Introduction to Strategic Management HCAD 5390

What is Strategy? Strategy is the overall plan for deploying resources to establish a favorable position. Tactic is a scheme for a specific maneuver.

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

Basic Framework External Environment The firm Goals & Values Competitors Customers Suppliers etc The firm Goals & Values Resources & Capabilities Structures & Systems Strategy

Definitions Strategic Management Process Value Creation 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.

Definitions Average Returns Above-Average Returns 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

Definitions Risk An investor’s uncertainty about the economic gains or losses that will result from a particular investment

Competitive Landscape Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new know-how, first mover Hypercompetitive environments Protect or invade established product or geographic markets Fundamental nature of competition is changing

Competitive Landscape Goods, services, people, skills, and ideas move freely across geographic borders Emergence of global economy Spread of economic innovations around the world Hypercompetitive environments Political and cultural adjustments are required Fundamental nature of competition is changing

Competitive Landscape Increasing rate of technological change and diffusion Emergence of global economy Rapid technological change The information age Increasing knowledge intensity Hypercompetitive environments Fundamental nature of competition is changing

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

Strategic Flexibility Organizational slack Strategic Flexibility Strategic Flexibility Strategic flexibility Strategic reorientation Capacity to learn

I/O Model of Above-Average Returns 1. External Environments General Environment Global Technological Economic Sociocultural Political/Legal Demographic 1. Strategy dictated by the external environment of the firm (what opportunities exist in these environments?) 2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?) Industry Environment I/O Model: McDonalds and Starbucks Respectively, in both cases the CEOs Ray Crock and Howard Schultz were examining the industry in which they worked. Crock was a sales rep for a firm that built malted milkshake machines. Schultz was a sales rep for a company that made home espresso machine accessories. Both noticed that there was a customer that was purchasing a large volume of these machines. They made trips to the locations of these stores and noticed that each was in an emerging industry that had high-growth potential and higher-than-average profit margins. McDonalds is in fast-food and drive-thru restaurants and Starbucks is in specialty coffee retail. Competitor Environment

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 Four Assumptions of the I/O Model Both Crock and Schultz identified the strategy that allowed their companies to achieve high profits: McDonalds through the “assembly line” of their burgers  and Starbucks with product marketing that created ambiance and consistency, a value perception that allowed them to charge high premium for their coffee.

Four Assumptions of the I/O Model 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 firm’s best interests, as shown by their profit-maximizing behaviors Four Assumptions of the I/O Model (cont.) Both McDonalds and Starbucks then spent time and capital to acquire and develop the skills needed to implement the business strategy. Crock became a business partner of the McDonald brothers and sold franchise agreements for them. Schultz took a position in the marketing department of Starbucks. Each later purchased the firm and used what they had learned to rapidly expand the company. Crock was able to use McDonalds quality, consistency, rapid assembly system, and drive-thru concepts to continue to realize high profits. Schultz was able to use the Starbucks image, ambiance concept, and marketing strengths to rapidly expand. One interesting note: Initially, Schultz started a Seattle coffeehouse chain (Il Giorande) that competed with Starbucks. His marketing manager was so adamant that Starbucks was a better concept capable of “going global” that Schultz sold his original coffeehouse chain and purchased Starbucks.

Industrial Organization Model I/O Model of Above-Average Returns Industrial Organization Model 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 The External Environment

Industrial Organization Model I/O Model of Above-Average Returns Industrial Organization Model 2. Locate an attractive industry with a high potential for above-average returns The External Environment An Attractive Industry Attractive industry: one whose structural characteristics suggest above-average returns

Industrial Organization Model I/O Model of Above-Average Returns Industrial Organization Model 3. Identify the strategy called for by the attractive industry to earn above-average returns The External Environment An Attractive Industry Strategy Formulation Strategy formulation: selection of a strategy linked with above-average returns in a particular industry

