Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition

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Strategic Managementand CompetitiveAdvantage:Concepts and CasesSixth EditionJay B. BarneyWilliam S. HesterlyInstructor’s Resource Manualfor Strategic Management andCompetitive AdvantageBy:Ram Subramanian

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1What Is Strategy and the StrategicManagement Process?GETTING TO KNOW YOUR STUDENTSChapter 1 and the accompanying class session will set the tone for the course. As such, thisclass session should be viewed as a bit of a sales job.Students that have spent time in thefunctional disciplines (finance, accounting, marketing, operations, etc.) sometimes viewstrategy as a fuzzy or touchy-feely class that is somehow less important than their functionaldiscipline classes. Students also tend to view strategy as something that will matter 20 yearsdown the road, but not in the immediate future. This is your opportunity to disabuse themof these ideas.This session can change minds and develop an enthusiasm among studentsthat will lead to an enjoyable, informative semester for everyone involved.We have foundthat a brief discussion aimed at establishing shared expectations and a convincing story willusually win over any skeptics in the class.More than once we have had students approachus after thefirst day and say, “Wow! This class is going to be so different and so much betterthan we expected.”TheTeaching Pointssection below and the example that follows offer some helpfulsuggestions.Teaching Points•Ask students what they have heard about your strategy class.•Ask students what they expect to learn about in your class.•Students will often connect strategy with sports, war, and/or chess.•Explain that strategy in the game of chess is all about positioning your ownpieces to gain advantage.The most advantageous positioning depends onthe current positioning of your own pieces, the current positioning of youropponent’s pieces, the expected future positioning of your opponent’spieces, and the desired future positioning of your own pieces.Therefore,one needs to understand the implications of current positioning and have anidea of what positioning the opponent is likely to adopt in the future.•Explain to students that managing a firm is somewhat like playing chess.The resources of the firm are like the pieces of a chess set. Explain that thisclass will be about positioning the resources of the firm with a view toward

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Chapter 1: What is Strategy and the Strategic Management Process?2gainingcompetitiveadvantageandearningsuperioreconomicreturns.Explain that you will take them through several models of analysis that willlook at the positioning of competitors, suppliers, customers, etc. Positioningof the focal firm’s own resources will be a central theme throughout theseveral models presented during the semester.INTRODUCTION TO THE STRATEGY COURSEWe suggest beginning the class with an example of how a change in strategy can bring abouttremendous change in the economic performance of companies.►Example: How Eisner Reinvented the Disney EmpireIn 1984, Disney’s stock price had been flat for a decade. Earnings per sharewere only $0.06. Disney had profits that year of $242 million.By this pointin time Disney had become primarily a theme park company. Seventy sevenpercent of its profits came from theme park operations that year.Twentytwo percent of profits came from consumer products (licensing MickeyMouse, Donald Duck, etc.).Only one percent of profits came from filmedentertainment in 1984.Indeed, Disney had become a different companyfrom what Walt Disney and his brother Roy O. Disney left behind. In 1971when Roy O. Disney died (he became CEO when Walt died in 1966), 50%of the company’s profits came from filmed entertainment.The Disney board was dissatisfied with the firm’s direction and itsfinancial performance.Michael Eisner was hired as the CEO of Disney in1984. He had extensive experience in the entertainment industry including astint as the president of Paramount Pictures.Eisner recognized the value of both the filmed entertainment legacyof the firm and the theme park operations that had been developed by thattime.Eisner soon focused on the animation and movie studios.He alsoopened the Disney vault to exploit the relatively untapped value of Disney’sanimated classics.Profits from filmed entertainment went from about $2.4million in 1984 to $845 million in 1994.Eisner spent considerable timeduring the early days of his tenure touring the theme parks to see what thecompany really had.He decided to upgrade the theme parks and increaseadmission prices.Profits from the theme parks went from $186 million in1984 to $688 million in 1994. Consumer products went from profits of $53million in 1984 to $433 million in 1994, a natural result of the success of thecompany’s filmed entertainment and theme park operations.The impressive part of these changes and results is that Eisner, toquite an extent, used resources that Disney already possessed such asanimation and live studios.Animators were challenged to create new andexciting content—something that had not happened in a long time. Some ofthe Disney classics pulled from the vault were converted to the VHS formatand distributed to the home market.It’s true that the timing of the advent ofthe VHS format and the proliferation of home video was fortunate forDisney. But, it’s also true that Eisner deployed the resources of Disney in a

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Chapter 1: What is Strategy and the Strategic Management Process?3different way from how they had been used in the years leading up to 1984.Disney’sanimators createdThe Little Mermaidin 1989 that had box officereceipts of $83.5 million.It won an Oscar.Beauty and the Beastwas releasedin 1991, setting new box office records for an animated film ($145.8 million).The Lion Kingcame out in 1994 and has had box office sales of over $328.5million and has sold over 30 million copies in the home video market.Allthree of these animated films did extremely well at the box office, the videostore, and the toy store.Intime, Eisner alsodiversifiedthe firm’s portfolioextensively.Disney bought ABC television, which included ESPN, hotels, professionalsports teams (Anaheim Angels and the Mighty Ducks), a cruise ship, anddeveloped a chain of retail stores.Licensing of Disney characters, old andnew, was aggressively expanded. In the early 1990s, Disney characters were acommonandhighlyprizedtoyincludedinkids’mealsatfastfoodrestaurants and as prizes in breakfast cereal boxes.From 1984 to 1994,Disney’s market capitalization increased from $2 billion to $28 billion. Nowthat’s strategy!The Disney story is not so stellar during the second half of Eisner’s20-year reign at Disney.Eisner battled with disenchanted board membersandexecutives,mostnotably,RoyDisneywhocoincidentallywasinstrumental in hiring Eisner in 1984.Earnings per share peaked in 1997 at$0.95 and dipped to $-0.02 in 2001. Critics contended that the reason for thedecline in performance was that Eisner had pushed out executives and boardmembers that provided checks and balances to his power.Disney’s failedrelationship with Pixar is often cited as a contributing factor to Disney’swoes.Other reasons for the decline wereclearly outside Eisner’s control.The terrorist attacks of Sept. 11, 2001, kept people away from theme parks,especially foreign visitors.After Eisner’s departure in late 2005, Bob Iger took over. Under Iger,Disney’s revenues and net income have risen steadily over the years and were$55.6 billion and $9.4 billion, respectively, in fiscal year 2016. (Huey &McGowan, Fortune 4/17/1995, 131(7): 44-55; Wessel, Orlando Sentinel,March 15, 2004; Yahoo Finance accessed on August 22, 2017).Slide 1-2Use this slide to explain to students that the Walt Disney Companyhad been implementing astrategy for several years that was very different from the company we know today.Thecompany’s strategy through the late seventies and early eighties was also different from whatWalt Disney himself left behind. The board knewthe company needed a strategic change.Slide 1-3Tell students that Eisner joined the company and began to make changes. Point out that thechanges he made in theme parks and filmed entertainment were changes in the use ofexisting company assets.Most of what he did was a matter of using firm resources in newand different ways.Highlight the financial results of changes made in theme parks and

