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Competing for ADVANTAGE

Chapter 1 Introduction to Strategic Management

PART ISTRATEGIC THINKING

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Introduction to Strategic Management

Key Terms

Competitive advantage

Derived from the successful formulation and execution of strategies which differ and create more value than competitor strategies

Strategic management process

The full set of commitments, decisions, and actions required for a firm to create value and earn returns that are higher than those of competitors

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The Competitive LandscapeThe US Airline Industry - An

Illustration

De-regulation 1978 Low-cost, limited route

carriers Terrorist attacks Volatile economic

conditions Global alliances High level of consolidation

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The Competitive LandscapeMajor Trends

Globalization Economic volatility Rapid technological

change

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Globalization of Markets and Industries

Key Terms

Globalization

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

Hypercompetition

Extremely intense rivalry among firms, characterized by escalating and aggressive competitive moves among market challengers

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Globalization of Markets and Industries

Artificial constraints on business transactions across national boundaries (such as tariffs) have been eliminated.

Restraints on the transfer of resources (such as equipment, capital, raw material, and even employees) across markets have decreased significantly.

The range of competitive opportunities available to firms has greatly increased.

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Globalization of Markets and Industries (cont.)

Hypercompetition has resulted from the dynamics of strategic maneuvering among global and innovative competitors in a volatile economy.

Performance standards have increased in many areas, including quality, cost, productivity, product introduction time, and operational efficiency.

Continuous improvement in all areas is necessary for continued survival.

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Economic Volatility

National debt levels Financial market instability Government actions to

reduce debt

Unanticipated crises

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Technological Trends

Increasing rate of technological change and diffusion.

Dramatic changes in information technology and ways in which information is used.

Increasing knowledge intensity.

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Disruptive Technologies

Destroys the value of existing technologies

Creative destruction process replaces existing technologies with new ones to create new markets

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Knowledge-Based Competitive Advantages

Business survival now depends on the ability to:

Capture intelligence Transform it into useable knowledge, and Diffuse it rapidly throughout the company

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Effect of Technology on the Competitive Landscape

Quick competitive information needs Shorter product life cycles Indistinguishable products Rapid technology replacement Inexpensive information available New business culture from

electronic-business models Continuous learning necessary

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Changes in the Competitive Landscape

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Sources of Competitive Advantage

Speed to market Access to and use of information Rapid diffusion of new, transformed

knowledge throughout the company Innovation Integration of new conditions into the mind

set of the organization Achieving or exceeding global standards Improved capabilities and skills through the

pursuit of higher performance standards Strategic flexibility

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Coping with Hypercompetitive Influences

Key Terms

Strategic flexibility

A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment

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Sources of Strategic Flexibility

Continuous learning

Strategic thinking

Strategic leadership

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Early Influences on the Strategy Concept

Key Terms Agency theory

A viewpoint which argues that agency problems exist when managers take actions that are in their own best interests rather than those of shareholders

Transactions costs economics

Examination of the efficiency of economic activity which instructs firms to purchase required resources through a market transaction unless particular conditions exist that make creating them internally more efficient

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Modern Strategic Management

Key Terms

Deterministic perspective

Strategy formulation argument that firms should adapt to their environments (establishing "fit") because the environmental situation determines the most effective strategies for achieving success

Enactment Principle that challenges the inevitability

of deterministic forces in the environment by recognizing the potential of human action to influence organizational results

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Foundational Concepts

The need for businesses to establish goals, formulate strategies to achieve them, set implementation and evaluation plans and controls to meet stated goals.

The integration of the external market factors into business planning.

The wisdom of balancing the conflicting needs of businesses' internal and external stakeholders.

The importance of an economic approach to identify market opportunities.

The importance of having or acquiring the resources and capabilities to achieve organizational objectives.

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Foundational Concepts (cont.)

The idea that political strategies should be used in addition to rational-deductive strategy development to address stakeholder interests and facilitate the achievement of organizational goals.

The use of organizational learning processes to achieve strategic success.

The use of agency theory to focus on shareholder returns as a primary criterion for firm success.

The use of transactions costs economics to determine whether to produce or acquire the resources needed by businesses.

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Three Perspectives on Value Creation

Industrial/Organization (I/O) Economic Model

Resource-Based View Stakeholder Approach

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The Industrial/Organization (I/O) Model of Above-Average Returns

The model explains the dominant influence of the external environment on a firm's strategic actions and performance.

“The model specifies that the industry in which a firm chooses to compete has a stronger influence on the firm’s performance than do the choices managers make inside their organizations.”

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Underlying Assumptions of the (I/O) Model

The external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns.

Most firms competing within a particular industry or industry segment are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources.

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Underlying Assumptions of the (I/O) Model (cont.)

Resources used to implement strategies are assumed to be highly mobile across firms. Because of resource mobility, any resource differences that might develop between firms will be short lived.

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.

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The Industrial/Organization (I/O) Model of Above-Average Returns

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Michael Porter’s Five Forces Model

The model suggests that an industry’s profitability is a function of interactions among:

Suppliers Buyers Competitive rivalry among industry

participants Product substitutes Potential entrants to the industry

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Michael Porter’s Contributions to the I/O Model

Reinforces the importance of economic theory

Offers an analytical approach that was previously lacking in the field of strategy

Describes the forces that determine the nature/level of competition and profit potential in an industry

Suggests how an organization can use the analysis to establish a competitive advantage

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Limitations of the I/O) Model

Only 2 strategies are suggested. Cost Leadership Differentiation

Internal resources and capabilities are not considered.

