CHAPTER 1.pptx

Authored by:
Marta Szabo White. Ph.D
Georgia State University
PART 1:
STRATEGIC
MANAGEMENT
INPUTS
CHAPTER 1:
STRATEGIC
MANAGEMENT &
STRATEGIC
COMPETITIVENESS

©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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THE STRATEGIC MANAGEMENT
PROCESS
FIGURE 1.1
The Strategic
Management
Process

KNOWLEDGE OBJECTIVES
● Define strategic competitiveness,
strategy, competitive advantage, above-
average returns, and the strategic
management process.
● Describe the competitive landscape and
explain how globalization and technological
changes shape it.
● Use the industrial organization (I/O)
model to explain how firms can earn above-
average returns.
● Use the resource-based model to explain
how firms can earn above-average returns.

KNOWLEDGE OBJECTIVES
● Describe vision and mission and discuss
their value.
● Define stakeholders and describe their
ability to influence organizations.
● Describe the work of strategic leaders.
● Explain the strategic management
process.

IMPORTANT DEFINITIONS
● STRATEGIC COMPETITIVENESS -
achieved when a firm successfully formulates and
implements a value-creating strategy
● STRATEGY - an integrated and coordinated
set of commitments and actions designed to
exploit core competencies and gain a competitive
advantage
● COMPETITIVE ADVANTAGE - when a
firm implements a strategy that creates superior
value for customers; competitors are unable to
duplicate it or find too costly to imitate it

IMPORTANT DEFINITIONS
● RISK - an investor’s uncertainty about the
economic gains or losses that will result from a
particular investment
● ABOVE-AVERAGE RETURNS - returns
in excess of what an investor expects to earn
from other investments with a similar amount of
risk
● AVERAGE RETURNS - returns equal to
those an investor expects to earn from other
investments with a similar amount of risk

INABILITY TO EARN AVERAGE RETURNS
resulted first in decline and, eventually, failure
●Enjoyed considerable success early on
●Tried to enrich its traditional approach with more
marketing and more attractive stores, demonstrating
a lack of market understanding
●Declining book sales for large chain store retailers
●Should have been entrepreneurial, innovative, and
market-oriented
OPENING CASE
ONCE A “GIANT,” BORDERS BECAME A “WEAKLING” ON ITS
KNEES

PROCESS
External environment and internal organization
are analyzed to determine resources, capabilities, and core
competencies—the sources of “strategic inputs.”
Vision and mission are developed; strategies are
formulated.
Strategies are implemented with the goal of
achieving strategic competitiveness and above-average returns.
Continuously
changing markets and industry conditions must match evolving
strategic inputs.

PROCESS
Rational: the approach firms use to achieve
strategic competitiveness and earn above-average
returns
FORMULATION and
IMPLEMENTATION:
the two types of strategic actions that must be
simultaneously integrated to successfully employ
the strategic management process

PROCESS

THE COMPETITIVE LANDSCAPE
emergence of a global
economy
rapid technological changes
computer networks and
telecommunications have blurred the boundaries of the
entertainment industry
MSNBC is co-owned by NBC Universal and
Microsoft
General Electric owns 49 percent of NBC Universal
and Comcast owns the remaining 51 percent
effective use of
the strategic management process reduces the likelihood of
failure for firms as they encounter the conditions of today’s
competitive landscape

Market instability and change
Rapidly escalating competition
Aggressive challengers
Strategic maneuvering to establish first-
mover advantage
Technology industries
Strategic flexibility - important tool

Goods, services, people, skills, and
ideas move freely across geographic
borders
New opportunities and challenges
emerge
Competitive environments are
broader and increasingly more complex

The European Union has become
one of the world’s largest markets,
with 700 million potential customers
China has become the second
largest economy in the world
surpassing Japan
India, the world’s largest democracy,
has an economy that now ranks as the
fourth largest in the world

