Strategic Management: Creating Competitive Advantages 1 Strategic Management: Creating Competitive Advantages McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

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

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

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 Characteristics of strategic decisions… Important Involve a significant commitment of resources Not easily reversible

Key Attributes Key Attributes of strategic management: Directs the organization toward overall goals and objectives Includes multiple stakeholders in decision making Needs to incorporate short-term and long-term perspectives Recognizes trade-offs between efficiency and effectiveness

Question The final realized strategy of a firm is a combination of: Intended and unrealized strategies Unrealized and emergent strategies Emergent and deliberate strategies Deliberate and unrealized strategies Answer: C

Strategic Management Process for Intended Strategies Missions and Goals External Analysis Strategic Choice Internal Analysis INTENDED STRATEGY Organizing for Implementation 31

Strategic Management Process Adapted from Exhibit 1.2 Realized Strategy and Intended Strategy: Usually Not the Same Source: H. Mintzberg and J. A. Waters, “Of Strategies, Deliberate and Emergent,” Strategic Management Journal 6 (1985), pp. 257-72.

Strategic Management Process for Emergent Strategies Missions and Goals Internal Analysis External Analysis EMERGENT STRATEGY Strategic Choice Does It Fit? Organizational Grassroots 32

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

Strategic Analysis (cont.) Clear goals and objectives permit effective allocation of resources Hierarchy of goals Vision Mission Strategic objectives Analyzing external environments Managers must scan the environment and analyze competitors General environment Industry environment

Strategic Analysis (cont.) Frameworks for analyzing a firm’s internal environment Strengths Weaknesses Analyzing strengths can uncover potential sources of competitive advantage

Strategic Analysis (cont.) Intellectual assets are drivers of Competitive advantage Wealth creation Networks and relationships among Employees Customers Suppliers Alliance partners

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

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

Strategy Formulation (cont.) International Strategy Appropriate entry strategies for foreign markets Sustain competitive advantage in global markets Effective strategies for entrepreneurial initiatives

Strategy Implementation Informational control Monitor and scan the environment Respond effectively to threats and opportunities Behavioral control Effective corporate governance Interests of managers and owners of the firm Organizational structure and design

Strategy Implementation (cont.) Organizational boundaries Flexible Permeable Strategic Alliances Develop organization that is committed to Excellence Ethical behavior

Strategy Implementation (cont.) Learning organization responsive to Rapid and unpredictable change Corporate entrepreneurship and innovation New opportunities Enhance innovative capacity Autonomous entrepreneurial behavior Product champions

Corporate Governance and Stakeholder Management Corporate governance: the relationship among various participants in determining the direction and performance of corporations Shareholders Management (led by the CEO) Board of Directors

Corporate Governance and Stakeholder Management (cont.) Board of Directors Elected representatives of the owners Ensure interests and motives of management are aligned with those of the owners Effective and engaged Board of Directors Shareholder activism Proper managerial rewards and incentives

Example: New Rules for Directors In light of numerous corporate scandals, the role and rules for board of directors are being redefined. Few areas of focus : Numbers Knowledge Strategy Focus Time & Understanding Watchdog New Rules for Directors Numbers Knowledge -- In 2007, companies will be reporting the CEO pay in their SEC filings, Board of Directors need to know and be able to explain the numbers Strategy Focus -- In addition to compliance, Boards need to focus on the strategy and leadership Time & Understanding -- Even non-financial members of the board need to keep an eye on the numbers; the number of earnings restatement hit an all time high in 2006 Watchdog -- About 120 companies are being investigated for options backdating and more than 50% of the 100 largest companies have replaced their CEOs in last 5 years – Boards need to become a watchdog instead of relying on crisis management Source: Tipsheet, Business Week, January 22, 2007 Source: Tipsheet, Business Week, January 22, 2007

Stakeholder Management Two views of stakeholder management Zero sum Stakeholders compete for attention and resources of the organization Gain of one is a loss to the other Symbiosis Stakeholders are dependent upon each other Mutual benefits

Social Responsibility Social responsibility: the expectation that businesses or individuals will strive to improve the overall welfare of society Managers must take active steps to make society better Socially responsible behavior changes over time Triple bottom line

Example: Social Responsibility Starbucks Coffee Company Corporate social responsibility is embedded throughout the organization. The following are some of the commitments they have made to be socially responsible: Commitment to origins Helping protect the environment Starbucks in your community Commitment to partners Starbucks Coffee Company Commitment to Origins: Starbucks makes an investment into their worldwide suppliers of coffee to improve their local communities, families, and environment. Helping protect the environment: Starbucks believes in being at the forefront of the environmental movement towards being "green".  The intent is to preserve and restore the lush natural resources around the world. Starbucks in your community: Starbucks actively attempts to improve the local communities where their employees live by volunteering for local events and providing programs that can positively affect community members. Commitment to partners: Starbucks refers to its 100,000 employees worldwide as "partners" in order promote a sense of commitment and passion for the organization. The company is committed to treat their employees the same way they treat their partners. Source: www.starbucks.com Source: www.starbucks.com

Example: Social Responsibility Johnson & Johnson’s credo sets its responsibilities to: J&J product users. J&J employees. Communities in which J&J employees live and work. J&J stockholders. Source: Courtesy of Johnson & Johnson.

Strategic Management Perspective Integrative view of the organization Assess how functional areas and activities “fit together” to achieve goals and objectives All managers and employees must take and integrative, strategic perspective of issues facing the organization

Coherence in Strategic Direction Company vision Massively inspiring Overarching Long-term Driven by and evokes passion Fundamental statement of the organization’s Values Aspiration Goals Hierarchy of Goals Company vision

Coherence in Strategic Direction Mission statements Purpose of the company Basis of competition and competitive advantages More specific than vision Focused on the means by which the firm will compete Hierarchy of Goals Company vision Mission statements

Coherence in Strategic Direction Strategic objectives Operationalize the mission statement Provide guidance on how the organization can fulfill or move toward the “higher goals” More specific Cover a more well-defined time frame Hierarchy of Goals Company vision Mission statements Strategic objectives

Coherence in Strategic Direction Strategic objectives Measurable Specific Appropriate Realistic Timely Challenging Resolve conflicts that arise Yardstick for rewards and incentives Hierarchy of Goals Company vision Mission statements Strategic objectives