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Chapter 1: What is Strategy and the Strategic Management Process?4filmed entertainment.The diversification efforts described in point 3 involved acquiringnew resources for the firm.Taken together, these strategic changes led to phenomenalgrowth in the market capitalization of Walt Disney. I like to finish this slide by pointing tothe screen with these actions and results and saying, “Now That’s Strategy!”DEFINING STRATEGYDefine Strategy and Describe the Strategic Management ProcessStrategy is a firm’s theory about how to gain competitive advantage.While many otherdefinitions of strategy refer to a plan or a set of coordinated actions, we take the definitionback to the theoretical level that would influence the creation of any such plan or set ofactions.You will see as the course unfolds that such a definition is very helpful in gettingstudents to think about why a particular strategy would make sense for a particular firm in aparticular set of circumstances.Slide 1-4Use this slide to talk about the definition of strategy. Pose the questions suggested below inthe teaching points section and then offer the final text block about what Eisner’s ‘theory’may have been.Teaching Points•Ask students what they think Michael Eisner’s theory about how to gaincompetitive advantage may have been.•Eisner’s theory seems to have been that people would be willing to pay apremium price for extraordinary entertainment.He recognized that Disneyhad the necessary resources to create extraordinary entertainment.•Herb Kelleher, a founder and CEO of Southwest Airlines, seems to have hada different theory about how to gain competitive advantage. His theory wasthat people would be willing to fly instead of driving, taking a bus, or taking atrain if the price could be made affordable.He also theorized that a certainpart of the market would prefer to pay a lower price and fly without some ofthe usual perks of air travel, like meals and reserved seats.•Both of these theories, and many others, can lead to competitive advantagedepending on circumstances, strategic insight, and strategic implementation.Slide 1-5Use this slide to take students through the teaching points below.THE STRATEGIC MANAGEMENT PROCESSImportant Point:Students must understand that strategic management is aprocess.LearningObjective1.1

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Chapter 1: What is Strategy and the Strategic Management Process?5Teaching Points•Explain to students that the course is designed to teach them a process. Thiswill help manage expectations about the course.•Explain that each element of the framework is linked to every other elementof the process framework.•Explain that students should take the long view—at the end of the semestereach element of the model will make more sense than it does on the day theysee it for the first time.•Show the slide of the whole model and explain that you will be taking themthrough each element of the model.•Refer back to the Disney example and explain that Eisner went through aprocess—it may not have been exactly this process. The point is that Eisnerdid not instantly decide to upgrade the theme parks.He went through aprocess of analysis before he came to the conclusion that updating the themeparks and increasing the admission price would likely lead to higher profits.Slide 1-6Explain to students that the mission of the firm should inform all other parts of the strategicmanagement process. Objectives should flow from the mission. External and internalanalysis should be done with an appreciation for the firm’s mission. Strategic choices shouldreflect the mission. Strategic implementation should be done with the mission of the firm inmind.Finally, the competitive advantage a firm possesses should be a reflection of thefirm’s mission.Mission.The text covers mission statements extensively; therefore, we suggest using classtime to reinforce the following:•A firm’s ultimate ability to achieve competitive advantage is inextricably tiedto its mission.•A firm’s mission is its raison d’etre (reason for existence).•The mission should inform every other segment of analysis throughout theprocess.Example:After short, but very successful careers in investment banking, two sisters starteda shoe company. One of the sisters had worked on a merger between two shoemanufacturers. Their father had been a steel worker whose feet were badlyinjured in an industrial accident. These sisters were anxious to start a firm thathad significant meaning to them. The mission oftheir new firm was “to providethe safest, highest quality shoes to the steel construction industry.” As you mightimagine, they were passionate about the mission of their new firm: SteelconShoes.Discussion & ActivityThis discussion will help students see how important the mission of anorganization is. Ask students to identify the mission of a firm they recognize.

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Chapter 1: What is Strategy and the Strategic Management Process?6Call on several students and list the companies they have identified alongwith a descriptive word or two about the mission of the firm.Then askstudents how the missions of the firms they have mentioned would influencethe strategy of those firms.Try to draw out of the students some positiveinfluences and some negative influences.Ask students if they think thesefirms could easily change what they do and how they do it given theirrespective missions.Slide 1-7Use this slide to show how objectives should flow from the mission of the firm andinfluence the other elements of the strategic management process.Refer to the Steelconexample.Steelcon’s mission is ‘to provide the safest, highest quality shoes to the steelconstruction industry,’ but one of the firm’s objectives is to ‘establish relationships with thelocals of the United Metal Workers Union in major U.S. cities.’Objectives.Objectives naturally flow from the mission or raison d’etre of firms.Objectivesare specific, measurable targets that a firm needs to reach in order to carry out its mission.Emphasize that:•the mission and objectives of a firm should serve as the basis or backgroundfor the strategic management process.•a firm’s mission and objectives should inform the analysis done in everyother segment of the model.•students should include a discussion of a firm’s mission and objectives incase analyses and in their written work to help ensure that they do not arriveat suggestions that are in conflict with the firm’s mission and objectives.External and Internal Analysis.The next steps in the strategic management process areexternal and internal analysis. At this point, it is best to:•offer a brief description of these two types of analyses•external analysis–a systematic examination of the environment inwhich the firm operates (phenomena external to the firm)•internal analysis–a systematic examination of a firm’s resources andcapabilities (phenomena occurring within the firm)•emphasizethatexternalandinternalanalysisenableafirmtomakeappropriate strategic choices.External and internal analysis are intended toenable managers to recognize sources of possible competitive advantage byidentifying unmet needs, broadly defined, in the external environment andthe firm’s abilities to meet those needs (internal analysis).Example:Steelcon Shoes goes through an analysis of the external environment and itsinternal environment (resources) whenever it considers introducing a new line ofshoes. This analysis helps them identify opportunities and threats in the externalenvironment to which they should pay attention. It also helps them to recognizewhat strengths and weaknesses they have as a firm.

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Chapter 1: What is Strategy and the Strategic Management Process?7Slide 1-8Explain that external and internal analysis are critical steps in helping a firm determine whatits theory will be regarding how to achieve competitive advantage.External analysis helpsthe firm see threats and opportunities in the business environment.Internal analysis helpsthe firm see the strengths and weaknesses of the firm.Short lists of the types of thingsmanagers look for in each type of analysis are offered.Strategic Choice.Strategic choice is the point in the process where managers choose howto organize and position the resources of the firm. Emphasize the following points:•meaningful strategic choices can be made only when managers understandthe external and internal environments they face•strategic choices are made at two levels: the business level and the corporatelevel•business level strategic choices deal with the positioning of a given business•a business may be positioned at the top of the market—high quality,high price; it may be positioned at the lower end of the market—lowquality, low price; or it may be positioned somewhere in betweenthese extremes•corporate level strategic choices determine in which businesses a firm willoperateThe following example will help illustrate these points.►Example: StanleyBlack & Decker’s Strategic ChoicesStanley Black & Decker makes small kitchen appliances and power tools forthe home and industrial markets. Stanley Black & Decker must decide howeach of these businesses will be positioned within their respective industries.These are business level strategic choices. There are different circumstancesand conditions in each of these businesses. Conditions in the externalenvironment may affect each of these businesses in a different way. InternalanalysismayrevealthatStanleyBlack&Decker’sresourcessuggestpositioning the small kitchen appliances business one way and positioningthe home power tools business another way.Corporate level strategic choices are made as managers decide whichbusinesses should form the corporate whole.Stanley Black & Decker mustdecide which businesses to buy or develop.Thus, Stanley Black & Deckerwould be making a corporate level strategic decision if they were to decide toenter the luggage business.They would be making a business level strategicdecision if they were to decide to position their luggage at the very high endof the market and charge a premium price.Teaching Points•Explain that many firms operate in more than one business.•Explain that firms may choose to manage each business differently.

