CHAPTER 1

Strategic Management
STRATEGIC MANAGEMENT INPUTS

Module - 1
Strategic Management Management of Strategy

PowerPoint Presentation by Charlie Cook The University of West Alabama

Competitiveness and Globalization: Concepts Seventh Concepts and Cases and Casesedition

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

Road Map 1. Define strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process. Competitive landscape and explain how globalization and technological changes shape it. Industrial organization (I/O) model to explain how firms can earn above-average returns. Resource-based model to explain how firms can earn aboveaverage returns. Describe vision and mission and discuss their value. Stakeholders and their ability to influence organizations. Describe the work of strategic leaders. Explain the strategic management process.
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2. 3. 4. 5. 6. 7. 8.

Meaning Strategy
A companies strategy is the managements action plan for running the business & conducting the operations. The companies strategy is all about how how management intends to grow the business, how it will build a loyal clientele & outcompete rivals, how each functional piece of the business will be

operated, how performance will be boosted.

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Important Definitions
Strategy An integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. Competitive Advantage When a firm implements a strategy that its competitors are unable to duplicate or find too costly to try to imitate. No competitive advantage is permanent. Strategic Competitiveness When a firm successfully formulates and implements a value-creating strategy.
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Important Definitions (contd)

Risk An investors 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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Important Definitions (contd)

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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 The firms first step in the process is to analyze its external & internal environment to determine its resources, capabilities & core competencies the sources of its Strategic Inputs. With this information, the firm develops its vision & mission & formulates its strategy. To implement this strategy, the firm takes action towards achieving strategic competitiveness & above-average returns. Effective strategic actions takes place in the context of carefully integrated strategy formulation. Implementing actions results in desired strategic outcomes. It is a dynamic process, as ever-changing markets & competitive structure are coordinated with a firms continuously evolving strategic inputs.
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FIGURE 1.1

The Strategic Management Process

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Topics to be discussed
a) Current competitive Landscape b) Models that firms use to gather information & knowledge required to choose their strategy & how to implement them These models also serve as the foundation for forming strategic vision & mission. 1. Industrial Organization Model (I/O Model)

2. Resource-Based Model

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CURRENT COMPETITIVE LANDSCAPE

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 The nature of competition in many of the industries is changing . The pace of change is relentless & is increasing. Even determining the boundaries of industries has become challenging.
Example: Impact of advances in interactive computer network & telecommunication on entertainment industry.

Conventional sources of competitive advantage economies of scale, huge advertising budgets are not effective as they were once. Managers must adopt a new mind-set that values flexibility, speed, innovation, integration & the challenge that evolve from constantly changing conditions.
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Hypercompetition Definition
A condition of rapidly competition based on: Price-quality positioning escalating

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

Competition to protect or invade established product or geographic markets Dynamic Global Economy
Rapid technological change Strategic maneuvering among global and innovative combatants

Under hypercompetetion assumptions of market stability are replaced by notions of inheriting instability & changes. Several factors create hypercompetetion two primary drivers are emergence of global economy & rapid changing technology.
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The 21st-Century Competitive Landscape

A Perilous Business World
Rapid changes in industry boundaries and markets

Conventional sources of competitive advantage losing effectiveness

Enormous investments required to compete globally Severe consequences for failure

Developing and Implementing Strategy

Allows for planned actions rather than reactions
Helps coordinate business unit strategies
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Global Economy
Goods, people, skills, and ideas move freely across geographic borders. Movement is relatively unfettered by artificial constraints such as tariffs. Expansion into global arena complicates a firms competitive environment.
Short-term: Where is the fastest growth likely to occur? Long-term: Where will sustainable growth occur? Example : GE has HQ in US but expects to earn as much as 60% of its revenue growth from developing economies (China & India)
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The March of Globalization

Globalization is the increase in economic interdependence among countriesthe flow of goods and services, financial capital, and knowledge across country borders . Globalization increases the range of opportunities for companies competing in the current competitive landscape purchase of RM, manufacturing equipments from other countries , higher level of performance etc.

