to customers for the pur pose of creating value for them.63 As
a foundation for building core competencies and hopefully competitive advantages, capabilities are often
based on developing, carrying and exchanging information and knowledge through the organisation’s
human capital.64 Hence, the value of human capital in developing and using capabilities and, ultimately,
core competencies cannot be overstated.65 In fact, it seems to be ‘well known that human capital makes
or breaks companies’.66 At pizza-maker Domino’s, human capital is critical to the organisation’s efforts to
change how it competes. Describing this, CEO Patrick Doyle says that, in many ways, Domino’s is becoming
‘a tech company … that sell pizzas’.67

As illustrated in Table 3.3, capabilities are often developed in specific functional areas (such as
manufacturing, R&D and marketing) or in a part of a functional area (such as advertising). Table 3.3 shows
a grouping of organisational functions and the capabilities that some companies are thought to possess in
terms of all or par ts of those functions.

Core competencies
Defined in Chapter 1, core competencies are capabilities that serve as a source of competitive advantage
for an organisation over its rivals. Core competencies distinguish a company competitively and reflect
its personality. Core competencies emerge over time through an organisational process of accumulating
and learning how to deploy different resources and capabilities.68 As the capacity to take action, core
competencies are the ‘crown jewels of a company’, the activities the organisation performs especially well
compared with competitors and through which the organisation adds unique value to the goods or services
it sells to customers.69 Thus, if a big pharma company (such as Pfizer) developed big data analytics as a core
competence, one could conclude that the organisation had formed capabilities through which it was able to
analyse and effectively use huge amounts of data in a competitively superior manner.

Innovation is thought to be a core competence at Apple, Google, Facebook, Amazon, Alphabet and
Netflix. As a capability, research and development (R&D) activities are the source of this core competence.
More specifically, the way Apple has combined some of its tangible (e.g. financial resources and research
laboratories) and intangible (e.g. scientists and engineers and organisational routines) resources to complete
R&D tasks creates a capability in R&D. By emphasising its R&D capability, Apple is able to innovate in ways
that create unique value for customers in the form of the products it sells, suggesting that innovation is a
core competence for Apple.

Excellent customer service in its retail stores is another of Apple’s core competencies. In this instance,
u n ique a nd contempora r y store desig ns (a ta ng ible resou rce) a re combi ned w it h k nowledgeable a nd
skilled employees (an intangible resource) to provide superior ser vice to customers. A number of carefully
developed t rai n i ng a nd development procedu res a re capabilit ies on wh ich Apple’s core competence of
excellent customer service is based. The procedures that are capabilities include ‘intensive control of how
employees interact with customers, scripted training for on-site tech support and consideration of every
store detail down to the pre-loaded photos and music on demo devices’.70

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Examples of organisations’ capabilities

Functional areas Capabilities Examples of organisations

Distribution • Effective use of logistics management
techniques

• Woolworths
• IKEA

Human resources • Motivating, empowering and retaining
employees

• Microsoft
• Southwest Airlines

Management
information
systems

• Effective and efficient control of
inventories through point-of-purchase
data-collection methods

• Coles

Marketing • Effective promotion of brand-name
products

• Effective customer service
• Innovative merchandising

• Procter & Gamble (P&G)
• Ralph Lauren Corp.
• McKinsey & Co.
• RM Williams

Management • Ability to envision the future of clothing • Zara

Manufacturing • Design and production skills yielding
reliable products

• Product and design quality
• Miniaturisation of components and

products

• Komatsu
• Sony

Research and
development

• Innovative technology
• Development of sophisticated lift-

control solutions
• Rapid transformation of technology into

new products and processes
• Digital technology

• Caterpillar
• Otis Elevator Co.
• Cochlear
• Apple
• Amazon
• Netflix
• Google
• Alphabet
• Facebook

Table 3.3

Consumer products giant P&G sells branded products that it values as superior quality and value to
customers located in more than 180 countries and generating billions of dollars in annual sales revenue.
Net sales in the third quarter of the 2020 fiscal year were US$17.2 billion, up 5 per cent compared with the
previous year. While its Beauty and Grooming segments only increased nominally, its Skin and Personal
Health Care, Fabric Care and Home Care segments increased by 10 per cent for the quarter.71 P&G has
numerous tangible and intangible resources that are used to form capabilities, some of which are core
competencies. Interestingly, even in light of its size and scale (in terms of the number of products sold and
the organisation’s encompassing geographic reach), P&G has perhaps five core competencies (labelled core
strengths by the organisation).

Building core competencies
Two tools assist organisations to identify their core competencies. The first consists of four specific
criteria of sustainable competitive advantage that can be used to determine which capabilities are core
competencies. Because the capabilities shown in Table 3.3 have satisfied these four criteria, they are

84 PART 1: STRATEGIC MANAGEMENT INPUTS

Procter & Gamble: using capabilities and core
competencies to create value for customers

Guided by its slogan of ‘Touching lives, improving life’,
P&G is known throughout the world for its stable of
consumer brands. Organised within 10 global business
categories (Skin and Personal Health Care), Fabric Care
and Home Care, Grooming, Beauty, Hair Care, Baby and
Feminine Care, Oral Care and Family Care are just a few
of the categories. Eight of the 10 global categories held
or experienced growth in 2019.

The organisation has 97 000 employees (compared
with 135 000 in 2007); a whopping 3500 products
produced in 25 manufacturing plants predominantly
located in the US and 14 customer business centres;
and it has grown its customer base to five billion, with
its largest brand reportedly being Pantene hair care
products.

How have these achievements been realised?
According to company officials and analysts, in part
it was done through plans to move quickly and
broadly into developing countries such as China and
India, and to produce products that would appeal to
new but lower-income customers. Of course, efforts
simultaneously continued to satisfy the needs of P&G’s
huge stable of current customers. These actions appear
to support the view that P&G is an effective competitor
that continuously seeks growth through its competitive
actions.

P&G relies on its capabilities and core competencies
to satisfy current customers and to develop products
to serve the needs of new customers. Typically, P&G
likes to use its capabilities and competencies to
grow organically rather than through mergers and
acquisitions or through cooperative relationships. In
the words of a previous P&G CEO: ‘Organic growth
is more valuable because it comes from your core
competencies. Organic growth exercises your
innovation muscle. If you use it, it gets stronger’.
The company does spend a lot on the bases for
competencies. For example, it claims ‘consumer
understanding’, based not only on its history but also
on 20 000 studies of consumers each year. Cutting-edge
technology, supply chain management skills, marketing

and advertising expertise, a broad product portfolio,
and R&D skills with respect to fats, oils, skin chemistry,
surfactants and emulsifiers, are a few of P&G’s highly
regarded capabilities. All of these capabilities, which
result from combinations of the organisation’s tangible
and intangible resources, allow P&G to perform tasks
that must be completed to produce, sell, distribute and
service its branded products.

Taking this a step further, we discover that these
capabilities contribute to the organisation’s five core
competencies (called core strengths by P&G). For
example, R&D capabilities are foundational to P&G’s
innovation and are a core competence. Similarly,
the organisation’s marketing and advertising skills
contribute to its consumer understanding and
brand-building core competencies. The supply chain
management capability is critical to the go-to-market
core competence (a competence through which P&G
‘reaches retailers and consumers at the right place
and time’) and to the scale competence (a competence
allowing P&G to be efficient and to create value
for customers as a result). Thus, we see how some
of P&G’s capabilities are linked to one or more of
the organisation’s five core competencies. From an
operational perspective, these core competencies
are activities P&G performs especially well relative to
competitors and through which the organisation is able
to create unique value for customers.

Sources: Procter & Gamble, 2019, P&G 2019 Annual Report, http://
pg.com; M. Shahbandeh, 2019, Procter & Gamble – Statistics & Facts,

Statista, 23 October; P&G, 2018, http://www.Pglocations.com; Statista,
2015, Total number of employees of Procter & Gamble worldwide from
2007 to 2015 (in thousands), http://www.statista.com/statistics/244037/

total-number-of-employees-of-procter-und-gamble-worldwide; P&G,
2015, Core strengths, https://www.pg.com/en_ANZ/company/core-
strengths.shtml; E. Byron, 2011, P&G turns Febreze into a $1 billion

brand, Wall Street Journal, http://www.wsj.com, 8 March; A. K. Reese,
2011, Planning to succeed at Procter & Gamble, Supply & Demand Chain
Executive, http://www.sdcexe.com, 12 January; Reuters, 2011, Energizer

to shut two international battery plants, http://www.fidelity.com, 9
March; Procter & Gamble, 2011, P&G core strengths, http://www.p&g.

com, 6 June; Standard & Poor’s Stock Report, 2011, Procter & Gamble
Co., http://www.standardandpoors.com, 11 June; Treflis, 2011, P&G’s

strategy to win market share to pay off, http://www.treflis.com, 12
January; B. Horovitz, 2010, Procter & Gamble looks beyond US borders,

USA Today, http://www.usatoday.com, 19 March.

Strategic focus |General

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core competencies. The second tool is the value chain analysis. Organisations use this tool to select the
value-creating competencies that should be maintained, upgraded or developed, and those that should be
outsourced.

The four criteria of sustainable competitive
advantage
Capabilities that are valuable, rare, costly to imitate and non-substitutable are core competencies (see
Table 3.4). In turn, core competencies can lead to competitive advantages for the organisation over its rivals.
Capabilities failing to satisfy the four criteria are not core competencies, meaning that although every core
competence is a capability, not every capability is a core competence. In other words, for a capability to be a
core competence, it must be valuable and unique from a customer’s point of view. For a core competence to be
a potential source of competitive advantage, it must be inimitable and non-substitutable by competitors.72

The four criteria of sustainable competitive advantage

Valuable capabilities • Assist an organisation to neutralise threats or exploit
opportunities

Rare capabilities • Are not possessed by many others

Costly-to-imitate
capabilities

• Historical: a unique and valuable organisational culture or brand
name

• Ambiguous cause: the causes and uses of a competence are
unclear

• Social complexity: interpersonal relationships, trust and
friendship among managers, suppliers and customers

Non-substitutable
capabilities

• No strategic equivalent

Table 3.4

A sustainable competitive advantage exists only when competitors cannot duplicate the benefits of
an organisation’s strategy or when they lack the resources to attempt imitation. For some period of time,
the organisation may have a core competence by using capabilities that are valuable and rare but imitable.
For example, some organisations are trying to develop a core competence and potentially a competitive
advantage by out-greening their competitors.

Interestingly, developing a ‘green’ core competence can contribute to the organisation’s efforts to earn
above-average returns while benefiting the broader society. For example, Qantas Group is committed to
minimising its impact on the environment by sustainable aviation through emissions and waste reduction
initiatives. A strong initiative includes removing 100 million single-use plastics from Qantas operations
by the end of 2020.73

Valuable
Valuable capabilities allow an organisation to exploit oppor tunities or neutralise threats in its external
environment. By effectively using capabilities to exploit opportunities or neutralise threats, an organisation
creates value for customers. For publishers, e-books are both an opportunity (to sell books through different
distribution channels) and a major threat (a reduction in publishers’ ability to sell books through traditional
channels, such as physical shopfronts). To neutralise the possibility or threat of lower sales revenue from
traditional channels, publishers such as Penguin Group are trying to determine how to take advantage
of the oppor tunities digital technologies create to transform their businesses. In par tnership with other
companies, Penguin sees using the internet to sell directly to customers as an opportunity to create value

valuable capabilities
allow the organisation
to exploit
opportunities or
neutralise threats
in its external
environment

86 PART 1: STRATEGIC MANAGEMENT INPUTS

for customers. Revenue in its e-books segment was projected to amount to US$15 635 million in 2021 with
1019 million users.74 Forbes, BBC and Fortune have all noted a massive boom in e-books and reading apps
readers as a result of the Covid-19 lockdowns.75 Amazon is considered a major threat to other booksellers
by some in both the digital and print worlds, and in December 2019 it was reported that Amazon had 42 per
cent of the US print book market and at least 80 per cent of the publishers’ e-book sales.76 It also owns Book
Depository, the UK online bookseller that operates a system with free postage for all books.77

Rare
Rare capabilities are capabilities that few, if any, competitors possess. A key question to be answered
when evaluating this criterion is: ‘How many rival organisation possess these valuable capabilities?’
Capabi l it ies possessed by ma ny r iva ls a re u n l i kely to become core competencies for a ny of t he i nvolved
organisations. Instead, valuable albeit common (i.e. not rare) capabilities are sources of competitive
parity.78 Competitive advantage results only when organisations develop and exploit valuable capabilities
that become core competencies and that differ from those shared with competitors. For example, Qantas’
sa fet y record is con sidered a core competenc y t hat ca n be d i f ferent iated f rom compet itors suc h as
Malaysian Airlines.

Costly to imitate
Costly-to-imitate capabilities are capabilities that other organisations cannot easily develop. Capabilities
that are costly to imitate are created because of one reason or a combination of three reasons (see Table 3.4).
First, an organisation sometimes is able to develop capabilities because of unique historical conditions. As
organisations evolve, they often acquire or develop capabilities that are unique to them.79

A n organisation with a unique and valuable organisational culture that emerged in the early stages of
the company’s history ‘may have an imperfectly imitable advantage over firms founded in another historical
period’80 – one in which less valuable or less competitively useful values and beliefs strongly influenced the
development of the organisation’s culture. Briefly discussed in Chapter 1, organisational culture is a set of
values that is shared by members in the organisation. We explain this in greater detail in Chapter 12. A n
organisational culture is a source of advantage when employees are held together tightly by their belief in
it.81 With its emphasis on cleanliness, consistency and service, and the training that reinforces the value of
these characteristics, the McDonald’s culture is thought by some to be a core competence and a competitive
advantage. Equally, Southwest Airlines’ culture in the US is considered a core competency.82 The same
seems to be the case for Natio, the Australian cosmetics company. It uses ‘pure and natural, plant-based’
ingredients, and the founders base the growing range of products on insight developed through yoga and
meditation. It is one of the fastest-growing brands in the industry and sells in top-end department stores
and chemists.83

A second cond ition of being costly to imitate occu rs when the lin k between the organ isation’s core
competencies a nd its compet it ive adva ntage is causally a mbig uous.84 In these instances, competitors
ca n not clea rly u nderstand how an organ isat ion uses its capabilit ies t hat a re core competencies as t he
foundation for competitive advantage. As a result, organisations are uncertain about the capabilities they
should develop to duplicate the benefits of a competitor’s value-creating strategy. For years, organisations
tried to imitate Southwest Airlines’ low-cost strategy, but most have been unable to do so, primarily because
they cannot duplicate this organisation’s unique culture. In the same way, the apparent simple success
of The Body Shop with environmentally sensitive cosmetics has not been fully imitated, despite several
attempts by global organisations.

Social complexity is the third reason that capabilities can be costly to imitate. Social complexity means
that at least some, and frequently many, of the organisation’s capabilities are the product of complex social
phenomena. Interpersonal relationships, trust, friendships among managers and between managers and
employees, and an organisation’s reputation with suppliers and customers are examples of socially complex
capabilities. Southwest Airlines is careful to hire people who fit or align with its culture. This complex

rare capabilities
capabilities that few,
if any, competitors
possess

costly-to-imitate
capabilities
capabilities that
another organisation
cannot easily develop

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interrelationship between the culture and human capital adds value in ways that other airlines cannot
match, such as jokes on flights by the flight attendants or the cooperation between gate personnel
and pilots.

Non-substitutable
Non-substitutable capabilities a re capabilities t hat do not have strategic equivalents. This final
criterion ‘is that there must be no strategically equivalent valuable resources that are themselves
either not rare or imitable. Two valuable firm resources (or two bundles of firm resources) are
st rateg ica l ly equ iva lent when t hey each ca n be sepa rately e x ploited to i mplement t he sa me
strategies’.85 In general, the strategic value of capabilities increases as they become more difficult
to substitute. The more intangible and hence invisible capabilities are, the more difficult it is for
organisations to find substitutes and the greater the challenge there is for competitors trying to
imitate an organisation’s value-creating strategy. Organisation-specific knowledge and trust-based
working relationships between managers and non-managerial personnel are examples of capabilities
that are difficult to identify and for which finding a substitute is challenging. However, causal
ambiguity may make it difficult for the organisation to learn as well and may stifle progress, because
the organisation may not know how to improve processes that are not easily codified and thus are
ambiguous.86

In summary, only using valuable, rare, costly-to-imitate and non-substitutable capabilities has
the potential for the organisation to create sustainable competitive advantages. Table 3.5 shows
t he compet it ive consequences a nd per for ma nce implicat ions resu lt ing f rom combinat ions of t he
four criteria of sustainability. The analysis suggested by the table helps managers to determine the
strategic value of an organisation’s capabilities. The organisation should not emphasise capabilities
that fit the criteria described in the first row in the table (i.e. resources and capabilities that are
neither valuable nor rare and that are imitable and for which strategic substitutes exist). Capabilities
yielding competitive parity and either temporary or sustainable competitive advantage, however,
will be supported. Some competitors, such as Coca-Cola and PepsiCo, and Boeing and Airbus, may
have capabilities that result in competitive parity. In such cases, the organisations will nurture these
capabilities while simultaneously tr ying to develop capabilities that can yield either a temporar y or
sustainable competitive advantage.

non-substitutable
capabilities
capabilities that do
not have strategic
equivalents

Outcomes from combinations of the criteria for sustainable competitive advantage

Is the
capability
valuable?

Is the
capability
rare?

Is the
capability
costly to
imitate?

Is the
capability non-
substitutable?

Competitive
consequences

Performance
implications

No No No No Competitive
disadvantage

Below-average
returns

Yes No No Yes/no Competitive parity Average returns

Yes Yes No Yes/no Temporary
competitive advantage

Average returns
to above-average
returns

Yes Yes Yes Yes/no Sustainable
competitive advantage

Above-average
returns

Table 3.5

88 PART 1: STRATEGIC MANAGEMENT INPUTS

Value chain analysis
Value chain analysis allows the organisation to understand the parts of its operations that create value and
those that do not.87 Understanding these issues is important because the organisation earns above-average
returns only when the value it creates is greater than the costs incurred to create that value.88

The value chain is a template that organisations use to analyse their cost position and to identify the
multiple means that can be used to facilitate implementation of a chosen strateg y.89 Today’s competitive
landscape demands that organisations examine their value chains in a global rather than a domestic-only
context. In particular, activities associated with supply chains should be studied within a global context.90

We show a model of the value chain in Figure 3.3. As depicted in the model, an organisation’s value
chain is segmented into value chain activities and support functions. Value chain activities are activities
or tasks the organisation completes in order to produce products and then sell, distribute and service those
products in ways that create value for customers. Suppor t f unctions include the activ ities or tasks the
organisation completes in order to support the work being done to produce, sell, distribute and service
t he products t he orga n isat ion is produci ng. A n orga n isat ion may develop a capabi l it y a nd /or a core
competence in any of the value chain activities and in any of the support functions. When it does so, it
has established an ability to create value for customers. In fact, as shown in Figure 3.3, customers are
the ones organisations seek to ser ve when using value chain analysis to identif y their capabilities and
core competencies. W hen using their unique core competencies to create unique value for customers that
competitors cannot duplicate, organisations have established one or more competitive advantages. This
appears to be the case for P&G as it relies on the five core competencies described earlier in the ‘Strategic
focus’ feature to produce unique, high-quality branded products that are sold to customers throughout
the world.

The activities associated with each part of the value chain are shown in Figure 3.4, while the activities
that are part of the tasks organisations complete when dealing with support functions appear in Figure 3.5.
All items in both figures should be evaluated relative to competitors’ capabilities and core competencies. To
become a core competence and a source of competitive advantage, a capability must allow the organisation
to either perform an activity in a manner that provides value superior to that provided by competitors, or

value chain activities
activities or tasks
the organisation
completes in order to
produce products and
then sell, distribute
and service those
products in ways
that create value for
customers

support functions
include the
activities or tasks
the organisation
completes in order
to support the
work being done
to produce, sell,
distribute and
service the products
the organisation is
producing

Support
functions

Supply-chain
management Operations

Follow-up
service

Customer
value

Value chain
activities

Distribution

Finance

Human resources

Management information systems

Marketing
(including

sales)

Figure 3.3 A model of the value chain

89CHAPTER 3
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to perform a value-creating activity that competitors cannot perform. Only under these conditions does
an organisation create value for customers and have oppor tunities to capture that value.

Creating value for customers by completing activities that are par t of the value chain often requires
building effective alliances with suppliers (and sometimes others to which the organisation outsources
activities, as discussed in the next section) and developing strong, positive relationships with customers.
When organisations have such strong, positive relationships with suppliers and customers, they are said to
have ‘social capital’.91 The relationships themselves have value because they produce knowledge transfer
and access to resources that an organ isation may not hold inter nally.92 To build social capital whereby
resources such as knowledge are transferred across organisations requires trust between the parties. The
par tners must tr ust each other in order to allow their resources to be used in such a way that both par ties
will benefit over time and neither party will take advantage of the other.93 Trust and social capital usually

Customer
value

Activities including sourcing,
procurement, conversion, and
logistics management that are

necessary for the organisation to
receive raw materials and convert

them into final products.

Supply-chain
management

Activities necessary to efficiently
change raw materials into finished
products. Developing employees’

work schedules, designing
production processes and physical
layout of the operations’ facilities,
determining production capacity

needs, and selecting and
maintaining production equipment

are examples of specific
operations activities.

Operations

Activities taken to increase a
product’s value for customers.

Surveys to receive feedback
about the customer’s satisfaction,

offering technical support after
the sale, and fully complying
with a product’s warranty are
examples of these activities.

Follow-up service

Distribution

Activities related to getting the
final product to the customer.
Efficiently handling customers’
orders, choosing the optimal
delivery channel, and working

with the finance support function
to arrange for customers’

payments for delivered goods are
examples of these activities.

Marketing
(including sales)

Activities taken for the purpose of
segmenting target customers on the

basis of their unique needs, satisfying
customers’ needs, retaining customers,

and locating additional customers.
Advertising campaigns, developing and
managing product brands, determining

appropriate pricing strategies, and
training and supporting a sales force are

specific examples of these activities.

Figure 3.4 Creating value through value chain activities

90 PART 1: STRATEGIC MANAGEMENT INPUTS

evolve over time with repeated interactions, but organisations may also establish special means to jointly
manage alliances that promote greater trust with the outcome of enhanced benefits for both partners.94

Evaluating an organisation’s capability to execute its value chain activities and suppor t functions is
challenging. Earlier in the chapter, we noted that identifying and assessing the value of an organisation’s
resources and capabilities requires judgement. Judgement is equally necessary when using value chain
analysis, because no obviously correct model or rule is universally available to help in the process. What
should an organisation do about value chain activities and suppor t functions in which its resources and
capabilities are not a source of core competence? Outsourcing is one solution to consider.

Outsourcing
Concerned with how components, finished goods or services will be obtained, outsourcing is the purchase of
a value-creating activity or a support function activity from an external supplier.95 Not-for-profit agencies
as well as for-profit organisations actively engage in outsourcing.96 Organisations engaging in effective
outsourcing increase their flexibility, mitigate risks and reduce their capital investments.97 In multiple
global industries, the trend towards outsourcing continues at a rapid pace.98 Moreover, in some industries,
virtually all organisations seek the value that can be captured through effective outsourcing. As with other
strategic management process decisions, careful analysis is required before the organisation decides to

Customer value

Human resources

Activities associated with
managing the organisation’s

human capital. Selecting, training,
retaining, and compensating

human resources in ways that
create a capability and hopefully
a core competence are specific

examples of these activities.

Management
information systems

Activities taken to obtain and
manage information and knowledge

throughout the organisation.
Identifying and utilising

sophisticated technologies,
determining optimal ways to collect

and distribute knowledge, and
linking relevant information and

knowledge to organisational
functions are activities associated

with this support function.

Finance

Activities associated with effectively
acquiring and managing financial

resources. Securing adequate
financial capital, investing in

organisational functions in ways
that will support the organisation’s
efforts to produce and distribute its

products in the short and long
term, and managing relationships

with those providing financial
capital to the organisation are

specific examples of these
activities.

Figure 3.5 Creating value through support functions

91CHAPTER 3
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outsource.99 And if outsourcing is to be used, organisations must recognise that only activities where they
cannot create value or where they are at a substantial disadvantage compared with competitors should
be outsourced.100

Outsourcing can be effective because few, if any, organisations possess the resources and capabilities
required to achieve competitive superiority in all value chain activities and support functions. For example,
research suggests that few companies can afford to develop internally all the technologies that might lead
to competitive advantage.101 By nurturing a smaller number of capabilities, an organisation increases the
probability of developing core competencies and achieving a competitive advantage because it does not
become overextended. In addition, by outsourcing activities in which it lacks competence, the organisation
may fully concentrate on those areas in which it can create value. The consequences of outsourcing cause
additional concerns.102 For the most part, these concerns revolve around the potential loss in organisations’
i n novat ive abi lit y a nd t he loss of jobs w it h i n compa n ies t hat decide to outsou rce some of t hei r work
activities to others. Thus, innovation and technological uncertainty are two important issues to consider
when making outsourcing decisions. However, organisations can also learn from outsource suppliers how
to increase their own innovation capabilities.103 Companies must be aware of these issues and be prepared to
fully consider the concerns about opportunities from outsourcing suggested by different stakeholders (e.g.
employees). The opportunities and concerns may be especially significant when organisations outsource
activities or functions to a foreign supply source (often referred to as offshoring).104 Bangalore, Bangladesh
and Belfast are hot spots for technology outsourcing, competing with major operations in other nations
such as China.105 The global pharmaceutical giant GlaxoSmithKline made a similar decision in expanding
its manufacturing base in Australia, despite the high wage levels there. It reasons that the manufacturing
plants are more efficient and quality control is easier in Australia.

