+1(978)310-4246 credencewriters@gmail.com



Find a company in trouble and write on that company :  I want to chose Twitter

Look for a publicly traded company

Information can be seen on SEC website

Yahoo finance page can help

8 K and 10 Q disclosure


15 Pages Minimum 10 References

About: You will write one 15- page strategic analysis of an existing company of your choice as part of this project. My recommendation is that you choose a company that is going through some tough times or is struggling with some key strategic issues. I am happy to make suggestions about such companies. You should imagine yourselves as part of the company’s top management team or as a team of consultants

You will conduct an in-depth study of the firm, and apply the concepts, analytical tools and frameworks of this course to analyze its external and internal environments, identify the firm’s strategic options, and come up with a set of recommendations to maximize the firm’s long-term performance.


Literature Review


Body of your work

Your recommendation


References 15 Page include Reference page But not Title Page and Appendix/Tables 12 fonts Double line spacing

Some of the basic terminology for this course that may be used in the final paper

Strategic management can help an organization gain competitive advantage, improve market share and plan for its future.

A key source of competitive advantage is the ability to perceive change in the market, and being able to pivot strategy and retool an organization to remain relevant.

A competitive advantage is an attribute that enables a company to outperform its competitors. It allows a company to achieve superior margins.

Barriers to Entry











Value Proposition




Product Life Cycle

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REV: DECEMBER 15, 2016
Strategy Execution Module 2:
Building a Successful Strategy
What You Will Learn in this Module: This module reviews the basics for building and
implementing strategy. First, you will learn the difference between corporate strategy and business
strategy. Next, you will learn how to conduct a SWOT analysis by analyzing competitive market
dynamics and firm capabilities. You will see how different types of assets and resources can create
competitive advantage. Finally, you will learn how to analyze the five forces of a successful business
strategy formulation and review the four “Ps” that are essential for effective strategy
implementation. These techniques will be the foundation for effective performance measurement
and control in any business.
This module reviews the underpinnings for a successful business strategy. Some readers may have
already studied some parts of this material in a business strategy or business policy course. For others,
the ideas and concepts will be new. Whatever your level of familiarity with this topic, we recommend
that you review this module because the remainder of our analysis in subsequent modules builds on
concepts that we introduce here.
Business strategy is at the root of effective performance measurement and control for two reasons.
First, performance measurement and control systems provide the analytic discipline and
communication channels to formalize business strategy and ensure that strategic goals are
communicated throughout the business. Second, performance measurement and control systems are
the primary vehicle to monitor the implementation of these strategies.
The techniques and systems that we discuss help managers answer two critical questions:
How can we be sure that people understand what we are trying to achieve? and,
How can we ensure that we are reaching our strategic goals?
This module was prepared by Professor Robert Simons with the assistance of Research Associate Jennifer Packard. Parts of this module are
adapted from Robert Simons, Performance Measurement & Control Systems for Implementing Strategy, Prentice Hall, 2000.
Copyright © 2016, 2017 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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Strategy Execution Module 2: Building a Successful Strategy
Corporate Strategy and Business Strategy
Strategy is a word that is used in many different ways in business and other organizational settings.
The first distinction that is important for our purposes is the distinction between corporate strategy
and business strategy.
Corporate strategy defines the way that a firm attempts to maximize the value of the resources it
controls. Corporate strategy decisions focus on where corporate resources will be invested. Questions
such as “What businesses should we compete in?” or “What level of resources should we invest across
our portfolio of businesses?” are typical of corporate-level resource allocation decisions. For example,
managers at Boston Retail Company can choose to compete in women’s clothing or in some entirely
different product category. They may wish to branch out into men’s clothing, or even to home
furnishings. In time, it may be possible to leverage existing distribution resources to enter an entirely
unrelated business, such as apparel manufacturing or wholesale distribution. These decisions—which
businesses and segments of the market to compete in—are necessary whenever a corporation decides
to expand its scope beyond a single product market.
Business strategy, by contrast, is concerned with how to compete in defined product markets. Once
managers have decided to compete in the women’s clothing market in Boston, they must attract
customers and build market share. How will they differentiate themselves from competitors to create
value in the marketplace? How can they offer something unique and valuable to their targeted
customers? These are the questions that we tackle in this module.
Figure 2-1 illustrates the distinction between corporate strategy and business strategy.
Figure 2-1
Corporate and Business Strategy
Corporate Strategy
Products & Services
to Create Value in
Product-Market A
Products & Services
to Create Value in
Product-Market B
Products & Services
to Create Value in
Product-Market C
Products & Services
to Create Value in
Product-Market D
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Strategy Execution Module 2: Building a Successful Strategy
Boston Retail Company
Throughout the fifteen modules that comprise the Strategy Execution series, Boston Retail
Company is used as an example to illustrate key concepts. Boston Retail, introduced in Module 1:
Managing Organizational Tensions, is a clothing chain based in a suburb of Boston. The founders
began with one store and a novel idea: to offer cheap but fashionable clothing to students who
attend Boston’s many colleges and universities. Their customers are young, enjoy wearing the
latest fashions, but have limited income. With early success, Boston Retail began expanding,
quickly increasing the number of stores and employees.
Boston Retail examples can be found in the following modules of the Strategy Execution series.
These modules are available from HBS Publishing at www.hbsp.harvard.edu.
Product #
Module 1: Managing Organizational Tensions
Module 2: Building a Successful Strategy
Module 3: Using Information for Performance Measurement and Control
Module 4: Organizing for Performance
Module 5: Building a Profit Plan
Module 6: Evaluating Strategic Profit Performance
Module 7: Designing Asset Allocation Systems
Module 8: Linking Performance to Markets
Module 9: Building a Balanced Scorecard
Module 10: Using the Job Design Optimization Tool to Build Effective Organizations
Module 11: Using Diagnostic and Interactive Control Systems
Module 12: Aligning Performance Goals and Incentives
Module 13: Identifying Strategic Risk
Module 14: Managing Strategic Risk
Module 15: Using the Levers of Control to Implement Strategy
Performance measurement and control techniques are important for the successful implementation
of both corporate strategies and business strategies. The majority of topics we will discuss in this and
later modules focus on creating value in specific product markets, which is the major issue for
managers who run businesses. However, for firms operating in multiple markets, special measurement
and control systems are needed to implement corporate level strategy effectively. We cover these
techniques and systems in later modules.
The formal processes for formulating and implementing business strategy can be captured in the
cascading hierarchy illustrated in Figure 2-2. Strategy formulation and implementation are multi3
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Strategy Execution Module 2: Building a Successful Strategy
faceted concepts. The cascading hierarchy of Figure 2-2 illustrates that a mission – the broad purpose
for which an organization exists – guides the formation of business strategy. Business strategy, in turn,
determines performance goals and measures, and, ultimately, patterns of action.
Figure 2-2
Hierarchy of Business Strategy
Perspective . . . .
. . . .
Business Strategy
. . . .
Performance Goals
& Measures
. . . .
Firm – Specific
Resources and
Before they develop specific business strategies, managers must analyze and understand (1) the
competitive market dynamics in their industry and (2) their own firm’s resources and capabilities.
Thus, the first stage of our analysis must relate the internal strengths and weaknesses of the firm to
external opportunities and threats in the marketplace. These two inputs to the strategy process are
illustrated as ovals at the top of Figure 2-2. SWOT is a useful acronym to remember the purpose of this
analysis. SWOT stands for: Strengths, Weaknesses, Opportunities, and Threats. The purpose of a
SWOT analysis is to relate firm-specific strengths and weaknesses back to the industry opportunities
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and threats. Only then can we understand the context within which successful strategies can be
Competitive Market Dynamics
What is the nature of the market? Who are the major competitors? What are the rules of the game?
How great is the potential for profit? These are questions that all managers must answer as they seek
to create competitive advantage in specific markets. The “five-forces” analysis provides a useful
framework and checklist for analyzing the competitive dynamics of any given industry.1
The five forces that determine the degree and nature of competition (as shown in Figure 2-3) are
(1) customers, (2) suppliers, (3) substitute products, (4) new entrants, and (5) competitive rivalry. In
any industry, these forces individually and collectively influence competitive dynamics and potentially
create opportunities for or constraints to effective competition.
Figure 2-3
Five Forces of Competitive Markets
Entrants to the Market
Suppliers of
Inputs and
Rivalry Among
Existing Competitors
Buyers and
Substitute Products
or Services
Adapted from Michael E. Porter, Competitive Strategy (New York: The Free Press, 1980), 4.
In attempting to understand market dynamics at the industry level, the following questions must
be analyzed in detail to fully understand opportunities and threats:
1 For a complete treatment, see Michael E. Porter, Competitive Strategy (New York: The Free Press, 1980).
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Who are our customers? How much does each buy from us? Would they be willing to buy
more? Under what circumstances?
Is any customer or customer group particularly important to us?
How do we appeal to different segments of the market? Why do our customers buy our product
or services? What advantages does it offer them?
How sensitive are our customers to price? To quality? To service? To other factors?
