10/17/2017 Introduction to Strategy

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Ramon Casadesus­Masanell, Herman C. Krannert Professor of Business Administration, Harvard Business School, developed this Core Reading with the assistance of Sunru Yong, HBS MBA 2007.

Copyright © 2014 Harvard Business School Publishing Corporation. All rights reserved. 1 INTRODUCTION

The purpose of strategy is to create a competitive advantage that generates superior, sustainable financial returns. There are two requirements for doing this successfully. The first is an understanding of the business landscape: the forces that shape competition, the dynamics among players, and the drivers of industry evolution. This informs where the firm chooses to engage with its competition. The second is the choice of a position on this landscape. The firm’s positioning shapes the choice of a business model and the underlying set of activities that sustains it.

Strategy, as you can see, consists of choices. It is the integrated set of choices that positions the business in its industry so as to generate superior financial returns over the long run.a Developing a good strategy is not easy: The right set of choices may not be obvious, they must be made amid uncertainty, and then they must be executed using finite resources. A strategy can fail because the firm has chosen a particularly difficult place on the business landscape and is not able to adapt to, or change, its environment. A strategy can fail because its choices are not truly integrated, and so its intended business model and positioning do not fully align. A successful strategy demonstrates consistency—consistency with the realities of the external environment, with regard to internal activities, and with respect to longer­term dynamics in the industry and the organization.

In the Essential Reading section, we provide an introduction to the discipline of strategy. We begin by briefly addressing misconceptions about strategy, drawing a clear distinction between proper strategy and other ideas and tools that may use similar terminology. We then examine the

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fundamental elements of strategy and the conceptual frameworks used to develop one. We introduce ways to analyze a business landscape in order to understand opportunities and constraints created by structural forces. This is followed by an overview of how the business model, and the activities that form it, must demonstrate internal consistency. Finally, we look at how the firm’s choices can lead to external consistency with the business landscape as well as to dynamic consistency over the long term. The Supplemental Reading section introduces some alternative perspectives on strategy. 2 ESSENTIAL READING

2.1 A Historical Perspective on Competitive Strategy

The concept of strategy has been muddied by many different uses of the term. A business may have what it calls a marketing strategy or an innovation strategy or a technology strategy. It may implement a balanced scorecard or strategic outsourcing or a process reengineering program. Each of these may be “strategies,” but only in the general sense that they comprise a broad plan supported by underlying actions. They should not be mistaken for strategy as we are defining it here, with its focus on the business as it performs in its environment and relative to other actors.

The word itself comes from the ancient Greek strategos, which referred to military command. In its original intent and in subsequent refinement in the following millennia, the concept of strategy was explicitly tied to the concerns of war. The late eighteenth­ and early nineteenth­century Prussian military theorist Carl von Clausewitz distinguished between tactics, such as campaigns on the battlefield, and the discipline of strategy. Strategy demanded a broad perspective; tactics were merely the means to an end. Strategy had to focus on “the object of the war [and] give an aim to the whole military action [emphasis added].”1 For von Clausewitz, strategy was the overarching plan—the “aim,” as he called it—to which specific campaigns and actions were subordinated, and which had to accommodate the uncertainties of external circumstances and enemy actions.

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The relevance of strategy in business became more apparent in the second half of the nineteenth century. Prior to this period, industries were typically marked by intense competition; most firms were small, with limited capital and no power to significantly influence their markets. Two critical factors changed that: The expansion of railroads provided better access to distant markets, and improved financial services provided better access to capital. Recall the two fundamental questions a business must answer with its strategy: where to compete and how to compete. Better access to markets and capital dramatically changed the ways that businesses could choose their answers. With those developments, large­scale investments became both possible and profitable, creating opportunities to achieve an advantage through economies of scale or economies of scope. Managers now had reason to apply strategy to business, and they consciously built companies to outflank competitors and to adapt to external forces. This led to the gradual emergence of large, vertically integrated businesses in the late nineteenth century.2

Indeed, these large companies were among the first to clearly articulate strategic thinking. For example, in the early twentieth century, General Motors crafted a strategy specifically to outmaneuver its close competitor, the Ford Motor Company. Further developments in strategic thinking came from the unhappy circumstances of the Second World War, which necessitated new analytical tools for allocating and deploying scarce resources. Those tools proved to be as relevant in business as in armed conflict.

The academic foundations of business strategy developed in parallel to the changes in the industrial economy. The earliest business schools were instrumental in establishing the role of managers as strategic thinkers rather than functional administrators. The business schools emphasized the importance of fitting a firm’s strategy with its environment. In the 1960s, the common approach was the SWOT framework, which matched a company’s “strengths” and “weaknesses” with its “opportunities” and “threats.” Subsequent work focused on defining a firm’s distinctive competencies and the logic for translating a SWOT analysis into a credible strategy. Even as the concepts of business strategy evolved, the underlying premise of strategy remained unchanged: It was the overarching plan for marshaling an organization to succeed in an uncertain environment and against opposing forces.

It is critical, then, to understand strategy in this original sense, as competitive strategy. Every business must operate in an environment marked by competition, structural forces, and uncertainty. Every business must make choices that fit together in a holistic, consistent way in order to succeed in that environment. Those choices are the essence of strategy. Deploying robust technology, building a thriving culture, and introducing innovations are all important, but they must not be mistaken for strategy. Cutting costs and boosting productivity are also important and may make an organization more effective, but again, they are tactics—not strategy itself. Operational effectiveness may be necessary for strategy, but it is not sufficient.3 In the remainder of this reading, we introduce the key building blocks of strategy. We examine how an understanding of the environment shapes a firm’s choices—its positioning and business model.

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We then consider how those choices enable a firm to succeed in its environment and to sustain its success over the long run.

No successful strategy is crafted in a vacuum. After all, the very purpose of strategy is to enable a business to achieve superior performance in its industry. Clearly, that demands a deep and insightful analysis of the environment in order to assess opportunities and risks. Ralph Waldo Emerson, the mid­nineteenth­century American essayist and poet, declared that “if a man . . . make a better mousetrap than his neighbor . . . the world will make a beaten path to his door.”4 Imagine, for a moment, an actual mousetrap company whose managers believe that success will come from nothing more than the introduction of their literal “better mousetrap.” Unfortunately, they have only a rudimentary understanding of their competitive environment. They have not considered the likelihood that a large rival will respond aggressively, cutting prices and eroding potential industry profits. They have forgotten that a critical component in the mousetrap comes from a single global supplier that is a notoriously tough negotiator. They have ignored the probability that a new company could enter the market, copying the mousetrap innovation and making any success short­lived. They have overlooked the fact that most mousetraps are sold through the same national retail chains, which threaten to flex their bargaining power and drive prices down, better mousetrap technology notwithstanding. The structural forces of this hypothetical example are daunting, but our imaginary mousetrap firm has wandered in blindly, ensuring a disappointing outcome.

Warren Buffett, the investor behind the tremendous success of Berkshire Hathaway, famously stated, “When an industry’s underlying economics are crumbing, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, ‘If you want to get a reputation as a good businessman, be sure to get into a good business.’)”5 Indeed, statistical analyses suggest that 10% to 20% of the variation in businesses’ profitability is driven by their respective industries.6 Figure 1 illustrates the magnitude of difference. The height of each bar on the y­axis shows average economic profit for all companies in an industry, and the width of the bar on the x­axis shows the total equity capital invested in that industry. The side­by­side comparison reveals a stark gap between the pharmaceutical or oil and gas industries, for example, and the wireless telecommunications or airline industries.

