Strategic Management1
Dr S M Tariq Zafar
Chapter 1
1
When we have completed this chapter
you should be able to:
– Define strategic
competitiveness competitive
advantage, and aboveaverage returns.
– Describe the 21st-century
competitive landscape and
explain how globalization
and technological changes
shape it.
– Use the industrial
organization (I/O) model to
explain how firms can earn
above-average returns.
– Use the resource-based
model to explain how
firms can earn aboveaverage returns.
– Describe strategic intent
and strategic mission
and discuss their value.
– Describe strategic intent
and strategic mission
and discuss their value.
– Define stakeholders and
describe their ability to
influence organizations.
2
Learning Objectives (cont’d)
- Use the resource-based model to explain how
firms can earn above-average returns.
- Describe the work of strategic leaders.
- Explain the strategic management process.
3
Let’s start by asking … some key questions!
1. What is a management
strategy course all
about?
5. What is the resourcebased model?
2. Just what is strategy?
6. Who are a firm’s key
stakeholders?
3. What is happening in
the business strategic
environment?
7. What affects do firm
stakeholders have on
strategy?
4. What is the industrial
organization (IO)
model?
8. Who is it who creates
“strategy” in
organizations?
4
Some Important Definitions
• Strategic Competitiveness
– When a firm successfully formulates and implements a
value-creating strategy.
• Sustainable Competitive Advantage
– When competitors are unable to duplicate a
company’s value-creating strategy.
• Strategic Management Process
– The full set of commitments, decisions, and actions
required for a firm to achieve strategic competitiveness
and earn above-average returns.
5
Definitions (cont’d)
• Risk
– An investor’s uncertainty about the economic gains
or losses that will result from a particular investment.
• Average Returns
– Returns equal to those an investor expects to earn
from other investments with a similar amount of risk.
• Above-average Returns
– Returns in excess of what an investor expects to
earn from other investments with a similar amount of
risk.
6
Hitt’s Strategic
Management
Process
Figure 1.1
Copyright © 2004 South-Western. All rights reserved.
7
Current Competitive Landscape
• It’s a “tough” world out there! A Perilous Business
World for the “faint hearted” . . .
– Investments required to compete on a global scale are
enormous.
– Consequences of failure are severe/
• Important Elements of Success
– Developing an effective strategy [game plan!]
– Implementing that strategy [executing the plan!]
8
Competitive Landscape
Global
economy
Strategic
maneuvering among
global and innovative
combatants
Rapid
technological
change
9
Competitive Landscape: Hypercompetition
Hypercompetition . . . A condition of rapidly
escalating competition based on:
• Price-quality positioning.
Hypercompetition
• Competition to create new
know-how and establish
first-mover advantage.
• Competition to protect or
invade established product
or geographic markets.
10
Our Global Economy
• The Global Economy is …
– Goods, people, skills, and ideas move freely
across geographic borders.
– Movement is relatively unfettered by artificial
constraints.
– Expansion into global arena complicates a
firm’s competitive environment.
11
The Global Economy (cont’d.)
• Globalization provides:
– Increased economic interdependence among
countries as reflected in the flow of goods and
services, financial capital, and knowledge
across country borders.
– Increased range of opportunities for
companies competing in the 21st-century
competitive landscape.
12
Technology and
Technological Changes
• Rate of change of technology and speed
at which new technologies become
available
– Perpetual innovation—how rapidly and
consistently new, information-intensive
technologies replace older ones.
– The development of disruptive technologies
that destroy the value of existing technology
and create new markets.
14
Technological Change
• The Information Age
– The ability to effectively and efficiently access
and use information has become an important
source of competitive advantage.
– Technology includes personal computers,
cellular phones, artificial intelligence, virtual
reality, massive databases, electronic
networks, internet trade.
15
Technological Changes
• Increasing Knowledge Intensity
– Strategic flexibility: set of capabilities used to
respond to various demands and
opportunities in dynamic and uncertain
competitive environments
– Organizational slack: slack resources that
allow the firm flexibility to respond to
environmental changes
– Capacity to learn
16
Two Approaches to
Above-Average Returns . . .
• Hitt’s I/O Model of
strategic planning . . .
• The Resource-Based
Model of strategic
planning . . .
17
Hitt’s I/O Model of
Above-Average Returns
• The industry in which a firm competes has a
stronger influence on the firm’s performance than
do the choices managers make inside their
organizations.
– Industry properties include:
•
•
•
•
•
economies of scale
barriers to market entry
diversification
product differentiation
degree of concentration of firms in the industry
18
Four Assumptions of the I/O Model
1
External environment imposes pressures and
constraints that determine strategies leading to aboveaverage returns.
2
Most firms competing in an industry control similar
strategically relevant resources and pursue similar
strategies.