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Chapter 1: What is Strategy and the Strategic Management Process?8•Explain that a firm is making a corporate level strategic choice any time itconsiders expanding into a new business or exiting a business.Thus, evensmall firms make corporate level strategic choices as they decide whichbusiness they will enter and which they will not.Slide 1-9Explain that strategic choices can meaningfully be made only after external and internalanalysis.Discuss business level choices and corporate level choices. UsetheStanleyBlack &Decker example above to demonstrate how firms face both types of strategic choices.Strategy Implementation.The implementation element of the strategic managementprocess is, just as the name implies, concerned withhowmanagers carry out the strategicchoices they make.Emphasize that:•organizationalstructureandcontrolarethebroadcategoriesofimplementationissuesthataretypicallyconsideredinthestrategicmanagement process.•hiring, promotion, compensation, and disciplinary policies are all issues thatwould need to be addressed as a firm engages in the strategic managementprocess.•different strategic choices call for different implementation approaches.Inform students that implementation issues are addressed in each chapter as appropriate.Slide 1-10Use this slide to emphasize that implementation issues are concerned with deciding exactlywho will do what to actually carry out strategic choices.Describe formal and informalrelationships that exist inorganizations.It would be good to mention that implementationissues affect how ‘happy’ people are working for a company.If your strategy is to offerpeople an extraordinary entertainment or shopping experience, unhappy employees can be aserious liability.Important Point:Stress that the best strategy in the world is only as good as itsimplementation. Several famous battles from history were determined by the relative qualityof implementation as opposed to the quality of the strategy itself.The following story hasproven quite effective in helping students appreciate the importance of implementation.►Example: The Confederate Army: Good Strategy, Bad ImplementationThe Confederate Army at the Battle of Gettysburg arguably had the betterstrategy. However, they did not have the ability to successfully carry out thatstrategy because their supply train was still several days behind them.Thesoldiers were able to move more quickly than the supply train.TheConfederateArmyhadmovedintoasuperiorposition(thatvirtuallyguaranteed success) before the Union Army could amass a sufficient numberof troops.

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Chapter 1: What is Strategy and the Strategic Management Process?9However, the Confederate generals knew that with the Union Armymoving towards Gettysburg, the Confederates would have a difficult timewinning the battle in time. They knew that if the battle was not decided veryquickly, the Confederates would run short on supplies and likely lose thebattle. At this point, General Robert E. Lee understood that if he waited forthe supply train, the advantage of his timing and positioning would be lost.He also understood that if he turned and ran, his soldiers would be sodemoralized that they would have effectively lost the war at that point.Hedecided to attack.The results were disastrous for both sides.The battlelasted several days.Tens of thousands of soldiers lost their lives.TheConfederate Army was defeated even though it had had the superior strategy.A similar story can be told of other famous battles such as the Battle of the Bulge inWorld War II wherein the Germans ran short of fuel when Allied forces captured Germanfuel supplies.Important Point:The main idea you want to drive home with students is thatimplementation issues are just as important as the strategic choices themselves.Teaching Points•Encourage students to address implementation issues throughout the coursein their casework and projects.For example, if a student suggests thata firm should expand its product line, the student should be able to discussimplementation issues such as the possible need to hire more people.Slide 1-11Explain that every strategic choice has implicit implementation issues associated with it.Different strategic choices may call for different implementation responses. The main pointhere is that implementation issues are just as important as formulation issues. One withoutthe other won’t lead to competitive advantage.The Gettysburg example is a nice break atthis point and it really helps drive home the point.Note: depending on where your studentswere born and raised they may take exception to this particular view of history. The accountI read was written by a Union officer, Lawrence Chamberlain.Competitive Advantage.Competitive advantage is the desired end state of the strategicmanagement process.Each of the other segments of the strategic management process isundertaken with the aim of achieving competitive advantage.Example:Any competitive advantage that Steelcon may enjoy will come from havinganalyzed the external environment and the internal environment to informstrategic choices, which will need to be implemented appropriately.If all this isdone in a way that is consistent with the mission of Steelcon, it can reasonablyexpect to achieve competitive advantage.

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Chapter 1: What is Strategy and the Strategic Management Process?10Slide 1-12The purpose of this slide is to offer a brief definition of competitive advantage and then toexplain that all the preceding elements of the strategic management process are aimed atachieving strategic advantage.Important Point:The concept of competitive advantage is foundational in thetext and the course. Therefore, students must understand this concept well so that theremainder of the course makes sense. The following teaching points provide a transition intoa detailed discussion of competitive advantage.Teaching Points•Remindstudentsthatthetextprovidesanextensivediscussionofcompetitive advantage and the measurement of competitive advantage.•Ask students why they chose to attend your university.Ask them why theydidn’t choose other universities.Use their answers to explain that youruniversity had some desirable characteristic(s) that made them prefer it overother universities.Those characteristics may be viewed as a competitiveadvantage.COMPETITIVE ADVANTAGEDefine Competitive Advantage and Explain Its Relationship to Economic Value CreationOnce we have taken students through a brief overview of the strategic management process,we move on to an in-depth discussion of competitive advantage and its measurement.Important Point:Remember that students need to understand the concept ofcompetitive advantage extremely well if the course is to make sense to them.Defining Competitive AdvantageStart by discussing the definition of competitive advantage: the ability to create moreeconomic value than competitors. Explain and elaborate on the following:•competitive advantage means that there is something about a firm’s offeringto the market that allows the firm to realize greater economic value thancompetitors (Harley-Davidson Motorcycles)•that difference in economic value could come about in several different ways•it could be that the product offered or the way it is offered causespeople topreferit to the point that they are willing to pay a higherprice for the product (Nordstrom)•it could be that the firm has figured out a way to produce anddistribute the product at alower costthan competitors (Wal-Mart)•a firm’s strategic choices and its implementation of those choices determinewhether or notthese differences willexist(K-Mart’s apparently failedattempts to move upscale)LearningObjective1.2