Competencies, strengths, weaknesses and
strategic decisions
By analysing the internal organisation, organisations are able to identify their strengths and weaknesses
in resources, capabilities and core competencies. For example, if an organisation has weak capabilities or
does not have core competencies in areas required to achieve a competitive advantage, it must acquire
those resources and build the capabilities and competencies needed. Alternatively, the organisation could
decide to outsource a function or activity where it is weak in order to improve its ability to use its remaining
resources to create value.106

In considering the results of examining the organisation’s internal organisation, managers should
understand that having a significant quantity of resources is not the same as having the ‘right’ resources.
The ‘right’ resources are those with the potential to be formed into core competencies as the foundation for
creating value for customers and developing competitive advantages as a result of so doing. Interestingly,
decision makers sometimes become more focused and productive when seeking to find the right resources
when the organisation’s total set of resources is constrained.107

Tools such as outsourcing assist the organisation to focus on its core competencies as the source of its
competitive advantage. However, evidence shows that the value-creating ability of core competencies
should never be taken for granted. Moreover, the ability of a core competence to be a permanent competitive
advantage cannot be assumed. The reason for these cautions is that all core competencies have the potential
to become core rigidities.108 Typically, events occurring in the organisation’s external environment create
conditions through which core competencies can become core rigidities, generating inertia and stifling
innovation: ‘Often the flip side, the dark side, of core capabilities is revealed due to external events when
new competitors figure out a better way to serve the firm’s customers, when new technologies emerge, or
when political or social events shift the ground underneath’.109

92 PART 1: STRATEGIC MANAGEMENT INPUTS

As discussed previously, over the past decade, digital technologies (part of the organisation’s external
environment) have rapidly changed customers’ shopping patterns for reading materials. For example,
Amazon’s use of the internet significantly changed the competitive landscape for bricks-and-mortar sellers
such as Angus and Robertson. Managers studying the organisation’s internal organisation are responsible
for making cer tain that core competencies do not become core rigidities.

A f ter study ing its ex ter nal env i ron ment to deter m ine what it m ight choose to do (as ex plained in
Chapter 2) and its internal organisation to understand what it can do (as explained in this chapter), the
organisation has the information required to select a business-level strategy that it will use to compete
against rivals. We describe different business-level strategies in the next chapter.

93CHAPTER 3
THE INTERNAL ORGANISATION: RESOURCES, CAPABILITIES, CORE COMPETENCIES AND COMPETITIVE ADVANTAGES

STUDY TOOLS
SUMMARY
LO1 In the current competitive landscape, the most

effective organisations recognise that an internal
analysis is identified by studying the organisation’s
internal organisation and it is imperative to determine
the organisational level of strength, capabilities
and competencies are matched with opportunities
(determined by studying the organisation’s external
environment).

LO2 Value is measured by a product’s performance
characteristics and by its attributes for which
customers are willing to pay. Even if the organisation
develops and manages resources in ways that create
core competencies and competitive advantages,
competitors will eventually learn how to duplicate the
benefits of any organisation’s value-creating strategy;
thus, all competitive advantages have a limited life.
Because competitive advantages are not always
permanently sustainable, as witnessed during the
Covid-19 pandemic, organisations must exploit their
current advantages while simultaneously using their
resources and capabilities to form new advantages
that may lead to future competitive success.

LO3 Tangible resources are assets that may be observed
and quantified. Production equipment, manufacturing
facilities, distribution centres and formal reporting
structures are examples of tangible resources.
Intangible resources are assets that are rooted deeply
in the organisation’s history and have accumulated
over time. The knowledge the organisation’s human
capital possesses is among the most significant of an
organisation’s capabilities and ultimately provides
the base for most competitive advantages. The
organisation must create an organisational culture that

allows people to integrate their individual knowledge
with that held by others so that, collectively, the
organisation has a significant amount of value-creating
organisational knowledge.

LO4 Capabilities are a more likely source of core
competence, and subsequently of competitive
advantages, than are individual resources. How an
organisation nurtures and supports its capabilities so
they can become core competencies is less visible to
rivals, making efforts to understand and imitate the
focal organisation’s capabilities difficult.

LO5 Only when a capability is valuable, rare, costly to
imitate and non-substitutable is it a core competence
and a source of competitive advantage. Core
competencies are a source of competitive advantage
only when they allow the organisation to create value
by exploiting opportunities in its external environment.
When this is no longer possible, the organisation
shifts its attention to forming other capabilities that
satisfy the four criteria of a sustainable competitive
advantage. Effectively managing core competencies
requires careful analysis of the organisation’s
resources (inputs to the production process) and
capabilities (resources that have been purposely
integrated to achieve a specific task or set of tasks).

LO6 Value chain analysis is used to identify and evaluate
the competitive potential of resources and capabilities.
By studying their skills relative to those associated
with value chain activities and support functions,
organisations can understand their cost structure and
identify the activities through which they can create
value.

KEY TERMS
competitive advantage

core competence

costly-to-imitate capabilities

global mindset

intangible resources

non-substitutable
capabilities

outsourcing

rare capabilities

strategic competitiveness

strategy

support functions

tangible resources

valuable capabilities

value

value chain activities

94 PART 1: STRATEGIC MANAGEMENT INPUTS

REVIEW QUESTIONS
1. Why is it important for an organisation to study

and understand the strengths of its internal
organisation?

2. What is value? Why is it critical for the organisation to
create value? How would an organisation examine its
value propositions?

3. What is meant by a value chain analysis? Why is this
analysis so important for managers to conduct?

4. What are the differences between tangible and
intangible resources? Are tangible resources more
valuable than intangible resources, or is the reverse
true? Why?

5. What are capabilities? How do organisations create
capabilities?

6. What four criteria must capabilities satisfy for them to
become core competencies? Why is it important for
organisations to use these criteria to evaluate their
capabilities’ value-creating potential?

7. Why do organisations need to create core competencies
to be sustainable?

8. What is outsourcing? Why do organisations outsource?
Will outsourcing’s importance grow in the future? If so,
why?

9. How do organisations identify internal strengths and
weaknesses? Why is it necessary that managers have
a clear understanding of their organisation’s strengths
and weaknesses?

10. What are core rigidities? What does it mean to say that
each core competence could become a core rigidity?

EXPERIENTIAL EXERCISES

Exercise 1: VRIO analysis – is the organisation’s
advantage sustainable?
In this chapter, the concepts of sustainable competitive
advantage and how organisations can use their unique
bundle of resources to achieve such an advantage were
introduced. Remember that a sustainable competitive
advantage can only be present if competitors are
unsuccessful in duplicating the organisation’s benefit or the
competitor is unable to acquire the resources necessary to
imitate.

However, discovering if a competitive advantage
is sustainable or merely temporary can be difficult for
managers. According to Business Insider’s War Room online
magazine (http://www.businessinsider.com/warroom),
there are six critical ingredients to achieve a sustainable
competitive advantage:
1. real intellectual property

2. a dynamic rather than a single product line

3. dramatic cost-improvement capabilities

4. a proven team with inside relationships

5. a lock on the customer or market

6. strong focus and differentiation.

In your teams, prepare for class discussion an analysis
of a Fortune 500 company that your team finds interesting
(the 2020 list may be viewed at http://fortune.com/
fortune500). Your team should be prepared, at a minimum,
to address the following issues:
1. How does the organisation describe its value

proposition?

2. What are the organisation’s capabilities?

3. What do you consider to be the organisation’s core
competencies?

4. Do you consider this organisation to possess a
sustainable competitive advantage? If so, do you believe
this to be sustainable in the future?

5. Categorise the organisation’s performance over the past
few years.

95CHAPTER 3
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NOTES
1. E. Rudea-Sabater & D. Derosby, 2011, The

evolving internet in 2025: Four scenarios,
Strategy & Leadership, 39: 32–8.

2. H. A. Ndofor, D. G. Sirmon & X. He, 2011,
Firm resources, competitive actions and
performance: Investigating a mediated
model with evidence from the in-vitro
diagnostics industry, Strategic Management
Journal, 32: 640–57; R. R. Wiggins & T.
W. Ruefli, 2002, Sustained competitive
advantage: Temporal dynamics and the
incidence of persistence of superior
economic performance, Organization
Science, 13: 82–105.

3. 2018, Onboard Singapore Airlines’ Boeing
787–10 ‘Dreamliner’ delivery flight, USA
Today, http://www.usatoday.com, 26
March; J. Ostrower, 2015, At Boeing,
innovation means small steps, not giant
leaps, Wall Street Journal Online, http://
www.wsj.com, 2 April.

4. M. Gruber, F. Heinemann, M. Brettel
& S. Hunbeling, 2010, Configurations
of resources and capabilities and their
performance implications: An exploratory
study on technology ventures, Strategic
Management Journal, 31: 1337–56; D. G.
Sirmon, M. A. Hitt & R. D. Ireland, 2007,
Managing firm resources in dynamic
markets to create value: Looking inside the
black box, Academy of Management Review,
32: 273–92.

5. F. Polidoro, Jr & P. K. Toh, 2011, Letting
rivals come close or warding them off? The
effects of substitution threat on imitation
deterrence, Academy of Management
Journal, 54: 369–92; A. W. King, 2007,
Disentangling interfirm and intrafirm
causal ambiguity: A conceptual model
of causal ambiguity and sustainable
competitive advantage, Academy of
Management Review, 32: 156–78.

6. M. Semadeni & B. S. Anderson 2010,
The follower’s dilemma: Innovation and
imitation in the professional services
industry, Academy of Management Journal,
53: 1175–93; U. Ljungquist, 2007, Core
competency beyond identification:
Presentation of a model, Management
Decision, 45: 393–402.

7. A. Parmigiani & S. S. Holloway, 2011,
Actions speak louder than modes:
Antecedents and implications of parent
implementation capabilities on business
unit performance, Strategic Management
Journal, 32: 457–85.

8. J. A. Adegbesan & M. J. Higgins, 2010,
The intra-alliance division of value
created through collaboration, Strategic
Management Journal, 32: 187–211; M. A.
Peteraf & J. B. Barney, 2003, Unraveling
the resource-based tangle, Managerial and
Decision Economics, 24: 309–23; J. B. Barney,
2001, Is the resource-based ‘view’ a useful
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alliances, Strategic Management Journal, 28:
623–34.

100. M. H. Zack & S. Singh, 2010, A knowledge-
based view of outsourcing, International
Journal of Strategic Change Management, 2:
32–53.

101. M. Reitzig & S. Wagner, 2010, The hidden
costs of outsourcing: Evidence from patent
data, Strategic Management Journal, 31:
1183–201; A. Tiwana, 2008, Does interfirm
modularity complement ignorance? A field
study of software outsourcing alliances,
Strategic Management Journal, 29: 1241–52.

102. C. S. Katsikeas, D. Skarmeas & D. C. Bello,
2009, Developing successful trust-based
international exchange relationships,

Journal of International Business Studies,
40: 132–55; E. Perez & J. Karp, 2007, US
to probe outsourcing after ITT case, Wall
Street Journal (Eastern Edition), 28 March,
A3, A6.

103. C. Grimpe & U. Kaiser, 2010, Balancing
internal and external knowledge
acquisition: The gains and pains from
R&D outsourcing, Journal of Management
Studies, 47: 1483–509; C. Weigelt & M.
B. Sarkar, 2009, Learning from supply-
side agents: The impact of technology
solution providers’ experiential diversity
on clients’ innovation adoption, Academy of
Management Journal, 52: 37–60.

104. P. D. O. Jensen & T. Pederson, 2011, The
economic geography of offshoring: The
fit between activities and local context,
Journal of Management Studies, 48: 352–72;
F. J. Contractor, V. Kumar, S. K. Kundu & T.
Pedersen, 2010, Reconceptualizing the firm
in a world of outsourcing and offshoring:
The organizational and geographical
relocation of high-value company
functions, Journal of Management Studies,
47: 1417–33.

105. N. Heath, 2009, Outsourcing: The new
hot spots, BusinessWeek, http://www.
businessweek.com, 20 February.

106. Y. Li, Z. Wei & Y. Liu, 2010, Strategic
orientations, knowledge acquisition, and
firm performance: The perspective of the
vendor in cross-border outsourcing, Journal
of Management Studies, 47: 1457–82; M. A.
Hitt, D. Ahlstrom, M. T. Dacin, E. Levitas &
L. Svobodina, 2004, The institutional effects
on strategic alliance partner selection in
transition economies: China versus Russia,
Organization Science, 15: 173–85.

107. D. M. Sullivan & M. R. Marvel, 2011,
Knowledge acquisition, network reliance,
and early-stage technology venture
outcomes, Journal of Management Studies,
48(6): 1169–93; M. Gibbert, M. Hoegl &
L. Valikangas, 2007, In praise of resource
constraints, MIT Sloan Management Review,
48(3): 15–17, 126.

108. E. Rawley, 2010, Diversification,
coordination costs, and organizational
rigidity: Evidence from microdata, Strategic
Management Journal, 31: 873–91.

109. D. L. Barton, 1995, Wellsprings of Knowledge:
Building and Sustaining the Sources of
Innovation, Boston, MA: Harvard Business
School Press, 30–1.

99CHAPTER 3
THE INTERNAL ORGANISATION: RESOURCES, CAPABILITIES, CORE COMPETENCIES AND COMPETITIVE ADVANTAGES

PA R T 2
STRATEGIC ACTIONS:
STRATEGY FORMULATION
4 Business-level strategy 102

5 Competitive dynamics 131

6 Corporate-level strategy 161

7 Acquisition and restructuring
strategies 189

8 International strategy 218

9 Cooperative strategy 252

101

101

Business-level strategy
CH

AP
TE

R
4

Studying this chapter should provide you with the strategic management knowledge
needed to:
LO1 discuss the relationship between customers and business-level strategies in

terms of who, what and how
LO2 explain the purpose of forming and implementing a business-level strategy
LO3 describe business models and explain their relationship with business-level

strategies
LO4 explain the differences among business-level strategies
LO5 use the five forces of competition model to explain how above-average returns

can be earned through each business-level strategy
LO6 discuss the risks of using each of the business-level strategies.

Learning Objectives

102

Clonakilla Wines is a Canberra region winery well-
known for its high-quality wines, particularly its Shiraz
Viognier, which was named as Australia’s wine of the
year in 2006 and 2011 and retails for over A$100 a bottle.
The Australian wine industry is highly competitive – it
is worth A$40 billion, encompassing 65 wine regions,
2500 wineries and 6000 grape growers and, as such,
a vast range of quality, volume produced and regional
prominence. The Canberra region alone has more than
30 wineries and 150 grape growers competing for local,
national and international customers.

Clonakilla’s iconic Shiraz Viognier

Clonakilla (the name means ‘meadow of the church’ in
Irish) is a family business based in Murrumbateman, New
South Wales, north of Canberra. The winery produces
between 18 000 and 20 000 cases (216 000 to 240 000
bottles) of wine annually, from grape varieties such as
Shiraz, Viognier and Riesling. According to Clonakilla,
when CSIRO Plant Industry researcher Dr John Kirk
planted the first vines in 1971, he had ‘no idea that his
vineyard would one day be celebrated as one of the
best in the country’ and that over the decades, there
would be ‘trials and tribulations as well as moments of
unprecedented success’.

After John’s son Tim Kirk visited the Rhone Valley in
France in 1991, his decision to blend a small amount of
Viognier white wine with the 1992 Shiraz paid off. The
major awards started in 1999, winning the NSW wine of
the year, followed by many others, and culminating in the
2006 and 2011 Australian wine of the year, and 2010 and

2011 international airlines best first class red wine. The
Wall Street Journal stated ‘some argue this is Australia’s
greatest red wine, it is certainly one of the greatest
Shirazs’. Wine critic and writer James Halliday described
Clonakilla’s Shiraz Viognier as ‘an icon wine, one of the
best in Australia’. Langton’s Andrew Callard describes it as
‘one of the most important advances in the development
of Australian Shiraz since the release of 1952 Penfolds
Grange Hermitage’. Langton, an Australian wine auction
house and publisher of the Langton classification of the
leading wines in Australia, went further and has included
the Shiraz Viognier in the highest category, ‘Exceptional’,
since 2010, a category it shares with other Australian
icons such as Penfolds Grange and Henschke Hill of
Grace. Tim Kirk himself was awarded Gourmet Traveller’s
Australian Winemaker of the Year in 2013, one of the
highest accolades in the Australian wine industry.

Similar to other winemakers, recurring trials or
challenges faced by Clonakilla included droughts
and water shortages, high evaporation rates, frosts
and grasshopper plagues, and all of these have been
exacerbated by the effects of climate change. Recent
challenges include how to deal with demand and growth,
maintain quality and differentiate the winery (and its
flagship wine) in an increasingly crowded market.

One of the important things for any organisation, but
particularly for a small business, is to define its competitive
strategy. Will the organisation compete on the basis of cost
or quality, and will it serve the whole market or focus on a
niche? Clonakilla employs a focused differentiation strategy,
with an integrated set of actions taken to produce goods that
serve the needs of a particular competitive segment (at an
acceptable cost) that customers perceive as being different
in ways that are important to them. For Clonakilla, the
differentiation is via quality.

This strategy has consequences for the competitive
forces that impact the organisation and also has wide-
ranging consequences for the organisation itself. To
successfully implement a focused differentiation strategy,
it needs to be consistent, persistent and aligned across
all aspects of the business. The product, price, place,
promotion, people, processes and physical evidence (the
‘7Ps’ of marketing) associated with the brand all need

Clonakilla Wines in a quality niche position

OPENING CASE STUDY

CHAPTER 4
BUSINESS-LEVEL STRATEGY

103

Vita l to a n orga n isat ion’s success,1 st rateg y is concer ned w it h ma k i ng choices a mong t wo or more
alter nat ives. 2 As we noted in Chapter 1, when choosing a st rateg y, t he organ isat ion decides to pu rsue
one course of action instead of others. The choices are influenced by opportunities and threats in the
organisation’s external environment3 (see Chapter 2), as well as by the nature and quality of the resources,
capabilities and core competencies in its internal organisation4 (see Chapter 3). As we see in the opening
case, Clonakilla has chosen a differentiation strategy that focuses on a specific niche in the market.

T he f u nda menta l objec t ive of usi ng a ny t y pe of st rateg y (see Fig u re 1.1) is to ga i n st rateg ic
competitiveness and earn above-average returns. 5 Strategies are purposeful, precede the taking of actions
to which they apply, and demonstrate a shared understanding of the organisation’s vision and mission.6 An
effectively formulated strategy marshals, integrates and allocates the organisation’s resources, capabilities
and competencies so that it will be properly aligned with its external environment.7 A properly developed
strategy also rationalises the organisation’s vision and mission along with the actions taken to achieve
them.8 Information about a host of variables, including markets, customers, technology, worldwide finance
and the changing world economy, must be collected and analysed to properly form and use strategies. In
the final analysis, sound strategic choices that reduce uncertainty regarding outcomes are the foundation
for building successful strategies.9

Business-level strategy, this chapter’s focus, is an integrated and coord inated set of commitments
and act ions t he organ isat ion uses to gain a compet it ive advantage by ex ploit ing core competencies in
specific product markets.10 Business-level strateg y indicates the choices the organisation has made about
how it intends to compete in ind iv idual product markets. The choices are impor tant because long-ter m
performance is linked to an organisation’s strategies.11 Given the complexity of successfully competing in
the global economy, the choices about how the organisation will compete can be difficult.12 For example,
many traditional bricks-and-mortar retail organisations have found themselves disrupted by the so-called
FA A NG group of technolog y companies trading publicly in the market – Facebook (FB), A mazon (A MZN),
Apple (AAPL), Netflix (NFLX) and Google (GOOG) – as customers change purchasing preferences to online
and subscription-based ser vices.13 This chapter will examine some of the aspects of information, reach,
richness and affiliation that help a business-level strategy to be successful.

Ever y organisation must form and use a business-level strateg y. This extends beyond commercial
organisations to include government departments, health care, sporting and community not-for-profit
organisations. Every organisation competes for staff, resources and market share. However, every organisation
may not use all the strategies – corporate-level, merger and acquisition, international and cooperative – that we
examine in Chapters 6 to 9. An organisation competing in a single product market area in a single geographic
location does not need a corporate-level strategy to deal with product diversity or an international strategy
to deal with geographic diversity. By contrast, a diversified organisation will use one of the corporate-level
strategies as well as a separate business-level strategy for each product market area in which it competes.
Every organisation – from the local dry cleaner to a community not-for-profit to the multinational corporation
– must develop and use at least one business-level strategy. Thus business-level strategy is the core strategy:
the strategy that the organisation forms to describe how it intends to compete in a product market.14

business-level
strategy
an integrated and
coordinated set
of commitments
and actions the
organisation uses to
gain a competitive
advantage by
exploiting core
competencies in
specific product
markets

to align with the chosen strategy – in this case, a quality
niche strategy.

Time will tell if Clonakilla’s focused differentiation
business-level strategy will maintain and build on its
market success.

Sources: Clonakilla website, 2020, A philosophy of wine, https://clonakilla.com.
au/story; G. Whiteside, 2019, Australia’s wine industry recovers from decade-

long grape glut, industry marketing group says, ABC News, https://www.abc.
net.au/news/rural/2019-10-18/australias-wine-glut-is-over/11613680,

18 October; H. Hooke, 2018, Langton’s Classification of Australian Wine,
The Real Review, https://www.therealreview.com/2018/09/03/langtons-

classification-of-australian-wine, 3 September; M. Allen, 2017, Odd couple:
Meet the winemakers at Clonakilla and Ravensworth, Australian Financial

Review, https://www.afr.com/life-and-luxury/food-and-wine/strange-
bedfellows-the-winemakers-at-clonakilla-and-ravensworth-20170518-
gw7mdq, 25 May; H. Hooke, 2012, Rewards for a ’killa instinct, Sydney

Morning Herald, https://www.smh.com.au/lifestyle/rewards-for-a-killa-
instinct-20120922-26d4j.html, 25 September.

STRATEGY NOW

Clonakilla’s
focused
differentiation
strategy

104 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

We discuss several topics to examine business-level strategies. Because customers are the foundation of
successful business-level strategies and should never be taken for granted,15 we present information about
customers that is relevant to business-level strategies. In terms of customers, when selecting a business-
level strategy the organisation determines who will be served, what needs those target customers have that
it will satisfy and how those needs will be satisfied. Selecting customers and deciding which of their needs
the organisation will try to satisfy – as well as how it will do so – are challenging tasks. Global competition
has created many attractive options for customers, making it difficult for an organisation to determine the
strateg y to best ser ve them.16 Effective global competitors have become adept at identifying the needs of
customers in different cultures and geographic regions, as well as learning how to quickly and successfully
adapt the functionality of an organisation’s good or ser vice to meet those needs.

Descriptions of the purpose of business-level strategies, and of the five business-level strategies, follow
the discussion of customers. The five strategies we examine are called generic because they can be used in
any organisation competing in any industry.17 Our analysis describes how the effective use of each strategy
allows the organisation to favourably position itself relative to the five competitive forces in the industry
(see Chapter 2).In addition, we use the value chain (see Chapter 3) to show examples of the primary and
support activities necessary to implement specific business-level strategies. Because no strategy is risk-
free,18 we also describe the different risks the organisation may encounter when using these strategies. In
Chapter 11, we explain the organisational structures and controls linked with the successful use of each
business-level strategy.

Customers: their relationship with
business-level strategies
Strategic competitiveness results only when the organisation satisfies a group of customers by using
its compet it ive adva ntages as t he basis for compet i ng i n i nd iv idua l product ma rkets.19 A key reason
orga n isat ions must sat isf y customers w it h t hei r busi ness-level st rateg y is t hat ret u r ns ea r ned f rom
relat ionsh ips w it h customers a re t he l i feblood of a l l orga n isat ions. 2 0 Even gover n ment agencies or
com munity organisations ex ist to prov ide a retu r n on investment to their ow ners, although the words
‘return’, ‘investment’ and ‘owner’ might mean different things to each of them. Every organisation has
customers a nd ever y orga n isat ion has compet itors. For exa mple, one of t he major compet itors of t he
Australian Taxation Office (ATO) is non-compliance with taxation laws, and the ATO invests significant
resources to convince and assist its customers to maintain voluntary compliance. Effective relationships
with customers are vital to success.

The most successful organisations try to find new ways to satisfy current customers and/or to meet
the needs of new customers. Being able to do this can be even more difficult when organisations and
consumers face challenging economic conditions. During such times, organisations may decide to reduce
their workforce to control costs. This can lead to problems, however, when having fewer employees makes
it more difficult for organisations to meet individual customers’ needs and expectations. In these instances,
some suggest that organisations should follow several courses of action, including paying extra attention to
their best customers and developing a flexible workforce by cross-training employees so they can undertake
a variety of responsibilities on their jobs. Amazon and Lexus have been identified as ‘customer service
champions’ because they devote extra care and attention to customer service, especially during challenging
economic times. 21

Effectively managing relationships with customers
The organisation’s relationships with its customers are strengthened when it delivers superior value to
them. Strong interactive relationships with customers often provide the foundation for the organisation’s
efforts to profitably serve customers’ unique needs.

CHAPTER 4
BUSINESS-LEVEL STRATEGY

105

As the follow ing statement shows, Caesar’s Enter tain ment (the world’s largest prov ider of branded
casino enter tainment) is committed to providing superior value to customers: ‘Caesar’s Enter tainment is
focused on building loyalty and value with its customers through a unique combination of great ser vice,
e xcel lent produc ts, u nsu r passed d ist r ibut ion, operat iona l e xcel lence a nd tec h nolog y leadersh ip’. 2 2
Importantly, as Caesar’s appears to anticipate, delivering superior value often results in increased customer
loyalty. In turn, customer loyalty has a positive relationship with profitability. However, more choices and
easily accessible information about the functionality of organisations’ products are creating increasingly
sophisticated and knowledgeable customers, making it difficult to earn their loyalty.23

A number of organisations have become skilled at the ar t of managing all aspects of their relationship
w it h t hei r customers. 2 4 For exa mple, A mazon is w idely recog n ised for t he qua l it y of i n for mat ion it
maintains about its customers, the ser vices it renders and its ability to anticipate customers’ needs. Using
the information it has, A mazon tries to serve what it believes are the unique needs of each customer, and it
has a strong reputation for being able to successfully do this. Amazon uses big data gathered from customers
while they browse to build and fine-tune its recommendation engine. The more Amazon knows about them,
the better it can predict what they want to buy. 25

As we discuss next, organisations’ relationships with customers are characterised by three dimensions.
Companies such as Acer and A mazon understand these dimensions and manage their relationships with
customers in light of them.