FIGURE 1 Average Economic Profit of U.S. Industry Groups

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Source: Ghemawat, Pankaj E., Strategy and the Business Landscape, 3rd, © 2010. Printed and Electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.

There can be little question that where a firm has chosen to compete is of great importance. Remember that the chart in Figure 1 shows the average profitability of an industry. A firm’s particular industry does not mean that great or lousy profits are a foregone conclusion, of course. There are relatively stronger and weaker companies in every industry. Perhaps our imaginary mousetrap company could overcome the apparent challenges in its industry—it just needs to understand them. Those challenges, which arise from the structural forces at work in every industry, matter tremendously for strategy because knowing how to adapt to or even reshape them is the key to achieving superior performance. To understand the business landscape, we examine the structural forces by conducting an industry analysis. For a more detailed description of the structural forces and the factors influencing them, see Core Reading: Industry Analysis (HBP No. 8101). Developing a clear perspective on the business landscape is the first step in generating the insights that will enable a firm to make better choices about exactly where and how it competes.

The Five Forces Framework developed by Michael Porter, an economist at Harvard Business School, remains one of the most widely used tools for industry analysis. Porter’s introduction of the framework in 1979 marked a critical evolution in the use of economic theory to inform business strategy.7 Classical economics had posited supply and demand curves in which many suppliers sold undifferentiated goods to many buyers, thus achieving an equilibrium of price and quantity for the market. In this theoretical construct, no single firm had any influence over pricing. For the purposes of strategy, the trouble with this supply­and­demand analysis was its limited application to industries in which participants could influence price. For example, some industries had very few suppliers or very few buyers, thus changing the relative balance of power. A company with a

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superior product could command a higher price from customers, and an enforceable patent could help it maintain that advantage. Studies conducted by economists in the 1950s suggested that structural factors such as those helped explain why one industry was more or less profitable than another.

Porter’s framework systematically evaluates those structural factors, focusing on how they influence industry profitability. Its power lies in its incorporation of the real­world, commonsense variables, or forces, that can make a particular industry an easy or difficult environment. Interactive Illustration 1 illustrates each of the forces.

INTERACTIVE ILLUSTRATION 1 Porter’s Forces Framework

Launch Interactive

Sources: Adapted and reprinted by permission of Harvard Business Review. Exhibit from "The Five Competitive Forces that Shape Strategy" by Michael E. Porter, January 2008. Copyright © 2008 by the Harvard Business School Publishing Corporation; all rights reserved; adapted and reprinted by permission of Harvard Business School Press. From Understanding Michael Porter: The Essential Guide to Competition and Strategy by Joan Magretta. Boston, MA: 2012, p. 41. Copyright © 2012 by the Harvard Business School Publishing Corporation; all rights reserved.

In classical economics, the world consisted of undifferentiated sellers and buyers. Porter’s framework assesses the nature of rivalry among those firms. It considers the suppliers the firms use, the customers they serve, and the relative power of each. The framework also factors in the

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threats posed by substitute products and potential new entrants. A refinement to Porter’s thinking adds a sixth force: complements, goods or services that make those of another firm more valuable. Each of these competitive forces is shaped by underlying factors, and understanding them is critical to crafting strategy.8

VIDEO 1 The Six Forces

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New entrants in an industry can quickly erode profits by increasing competition, introducing alternative products, and capturing market share. New players are best able to make inroads when the incumbent players do not benefit from economies of scale, a strong brand identity, or proprietary knowledge. In such environments, we say that there are low barriers to entry. For example, there are relatively low barriers to developing applications (apps) for Android smartphones and the Apple iPhone; all it takes are a few software developers and an idea. This makes it possible for startup developers to enter and quickly grow, and makes it difficult for existing app providers to charge a significant price premium, which explains in part the low prices of most apps.

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If suppliers offer a unique product, have made it difficult to switch to other suppliers, or are more concentrated than the industry they serve, then they can raise the prices at which they supply the industry. A powerful supplier group can drive up costs that industry players are unable to pass on to their customers. Coca­Cola, with its powerful brand and flavor, is a perfect example. It sells its exclusive, proprietary soda concentrate to bottlers—there are relatively many of them—which have limited flexibility to raise prices, thus constraining industry profits.

Powerful customers can also affect industry profitability. An industry’s buyers are powerful if they are concentrated or are free to direct their purchases elsewhere. The U.S. retail industry has seen buyer power increasingly consolidated to Walmart, Target, and several drugstore chains. The many industries that sell through those channels have seen their profit margins squeezed because they have no other customers of comparable size and those retailers have the wherewithal to switch vendors.

When multiple products from different industries all serve the same purpose for customers, they are called substitutes. They place a ceiling on an industry’s ability to increase prices and grow. Taxi fares, for example, are kept in check in cities with robust public transportation.

Players in almost every industry compete with one another, but if that competition manifests itself in aggressive actions, everyone’s profits can suffer. Intense rivalry is common when the competitors are of similar size and sell undifferentiated products, or when industry growth is slow. Other contributing factors include high fixed costs, overcapacity in the industry, and investments in assets that cannot be repurposed. Competition is most harmful when it results in aggressive, sustained price wars, which decrease the available profit pool for everyone. The global automobile industry, for example, has significantly more production capacity than the market’s ability to absorb new vehicles. The shift in consumer preference to small, fuel­efficient, and lower­priced vehicles has further contributed to very intense competition.

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A firm has a complement when its goods are made more valuable by those of another firm.b Businesses can create significant value when they complement one another, even while competing to claim that value.9 Consider the history of Microsoft and Intel. In the early years of the personal computer (PC) industry, Microsoft’s Window operating systems could work only with Intel processors. Jointly, the companies exercised considerable power over the market, and their success was closely linked. The fragmented PC manufacturing industry built all its products around the so­called Wintel platform while finding itself relegated to making low­margin hardware. Attempts by IBM to reclaim the operating system market were in vain. Software developers also became complements to the Wintel axis. The more productivity software, games, and other applications they developed for this platform, the more valuable the platform became.

The key factor in the power of complements is how easily buyers and the complements themselves are able to switch to alternatives. Buyers who cannot easily switch to another platform, as was the case with most PC manufacturers as well as end users, give the complements significant power. If they cannot take their business elsewhere, the complementors are free to set a high price for their goods and services. Between complementors, the ability of one to switch weakens the claims of the other. Microsoft’s cooperation with the chipmaker AMD and Intel’s efforts with the Linux operating system were both moves to keep the other’s power in check.10

Interactive Illustration 2 shows how structural forces differ for specific industries. As you can see, industries with higher average profitability, such as household and personal care, face more forgiving structural forces. Businesses in less profitable industries, such as motor vehicles, must contend with a more difficult environment.

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INTERACTIVE ILLUSTRATION 2 Link between Economic Profit of U.S. Industry Groups and Porter’s Forces Framework

Launch Interactive

Sources: Ghemawat, Pankaj E., Strategy and the Business Landscape, 3rd, © 2010. Printed and Electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey; adapted and reprinted by permission of Harvard Business Review. Exhibit from "The Five Competitive Forces that Shape Strategy" by Michael E. Porter, January 2008. Copyright © 2008 by the Harvard Business School Publishing Corporation; all rights reserved.