Huawei also needs Guanxi in
the United States
Strong relationships in which each party
feels obligated to help the other
Key element of doing business in China
Building strong relationships is an
important dimension of Chinese culture;
Guanxi is also important when conducting
business in the United States

Hypercompetitive business environment
challenges firms to reconsider which markets to
compete in; this positioning is more critical than ever
GE - headquartered in the U.S., yet up to 60% of
its revenue growth through 2015 will be generated
from rapidly developing economies such as China
and India
Jeffrey Immelt - suggests that we have entered a
new economic era in which the global economy will
be more volatile and emerging economies such as
Brazil, China, and India will be the major drivers of
growth

Globalization is
increasing economic
interdependence
among countries and
their organizations as
reflected in the flow of
goods and services,
financial capital, and
knowledge across
country borders.
Globalization is the
product of a large
number of firms
competing against
one another in an
increasing number of
global economies.
Highly globalized
firms must anticipate
ever-increasing
complexities in their
operations as goods,
services, people, etc.
move freely across
geographic borders.
THE MARCH OF GLOBALIZATION

Globalization has led
to higher performance
standards in quality,
cost, productivity,
product introduction
time, and operational
efficiency. These
standards translate
and impact domestic-
only firms as well.
Free flow of resources
among global
economies, global
sourcing for firms,
global purchasing for
customers, and a
global forum for
workers all serve as a
key source of
competitive
advantage for firms.
Firms must learn that
in this twenty-first
century competitive
landscape, only firms
capable of meeting, if
not exceeding, global
standards, have the
capability to earn
above-average
returns.
THE MARCH OF GLOBALIZATION

Significant time is
required for firms to
learn how to compete
in new markets, and
performance may
suffer during this time.
With globalization,
firms may over-
diversify
internationally, which
can have strong
negative effects on a
firm’s overall
performance.
It is critical for firms
competing globally to
remain strategically
committed to and
competitive in both
domestic and
international markets.
THE RISKS OF GLOBALIZATION

Technology is significantly altering the nature of
competition and enabling unstable competitive
environments
Technology Diffusion & Disruptive
Technologies
Information Age
Increasing Knowledge Intensity
TECHNOLOGY AND TECHNOLOGICAL
CHANGES

Technology Diffusion - Category
1
the speed at which new
technologies become available and are used; has
increased substantially over the past 15 to 20 year.
of technology diffusion: How long it
took to get the following into 25 percent of U.S.
homes:
● Telephone — 35 years
● TV — 26 years
● Radio — 22 years
● PCs — 16 years
CHANGES

Technology Diffusion - Category 1
Perpetual Innovation
describes how rapidly and
consistently new, information-intensive technologies
replace older ones
the shorter product life
cycles resulting from rapid diffusions of new
technologies place a competitive premium on being
able to quickly introduce new, innovative goods and
services
speed to market with
innovative products is a primary source of competitive
advantage
CHANGES

must be derived from an understanding
of global standards and global expectations in terms of
product functionality
an excellent example of radical innovation
by a large established firm
to diffuse the technology
and enhance the innovation value, firms need to be
innovative in incorporating the new technology into
their product
CHANGES

now may take only 12
to 18 months for firms to gather information about
research and development and product decisions for their
competitors
may be an effective protection of proprietary
technology in a small number of industries, e.g.,
pharmaceuticals
many firms often do not apply
for patents to prevent competitors from gaining access to
the technological knowledge included in the patent
application, e.g., the electronics industry
CHANGES

Disruptive Technologies
technologies that destroy
the value of an existing technology and create new
markets, many times representing radical or breakthrough
innovation
iPods, iPads, WiFi, and the browser
a
disruptive or radical technology creates a new industry,
thereby destroying the existing industry; with superior
resources, experience, and access to the new technology,
some incumbents may be able to adapt
CHANGES

