PART I
STRATEGIC THINKING
Chapter 1
Introduction to Strategic Management
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Key Terms
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Competitive advantage
Derived from the successful formulation and execution of
strategies which differ and create more value than
competitor strategies
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Strategic management process
The full set of commitments, decisions, and actions
required for a firm to create value and earn returns that
are higher than those of competitors
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De-regulation 1978
Low-cost, limited route carriers
Terrorist attacks
Volatile economic conditions
Global alliances
High level of consolidation
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Globalization
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Economic volatility
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Rapid technological change
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Key Terms
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Globalization
Increasing economic interdependence among countries
as reflected in the flow of goods and services, financial
capital, and knowledge across country borders
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Hypercompetition
Extremely intense rivalry among firms, characterized
by escalating and aggressive competitive moves among
market challengers
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Artificial constraints on business
transactions across national boundaries
(such as tariffs) have been eliminated.
Restraints on the transfer of resources (such
as equipment, capital, raw material, and
even employees) across markets have
decreased significantly.
The range of competitive opportunities
available to firms has greatly increased.
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Hypercompetition has resulted from the
dynamics of strategic maneuvering among
global and innovative competitors in a
volatile economy.
Performance standards have increased in
many areas, including quality, cost,
productivity, product introduction time, and
operational efficiency.
Continuous improvement in all areas is
necessary for continued survival.
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National debt levels
 Financial
market instability
 Government actions to reduce
debt
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Unanticipated crises
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Increasing rate of technological
change and diffusion.
Dramatic changes in information
technology and ways in which
information is used.
Increasing knowledge intensity.
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Destroys the value of existing
technologies
Creative destruction process
replaces existing technologies with
new ones to create new markets
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Business survival now depends on the ability to:
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Capture intelligence
 Transform it into useable knowledge, and
 Diffuse it rapidly throughout the company
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Quick competitive information needs
Shorter product life cycles
Indistinguishable products
Rapid technology replacement
Inexpensive information available
New business culture from electronicbusiness models
Continuous learning necessary
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Speed to market
Access to and use of information
Rapid diffusion of new, transformed knowledge
throughout the company
Innovation
Integration of new conditions into the mind set
of the organization
Achieving or exceeding global standards
Improved capabilities and skills through the
pursuit of higher performance standards
Strategic flexibility
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Key Terms
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Strategic flexibility
A set of capabilities used to respond to
various demands and opportunities existing
in a dynamic and uncertain competitive
environment
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Continuous learning
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Strategic thinking
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Strategic leadership
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Key Terms
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Agency theory
A viewpoint which argues that agency problems
exist when managers take actions that are in their
own best interests rather than those of
shareholders
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Transactions costs economics
Examination of the efficiency of economic activity
which instructs firms to purchase required
resources through a market transaction unless
particular conditions exist that make creating them
internally more efficient
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Key Terms
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Deterministic perspective
Strategy formulation argument that firms should
adapt to their environments (establishing "fit")
because the environmental situation determines
the most effective strategies for achieving success
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Enactment
Principle that challenges the inevitability of
deterministic forces in the environment by
recognizing the potential of human action to
influence organizational results
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The need for businesses to establish goals, formulate
strategies to achieve them, set implementation and
evaluation plans and controls to meet stated goals.
The integration of the external market factors into
business planning.
The wisdom of balancing the conflicting needs of
businesses' internal and external stakeholders.
The importance of an economic approach to identify
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 to produce or acquire the resources needed
by businesses.
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Industrial/Organization (I/O)
Economic Model
Resource-Based View
Stakeholder Approach
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The model explains the dominant
influence of the external environment
on a firm's strategic actions and
performance.
“The model specifies that the industry in which a
firm chooses to compete has a stronger influence
on the firm’s performance than do the choices
managers make inside their organizations.”
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The external environment is assumed to
impose pressures and constraints that
determine the strategies that would result
in above-average returns.
Most firms competing within a particular
industry or industry segment are assumed
to control similar strategically relevant
resources and to pursue similar strategies in
light of those resources.
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Resources used to implement strategies are
assumed to be highly mobile across firms.
Because of resource mobility, any resource
differences that might develop between
firms will be short lived.
Organizational decision makers are
assumed to be rational and committed to
acting in the firm's best interests, as shown
by their profit-maximizing behaviors.