Consider how structural forces are manifested in two very different industries: airlines and pharmaceuticals. Following deregulation in the airline industry in the United States, many new entrants emerged to compete on the most profitable routes.11 This eventually led to overcapacity, saddling airlines with high fixed costs and underutilized assets on many routes. Margins suffered as competitors waged intense price wars, instituting costly frequent flyer programs that attempted to lock in customers but eventually became yet another means of price discounting. Relatively low barriers to entry, the availability of substitutes (travelers have other options, such as car, train, bus, or even private and chartered jets), and especially intense competition have made airlines the least profitable industry of the past few decades. Pharmaceutical companies, in contrast, have enjoyed rather favorable structural forces. Industry revenues have grown as new disease areas have presented themselves, giving firms a “growing pie” for which to compete. Drug development takes years and may cost hundreds of millions of dollars, dissuading potential entrants.

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Furthermore, strong patent laws protect any breakthrough, allowing blockbuster drugs to earn billions. Buyers hold little leverage because patients are generally unwilling to gamble with their health, and decision power is diffused—doctors are happy to prescribe, and insured patients pay only a fraction of the drug cost. It is not hard to see why the industry has generated such attractive returns.

Since its introduction, the Five Forces Framework has been debated and tested. Porter had limited empirical evidence and relied partly on common sense in developing the framework.12 Some evidence suggests that not all the forces are of equal significance. Follow­up studies show that, historically, two of the five forces—when they are the result of the right underlying factors— are likely to have the greatest impact on industry profitability. Arguably, the most important determinant of profitability is the threat of new entrants.13 This is particularly true when barriers to entry are high as a result of economies of scale, brand identity, or capital requirements. Intensity of rivalry is also powerful in affecting profitability when it is driven by slowing industry growth and the concentration and balance of competition.14

Of course, when it comes to creating strategy, understanding structural forces provides nothing more than the starting point. Firms must choose how they respond to these forces. Performance differences among industry participants are the result of where and how they have each chosen to engage with their environment. This is no small matter. Which market segments are the most attractive? How can other companies be discouraged from entering the market? How can leverage over buyers or suppliers be increased? How will the structural forces evolve? These questions reflect the complexities that the strategist faces. Clearly, there are many ways a business can choose where to compete and how to do so. The metaphor of a business landscape, as illustrated in Figure 2, is a very useful way to conceptualize this.15 A business’s choices can lead to higher or lower profitability, represented by points on the landscape.

FIGURE 2 A Three-Dimensional Business Landscape

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Source: Ghemawat, Pankaj E., Strategy and the Business Landscape, 3rd, © 2010. Printed and Electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.

For example, a firm may choose where to compete by moving into a market segment where competition is less intense, innovation cannot be easily replicated, or customers are more fragmented. It could move off the current landscape altogether, finding an opportunity to create a market where none exists and exploring uncharted territory, to extend the metaphor. The objective of strategy is thus to steer the business to a high point of profitability on the landscape.16,17 Only a clear perspective on the environment and its forces makes this possible. Whatever its chosen market, establishing a profitable, defensible position may require very specific choices about how the business competes. In the following section, we will examine how a firm develops an integrated set of choices in response to the landscape that can lead to success over the long run.

2.2 The Integrated Set of Choices: Achieving Internal Consistency

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A business makes many choices, large and small. They may fit together in a logical way, or they may be incoherent, an accumulation of decades of decisions, with different parts of the company pulling in different directions. How should these choices be understood with regard to strategy? The firm decides how to compete with its business model, which is the underlying logic of the firm, how it operates, and how it creates and captures value.18 The business model itself consists of many other choices. The stronger the fit of those choices, the more robust the business model is and the more difficult it is to replicate. Also implicit in these choices is the need to make trade­offs, recognizing that the most important choices, if they are to be executed effectively, usually involve a decision not to do something else. We will examine each of these concepts in turn.

Consider the different business models, and the different activities that form those models, found in companies within the same industry. BMW offers luxury vehicles for high­income consumers, while the Ford Motor Company provides a much wider product range intended for the mass market. Walmart is a mass merchandiser that celebrates everyday low prices, while Nordstrom’s customers pay extra for high­end brands and better service. Cirque du Soleil reinvented the circus to create a theatrical experience for adults, while Barnum & Bailey continues to target families with its traditional traveling circus, complete with elephants, lions, and trapeze artists. Ikea offers low­ priced, self­assembled home goods for customers on a tighter budget, while Williams­Sonoma carries premium housewares and furniture. Each of these companies has chosen different sets of activities that form different business models.

There are two fundamental considerations in any business model: the value proposition and the target market. The value proposition, in its most generic sense, can be based on either differentiation or low cost. A differentiated firm offers a product perceived to be better in some way than alternatives, thereby increasing the customer’s willingness to pay. A firm with low­cost positioning attracts customers by offering lower prices—or better value at a low price—than its competitors. The target market is defined by scope, which can be broad (“mass market”) or narrow (“niche” or “focused”).19 Cirque du Soleil competes as a differentiated company focused on a niche market. Walmart is clearly a low­cost competitor aiming for the mass market, trumpeting low prices as its key attraction.

The value proposition and the target market are the most fundamental strategic choices for a firm because they shape all the other aspects of the business model. Click on Interactive Illustration 3 to see the choices a firm may make relative to its competitors.20

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INTERACTIVE ILLUSTRATION 3 Types of Competitive Advantage Within a Specific Segment

Launch Interactive

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.

The goal is to maximize the gap, or the wedge, between a customer’s willingness to pay and the company’s cost, which is determined by the supplier’s opportunity cost (the smallest amount that a supplier will accept for the services and resources required to produce a good or service). For more on this, see Core Reading: Competitive Advantage (HBP No. 8105). A differentiated firm has increased the customer’s willingness to pay. Note that this usually requires an accompanying increase in cost because persuading customers to pay more means investing additional resources in the product or service. In simple terms, the differentiated firm’s goal is to increase the price a lot while allowing costs to increase only a little. A firm competing on low cost aims for an outcome that is the mirror image: It decreases price below the competition, attracting price­conscious customers, while driving its relative cost position as far down as possible. In some cases, firms may even have it both ways—driving costs below the industry average and increasing the customer’s willingness to pay. Such firms have generally locked in customers in some way while simultaneously benefiting from economies of scale that reduce costs relative to competitors’.

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To achieve the economic outcomes shown in Interactive Illustration 3, the business model must be built around a coherent set of activities. A firm’s activities may include product development, procurement, manufacturing, deliveries, sales, and much more. An underlying economic logic must tie together the chosen activities, ensuring that the right customer value is delivered at the right cost.21 For example, by relentlessly driving costs out of every area of its business, Walmart is able to consistently offer the lowest prices across product categories. This in turn attracts the store traffic and the volume of purchases required to operate at the low gross margins that come with discount pricing.

As we’ve noted, for a business model to work, the firm’s chosen activities need to demonstrate fit.22 First, and most obviously, they need to fit the firm’s value proposition (differentiated or low cost?) and its target market (broad or narrow?). This is simple consistency. BMW manufactures luxury automobiles and motorcycles, so it needs to have high­quality engineering and manufacturing to justify its premium price. It would be foolhardy to offer cheaply made vehicles and hope that customers remain willing to pay so much. Similarly, to offer everyday low prices, Walmart must source low­cost products and keep its operating expenses as low as possible. Introducing a line of high­end Swiss watches would be inconsistent.

