McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

What is Strategic Management? Chapter 1 What is Strategic Management?

Two Perspectives of Leadership Romantic view Leader is the key force in organization’s success External control perspective Focus is on external factors that affect an organization’s success Leaders can make a difference Must be aware of opportunities and threats faced in external environment Must have thorough understanding of the firm’s resources and capabilities 1-3

The Nature of Strategic Management Today must do more than set long-term strategies and hope for the best Must go beyond “incremental management” Making minor changes Today’s pace of change is accelerating Manager’s must make major and minor changes in strategic direction Leaders must be: Proactive Anticipate change Continually refine and make strategic changes 1-4

Strategic Management Strategic Management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages 1-5

Strategic Management Analysis Strategic decisions Actions Strategic goals (vision, mission, strategic objectives) Internal and external environment of the firm Strategic decisions What industries should we compete in? How should we compete in those industries? Actions Allocate necessary resources Design the organization to bring intended strategies to reality 1-6

Strategic Management Strategic management is the study of why some firms outperform others How to compete in order to create competitive advantages in the marketplace How to create competitive advantages in the market place Unique and valuable Difficult for competitors to copy or substitute 1-7

Key Attributes Key Attributes of strategic management: Directs the organization toward overall goals and objectives Includes multiple stakeholders in decision making 1-8

Key Attributes Key Attributes of strategic management: Needs to incorporate short-term and long-term perspectives Peter Senge refers to this needs as a “creative tension” Must maintain a vision for the future of the organization and focus on its present operating needs Recognizes trade-offs between efficiency and effectiveness 1-9

Strategic Management Process Henry Mintzberg, management scholar at McGill University Business environment far from predictable Decisions seldom based on optimal rationality alone Decisions following analysis constitute intended strategy Final realized strategy of any firm is a combination of deliberate and emergent strategies 1-10

Strategic Management Process 1-11

Strategic Analysis Starting point in the strategic management process Precedes effective formulation and implementation of strategies 1-12

Strategic Analysis (cont.) Frameworks for analyzing a firm’s internal environment Strengths Weaknesses Analyzing strengths can uncover potential sources of competitive advantage Analyzing external environments Competitors General environment Industry environment 1-13

Strategy Formulation Business level strategy: Successful firms develop bases for competitive advantage Cost leadership Differentiation Focusing on narrow or industry-wide market segments Sustainability Industry life cycle 1-14

Strategy Formulation (cont.) Corporate-level strategy addresses: Firm’s portfolio or group of businesses What business(es) should we be in? How can we create synergies among the businesses? Diversification Related Unrelated 1-15

Resource-Based View of the Firm Resource-based view -- helpful perspective for understanding strategic management and its activities Two perspectives The internal analysis of phenomena within a company An external analysis of the industry and its competitive environment 1-16

Resource-Based View of the Firm Firm’s resources must be evaluated in terms of how valuable, rare, and hard they are for competitors to duplicate Three key types of resources Tangible resources Intangible resources Organizational capabilities 1-17

Resource-Based View of the Firm 1-18

Types of Resources: Tangible Resources Relatively easy to identify Financial resources Firm’s cash accounts Firm’s capacity to raise equity Firm’s borrowing capacity Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment Relatively easy to identify, and include physical and financial assets used to create value for customers 1-19

Types of Resources: Tangible Resources Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks Organizational resources Effective strategic planning processes Excellent evaluation and control systems 1-20

Types of Resources: Intangible Resources Difficult for competitors (and the firm itself) to account for or imitate Human Experience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time 1-21

Types of Resources: Intangible Resources Innovation and creativity Technical and scientific skills Innovation capacities Reputation Brand name Reputation with customers Reputation with suppliers 1-22

Types of Resources: Organizational Capabilities Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital 1-23

Firm Resources and Sustainable Competitive Advantages Resources alone are not basis for competitive advantages, nor are advantages sustainable over time Resources or capabilities may help firm to increase revenue or lower costs Only temporary advantage 1-24

Firm Resources and Sustainable Competitive Advantages Implications Is the resource or capability… Valuable Rare Difficult to imitate Difficult to substitute Neutralize threats and exploit opportunities Not many firms possess Physically unique Path dependency Causal ambiguity Social complexity No equivalent strategic resources or capabilities 1-25

Firm Resources and Sustainable Competitive Advantages Is the Resource Valuable? Resources are valuable when they enable a firm to formulate and implement strategies that improve its efficiency or effectiveness SWOT matrix suggests firms improve performance only when they exploit opportunities or neutralize threats 1-26

Firm Resources and Sustainable Competitive Advantages Is the Resource Rare? If competitors possess same valuable resource, not source of competitive advantage Common strategies based on a resources is not an advantage Some strategies require mix of resources – tangible assets, intangible assets, and organizational capabilities 1-27

Firm Resources and Sustainable Competitive Advantages Can the Resource Be Imitated Easily? Inimitability is key to value creation Constrains competition Competitors will eventually find a way to copy valuable resources Advantage based on inimitability won’t last forever 1-28

Firm Resources and Sustainable Competitive Advantages Can the Resource Be Imitated Easily? Managers can develop strategies around resources that have one or more of the following four characteristics: Physical Uniqueness Path dependency Causal ambiguity Social complexity 1-29

Firm Resources and Sustainable Competitive Advantages Are Substitutes Readily Available? Must be no strategically equivalent valuable resources that are themselves not rare or inimitable Substitutability takes two forms: Substitute similar resource to implement same strategy Very different resources can become strategic substitutes 1-30

Criteria for Sustainable Competitive Advantages 1-31