Ch01 Hitt Lecture

Copyright © 2004 South-WesternAll rights reserved.

PowerPoint slides by:R. Dennis

MiddlemistColorado State

University

Chapter 1Chapter 1Chapter 1Chapter 1

Strategic Management and Strategic Competitiveness

Copyright © 2004 South-Western. All rights reserved. 1–2

Knowledge Objectives

• Studying this chapter should provide you with the strategic management knowledge needed to:Define strategic competitiveness competitive

advantage, and above-average returns.

Describe the 21st-century 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.


Knowledge Objectives (cont’d)

• Studying this chapter should provide you with the strategic management knowledge needed to:Use the resource-based model to explain how

firms can earn above-average returns.

Describe strategic intent and strategic 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.


Definitions

• Strategic CompetitivenessWhen a firm successfully formulates and

implements a value-creating strategy

• Sustainable Competitive AdvantageWhen competitors are unable to duplicate a

company’s value-creating strategy

• Strategic Management ProcessThe full set of commitments, decisions, and

actions required for a firm to achieve strategic competitiveness and earn above-average returns


Definitions (cont’d)• Risk

An investor’s uncertainty about the economic gains or losses that will result from a particular investment

• Average ReturnsReturns equal to those an investor expects to

earn from other investments with a similar amount of risk

• Above-average ReturnsReturns in excess of what an investor expects to

earn from other investments with a similar amount of risk


Figure 1.1Figure 1.1

The Strategic

Management Process

Copyright © 2004 South-Western. All rights reserved.


Current Competitive Landscape

• A Perilous Business World

Investments required to compete on a global scale are enormous

Consequences of failure are severe

• Important Elements of Success

Developing strategy

Implementing strategy


Global Global economyeconomy

Rapid Rapid technological technological

changechange

Competitive Landscape

Strategic maneuvering among global and

innovative combatants

Strategic maneuvering among global and

innovative combatants


Competitive Landscape: Hypercompetition

HypercompetitionHypercompetition

HypercompetitionA condition of rapidly escalatingcompetition based on

• Price-quality positioning

• Competition to create new know-how and establish first-mover advantage

• Competition to protect or invade established product or geographic markets


Global Economy

• Global Economy

Goods, people, skills, and ideas move freely across geographic borders

Movement is relatively unfettered by artificial constraints

Expansion into global arena complicates a firm’s competitive environment


Global Economy (cont’d)

• Globalization

Increased economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders

Increased range of opportunities for companies competing in the 21st-century competitive landscape


Country Competitiveness Rankings (Population over 20 Million)

Country 2002 2003United States 1 2Australia 2 3Canada 3 2Malaysia 4 6Germany 5 4Taiwan 6 7United Kingdom 7 5France 8 9Spain 9 8Thailand 10 10Japan 11 11China 12 12Brazil 13 0China 14 0Korea 15 10

Country 2002 2003Colombia 16 20Italy 17 14South Africa 18 16India 19 0India 20 17Brazil 21 15Philippines 22 18Romania 23 0Mexico 24 19Turkey 25 23Russia 26 21Poland 27 22Indonesia 28 25Argentina 29 26Venezuela 30 24

SOURCE: From World Competitiveness Yearbook 2003, IMD, Switzerland. http://www.imd.ch.wcy.esummary, April. Reprinted by permission.

Table 1.1Table 1.1


Technology and Technological Changes• Rate of change of technology and speed at

which new technologies become availablePerpetual innovation—how rapidly and

consistently new, information-intensive technologies replace older ones

The development of disruptive technologies that destroy the value of existing technology and create new markets


Technological Change

• The Information Age

The ability to effectively and efficiently access and use information has become an important source of competitive advantage

Technology includes personal computers, cellular phones, artificial intelligence, virtual reality, massive databases, electronic networks, internet trade


Technological Changes

• Increasing Knowledge IntensityStrategic flexibility: set of capabilities used to

respond to various demands and opportunities in dynamic and uncertain competitive environments

Organizational slack: slack resources that allow the firm flexibility to respond to environmental changes

Capacity to learn


I/O Model of Above-Average Returns

• The industry in which a firm competes has a stronger influence on the firm’s performance than do the choices managers make inside their organizations Industry properties include

economies of scalebarriers to market entrydiversificationproduct differentiationdegree of concentration of firms in the industry


Four Assumptions of the I/O Model

External environment imposes pressures and constraints that determine strategies leading to above-average returns

1

2Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies

Resources used to implement strategies are highly mobile across firms3

4Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests (profit-maximizing)


I/O Model of Above-Average Returns

1.1. Strategy dictated by the Strategy dictated by the external environment of external environment of the firm (what the firm (what opportunities exist in opportunities exist in these environments?)these environments?)