Second, the choices should be mutually reinforcing. Cirque du Soleil eschews the circus elements that appeal to children, drawing on a unique mix of music, costume, acrobatics, and dance that captivate adults.23 Its most profitable shows are so­called resident shows in popular travel destinations, such as Las Vegas, where it works in close partnership with upscale hotels. Each of those choices—the type of show, the target audience, the location, the partnerships—fits with and strengthens the others. Its shows attract adults, and the chosen destinations attract both business travelers and vacationers with money to spend. These choices allow Cirque du Soleil to command a premium price for tickets and to sell a higher percentage of seats per show. Because the audiences are likely to buy dinner and drinks before or after the show, Cirque du Soleil is a prime entertainment partner for hotels, which in turn provide part of the substantial capital required to develop its one­of­a­kind shows.24

Finally, the choices should fit in a way that enables optimization of effort, thereby enabling cost efficiencies among its activities. To offer affordable products, Ikea must maintain a lean operation; it does so by minimizing retail staff, offering a self­service store experience, designing modular furniture for self­assembly, ensuring stock is available in the store, and locating its large stores outside urban centers. These are optimizing choices: Each decision makes the others easier to execute and therefore strengthens the business model. For example, building large stores enables Ikea to keep sufficient inventory on hand, which is necessary for customers to choose their own

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furniture from the showroom floors, collect it themselves from the warehouse area, and bring it home to assemble themselves.

Of course, activities that fit together imply that the converse is true: There are other activities that would not fit. A well­conceived business model invariably demands trade­offs. For example, in recognition of the importance of image and reputation, the retailer Nordstrom has traded the bigger sales volumes that come with targeting budget­conscious households in order to win with higher­spending customers. It would struggle to become a true discount retailer, and customers would be unlikely to accept such a deviation from its image. Trade­offs are also found in the activities themselves. BMW cannot succeed in producing economy vehicles with its existing business model—its choices in engineering, manufacturing, marketing, and distribution activities have made this very difficult. Finally, limits on coordination and control within the organization require trade­offs. Front­line staff members, for example, perform better when they are equipped with a clear mandate. A firm that refuses to make trade­offs sends mixed signals and creates confusion. Ikea has a lean retail team that fits with its self­service model. Imagine if it asked its staff members to focus on explaining products, presenting color swatches, and giving each customer a tailored selling experience; it is highly doubtful such a change could work. In other words, the business model determines the tactics available to the firm as well as those that are not; certain tactics will be inconsistent, if not impossible.

Few businesses can succeed in being all things to all people. Those that can, and can make money at it, find success is fleeting. Inevitably, segment­specific needs will emerge and more­ focused competitors will find ways to meet those needs more capably. A firm’s business model succeeds when it can profitably meet market demand with choices that are consistent, mutually reinforcing, and collectively optimal. It works best when trade­offs are recognized and accepted, ensuring that parts of the business are not working at cross purposes. This is the essence of making an integrated set of choices, and this is the key to allowing the firm to establish and defend its place on the business landscape.

2.3 Positioning on the Business Landscape: Achieving External Consistency

We noted that firms aim to maximize the wedge between their supplier opportunity cost and their customers’ willingness to pay. Firms that command and sustain a larger wedge than their peers

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are said to have a competitive advantage. The business landscape metaphor suggests that there are areas (that is, market segments) of higher potential profit where the wedge has been widened. Occupying those spots requires the right strategy, one that exhibits consistency on all fronts. The business model must be internally consistent and must fit with the realities of the environment— that is, it must also be externally consistent. Finding and occupying these points on the landscape is strategic positioning. It is not easy, of course. It is no small matter to identify the right place on the business landscape, nor is it simple to build a business model that can position the firm there and enable it to remain. This is why many firms end up resembling one another, deploying “me too” strategies, competing against one another for the same customers and with the same offering, eroding industry profitability and achieving only mediocre financial performance.

How can companies avoid that fate? By providing something unique and valuable that is important to someone: a customer, a complementor, a supplier. The acid test is the imaginary state of the world without the firm: If it simply disappeared, would it be easily replaced?25 If the answer is no, then that firm has likely achieved internal and external consistency. By creating unique value for someone, a firm can mitigate the negative aspects of its industry or take advantage of the positive ones.

The landscape metaphor provides a visual for ways in which a firm engages with its environment. Recall our mousetrap company, currently at point A on the business landscape in Interactive Illustration 4. Despite offering a genuinely better mousetrap and deploying a highly trained sales team, it has not succeeded in finding a high point of profitability on the landscape. It faces low willingness to pay from its targeted retail channels, and its costs are very high. Powerful customers, powerful suppliers, and intense rivalry have made its position a rather unattractive one.

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INTERACTIVE ILLUSTRATION 4 Positioning within a Three-Dimensional Business Landscape

Launch Interactive

Source: Ghemawat, Pankaj E., Strategy and the Business Landscape, 3rd, © 2010. Printed and Electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey.

Now suppose the firm surveys the business landscape and weighs a number of different strategic options: a different target market, a different business model, different positioning and a different target market, and a different business landscape.

Rather than compete for the household consumer market, it could redeploy its skilled sales team to the institutional market, where it serves hotels, office buildings, and other professionally managed facilities. There is less competition here, customers are more fragmented, and its sales capabilities are better matched to the market. This is point B, which is a more profitable point on the landscape.

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An alternative outcome could be a move to point C, where the mousetrap company continues to serve the same market but changes its business model. For instance, the company could rebrand and reposition itself as a luxury option for more­discerning consumers willing to pay a premium. It could also find an opportunity for backward integration (controlling the supply of parts) if it found that doing so would enable an improved cost position, thereby improving the firm’s profitability. Either option could be accomplished while the mousetrap company continued to serve the same market for household use.

An even more dramatic change could take the mousetrap company to point D. Imagine that the better mousetrap design can be repurposed to catch and protect small pets. Owners of hamsters; gerbils; and other small, furry, and easily lost animals are eager to find a more reliable way to retrieve their pets. Willingness to pay is much higher, the relevant retail channel is more fragmented, and competition is almost nonexistent. With its patented products, the mousetrap company could establish a strong, defensible position in a wholly new, unexplored part of the landscape.

The structural forces shaping the landscape are not static. Success could also come through changing relationships. An exclusive alliance with a pest control company or a tightly linked product with a complement (a specialty mouse­targeted cheese company perhaps!) could affect the structural forces themselves. These shifts could lead to changes in the “topography,” as it were, creating new places and ways to create and capture value.

The examples are fanciful, of course, and the moves are merely illustrative. However, there are countless examples of successful firms that have positioned or repositioned themselves on the business landscape just as our imaginary mousetrap company is contemplating. In the rental car market, Enterprise Rent­A­Car deliberately chose a different target market than its competitors. Rather than entering the crowded and very competitive market for travelers at airports, it focused on local market needs such as consumers who need a replacement car because their own car is being repaired.26 In the steel industry, Nucor relied on minimill technology in contrast to huge, integrated competitors that used blast furnaces. This required a fundamentally different business model, which proved more flexible, lower cost, and far more profitable.27 FedEx reimagined parcel delivery, inventing an overnight service that served a wholly new place on the business landscape and required a sophisticated logistics­driven business model that had not existed previously.28

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Great strategy is sometimes the result of trial and error and adaptation rather than perfect foresight and execution. When strategy is done well, however, the firm may find it has created a defensible competitive advantage. Reading the business landscape correctly and choosing the right business model can lead to a position that is very difficult to replicate. Internal and external strategic consistency almost always indicate a business model marked by particular activities linked in specific ways, and this is usually very hard for competitors to imitate. See Core Reading: Competitive Advantage (HBP No. 8105) for more details.

Let’s return to the airline industry to see how strategic positioning can play out in the real world. Our prior examination of that industry’s business landscape showed that it is beset by difficult structural forces and has generated low profits. Yet Southwest Airlines has created a competitive advantage and significantly outperformed its industry peers, proving that superior performance is possible when a firm chooses the right spot on the business landscape and figures out the right business model to get and stay there.

