PowerPoint slides by Susan A. Peterson, Scottsdale Community College PowerPoint slides by Susan A. Peterson, Scottsdale Community College Chapter 5: Strategic Management Chapter 5: Strategic Management m a n a g e m e n t 2e H i t t / B l a c k / P o r t e r

© 2008 Prentice-Hall Business Publishing 2 Learning Objectives After studying this chapter, you should be able to: Explain what a competitive advantage is and identify its components Describe the strategic management process Explain the role an environmental analysis plays in strategy formulation List and describe the five dimensions of the general environment Explain the five forces in the industry and competitor environments After studying this chapter, you should be able to: Explain what a competitive advantage is and identify its components Describe the strategic management process Explain the role an environmental analysis plays in strategy formulation List and describe the five dimensions of the general environment Explain the five forces in the industry and competitor environments

© 2008 Prentice-Hall Business Publishing 3 Learning Objectives Discuss how to conduct an internal analysis of a firm’s resources using value chain analysis Utilize SWOT analysis to describe the organization’s conditions and select the best strategy Identify and explain business-level, generic strategies Describe strategic actions used in strategy implementation such as acquisitions and strategic alliances Discuss how to conduct an internal analysis of a firm’s resources using value chain analysis Utilize SWOT analysis to describe the organization’s conditions and select the best strategy Identify and explain business-level, generic strategies Describe strategic actions used in strategy implementation such as acquisitions and strategic alliances

© 2008 Prentice-Hall Business Publishing 4 Strategic Management Strategic management requires an understanding of: Strategic management process How to develop an overall strategy Intended targets of the strategy Strategic management requires an understanding of: Strategic management process How to develop an overall strategy Intended targets of the strategy

© 2008 Prentice-Hall Business Publishing 5 Competitive Advantage Competitive advantage The ability of a firm to win consistently over the long term in a competitive situation Competitive advantage is created through the achievement of four qualities Competitive advantage The ability of a firm to win consistently over the long term in a competitive situation Competitive advantage is created through the achievement of four qualities Superior Value Rarity Difficult to Imitate Non-substitutability

© 2008 Prentice-Hall Business Publishing 6 Qualities Leading to Competitive Advantage Superior value Firm provides products and services that produce value that is superior to competitors Comparative advantage -Compared to others, the value is superior Distinctive competence -Superior product is result of a unique competence Superior value Firm provides products and services that produce value that is superior to competitors Comparative advantage -Compared to others, the value is superior Distinctive competence -Superior product is result of a unique competence Superior Value

© 2008 Prentice-Hall Business Publishing 7 Qualities Leading to Competitive Advantage Rarity How many other firms hold similar capabilities? Rarity How many other firms hold similar capabilities? Superior Value Rarity

© 2008 Prentice-Hall Business Publishing 8 Qualities Leading to Competitive Advantage Difficult to imitate Managers must create barriers that make it hard for others to copy their superiority advantages -Culture -Product design -Marketing strategy -And others Difficult to imitate Managers must create barriers that make it hard for others to copy their superiority advantages -Culture -Product design -Marketing strategy -And others Superior Value Rarity Difficult to Imitate

© 2008 Prentice-Hall Business Publishing 9 Qualities Leading to Competitive Advantage Non-substitutability Can the customer’s need be met by alternative means? -Encyclopedias vs. information on Internet -Movie theater entertainment vs. concert band entertainment Non-substitutability Can the customer’s need be met by alternative means? -Encyclopedias vs. information on Internet -Movie theater entertainment vs. concert band entertainment Superior Value Rarity Difficult to Imitate Non-substitutability

© 2008 Prentice-Hall Business Publishing 10 Turning a Competitive Advantage into Profits A competitive advantage should generate above- average returns: profits that are greater than the average for a comparable set of firms