Who are our major suppliers? How much do we buy from each? Would we be willing to buy
more or less? Under what circumstances?
Is any supplier or supplier group particularly important to us?
What supply factors are critical to us – quality, price, reliability, service, and so forth?
How costly is it for us to switch to alternate suppliers or sources?
Substitute Products
What substitutes for our products or services exist in the market?
How are they different from our offerings in terms of price, quality, and performance?
How likely are our customers to switch to competitor’s products or services?
New Entrants
What are the barriers to entry to deter new competitors from entering our markets?
How strong is our brand franchise?
How difficult would it be for a new competitor to imitate the way we do business?
Competitive Rivalry
Is the industry growing or shrinking?
Are there few or many competitors?
Is there over-capacity in the industry?
What are the switching costs for customers who might consider purchasing goods and services
from competing firms?
What is the ownership structure of competing firms? How important is our market to each of
At Boston Retail, managers have targeted a specific customer segment: young, fashion-conscious
students. However, because of limited incomes, many of these customers are price sensitive, so
merchandise must be both up-to-date and price competitive. To reach this goal, Boston Retail has found
non-traditional suppliers—some of whom are themselves start-ups—who are willing to supply
fashionable goods at reasonable prices. These suppliers are critical to Boston Retail’s strategy.
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There are many substitutes in the market and competition is intense. To prosper, managers at
Boston Retail have decided to follow a niche strategy and expand only to regions that have similar
customer demographics, but they must choose their battlefields carefully. Fortunately, the failure of a
competitor—a business that offered a full line of women’s and men’s clothes throughout New
England—has opened up the possibility for enlarging the business.
Armed with insight about opportunities and threats in a specific market, managers are ready to set
strategy. But, before they can make definitive recommendations for a successful strategy, they must
assess the internal strengths (and weaknesses) of the business. It is useless to enter a competitive arena
unless a firm has the resources to fight for market share and a reasonable chance of earning profit.
Resources and Capabilities of a Business
Accordingly, the next stage of a SWOT analysis, shown at the top of Figure 2-2, is to analyze the
resources and capabilities of the firm to determine what a business does well and what it does not do
As a first step in analyzing internal strengths and weaknesses, we can look at a firm’s balance sheet
to learn more about the resources that are available for competition (in this discussion, we focus only
on the asset side of the balance sheet, leaving consideration of the debt and equity side of the balance
sheet to finance and financial statement analysis courses). As we perform this analysis, we need to
remember that accountants apply a series of tests to determine which resources can be recorded on the
balance sheet. In accounting, an asset is defined as a resource, owned or controlled by the entity, that will
yield future economic benefits. Examples include a plant, equipment, cash in the bank, and inventory. For
purposes of strategy formulation, a resource is more broadly defined as a strength of the business
embodied in the tangible or intangible assets that are tied semi-permanently to the firm.2 As we shall see, a
resource may or may not appear as an asset on the balance sheet.
Balance Sheet Assets
The following assets are customarily recorded on the balance sheet. These accounting assets are
employed by the firm to generate revenues and will be the focus, in later modules, of analytic
techniques for performance measurement and control of strategy.
Current Assets
The first category on the balance sheet is current assets. Current assets include
cash and other assets that will be turned into cash during the course of an accounting cycle—normally
one year. Current assets include:
marketable securities
accounts receivable
prepaid expenses
2 B. Wernerfelt, “A Resource-Based View of the Firm,” Strategic Management Journal, 5 (1984):171-180.
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Any strategy requires sufficient cash flow to fund it. Cash is needed to pay bills, purchase inventory,
pay service providers, and meet current debt obligations. Cash flows, based on sales and the conversion
of inventory to cash, must be planned carefully in advance to ensure that cash levels will be adequate,
especially in a growing business. A large cash reserve may provide the freedom to fund growth or
acquisition strategies. Our profit planning and performance measurement techniques must, therefore,
include analysis of cash flows, cash reserves, and forecasts of the cash needed to fund specific strategies.
Productive Assets The second major category of assets on the balance sheet is productive
assets. These assets are used to produce goods and services for customers. Productive assets represent
the machinery, technology, and infrastructure necessary to compete. Some of these assets contribute
directly to production—such as a machine in the manufacturing process. Other productive assets
contribute indirectly to production—such as the computer hardware and software used to support gate
agents at an airline terminal. Examples of productive assets include:
computers and information technology equipment
manufacturing equipment
Productive assets must be sufficient—both in quantity and type—to support a business’s strategy.
As part of our performance measurement and control toolkit, we will discuss techniques to analyze the
acquisition of productive assets and to measure their effective utilization.
Intangible Assets
The final category of assets on the balance sheet is intangible assets. These
copyrights, patents, and trademarks
valuable licenses (e.g., broadcast rights)
For any asset—either tangible or intangible—to be recognized on the balance sheet, accountants
impose two tests. First, an asset must have future value to the firm. Second, that value must be
quantifiable with reasonable precision. Tangible assets, such as buildings and equipment, or financial
assets, such as cash and notes receivable, easily pass these tests and, therefore, are included on a firm’s
balance sheet. For intangible assets, however, the second condition—the ability to quantify value with
precision—is typically met only when that value is priced through a third party transaction. Examples
of arm’s length transactions that implicitly price the value of an intangible asset include the purchase
of a broadcast license, the signing of a lease agreement, the granting of a patent based on past
investment in proprietary research, or the creation of goodwill on the purchase of a subsidiary. Other
intangible assets that build up over time, such as reputation or dealer contacts, are much more
problematic for accounting purposes. Their monetary value is difficult to measure, so these resources
rarely appear on a firm’s balance sheet.
Intangible Resources
Intangible resources are often among a business’s most valuable assets.
These intangible resources may include, for example:
distinctive internal capabilities
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market franchises
networks and relationships with suppliers and customers
In highly competitive markets, it is these three categories of resources that provide the essential
difference between success and failure. They are critical to achieving profit goals and strategies, yet
they are not recognized on a firm’s financial statements. Because intangible resources are a central focus
of management’s attention, our analysis of performance measurement and control systems must take
into account the quality and nature of these intangible resources. Let’s review briefly the nature of these
three categories of resources.
Distinctive Internal Capabilities Distinctive business capabilities—sometimes called core or
distinctive competencies—refer to the special resources and know-how possessed by a firm that give it
competitive advantage in the marketplace. Distinctive capabilities include the ability to perform worldclass research (e.g., Merck), excellence in product design (e.g., Apple), superior marketing skills (e.g.,
Coca-Cola), the ability to manage costs (e.g., Vanguard Mutual Funds), proprietary information
technology (e.g., UPS Tracking), proprietary manufacturing skills (e.g., Intel), high-volume fulfilment
(Amazon), and so on. Distinctive capabilities are of three types: functional skills, market skills, and
embedded resources.
Functional skills refer to strengths (and weaknesses) in the major functional areas of a business,
such as information technology, research and development, production, marketing and sales, and
distribution. Each of these functions can be an important source of opportunity in the marketplace.
Research and development creates value at Samsung, manufacturing quality allows differentiation in
the market place for many Japanese automobile companies, marketing skills at consumer packaged
goods companies such as General Mills allow successful competition. As the name suggests, functional
skills reside in the internal functions of a business. Functional vice presidents—e.g., vice presidents of
marketing or manufacturing—are usually responsible for managing these critical competencies.
Market skills refer to a business’s ability to respond to market needs. Rather than analyzing
resources and competencies by function, the appropriate unit of analysis is the customer or market
segment. Here, the analysis focuses on (1) understanding what attributes of a product or service create
value for a customer, and (2) assessing the business’s ability to provide those attributes. Responsiveness
is key—to demands of price, quality, flexibility, reliability, service, or whatever else may be important
in creating value in the eyes of a defined customer or market segment. Examples of well-known
companies with strong market skills include American Express (travel and financial services), Johnson
& Johnson (health care products), and Nordstrom (fashion retail).
The final category of distinctive capability is embedded resources—tangible resources that are
difficult to acquire and/or replace. Physical plants, distribution channels, and information technology
are all embedded assets that represent potential strengths and weaknesses. Although their historical
transaction prices may appear on a balance sheet, these assets are far more valuable than a balance
sheet would suggest because of the distinctive capability that they provide. A plant may be new or
old—efficient or inefficient—yielding a competitive strength or weakness in the market. Similarly,
information technology advantages over competitors may be a strength (or a weakness if old and
outdated), as may a long-standing network of dealer contracts.3
3 For a complete treatment of this topic, see Pankaj Ghemawat, Commitment: The Dynamic of Strategy (New York: The Free Press, 1991).
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Distinctive business capabilities—whether from functional skills, market skills, or embedded
resources—often build up over long periods of time. Think of the firms listed above and ask yourself
how long it took these firms to acquire their distinctive capabilities. How long did it take Merck to