Technology and Innovation
“legendary” market power, phenomenal growth
rate, and impressive financial performance stem from its
new technology development and innovation
Apple is expected to retain at least 80% of
the tablet computer market even with the many imitative
products on the market
Apple’s stores in China handle 40,000
people daily, four times the average flow of U.S.
customers
CHANGES

Technology and Innovation
Apple provides an example of technological
entrepreneurship across multiple industries
● Innovation and industry transformation, e.g., iPod,
iPad, and the iPhone
● iPod and the complementary iTunes have
revolutionized how music is sold and used by consumers
● iPad, in conjunction with Amazon’s Kindle, is
changing the publishing industry; moving to electronic books
CHANGES

The Information Age - Category 2
in information technology have
occurred in recent years, e.g., personal computers, cellular
phones, artificial intelligence, virtual reality, massive
databases, and multiple social networking sites
the ability to effectively and
efficiently access and use information has become an
important source of competitive advantage in virtually all
industries
enables small firms to be
flexible and competitive in the global arena
CHANGES

The Information Age - Category 2
both the pace of change in information
technology and its diffusion will continue to increase
the declining costs of information
technologies and the increased accessibility to them
are evident in the current competitive landscape
contributing factor to hypercompetition
the global proliferation of
computers increases the speed and diffusion of
information technologies and enables a level playing
field
CHANGES

Increasing Knowledge Intensity -
Category 3
information, intelligence, and expertise
are the basis of technology and its application
in the 1980s, the basis of
competition shifted from hard assets to intangible
resources; knowledge is a critical organizational resource
and an increasingly valuable source of competitive
advantage
knowledge gained through
experience, observation, and inference is an intangible
resource; the value of intangible resources is growing as
a proportion of total shareholder value
CHANGES

Category 3
enhanced for the firm
that develops the ability to capture intelligence,
transform it into usable knowledge, and diffuse it rapidly
throughout the firm
firms must develop (e.g.,
through training programs) and acquire (e.g., by hiring
educated and experienced employees) knowledge,
integrate it into the organization to create capabilities,
and then apply it to gain a competitive advantage
CHANGES

Category 3
knowledge falls into
competitor’s hands, e.g., hiring of professional
staff/managers by competitors
because of the potential for
spillovers, firms must act quickly to use their knowledge
in productive ways
facilitates knowledge diffusion
to where it has value
CHANGES

Category 3
Set of capabilities used to respond to various
demands and opportunities existing in a dynamic and
uncertain competitive environment
Enables the capacity to learn
Facilitates coping with hypercompetition, uncertainty,
and risk
Firms should try to develop strategic flexibility in all
areas of operations
CHANGES

TWO MODELS OF STRATEGIC
DECISION MAKING
Firms use two major models to help develop their
vision and mission and then choose one or more
strategies in pursuit of strategic competitiveness and
above-average returns.
EXTERNA
L
I/O
MODEL
INTERNAL
RESOURC
E-BASED
MODEL

THE I/O MODEL OF ABOVE-AVERAGE
RETURNS
Grounded in economics, the I/O model has
First, the external environment is assumed to
impose pressures and constraints that determine the
strategies that would result in above-average
returns.
Second, most firms competing within an industry or
within a segment of that industry are assumed to
control similar strategically relevant resources and to
pursue similar strategies in light of those resources.
Four Underlying Assumptions

Third, resources used to implement strategies are
assumed to be highly mobile across firms, so any
resource differences that might develop between
firms will be short-lived.
Fourth, organizational decision-makers are
assumed to be rational and committed to acting in
the firm’s best interests, as shown by their profit-
maximizing behavior.
THE I/O MODEL of ABOVE-AVERAGE
RETURNS

The Five Forces Model of competition is an
analytical tool used to help firms find the industry
that is the most attractive, as measured by its
profitability potential.
The Five Forces Model suggests that an
industry’s profitability (i.e., its rate of return on
invested capital relative to its cost of capital) is a
function of interactions among the Five Forces:
suppliers, buyers, rivalry, product substitutes, and
potential entrants to the industry.
THE I/O MODEL of ABOVE-
AVERAGE RETURNS