Industrial Organization Model I/O Model of Above-Average Returns Industrial Organization Model 4. Develop or acquire assets and skills needed to implement the strategy The External Environment An Attractive Industry Strategy Formulation Assets and Skills Assets and skills: those assets and skills required to implement a chosen strategy

Industrial Organization Model I/O Model of Above-Average Returns Industrial Organization Model 5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy Strategy Implementation

Industrial Organization Model I/O Model of Above-Average Returns Industrial Organization Model The External Environment An Attractive Industry Strategy Formulation Assets and Skills Superior returns: earning of above-average returns Strategy Implementation Superior Returns

Resource-based Model of Above Average Returns 1. Strategy dictated by the firm’s unique resources and capabilities 2. Find an environment in which to exploit these assets (where are the best opportunities?) 1. Firm’s Resources The Firm Resource-based model: Patents and Inventions The resource-based view (RBV) of the firm is hedged on two axiomatic assumptions. First, resources are distributed heterogeneously across firms, and second, these resources cannot be transferred between firms without cost. These axioms lend themselves to two additional tenets (cf., Barney, 1991): (a) Resources that simultaneously enhance a firm’s market effectiveness (valuable) and are not widely dispersed (rare) can produce competitive advantage; and (b) when such resources are concurrently expensive to imitate (inimitable) and costly to substitute (nonsubstitutable), the competitive advantage is sustainable. Thus, value and rarity are each necessary before inimitability and nonsubstitutability might yield a sustainable competitive advantage (Priem & Butler, 2001).

Resource-based Model of Above Average Returns 1. Identify the firm’s resources-- strengths and weaknesses compared with competitors Resources Resources: inputs into a firm’s production process Resource-based model: Patents and Inventions (cont.) Despite its face validity and rapid diffusion throughout the management literature, there have only been limited empirical tests of RBV’s tenets (cf., Priem & Butler, 2001). To echo Miller and Shamsie (1996, p. 519), “the concept of resources remains an amorphous one that is rarely operationally defined or tested for its performance implications in different competitive environments.” Many managers use RBV’s terms with little specificity or attention to causal relationships. Researchers have identified several types of valuable and rare resources that could generate rents. Some examples include information technology (Powell, 1997), strategic planning (Powell, 1992), organizational alignment (Powell, 1992a), human resources management (Lado & Wilson, 1994; Wright & McMahan, 1992), trust (Barney & Hansen, 1994), organizational culture (Oliver, 1997), administrative skills (Powell, 1993), expertise of top management (Castanias & Helfat, 1991), and even Guanxicomplex networks (Tsang, 1998).

Resource-based Model of Above Average Returns 2. Determine the firm’s capabilities--what it can do better than its competitors Resources Capability Capability: capacity of an integrated set of resources to integratively perform a task or activity Resource-based model: Patents and Inventions (cont.) The degree to which RBV is likely to help managers depends on the extent to which it can be used to achieve competitive advantage. Hence, recently, Markman and his colleagues have attempted to clarify three basic questions: (1) Can a single resource be simultaneously valuable, rare, inimitable, and nonsubstitutable? (2) Can an inimitable and nonsubstitutable resource be measured? And (3) To what extent is an inimitable and nonsubstitutable resource associated with competitive advantage? Using five-year data from 85 large, publicly traded pharmaceutical companies, Markman and his colleagues advance the view that a single resource-patented invention could qualify as simultaneously valuable, rare, hard to imitate, and difficult to substitute. In other words, the answer to the first question is yes; some patents are valuable, rare, inimitable, and nonsubstitutable resources. The answers to the second and third questions are “yes” as well. That is, controlling for assets, sales, and investment in R&D, they found that a patent’s quality and scope are significantly related to competitive advantage as captured by new products and, to some extent, to profitability.