build up its world-class research capabilities? Or Coca-Cola to acquire its awesome marketing
Note also how difficult these capabilities are to copy. How difficult would it be to try to imitate any
of these firms in what they do so well? Imagine attempting to “out-market” Coca-Cola, to beat Merck
at developing the next generation of hypertension drugs, or to build distribution facilities that could
be more efficient than Amazon’s? Possessing distinct capabilities is a unique resource that often gives
a business substantial competitive advantage (and puts competitors at a substantial disadvantage).
In some instances, capabilities are created by being first at something—a “first-mover”—and
locking out competitors. For example, Toyota was the first to launch a mass-produced hybrid car—the
Prius—in 1997. With their proprietary technology, Toyota was able to keep competitors at bay until
2006 when GM and Nissan entered the market. By then, the Prius had defined the hybrid category.
Despite the entrance of competitors, Prius was still the most popular hybrid in 2014, with a 40% share
of the hybrid market.4
Business capabilities are the lifeblood of any firm operating in a competitive market and are among
its most valuable assets. Although business capabilities sometimes appear on the balance sheet—e.g.,
large-scale distribution centers or investments in proprietary information technology—most business
capabilities represent intangible assets that are not normally valued on a firm’s balance sheet. They are
“invisible assets.”5
Managers must understand the existence and nature of these invisible resources if they are to
measure their effectiveness in achieving profit goals and strategies. Performance measures must focus
on the key drivers of success. Moreover, these capabilities are dynamic: they are constantly changing.
New capabilities are developed, people and skills come and go, new technologies emerge, and new
alliances are formed. Performance measurement and control systems must provide the essential
feedback to allow managers to monitor the health of these distinctive resources.
Market Franchises Market franchises is the second category of intangible resources. The term
franchise is used two ways in business. In a strict sense, a franchise is a contractual agreement that allows
an independent party to use a trade name or to sell a specific product owned by someone else. A franchise
agreement names the franchisor—the owner of the brand name—and the franchisee—who purchases the
right to use the brand name under conditions set out in the franchise agreement (e.g., standards related
to quality control, pricing, etc.). The ubiquitous North American fast food restaurants, such as
McDonald’s and Burger King, are typically operated as franchises. So too are auto repair centers (e.g.,
Midas Muffler) and rental car agencies (e.g., Avis Budget Group). In each of these instances an
independent owner/operator of the retail unit is the franchisee who has purchased the right to sell
products and operate under the brand name of the franchisor.
A franchisee is willing to pay a fee and be bound by the strict terms of the franchise agreement
because he or she is receiving something valuable in return—a recognized brand name and set of
products or services (“a franchise”) that can be expected to draw in customers.
4 Chris Woodyard, “Hybrid Cars Losing Market Share,” USA Today, June 9, 2014.
5 Hiroyuki Itami, Mobilizing Invisible Assets (Boston: Harvard University Press, 1987).
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Thus, the more general use of the term franchise among business managers refers to a business’s
distinctive ability to attract customers who are willing to purchase the business’s products and services based on
market-wide perceptions of value. A business is said to “own a franchise” when a brand name itself is an
important source of revenue and value to the business. For example, consumers may seek out and be
willing to pay a premium for an Apple iPhone, Johnson & Johnson Band-Aids, a Citibank credit card,
Cheerios breakfast cereal, a Coca-Cola soda, Chanel perfume, or any number of products that have
created market franchises through customer awareness and brand loyalty.
Dunkin’ Donuts versus Krispy Kreme
Since its founding in 1950, Dunkin’ Donuts has built up the leading position in the $5 billion
donut business with more than 5,000 franchised U.S. restaurants. In 2003, Krispy Kreme, a North
Carolina-based competitor, decided to enter the New England home base and stronghold of
Dunkin’ Donuts. As an initial step, Krispy Kreme planned to open sixteen stores throughout
Massachusetts, Connecticut, and Rhode Island; Dunkin’ Donuts had 600 stores in the Boston area
alone, with 250 new stores planned for the region.
In response to this competitive threat, Dunkin’ Donuts increased their focus on convenience by
expanding quickly to ensure there was a Dunkin’ Donuts for every 7,000 residents; no matter where
a consumer went in New England, they could find a donut and hot cup of coffee. Dunkin’ Donuts
also promoted their beverage options to further differentiate themselves. Then, Dunkin’ Donuts
announced its intentions to expand into Krispy Kreme’s home of North Carolina with several new
Driven back by the aggressive response from Dunkin’ Donuts, Krispy Kreme succeeded in
opening only seven of its planned sixteen stores. Eventually, all these stores were forced to close
except for one located inside the Connecticut casino, Mohegan Sun. Today, the battle for market
dominance between Krispy Kreme and Dunkin’ Donuts continues as both compete for the best
locations on the West Coast of the United States.
Source: James Burnett, “The Donut War,” Boston Magazine, March 2003; Daniel B. Kline, “Donut Wars Spread as Dunkin,
Krispy Kreme Vie for New Markets,” Boston.com, January 18, 2013, http://www.boston.com/business/news/2013/01/
accessed January 13, 2016.
Needless to say, franchises are among the most important and valuable assets of a business. Healthy
franchises produce long-lived streams of revenue and profitability. Managers jealously guard their
brand franchises and invest heavily in their brands to ensure a continuing perception of value in the
eyes of current and potential customers. Accordingly, it is common in consumer companies for the
highest levels of management—often the CEO—to insist that all new brand advertising be reviewed
by them personally to ensure that misguided advertising does not dilute or harm the brand image.
Unfortunately, a balance sheet—which is based on historical cost transactions—is of little help in
determining the value of a company’s brand franchise. Because the value of a brand cannot be
measured with precision, financial accounting standards in North America do not allow the
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recognition of franchise value on a firm’s financial statements. How much is the Patagonia brand name
worth? It clearly has great value, but you won’t find its value reported in its financial statements.6
The exception to this rule occurs when businesses are bought and sold by corporate owners. When
one firm buys another, it is buying more than the physical assets of the business, such as its buildings
and equipment. It is also buying its franchise—the brand name, the customer base, and the goodwill
in the marketplace. Thus, the purchase price of an acquisition is often significantly higher than the
assessed value of its tangible assets. To make the debits equal the credits, accountants must somehow
reconcile the difference between the purchase price of the business, which includes franchise value,
and the historical cost shown on the balance sheet, which omits it. This residual—the difference
between purchase price and the value of identifiable assets—is classified as “goodwill,” an intangible
asset recorded on the balance sheet and charged to income as the value of the intangible asset declines.
Notwithstanding the limitations of financial accounting, effective performance measurement and
control systems must monitor the effective use of all significant business assets. Accordingly, as we
think about techniques for achieving profit goals and strategies, we must pay special care to ensure
that our performance measurement and control systems capture and protect the value of brand
Relationships and Networks
In addition to distinctive capabilities and market franchises,
successful businesses must also create and nurture long-term relationships with important suppliers
and customers. These relationships are critical intangible resources for successful strategies.
Suppliers of factor inputs—raw materials, parts, technical services, administrative support—are
essential to the success of any business. Relationships with suppliers can be especially important if:
there are few suppliers to choose from
there are few substitutes for the product or service that the supplier provides
the supplier’s product or service is important to the competitive success of the business
switching to alternative sources of supply is expensive7
In these situations, good relations with suppliers is an essential resource to be monitored carefully.
Similarly, relationships with buyers are important to competitive success if:
the customer buys large quantities relative to the business’s total sales
products or services are standard or undifferentiated (allowing customers to easily purchase
from someone else)
the buyer can switch to alternative suppliers with little cost8
6 In countries such as Britain that depart from the cost-based accounting model favored in North America, the value of a franchise
can be estimated and shown explicitly on the balance sheet.
7 Porter, Competitive Strategy (New York: The Free Press, 1980), pp. 27-28.
8 ibid, pp. 24-26.
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In many industries, distribution access is a pre-requisite for success. Products are sold to
wholesalers who warehouse and deliver products to retail stores; retailers in turn sell the product to
customers. This is true in the brewing industry, for example, where MillerCoors Breweries sells beer in
large quantity to regional wholesalers. Sales representatives who are employees of the wholesaler visit
retail establishments (restaurants and liquor stores) on a weekly basis to deliver product, stock shelves,
and take orders for later delivery. Without these distributors, the nature of MillerCoor’s competitive
position would be severely damaged. In industries such as this, access to efficient distribution channels
that facilitate the flow of goods and services from the producer to the end consumer is an extremely
valuable resource.
Information Technology at Walmart
First established in 1962, Walmart was the first major retailer to target expansion in small
Southern towns throughout the U.S. This gave Walmart the opportunity to purchase cheap real
estate and establish their reputation for low prices. Since then, Walmart has held on to its low-price
advantage by being the first retailer to implement new technologies such as electronic ordering,
satellite information systems to communicate with vendors, a two-step hub and spoke distribution
model, and updated inventory tracking systems.
Over time, however, rivals replicated many of Walmart’s practices or have found their own
ways to improve efficiencies in order to attack Walmart’s “lowest price” strategy. Online vendors,
such as Amazon, posed a special threat. In 2011, after seeing the third straight year of same-store
sales declines, Walmart established @WalmartLabs, an in-house technology innovation center. The
mission of @WalmartLabs was to create “enabling” technologies and ultimately convert these