FIRMS CAN EARN ABOVE-AVERAGE RETURNS:
● Cost Leadership Strategy – producing standardized
goods or services at costs below those of competitors
● Differentiation Strategy - producing differentiated
goods or services for which customers are willing to
pay a price premium
The I/O model suggests that above-average returns are
earned when firms are able to effectively study the
external environment as the foundation for identifying an
attractive industry and implementing the appropriate
strategy.
THE I/O MODEL of ABOVE-AVERAGE
RETURNS

RETURNS
Research findings support the I/O model, in that
approximately 20% of a firm’s profitability is
explained by the industry in which it chooses to
compete.
However, this research also shows that 36% of the
variance in firm profitability can be attributed to
the firm’s characteristics and actions.
These findings suggest that the External AND
Internal environments influence the company’s
ability to achieve strategic competitiveness and
earn above-average returns.

RETURNS
FIGURE 1.2
The I/O Model
of Above
Average
Returns

THE RESOURCE-BASED MODEL
OF ABOVE-AVERAGE RETURNS
The resource-based model assumes that each
organization is a collection of unique resources
and capabilities.
The uniqueness of its resources and capabilities
is the basis of a firm’s strategy and its ability to
earn above-average returns.
The core assumption of the resource-based
model is that the firm’s unique resources,
capabilities, and core competencies have more
influence on selecting and using strategies than
does the firm’s external environment.

There are FOUR components to the
Resource- Based Model:
● Resources
● Capabilities
● Core Competencies
● Competitive Advantage
There are FOUR criteria that if resources and
capabilities fulfill, then they become Core
Competencies:
● Valuable
● Rare
● Costly to Imitate
● Nonsubstitutable

•Resources are inputs into a firm’s production
process, such as capital equipment, the skills of
individual employees, patents, finances, and
talented managers.
•A firm’s resources are either tangible or
intangible and are classified into three categories:
physical, human, and organizational capital.
•Resources alone may not yield a competitive
advantage. 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.

of ABOVE-AVERAGE RETURNS
A capability is the capacity for a set of resources
to perform a task or an activity in an integrative
manner.
Capabilities evolve over time and must be
managed dynamically in pursuit of above-average
returns.
Core competencies are resources and
capabilities that serve as a source of competitive
advantage.
KEY WORD: INTEGRATIVE

When these four criteria are met, resources and
capabilities become core competencies:
•They are valuable when they allow a firm to
take advantage of opportunities or
neutralize threats.
VALUABLE
•They are rare when possessed by few, if any,
current and potential competitors.
RARE
•Resources are costly to imitate when other
firms cannot obtain them or are at a cost
disadvantage.
COSTLY TO
IMITATE
•They are nonsubstitutable when they have no
structural equivalents.
NON-
SUBSTITUTABLE

First, differences in firms’ performances across
time are due primarily to their unique resources
and capabilities rather than the industry’s structural
characteristics.
Second, firms acquire different resources and
develop unique capabilities based on how they
combine and use the resources.
Four Underlying Assumptions

of ABOVE-AVERAGE RETURNS
Third, that resources and capabilities are NOT
highly mobile across firms.
Fourth, that the differences in resources and
capabilities are the basis of competitive
advantages.
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.

FIGURE 1.3
The Resource-
Based Model
of Above
Average
Returns

TWO MODELS OF STRATEGIC
DECISION MAKING
Evidence indicates that both models yield insights
that are linked to successfully selecting and using
strategies.
EXTERNA
L
I/O
MODEL
INTERNAL
RESOURC
E-BASED
MODEL

VISION
• Vision is a picture of what the firm wants to be
and, in broad terms, what it wants to ultimately
achieve.
• A vision statement is short and concise, making
it easy to remember.
• It articulates the ideal description of the
organization and gives shape to its intended
future.