Reach, richness and affiliation
The reach d i mension of relat ionsh ips w it h customers is concer ned w it h t he orga n isat ion’s access a nd
connection to customers. In general, organisations seek to extend their reach, add ing customers in the
process of doing so.

Reach is an especially critical dimension for social networking sites such as Facebook and Instagram in
that the value these organisations create for users is to connect them with others. The number of Facebook
users has been dramatically increasing globally.26 Reach is also important to Netflix, which began life as a
provider of postal DVDs in the USA and now streams movies and series to 190 countries. Fortunately for this
organisation, its reach continues to expand. In a letter sent to shareholders in July 2019, Netflix reported
it had 151 million subscribers and estimated it would grow that number by seven million in one quar ter to
158 million total subscribers.27 Nine years earlier, the company had just over 20 million subscribers, and it
added 25 million subscribers in 2018–19.

Richness, the second dimension of organisations’ relationships with customers, is concerned with the
depth and detail of the two-way flow of information between the organisation and the customer. The
potent ia l of t he r ich ness d i mension to help t he orga n isat ion establ ish a compet it ive adva ntage i n its
relationship with customers leads many organisations to offer online services in order to better manage
i nfor mat ion excha nges w it h t hei r customers. Broader a nd deeper i n for mat ion-based excha nges allow
organisations to better understand their customers and their needs. Such exchanges also enable customers
to become more k nowledgeable about how t he organ isation can satisf y t hem. Inter net tech nolog y and
e-com merce t ra nsact ions have substa nt ia l ly reduced t he costs of mea n i ng f u l i n for mat ion excha nges
with current and potential customers. As we have noted, A mazon is a leader in using the internet to build
relat ionsh ips w it h customers. In fact, it bil ls itself as t he most ‘customer-cent r ic compa ny ’ on Ea r t h.
A mazon and other organisations use rich information from customers to help them develop innovative
new products that better satisfy customers’ needs. 28

Affiliation, t he t h i rd d imension, is concer ned w it h facilitat ing usef u l interact ions w it h customers.
View ing t he world t h rough t he customer ’s eyes and constant ly seek ing ways to create more value for
the customer have positive effects in terms of affiliation. This approach enhances customer satisfaction
and produces fewer customer complaints. In fact, for ser v ices, customers of ten do not complain when
dissatisfied; instead they simply go to competitors for their service needs.29 Internet navigators such as

106 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Reach is important for Netflix

Source: Shutterstock.com/DenPhotos

Microsoft’s MSN Autos help online clients find and sort information. MSN
Autos provides data and software to prospective car buyers that enables
them to compare car models along multiple objective specifications. A
prospective buyer who has selected a specific car based on comparisons
of different models can then be linked to dealers that meet the customer’s
needs a nd pu rchasing requirements. Infor mation about ot her relevant
issues such as financing and insurance, and even local traffic patterns,
is also available at the site. Because its revenues come not from the final
customer or end user but from other sources (such as adver tisements on
its website, hyperlinks, and associated products and services), MSN Autos
represents the customer’s interests, a service that fosters affiliation.30 In
Australia, Seek promotes a similar affiliation for customers through the
number of services it provides to job seekers via its portal, including career
advice and templates for résumés. 31

As we discuss next, effectively managing customer relationships
(a long t he d i mensions of reach, r ich ness a nd a f f i l iat ion) helps t he
organisation answer questions related to the issues of who, what and how.

Who: determining the customers to serve
Deciding who the target customer is that the organisation intends to serve with its business-level strategy is
an important decision.32 Organisations divide customers into groups based on differences in the customers’
needs (needs are d iscussed f ur ther in the next section) to make this decision. Div id ing customers into
groups based on their needs is called market segmentation, which is a process that clusters people with
similar needs into individual and identifiable groups.33 In the animal food products business, for example,
the food product needs of owners of companion pets (e.g. dogs and cats) differ from the needs for food
and health-related products of those owning production animals (e.g. livestock). A subsidiar y of Colgate-
Palmolive, Hill’s Pet Nutrition, sells food products for pets. In fact, the company’s mission is ‘to help enrich
and lengthen the special relationship between people and their pets’. 34 Thus, Hill’s Pet Nutrition targets
the needs of different segments of customers with the food products it sells for animals.

Almost any identifiable human or organisational characteristic can be used to subdivide a market
into segments that differ from one another on a given characteristic. Common characteristics on which
customers’ needs var y are illustrated in Table 4.1.

What: determining which customer needs to satisfy
A fter the organisation decides who it will ser ve, it must identify the targeted customer group’s needs that
its goods or ser vices can satisfy. In a general sense, needs (what) are related to a product’s benefits and
features.35 Successful organisations learn how to deliver to customers what they want, when they want it.36
Having close and frequent interactions with both current and potential customers helps the organisation
identify those individuals’ and groups’ current and future needs. 37

From a strategic perspective, a basic need of all customers is to buy products that create value for them.
The generalised forms of value that goods or ser vices provide are either low cost with acceptable features
or highly differentiated features with acceptable cost. During the global financial crisis (GFC) of 2008–09,
organisations across industries recognised their customers’ needs to feel as secure as possible when making
purchases. The most effective organisations continuously strive to anticipate changes in customers’ needs.
The organisation that fails to anticipate and certainly to recognise changes in its customers’ needs may lose
its customers to competitors whose products can provide more value to the focal organisation’s customers.
It is also recognised that consumer needs and desires have been changing in recent years. For example,
more consumers desire to have an experience rather than to simply purchase a good or ser vice. As a result,

market segmentation
a process used
to cluster people
with similar needs
into individual and
identifiable groups

CHAPTER 4
BUSINESS-LEVEL STRATEGY

107

one of Starbucks’ goals has been to provide an experience, not just a cup of coffee. Customers also prefer to
receive customised goods and services. Starbucks in the USA has been doing this for some time, by allowing
customers to design their own d rinks, within its menus (which have become rather extensive over time).
Customers also demand fast service. Consumers of coffee are known for their impatience, and rapid service
is now expected by most consumers. 38 Unhappy consumers lead to lost sales, from both those consumers
and others who learn of their dissatisfaction. Therefore, it is impor tant to maintain customer satisfaction
by meeting and satisfying consumers’ needs. 39

How: determining core competencies necessary to
satisfy customer needs
A fter deciding who the organisation will serve and the specific needs of those customers, the organisation
is prepared to determine how to use its capabilities and competencies to develop products that can satisfy
t he needs of its ta rget customers. A s ex pla i ned i n Chapters 1 a nd 3, core competencies a re resou rces
a nd capabi l it ies t hat ser ve as a sou rce of compet it ive adva ntage for t he orga n isat ion over its r iva ls.
Organisations use core competencies (how) to implement value-creating strategies and thereby satisf y
customers’ needs. Only those organisations with the capacity to continuously improve, innovate and
upgrade their competencies can expect to meet and hopefully exceed customers’ expectations across time.40
Organisations must continuously upgrade their capabilities to ensure that they maintain an advantage
over their rivals by providing customers with a superior product.41 Often these capabilities are difficult
for competitors to imitate, par tly because they are constantly being upgraded, but also because they are
integrated and used as configurations of capabilities to perform an important activity (e.g. R&D).42

Organisations draw from a wide range of core competencies to produce goods or services that can
satisfy customers’ needs. For example, Merck is a large pharmaceutical organisation well known for its
R&D capabilities. In recent times, Merck has been building on these capabilities by investing heavily in
R&D. In 2015, Merck invested US$6.7 billion to conduct research and identify major new drugs; in 2018,
it invested US$9.7 billion. These new drugs are intended to meet the needs of consumers and to sustain
Merck’s competitive advantage in the industr y.43

Basis for customer segmentation

Consumer
markets

1 Demographic factors (age, income, sex, etc.)
2 Socioeconomic factors (social class and stage in the family life cycle)
3 Geographic factors (cultural, regional and national differences)
4 Psychological factors (lifestyle and personality traits)
5 Consumption patterns (heavy, moderate and light users)
6 Perceptual factors (benefit segmentation and perceptual mapping)

Industrial
markets

1 End-use segments
2 Product segments (based on technological differences or production

economics)
3 Geographic segments (defined by boundaries between countries or by

regional differences within them)
4 Common buying factor segments (cut across product market and

geographic segments)
5 Customer size segments

Source: Based on information in S. C. Jain, 2009, Marketing Planning and Strategy, Mason, OH:
South-Western-Cengage Custom Publishing.

Table 4.1

108 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

SAS Institute is the world’s largest privately owned software company
and is the leader in business intelligence and analy tics. Customers use
SAS programs for data warehousing, data mining and decision suppor t
purposes. SAS serves 83 000 sites in 147 countries and 92 per cent of the
top Fortune 100 firms. Allocating approximately 24 per cent of revenues
to R&D, a percentage that exceeds its competitors, SAS relies on its core
competence in R&D to satisfy the data-related needs of such customers,
including a host of consumer goods organisations (e.g. hotels, banks and
catalogue companies).44

Sometimes organisations may find it necessary to use their core
competencies as the foundation for producing new goods or ser vices for
new customers. This may be the case for some small car par ts suppliers.
Given that car production in recent years has declined about one-th ird
from more typical levels in major markets, a number of these organisations
are seek ing to d iversif y their operations, perhaps ex iting the car par ts
supplier industry as a result. Some analysts believe that the first rule for
these small manufacturers is to determine how their current capabilities
and competencies might be used to produce value-creating products for
different customers. One analyst gave the following example of how this
might work: ‘There may be no reason that a company making automobile door handles couldn’t make ball-
and-socket joints for artificial shoulders’.45

Our discussion about customers shows that all organisations must use their capabilities and core
competencies (the how) to satisf y the needs (the what) of the target g roup of customers (the who) that
the organisation has chosen to serve. Next, we describe the different business-level strategies that are
available to organisations to use to satisfy customers as the foundation for earning above-average returns.

The purpose of a business-level strategy
The purpose of a business-level strategy is to create differences between the organisation’s position and
t hose of its compet itors.46 To position itself differently from competitors, an organisation must decide
whether it intends to perform activities differently or to perform different activities. Strategy defines the path
t hat prov ides t he d irection of actions to be taken by leaders of t he organ isation.47 In fact, ‘choosing to
perform activities differently or to perform different activities than rivals’ is the essence of business-level
strategy.48 Thus, the organisation’s business-level strategy is a deliberate choice about how it will perform
the value chain’s primar y and suppor t activities to create unique value. Indeed, in the cur rent complex
competitive landscape, successful use of a business-level strateg y results from the organisation learning
how to integrate the activities it performs in ways that create superior value for customers.

Business models and their relationship with
business-level strategies
As is the case with strategy, there are multiple definitions of a business model. 49 The consensus across
these definitions is that a business model describes what an organisation does to create, deliver and capture
value for its stakeholders. 50 As explained in Chapter 1, stakeholders value related yet different outcomes.
For example, for shareholders, the organisation captures and d istr ibutes value to them in the for m of a
retur n on their investment. For customers, the organisation creates and delivers value in the for m of a
product featuring the combination of price and features for which they are willing to pay. For employees,
the organisation creates and delivers value in the form of a job about which they are passionate and through

business model
describes what an
organisation does to
create, deliver and
capture value for its
stakeholders

This crowded shop could benefit from more attention to
service or alternative service options such as self-service
or online shopping. Too few salespeople to process
transactions can have a negative impact on a customer’s
experience.

Source: Shutterstock.com/Sorbis

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109

which they have opportunities to develop their skills by participating in continuous learning experiences. In
a sense then, a business model is a framework for how the organisation will create, deliver and capture value
while a business-level strateg y is the set of commitments and actions that yields the path an organisation
intends to follow to gain a competitive advantage by exploiting its core competencies in a specific product
market. Understanding customers in terms of who, what and how is foundational to developing and using
successfully both a business model and a business-level strateg y. 51

Regardless of the business model chosen, those leading an organisation should view that selection as one
that will require adjustment in response to conditions that change from time to time in the organisation’s
external environment (e.g. an opportunity to enter a new region surfaces) and its internal environment (e.g.
the development of new capabilities). 52 Par ticularly because it is involved primarily with implementing a
business-level strateg y, the operational mechanics of a business model should change given the realities
an organisation encounters while engaging rivals in marketplace competitions.

There is an array of different business models, from which organisations select one to use.53 A franchise
business model, for example, finds an organisation licensing its trademark and the processes it follows to
create and deliver a product to franchisees. In this instance, the organisation franchising its trademark
and processes captures value by receiving fees and royalty payments from its franchisees.

McDonald’s and Jim’s Group (Jim’s Mowing, Jim’s Cleaning, Jim’s Dog Wash, etc.) both use the franchise
business model. McDonald’s uses the model as par t of its cost leadership strateg y, while Jim’s Group uses
it to implement a differentiation strategy (we discuss both strategies in detail in the next major section).
The McDonald’s cost leadership strategy finds it using processes detailed in its franchise business
model to deliver food items to its customers that are offered at a low price but with acceptable levels of
differentiation. Customers receive acceptable levels of differentiation in terms of taste quality, service
quality, the clean liness of the organ isation’s un its and the value customers believe they receive when
buying McDonald’s food. 54 Jim’s Group also uses a franchise business model, but its model differs from the
McDonald’s model. Rather than hav ing the same product at each franch ise, Jim’s has over 50 d iv isions
covering household ser vices such as mowing, cleaning, dog washing and fencing.55 A lso, Jim’s employs
a regional and national franchisor model where owning a region or a division allows the franchisor the
right to sell franchises in a specific area.56 Thus, while McDonald’s and Jim’s Group use the same business
model, the franchising business models these organisations use differ in the actions they take to implement
different business-level strategies.

As mentioned, there are multiple kinds of business models, including the subscription model. In this
instance, the business model finds an organisation offering a product to customers on a regular basis, such as
once-per-month, once-per-year or upon demand. Netflix uses a subscription business model, as does Xero, an
organisation providing accounting software that extends to business functions such as payroll, timesheets
and expense management. In this way, Xero combines the differentiation strategy with a subscription
model to create, deliver and capture value for the stakeholders (e.g. customers, suppliers and employees)
with whom the organisation interacts while implementing its business-level strateg y. 57 Other business
models that also support the use of any of the five generic business-level strategies we discuss next include
the following: (1) a freemium model (here the organisation provides a basic product to customers for free
and earns revenues and profits by selling a premium version of the service – examples include Dropbox and
Mailchimp); (2) an advertising model (where, for a fee, organisations provide advertisers with high-quality
access to their target customers – Google and Pinterest are examples of organisations using this business
model); and (3) a peer-to-peer model (where a business matches those wanting a particular service with
those providing that ser vice – an example is A irbnb).

Types of business-level strategies
Organisations choose from among five business-level strategies to establish and defend their desired
st rateg ic posit ion aga i nst compet itors: cost leadership, differentiation, focused cost leadership, focused

110 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

differentiation and integrated cost leadership/differentiation (see Figure 4.1). Each business-level strategy helps
the organisation to establish and exploit a par ticular competitive advantage within a par ticular competitive
scope. How organisations integrate the activities they perform within each different business-level strategy
demonstrates how they differ from one another.58 For example, organisations have different activity maps,
and thus Virgin Australia’s activity map differs from those of competitor airlines Jetstar and Regional
Express. Superior integration of activities increases the likelihood of an organisation being able to gain an
advantage over competitors and earn above-average returns.

W hen selecting a business-level strateg y, organisations evaluate two ty pes of potential competitive
advantages: ‘lower cost than rivals, or the ability to differentiate and command a premium price that
exceeds the extra cost of doing so’. 59 Having lower cost derives from the organisation’s ability to perform
activities differently from rivals; being able to differentiate indicates the organisation’s capacity to
perform different (and valuable) activities. Thus, based on the nature and quality of its internal resources,
capabilities and core competencies, an organisation seeks to form either a cost competitive advantage or a
distinctiveness competitive advantage as the basis for implementing its business-level strateg y.60

Two t y pes of ta rget ma rkets a re a broad ma rket a nd na r row ma rket seg ment(s) (see Fig u re 4.1).
Organisations serving a broad market seek to use their capabilities to create value for customers on an
industry-wide basis. A narrow market segment means that the organisation intends to serve the needs of a
narrow customer group. With focus strategies, the organisation ‘selects a segment or group of segments in
the industry and tailors its strategy to serving them to the exclusion of others’.61 Buyers with special needs
and buyers located in specific geographic regions are examples of narrow customer groups.62 As shown in
Figure 4.1, an organisation could also strive to develop a combined low-cost/distinctiveness value-creation
approach as the foundation for serving a target customer group that is larger than a narrow market segment
but not as comprehensive as a broad (or industr y-wide) customer group. In this instance, the organisation
uses the integrated cost leadership/differentiation strategy.

None of the five business-level strategies shown in Figure 4.1 is inherently or universally superior to
the others.63 The effectiveness of each strategy is contingent both on the opportunities and threats in an
organisation’s external environment and on the strengths and weaknesses derived from the organisation’s
resource por tfolio. It is critical, therefore, for the organisation to select a business-level strateg y that is
based on a match between the oppor tunities and threats in its external environment and the strengths of
its internal organisation as shown by its core competencies.6 4 A fter the organisation chooses its strateg y,
it shou ld consistently emphasise actions t hat a re requ ired to successf u lly use it. For example, Big W ’s

Figure 4.1 Five business-level strategies

Narrow target

Broad target Cost leadership Differentiation

Cost

Competitive advantage

Competitive scope

Uniqueness

Focused cost
leadership

Focused
differentiation

Integrated cost
leadership/differentiation

CHAPTER 4
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111

continuous emphasis on driving its costs lower is thought to be a key to the organisation’s effective cost
leadership strateg y.65

Cost leadership strategy
The cost leadership strategy is an integrated set of actions taken to produce goods or services with features
that are acceptable to customers at the lowest cost, relative to those of competitors.66 Organisations using
the cost leadership strateg y commonly sell standardised goods or ser vices ( but with competitive levels
of differentiation) to the industry’s most typical customers. Process innovations – which are newly
designed production and distribution methods and techniques that allow the organisation to operate more
efficiently – are critical to successful use of the cost leadership strategy.67

As noted, cost leaders’ goods and services must have competitive levels of differentiation that create
value for customers. For example, in recent years Hyundai Motors has emphasised the design of its cars in
the market as a source of differentiation while implementing a cost leadership strategy. Called ‘cheap chic’,
this is used by K ia Motors, and some analysts have a positive view of this decision, saying: ‘ W hen they’re
done, K ia’s cars will still be low-end [in price], but they won’t necessarily look like it’.68 It is impor tant for
organisations using the cost leadership strateg y to not simply concentrate on reducing costs, because it
could result in the organisation efficiently producing products that no customer wants to purchase. In
fact, such extremes could limit the potential for impor tant process innovations and lead to employment
of lower-skilled workers, poor conditions on the production line, accidents and a poor quality of work life
for employees.69

As shown in Figure 4.1, the organisation using the cost leadership strategy targets a broad customer
segment or group. Cost leaders concentrate on finding ways to lower their costs relative to competitors by
constantly rethinking how to complete their primary and support activities to reduce costs still further, while
maintaining competitive levels of differentiation.70

As primar y activities, inbound logistics (e.g. materials handling, warehousing and inventor y control)
and outbound logistics (e.g. collecting, storing and distributing products to customers) often account for
significant portions of the total cost to produce some goods and services. Research suggests that having
a compet it ive adva ntage i n log ist ics creates more va lue w it h a cost leadersh ip st rateg y t ha n w it h a
differentiation strategy.71 Thus, cost leaders seek ing competitively valuable ways to reduce costs may
want to concentrate on the primary activities of inbound logistics and outbound logistics. In so doing, many
organisations choose to outsource their manufacturing operations to low-cost organisations with low-wage
employees (e.g. China).72 However, care must be taken because outsourcing also makes the organisation
more dependent on organisations over which they have little control. At best, it creates interdependencies
between the outsourcing organisation and the suppliers. If dependencies become too great, it gives the
supplier more power, with which it may increase the prices of the goods and services provided. Such actions
could harm the organisation’s ability to maintain a low-cost competitive advantage.73

Cost leaders also carefully examine all support activities to find additional potential cost reductions.
Developing new systems for finding the optimal combination of low-cost and acceptable levels of
differentiation in the raw materials required to produce the organisation’s goods or services is an example
of how the procurement suppor t activity can facilitate successful use of the cost leadership strateg y.

A s desc r ibed i n Chapter 3, orga n isat ions use va lue cha i n a na lysis to ident i f y t he pa r ts of t he
organisation’s operations that create value and those that do not. Fig ure 4.2 demonstrates the primar y
and suppor t activ ities that allow an organ isation to create value th rough the cost leadersh ip st rateg y.
Organisations unable to link the activities shown in this figure through the activity map they form typically
lack the core competencies needed to successfully use the cost leadership strateg y.

Effective use of the cost leadership strategy allows an organisation to earn above-average returns in
spite of the presence of strong competitive forces (see Chapter 2). The five forces model (rivalry with existing
competitors, bargaining power of customers, bargaining power of suppliers, threat of new entrants, and

cost leadership
strategy
an integrated set
of actions taken to
produce goods or
services with features
that are acceptable
to customers at the
lowest cost, relative to
that of competitors

112 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

threat of substitute products) can be applied for any of the five business-level strategies. The next sections
(one covering each of the five forces) explain how organisations implement a cost leadership strategy from
the perspective of the industr y forces that impact on them when using that business-level strateg y.

Rivalry with existing competitors
Having the low-cost position is valuable to deal with rivals. Because of the cost leader’s advantageous
position, rivals hesitate to compete on the basis of price, especially before evaluating the potential outcomes
of such competition.74 The US giant Walmar t is a good case study of how hard this can be: it has been
known for its ability to maintain very low costs, thereby creating value for customers in competition with,
among others, Target and Dollar Stores. However, changes it made to attract upmarket customers made
its low-cost position vulnerable to rivals. Ultra-low-cost players such as A mazon took advantage of this
opportunity. Amazon is a low-cost leader and has begun to siphon off Walmart customers. Because of
Walmart’s unprecedented loss of sales and market position, it has started to fight back by returning to its
former strategy, and is implementing new competitive actions as well.

The degree of rivalry present is based on a number of different factors such as size and resources of
rivals, their dependence on the par ticular market, and location and prior competitive interactions, among

Sources: Based on M. E. Porter, 1998, Competitive Advantage: Creating and Sustaining Superior Performance, New York: The Free Press;
D. G. Sirmon, M. A. Hitt & R. D. Ireland, 2007, Managing firm resources in dynamic environments to create value: Looking inside the black box, Academy of Management

Review, 32: 273–92; J. B. Barney, D. J. Ketchen, Jr, M. Wright, D. G. Sirmon, M. A. Hitt, R. D. Ireland & B. A. Gilbert, 2011, Resource orchestration to create competitive advantage:
Breadth, depth and life cycle effects, Journal of Management, 37(5): 1390–412.

Examples of value-creating activities associated with the cost leadership strategy

Supply-chain
management

Support
functions

Value chain
activities

Operations Distribution

Customers

Marketing
(including

sales)

Follow-up
service

Finance
Manage financial resources to ensure positive cash flow and low debt costs.

Effective
relationships
with suppliers
to maintain
efficient flow
of goods
(supplies) for
operations

Build
economies
of scale
and efficient
operations (e.g.,
production
processes)

Use of low-
cost modes of
transporting
goods and
delivery times
that produce
lowest costs

Targeted
advertising
and low
prices for
high sales
volumes

Efficient
follow-up
to reduce
returns

Develop policies to ensure efficient hiring and retention to keep costs low.
Implement training to ensure high employee efficiency.

Human resources

Develop and maintain cost-effective MIS operations.
Management information systems

Figure 4.2

CHAPTER 4
BUSINESS-LEVEL STRATEGY

113

others.75 Organisations may also take actions to reduce the amount of rivalry that they face. For example,
organisations sometimes form joint ventures to reduce rivalry and increase the amount of profitability
enjoyed by organisations in the industr y.76

In t he past, r iva ls hesitated to compete d i rect ly w it h Wa l ma r t st r ict ly on t he basis of costs a nd,
subsequently, pr ices to consumers. Yet, given Walmar t’s changes, its pr ices on some products are only
slightly below the prices of similar goods at Target. Walmar t’s changes then also provided an oppor tunity
for Target and Costco. Walmart saw the error in its new direction and vowed to return to its cost leadership
strateg y of providing the lowest prices on all goods sold.

Bargaining power of buyers (customers)
Powerful customers can force a cost leader to reduce its prices, but not below the level at which the cost
leader’s next-most-efficient industry competitor can earn average returns. Although powerful customers
might be able to force the cost leader to reduce prices even below this level, they probably would choose
not to do so. Prices that are low enough to prevent the next-most-efficient competitor from earning average
returns would force that organisation to exit the market, leaving the cost leader with less competition and
in an even stronger position. Customers would thus lose their power and pay higher prices if they were
forced to purchase from a single organisation operating in an industr y without rivals.

Buyers can also develop a cou nterbalancing power to t he customers’ power by ca ref u lly analysing
a nd u ndersta nd i ng each of t hei r customers. To help i n obta i n i ng i n for mat ion a nd u ndersta nd i ng t he
customers, buyers can participate in customers’ networks. In so doing, they share information, build trust
and participate in joint problem solving with their customers.77 In turn, they use the information obtained
to supply a product that provides superior value to customers by most effectively satisfying their needs.