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The Resource-Based Model of Above-Average Returns

The model proposes that a firm's unique collection of resources and capabilities is the primary influence on the selection and use of a strategy or strategies to exploit opportunities in the external environment which result in successful performance.

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The Resource-Based Model of Above-Average Returns

Key Terms

Distinctive competencies

Firm attributes that allow it to pursue a strategy better than other firms

Resources

Inputs into a firm's production process

Capability

Capacity for a set of resources to perform a task or activity in an integrative manner

Core competencies

Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals

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Assumptions of the Resource-Based Model

Capabilities evolve and must be managed dynamically in pursuit of value creation and higher firm performance.

Across time, firms acquire different resources and develop unique capabilities.

Resources may not be easily transferable across firms.

The differences in resources are the basis of competitive advantage.

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Relevance of Resources to Strategic Management Models

Resources serve as the foundation for the establishment of competencies.

Resources facilitate the implementation of a product market strategy.

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Types of Resources in the Resource-Based Model

Physical

Human

Organizational capital

Resources may be either tangible or intangible.

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Two Types of Core Competencies

Managerial competencies

Product-related competencies

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Criteria for Providing a Competitive Advantage

Valuable

Rare

Costly to imitate

Nonsubstitutable

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The Resource-Based Model of Above-Average Returns

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The Stakeholder Model of Responsible Firm Behavior and

Firm Performance

The model proposes that a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors.

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The Stakeholder Model of Responsible Firm Behavior and Firm Performance

Key Terms

Stakeholders Individuals and groups who can affect,

and are affected by, the strategic outcomes a firm achieves and who have enforceable claims on a firm's performance

Strategic intelligence

The information firms collect from their network of stakeholders to deal with diverse and cognitively complex competitive situations and to stimulate innovation

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The Three Stakeholder Groups

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Secondary Stakeholders

Government entities and administrators

Activists and advocacy groups Religious organizations Other non-governmental

organizations

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Critical Problem Facing Management Today

There is a general lack of public trust for big businesses and their

managers.

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The Stakeholder Model of Responsible Firm Behavior and Firm Performance

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Challenges of the Stakeholder Model

Anticipating and managing additional costs associated with treating stakeholders in the manner suggested by stakeholder theory

Determining how much value to allocate without “giving away the store”

Determining how to allocate value (or returns) commensurate with stakeholder contribution

Establishing trust and mutual satisfaction of goals to increase the level of strategic intelligence available to the firm’s strategic leaders

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Ways Stakeholder Relationships Contribute to Competitive Advantage

Timely and high quality strategic intelligence can be gathered to improve a firm's strategic decisions.

A trustworthy reputation draws valuable customers, suppliers, and business partners which enable the firm to gain superior resources and opportunities.

A trustworthy reputation attracts investors who offer financial resources.

Fair and respectful treatment of employees attracts high quality human resources essential in today’s competitive environment.

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Ways Stakeholder Relationships Contribute to Competitive Advantage

Transactions costs associated with making and enforcing agreements can be reduced.

Implementation of strategies can be enhanced by improving commitment from stakeholders who are involved with strategic decisions.

Responsible behavior can protect a firm from the expense and risk associated with negative actions (such as adverse regulation, legal suits and penalties, consumer dissatisfaction, employee work outages, and bad press.)

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Strategic Thinking

Key Terms

Strategic thinking competencyThe knowledge, skills, and abilities needed to

detect market opportunities, formulate a vision to capitalize on these opportunities, and engineer feasible strategies to realize organizational and stakeholder value

Strategic Intent Organizational term used to describe a dream

that challenges and energizes a company -- a vision which elicits the help of others in creating a firm’s competitive advantage

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Strategic Thinking

Intent focused Comprehensive Opportunistic Considers multiple time

horizons Hypothesis driven Involves risk

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Encouraging Strategic Thinking

Employ top managers who are champions of change.

Establish systems and processes which capture new ideas as they occur.

Train managers and employees in strategic thinking methods and processes.

Foster an environment which rewards risk taking.

Provide flexibility in strategic management processes to allow incorporation of new ideas with potential.

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The Strategic Management Process

Key Terms

Strategic management process

The full set of commitments, decisions, and actions required for a firm to create value and earn returns that are higher than those of competitors

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The Strategic Management Process

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ETHICAL QUESTION

How should ethical considerations be included in analyses of the firm’s

external environment and its internal organization?

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ETHICAL QUESTION

To what extent does a firm have an ethical responsibility to provide

information to its stakeholders that they will not find agreeable? How

does the amount and type of information shared vary from one

stakeholder to another?

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ETHICAL QUESTION

Do firms face ethical challenges, perhaps even ethical dilemmas, when trying to satisfy both the

short-term and long-term expectations of capital market

stakeholders?

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ETHICAL QUESTION

What types of ethical issues and challenges do firms encounter when

competing internationally?

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ETHICAL QUESTION

What ethical responsibilities does the firm have when it earns above-average returns? Who should make decisions regarding this issue, and

why?

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ETHICAL QUESTION

What should top-level managers do to ensure that a firm’s strategic management process leads to

outcomes that are consistent with the firm’s values?