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Chapter 1

Strategic Management and


Strategic Competitiveness

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

©2000 South-Western College Publishing


Ch1-1
Learning Objectives
1. Define strategic competitiveness, strategy, competitive
advantage, above-average returns, and the strategic
management process.
2. Describe the 21st-century competitive landscape and
explain how globalization and technological changes
shape it.
3. Use the industrial organization (I/O) model to explain
how firms can earn above-average returns.
4. Use the resource-based model to explain how firms
can earn above-average returns.

Ch1-2
Continuation of Learning
Objectives

5. Describe vision and mission and discuss


their value.
6. Define stakeholders and describe their
ability to influence organizations.
7. Describe the work of strategic leaders.
8. Explain the strategic management process.

Ch1-3
Strategic Competitiveness
Achieved when a firm successfully formulates
and implements a value-creating strategy

Sustained Competitive Advantage


Occurs when a firm develops a strategy that
competitors are not simultaneously implementing
Provides benefits which current and potential
competitors are unable to duplicate

Above-Average Returns
Returns in excess of what an investor expects to
earn from other investments with similar risk
Ch1-4
The Strategic Management Process
Involves the full set of:

Commitments Decisions Actions

which are required for firms to achieve:

Strategic Competitiveness
Sustained Competitive Advantage
Above-Average Returns
Ch1-5
Chapter One: Key Themes
Challenge of Strategic Management

Changing Competitive Landscape

Two Models of Superior Profitability


• Industrial Organization Model
• Resource-Based Model

Key Stakeholder Groups


Ch1-6
Challenge of Strategic Management

Only 16 of the 100 largest U.S. companies at


the start of the 20th century are still
identifiable today!

In a recent year, 44,367 businesses filed for


bankruptcy and many more U.S. businesses failed

Competitive success is transient...unless care is


taken to preserve competitive position
Ch1-7
Challenge of Strategic Management
Best Stocks of the Decade
% Change 1990-99
The goals of achieving Cisco 124,825%
strategic competitiveness AOL 81,400%
and earning above- Dell 72,400%
EMC 68,314%
average returns are CMGI 57,191%
challenging Solectron 21,233%
JDS Uniphase 18,755%
Tellabs 16,921%
Clear Channel Communications 13,700%
Best Buy 9,376%
The performance of Maxim Integrated 8,735%
some companies more Veritas Software 8,536%
Charles Schwab 7,985%
than meets strategic Microsoft 7,483%
management's Sun Microsystems 7,163%
Safeguard Scientifics 6,816%
challenge Qlogic 6,764%
Yahoo 6,744%
Qualcomm 6,388%
Applied Materials 6,350% Ch1-8
21st Century Competitive Landscape

Fundamental nature of The pace of change


competition is changing is relentless....
• Rapid technological changes
and increasing
• Rapid technology diffusions
Traditional industry
• Dramatic changes in boundaries are
information and blurring, such as...
communication technologies
• Computers
• Increasing importance of • Telecommunications
knowledge

Ch1-9
21st Century Competitive Landscape

The global economy is Traditional sources of


changing competitive advantage
no longer guarantee
• People, goods, services and
success
ideas move freely across
geographic boundaries New keys to success
• New opportunities emerge include:
in multiple global markets • Flexibility
• Markets and industries • Innovation
become more • Speed
internationalized • Integration

Ch1-10
21st Century Competitive Landscape
A country’s Country Competitiveness Rankings
1999 1998 Country Competitiveness Competitiveness
competitiveness is Index 1999 Index 1998
1 1 Singapore 2.12 2.16
achieved through the 2 3 United States 1.58 1.41
accumulation of 3 2 Hong Kong 1.41 1.91

individual firms’ 4
5
6
5
Taiwan
Canada
1.38
1.33
1.19
1.27
strategic 6
7
8
10
Switzerland
Luxembourg
1.27
1.25
1.10
1.05
competitiveness in 8 4 United Kingdom 1.17 1.29
9 7 Netherlands 1.13 1.13
the global economy 10 11 Ireland 1.11 1.05
11 15 Finland 1.11 0.70
12 14 Australia 1.04 0.79
13 13 New Zealand 10.1 0.84
Achieving improved 14 12 Japan 1.00 0.97
15 9 Norway 0.92 1.09
competitiveness 16 17 Malaysia 0.86 0.59
allows a country's 17 16 Denmark 0.85 0.61
18 30 Iceland 0.59 -0.18
citizens to have a 19 23 Sweden 0.58 0.25
higher standard of 20
21
20
18
Austria
Chile
0.37
0.57
0.37
0.57
living 22 19 Korea 0.46 0.39
23 22 France 0.44 0.25
24 27 Belgium 0.39 -0.03
25 24 Germany 0.37 0.15
26 25 Spain 0.16 0.02
Alternative Models of Superior Returns
Industrial Organization Resource-Based
Model Model
The External Environment Resources

An Attractive Industry Capability

Strategy Formulation Competitive Advantage


Assets and Skills An Attractive Industry
Strategy Implementation Strategy Implementation
Superior Returns Superior Returns

Ch1-12
I/O Model of Superior Returns

The Industrial Organization model


suggests that above-average returns
for any firm are largely determined
by characteristics outside the firm.

