Module 7 – Article Notes

Paper #1
Transient Advantage (Rita McGrath)

Spotlight on strategy for turbulent times

Achieving a sustainable competitive edge is nearly impossible these days. Strategy is still useful in
turbulent industries (airlines): leaders can compete effectively, but not by sticking to the same old
playbook.
a) Companies cannot afford to spend months at a time crafting a single long-term strategy.
b) To stay ahead, they need to constantly start new strategic initiatives, building, and
exploiting many transient competitive advantages at once. Sustainable competitive adv is
now the exception, not the rule. Transient advantage is the new normal and firms need to
embrace it. They should learn to launch new strategic initiatives again and again, and
creating a portfolio of advantages that can be built quickly and abandoned just as rapidly.
c) Success will require a new set of operational capabilities
d) Though individually temporary, these advantages, as a portfolio, can keep companies in
the lead over the long-run
e) Firms should abandon the assumption that stability in business is the norm: they should not
even think it is a goal .... but should instead work to spark continuous change, avoiding
dangerous rigidity.
f) Firms should view strategy differently, as more fluid, more customer-centric, less industry-
bound

 It is now rare for a company to maintain a truly lasting advantage. Competitors and
customers have become too unpredictable, and industries too amorphous (unstructured, vague).
The forces at work here are familiar: digital revolution, few barriers to entry, globalization and a
flat world.
 To compete in a transient advantage economy, firms must be willing to honestly assess
whether current advantages are at risk (competition emerging from places they didn’t expect).

The Anatomy of a Transient Advantage

A competitive advantage begins with a:

a) Launch Process  in which the organization identifies an opportunity and mobilizes

resources to capitalize on it. In this phase, the firms need people who are capable of filling
in blank sheets of paper with ideas, who are comfortable with experimentation and
iteration, and who probably get bored with the kind of structure required to manage a large,
complex organization
b) Ramp Up  Business idea is brought to scale. This phase calls for people who can
assemble the right resources at the right time with the right quality and deliver on the
promise of the idea
c) Exploitation  If a firm is fortunate, it begins a period of exploitation, in which it captures
profits and share, and forces competitors to react. At this phase, company needs people who
are good at M&A, analytical decision-making, and efficiency. For sensible reasons,
companies with any degree of maturity tend to be oriented toward the exploitation phase of
the life cycle
d) Reconfigure  often the very success of the initiative spawns competition, weakening the
advantage. So, the firm has to reconfigure what it’s doing to keep the advantage fresh. Firm
needs people who aren’t afraid to radically rethink business models or resources
e) Disengagement  in some cases, the advantage is completely eroded, compelling the
company to begin a disengagement process in which resources are extracted and
 Module 7 – Article Notes

reallocated to the next generation advantage. Firms need people who can be candid, tough-
minded and can make emotionally difficult decisions.
7 Dangerous Misconceptions
Companies in high-velocity industries must learn to cycle rapidly through the stages of competitive
advantage. They also need the capacity to develop and manage a pipeline of initiatives since many will be
short-lived. Deeply embedded assumptions can lead companies into traps. The assessment “is your
company prepared for the transient-advantage economy” will give firms a sense of whether their
organization is vulnerable to these traps.

1) The first-mover trap: it is the belief that being first to market and owning assets create a
sustainable position. However, it is still true for aircraft engines or mining industries ... but
in most industries, a first-mover advantage doesn’t last.
2) The superiority Trap: Almost any early-stage technology, process, or product won’t be as
effective as something that is been honed and polished for years. Because of that disparity,
many companies don’t’ see the need to invest in improving their established offerings until
the upstart innovations mature, by which time it is often too late for the incumbents
3) The Quality Trap: many firms in exploit mode stick with a level of quality higher than
customers are prepared to pay for. When a cheaper, simpler offer is good enough,
customers will abandon the incumbent
4) The hostage-resources Trap: it is when executives running big, profitable businesses get
to call the shots. They have no incentives to shift resources to new ventures
5) The white-space trap: when opportunities don’t fit their structure, firms often simply
forgo them instead of making the effort to reorganize.
6) The empire-building trap: the more assets and employees a firm manage, the better.
However, this system promotes hoarding, bureaucracy building, and fierce defense of the
status quo. It inhibits experimentation, iterative learning and risk-taking. It causes
employees who like to do new things to leave
7) The sporadic-innovation trap: many companies don’t have a system for creating a
pipeline of new advantages. As a result, innovation is an on-again, off-again process that is
driven by individuals making it extraordinarily vulnerable to swings in the business cycle