Southwest Airlines offers affordable air travel, focusing on customers who are price­sensitive or seek the convenience of reliable, frequent flights. Its service is deliberately no frills: It offers only economy class, does not have assigned seating, and serves no meals. It aims to be a low­cost competitor, focused on the market segment willing to forgo the amenities offered by typical airlines. Since its founding, in 1967, it has turned a profit every single year—whereas many of its competitors have entered bankruptcy at least once—and it has grown to be the largest carrier in the United States, as measured by total number of domestic passengers.29

How did Southwest succeed? As we discussed earlier, the industry’s structural unattractiveness is due in part to intense competition, which is fueled by very high fixed costs. In contrast to its full­ service competitors, Southwest targeted price­sensitive customers and was focused, especially in the early years, on midsize cities and the secondary airports of large cities. In other words, Southwest Airlines deliberately staked out a different, less competitive part of the business landscape. This helped the airline avoid the intense rivalry in other segments but also mitigated the power of customers. On routes that Southwest serves, no other carrier offers the same combination of convenience and cost, and the airline attracts a self­selected segment of customers who have knowingly chosen a different flying experience.

Southwest relies on a fundamentally different business model to create and capture significant value, one that demonstrates fit, mutually reinforcing activities and optimization. The business model hinges on keeping costs very low and attracting a high volume of passengers by offering low fares and focusing on less competitive routes. In addition, Southwest keeps more of the revenue from each ticket by selling most tickets directly instead of through third­party agents.

Southwest faces many of the same high fixed costs as the rest of the industry, but it makes those costs as productive as possible. This comes from operational choices that keep planes in the air rather than idle on the ground, which translates into a far lower cost per mile. Southwest uses a point­to­point route structure, thus avoiding the costly coordination issues, delays, and

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underutilization that come with the hub­and­spoke model other airlines use. It trains its ground and flight crews to operate like a pit crew at the Indianapolis 500—cleaning, servicing, fueling, and loading planes at the gate in less than half the time needed by competitors. The airline achieves that by not offering meals that must be loaded and by using only one type of plane, the Boeing 737, which greatly simplifies and speeds up maintenance. In addition, because Southwest offers no assigned seats, passengers are motivated to arrive early, line up immediately, and board quickly. Remarkably, Southwest has trained its own customers to contribute to the efficiency of its operations. Enabling all those activities are employees who are better­compensated and with whom the airline has more harmonious labor relations than exist elsewhere in the industry, creating a culture that fosters productivity and initiative. The economic logic of these decisions can be seen in the depiction of the Southwest Airlines business model in Interactive Illustration 5. The interactive illustration shows how activities connect with, and reinforce, one another.

INTERACTIVE ILLUSTRATION 5 Southwest Airlines’ Business Model

Launch Interactive

Source: Adapted from Ramon Casadesus-Masanell and Joan Enric Ricart, "From Strategy to Business Models," Long Range Planning 43, no. 2–3 (April–June 2010): 195–215.

Southwest Airlines has found a way to mitigate the negative structural forces of its external environment and, in so doing, has developed a unique business model. The tremendous fit of Southwest’s choices—and the trade­offs the airline knowingly embraced—has also led to a very

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defensible position. In short, its strategy demonstrates both internal and external consistency, and this is at the heart of its competitive advantage.

Not so with the full­service airlines that attempted to encroach on Southwest’s position on the business landscape. They have demonstrated that it is one thing to claim a particular strategic position, such as being a low­cost provider, and another thing altogether to develop a coherent, profitable business model that makes that position possible. Trying to craft a low­cost model within an existing full­service operation is simply not feasible. Continental Lite, Delta Song, and United Ted were all attempts by full­service airlines to compete head­to­head with Southwest, and all of them failed. In contrast, the players that set out with their business model and strategic positioning aligned—thereby achieving external and internal consistency—have seen some success in borrowing from Southwest. Ryanair began with the explicit objective of becoming the “Southwest of Europe,”30 while JetBlue gained early traction by targeting a different customer segment while replicating aspects of Southwest’s model.31

We have seen that a successful strategy, one that can create a competitive advantage for a company, requires an integrated set of choices that demonstrate internal and external consistency. We now turn to the matter of sustaining superior performance for the long term, which can be thought of as dynamic consistency.

2.4 Performance over the Long Run: Dynamic Consistency

For a firm that has created a competitive advantage, maintaining dynamic consistency is a matter of dealing with threats. As discussed earlier, a firm creates and captures value through its positioning and business model. Neither the position nor the model is permanent; however, with enough time and pressure, outside forces can prove disruptive.

The threat of imitation should be self­evident. Any profitable success by one firm will lead other firms to try to replicate it; profits draw a crowd. Unfortunately, history suggests that any advantage based on product or process innovation is fleeting, even when protected by a patent.32 What may be an attractive high point on the business landscape is thus pulled down by increased competition. For example, Chrysler revolutionized the family­car market in the United States with the introduction of the minivan in the mid­1980s. While it was recognized as the leader in this

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segment, it did not take long for competitors to follow suit. Similarly, Apple saw its user­friendly operating system imitated by Windows, and Ben & Jerry’s found rivals introducing their own super premium ice creams. It is, of course, possible to create barriers to imitation. If a firm achieves economies of scale or scope (that is, if it is large in a specific market or in interrelated markets), would­be imitators may be deterred. Long­term contracts and relationships, institutional knowledge, network externalities, a credible threat of retaliation, and strategic complexity can also convince potential competitors that profitable imitation will be difficult.

Threats from substitute offerings are generally difficult to predict and manage. They occur when demand shifts as a result of changes in technology or customer needs. They can come from subtle product benefits, such as calcium­enriched orange juice, which reduces sales of milk. And they can come from unexpected places: Who could have foreseen that videoconferencing would reduce the need for business travel? Threats from substitution can be quite dramatic, as when a wholly new paradigm reshapes the business landscape, uncovering new areas of value and destroying others. Consider, for example, the rapid growth of digital photography, which largely displaced a photographic film industry that had existed for more than a century. Businesses that face the threat of substitution can fight back by further differentiating or incorporating the benefits that are shifting demand. If the shift is unavoidable, a firm may even choose to encourage substitution, but on its own terms, for example, by using an established brand and superior cost position to accelerate substitution while protecting market share.

Holdup occurs when the bargaining power of a firm’s buyers, suppliers, or complements increases, allowing them to capture more value. Growing dependence on, or interdependence among, these parties can lead to greater overlap and conflict in claiming value. Conceptually, this is easiest to picture in a market with just one seller and one buyer. Value can be created only when they transact, but what one claims is a direct reduction of what remains for the other. This tension looms over any critical, interdependent relationship, such as that between automakers and key suppliers or between Walmart and Target on the one hand and leading consumer products companies, such as Procter & Gamble and Unilever, on the other. It is especially threatening if a firm has made investments in relationship­specific assets. For example, Coca­Cola’s independent bottlers cannot easily redeploy their assets; thus, they have little leverage in their relationship with Coca­Cola. Firms can mitigate the threat of holdup by broadening their base of suppliers or customers, establishing contractual protections, or pursuing vertical integration (that is, taking over more of the activities in their supply chains).