experiences into sales. The in-house development group works on all types of technologies
including e-commerce, search technologies, mobile communications and applications, and social
For the holiday season, for example, @Walmart Labs developed Shopycat, a Facebook and web
app that generates gift ideas for individuals based on their preferences. They also created a program
that reviews a user’s shopping list and makes recommendations on how to get the best prices by
buying different brands or sizes. These proprietary technologies have allowed Walmart to better
communicate with consumers, building a stronger relationship and increasing brand loyalty. This
exclusive technology has also allowed Walmart to increase their online presence and sales. Today,
Walmart maintains the title of number one retailer in the United States with a 9% market share, and
they are the third largest retailer in the world.
Source: Jack Neff, “Walmart Seeks Boost with Tech from Labs,” Advertising Age 82, no. 32 (September 12, 2011), p. 6; Mintel
Market Sizes, Retailing Database, 2014.
In many cases, electronic linkages to suppliers and customers are vital and can be extremely
valuable resources providing a competitive advantage. These linkages may allow orders to be instantly
transmitted from buyer to seller with real-time updating of purchase orders, inventory records, and
shipment dates. Electronic sharing of sales information can allow producers, suppliers, and customers
to work together to better target consumers and increase sales. For example, when a consumer buys a
container of Tide laundry detergent at a Kroger grocery store using their loyalty card, information
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about the transaction is captured by the retailer at the point of sale. This information may include
pricing, details about which items were purchased at the same time, and demographics about the
shopper. This data, aggregated with other transactions, can be shared with Procter & Gamble, the
manufacturer of Tide. Kroger and Procter & Gamble can then work together to understand how to
increase profits for both of them by determining how pricing differences affect purchase patterns,
identifying new promotional opportunities, and better understanding which consumers should be
The 4 Ps of Strategy
Look back at Figure 2-2. Our SWOT analysis has now considered the strengths, weaknesses,
opportunities, and threats created by the interplay of competitive market dynamics and firm-specific
resources and capabilities. This is the background or context for the formation and implementation of
business strategy. Next, to formulate and implement strategy effectively, we must understand the
design implications of each of the four cascading boxes shown on the lower half of Figure 2-2.
Understanding these different views of strategy will be essential to the performance measurement and
control techniques developed in later modules. In the remainder of this module, we analyze strategy
from these different angles: strategy as perspective, strategy as position, strategy as plans, and strategy
as patterns of action. These are the four Ps of strategy.9
Creating a Mission—Strategy as Perspective
Mission is the starting point for our analysis of the formulation and implementation of business
strategy. Mission refers to the broad purpose, or reason, that a business exists. At the most basic level,
a firm’s mission is recorded in its legal charter or articles of incorporation. However, senior managers
usually draft their own versions of the business’s mission to communicate their personal views of ideals
and core values to employees throughout the organization.
Good missions supply both inspiration and a sense of direction for the future. Pixar, for example,
established the following mission statement:
Pixar’s objective is to combine proprietary technology and world-class creative talent to
develop computer-animated feature films with memorable characters and heartwarming
stories that appeal to audiences of all ages. 10
Pixar’s mission clearly and succinctly defines the company goals (develop computer-animated
feature films) while demonstrating what sets them apart from other film makers (proprietary
technology and world-class creative talent). At the same time, the statement makes each employee
proud of his or her association with the company and its core values (memorable characters and
heartwarming stories that appeal to audiences of all ages).
Missions are often written down in formal documents know as mission statements that are
circulated widely throughout a firm. A mission statement communicates the core values of the
business. Some firms may adopt different names for their mission statements such as credo, or statement
9 Henry Mintzberg, “Five Ps for Strategy,” California Management Review (Fall 1987). The fifth “P,” not covered in this module, is
10 Web.archive.org, Pixar Corporate Overview, July 5, 2011, http://web.archive.org/web/20110705100315/ http://www. pixar.
com/companyinfo/about_us/overview.htm, accessed January 13, 2016.
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of purpose, but they all serve the same objective: to communicate the larger purpose of the organization and
inspire pride in participants.
Johnson & Johnson’s Credo is reproduced as Figure 2-4:
Figure 2-4
Johnson & Johnson Credo
Our Credo
We believe our first responsibility is to the doctors, nurses and patients,
to mothers and fathers and all others who use our products and services.
In meeting their needs everything we do must be of high quality. We must
constantly strive to reduce our costs in order to maintain reasonable
prices. Customers’ orders must be serviced promptly and accurately. Our
suppliers and distributors must have an opportunity to make a fair profit.
We are responsible to our employees, the men and women who work
with us throughout the world. Everyone must be considered as an
individual. We must respect their dignity and recognize their merit. They
must have a sense of security in their jobs. Compensation must be fair
and adequate, and working conditions clean, orderly and safe. We must
be mindful of ways to help our employees fulfill their family
responsibilities. Employees must feel free to make suggestions and
complaints. There must be equal opportunity for employment,
development and advancement for those qualified. We must provide
competent management, and their actions must be just and ethical.
We are responsible to the communities in which we live and work and to
the world community as well. We must be good citizens — support good
works and charities and bear our fair share of taxes. We must encourage
civic improvements and better health and education. We must maintain
in good order the property we are privileged to use, protecting the
environment and natural resources.
Our final responsibility is to our stockholders. Business must make a
sound profit. We must experiment with new ideas. Research must be
carried on, innovative programs developed and mistakes paid for. New
equipment must be purchased, new facilities provided and new products
launched. Reserves must be created to provide for adverse times. When
we operate according to these principles, the stockholders should realize
a fair return.
Johnson & Johnson, Johnson & Johnson Company Website, http://www.jnj.com/sites/default/files/pdf/jnj_
ourcredo_english_us_8.5x11_cmyk.pdf, accessed May 23, 2016.
Note that in both the Pixar and Johnson & Johnson examples—as well as the missions of most high
performance companies—maximizing profit is not the principal reason for existence. Earning profit is
never a sufficient definition of a firm’s mission: higher ideals are necessary to instill pride and motivate
productive effort from employees. Of course, every company has to earn profit—just as each of us
needs oxygen and water to survive. However, breathing and quenching our thirst are not the primary
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purposes by which we define our human existence. Like profit, they are a necessary, but not sufficient,
condition for success.
A firm’s mission provides an overarching perspective to all its activities. Rooted in a business’s
history, its culture, and the values of its senior managers, a mission provides the guideposts that allow
all employees to understand how the firm responds to the opportunities that surround it. Can you
imagine Ferrari introducing a low-priced entry level car to compete with Kia? Or McDonalds opening
a fashionable French restaurant? Or Dom Perignon introducing a cut-price bargain wine under their
exclusive champagne brand name? Of course not. In each of these firms, an overarching perspective
frames the opportunities that managers pursue and the types of decisions they make when faced with
competing choices. This perspective is the lens through which business strategy is defined.
The mission of Boston Retail is reproduced as Figure 2-5. What do you think of it? What are its
strengths and weaknesses? (Remember, its purpose is to inspire, instill pride, and give an overarching
sense of direction and perspective to employees at all levels of the business).
Figure 2-5
Boston Retail Mission
Boston Retail Clothing was founded to offer young-at-heart customers
the best in fashion, value, and fun. Our employees work together as a team
to listen, learn, and serve to the very best of our ability.
We will not sell products that we would not be proud to own and wear ourselves.
We anticipate fashion trends and ensure that our products lead the way.
Choosing How to Compete—Strategy as Position
With the mission of the business providing overall perspective—a backdrop for formulating
strategy—the next step is to focus on two key questions about the position of a business in its
competitive market place: (1) How do we create value for our customers? and (2) how do we
differentiate our products and services from those of our competitors?
Managers of competing firms might answer these questions in very different ways. Some firms may
choose to create value by offering their goods and services at low cost, hoping to draw customers who
are price sensitive; other firms may compete by differentiating their products and services in a way
that adds unique benefits for customers, or by customizing product offerings to respond to the
specialized needs of specific customer segments. In the mutual fund industry, for example, Fidelity has
successfully differentiated itself by providing high levels of service and excellent investment returns
on its actively managed funds. The ability of its fund managers to outperform market indexes is critical
to its differentiation strategy. Because of its history of superior returns and high service levels, many
customers are willing to pay Fidelity a fee that is higher than some competitors in the industry. By
contrast, Vanguard Mutual Funds competes on the basis of price and attracts its customer by offering
the lowest possible management fees. Vanguard does not attempt to outperform the market, but
instead specializes in index funds that mirror the rise and fall of the stock market. Finally, some
specialized mutual funds target their offerings only at specified customer groups, such as the Teachers
Income and Annuity fund that tailors its services to college pension funds.
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Setting Profit and Performance Goals—Strategy as Plans
After determining the mission and desired strategic position for the business (by analyzing
competitive dynamics and resources and capabilities), the preparation of plans and goals represents
the formal means by which managers (a) communicate a business’s strategy to the organization, and
