Fall, 2007St. Norbert College Seminar in Policy and Strategy 1 Seminar in Business Policy and...

Fall, 2007 St. Norbert CollegeSeminar in Policy and Strategy

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Seminar in Business Policy and StrategyDay One Lecture Outline

• Class Roster & Familiarity Probe• Instructor Introduction• WSJ and other Periodical Subscriptions• Introduce Books

– Winning Fortune Magazine– The World is Flat Wall Street Journal

• Class Web Page and Syllabus• Introduce Capstone Simulation

http://www.snc.edu/socsci/chair/485/485_hmpg.htm


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Definitions• Strategy – an integrated set of commitments and actions

designed to exploit core competencies and gain a competitive advantage

• Strategic Management - the process of intentionally organizing a full set of commitments, decisions and actions to achieve competitive advantage and superior returns

• I/O Model of Strategic Management

• Resource Based Model of Strategic Management

NEXT


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I/O Model ofAbove-Average Returns

• I/O = Industry/Organizational• 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 scale• barriers to market entry• diversification• product differentiation• degree of concentration of firms in the industry


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I/O Model of Strategic Management

• Study External Environment

• Identify an Attractive Industry

• Formulate Appropriate Strategies

• Acquire necessary Assets and Skills to Implement Strategies

• Implement Strategies

• Above Average Returns


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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


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Resource Based Model ofStrategic Management

• Identify Assets and Skills

• Determine Capabilities

• Shape Competitive Advantages

• Identify an Attractive Industry

• Formulate and Implement Appropriate Strategies

• Above Average Returns


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Definitions Continued• Strategic Competitiveness

– When a firm successfully formulates and implements a value-creating strategy

• Sustainable Competitive Advantage– When competitors are unable to duplicate a

company’s value-creating strategy• Strategic Management Process

– The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns


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Definitions (cont’d)• Risk

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

• Average Returns– Returns equal to those an investor expects to earn

from other investments with a similar amount of risk• Above-average Returns

– Returns in excess of what an investor expects to earn from other investments with a similar amount of risk


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Definitions Continued• Strategic Mission and Vision

– See Chapter One, WINNING– Externally focused– Mission describes 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

– Vision describes some milestone that the firm will reach in the future - an aspiration


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Definitions Continued

• 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


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Definitions Continued

• Resources – inputs to the firm’s production process (i.e. – capital, individual skills, patents, managers, etc.)– Tangible and Intangible

• Capability – capacity for a set of resources to perform a task or activity

• Stakeholders – people who are affected by a firms performance and who have a claim on the firms performance


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The Three Stakeholder

Groups


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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


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Product Market Stakeholders• Customers

– Demand reliable products at low prices• Suppliers

– Seek loyal customers willing to pay highest sustainable prices for goods and services

• Host communities– Want companies willing to be long-term

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

• Union officials– Want secure jobs and desirable working

conditions


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Organizational Stakeholders

• Employees – Expect a dynamic, stimulating and rewarding

work environment– Are satisfied by a company that is growing and

actively developing their skills


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Stakeholder Involvement• Two issues affect the extent of

stakeholder involvement in the firm

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?

How to divide How to divide returns among returns among stakeholders?stakeholders?


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SWOT Analysis

• Strengths, Weaknesses (internal)

• Opportunities and Threats (External

• Assessing the internal Strengths and Weaknesses and matching them with external Opportunities and Threat


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The Context of Internal Analysis

• Effective analysis of a firm’s internal resources and capabilities (learning what the firm can do) requires:– Fostering an organizational setting in which

experimentation and learning are expected and promoted

– Using a global mind-set

– Thinking of the firm as a bundle of heterogeneous resources and capabilities that can be used to create an exclusive market position


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Resources and Capabilities• Resources

– Inputs into a firm’s production process• Capital equipment

(T)• Skills of individual

employees (I)• Patents (T)• Finances (T)• Talented managers

(I)

• Capabilities– Capacity of a set of

resources to perform in an integrative manner

– A capability should not be• So simple that it is

highly imitable• So complex that it

defies internal steering and control


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• Resources– Are the source of a firm’s

capabilities

– Are broad in scope

– Cover a spectrum of individual, social and organizational phenomena

– Alone, do not yield a competitive advantage

• Resources– Are a firm’s assets,

including people and the value of its brand name

– Represent inputs into a firm’s production process, such as:

• Capital equipment• Skills of employees• Brand names• Financial resources• Talented managers

• Resources– Tangible resources

• Financial resources

• Physical resources

• Technological resources

• Organizational resources

– Intangible resources• Human resources

• innovation resources

• Reputation resources

Resources, Capabilities andCore Competencies


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Tangible Resources

Financial Resources •The firm’s borrowing capacity•The firm’s ability to generate internal funds

Organizational Resources •The firm’s formal reporting structure and its formal planning, controlling,and coordinating systems

Physical Resources •Sophistication and location of a firm’s plant and equipment

•Access to raw materials

Technological Resources •Stock of technology, such as patents, trade-marks, copyrights, and trade secrets


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Intangible ResourcesHuman Resources • Knowledge

• Trust• Managerial capabilities• Organizational routines

Innovation Resources • Ideas

• Scientific capabilities • Capacity to innovate

Reputational Resources • Reputation with customers

• Brand name • Perceptions of product quality,

durability, and reliability • Reputation with suppliers • For efficient, effective, supportive, and

mutually beneficial interactions and relationships


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• Capabilities– Are the firm’s capacity to

deploy resources that have been purposely integrated to achieve a desired end state

– Emerge over time through complex interactions among tangible and intangible resources

– Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital

• Capabilities– The foundation of many

capabilities lies in:• The unique skills and

knowledge of a firm’s employees

• The functional expertise of those employees

– Capabilities are often developed in specific functional areas or as part of a functional area



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• Core Competencies– Resources and capabilities that

serve as a source of a firm’s competitive advantage:• Distinguish a company

competitively and reflect its personality

• Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

• Core Competencies

– Activities that a firm performs especially well compared to competitors

– Activities through which the firm adds unique value to its goods or services over a long period of time



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Core Competencies

• There are four key criteria of resources and capabilities that, when met, become core competencies

• Managerial competencies are especially important

• Core competencies serve as a source of competitive advantage (VRCN)


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Four Key Criteria of Resources and Capabilities (VRCN)

• Valuable– Resources and capabilities are valuable when

they allow a firm to take advantage of opportunities or neutralize threats in external environment

• Rare– Resources and capabilities are rare when

possessed by few, if any, current and potential competitors


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Four Key Criteria of Resources and Capabilities (VRCN)

• 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


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Building Sustainable Competitive Advantage

• Four Criteria of Sustainable Competitive Advantage– Valuable– Rare– Costly to imitate– Nonsubstituable


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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


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Competitive Advantage

• Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively– Acquired– Bundled– Leveraged

• Over time, the benefits of any value-creating strategy can be duplicated by competitors


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Competitive Advantage (cont’d)

• Sustainability of a competitive advantage is a function of– The rate of core competence obsolescence due

to environmental changes– The availability of substitutes for the core

competence– The difficulty competitors have in duplicating

or imitating the core competence


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Creating Competitive Advantage

• Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage

• Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies


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Creating Value• By exploiting their core competencies or

competitive advantages, firms create value• Value is measured by

– A product’s performance characteristics– The product’s attributes for which customers are

willing to pay• Defined as “What the customer wants, When

the customer wants it, Where the customer wants it, at a Price the customer is willing to pay”


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The Challenge ofInternal Analysis

• Strategic decisions in terms of the firm’s resources, capabilities, and core competencies

– Are non-routine

– Have ethical implications

– Significantly influence the firm’s ability to earn above-average returns


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The Challenge ofInternal Analysis (cont’d)

• To develop and use core competencies, managers must have– Courage– Self-confidence– Integrity– The capacity to deal with uncertainty and

complexity– A willingness to hold people (and themselves)

accountable for their work


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The Context of External Analysis

• Effective analysis of a firm’s External Environment (learning what the firm might be able to do) requires assessing the Characteristics of the External Environmental Components– General Environment– Industry Environment– Competitor Environment


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The External Environment


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General Environment• Dimensions in the broader society that

influence and industry and the firms within it– Economic

– Sociocultural

– Global

– Technological

– Political/legal

– Demographic


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Opportunities and Threats

• Opportunity– A condition in the general environment that if

exploited, helps a company achieve strategic competitiveness

• Threat– A condition in the general environment that

may hinder a company’s efforts to achieve strategic competitiveness


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Industry Environment

• Industry Defined– A group of firms producing products that are

close substitutes

• Firms that influence one another

• Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns


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Industry Environment

• Porter’s Five-Forces Model


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The Five Forces of Competition Model


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Five Forces Model of Competition

• An industry’s profitability results from interaction among– Suppliers– Buyers– Competitive rivalry among firms currently in

the industry– Product substitutes– Potential entrants to the industry


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Low entry barriers

Interpreting Industry Analyses

UnattractiveIndustry

Suppliers and buyers have strong positions

Strong threats from substitute products

Intense rivalry among competitors

Low profit potential


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AttractiveIndustry

High entry barriers

Interpreting Industry Analyses

Suppliers and buyers have weak positions

Few threats from substitute products

Moderate rivalry among competitors

High profit potential


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Competitor Environment

• All of the companies that the firm competes against.


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Competitor Analysis Components


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Outsourcing

• The purchase of a value-creating activity from an external supplier– Few organizations possess the resources and

capabilities required to achieve competitive superiority in all primary and support activities

• By forming and emphasizing fewer capabilities– A firm can concentrate on those areas in which it

can create value– Specialty suppliers can perform outsourced

capabilities more efficiently


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Strategic Rationales for Outsourcing• Improve business focus

– Lets a company focus on broader business issues by having outside experts handle various operational details

• Provide access to world-class capabilities– The specialized resources of outsourcing

providers makes world-class capabilities available to firms in a wide range of applications


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Strategic Rationales for Outsourcing• Accelerate business re-engineering benefits

– Achieves re-engineering benefits more quickly by having outsiders—who have already achieved world-class standards—take over process

• Sharing risks– Reduces investment requirements and makes

firm more flexible, dynamic and better able to adapt to changing opportunities

• Frees resources for other purposes– Redirects efforts from non-core activities

toward those that serve customers more effectively


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Outsourcing vs. Offshoring

• Outsourcing - the process of contracting with another organization to accomplish a non-critical responsibility more efficiently for a firm, either domestically or overseas– Payroll, Distribution, Fabrication

• Offshoring - the process of outsourcing to firms in foreign countries– Generally involves the competitive advantage of

exploiting cheaper labor• In the U. S., 90% of jobs outsourced go to other

domestic organizations, only 10% are sent off shore


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Strategic Management ProcessReview the QuickMBA Discussion

• Study the external and internal environments• Identify marketplace opportunities and threats• Identify organizational resources and capabilities• Develop core competencies from the resources and

capabilities• Use strategic intent to leverage resources,

capabilities and core competencies into competitive advantages

• Integrate formulation and implementation of strategies

• Seek feedback to improve strategies

Fall, 2007St. Norbert College Seminar in Policy and Strategy 1 Seminar in Business Policy and...

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