Strategy for Transient Advantage (TA): The New Playbook

Companies that want to create a portfolio of transient advantages (TA) need to make eight major shifts in
the way that they operate:
1) Think about arenas, not industries: one of the more cherished ideas in traditional
management is that by looking at data about other firms, they can uncover the right strategy
for their organization. Michael Porter’s five forces model assumes that firms are mainly
comparing to others in a similar industry. However, in today’s environment, where industry
lines are quickly blurring because it doesn’t give you the full picture, this can blindside
firms. Today’s strategy involves orchestrating competitive moves in what is called ‘arenas’,
which is a combination of a customer segment, an offer and a place in which that offer is
delivered. The very notion of TA is less about making more money than industry peers, but
more about responding to customers’ jobs to be done.

2) Set broad themes and then let people experiment: the shift to a focus on arenas means
that firms can’t analyze its way to an advantage with armies of junior staffers or consultants
anymore. Today’s gifted strategist examine the data, certainly, but they also use advanced
pattern recognition, direct observation, and the interpretation of weak signals in the
environment to set broad themes. Within those themes, they free people to try different
approaches and business models
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3) Adopt metrics that support entrepreneurial growth: When advantages come and go,
conventional metrics can effectively kill off innovations by imposing decision rules that
make no sense. The NPV rule sometimes leads companies to underinvest in new
opportunities. Instead, firms can use the logic of “real options” to evaluate new moves. It is
a small investment that conveys the right, but not the obligation to make a more significant
commitment in the future. It allows the organization to learn through trial and error.

4) Focus on experiences and solutions to problems: as barriers to entry tumble, product

features can be copied in an instant. Even service offerings in many industries have become
commoditized. Competitors quickly move in and many companies are so internally focused
that they are oblivious to the customer’s experience. Firms should focus on what customers
crave, and provide well-designed experiences and complete solutions to their problems.
Companies skilled at exploiting transient advantage put themselves in their customers’ place
and consider the outcome customers are trying to achieve. This can help generate substantial
profits and steady growth for the company, not to mention customers’ appreciation.

5) Build strong relationships and networks: one of the few barriers to entry that remain
powerful in a transient advantage context deals with people and their personal networks.
Evidence suggests that the most successful and sought-after employees are those with the
most robust networks. Realizing that strong relationships with customers are a profound
source of advantage, many companies have begun to invest in communities and networks as
a way of deepening ties with customers. Social networks have the power to enhance or
destroy a firm’s credibility in nanoseconds as customers enjoy an unprecedented ability to
connect with one another. Firms that are skilled at managing networks are also notable for
the way they preserve important relationships

6) Avoid brutal restructuring: learn healthy disengagement: transient advantage firms

seldom engage in restructure, downsizing or mass firings. Many firms continue to adjust and
readjust their resources instead of chopping things off. When an initiative is wound down, it
finds its way to insignificance. The challenge then is disengaging from a business in the
least destructive, most beneficial way. Preparing customers to transition away from old
advantages is a lot like getting them to adopt a new product but in reverse. Not all customers
will be prepared to move at the same rate, and there is a sequence to which customers should
transition first, second and so on. The point is that in trying to force many customers to
move faster than they were prepared to, firms enraged them.

7) Get systematic about early-stage innovation: if advantages eventually disappear, it only

makes sense to have a process for filing pipeline with new ones. Companies that innovate
proficiently manage the process in similar ways. They have a governance structure suitable
for innovation and allow senior leaders to make go or no-go decisions about it outside the
planning processes for individual businesses. The earmarked innovation budget, which gets
allocated across projects, means that new initiatives don’t have to compete with established
business for resources. Such companies also have a strong sense of how innovations fit into
the larger portfolio, and a line of sight to initiatives in all different stages. They hunt
systematically for opportunities, usually beyond the boundaries of the firm and its R&D
department and figuring out what customers are trying to accomplish and how the firm can
help them do it.

