In Chapter 1 we will discuss strategic management and strategic competitiveness. We will take a close look at the strategic management process, define it, and examine the steps involved in the process and the concepts used in each step. Let’s begin by defining a few terms. Strategic competitiveness is when a firm successfully forms and implements a value-creating strategy. A strategy is an integrated, coordinated set of commitments and actions that exploit core competencies and gain competitive advantage. A firm has a competitive advantage when it implements a strategy competitors are unable to duplicate or find too costly to try to imitate. No competitive advantage is permanent.
Firms use the strategic management process to achieve strategic competitiveness and earn above-average returns. Strategic competitiveness is achieved when a firm has developed and learned how to implement a value-creating strategy. Above average returns (in excess of what investors expect to earn from other investments with similar levels of risk) provide the foundation a firm needs to simultaneously satisfy all of its stakeholders.
The first step of the strategic management process is to analyze strategic inputs. To do this, a firm must evaluate its competitive landscape.
The first step in the strategic management process is to analyze strategic inputs. There are two models to assist with doing this. The Industrial organization model is based on the logic that the external environment primarily determines a firm’s strategic decisions. The resource-based model looks to the firm’s internal sources of strategic competitiveness. Global economy and hypercompetition Technology Competitive advantage Competitive landscape characteristics Industries are changing as companies partner and technologies converge. Conventional sources of competitive advantage - such as scale – are less effective. Managers value flexibility, speed, innovation, integration, and a dynamic environment. Global competition requires enormous investments with costly consequences of failure. Success requires an effective strategy properly timed and supported.
Rate of technology diffusion is defined as the speed at which new technologies become available and are used. The rate of technology diffusion has increased substantially over the past 15 to 20 years. There are at least three indicators of rapid technology diffusion: Perpetual innovation, patents becoming less effective because technology changes so rapidly, and disruptive technologies. Another aspect of technology is called the information Age. Today’s businesses compete in an information-based economy known as the Information Age. Effectively and efficiently accessing and using information has become an important source of competitive advantage in virtually all industries. Both the pace of change in information technology and its diffusion will continue to increase. The Internet has fueled hypercompetition on a global scale. Yet another aspect of technology is increasing knowledge intensity. Knowledge – including information, intelligence, and expertise - is the basis of technology and its application. Knowledge is a critical organizational resource and an increasingly valuable source of competitive advantage. As an example, consider Wal-Mart. Wal-Mart transformed retailing by leveraging its knowledge of supply chain management and its information-rich relationships with customers and suppliers.
As mentioned earlier, the industrial organization (I/O) model says that the external environment was thought to be the primary determinant of strategies that firms selected to be successful. The industrial organization model of above-average returns explains the external environment’s dominant influence on a firm’s strategic actions. The model specifies that the industry in which a company chooses to compete has a stronger influence on performance than do the choices managers make inside their organizations. The firm’s performance is believed to be determined primarily by a range of industry properties, including economies of scale, barriers to market entry, diversification, product differentiation, and the degree of concentration of firms in the industry. This model explains the external environment’s dominant influence on a firm’s strategic actions. It challenges firms to select the most attractive industry in which to compete. The model makes four assumptions. First, the external environment imposes pressures and constraints that determine the strategies for above-average returns. Second, most competitors control similar strategically relevant resources and pursue similar strategies based on those resources. Third, resources used to implement strategies are highly mobile across firms, so any resource differences between firms are short-lived. Fourth, organizational decision makers are rational and committed to acting in the firm’s best interests.
