A Simpler Guide to Chapter 5: Internal Analysis

The goal of this chapter is to look inside your company. 1 Before you can create
a successful strategy, you must have a realistic understanding of your
company's resources and what it does well or poorly. 2 This process helps you
identify your company's internal Strengths and Weaknesses. 33333
There are three main tools for this analysis:
1. The Resource-Based View (RBV)

2. SWOT Analysis
3. Value Chain Analysis (VCA)

1. The Resource-Based View (RBV)

• The Core Idea: This view states that a firm's success comes from its
unique set of internal resources and capabilities. 4 These internal assets
are more important for creating a competitive advantage than just the
company's position in the market. 5
• The Three Types of Resources6:
o Tangible Assets: These are the physical and financial resources a
company owns. 77 You can touch them. Examples include
production facilities, raw materials, and cash. 8888
o Intangible Assets: These are resources you can't touch but are
often very critical for competitive advantage. 9999 Examples
include brand names, company reputation, patents, and
employee morale. 10101010

o Organizational Capabilities: These are not physical assets, but

the skills a company uses to transform its inputs (like raw
materials) into outputs (like finished products). 111111 Think of them
 as the company's ability to combine assets, people, and
processes effectively. 12
• What Makes a Resource Truly Valuable?

For a resource to give you a real, long-term advantage, it must pass these
tests13:
o Is it superior? Does it help you meet a customer's needs better
than your competitors can? 14141414
o Is it scarce? Is the resource in short supply or hard to find? 15151515
o Is it hard to imitate? A resource that competitors can easily copy
won't provide a long-term advantage. 16 Resources can be hard to
imitate for four reasons17:
▪ They are physically unique (e.g., a perfect real estate
location). 18
▪ They are "path-dependent" (they took a long and unique
path to develop, like years of experience). 19
▪ There is "causal ambiguity" (competitors can't figure out
exactly what your "secret sauce" is). 20
▪ There is "economic deterrence" (it would cost competitors
too much money to try and copy it). 21
o Who gets the profit (Appropriability)? The company must be the
one that captures the profits created by the resource. 222222
o Is it durable? How quickly does the resource lose its value? The
slower it depreciates, the more valuable it is. 23
o Can it be substituted? Are there other alternatives available? If
your resource has no easy substitutes, it is more valuable.

2. SWOT Analysis
 • The Core Idea: SWOT is a popular technique used by managers to get a
quick overview of a company's strategic situation. 24242424 It assumes
that an effective strategy comes from a good "fit" between a firm's
internal factors and its external situation. 25
• Defining the Four Parts:
o Strengths: A resource or capability that gives the firm an
advantage over competitors. 26262626 It's something the company is
good at.
o Weaknesses: A limitation or a deficiency in a resource or
capability when compared to competitors. 27272727 It's a
disadvantage.
o Opportunities: A favorable situation in the company's external
environment. 28282828
o Threats: An unfavorable situation in the company's external
environment. 29292929
• The SWOT Strategy Matrix30:
The most important part of SWOT is matching these factors to create
strategies:
o Cell 1 (Strengths + Opportunities): This is the best situation. It
supports an aggressive strategy where you use your strengths to
capture opportunities. 31313131
o Cell 2 (Strengths + Threats): You are strong, but the environment
is hostile. This supports a diversification strategy where you use
your strengths to enter new areas to avoid the threats. 3232
o Cell 3 (Weaknesses + Opportunities): There are great
opportunities, but your company is weak. This supports a
turnaround-oriented strategy where you focus on fixing your
weaknesses so you can then pursue the opportunities. 33333333
 o Cell 4 (Weaknesses + Threats): This is the worst situation. It
supports a defensive strategy focused on survival and
minimizing damage. 34343434

• Limitations of SWOT Analysis35:

o It can make you focus too much on a single strength while
ignoring threats. 36
o It can be a static analysis that doesn't account for changing
circumstances. 37
o Just because something is a strength doesn't automatically mean
it's a source of competitive advantage. 38

