Chapter 1 – Strategic Management & Competitiveness

The Strategic Management Process Strategy Implementation Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Agenda What is strategy? Current competitive landscape I/O model of above-average returns Resource-based model of above-average returns Strategic management process

What is Strategy? Greek origin: stratos = army, agos = leader Strategy as “the basic characteristics of the match an organization achieves with its environment” (Hofer & Schendel, 1978, Strategy Formulation: Analytical Concepts; the field’s first textbook). Strategy as “the basic characteristics of the match an organization achieves with its environment.” (Hofer & Schendel, 1978, Strategy formulation: Analytical concepts; the field’s first textbook) Strategy as “plan, pattern, position, perspective, and ploy” (Henry Mintzberg, 1987, Five P’s for Strategy). Strategy as “plan, pattern, position, perspective, and ploy.” (Henry Mintzberg, 1987, Five P’s for Strategy) Strategy is “the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.” Sun Tzu (400-300 b.c.) Strategy is “the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.” (Sun Tzu, approx. 500 BC) Strategy as a “pattern of objectives, purposes, or goals, and major policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be” (Kenneth Andrews, 1971, The Concept of Corporate Strategy). Strategy as a “pattern of objectives, purposes, or goals, and major policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.” (Kenneth Andrews, 1971, The concept of corporate strategy) “Everyone has a strategy until you get punched in the mouth” (Mike Tyson). “Everyone has a plan ‘till they get punched in the mouth.” (Mike Tyson)

Strategy Strategy has been defined as “the match an organization achieves between its internal resources and skills […] and the opportunities and risks created by its external environment.” “Know yourself, know your opponents; encounter a hundred battles, win a hundred victories.” Sun Tzu, “The Art of War”, approx. 500 BC Source: Hofer, C. W. & Schendel, D. (1978). “Strategy formulation: Analytic concepts”, St. Paul, MN: West: 12.

Goals of Strategy Above-Average Returns Returns in excess of what an investor expects to earn from other investments with a similar amount of risk Example: The theoretical value of a firm is the discounted present value of all its future free cash flows. Accordingly a shortcut stock price formula is simply a growing perpetuity (Gordon Model): So to increase a firms stock price, the growth rate has to increase, because the current growth rate is already factored into the price!. Strategic Competitiveness When a firm successfully formulates and implements a value-creating strategy Sustainable Competitive Advantage When competitors are unable to duplicate a company’s value-creating strategy

Strategy: Deliberate and Emergent Source: Mintzberg, H., Ahlstrand, B., & Lampel, J. (1998). “Strategy safari”, London, UK: Prentice Hall: 12.

Agenda What is strategy? Current competitive landscape I/O model of above-average returns Resource-based model of above-average returns Strategic management process

Changes in the Competitive Landscape

Today’s Competitive Environment Global economy Rapid technological change

Rapid technological change Global economy Rapid technological change Global Economy Global Economy Goods, people, skills, and ideas move freely across geographic borders Movement is relatively unfettered by artificial constraints Expansion into global arena complicates a firm’s competitive environment Globalization Increased economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders Increased range of opportunities for companies competing in the 21st-century competitive landscape

World’s Largest Economic Entities Global economy Rapid technological change Source: Peng, M. W. (2006). “Global Strategy”, Mason, OH: South-Western: 23.

Technological Changes Global economy Rapid technological change Technological Changes Rate of change of technology and speed at which new technologies become available Perpetual innovation – how rapidly and consistently new, information-intensive technologies replace older ones The development of disruptive technologies that destroy the value of existing technology and create new markets (Schumpeterian innovation)

Technological Changes Global economy Rapid technological change Technological Changes Moore’s Law (Gordon Moore, co-founder of Intel): At our rate of technological development, the complexity of an integrated circuit (i.e. number of transistors per square inch), with respect to minimum component cost will double every 24 months.

Technological Changes Source: New York Times, February 10, 2008

Source: Hitt, M. A. , Keats, B. W. , & DeMarie, S. M. (2006) Source: Hitt, M. A., Keats, B. W., & DeMarie, S. M. (2006). “Navigating in the new competitive landscape: Building strategic flexibility and competitive advantage in the 21st century”, Academy of Management Executive, 12(4): 22-42.

