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Strategy and Competitive Analysis Learning Series:

What is Strategy?

Course Script

IMA Strategy and Competitive Analysis Learning Series®

Course 3:

Creating Competitive Advantage at the Business and Functional Levels

Copyright © 2018 IMA® (Institute of Management Accountants). All rights reserved. 2 Last updated: 4/9/2018

INTRODUCTION Screen # Screen title Script Welcome

Welcome Welcome to Course 3: Creating Competitive Advantage at the Business and Functional Levels. This course is a part of IMA’s Strategy and Competitive Analysis Learning Series. You can learn more about the structure of this learning series by clicking the “Series Overview” tab at the top right of the screen. In Courses 1 and 2, we introduced the strategic planning process and some analytical tools used to perform an environmental scan of an organization’s internal and external environment. The goal of Course 3 is to explore the fundamentals of competitive advantage and to consider some specific business- and functional-level strategies. This course consists of five lessons:

• Lesson 1: Strategic Planning Recap • Lesson 2: What Is Competitive Advantage? • Lesson 3: Business-Level Strategies • Lesson 4: Functional-Level Strategies • Lesson 5: Summary and Final Assessment

We recommend that you complete the lessons in sequential order for the optimal learning experience. To proceed to the course, select “Instructions” or the chess piece that corresponds to the lesson you would like to begin. For an overview on how to best prepare for the CSCA exam, select “How to Study.”


Series Overview

Series Overview The IMA Strategy and Competitive Analysis Learning Series® is comprised of three modules and 14 topics as shown in this diagram, which aligns with ICMA's Content Specification Outline for the Certified in Strategy and Competitive Analysis (CSCA) credential. We will explore this diagram in more detail in Lesson 1 of this course. Use the buttons on the left for an outline of topics covered in each course and for an overview of the Practice Question Bank. We recommend that you complete the courses in sequential order for an optimal learning experience.


INSTRUCTIONS Preparing to Learn

Preparing to Learn

Let’s take a look at what you need to know before you get started on this course. To begin, you can work through the lessons at your own pace either in one sitting, or you can complete some of the course and return at a later time to continue where you left off. Upon completing the course, you’ll earn NASBA CPE credits.

Audio Audio This course has audio and video components. In the left-hand corner of the slide, you can adjust the volume of the presentation audio. If you want to read the notes without listening to the voice-over, you can drag the volume controls down to the lowest level. The screen-by-screen transcript can be accessed from the “Script” tab (below the IMA® logo on the left).

Navigation

Navigation

Now let’s look at how you’ll navigate through the course. There are navigation buttons at the bottom of the screen to help you do this. The Previous and Next buttons to the right of the slide provide the ability to move forward and backward through the lesson. The progress bar includes a Pause/Play button that allows you to control the audio and animations on the screen. You can also use the Replay button to restart the screen from the beginning. You may navigate directly to a specific screen by using the “Menu” tab on the left.

Resources

Resources

Use the “Glossary” tab to look up terms. Use the “Resources” tab to access reading materials and supplemental documents for this course. You can view or print all items in the “Resources” tab including:

• the IMA Strategy and Competitive Analysis Learning Series® Course Roadmap and Overview,

• the course script, which can be used to take notes


as you progress through this course, • the IECJ Western Cabinets case study, • suggested answers for Course 3 exercises 2.5 &

2.6, • the CSCA Ratio & Formula Definitions, • a glossary that includes all terms in this learning

series, • printable flashcards of glossary terms, • a course details document, • instructions for the Practice Question Bank, and • a “How to Prepare for the CSCA Exam” summary.

All documents in the “Resources” tab are attachments in the course and will open in a new browser window. Be sure to navigate back to the current browser window to return to where you left off in the course. Your progress will not be lost by opening a document from the “Resources” tab.

Interactions

Interactions

Throughout the course, you will encounter pushpin and magnifying glass icons like these. Selecting pushpins will display additional information related to the current topic. Selecting the magnifying glass will enlarge images when available.

Requirements

Requirements

Course requirements include:

• Completing all Knowledge Check questions, which are included at the conclusion of each lesson. The purpose of these Knowledge Check questions is to assess your understanding of the material. You must complete all Knowledge Check questions before taking the Final Assessment.

• Passing the Final Assessment with a 70% or higher, in order to earn NASBA CPE credits. The Final Assessment is based on content found in all lessons.

• After passing the Final Assessment, you can access and print your Certificate of Completion.

• You have two years to complete this course.


LESSON 1: Strategic Planning Recap

1.1 IMA Strategy and Competitive Analysis Learning Series®

As noted in the “Series Overview” tab, this diagram is a graphical representation of the three sections and 14 topics covered in the CSCA® Content Specification Outline (CSO). We will use it as a roadmap as we proceed through the courses in this learning series. In Module A, we explored strategic analysis and looked at the strategic process from both the external perspective (environmental scanning) and the internal perspective (internal analysis). In Module B, we’ll focus on competitive advantage from the business, functional, corporate, and global perspectives and explore how these viewpoints together can sustain competitive advantage. In Module C, we’ll focus on strategic alternatives, risk management, strategic implementation, strategic measurement and governance, social responsibility, and ethics.

1.2 This Course Course 3 is titled “Creating Competitive Advantage at the Business and Functional Levels.” The goal of this course is to explore the fundamentals of competitive advantage and to consider various business and functional level strategies, which can be considered the front line of strategy. We will move on to exploring higher-level strategy in corporate and global contexts and sustaining competitive advantage in Course 4 of this learning series. It is important to note that the sequence of the strategies considered may differ depending on the size and focus of the organization.

1.3 Course Learning Objectives

Upon completion of this course, you will be able to:

• Demonstrate an understanding of competitive advantage.

• Identify the cost leadership and product/service differentiation strategies of achieving competitive


advantage.

• Explain the importance of core and differentiated competencies and how they can lead to a sustained competitive advantage.

• Describe key business-level strategies and how they are used to improve a company’s competitive position.

• Recognize how operational excellence, quality optimization, technology, and innovation can be used to develop an effective functional-level strategy.

1.4 Acknowledgements IMA would like to acknowledge the sources listed for the contributions made to the development of this course: The New York Center for Strategic Innovation LLC, Frank Mruk, Bonnie Budd, and Sarah Smith. The IMA Strategy and Competitive Analysis Learning Series® references numerous IMA resources, which are listed under the “Resources” tab of this course. IMA would like to also thank all of the authors of these materials.

1.5 Course Resources In order to fully understand the course content, you must read the following: • For Lesson 1, the IMA Educational Case Journal

(IECJ) case study “Western Cabinets: Building a Cabinet or Building a Transformation?” by clicking the “Resource” tab.

And the following articles from HBR’s 10 Must Reads on Strategy: • For Lesson 3: The “Idea in Brief” and “Idea in

Practice” sections of the articles “Blue Ocean Strategy” (pp. 125-127 and 130-132) by W. Chan Kim and Renee Mauborgne, and “Reinventing Your Business Model” (pp. 105-107 and 110) by Mark Johnson, Clayton Christensen, and Henning Kagermann.