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 Challenges understanding the cultural sensitivity , ever-increasing complexity in their operations as goods, services, people move freely across geographical boarders Liability of foreignnessthe risks of participating outside of a firms domestic country in the global economy the amount of time required for firms to learn how to compete in markets that are new to them.

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Technology and Technological Changes

Trends & conditions can be placed into three categories : Technology Diffusion & Disruptive Technologies, the information age & increasing knowledge intensity Technology Diffusion The speed at which new technologies become available.
Television 35 years to reach 25% of homes in US, TV 26 years, Radio 22 years, PCs 16 years & Internet 7 years.

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 Disruptive Technologies Technologies that destroy the value of existing technology and create new markets. New markets created by iPods, PDAs, WiFi etc Perpetual Innovation The rapidity and consistency with which new, information-intensive technologies replace older ones. In computer industry Size of computers, features added over years etc
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Technological Changes
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.

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Technological Changes (contd)

Increasing Knowledge Intensity Knowledge as a critical organizational resource for creating an intangible competitive advantage. Knowledge can be gained through experience, observation & inference. Firm must develop & acquire knowledge integrate it into organization to create capability & then apply it to gain competitive advantage.

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 Strategic flexibility: the 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 To be strategically flexible on a continuous basis & to gain the competitive benefit of such flexibility a firm has to develop the capacity to learn. Continuous learning provides the firm with new & upto-date set of skills, which allow it to adopt to its environment as it encounters changes.
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I/O MODEL OF ABOVEAVERAGE RETURNS

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 I/O Model (Industrial Organization Model) explains the dominance of the External Environment: The industry in which a firm competes has a stronger influence on the firms performance than do the choices managers make inside their organizations. Industry Properties Determining Performance are: 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 Above-Average Returns

External Environments
General Global Industry Environment

1. Strategy is dictated by the external environment of the firmwhat opportunities exist in these environments?

Competitor Environment Technological Environment

2. Firm develops internal skills required by external environmentwhat can the firm do about the opportunities?

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Four Assumptions of the I/O Model

1. External environment imposes pressures and constraints that determine strategies leading to aboveaverage returns. 2. Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies 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 (profit-maximizing).
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FIGURE 1.2

The I/O Model of Above-Average Returns

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Industrial Organization Model

The External Environment

1. 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

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Industrial Organization Model

The External Environment
Attractive Industry

2. Locate an attractive industry with a high potential for aboveaverage returns.

Attractive industry: One whose structural characteristics suggest above-average returns.

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Industrial Organization Model

The External Environment Attractive Industry

Strategy Formulation

3. 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.

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Industrial Organization Model

The External Environment Attractive Industry Strategy Formulation Assets and Skills

4. Develop or acquire assets and skills needed to implement a chosen strategy. Assets and skills: those assets and skills required to implement a chosen strategy.
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Industrial Organization Model

The External Environment Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation

5. Use the firms 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.
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Industrial Organization (I/O) Model

The External Environment
Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation

Superior Returns

Superior returns: earning above-average returns

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Five Forces Model of Competition

The Five Force model of competition is an analytical tool used to help firm to analyze the external environment. Industry Profitability The industrys rate of return on invested capital relative to its cost of capital An industrys 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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 Firms earn above-average returns by: Cost leadership Producing standardized products or services Differentiation Manufacturing differentiated products for which customers are willing to pay a price premium I/O Model suggest that: Above-average returns are earned when firm implement the strategy dictated by the characteristics of the general industry & competitors environments.

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 Research findings support the I/O Model 20% of a firms profitability can be explained by the industry in which it choose to compete. However, 36% of the variance in profitability could be attributed to the firms characteristics & actions. These findings suggest that both environment & firms characteristics play a role in determining the firms specific level of profitability. Thus, a reciprocal relationship lies between the environment & the firms strategy.
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THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS

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 Model Assumptions 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. 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.
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Resources and Capabilities

Resources
Inputs into a firms production process:
Capital equipment Skills of individual employees Patents Finances Talented managers

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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Core Competencies
When the four key criteria of resources and capabilities are met, they become core competencies. Managerial competencies are especially important. Core competencies serve as a source of competitive advantage, create value, and provide the opportunity for above-average returns.