3. Value Chain Analysis (VCA)

• The Core Idea: This is a way of looking at your business as a chain of
activities that transforms inputs into outputs that customers value.
39393939
It helps you understand exactly how your business creates value.
40
Customer value is created in three ways: by making the product
different, by making it cheaper, or by delivering it faster. 41
• The Two Types of Activities in the Chain42:
o Primary Activities: These are the core activities directly involved
in creating and delivering the product. They are:
1. Inbound Logistics (receiving and storing raw materials) 43
2. Operations (turning inputs into the final product) 44
3. Outbound Logistics (distributing the product to customers)
45

4. Marketing and Sales (convincing customers to buy) 46

5. Service (after-sales support) 47

 o Support Activities: These activities make the primary activities
possible. They are:
1. General Administration (management, finance) 48

2. Human Resource Management (hiring and training) 49

3. Research, Technology, and Systems Development (R&D) 50
4. Procurement (the function of purchasing inputs) 51
• How to Use the Value Chain:
The goal is to analyze each activity to see where you have strengths and
weaknesses. 52

1. Identify Activities: Break down the company's operations into these

specific activities. 53
2. Allocate Costs: Try to assign a cost to each activity. 54 This helps you
see where your money is going. This method is often called Activity-Based
Costing. 55555555

3. Examine the Chain: Identify the activities that are most critical to
satisfying customers and achieving success. 56 This should be guided by the
company's mission. 57
4. Compare to Competitors: VCA is most effective when you compare
your value chain activities to those of your key competitors. 58

4. Making Meaningful Comparisons

To truly know if something is a strength or a weakness, you need objective
standards for comparison. 59 There are four ways to do this:
1. Comparison with Past Performance: Evaluating your internal factors
based on your company's own history and experience. 60
 2. Stages of Industry Evolution: The skills required for success change as
an industry goes through its life cycle (for example, from introduction to
growth to maturity). 61 You should compare your company's capabilities
to what is needed for success in the current stage of your industry. 62
3. Benchmarking against Competitors: This means comparing how your
company performs a specific activity with how your competitors (or
other world-class companies) perform the same activity. 63 Favorable
differences can be the foundation of your strategy. 64
4. Comparison with Industry Success Factors: Every industry has key
determinants of success. You should use these factors as a checklist to
evaluate your own firm's strengths and weaknesses. 65

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A Simpler Guide to Chapter 6: Formulating Long-Term Objectives

& Grand Strategies
This chapter explains how a company translates its broad mission into
specific, actionable plans. It covers two main topics:
1. Long-Term Objectives: These are the specific results a company wants
to achieve over several years. 1
2. Grand Strategies: These are the comprehensive, master plans a
company uses to achieve its long-term objectives. 2

Part 1: Long-Term Objectives

To achieve long-term success, companies typically set objectives in seven key
areas3:
• Profitability: The ability to make an acceptable level of profit in the long
run, often measured by earnings per share or return on equity. 4
 • Productivity: The goal of trying to increase the efficiency of the
company's systems. 5 Firms that improve their input-to-output ratio
usually see increased profitability. 6

• Competitive Position: A company's level of dominance in the market. 7

This is often measured by total sales or market share. 8
• Employee Development: Investing in employees through education
and training, which often leads to higher productivity and loyalty. 9
• Employee Relations: Improving the work environment and satisfying
employee needs through programs like safety initiatives or worker
representation committees. 10
• Technological Leadership: A company must decide whether it wants to
be a leader or a follower in its industry's technology. 11
• Public Responsibility: Setting goals related to a company's
responsibilities to its customers and to society. 12

Qualities of Good Long-Term Objectives

For an objective to be effective, it should have these seven qualities13:
1. Acceptable: Objectives should be acceptable to groups outside the
firm. 14
2. Flexible: Objectives should be adaptable to unexpected changes in the
business environment. 15
3. Measurable: Objectives must clearly state what will be achieved and
when it will be achieved. 16
4. Motivating: Goals should be challenging enough to motivate people,
but not so high that they are impossible to reach. 17
5. Suitable: Objectives must fit with the company's broader mission
statement. 18
 6. Understandable: Managers at all levels must understand what they are
supposed to achieve. 19
7. Achievable: The objectives must be possible to accomplish. 20

The Balanced Scorecard

• This is a tool that helps companies link their strategy to tangible goals
and actions. 212121 It was developed by Robert Kaplan and David Norton.
22

• The Scorecard allows managers to evaluate the company from four

perspectives23:

1. Financial Performance
2. Customer Knowledge
3. Internal Business Processes
4. Learning and Growth
• The objectives and measures of these four perspectives are linked in a
cause-and-effect relationship, meaning that success in one area should
lead to improvements in the next. 24

Part 2: Grand Strategies

A Grand Strategy provides the basic direction for a company's major actions.
25
It is a comprehensive, general approach to achieving long-term goals. 26
There are 15 principal grand strategies to consider 27:
Growth-Oriented Strategies
1. Concentrated Growth: The company directs all its resources to the
profitable growth of one single product, in one single market, with one
single technology. 28
 2. Market Development: This strategy involves marketing current
products to customers in new markets. 29 This can be done by opening
new geographic locations or by advertising to new customer segments.
30

3. Product Development: This involves significantly modifying existing

products or creating new but related products to sell to current
customers through existing channels. 31
4. Innovation: A strategy where a company seeks high profits by creating a
new or greatly improved product, making existing products obsolete.
32323232

Integration Strategies
5. Horizontal Integration: The company grows by acquiring one or more similar
firms that operate at the same stage of the production-marketing chain. 33
This eliminates competitors and gives the company access to new markets.
34
6. Vertical Integration: The company acquires firms that either supply it with
inputs (like raw materials) or are customers for its outputs (like distributors).
35
Diversification Strategies
7. Concentric Diversification: Acquiring a business that is related to the
company in terms of its technology, markets, or products. 36 The new
business should be highly compatible with the current business. 37
8. Conglomerate Diversification: Acquiring a business in a completely
unrelated industry, usually because it is a promising investment opportunity.
383838 The main concern is profitability, not synergy. 39

Defensive Strategies
9. Turnaround: This strategy is for companies with declining profits. 40 It
involves a concerted effort to fortify the company's core competencies. 41 It
typically begins with one of two forms of "retrenchment"42:

* Cost Reduction: Decreasing the workforce, leasing equipment instead of

buying it, etc.
* Asset Reduction: Selling land, buildings, or equipment.
10. Divestiture: This strategy involves selling off a firm or a major part of a firm.
43 This may happen if a business doesn't fit with the parent corporation, if the
corporation needs cash, or due to government antitrust action. 44444444

11. Liquidation: The company is sold in parts for its tangible asset value. 45
This strategy is chosen when the business is failing and the goal is to minimize
the losses for all stockholders. 46
12. Bankruptcy: This occurs when a business cannot pay its debts. 47 There
are two types: liquidation bankruptcy (selling all assets) and reorganization
bankruptcy (the firm tries to remain viable). 48
Collaborative Strategies (Corporate Combinations)
13. Joint Ventures: Two or more firms create a new, separate company (a
"child" company) for the benefit of the co-owners ("parent" companies). 49
This is often done when each firm lacks a necessary component for success
on its own. 50
14. Strategic Alliances: Partnerships where companies work together on a
project for a defined period, but they do not create a new company or take
equity in one another. 51 Licensing is a common form of strategic alliance. 52
15. Consortia: These are large, interlocking relationships between businesses
within an industry, designed to share costs and risks. 53 In Japan they are
known as keiretsus and in South Korea as chaebols. 54

Part 3: The Selection Process

The selection of long-term objectives and grand strategies are highly
interdependent decisions that happen at the same time. 55 Objectives are
what you want to achieve, while strategies are the actions you will take to
achieve them. 56
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A Simpler Guide to Chapter 7: Strategic Analysis and Choice

This chapter focuses on the decision-making phase of strategy. After
analyzing your company's internal situation (Chapter 5) and knowing the 15
possible grand strategies (Chapter 6), this chapter helps you choose the right
path forward. It answers two main questions:
1. How can my business build a lasting competitive advantage?
2. How does my business choose the right grand strategy to guide its
future?

Part 1: Building a Sustainable Competitive Advantage (SCA)

A business succeeds because it has an advantage over its competitors1. The

two most important sources of competitive advantage are the business’s cost
structure and its ability to differentiate itself from competitors2. The goal is
to choose a business strategy built on one or both of these sources.
1. Evaluating Cost Leadership Opportunities

• The Core Idea: This strategy requires the business to provide its product
or service at a cost that is sustainably lower than what its competitors
can achieve3.
 • How It's Achieved: A business must either perform its value chain
activities more cost-effectively than rivals, or it must completely
reconfigure its value chain to gain a cost advantage4.