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The final threat is internal: It comes from poor management and suboptimal performance. Slack is waste and inefficiency that ultimately weaken the firm. Lack of discipline and accountability can lead to slack, resulting in unwise investments or a bloated cost structure. General Motors, for instance, has made staggeringly bad strategic investments, destroying anywhere from $100 billion to $200 billion in value over a 17­year period.33 Careful performance monitoring, alignment of managerial incentives, and commitments to return cash to shareholders can reduce this type of waste.

It may be helpful to think of these threats as a reversal of the decisions and factors behind a successful strategy. If a firm has created a competitive advantage, then it has figured out a profitable way to thrive in its position on the business landscape. However, threats to sustainability exist because the structural forces we reviewed earlier are not static. With imitation and substitution, the problems of new entrants or an increase in the number of rivalries or substitution are realized. With holdup, the balance of power has shifted toward suppliers or buyers or complementors. Without constant attention and rigorous management, the consistency and performance level of even a successful business model can be eroded. This is slack.

Maintaining superior performance is not easy, but it is possible. Despite the powerful complementary relationship that developed between Microsoft and Intel, as described earlier, Intel took nothing for granted. Recognizing the threat of imitation, the company waged costly, drawn­out battles against NEC and AMD to protect its microcode. It also managed relationships with buyers in order to mitigate the risk of holdup. When Intel produced computer products for a few years in the 1980s (an example of forward integration), the company demonstrated its capacity to be more than just a chipmaker, blunting any holdup threat from its buyers. When IBM hesitated to introduce the 386 microchip, Intel pioneered it with Compaq—with great success—thereby reducing dependence on IBM. In the 1990s, it launched the Intel Inside campaign to convince consumers about the advantages of Intel processors and blunt the threat of imitators. While this antagonized some manufacturers, it created demand among consumers, leading to wide adoption among PC manufacturers. With each of those actions, Intel focused on keeping the balance of power in its favor. Andy Grove, the former CEO who had been with the business since its founding, famously operated under the dictum, “Only the paranoid survive.”34 The lesson is that dynamic consistency requires vigilance to ensure that threats are well understood and kept at bay.

2.5 What Is Next?

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In subsequent readings in this series, we will explore in much greater depth the topics introduced here, including industry analysis and competitive advantage. We will also examine, among other topics, corporate strategy, which can allow a single firm to compete in multiple industries with multiple business models, as well as global strategy for firms whose business landscape stretches around the world. The foundational definition of strategy—an integrated set of choices that position the firm to generate superior returns over the long run—will remain constant; these additional topics will add depth and nuance as you explore this rich discipline. 3 SUPPLEMENTAL READING

There is not just one way to think about strategy. The perspective presented in this reading is built on Michael Porter’s foundational work on the Five Forces Framework and competitive advantage. Three other schools of thought in particular provide valuable concepts that complement what we have explored in this reading. Blue Ocean Strategy posits that strategy should focus less on dealing with competition and more on avoiding it altogether. Success, this approach suggests, lies in finding new, uncontested space where competition is largely irrelevant. The resource­based view (RBV) focuses on a company’s resources and capabilities as the key determinants of a successful strategy. The third perspective, emergent strategy, is not an alternative framework per se; rather, it suggests a particular process for arriving at a strategy, downplaying the importance of deliberative, centralized planning, and instead emphasizing the role of organizational learning, intuition, and adaptation.

Blue Ocean Strategy, developed by W. Chan Kim and Renée Mauborgne of INSEAD, focuses on the question of where a firm should go. Kim and Mauborgne argue that the relevant frame of reference is neither the industry nor the company itself, but rather the strategic move. Successful strategy lies in finding and moving to new markets where competition is nonexistent. Using the metaphor of the ocean, it distinguishes between “red oceans,” which are overcrowded by competitors, and “blue oceans,” where unmet demand can be found. In red oceans, firms are in a never­ending fight to outperform rivals for the existing market. Growth and profitability are

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constrained and eventually eroded by competition. As Kim and Mauborgne explain, the ocean is red because “products turn into commodities and increasing competition turns the water bloody.”35

Blue oceans are, by definition, uncontested by competitors. The waters are calm, untainted, and perhaps unknown because the right value proposition has not been developed. Indeed, a successful Blue Ocean Strategy typically requires creating new demand with a value proposition that no other company has yet delivered—or even identified as an opportunity. Blue oceans need not be wholly new industries or the result of breakthrough technology. Instead, they can emerge from unattractive core businesses once the boundaries of existing industries are shifted; this enables value pioneering, defined as offering existing products and services in a compelling new way. With the introduction of the Model T, for example, Ford ignored the existing automobile market, which provided customized, luxury vehicles exclusively for the wealthy. His car “for the multitude” shifted the boundaries of both cars and horse­drawn carriages, thereby creating a blue ocean. In the competitive, low­margin personal computer industry of the 1990s, Dell created a blue ocean with its fast, affordable build­to­order model, creating a new PC­buying experience. Cirque du Soleil and Southwest Airlines, described earlier in this reading, also found blue oceans —the former by blurring the lines between theater and the circus, and the latter by making air travel as convenient and affordable as taking the bus.

Creating new market demand usually requires fundamental changes in how the firm operates. Ford pioneered the assembly line, Dell developed a world­class supply chain, and Southwest Airlines created a unique point­to­point model with unrivaled efficiency. Such moves are usually hard for would­be competitors to imitate. Furthermore, the sole player in the blue ocean initially captures all market demand, so it enjoys economies of scale and can achieve a low­cost position, all the while building a powerful brand. This can lead to a sustainable, enduring advantage.

The resource­based view (RBV) of the firm begins, as the name suggests, with the company’s resources and capabilities. In this framework, resources are what the company has, and capabilities are what the company does with them.36 Developed in the 1990s, RBV was intended as a correction to the application of strategic thinking over the previous decade. Michael Porter’s Five Forces Framework emphasized industry structural forces and positioning. Along with the Boston Consulting Group’s famous growth­share matrix and its derivatives, this approach had led some to overemphasize choosing the “right” industry. This myopic focus on external factors ignored the importance of the unique resources of individual companies. In contrast, some popular tools and concepts primarily focused inward; examples included core competence, lean production, total quality management, and reengineering. The implication was that true advantage came from within, drawn from the internal skills, management, and operations of the business.

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Proponents of RBV sought to bridge the outward and inward approaches. RBV affirms that ownership of valuable resources is indeed the source of a company’s advantage—but the value of those resources can be determined only by external market forces. David Collis and Cynthia Montgomery of Harvard Business School state that the value of a resource lies in the interplay of three fundamental forces:37

1 Market demand: The resource enables customer demand to be met in a competitively superior way.

2 Scarcity: The resource is not easily imitated or substituted, and it is durable.

3 Appropriability: The resource and its profits are owned by the company.

Consider Toyota’s manufacturing quality, Google’s search algorithms, or Apple’s innovation and user­experience expertise. Those resources and capabilities lie behind the superior products and services that the market demands. Toyota is the standard­bearer for high­quality, reliable automobiles and is the global market leader. The market prefers Toyota products and is willing to pay a premium for them. The resources are also scarce, having been proven both durable and resilient to imitation. Bing, Yahoo!, and others have failed to dethrone Google as the leading search engine or to replicate the success of its revenue model. Finally, the rewards for these resources have been appropriated by the companies themselves, generating strong, sustainable financial returns. Apple’s rise to become the most valuable company in the world reflects its control over its own intellectual property, as well as the broader ecosystem it has created.

There are variants of the RBV theory. For example, the VRIO framework—an acronym for value, rarity, imitability and organization—evaluates the question of value, rarity, and imitability, and examines the organization.38 Regardless of the framework, the underlying thinking is the same. In either approach, the key to RBV is evaluating internal resources according to rigorous tests of the external environment.