This model largely focuses on industry


structure or attractiveness of the
external environment rather than
internal characteristics of the firm.

Ch1-13
I/O Model of Superior Returns
External Action required:
Environment Study the external
environment, especially
General Environment the industry environment.
Industry Environment
Competitive
Environment

Ch1-14
I/O Model of Superior Returns
External Action required:
Environment Locate an industry with
An Attractive high potential for above-
GeneralIndustry
Environment average returns.
Industry Environment
An industry whose
Competitive
structural characteristics
Environment
suggest above-average
returns are possible

Ch1-15
I/O Model of Superior Returns
External Action required:
Environment Identify strategy called for
Attractive by the industry to earn
GeneralIndustry
Environment above-average returns.
Strategy
Industry Environment
An industry whose
Competitive Formulation
structural characteristics
Environment Selection of a strategy
suggest above-average
returns are linked with above-
possible
average returns in a
particular industry

Ch1-16
I/O Model of Superior Returns
External Action required:
Environment Develop or acquire assets
Attractive and skills needed to
GeneralIndustry
Environment implement the strategy.
Strategy
Industry Environment
An industry whose
Competitive Formulation
structural characteristics
Environment Selection ofAssets
suggest above-average and Skills
a strategy
returns are linked with above-
possible
Assetsinand
average returns a skills
required to implement
particular industry
a chosen strategy

Ch1-17
I/O Model of Superior Returns
External Action required:
Environment Use the firm’s strengths
Attractive (its assets or skills) to
GeneralIndustry
Environment implement the strategy.
Strategy
Industry Environment
An industry whose
Competitive Formulation
structural characteristics
Environment Selection ofAssets
suggest above-average and Skills
a strategy
returns are linked with above-
possible
average returns a Strategy
Assetsinand skills
required to
particular industry Implementation
implement
a chosen strategy
Selection of strategic
actions linked with
effective implementation
of the chosen strategy

Ch1-18
I/O Model of Superior Returns
External Action required:
Environment Maintain selected strategy
Attractive in order to outperform
GeneralIndustry
Environment industry rivals.
Strategy
Industry Environment
An industry whose
Competitive Formulation
structural characteristics
Environment Selection ofAssets
suggest above-average and Skills
a strategy
returns are linked with above-
possible
average returns a Strategy
Assetsinand skills
required to
particular industry Implementation
implement
a chosen strategy Superior Returns
Selection of strategic
actions linked with
Earning of above-
effective implementation
average
of the chosen returns
strategy

Ch1-19
Resource-Based Model of Superior Returns

The Resource-Based model suggests


that above-average returns for any
firm are largely determined by
characteristics inside the firm.

This model focuses on developing or


obtaining valuable resources and
capabilities which are difficult or
impossible for rivals to imitate.

Ch1-20
Resource-Based Model of Superior Returns
Action required:
Resources Identify firm resources.
Study strengths and weak-
Inputs to a firm’s nesses relative to rivals.
production process.

Ch1-21
Resource-Based Model of Superior Returns
Action required:
Resources Determine what firm
Capability capabilities allow it to do
Inputs to a firm’s better than rivals.
production process.
Capacity for an integrated
set of resources to perform
a task or activity.

Ch1-22
Resource-Based Model of Superior Returns
Action required:
Resources Determine how firm’s
Capability resources and capabilities
Inputs to a firm’s may create competitive
production process.
Capacity Competitive
for an integrated advantage.
Advantage
set of resources to
integratively perform a
Ability of a firm to
task or activity.
outperform its rivals

Ch1-23
Resource-Based Model of Superior Returns
Action required:
Resources Locate an attractive
Capability industry.
Inputs to a firm’s
production process.
Capacity Competitive
for an integrated
Advantage
set of resources to
integratively perform aAn Attractive
Ability of aIndustry
task or activity. firm to
outperform its rivals
Location of an industry
with opportunities that
can be exploited by the
firm’s resources and
capabilities