2.2. Firm develops internal Firm develops internal skills required by skills required by external environment external environment (what can the firm do (what can the firm do about the about the opportunities?)opportunities?)

External Environments

GeneralEnvironment


The I/O Model ofAbove-Average Returns

Adapted from Figure 1.2Adapted from Figure 1.2

The External Environment

1.1. Study the external Study the external environment, especially the environment, especially the industry environmentindustry environment

• The general The general environmentenvironment

• The industry The industry environmentenvironment

• The competitor The competitor environmentenvironment


An Attractive Industry

2.2. Locate an attractive Locate an attractive industry with a high industry with a high potential for above-potential for above-average returnsaverage returns

• An industry whose An industry whose structural structural characteristics suggest characteristics suggest above-average returnsabove-average returns






3.3. Identify the strategy called for Identify the strategy called for by the attractive industry to by the attractive industry to earn above-average returnsearn above-average returns

• Selection of a Selection of a strategy linked with strategy linked with above-average above-average returns in a particular returns in a particular industryindustry



Strategy Formulation



Assets and Skills


4.4. Develop or acquire assets Develop or acquire assets and skills needed to and skills needed to implement the strategyimplement the strategy

• Assets and skills Assets and skills required to required to implement a chosen implement a chosen strategystrategy






Strategy Implementation


5. Use the firm’s strengths 5. Use the firm’s strengths (its developed or acquired (its developed or acquired assets and skills) to assets and skills) to implement the strategyimplement the strategy

• Selection of strategic Selection of strategic actions linked with actions linked with effective effective implementation of the implementation of the chosen strategychosen strategy




Assets and Skills



Superior Returns





Assets and Skills


• Superior returns: Superior returns: earning of above-earning of above-average returnsaverage returns



Five Forces Model of Competition

• An industry’s profitability results from interaction amongSuppliersBuyersCompetitive rivalry among firms currently in the

industryProduct substitutesPotential entrants to the industry


Five Forces Model of Competition (cont’d)• Firms earn above average returns by

Producing standardized products or servicesManufacturing differentiated products for which

customers are willing to pay a price premium


Resource-Based Model of Above-Average Returns

• Each organization is a collection of unique resources and capabilities that provides the basis for its strategy and that is the primary source of its returns

• Capabilities evolve and must be managed dynamically


Resource-Based Model of Above-Average Returns (cont’d)

• Differences in firms’ performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry

• Firms acquire different resources and develop unique capabilities


Resource-Based Model of Above-Average Returns (cont’d)

1.1. Strategy dictated by the Strategy dictated by the firm’s unique resources firm’s unique resources and capabilitiesand capabilities

2.2. Find an environment in Find an environment in which to exploit these which to exploit these assets (where are the assets (where are the best opportunities?)best opportunities?)

Firm’s Firm’s ResourcesResources


Resources and Capabilities

• Resources Inputs into a firm’s

production processCapital equipmentSkills of individual

employeesPatentsFinancesTalented

managers

• CapabilitiesCapacity of a set of

resources to perform in an integrative manner

A capability should not beSo simple that it is

highly imitableSo complex that it

defies internal steering and control


The Resource-Based Model of Above-Average Returns


Resources

1.1. Identify the firm’s resources. Identify the firm’s resources. Study its strengths and Study its strengths and weaknesses compared with weaknesses compared with those of competitorsthose of competitors

• Inputs into a firm’s Inputs into a firm’s production processproduction process




Capability 2.2. Determine the firm’s Determine the firm’s capabilities. What do the capabilities. What do the capabilities allow the firm to capabilities allow the firm to do better than its competitors.do better than its competitors.

• Capacity of an Capacity of an integrated set of integrated set of resources to resources to integratively perform a integratively perform a task or activitytask or activity

Resources




3.3. Determine the potential of the firm’s Determine the potential of the firm’s resources and capabilities in terms resources and capabilities in terms of a competitive advantage.of a competitive advantage.

• Ability of a firm to Ability of a firm to outperform its rivalsoutperform its rivals

Competitive Advantage

Capability

Resources





4.4. Locate an attractive Locate an attractive industry.industry.

• An industry with An industry with opportunities that opportunities that can be exploited by can be exploited by the firm’s resources the firm’s resources and capabilitiesand capabilities


Capability

Resources





5. Select a strategy that best allow 5. Select a strategy that best allow the firm to utilize its resources the firm to utilize its resources and capabilities relative to and capabilities relative to opportunities in the external opportunities in the external environment.environment.