Bargaining power of suppliers
The cost leader operates with margins greater than those of competitors and strives to constantly increase
its margins by driving its costs lower. Among other benefits, higher gross margins relative to those of
competitors make it possible for the cost leader to absorb its suppliers’ price increases. W hen an industr y
faces substantial increases in the cost of its supplies, only the cost leader may be able to pay the higher
prices and continue to earn either average or above-average returns. A lternatively, a powerful cost leader
may be able to force its suppliers to hold down their prices, which would reduce the suppliers’ margins in
the process. This has become the fate of farming globally: large organisations are forcing farmers to sell
at low prices.

Some organisations create dependencies on suppliers by outsourcing whole functions. They do so to
reduce their overall costs.78 They may outsource these activities to reduce their costs because of earnings
pressures from stakeholders (e.g. institutional investors who own a major stock holding in the company)
in the industr y.79 Often when there is such earnings pressure, the organisation may see foreign suppliers
whose costs are also lower, providing them the capability to offer the goods at lower prices.80 Yet when
organisations outsource, particularly to a foreign supplier, they also need to invest time and effort into
building a good relationship, hopefully developing tr ust between the organisations. 81

Potential entrants
Through continuous efforts to reduce costs to levels that are lower than those of competitors, a cost leader
becomes highly efficient. Because increasing levels of efficiency (e.g. economies of scale) enhance profit
margins, they serve as a significant entry barrier to potential competitors.82 New entrants must be willing
to accept no-better-t han-average retu r ns u nt il t hey gain t he ex per ience requ i red to approach t he cost
leader’s efficiency. To earn even average returns, new entrants must have the competencies required to
match the cost levels of competitors other than the cost leader. The low profit margins (relative to margins
earned by organisations implementing the differentiation strategy) make it necessary for the cost leader
to sell large volumes of its product to earn above-average returns. However, organisations striving to be

114 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

the cost leader must avoid pricing their products so low that their ability to operate profitably is reduced,
even though volume increases.

Product substitutes
Compared w ith its industr y r ivals, the cost leader also holds an attractive position in ter ms of product
substitutes. A product substitute becomes an issue for the cost leader when its features and characteristics,
in terms of cost and differentiated features, are potentially attractive to the organisation’s customers.
When faced with possible substitutes, the cost leader has more flexibility than its competitors. To retain
customers, it can reduce the price of its good or ser vice. With still lower prices and competitive levels of
differentiation, the cost leader increases the probability that customers prefer its product rather than a
substitute.

Competitive risks of the cost leadership strategy
The cost leadership strategy is not risk free. One risk is that the processes used by the cost leader to produce
a nd d ist r ibute its good or ser v ice cou ld become obsolete because of compet itors’ i n novat ions.8 3 These
innovations may allow rivals to produce at costs lower than those of the original cost leader, or to provide
additional differentiated features without increasing the product’s price to customers.

A second risk is that too much focus by the cost leader on cost reductions may occur at the expense
of trying to understand customers’ perceptions of ‘competitive levels of differentiation’. Low-cost
stores are sometimes cr iticised for hav ing too few salespeople available to help customers and too few
individuals at checkout registers. These complaints suggest that there might be a discrepancy between
how organisations and customers define ‘minimal levels of service’ and organisations’ attempts to drive
their costs increasingly lower.

Imitation is a final risk of the cost leadership strategy. Using their own core competencies, competitors
somet i mes lea r n how to successf u l ly i m itate t he cost leader ’s st rateg y. W hen t h is happens, t he cost
leader must increase the value its good or ser vice provides to customers. Commonly, value is increased by
selling the current product at an even lower price or by adding differentiated features that create value for
customers while maintaining price.

Differentiation strategy
The differentiation strategy is a n i nteg rated set of act ions ta ken to produce goods or ser v ices (at a n
acceptable cost) that customers perceive as being different in ways that are important to them.8 4 W hile
cost leaders serve a typical customer in an industry, differentiators target customers for whom value is
created by the manner in which the organisation’s products differ from those produced and marketed by
competitors. Product innovation, which is ‘the result of bringing to life a new way to solve the customer’s
problem – through a new product or service development – that benefits both the customer and the
sponsoring company’,85 is critical to successful use of the differentiation strategy.86

Organisations must be able to produce differentiated products at competitive costs to reduce upward
pressure on the price that customers pay. When a product’s differentiated features are produced at non-
compet it ive costs, t he pr ice for t he product may exceed what t he orga n isat ion’s ta rget customers a re
willing to pay. If the organisation has a thorough understanding of what its target customers value, the
relative importance they attach to the satisfaction of different needs, and for what they are willing to pay a
premium, the differentiation strategy can be effective in helping it earn above-average returns. Of course, to
achieve these returns, the organisation must apply its knowledge capital (knowledge held by its employees
and managers) to provide customers with a differentiated product that gives them superior value.87

Through the differentiation strategy, the organisation produces non-standardised (i.e. distinctive)
products for customers who value differentiated features more than they value low cost. For example,
supe r ior produc t rel iabi l it y a nd du rabi l it y a nd h ig h-pe r for ma nce sou nd system s a re a mong t he

differentiation
strategy
an integrated set
of actions taken
to produce goods
or services (at an
acceptable cost) that
customers perceive as
being different in ways
that are important to
them

CHAPTER 4
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115

differentiated features of Toyota Motor Corporation’s Lexus products. However, Lexus offers its vehicles
to customers at a competitive purchase price relative to other luxury automobiles. As with Lexus products,
a product’s unique attributes, rather than its purchase price, provide the value for which customers are
willing to pay.

To maintain success with the differentiation strategy results, the organisation must consistently
upgrade differentiated features that customers value and/or create new valuable features (innovate)
without significant cost increases.8 8 Th is approach requ i res orga n isat ions to consta nt ly cha nge t hei r
product lines.89 These organisations may also offer a portfolio of products that complement each other,
thereby enriching the differentiation for the customer and perhaps satisfying a portfolio of consumer
needs.9 0 For example, Billabong, the Australian surf wear company that star ted in 1973, has a wide range
of surf wear and snowboarding products differentiated by its brand as a well-established surf-oriented
and board-spor ts company. It strives to keep this fresh with a continual stream of new products and with
sponsorship of surfing (e.g. the Billabong Pipeline Masters) and snowboarding events. That said, despite
the brand’s prominence, management at Billabong got the company into trouble in 2012 and 2013, to the
extent that the brand’s value did not equal the debt level – a good brand is extremely valuable, but is not
the complete answer. After disappointing sales and losses, the company was acquired by the owner of rival
brand Quiksilver in a A$198 million deal in 2018.91

Because a differentiated product satisfies customers’ unique needs, organisations following the
differentiation strategy are able to charge premium prices. The ability to sell a good or service at a price that
substantially exceeds the cost of creating its differentiated features allows the organisation to outperform
rivals and earn above-average returns. Rather than costs, an organisation using the differentiation strategy
primarily concentrates on investing in and developing features that differentiate a product in ways that
create value for customers.92 Overall, an organisation using the differentiation strategy seeks to be different
from its competitors on as many dimensions as possible. The less similarity between an organisation’s goods
or services and those of competitors, the more buffered it is from rivals’ actions. Commonly recognised
differentiated goods include Toyota’s Lexus, Rolex watches, Caterpillar’s heavy-duty earth-moving
equipment and McKinsey & Co.’s consulting services.

A good or service can be differentiated in many ways. Unusual features, responsive customer service,
rapid product innovations and technological leadership, perceived prestige and status, different tastes, and
engineering design and performance are examples of approaches to differentiation.93 W hile the number of
ways to reduce costs may be finite, virtually anything an organisation can do to create real or perceived
value is a basis for differentiation. Consider product design as a case in point. Because it can create a positive
experience for customers, design is an important source of differentiation (even for cost leaders seeking to
find ways to add functionalities to their low-cost products as a way of differentiating their products from
competitors) and, hopefully, of competitive advantage. 94 Apple is often cited as the organisation that sets
the standard in design, with the iPhone and the iPad demonstrating Apple’s product design capabilities.95

The value chain can be analysed to determine if an organisation is able to link the activities required to
create value by using the differentiation strategy. Examples of primary value chain activities and support
functions that are commonly used to differentiate a good or service are shown in Figure 4.3. Organisations
without the skills needed to link these activities cannot expect to successfully use the differentiation
strategy. Next, we explain how organisations using the differentiation strategy can successfully position
themselves in terms of the five forces of competition (see Chapter 2) to earn above-average returns.

Rivalry with existing competitors
Customers tend to be loyal purchasers of products differentiated in ways that are meaningful to them. As
their loyalty to a brand increases, customers’ sensitivity to price increases is reduced. The relationship
between brand loyalty and pr ice sensitiv ity insulates an organ isation f rom competitive r ivalr y. Thus,
Bose is insulated from intense rivalr y as long as customers continue to perceive that its stereo equipment

116 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

offers superior sound quality at a competitive purchase price. Bose has a strong positive reputation for high
quality and unique products. Thus, reputations can sustain the competitive advantage of organisations
following a differentiation strategy.96

Bargaining power of buyers (customers)
The distinctiveness of differentiated goods or services reduces customers’ sensitivity to price increases.
Customers are willing to accept a price increase when a product still satisfies their perceived unique
needs better than does a competitor’s offering. Thus, the golfer whose needs are specifically satisfied by
Callaway golf clubs will be likely to continue buying those products even if their cost increases. Similarly,
the customer who has been highly satisfied with a Louis Vuitton wallet will probably replace that wallet
with another one made by the same company, even though the purchase price is higher than the original
one. Purchasers of brand-name food and household items (e.g. Vegemite and K leenex tissues) accept price
increases in those products as long as they continue to perceive that the product satisfies their distinctive

Supply-chain
management

Support
functions

Value chain
activities

Operations Distribution

Customers

Marketing
(including

sales)

Follow-up
service

Finance
Make long-term investments in development of new technology and innovative
products, in marketing and advertising, and in ability to provide exceptional service.

Human resources
Recruit highly qualified employees and invest in training that provides them with the
latest technological knowledge and the capabilities to provide breakthrough services.

Management information systems
Acquire and develop excellent information systems that provide up-to-date market
intelligence and real-time information in all areas relevant for strategic and major
operational decisions.

Develop and
maintain positive
relation with
major suppliers.
Ensure the
receipt of high-
quality supplies
(raw materials
and other
goods).

Manufacture
high-quality
goods.
Develop
flexible systems
that allow rapid
response to
customers’
changing needs.

Provide
accurate and
timely delivery
of goods to
customers.

Build strong
positive
relationships
with customers.
Invest in
effective
promotion and
advertising
program.

Have
specially
trained unit to
provide after-
sales service.
Ensure high
customer
satisfaction.

Examples of value-creating activities associated with the differentiation strategy

Source: Based on M. E. Porter, 1998, Competitive Advantage: Creating and Sustaining Superior Performance, New York: The Free Press; D. G. Sirmon, M. A. Hitt & R. D. Ireland,
2007, Managing firm resources in dynamic environments to create value: Looking inside the black box, Academy of Management Review, 32: 273–92; J. B. Barney, D. J. Ketchen,

Jr, M. Wright, D. G. Sirmon, M. A. Hitt, R. D. Ireland & B. A. Gilbert, 2011, Resource orchestration to create competitive advantage: Breadth, depth and life cycle effects, Journal of
Management, 37(5): 1390–412.

Figure 4.3

CHAPTER 4
BUSINESS-LEVEL STRATEGY

117

needs at an acceptable cost. In all of t hese instances, t he customers a re relat ively insensit ive to pr ice
increases because they do not think that an acceptable product alternative exists.

Bargaining power of suppliers
B e c au s e t he o r g a n i s at ion u s i n g t he d i f fe r e nt i at ion s t r ateg y c h a r ge s a p r e m iu m p r ice fo r
its products, suppliers must provide high-quality components, driving up the organisation’s costs. However,
the high margins the organisation earns in these cases partially insulate it from the influence of suppliers
in that higher supplier costs can be paid through these margins.97 Alternatively, because of buyers’ relative
insensitivity to price increases, the differentiated organisation might choose to pass the additional cost of
supplies on to the customer by increasing the price of its unique product.

Potential entrants
Customer loyalty and the need to overcome the uniqueness of a differentiated product present substantial
barriers to potential entrants. Entering an industry under these conditions typically demands significant
investments of resources and patience while seeking customers’ loyalty.

Product substitutes
Organisations selling brand-name goods and services to loyal customers are positioned effectively against
product substitutes. By contrast, organisations without brand loyalty face a higher probability of their
customers switching either to products that offer differentiated features that serve the same function
(particularly if the substitute has a lower price) or to products that offer more features and perform more
attractive functions.

Competitive risks of the differentiation strategy
One risk of the differentiation strategy is that customers might decide that the price differential between
the differentiator’s product and the cost leader’s product is too large. In this instance, an organisation may
be offering differentiated features that exceed target customers’ needs. The organisation then becomes
vulnerable to competitors that are able to offer customers a combination of features and price that is more
consistent with their needs.

This risk is generalised across a number of organisations producing different types of products during
an economic recession, which is a time when sales of lu xur y goods (e.g. jeweller y and leather goods) often
suffer. The decline during the GFC was more severe in the USA compared with Australia, but it certainly
affected Australian companies. Billabong, already struggling with the fact that its core target had become
older and its brand less ‘surf ’, was badly hit by an ill-timed expansion into having its own stores ( because
that is where the biggest profits were in the value chain). This took shape as the GFC crisis hit, and profits
shrank as debt increased, which contributed to the company’s sale in 2018. 98

As the Billabong example demonstrates, another risk of the differentiation strategy is that an
organisation’s means of differentiation may cease to provide value for which customers are willing to pay
(i.e. it stopped being a really credible youth surf brand). A differentiated product becomes less valuable if
imitation by rivals causes customers to perceive that competitors offer essentially the same good or service,
but at a lower price.99 A third risk of the differentiation strategy is that experience can narrow customers’
perceptions of the value of a product’s differentiated features. For example, customers having positive
experiences with generic tissues may decide that the differentiated features of the Kleenex product are
not worth the extra cost. To counter this risk, organisations must continue to meaningfully differentiate
their product (e.g. through innovation) for customers at a price they are willing to pay.10 0

Cou nter feit i ng is t he d if ferent iat ion st rateg y ’s fou r t h r isk. ‘Cou nter feits a re t hose products bea r i ng
a t rade ma rk t hat i s ide nt ica l to or i nd i st i ng u i shable f rom a t rade ma rk reg i ste red to a not he r pa r t y,

118 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

t hus i n f r i ng i ng t he r ights of t he holder of t he t radema rk .’101 Companies such as Hewlett-Packard must
ta ke ac t ion s to dea l w it h t he proble m s cou nte r fe it good s c reate for orga n i sat ion s whose r ig ht s a re
i n f r i nged upon .

Focus strategies
The focus strategy is an integrated set of actions taken to produce goods or ser vices that ser ve the needs
of a pa r t icula r compet it ive seg ment. Thus, organ isat ions use a focus st rateg y when t hey ut ilise t hei r
core competencies to ser ve the needs of a par ticular industr y segment or niche to the exclusion of others.
Examples of specific market segments that can be targeted by a focus strategy include a particular buyer
group (e.g. youths or senior citizens), a different segment of a product line (e.g. products for professional
painters or the do-it-yourself group) and a different geographic market (e.g. northern or southern Italy by
using a foreign subsidiar y).102

There are many specific customer needs that organisations can serve by using a focus strategy. For
example, Melbour ne-based fast-food organisation Lord of the Fr ies positions itself as ‘hip’ and ethical,
appealing to students and anti-establishment people with its vegan burgers and high-end fries (hot chips).103
By successfully using a focus strategy, organisations such as these gain a competitive advantage in specific
market niches or segments, even though they do not possess an industr y-wide competitive advantage.

A lthough the breadth of a target is clearly a matter of degree, the essence of the focus strateg y ‘is the
exploitation of a narrow target’s differences from the balance of the industry’.10 4 Organisations using the
focus strategy intend to serve a particular segment of an industry more effectively than can industry-wide
competitors. They succeed when they effectively serve a segment whose unique needs are so specialised
that broad-based competitors choose not to serve that segment or when they satisfy the needs of a segment
being ser ved poorly by industr y-wide competitors.105

Organisations can create value for customers in specific and unique market segments by using the
focused cost leadership strategy or the focused differentiation strategy.

Focused cost leadership strategy
Based in Sweden (but with a financial base in the Netherlands), IKEA,
a global furniture retailer with 433 stores in 27 countries, 211 000 staff,
suppliers in 51 countries and sales revenue of €41 billion in 2019, uses
the focused cost leadership strategy. Young buyers desiring style at a low
cost are IKEA’s target customers.106 For these customers, the organisation
of fe rs home f u r n i sh i ngs t hat combi ne good desig n , f u nc t ion a nd
acceptable quality with low prices. According to the organisation, ‘Low
cost is always in focus. This applies to ever y phase of our activities’.107

I K E A e mpha si ses seve ra l ac t iv it ies to keep it s cost s low. For
exa mple, i nstead of rely i ng pr i ma r i ly on t h i rd-pa r t y ma nu fact u rers,
the organisation’s engineers design low-cost, modular fur niture ready
for assembly by customers. To eliminate the need for sales associates or
decorators, IKEA positions the products in its stores so that customers can
view different living combinations (complete with sofas, chairs, tables,
etc.) in a single room-like setting, which helps the customer imagine how
furniture will look in their home. A third practice that helps keep IK EA’s
costs low is requiring customers to transpor t their own purchases rather
than providing a deliver y ser vice.

Although it is a cost leader, IKEA also offers some differentiated
features that appeal to its target customers, including its unique furniture designs, in-store playrooms for
children, wheelchairs for customer use and extended hours. IKEA believes that these services and products

focus strategy
an integrated set
of actions taken to
produce goods or
services that serve the
needs of a particular
competitive segment

IKEA, the Swedish branded furniture organisation, is a
well-known model for running a low-cost value chain.

Source: iStock.com/cloudytronics

CHAPTER 4
BUSINESS-LEVEL STRATEGY

119

‘are uniquely aligned with the needs of [its] customers, who are young, are not wealthy, are likely to have
children (but no nanny), and, because they work, have a need to shop at odd hours’.108 Thus, IKEA’s focused
cost leadership strategy also includes some differentiated features with its low-cost products.

Focused differentiation strategy
Other organisations implement the focused differentiation strategy. As noted earlier, there are many
dimensions on which organisations can differentiate their good or service. Lord of the Fries differentiates
by the quality of its food and by demonstrating in its newsletter, internet and Facebook presences how
highly aware it is of youth music culture. It also sells exclusively vegan products, distinguishing itself
from the competition on ethical grounds.

The activities required to use the focused cost leadership strateg y are vir tually identical to those of
t he indust r y-w ide cost leadersh ip st rateg y (see Fig u re 4.2), a nd act iv it ies requ i red to use t he focused
differentiation strategy are largely identical to those of the industry-wide differentiation strategy (see
Figure 4.3). Similarly, the manner in which each of the two focus strategies allows an organisation to deal
successfully with the five competitive forces parallels those of the two broad strategies. The only difference
is in the organisation’s competitive scope; the organisation focuses on a narrow industry segment. Thus,
Figures 4.2 and 4.3 and the text describing the five competitive forces also explain the relationship between
each of the two focus strategies and competitive advantage.

Competitive risks of focus strategies
With either focus strateg y, the organisation faces the same general risks as the organisation using the
cost leadership or the differentiation strategy, respectively, on an industry-wide basis. However, focus
strategies have two additional risks.

First, a competitor may be able to focus on a more narrowly defined competitive segment and thereby
‘out-focus’ the focuser. This would happen to IKEA if another organisation found a way to offer IKEA’s
customers (young buyers interested in stylish furniture at a low cost) additional sources of differentiation
while charging the same price, or to provide the same service with the same sources of differentiation at a
lower price. Second, a company competing on an industr y-wide basis may decide that the market segment
ser ved by t he organ isation using a focus st rateg y is att ractive and wor t hy of competitive pu rsuit. For
example, leading up to Christmas 2019, Billabong’s broad youth target was under attack from ‘core surf ’
brands, and the company’s operations were disr upted by an international cyber attack.109

Integrated cost leadership/differentiation strategy
Most consumers have high expectations when purchasing a good or ser vice. In general, it seems that most
consumers want to pay a low price for products with somewhat highly differentiated features. Because
of these customer expectations, a number of organisations engage in primar y value chain activities and
support functions that allow them to simultaneously pursue low cost and differentiation. Organisations
seeking to do this use the integrated cost leadership/differentiation strategy. The objective of using this
strategy is to efficiently produce products with some differentiated features. Efficient production is the
source of maintaining low costs, while differentiation is the source of creating unique value. Organisations
that successfully use the integrated cost leadership/differentiation strategy usually adapt quickly to
new tech nologies and rapid changes in their exter nal env iron ments. Simultaneously concent rating on
developing two sources of competitive advantage (cost and differentiation) increases the number of primary
and suppor t activities in which the organisation must become competent. Such organisations often have
strong networks with external par ties that perform some of the primar y and suppor t activities.110 In turn,
having skills in a larger number of activities makes an organisation more flexible.

integrated cost
leadership/
differentiation
strategy
involves engaging in
primary value chain
activities and support
functions that allow
an organisation
to simultaneously
pursue low cost and
differentiation

120 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Concent rat ing on t he needs of its core customer g roup ( h igher-income, fash ion-conscious d iscou nt
shoppers), Target (Australia) uses an integrated cost leadership/differentiation strategy, as shown by
its ‘Expect more. Pay less’ brand promise. Target’s annual report describes this strategy: ‘Our enduring
“Expect more. Pay less” brand promise helped us to deliver greater convenience, increased sav ings and
a more personalised shopping experience’. However, Australian bricks-and-mortar retail stores are
st r uggl i ng aga i nst on l i ne shoppi ng a nd st ronger Eu ropea n a nd US compet itors, a nd Ta rget closed 15
stores in 2018 –19 af ter a 1.5 per cent decline in sales. In 2010, Ta rget had 341 stores in Aust ralia, but
this had dropped to 289 stores by 2019.111 European-based Zara, which pioneered ‘cheap chic’ in clothing
apparel, is another organisation using the integrated cost leadership/differentiation strategy. Zara offers
current and desirable fashion goods at relatively low prices. To implement this strategy effectively requires
sophisticated designers and means of managing costs, which fits Zara’s capabilities. Zara can design and
begin manufacturing a new fashion in three weeks, which suggests a highly flexible organisation that can
adapt easily to changes in the market or with competitors.112

Flexibility is required for organisations to complete primary value chain activities and support functions
in ways that allow them to use the integrated cost leadership/differentiation strategy in order to produce
somewhat differentiated products at relatively low costs. Chinese car manufacturers have developed a
means of product design that provides a flexible architecture that allows low-cost manufacturing but
also car designs that are differentiated from competitors.113 Flexible manufacturing systems, information
networks and total quality management systems are three sources of flexibility that are particularly
useful for organisations tr y ing to balance the objectives of continuous cost reductions and continuous
enhancements to sources of differentiation as called for by the integrated strategy.

The Chinese footwear and apparel company Li Ning has implemented an integrated cost leadership/
differentiated strategy. The company entered the market and grew quickly using a cost leadership strategy.
It is now entering the upscale markets in China, in which it will compete with Nike and Adidas. It is also
entering the US market, in which it will compete against both of these organisations and other brand-name
sportswear producers. Thus, it will encounter significant challenges. In fact, it may end up ‘stuck in the
middle’ and not compete effectively in any markets. Perhaps its opportunity is to provide high-quality
brand-name goods for a lower price than its ‘upmarket’ competitors.

Apple vs Samsung vs Huawei: the battle for smart
technology

Apple traditionally had several advantages that kept
it as market leader in its sector of ‘smart technology’.
It is a product innovator, has a huge installed base of
customers, and owns and controls most of its supply
chain and value chain. Apple is not only a product
innovator; it creates new markets and then dominates
them as a first mover. Apple has done this with the
iPod, iPhone and iPad. However, as shown in Figure 4.4,
both Samsung and Huawei surpassed Apple in
smartphone sales in 2018 and 2019, with similar trends
for tablets and other devices.

There are significant differences in the overall
company market focus between the tech giants.
Apple is focused on consumer technology, Huawei is
focused more specifically on telecommunications, and

Samsung is a highly diversified company with interests
in technology, motor vehicles, military hardware,
apartments and ships, and even operates a Korean
amusement park. Samsung is one of the top four
investors in R&D globally, along with Amazon, Alphabet
(Google) and Volkswagen. Samsung invested over
US$15 billion in R&D in 2018.

In response to its competitors, Apple has stepped up
its own R&D spend, with a record US$4.2 billion in a single
quarter in 2019. Apple still leads in terms of installed
customer base, and perhaps most significantly, in terms
of profit. Also, Apple is well-positioned to take advantage
of the customer trend towards online and subscription-
based services, with Apple’s services divisions making up
an increasing percentage of its revenues and profits.

Strategic focus |Technology

CHAPTER 4
BUSINESS-LEVEL STRATEGY

121

Apple’s services business brings in more revenue
than the iPad or Mac. Apple’s future seems to be
clearly focused on services and subscriptions, with
Apple Music, App Store, iCloud, iTunes, Apple Books,
Apple Pay, AppleCare and licensing as the fastest-
growing part of the company. Apple may be beaten
on physical devices by Samsung and Huawei, but
Apple’s differentiation strategy based on product
innovation, a superb brand, and a focus on services and
subscriptions is likely to be a winner.

