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Introduction to strategic management

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Introduction to strategic management

Introduction to strategic management

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  • I/O Model: McDonalds and Starbucks
    Respectively, in both cases the CEOs Ray Crock and Howard Schultz were examining
    the industry in which they worked. Crock was a sales rep for a firm that built malted
    milkshake machines. Schultz was a sales rep for a company that made home espresso
    machine accessories. Both noticed that there was a customer that was purchasing a large
    volume of these machines. They made trips to the locations of these stores and noticed
    that each was in an emerging industry that had high-growth potential and higher-than-average
    profit margins. McDonalds is in fast-food and drive-thru restaurants and Starbucks
    is in specialty coffee retail.
  • Four Assumptions of the I/O Model
    Both Crock and Schultz identified the strategy that allowed their companies to achieve
    high profits: McDonalds through the “assembly line” of their burgers  and Starbucks with
    product marketing that created ambiance and consistency, a value perception that allowed
    them to charge high premium for their coffee.
  • Four Assumptions of the I/O Model (cont.)
    Both McDonalds and Starbucks then spent time and capital to acquire and develop the
    skills needed to implement the business strategy. Crock became a business partner of the
    McDonald brothers and sold franchise agreements for them. Schultz took a position in the
    marketing department of Starbucks. Each later purchased the firm and used what they had
    learned to rapidly expand the company. Crock was able to use McDonalds quality, consistency,
    rapid assembly system, and drive-thru concepts to continue to realize high profits.
    Schultz was able to use the Starbucks image, ambiance concept, and marketing
    strengths to rapidly expand.
    One interesting note: Initially, Schultz started a Seattle coffeehouse chain (Il Giorande)
    that competed with Starbucks. His marketing manager was so adamant that Starbucks
    was a better concept capable of “going global” that Schultz sold his original
    coffeehouse chain and purchased Starbucks.
  • Resource-based model: Patents and Inventions
    The resource-based view (RBV) of the firm is hedged on two axiomatic assumptions. First,
    resources are distributed heterogeneously across firms, and second, these resources cannot
    be transferred between firms without cost. These axioms lend themselves to two additional
    tenets (cf., Barney, 1991): (a) Resources that simultaneously enhance a firm’s market
    effectiveness (valuable) and are not widely dispersed (rare) can produce competitive
    advantage; and (b) when such resources are concurrently expensive to imitate (inimitable)
    and costly to substitute (nonsubstitutable), the competitive advantage is sustainable.
    Thus, value and rarity are each necessary before inimitability and nonsubstitutability
    might yield a sustainable competitive advantage (Priem & Butler, 2001).
  • Resource-based model: Patents and Inventions (cont.)
    Despite its face validity and rapid diffusion throughout the management literature, there
    have only been limited empirical tests of RBV’s tenets (cf., Priem & Butler, 2001). To
    echo Miller and Shamsie (1996, p. 519), “the concept of resources remains an amorphous
    one that is rarely operationally defined or tested for its performance implications in different
    competitive environments.” Many managers use RBV’s terms with little specificity
    or attention to causal relationships. Researchers have identified several types of valuable
    and rare resources that could generate rents. Some examples include information technology
    (Powell, 1997), strategic planning (Powell, 1992), organizational alignment
    (Powell, 1992a), human resources management (Lado & Wilson, 1994; Wright &
    McMahan, 1992), trust (Barney & Hansen, 1994), organizational culture (Oliver, 1997),
    administrative skills (Powell, 1993), expertise of top management (Castanias & Helfat,
    1991), and even Guanxicomplex networks (Tsang, 1998).
  • Resource-based model: Patents and Inventions (cont.)
    The degree to which RBV is likely to help managers depends on the extent to which it
    can be used to achieve competitive advantage. Hence, recently, Markman and his colleagues
    have attempted to clarify three basic questions: (1) Can a single resource be simultaneously
    valuable, rare, inimitable, and nonsubstitutable? (2) Can an inimitable and
    nonsubstitutable resource be measured? And (3) To what extent is an inimitable and nonsubstitutable
    resource associated with competitive advantage?
    Using five-year data from 85 large, publicly traded pharmaceutical companies,
    Markman and his colleagues advance the view that a single resource-patented invention
    could qualify as simultaneously valuable, rare, hard to imitate, and difficult to substitute.
    In other words, the answer to the first question is yes; some patents are valuable, rare,
    inimitable, and nonsubstitutable resources. The answers to the second and third questions
    are “yes” as well. That is, controlling for assets, sales, and investment in R&D, they
    found that a patent’s quality and scope are significantly related to competitive advantage
    as captured by new products and, to some extent, to profitability.
  • Four Attributes of Resources and Capabilities
    (Competitive Advantage)
    Despite these findings and the intuitive appeal of RBV, challenges remain. Priem and Butler
    (2001) noted that a resource that is valuable, rare, hard to imitate, and not substitutable
    is also difficult to assess, manipulate, or deploy, and therefore difficult to exploit. Their
    analytical assessment spurred an important debate regarding RBV’s practical utility. For
    example, tacit knowledge, organizational learning, workflow, time, interorganizational
    ties, communications, and human interactions might be seen as hard to imitate and nonsubstitutable
    resources, but such resources are neither necessarily rare nor inevitably
    valuable. Thus, while many “things” might be classified as resources, intangibles are less
    amenable to managerial manipulation, rendering their associations with competitive advantage
    tenuous. For example, tacit knowledge is frequently conceptualized as a source
    of competitive advantage, yet we don’t know how (and at what rate) managers create and
    use that which is inherently unknowable. Personnel, machinery, land, technical procedures,
    and financial capital are relatively easy to quantify resources. Brand names, however,
    and organizational knowledge, learning, and culture are extremely difficult to craft,
    use, measure, and manage. In sum, the practical utility of RBV to managers remains
    weak as long as we fail to explicitly parameterize and measure the extent to which certain
    resources are valuable, rare, inimitable, and nonsubstitutable.