© 2008 Prentice-Hall Business Publishing 11 Strategic Management Process: Setting Direction Strategic management process is a planning process in which managers: 1. Set the organization's general direction and objectives 2. Formulate a specific strategy 3. Plan and carry out the strategy’s implementation 4. Monitor results and make necessary adjustments

© 2008 Prentice-Hall Business Publishing 12 Strategic Management Process Determine strategic vision Establish objectives Formulate strategy Implement strategy Action plans Implement plans Monitor outcomes Implement strategy Action plans Implement plans Monitor outcomes Analyze internal resources Analyze external environment Adapted from Exhibit 5.1 Define organizational mission

© 2008 Prentice-Hall Business Publishing 13 Determining the Strategic Vision Strategic vision: provides a view of the firm over the long term and what it should achieve in the future. Strategic vision: -Provides general identity, direction, and level of aspirations -Is the heart of the strategy and strategic plan -Is short and compelling

© 2008 Prentice-Hall Business Publishing 14 Mission Statement Mission statement articulates fundamental purpose of the organization Company philosophy Company identity, or self-concept Principal products or services Customers and markets Geographic focus Obligations to shareholders Commitment to employees

© 2008 Prentice-Hall Business Publishing 15 Mission Statement for the Internal Revenue Service The IRS mission is to “provide America’s Taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.” The IRS mission is to “provide America’s Taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.” Adapted from Exhibit 5.2

© 2008 Prentice-Hall Business Publishing 16 External Environmental Analysis Managers must conduct an analysis of the firm’s general environment: Social/cultural Technological Economic Political/legal Global Managers must conduct an analysis of the firm’s general environment: Social/cultural Technological Economic Political/legal Global The Firm Social/ Cultural Environment Techno- logical Environment Political/ Legal Environment Global Environment Economic Environment

© 2008 Prentice-Hall Business Publishing 17 General Environment Sociocultural forces include: Demographics Societal values Sociocultural forces include: Demographics Societal values

© 2008 Prentice-Hall Business Publishing 18 General Environment Technology forces Product technological changes Process technological changes Technology forces Product technological changes Process technological changes

© 2008 Prentice-Hall Business Publishing 19 General Environment Economic forces Current economic conditions Economic cycles Structural changes Economic forces Current economic conditions Economic cycles Structural changes

© 2008 Prentice-Hall Business Publishing 20 General Environment Political and legal forces Laws and regulations Government spending Political and legal forces Laws and regulations Government spending

© 2008 Prentice-Hall Business Publishing 21 General Environment Global forces Impact on and interaction with the other forces Institutional forces Physical forces Global forces Impact on and interaction with the other forces Institutional forces Physical forces

© 2008 Prentice-Hall Business Publishing 22 The General Environment of Coca-Cola Coca-Cola Social/ Cultural Environment Techno- logical Environment Political/Legal Environment Baby boomers drink less Immigrants drink less Concern about recycling Concerns about health New recycle-friendly canning technology New promotion opportunities via the Internet Global Environment Economic Environment Increased health standards for bottling Stricter liability legislation Increase in acceptance of carbonated drinks in India and China Easier consumer access to refrigeration Slow economic growth Prospect of economic recovery Adapted from Exhibit 5.3

© 2008 Prentice-Hall Business Publishing 23 Industry and Competitive Environment Suppliers Customers New Entrants Industry competitors Rivalry among existing firms Substitutes

© 2008 Prentice-Hall Business Publishing 24 Profits and Industry Forces  Few competitors  Quality-based competition  High entry barriers  Few new entrants  Many customers  Fragmented customers  Many suppliers  Few competitors  Quality-based competition  High entry barriers  Few new entrants  Many customers  Fragmented customers  Many suppliers  Many competitors  Price-based competition  Low entry barriers  Many new entrants  Many substitutes  Few customers  United customers  Few suppliers  Many competitors  Price-based competition  Low entry barriers  Many new entrants  Many substitutes  Few customers  United customers  Few suppliers Higher Profits Lower Profits Adapted from Exhibit 5.4