The case study is accessible from the “Resources” tab. You can view or print all items in the “Resources” tab including the course script, which can be used for note-taking purposes, as well as other helpful documents.


1.6 Review of Key Topics

Let’s review some key topics covered in prior courses of this learning series. In Module A, we explored the components of strategic planning, such as:

• What strategy is, • The strategic management system, and • The building blocks of strategy.

We also considered environmental scanning in terms of:

• Micro and macro environment, • Competitive market analysis, and • Analytical tools such as PESTEL, Porter’s Five

Forces, and Gap analysis.

Finally, we covered internal analysis, including:

• Core and differentiated competencies of a firm, • The value chain, and • The process of identifying strengths and

weaknesses.

All of this analysis leads to strategy formulation, which helps answer the question “How do we get there?” During this phase, a firm develops its strategies for creating competitive advantage at the business, functional, corporate, and global levels. All of these topics will be covered in Module B; in this course, we will focus on the business and functional levels. First, let’s move to some exercises that encompass some of the important concepts covered in prior courses. After you have read the IMA IECJ case study “Western Cabinets: Building a Cabinet or Building a Transformation?” click “Next” to proceed.

1.7 Western Cabinets

Case Study: Mission and Vision

As you will recall from the case, Western Cabinets’ mission is to create superior cabinetry, provide excellent customer service, and foster employee success. Its vision is to be the most respected cabinet manufacturer in North America. It states, “We will create cabinetry that our customers will be proud to have in their


homes. Our team will realize these goals in an environment that promotes integrity and rewards hard work and dedication.”

1.8 Exercise 1.1 Leveraging your knowledge of the environmental scan from Course 2, what are some of Western Cabinets’ environmental threats? List four of them in the text box below. Once you have listed your answers, click the pushpin to compare your answers.

1.9 Exercise 1.2 What are some of Western Cabinets' internal scan results? Describe four of its strengths and weaknesses below.

1.10 Exercise 1.3 In Course 2, we spent time discussing Porter’s Five Forces in depth. Choose whether each force is high or low as the model relates to the Western Cabinets’ case. Click high or low for each of Porter’s Five Forces in the diagram below, and then click “Submit.”

1.11 Reflection: Western Cabinets Case Study

It can be said that there is lack of clarity regarding the purpose of the Western Cabinets organization as well as the policies, procedures, and controls put in place. Do you think that is true, and why?

Think about your organization.

• Is there a lack of clarity regarding the purpose of your organization?

• Are strong policies, procedures, and controls in place?

• Where are there possible opportunities for improvement?

When you are ready, click “Next” to proceed to Lesson 2.


LESSON 2: What is Competitive Advantage?

2.1 Welcome to Lesson 2

Welcome to Lesson 2: What Is Competitive Advantage? In this lesson, you will learn how to:

• Define competitive advantage.

• Recognize two main approaches a company can take to achieve competitive advantage: low cost and differentiation.

• Describe additional approaches of achieving competitive advantage.

• Identify ways to assess activities leading to competitive advantage using value chain analysis.

2.2 What Is Competitive Advantage?

What is competitive advantage? According to IMA’s Statement on Management Accounting Value Chain Analysis for Assessing Competitive Advantage, "A firm's overall competitive advantage derives from the difference between the value it offers to customers and its cost of creating that customer value." Competitive advantage is an edge an organization creates in relation to competitors when it can provide the same value as its competitors but at a lower price, or when it can charge higher prices by providing greater value through differentiation. When a firm is able to match its core competencies with opportunities, competitive advantage can be achieved. This advantage allows the organization to generate greater sales or margins and/or retain more customers than its competition and may be the result of access to highly skilled personnel, superior technology, natural resources (such as high-grade ores or inexpensive power), optimal geographic location, or high entry barriers for other organizations to attain.

2.3 Cost Leadership vs. Differentiation

In the context of achieving competitive advantage, there are two overarching fundamental strategies a company must decide on: cost leadership and differentiation. How can a company decide which position to pursue?


Select the tabs above to learn about models that can be used to help a company make this decision.

2.3 a Generic Strategies Michael Porter’s Generic Strategies Let’s take a look at Michael Porter’s Generic Strategies model to help answer how companies can decide which positions to pursue. Click on each section of the diagram to learn more.

2.3 a-1 Cost Leadership Cost leadership occurs when a company can sell a product at a lower price than its competitors due to its ability to design, produce, and market a product more efficiently. A cost leadership strategy focuses on achieving a competitive advantage by having the lowest cost.

2.3 a-2 Differentiation Differentiation occurs when a company provides a unique and superior value in terms of quality, special features, or customer service. Differentiation can be divided into three categories: product innovation, marketing, and identity management. This strategy is implemented successfully when the product leads to strong brand loyalty and a higher barrier to entry for competitors.

2.3 a-3 Focus A generic strategy reflects the choices made regarding both the type of competitive advantage (low cost or differentiation) and the scope (narrow or broad). A company can choose one of two types of scope, either focus or industry-wide. Focus is when a company offers its products to selected segments of the market instead of the entire market.

2.3 a-4 Stuck in the Middle Stuck in the Middle: An additional element of the model is known as “stuck in the middle,” in which organizations fail to gain competitive advantage through low cost or superior differentiation, or both. For example, several U.S. bicycle makers (including Schwinn, Huffy, Murray, and Columbia) found themselves in this position during the 1980s. These companies lacked a cost advantage strategy and failed to foresee a differentiation opportunity


of the emerging mountain bike market. By contrast, Cannondale Bicycles captured market share after introducing its large-diameter frame mountain bicycle, reflecting a strong differentiation strategy approach.

2.3 b Examples Let’s look at some examples. Cost leadership: Home Depot, Walmart, and Redbox skillfully execute the economies of scale (efficiencies formed by volume) and economies of scope (efficiencies formed by variety) to offer highly standardized products, using technology to increase efficiencies across the value chain. Redbox is a company that focuses its cost leadership position in a niche market of DVD renters, by allowing customers to rent DVDs for only $1. Differentiation: Netflix, Ralph Lauren, and Cinnabon all demonstrate differentiation strategies. Differentiation often consists of two components: how firms differentiate themselves from their competition, and how they differentiate themselves in their customers’ mind. Netflix's strategy uses technology to increase efficiencies across the value chain and differentiate itself from its competition by selling online streaming or DVD rentals without a return date. Ralph Lauren's strategy is to differentiate itself in its customers’ mind by selling high-end fashion based on classic American style. Cinnabon uses a focused differentiation strategy by selling a limited variety of high-quality, indulgent pastries that taste homemade.

2.3 c Expanded Version Expanded versions of the Generic Strategies model: Since Porter’s Generic Strategies model was published, several expanded versions of the model were developed. These versions change the “stuck in the middle” scenario to a more positive hybrid “best value scenario” (i.e., both differentiator and a cost provider). In this model:

• A broad low-cost provider strategy strives to produce lower overall costs than the competition on similar products that attract a broad spectrum


of buyers usually by underpricing rivals. • A broad differentiation strategy strives to

differentiate product offerings from rivals through unique attributes that appeal to a large cross-section of buyers.

• A focused low-cost strategy concentrates on a narrow buyer segment outcompeting rivals on costs.

