PowerPoint slides by: R. Dennis Middlemist Colorado State University Copyright © 2004 South-Western All rights reserved. Chapter 1 Strategic Management and Strategic Competitiveness

Copyright © 2004 South-Western. All rights reserved.1–2 Definitions 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 Strategic Management Process  The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns

Copyright © 2004 South-Western. All rights reserved.1–3 Definitions (cont’d) Risk  An investor’s uncertainty about the economic gains or losses that will result from a particular investment Average Returns  Returns equal to those an investor expects to earn from other investments with a similar amount of risk Above-average Returns  Returns in excess of what an investor expects to earn from other investments with a similar amount of risk

Copyright © 2004 South-Western. All rights reserved.1–4 Figure 1.1 The Strategic Management Process Copyright © 2004 South-Western. All rights reserved.

1–5 Technology and 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

Copyright © 2004 South-Western. All rights reserved.1–6 Technological Change The Information Age  The ability to effectively and efficiently access and use information has become an important source of competitive advantage  Technology includes personal computers, cellular phones, artificial intelligence, virtual reality, massive databases, electronic networks, internet trade

Copyright © 2004 South-Western. All rights reserved.1–7 Technological Changes Increasing Knowledge Intensity  Strategic flexibility: set of capabilities used to respond to various demands and opportunities in dynamic and uncertain competitive environments  Organizational slack: slack resources that allow the firm flexibility to respond to environmental changes  Capacity to learn

Copyright © 2004 South-Western. All rights reserved.1–8 I/O Model of Above-Average Returns The industry in which a firm competes has a stronger influence on the firm’s performance than do the choices managers make inside their organizations  Industry properties include  economies of scale  barriers to market entry  diversification  product differentiation  degree of concentration of firms in the industry

Copyright © 2004 South-Western. All rights reserved.1–9 Four Assumptions of the I/O Model External environment imposes pressures and constraints that determine strategies leading to above-average returns 12 Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies Resources used to implement strategies are highly mobile across firms 34 Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests (profit-maximizing)

Copyright © 2004 South-Western. All rights reserved.1–10 I/O Model of Above-Average Returns 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?) External Environments General Environment

Copyright © 2004 South-Western. All rights reserved.1–11 The I/O Model of Above-Average Returns Adapted from Figure 1.2 The External Environment 1.Study the external environment, especially the industry environment The general environmentThe general environment The industry environmentThe industry environment The competitor environmentThe competitor environment

Copyright © 2004 South-Western. All rights reserved.1–12 An Attractive Industry 2.Locate an attractive industry with a high potential for above- average returns An industry whose structural characteristics suggest above-average returnsAn industry whose structural characteristics suggest above-average returns The External Environment The I/O Model of Above-Average Returns Adapted from Figure 1.2

Copyright © 2004 South-Western. All rights reserved.1–13 The I/O Model of Above-Average Returns 3.Identify the strategy called for by the attractive industry to earn above-average returns Selection of a strategy linked with above- average returns in a particular industrySelection of a strategy linked with above- average returns in a particular industry The External Environment An Attractive Industry Strategy Formulation Adapted from Figure 1.2

Copyright © 2004 South-Western. All rights reserved.1–14 Assets and Skills The I/O Model of Above-Average Returns 4.Develop or acquire assets and skills needed to implement the strategy Assets and skills required to implement a chosen strategyAssets and skills required to implement a chosen strategy The External Environment An Attractive Industry Strategy Formulation Adapted from Figure 1.2

Copyright © 2004 South-Western. All rights reserved.1–15 Superior Returns The I/O Model of Above-Average Returns The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior returns: earning of above-average returnsSuperior returns: earning of above-average returns Adapted from Figure 1.2

Copyright © 2004 South-Western. All rights reserved.1–16 Five Forces Model of Competition An industry’s profitability results from interaction among  Suppliers  Buyers  Competitive rivalry among firms currently in the industry  Product substitutes  Potential entrants to the industry

Copyright © 2004 South-Western. All rights reserved.1–17 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 Resources 1.Identify the firm’s resources. Study its strengths and weaknesses compared with those of competitors Inputs into a firm’s production processInputs into a firm’s production process

Copyright © 2004 South-Western. All rights reserved.1–18 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 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 activityCapacity of an integrated set of resources to integratively perform a task or activity Resources

Copyright © 2004 South-Western. All rights reserved.1–19 The Resource-Based Model of Above-Average Returns Adapted from Figure Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage. Ability of a firm to outperform its rivalsAbility of a firm to outperform its rivals Competitive Advantage Capability Resources