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Criteria for Resources and Capabilities That Become Core Competencies

Valuable

Rare

Core Competencies

Nonsubstitutable

Costly to Imitate

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Resources and Capabilities - Competitive Advantage

Not all of a firms resources & capabilities have the potential to

be the basis for competitive advantage. This potential is realized when resources & capabilities are : valuable, rare, costly to imitate & non substitutable
Valuable: Allow the firm to exploit opportunities or neutralize threats in its external environment Rare: Possessed by few, if any, current and potential competitors Costly to imitate: When other firms cannot obtain them or must obtain them at a much higher cost Non Substitutable: The firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage
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Resource-Based Model of Above-Average Returns (contd)

Strategy:
Competitive Advantage
Resources Capabilities Core Competencies

1. Strategy is dictated by the firms unique resources and capabilities. 2. Find an environment in which to exploit these assets (where are the best opportunities?)

Environment

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FIGURE 1.3

The ResourceBased Model of Above-Average Returns

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Resource-Based Model (contd)

Resources

Resources: inputs into a firms production process

1. Identify the firms resourcesstrengths and weaknesses compared with competitors

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Resource-Based Model (contd)

Resources
Capability

Capability: capacity of integrated set of resources to integratively perform a task or activity.

2. Determine the firms capabilitieswhat it can do better than its competitors. an

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Resource-Based Model (contd)

Resources
Capability Competitive Advantage

Competitive advantage: ability of a firm to outperform its rivals.

3. Determine the potential of the firms resources and capabilities in terms of a competitive advantage.

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Resource-Based Model (contd)

Resources
Capability Competitive Advantage Attractive Industry

4. Locate an attractive industry.

Attractive industry: an industry with opportunities that can be exploited by the firms resources and capabilities.

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Resource-Based Model (contd)

Resources
Capability Competitive Advantage Attractive Industry Strategy Formulation and Implementation

Strategy formulation and implementation: strategic actions taken to earn above average returns.

5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment.
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Resource-Based Model (contd)

Resources
Capability Competitive Advantage Attractive Industry Strategy Formulation and Implementation

Superior Returns

Superior returns: earning above-average returns

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Why Two Models?

Industrial Organization (I/O) Model
Focuses on the environment outside the firm.

Resource-Based Model
Focuses on the inside of the firm

Successful strategy formulation and implementation actions result only when the firm properly uses both models.

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VISION & MISSION

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Vision
A enduring picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve. Stretches and challenges people and evokes emotions and dreams. Effective vision statements are: Developed by a host of people from across the organization. Clearly tied to external and internal environmental conditions. Consistent with strategic leaders decisions and actions.

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Key Elements of a Strategic Vision

Delineates business managements aspirations for the

Provides a panoramic view of where we are going , Charts a strategic path Is distinctive and specific to a particular organization
Avoids use of generic language that is dull and boring and that could apply to most any company

Captures the emotions of employees and steers them in a common direction Is challenging and a bit beyond a companys immediate reach
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Role of a Strategic Vision

A well-conceived and well-communicated vision functions as a valuable managerial tool to Give the organization a sense of direction, mold organizational identity, and create a committed enterprise Inform company personnel and other stakeholders what management wants its business to look like and where we are going Spur company personnel to action Provide managers with a reference point to Make strategic decisions Translate the vision into hard-edged and strategies Prepare the company for the future

objectives

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Mission
Specifies the business or businesses in which the firm intends to compete and the customers it intends to serve. Is more concrete than the firms vision. Is more effective when it fosters strong ethical standards. Above-average returns are the fruits of the firms efforts to achieve its vision and mission.