(b) coordinate the internal resources to ensure that the strategy can be achieved. When managers are
asked, “What is your strategy?” they will often refer to their strategic plans—the documents where
strategy is written down.
Mission and Strategy at Alibaba
Alibaba is a Chinese e-commerce company originally formed to provide business-to-business
sales between Chinese manufacturers and the rest of the world using web portals. Jack Ma, founder
and executive chairman of Alibaba, described the key aspects for success in his business:
Corporate culture should be connected to societal values. That is to say, values and mission come before a
corporate strategy can be formulated. After the strategy is laid out, organizational structure can be created,
followed by talent recruitment. It is one coherent system. I did not understand that in the past, but I have
gained more understanding over the years and have created something systematic of my own. Today’s Alibaba
is not built by stitching pieces together, but by missions and values. Our corporate culture can be summarized
with four simple words: openness, transparency, sharing, and responsibility. Those words correspond with
my understanding of the internet.
Source: Xiao-Ping Chen, “Company Culture and Values are the Lifelines of Alibaba,” International Association for Chinese
Management Research, August, 2013, http://www.iacmr.org/v2/Publications/CMI/LP021101_EN.pdf, accessed August 3,
A major purpose of preparing plans is to communicate intended strategy. With agreement among
top managers about how to compete in the marketplace, it is essential that they communicate this
direction to the organization at large. Plans and goals can be used to communicate strategies and
coordinate action. The linkage can be visualized as shown in Figure 2-6.
Goals, as reflected in profit plans and operating plans, are the ends or results that management desires
to achieve in implementing the business strategy. Examples of goals for Boston Retail might include:
increase market share
open new stores
launch a new product line
reduce expenses
improve information technology capabilities
improve customer satisfaction
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Figure 2-6
Linking Strategy with Action
Goals & Plans
However, goals become actionable only when time frames and quantitative indicators of success
are added. Without performance indicators and time frames, managers cannot track progress and
evaluate their success in achieving goals. For example, to be actionable, the performance goals listed
above could be re-written as follows:
increase market share by 4% within 18 months
open 2 new stores during the next year
launch a new product line by July 1
reduce expenses by 5% over the next year
install a new automated inventory system in the next six months
improve customer satisfaction by 12%
The final requirement for effective communication and implementation of strategically important
goals is a measure or scale that can be used by managers to monitor progress toward these goals. For
example, when driving your car on a long trip, you may set a goal of covering 100 more miles before
stopping for gas. However, without an odometer and fuel gauge, you have no way of tracking your
success in achieving that goal. Measures are equally important for every business. For the business
goals and objectives listed above, we might measure:
number of units of product shipped
number of new store openings
number of new product launches
spending levels in dollars
customer satisfaction ratings on a scale of 1 to 10
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Plans can be used to communicate strategy, set goals, and coordinate resources. In subsequent
modules we will discuss the nature of information used for performance measurement and control,
and then we will study in detail how to: build profit plans, evaluate performance against those plans,
ensure that adequate resources are on hand to support successful implementation of strategies, link
performance goals with markets, and design balanced measurement systems to communicate and
monitor the achievement of strategic goals.
Feedback and Adjustment—Strategy as Patterns in Action
The hierarchy of missionï‚® strategyï‚® goalsï‚® measuresï‚® actions (shown in Figure 2-2) illustrates a
cascading concept—from a general inspirational mission to specific quantitative measures of success.
As we have discussed briefly, this hierarchy is supported by strategic plans based on a series of analytic
techniques such as SWOT. However, this is an incomplete picture of the strategy process. Not all
successful strategies are planned. Many arise spontaneously. Consider the following story:
Robert Stage, president of Hamilton Bank, was addressing a group of MBA students
at Harvard Business School. Hamilton Bank was an important competitor in the private
banking industry. The bank specialized in meeting the personal and corporate banking
needs of wealthy individuals who owned their own businesses.
A student raised her hand and asked, “Mr. Stage, you’ve told us that your private
banking strategy is new. Where did it come from? Whose idea was it?”
Stage responded, “Denise, that’s an excellent question. You probably think that a
group of us—Hamilton’s executive committee—got together and worked it out based on
market opportunities and an assessment of our own capabilities. But it didn’t happen like
that. As I explained to you, our earlier strategy was much broader….and not very
successful. We had scheduled a series of performance review meetings with key managers
around the world—country heads of major markets. Each came to the meeting to review
their profit plans for the coming year and discuss year-to-date performance.”
“What surprised us was how many country managers described profitable niches they
had created catering to wealthy business owners in their local countries. During the
meetings, we started to question how much of this type of business we had around the
world. No one had a clue. So we commissioned a study to find out.
After a couple of months’ hard work, we were stunned to discover that, in country
after country, our local managers had built up very solid and profitable franchises
catering to this market segment. After digesting this for a time, and looking at the
momentum that had already been built, we decided that this could be the key to a
successful strategy in the future. After further analysis and a lot of thought, we threw out
the old strategy, and adopted this new one. We’re still in the process of rolling it out. This
strategy didn’t come from the top—it emerged from the bottom of the organization as
local managers independently figured out how to create value in their markets.”
This story is not unusual. Many successful strategies arise from local experimentation and
replication. New approaches are tried—and many fail. But some work in unexpected ways, and
suggest new ideas to managers about how to reposition the business. Experiments, trial and error, and
sometimes just plain luck lead to new tactics and ways of competing. If these innovations are replicated,
managers can learn over time how to change and/or improve their strategy. This “bottom-up” strategy
is illustrated in Figure 2-7.
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Figure 2-7
Bottom-Up or Emergent Strategy
The importance of emergent strategy and learning is as true in life as in business. Read the
biography of any successful business person (or any person, for that matter) and ask yourself how
much of their success was planned, and how much was due to serendipity and a willingness to embrace
new circumstances that were emerging around them.
Thus, strategy can be planned—as we have discussed at length in our analysis of strategy as position
and plans—but it can also emerge in unexpected and unanticipated ways. At Boston Retail, the decision
to focus on college students was not planned. The company’s first store stocked a wide variety of
merchandise: clothing for both men and women, as well as an assortment of household goods.
However, the female college students who worked in the store attracted friends who enjoyed mixing
unusual fashion accessories to create bold statements. Over time, the store became known among local
college women as a unique source of fashion accessories. Without a lot of forethought by the owners,
volume in this category grew steadily. In time, a decision was made by the owner/president to
specialize in the college fashion niche and eliminate other product lines. Replicating this formula, the
business prospered and additional stores were opened.
Professor Henry Mintzberg describes how this can happen in other unpredictable ways,
Out in the field, a salesman visits a customer. The product isn’t quite right, and
together they work on some modifications. The salesman returns to his company and puts
the changes through; after two or three more rounds, they finally get it right. A new
product emerges, which eventually opens up a new market. The company has changed
strategic course.11
11 Henry Mintzberg, “Crafting Strategy,” Harvard Business Review 65, no. 4 (July-August, 1987): 66.
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The potential for new strategies to emerge in unexpected ways requires managers to be aware of
changing patterns of action in their businesses. For example, in 2013, T-Mobile shook up the wireless
carrier industry by changing the way it structured products and pricing to customers. The change
resulted from feedback from customers and was driven by ideas from employees. The customer service
department was continually hearing how their customers hated being locked into a contract and were
fed up with their wireless carriers. This feedback ignited the idea to reposition the company as the
“uncarrier” underdog. T-Mobile did away with contracts and roaming fees, offered free music
streaming, and even offered to buy customers out of contracts with competitors. These changes shook
up the way business was done in the industry and increased T-Mobile’s customer base by over 8 million
people. Top managers were ready to learn—they were alert for changing patterns in the business and
were able to embrace the new strategy when it became evident from the actions of consumers and
lower level employees that this new approach could pave a profitable pathway to the future.12
Emergent Strategy at Amazon.com
Amazon.com opened its virtual doors in 1995, originally as an on-line retail bookstore. Since
then, the company has expanded into offering all types of merchandise on a worldwide scale, as
well as branching into other businesses such as co-branded credit cards and advertising services.
In 2014, Amazon had sales of over $89 billion.
Amazon founder and CEO, Jeff Bezos, made a goal of eliciting new ideas from employees. Bezos
purposefully refused to appoint a Chief Innovation Officer because he wanted all employees to
understand that innovation is everyone’s job. Employees are often given an “innovation challenge”
that must be solved using a “two pizza team” (a team small enough to be fed by two pizzas). This
emphasis on employee creativity and innovation has resulted in a number of major moves from
Amazon that have jolted the industry. These include one-click shopping, creation of a used-book
marketplace, Amazon Web Services offering IT services to other companies, and experiments with
delivery drones. As stated by Bezos, “Experiments are the key to innovation because they rarely
turn out as you expect, and you learn so much (in the process).”
Source: Amazon, Annual Report, 2014; Hal Gregersen and Jeff Dyer, “The World’s Most Innovative Companies 2013,”
