Competing For Advantage
Part I – Strategic Thinking
Chapter 1 – What is Strategic Management?

 U.S. Automobile Industry Conditions in 1970s
 Increase in gas prices
 Dramatic increase in quality of Japanesemade vehicles
 Negative Impact to U.S. Automakers
 Slow response to global forces
 Inability to compete against new entrants to
US market
 Failure to make technological improvements to stay competitive

Globalization of Markets and Industries
 Key Terms
 Globalization – increased economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders
 Hypercompetition – extremely intense rivalry among competing firms, characterized by escalating and increasingly aggressive competitive moves

Globalization of Markets and Industries
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Reduced restraints on business transactions across national boundaries (such as tariffs)
Difficulty in recognizing or determining boundaries of an industry (for example, the blur among television, telephone, and computer service providers)
Greatly increased range of opportunities for acquiring resources (such as equipment, capital, raw material, or even employees) and for selling goods and services

Globalization of Markets and Industries
 Hypercompetition resulting from the dynamics of strategic maneuvering among global and innovative competitors
 Increased performance standards in many areas, including quality, cost, productivity, product introduction time, and operational efficiency
 Continuous improvement in all areas is necessary for continued survival

 Key Terms
 Strategic Flexibility – set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment

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Increasing rate of technological change and diffusion, and increasing speed at which technologies become available and are used
Dramatic information technology changes of recent years, and different ways that information is being used
Increasing knowledge intensity, the basis for technology and its application

Changes in the Competitive Landscape

Changes in the Competitive Landscape
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Quick competitive information needs
Shorter product life cycles
Indistinguishable products
Rapid technology replacement
Availability of inexpensive information
New business culture from electronicbusiness models
Continuous learning is necessary

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Speed to market
Access and use of information
Rapid diffusion of new, transformed knowledge throughout the company
Innovation
Integration of new conditions into organization mind set
Global standard achievement
Strategic flexibility

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Value of existing technologies is destroyed
Creative destruction process replaces existing technologies with new ones
New markets are created

Early Influences on the Strategy Concept
 Key Terms
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Agency Theory – the idea that agency problems exist when managers take actions that are in their own best interests rather than those of shareholders
Transactions Costs Economics – examination of the efficiency of economic activity that instructs firms to buy required resources through a market transaction, unless certain conditions exist that efficiently allow firms to create them internally

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The need to establish goals, formulate strategies to achieve them, and set implementation (resourceallocation) plans to meet them
The integration of external market factors into business planning
The wisdom of balancing the conflicting needs of internal and external stakeholders
The importance of an economic approach to identifying market opportunities
The importance of having or acquiring the resources and capabilities to achieve organizational objectives

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The idea that political strategies should be used in addition to rational-deductive strategy development to address stakeholder interests and facilitate the achievement of organizational goals
The use of organizational learning processes to achieve strategic success
The use of Agency Theory to focus on shareholder returns as a primary criterion for firm success
The use of Transactions Costs Economics to determine whether a business should produce or acquire the resources needed

 Key Terms
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Deterministic Perspective – the argument that a firm should adapt to its environment, establishing "fit“ (environmental situation determines the most effective strategies for achieving success)
Enactment – the principle that recognizes the potential of influencing the environment through human action (environmental forces do not entirely determine strategic moves to create a competitive advantage)

Three Perspectives on Value Creation
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Industrial/Organization (I/O)
Economic Model
Resource-Based View
Stakeholder Approach

The Industrial/Organization (I/O)
Model of Above-Average Returns
 Basic Premise of the I/O Model
– to explain the dominant influence of the external environment on a firm's strategic actions and performance

The Industrial/Organization (I/O)
Model of Above-Average Returns
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Underlying Assumptions
That the external environment imposes pressures and constraints that determine the strategies resulting in above-average returns
That most firms competing within a particular industry or industry segment control similar strategically relevant resources and pursue similar strategies in light of those resources

The Industrial/Organization (I/O)
Model of Above-Average Returns
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Underlying Assumptions (cont.)
That resources for implementing strategies are highly mobile across firms, and that due to this mobility any resource differences between firms will be short lived
That organizational decision makers are rational and committed to acting in the firm's best interests, as shown by their profitmaximizing behaviors

The
Industrial/
Organization
(I/O) Model of Above-
Average
Returns

The Industrial/Organization (I/O)
Model of Above-Average Returns
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Michael Porter’s Five-Forces Model
Reinforces the importance of economic theory
Offers an analytical approach that was previously lacking in the field of strategy
Describes the forces that determine the nature/level of competition and profit potential in an industry
 Suggests how an organization can use the analysis to establish a competitive advantage

The Industrial/Organization (I/O)
Model of Above-Average Returns
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Limitations
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Only two strategies are suggested:
Cost Leadership
Differentiation
Internal resources and capabilities are not considered