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The model suggests that an industry’s
profitability is a function of interactions among:
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Suppliers
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Buyers
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Competitive rivalry among industry
participants
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Product substitutes
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Potential entrants to the industry
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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
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Only 2 strategies are suggested.
Cost Leadership
 Differentiation
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Internal resources and capabilities
are not considered.
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The model proposes that a firm's unique
collection of resources and capabilities is
the primary influence on the selection and
use of a strategy or strategies to exploit
opportunities in the external environment
which result in successful performance.
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Key Terms
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Distinctive competencies
Firm attributes that allow it to pursue a strategy better
than other firms
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Resources
Inputs into a firm's production process
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Capability
Capacity for a set of resources to perform a task or
activity in an integrative manner
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Core competencies
Resources and capabilities that serve as a source of
competitive advantage for a firm over its rivals
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Capabilities evolve and must be managed
dynamically in pursuit of value creation and
higher firm performance.
Across time, firms acquire different resources
and develop unique capabilities.
Resources may not be easily transferable across
firms.
The differences in resources are the basis of
competitive advantage.
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Resources serve as the foundation for
the establishment of competencies.
Resources facilitate the
implementation of a product market
strategy.
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Physical
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Human
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Organizational capital
Resources may be either tangible or intangible.
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Managerial competencies
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Product-related competencies
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Valuable
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Rare
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Costly to imitate
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Nonsubstitutable
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The model proposes that a firm can
effectively manage stakeholder
relationships to create a competitive
advantage and outperform its
competitors.
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Key Terms
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Stakeholders
Individuals and groups who can affect, and are
affected by, the strategic outcomes a firm achieves
and who have enforceable claims on a firm's
performance
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Strategic intelligence
The information firms collect from their network of
stakeholders to deal with diverse and cognitively
complex competitive situations and to stimulate
innovation
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Government entities and
administrators
Activists and advocacy groups
Religious organizations
Other non-governmental
organizations
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There is a general lack of public trust
for big businesses and their managers.
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Anticipating and managing additional costs
associated with treating stakeholders in the
manner suggested by stakeholder theory
Determining how much value to allocate
without “giving away the store”
Determining how to allocate value (or returns)
commensurate with stakeholder contribution
Establishing trust and mutual satisfaction of
goals to increase the level of strategic
intelligence available to the firm’s strategic
leaders
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Timely and high quality strategic intelligence
can be gathered to improve a firm's strategic
decisions.
A trustworthy reputation draws valuable
customers, suppliers, and business partners
which enable the firm to gain superior
resources and opportunities.
A trustworthy reputation attracts investors
who offer financial resources.
Fair and respectful treatment of employees
attracts high quality human resources essential
in today’s competitive environment.
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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 regulation, legal suits
and penalties, consumer dissatisfaction,
employee work outages, and bad press.)
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Key Terms
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Strategic thinking competency
The knowledge, skills, and abilities needed to detect
market opportunities, formulate a vision to capitalize
on these opportunities, and engineer feasible
strategies to realize organizational and stakeholder
value
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Strategic Intent
Organizational term used to describe a dream that
challenges and energizes a company -- a vision which
elicits the help of others in creating a firm’s competitive
advantage
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Intent focused
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Comprehensive
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Opportunistic
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Considers multiple time horizons
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Hypothesis driven
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Involves risk
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Employ top managers who are champions of
change.
Establish systems and processes which capture
new ideas as they occur.
Train managers and employees in strategic
thinking methods and processes.
Foster an environment which rewards risk
taking.
Provide flexibility in strategic management
processes to allow incorporation of new ideas
with potential.
48

Key Terms

Strategic management process
The full set of commitments, decisions, and
actions required for a firm to create value
and earn returns that are higher than those
of competitors
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50
How should ethical considerations be
included in analyses of the firm’s external
environment and its internal organization?
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To what extent does a firm have an
ethical responsibility to provide
information to its stakeholders that they
will not find agreeable? How does the
amount and type of information shared
vary from one stakeholder to another?
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Do firms face ethical challenges, perhaps
even ethical dilemmas, when trying to
satisfy both the short-term and long-term
expectations of capital market
stakeholders?
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What types of ethical issues and challenges
do firms encounter when competing
internationally?
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What ethical responsibilities does the firm
have when it earns above-average
returns? Who should make decisions
regarding this issue, and why?
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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?
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