• A firm’s vision tends to be enduring, whereas its
mission can change in light of changing
environmental conditions.
• vision statements reflect a firm’s values and
aspirations and are intended to capture the heart
and mind of each stakeholder.
• Executives and top-level managers must
formulate and implement strategies consistent with
the vision.
VISION

Examples:
Our vision is to be the world’s best quick service
restaurant. (McDonald’s)
To make the automobile accessible to every
American.
(Ford Motor Company’s vision when established
by Henry Ford)
VISION

MISSION
• The vision is the foundation for the firm’s
mission.
• The firm’s mission is more concrete than its
vision.
• A mission specifies the business or
businesses in which the firm intends to compete
and the customers it intends to serve.

MISSION
Examples:
Be the best employer for our people in each
community around the world and deliver
operational excellence to our customers in each
of our restaurants. (McDonald’s)
Our mission is to be recognized by our
customers as the leader in applications
engineering. We always focus on the activities
customers desire; we are highly motivated and
strive to advance our technical knowledge in the
areas of material, part design, and fabrication
technology. (LNP, a GE Plastics Company)

MISSION
• Similar to the vision, a mission should
establish a firm’s individuality and should be
inspirational to all stakeholders.
• A firm’s vision and mission are critical
aspects of the strategic inputs required to
engage in strategic actions that help achieve
strategic competitiveness and earn above-
average returns.

VISION, MISSION AND ETHICS
The probability of forming an effective mission increases
when employees have a strong sense of the ethical
standards that guide their behaviors.
•Deciding what a firm wants to
become
●VISION
•Deciding who it intends to
serve and how it wants to
serve those individuals and
groups
●MISSION
Business
ethics
are a
vital
part
of:

STAKEHOLDERS
Are there individuals, groups, and organizations
who have a stake in the organization
● Who can affect the firm’s vision and mission?
● Are affected by the strategic outcomes
achieved?
● Have enforceable claims on the firm’s
performance?
Competitive Advantage
Firms effectively managing stakeholder
relationships outperform those that do not.

STAKEHOLDERS
• Organizations are not equally dependent
on all stakeholders, so not every
stakeholder has the same level of
influence.
• The more critical and valued a
stakeholder’s participation, the greater a
firm’s dependence on it, which gives the
stakeholder more potential influence over
the firm.
• Managers must find ways to
accommodate or insulate the organization
from the demands of stakeholders

Three groups of stakeholders:
C
● Shareholders and the major suppliers of a firm’s
capital
● A firm’s primary customers, suppliers, host
communities, and unions representing the
workforce
● Firm’s employees, including both non-managerial
and managerial personnel
CLASSIFICATION OF STAKEHOLDERS
Capital market stakeholders
Product market stakeholders
Organizational stakeholders

FIGURE 1.4
The Three
Stakeholder
Groups

Trade-offs must be made in situations where the
objectives of various stakeholder groups differ or conflict.
● Shareholders – individuals and groups who have
invested capital in a firm in the expectation of earning
a positive return on their investments. These
stakeholders’ rights are grounded in laws governing
private property and private enterprise.
● Consumers – interests are maximized when the
quality and reliability of a firm’s products are
improved, but without high prices.
● High returns to customers might come at the
expense of lower returns for capital market
stakeholders and vice-versa.
Conflict examples:

MANAGING STAKEHOLDER CONFLICT
• First, a firm must thoroughly identify and
understand all important stakeholders.
• Second, it must prioritize them, in case it
cannot satisfy all of them.
• Power is the most critical criterion in
prioritizing stakeholders.
• Other criteria might include the urgency of
satisfying each particular stakeholder group
and the degree of importance of each to the
firm’s above-average returns.

