Chapter 1: Creating Competitive Advantages MNGT 4800 Dr. Shook

Agenda Strategic management defined Strategic management defined Strategic management process Strategic management process Schools of thought Schools of thought Corporate governance and stakeholder management Corporate governance and stakeholder management Environmental forces creating change Environmental forces creating change Hierarchy of strategic goals Hierarchy of strategic goals

Two Perspectives of Leadership Strategic Choice Perspective Strategic Choice Perspective (Romantic view) (Romantic view) Leader is the key force in organization’s success Leader is the key force in organization’s success Population Ecology Population Ecology (External control perspective) (External control perspective) Focus is on external factors that affect an organization’s success Focus is on external factors that affect an organization’s success

Two Perspectives of Leadership Leaders can make a difference Leaders can make a difference Must be aware of opportunities and threats faced in external environment Must be aware of opportunities and threats faced in external environment Must have thorough understanding of the firm’s resources and capabilities Must have thorough understanding of the firm’s resources and capabilities

Strategic Management Definition: Strategic management consists of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. Key attributes of strategic management Directs the organization toward overall goals and objectives. Directs the organization toward overall goals and objectives. Includes multiple stakeholders in decision making Includes multiple stakeholders in decision making Needs to incorporate short-term and long-term perspectives Needs to incorporate short-term and long-term perspectives Recognizes trade-offs between efficiency and effectiveness Recognizes trade-offs between efficiency and effectiveness

Strategic Management Analysis (Chs. 1, 2, 3, and 4) Analysis (Chs. 1, 2, 3, and 4) Strategic goals (vision, mission, strategic objectives) Strategic goals (vision, mission, strategic objectives) Internal and external environment of the firm Internal and external environment of the firm Strategic decisions (Chs 5, 6, 7, and 8) Strategic decisions (Chs 5, 6, 7, and 8) In which industry(ies) should we compete? In which industry(ies) should we compete? How should we compete in those industries? How should we compete in those industries? Actions (Chs 9, and 10) Actions (Chs 9, and 10) Allocate necessary resources Allocate necessary resources Design the organization to bring intended strategies to reality Design the organization to bring intended strategies to reality

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

Strategic Intentions Intended Strategy Deliberate Strategy Unrealized Strategy Emergent Strategy Realized Strategy

2 2 Two Foundational Schools of Thought Industrial Organization Model 1 1 Resource-Based Model

– Assumptions: u The external environment imposes constraints that determine the strategies that can result in superior determine the strategies that can result in superior profitability. profitability. u Competing firms control similar resources and pursue similar strategies similar strategies u Resources utilized by firms are highly mobile thus homogeneous thus homogeneous 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.

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. The I/O model largely focuses on industry structure or attractiveness of the external environment rather than internal characteristics of the firm.

Resource-Based Model of Superior Returns –Assumptions: u Firms acquire different resources over time u Resources heterogeneity within a particular industry industry u Resources may not be highly mobile across firms firms u Difference in resources and how they are used form the basis of competitive advantage form the basis of competitive advantage

The Resource-Based Model suggests that above-average returns for any firm are largely determined by characteristics inside the firm. 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. The Resource-Based view focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate. Resource-Based Model of Superior Returns

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

Corporate Governance and Stakeholder Management Board of directors Board of directors Elected represent- atives of the owners Elected represent- atives of the owners Ensure interests and motives of man- agement are aligned with those of the owners Ensure interests and motives of man- agement are aligned with those of the owners Effective and engaged board of directors Effective and engaged board of directors Shareholder activism Shareholder activism Proper managerial rewards and incentives Proper managerial rewards and incentives Exhibit 1.4 The Key Elements of Corporate Governance

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

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

Four Additional Types of Capital In addition to financial capital Type of CapitalDescription EcologicalRenewable resources generated by living systems, such as wood or animal by-products MaterialNonrenewable or geological resources such as mineral ores and fossil fuels HumanPeople’s knowledge, skills, health, nutrition, safety, security, and motivation SocialAssets of civil society, such as social cohesion, trust, reciprocity, equity, and other values that provide mutual benefit

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

Strategic Management Perspective Key driving forces increasing the need for strategic perspective and involvement Key driving forces increasing the need for strategic perspective and involvement Globalization Globalization Technology Technology Intellectual capital Intellectual capital These forces are These forces are Interrelated Interrelated Accelerating the rate of change and uncertainty Accelerating the rate of change and uncertainty

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

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

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

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