3
Resources used to implement strategies are
highly mobile across firms.
4
Organizational decision makers are assumed to be
rational and committed to acting in the firm’s best
interests (profit-maximizing.).
19
I/O Model of Above-Average Returns
External Environments
General
Environment
1. Strategy is dictated by
the external
environment of the
firm (what
opportunities exist in
these environments?)
2. Firm develops
internal skills required
by external
environment (what
can the firm do about
the opportunities?)
20
The External
Environment
The I/O Model of
Above-Average Returns
1. Study the external
environment, especially
the industry environment.
• The general environment
• The industry environment
• The competitor environment
Adapted from Figure 1.2
21
The External
Environment
An Attractive
Industry
The I/O Model of
Above-Average Returns
2. Locate an attractive
industry with a high
potential for aboveaverage returns.
• An industry whose
structural characteristics
suggest above-average
returns.
Adapted from Figure 1.2
22
The External
Environment
An Attractive
Industry
Strategy
Formulation
The I/O Model of
Above-Average Returns
3. Identify the strategy called
for by the attractive
industry to earn aboveaverage returns.
• Selection of a strategy
linked with aboveaverage returns in a
particular industry.
Adapted from Figure 1.2
23
The External
Environment
An Attractive
Industry
Strategy
Formulation
Assets and Skills
The I/O Model of
Above-Average Returns
4. Develop or acquire
assets and skills
needed to implement
the strategy.
• Assets and skills
required to implement a
chosen strategy.
Adapted from Figure 1.2
24
The External
Environment
An Attractive
Industry
Strategy
Formulation
Assets and Skills
Strategy
Implementation
The I/O Model of
Above-Average Returns
5. Use the firm’s strengths
(its developed or
acquired assets and
skills) to implement the
strategy.
• Selection of strategic
actions linked with
effective implementation
of the chosen strategy.
Adapted from Figure 1.2
25
The External
Environment
The I/O Model of
Above-Average Returns
An Attractive
Industry
Strategy
Formulation
Assets and Skills
Strategy
Implementation
Superior Returns
• Superior returns: earning
of above-average
returns.
Adapted from Figure 1.2
26
Michael Porter’s Five Forces Model
of Competition
• An industry’s profitability results from
interaction among:
– Suppliers
– Buyers
– Competitive rivalry among firms currently in
the industry
– Product substitutes
– Potential entrants to the industry
27
Porter’s Five Forces Model of Competition (cont’d.)
• Firms earn above average returns by:
– Producing standardized products or services.
– Manufacturing differentiated products for
which customers are willing to pay a price
premium.
28
The Resource-Based Model
of Above-Average Returns
• Each organization is a collection of unique
resources and capabilities that provides the
basis for its strategy and that is the primary
source of its returns.
• Capabilities evolve and must be managed
dynamically.
29
Resource-Based Model of Above-Average
Returns (cont’d.)
• Differences in firms’ performances are due
primarily to their unique resources and
capabilities rather than structural
characteristics of the industry.
• Firms acquire different resources and
develop unique capabilities.
30
Resource-Based Model
of Above-Average Returns (cont’d.)
Firm’s Resources
1. Strategy is dictated by
the firm’s unique
resources and
capabilities.
2. Find an environment in
which to exploit these
assets (where are the
best opportunities?)
31
Resources and Capabilities
• Resources
– Inputs into a firm’s
production process:
• Capital equipment
• Skills of individual
employees
• Patents
• Finances
• Talented managers
• Capabilities
– Capacity of a set of
resources to
perform in an
integrative manner.
– A capability should
not be:
• So simple that it is
highly imitable
• So complex that it
defies internal
steering and
control
32
The Resource-Based Model
of Above-Average Returns
Resources
1. Identify the firm’s
resources. Study its
strengths and weaknesses
compared with those of
competitors.
• Inputs into a firm’s
production process
Adapted from Figure 1.3
33
The Resource-Based Model
of Above-Average Returns
Resources
Capability
2. Determine the firm’s
capabilities. What do the
capabilities allow the firm to
do better than its
competitors.
• Capacity of an integrated
set of resources to
integratively perform a
task or activity.
Adapted from Figure 1.3
34
The Resource-Based Model
of Above-Average Returns
Resources
Capability
Competitive
Advantage
3. Determine the potential of
the firm’s resources and
capabilities in terms of a
competitive advantage.
• Ability of a firm to
outperform its rivals.
Adapted from Figure 1.3
35
The Resource-Based Model
of Above-Average Returns
Resources
Capability
Competitive
Advantage
An Attractive
Industry
4. Locate an attractive
industry.
• An industry with
opportunities that can
be exploited by the
firm’s resources and
capabilities.