8) Experient, Iterate, learn: big mistake companies make all the time is planning new
ventures with the same approaches they use for more-established businesses. Instead, they
 Module 7 – Article Notes

need to focus on experimentation, learning and be prepared to make a shift or change

emphasis as new discoveries happen.
The discovery phase is followed by business model definition and incubation, in which a
project takes the shape of an actual business and may begin pilot tests or serving customers.
Only once the initiative is relatively stable and healthy, it is ramped up. All too often, in
their haste to get commercial traction, companies rush through this phase. As a result,
whatever product they introduce has critical flaws. They also spend way too much money
before testing the critical assumptions that will spell success or failure

Leadership as Orchestration
 No leader could cognitively handle the complexity of scores of individual arenas, all at slightly
different stages of development. What great leadership do is figure out some key directional
guidelines, put in place good processes for core activities such as innovation, and use their
influence over a few crucial inflection points to direct the flow of activities in the organization.
 This requires a new kind of leader: one who initiates conversations that question rather than
reinforce the status quo. A strong leader seeks contrasting opinions and honest disagreement.
Diversity increasingly becomes a tool for picking up signals that things may be changing.
Broader constituencies may well become involved in the strategy process.
 Transient-advantage leaders recognize the need for speed. Fast and roughly right decision-making
will replace deliberations that are precise but slow. In a world, where advantages last for five
minutes, leaders can blink and miss the window of opportunity.
 Strategy requires making tough choices about what to do and even more important, what not to
do. Defining where they want to compete, how they intend to win and how they are going from
advantage to advantage is critical
 Module 7 – Article Notes

Paper #2
Which Strategy When (Bingham, Eisenhardt, Furr)

Markets are changing, competition is shifting and some companies may be suffering or perhaps
thriving, at least for now. Whatever the immediate circumstances, managers are forever asking the
same questions.

The leading questions:

 Where do we go from here, and which strategy will get us there?
 Should we fortify our strategic position, move into nearby markets or branch out into radically
new territory?
 How can managers know which strategic framework is the most appropriate one?
 Strategic plans, market analyses, and hefty binders that strategy consulting firms leave behind
often jumble strategic lenses: five forces analysis, portfolio review, assessment of core
competencies, examination of profit pools, competitive landscape and so on. But which analyses
are most helpful right now?

Most managers recognize that not all strategies work equally well in every setting. So, to
understand how to choose the right strategy at the right time, it is best to analyze the logics of
different strategies and break into 3 archetypes:
 Strategies of position
 Strategies of leverage
 Strategies of opportunity

What is right for a company depends on its circumstances, its available resources and how
management combines those resources together.
 By observing market leaders employing archetypal strategies, we found that many assumptions
about competitive advantage simply don’t hold.
 Although strategist talk about strategically valuable resources, sometimes very ordinary resources
assembled well are all that’s required for competitive advantage
 Sometimes, it makes good sense to bypass the largest markets and focus instead on where
resources fit best. In other circumstances, it may be preferable to ignore existing resources and
attack an emergent market.
 In some situations, basic rules of thumb work better than detailed plans. Surprisingly, these
simple strategies can be harder to imitate than complex ones.

How to choose the right strategy

 When it makes sense to pursue strategies of position, leverage or opportunity, the key is to look
first at the immediate circumstances, current resources and the relationships among the various
resources. Understanding these factors will help you get started with the right strategic
framework

 The first step for managers is a thoughtful review of their industry. Specifically, assess whether
the industry is stable, dynamic or somewhere in between

 How do firms gauge this dynamism? By asking:

a) If they can map the 5 industry structure forces in my industry
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b) If they can identify buyers, suppliers, customers and substitutes by name and tick off
barriers to entry, and if these 5 factors tend to stay largely the same, then you are
probably operating within a stable industry
c) If the industry is too unsettled to map (mobile internet applications) or the basic rules
are in flux (clean or nano technology), then you most likely inhabit a dynamic industry
d) Where do products fit in terms of product life cycle? In stable industries, standards are
well-defined, product expectations are clear, product life cycles are short, products are
diverse and no clear dominant technology or product has emerged. The auto industry is
historically stable, but new technologies (for example, hybrid and electric-powered
engines), compressed product development times, volatile oil prices and regulatory
pressure have increased dynamism.
e) Firms should not forget its own circumstances: whether it is a startup with a promising
business model or an established player with global reach will also affect where firms
should fit. Once firms understand industry circumstances, assessing its resources and
the links among them is essential. Because resources lie at the heart of strategy as they
enable companies to set themselves apart from competition.
f) Tangible resources are relatively straightforward to assess while intangible resources
are trickier. Beyond these, organizational processes can provide a critical basis for
advantage
g) Once firms are done assessing resources, they should determine how advantageous
they really are. The most strategically important resources are valuable (useful in the
industry), rare (possessed by only a few), inimitable (difficult to copy) and non-
substitutable (lacking in functional equivalents). These resources are a potential source
of competitive advantage. Yet even if they can provide advantage, they aren’t
absolutely necessary for competitive advantage. Even common resources can be a
source of advantage depending on how they are linked with other resources
h) A secret to picking the right strategic framework is assessing how firms’ resources
relate to one another. Some resources are tightly linked and create more defensible
strategic positions, but they resist change. Loosely linked resources are easier to
change, but they can be inefficiently deployed and redundant. When resources are
tightly linked, they are hard to copy: interdependent resources create complexity, and
so copying them and their linkages is challenging and time-consuming.

The position strategy

When industries are stable, a strong case can often be made for a position strategy. It involves selecting a
valuable and unoccupied industry position and then building up its defenses. It seems straightforward, but
it is often assumed their success requires strategically important resources.
 This is the strategy that is commonly associated with five forces analysis, where competitive
advantage comes from constructing a fortress around an attractive market. Industry stability
ensures that the position of the fortress provides a long-term competitive advantage, thereby
justifying repeated investments to reinforce and preserve the position. The strategy remains
valuable until the terrain shifts and the strategic position is eroded
 Competitive advantage depends first on choosing a valuable and unoccupied strategic position in
a given industry. Then, creating and linking company resources to defend that position. It can
come from defending a strategic position through a system of tightly linked resources, not
necessarily from the superiority of the resources
 A valuable strategic position drives superior profitability through the ability to either boost prices
or reduce costs. Companies often defend their positions by assembling resource combinations that
their competitors cannot easily imitate. The key to comp. advantage with a position strategy is not
just having a valuable strategic position, but also linking resources to defend successfully
challengers
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 Managers can’t just rest on their laurels. They may need to refresh their resources and strengthen
the links among them if they want to maintain competitive advantage
 Like any strategy, it has an Achilles hell: change. When industries change, moving a fortress
locked into a strategic position is tough. Changing a tightly linked system means dismantling the
very synergies that management worked so hard to build and putting the organization at risk
during the transition to a new strategy. As a result, executives either ignore change or make
changes at the margin. But neither approach works
 Once stable markets change, entrenched strategic positions tend to falter. Change forces managers
to dismantle their existing resource system and resemble them in new strategic positions. This is
difficult and time – consuming. A combination that can potentially be lethal because performance
may not improve until the pieces are reassembled and linked.

The leverage strategy

In markets where change is moderate, leverage strategies often beat position strategies. Since change is
incremental and predictable, it makes sense for managers to coevolve their strategically important
resources with the industry.
 While position strategies are based on the fortress analogy, leverage strategies are more like
chess, where competitive advantage comes from both having valuable pieces and making smart
moves with them. Additionally, pursuing leverage strategies will allow firms to achieve
competitive advantage by using their strategically important resources in existing and new
industries at a pace that is consistent with market change.
 This strategy, commonly associated with the resource-based view (RBV) of the company focused
on building or acquiring resources that are valuable, rare, difficult to imitate, and non-
substitutable to leverage them into new products and markets. It can focus on refreshing and
consistently deploying core resources in current markets.
 This strategy is not only about expansion. Sometimes, it makes sense to pull back and redeploy
resources. These resources need not be wedded to specific products or services. Rather, they can
be used to create competitive advantage in other contexts. A deep knowledge base of resources
and capabilities is often fungible across multiple products and markets. While leveraging
resources in existing markets is important, leveraging resources into new markets is important
too.
 A common mistake with leverage strategies is that firms may forget to re-assess the strategic
importance of resources (especially value, rarity, and non-substitutability) in potential new
markets. While resources in position strategies are often tightly interlocked, resources in leverage
strategies are often only moderately interconnected
 A primary challenge of creating competitive advantage with a leverage strategy is updating the
resource portfolio as industries change. This can mean choosing whether to acquire, partner or
develop key resources in-house. Even when managers see the need for adding, upgrading, or
eliminating resources, entrenched beliefs and internal power struggles can interfere.
 Immediate performance from existing resources takes precedence over later performance from
new resources that may be several years away.