© 2008 Prentice-Hall Business Publishing 25 Industry and Competitive Environment of JetBlue JetBlue Customers Business travelers Leisure travelers Customers Business travelers Leisure travelers Competitors Rivalry: Price New entrants: Few Substitutes: Video conferencing Competitors Rivalry: Price New entrants: Few Substitutes: Video conferencing Suppliers Planes: Airbus Jet fuel: many suppliers such as Exxon Mobil Suppliers Planes: Airbus Jet fuel: many suppliers such as Exxon Mobil Labor No union representation Ample supply of pilots and flight attendants Labor No union representation Ample supply of pilots and flight attendants Regulators FAA Airport authorities Regulators FAA Airport authorities Strategic Partners No airline partners Initial partnership With satellite TV provider Strategic Partners No airline partners Initial partnership With satellite TV provider Adapted from Exhibit 5.5

© 2008 Prentice-Hall Business Publishing 26 The Value Chain Primary Activities Support Activities Adapted from Exhibit 5.6

© 2008 Prentice-Hall Business Publishing 27 Integrating Internal and External Analyses Internal environment Strengths Weaknesses Tools -Core competencies framework -Resource analysis framework -Value chain framework Internal environment Strengths Weaknesses Tools -Core competencies framework -Resource analysis framework -Value chain framework Internal Environment SWOT

© 2008 Prentice-Hall Business Publishing 28 Integrating Internal and External Analyses External environment Opportunities Threats Tools -Product life cycle analysis -Portfolio analysis -Five forces framework External environment Opportunities Threats Tools -Product life cycle analysis -Portfolio analysis -Five forces framework External Environment SWOT

© 2008 Prentice-Hall Business Publishing 29 Strategic Objectives Strategic objectives translate the strategic intent and mission into concrete and measurable goals Facilitates a firm's ability to -Allocate resources appropriately -Reach a shared understanding of priorities -Delegate responsibilities -Hold people accountable for results Strategic objectives translate the strategic intent and mission into concrete and measurable goals Facilitates a firm's ability to -Allocate resources appropriately -Reach a shared understanding of priorities -Delegate responsibilities -Hold people accountable for results

© 2008 Prentice-Hall Business Publishing 30 Formulating a Strategy Competitive strategy: determining how the company is going to compete and achieve its strategic objectives, mission, and ultimate strategic intent Generic strategies Techniques and tools Competitive strategy: determining how the company is going to compete and achieve its strategic objectives, mission, and ultimate strategic intent Generic strategies Techniques and tools

© 2008 Prentice-Hall Business Publishing 31 Formulating a Strategy Generic competitive strategies Cost leadership Differentiation Focus

© 2008 Prentice-Hall Business Publishing 32 Generic Strategies and Scope General player whose product or service features command industry average prices but whose costs are significantly below the industry average Example: Wal-Mart General player whose product or service features command industry average prices but whose costs are significantly below the industry average Example: Wal-Mart Niche player with average Prices and below-average costs That focuses on a segment of customers or a specific geography Example: Columbia Sports Niche player with average Prices and below-average costs That focuses on a segment of customers or a specific geography Example: Columbia Sports General player whose product or service features command premium prices and whose costs are at the industry average Example: Sony General player whose product or service features command premium prices and whose costs are at the industry average Example: Sony Niche player with average costs but commanding premium prices that focuses on the high end and customers in a general or specific geography Example: Morgan Motors Niche player with average costs but commanding premium prices that focuses on the high end and customers in a general or specific geography Example: Morgan Motors Scope General Focused Differentiation Cost leadership Strategy

© 2008 Prentice-Hall Business Publishing 33 Formulating a Strategy Other generic competitive strategies: Integrated Differentiation-Cost Leadership Multipoint Competition

© 2008 Prentice-Hall Business Publishing 34 Strategy Implementation Strategy Structure Systems Shared Values Shared Values Skills Staff Style