• Strategic actions Strategic actions taken to earn above-taken to earn above-average returnsaverage returns



Capability

Resources



Adapted from Figure 1.3Adapted from Figure 1.3Superior Returns

• Superior returns: Superior returns: earning of above-earning of above-average returnsaverage returns




Capability

Resources


Key Criteria of Resources and CapabilitiesValuable

Resources and capabilities are valuable when they allow a firm to take advantage of opportunities or neutralize threats in external environment

• RareResources and capabilities are rare when

possessed by few, if any, current and potential competitors


Key Criteria of Resources and Capabilities• Costly to Imitate

Resources and capabilities are costly to imitate when other firms either cannot obtain them or are at a cost disadvantage in obtaining them

• Nonsubstitutable

Resources and capabilities are nonsubstitutable when they have no structural equivalents


Core Competencies

• When the four key criteria of resources and capabilities are met, they become core competencies

• Core competencies serve as a source of competitive advantage

• Managerial competencies are especially important


How Resources and Capabilities Provide Competitive Advantage

The firm is organized appropriately to The firm is organized appropriately to obtain the full benefits of the resources obtain the full benefits of the resources in order to realize a competitive in order to realize a competitive advantage advantage

ValuableValuable Allow the firm to exploit opportunities Allow the firm to exploit opportunities or neutralize threats in its external or neutralize threats in its external environmentenvironment

RareRare Possessed by few, if any, current and Possessed by few, if any, current and potential competitorspotential competitors

Costly to Costly to imitateimitate

When other firms cannot obtain them When other firms cannot obtain them or must obtain them at a much higher or must obtain them at a much higher costcost

NonsubstitutaNonsubstitutableble


Resources and Capabilities, Core Competencies, and Outcomes

Core Core CompetenciesCompetencies

Competitive Competitive AdvantageAdvantage

Value CreationValue Creation

Above Average Above Average ReturnsReturns

ValuableValuable

RareRare

Costly to Costly to ImitateImitate

NonsubstitutablNonsubstitutablee


Strategic Intent

• Internally focused

• The leveraging of a firm’s resources, capabilities and core competencies to accomplish the firm’s goals

• Exists when all employees and levels of a firm are committed to the pursuit of a specific, significant performance criterion


Strategic Mission

• Externally focused

• A statement of a firm’s unique purpose and the scope of its operations in product and market terms

Establishes a firm’s individuality and is inspiring and relevant to all stakeholders

Provides general descriptions of the firm’s intended products and its markets


Stakeholders

• Individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance

• Claims are enforced by the stakeholder’s ability to withhold essential participation


The Three Stakeholder

Groups

Figure 1.4Figure 1.4


Capital Market Stakeholders

• Shareholders and lenders expect the firm to preserve and enhance the wealth they have entrusted to it

• Returns should be commensurate with the degree of risk to the shareholder


Product Market Stakeholders• Customers

Demand reliable products at low prices

• SuppliersSeek loyal customers willing to pay highest

sustainable prices for goods and services

• Host communitiesWant companies willing to be long-term

employers and providers of tax revenues while minimizing demands on public support services

• Union officialsWant secure jobs and desirable working

conditions


Organizational Stakeholders

• Employees Expect a dynamic, stimulating and rewarding

work environmentAre satisfied by a company that is growing and

actively developing their skills


Stakeholder Involvement

• Two issues affect the extent of stakeholder involvement in the firm How to divide returns How to divide returns

to keep stakeholdersto keep stakeholdersinvolved?involved?

Capital

Market

Capital

Market

Product

Market

Product

Market

Organizational

Organizational

How to increase How to increase returns so everyone returns so everyone has more to share?has more to share?


Strategic Leaders

• People responsible for the design and execution of strategic management processes

• Decisions they make includeHow resources will be developed or acquiredAt what price resources will be obtainedHow resources will be used


Organizational Culture

• The complex set of IdeologiesSymbolsCore values

that are shared throughout the firm,

that influence how the firm conducts business


Mapping an Industry’s Profit Pools

• Define the pool’s boundaries

• Estimate the pool’s overall size

• Estimate the size of the value-chain activity in the pool

• Reconcile the calculations


Strategic Management Process

• Study the external and internal environments

• Identify marketplace opportunities and threats

• Determine how to use core competencies

• Use strategic intent to leverage resources, capabilities and core competencies and win competitive battles

• Integrate formulation and implementation of strategies

• Seek feedback to improve strategies

Ch01 Hitt Lecture

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