Four Attributes of Resources and Capabilities (Competitive Advantage) Valuable allow the firm to exploit opportunities or neutralize threats in its external environment Rare possessed by few, if any, current and potential competitors Resources and Capabilities Costly to imitate when other firms cannot obtain them or must obtain them at a much higher cost Four Attributes of Resources and Capabilities (Competitive Advantage) Despite these findings and the intuitive appeal of RBV, challenges remain. Priem and Butler (2001) noted that a resource that is valuable, rare, hard to imitate, and not substitutable is also difficult to assess, manipulate, or deploy, and therefore difficult to exploit. Their analytical assessment spurred an important debate regarding RBV’s practical utility. For example, tacit knowledge, organizational learning, workflow, time, interorganizational ties, communications, and human interactions might be seen as hard to imitate and nonsubstitutable resources, but such resources are neither necessarily rare nor inevitably valuable. Thus, while many “things” might be classified as resources, intangibles are less amenable to managerial manipulation, rendering their associations with competitive advantage tenuous. For example, tacit knowledge is frequently conceptualized as a source of competitive advantage, yet we don’t know how (and at what rate) managers create and use that which is inherently unknowable. Personnel, machinery, land, technical procedures, and financial capital are relatively easy to quantify resources. Brand names, however, and organizational knowledge, learning, and culture are extremely difficult to craft, use, measure, and manage. In sum, the practical utility of RBV to managers remains weak as long as we fail to explicitly parameterize and measure the extent to which certain resources are valuable, rare, inimitable, and nonsubstitutable. Nonsubstitutable the firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage

Core Competencies Core Competencies Resources and capabilities that meet these four criteria become a source of: Valuable Rare Core Competencies Core Competencies Resources and Capabilities Costly to imitate Nonsubstitutable

Core Competencies are the basis for a firm’s Competitive advantage Value Creation Core Competencies Ability to earn above-average returns

Competitive Advantage Resource-based Model of Above Average Returns Resource-based Model 3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage Resources Capability Competitive Advantage Competitive advantage: ability of a firm to outperform its rivals

Resource-based Model of Above Average Returns 4. Locate an attractive industry Resources Capability Competitive Advantage An Attractive Industry An attractive industry: an industry with opportunities that can be exploited by the firm’s resources and capabilities

Resource-based Model of 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 Resources Capability Competitive Advantage An Attractive Industry Strategy formulation and implementation: strategic actions taken to earn above average returns Strategy Form/Impl

Resource-based Model of Above Average Returns Resources Capability Competitive Advantage An Attractive Industry Superior returns: earning of above-average returns Strategy Form/Impl Superior Returns

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

Emergent and Deliberate Strategies Intended Strategy Deliberate Strategy Realized Strategy Unrealized Strategy Emergent Strategy From “Strategy Formation in an Adhocracy” by Henry Mintzberg and Alexandra McHugh, Administrative Science Quarterly, Vol. 30, No. 2, June 1985. Reprinted by permission of Administrative Science Quarterly. 30

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

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

The Firm and Its Stakeholders The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders Groups who are affected by a firm’s performance and who have claims on its wealth THE FIRM

The Firm and Its Stakeholders Capital Market Stakeholders Shareholders Major suppliers of capital Banks Private lenders Venture capitalists

Capital Market Stakeholders Product Market Stakeholders The Firm and Its Stakeholders Stakeholders Capital Market Stakeholders Product Market Stakeholders Primary customers Suppliers Host communities Unions

The Firm and Its Stakeholders Capital Market Stakeholders Product Market Stakeholders Organizational Stakeholders Employees Managers Nonmanagers

Values 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.

Johnson & Johnson Credo* First Responsibility Is to Those Who Use J&J Products Next Come Its Employees Next, the Communities in Which the Employees Live and Work Its Final Responsibility Is to Its Stockholders 13

Levels of Strategy Functional Business Corporate Global 15

Functional-Level Strategy Manufacturing Marketing Materials Management Research and Development Human Resources 16

Business-Level Strategy Cost Leadership Differentiation Market Niche Focus 17

Global Strategies Multidomestic International Global Transnational 18

Corporate-Level Strategy Vertical Integration Diversification Strategic Alliances Acquisitions New Ventures Business Portfolio Restructuring 19