• Benefits of Cost Leadership:

o It reduces the pricing pressure you feel from buyers5.
o Sustained low-cost advantages can push rivals to compete in
other areas6.
o New companies trying to compete on price must face an
entrenched, experienced cost leader7.

o It should make substitute products seem less attractive 8.

o Higher profit margins allow you to withstand cost increases from
suppliers9.
• Risks of Cost Leadership:
o Many cost-saving activities are easy for competitors to
duplicate10.
o The cost differences between competitors often decline over
time11.
2. Evaluating Differentiation Opportunities
• The Core Idea: This strategy requires that the business have
sustainable advantages that allow it to provide buyers with something
they find uniquely valuable12.
• How It's Achieved: Differentiation usually comes from one or more
activities in the value chain that create a unique value that is important
to buyers13.
• How It's Sustained: For differentiation to last, two things must happen:
1) buyers must continue to see it as highly valuable, and 2) competitors
must not be able to imitate it14.
 • Benefits of Differentiation:
o Rivalry is reduced when a business successfully differentiates
itself15.

o Buyers are less sensitive to prices for effectively differentiated

products16.
o Brand loyalty is hard for new competitors to overcome 17.
• Risks of Differentiation:
o Imitation from competitors can narrow the perceived
differentiation in the customer's mind18.

o The cost difference between the differentiated business and low-

cost competitors can become too great, making customers
unwilling to pay extra for the differentiation 19.
3. Evaluating Speed as a Competitive Advantage
• The Core Idea: Speed, which means a rapid response to customer
requests or market changes, has become a major source of competitive
advantage for many firms20.
• How It's Achieved: Speed can be created through different activities,
such as faster customer responsiveness, shorter product development
cycles, quicker product improvements, and faster delivery21.
4. Evaluating Market Focus as a Competitive Advantage

• The Core Idea: Market focus is the extent to which a business

concentrates on a narrowly defined market segment or "niche" 22.
• How It Works: Focus allows a business to compete on the basis of low
cost, differentiation, and/or speed against much larger businesses, but
only within that narrow niche23.

• Risks of Focus:
 o Your success in the niche might attract major competitors who
waited for you to "prove" the market is profitable 24.
o Your focused company might become a takeover target for larger
firms that want to add your product to their portfolio25.

Part 2: How to Choose a Grand Strategy

This section provides two models to help businesses, especially those with
one dominant product, choose from the 15 grand strategies.
Model 1: The Grand Strategy Selection Matrix

• The Core Idea: This model helps you choose a strategy based on two
questions:
1. What is the principal purpose of the strategy? (Is it to overcome a
weakness or maximize a strength?)26.
2. What is the firm's focus for growth? (Is it internal, using the firm's
own resources, or external, through acquiring other
companies?)27.
• Using the Matrix:
o Quadrant I (External, Overcome Weakness): For a firm with
weaknesses, external solutions like Vertical Integration or
Conglomerate Diversification can reduce risk and provide
profitable alternatives28.
o Quadrant II (Internal, Overcome Weakness): To fix weaknesses
internally, a firm might choose Turnaround or Divestiture 29.
o Quadrant III (Internal, Maximize Strength): To grow using
internal strengths, a firm might choose Concentrated Growth or
Product Development30.
 o Quadrant IV (External, Maximize Strength): A strong firm can
use external strategies like Horizontal Integration or Concentric
Diversification to grow31.

Model 2: The Model of Grand Strategy Clusters

• The Core Idea: This model suggests that the best strategy depends on
two factors: the growth rate of the market and the firm's competitive
position in that market32.
• Using the Model:
o Quadrant I: Strong Competitive Position in a Rapidly Growing
Market. Suggested strategies include Concentrated Growth and
Vertical or Horizontal Integration33.
o Quadrant II: Weak Position in a Rapidly Growing Market. The
market is attractive, but the firm is not a leader. Suggested
strategies include Horizontal Integration, Divestiture, or finding a
niche through a reformulated Concentrated Growth strategy34.
o Quadrant III: Weak Position in a Slow-Growth Market. This is
the most difficult situation. Suggested strategies include
Turnaround, Divestiture, or Liquidation35.
o Quadrant IV: Strong Position in a Slow-Growth Market. The firm
is a "cash cow" and can use its profits to fund Diversification
(either concentric or conglomerate) or Joint Ventures36.
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This chapter is about implementation—the most practical part of the
strategic process. It focuses on how to turn strategic thoughts into real-world
actions. All previous chapters were about "planning the work"; this chapter is
about "working the plan"1.
A Simpler Guide to Chapter 9: Strategy Implementation
For a strategy to be successful, managers must do four things well 2:

1. Identify short-term objectives.

2. Initiate specific functional tactics.
3. Communicate policies that empower people in the organization.
4. Design effective rewards.