Recall our definition of strategy in this reading as the integrated set of choices that positions the business in its industry so as to generate superior financial returns over the long run. Neither Blue Ocean Strategy nor RBV should be viewed as contradictory to this. In a sense, Blue Ocean Strategy is a more narrowly focused application of industry analysis. It takes structural industry forces and their impact on profitability as a given and helps managers shift industry lines to mitigate or avoid negative external factors. Similarly, the starting point of RBV is the company’s resources and capabilities—in essence, the critical elements within the business model that create a sustainable advantage. Indeed, the tests of a resource’s value can also be understood as the

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inverse of the six structural forces that shape the industry. A resource that passes the market demand test reduces customer power and blunts competitive rivalry. A scarce resource provides protection from new entrants and substitutes. A resource whose value is appropriable by the company ensures that profits are protected from suppliers and complementors. In conclusion, RBV and Blue Ocean Strategy may differ from our approach with regard to their respective areas of emphasis, but they are useful, complementary frameworks that can serve the strategist well.

This brings us to the question of who the strategist should be and how a successful strategy is developed. This is the issue raised by emergent strategy. Is the CEO the chief strategist? The executive team? A separate strategic planning department? Is strategy merely the result of good analysis or perhaps an annual brainstorming and planning exercise? In our discussions of strategy thus far, there is an implicit assumption that strategy is driven by objective analysis, planned in advance, and then executed by the organization according to the plan. The notion of making choices about the business model and positioning suggests a deliberative process, with decisions made to marshal the organization’s resources in order to capture a particular market.

Critics of that approach, notably Henry Mintzberg of McGill University and INSEAD, point to the chasm between centralized, formal planning and actual, realized strategy. Mintzberg challenges the assumption that any strategic planner can have the objectivity and foresight to develop the “right” strategy. Businesses often have elaborate, multiyear strategies that may be quickly rendered irrelevant by external events or may be completely divorced from what the organization actually does or should do. The alternate view is that strategy emerges from a process of experimentation, learning, and adaptation. It can come from learning at the front lines of the organization, rather than being decided on by the CEO or an “objective” strategic planner.39

A rational, deliberate strategy may seem to be the source of success. The Palm far outperformed Sony, Apple, Hewlett­Packard, and other electronics giants in the early years of personal digital assistants (PDAs).40 It is easy to impose a narrative in which insightful, comprehensive analysis led to a rational, successful plan. Yet dig deeper, and an honest account from management reveals the realities of on­the­fly learning, opportunistic adjustments, and even luck. Palm’s first attempt at a PDA was a dismal failure. The actual, realized strategy developed from a messy, unplanned process, as market feedback shaped management’s views and operational choices. Proponents of emergent strategy suggest that this is the right approach, and that it is more important to foster a learning, adaptive organization than to invest in deliberate strategic planning. Clayton Christensen of Harvard Business School particularly emphasizes the importance of allowing for an emergent strategy when innovating for an uncertain market. The organization that consciously chooses to learn and make course corrections can avoid sinking vast resources into a flawed strategy.41

In most organizations, strategy involves both planning and learning. Mintzberg states, “[S]trategy formation walks on two feet, one deliberate, the other emergent.”42 Analysis is still vital for shaping, catalyzing, and testing strategic thinking. Deliberation can help identify key opportunities or vulnerabilities as a starting point and help shape resourcing decisions, for

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example. Commitment to subsequent and ongoing learning from an emergent process leaves room for the necessary adjustments and adaptation. The capacity to manage both effectively may well be the key organizational factor behind the most successful strategies. 4 KEY TERMS

Blue Ocean Strategy A business’s creation of a new, uncontested market space that marginalizes competitors and creates new consumer value while decreasing costs.

competitive advantage A firm’s ability to create a large gap between the amount its customers are willing to pay and the costs it incurs. To create this advantage, a firm must perform activities more effectively or distinctively than its industry rivals.

complement A company in one industry that provides products or services that increase the value of the products or services of a company in another industry.

differentiation A strategy based on offering products or services that command a price premium because they are superior in quality, reliability, and/or prestige.

economic profit A company’s residual wealth, calculated by deducting the cost of capital from its operating profit. Also known as economic value added (EVA).

economies of scale The decline in the cost of production per unit as the volume grows.

economies of scope The decline in the cost of production due to the sharing of resources across products and services.

emergent strategy The view that a successful strategy is less the product of deliberation and planning than of the collision of intentions and reality, whether internal or external.

resource-based view The view that the development of a company’s resources and capabilities are the most effective basis of a successful strategy.

strategic positioning The means by which a manager situates a company relative to its competitors.

SWOT framework A theory that matches a company’s strengths against its weaknesses and its opportunities against its threats.

vertical integration A strategy in which a business takes over functions once provided by suppliers or customers.

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Bingham, Christopher B., Kathleen M. Eisenhardt, and Nathan R. Furr. “Which Strategy When?” MIT Sloan Management Review 53, no. 1 (Fall 2011): 71–78.

Brandenburger, Adam M., and Barry J. Nalebuff. Co­opetition. New York: Doubleday, 1996.

Burke, Andrew, Andrew van Stel, and Roy Thurik. “Blue Ocean vs. Five Forces.” Harvard Business Review 85, no. 5 (May 2010): 28.

Collis, David J. “Corporate Strategy: A Conceptual Framework.” HBS No. 391–284. Boston, MA: Harvard Business School, 1991 (revised 1995).

Collis, David J. “Scope of the Corporation.” HBS No. 795–139. Boston, MA: Harvard Business School, 1995.

Collis, David J., and Cynthia A. Montgomery. “Competing on Resources (HBR Classic).” Harvard Business Review 86, no. 7/8 (July–August 2008): 140–150.

Collis, David J., and Michael G. Rukstad. “Can You Say What Your Strategy Is?” Harvard Business Review 86, no. 4 (April 2008): 82–90.

Fréry, Frédéric. “Fundamental Dimensions of Strategy.” MIT Sloan Management Review 48, no. 1 (Fall 2006): 71–75.

Ghemawat, Pankaj. “Sustainable Advantage.” Harvard Business Review 64, no. 5 (September– October 1986): 53.

Grant, Robert M. “Resource­Based Theory of Competitive Advantage: Implication for Strategy Formulation.” California Management Review 33, no. 3 (Spring 1991): 114–135.

Greenwald, Bruce C., and Judd Khan. “All Strategy Is Local.” Harvard Business Review 83, no. 9 (September 2005): 94–104.

Kim, W. Chan, and Renée A. Maugborgne. “Creating New Market Space.” Harvard Business Review 77, no. 1 (January–February 1999): 83–93.

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Kim, W. Chan, and Renée A. Mauborgne. “Value Innovation: The Strategic Logic of High Growth (HBR OnPoint Enhanced Edition).” Harvard Business Review 82, no. 7/8 (July–August 2004): 172–180.

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Porter, Michael E. Competitive Strategy. New York: Free Press, 1980.

Porter, Michael E. “The Five Competitive Forces That Shape Strategy.” Harvard Business Review 86, no. 1 (January 2008): 78–93.

Porter, Michael E. “What Is Strategy?” Harvard Business Review 74, no. 6 (November– December 1996): 61–78.

Prahalad, C. K., and Gary Hamel. “Core Competence of the Corporation.” Harvard Business Review 68, no. 3 (May–June 1990): 79–91.