Organizational analysis Environmental analysis SWOT Analysis Strengths Weaknesses Organizational analysis Opportunities Threats Environmental analysis How does a strategy allow us to exploit our strengths, avoid or fix our weaknesses, exploit our opportunities, and neutralize our threats? Strategic choices

Agenda What is strategy? Current competitive landscape I/O model of above-average returns Resource-based model of above-average returns Strategic management process

Organizational analysis Environmental analysis I/O Model Focus Strengths Weaknesses Organizational analysis Opportunities Threats Environmental analysis

I/O Model: Above-Average Returns External Environments Strategy dictated by the external environment of the firm (what opportunities exist in these environments?) Firm develops internal skills required by external environment (what can the firm do about the opportunities?) General Environment “Outside-in”

The I/O Model of Above-Average Returns The External Environment Study the external environment, especially the industry environment. The general environment The industry environment The competitor environment

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

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

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

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

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

Agenda What is strategy? Current competitive landscape I/O model of above-average returns Resource-based model of above-average returns Strategic management process

Resource-Based Model Focus Strengths Weaknesses Organizational analysis Opportunities Threats Environmental analysis

Resource-Based Model Each organization is a collection of unique resources and capabilities that provides the basis for its strategy Capabilities evolve and must be managed dynamically (acquired and/or developed) Differences in firms’ performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry

Resource-Based Model – cont’d Strategy dictated by the firm’s unique resources and capabilities Find an environment in which to exploit these assets (where are the best opportunities?) Differences in firms’ performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry Firm’s Resources THE FIRM “Inside-out”

Criteria for Resources and Capabilities That Become Core Competencies Valuable Rare Costly to Imitate Nonsubstitutable Possessed by few, if any, current and potential competitors Allow the firm to exploit opportunities or neutralize threats in its external environment Core Competencies The firm is organized to obtain the full benefits of the resources When other firms cannot obtain them or must obtain them at a much higher cost

The RBV Model of Above-Average Returns Resources Identify the firm’s resources. Study its strengths and weaknesses compared with those of competitors. Inputs into a firm’s production process

The RBV Model of Above-Average Returns Resources Capability 2. Determine the firm’s capabilities. What do the capabilities allow the firm to do better than its competitors. Capacity of an integrated set of resources to integratively perform a task or activity

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

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

The RBV Model of Above-Average Returns Resources Capability 5. Select a strategy that best allow the firm to utilize its resources and capabilities relative to opportunities in the external environment. Competitive Advantage An Attractive Industry Strategic actions taken to earn above-average returns Strategy Implementation

The RBV Model of Above-Average Returns Resources Capability Competitive Advantage An Attractive Industry Superior returns: Earning of above-average returns Strategy Implementation Superior Returns

The I/O Model The RBV Model The External Environment Resources Capability An Attractive Industry Competitive Advantage Strategy Formulation An Attractive Industry Assets and Skills Strategy Implementation Strategy Implementation Superior Returns Superior Returns

Environmental analysis Organizational analysis SWOT Analysis Framework: RBV Model Framework: I/O Model Opportunities Threats Environmental analysis Strengths Weaknesses Organizational analysis

Agenda What is strategy? Current competitive landscape I/O model of above-average returns Resource-based model of above-average returns Strategic management process

Vision Picture of what the firm wants to be and ultimately achieve Reflects a firm’s values and aspirations “Big Picture” thinking with passion that helps people feel what they are supposed to be doing Should be tied to the conditions in the firm’s external and internal environments

Vision - Examples “We must be a great company with great people” (LG Electronics) “Our vision is to be the world’s best quick service restaurant” (McDonald’s) “To make the automobile accessible to every American” (Ford Morot Company’s vision from Henry Ford) “We want to become the Harvard of the West Coast” (Stanford University)

Mission Externally focused application of its vision A statement of a firm’s unique purpose and the scope of its operations in product and market terms Provides general descriptions of the firm’s intended products and its markets Establishes a firm’s individuality and is inspiring and relevant to all stakeholders

Mission - Examples “To bring people together anytime and anywhere” (AT&T) “To experience the emotion of competition, winning, and crushing competitors” (Nike) “To give ordinary folk the chance to buy the same things as rich people” (Wal-Mart) “To make people happy” (Disney) “Putting a Coke within arm's reach of every consumer in the world” (Coca-Cola)

From Intent & Mission to Action Mission/Intent Fundamental purposes Objectives Measurable performance targets Strategies Means to accomplish objectives Tactics/Policies Actions to implement strategies

The Three Stakeholder Groups

Stakeholder Management Two issues affect the extent of stakeholder involvement in the firm How to divide returns to keep stakeholders involved? How to increase returns so everyone has more to share? Capital Market Organizational Product Market

Strategic Management Process Study the external and internal environments Identify marketplace opportunities and threats Determine how to use strengths (core competencies) and avoid/improve weaknesses Leverage resources, capabilities, and core competencies and win competitive battles Integrate formulation and implementation of strategies Seek feedback to improve strategies

Strategic Leaders Strategic Leaders People located in different parts of the firm who are using the strategic management process to help the firm reach its vision and mission. Prerequisites for Effective Strategic Leadership Hard work Thorough analyses Honesty Desire for accomplishment Common sense

To Do’s Purchase class text (from PSU bookshop or online) – ensure that it includes the cases! Turn in a one page personal bio Review HIH Chapters 1-3 Form your Case Analysis Groups and Let Me Know Who They Are. Meet with your Case Analysis Group