Sources: E. Schulze, 2019, Huawei smartphone sales surge 50%
as Apple and Samsung struggle, CNBC, https://www.cnbc.

com/2019/05/01/huawei-ahead-of-apple-in-q1-2019-smartphone-
shipments.html, 1 December; J. Riley, 2013, Samsung – the world’s

biggest diversified company?, https://www.tutor2u.net/business/

blog/samsung-the-worlds-biggest-diversified-company, 9 February;
Statista, 2019, Ranking of the 20 companies with the highest

spending on research and development in 2018 (in billion U.S.
dollars), https://www.statista.com/statistics/265645/ranking-of-
the-20-companies-with-the-highest-spending-on-research-and-

development, 1 December; Naresh, 2019, Samsung continues
to pour money into R&D, https://www.sammobile.com/news/

samsung-spending-on-research-development-grows, 1 September;
C. Miller, 2019, Apple R&D spending continues to increase as it

invests in core iPhone tech, future products, https://9to5mac.
com/2019/08/04/apple-rd-spending-q3, 4 August; C. Gartenberg,

2019, How Apple makes billions of dollars selling services: Breaking
down Apple’s new focus – from Apple Music to accounting tricks,

The Verge, https://www.theverge.com/2019/3/20/18273179/apple-
icloud-itunes-app-store-music-services-businesses, 20 March; D.
Reisinger, 2016, How Apple nabbed 104% of smartphone profits

last quarter, Fortune, https://fortune.com/2016/11/04/apple-
smartphone-profits, 4 November.

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
2018Q1

U
n

it
m

ar
ke

t
sh

ar
e

2018Q2 2018Q3 2018Q4 2019Q1

Samsung Huawei Apple Xiaomi vivo* OPPO*

Source: E. Schulze, 2019, Huawei smartphone sales surge 50% as Apple and Samsung struggle,
https://www.cnbc.com/2019/05/01/huawei-ahead-of-apple-in-q1-2019-smartphone-

shipments.html, 1 December.

Global smartphone market shareFigure 4.4

Flexible manufacturing systems
A flexible manufacturing system (FMS) increases the ‘flexibilities of human, physical and information
resources’114 that the organisation integrates to create relatively differentiated products at relatively low
costs. A significant technological advance, FMS is a computer-controlled process used to produce a variety
of products in moderate, flexible quantities with a minimum of manual intervention.115 Often the flexibility
is derived from modularisation of the manufacturing process (and sometimes other value chain activities
as well).116

The goal of an FMS is to eliminate the ‘low cost versus product variety’ trade-off that is inherent in
traditional manufacturing technologies. Organisations use an FMS to change quickly and easily from
making one product to making another. Used properly, an FMS allows the organisation to respond more
effectively to changes in its customers’ needs, while retaining low-cost advantages and consistent product
quality.117 Because an FMS also enables the organisation to reduce the lot size needed to manufacture a

122 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

product efficiently, the organisation’s capacity to serve the unique needs of a narrow competitive scope
is higher. In industries of all types, effective mixes of the organisation’s tangible assets (e.g. machines)
and intangible assets (e.g. people’s sk ills) facilitate implementation of complex competitive st rategies,
especially the integrated cost leadership/differentiation strategy.118

Information networks
By linking organisations with their suppliers, distributors and customers, information networks provide
another source of flexibility. These networks, when used effectively, help the organisation to satisfy
customer expectations in terms of product quality and deliver y speed.119

Earlier, we discussed the importance of managing the organisation’s relationships with its customers in
order to understand their needs. Customer relationship management (CR M) is one form of an information-
based network process t hat organ isat ions use for t h is pu r pose.120 An effective CRM system provides a
360 -deg ree v iew of t he orga n isat ion’s relat ionsh ip w it h customers, encompassi ng a l l contact poi nts,
busi ness processes a nd com mu n icat ion med ia a nd sa les cha n nels.121 T he orga n isat ion ca n t hen use
this information to determine the trade-offs its customers are willing to make between differentiated
features and low cost – an assessment that is vital for organisations using the integrated cost leadership/
differentiation strategy. Such systems help organisations to monitor their markets and stakeholders and
allow them to better predict future scenarios. This capability helps organisations to adjust their strategies
to be better prepa red for t he f utu re.122 Thus, to make comprehensive strategic decisions with effective
knowledge of the organisation’s context, good information flow is essential. Better-quality managerial
decisions require accurate information on the organisation’s environment.123

Total quality management systems
Total quality management (TQM) is a managerial process that emphasises an organisation’s commitment
to t he customer a nd to cont i nuous i mprovement of all processes t h rough problem-solv ing approaches
based on empowerment of employees.124 Organisations develop and use TQM systems to increase customer
satisfaction, cut costs and reduce the amount of time required to int roduce in novative products to the
marketplace.125

Organisations able to simultaneously reduce costs while enhancing their ability to develop innovative
products increase their flexibility, an outcome that is particularly helpful to organisations implementing the
integrated cost leadership/differentiation strategy. Exceeding customers’ expectations regarding quality is
a differentiating feature, and eliminating process inefficiencies to cut costs allows the organisation to offer
that quality to customers at a relatively low price. Thus, an effective TQM system helps the organisation
develop the flexibility needed to identify opportunities to simultaneously increase differentiation and
reduce costs. Yet TQM systems are available to all competitors, so they may help organisations maintain
competitive parity, but rarely alone will they lead to a competitive advantage.126

Competitive risks of the integrated cost leadership/
differentiation strategy
The potential to earn above-average returns by successfully using the integrated cost leadership/
differentiation strategy is appealing. However, it is a risky strategy because organisations find it difficult to
perform primary value chain activities and support functions in ways that allow them to produce relatively
inexpensive products with levels of differentiation that create value for the target customer. Moreover, to
properly use this strategy across time, organisations must be able to simultaneously reduce costs incurred
to produce products (as required by the cost leadership strategy) while increasing products’ differentiation
(as required by the differentiation strategy).

Organisations that fail to perform the primary and support activities in an optimum manner become
‘stuck in the middle’.127 Being stuck in the middle means that the organisation’s cost str ucture is not low

total quality
management (TQM)
a managerial
innovation that
emphasises an
organisation’s
total commitment
to the customer
and to continuous
improvement of every
process through the
use of data-driven,
problem-solving
approaches based
on empowerment of
employee groups and
teams

CHAPTER 4
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123

enough to allow it to attractively price its products and that its products are not sufficiently differentiated to
create value for the target customer. These organisations will not earn above-average returns, and they will
earn average returns only when the structure of the industry in which they compete is highly favourable.128
Thus, organisations implementing the integrated cost leadership/differentiation strategy must be able to
produce products that offer the target customer some differentiated features at a relatively low cost/price.

Organisations can also become stuck in the middle when they fail to successfully implement either the
cost leadership or the differentiation strategy. In other words, industry-wide competitors too can become
stuck in the middle. Tr ying to use the integrated strateg y is costly in that organisations must pursue both
low costs and differentiation. This is the challenge for Li Ning Company mentioned earlier. If it can offer
high-quality goods desired by consumers at lower prices, however, it may be able to capture market share
from the leaders, such as Nike.

Organisations may need to form alliances with other organisations to achieve differentiation, yet
alliance partners may extract prices for the use of their resources that make it difficult to meaningfully
reduce costs.129 Organisations may be motivated to make acquisitions to maintain their differentiation
through innovation or to add products to their portfolio not offered by competitors.130 Research suggests
that organisations using ‘pure strategies’, either cost leadership or differentiation, often outperform
organisations attempting to use a ‘hybrid strategy’ (i.e. integrated cost leadership/differentiation strategy).
This research suggests the risky nature of using an integrated strategy.131 However, the integrated strategy
is becoming more common and perhaps necessar y in many industries because of technological advances
and global competition. This strategy often requires a long-term perspective to make it work effectively,
and therefore it requires dedicated owners that allow the implementation of a long-term strategy that can
require several years to produce positive returns.132

124 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

LO1 Customers are the foundation of successful business-
level strategies. When considering customers, an
organisation simultaneously examines three issues:
who, what and how. These issues refer, respectively,
to the customer groups to be served, the needs those
customers have that the organisation seeks to satisfy,
and the core competencies the organisation will use
to satisfy customers’ needs. Increasing segmentation
of markets throughout the global economy creates
opportunities for organisations to identify more
distinctive customer needs they can serve with one of
the business-level strategies.

LO2 A business-level strategy is an integrated and
coordinated set of commitments and actions the
organisation uses to gain a competitive advantage
by exploiting core competencies in specific product
markets. Five business-level strategies (cost leadership,
differentiation, focused cost leadership, focused
differentiation and integrated cost leadership/
differentiation) are examined in the chapter.

LO3 A business model, which describes what an
organisation does to create, deliver and capture
value for stakeholders, is part of an organisation’s
business-level strategy. In essence, a business model
is a framework for how the organisation will use
processes to create, deliver and capture value, while a
business-level strategy is the path the organisation will
follow to gain a competitive advantage by exploiting
its core competencies in a specific product market.
There are many types of business models, including
the franchise, subscription, freemium, advertising and
peer-to-peer models. Organisations may pair each
type of business model with any one of the five generic
business-level strategies as they seek to compete
successfully against rivals.

LO4 Organisations seeking competitive advantage
through the cost leadership strategy produce no-
frills, standardised products for an industry’s typical
customer. However, these low-cost products must
be offered with competitive levels of differentiation.
Above-average returns are earned when
organisations continuously emphasise efficiency

such that their costs are lower than those of their
competitors, while providing customers with products
that have acceptable levels of differentiated features.

Through the differentiation strategy, organisations
provide customers with products that have different
(and valued) features. Differentiated products must
be sold at a cost that customers believe is competitive
relative to the product’s features as compared
with the cost–feature combinations available from
competitors’ goods. Because of their distinctiveness,
differentiated goods or services are sold at a premium
price. Products can be differentiated on any dimension
that a customer group values. Organisations using
this strategy seek to differentiate their products from
competitors’ goods or services on as many dimensions
as possible. The less similarity to competitors’
products, the more buffered an organisation is against
competition with its rivals.

Through the cost leadership and differentiated
focus strategies, organisations serve the needs
of a narrow competitive segment (e.g. a buyer
group, product segment or geographic area). This
strategy is successful when organisations have the
core competencies required to provide value to a
specialised market segment that exceeds the value
available from organisations serving customers on an
industry-wide basis.

Organisations using the integrated cost leadership/
differentiation strategy strive to provide customers
with relatively low-cost products that also have valued
differentiated features. Flexibility is required for
organisations to learn how to use primary value chain
activities and support functions in ways that allow
them to produce differentiated products at relatively
low costs.

LO5 Porter’s five forces of competition model is a tool
for analysing the forces that shape the industry
immediately impacting on an organisation. The model
helps to define where the major forces are, what
shapes competition in that industry and whether the
industry is attractive for an organisation. The five
forces are: (1) rivalry with existing competitors,

STUDY TOOLS
SUMMARY

CHAPTER 4
BUSINESS-LEVEL STRATEGY

125

(2) bargaining power of customers, (3) bargaining
power of suppliers, (4) threat of new entrants, and
(5) threat of substitute products. Effective use of this
model can shape business-level strategy to adjust to
compensate for or counteract these forces.

LO6 Competitive risks associated with the cost leadership
strategy include: (1) a loss of competitive advantage
to newer technologies; (2) a failure to detect changes
in customers’ needs; and (3) the ability of competitors
to imitate the cost leader’s competitive advantage
through their own distinct strategic actions.

Risks associated with the differentiation strategy
include: (1) a customer group’s decision that the
differences between the differentiated product
and the cost leader’s goods or services are no
longer worth a premium price; (2) the inability of a
differentiated product to create the type of value for
which customers are willing to pay a premium price;
(3) the ability of competitors to provide customers
with products that have features similar to those of

the differentiated product, but at a lower cost;
and (4) the threat of counterfeiting, whereby
organisations produce a cheap imitation of a
differentiated good or service.

The competitive risks of focus strategies include: (1)
a competitor’s ability to use its core competencies
to ‘outfocus’ the focuser by serving an even more
narrowly defined market segment; (2) decisions by
industry-wide competitors to focus on a customer
group’s specialised needs; and (3) a reduction in
differences of the needs between customers in a
narrow market segment and the industry-wide market.

The primary risk of the integrated cost leadership/
differentiation strategy is that an organisation might
produce products that do not offer sufficient value
in terms of either low cost or differentiation. In
such cases, the organisation becomes ‘stuck in the
middle’. Organisations stuck in the middle compete
at a disadvantage and are unable to earn more than
average returns.

KEY TERMS
business model

business-level strategy

cost leadership strategy

differentiation strategy

focus strategy

integrated cost leadership/
differentiation strategy

market segmentation

total quality management

REVIEW QUESTIONS
1. What is a business-level strategy?

2. What is the relationship between an organisation’s
customers and its business-level strategy in terms of
who, what and how? Why is this relationship important?

3. In what ways do non-commercial organisations (public
sector or not-for-profit) compete?

4. What changes in the market (including customer
behaviour and preferences) are causing the need to
review business-level strategy?

5. What are the differences among the cost leadership,
differentiation, focused cost leadership, focused
differentiation and integrated cost leadership/
differentiation business-level strategies?

6. How can organisations use each of the business-level
strategies to position themselves favourably relative to
the five forces of competition?

7. What are the specific risks associated with using each
business-level strategy?

EXPERIENTIAL EXERCISES

Exercise 1: Market segmentation through branding
The ‘who’ in an organisation’s target market is an
extremely important decision. As discussed in the chapter,
organisations divide customers into groups based upon

differences in customer needs, which is the heart of market
segmentation. For example, if you owned a restaurant
and your target market was university-aged students, your
strategy would be very different than if your target market
was business professionals.

126 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

In this exercise, your team will be identifying market
segmentation strategies used by various organisations.
Remember that market segmentation ‘is a process used to cluster
people with similar needs into individual and identifiable groups’.

Part 1
Your team should select an advertised and prominent brand.
You may choose a business or consumer product. However,
you should choose a brand widely known and widely
advertised. Once you have chosen the brand, find and collect
at least four instances of this brand being advertised in print
or digital media. Find your four or more instances from
different publications, if possible.

Part 2
Assemble a poster with the images you collected from your
research. Be prepared to present your findings to the class.
1. Why did you choose this brand?

2. Review each of the criteria discussed in Table 4.1 for
either your consumer market or industrial market.

Exercise 2: Create a business-level strategy
This assignment brings together elements from the previous
chapters. Accordingly, you and your team will create a
business-level strategy for an organisation of your own
creation. The instructor will assign you an industry. You will
create a strategy for entering that industry using one of the
five potential business-level strategies.

Each team is assigned one of the business-level
strategies described in the chapter:
• cost leadership

• differentiation

• focused cost leadership

• focused differentiation

• integrated cost leadership/differentiation.

Part 1
Research your industry and describe the general
environment and the industry. Using the dimensions of
the general environment, identify some factors for each
dimension that are influential for your industry. Next,
describe the industry environment using the five forces
model. Database services like Mint Global, Datamonitor
or IBIS World can be helpful in this regard. If those are not
available to you, consult your local librarian for assistance.
You should be able to clearly articulate the opportunities and
the threats that exist.

Part 2
Create on a poster the business-level strategy assigned to
your team. Be prepared to describe the following:
• What is the mission statement?

• What is the description of your target customer?

• Provide a picture of your business. Where is it located
(city, suburban, rural etc.)?

• What trends provide opportunities and threats for your
intended strategy?

• List the resources, both tangible and intangible, required
to compete successfully in this market.

• How will you go about creating a sustainable competitive
advantage?

NOTES
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1997, Customization or conformity: An
institutional and network perspective on
the content and consequences of TQM
adoption, Administrative Science Quarterly,
42: 366–94.

125. S. Modell, 2009, Bundling management
control innovations: A field study of
organisational experimenting with total
quality management and the balanced
scorecard, Accounting, Auditing &
Accountability Journal, 22: 59–90.

126. A. Keramati & A. Albadvi, 2009, Exploring
the relationship between use of
information technology in total quality
management and SMEs performance
using canonical correlation analysis:
A survey on Swedish car part supplier
sector, International Journal of Information
Technology and Management, 8: 442–62; R.
J. David & S. Strang, 2006, When fashion is
fleeting: Transitory collective beliefs and
the dynamics of TQM consulting, Academy
of Management Journal, 49: 215–33.

127. Porter, Competitive Advantage, 16.
128. Porter, Competitive Advantage, 17.
129. M. A. Hitt, L. Bierman, K. Uhlenbruck

& K. Shimizu, 2006, The importance of
resources in the internationalization of
professional service firms: The good, the
bad, and the ugly, Academy of Management
Journal, 49: 1137–57.

130. P. Puranam, H. Singh & M. Zollo, 2006,
Organizing for innovation: Managing
the coordination–autonomy dilemma
in technology acquisitions, Academy of
Management Journal, 49: 263–80.

131. S. Thornhill & R. E. White, 2007, Strategic
purity: A multi-industry evaluation of pure
vs. hybrid business strategies, Strategic
Management Journal, 28: 553–61.

132. B. Connelly, L. Tihanyi, S. T. Certo & M. A.
Hitt, 2010, Marching to the beat of different
drummers: The influence of institutional
owners on competitive actions, Academy of
Management Journal, 53: 723–42.

130 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Competitive dynamics

Studying this chapter should provide you with the strategic management knowledge
needed to:
LO1 define competitors, competitive rivalry, competitive behaviour and competitive

dynamics
LO2 describe market commonality and resource similarity as the building blocks of a

competitor analysis
LO3 explain awareness, motivation and ability as drivers of competitive behaviours
LO4 describe how strategic actions and tactical actions drive competitive rivalry

between organisations
LO5 discuss factors affecting the likelihood a competitor will take competitive

actions
LO6 describe factors affecting the likelihood a competitor will respond to actions

taken against it
LO7 explain the competitive dynamics in each of slow-cycle, fast-cycle and

standard-cycle markets.

Learning Objectives

CH
AP

TE
R

5

131

Major supermarket chains are a global phenomenon.
In Australia, Coles and Woolworths control around
80 per cent of the market and are among the 20 biggest
retailers in the world, having thrashed the competition
for over a century. However, globally they are dwarfed by
Tesco. Tesco PLC is the world’s third-largest retailer (only
Walmart and France’s Carrefour are larger), suggesting its
ability to compete successfully against companies both
in the UK (its home market) and throughout the world.
However, the organisation’s recent competitive struggles,
both domestically and globally, appear to highlight that,
as noted in Chapter 1, no company’s success at a point in
time guarantees its future success.

So what are some descriptors of the situation Tesco
encountered? From a financial perspective, the organisation
reported a decline in profits in 2012 for the first time in
approximately two decades, and profits declined significantly
through to 2017 before a partial recovery in 2018 and 2019.
In 2013, Tesco closed its Fresh & Easy stores in the USA and
also took a write-down of £804 million to reflect the then-
current value of its UK properties. In all, Tesco wrote down
the value of its global operations by US$3.5 billion in 2013.
(This global write-down accounts for the organisation’s
troubled operations in countries such as Turkey, China and
India as well as the closing of its US operations.)

Another issue is that revenue had been declining in
Tesco’s home market, partially due to competition from
discount rivals like Aldi and Lidl, where the company
still generates roughly two-thirds of its sales and profits.
Part of the reason for the revenue decline is related
to customer service, as suggested by the fact that the
results from a survey of UK consumers a few years ago
‘found that despite £1 billion of investment in the U.K.
in FY2012/13, customer perceptions of Tesco’s quality,
prices, promotions and overall value for money had all
deteriorated quarter on quarter and year on year’. In light
of these results, the organisation took a number of actions,
including adding more and better-trained staff members
in its stores, refurbishing those stores, and revamping its
product lines and the prices it charged for them.

Revamping product lines and changing the prices
charged for items are tactical actions. In contrast,
entering (and exiting) the US market with the Fresh &

Easy concept was a strategic action (strategic and tactical
actions and responses are defined later in this chapter).
On the surface, entering the large US market seems
to be a reasonable course of action for a successful
global retailer to take. As is often the case, though,
execution of that strategic action appears to be where
problems were encountered. Fresh & Easy stores were
sized to be handy neighbourhood stores such as those
found in many European cities. This did not appeal to
American consumers, as suggested by an analyst: ‘My
sense is that what they tried to do was make a European
model. Europeans tend to make more frequent trips
to grocery stores, maybe every day or every other day,
where Americans are used to going for bigger trips
less frequently’. Additionally, products carried in stores
located in different parts of the USA were not customised
to any degree, meaning that the potentially unique
needs of any local consumers who might choose to shop
daily were not being identified and satisfied. Tesco sold
Fresh & Easy in 2013 and exited the American market.

Tesco has taken additional strategic actions as part of
its current array of competitive behaviours. For example,
it took positions in other companies for the purpose
of being able to turn their stores into compelling retail
destinations for customers. ‘Investments in the Harris &
Hoole coffee chain, working with the Euphorium bakery
brand in London and acquiring the Giraffe restaurant chain’
are examples of the competitive behaviour Tesco displayed
as a foundation for improving its performance and trying to
outcompete its rivals in the process of doing so. However,
after poor results and corporate financial pressures, these
investments were divested in 2016. Tesco is hoping that
investments in mobile payment technology and other
initiatives will help to improve its market position.

Sources: 2016, Tesco starts sell-off ahead of results with Asian disposal,
BBC News, https://www.bbc.com/news/business-36022305, 12 April; M. Knox,
2015, Supermarket Monsters, Melbourne: Redback; J. Davey & K. Holton, 2013,
Tesco quits U.S. and takes $3.5 billion global writedown, Reuters, http://www.
reuters.com, 17 April; J. Dunkley, 2014, Warren Buffett says Tesco investment

was a ‘huge mistake’, Independent, https://www.independent.co.uk/news/
business/news/warren-buffett-says-tesco-investment-was-a-huge-mistake-
9770684.html, 2 October; K. Gordon, 2013, Tesco leans on outside brands,
Wall Street Journal, http://www.wsj.com, 18 April; R. Head, 2013, Can Tesco
outperform Wal-Mart stores?, Daily Finance, http://www.dailyfinance.com,

21 March; N. Pratley, 2013, Tesco’s era of rolling out its aisles is over, for now,
The Guardian, http://www.guardian.co.uk, 17 April.

OPENING CASE STUDY
Tesco PLC: a case study in competitive behaviour

132 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Organisations operating in the same market, offering similar products and targeting similar customers
are competitors.1 Qantas, Virgin Australia, Regional Express and Jetstar (part of the Qantas Group) are
competitors, as are PepsiCo and Coca-Cola Company, and to some extent, even the Salvation Army and
St Vincent de Paul. As described in the opening case study, Tesco in the UK is currently engaging in a
competitive battle in the supermarket game with large competitors, with at least one, Aldi, having a slightly
different model, one that seems to be successful. Coles and Woolworths also face the Aldi threat in the
Australian market.2

Organisations interact with their competitors as part of the broad context within which they operate
while attempting to earn above-average returns.3 As stated in Chapter 4, competitors and return on
investment also applies to non-commercial organisations, including government departments, not-for-
profit, sporting, health care and community organisations. The decisions organisations make about their
interactions with their competitors significantly affect their ability to earn above-average returns.4 Because
80–90 per cent of new organisations fail, learning how to select the markets in which to compete and how
to best compete within them is highly important.5

Competitive rivalry is the ongoing set of competitive actions and competitive responses that occur
among organisations as they manoeuvre for an advantageous market position.6 Especially in highly
competitive industries, organisations constantly jockey for advantage as they launch strategic actions and
respond or react to rivals’ moves.7 It is important for those leading organisations to understand competitive
rivalry, in that ‘the central, brute empirical fact in strategy is that some firms outperform others’,8 meaning
that competitive rivalry influences an individual organisation’s ability to gain and sustain competitive
advantages.9

A sequence of organisation-level moves results, with the rivalry a consequence from organisations
initiating their own competitive actions and then responding to actions taken by competitors.10 Competitive
behaviour is the set of competitive actions and responses the organisation takes to build or defend its
competitive advantages and to improve its market position.11 Through competitive behaviour, the
organisation tries to successfully position itself relative to the five forces of competition (see Chapter
2) and to defend current competitive advantages while building advantages for the future (see Chapter
3). Increasingly, competitors engage in competitive actions and responses in more than one market.12
Organisations competing against each other in several product or geographic markets are engaged in multi-
market competition.13 All competitive behaviour – that is, the total set of actions and responses taken by
all organisations competing within a market – is called competitive dynamics. The relationships among
these key concepts are shown in Figure 5.1.

This chapter focuses on competitive rivalry and competitive dynamics. An organisation’s strategies
are dynamic in nature because actions taken by one organisation elicit responses from competitors that,
in turn, typically result in responses from the organisation that took the initial action.14 Strateg y is not a
matter of following a recipe. It is more like a game of chess. You cannot have an effective strategy without
considering the responses by competitors, and your response to their responses.

Competitive rivalries affect an organisation’s strategies, as shown by the fact that a strategy’s success
is determined not only by the organisation’s initial competitive actions but also by how well it anticipates
competitors’ responses to them and by how well the organisation anticipates and responds to its competitors’
initial actions (also called attacks).15 Although competitive rivalry affects all types of strategies (e.g.
corporate-level, acquisition and international), its dominant influence is on the organisation’s business-
level strategy or strategies. Indeed, organisations’ actions and responses to those of their rivals are the basic
building blocks of business-level strategies.16 You will recall from Chapter 4 that business-level strategy is
concerned with what the organisation does to successfully use its competitive advantages in specific product
markets. In the global economy, competitive rivalry is intensifying,17 meaning that the significance of its
effect on organisations’ business-level strategies is increasing. However, organisations that develop and
use effective business-level strategies tend to outperform competitors in individual product markets, even
when experiencing intense competitive rivalry that price cuts bring about.18

competitors
organisations
operating in the same
market, offering
similar products and
targeting similar
customers

STRATEGY NOW

Tesco’s
competitive
behaviour

competitive rivalry
the ongoing set of
competitive actions
and competitive
responses occurring
between competitors
as they compete
against each other
for an advantageous
market position

competitive
behaviour
the set of competitive
actions and
competitive responses
the organisation
takes to build or
defend its competitive
advantages and to
improve its market
position

multi-market
competition
occurs when
organisations compete
against each other
in several product or
geographic markets

competitive dynamics
refers to all
competitive
behaviours; that is,
the total set of actions
and responses taken
by all organisations
competing within a
market

CHAPTER 5
COMPETITIVE DYNAMICS

133

Figure 5.1 From competitors to competitive dynamics

• To gain an advantageous market position

• Competitive dynamics
• Competitive actions and responses taken by all organisations competing
in a market

Competitors
Engage in

W
h

at resu
lts?