Insead Knowledge, Sept 5, 2013, http://knowledge.insead.edu/innovation/entrepreneurship/the-worlds-mostinnovative-companies-2013-2596, accessed January 14, 2016.
To capture the benefits of emerging strategy, managers must foster organizational learning – the
ability of an organization to monitor changes in its environment and adjust its processes, products, and
services to capitalize on those changes. They must use their performance measurement and control
systems to encourage employees to constantly innovate and search for signs of change in the business.
Managers must encourage employees to experiment, to find new opportunities, and test new ideas.
And, perhaps most importantly, they must ensure that performance measurement and control systems
create effective communication channels to move this information up the line from employees to senior
12 Danielle Sacks, “Who the @!#$&% is this Guy? John Legere’s Strategy for Taking New Customers by Storm,” Fast Company,
June 20, 2015, http://www.fastcompany.com/3046877/who-the-is-this-guy-john-legeres-strategy-for-taking-new-customersby-storm, accessed July 27, 2016.
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managers at headquarters. Feedback becomes critical for learning: it allows managers to fine-tune and,
sometimes, radically change their business strategies.
Module Summary
Getting strategy right is not simple—if it was, top managers would not command the high salaries
and bonuses that are the rewards of success. Implementing successful strategies requires the ability to
conduct SWOT analysis of market dynamics and internal capabilities. Then, managers must be able to
control the multiple dimensions reflected in the four Ps of strategy implementation (see Figure 2-8).
Figure 2-8
Basics for Successful Strategy Implementation
& Mission
Patterns of
Plans &
Ideals, values, and history must be woven together into an overall perspective that provides a lens
through which to view the opportunities that surround the business. This is strategy as perspective.
Managers must also have a deep understanding—a gut-level intimacy—of the market dynamics in
their industry. They must use a five forces analysis to understand customers, suppliers, products, and
competitors. Based on a SWOT assessment of their own business’s strengths and weaknesses, they
must choose how to create value for customers. Will they compete on price? On quality? On service?
On product features? This is strategy as position. Once strategy is set, managers must possess the tools
to implement it. They must prepare plans, communicate goals, coordinate resources, motivate people,
and measure and monitor implementation. This is strategy as plans. Finally, to succeed over the longterm, managers must keep their eyes focused on customers and competitors and their ears to the
ground. They must listen and learn. They must encourage employees to experiment and constantly
challenge subordinates to share their ideas and successes so this information can be used to realign
strategy over time. This is strategy as emerging patterns of actions.
The remainder of the modules in this series are devoted to learning how to use performance
measurement and control systems to achieve profit goals and strategies. To do so, we introduce the
tools and techniques that allow managers to take charge of all the aspects of successful strategy.
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Terms Defined in Previous Modules
Business goals the measurable aspirations that managers set for a business. Goals are determined
by reference to business strategy. Goals may be financial—for example, to achieve a 14% return
on sales—or nonfinancial—such as to increase market share from 6% to 9%. (Module 1: Managing
Organizational Tensions)
Business strategy how a company creates value for customers and differentiates itself from
competitors in a defined product market. (Module 1: Managing Organizational Tensions)
Performance measurement and control systems the formal information-based routines and
procedures managers use to maintain or alter patterns in organizational activities. (Module 1:
Managing Organizational Tensions)
Profit plan a summary of future financial inflows and outflows for a specified future accounting
period. It is usually prepared in the familiar form of an income statement. (Module 1: Managing
Organizational Tensions)
Suggested Study Cases
To enhance your understanding of the ideas covered in this module, we recommend that you
study one or more of the following Harvard Business School Cases. These cases are available
from Harvard Business School Publishing at www.hbsp.harvard.edu.
Henkel: Building a Winning Culture
Case A (HBS No. 112-060)
Case B (HBS No.115-040)
Siebel Systems: Organizing for the Customer (HBS No. 103-014)
Google to Alphabet: Ten Things We Know to Be True (HBS No. 116-029)
Quiet Logistics
Case A (HBS No. 115-001)
Case B (HBS No. 115-003)
J Boats (HBS No. 197-015)
Responding to the Wii? (HBS No. 709-448)
eBay, Inc. and Amazon.com (A) (HBS No. 712-405)
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Ramon Casadesus-Masanell, Series Editor
8105 | Published: January 31, 2014
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Table of Contents
1 Introduction ……………………………………………………………………………………….. 3
2 Essential Reading ………………………………………………………………………………. 6
2.1 The Logic of Value Creation and Distribution ……………………………… 6
Willingness to Pay and Supplier Opportunity Cost …………………….. 6
Added Value ………………………………………………………………………………… 8
Added Value and Competitive Advantage …………………………………. 9
2.2 The Tension Between Cost and Willingness to Pay ……………………. 9
2.3 Activity Analysis ………………………………………………………………………… 12
Step 1: Catalog Activities (The Value Chain) …………………………….. 12
Step 2: Use Activities to Analyze Relative Costs ………………………. 13
Step 3: Use Activities to Analyze Relative Willingness to Pay ….. 16
Step 4: Explore Options and Make Choices ………………………………. 19
The Whole Versus the Parts ………………………………………………………. 21
2.4 Concluding Thoughts…………………………………………………………………. 22
3 Supplemental Reading …………………………………………………………………….. 23
3.1 Analyzing Value Propositions …………………………………………………….. 23
4 Key Terms…………………………………………………………………………………………. 26
5 For Further Reading …………………………………………………………………………. 26
6 Endnotes …………………………………………………………………………………………… 27
7 Index …………………………………………………………………………………………………. 29
This reading contains links to online interactive illustrations, denoted by the icon
above. To access these exercises you will need a broadband Internet connection.
Please verify that your browser meets the minimum technical requirements by
visiting http://hbsp.harvard.edu/list/tech-specs.
Pankaj Ghemawat, Professor of Strategic Management, IESE Business School, and
Jan W. Rivkin, Bruce V. Rauner Professor of Business Administration, Harvard
Business School, developed this Core Reading.
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ome companies generate far greater profits than others. The
pharmaceutical company Merck produced an economic profit of
more than $11.3 billion from 1994 to 2012. Over the same period,
U.S. Steel produced an economic loss of more than $330 million; its cost
of capital exceeded its accounting profit by a wide margin. Large differences in economic performance across industries are commonplace, but
profitability can vary even more among companies in the same industry.
To understand those intra-industry differences, we turn to the concept
of competitive advantage, our focus in this reading.
Strategists must understand the roots of performance differences both across and within
industries. Differences in industry structure shed light on the former.2 To a certain extent,
Merck has generated more economic profit than U.S. Steel because the pharmaceutical
industry is structurally more attractive than the steel industry. Rivalry in pharmaceuticals is
muted by factors such as patent protection, product differentiation, and expanding demand.
In contrast, rivalry in the steel industry is fierce—fueled by excess capacity, limited differences
among products, and slow growth. Many pharmaceutical users hesitate to switch products or
brands, while steel customers are usually willing to switch producers in order to get a better
price. Many pharmaceuticals are made from commodities with little labor input, while unions
exercise such power in the steel industry that labor costs often account for one-quarter of total
revenue. Such contrasts in industry-level competitive forces are one reason for the variation in
profit levels of firms in different industries. (For more on the forces that influence industry
profitability, see Core Reading: Industry Analysis [HBP No. 8101].) Figure 1 shows, for each of
many industries, the percentage spread between the industry’s return on equity and its cost of
equity (the vertical axis) and the average equity in the industry (the horizontal axis) for the
period 1994–2012. Reflecting differences in industry-level competitive forces, the
pharmaceutical industry has been among the greatest generators of economic profit, while the
steel industry has generated much less. The typical pharmaceutical maker is far more
profitable than the typical steel producer.b
Merck is not a typical pharmaceutical company, however, nor is U.S. Steel a typical steel
producer. As Figures 2 and 3 illustrate, industry averages such as those shown in Figure 1 can
mask large differences in economic profit within industries. Merck was far more effective at
producing economic profits than were many drug companies during the 1994–2012 period,
while U.S. Steel performed worse than other steel producers. Indeed, research indicates that
intra-industry differences in profitability like those shown in Figures 2 and 3 may be larger
than differences across industries.3 Industry-level effects appear to account for 10% to 20% of
the variation in profitability across industries, while stable within-industry effects account for
30% to 45% of the variation within an industry. (Most of the remainder can be assigned to
effects that fluctuate from year to year.)
a The accounting profit it generated exceeded its cost of equity capital by that amount.
b We are grateful to Randy DeGeer of Marakon Associates for collecting and analyzing the data for
Figures 1, 2, and 3.
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FIGURE 1 Economic Profits of U.S. Industry Groups, 1994–2012
Source: CapIQ, MRP from Damodran, Marakon analysis.
FIGURE 2 Economic Profits in the Pharmaceutical Industry, 1994–2012
Source: CapIQ, MRP from Damodran, Marakon analysis.
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FIGURE 3 Economic Profits in the Steel Industry, 1994–2012
Source: CapIQ, MRP from Damdran, Marakon analysis.
The concept of competitive advantage helps strategists understand and analyze withinindustry differences in performance. A firm has a competitive advantage over its rivals if it has
driven a wide wedge between the amount its customers are willing to pay and the costs it
incurs—indeed, a wider wedge than its competitors have achieved.4 A firm with a competitive
advantage is positioned to earn superior profits within its industry.
In focusing on competitive advantage to help explain performance differences within an
industry, we are not denying the importance of industry-level effects. Indeed, industry analysis
is crucial to creating competitive advantage for several reasons. First, companies that generate
competitive advantages typically do so by devising strategies that neutralize the unattractive
features of their industries and exploit the attractive features. Second, industry conditions
appear to have a large influence on whether competitive advantages are even possible.5 In