The Opportunity Strategy

In contrast to stable industries, dynamic industries are characterized by superabundant flows of fast-
moving but often unpredictable opportunities. Industry structure is characteristically shifting as
competitors come and go, customers modify their preferences and business models are in flux.
 It is impossible to know how long competitive advantage last, but probably not very long. Even
though managers seek a long-term competitive advantage, they should focus on doing business as
if it doesn’t exist (like it could vanish at any point in time). As a result, strategy focuses on
capturing opportunities that create a series of temporary competitive advantages
 Module 7 – Article Notes

 Unlike the fortress and chess views of strategy, pursuing an opportunity strategy is like surfing:
performance comes from catching a great wave at the right time, even though the duration of that
wave is likely to be short and the ride, a precarious ‘edge of chaos’ experience was falling off is
always a possibility. Timing and capturing successive waves are what matters. Competitive
advantage comes from capturing attractive, but fleeting opportunities sooner, faster, and better
than competitors. It requires combining 2 elements:

a) Choosing a focal strategic process: the key is to choose one where the flow of
attractive opportunities is steady and deep.
b) Developing simple rules that guide that process: Once managers have identified
their focal strategic process, they need to learn some simple rules. The easiest to
learn are rules of thumb for picking and processing opportunities. Rules for pacing
and priorities are more difficult to learn.

Together, they enable companies to be flexible enough to capture unanticipated

opportunities while still being broadly coherent and efficient. The idea is to provide enough
structure for action while also allowing flexibility to capture unanticipated opportunities.

 On the surface, Opportunity strategies relying on simple rules seem easy to copy, but since
opportunities and outcomes are so varied, it is actually difficult to decode the rules from the
outside. Competitors can try to mimic processes (for acquisition or product development) but
rules are often the results of idiosyncratic trial and error.
 Opportunity strategy is built on processes that are only loosely connected to one another.
 Although intuition suggests that rules begin as abstract and become detailed, opportunity strategy
stresses the opposite. Rather than becoming routine to ensure efficiency, rules often become more
abstract and remain few in number to ensure flexibility to address unanticipated opportunities.
 When an opportunity flow become less attractive (greater competition for the opportunities or
lower payoff from the opportunities), or when more attractive opportunity flows emerge, it is
time to pivot to the superior flow and its related strategic process.
 The key point is that shifts in where to compete are driven more by the attractiveness of
opportunity flows than by fit with the company’s strategically important resources. For
entrepreneurial startups, it is often critical to add more strategic processes and rules than is
comfortable. Too little structure is riskier than too much. But for large companies, the greater risk
is having too much structure.
 Most managers intuitively worry about bureaucracy and red tape, but pursuing an opportunity
strategy requires holding the line on the number of rules, not just their content. Managers should
be alert to signs of consolidation, standardization, longer product life cycles, and other such
indications that the industry is maturing and becoming less dynamic

Which strategy should firms use?

 The reality is that no single strategy works in every industry always. Although the essence of
strategy is being different, establishing that difference (whether it is through different positions,
resources or rules) depends on the circumstances
 Each approach works best in particular settings and has its own implications for strategic actions,
pitfalls, competitive advantage, and performance
 When firms think they have it right, they may well need to change again. But by, understanding
the archetypal strategic frameworks and the factors underlying each choice, they will be better
prepared to craft the next strategy
 Module 7 – Article Notes

Paper #3
What is Your Strategy (Xavier Gilbert)

The purpose of strategy is to set a development route to a place where a firm has not been before. This
place is expected to provide a sustainable competitive advantage, ensuring a sustainable economic profit.

 Achieving a high enough level of operational efficiency is a pre-requisite for embarking on any
development route. It should be pursued all the time in a way that contributes to the selected
development route
 Strategic thinking, selecting a development route, requires that firms match, in an advantageous
and sustainable way, internal capabilities and resources, external upside (opportunities), and
downside (threats) competitive challenges.
 It must fit in a coherent conceptual framework that provides a rationale for the key decisions.
This framework must be communicated in a clear, simple way and should provide clear priorities

What is the firm overall strategic direction?