Why?

How?

What results?

Competitive
rivalry

• Through competitive behaviour
• Competitive actions
• Competitive responses

Source: Based on M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration,
Academy of Management Review, 21: 100–34.

A model of competitive rivalry
Competitive rivalry evolves from the pattern of actions and responses as one organisation’s competitive
actions have noticeable effects on competitors, eliciting competitive responses from them.19 This pattern
suggests that organisations are mutually interdependent, that they are affected by each other’s actions and
responses, and that marketplace success is a function of both individual strategies and the consequences of
their use.20 Increasingly, too, executives recognise that competitive rivalry can have a major effect on the
organisation’s financial performance.21 Research shows that intensified rivalry within an industry results
in decreased average profitability for the competing organisations.22 For example, Research In Motion
(RIM) dominated the smartphone market with its BlackBerry operating system platform until Apple’s
iPhone platform emerged. Likewise, the introduction of the Android platform by Google and the growth
of Samsung has cut into RIM’s market share and thereby further lowered the company’s performance
expectations. The organisation is now in deep trouble with, in mid-2019, only around 0.04 per cent of the
global smartphone market.23

Figure 5.2 presents a straightforward model of competitive rivalry at the organisation level; this type
of rivalry is usually dynamic and complex.24 The competitive actions and responses the organisation takes
are the foundation for successfully building and using its capabilities and core competencies to gain an
advantageous market position.25 The model in Figure 5.2 presents the sequence of activities commonly
involved in competition between a particular organisation and each of its competitors. Companies can use the
model to understand how to be able to predict competitors’ behaviour (actions and responses) and reduce the
uncertainty associated with competitors’ actions.26 Being able to predict competitors’ actions and responses
has a positive effect on the organisation’s market position and its subsequent financial performance.27
The sum of all the individual rivalries modelled in Figure 5.2 that occur in a particular market reflect the
competitive dynamics in that market.

STRATEGY NOW

Apple’s cutting-
edge technology
strategy

134 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

The remainder of the chapter explains components of the model shown in Figure 5.2. We first describe
market commonality and resource similarity as the building blocks of a competitor analysis. Next, we
discuss the effects of three organisational characteristics – awareness, motivation and ability – on the
organisation’s competitive behaviour. We then examine competitive rivalry between organisations (or
inter-organisation rivalry) in detail, by describing the factors that affect the likelihood an organisation
will take a competitive action and the factors that affect the likelihood an organisation will respond to a
competitor’s action. In the chapter’s final section, we turn our attention to competitive dynamics to describe
how market characteristics affect competitive rivalry in slow-cycle, fast-cycle and standard-cycle markets.

Competitor analysis
As previously noted, a competitor analysis is the first step the organisation takes to be able to predict
the extent and nature of its rivalry with each competitor. The number of markets in which organisations
compete against each other (called market commonality, defined in the following section) and the similarity
in their resources (called resource similarity, also defined in the following section) determine the extent
to which organisations are competitors. Organisations with high market commonality and highly similar
resources are ‘clearly direct and mutually acknowledged competitors’.2 8 The drivers of competitive
behaviour – as well as factors influencing the likelihood that a competitor will initiate competitive actions
and will respond to its competitors’ actions – influence the intensity of rivalry, even for direct competitors.29

In Chapter 2, we discussed competitor analysis as a technique organisations use to understand their
competitive environment. Together, the general, industry and competitive environments comprise the

Figure 5.2 A model of competitive rivalry

Drivers of competitive
behaviour

Awareness

Motivation

Inter-organisation rivalry:
Action and response

Likelihood of attack
• First-mover incentives
• Organisational size
• Quality

Likelihood of response
• Type of competitive action
• Actor’s reputation
• Market dependence
• Resource availability

Competitor analysis

Market commonality

Resource similarity

Ability for action
and response

Relative size

Speed

Innovation

Quality

Feedback

Feedback

Outcomes of
inter-organisation rivalry

Competitive market types
• Slow cycle
• Standard cycle
• Fast cycle

Competitive outcomes
• Sustained competitive
advantage
• Temporary competitive
advantage

Evolutionary outcomes
• Entrepreneurial actions
• Growth-oriented actions
• Market-power actions

Source: Adapted from M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a theoretical integration,
Academy of Management Review, 21: 100–34.

CHAPTER 5
COMPETITIVE DYNAMICS

135

organisation’s external environment. We also described how competitor analysis is used to help the
organisation understand its competitors. This understanding results from studying competitors’ future
objectives, current strategies, assumptions and capabilities (see Figure 2.5 in Chapter 2). In this chapter,
the discussion of competitor analysis is extended to describe what organisations study to be able to
predict competitors’ behaviour in the form of their competitive actions and responses. The discussions of
competitor analysis in Chapter 2 and in this chapter are complementary in that organisations must first
understand competitors (Chapter 2) before their competitive actions and competitive responses can be
predicted (this chapter).

Such competitive awareness is illustrated in the competitors in the global automobile market such as
Toyota, Ford, General Motors, Honda, Tesla, Tata, Chrysler, Nissan, Volkswagen (VW), Daimler-Benz and
others. These analyses are highly important because they help managers to avoid ‘competitive blind spots’,
in which managers are unaware of specific competitors or their capabilities. If managers have competitive
blind spots, they may be surprised by a competitor’s actions, thereby allowing the competitor to increase its
market share at the expense of the manager’s organisation.30 Competitor analyses are especially important
when an organisation enters a foreign market. Managers need to understand the local competition and
foreign competitors currently operating in the market.31 Without such analyses, they are less likely to be
successful.

Market commonality
Each industry is composed of various markets. The financial services industry has markets for insurance,
brokerage services, banks and so forth. To concentrate on the needs of different, unique customer
groups, markets can be further subdivided. The insurance market, for example, could be broken into
market segments (such as commercial and consumer), product segments (such as health insurance and
life insurance) and geographic markets (such as Western Europe and South-East Asia). In general, the
capabilities generated by the internet’s technologies help to shape the nature of industries’ markets, along
with the competition among organisations operating in them. For example, Alex Tosolini, formerly vice
president of e-commerce for Procter & Gamble (P&G), noted: ‘Facebook is both a marketing and a distribution
channel, as P&G has worked to develop “f-commerce” capabilities on its fan pages, fulfilled by Amazon,
which has become a top 10 retail account for Pampers’, a disposable nappy product.32

Competitors tend to agree about the different characteristics of individual markets that form an
industry. For example, in the transportation industry, the commercial air travel market differs from the
ground transportation market, which is served by such organisations as YRC Worldwide (one of the largest
transportation service providers in the world) and major YRC competitor FedEx Freight.33 Although differences
exist, many industries’ markets are partially related in terms of the technologies used or the core competencies
needed to develop a competitive advantage. For example, although railroads and truck ground transport
compete in a different segment and can be substitutes, different types of transportation companies need to
provide reliable and timely service. Commercial air carriers such as Jetstar and Virgin Australia must therefore
develop service competencies to satisfy their passengers, while YRC, railroads and their major competitors
must develop such competencies to serve the needs of those using their services to transport goods.

Organisations sometimes compete against each other in several markets that are in different industries.
As such, these competitors interact with each other several times, a condition called market commonality.
More formally, market commonality is concerned with the number of markets in which the organisation and
a competitor are jointly involved and the degree of importance of the individual markets to each.34 When
organisations produce similar products and compete for the same customers, as in the global automobile
industry, the competitive rivalry is likely to be high.35 Organisations competing against one another in several
or many markets engage in multi-market competition.36 Coca-Cola and PepsiCo compete across a number of
product (e.g. soft drinks and bottled water) and geographic markets. Airlines, chemicals, pharmaceuticals
and consumer foods are examples of other industries in which organisations often simultaneously compete
against each other in multiple markets.

market commonality
concerned with the
number of markets
with which the
organisation and a
competitor are jointly
involved and the
degree of importance
of the individual
markets to each

136 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Organisations competing in several markets have the potential to respond to a competitor’s actions not
only within the market in which the actions are taken, but also in other markets where they compete with
the rival. This potential creates a complicated competitive mosaic in which ‘the moves an organisation
makes in one market are designed to ach ieve goals in anot her market in ways t hat aren’t im med iately
apparent to its rivals’.37 This potential complicates the rivalry between competitors. In fact, research
suggests that an organisation with greater multi-market contact is less likely to initiate an attack but
more likely to respond aggressively when attacked. For instance, research in the computer industry found
that organisations ‘respond to competitive attacks by introducing new products but do not use price as a
retaliatory weapon’.38 Thus, in general, multi-market competition reduces competitive rivalry, but some
organisations will still compete when the potential rewards (e.g. potential market share gain) are high.39

Competitive rivalry in fast fashion: a constant stream
of actions and responses

Zara is competing in the ‘fast fashion’ segment of the
retailing clothing industry and ‘uses its resources and
capabilities as the foundation for its core competencies’.
These core competencies allow Zara to ‘give customers
what they want and get it to them faster than anyone
else’. Quick designs and its supply chain are two core
competencies that remain critical to Zara’s success.

In terms of design, analysts say that Zara gives
customers decently made fashion items that are based
on the latest looks from runways throughout the world,
yet are also sold at affordable prices – hence the reason
to ascribe the term ‘cheap chic’ to the organisation’s
clothes and to those produced by its major competitors
as well. With respect to the supply chain competence, this
is framed around the fact that Spanish parent company
Industria de Diseño Textil (Inditex) owns a number of
brands in addition to Zara, such as Massimo Dutti, Bershka,
Pull & Bear, Stradivarius and Oysho. In total, the clothing
giant has over 7400 stores located in over 90 countries.
In serving the product needs of all of its units, some say
that ‘Inditex is something of a supply chain marvel: clothes
move from concept to design to the Zara stores in a matter
of days. And they move out of Zara stores within weeks’.

With over 4500 stores located in over 70 countries,
Swedish multinational Hennes & Mauritz (H&M)
is another very large global clothing retailer. This
organisation also concentrates on the fast fashion
market, and Zara and H&M compete on some of
the same dimensions, such as supply chain. But as
discussed in Chapter 3, organisations’ resources are
unique or idiosyncratic and as such do not yield identical
capabilities and core competencies. This uniqueness is
the foundation for how organisations compete against

one another. Relative to H&M, Zara’s supply chain
appears to be an advantage and a means of taking
competitive actions. In the words of an analyst: ‘Zara
has a lightning-fast supply chain with 50 per cent of
its clothes made in Western Europe. That allows it to
capture catwalk and luxury trends and put product
in its stores within weeks – something customers are
willing to pay a premium for’. While H&M’s supply
chain is impressive, it does not allow the organisation
to achieve competitive parity with Zara with respect
to this competitive dimension. ‘H&M with its longer
supply chain can’t keep pace in terms of fashion, so
it tries to compete on price instead: H&M’s offerings
are on average about 60 per cent cheaper than Zara’s.
But the Stockholm-based chain is still more expensive
than budget competitors such as Primark, owned by
Associated British Foods PLC and US chain Forever 21,

Strategic focus | Technology

A window display from a Zara store. Zara’s supply chain
gives it a competitive advantage and underlies its ability to
take competitive actions.

Source: iStock.com/ManuelVelasco

CHAPTER 5
COMPETITIVE DYNAMICS

137

Resource similarity
Resource similarity is the extent to which the organisation’s tangible and intangible resources are
comparable to a competitor’s in terms of both type and amount.40 Organisations with similar ty pes and
amounts of resources are likely to have similar strengths and weaknesses and use similar strategies.41 The
competition between FedEx and United Parcel Service (UPS) in using information technology to improve
the efficiency of their operations and to reduce costs demonstrates these expectations. Pursuing similar
strategies that are supported by similar resource profiles, personnel in these organisations work at pace
to receive, sort and ship packages. Rival DHL (owned by Deutsche Post) is trying to compete with the two
global giants. DHL has made impressive gains in recent years; it competes strongly in Europe and Asia with
resources and capabilities similar to those of FedEx and UPS.42 To survive, it has negotiated a partnership
agreement with UPS and others to make its US deliveries. Such arrangements are often referred to as
‘coopetition’ (cooperation between competitors). This agreement has helped DHL to focus on its European
operations, where it has pioneered the use of street scooters and electric delivery vans to improve its
environmental profile.43

When performing a competitor analysis, an organisation analyses each of its competitors in terms
of market commonality and resource similarity. The results of these analyses can be mapped for visual
comparisons. In Figure 5.3, we show different hypothetical intersections between the organisation and
individual competitors in terms of market commonality and resource similarity. These intersections
indicate the extent to which the organisation and those with which it is compared are competitors.

resource similarity
the extent to which
the organisation’s
tangible and
intangible resources
are comparable to a
competitor’s in terms
of both type and
amount

leaving H&M struggling to position itself’. Thus, in
terms of competitive rivalry, Zara uses its supply chain
advantage while H&M uses price as a competitive
action to try to reduce the value Zara generates by
emphasising its supply chain.

There are additional examples of competitive rivalry
between Zara and H&M. Recently, H&M, along with
other retailers including Gap, American Eagle Outfitters
and Forever 21, established units in Mexico. Steadily
increasing incomes of Mexican citizens and the country’s
sizeable and youthful population are reasons for these
entries. However, Zara is a first mover in Mexico, having
established its first unit there in 1992 and expanding that
initial location to around 440 Inditex stores (including
more than 90 Zara stores). Thus, entry now by some
additional clothing retailers is a competitive response to
the competitive action Zara took long ago. On the other
hand, H&M is seeking to expand more rapidly in India
compared with Zara. In this instance, H&M is taking a
competitive action to which Zara may have to respond.

The internet is a growing source of competitive
rivalry between Zara and H&M. More specifically, H&M
announced that it would establish a significant online
shopping presence in the USA. However, this intended
action appears to be at least in part a response to Zara’s

increasing internet-related success. In commenting
about its website, a Zara official noted that the number
of visitors to the site had doubled and that the site was
receiving over two million hits per day. Both chains
announced in 2019 that they would be closing some
stores to invest more resources in online shopping.

Overall, the never-ending string of competitive
actions and responses occurring between Zara and
H&M provide an interesting ‘picture’ of competitive
rivalry.

Sources: H&M Group, 2020, https://hmgroup.com/investors/five-
year-summary.html, 21 January; G. Smith, 2019, H&M and Zara are

closing stores to get ahead, https://fortune.com/2019/08/11/hm-zara-
store-closing, 11 August; C. Hudgins, 2019, Zara owner Inditex faces

headwinds but still outruns rival H&M, https://www.spglobal.com/
marketintelligence/en/news-insights/latest-news-headlines/50958006,

8 April; Inditex Annual Report 2018, 2018 in data, https://static.inditex.
com/annual_report_2018/en/2018-data.html; C. Bjork, 2013, Inditex
profit rises as global expansion continues, Wall Street Journal, http://

www.wsj.com, 13 March; J. Cartner-Morley, 2013, How Zara took over
the high street, The Guardian, http://www.guardian.co.uk, 15 February;

L. Dishman, 2013, H&M’s competitive advantage: Expansion in India,
Forbes, http://www.forbes.com, 29 April; J. Hansegard, 2013, H&M plans

U.S. online store in summer, Wall Street Journal, http://www.wsj.com,
21 March; M. Moffett, 2013, Soul-searching in Spanish fashion after
Bangladesh factory details, Wall Street Journal, http://www.wsj.com,

23 May; M. Sanchantra & L. Burkitt, 2013, Asia gravitates to cheap chic,
Wall Street Journal, http://www.wsj.com, 23 April.

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Zara’s internet
success

138 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

For example, the organisation and its competitor displayed in quadrant I have similar types and amounts
of resources (i.e. the two organisations have a similar portfolio of resources). The organisation and its
competitor in quadrant I would use their similar resource portfolios to compete against each other in many
markets that are important to each. These conditions lead to the conclusion that the organisations modelled
in quadrant I are direct and mutually acknowledged competitors (e.g. as in the global car industry). By
contrast, the organisation and its competitor shown in quadrant III share few markets and have little
similarity in their resources, indicating that they are not direct and mutually acknowledged competitors.
Thus, a small, local, family-owned Italian restaurant does not compete directly against Pizza Hut, nor
does it have resources that are similar to those of Pizza Hut (which also owns KFC). The organisation’s
mapping of its competitive relationship with rivals is fluid as organisations enter and exit markets and as
companies’ resources change in type and amount. Thus, the companies with which the organisation is a
direct competitor change across time.

Drivers of competitive actions and
responses
As shown in Figure 5.2, market commonality and resource similarity influence the drivers (awareness,
motivation and ability) of competitive behaviour. In turn, the drivers influence the organisation’s
competitive behaviour, as shown by the actions and responses it takes while engaged in competitive
rivalry.44

Awareness, which is a prerequisite to any competitive action or response taken by an organisation,
refers to the extent to which competitors recognise the degree of their mutual interdependence that results
from market commonality and resource similarity.45 Awareness tends to be greatest when organisations
have highly similar resources (in terms of types and amounts) to use while competing against each
other in multiple markets. Komatsu Ltd, Japan’s top construction machinery maker, and Caterpillar Inc.
have similar resources and are certainly aware of each other’s actions.46 The same is true for Walmart
and France’s Carrefour, the two largest supermarket groups in the world. The last two organisations’

Figure 5.3 A framework of competitor analysis

Resource
similarity

Market
commonality

Low

Portfolio of resources A

High

The shaded area represents the degree of market commonality between two firms.

Portfolio of resources B

High

Low

II I

III IV

Source: M.-J. Chen, 1996, Competitor analysis and interfirm rivalry: Toward a
theoretical integration, Academy of Management Review, 21: 100–34.

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139

joint awareness has increased as they use similar resources to compete against each other for dominant
positions in multiple European and South American markets. In China, where local competitors Alibaba,
JD.com and Suning dominate the market, the success of Walmart and Carrefour has diverged, with
Carrefour choosing in 2019 to sell an 80 per cent stake in its 210 retail stores to Suning and basically exit
the market, whereas Walmart is remaining with 400 stores.47 Awareness affects the extent to which the
organisation understands the consequences of its competitive actions and responses. A lack of awareness
can lead to excessive competition, resulting in a negative effect on all competitors’ performance.48

Motivation, which concerns the organisation’s incentive to take action or to respond to a competitor’s
attack, relates to perceived gains and losses. Thus, an organisation may be aware of competitors but may
not be motivated to engage in rivalry with them if it perceives that its position will not improve or that
its market position won’t be damaged if it doesn’t respond.49 In some cases, organisations may locate near
competitors in order to more easily access suppliers and customers.

Market commonality affects the organisation’s perceptions and resulting motivation. For example, the
organisation is generally more likely to attack the rival with whom it has low market commonality than the
one with whom it competes in multiple markets. The primary reason is the high stakes involved in trying
to gain a more advantageous position over a rival with whom the organisation shares many markets. As
mentioned earlier, multi-market competition can find a competitor responding to the organisation’s action
in a market different from the one in which the initial action was taken. Actions and responses of this type
can cause both organisations to lose focus on core markets and to battle each other with resources that had
been allocated for other purposes. Because of the high stakes of competition under the condition of market
commonality, the probability is high that the attacked organisation will respond to its competitor’s action
in an effort to protect its position in one or more markets.50

In some instances, the organisation may be aware of the markets it shares with a competitor and be
motivated to respond to an attack by that competitor, but lack the ability to do so. Ability relates to each
organisation’s resources and the flexibility they provide. Without available resources (such as financial
capital and people), the organisation lacks the ability to attack a competitor or respond to its actions. For
example, smaller and newer organisations tend to be more innovative but generally have fewer resources
to attack larger and established competitors. Likewise, foreign organisations often are at a disadvantage
against local organisations because of the local organisations’ social capital (relationships) with consumers,
suppliers and government officials.51 However, similar resources suggest similar abilities to attack and
respond. When an organisation faces a competitor with similar resources, careful study of a possible
attack before initiating it is essential because the similarly resourced competitor is likely to respond to
that action.52

Resource dissimilarity also influences competitive actions and responses between organisations, in that
‘the greater is the resource imbalance between the acting firm and competitors or potential responders,
the greater will be the delay in response’53 by the organisation with a resource disadvantage. For example,
Walmart initially used a focused cost leadership strategy to compete only in small communities (those
with a population of 25 000 or less). Using sophisticated logistics systems and extremely efficient
purchasing practices, among others, to gain competitive advantages, Walmart created a new type of value
(primarily in the form of wide selections of products at the lowest competitive prices) for customers in
small retail markets. Local competitors lacked the ability to marshal needed resources at the pace required
to respond quickly and effectively. However, even when facing competitors with greater resources (greater
ability) or more attractive market positions, organisations should eventually respond, no matter how
daunting the task seems. Choosing not to respond can ultimately result in failure, as happened with at
least some local retailers who didn’t respond to Walmart’s competitive actions. Of course, the actions
taken by Walmart were only the beginning. Walmart has become the largest physical retailer in the
world (a title that belongs to Amazon, or perhaps Alibaba, in online retail) and is feared by competitors
large and small.

140 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Competitive rivalry
The ongoing competitive action–response sequence between an organisation and a competitor affects the
performance of both organisations;54 thus, it is important for companies to carefully analyse and understand
the competitive rivalry present in the markets they serve to select and implement successful strategies.55
Understanding a competitor’s awareness, motivation and ability helps the organisation to predict the
likelihood of an attack by that competitor and the probability that a competitor will respond to actions
taken against it.

As we described earlier, the predictions drawn from studying competitors in terms of awareness,
motivation and ability are grounded in market commonality and resource similarity. These predictions
are fairly general. The value of the final set of predictions the organisation develops about each of its
competitors’ competitive actions and responses is enhanced by studying the ‘Likelihood of attack’ factors
(such as first-mover incentives and organisational size) and the ‘Likelihood of response’ factors (such as
the actor’s reputation) that are shown in Figure 5.2. Evaluating and understanding these factors allows the
organisation to refine the predictions it makes about its competitors’ actions and responses.

Strategic and tactical actions
Organisations use both strategic and tactical actions when forming their competitive actions and
competitive responses in the course of engaging in competitive rivalry.56 A competitive action is a strategic
or tactical action the organisation takes to build or defend its competitive advantages or improve its market
position. A competitive response is a strategic or tactical action the organisation takes to counter the effects
of a competitor’s competitive action. A strategic action or strategic response is a market-based move that
involves a significant commitment of organisational resources and is difficult to implement and reverse. A
tactical action or tactical response is a market-based move that is taken to fine-tune a strategy; it involves
fewer resources and is relatively easy to implement and reverse.

Apple opened a service called ‘Game Center’ once it found that users were using its iPhone, iPad and
iPod platforms for video games. With its update to its iOS (operating system) software, game producers
began producing game applications to use the Apple system as its graphics became more advanced. This
represented a strategic move by Apple. The now wider category of its ‘App store’ includes over 1.8 million
items, making it easy for Apple users to find handy applications and fun games. Game platform hardware
and software producers such as Nintendo and Sony then created strategic responses to the Apple threat. For
example, Sony, which produces the PlayStation console, partnered with
Sony Ericsson to make the Xperia Play phone, which uses ‘PlayStation-
certified games’ and runs on Google’s Android operating system. As of
the fourth quarter of 2019, Android users were able to choose between
2.57 million apps, making Google Play the app store with the biggest
number of available apps.57

Coles supermarkets price aggressively as a means of increasing
revenues and gaining market share at the expense of competitors.
However, pricing is a tactical strategy and is easily matched by
Woolworths and IGA in the Australian market. Although pricing
aggressively is at the core of what Coles is and how it competes, can the
tactical action of aggressive pricing continue to lead to the competitive
success the organisation has historically enjoyed? Is Coles achieving
the type of balance between strategic and tactical competitive actions
and competitive responses that is the foundation for all organisations’
success in marketplace competitions? Can it answer the threat of Aldi
with still lower prices?

competitive action
a strategic or
tactical action the
organisation takes
to build or defend
its competitive
advantages or
improve its market
position

competitive response
a strategic or
tactical action the
organisation takes to
counter the effects
of a competitor’s
competitive action

strategic action or
strategic response
a market-based
move that involves
a significant
commitment of
organisational
resources and is
difficult to implement
and reverse

tactical action or
tactical response
a market-based
move that is taken to
fine-tune a strategy;
it involves fewer
resources and is
relatively easy to
implement and
reverse

Sony, makers of the PlayStation console, partnered with
Sony Ericsson to make the Xperia Play phone.

Source: Getty Images/Bloomberg

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141

When engaging rivals in competition, organisations must recognise
the differences between strategic and tactical actions and responses
and should develop an effective balance between the two types of
competitive actions and responses. Several years ago, Airbus, Boeing’s
major competitor in commercial airliners, became aware that Boeing
was strongly committed to taking the actions it believed were necessary
to successfully launch the 787 Dreamliner, because deciding to design,
build and launch the 787 was a major strategic action. Analysts believed
that Boeing’s development of the 787 airliner was a strategic response to
Airbus’ then-new A380 aircraft.58

Likelihood of attack
In addition to market commonality, resource similarity and the drivers
of awareness, motivation and ability, other factors affect the likelihood
a competitor will use strategic actions and tactical actions to attack its
competitors. Three of these factors – first-mover incentives, organisational
size and quality – are discussed next.