• A focused differentiation strategy concentrates on a narrow buyer segment outperforming rivals on customized attributes.

In this model, a best-value-provider strategy gives customers more value for their money by satisfying buyers via unique attributes and low cost. It is a hybrid strategy.

2.4 Ideas to Create a Differentiated Strategy

Porter’s Generic Strategies model highlights differentiation as one way to achieve competitive advantage. There are many ways an organization can differentiate itself from its competitors. The article “Find Your Differentiator: 21 Ways to Gain a Competitive Advantage for Your Firm,” by Lee Frederiksen lists 21 ways to gain a competitive advantage for your firm with differentiation. Click the pushpin to read the strategies, then click “Next” to proceed to an exercise on low-cost and differentiation.

2.5 Exercise 2.1 Let’s look at IKEA, the Scandinavian chain selling ready-to-assemble furniture as well as housewares in a warehouse-like space, to assess its strategy in the market. The company is known for its modern designs and is often associated with eco-friendly simplicity. IKEA’s vision and mission is: “At IKEA our vision is to create a better everyday life for the many people. Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.”


Based on IKEA’s vision and mission, does IKEA mainly compete by cost leadership or differentiation?

2.6 Exercise 2.2 While IKEA competes mainly by being a low cost provider, it also leverages differentiation strategies to compete in the market. Which of IKEA’s key competitive advantage points are based on differentiation? Drag the correct answer to the differentiation box.

2.7 Value Chain: Low Cost Strategies

As you will recall from Course 2 of this learning series, this is Porter’s Value Chain model, which is one of many ways to represent a firm’s value chain. We will use this diagram to show how firms can leverage their value chain process to achieve competitive advantage. Let’s expand on this concept by reviewing a low-cost strategy in each of the primary and support activities of the value chain.

For primary activities, low-cost strategies include the following approaches along the value chain:

• Inbound Logistics: Efficient localized proximity with suppliers.

• Operations: Efficient plant scale to minimize manufacturing costs and timing of purchases.

• Outbound Logistics: Delivery scheduled to reduce costs, low-cost transportation, and efficient order sizes. Marketing and Sales: Small highly trained sales force and national advertising.

• Service: Low-cost strategies include effective product installers and reduction of service calls.


For support activities, low-cost strategies include the following approaches along the value chain:

• Procurement: Systemic low-cost procurement procedures, evaluation, and feedback loops.

• Technology Development: Optimized

technology to reduce costs.

• Human Resource Management: Policies to reduce turnover cost, such as training programs, to improve efficiency and performance.

• Firm Infrastructure: Efficient and aligned strategic management and flat organization structure to reduce overhead.

When low-cost strategies are cascaded from the very top of the organization to the value-chain level, resulting in a holistic application of strategy throughout the organization, competitive advantage can be achieved. Now let’s look at a specific example.

2.8 The Value Chain: Low-Cost Example (IKEA)

Many of the strategies IKEA employs are in a low-cost context, such as:

• Inbound Logistics: IKEA employs in-store personnel to handle inventory management.

• Operations: IKEA reduces cost in the process of moving, shipping, and loading of products by designing packaging sizes and product configurations to efficiently maximize container and truck cargo space utilization.

• Outbound Logistics: Customers, not employees, transport products to their final destination (customers select the furniture and take it to their cars themselves). Marketing and Sales: IKEA targets families with lower income, students, and singles.


• Services: IKEA has very limited customer service and a very small number of sales assistants in its stores.

Now let's move to differentiation strategies for the value chain.

2.9 Value Chain: Differentiation

We will now examine differentiation strategies as they relate to the value chain by focusing on each of the primary and support activities. Competitive advantage, which relies on differentiation, demands specific interventions in the value chain.

Starting with the primary activities, some examples of differentiation might include:

• Inbound Logistics: Consistent focus on quality improvement and on minimizing damage.

• Operations: Focused on superior quality or unique attributes.

• Outbound Logistics: Rapid, timely, and customized.

• Marketing and Sales: Premium pricing and strong connection between research and development, and marketing.

• Service: Superior customer service over and above the norm.

Some examples of support activities might include: • Firm Infrastructure: Organization focused on the

customer and on customer preferences and high quality.

• Human Resource Management: Policies to encourage creativity and innovation.

• Technology Development: Research and development is oriented to unique and innovative products and features.

• Procurement: Focus on specialized niche.


2.10 The Value Chain: Differentiation Example (Apple)

Now let’s look at a value chain differentiation example for Apple, starting with primary activities:

• Inbound Logistics: Apple maintains a highly sophisticated supply-chain management.

• Operations: Apple’s hardware products are outsourced and manufactured by partners around the world. Outbound logistics: Apple has unique, well-designed, functional, and streamlined packaging.

• Marketing and Sales: Apple sells its products and services online, in retail stores, through a direct sales force, and through third-party wholesalers. Apple’s retail stores are designed to place emphasis on having helpful employees rather than “salespeople” trying to sell products.

• Service: Apple is famous for its customer service. The company maintains experience centers in major cities around the globe where the level of quality of products and services is on display.

Moving on to support activities: • Firm Infrastructure: Apple’s firm infrastructure is

orientated to high-quality customers and their preferences.

• Human Resource Management: HR policies are oriented to recruit the most qualified programmers and designers.

• Technology Development: Technology development is orientated around exceptional design and innovation.

• Procurement: Focuses on contracting with high-quality vendors.

2.11 Reminder of Resources

The exercises on the upcoming slides are based on the IECJ case study “Western Cabinets: Building a Cabinet or Building a Transformation?” Click “Next” to proceed to the exercises related to the critical concepts we covered in this lesson.


2.12 Exercise 2.3 The new CEO, Mr. Smith, is rethinking the company from a traditional “low-cost vs. differentiation” strategic decision. For Western Cabinets, determine where the company currently stands in terms of its product strategy. Does Western Cabinets have a differentiation strategy, low-cost strategy, or both, or is it stuck in the middle? Click on the box that best describes the strategic position of Western Cabinets.

2.13 Exercise 2.4 Now think about how Western Cabinets might strategize to determine long-term objectives, key success factors, and management control variables around differentiation, cost leadership, or differentiation/cost leadership perspectives. Click on the respective box to view the key success factors and management control under each strategy.

2.14 Exercise 2.5 What might you do to focus the company on a cost leadership orientation in its value chain approach? For each of these activities, consider relevant functions and type your thoughts in each of the activity boxes. Note: There is no perfect answer to this question, as it is difficult to predict the future. Therefore, a strategist needs a line of logic to back up his or her assumptions. Click the pushpin to see how these answers compare with yours.

2.15 Exercise 2.6 Now let’s take another moment to consider activity examples for each step of Western Cabinets’ value chain if its strategy was to focus on a differentiation orientation. Remember: There is no perfect answer to this question, as it is difficult to predict the future. Even so, a strategist needs a line of logic to back up his or her assumptions. Click the pushpin to see how these answers compare with yours.


2.16 Reflection: Western Cabinets Wrap-Up

Take a moment to think about the Western Cabinets case study, and consider which competitive advantage strategy you would recommend the CEO choose.