The Resource-Based Model of
Above-Average Returns
 Key Terms
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Distinctive Competencies – attributes that allow a firm to pursue a certain strategy more efficiently than other firms
Resources – inputs into a firm's production process, such as capital equipment, employee skills, patents, high-quality managers, financial condition, etc.
Capability – capacity for a set of resources to perform a task or activity in an integrative manner

The Resource-Based Model of
Above-Average Returns
 Key Terms (cont.)
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Core Competencies – a firm’s resources and capabilities that serve as sources of competitive advantage over its rivals
Competitive Advantage – the successful formulation and execution of strategies that are different from and produce more value than the strategies of competitors
 Sustainable Competitive Advantage (referred to as "Competitive Advantage" in text) – competitive advantage that is possible only after competitors' efforts to duplicate the value-creating strategy have ceased or failed

The Resource-Based Model of
Above-Average Returns
 Basic Premise of the Resource-
Based Model – to propose that a firm's unique resources and capabilities should define its strategic actions and be used effectively to exploit opportunities in the external environment to ensure successful performance

The Resource-Based Model of
Above-Average Returns
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Physical
Human
Organizational capital

The Resource-Based Model of
Above-Average Returns
 Types of resources that become a competitive advantage
 Valuable
 Rare
 Costly to imitate
 Nonsubstitutable

The Resource-Based Model of
Above-Average Returns
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The
Resource-
Based Model of Above-
Average
Returns

 Key Terms
 Stakeholders – individuals and groups that can affect (and are affected by) the strategic outcomes a firm achieves, and that have enforceable claims on a firm's performance
 Strategic Intelligence – information that firms collect from their network of stakeholders and use to deal with diverse and cognitively complex competitive situations

 Basic Premise of the Stakeholder
Model – to propose that a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors

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 Government entities and administrators
Activists and advocacy groups
Religious organizations
Other nongovernmental organizations

The
Stakeholder
Model of
Responsible
Firm Behavior and Firm
Performance

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Timely and high quality strategic intelligence is gathered to improve a firm's strategic decisions
A trustworthy reputation draws valuable customers, suppliers, and business partners to acquire or develop competitive resources
A trustworthy reputation attracts investors to offer financial resources
Firms that have fair and respectful treatment of employee relationships attract high-quality human resources

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Transactions costs associated with making and enforcing agreements can be reduced
Implementation of strategies can be enhanced by improving commitment from stakeholders who are involved with strategic decisions
Responsible behavior can protect a firm from the expense and risk associated with negative actions (such as adverse regulations, legal suits and penalties, consumer dissatisfaction, employee work outages, or bad press)

Strategic Thinking and the Strategic
Management Process
 Key Terms
 Strategic Management Process – full set of commitments, decisions, and actions required for a firm to create value and earn returns that are higher than those of competitors

 Key Terms
 Strategic Intent – organizational term used for a vision that challenges and energizes a company; the leveraging of a firm's resources, capabilities, and core competencies to accomplish a firm's goals in its competitive environment
 Resources – inputs into a firm's production process, such as capital equipment, employee skills, patents, high-quality managers, financial condition, etc. (Described in Chapter 4)

 Key Terms
 Capability – capacity for a set of resources to perform a task or activity in an integrative manner
 Core Competencies – resources and capabilities that serve as a source of competitive advantage for a firm over its rivals

Effective Formation of Strategic Intent
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When all levels of a firm are committed to the pursuit of specific, significant performance criterion
When employees believe fervently in their company's product
When employees are entirely focused on the firm's ability to outperform its competitors

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Takes advantage of unanticipated opportunities as they arise
Recognizes all time frames (learning from past experiences, exploiting current competitive advantages, and considering long-term implications of decisions and actions)
Is a sequential process of hypothesis testing (evaluating creative ideas from their generation, to trial market assessment, to full-blown market implementation)

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Employ top managers who are champions of change
Put in place systems and processes to find innovative ideas for operating ("front line") areas of an organization
Train managers and employees in strategic thinking methods and processes
Provide flexibility in strategic management processes to allow incorporation of new ideas that have potential

The Strategic
Management
Process

Ethical Questions
What is the relationship between ethics and the firm’s stakeholders? For example, from an ethical perspective, how much information should the firm reveal to each of its stakeholders, and how should that vary among stakeholders?

Ethical Questions
Do firms face ethical challenges —perhaps even ethical dilemmas —when trying to satisfy both short-term and long-term expectations of capital market stakeholders?

Ethical Questions
What types of ethical issues and challenges do firms encounter when competing internationally?

Ethical Questions
What ethical responsibilities does the firm have when it earns above-average returns?
Who should make decisions regarding these issues, and why?

Ethical Questions
How should ethical considerations be included in analyses of the firm’s external environment and internal organization?

Ethical Questions
What should top-level managers do to ensure that a firm’s strategic management process leads to outcomes that are consistent with the firm’s values?