CHAPTER 1

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

Introduction to Strategic Management

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. Average Return - Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk Above-Average Returns - Returns that are in excess of what an investor expects to earn from other investments with a similar amount of risk Risk An investors uncertainty about the economic gains or losses that will result from a particular investment

Rapid technological change Increasing rate of technological change and diffusion The information age Increasing knowledge intensity

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

Organizational slack

Strategic reorientation Capacity to learn

Strategic flexibility

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

I/O (Industry Organization) Model of AboveAverage Returns

Four Assumptions of the I/O Model 1. The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns 2. 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 3. Resources used to implement strategies are highly mobile across firms 4. Organizational decision makers are assumed to be rational and committed to acting in the firms best interests, as shown by their profit-maximizing behaviors

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Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy Use the firms strengths (its developed or acquired assets and skills) to implement the strategy Superior returns Returns: earning above-average

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Resource-based Model of Above Average Returns

1. External Environment: General Environment (Political/Legal, Global, Demographic, Sociocultural, Technological, Economic) that affects the Industry Environment and the Competitor Environment 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 1. Resources: inputs into a firms production process Identify the firms resources-- strengths and weaknesses compared with competitors Capability: capacity of an integrated set of resources to integratively perform a task or activity Determine the firms capabilities--what it can do better than its competitors Four Attributes of Resources and Capabilities (Competitive Advantage) allow the firm to exploit opportunities or neutralize threats in its external environment Rare possessed by few, if any, current and potential competitors when other firms cannot obtain Costly to imitate them or must obtain them at a much higher cost the firm is organized appropriately Nonsubstitutable to obtain the full benefits of the resources in order to realize a competitive advantage Valuable Resources and capabilities that meet these four criteria become a source of CORE COMPETENCIES CORE COMPETENCIES are the basis for a firms: o Competitive Advantage o Value Creation o Ability to earn above-average returns

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Attractive Industry: one whose structural characteristics suggest above-average returns Locate an attractive industry with a high potential for above-average returns Strategy Formulation: selection of a strategy linked with above-average returns in a particular industry Identify the strategy called for by the attractive industry to earn above-average returns Assets and skills: those assets and skills required to implement a chosen strategy Develop or acquire assets and skills needed to implement the strategy

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Competitive advantage: ability of a firm to outperform its rivals Determine the potential of the firms resources and capabilities in terms of a competitive advantage An attractive industry: an industry with opportunities that can be exploited by the firms resources and capabilities Locate an attractive industry Strategy formulation and implementation: strategic actions taken to earn above average returns Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment Superior returns: earning of above-average returns

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2. Product Market Stakeholders : a. Primary customers b. Suppliers c. Host communities d. Unions 3. Organizational Stakeholders: a. Employees b. Managers c. Nonmanagers

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Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm 1. How do you divide the returns to keep stakeholders involved? 2. How do you increase the returns so everyone has more to share?

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Strategic Intent & Mission

Strategic Intent - Winning competitive battles by leveraging the firms resources, capabilities, and core competencies Strategic Mission - An application of strategic intent in terms of products to be offered and markets to be served Organizational

Capital Market

Product Market

Organizational Strategists The Firm and Its Stakeholders

The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders Serve as a major source of competitive advantage Are held responsible by stakeholders Make decisions regarding development, acquisition, cost and use of resources Assess risks of strategic actions

Stakeholders 1. Capital Market Stakeholders Major suppliers of capital Banks Private lenders Venture capitalists