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Chapter 1: What is Strategy and the Strategic Management Process?11•thus,competitiveadvantagestemsfrompreferencesand/orcostadvantagesSlide 1-13Point out that competitive advantage comes about as the result of differences.Emphasizethat if many firms are doing the same thing in the same way, no firm will have an advantageover any other firm.The third bullet point is an important one.Make sure studentsunderstand that competitive advantage can come from doing something different from otherfirms, and from doing something similar, but doing it much better than competitors.Slide 1-14Use this slide to make the point that difference that may lead to competitive advantage canbe put into two broad categories:preferences and cost advantages.A subtle point withwhich many students will identify is that the competitive advantages of some firms in today’sworld stem from differences in the people the firms are able to attract and hire. Some firmsare better than others at attracting the kind of human resources that will help lead topreferences for the firm’s output and/or cost advantages for the firm.Competitive Advantage and the Strategic Management Process RevisitedThis is a good place to refer back to the elements of the strategic management process andexplain that the purpose of going through the analysis of each of these elements is to enablemanagers to make choices that will lead to:1)preferencesfor the firm’s output,and/or2)cost advantagesfor the firm’s outputEmphasize that:•these differences in preference or cost are the bedrocks of competitiveadvantage.•there has to be somethingdifferentabout what a firm does in order for acompetitive advantage to exist.•each element of the strategic management process framework should beviewed as having the potential to help a firm create this difference.Example:Consider Apple’s iPod.Apple’s mission statement reads in part, “Apple is alsospearheading the digital music revolution with its iPod portable music playersand iTunes online music store.” A reasonable objective for Apple as it embarkedupon this part of its mission would have been, “develop a stylish, highlyfunctional digital music device.”Apple’s external analysis would have shownthat there were competing technologies developing.An important part of theirexternal analysis must have revealed that if a firm wanted to succeed with ahardware offering, it also needed a reliable content provider.Apple’s internalanalysis would have revealed that the firm definitely had the R&D and designcapabilities.Apple’s marketing capabilities, in conjunction with its advertisingagencies, were obviously capable, as evidenced by their history with otherproducts. Strategic choices were made about developing the iPod and bringing itto market along with the iTunes service. Implementation issues surrounding the

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Chapter 1: What is Strategy and the Strategic Management Process?12development and launch have been handled well. The ease of use of the iTunesservice is indicative of attention to implementation issues. Apple appears to beachievingcompetitiveadvantagewithitsiPodproduct.Apple’searningsincreased from $1.989 billion in 2006, to $3.496 billion in 2007, to $4.834 billionin 2008. In 2009, Apple announced that with 4 billion iTunes downloads, it wasthe second largest music retailer after Wal-Mart.Apple appears to have appliedthe principles of the strategic management process to the development andintroduction of the iPod. It later used basically the same process to successfullyintroduce the iPad tablet in 2010 to become the leader in that segment. Both theiPod and the iPad contributed the bulk of Apple’s 2016 revenues.Slide 1-15Use this slide to reinforce the concept that the strategic managementprocess is intended tohelpmanagers identify and exploit potential sourcesof difference that may lead topreferences and/or cost advantages, and ultimately to competitive advantage.Using a Graph to Explain Competitive AdvantageAnother way to explain competitive advantage is to compare a graph of a perfectlycompetitive market and a graph of a monopolistic market.Slide 1-16 shows these twographs. These graphs feature the demand and cost curves facing individual firms within therespective markets.In the perfectly competitive market graph:•the assumption is that every firm is the same•any above normal profits have been bid away and every firm has the samecost curves•average total cost equals price, meaning there are no above normal profits•all firms in the market are assumed to be earning normal economic returns—just enough to keep capital invested in the activities of the firm•the demand curve facing any given firm in the market is flat, indicating thatconsumers have no preference for the product of one firm over the productsof any other firms.(Note: The aggregate demand curve for the industry isdownward sloping, but the demand curve facing any one firm is flat. This isbecause price is set where aggregate demand and aggregate supply intersect.Any firm that sets price any higher than this price would be unable to sellanything.)•thus, firms in this market are price takers, they cannot influence priceIn the monopolistic market graph:•the firm faces a downward sloping demand curve•the downward sloping demand curve indicates that the firm could raise priceand some consumers would still buy their product•the cost curves are drawn such that there is the possibility of above normalreturns indicated by the hash-marked area (Note:In models of long runmonopolistic competition, economists assume that all firms have the samecost curves and that above normal profits have been bid away.We do notmake that assumption.)

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Chapter 1: What is Strategy and the Strategic Management Process?13Important Point:As you explain these graphs, make the point that it isconceivable that a firm in a competitive market could have a cost structure that allowed foran above average return. Thus, an above average return is possible due to favorable costs ineither market type.However, the main point of the graphs is that the downward slopingdemand curve suggests that buyers have a preference for the products of the focal firm.That preference could lead to a competitive advantage.Slide 1-16Use this slide as suggested in this section.Point out that the cross-hatched area representsthe increased economic performance (profits) available to firms in such a market—evidenceof a competitive advantage.Explain that firms want to face a downward sloping demand curve.A firm’sdemand curve would be downward sloping anytime customers had a preference for thatfirm’s product over the products of other firms.The preference could come from productfeatures, level of service, convenience, etc.The point is that there is something differentabout thefirm’s offering that customers prefer.Temporary and Sustainable Competitive AdvantageOne of the fundamentals of economics, and human behavior for that matter, is that ifsomething proves to be profitable (or otherwise desirable) others will attempt to imitate oracquire it.Thus, if a firm develops a competitive advantage, other firms will attempt toimitate whatever it is that gives that firm an advantage.This means that most advantageswill be relatively short-lived because of imitation.Example:Cellulartelephoneserviceprovidersquicklymatchtheofferingsofcompetitors—free nights and weekends, multiple phone family plans, nationwidelong distance, variable usage plans, etc.Any one of these plan features wouldlikely be a source of competitive advantage if a single firm could offer it withoutbeing quickly imitated.When these features were first offered, consumers hadpreferences for one company over another.After the major competitors alloffered these features, there was no advantage to offering the features.You can go back to the demand curves to illustrate that if many firms offeressentially the same thing, the demand curve for any one firm is flat (there is no preferencefor one over another).If a firm faces a downward sloping demand curve because it has arare offering, the efforts at imitation by other firms will tend to flatten that demand curve.Therefore, most competitive advantage will be temporary.Slide 1-17Emphasize that competitors will be attracted to the high profits of firms that enjoy acompetitive advantage. Once imitation efforts are successful, the competitive advantage willevaporate.When we say that a firm has a temporary competitive advantage,we mean thatthe specific imitation is foreseeable. For example, we may know that a competitor is only 18months away from introducing a very similar product.

