McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 1
What is Strategic
Management?
Learning Objectives
After reading this chapter, you should have a
good understanding of:
 The definition of strategic management and its four
key attributes.
 The strategic management process and its three
interrelated and principal activities.
 The resource-based view of the firm and the
different types of tangible and intangible
resources, as well as organizational capabilities.
 The four attributes that a firm’s resources must
possess to maintain a sustainable advantage
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Two Perspectives of Leadership

Romantic view


Leader is the key force in organization’s success
External control perspective


Focus is on external factors that affect an
organization’s success
Leaders can make a difference


Must be aware of opportunities and threats faced in
external environment
Must have thorough understanding of the firm’s
resources and capabilities
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Example: What’s In a Leader?
 Always emphasized the importance of
innovative and flexible leadership that is adept
at adjusting to changing times and
circumstances
 In 1989, CEO of Ford Motor received Chief
Executive magazine's CEO of the Year Award
 Fred Smith started Federal Express in 1971 on
a premise that was found to be highly
improbable by one of his business school
professors
www.forbes.com/leadership/2007/08/07/ceo-management-personalities-lead-cz_ek_0807topceo.html
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The Nature of Strategic Management
 Today must do more than set long-term
strategies and hope for the best
 Must go beyond “incremental management”
Making minor changes
 Today’s pace of change is accelerating
Manager’s must make major and minor changes in
strategic direction
 Leaders must be:
Proactive
Anticipate change
Continually refine and make strategic changes
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Strategic Management
 Strategic Management consists of the
analyses, decisions, and actions an
organization undertakes in order to
create and sustain competitive
advantages
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Strategic Management
 Analysis
Strategic goals (vision, mission, strategic objectives)
Internal and external environment of the firm
 Strategic decisions
What industries should we compete in?
How should we compete in those industries?
 Actions
Allocate necessary resources
Design the organization to bring intended strategies
to reality
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Strategic Management
 Strategic management is the study of
why some firms outperform others
How to compete in order to create
competitive advantages in the marketplace
How to create competitive advantages in the
market place
Unique and valuable
Difficult for competitors to copy or substitute
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Question
 Which of the following is not a key attribute of
strategic management?
a) Recognizes trade-offs between efficiency and
effectiveness
b) Directs management in making proper decisions to
benefit firm
c) Directs the organization toward overall goals and
objectives
d) Needs to incorporate short-term and long-term
perspectives
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Key Attributes
Key Attributes of strategic
management:
 Directs the organization toward overall
goals and objectives
 Includes multiple stakeholders in
decision making
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Key Attributes
Key Attributes of strategic management:
 Needs to incorporate short-term and longterm perspectives
Peter Senge refers to this needs as a “creative
tension”
Must maintain a vision for the future of the
organization and focus on its present operating
needs
 Recognizes trade-offs between efficiency and
effectiveness
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Question
 The final realized strategy of a firm is a
combination of:
a) Intended and unrealized strategies
b) Unrealized and emergent strategies
c) Emergent and deliberate strategies
d) Deliberate and unrealized strategies
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Strategic Management Process
 Henry Mintzberg, management scholar at
McGill University
Business environment far from predictable
Decisions seldom based on optimal rationality
alone
 Decisions following analysis constitute
intended strategy
 Final realized strategy of any firm is a
combination of deliberate and emergent
strategies
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Strategic Management Process
1-15
Strategic Analysis
 Starting point in the strategic management
process
 Precedes effective formulation and
implementation of strategies
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Strategic Analysis (cont.)
 Frameworks for analyzing a firm’s internal
environment
Strengths
Weaknesses
 Analyzing strengths can uncover potential sources
of competitive advantage
 Analyzing external environments
Competitors
General environment
Industry environment
1-17
Example: Sony’s Move
 Video game leader struggles
 Historical industry leader Nintendo had
drifted down to third
 Sony Vs. Microsoft and Nintendo
 Slashed price of its PlayStation 3 console
 Simplest option is to just come up with a
copy-cat version of Nintendo’s Wii controller
www.forbes.com/leadership/2007/08/01/sony-games-innovation-lead-cz_cc_0802christensen.html
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Strategy Formulation
 Business level strategy:
Successful firms develop bases for competitive
advantage
Cost leadership
Differentiation
Focusing on narrow or industry-wide market segments
Sustainability
Industry life cycle
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Strategy Formulation (cont.)
Corporate-level strategy addresses:
 Firm’s portfolio or group of businesses
What business(es) should we be in?
How can we create synergies among the businesses?
 Diversification
Related
Unrelated
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Question