First-mover incentives
A first mover is an organisation that takes an initial competitive action in order to build or defend its
competitive advantages or to improve its market position. The first-mover concept has been influenced by
the work of the famous economist Joseph Schumpeter, who argued that organisations achieve competitive
advantage by taking innovative actions59 (innovation is defined and described in detail in Chapter 13). In
general, first movers ‘allocate funds for product innovation and development, aggressive advertising, and
advanced research and development’.60

The benefits of being a successful first mover can be substantial.61 Especially in fast-cycle markets
(discussed later in the chapter), where changes occur rapidly and it is virtually impossible to sustain a
competitive advantage for any length of time, a first mover can experience many times the valuation
and revenue of a second mover.62 This evidence suggests that although first-mover benefits are never
absolute, they are often critical to an organisation’s success in industries experiencing rapid technological
developments and relatively short product life cycles.6 3 In addition to earning above-average returns
until its competitors respond to its successful competitive action, the first mover can gain the loyalty of
customers who may become committed to the goods or services of the organisation that first made them
available, and gain market share that can be difficult for competitors to take during future competitive
rivalry.64 The general evidence that first movers have greater survival rates than later market entrants is
perhaps the culmination of first-mover benefits.65

The organisation trying to predict its competitors’ competitive actions might conclude that they will
take aggressive strategic actions to gain first movers’ benefits. However, even though an organisation’s
competitors might be motivated to be first movers, they may lack the ability to do so. First movers tend to
be aggressive and willing to experiment with innovation and take higher, yet reasonable, levels of risk.66 To
be a first mover, the organisation must have readily available the resources to significantly invest in R&D,
as well as to rapidly and successfully produce and market a stream of innovative products and services.67
If the organisation does not have the necessary resources or cannot establish the necessary legitimacy,
being a first mover can lead to survival risks.68

Organisational slack makes it possible for organisations to have the ability (as measured by available
resources) to be first movers. Slack is the buffer or cushion provided by actual or obtainable resources
that are not currently in use and are in excess of the minimum resources needed to produce a given level
of organisational output. For example, in January 2020, Apple passed a share price of US$300 (around

first mover
an organisation
that takes an initial
competitive action
in order to build or
defend its competitive
advantages or to
improve its market
position

A high rivalry situation can be partly hidden by brands:
check the organisations behind water brands and you will
find many are owned by Coca-Cola or PepsiCo. There’s
not as much competition as it seems.

Source: Shutterstock.com/Pressmaster

142 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

A$440) and had a A$245 billion cash hoard.69 As a liquid resource, slack can quickly be allocated to support
competitive actions, such as R&D investment and aggressive marketing campaigns that lead to first-mover
advantages. This relationship between slack and the ability to be a first mover allows the organisation to
predict that a first-mover competitor likely has available slack and will probably take aggressive competitive
actions to continuously introduce innovative products and services. Furthermore, the organisation can
predict that, as a first mover, a competitor will try to rapidly gain market share and customer loyalty in
order to earn above-average returns until its competitors are able to effectively respond to its first move.

Organisations evaluating their competitors should realise that being a first mover carries risk. For
example, it is difficult to accurately estimate the returns that will be earned from introducing product
innovations to the marketplace.70 Additionally, the first mover’s cost to develop a product innovation
can be substantial, reducing the slack available to support further innovation. Thus, the organisation
should carefully study the results a competitor achieves as a first mover. Continuous success by the
competitor suggests additional product innovations, while lack of product acceptance over the course
of the competitor’s innovations may indicate less willingness in the future to accept the risks of being a
first mover.71

A second mover is an organisation that responds to the first mover’s competitive action, typically
through imitation. More cautious than the first mover, the second mover studies customers’ reactions to
product innovations. In the course of doing so, the second mover also tries to find any mistakes the first
mover made so that it can avoid them and the problems they created. Often, successful imitation of the first
mover’s innovations allows the second mover to avoid the mistakes and the major investments required
of the pioneers (first movers).72

Second movers also have the time to develop processes and technologies that are more efficient than
those used by the first mover or that create additional value for consumers.73 The most successful second
movers rarely act too fast (so they can fully analyse the first mover’s actions) nor too slow (so they do not
give the first mover time to correct its mistakes and ‘lock in’ customer loyalty).74 Overall, the outcomes of
the first mover’s competitive actions may provide an effective blueprint for second and even late movers
(discussed below) as they determine the nature and timing of their competitive responses.75 Determining
whether a competitor is an effective second mover (based on its past actions) allows a first-mover
organisation to predict that the competitor will respond quickly to successful, innovation-based market
entries. The first mover can expect a successful second-mover competitor to study its market entries and to
respond with a new entry into the market within a short time period. As a second mover, the competitor will
try to respond with a product that provides greater customer value than does the first mover’s product. The
most successful second movers are able to rapidly and meaningfully interpret market feedback to respond
quickly, yet successfully, to the first mover’s successful innovations.

For example, Hyundai has traditionally been a second mover in the automobile industry. However, it
has decided that ‘playing follow the leader on R&D isn’t good enough any more’.76 It is leading the way in
a number of new features in its vehicles, such as an ‘onslaught of new drive train technologies’ and a new
hybrid drive that makes the transmission – and therefore the car – efficient at higher speeds than traditional
hybrids such as the Toyota Prius. In 2019, Hyundai announced major changes to its R&D structure, with
an agile structure aimed at pre-empting changing markets, and an ‘architecture-driven system-based
organisation’ to streamline the vehicle development process.77

A late mover is an organisation that responds to a competitive action a significant amount of time
after the first mover’s action and the second mover’s response. Typically, a late response is better than no
response at all, although any success achieved from the late competitive response tends to be considerably
less than that achieved by first and second movers. However, on occasion, late movers can be successful if
they develop a unique way to enter the market and compete. For organisations from emerging economies,
this often means a niche strategy with lower-cost production and manufacturing.78

The organisation competing against a late mover can predict that the competitor will likely enter
a particular market only after both the first and second movers have achieved success in that market.

second mover
an organisation that
responds to the first
mover’s competitive
action, typically
through imitation

late mover
an organisation
that responds to a
competitive action,
but only after
considerable time has
elapsed after the first
mover’s action and
the second mover’s
response

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143

Moreover, on a relative basis, the organisation can predict that the late mover’s competitive action will
allow it to earn average returns only after the considerable time required for it to understand how to create
at least as much customer value as that offered by the first and second movers’ products.

Organisational size
An organisation’s size affects the likelihood it will take competitive actions, as well as the types and
timing of those actions.79 In general, small organisations are more likely than large companies to launch
competitive actions and tend to do it more quickly. Smaller organisations are thus perceived as nimble and
flexible competitors who rely on speed and surprise to defend their competitive advantages or develop new
ones while engaged in competitive rivalry, especially with large companies, to gain an advantageous market
position.80 Small organisations’ flexibility and nimbleness allow them to develop variety in their competitive
actions; large organisations tend to limit the types of competitive actions used.81

Large organisations, however, are likely to initiate more competitive actions along with more strategic
actions during a given period.82 Thus, when studying its competitors in terms of organisational size, the
organisation should use a measurement such as total sales revenue or total number of employees. The
competitive actions the organisation likely will encounter from competitors larger than it is will be different
from the competitive actions it will encounter from smaller competitors. The organisational size factor
adds another layer of complexity. When engaging in competitive rivalry, the organisation often prefers a
large number of unique competitive actions. Ideally, the organisation has the amount of slack resources
held by a large organisation to launch a greater number of competitive actions and a small organisation’s
flexibility to launch a greater variety of competitive actions. Herb Kelleher, cofounder and former CEO of
Southwest Airlines (the world’s largest low-cost airline), addressed this matter: ‘Think and act big and
we’ll get smaller. Think and act small and we’ll get bigger’.83

In the context of competitive rivalry, Kelleher’s statement can be interpreted to mean that relying on
a limited number or types of competitive actions (which is the large organisation’s tendency) can lead to
reduced competitive success across time, partly because competitors learn how to effectively respond to
the predictable. By contrast, remaining flexible and nimble (which is the small organisation’s tendency)
in order to develop and use a wide variety of competitive actions contributes to success against rivals.

Coles supermarkets are retailers previously owned by the Wesfarmers corporation, but they demerged
from Wesfarmers in 2018. There are around 2200 retail outlets in the Coles group, with supermarkets and
liquor stores across Australia. Because of its size, scale and resources, Coles has the flexibility required to
take many types of competitive actions that few – if any – of its competitors can undertake, and at reduced
cost. Demonstrating this type of flexibility in terms of competitive actions has proven critical to the success
of its entry into the petrol retailing and insurance industries.84

Quality
Quality has many definitions, including ‘fit for purpose’, and well-established definitions relating it to
the production of goods or services with zero defects85 and as a cycle of continuous improvement.86 From
a strategic perspective, we consider quality to be the outcome of how an organisation competes through
its primary and support activities (see Chapter 3). Thus, quality exists when the organisation’s goods or
services meet or exceed customers’ expectations. Some evidence suggests that quality may be the most
critical component in satisfying the organisation’s customers.87

In the eyes of customers, quality is about doing the right things relative to performance measures that
are important to them.88 Customers may be interested in measuring the quality of an organisation’s goods
and services against a broad range of dimensions. Sample quality dimensions in which customers commonly
express an interest are shown in Table 5.1.

Quality is possible only when top-level managers support it and when its importance is institutionalised
throughout the entire organisation and its value chain.89 When quality is institutionalised and valued by

STRATEGY NOW

Southwest Airlines

quality
exists when the
organisation’s goods
or services meet or
exceed customers’
expectations

144 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

all, employees and managers alike become vigilant about continuously finding ways to improve quality.9 0
Quality is a universal theme in the global economy and is a necessary but insufficient condition for
competitive success.91 Without quality, an organisation’s products lack credibility, meaning that customers
don’t think of them as viable options. Indeed, customers won’t consider buying a product until they believe
that it can satisfy at least their base-level expectations in terms of quality dimensions that are important
to them.92 Boeing’s 787 aircraft was delayed due to quality concerns. Many of its problems came from its
numerous suppliers and supply chain subassemblies, but such media events made large airline customers
nervous, and there were some associated postponements in orders.93

Quality affects competitive rivalry. The organisation evaluating a competitor whose products suffer
from poor quality can predict declines in the competitor’s sales revenue until the quality issues are resolved.
In addition, the organisation can predict that the competitor likely won’t be aggressive in its competitive
actions until the quality problems are corrected in order to gain credibility with customers.94 However,
after the problems are corrected, that competitor is likely to take more aggressive competitive actions.

Likelihood of response
The success of an organisation’s competitive action is affected by the likelihood that a competitor will
respond to it as well as by the type (strategic or tactical) and effectiveness of that response. As noted earlier,
a competitive response is a strategic or tactical action the organisation takes to counter the effects of a
competitor’s competitive action. In general, an organisation is likely to respond to a competitor’s action
when:

1 the action leads to better use of the competitor’s capabilities to gain or produce stronger competitive
advantages or an improvement in its market position

Table 5.1 Quality dimensions of goods and services

Product quality dimensions

1 Performance – operating characteristics

2 Features – important special characteristics

3 Flexibility – meeting operating specifications over some period of time

4 Durability – amount of use before performance deteriorates

5 Conformance – match with pre-established standards

6 Serviceability – ease and speed of repair

7 Aesthetics – how a product looks and feels

8 Perceived quality – subjective assessment of characteristics (product image)

Service quality dimensions

1 Timeliness – performed in the promised period of time

2 Courtesy – performed cheerfully

3 Consistency – giving all customers similar experiences each time

4 Convenience – accessibility to customers

5 Completeness – fully serviced, as required

6 Accuracy – performed correctly each time
Source: Adapted from J. Evans, 2008, Managing for Quality and Performance, 7th edn,

Mason, OH: Thomson Publishing.

CHAPTER 5
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145

2 the action damages the organisation’s ability to use its capabilities to create or maintain an advantage
3 the organisation’s market position becomes less defensible.95
In addition to market commonality and resource similarity and awareness, motivation and ability,

organisations evaluate three other factors – type of competitive action, reputation and market dependence
– to predict how a competitor is likely to respond to competitive actions (see Figure 5.2).

Type of competitive action
Competitive responses to strategic actions differ from responses to tactical actions. These differences allow
the organisation to predict a competitor’s likely response to a competitive action that has been launched
against it. Strategic actions commonly receive strategic responses and tactical actions receive tactical
responses. In general, strategic actions elicit fewer total competitive responses because strategic responses,
such as market-based moves, involve a significant commitment of resources and are difficult to implement
and reverse.96

Another reason that strategic actions elicit fewer responses than do tactical actions is that the time
needed to implement a strategic action and to assess its effectiveness can delay the competitor’s response
to that action.97 By contrast, a competitor likely will respond quickly to a tactical action, such as when an
airline company almost immediately matches a competitor’s tactical action of reducing prices in certain
markets. Either strategic actions or tactical actions that target a large number of a rival’s customers are
likely to elicit strong responses.98 In fact, if the effects of a competitor’s strategic action on the focal
organisation are significant (e.g. loss of market share or loss of major resources such as critical employees),
a response is likely to be swift and strong.99

Actor’s reputation
In the context of competitive rivalry, an actor is the organisation taking
a n act ion or a response wh ile reputation is ‘the positive or negative
attribute ascribed by one rival to another based on past competitive
behaviour’.10 0 A positive reputation may be a source of above-average
returns, especially for consumer goods producers.101 Thus, a positive
corporate reputation is of strategic value102 and affects competitive
rivalry. To predict the likelihood of a competitor’s response to a current
or planned action, organisations evaluate the responses that the
competitor has taken previously when attacked – past behaviour is
assumed to be a predictor of future behaviour.

Competitors are more likely to respond to strategic or tactical
actions when they are taken by a market leader.10 3 In particular,
evidence suggests that commonly successful actions, especially
strategic actions, will be quickly imitated. For example, although
a second mover, IBM committed significant resources to enter the
information service market. When IBM was immediately successful
in this endeavour, competitors such as Hewlett-Packard (HP), Dell and
others responded with strategic actions to enter the market.104 IBM’s

reputation, as well as its successful strategic action, strongly influenced entry by these competitors.
In contrast to an organisation with a strong reputation such as IBM, competitors are less likely to

take responses against a company with a reputation for competitive behaviour that is risky, complex and
unpredictable. The organisation with a reputation as a price predator (an actor that frequently reduces
prices to gain or maintain market share) generates few responses to its pricing tactical actions because
price predators, which typically increase prices once their market share objective is reached, lack credibility
with their competitors.105 Occasionally, an organisation with a minor reputation can sneak up on larger,

more resourceful competitors and take market share from them. In recent years, for example, organisations
from emerging markets have taken market share from major competitors based in developed markets.106

Dependence on the market
Market dependence denotes the extent to which an organisation’s revenues or profits are derived from a
particular market.107 In general, competitors with high market dependence are likely to respond strongly to
attacks threatening their market position.108 Interestingly, the threatened organisation in these instances
may not always respond quickly, even though an effective response to an attack on the organisation’s
position in a critical market is important.

Akamai Technologies is the dominant player in a multi-billion dollar market for content delivery network
(CDN) services. If a person clicks on a website to download software or music, or to examine headlines
or video clips, Akamai often provides these bigger files to the consumer through its servers rather than
through the company computer system from which the download appears to be taking place. Akamai owns
and operates the world’s largest CDN, which spans more than 216 000 servers in over 120 countries and more
than 1500 networks around the world.109 As such, Akamai has well-equipped servers to facilitate improved
and more reliable download performance, as it handles billions of daily web interactions for organisations
like NBC, the NASDAQ market and the US Department of Defense. However, because Akamai is dependent
on this market (it is not very diversified), rival CDN providers such as Limelight Networks and Level 3
Communications have forced Akamai to lower its basic CDN service prices. The company has responded
quickly to both tactical and strategic entry moves and hopes to make up the difference through ‘volume’.
However, Akamai is facing more competition as major companies such as Amazon (with CloudFront) and
Microsoft (with Azure CDN) add content distribution capabilities to their networks.110

Competitive dynamics
Whereas competitive rivalry concerns the ongoing actions and responses between an organisation and its
direct competitors for an advantageous market position, competitive dynamics concern the ongoing actions
and responses among all organisations competing within a market for advantageous positions. Building
and sustaining competitive advantages are at the core of competitive rivalry, in that advantages are the
key to creating value for shareholders.111

To explain competitive dynamics, we explore the effects of varying rates of competitive speed in
different markets (called slow-cycle, fast-cycle and standard-cycle markets) on the behaviour (actions
and responses) of all competitors within a given market. Competitive behaviours as well as the reasons
for taking them are similar within each market type but differ across types of markets. Thus, competitive
dynamics differ in slow-cycle, fast-cycle and standard-cycle markets. The sustainability of the
organisation’s competitive advantages differs across the three market types. Research has also shown
how organisations go through life-cycle stages as markets within which an organisation is competing
evolve over time.112 However, understanding what happens within each type of market is more pertinent
in knowing how to respond to the competition.

As noted in Chapter 1, organisations want to sustain their competitive advantages for as long as
possible, although no advantage is permanently sustainable. The degree of sustainability is affected by
how quickly competitive advantages can be imitated and how costly it is to do so.

Slow-cycle markets
Slow-cycle markets are those in which the organisation’s competitive advantages are shielded from
imitation, commonly for long periods of time, and where imitation is costly.113 Thus, competitive advantages
are sustainable over longer periods of time in slow-cycle markets.STRATEGY NOW

IBM, HP and Dell

slow-cycle markets
markets in which
the organisation’s
competitive
advantages are
shielded from
imitation for what
are commonly long
periods of time and
where imitation is
costly

Dell’s response to actions by competitors such as IBM and HP
is influenced by their reputation.

Source: Dreamstime.com/Ken Wolter

146 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

more resourceful competitors and take market share from them. In recent years, for example, organisations
from emerging markets have taken market share from major competitors based in developed markets.106

Dependence on the market
Market dependence denotes the extent to which an organisation’s revenues or profits are derived from a
particular market.107 In general, competitors with high market dependence are likely to respond strongly to
attacks threatening their market position.108 Interestingly, the threatened organisation in these instances
may not always respond quickly, even though an effective response to an attack on the organisation’s
position in a critical market is important.

Akamai Technologies is the dominant player in a multi-billion dollar market for content delivery network
(CDN) services. If a person clicks on a website to download software or music, or to examine headlines
or video clips, Akamai often provides these bigger files to the consumer through its servers rather than
through the company computer system from which the download appears to be taking place. Akamai owns
and operates the world’s largest CDN, which spans more than 216 000 servers in over 120 countries and more
than 1500 networks around the world.109 As such, Akamai has well-equipped servers to facilitate improved
and more reliable download performance, as it handles billions of daily web interactions for organisations
like NBC, the NASDAQ market and the US Department of Defense. However, because Akamai is dependent
on this market (it is not very diversified), rival CDN providers such as Limelight Networks and Level 3
Communications have forced Akamai to lower its basic CDN service prices. The company has responded
quickly to both tactical and strategic entry moves and hopes to make up the difference through ‘volume’.
However, Akamai is facing more competition as major companies such as Amazon (with CloudFront) and
Microsoft (with Azure CDN) add content distribution capabilities to their networks.110

Competitive dynamics
Whereas competitive rivalry concerns the ongoing actions and responses between an organisation and its
direct competitors for an advantageous market position, competitive dynamics concern the ongoing actions
and responses among all organisations competing within a market for advantageous positions. Building
and sustaining competitive advantages are at the core of competitive rivalry, in that advantages are the
key to creating value for shareholders.111

To explain competitive dynamics, we explore the effects of varying rates of competitive speed in
different markets (called slow-cycle, fast-cycle and standard-cycle markets) on the behaviour (actions
and responses) of all competitors within a given market. Competitive behaviours as well as the reasons
for taking them are similar within each market type but differ across types of markets. Thus, competitive
dynamics differ in slow-cycle, fast-cycle and standard-cycle markets. The sustainability of the
organisation’s competitive advantages differs across the three market types. Research has also shown
how organisations go through life-cycle stages as markets within which an organisation is competing
evolve over time.112 However, understanding what happens within each type of market is more pertinent
in knowing how to respond to the competition.

As noted in Chapter 1, organisations want to sustain their competitive advantages for as long as
possible, although no advantage is permanently sustainable. The degree of sustainability is affected by
how quickly competitive advantages can be imitated and how costly it is to do so.

Slow-cycle markets
Slow-cycle markets are those in which the organisation’s competitive advantages are shielded from
imitation, commonly for long periods of time, and where imitation is costly.113 Thus, competitive advantages
are sustainable over longer periods of time in slow-cycle markets.STRATEGY NOW

IBM, HP and Dell

slow-cycle markets
markets in which
the organisation’s
competitive
advantages are
shielded from
imitation for what
are commonly long
periods of time and
where imitation is
costly

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147

Building a unique and proprietary capability produces a competitive advantage and success in a slow-
cycle market. This type of advantage is difficult for competitors to understand. As discussed in Chapter 3,
a difficult-to-understand and costly-to-imitate resource or capability usually results from unique historical
conditions, causal ambiguity and/or social complexity. Copyrights, geography, patents and ownership
of an information resource are examples of resources.114 After a proprietary advantage is developed, the
organisation’s competitive behaviour in a slow-cycle market is oriented to protecting, maintaining and
extending that advantage. Thus, the competitive dynamics in slow-cycle markets usually concentrate
on competitive actions and responses that enable organisations to protect, maintain and extend their
competitive advantage. Major strategic actions in these markets, such as acquisitions, usually carry less
risk than in faster-cycle markets.115

Walt Disney Co. continues to extend its proprietary characters, such as Mickey Mouse, Minnie Mouse
and Goofy. These characters have a unique historical development as a result of Walt and Roy Disney’s
creativity and vision for entertaining people. Products based on the characters seen in Disney’s animated
films are sold through Disney’s theme park shops as well as free-standing retail outlets called Disney Stores.
Because copyrights shield it, the proprietary nature of Disney’s advantage in terms of animated character
trademarks protects the organisation from imitation by competitors.

Consistent with another attribute of competition in a slow-cycle market, Disney protects its exclusive
rights to its characters and their use. As with all organisations competing in slow-cycle markets, Disney’s
competitive actions (such as building theme parks in France, Japan and China) and responses (such
as lawsuits to protect its right to fully control use of its animated characters) maintain and extend its
proprietary competitive advantage while protecting it.

Patent laws and regulatory requirements such as those requiring approval to launch new products shield
pharmaceutical companies’ positions. Competitors in this market try to extend patents on their drugs to
maintain advantageous positions that the patents provide. However, after a patent expires, the organisation
is no longer shielded from competition, allowing generic imitations and usually leading to a loss of sales.

The competitive dynamics generated by organisations competing in slow-cycle markets are shown in
Figure 5.4. In slow-cycle markets, organisations launch a product (e.g. a new drug) that has been developed
through a proprietary advantage (e.g. R&D) and then exploit it for as long as possible while the product is
shielded from competition. Eventually, competitors respond to the action with a counterattack. In markets
for drugs, this counterattack commonly occurs as patents expire or are broken through legal means, creating
the need for another product launch by the organisation seeking a protected market position. It is becoming
more difficult for organisations like Merck, Pfizer or GlaxoSmithKline (GSK) to get drugs approved; patent-
protected drug approvals are trending down, while risky research spending is rising.116

Fast-cycle markets
Fast-cycle markets are markets in which the organisation’s capabilities that contribute to competitive
advantages are not shielded from imitation and where imitation is often rapid and inexpensive.117 Thus,
competitive advantages aren’t sustainable in fast-cycle markets. Organisations competing in fast-cycle
markets recognise the importance of speed; these companies appreciate that ‘time is as precious a business
resource as money or head count – and that the costs of hesitation and delay are just as steep as going over
budget or missing a financial forecast’.118 Such high-velocity environments place considerable pressures on
top managers to quickly make strategic decisions that are also effective.119 The often substantial competition
and technology-based strategic focus make the strategic decision complex, increasing the need for a
comprehensive approach integrated with decision speed, which are two often-conflicting characteristics
of the strategic decision process.120

Reverse engineering and the rate of technology diffusion in fast-cycle markets facilitate rapid imitation.
A competitor uses reverse engineering to quickly gain the knowledge required to imitate or improve
the organisation’s products. Technology is diffused rapidly in fast-cycle markets, making it available to
competitors in a short period. The technology often used by fast-cycle competitors isn’t proprietary, nor

fast-cycle markets
markets in which
the organisation’s
capabilities are
not shielded from
imitation and
where imitation
happens quickly and
perhaps somewhat
inexpensively

148 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

is it protected by patents as is the technology used by organisations competing in slow-cycle markets. For
example, only a few hundred parts, which are readily available on the open market, are required to build
a PC. Patents protect only a few of these parts, such as microprocessor chips. Interestingly, research also
demonstrates that showing what an incumbent organisation knows and its research capability can be a
deterrent to other organisations to enter the market.121

The reality of fast-cycle markets has led to the development of generational products. Such products
usually start with a substantial technical advance in the performance of a product category and are followed
with additional regular, though incremental, technological advances as new generations of products are
introduced, as in Intel semiconductor logic chips or HP printer families.122 Fast-cycle markets are more
volatile than slow-cycle and standard-cycle markets. Indeed, the pace of competition in fast-cycle markets
is almost frenzied, as companies rely on innovations as the engines of their growth. Because prices often
decline quickly in these markets, companies need to profit quickly from their product innovations. Cloud
computing is an example where change is happening rapidly as organisations seek to establish space in
the market while it evolves rapidly.123

Fast-cycle market characteristics make it virtually impossible for companies in this type of market
to develop sustainable competitive advantages. Recognising this reality, organisations avoid ‘loyalty’ to
any of their products, preferring to cannibalise their own before competitors learn how to do so through
successful imitation. This emphasis creates competitive dynamics that differ substantially from those found
in slow-cycle markets. Instead of concentrating on protecting, maintaining and extending competitive
advantages, as in slow-cycle markets, companies competing in fast-cycle markets focus on learning how to
rapidly and continuously develop new competitive advantages that are superior to those they replace. They
commonly search for fast and effective means of developing new products. For example, it is common in
some industries for organisations to use strategic alliances to gain access to new technologies and thereby
develop and introduce more new products into the market.124 In recent years, many of these alliances have
been offshore (with partners in foreign countries) in order to access appropriate skills while maintaining
lower costs to compete. However, achieving the appropriate balance is important so that key capabilities
are not lost in the offshoring and outsourcing process.125

The competitive behaviour of organisations competing in fast-cycle markets is shown in
Figure 5.5. As suggested by the figure, competitive dynamics in this market type entail actions and
responses that are oriented to rapid and continuous product introductions and the development of a stream
of ever-changing competitive advantages. The organisation launches a product to achieve a competitive

Figure 5.4 Gradual erosion of a sustained competitive advantage

Returns from
a sustained
competitive
advantage

Time (years)

Launch
Exploitation

Counterattack

0 5 10

Source: Adapted from I. C. MacMillan, 1988, Controlling competitive dynamics by
taking strategic initiative, Academy of Management Executive, 11(2): 111–18.