• Servicing the few needs of many customers. • Servicing the broad needs of few customers. • Servicing the broad needs of many customers in a

narrow market. Thinking through strategy this way is a pathway to competitive advantage. Think about these exercises in the context of your organization. What changes would you make?

2.17 Core Competencies Revisited

In order to choose the best strategy to achieve competitive advantage, an organization must first identify its core and differentiated competencies. As you will recall from Course 2, we explored that a core competency can be identified by the following tests:

• Can it be leveraged? Does it provide potential access to a wide variety of markets?

• Does it enhance customer value? Does it make a significant contribution to the perceived customer benefits of the end product?

• Can it be imitated? Does it reduce the threat of imitation by competitors?

Once an organization has identified its core competencies, it is then able to distinguish the subset that makes up its differentiated competencies, which can be a key pathway for an organization to achieve competitive advantage.

2.18 Differentiated (Distinctive) Competencies

Differentiated, or distinctive, competencies are competitively valuable activities that a company performs better than its rivals. Distinctive competencies help companies differentiate themselves from rivals.

2.19 Differentiated Competencies: Examples

Differentiation is often achieved through high-quality special features, superior customer service, rapid product innovation, advanced technological features, and/or image management. Click the pushpin to see examples of some companies that differentiate themselves.


2.20 Absolute Cost Advantage

In economics, the principle of absolute cost advantage refers to the ability of an organization to produce a good, product, or service in greater quantity than its competitors, using the same amount of resources but at a lower cost. In some cases differentiated competencies lead to an absolute cost advantage. For example, Walmart’s strong logistics capabilities, with an emphasis on efficiency and cost, give it an advantage over its competitors.

2.21 Differentiated Competencies: Barriers to Imitation

A company with a competitive advantage will earn higher-than-average profits. But businesses need to protect their advantage because success in the market is often quickly imitated. Barriers to imitation are the obstacles that prevent new competitors from easily entering an industry or area of business. Differentiated competencies can help set up barriers to imitation or defer competition from catching up. These barriers can be resource-based or capability-based. We will introduce the concept in this lesson and then expand on it in Course 4 of this learning series. Examples of resource-based barriers include a natural monopoly (such as Debeers with diamonds) or patents (such as Merck with prescription drugs). Capability-based examples include cost advantages through high-volume value innovation (such as the Apple iPhone), network externalities through a large customer base (such as Ebay), culture (such as Disney), and real-estate development (such as McDonalds).

2.22 Lesson 2: Concluding Thoughts

In this lesson, we learned that competitive advantage is the advantage a firm has over its competitors. The two main approaches firms can use to establish competitive advantage are low-cost and differentiation. We also saw how Michael Porter's Generic Strategies model can be used to assess which strategy a firm should choose by helping answer: • Should a firm compete in head-to-head competition

based on low cost? Or


• Should it differentiate its products or services via a niche?

We also explored various strategies that organizations could employ throughout the value chain to help achieve a differentiated and/or low-cost competitive advantage. The overall purpose of strategic planning is to achieve sustained competitive advantage. This lesson gave a high-level overview of creating competitive advantage. In subsequent lessons, we will look at specific strategies firms can implement to achieve and sustain competitive advantage at various levels.

2.23 Lesson 2: Knowledge Check

Now it’s time to check your knowledge by answering a few questions about this lesson. When you’re ready to begin the quiz, click the “Next” button.


LESSON 3: Business- Level Strategies


Welcome to Lesson 3: Business-Level Strategies. As mentioned in Lesson 1, this course will examine specific business- and functional-level strategies relating to creating competitive advantage. In this lesson, you will learn to:

• Define and understand the importance of business-level strategies.

• Identify how they are directly linked to mission and vision.

• Define the two main categories: competitive and cooperative.

Now we will cover some of the key strategies that businesses need to implement in order to determine which products or services to offer and how to create value for customers.

3.2 Reminder of Resources

If you haven’t already done so, read the “Idea in Brief” and “Idea in Practice” sections for the articles “Reinventing Your Business Model” (pp. 105-107 and 110) and “Blue Ocean Strategy” (pp. 125-127 and 130-132).

3.3 Strategic Aim of Business

Strategy is directly linked to mission and vision and answers the question “How will we achieve our vision?” The focus of business-level strategies is to improve a company’s competitive position and to sustain competitive advantage. In the book Strategic Management: An Integrated Approach, authors Charles W. L. Hill and Gareth R. Jones define business-level strategies as those “which [encompass] the business’s overall competitive theme, the way it positions itself in the marketplace to gain a competitive advantage, and the different positioning strategies that can be used in different industry settings—for example, cost leadership, differentiation, focusing on a particular niche or segment of the industry,


or some combination of these.” A firm’s resources and capabilities help establish their differentiated competencies, which in turn help formulate business strategy. Business-level strategies include the various competitive and cooperative strategies that feed into a business model.

3.4 Hierarchy of Strategies

Most often, a hierarchy of strategies exists in organizations; each with a separate purpose. This hierarchy typically flows from the top down,

• from corporate strategy, which is about the overall direction of the organization and management of its businesses,

• to business strategy, which is about competitive and cooperative business strategies, and

• to functional strategies, which is about maximizing resource productivity.

The size of the company often affects the hierarchy (for example, smaller companies may not have multiple businesses). This lesson will focus on the business-level strategies, Lesson 4 will focus on functional-level strategies, and Course 4 will explore corporate- and global-level strategies.

3.5 Business Level Strategy Approaches

Business strategies may fit within two overall categories: competitive and cooperative strategies. Competitive Strategy enables competition with rivals. An example is the office supply company Staples, which has added copying, UPS shipping, and mobile technicians, who can fix computers and install networks, to differentiate itself from its competition. Cooperative Strategy enables cooperation with rivals. An example is Intel, which has formed an alliance with Microsoft to differentiate from Advanced Micro Devices (AMD), its primary competitor. Some corporations may choose to do both simultaneously. This is called coopetition. These firms


may cooperate to obtain efficiency in some areas, while competing in other areas. Examples include the successful collaboration of Nolan Group and Sony to jointly produce augmented reality motorcycle helmets and the collaboration of Ford and Toyota to develop a new hybrid vehicle. Click the pushpin to see examples of coopetition.

3.6 Competitive Advantage Frameworks

There are a variety of approaches to use when determining strategies for competing in the marketplace. Some key competitive strategies include: - Market segmentation - Pricing as a strategic lever - New product and new market development - Innovation - Blue Ocean Strategy Some key cooperative strategies include: - Value chain partnerships - Licensing - Franchising - Strategic alliance - Joint venture

3.7 Competitive Strategies: Market Segmentation

Let’s begin our review of competitive strategies with market segmentation. Market segmentation is a business strategy for dividing a market into groups, or segments, based on different characteristics. A market segment can include a group of consumers who share similar interests, needs, or geographic locations. There are a variety of methods to segment a firm’s customer base. Click the tabs to explore some of the more common methods.

3.7 a Geographic Segmentation

Geographic Segmentation is when a business divides its market on the basis of geography. Geographic segmentation often includes variables such as climate,


population density, or state boundaries. Click the pushpin for an example.