Transcript

  • 1. Introduction to Strategic Management HCAD 5390
  • 2. What is Strategy? Strategy is the overall plan for deploying resources to establish a favorable position. Tactic is a scheme for a specific maneuver.
  • 3.  Characteristics – – – of strategic decisions… Important Involve a significant commitment of resources Not easily reversible
  • 4. Basic Framework External Environment The firm Goals & Values Resources & Capabilities Structures & Systems Competitors Strategy Customers Suppliers etc
  • 5. Definitions Strategic Management Process The full set of commitments, decisions, and actions required for a firm to create value and earn above-average returns Value Creation What is achieved when a firm successfully formulates and implements a strategy that other companies are unable to duplicate or find too costly to imitate.
  • 6. Definitions Average Returns Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk Above-Average Returns Returns that are in excess of what an investor expects to earn from other investments with a similar amount of risk
  • 7. Definitions Risk An investor’s uncertainty about the economic gains or losses that will result from a particular investment
  • 8. Competitive Landscape Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new knowhow, first mover Hypercompetitive environments Fundamental nature of competition is changing Protect or invade established product or geographic markets
  • 9. Competitive Landscape Emergence of global economy Goods, services, people, skills, and ideas move freely across geographic borders Spread of economic innovations around the world Hypercompetitive environments Fundamental nature of competition is changing Political and cultural adjustments are required
  • 10. Competitive Landscape Emergence of global economy Rapid technological change Increasing rate of technological change and diffusion The information age Increasing knowledge intensity Hypercompetitive environments Fundamental nature of competition is changing
  • 11. Strategic Flexibility A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment It involves coping with uncertainty and the accompanying risks
  • 12. Strategic Flexibility Organizational slack Strategic reorientation Capacity to learn Strategic Flexibility flexibility
  • 13. I/O Model of Above-Average Returns 1. External Environments General al ral tur ltu cul cu cio cio So So Competitor Environment Technological Environment Ec on o mi c Industry Environment ic ic ph ph g ra g ra mo mo De De Po liti ca l /L ega l Global 1. Strategy dictated by the external environment of the firm (what opportunities exist in these environments?) 2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?)
  • 14. Four Assumptions of the I/O Model 1. The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns 2. Most firms competing within a particular industry or within a certain segment of it are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources
  • 15. Four Assumptions of the I/O Model 3. Resources used to implement strategies are highly mobile across firms 4. 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
  • 16. I/O Model of Above-Average Returns Industrial Organization 1. Study the external environment, especially the Model The External Environment industry environment • economies of scale • barriers to market entry • diversification • product differentiation • degree of concentration of firms in the industry
  • 17. I/O Model of Above-Average Returns Industrial Organization 2. Locate an attractive industry with a high potential for Model The External Environment An Attractive Industry above-average returns Attractive industry: one whose structural characteristics suggest above-average returns
  • 18. I/O Model of Above-Average Returns Industrial Organization 3. Identify the strategy called for by the attractive industry Model The External Environment to earn above-average returns An Attractive Industry Strategy Formulation Strategy formulation: selection of a strategy linked with above-average returns in a particular industry
  • 19. I/O Model of Above-Average Returns Industrial Organization 4. Develop or acquire assets and skills needed to implement Model The External Environment the strategy An Attractive Industry Strategy Formulation Assets and Skills Assets and skills: those assets and skills required to implement a chosen strategy
  • 20. I/O Model of Above-Average Returns Industrial Organization 5. Use the firm’s strengths (its developed or acquired assets Model The External Environment and skills) to implement the strategy An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy
  • 21. I/O Model of Above-Average Returns Industrial Organization Model The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior Returns Superior returns: earning of above-average returns
  • 22. Resource-based Model of Above Average Returns 1. Firm’s Resources 1. Strategy dictated by the firm’s unique resources and capabilities 2. Find an environment in which to exploit these assets (where are the best opportunities?)