Adapted from Figure 1.3
36
The Resource-Based Model
of Above-Average Returns
Resources
Capability
Competitive
Advantage
An Attractive
Industry
Strategy
Implementation
5. Select a strategy that
best allow the firm to
utilize its resources and
capabilities relative to
opportunities in the
external environment.
• Strategic actions taken to
earn above-average
returns.
Adapted from Figure 1.3
37
The Resource-Based Model
of Above-Average Returns
Resources
Capability
Competitive
Advantage
An Attractive
Industry
Strategy
Implementation
Superior Returns
• Superior returns: earning
of above-average returns
Adapted from Figure 1.3
38
Key Criteria of Resources and
Capabilities . . .
Valuable
– Resources and capabilities are valuable when
they allow a firm to take advantage of
opportunities or neutralize threats in external
environment.
• Rare
– Resources and capabilities are rare when
possessed by few, if any, current and potential
competitors.
39
Key Criteria of Resources and Capabilities [con’t.]
• Costly to Imitate
– Resources and capabilities are costly to
imitate when other firms either cannot obtain
them or are at a cost disadvantage in obtaining
them.
• Nonsubstitutable
– Resources and capabilities are
nonsubstitutable when they have no structural
equivalents.
40
The all-important Core Competencies
• When the four key criteria of resources and
capabilities are met, they become core
competencies.
• Core competencies serve as a source of
competitive advantage.
• Managerial competencies are especially
important.
41
How Resources and Capabilities Provide
Competitive Advantage . . .
Valuable Allow the firm to exploit opportunities or
neutralize threats in its external environment.
Rare Possessed by few, if any, current and
potential competitors.
Costly to imitate When other firms cannot obtain them or
must obtain them at a much higher cost.
Nonsubstitutable The firm is organized appropriately to obtain
the full benefits of the resources in order to
realize a competitive advantage.
42
Resources and Capabilities, Core
Competencies, and Outcomes
Valuable
Core
Competencies
Rare
Competitive
Advantage
Costly to Imitate
Value Creation
Nonsubstitutable
Above Average
Returns
43
Strategic Intent
• Its internally focused.
• It requires the leveraging of a firm’s resources,
capabilities and core competencies to accomplish
the firm’s goals.
• It only exists when all employees and levels of a
firm are committed to the pursuit of a specific,
significant performance criterion.
44
Strategic Mission
• Is externally focused.
• Is a statement of a firm’s unique purpose
and the scope of its operations in product
and market terms.
– It establishes a firm’s individuality and is
inspiring and relevant to all stakeholders.
– It provides general descriptions of the firm’s
intended products and its markets.
45
Stakeholders
• Are all those individuals, groups and
entities who can affect, and are affected
by, the strategic outcomes achieved and
who have enforceable claims on a firm’s
performance.
• Stakeholder claims are enforced by their
ability to withhold essential participation.
46
The Three
Stakeholder
Groups
Figure 1.4
47
Capital Market Stakeholders
• Shareholders and lenders expect the firm
to preserve and enhance the wealth they
have entrusted to it.
• Returns should be commensurate with the
degree of risk to the shareholder.
48
Product Market Stakeholders
• Customers
– Demand reliable products at low prices.
• Suppliers
– Seek loyal customers willing to pay highest
sustainable prices for goods and services.
• Host communities
– Want companies willing to be long-term employers
and providers of tax revenues while minimizing
demands on public support services.
• Union officials and their members
– Want secure jobs and desirable working conditions.
49
Organizational Stakeholders
Employees [The “worker-bees!”]
– Expect a dynamic, stimulating and rewarding
work environment.
– Are satisfied by a company that is growing
and actively developing their skills.
50
Stakeholder Involvement
• Two issues affect the extent of stakeholder
involvement in the firm
How to divide returns
to keep stakeholders
involved?
Organizational
How to increase
returns so everyone
has more to share?
Capital
Market
Product
Market
51
Strategic Leaders
• People in the enterprise who are
responsible for the design and execution of
strategic management processes.
• Decisions they make include:
– How resources will be developed or acquired.
– At what price resources will be obtained.
– How resources will be used.
52
Organizational Culture
• The complex set of
– Ideologies
– Symbols
– Core values
that are shared throughout the firm,
that influence how the firm conducts
business.
53
Mapping an Industry’s Profit Pools
• Define the pool’s boundaries.
• Estimate the pool’s overall size.
• Estimate the size of the value-chain activity
in the pool.
• Reconcile the calculations.
54
The Strategic Management Process
1. Study the external and internal environments.
2. Identify marketplace opportunities and threats.
3. Determine how to use core competencies.
4. Use strategic intent to leverage resources,
capabilities and core competencies and win
competitive battles.
5. Integrate formulation and implementation of
strategies.
6. Seek feedback to improve strategies.
55