Copyright © 2004 South-Western. All rights reserved.1–20 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 An Attractive Industry 4.Locate an attractive industry. An industry with opportunities that can be exploited by the firm’s resources and capabilitiesAn industry with opportunities that can be exploited by the firm’s resources and capabilities Competitive Advantage Capability Resources

Copyright © 2004 South-Western. All rights reserved.1–21 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 Superior Returns Superior returns: earning of above-average returnsSuperior returns: earning of above-average returns Strategy Implementation An Attractive Industry Competitive Advantage Capability Resources

Copyright © 2004 South-Western. All rights reserved.1–22 Key Criteria of Resources and Capabilities Valuable  Resources and capabilities are valuable when they allow a firm to take advantage of opportunities or neutralize threats in external environment Rare  Resources and capabilities are rare when possessed by few, if any, current and potential competitors

Copyright © 2004 South-Western. All rights reserved.1–23 Key Criteria of Resources and Capabilities Costly to Imitate  Resources and capabilities are costly to imitate when other firms either cannot obtain them or are at a cost disadvantage in obtaining them Nonsubstitutable  Resources and capabilities are nonsubstitutable when they have no structural equivalents

Copyright © 2004 South-Western. All rights reserved.1–24 Core Competencies When the four key criteria of resources and capabilities are met, they become core competencies Core competencies serve as a source of competitive advantage Managerial competencies are especially important

Copyright © 2004 South-Western. All rights reserved.1–25 How Resources and Capabilities Provide Competitive Advantage The firm is organized appropriately to obtain the full benefits of the resources in order to realize a 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 Costly to imitate When other firms cannot obtain them or must obtain them at a much higher cost Nonsubstitutable

Copyright © 2004 South-Western. All rights reserved.1–26 Resources and Capabilities, Core Competencies, and Outcomes Core Competencies Competitive Advantage Value Creation Above Average Returns Valuable Rare Costly to Imitate Nonsubstitutable

Copyright © 2004 South-Western. All rights reserved.1–27 Strategic Intent Internally focused The leveraging of a firm’s resources, capabilities and core competencies to accomplish the firm’s goals Exists when all employees and levels of a firm are committed to the pursuit of a specific, significant performance criterion

Copyright © 2004 South-Western. All rights reserved.1–28 Strategic Mission Externally focused A statement of a firm’s unique purpose and the scope of its operations in product and market terms  Establishes a firm’s individuality and is inspiring and relevant to all stakeholders  Provides general descriptions of the firm’s intended products and its markets

Copyright © 2004 South-Western. All rights reserved.1–29 Stakeholders Individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance Claims are enforced by the stakeholder’s ability to withhold essential participation

Copyright © 2004 South-Western. All rights reserved.1–30 The Three Stakeholder Groups Figure 1.4

Copyright © 2004 South-Western. All rights reserved.1–31 Capital Market Stakeholders Shareholders and lenders expect the firm to preserve and enhance the wealth they have entrusted to it Returns should be commensurate with the degree of risk to the shareholder

Copyright © 2004 South-Western. All rights reserved.1–32 Product Market Stakeholders Customers  Demand reliable products at low prices Suppliers  Seek loyal customers willing to pay highest sustainable prices for goods and services Host communities  Want companies willing to be long-term employers and providers of tax revenues while minimizing demands on public support services Union officials  Want secure jobs and desirable working conditions

Copyright © 2004 South-Western. All rights reserved.1–33 Organizational Stakeholders Employees  Expect a dynamic, stimulating and rewarding work environment  Are satisfied by a company that is growing and actively developing their skills

Copyright © 2004 South-Western. All rights reserved.1–34 Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firm  How to divide returns to keep stakeholders involved? Capital Market Product Market Organizational  How to increase returns so everyone has more to share?

Copyright © 2004 South-Western. All rights reserved.1–35 Strategic Leaders People responsible for the design and execution of strategic management processes Decisions they make include  How resources will be developed or acquired  At what price resources will be obtained  How resources will be used

Copyright © 2004 South-Western. All rights reserved.1–36 Organizational Culture The complex set of  Ideologies  Symbols  Core values that are shared throughout the firm, that influence how the firm conducts business

Copyright © 2004 South-Western. All rights reserved.1–37 Strategic Management Process Study the external and internal environments Identify marketplace opportunities and threats Determine how to use core competencies Use strategic intent to leverage resources, capabilities and core competencies and win competitive battles Integrate formulation and implementation of strategies Seek feedback to improve strategies