Chapter 1: Strategic Management and
Strategic Competitiveness
 Overview:
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Nature of Competition
I/O Model of Above-Average Returns (AAR)
Resource-Based Model of AAR
Strategic Vision and Mission
Stakeholders
Strategic Leaders
The Strategic Management Process
What is Performance?
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Nature of Competition: Basic concepts
 Strategy
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Integrated and coordinated set of commitments and actions designed
to exploit core competencies and gain a competitive advantage
 Competitive Advantage (CA)
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When a firm implements a strategy that competitors are unable to
duplicate or find too costly to imitate
 Strategic Competitiveness
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Achieved when a firm successfully formulates & implements a valuecreating strategy
 Above Average Returns
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Returns in excess of what investor expects in comparison to other
investments with similar risk
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The Strategic Management Process
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Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
 Underlying Assumptions
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External environment imposes pressures and constraints that
determine the strategies resulting in AAR
Most firms that compete within a particular industry control similar
resources and pursue similar strategies
Resources for implementing strategies are highly mobile across firms
Organizational decision makers are rational and committed to acting in
the firm's best interests, as shown by their profit-maximizing behaviors
Limitations
Only two strategies are suggested for competing in an industry:
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Cost Leadership or Differentiation
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Internal resources & capabilities are not considered
AAR are earned when a firm implements the strategy dictated by
external environment (general, industry, and competitor)
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Industrial
Organizational
(I/O) Model of
AboveAverage
Returns
(AAR)
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The Resource-Based Model of AAR
 Resources
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Inputs into a firm's production process
 Includes capital equipment, employee skills, patents, highquality managers, financial condition, etc.
Basis for competitive advantage: When resources are valuable,
rare, costly to imitate, and nonsubstitutable
3 categories of internal/firm-specific resources
 Physical, Human, Organizational capital
 Capability
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Capacity for a set of resources to perform a task or activity in an
integrative manner
 Core Competency
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A firm’s resources and capabilities that serve as sources of
competitive advantage over its rival
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The Resource-Based Model of AAR
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Basic Premise - a firm's unique resources & capabilities is
the basis for firm strategy and AAR
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Each organization is a bundle of unique resources and capabilities
Performance difference between firms emerge over time due to
these unique resources and capabilities (versus industry’s
structural characteristics)
Combined uniqueness should define the firms’ strategic actions
 A firm has superior performance because of
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Unique resources and capabilities, and the combination makes
them different, and better, than their competition – driving the
competitive advantage
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The
ResourceBased
Model of
AAR
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Vision and Mission
 Purpose:
 Chart the company’s long-term direction (vision)
 Describe the company’s purpose (mission)
 Give the firm a strong identity
 Create a roadmap of the company’s future
 Kind of company to become – direction we are headed
 Indicates the long-term course management has
charted for the company
 Together mission and vision provide foundation for
strategy formulation and implementation
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Vision and Mission
 Mission
 Also called business purpose or business definition
 Addresses “who we are and what we do”
 Outlines the organization’s activities and business
make-up
 More specific than the vision
 Focuses on present business and purpose
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Businesses and industries company is in now
Customer needs currently being served
Should pin down the company’s real area of business
interest
Serves as a boundary for what to do and not do
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Vision and Mission
 Vision
 Concerns future business path – “where we are going”
 The kind of company we are trying to become
 Customer needs to be satisfied in the future
 A guiding concept for the organization
 Charts a company’s future strategic course – defines
the business makeup in 5 to 10 years
 Requires the exercise of strategic thinking and
management foresight
 The responsibility of a firm's top strategic leader – the
CEO
 Serves as foundation for mission
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Vision and Mission
 Why is it important to develop vision and
mission?
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Provides a clear long-term direction for the organization
Guides employee actions and gives them and the
organization a sense of purpose
Guides managerial decision-making
Helps stakeholders (who, how) understand your
business (investors, bank-loans, outside legitimacy)
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Stakeholders
 Basic Premise – a firm can effectively manage
stakeholder relationships to create a competitive
advantage and outperform its competitors
 Stakeholders – individuals and groups who can
affect, and are affected by, the strategic outcomes
achieved and who have enforceable claims on a
firm’s performance
 Must minimally meet the expectations of each
stakeholder group
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Above average returns (AAR) makes this easier to do
3 Major Stakeholder Groups
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The Three Stakeholder Groups
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Strategic Leaders
 People (primarily managers) located in different parts of the
firm using the strategic management process to help the firm
reach its vision and mission
 The Work of Effective Strategic Leaders
 Must be able to think strategically
 Involved in internal and external analyses,
development of vision and mission, strategy
formulation and implementation, and constant review,
evaluation, and adjustment
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Create and sustain organizational structure and culture
Can exist at different organizational levels
 Corporate, business, functional, operating
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The Strategic Management Process
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What is Performance?
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Performance is central to the study and practice of strategy
Organizational performance is complicated
Numerous definitions, approaches, and types of performance
Can be an elusive concept
Examples:
 Goal attainment - Vision/mission, objectives
 Effectiveness – A hospital curing sick people
 Quality – Customer service
 Efficiency - Inputs to outputs
 Financial/accounting/economic returns – ROA, EPS
 Can also vary by type of firm
 For-profit versus not-for-profit
 Publicly traded?
 Government
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Measuring Performance
 Stakeholders View
 An organization’s performance should be evaluated
relative to the preferences and desires of stakeholders
that provide resources to a firm
 Different stakeholders can have different interests and
different criteria for evaluating performance
 May need to choose which stakeholders to satisfy
 Must minimally satisfy the interests of each stakeholder
group
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Measuring Performance
 Simple Accounting Measures
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Most popular approach
Publicly available for many firms
They communicate a great deal of information
Most often rely on ratio analysis
4 Major categories of ratios
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Profitability
Liquidity
Leverage
Activity
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Measuring Performance
 Profitability Ratios
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Ratios with some measure of profit in the
numerator and some measure of firm size or
assets in the denominator
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ROA, ROE, margins, EPS, p/e ratio
 Liquidity Ratios
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Ratios that focus on the ability of a firm to meet its
short–term financial obligations
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Current ratio, quick ratio
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Measuring Performance
 Leverage Ratios
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Ratios that focus on the level of a firm’s
indebtedness
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Debt to assets, debt to equity, times interest earned
 Activity Ratios
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Ratios that focus on the level of activity in a firm’s
business
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Inventory turnover, average collection period
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The Relative Nature of
Performance
 Performance is always relative to other firms
 Performance should be compared to industry average(s)
 AAR are above industry average
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Normal and below normal returns
 Industry adjustments
 Some industries are more profitable than others
 Can adjust for industry performance and compare
performance levels across industries
 Looking at trends can also be useful
 From earlier
 I/O Model - Pick attractive industry(ies) to compete in
 Resource-Based Model - Develop unique bundles of
resources and capabilities
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