some industries (e.g., computer leasing), conditions straitjacket firms, leaving them little room
to establish a superior wedge between willingness to pay and costs. In other industries (e.g.,
prepackaged software), conditions permit the most effective firms to enjoy large advantages
over the least effective. Finally, market leaders often face a tension between managing industry
structure and pursuing an advantage within that structure. When deciding whether to build a
new aluminum smelter, for instance, Alcoa must consider the impact of the additional
capacity on industry supply and demand, not just on Alcoa’s competitive advantage. This is
true not only because Alcoa is a large player in the business, but also because Alcoa is closely
tracked by its rivals.
In examining the logic of how firms create competitive advantage, this reading emphasizes
two themes. First, to create an advantage, a firm must configure itself to do something unique
and valuable. In other words, the firm must ensure that, were it to disappear, someone in its
network of suppliers, customers, and complements would miss it and no one could replace it
completely.6 The first section of the reading uses the concept of added value to make this
point more precisely. Second, competitive advantage arises only when the full range of a firm’s
activities—production, finance, marketing, logistics, and so on—act in harmony. The essence
of creating advantage is finding an integrated set of choices that distinguishes a firm from its
rivals. The second section of the reading explores the steps involved in analyzing a firm’s
activities to understand the sources of competitive advantage. The Supplemental Reading
section discusses the use of value proposition analysis as a reflection of the choices about the
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particular kinds of value the firm will offer. Whereas value chain analysis and relative cost
analysis, discussed in the Essential Reading section, focus internally on a firm’s operations,
value proposition analysis looks outward at customers.
Two caveats before we proceed: First, for ease of explication, this reading separates the
challenge of creating competitive advantage from that of sustaining it. In reality, the two
cannot be separated: The choices that establish a firm’s advantage also influence whether it
can be sustained. Second, this reading takes an analytical approach to competitive advantage,
but in actuality many of the greatest advantages come not from analysis but from insight and
trial and error. The analysis described here is not intended to deny the importance of
exploratory approaches.
2.1 The Logic of Value Creation and Distribution
A firm that has a competitive advantage is one that has added value. To illustrate that concept,
which was developed by Adam Brandenburger, Barry Nalebuff, and Harborne Stuart, 7
consider the portal crane business of Harnischfeger Industries.8
Harnischfeger, based in Milwaukee, Wisconsin, manufactured equipment for industrial
customers. Its material-handling equipment division served a range of customers, including
forest products companies such as International Paper. In the late 1970s, Harnischfeger began
to offer these customers a new product: portal cranes, designed to lift tree-length logs off
railcars and trucks and to hoist them around wood yards. The cranes were a significant
improvement over the giant forklifts that they replaced.
In fact, it was possible to calculate the customer benefits reasonably precisely. Each crane
replaced a fleet of forklifts, which cost roughly $1 million. A crane was less expensive to
operate than a forklift fleet; it required less labor, fuel, and maintenance, for instance.
Altogether over its life span, each crane generated a net present value of $6.5 million of savings
in operating costs. It cost Harnischfeger only $2.5 million to produce and install each crane.
Thus a large gap existed between the customer benefits associated with a crane ($1 million
plus $6.5 million) and Harnischfeger’s costs ($2.5 million). Despite that gap, by the late 1980s
Harnischfeger was making little profit on its sales of portal cranes. Why?
Willingness to Pay and Supplier Opportunity Cost
As we’ve noted, competitive advantage is associated with creating a large gap between a
customer’s willingness to pay and the company’s cost. That cost can be thought of in terms of
the supplier’s opportunity cost. (We’ll discuss the difference between actual costs and
supplier’s opportunity cost at the end of this section.) A customer’s willingness to pay for a
product or service is the maximum amount of money a customer is willing to part with in
order to obtain the product or service. A customer considering the purchase of a portal crane
from Harnischfeger would be willing to pay as much as $7.5 million for it. If it cost more than
that, the customer would be better off buying the forklifts for $1 million and paying the extra
$6.5 million to operate them.
The concept of supplier opportunity cost is symmetrical to willingness to pay. It is the
smallest amount a supplier will accept for the services and resources required to produce a
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good or service. We call this an “opportunity cost” because it is dictated by the best
opportunities a supplier has to sell its services and resources elsewhere. In the example, the
actual cost that Harnischfeger incurred to deliver a portal crane was $2.5 million. We don’t
know the lowest amount the company’s suppliers would have accepted, but we will speculate
that it was not far below $2.5 million—say, $2.0 million.
Imagine that Harnischfeger is bargaining with International Paper, one of the largest paper
manufacturers, over the price of a portal crane. For now, suppose that Harnischfeger is the
only company that can provide a portal crane and that International Paper is the sole
customer. The price that emerges from the bargaining may fall anywhere between $2.5
million, Harnischfeger’s cost, and $7.5 million, International Paper’s willingness to pay. (See
Interactive Illustration 1 for an example of this concept.) Our theory says nothing about
where the price will fall within this range. If Harnischfeger is a particularly tough bargainer,
then the price will climb toward $7.5 million. If International Paper is more shrewd during
negotiations, the price will edge toward $2.5 million.
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2DYoZvy
Source: Adapted from ”Value-Based Business Strategy,” by Adam. M. Brandenburger and Harbone W. Stuart, Journal of Economics &
Management 5, no. 1 (Spring, 1996): 5–24. © 1996 from MIT Sloan Management Review/Massachusetts Institute of Technology. All rights
reserved. Distributed by Tribune Content Agency, LLC.
The total value created by a transaction is the difference between the customer’s
willingness to pay and the supplier’s opportunity cost. In the example, the sale of a crane to
International Paper creates a value of $5.5 million: An item worth $7.5 million to the customer
is created from supplied resources that had a value of only $2.0 million in their next-best use.
The value captured by Harnischfeger is the difference between the negotiated price and the
$2.5 million it cost to produce and install the crane. International Paper captures value equal
to $7.5 million minus the price. And suppliers capture $0.5 million (Interactive Illustration 1
illustrates the concept).
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Added Value
A firm’s added value plays a large role in determining how much value it actually captures in a
transaction. The added value of a firm is the maximal value created by all participants in a
transaction minus the maximal value that could be created without the firm. In essence, it is
the value that would be lost to the world if the firm disappeared. Consider the situation with
Harnischfeger as the sole provider of cranes and International Paper as the only customer. If
Harnischfeger opts out of the transaction, the entire $5.5 million of value goes uncreated. The
same is true if International Paper refuses to participate. Both Harnischfeger and International
Paper have an added value of $5.5 million.
Now consider what happened in the late 1980s, when Kranco, a management-buyout firm
headed by former Harnischfeger executives, entered the market for portal cranes. Assume that
Kranco produces an identical product, with a cost of $2.5 million and a supplier opportunity
cost of $2.0 million, and it generates the same willingness to pay of $7.5 million. The added
value of Harnischfeger is now $0. If it participates in a deal with International Paper, the total
value created is $5.5 million. If it opts out, Kranco can fill its place, and the value of $5.5
million is still generated.
Under a condition known as unrestricted bargaining, the amount of value a firm can claim
cannot exceed its added value. To see why this is so, assume for a moment that a lucky firm
does strike a deal that allows it to capture more than its added value. Then the value left over
for the remaining participants is less than the value those others could generate by arranging a
deal among themselves. The remaining participants could break off and form a separate pact
that improves their collective lot. Any deal that grants a firm more than its added value is
fragile because of such separate pacts. Once Kranco enters, it is not surprising that
Harnischfeger captures little value and is barely profitable. After all, it has little or no
added value.
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2IWyhMz
Source: Adapted from Pankaj Ghemawat and Jan W. Rivkin, ”Creating Competitive Advantage,” HBS No. 798–062, Boston, MA: Harvard
Business School, 1998. Copyright © 1998 by the President and Fellows of Harvard College. Reprinted by permission.
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Suppose now that Harnischfeger adds some new services to its core product. (Using
Interactive Illustration 2, enter the following parameters to demonstrate how Harnischfeger
can increase its added value.) The services boost the willingness to pay of International Paper
to $9.0 million, but because the services entail additional labor, they raise supplier opportunity
costs to $3.0 million. The total value created if Harnischfeger participates is now $9.0 million
− $3.0 million = $6.0 million. The total value if Harnischfeger opts out and Kranco provides
the crane is $7.5 million − $2.0 million = $5.5 million. The new services boost Harnischfeger’s
added value from $0 to $0.5 million, essentially because they raise willingness to pay by more
than they increase supplier opportunity costs. By widening the gap between willingness to pay
and supplier opportunity cost, Harnischfeger increases the amount of value it can claim.
Added Value and Competitive Advantage
The logic laid out so far suggests that a firm can boost its added value by widening the wedge
between customer willingness to pay and supplier opportunity cost. We say that a firm with a
wider wedge than its rivals has a competitive advantage in its industry. That firm has added
value and therefore the potential for profit. The notion of added value highlights the fact that
competitive advantage derives fundamentally from scarcity. A firm establishes added value by
making sure that it is unique in some valuable way—that the network of suppliers, customers,
and complementors within which it operates is more productive with it than without it and
that it is not readily replaced.
There are two basic ways a firm can establish an advantage. First, it can raise customers’