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Characteristics of a Mission Statement

Identifies the boundaries of the current business and highlights Present products and services Types of customers served Geographic coverage Conveys Who we are, What we do, and Why we are here
A well-conceived mission statement distinguishes a companys business makeup from that of other profit-seeking enterprises in language specific enough to give the company its own identify!
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Key Elements of a Mission Statement

Three factors need to be identified for completeness Customer needs being met

What is being satisfied

Customer groups or markets being served

Who is being satisfied

What the organization does (in terms of business approaches, technologies used, and activities performed) to satisfy the target needs of the target customer groups

How customer needs are satisfied

A companys mission is not to make a profit! Its true mission is its answer to What will we do to make a profit? Making profit is an objective or intended outcome!
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Strategic Vision vs. Mission

A strategic vision concerns a firms future business path - where we are going
Markets to be pursued Future product/market/ customer/technology focus Kind of company management is trying to create

The mission statement of a firm focuses on its present business purpose - who we are and what we do
Current product and service offerings Customer needs being served Technological and business capabilities

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Vision To be the most admired Integrated Power and Energy Company delivering sustainable value to all stakeholders Mission We will become the most admired Company delivering sustainable value by: Being the supplier and partner of choice Achieving excellence in safety, operations and project management Focusing on the culture of sustainability Ensuring growth and delivering value to the stakeholders Caring for the community
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STAKEHOLDERS

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Stakeholders
Individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firms performance.
Claims on the firms performance are enforced by the stakeholders ability to withhold participation essential to the firms survival. The more critical and valued a stakeholders participation, the greater a firms dependency on it.

Managers must find ways to either accommodate or insulate the organization from the demands of stakeholders controlling critical resources.
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FIGURE

1.4

The Three Stakeholder Groups

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Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm: How to divide returns to keep stakeholders involved? How to increase returns so everyone has more to share?
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Stakeholders
Capital Market Stakeholders Capital Market Stakeholders Shareholders Major suppliers of capital Banks Private lenders Venture capitalists

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Capital Market Stakeholders

Shareholders and lenders expect the firm to preserve and enhance the wealth they have entrusted to it. Want the return on their investment (and, hence, their wealth) to be maximized. Expect returns to be commensurate with the degree of risk to the shareholder.(i.e. high risk high return, low risk low return) Management must balance the interests of shareholders and lenders with its concerns for the firms future competitive ability.
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Stakeholders (contd)
Capital Market Stakeholders Product Market Stakeholders Product Market Stakeholders
Customers
Suppliers Host communities Unions

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Product Market Stakeholders

Customers
Demand reliable products at low prices

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

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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Stakeholders (contd)
Capital Market Stakeholders Product Market Stakeholders Organizational Stakeholders Organizational Stakeholders Employees Managers Non-managers

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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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Strategic Leaders
Strategic Leaders People located in different parts of the firm who are using the strategic management process to help the firm reach its vision and mission. Prerequisites for Effective Strategic Leadership Hard work Thorough analyses Honesty Desire for accomplishment Common sense
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Strategic Leaders (contd)

Organizational Culture
The complex set of ideologies, symbols, and core values that are shared throughout the firm and that influence how the firm conducts business.

The Value of a Functional Organizational Culture

Supports effective delegation responsibilities Provides support for strategic leaders Encourages social energy Fosters of respect for others of strategic

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Predicting Outcomes of Strategic Decisions: Profit Pools

Profit Pool : The total profits earned in an industry at all points along the value chain Identifying the components of a profit pool:
Define the pools boundaries. Estimate the pools overall size. Estimate size of each value-chain activity in the pool. Reconcile the calculationswhich activity provides the most profit potential?
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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 strategies. and implementation of

Seek feedback to improve strategies.

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Points covered:
Stakeholders in Business Competitive landscape The I/O Model Resource-based Model of Above Average Return, Vision, Mission and Purpose Definitions: Strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process etc Strategic Management process
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Last years paper

Define Vision, Mission and Purpose, and discuss their importance in Strategic Management Process. Company A targets to achieve Above Average Returns, and their top management is in dilemma to select either Input-Output Model or Resource based Model. As a Manager, which Model would you recommend Company A and Why?

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