Rivkin, Jan W. “Options­Led Approach to Making Strategic Choices.” HBS No. 702–433. Boston, MA: Harvard Business School, 2006.

Wernerfelt, Birger. “A Resource­Based View of the Firm.” Strategic Management Journal 5, no 2 (April–June, 984): 171–180. 6 ENDNOTES

1 Carl von Clausewitz, On War (Book 3, Chapter 1), translated by Colonel J.J. Graham (London: Kegan Paul, Trench, Trubner and Co., 1908).

2 Pankaj Ghemawat, Strategy and the Business Landscape (Upper Saddle River, NJ: Prentice Hall, 2010).

3 Michael E. Porter, “What Is Strategy?” Harvard Business Review 74, no. 6 (November– December 1996): 61–78.

4 Pankaj Ghemawat and Gary P. Pisano, “Sustaining Superior Performance: Commitments and Capabilities,” HBS No. 798–008 (Boston: Harvard Business School, 1997).

5 Peter Bevelin, A Few Lessons For Investors and Management from Warren E. Buffett (Glendale, CA: PCA Publications L.L.C., 2012), p. 18.

6 Data and analysis from Dean Neese of Marakon/Trinsum, used in Pankaj Ghemawat, Strategy and the Business Landscape (Upper Saddle River, NJ: Prentice Hall, 2010).

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7 Michael E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review 57, no.2 (March–April 1979): 78–93.

8 Michael E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review 57, no.2 (March–April 1979): 78–93.

9 Adam Brandenburger and Barry J. Nalebuff, Co­opetition (New York, NY: Doubleday, 1996).

10 Ramon Casadesus­Masanell and David B. Yoffie,“Wintel: Cooperation and Conflict,” Management Science 53, no. 4 (April 2007): 584–598.

11 Alfred Khan, “Surprises of Airline Deregulation,” American Economic Review 78, no. 2 (May 1988): 316–322, as cited in Pankaj Ghemawat, Strategy and the Business Landscape (Upper Saddle River, NJ: Prentice Hall, 2010).

12 Pankaj Ghemawat, Strategy and the Business Landscape (Upper Saddle River, NJ: Prentice Hall, 2010).

13 Bruce Greenwald and Judd Kahn, Competition Demystified: A Radically Simplified Approach to Business Strategy (New York, NY: Penguin, 2005).

14 Richard Schmalensee, “Inter­Industry Studies of Structure and Performance,” in Handbook of Industrial Organization, eds. Richard Schmalensee and Robert D. Willig (Amsterdam: North Holland, 1989), as cited in Pankaj Ghemawat, Strategy and the Business Landscape (Upper Saddle River, NJ: Prentice Hall, 2010).

15 Jan W. Rivkin, “How Can a Strategist Analyze the Parts of a Firm’s Strategy? Advanced Competitive Strategy, Module Note for Students,” HBS No. 706–431 (Boston: Harvard Business School, 2006); Pankaj Ghemawat acknowledged the use of the landscape metaphor from evolutionary biology, especially Stuart A. Kauffman, The Origins of Order (New York, NY: Oxford University Press, 1993).

16 Jan W. Rivkin, “How Can a Strategist Analyze the Parts of a Firm’s Strategy? Advanced Competitive Strategy, Module Note for Students,” HBS No. 706–431 (Boston: Harvard Business School, 2006).

17 Daniel A. Levinthal, “Adaptation on Rugged Landscapes,” Management Science 43, no. 7 (July 1997): 934–950.

18 Ramon Casadesus­Masanell, “Competing Through Business Models, Course Overview Note for Instructors,” HBS No. 710–470 (Boston: Harvard Business School, 2010).

19 Michael E. Porter, Competitive Strategy (New York, NY: Free Press, 1980).

20 Pankaj Ghemawat and Jan W. Rivkin, “Creating Competitive Advantage,” HBS No. 798– 062 (Boston: Harvard Business School, 1998).

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21 Joan Magretta, “Why Business Models Matter,” Harvard Business Review 80, no 5 (May 2002): 86–92.

22 Michael E. Porter, “What Is Strategy?” Harvard Business Review 74, no. 6 (November– December 1996): 61–78.

23 W. Chan Kim and Renée Mauborgne, “Blue Ocean Strategy,” Harvard Business Review 82, no. 10 (October 2004): 76–84.

24 Ramon Casadesus­Masanell and Maxime Aucoin, “Cirque du Soleil—The High­Wire Act of Building Sustainable Partnerships,” HBS No. 709–411 (Boston: Harvard Business School, 2010).

25 Adam M. Brandenburger and Barry J. Nalebuff, Co­opetition (New York, NY: Doubleday, 1996).

26 Meghan Busse, Jeroen Swinkels, and Greg Merkley, “Enterprise Rent­A­Car,” HBS No. KEL612 (Evanston: Kellogg School of Management, 2012).

27 Clayton M. Christensen, The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business (New York, NY: HarperBusiness, 2011).

28 Christopher H. Lovelock, “Federal Express: Early History,” HBS No. 804–095 (Boston: Harvard Business School, 2004).

29 Ramon Casadesus­Masanell et al., “Two Ways to Fly South: Lan Airlines and Southwest Airlines,” HBS No. 707–414 (Boston: Harvard Business School, 2010).

30 Jan W. Rivkin, “Dogfight over Europe: Ryanair (C),” HBS No. 700–117 (Boston: Harvard Business, 2006).

31 David W. Hoyt et al, “JetBlue Airways: A New Beginning,” HBS No. L17 (Stanford: Stanford Graduate School of Business, 2010).

32 Pankaj Ghemawat, “Sustainable Advantage,” Harvard Business Review 64, no. 5 (September–October 1986): 53–58.

33 Pankaj Ghemawat, Strategy and the Business Landscape (Upper Saddle River, NJ: Prentice Hall, 2010).

34 Ramon Casadesus­Masanell, David B. Yoffie, and Sasha Mattu, “Intel Corporation: 1968– 2003,” HBS No. 703–427 (Boston: Harvard Business School, 2010).

35 W. Chan Kim and Renée Mauborgne, “Blue Ocean Strategy,” Harvard Business Review 82, no. 10 (October 2004): 76–84.

36 Robert M. Grant, “The Resource­Based Theory of Competitive Advantage: Implications for Strategy Formulation,” California Management Review 33, no. 3 (Spring 1991): 114–

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135.

37 David J. Collis and Cynthia A. Montgomery, “Competing on Resources (HBR Classic),” Harvard Business Review 86, no. 7/8 (July–August 2008): 140–150.

38 Jay B. Barney and William S. Hesterly, Strategic Management and Competitive Advantage: Concepts and Cases (Upper Saddle River, NJ: Prentice­Hall, 2005).

39 Henry Mintzberg, The Rise and Fall of Strategic Planning (Upper Saddle River, NJ:Prentice Hall, 1994).

40 Scott D. Anthony et al., “Mastering Emergent Strategies: Taking Uncertain Ideas Forward,” in Innovator’s Guide to Growth: Putting Disruptive Innovation to Work (Boston: Harvard Business School Press, 2008).

41 Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth (Boston, MA: Harvard Business School Press, 2003).

42 Henry Mintzberg and James A. Waters, “Of Strategies, Deliberate and Emergent,” Strategic Management Journal 6, no. 3 (July–September 1985): 257–272. FOOTNOTES

a The author thanks Professor Jan W. Rivkin for this definition.

b It should be noted that Porter’s original framework posited only the first five forces. The sixth force, complements, was an important and subsequent refinement by Adam Brandenburger and Barry Nalebuff.

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