All of the following are key types of resources
except:
a)
b)
c)
d)
Physical
Tangible
Intangible
Organizational capabilities
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Resource-Based View of the Firm
 Resource-based view -- helpful perspective for
understanding strategic management and its
activities
 Two perspectives
The internal analysis of phenomena within a company
An external analysis of the industry and its competitive
environment
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Resource-Based View of the Firm
 Firm’s resources must be evaluated in
terms of how valuable, rare, and hard they
are for competitors to duplicate
 Three key types of resources
Tangible resources
Intangible resources
Organizational capabilities
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Resource-Based View of the Firm
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Types of Resources:
Tangible Resources
 Relatively easy to identify
 Financial resources
Firm’s cash accounts
Firm’s capacity to raise equity
Firm’s borrowing capacity
 Physical resources
Modern plant and facilities
Favorable manufacturing locations
State-of-the-art machinery and equipment
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Types of Resources:
Tangible Resources
 Technological resources
Trade secrets
Innovative production processes
Patents, copyrights, trademarks
 Organizational resources
Effective strategic planning processes
Excellent evaluation and control systems
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Question
Intangible resources are:
a)
b)
c)
d)
The same as capital resources
Easy to attain and keep on hand
Easily substitutable or imitated
Difficult for competitors to account for or imitate
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Types of Resources:
Intangible Resources
 Difficult for competitors (and the firm itself) to
account for or imitate
Human
Experience and capabilities of employees
Trust
Managerial skills
Firm-specific practices and procedures
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Types of Resources:
Intangible Resources
 Innovation and creativity
Technical and scientific skills
Innovation capacities
 Reputation
Brand name
Reputation with customers
Reputation with suppliers
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Example: McDonald’s Innovation
 Focus on nonconsumption and a welldesigned innovation process
 McDonald's sought to increase sales
during parts of the day when its share of
total food and snack consumption was low
 Breakfast – McGriddle products
 Snacking occasions – Snack wrap
www.forbes.com/claytonchristensen/2007/08/31/christensen-innovation-mcdonalds-pf-guru_in_cc_0904christensen_inl.html
1-30
Types of Resources:
Organizational Capabilities
 Competencies or skills that a firm employs to
transform inputs to outputs, and capacity to
combine tangible and intangible resources to
attain desired end
Outstanding customer service
Excellent product development capabilities
Innovativeness of products and services
Ability to hire, motivate, and retain human capital
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Dell’s Resources and Capabilities
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Firm Resources and
Sustainable Competitive Advantages
 Resources alone are not basis for competitive
advantages, nor are advantages sustainable
over time
 Resources or capabilities may help firm to
increase revenue or lower costs
Only temporary advantage
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Firm Resources and
Sustainable Competitive Advantages
Is the resource or
capability…
Valuable
Rare
Difficult to imitate or
substitute
Implications
• Neutralize threats and
exploit opportunities
• Not many firms possess
• Physically unique
• Path dependency
• Causal ambiguity
• Social complexity
Organizationally
Activatible?
• Firm has complementary
resources to optimize
capability
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Firm Resources and
Sustainable Competitive Advantages
 Is the Resource Valuable?
Resources are valuable when they enable a firm to
formulate and implement strategies that improve its
efficiency or effectiveness
SWOT matrix suggests firms improve performance
only when they exploit opportunities or neutralize
threats
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Firm Resources and
Sustainable Competitive Advantages
 Is the Resource Rare?
If competitors possess same valuable resource,
not source of competitive advantage
Common strategies based on a resources is not
an advantage
Some strategies require mix of resources –
tangible assets, intangible assets, and
organizational capabilities
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Firm Resources and
Sustainable Competitive Advantages
 Can the Resource Be Imitated Easily?
Inimitability is key to value creation
Constrains competition
Competitors will eventually find a way to copy
valuable resources
Advantage based on inimitability won’t last forever
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Firm Resources and
Sustainable Competitive Advantages
 Can the Resource Be Imitated Easily?
Managers can develop strategies around
resources that have one or more of the following
four characteristics:
Physical Uniqueness
Path dependency
Causal ambiguity
Social complexity
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Firm Resources and
Sustainable Competitive Advantages
 Are Substitutes Readily Available?
Must be no strategically equivalent valuable
resources that are themselves not rare or inimitable
Substitutability takes two forms:
Substitute similar resource to implement same
strategy (In-person vs. Video Training)
Very different resources can become strategic
substitutes (Internet vs. Brick & Mortar facilities)
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Firm Resources and
Sustainable Competitive Advantages
 Is the Capability Organizationally Activatable?
Firm must have access to complementary
resources to maximize capability potential
Types of Complementary Resources Include:
Financial Capital
Production/Manufacturing Facilities
Marketing KSAs
Distribution Networks
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Criteria for Sustainable Competitive
Advantage and Strategic Implications
Is a resource or capability…
Valuable
Rare Inimitable/ Activatable Implications
Substitute
for Competitiveness
No
No
No
No
Competitive disadvantage
Yes
No
No
No
Competitive parity
Yes
Yes
No
No
Temporary competitive
advantage
Yes
Yes
Yes
Yes
Sustainable competitive
advantage
Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications
Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of
Management 17 (1991), pp. 99-120.
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