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Chapter 1: What is Strategy and the Strategic Management Process?14A competitive advantage may be sustainable if other firms are unable to imitate thesource of competitive advantage. The research box in Chapter 1 explains that somecompetitive advantages do, in fact, last while others do not.The logic as to why and how competitive advantage can be sustainable will becovered in more detail later in the book.At this point in the course it is sufficient to statethat competitive advantages will persist until another firm can either:•duplicate the source of competitive advantage, or•offer a substitute that is valued as highly as the original source of competitiveadvantage.Important Point:Perhaps the most important thing for students to understandat the beginning of the course is that when we talk about a sustainable competitiveadvantage, we do not mean that the advantage will last indefinitely, no matter whatcompetitors do. As indicated in the research box, most firms that seem to have a sustainablecompetitive advantage are able to innovate repeatedly, such as by introducing new products,over time.Thus, the advantage seems to be the ability to innovate and stay ahead ofcompetitors rather than a single product or service.Slide 1-18Use this slide to explain that a sustainable competitive advantage means that others cannotimitate the advantage andthatthere is no better product in the foreseeable future.Explainthat a sustainable competitive advantage does not imply that the advantage will last forever.Rather, it means that right now,no one can imitate the advantage or offer a better product,etc. It could happen, it probably will happen, but we can’t foresee it happening.A firm’scompetitive advantage is also dependent on what consumers want at anygiven point in time.U.S. automakers (GM, Ford, Chrysler) experienced several years ofphenomenal sales of sport utility vehicles (SUVs). However, consumers appear to be losingtheir taste for these larger vehicles.Concerns about highway safety and gas consumptionseem to be cooling the market for SUVs.If this trend continues, design ability andproduction capacity for SUVs could turn from a source of competitive advantage to a sourceof competitive disadvantage. Thus, a competitive advantage can fade away due to changes inconsumer preferences even if competitors do not compete away the advantage.Competitive ParityCompetitive parity means that a firm and/or its output are viewed as being about the sameas other firms, or in other words, about average in the marketplace.Example:Many people view store brand denim jeans as being about the same.Shopko,Sears K-Mart, Costco, Wal-Mart, and Target all offer denim jeans.These jeansare basic and simple clothing.Consumers apparently do not see importantdifferences among these offerings.As a result, these retailers do not enjoy anycompetitive advantage stemming from their store brand jeans.You can refer back to the flat demand curve to make the point that firms facing aflat demand curve are at competitive parity.They are not viewed as being any better or

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 17 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?15worse than the average firm.Customers have no preference or aversion to the marketoffering of the firm.Slide 1-19Explain to students that most firms experience competitive parity in most aspects of theirbusiness. They are about average. As long as firms are hovering around averages, they willnot enjoy competitive advantage. Preferences and/or cost advantagesare negligible at best.Point out that competitive parity on some dimensions is critical tosuccess.Competitive DisadvantageA competitive disadvantage can occur for many reasons:•potential customers may have an aversion (preference not to buy) to afirm’smarket offeringExample:Some consumers refuse to shop at Wal-Mart because of the company’s policieson various issues.Labor interests argue that Wal-Mart stifles attempts toorganize labor and that it favors offshore labor by purchasing from foreignproducers.Others oppose Wal-Mart’s expansion policies because they fear thatWal-Mart drives out smaller competitors and thereby destroys downtown areasof smaller towns and cities. Wal-Mart does not appear to suffer significant saleslosses as a result of these aversions.However, among likeminded consumers,Wal-Mart is at a competitive disadvantage because of these policies.•an unfavorable cost structure due to outdated and inefficient equipmentand/or technology•a bad reputationIf thefirm or the firm’s output is viewed as being inferior to most other firms,almost anything could potentially become a source of competitive disadvantage.Slide 1-20Point out thatfirms may have disadvantages as well as advantages.Use the Wal-Martexample above to illustrate that even though Wal-Mart appears to have so many advantages,it does have its disadvantages too.Competitive Advantage SummaryImportant Points:•most firms, by definition, experience competitive parity.•this strategy course is all about helping firms realize competitive advantage.In other words, the aim of the textbook and the course is to help firms avoidcompetitive disadvantage and competitive parity.•students should be informed that the remainder of the course will teach themhow to help firms discover and exploit sources of competitive advantage.

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 18 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?16As you make the transition from competitive advantage as a concept to measuring it, itmakes sense to take a detour to talk about a company’s business model. Recentwork byOsterwalder and Pigneur on the“business model canvas”would be interesting to studentsbecause it helps managers see the entire landscape of their business as a single snapshot.Once the individual elements of the business model canvas are laid out, it would make senseto use the example of (say) Pandora Media to illustrate what the elements are and to see thefit (or lack of fit) among the elements.Measuring Competitive AdvantageDescribe Two Different Approaches to Measuring Competitive AdvantageThe basic logic of measuring competitive advantage is that if a firm has one or morecompetitive advantages, we should find evidence of that advantage in the performance ofthe firm.Important Point:Students must understand that it is sometimes difficult todirectly link the performance of a firm to the firm’s competitive advantage.It is often easyto see that a firm is achieving superior performance, but it may be difficult to trace thatsuperior performance to a specific competitive advantage.Even if we can trace superiorperformance to a specific competitive advantage it remains nearly impossible to measure andquantify the competitive advantage itself.Rather,we are left to use the firm’s performanceas a proxy measure of the firm’s competitive advantage. If there are several potential sourcesof competitive advantage within a firm, then the measurement issue becomes even moreinexact. The following example will help illustrate this point.Example:For more than three decades, Southwest Airlines has consistently achievedeconomic performance superior to the rest of the airline industry. An analysis ofSouthwest reveals three potential sources of competitive advantage:•a set of human resource practices that has resulted in a workforce that isdifferent from other airlines.The workforce is highly cross functional—tothe point of pilots sometimes handling baggage. Employees are willing to dowhatever is necessary to turn planes around at gates in about half the time ittakes other airlines. On average, the workforce is paid less than other airlinespay and yet, Southwest’s employee turnover is extremely low.•a fleet of aircraft consisting of a single model–the Boeing 737. This policycreates efficiency in maintaining the aircraft and ensuring that every flightcrew can handle every aircraft in the company.•a network of short non-hub-to-hub routes. These routes allow Southwest touse airports that have lower gate fees and less congestion than the largermetropolitan airports used by other major airlines.It’s easy to see that these differences from other airlines may be sources ofcompetitive advantage for Southwest.Thus, we can see that Southwest hassuperior economic performance and we can see that there are several plausiblesources of competitive advantage. However, we cannot measure the competitiveLearningObjective1.3

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 19 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?17advantage directly. Rather, we rely on economic performance as an indicator ofsources of competitive advantage possessed by Southwest.Slide 1-21Explain that measuring competitive advantage directly is virtually impossible.We can lookto economic performance for an indicator of competitive advantage.Accounting and Economic Measures of Competitive AdvantageThe text offers a detailed description of accounting and economic measures of competitiveadvantage. Students who have had an accounting and a finance class will easily recognize themeasures of performance listed in the book.Enough detail is offered in the text thatstudents who have not had these classes will still gain a basic understanding of the concepts.In our experience, students are more familiar with accounting ratios than theeconomic terms used to measure competitive advantage. Accounting ratios of the focal firmare simply compared to industry averages of those ratios to determine if the focal firm isachieving better than average performance.Therefore, we suggest that you focus morediscussion on the economic measures of competitive advantage.Competitive advantage is often measured in accounting terms and economic terms.A firm is said to have a competitive advantage if one or more of its accounting measuresexceed(s) the industry average for that particular measure. For example, if a firm’s return onsales is 23 percent and the industry average is 15 percent, we would take that as an indicationthat the firm had a competitive advantage.On the other hand, economic measures ofperformance are compared to a firm’s own cost of capital to determine if that firm has acompetitive advantage. If a firm earns a 20 percent return on equity and the firm calculatesthat its cost of capital is only 12 percent, then we would conclude that the firm has acompetitive advantage.Both of these methods of assessing the competitive advantage of afirm point back to our definition of a competitive advantage: the ability to create moreeconomic value than competitors.Slide 1-22Remind students that accounting returns compared to industry averages offer an indicationof advantage, parity, or disadvantage.Economic measures are a matter of comparing afirm’s returns to its cost of capital. Explain that a firm’s cost of capital reflectsthe markets’expectations about the firm and other similar firms. If a firm earns in excess of that cost ofcapital, the firm has bested the markets’expectations—indicating that the firm has anadvantage over other firms.Important Points:•the logic behind the conclusion that a firm earning a return greater than itscost of capital as a competitive advantage typically requires more in-depthexplanation than the logic behind accounting return measures of competitiveadvantage.•the language used to describe economic measures of competitive advantagewillproveveryusefulthroughoutthecourseintalkingabouttheeffectiveness of a firm’s strategic management efforts.•a shared understanding of these terms is critical to the success of the course.