willingness to pay for its products without incurring a commensurate increase in
supplier opportunity cost. Second, it can reduce supplier opportunity cost without
sacrificing willingness to pay. Either approach establishes the wider wedge that can define
competitive advantage.
Supplier opportunity costs versus actual costs. So far, we have treated buyers, with their
willingness to pay, and suppliers, with their opportunity costs, symmetrically. Just as
willingness to pay captures the most that buyers will pay for a product, opportunity cost is the
least that suppliers will accept for the resources used to make a product. The symmetry is
useful: It reminds us that competitive advantage can come from better management of
supplier relations, not just from a focus on downstream customers. Recent efforts to
streamline supply chains reflect the importance of driving down supplier opportunity costs.
In practice, however, managers often examine actual costs, not opportunity costs, because
data on actual costs are concrete and available. In the remainder of this reading, we focus on
the analysis of actual costs. We assume, in essence, that supplier opportunity costs and actual
costs track one another closely. A firm’s quest for competitive advantage then becomes a
search for ways to widen the wedge between actual costs and willingness to pay.
2.2 The Tension Between Cost and Willingness to Pay
Widening the wedge between cost and willingness to pay is difficult because a firm must often
incur higher costs in order to deliver a product or service for which customers are willing to
pay more. Among Mexican restaurants in the fast casual segment, Chipotle is able to charge
more for items on its menu than either Jack-in-the-Box, Qdoba Mexican Grill, or Taco Bell’s
Cantina Bell largely because of its commitment to sustainability and sustainable sourcing.
However, the use of organic and locally sourced ingredients and the costs associated with
obtaining Leadership in Environmental and Engineering Design (LEED) certifications drive
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up costs. Chipotle’s attractive profit margin derives largely from the fact that the difference
between what its customers are willing to pay and what its rivals’ customers are willing to pay
is greater than the incremental costs associated with Chipotle’s more expensive supply chain.10
As noted above, a firm can achieve a competitive advantage by devising a way to (1) raise
willingness to pay a great deal with only slight increases in costs or (2) reap large cost savings
with only slight decreases in customer willingness to pay. We call the first a differentiation
strategy and the second a low-cost strategy (Interactive Illustration 3 illustrates the
Types of Competitive Advantage Within a Specific Segment
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2Gglse7
Source: Adapted from Pankaj Ghemawat and Jan W. Rivkin, “Creating Competitive Advantage,” HBS No. 798–062, Boston, MA: Harvard
Business School, 1998. Copyright © 1998 by the President and Fellows of Harvard College. Reprinted by permission.
It’s important to note that the term differentiated is often misused. When we say that a firm
has differentiated itself, we mean that it has boosted the willingness of customers to pay for its
output—that it commands a price premium. We do not mean simply that the company is
different from its competitors. Hyundai is certainly different from Toyota, but it is not
differentiated with respect to Toyota. Similarly, a company does not differentiate itself by
charging a lower price than its rivals. A firm’s choice of price does not usually affect how
much customers are intrinsically willing to pay for a good.c
The tension between cost and willingness to pay is not absolute: Some firms can discover
ways to produce superior products at lower cost and thus achieve a dual competitive
advantage. In the 1970s and 1980s, for instance, Japanese manufacturers in a number of
industries found that by reducing defect rates, they could make higher-quality products at
lower cost. In the market for certain memory chips, Samsung discovered that by being the first
to release new generations of chips, it could both command a price premium and gain the
c Exceptions to this rule arise when the price of a good conveys information about it.
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volume and production experience that would give it a cost advantage. 12 Examples
of companies that achieve both differentiation and low cost are noteworthy and well
worth understanding.13
Strategy scholars debate, however, how common dual advantages are. Some argue that they
are rare and are typically based on operational practices across firms that are easily copied.14
Others contend that breaking the trade-offs between cost and willingness to pay—replacing
trade-offs with “trade-ons”—is a fundamental way to transform competition in an industry.15
In microprocessors, Intel has been able to achieve a higher willingness to pay among its
customer base while benefiting from a lower cost structure than AMD.
There are many ways to resolve the tension between cost and willingness to pay. Some
examples illustrate the possibilities:
• Apple has boosted willingness to pay to an enviable degree in several product
categories—digital music players, mobile phones, and tablets—by charging large
premiums compared with its competitors. One key has been product innovation.
During the past decade, Apple has consistently developed products that have
determined the aspirations of their product categories. These products are almost
product lines unto themselves—an iPod is not just another digital music player, an
iPhone is not just a mobile phone, and an iPad is not just another tablet. Superior
technical expertise, attention to design, and materials all raise the cost of these
products, but customers are willing to pay much more for them because they perform
functions that other products in their class either fail to perform or perform only with
great effort on the part of the user. Apple has also created complementary products that
are free to the end user (such as iTunes software and access to the iTunes store and the
App Store) that make its products more useful and convenient than those of its
competitors, and thus boost customers’ willingness to pay. While developing these
complements and providing them for free to customers has been costly, Apple has
recouped its investment (and then some) by charging the sellers of music, apps, and
other content for access to its customer base.16
• In the video game industry, Nintendo Wii has a dual competitive advantage in the
family segment. The Wii delivers more value to families than the Xbox 360 and Sony
PlayStation 3 (PS3), and therefore increases their willingness to pay because of its
uncomplicated, user-friendly interface, its small configurations, its ability to get
players off the couch, and the availability of complementary games that incorporate
the famous Nintendo characters. The Wii also has a cost advantage relative to the
Xbox 360 and PS3 because its console incorporates older and therefore less expensive
computing technology.
• Singapore Airlines has gained an extraordinary reputation for service among customers
around the world. It has won the World’s Best Airline award from Condé Nast Traveler
24 out of 25 times and has won Skytrax’s Airline of the Year award three times in the
past decade. However, it also runs one of the airline industry’s most cost-effective
operations, primarily by managing its two main assets—planes and people—very
efficiently. For example, it replaces aircrafts more frequently than the industry
standard, which costs more upfront but less down the road in fuel, maintenance, and
downtime expenses. It also uses the frequency and size of its purchases to earn price
breaks from airplane manufacturers. The airline invests more than its rivals in training
employees, allowing it to hire young workers with lower salaries. By making much of
employee compensation dependent on company profit, it encourages staff members to
control costs. While Singapore Airlines maintains large flight crews in order to offer
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outstanding service, it pinches pennies in areas hidden from consumers such as sales
and administration.17
2.3 Activity Analysis
How can one identify opportunities to raise willingness to pay by more than costs or to drive
down costs without sacrificing too much willingness to pay? Sheer insight into customers and
supply chain dynamics certainly plays a large role. For example, Reed Hastings sees the advent
of DVDs and the Internet, realizes that brick-and-mortar video rental stores add more costs
than benefits for many customers, and founds the DVD-by-mail service Netflix. Or Tory
Burch recognizes that ambitious midcareer women are willing to pay a substantial premium
for tasteful clothing and accessories, which her company can design and source at modest
costs. Dumb luck also plays a role: Engineers searching for a coating material for missiles in
the 1950s discovered the lubricant WD-40, whose sales continued to generate a return on
equity between 40% and 50% four decades later.
We believe, however, that smart luck beats dumb luck and that analysis can hone insight.
To analyze competitive advantage, strategists typically separate a firm into its discrete
activities or processes and then examine how each contributes to the firm’s relative cost
position or willingness to pay.18 The activities undertaken to design, produce, sell, deliver, and
service goods are what ultimately incur costs and generate willingness to pay. Differences
across firms in those activities—what firms actually do every day—hence dictate competitive
advantage. By analyzing a firm activity by activity, managers can
understand why the firm does or does not have a competitive advantage,
spot opportunities to increase a firm’s competitive advantage, and
foresee shifts in competitive advantage.
A firm’s managers generally analyze activities in four steps. First, they catalog the firm’s
activities. Second, they examine the costs associated with each activity, and they explore
differences in rivals’ activities to understand how and why their own costs are higher or lower.
Third, they analyze how each activity generates customer willingness to pay, and they study
differences in competitors’ activities to examine how and why their customers are willing to
pay more or less. Finally, they consider changes in the firm’s activities that could widen the
wedge between costs and willingness to pay. Let’s discuss these steps in order.
Step 1: Catalog Activities (The Value Chain)
In the remainder of this reading, we employ an activity template, the value chain, that
illustrates the sequence of activities or discrete economic functions a company performs to
design, produce, sell, deliver, and support its products.19 The template divides activities into
two classes: primary activities that directly generate a good or service, and support activities
that make the primary activities possible. Primary activities are broken down further into
inbound logistics, operations, outbound logistics, marketing and sales, and post-sales service.
Support activities include procurement of inputs, development of technology and human
resources, and general firm infrastructure. It’s important to note that the value chain should
not represent everything the firm does. Instead, it is intended to highlight the activities that
the firm does differently from competitors, including what it does not do that competitors
might. Interact…
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