To describe its strategy, the first step is to explain its overall strategic direction by framing every activity
in the company to have impact over 3 different time horizons. It is important that moves with a shorter-
term impact do not foreclose moves with a longer-term impact. Moves with a longer-term impact are not
considered as ‘music of future’, it should start immediately. When firms explain their strategy, the
strategic direction provides the overall reference frame for the other building blocks of their strategy: it
must be supported by specific targets.

a) The next few months on mostly familiar territory (maintaining operational & sales
excellence)
b) The medium term on somewhat familiar and somewhat uncertain territory: however, the
missing knowledge is obtainable (leveraging and developing the business)
c) The longer term or unfamiliar territory, where no one has been before if any competitive
advantage is expected (out-of-the box projects  creating new future options)

Maintaining Operational and sales excellence: making sure that the competitive formula works optimally
and improving it incrementally. This is essentially about pursuing operational efficiency and sales
effectiveness. It should be part of any strategy, and pursued in a way that supports the strategy over the
medium and long term. But it does not require much strategic thinking.

Leveraging and developing the business: making sure that the competitive formula is used and stretched
to its full potential. This may require extending the current business model to serve new customers and to
support a broader offer. Or it may requires redesigning the current business model to better respond to
evolving market expectations. Strategies always need to explore and pursue such opportunities to make
sure that firms are not leaving money on the table.

Creating new future options: inventing the competitive formula of the future. If firms don’t take their
future in their own hands, someone else will. Actively testing future options must be part of any strategy.

What are firms’ strategic targets?

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Setting specific strategic targets would allow firms to measure its progress along its selected strategic
direction. They should not be generic performance measures such as revenue, profitability, or even
economic value creation. These could apply to any strategic direction.
 Firms need to select performance measures that really capture the progress of key projects in the
‘maintain, leverage and develop, and create new options’ categories. If the strategic thinking is
coherent, then the generic performance measures will follow naturally
 If the strategic direction requires that firms bring more new products to the market faster, they
could measure the time to market or the share of new products in revenue. If the strategic
direction requires that firms develop new competencies, they should assess whether these
competencies manifest themselves through corresponding behaviors and management practices.
 Strategic targets must be SMART:
Specific: tangible, not impressionistic
Measurable
Achievable: not aspirational as this is for vision and mission statement
Relevant: specific to the competitive formula
Time-bound: specifying when firms want to reach them and in which sequence

What is the firm’ competitive formula?

This describes how firms should assemble, manage capabilities and resources to follow the chosen
strategic direction, and address advantageously and sustainably its perceived competitive challenges . This
needs to be understood across the organization so that every activity contributes to the execution of its
strategy. It relies on 3 critical choices below. These 3 decisions are not made in a nice sequential way as
presented below. Perfecting them requires many iterations.
1. Matching an offer to its target customers: who are its target customers and markets? What are
they willing to pay (WTP) for? How much, relative to comparable offers? How does the offer
reflect the WTP? Or because they don’t think it will make a difference? Which features of your
offer are they unwilling to pay for because they don’t need them Willingness to pay is a measure
of customer-perceived value

2. Defining its economic model: how do firms make economic profit? Economic profit takes into
account the cost of using working capital and fixed assets. How do firms maximize revenue given
what customers are willing to pay for its offer? And how do firms minimize the costs of
delivering its offer?
On the revenue side: did firms have a differentiated offer relative to the competition? The
differentiation must be strong enough to allow firms to charge a price premium and would need
to accept a lower volume to maintain the differentiation. In this case, firms have selected
premium pricing as a major revenue driver
On the cost side: there is no excuse for not being the lowest cost player in the category firms
compete. This can be achieved through a combination of tight cost management, smart business
model design, and volume
On both sides: some firms have managed to have both a differentiated offer and a relatively high
volume. In order to have a high market share, they have decided not to charge the full price
premium they could charge. High market share is needed to prevent the competition from gaining
volume and having a cost advantage. They control the profits of competition and this is typically
a historical position that has taken many years to develop. Both pricing and volume are their
profit drivers

3. Configuring its business model: business model or business system is the chain of activities that
firms must be performed to bring the offer from R&D labs to customers. It comprises
development activities, production and logistics activities, and customer-relations activities.
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2 decisions are involved in designing the business model/business system:

a) Firms must decide which activities must be performed to deliver all the perceived value
that your target customers are willing to pay for.
b) Firms must decide which of these activities they will perform, and which of these
activities will be performed by other business-system players.