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 20 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?18Normal Economic ReturnWhen a firm just earns its cost of capital it is said to be earning a normal economic return.Such a firm is meeting the expectations of the market with regard to the level of risk aninvestment in such firm entails.Another way of looking at this idea is that if a firm isearning a normal return, investors are just barely willing to keep investing in the firm. If thefirm were to earn any less, investors would pull their capital out of the firm.Above Normal Economic ReturnSpecifically, a firm is said to be earning an above normal economic return if the firm isearning more than its cost of capital.An above normal economic return is indicative of acompetitive advantage. By definition, such a firm is said to be exceeding the expectations ofthe market. This is another important indicator of competitive advantage. The firm is doingbetter than the market expects a firm to do in its particular industry. Such a firm will likelyattract new capital as investors will be eager to get in on the higher returns of this firm.Below Normal ReturnOf course, a firm earning less than its cost of capital is said to be earning a below normaleconomic return.Firms cannot survive long if they are earning below normal economicreturns. Investors will take their capital elsewhere.Important Point:The relationships between types of competitive advantage,accountingperformance,andeconomicperformancearefairlystraightforward.Acompetitive advantage is said to lead to above average accounting performance and abovenormal economic performance. Competitive parity leads to average accounting performanceand normal economic performance.Of course, competitive disadvantage is said to lead tobelow average accounting performance and below normal economic performance.Slide 1-23Use this slide to illustrate that competitive advantage, parity, and disadvantage are viewed ashaving a predictable impact on economic performance.Refer to the explanations above toexplain normal, above normal, and below normal economic performance. Remind studentsthat our interest lies in helping firms achieve above normal economic performance.Discussion & ActivityHave the students break into their groups. Ask each group to identify a firmthat they think has a competitive advantage. Ask them to identify the sourcesof competitive advantages in the firm they choose. Then ask the students ifthe firm’s performance would indicate a competitive advantage.Have the students reunite as a class.Have one or two of the groups sharetheir groups’ findings with the class.Some of the firms mentioned may nothave well known above average accounting performance and students usuallywill not know a firm’s cost of capital.This provides a good opportunity toask the students why they think a firm has a competitive advantage if theydon’t or can’t see the performance indicators of competitive advantage.As

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 21 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?19the discussion continues,students should begin to see that there are otherindicators of thedifferencesamong firms that lead to competitive advantagebesides accounting returns and economic returns.EMERGENT VERSUS INTENDED STRATEGIESExplain the Difference Between Emergent and Intended StrategiesImportant Points:Emphasize that strategies often change.Students shouldunderstand that:•even if firms go through a rigorous strategic planning process at some pointin time, they often change strategies in response to changes that occur in thefirm and/or in the marketplace.•firms need to remain flexible in the strategic management process.Asmanagers begin to implement a strategy, they often discover new informationthat was not available when they began the strategic management process.•effective managers will quickly integrate this new information into thestrategic management process.A good example of this is Honda Motors’ entry into the U.S. market.Slide 1-24Explain that managers must remain flexible throughout the strategic management process,even if an intended strategy has already been formulated, perhaps even implemented.Ifmanagers see that an intended strategy is not likely tolead to competitive advantage andabove normal returns, they should adapt.Use the Honda example below to illustrate theimportance of changing strategy when new information comes to light.►Example: Honda: Smaller Bikes, Bigger WinsHonda’s intended strategy was to enter the U.S. market with motorbikessimilar to the bikes that British manufacturers like Norton and Triumph wereexporting to the U.S. in the late 1950s. Norton and Triumph had a traditionof making large, powerful road bikes that spanned several decades.Hondahad no such tradition in mass-producing these larger bikes.Honda hadgained experience on the race circuit, which had built its confidence that itcouldcompetewithBritishmanufacturers.Honda’sexperienceinmotorcycle production was centered around smaller bikes in the 50cc rangethat were used as delivery vehicles in Japan.The 50cc Supercub had been avery successful model for Honda in Japan.Honda’s firstlarge bikes (250cc and 305cc, which would be small bytoday’s standards) in the U.S. were plagued with quality problems.Theysimply weren’t built to stand up to the rigors of U.S. highways. Many of thebikes had to be sent back to Japan because of quality problems. For a time,it looked as if Honda’s attempt to enter the U.S. market was doomed toLearningObjective1.4

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 22 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?20failure. Honda had planned to introduce a mix of large and small bikes in theU.S., but their focus was to be on the larger bikes.During the early monthsof Honda’s entry into the U.S., companyexecutives were riding some of the smaller bikes around Los Angeles as theywere setting up operations.A buyer from Sears saw the small bikes, askedthe men where they got them from, ordered some from Honda, and sales ofthe bikes were brisk.Honda soon learned that the smaller bikes were to be the source ofearly success in the U.S. Of course, Honda expanded into the larger bikes asbrand recognition grew.After a few short years, Honda introduced its firstautomobile in the U.S. market in 1963. The company has since become oneof the top motor companies in the world. (Pascale, 1989, Honda A & BCases, HBS Publishing).Honda’s experience suggests the importance ofplanning and then remaining flexible as the plan is carried out.Important Points:•even though Honda did not carry out its original plan, the planning processhad put them in a position to adopt an emerging strategy that turned out tobe quite successful.•students should understand that there is a trade off between strict adherenceto a strategy and responding to threats and opportunities that may presentthemselves along the way.•managers should remain flexible and be willing to apply strategic logic to newsituations as they arise.SUMMARYAs you summarize, remember that this class session has a sales component.Remindstudents of the vital role that the strategic management process can play in an organization.The Disney and the Gettysburg stories illustrate the important nature of strategic thinking inorganizations.Emphasize the importance of implementation issues.Remind them that theeffectiveness of any strategy is limited to the effectiveness of its implementation.Remindthem of the Confederate Army’s failure at Gettysburgbecause of faulty implementation of asuperior strategy.We suggest concluding the class session with a reminder of the importance ofcompetitive advantage.•restatethedefinition: theabilitytocreatemoreeconomicvaluethancompetitors.•remindstudentsthattheabilitytocreatemoreeconomicvaluethancompetitors depends ondifferences. Firms have to offer something different inorder to generate a competitive advantage.Important Point:The whole point of the strategic management process is tohelp firms recognize where sources of difference might be and how they might best beexploited.Referring back to a downward sloping demand curve seems to be a helpful wayto get students to think about the importance of differences.