POWER
URGENCY
IMPORTANCE

CHALLENGES:
When earning above-average returns, a firm can more
easily satisfy multiple stakeholders simultaneously.
When earning only average returns, a firm is unable to
maximize the interests of all stakeholders, thus
stakeholders should be at least minimally satisfied.
Cultural differences and societal values also influence
stakeholder priorities.

BALANCING CONFLICTING
SHAREHOLDER GOALS
The returns that shareholders expect are
commensurate with the degree of risk accepted with
those investments.
CHALLENGING FOR MANAGERS:
● Some shareholders want short-term
increases in returns
● Others desire building long-term
competitiveness
Often large shareholders prefer that the firm minimize
its use of debt because of the risk of debt, its cost, and
the possibility that debt holders have first call over
shareholders on the firm’s assets in case of default.
CAPITAL MARKET STAKEHOLDERS

• Though all product market stakeholders are
important, without customers, the other product
market stakeholders are of little value.
• Customers demand reliable products at the
lowest possible prices.
• Host communities want companies willing to be
long-term employers and providers of tax revenue
without placing excessive demands on public
support services.
PRODUCT MARKET STAKEHOLDERS

• Suppliers seek loyal customers who are willing to
pay the highest sustainable prices for the goods and
services they receive.
• Union officials are interested in secure jobs, under
highly desirable working conditions, for the
employees they represent.
• Product market stakeholders are generally
satisfied when a firm’s profit margin reflects at least
a balance between the returns to capital market
stakeholders and goals of product market
stakeholders.
PRODUCT MARKET STAKEHOLDERS

• Employees expect the firm to provide a
dynamic, stimulating, and rewarding work
environment.
• Employees are usually satisfied working for
a company that is:
● Growing
● Actively developing their skills to be
effective team members
● Meeting or exceeding global work
standards
ORGANIZATIONAL STAKEHOLDERS

• International assignments help cultivate
employee skills for the global competitive
landscape.
• The process of managing expatriate
employees and helping them build
knowledge can have significant effects on a
firm’s global competence.
• To be successful, strategic leaders must
effectively leverage a firm’s human capital.
ORGANIZATIONAL STAKEHOLDERS

• Strategic leaders are people located in
different areas and levels of the firm
using the strategic management
process to select strategic actions that
help the firm achieve its vision and
fulfill its mission.
• Successful strategic leaders are
decisive, committed to nurturing those
around them, and are committed to
helping the firm create value for all
stakeholder groups.
STRATEGIC LEADERS

STRATEGIC LEADERS
The global
economy
• Globalization
• Rapid technological
change
• Increasing
importance of
knowledge
• People as sources
of competitive
advantage
Increasingly, CEOs delegate
strategic responsibilities to
include decision-makers
closest to the action due to
the changing competitive
landscape:

• Visionary Strategic Leaders emphasize not only
maximizing shareholder wealth, but maximizing the
interests of all stakeholders, underscoring a civic
and personal commitment to corporate citizenship.
• Organizational culture affects strategic leaders and
their work. In turn, strategic leaders’ decisions and
actions shape a firm’s culture.
• Organizational culture is the social energy that
drives—or fails to drive—the organization, the
ideologies, symbols, and shared core values.
STRATEGIC LEADERS AND
ORGANIZATIONAL CULTURE

THE WORK OF EFFECTIVE STRATEGIC
LEADERS
SUCCESSFUL STRATEGIC LEADERSHIP
CHARACTERISTICS
• Hard working
● Embraces dynamic competitive landscape
• Brutally honest
• Tenacious
• Penchant for wanting the firm and its people
to accomplish more
• Strong strategic orientation

THE WORK OF EFFECTIVE STRATEGIC
LEADERS
SUCCESSFUL STRATEGIC LEADERSHIP
CHARACTERISTICS
• Innovative thinker
• Exploratory learning of new and unique forms
of knowledge
• Exploitative learning, which adds incremental
knowledge to existing knowledge bases
• Global mindset
• Dreams that challenges and energizes a
company, i.e., vision

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