3.7 b Demographic Segmentation

Demographic Segmentation is based on differences in socio-economic factors of consumers. Demographic segmentation includes variables such as age, income, gender, ethnic background, religion, and stage in life. Click the pushpin for an example.

3.7 c Psychographic Segmentation

Psychographic Segmentation is a method of defining groups of consumers according to factors such as their preferences for leisure activities or for what they value. Psychographic segmentation includes variables based on consumers’ personalities, motives, passions, and lifestyles. Click the pushpin for an example.

3.7 d Behavioral Segmentation

Behavioral Segmentation is a type of market segmentation based on differences in consumption behavior. Behavioral segmentation includes variables based on knowledge, preconceptions, attitudes, and uses of and responses to a product. Click the pushpin for examples.

3.8 Pricing as a Strategic Lever

Another competitive strategy is using pricing as a strategic lever. Strategies that help companies manage price competition are:

• Price signaling, • Price leadership, • Non-price competition, and • Capacity control.

Click each tab to learn more about these strategies.

3.8 a Price Signaling Price Signaling is the process that companies use to increase or decrease product prices to convey their intentions to other companies and influence the way these competitors price their products. Companies may use price signaling to announce that they will vigorously respond to hostile competitive moves that threaten them.


For example, they may signal that an aggressive move to cut prices will be met in kind.

3.8 b Price leadership Price leadership is more common in industries that are dominated by a small number of sellers (oligopolies), such as in the airline industry. As cited in the Strategic Management textbook by Hill and Jones, “Price leadership is when one company assumes the responsibility for setting the pricing option that maximizes industry profitability, that company assumes the position as price leader. Formal price leadership, or when companies jointly set prices, is illegal in the U.S. under antitrust laws; therefore, the process of price leadership is often very subtle.”

3.8 c Nonprice Competition

Nonprice competition is a strategy typically used in mature industries in which a firm uses differentiation of products or services to distinguish itself from competitors on the basis of attributes like design and quality. Nonprice competition also uses tactics other than price, such as free products and free shipping, to manage rivalry within an industry.

3.8 d Capacity Control Capacity Control helps mature industries avoid very aggressive price competition. For example, the airline industry can increase capacity by increasing the number of seats or decrease capacity by reducing the number of flights available to raise rates. Capacity control is the management of resources so that utilization approaches the maximum possible without straining the whole system.

3.9 New Product and New Market Development

New product and new market development can create significant differentiation for organizations. Approaches to achieving differentiation and growing market share include:

• Leveraging brand • Understanding the impact of fragmented vs.

consolidated industries • Understanding the impact of industry life cycle

stage Click on the tabs to learn more.


3.9 a Leveraging Brand Leveraging brand is a brand-leveraging strategy takes advantage of its existing brand power to support the company’s entry into a new market. Companies can influence purchasing decisions of consumers by exploiting their pre-established reputation of a brand’s level of quality. By consistently relating this knowledge to new products carrying the familiar brand, consumers can have a sense of familiarity and are more likely to make a purchase. To see an example, click the pushpin.

3.9 b Fragmented vs. Consolidated Industries

Fragmented vs. Consolidated Another new product and/or new market consideration involves firms being aware of which market they are competing in: that of a fragmented market, where firms compete by price, or that of a consolidated industry, where firms compete by differentiation. For example, a fragmented industry is “where no firm has a large market share and each firm serves only a small piece of the total market in competition with others. As new competitors enter the industry, prices drop as a result of competition.” In contrast, a consolidated industry “is dominated by a few large firms, each of which struggles to differentiate its products from the competition.” The major home appliance industry is an example of a mature, consolidated industry that is controlled by a few major competitors. The impact of this structure is that consumers become smarter when it comes to shopping and making purchasing decisions based on better information that can be obtained on the internet. Knowledge of this information provides much input to the product strategy employed at the business level. Click on the pushpins for examples.


3.9 c Impact of Industry Life Cycle

Impact of Industry Life Cycle Taking this one step further, organizations need to understand what stage their product or industry falls in and how they are impacted by the industry life cycle. As previously discussed in Course 2, understanding the impact of industry life cycle stage is important. Sales typically begin slowly at the introduction phase, and then take off rapidly during the growth phase. After leveling out at the shakeout and maturity phases, sales then begin a gradual decline.

3.10 Innovation Strategy Now let’s look at innovation as a business-level strategy. As markets grow increasingly unpredictable and value propositions need to evolve, innovation isn’t just a buzzword with a hashtag; it’s a lifeline for any business that wants to sustain its value. Let’s begin this topic by examining the differences between an idea, an invention, and an innovation. An idea is defined as a formed thought or opinion. An invention is a unique or novel method, composition, or process. It may also be an improvement. Ideas aren’t patentable, but inventions are. Innovation can refer to something new or to a change made to an existing product, idea, or field. When talking about value innovations, the first telephone was considered an invention, the first cellular telephone was considered either an invention or an innovation, and the first smartphone was considered an innovation. Patrick Stroh, author of Advancing Innovation, suggests that “innovation can be defined and measured by the value we create along the way for our customers and stakeholders.” Click the tabs to explore innovation strategy.

3.10 a Innovation Funnel Innovation funnel depicts the basic premise that there are many ideas that need to be explored and filtered down into concepts. In order to manage innovations, many companies today employ the model of an innovation funnel. These concepts can then be tested


until a final innovation is selected and launched. There are many versions of the funnel that exist, and the image shown here is a traditional model reflecting the assessment, development, test, and launch phases.

3.10 b Key Factors That Shape the Innovation Process

Key Factors That Shape the Innovation Process Innovation can be thought of as either process innovation or product innovation. Process innovation refers to a new or improved way an organization does business, and product innovation involves creating or improving an organization’s goods or services. In either case, there are several key factors that shape the innovation process, including:

• Support and climate for innovation • Financial resources allocated for innovation • An innovation-learning mind-set • Management patience for innovation • Implementation policies and practices

3.10 c Alternative

Processes Alternative processes for innovation include: Co-creation: Co-creation relates more specifically to the relationship between an organization and a defined group of its stakeholders, usually its customers. In the article “Co-Opting Customer Competence,” the authors define co-creation as “an active, creative, and social process based on collaboration between producers and users that is initiated by the firm to generate value for customers.” Co-creation means working with the end users of your product or service to exchange knowledge and resources in order to deliver a personalized experience using the organization’s value proposition. Open innovation: Creating and innovating with external stakeholders such as customers, suppliers, partners, and the wider community. Crowdsourcing: Crowdsourcing occurs when an organization outsources projects to the public, tapping into the knowledge and creativity of a broader group of people.


3.10 d Innovation Types Innovation Types There are several types of innovation, including architectural, incremental, radical, and disruptive. An architectural innovation includes creating new products using or reconfiguring existing technology. An incremental innovation is a series of small improvements that usually help maintain or improve a company’s competitive position over time. A radical innovation solves a complex problem that existing products don’t solve, and the innovation usually involves a significant shift in the performance of existing products. It gives birth to new industries. A disruptive innovation creates a new market by disrupting an existing market and displacing established market leaders and alliances. Take a look at examples of each type of innovation by clicking the pushpins.