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 23 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?21Slide 1-25Explain that firms could set out to merely survive. To do so, they would still need to adaptover time as competitors improved and new offerings were introduced.But who wants tomerely survive? Quickly move to the next slide.Slide 1-26Use thisslide to drive home the point with enthusiasm that this course is about helpingfirms achieve competitive advantage.Emphasize that the strategic management process isintendedtohelpmanagersfindandexploitdifferencesthatwillhopefullyleadtocompetitive advantage. Quickly move to the next slide.Slide 1-27Refer to this slide to show students that a perfectly competitive market is something firmswould want to avoid. A perfectly competitive market is the survival story. The imperfectlycompetitive market model on the left is the thriving story.Tell students that this class isabout helping them help firms to enjoy the benefits of a downward sloping demand curve—meaning that people have a preference for the offering of the firm and they’re willing to payfor it.WHY YOU NEED TO KNOW ABOUT STRATEGYDiscuss Why it is Important for You to Study Strategy and the Strategic Management ProcessPoint out to students that an understanding of strategy may have rather immediate benefitsfor them:•some major employers (Ford Motor Company, McKinsey & Co., KPMG,etc.) are now using case analyses as part of the recruiting process.Studentswho have a good foundation in strategy tend to have an advantage overstudents who have not had a strategic management course.•students will soon find themselves fulfilling roles in organizations where theability to think strategically about issues will make them much more valuableto employers. A fund manager once commented in a recruiting meeting thathe could hire any number of graduates who knew how to plug the numbersinto formulas to project revenue growth, returns, etc.However, who hereally wanted to hire were graduates who could come up with those numbersto plug into the formulas based on strategic thinking about what the firmshad announced they were going to do.•even if students are not asked to set the grand strategy of an organization intheir first job, they will almost surely be called upon to fulfill a role in whichknowledge of the strategic management process will help them to do a betterjob.LearningObjective1.5

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 24 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?22Slide 1-28Help students realize that the concepts they will be learning in this course have application intheir own lives. Students can apply the concepts to make better decisions about which firmsto work for and which specialties to develop and exploit.Making Strategy Relevant: Career PathThe authors know people who have used strategic logic to assess the actions of theiremployers to determine whether they want to remain with that firm or leave for another firmwith a more promising future.Thus, students should understand that their personal careerdecisions can be better informed by the strategic management process.Remind students of the strategic management process.Explain that the balance ofthe course consists of studying each element of the process. Reassure them that by the endof the course, they will have a framework for thinking about issues they will surely face intheir professional lives.Final CommentsYour final comments to the class might be something to the effect that this is a class aboutcompetitive advantage.Students will learn the strategic management process with the goalof being able to help firms realize competitive advantage.Understanding the strategicmanagement process will also help students manage their personal careers. Remind studentsthat the difference between success and failure is often a matter of strategic management.Perhaps even more importantly, the difference between above normal performance andaverage performance (or mere survival) is often a matter of strategic management.Slide 1-29Emphasize that strategy is a way of thinking about challenges we face in the workplace andin our personal lives.In a sense, disciplined strategic thinking forces us to anticipate thelikely outcomes of our intended actions and efforts before we act. This process increases theprobability that our actions will lead to success.Thus, thinking strategically can make asubstantial difference inthe outcomes of our actions and efforts.CHALLENGE QUESTIONS1-1.Some firms publicize their corporate mission statements by including them in annualreports, on company letterheads, and in corporate advertising.What, if anything,does this practice say about the ability of these mission statements to be sources ofsustained competitive advantage for a firm?The act of publicizing a mission statement indicates that the managers of afirmwantthe mission statement to be a source of sustained competitiveadvantage.However, simply publicizing the mission statement does notguarantee that it will lead to sustained competitive advantage.The real testof whether a mission statement is a source of competitive advantage is theabilityofthemissionstatementtomotivateandunitepeopleinoutperforming the competition.

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 25 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?231-2.Why would including a corporate mission statement on company letterhead or incorporate advertising be seen as a source of sustained competitive advantage?As indicated above, the real test of whether a mission statement is a sourceof competitive advantage is the ability of the mission statement to motivateand unite people in outperforming the competition.When a companyincludes its mission statement on its corporate stationery, it is sending themessage that its mission is not only important but that everyone should workconsistently toward it.1-3.Little empirical evidence indicates that having a formal, written mission statementimproves a firm’s performance.Yet many firms spend a great deal of time andmoney developing mission statements. Why?Firms invest in developing mission statements in the hope that the missionstatement will serve to motivate and unite people around a common goal.Ideally,themissionstatementservestoinformpeoplewithintheorganization about what they can and should do to further the interests ofthe organization.The mission statement also communicates a message topeople outside the organization. Firms rationally invest in efforts to developmissionstatementsbecauseofthepotentialbenefitsofthisfavorablecommunication.1-4.Explain if it is possible to distinguish between an emergent strategy and an ad hocrealization of a firm’s past decisions?Yes, if you know something about the extent to which the firm engaged inthe strategic management process.If there is a clear history of the firmadjusting strategy in response to new information, while sticking to itsmission and objectives, then the firm has engaged in an emergent strategy. Ifthere appears to be no logical pattern to a firm’s past decisions, then it isunlikely that the firm really has a strategy.1-5.Both external and internal analyses are important in the strategic managementprocess. Is the order in which these analyses are done important?Although these two types of analysis are often done simultaneously, theordermattersbecauseinternalanalysislooksathowthefocalfirm’sresources compare to acompetitor’s resources. In contrast, external analysislooks at factors outside the firm. The order is important because each affectsthe other and, in turn, both affect the company’s strategy.1-6.If the order of analyses is important, which should come first: external analysis orinternal analysis?

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 26 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?24An external analysis identifies opportunities and threats while an internalanalysis indicates the company’s strengths and weaknesses. One could arguethat a company’s strategy should attempt to exploit the opportunities.Bythis argument, an external analysis should come first.1-7.Concerning external analysis and internal analysis, if the order of importance is notimportant, why not?Performing an external analysis first suggests that a company’s strategyshould match a firm’s strengths with opportunities.One could argue that ifan internal analysis is performed first, then its strengths could be used todevelop opportunities. In short, this argument would say that the order doesnot matter because the end result is the same.1-8.Will a firm that has a sustained competitive disadvantage necessarily go out ofbusiness?No, a firm could have a sustained competitive disadvantage and remain inbusiness. Remember that a sustained competitive disadvantage simply meansthe firm is generating less value than competitors.Many firms continue tooperate even though they do so at a competitive disadvantage in some areasbecause they usually have some advantage in another area.1-9.Will a firm with below average accounting performance over a long period of timenecessarily go out of business?No, a firm could have below average accounting performance and remain inbusiness.As long as the returns to the owners of the firms are satisfactory,the firm will remain in business, even if those returns are less than theindustry average.1-10.Will a firm with below normal economic performance over a long period of timenecessarily go out of business?Yes, a firm that earns a below average economic return over a long period oftime will eventually go out of business. The reason for this is that the firm isearning less than its cost of capital.In time, the firm would be unable toattract capital and would be forced to go out of business.1-11.Can more than one firm have a competitive advantage in an industry at the sametime?Yes, more than one firm can have a competitive advantage in an industry atthe same time.Two or more firms could have advantages in different areasand thereby appeal to different customers—each firm having an advantageover other firms with respect to different customers.