The core assumption of the I/O model is that the firm’s external environment has more of an influence on the choice of strategies than do the firm’s internal resources, capabilities, and core competencies. Thus, the I/O model is used to understand the effects an industry’s characteristics can have on a firm when deciding what strategy or strategies to use to compete against rivals. The logic supporting the I/O model suggests that above-average returns are earned when the firm locates an attractive industry and successfully implements the strategy dictated by that industry’s characteristics. The core assumption of the resource-based model is that the firm’s unique resources, capabilities, and core competencies have more of an influence on selecting and using strategies than does the firm’s external environment. Above-average returns are earned when the firm uses its valuable, rare, costly to imitate, and nonsubstitutable resources and capabilities to compete against its rivals in one or more industries. Evidence indicates that both models yield insights that are linked to successfully selecting and using strategies. Thus, firms want to use their unique resources, capabilities, and core competencies as the foundation for one or more strategies that will allow them to compete in industries they understand. in order to retain their support. A firm earning below average returns must minimize the amount of support it loses from dissatisfied stakeholders. The I/O model also includes the five forces model of competition. This analytical tool is used to help firms select the most attractive industry in which to compete. According to the model, an industry’s profitability is a function of interactions among five forces: suppliers, buyers, competitive rivalry among firms currently in the industry, product substitutes, and potential entrants to the industry.
The Resource-Based Model of Above-Average Returns is the second model discussed in this chapter as a basis for a strategy to earn above-average returns. Resources are inputs into a firm’s production process - such as capital equipment, the skills of individual employees, patents, finances, and talented managers. There are 3 categories of resources: physical resources, human resources, and organizational capital resources.
Using the resources-based model, it is logical that a business would enter an industry in which it had competitive advantages. To become a competitive advantage, a resource must have four attributes. They are as follows. Resources are valuable when they allow a firm to take advantage of opportunities or neutralize threats in its external environment. They are rare when possessed by few, if any, current and potential competitors. Resources are costly to imitate when other firms either cannot obtain them or are at a cost disadvantage in obtaining them compared with the firm that already possesses them. And they are nonsubstitutable when they have no structural equivalents. Many resources can either be imitated or substituted over time. Therefore, it is difficult to achieve and sustain a competitive advantage based on resources alone. When these four criteria are met, however, resources and capabilities become core competencies.
After studying the external environment and the internal environment, the firm has the information it needs to form a vision and a mission. Stakeholders (those who affect or are affected by a firm’s performance, as discussed later in the chapter) learn a great deal about a firm by studying its vision and mission. Indeed, a key purpose of vision and mission statements is to inform stakeholders of what the firm is, what it seeks to accomplish, and who it seeks to serve. Vision is “big picture” thinking with passion that helps people feel what they are supposed to be doing in the organization. People feel what they are to do when their firm’s vision is simple, positive, and emotional, but a good vision stretches and challenges people as well. Vision statements reflect a firm’s values and aspirations and are intended to capture the heart and mind of each employee and, hopefully, many of its other stakeholders. The vision is the foundation for the firm’s mission.
Stakeholders are the individuals and groups who can affect the vision and mission of the firm, are affected by the strategic outcomes achieved, and have enforceable claims on a firm’s performance. Stakeholder relationships can be managed to be a source of competitive advantage. A firm’s stakeholders can be separated into at least three groups: capital market stakeholders (shareholders and the major suppliers of a firm’s capital), the product market stakeholders (the firm’s primary customers, suppliers, host communities, and unions representing the workforce), and the organizational stakeholders (all of a firm’s employees, including both nonmanagerial and managerial personnel). Capital market stakeholders - Shareholders and lenders expect a firm to preserve and enhance the wealth they have invested in it. The returns expected reflect the degree of risk. Dissatisfied lenders may impose stricter covenants on subsequent borrowing of capital or reflect their concerns through several means, including selling their stock. Product market stakeholders - Product market stakeholders include customers, suppliers, host communities, and unions. Organizational stakeholders - Employees—the firm’s organizational stakeholders—expect the firm to provide a dynamic, stimulating, and rewarding work environment. The education and skills of a firm’s workforce are competitive weapons affecting strategy implementation and firm performance. Strategic leaders - Strategic leaders are people located in different parts of the firm using the strategic management process to help the firm reach its vision and mission. Today, the effectiveness of the strategic management process increases when it is grounded in ethical intentions and behaviors.
Strategic leaders map an industry’s profit pool to anticipate the possible outcomes of different decisions and to focus on growth in profits rather than strictly growth in revenues. Analyzing the profit pool in the industry may help a firm see something others are unable to see by helping it understand the primary sources of profits in an industry.
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Chapter 1 Strategic Management and Strategic Competitiveness Hitt, Ireland, and Hoskisson