3.11 Implementing Blue and Red Ocean Strategies

In the article “Blue Ocean Strategy” in HBR’s 10 Must Reads on Strategy, the authors developed a creative positioning approach to stretching and leveraging core competencies so as to gain an advantage in competing for the future. They state that “tomorrow’s leading companies will succeed not by battling competitors but by creating ‘blue oceans’ of uncontested market space ripe for growth.” They call these strategic moves the “value innovations” that “render rivals obsolete and unleash new demand.” The authors go on to explain that “red oceans” represent all the industries in existence today—the known market space where companies fight to outperform their rivals, profits and growth are reduced, and competition turns the water bloody. “Blue oceans” are the untapped market space and denote all the industries not in existence today. There are two ways to create blue oceans: by forming


completely new industries or by altering the boundaries of an existing industry. Click the tabs to learn more.

3.11 a Blue Ocean vs. Red Ocean

Blue Ocean vs. Red Ocean Blue Ocean Strategies have the following attributes:

• Create uncontested market space • Make the competition irrelevant • Create and capture new demand • Break the value/cost trade-off • Align the whole system of activities in pursuit of

differentiation or cost

Red ocean strategies have the following attributes: • Compete in the existing marketplace • Beat the competition • Exploit existing demand • Make the value/cost trade-off • Align with differentiation or low cost

Click the pushpin to see an example.

3.11 b Value Strategy Value Strategy Value strategy is the cornerstone of Blue Ocean Strategy and hinges on three main principles: 1. Assume you can shape your industry’s conditions. 2. Focus on what the majority of your customers value. 3. Consider how you might change your offerings to

capture the market you’ve identified by: • Eliminating features that offer no value to

customers. • Simplifying products. • Improving high-value features of products. • Creating new features that your industry has

never offered.

3.11 c Value Innovation Value Innovation Value innovation, also a part of Blue Ocean Strategy, is the simultaneous pursuit of differentiation (or buyer value) and low cost, creating a leap in value for both buyers and the company. Organizations must place equal emphasis on both value and innovation. Seeking to create value for products and services without


innovation may increase value to the buyer/user, but it is unlikely to stand out in the marketplace. Similarly, creating an innovation without value may be futuristic and technology-driven, but it generally fails to meet buyers’/users’ needs, wants, values, or what they are willing to pay. Successful innovation occurs at the intersection of buyer value and cost.

3.12 Exercise 3.1 Reflect and think about the article “Blue Ocean Strategy” in the context of the success of Cirque du Soleil, and answer the following questions. When finished, click the pushpins to compare your responses with answers from the article.

3.13 Cooperative Strategies

Now that we looked at competitive strategies, let’s switch gears and see how cooperation can also lead to competitive advantage. Depending on the size and nature of the organization, these strategies can be at the business level or the corporate level. British philosopher Bertrand Russell stated, “The only thing that will redeem mankind is cooperation.”

3.14 Explore Cooperative Strategies

Cooperative strategies differ in terms of control and risk. Looking at the progression from low to high, one can see that value chain partnerships, licensing, franchising, strategic alliances, and joint ventures each have different degrees of ownership control and investment risk. This chart is intended as a schematic representation of most typical positions. Various expansion approaches do not always fall neatly in the hierarchy positions indicated here. Depending on the industry dynamics, the specific companies involved, and the chart viewer’s perspective, these positions on the chart could easily shift. Click the tabs to examine each cooperative strategy in more detail. We will further explore these strategies as well as mergers and acquisitions and wholly owned subsidiaries in Course 4.


3.14 a Value Chain Partnerships

Value Chain Partnerships A value chain partnership is a strong and close alliance in which one company or unit forms a long-term arrangement with a key supplier or distributor for mutual advantage. Click the pushpin for an example.

3.14 b Licensing Arrangements

Licensing Arrangements In this arrangement, the licensing firm grants rights to another firm in another market or country to produce and/or sell a product. Licensing is an effective strategy if the trademark or brand name is strong but the company does not have sufficient funds to finance entering the industry or the country directly. Click the pushpin for an example.

3.14 c Franchising Franchising is a long-term cooperative relationship between two entities. The franchisor grants the franchisee the right to use a developed concept (for example, trademarks/brand names, service and marketing methods, and the entire business operation model for a fee). The franchisee then uses these to build a thriving business. Click the pushpin for examples.

3.14 d Strategic Alliance A strategic alliance is a cooperative arrangement between two or more independent firms or business units that engage in business activities for mutual economic gain. Companies or business units may form a strategic alliance for a number of reasons, including:

• To obtain new capabilities. • To obtain access to specific markets. • To reduce financial risk. • To reduce political risk.

A study by Coopers & Lybrand (now PricewaterhouseCoopers) found that firms involved in strategic alliances had 11% higher revenue and a 20% higher growth rate than companies that were not involved in alliances. Click the pushpin for an example.


3.14 e Joint Venture Joint venture is a cooperative business activity where two or more separate organizations join forces for strategic purposes. It creates an independent business entity and allocates ownership, operational responsibilities, and financial risks and rewards to each member, while preserving their separate identities. Click the pushpin for an example.

3.15 Business Level Strategies

Now that we have reviewed the various competitive and cooperative strategies at the business level, let’s take a look at business models to see how these strategies are monetized.

3.16 Business Models A business model is an abstract representation of strategic analysis showing how a business intends to generate revenue and make a profit from operations. There are many different methods to generating a business model, but it is generally composed of essentials that create and provide value for the organization, including the customer value proposition, the profit formula, key resources, and key processes. The business model canvas is one such model used as a template for developing new or documenting existing business models. The concept of customer value proposition is one of the most important elements of any business model. Customer value proposition is the intended overall value and/or benefit a customer will gain from a product or service in return for its costs, including money, time, and effort. It answers the questions:

• Who is your target customer? • What problem are you solving, or what need are

you fulfilling? • What is your offering? • What satisfies the problem or fulfills the need?

Click on the pushpin for examples. Further in-depth examination of business models is beyond the scope of this course, but it is important to note that business models monetize an organization’s strategy.



In this lesson, we reviewed that the focus of business-level strategies is to improve a company’s competitive position and to sustain competitive advantage. A firm’s resources and capabilities help establish its differentiated competencies, which in turn help formulate business strategy. Business-level strategies include the various competitive and cooperative strategies that feed into a business model. We also learned that strategy is directly linked to mission and vision and answers “How will we achieve our vision?” To conclude, in business, competition is not a zero-sum game (a game with only winners and losers). Competition and collaboration between business competitors, in the hope of mutually beneficial results, is often a strategy an organization may pursue.


Now it’s time to check your knowledge by answering a few questions about this lesson. When you are ready to begin the quiz, click the “Next” button.


LESSON 4: Functional-Level Strategies


Welcome to Lesson 4: Functional-Level Strategies. In this lesson, you will learn to:

• Recognize the importance of fit, or strategic alignment, of functional areas to an organization’s overall strategy.

• Explain how operational excellence initiatives can add value to an organization.

• Identify key theories of quality optimization and define quality management models including TQM, Kaizen, Six Sigma, Lean, Baldrige Performance Excellence Program, and ISO 9000.

