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Chapter 1 introduction to strategic management
- 1. Introduction to Strategic Management Dr.Jayashree R. Kotnal Lecturer, M.Com Vijayapur ASP College of Commerce
- 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 The firm Goals & Values Resources & Capabilities Structures & Systems External Environment Competitors Customers Suppliers etc Strategy
- 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 Returns that are in excess of what an investor expects to earn from other investments with a similar amount of risk Above-Average Returns Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk Average Returns
- 7. Definitions Risk An investor’s uncertainty about the economic gains or losses that will result from a particular investment
- 8. Fundamental nature of competition is changing Competitive Landscape Hypercompetitive environments Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new know-how, first mover Protect or invade established product or geographic markets
- 9. Fundamental nature of competition is changing Hypercompetitive environments Competitive Landscape Emergence of global economy Goods, services, people, skills, and ideas move freely across geographic borders Spread of economic innovations around the world Political and cultural adjustments are required
- 10. Hypercompetitive environments Competitive Landscape Emergence of global economy Rapid technological change Increasing rate of technological change and diffusion The information age Increasing knowledge intensity 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 Strategic Flexibility Strategic Flexibility StrategicStrategic flexibilityflexibility StrategicStrategic reorientationreorientation Capacity toCapacity to learnlearn OrganizationalOrganizational slackslack
- 13. Strategy dictated by theStrategy dictated by the external environment ofexternal environment of the firm (whatthe firm (what opportunities exist inopportunities exist in these environments?)these environments?) Firm develops internalFirm develops internal skills required by externalskills required by external environment (what canenvironment (what can the firm do about thethe firm do about the opportunities?)opportunities?) GeneralGeneral EnvironmentEnvironment GlobalGlobal TechnologicalTechnological Economic Economic Sociocultural Sociocultural Political/Legal Political/Legal Demographic Demographic 1. External Environments Industry Environment Competitor Environment I/O Model of Above-Average Returns
- 14. Four Assumptions of the I/O Model The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns 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 Resources used to implement strategies are highly mobile across firms 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. Industrial OrganizationIndustrial Organization ModelModel I/O Model of Above-Average Returns Study the external environment, especially the industry environment economies of scale barriers to market entry diversification product differentiation degree of concentration of firms in the industry The External EnvironmentThe External Environment
- 17. I/O Model of Above-Average Returns Locate an attractive industry with a high potential for above- average returns Attractive industry: one whose structural characteristics suggest above-average returns Industrial OrganizationIndustrial Organization ModelModel The External EnvironmentThe External Environment An Attractive IndustryAn Attractive Industry
- 18. I/O Model of Above-Average Returns Identify the strategy called for by the attractive industry to earn above- average returns Strategy formulation: selection of a strategy linked with above-average returns in a particular industry Industrial OrganizationIndustrial Organization ModelModel The External EnvironmentThe External Environment An Attractive IndustryAn Attractive Industry Strategy FormulationStrategy Formulation
- 19. I/O Model of Above-Average Returns Develop or acquire assets and skills needed to implement the strategy Assets and skills: those assets and skills required to implement a chosen strategy Industrial OrganizationIndustrial Organization ModelModel The External EnvironmentThe External Environment An Attractive IndustryAn Attractive Industry Strategy FormulationStrategy Formulation Assets and SkillsAssets and Skills
- 20. I/O Model of Above-Average Returns Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy Industrial OrganizationIndustrial Organization ModelModel The External EnvironmentThe External Environment An Attractive IndustryAn Attractive Industry Strategy FormulationStrategy Formulation Assets and SkillsAssets and Skills Strategy ImplementationStrategy Implementation