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149

advantage and then exploits the advantage for as long as possible. However, the organisation also tries to
develop another temporary competitive advantage before competitors can respond to the first one. Thus,
competitive dynamics in fast-cycle markets often result in rapid product upgrades as well as quick product
innovations.126

As our discussion suggests, innovation plays a critical role in the competitive dynamics in fast-cycle
markets. For individual organisations, then, innovation is a key source of competitive advantage. Through
innovation, the organisation can cannibalise its own products before competitors successfully imitate them
and still maintain an advantage through next-generation products.

Figure 5.5 Developing temporary advantages to create sustained advantage

Returns from
a series of
replicable
actions

Time (years)

Launch
Exploitation

Counterattack

Organisation has already
advanced to
advantage no. 2

5 10 15

etc.

Source: Based on I. C. MacMillan, 1988, Controlling competitive dynamics by taking
strategic initiative, Academy of Management Executive, 11(2): 111–18.

The emergence of competitive rivalry among
battery manufacturers: who will establish the most
attractive market position?

Although small in size today, the growth potential of the
battery-storage market is substantial. ‘Utilities looking
for less expensive alternatives to power plants that fire
up during peak hours to meet power demands’ are
a key customer for the manufacturers of large-scale
battery-storage products. Utility companies encounter
the challenge of having sufficient capacity to meet
peak demand for energy consumption. Commonly,
mornings and evenings are the times when customers
use the greatest amounts of the product that utilities
provide. At non-peak times though, utilities have idle
capacity. Examining today’s competitive scene finds IHS
Markit predicting that the global market for batteries
in the power sector will expand annually by 14 per cent
through at least 2025. Thus, energy storage on a large-
scale basis is an attractive market.

Increasing levels of power generation from renewable
energy sources such as wind and power and the need
to store that energy influence the growth in large-scale
battery-storage units. The challenge with wind and solar
as energy sources is that they are intermittent energy
sources. In this sense, power companies do not know
exactly when the wind will blow (and for how long and
at what velocity) and exactly when the sun will shine
(and for how long and with what degree of intensity).
Large-scale storage batteries address this issue by
allowing the capture of wind- and solar-generated power
when created and then storing it until needed to meet
consumer demand. In the words of an industry expert:
‘With large grid systems, batteries can be attached
directly to generation sources such as wind turbines
and solar panels to store and release excess electricity

Strategic focus | Sustainability

150 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Tesla’s battery storage facility can store a megawatt of
alternative energy, allowing the district to use more ‘green’
power during peak times of the day.

Source: Alamy Stock Photo/ZUMA Press

that the grid can’t absorb in that moment, or even be
used in hybridizing conventional power generation (gas
engines or turbines) in order to enhance the flexibility
of and speed of response to grid intermittency.’ The
decreasing cost of lithium-ion batteries is increasing the
attractiveness of large-scale, battery-storage systems.
(Small versions of lithium-ion batteries power mobile
phones and a host of other products.)

Tesla, Siemens AG and General Electric (GE) are
primary competitors in the large-scale, battery-storage
system market. The commercial attractiveness of this
market elicits competition among these competitors
as they jockey to establish the most attractive market
position. In mid-2017, for example, Tesla announced
that in partnership with Neoen, a French renewable
energy provider, it would build, deliver and install the
world’s largest lithium battery to a location north of
Jamestown, South Australia, in 100 days. Tesla fulfilled
this promise and delivered a battery-storage product
that runs constantly and provides stability services
for renewable energy sources and is available for
emergency backup power in case of an energy shortfall.
Early operational results from using this product have
been positive.

Recognising the importance of battery-storage size
in what is an attractive market and to compete against
Tesla, Siemens and AES combined their efforts to form
an energy storage start-up called Fluence Energy.
This partnership commenced operations on 1 January

2018; the organisation immediately became the
‘supplier of AES’ Alamitos power center energy storage
project in Long Beach, California serving Southern
California Edison and the Western Los Angeles area’.
Fluence’s battery-storage project was to be the largest
in the world, exceeding the size of Tesla’s project
in South Australia.

Trying to catch up to rivals Tesla and Siemens, GE
announced in early 2018 that it would establish a giant
energy-storage platform called GE Reservoir. This
platform ‘is expected to store electricity generated by
wind turbines and solar panels for later use’.

How do GE, Tesla and Siemens’ products differ?
What position will each organisation’s product allow it
to establish in the large-scale battery-storage market?
With respect to GE, some analysts observe that ‘one of
GE’s biggest challenges will be differentiating its battery
products from those offered by competitors such as
Fluence’. Early responses to this challenge suggest that
GE’s Reservoir platform lasts approximately 15 per cent
longer than competitors’ products; faster installation of
the platform is a second differentiator. Thus, product
longevity and installation ease may be the foundation
for GE’s effort to ‘stake out’ a viable market position.
For Tesla, being a first mover (this concept is discussed
later in the chapter) and being very willing to collaborate
with governmental agencies to install products may be
sources of differentiation (Tesla and Neoen partnered
with the South Australian Government to establish
their battery-storage system). Siemens uses a ‘holistic
approach’ to serve battery-storage customers. In this
sense, the organisation notes that it offers ‘customers
in the battery industry solutions comprising software,
automation and drives spanning the entire value
chain’. Thus, integrated technology solutions may
be a marketplace differentiator for Siemens and for
Fluence, the start-up formed by Siemens and AES.

Going forward, these three major competitors will
encounter competition from additional entrants to
a very attractive market. Overall, ‘competition in the
energy storage market will only improve the industry,
forcing companies like Tesla and the newly-established
Fluence (and GE) to continue being innovative’. Thus,
energy customers throughout the world will benefit from
the competitive rivalry occurring among organisations
seeking to establish the most attractive market position.

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Sources: 2018, Siemens backs efficient digitalized large-scale production
of batteries, Siemens Homepage, http://www.siemens.co, 22 February;
E. Ailworth, 2018, GE Power, in need of a lift, chases Tesla and Siemens

in batteries, Wall Street Journal, http://www.wsj.com, 7 March; J. Cropley,
2018, GE rolls out battery-based energy storage product, Daily Gazette,

http://www.dailygazette.com, 7 March; T. Kellner, 2018, Making
waves: GE unveils plans to build an offshore wind turbine the size of a

skyscraper, the world’s most powerful, Renewables, http://www.ge.com,
1 March; F. Lambert, 2018, AES and Siemens launch new energy storage

startup to compete with Tesla Energy, will supply new world’s biggest
battery project, Electrek, http://www.electrek.com, 11 January; C. Mimms,

2018, The battery boost we’ve been waiting for is only a few years
out, Wall Street Journal, http://www.wsj.com, 18 March; S. Patterson &
R. Gold, 2018, There’s a global race to control batteries – and China is

winning, Wall Street Journal, http://www.wsj.com, 11 February; B. Spaen,
2018, New ‘Fluence Energy’ builds world’s biggest storage system in

California, GreenMatters, http://www.greenmatters.com, 12 January;
B. Fung, 2017, Tesla’s enormous battery in Australia, just weeks old, is

already responding to outages in ‘record’ time, Washington Post, http://
www.washingtonpost.com, 26 December; I. Slav, 2017, Tesla is facing
stiff competition in the energy storage war, OilPrice.com, http://www.

oilprice.com, 17 July.

Standard-cycle markets
Standard-cycle markets are markets in wh ich t he organ isation’s competitive advantages are par tially
shielded from imitation, and imitation is moderately costly. Competitive advantages are partially
sustainable in standard-cycle markets, but only when the organisation is able to continuously upgrade the
quality of its capabilities to stay ahead of competitors. The competitive actions and responses in standard-
cycle markets are designed to seek large market shares, to gain customer loyalty through brand names
and to carefully control an organisation’s operations in order to consistently provide the same positive
experience for customers.127

Standard-cycle companies serve many customers in competitive markets. Because the capabilities and
core competencies on which their competitive advantages are based are less specialised, imitation is faster
and less costly for standard-cycle organisations than for those competing in slow-cycle markets. However,
imitation is slower and more expensive in these markets than in fast-cycle markets. Thus, competitive
dynamics in standard-cycle markets rest midway between the characteristics of dynamics in slow-cycle
and fast-cycle markets. Imitation comes less quickly and is more expensive for standard-cycle competitors
when an organisation is able to develop economies of scale by combining coordinated and integrated design
and manufacturing processes with a large sales volume for its products.

Because of large volumes, the size of mass markets and the need to develop scale economies, the
competition for market share is intense in standard-cycle markets. In some markets associated with
consumer electronics, fast cycles occur, such as in smartphones and tablet sales. However, in other
consumer segments such as the television market, the cycles are more placid and closer to standard-cycle
markets. Nonetheless, rivalry is intense as new technologies emerge. For example, prices came down in
the flat-panel television market as competition in this market become relatively more stable. The steady
increase in screen resolution and technology has led to 4K and 8K models, with relatively stable prices.
The biggest changes over the past 10 years have been with OLED (organic light emitting diode) and QLED
(quantum-dot light emitting diode) displays, particularly with the web-connected nature of ‘smart’ TVs.
Smart TVs, a connected convergence of TVs, set-top boxes and computers, have integrated and interactive
Web 2.0 features to browse the internet, view photos and stream music or videos. Sony, LG Electronics and
Samsung are highly competitive rivals in this market.128

Innovation can also drive competitive actions and responses in standard-cycle markets, especially
when rivalry is intense. Some innovations in standard-cycle markets are incremental rather than radical
in nature (incremental and radical innovations are discussed in Chapter 13). For example, consumer foods
producers are innovating within their lines of healthy products. Overall, many organisations are relying
on innovation as a means of competing in standard-cycle markets and earning above-average returns.

Overall, innovation has a substantial influence on competitive dynamics as it affects the actions and
responses of all companies competing within a slow-cycle, fast-cycle or standard-cycle market. We have
emphasised the importance of innovation to the organisation’s strategic competitiveness in earlier chapters
and do so again in Chapter 13. These discussions highlight the importance of innovation in most types of
markets.

standard-cycle
markets
markets in which
the organisation’s
competitive
advantages are
moderately shielded
from imitation and
where imitation is
moderately costly

152 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

STUDY TOOLS
SUMMARY
LO1 Competitors are organisations competing in the

same market, offering similar products and targeting
similar customers. Competitive rivalry is the ongoing
set of competitive actions and competitive responses
occurring between competitors as they compete
against each other for an advantageous market
position. The outcomes of competitive rivalry influence
the organisation’s ability to sustain its competitive
advantages as well as the level (average, below average
or above average) of its returns on investment.

The set of competitive actions and responses that
an individual organisation takes while engaged in
competitive rivalry is called competitive behaviour.
Competitive dynamics is the set of actions and
responses taken by all organisations that are
competitors within a particular market. Remember
that strategy is like a game of chess.

LO2 A competitor analysis is the first step the organisation
takes to be able to predict its competitors’ actions
and responses. In Chapter 2, we discussed what
organisations do to understand competitors. This
discussion was extended in this chapter to describe
what the organisation does to predict competitors’
market-based actions. Thus, understanding precedes
prediction. Market commonality (the number of
markets in which competitors are jointly involved
and their importance to each) and resource similarity
(how comparable competitors’ resources are in
terms of type and amount) are studied to complete
a competitor analysis. In general, the greater the
market commonality and resource similarity, the
more organisations acknowledge that they are direct
competitors.

LO3 Market commonality and resource similarity shape
the organisation’s awareness (the degree to which
it and its competitors understand their mutual
interdependence), motivation (the organisation’s
incentive to attack or respond) and ability (the quality
of the resources available to the organisation to
attack and respond). Having knowledge of these
characteristics of a competitor increases the quality of
the organisation’s predictions about that competitor’s
actions and responses.

LO4 Organisations study competitive rivalry in order to
predict the competitive actions and responses that
each of their competitors likely will take. Competitive
actions are either strategic or tactical in nature.
The organisation takes competitive actions to defend
or build its competitive advantages or to improve its
market position. Competitive responses are taken
to counter the effects of a competitor’s competitive
action. A strategic action or a strategic response
requires a significant commitment of organisational
resources, is difficult to successfully implement and
is difficult to reverse. By contrast, a tactical action
or a tactical response requires fewer organisational
resources and is easier to implement and reverse.
For example, for an airline company, entering major
new markets is an example of a strategic action or
a strategic response, while changing its prices in a
particular market is an example of a tactical action or
a tactical response.

LO5 In addition to market commonality, resource similarity,
awareness, motivation and ability, three more-specific
factors affect the likelihood a competitor will take
competitive actions. The first of these concerns first-
mover incentives. First movers – those taking an
initial competitive action – often gain loyal customers
and earn above-average returns until competitors
can successfully respond to their action. Not all
organisations can be first movers in that they may lack
the awareness, motivation or ability required to engage
in this type of competitive behaviour. Moreover,
some organisations prefer to be a second mover (the
organisation responding to the first mover’s action).
One reason for this is that second movers, especially
those acting quickly, can successfully compete against
the first mover. By evaluating the first mover’s product,
customers’ reactions to it and the responses of other
competitors to the first mover, the second mover
can avoid the early entrant’s mistakes and find ways
to improve upon the value created for customers by
the first mover’s good or service. Late movers (those
that respond a long time after the original action was
taken) commonly are lower performers and are much
less competitive.

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153

Organisational size, the second factor, tends to
reduce the variety of competitive actions that large
organisations launch, while it increases the variety of
actions undertaken by smaller competitors. Ideally, the
organisation would prefer to initiate a large number of
diverse actions when engaged in competitive rivalry.

The third factor, quality, is a base denominator to
competing successfully in the global economy. It is a
necessary prerequisite to achieving competitive parity,
and is a necessary but insufficient condition for gaining
an advantage.

LO6 To predict a competitor’s response to its actions,
an organisation should examine the type of action
(strategic or tactical) it took, the competitor’s
reputation for the nature of its competitive behaviour,
and that competitor’s dependence on the market in
which the action was taken. In general, the number
of tactical responses taken exceeds the number of
strategic responses. Competitors respond more
frequently to the actions taken by the organisation
with a reputation for predictable and understandable
competitive behaviour, especially if that organisation
is a market leader. In general, the organisation can
predict that when its competitor is highly dependent
for its revenue and profitability on the market in
which the organisation took a competitive action,
that competitor is likely to launch a strong response.

However, organisations that are more diversified
across markets are less likely to respond to a particular
action that affects only one of the markets in which
they compete.

LO7 In slow-cycle markets, where competitive advantages
can be maintained for at least a period of time, the
competitive dynamics often include organisations
taking actions and responses intended to protect,
maintain and extend their proprietary advantages.
In fast-cycle markets, competition is substantial as
organisations concentrate on developing a series of
temporary competitive advantages. This emphasis
is necessary because organisations’ advantages in
fast-cycle markets aren’t proprietary and, as such,
are subject to rapid and relatively inexpensive
imitation. Standard-cycle markets have a level of
competition between that in slow-cycle and fast-cycle
markets; organisations are moderately shielded from
competition in these markets as they use capabilities
that produce competitive advantages that are
moderately sustainable. Competitors in standard-
cycle markets serve mass markets and try to develop
economies of scale to enhance their profitability.
Innovation is vital to competitive success in each of the
three types of markets. Companies should recognise
that the set of competitive actions and responses
taken by all organisations differs by type of market.

KEY TERMS
competitive action

competitive advantage

competitive behaviour

competitive dynamics

competitive response

competitive rivalry

competitors

fast-cycle markets

first mover

late mover

market commonality

multi-market competition

quality

resource similarity

second mover

slow-cycle markets

standard-cycle markets

strategic action or strategic
response

strategic competitiveness

strategy

tactical action or tactical
response

REVIEW QUESTIONS
1. Who are competitors? How are competitive rivalry,

competitive behaviour and competitive dynamics
defined in the chapter?

2. What is market commonality? What is resource
similarity? What does it mean to say that these
concepts are the building blocks for a competitor
analysis?

3. How do awareness, motivation and ability affect the
organisation’s competitive behaviour?

4. What factors affect the likelihood an organisation will
take a competitive action?

5. What factors affect the likelihood an organisation will
initiate a competitive response to the action taken by a
competitor?

154 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

6. What competitive dynamics can be expected among
organisations competing in slow-cycle markets? In fast-
cycle markets? In standard-cycle markets?

7. How do competitive dynamics apply in non-commercial
organisations and sectors?

EXPERIENTIAL EXERCISES

Exercise 1: Tragedy of the commons
The tragedy of the commons is a dilemma that encompasses
elements from social psychology and competitive behaviour,
among other disciplines. The concept first appeared in 1968
in an article by Garrett Hardin in the journal Science. The
dilemma arises from a situation in which individuals act in
ways that may not necessarily be in everyone’s long-term
interests. In general, the tragedy of the commons occurs
when individuals all have equal access to a shared resource
and each individual seeks to maximise his or her own self-
interest. For a contemporary example, think about global
warming in general, or localised pollution in particular, as
instances of the dilemma: there is a distinct advantage for
one country, state or business to pollute, which in turn
imperils society as a whole.

As explained by De Young,129 ecologist Garrett Hardin’s
parable involves a pasture ‘open to all’. He asks us to
imagine the grazing of animals on a common ground.
Individuals are motivated to add to their flocks to increase
personal wealth. Yet, every animal added to the total
degrades the commons a small amount. Although the
degradation for each additional animal is small relative to
the gain in wealth for the owner, if all owners follow this
pattern, the commons will ultimately be destroyed. And,
being rational actors, each owner is motivated to add to
their flock: ‘Therein is the tragedy. Each man is locked into a
system that compels him to increase his herd without limit –
in a world that is limited. Ruin is the destination toward
which all men rush, each pursuing his own interest in a
society that believes in the freedom of the commons’.130

In this exercise, the instructor needs four volunteers
to participate. You will be asked to come to the front of
the class and demonstrate the concept through a short
exercise. You should be familiar with the tragedy of the
commons. There are many good resources in the library and
you are encouraged to read Hardin’s original 1968 article in
Science (vol. 162, pages 1243–48), titled ‘The tragedy of the
commons’ before attending class.

Exercise 2: Is being the first mover usually
advantageous?
Henry Ford is often credited with saying that he would rather
be the first person to be second. This is strange coming
from the innovator of the mass-produced automobile in the
USA. So is the first mover advantage really a myth or is it
something that every organisation should strive for?

First movers are typically considered to be the ones
that initially introduce an innovative product or service into
a market segment (in other words, the first to market in a
new product or service segment). The notion subscribed to
first movers is that doing so creates an almost impenetrable
competitive advantage that later entrants find difficult
to overcome. However, history is replete with situations
where second or later movers find success. If the best way
to succeed in the future is to understand the past, then an
understanding of why certain first movers succeeded and
others failed should be instructive. Accordingly, this exercise
requires you to investigate a first mover and identify
specifically why, or why not, it was able to hold onto its first-
mover advantage.

Part 1
Pick an industry that you find interesting. This assignment
can be done individually or in a team. Research that industry
and identify one or two instances of a first mover, and
research the introduction of a new offering into new market
segments. For example, you might pick consumer electronics
and look for organisations that initiated new products in
new market segments. Your choice of industry must be
approved in advance by your instructor as duplication of
industries is to be avoided.

Part 2
Each individual or team is to present their findings, with the
discussion centring on the following at a minimum:
• Provide a brief history and description of the industry

chosen; for example, was this a fast-, standard- or slow-
cycle market at the time the first mover initiated its
strategic action?

CHAPTER 5
COMPETITIVE DYNAMICS

155

• Identify how the innovation of new products has
traditionally been accomplished in this industry: through
new organisations entering the market or by existing
organisations launching new offerings?

• Identify one or two first movers and provide a
review of what happened. If the product or offering

is still considered successful, describe why. If not,
why is it not?

• What did you learn as a result of this exercise? Do you
consider the first mover a wise strategy, and is your
answer dependent upon industry, timing or luck?

NOTES
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160 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Studying this chapter should provide you with the strategic management knowledge
needed to:
LO1 define corporate-level strategy and discuss its purpose
LO2 describe different levels of diversification with different corporate-level

strategies
LO3 explain three primary reasons organisations diversify
LO4 describe how organisations can create value by using a related diversification

strategy
LO5 explain the two ways value can be created with an unrelated diversification

strategy
LO6 discuss the incentives and resources that encourage diversification
LO7 describe motives that can encourage managers to over-diversify an

organisation, unintentionally reducing value.

Learning Objectives

Corporate-level strategy

CH
AP

TE
R

6

161

OPENING CASE STUDY

The world has many very large corporations. Australia’s
Wesfarmers, which started as a farmers cooperative,
is relatively small by world standards but owns an
array of significant business units, including Bunnings,
Officeworks, Kmart, Target and a range of industrial
firms, covering chemicals, energy and fertilisers in one
division, and general industrial and safety in another.
It previously owned the Coles empire (Coles, BI-LO,
Liquorland, etc.) and is extremely well regarded as a
diversified organisation. General Electric (GE) is much
larger; it would be easier to list business areas in which
it does not compete than to list those in which it sells
products. GE competes in 16 different industries:
appliances, aviation, consumer electronics, electrical
distribution, energy, entertainment, finance, gas,
health care, lighting, locomotives, oil, software, water,
weapons and wind turbines. As can be seen from
this list, these industries are quite diverse. Yet there
are similarities among several of them. In fact, GE’s
businesses are grouped in four divisions: GE Capital,
GE Energy, GE Technology Infrastructure and GE
Home & Business Solutions. In recent years, more
than 50 per cent of GE’s annual revenue has come
from its financial services businesses. Thus, it could be
labelled a services company with a strong industrial
component. In 2015 GE was ranked the eighth-largest
corporation in the Fortune 500, but dropped to 18th by
2018, 21st by 2019 and 33rd by 2020. In June 2018, it
lost its coveted position as the only remaining original
company that was listed in the initial Dow Jones
Industrial Average in 1896. For the past 124 years, GE
has achieved an average annual increase in its stock
value of 5.8 per cent, but has been recently burdened
by debt and exposure to a turbulent market.

These data suggest that despite recent troubles,
GE has an impressive history and has experienced a
significant amount of success. It is one of only a few
widely diversified organisations to achieve such success.
GE is a highly influential global corporation. Its former
CEO, Jeffrey Immelt, was selected by US President
Barack Obama to chair an advisory group on economic

and job creation concerns. However, GE has experienced
some ‘bumps in the road’ along the way. This is to
be expected because it is difficult to manage a large,
widely diversified set of businesses. In the past, GE was
criticised for the poor environmental records of some
of its businesses. Finally, it had reductions in stock value
during the first two decades of the 21st century. GE
has bounced back from some of these problems. It has
worked hard to overcome and correct its environmental
problems. Today, it is a major player in the ‘clean energy’
industry, such as wind turbines and solar power. GE
is also beginning to experience strong growth from its
investments in emerging economies such as China and
Brazil. In both of these countries, GE has made major
business investments working with local partners and
has developed R&D centres as well.

A common strategy to achieve growth (and
diversification) for GE over the years has been mergers
and acquisitions. For example, in 2011 GE acquired
French company Converteam for US$3.2 billion. This
company will provide support equipment for GE’s
wind turbine business. The years 2014 and 2015 were
also lively for GE. In this period, it acquired French
organisation Alstom for US$17 billion, announced it
would sell its property portfolio, and sold most of its
finance units and also its health care finance units.

The quintessential diversified organisation

General Electric wind turbines at Silverton Wind Farm, New
South Wales, (similar to those above) each produce 3.4
megawatts of energy.

Source: iStock.com/istock80

162 PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Ou r d iscussions of busi ness-level st rateg ies (Chapter 4) a nd t he compet it ive r iva l r y a nd compet it ive
dy nam ics associated w it h t hem (Chapter 5) have concent rated on organ isat ions compet ing in a single
indust r y or product ma rket.1 In t h is chapter, we int roduce you to cor porate-level st rategies, wh ich a re
strategies organisations use to diversify their operations from a single business competing in a single market
into several product markets – most commonly, into several businesses.

Purpose of corporate-level strategies
A corporate-level strategy speci fies actions an organ isation ta kes to gain a competitive advantage by
selecting and managing a group of different businesses competing in different product markets. Corporate-
level strategies help companies to select new strategic positions – positions that are expected to increase
the organisation’s value.2 As explained in the opening case, General Electric competes in 16 widely diverse
industries and Wesfarmers in 10 (depending on how you define industries).

A s is t he case w it h GE, orga n isat ions use cor porate-level st rateg ies as a mea ns to g row revenues
and profits, but there can be different strategic intents in addition to grow th. Organisations can pursue
defensive or offensive strategies that realise growth but have different strategic intents. Organisations can
also pursue market development by moving into different geographic markets (this approach is discussed
in Chapter 8). Organisations can acquire competitors (horizontal integration) or buy a supplier or customer
(ver tical integration). These strategies are discussed in Chapter 7. The basic cor porate strateg y, the topic
of this chapter, focuses on diversification.

The decision to take actions to pursue growth is never a risk-free choice for organisations. Indeed, as the
opening case explored, GE’s environmental record likely suffered because of a lack of adequate oversight and
the strong interest in producing returns for the shareholders. Effective or