Part 1: Short-Term Objectives

Short-term objectives are the link that turns long-term strategy into reality3.
They give people in the organization detailed guidance on what needs to be
done today and tomorrow4.
• How They Help Implementation:

o First, they "operationalize" long-term objectives, making them

concrete and actionable5.
o Second, discussing and agreeing on short-term objectives helps
to raise issues and potential conflicts between departments,
allowing them to be coordinated and resolved6.
• The Importance of Action Plans:
Short-term objectives are often supported by action plans, which make them
more powerful in three ways7:
1. Specificity: Action plans identify the specific activities and tactics to be
done in the next week, month, or quarter8. They answer "What exactly is to be
done?"9.

2. Time Frame: An action plan has a clear timeline for completion,

including when the work will start and when results are expected10.
3. Responsibility: An action plan identifies "who is responsible" for each
action11.
• Qualities of Effective Short-Term Objectives:

o Measurable: They must clearly state what will be accomplished,

when it will be accomplished, and how its success will be
measured12.
o Prioritized: Since not all objectives are equally important,
priorities must be set to avoid conflicting assumptions and to
guide resource allocation13.

o Linked to Long-Term Objectives: They must clearly support the

achievement of the company's bigger, long-term goals14.

Part 2: Functional Tactics that Implement Business Strategies

Functional tactics are the specific, daily activities that each department (like
marketing, manufacturing, or finance) needs to execute to implement the
overall business strategy15151515. They are different from business strategies in
three key ways16:
1. Time Horizon: Functional tactics are short-term (what to do now), while
business strategies are long-term (3-5 years out)17.
2. Specificity: Functional tactics are very specific and detailed, while
business strategies are broad18. They tell operating managers exactly
what their unit is expected to do19.
3. Participants: The general manager of a business is responsible for the
business strategy20. He or she then delegates the development of
functional tactics to the heads of the operating areas21.

Part 3: Empowering Operating Personnel: The Role of Policies

Policies are directives designed to guide the thinking and decisions of
managers and their subordinates as they implement the strategy22. In today's
environment, policies are seen as tools to empower employees by giving
them the authority to make decisions that meet customer needs23.
• How Policies Empower People:
o They establish indirect control by clearly stating how things
should be done, which allows employees to act independently
within those guidelines24.
o They promote uniform handling of similar activities25.

o They ensure quicker decisions by standardizing answers to

routine questions26.
o They institutionalize basic aspects of organizational behavior,
which minimizes conflicting practices27.
o They reduce uncertainty in day-to-day decision making28.

o They counteract resistance to chosen strategies by clarifying what

is expected29.
o They offer a way for managers to avoid hasty, ill-conceived
decisions30.
• Policies can be formal and written or informal and unwritten 31. Formal,
written policies have several advantages, such as reducing
misunderstanding, ensuring consistency, and providing a convenient
reference32.

Part 4: Executive Bonus Compensation Plans

The goal of an executive bonus plan is to motivate executives to achieve the
main goal of the company: maximizing shareholder wealth 33. Because
executives might sometimes choose actions that increase their personal pay
or power, a bonus plan is used to align their decision-making with the owners'
goals34. The success of a bonus plan depends on properly matching the plan
to the firm's strategic objectives35.
• Types of Executive Bonus Plans:

o Stock Option Grants: Gives executives the right to buy company

stock at a fixed price in the future.
o Restricted Stock Plan: Gives executives stock that they cannot
sell for a certain period of time.
o Golden Handcuffs: A type of bonus that is deferred (paid out over
time) to keep the executive with the company.

o (Note: The summary refers to exhibits that describe these plans in

more detail and match them to corporate goals.) 36