- 21. I/O Model of Above-Average Returns Industrial Organization Model The External EnvironmentThe External Environment An Attractive IndustryAn Attractive Industry Strategy FormulationStrategy Formulation Assets and SkillsAssets and Skills Strategy ImplementationStrategy Implementation Superior ReturnsSuperior Returns Superior returns: earning of above-average returns
- 22. Strategy dictated by the firm’s unique resources and capabilities Find an environment in which to exploit these assets (where are the best opportunities?) Resource-based Model of Above Average Returns 1. Firm’s Resources1. Firm’s Resources
- 23. Identify the firm’s resources-- strengths and weaknesses compared with competitors Resources: inputs into a firm’s production process Resource-based Model of Above Average Returns Resource-basedResource-based ModelModel ResourcesResources
- 24. 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 Resource-based Model of Above Average Returns Resource-basedResource-based ModelModel ResourcesResources CapabilityCapability
- 25. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage Competitive advantage: ability of a firm to outperform its rivals Resource-based Model of Above Average Returns Resource-basedResource-based ModelModel ResourcesResources CapabilityCapability Competitive AdvantageCompetitive Advantage
- 26. Locate an attractive industry An attractive industry: an industry with opportunities that can be exploited by the firm’s resources and capabilities Resource-based Model of Above Average Returns Resource-basedResource-based ModelModel ResourcesResources CapabilityCapability Competitive AdvantageCompetitive Advantage An Attractive IndustryAn Attractive Industry
- 27. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment Strategy formulation and implementation: strategic actions taken to earn above average returns Resource-based Model of Above Average Returns Resource-basedResource-based ModelModel ResourcesResources CapabilityCapability Competitive AdvantageCompetitive Advantage An Attractive IndustryAn Attractive Industry Strategy Form/ImplStrategy Form/Impl
- 28. Resource-based Model of Above Average Returns Resource-basedResource-based ModelModel ResourcesResources CapabilityCapability Competitive AdvantageCompetitive Advantage An Attractive IndustryAn Attractive Industry Strategy Form/ImplStrategy Form/Impl Superior ReturnsSuperior Returns Superior returns: earning of above-average returns
- 29. Strategic Intent & Mission Strategic Intent Winning competitive battles by leveraging the firm’s resources, capabilities, and core competencies Strategic Mission An application of strategic intent in terms of products to be offered and markets to be served
- 30. Emergent and Deliberate Strategies Intended Strategy Realized Strategy Deliberate Strategy Unrealized 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.
- 31. Strategic Management Process for Intended Strategies Missions and Goals Missions and Goals Strategic Choice Strategic Choice Organizing for Implementation Organizing for Implementation Internal Analysis Internal Analysis External Analysis External Analysis INTENDED STRATEGY
- 32. Strategic Management Process for Emergent Strategies Missions and Goals Missions and Goals Internal Analysis Internal Analysis External Analysis External Analysis EMERGENT STRATEGY Strategic Choice Does It Fit? Strategic Choice Does It Fit? Organizational Grassroots Organizational Grassroots
- 33. Groups who are affected by aGroups who are affected by a firm’s performance and whofirm’s performance and who have claims on its wealthhave claims on its wealth The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders The Firm and Its Stakeholders StakeholdersStakeholders
- 34. Capital Market StakeholdersCapital Market Stakeholders The Firm and Its Stakeholders ShareholdersShareholders Major suppliers of capitalMajor suppliers of capital •BanksBanks •Private lendersPrivate lenders •Venture capitalistsVenture capitalists StakeholdersStakeholders
- 35. Capital Market StakeholdersCapital Market Stakeholders Product Market StakeholdersProduct Market Stakeholders The Firm and Its Stakeholders Primary customersPrimary customers SuppliersSuppliers Host communitiesHost communities UnionsUnions StakeholdersStakeholders
- 36. Capital Market StakeholdersCapital Market Stakeholders Product Market StakeholdersProduct Market Stakeholders Organizational StakeholdersOrganizational Stakeholders The Firm and Its Stakeholders EmployeesEmployees ManagersManagers NonmanagersNonmanagers StakeholdersStakeholders
- 37. Values Johnson & Johnson’s credo sets its responsibilities to: 1. J&J product users. 2. J&J employees. 3. Communities in which J&J employees live and work. 4. J&J stockholders. Source: Courtesy of Johnson & Johnson.
- 38. 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
- 39. Functional Business Corporate Global Levels of StrategyLevels of Strategy
Editor's Notes
- 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 Guanxicomplex 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.