Functional-level strategies leverage efficiency, operational excellence, and quality best practices to reinforce the organization’s core competencies. The results are product and process improvements and innovations tailored to meet business needs. In this lesson, we will discuss some of the various strategies that functional-level operations need to implement to support the business and to create value for customers.

4.2 Functional-Level Strategies

Functional-level strategies include operational strategies for specific functional areas of the organization, such as marketing, human resources, finance, information management, and public relations. Just like business-level strategies, functional-level strategies are shaped by a firm’s overall mission, vision, and goals, and they also build resources and capabilities that in turn form differentiated competencies.

4.3 Hierarchy of Strategies

Let’s revisit the hierarchy of strategies diagram first introduced in Lesson 3.

As we move down the diagram, our orientation gets increasingly tactical. Functional strategy is the approach a functional area takes in order to achieve corporate and business unit goals by optimizing activities, maximizing


resource productivity, and ensuring high-quality results. Multidivisional corporations have numerous business units, each with its own business strategy. Similarly, each business unit has numerous functional departments, each with its own functional strategy.

Leadership teams must translate their organizational strategy into a balanced set of objectives that can be carried out at the functional level. Strategy practitioners work with the leadership team to help them understand the outcomes they are seeking for each key driver of success and major strategy statement. Defining the functional linkages between the longer-term strategic plan and the nearer-term operating plan brings consistency to the entire planning process.

Optimization of performance in an organization is predicated on how well the functional strategies align with the overall corporate and business strategies. For example, if a business unit is following a differentiation competitive strategy with a luxury brand, it requires a manufacturing functional strategy that emphasizes high-end quality assurance processes, a human resource functional strategy that emphasizes the hiring and training of highly skilled workers, and a marketing functional strategy that emphasizes high-end advertising to increase consumer demand. If a business unit were to follow a low-cost competitive strategy, however, a different set of functional strategies would be needed to support the business strategy.

4.4 Functional Categories

Let's look at some specifics of functional strategy as it relates to Porter’s Generic Value Chain. Recall from Course 2 that Porter’s Value Chain is generic, and firms may have different functional categories broken into primary and support activities. Click the diagram for examples of strategies a firm can implement at the functional level for each activity.

4.4 a Inbound Logistics Inbound Logistics: • Centralization (all logistics out of a central


location) • Outsourcing (use of third-party vendors for

receiving) • Inventory control strategies (e.g., Just In Time)

Operations Operations: • Vertical/horizontal integration* • Geographic location* • Arbitrage, adaptation, aggregation strategies*

*Will be discussed in Course 4

Outbound Logistics

Outbound Logistics: • Centralization • Outsourcing • Different transportation modes, such as rail or

trucking • Aggregation of shipping volumes

Marketing and

Sales Marketing and Sales:

• Push strategies • Pull strategies • Skim strategies, and • Penetration pricing

Service Service:

• Identify and resolve issues before they become problems

• Define and track customer responsiveness • Solve problems before customers even realize

they exist

Firm Infrastructure Firm Infrastructure: • Adjusting the mixture of debt vs. equity • Minimizing the impact of taxes • Diversification


• Firm-wide quality control systems • Implementation of an ERP system

Human Resource Management

Human Resources: • Performance incentives • Diversity as a core strength • Self-managing work teams • Work-life balance • Creative work spaces

Technology

Development

Technology Development: • Enhance website capabilities to create efficiency

in processing sales, and to improve buying experience for customers.

• Decision making takes advantage of recent advances in technology.

Procurement

Procurement:

• Use of procurement card • Centralized purchasing • Global sourcing • Supplier optimization (mix of vendors that provide

best prices and terms)

4.5 Operational Fit Leads to Efficiency

Functional-level strategies focus on improving the efficiencies of operations with the goal of achieving operational excellence and optimization. In Michael Porter’s article “What Is Strategy?” on pages 20 to 28, he discusses the importance of fit, which has to do with the way a company’s activities interact and reinforce one another. This is also known as strategic alignment. Porter states, for example, that “a sophisticated sales force confers a greater advantage when the company’s product embodies premium technology and its marketing approach emphasizes customer assistance and support.” Based on the article, there are three types of fit in the following hierarchy:

• First-order is Consistency, • Second-order is Reinforcement, and • Third-order is Optimization.


In all three types of fit, the whole matters more than the parts. Competitive advantage and efficiency grows out of operational fit in the entire system. While operational effectiveness is about achieving excellence in individual activities or functions, strategy is about effectively combining activities. Let’s look at this concept in more detail. Use the tabs above to explore the hierarchy of operational fit.

4.5 a Consistency First-order fit is about consistency between functions and overall strategy. An example of this would be a low-cost strategy and subsequent low-cost orientation in all functions in the value chain.

4.5 b Reinforcement Second-order fit is about activities that are reinforcing. An example might be a differentiation strategy where a differentiated niche product is reinforced by differentiated niche marketing and sales approach.

4.5 c Optimization Third-order fit is when reinforced activities are optimized. For example, where a low-cost strategy is optimized with a total quality management operational plan.

4.6 Achieving Efficiency through Technology

Technological breakthroughs, innovation, and smart investments in research and development can play a tremendous role in jumpstarting operational excellence and efficiency at the functional level. Superior technology and information systems often lead to higher levels of efficiency. One example is the evolution from paper ledger accounting to full-scale integrated accounting systems. Enterprise resource planning (ERP) systems are typically a suite of integrated business management applications that organizations can use to collect, store, manage, and interpret data from many business activities throughout the organization’s value chain, including product planning, purchasing, manufacturing, delivery, service, and sales. Some of the operational benefits of an ERP system are improved accuracy and process innovation, “single view of the truth” (e.g., one central database), and more powerful reporting. ERP systems, as well as technological


breakthroughs such as artificial intelligence and robotic process automation, can lead to a higher level of efficiency through the alignment and monitoring of strategy from global to corporate to business to the functional level.

4.7 Operational Excellence

Operational excellence is the process of ongoing improvement in the way an organization functions. It can be achieved through enhancements in efficiency, quality, innovation, and customer responsiveness. An improvement made in one area may also contribute to improving other areas. Some goals at the functional level are:

• Improving economies of scale by increasing production volumes can create efficiency in an organization.

• Optimizing supply chain management can lead to the effectiveness and efficiency of operations.

• Creating activities that add value to the organization and reducing or eliminating nonvalue-added activities can improve performance and lead to efficiency as well as innovation.

• Focusing on hiring, mentoring, and training staff can lead to higher-quality output of products and services, increased efficiency, and better customer responsiveness.

• Implementing well-constructed performance compensation systems can contribute to improvements in efficiency, quality, innovation, and customer responsiveness when performance goals are tied to these areas.