The second decision is very critical because it will determine firm’s ability to optimize its bottom
line.
 Firms will want to perform activities that are critical to generating perceived value for its
target customers and for which they are willing to pay. They would want to perform
activities for which they have a cost advantage
 Firms will want to outsource activities that are not critical to generating perceived value
for its target customers and for which they are less willing to pay. They would want to
outsource activities for which they have a cost disadvantage to someone with a cost
advantage
 In some instances, firms may not have much choice since some businesses have readily
available distribution channels that are the only gateway to the market
 Sharing the business system with other players, however, is not without its challenges.
Customer’s money is considered as a cake and all the players may try to increase its size.
Firms will also be tempted to grab more than one’s fair share. They do so in two
complementary ways:
a) They do their best to make the other players easy to substitute and thus
unable to charge a premium price
b) They strive to make themselves difficult to substitute and thus able to
capture more than their fair share of the value created across the business
system

The job of a leader is to synthesize the complexity of strategic thinking into simple, clear guidelines for
the organization. So, their thinking process and competitive formula are best presented and explained in
this sequential way:
 Selecting target customers and specifying the offer: matching offer features and willingness to
pay
 Defining the economic profit model: it can be done by balancing price and volume as revenue
drivers, being the lowest-cost player in competition category
 Configuring the business system: it can be done by delivering the required perceived value, being
un-substitutable, and being the lowest cost player.

What are firms’ current competitive challenges?

Strategic direction shows the firm’s destination while competitive formula is the ship. There are
challenges along the way that the competitive formula must respond to in order to get to its destination.
These challenges are in fact upside and downside challenges: opportunities and threats in its competitive
environments. They are changes in its environment that create opportunities for, and threats to, the
competitive formula, the capabilities and resources the firm has to support it. It is critical for firms to
know what are their current most critical competitive challenges.
 Some changes may be plainly visible, one-time changes or ongoing trends: they require an
immediate response. Some may be more hypothetical and need to be assessed through scenario
work.
 Possible competitive challenges can be organized in 5 main clusters:
a) Changes in target customers
b) Changes affecting the offer: technology, regulations, fashion, ...
 Module 7 – Article Notes

c) Changes in competition: new initiatives, exits, entries

d) Changes impacting the business system or business model: technology, sourcing,
integration ...
e) Changes in the environment: economic, ecological, regulatory, political, public opinion

Which resources and capabilities do firms need to execute their competitive formula
advantageously and sustainably in the current context?
Firms should always question: how fit is its competitive formula to address opportunities and threats
challenges and reach its destination? What are its current strengths and weaknesses relative to these
challenges? Which strengths do firms need to reinforce and which weaknesses do they need to correct to
make sure their competitive formula helps them reach their destination:
 People behaviors and know-how: behaviors include how people work, their attitudes and values,
their readiness for change, the typical leadership style. Know-how covers the technically
competencies that people or group of people have: IP, experience, ability to work across silos ...
 Processes include the organization systems to run the business: they often result from previous
strategy directions but don’t necessarily help for future ones
 Infrastructure: it covers assets, properties, locations and financial resources
 Networks: the working relationships you may have with suppliers, channels, customers,
specifiers, scientific communities, law makers ...

What are firms’ competitive advantages?

It is critical for firms to look at strengths and weaknesses relative to the competition. What do they
believe makes its competitive formula uniquely and sustainably profitable? It is important to identify
explicitly which competitive advantages they are seeking.
 Many companies are not really aware of what their competitive advantages and disadvantages are
in the eyes of their customers. As a result, they can either easily destroy some advantages through
routine cost-cutting or they can ignore a disadvantage because it was always done that way.
 Being the undisputed leader in one activity of the business system is not the key to success. It can
help, but engineering a uniquely designed coherent system of which you own the coordination, is
an absolute requirement in order to make your competitive formula sustainable. Competitive
advantage comes from making the whole system work like a Swiss clock. This will be then very
difficult for other players to match.

Strategic priorities (p.8)

How to communicate strategy in a simple, compelling way? (p.9)