Successful strategy requires the firm to choose the markets in which its distinctive capabilities yield competitive advantage. But the adaptive, incremental nature of strategy means that the starting-point is where the firm is now. Every firm is part of an industry, a member of a strategic group, and serves a variety of product and geographic markets. The strategic audit of the firm begins (in Chapter 18) with the analysis of that industry, that strategic group, these markets. Chapter 19 goes on to consider the firm's own distinctive capabilities and strategic assets, the markets in which they are, and might be, deployed, and the extent to which they yield appropriable and sustainable competitive advantages. The strategic audit of the firm determines the extent to which these competitive advantages are maximized, and realized.
In this way, Chapters 18 and 19 bring together the analysis contained in earlier chapters of the book and display their practical application. There are dangers in describing a process of strategy formation. The determination of strategy is not a checklist which can be handed over to the planning department, or to a firm of consultants. It emerges from the firm's analysis of its own capabilities, and is part of its everyday decision- making. Nor are there recipes for strategy, or a menu of generic strategies. Effective strategy, based on distinctive capabilities, is unique to the firm that pursues it.
Chapter 20 asks what light the structure of strategy throws on the competitive advantage, not of firms, but of nations. This issue falls into two distinct, though related, parts. To what extent does the competitive advantage of individual firms represent the creation of wealth for the national, or international, economy? And when is it simply an appropriation of wealth to the stakeholders of the firm? I go on to consider more directly how the competitive advantage of nations, or groups of nations, rests on their own distinctive capabilities.