• Being able to quickly adapt to customers’ changing needs can enable a company to achieve the goals of innovation and customer responsiveness

• Striving for customer loyalty can lead to a higher profit per customer, increased quality, and customer responsiveness


4.8 Quality Optimization

Quality optimization involves producing a product that is the highest level of quality at an acceptable cost. Quality management models can help an organization achieve operational excellence and quality, which leads to a competitive advantage in both differentiation and cost strategies. With a focus on quality, an organization can achieve consistently high customer loyalty, increased cash flow, satisfied employees, and a healthy work environment. These models help ensure that quality is defined in terms of both reliability (when a product performs well and rarely breaks down) and excellence (superior features or level of service). Click on the pushpins to learn more about some of the most popular models of quality management:

• Total Quality Management (TQM)

• Kaizen

• Six Sigma

• Lean

• Malcolm Baldrige Performance Excellence Program

• ISO 9000

4.9 Costs of Quality The pursuit of quality has a cost. This cost can be broken

into four components: Prevention Costs are incurred to avoid quality problems. These costs are often associated with the design, implementation, and maintenance of a quality management system. (For example TQM, ISO 9000) Appraisal Costs are associated with measuring and monitoring quality-related activities. Included in this category are the costs associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications (e.g., supplier ratings, quality audits). Internal Failure Costs are incurred to remedy defects


discovered before the product or service is delivered to the customer. These costs occur when the results of work fail to reach design quality standards and are detected before they are transferred to the customer (e.g., waste, rework, replacement). External Failure Costs are incurred to remedy defects discovered by customers. These costs occur when products or services that fail to reach design quality standards are not detected until after transfer to the customer (e.g., warranty, returns, service calls, product recall, and loss of reputation). Over time, the pursuit of quality should lower costs. By investing in quality from the start, expenses incurred for fixing issues related to poor quality products and services can be minimized or avoided. Source: ASQ(American Society for Quality) http://asq.org/learn-about-quality/cost-of-quality/overview/overview.html

4.10 Exercise 4.1 The CEO of your firm is committed to quality. As a financial management professional in the firm, you are proposing a bold new program called the VT Initiative to sponsor a new supply-side vendor training program with onsite training, technology, and certification. The program is focused on continuous improvement (Kaizen). It trains the vendors to utilize a new tracking system to document processes and results using the data collected. It is an attempt to empower your suppliers as team players and get them integrated into your systems. Which of the following might your CEO suggest is missing from your proposal?

4.11 Exercise 4.2 In preparing your budget for the VT Initiative, how would you classify the following costs? Match the costs to the four categories of quality cost. You have two attempts.

4.12 Core Competencies at the Functional Level

Quality and operational excellence strategies at the functional level can lead to competitive advantage in both low-cost and differentiation strategies by leveraging core competencies to improve product and process innovation.


Companies regularly examine and make use of their core competencies that sustain their competitive advantage across the functional, business, and corporate levels. For example, Apple and Goldman Sachs (differentiation) and Toyota and Walmart (low-cost).

4.13 Leveraging Core Competencies

Let’s look at some ways core competencies can be leveraged at the functional level for low-cost and differentiation strategies. Click the pushpins to see examples.

4.14 Innovation and Operational Excellence

Innovation refers to the act of creating new products or processes and is the most impactful at the functional level. Product and process innovations most frequently lead directly to increased profitability. Product innovation is the development of products that are new and have superior attributes to existing products. Process innovation is the development of a new process for producing products and delivering them to customers. Click the pushpins for examples.

4.15 The Role of the Management Accountant

In today’s dynamic economic ecosystem, management accountants must play an active role in positioning their organization for competitive advantage. This involves recognizing the differences between competitive strategies of cost leadership and differentiation and their strategic application to the entire value chain. It is also critical to recognize at the functional level the importance of quality, efficiency, customer responsiveness, and product and process innovation in the strategic management system. In their book Profit from the Core: A Return to Turbulent Times, authors Chris Zook and James Allen report that “most companies fail to achieve the target growth numbers they plan for in their strategic planning sessions. There is often a gap between ambition and performance and a disconnect between strategy formulation and strategy execution. If the employees who are closest to customers at the functional level and who operate processes that most


intimately create value are unaware of the strategy, they surely cannot help the organization implement it effectively. It is critical that financial professionals take a leadership role in making sure that strategic intent at the top of the organization is wholeheartedly embraced and executed at the business and functional levels of an organization.”


Creating competitive advantage involves delivering unique value using two overarching strategies: low-cost and differentiation. Strategies for competitive advantage can be analyzed from the global, corporate, business, and functional perspectives. In this course, we examined strategies at the business and functional levels. At the business level, competitive advantage can be gained using strategies such as new product and new market development, pricing, innovation, and market segmentation. At the functional level, organizations can implement strategies such as operational excellence, quality optimization, and innovation. At every level of the organization, there needs to be synergy and a cascading of the strategy from the very top down to the functional levels.


Now it’s time to check your knowledge by answering a few questions about this lesson. When you are ready to begin the quiz, click the “Next” button.


LESSON 5: Summary and Final Assessment


Welcome to Lesson 5: Summary and Final Assessment. In this lesson, you’ll review the learning objectives and take the final assessment. Let’s start by looking at the key learnings from the previous four lessons. We began this course with a brief recap of the strategic planning process, which was based on learnings from Courses 1 and 2. We then moved on to define competitive advantage and highlighted the differences between competitive strategies of cost leadership and differentiation. We discussed that once an organization has decided which strategy to pursue, it must be consistently applied through all of the levels of the organization, and the strategy must reinforce the organization’s mission, vision, and core values. This course has provided you with an overview of competitive advantage and some key business- and functional-level strategies an organization can use to gain competitive advantage.

5.2 Review of Learning Objectives

Let’s review the learning objectives for this course. In the preceding lessons, you learned to:

• Demonstrate an understanding of competitive advantage.

• Identify the cost leadership and product/service differentiation strategies of achieving competitive advantage.

• Explain the importance of core and differentiated competencies and how they can lead to a sustained competitive advantage.

• Describe key business-level strategies and how they are used to improve a company’s competitive position.

• Recognize how operational excellence, quality optimization, technology, and innovation can be used to develop an effective functional-level strategy.


If you are unsure of your understanding of any of these objectives, please review the lessons before attempting the final assessment. Before you can receive credit for this training, you must successfully complete the final assessment with a score of 70% or higher.

5.3 Final Assessment Congratulations! You’re ready to take the Final Assessment. We hope this course has provided you with the fundamentals of competitive advantage and an overview of business and functional-level strategies. As you take the Final Assessment, consider each question carefully, and select the best answer for each question. You must successfully complete the Final Assessment with a score of 70% or higher to receive credit for this training. When you are ready, click the “Next” button to begin.

5.4 Practice Question Bank

As a reminder, you can assess your level of understanding of the course content using the Practice Question Bank, part of the IMA Strategy and Competitive Analysis Learning Series®. It features multiple-choice questions, sample case studies with suggested answers, options to customize quizzes, and more. For additional information, see the Practice Question Bank document in the “Resources” tab. At the conclusion of this course, you can choose to navigate to the Learning Center to access the Practice Question Bank, take the next course in the series, or return at a later date.

5.5 Contact Us Please contact us if you have questions about this course or if you are interested in other IMA courses.

5.6 Thank You! If you haven’t already taken the survey, please click the link below. Thank you for taking Course 3: Creating Competitive Advantage at the Business and Functional Levels, part of the IMA Strategy and Competitive Analysis Learning Series.

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