Ch1-24
Resource-Based Model of Superior Returns
Action required:
Resources Select strategy that best
Capability exploits resources and
Inputs to a firm’s capabilities relative to
production process.
Capacity Competitive
for an integrated opportunities in environs.
Advantage
set of resources to
integratively perform aAn Attractive
Ability of aIndustry
task or activity. firm to
outperform its rivalsStrategy
Location of an industry
Formulation
with opportunities that and
Implementation
can be exploited by the
firm’s resources and
Strategic actions taken to
capabilities
earn above-average
returns

Ch1-25
Resource-Based Model of Superior Returns
Action required:
Resources Maintain selected strategy
Capability in order to outperform
Inputs to a firm’s industry rivals.
production process.
Capacity Competitive
for an integrated
Advantage
set of resources to
integratively perform aAn Attractive
Ability of aIndustry
task or activity. firm to
outperform its rivalsStrategy
Location of an industry
Formulation
with opportunities that and
can be exploited Superior Returns
Implementation
by the
firm’s resources and
Strategic actions
capabilities taken
Earning to
of above-
earn above-average
average returns
returns

Ch1-26
Resources and capabilities lead to
Competitive Advantage when they are:

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 either cannot obtain them


or must obtain them at a much higher cost

Nonsubstitutable the firm must be organized appropriately to


obtain the full benefits of the resources in
order to realize a competitive advantage
Ch1-27
When these four
criteria are met,
Resources and Core Competencies
Capabilities
become:

Core Competencies are resources and capabilities


that can serve as a source of Competitive Advantage.

The Resource-Based model argues that Core


Competencies are the basis for a firm’s Competitive
Advantage, Strategic Competitiveness and Ability to
Earn Above-average Returns.
Ch1-28
Vision
is a picture of what the firm wants to be and, in
broad terms, what it wants to
ultimately achieve.

Mission
specifies the business or businesses in which the
firm intends to compete and the customers it
intends to serve
Ch1-29
Strategic Intent
Winning competitive battles through deciding
how to leverage internal resources, capabilities,
and core competencies.

Strategic Mission
An application of strategic intent in terms of
products to be offered and markets to be served.

Ch1-30
Strategic Intent
BUSINESS WEEKS’S 10 Top Managers of the Year, 1999
Name Company Strategic Accomplishment
The most Minoru Arakawa Nintendo America Scored huge hit by bringing Pokė mon to U.S.
effective over objections of co-workers and negative
market research
strategists provide Bernard Arnault LVMH From just 23 in Oct. ’98, LVMH’s U.S. shares
have vaulted 280%, to about 87
a vision (strategic Arthur Blank Home Depot Profits should jump 46%, to $2.3 billion for
fiscal year 1999. Sales are expected to grow
intent) to 25%, to $38 billion

effectively elicit Peter Bijur Texaco After his company was labeled racist, attracted
minorities to key jobs, including treasurer Ira
Hall, a former IBM executive
the help of others
Gordon Binder Amgen Boosted stock price by around 100% last year, to
in creating a about $54
Steve Case America Online Deals to broaden AOL’s availability and services
firm's competitive will help boost income 102% this fiscal year, to
$800 million
advantage. John Chambers Cisco Systems Broadened Cisco into strategic businesses such
as software, consulting, and fiber-optic
communications
Jim Curvey Fidelity Investments Reduced internal conflicts and spurred growth
through management changes
Thierry Desmarest Totalfina Acquired rival French oil company ELF
Aquitaine for $44 billion. Shares up about 35%
in ’99, as profits expected to grow 20%, to $3.1
billion
Bernie Ebbers MCI Worldcom Turned toward more profitable data, Internet,
and international operations
Ch1-31
Stakeholders: Groups who are affected by a firm’s
performance and who have claims on its
wealth

The firm must maintain


performance at an adequate level in
order to maintain the participation Capital Market
of key stakeholders

Firm Stock market/Investors


Debt suppliers/Banks

Product Market
Organizational
Primary Customers
Suppliers Employees
Managers
Non-Managers
Ch1-32
Stakeholder Involvement
Each of the key stakeholders
wants a piece of the same pie

1 How do you divide the pie


in order to keep all of the
stakeholders involved?

2
How do you increase the
size of the pie so that there
is more to go around?

Ch1-33
Strategic Leaders

are people located in different parts of


the firm using the strategic management
process to help the firm reach its vision
and mission.

Ch1-34
Chapter 2
Strategic External
Environment
The Strategic
Inputs
Strategic Intent
Strategic Mission
Management
Chapter 3
Internal Process
Environment

Strategy Formulation Strategy Implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11


Business-Level Competitive Corporate-Level Corporate Structure
Strategic
Actions

Strategy Dynamics Strategy Governance & Control

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13


Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic

Strategic
Competitiveness
Feedback Above Average
Returns
Ch1-35