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 27 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?251-12.Is it possible for a firm to simultaneously have a competitive advantage and acompetitive disadvantage?Yes,afirmcansimultaneouslyhaveacompetitiveadvantageandacompetitive disadvantage.Wal-Mart is a good example.Wal-Mart has acompetitive advantage in distribution logistics and information technology.It also has a disadvantage in reputation among some customers because of itslabor and location policies. On balance, it would appear that the advantagesWal-Mart enjoys vastly outweigh its disadvantages.Problem Set Answers1-13.Write objectives for each of the following mission statements.a.We will be a leader in pharmaceutical innovation.b.Customer satisfaction is our primary goal.c.We promise on time delivery.d.Product quality is our first priority.Answersa.At least 25% of our sales in the next five years will be generated from newproducts.b.Ensure that customer complaints are less than 1% of all units sold.c.At least 98% of all deliveries each quarter will be consistent with the termsnegotiated with our customers.d.Ensure that Six Sigma is implemented across all manufacturing lines within twoyears.1-14.Rewrite each of the following objectives to make them more helpful in guiding afirm’s strategic management process.a.We will introduce five new drugs.b.We will understand our customer’s needs.c.Almost all of our products will be delivered on time.d.The number of defects in our products will fall.Answersa.For the next five years, one new drug will be successfully brought to market eachyear.b.Customer profiles will be developed for each of our customers through point ofsale surveys leading to at least 98% accuracy in our customer database within twoyears.c.Less than 1% of our deliveries each quarter will fail to meet our specified deliverytimes.d.Defects will not exceed 1 defect per 10,000 units produced per quarter.

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 28 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?261-15.Do firms with the following financial results have below normal, normal, or abovenormal economic performance?a.ROA = 14.3%, WACC = 12.8%b.ROA = 4.3%, WACC = 6.7%c.ROA = 6.5%, WACC = 9.2%d.ROA = 8.3%, WACC = 8.3%Answersa.Above normal economic performanceb.Below normal economic performancec.Below normal economic performanced.Normal economic performance1-16.Do these same firms have below average, average, or above average accountingperformance?a.ROA = 14.3%, Industry Avg. ROA = 15.2%b.ROA = 4.3%, Industry Avg. ROA = 4.1%c.ROA = 6.5%, Industry Avg. ROA = 6.1%d.ROA = 8.3%, Industry Avg. ROA = 9.4%Answersa.Below average accounting performanceb.Average (slightly above) accounting performancec.Above (average) average accounting performanced.Below average accounting performance1-17.Is it possible for a firm to simultaneously earn above normal economic returns andbelow average accounting returns? How about below normal economic returns andabove average accounting returns?Why or why not?If this can occur, whichmeasure of performance is more reliable: economic performance or accountingperformance? Why?AnswerGenerally, there is a correlation between economic and accounting measures ofcompetitive advantage.It is possible for a firm to earn above average accountingperformance and simultaneously below normal economic performance. The same istrue for below average accounting performance and simultaneously above averageeconomic performance. In the former, the firm is not earning its cost of capital butis earning above industry average accounting performance. In the latter, the firm hasa very low cost of capital and is earning at a rate in excess of this cost, but still belowthe industry average.

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 29 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?271-18.Examine the following corporate websites and determine if the strategies pursued bythese firms were emergent, deliberate, or both emergent and deliberate. Justify youranswers with facts from the websites.(a)www.walmart.com(b)www.homedepot.com(c)www.cardinal.comAnswersa.While student answers will vary on how far back they look at Wal-Mart’sstrategy,itwouldbeclearthatthecompany’sinternationalstrategyisacombination of emergent and deliberate.The company’s failure incertainforeign markets, such as Germany, for example, is a situation where theirdeliberate strategy failed, while their expansion into Mexico was carefully thoughtout and so was deliberate.a.Similar to Wal-Mart, Home Depot’s strategy early in its life was largely deliberate.Changes in the economy and emergence of competitors have changed this to acombination of deliberate and emergent.a.Cardinal Healthmanufactures and sells medical products to hospitals andhospital chains.Given the significant changes to the regulations in health care,Cardinal’s strategy is a mix of deliberate and emergent.For example, providingend-to-endinventorymanagementtocustomerscouldbeseenaslargelyemerging from hospitals’ need to manage costs better given the increase powerof health insurance companies.1-19.Using the information provided, calculate this firm’s ROA, ROE, Gross ProfitMargin, and QuickRatio.If this firm’s WACC is 6.6% and the average firm in itsindustry has an ROA of 8%, is this firm earning above or below normal economicperformance and above or below average accounting performance?Net Sales6,134Cost of Goods Sold(4438)Selling, General Admin. Expense(996)Other Expenses(341)Interest Income72Interest Expense(47)Provision for Taxes(75)Other Income245Net Income554Operating Cash3,226Accounts Receivable681Inventories20Other Current Assets0Total Current Assets3,927Gross Prop., Plant, Equip.729Accumulated Depreciation(411)

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 30 preview image

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Chapter 1: What is Strategy and the Strategic Management Process?28Book Value of Fixed Assets318Goodwill0Net Other Operating Assets916Total Assets5,161Net Current Liabilities1,549Long Term Debt300Deferred Income Taxes208Preferred Stock0Retained Earnings0Common Stock3,104Other Liabilities0Total Liabilities and Equity5,161Answersa.ROA = 1.19b.ROE = 17.8%c.Gross Profit Margin = 27.6%d.Quick Ratio = 2.52It is apparent that this firm is earning below average accounting performance.

Class Notes for Strategic Management and Competitive Advantage: Concepts and Cases, 6th Edition - Page 31 preview image

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2Evaluating a Firm’s ExternalEnvironmentWHY EXTERNAL ANALYSIS?Students need to come away from this class session with a sound understanding of 1) whyexternal analysis is a critical element of the strategic management process, 2) how to do aneffective external analysis, and 3) what todoin response to external analysis.Externalanalysis, as presented in the text, is intended to help firms understand the threats andopportunities that exist in the competitive environment in which a firm operates.A goodgrasp of these threats and opportunities tell a firm what itshoulddo given what the firmfaces.As such, external analysis is a necessary precursor to strategic choices.It wouldn’tmake much sense for a firm to begin making strategic choices without knowing what it facedin the external environment.Firms that fail to do appropriate external analysis face the risk of encounteringthreats that were not anticipated in the strategic management process.Likewise, such firmsmay also miss out on opportunities. Of course, external analysis cannot identify everypossible threat and opportunity, but it can greatly increase the probability that a firm’sstrategy will be able to neutralize threats and exploit opportunities.Firms that take adisciplined approach to external analysis will likely have an advantage over those firms thatembark upon strategies without taking the time to understand the external environment.A good analysis of the external environment may allow a firm to face threats andopportunities at a point in time when the firm does not have resources committed to aparticular strategy.For example, a firm contemplating entry into a new business maydiscover a significant threat through its external analysis before actually entering the newbusiness. Such a discovery would allow the firm to either abandon the idea or adopt astrategy that would neutralize that particular threat.The following teaching points suggest an engaging way to begin this session and getstudents to recognize the importance of external analysis.Teaching Points•Tell the students to assume they have just been informed that they have wonan all expenses-paid extreme adventure vacation to one of the world’s mostchallenging destinations in a distant country.

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