  • 23. Resource-based Model of Above Average Returns Resource-based Model Resources 1. Identify the firm’s resources-- strengths and weaknesses compared with competitorsinputs into a firm’s Resources: production process
  • 24. Resource-based Model of Above Average Returns Resource-based Model Resources Capability 2. Determine the firm’s capabilities--what it can do better than its competitors Capability: capacity of an integrated set of resources to integratively perform a task or activity
  • 25. Four Attributes of Resources and Capabilities (Competitive Advantage) Rare Costly to imitate Nonsubstitutable Resources and Capabilities Valuable allow the firm to exploit opportunities or neutralize threats in its external environment possessed by few, if any, current and potential competitors when other firms cannot obtain them or must obtain them at a much higher cost the firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage
  • 26. Resources and capabilities that meet these four criteria become a source of: Rare Costly to imitate Nonsubstitutable Resources and Capabilities Valuable Core Competencies
  • 27. Core Competencies are the basis for a firm’s Competitive advantage Value Creation Ability to earn above-average returns Core Competencies
  • 28. Resource-based Model of Above Average Returns Resource-based Model Resources 3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage Capability Competitive Advantage Competitive advantage: ability of a firm to outperform its rivals
  • 29. Resource-based Model of Above Average Returns Resource-based Model 4. Locate an attractive industry Resources Capability Competitive Advantage An Attractive Industry An attractive industry: an industry with opportunities that can be exploited by the firm’s resources and capabilities
  • 30. Resource-based Model of Above Average Returns Resource-based Model Resources Capability 5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment Competitive Advantage An Attractive Industry Strategy Form/Impl Strategy formulation and implementation: strategic actions taken to earn above average returns
  • 31. Resource-based Model of Above Average Returns Resource-based Model Resources Capability Competitive Advantage An Attractive Industry Strategy Form/Impl Superior Returns Superior returns: earning of above-average returns
  • 32. Strategic Intent & Mission  Strategic  Winning competitive battles by leveraging the firm’s resources, capabilities, and core competencies  Strategic  Intent Mission An application of strategic intent in terms of products to be offered and markets to be served
  • 33. Emergent and Deliberate Strategies Intended Strategy Deliberate Strategy Unrealized Strategy Realized Strategy Emergent Strategy From “Strategy Formation in an Adhocracy” by Henry Mintzberg and Alexandra McHugh, Administrative Science Quarterly, Vol. 30, No. 2, June 1985. Reprinted by permission of Administrative Science Quarterly.
  • 34. Strategic Management Process for Intended Strategies Missions Missions and Goals and Goals External External Analysis Analysis Strategic Strategic Choice Choice INTENDED STRATEGY Organizing for Organizing for Implementation Implementation Internal Internal Analysis Analysis
  • 35. Strategic Management Process for Emergent Strategies External External Analysis Analysis Missions Missions and Goals and Goals Strategic Choice Strategic Choice Does It Fit? Does It Fit? EMERGENT STRATEGY Organizational Organizational Grassroots Grassroots Internal Internal Analysis Analysis
  • 36. The Firm and Its Stakeholders Stakeholders Groups who are affected by a The firm must maintain firm’s performance and who performance at an adequate have claims on its wealth level in order to retain the participation of key stakeholders
  • 37. The Firm and Its Stakeholders Stakeholders Capital Market Stakeholders Shareholders Major suppliers of capital •Banks •Private lenders •Venture capitalists
  • 38. The Firm and Its Stakeholders Stakeholders Capital Market Stakeholders Product Market Stakeholders Primary customers Suppliers Host communities Unions
  • 39. The Firm and Its Stakeholders Stakeholders Capital Market Stakeholders Product Market Stakeholders Organizational Stakeholders Employees Managers Nonmanagers
  • 40. Values Johnson & Johnson’s credo sets its responsibilities to: 1. 2. 3. 4. J&J product users. J&J employees. Communities in which J&J employees live and work. J&J stockholders. Source: Courtesy of Johnson & Johnson.
  • 41. Johnson & Johnson Credo*  First Responsibility Is to Those Who Use J&J Products  Next Come Its Employees  Next, the Communities in Which the Employees Live and Work  Its Final Responsibility Is to Its Stockholders
  • 42. Levels of Strategy Functi o nal Business Corp o r at e Global
  • 43. •Functional-Level Strategy – – – – – Manufacturing Marketing Materials Management Research and Development Human Resources
  • 44. • Business-Level Strategy – – – Cost Leadership Differentiation Market Niche Focus
  • 45. • Global Strategies – – – – Multidomestic International Global Transnational
  • 46. • Corporate-Level Strategy – – – – – – Vertical Integration Diversification Strategic Alliances Acquisitions New Ventures Business Portfolio Restructuring