1. MGNT428 – Spring 2006 Dr. Tom Lachowicz, Instructor
Business Policy & Strategy … an introduction to the COBE BBA degree capstone foundations course . . .
MGNT428 – Spring 2006
Dr. Tom Lachowicz, Instructor

2. Instructional techniques …
Hitt Text Chapter readings + lectures + Supplemental readings …
Five Harvard Business School Case Studies
Meg Whitman & E-Bay
The Walt Disney Company
Apple Computer
Airborne Express
Husky Injection Molding Systems
All are employed in the Course!

3. Course Overview Learning objectives:
To apply tools for analyzing the financial and competitive positioning of firms and industries.
To comprehend the complexities facing managers in implementing strategic plans.
To comprehend methods used for matching a firm’s internal capabilities with the demands of competitive constraints.
To examine methods used to determine where, how, and for how long a firm can create its competitive advantage.

4. Learning objectives (cont’d.)
To develop useful administrative and individual and group communication skills required for achieving successful outcomes for your firm in the BSG.

5. Any questions?
Q & A time . . .

6. The Hitt Text: Chapter 1 Notes
MGNT428 – Business Policy
& Strategy
Dr. Tom Lachowicz, Instructor

7. When we have completed this chapter you should be able to:
Define strategic competitiveness competitive advantage, and above-average returns.
Describe the 21st-century competitive landscape and explain how globalization and technological changes shape it.
Use the industrial organization (I/O) model to explain how firms can earn above-average returns.
Use the resource-based model to explain how firms can earn above-average returns.
Describe strategic intent and strategic mission and discuss their value.
Define stakeholders and describe their ability to influence organizations.

8. Learning Objectives (cont’d)
- Use the resource-based model to explain how firms can earn above-average returns.
- Describe the work of strategic leaders.
- Explain the strategic management process.

9. Let’s start by asking … some key questions!
What is a management strategy course all about?
Just what is strategy?
What is happening in the business strategic environment?
What is the industrial organization (IO) model?
What is the resource-based model?
Who are a firm’s key stakeholders?
What affects do firm stakeholders have on strategy?
Who is it who creates “strategy” in organizations?

10. Some Important 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.

11. Definitions (cont’d) Risk Average Returns Above-average Returns
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.

12. Hitt’s Strategic Management Process
Figure 1.1
Copyright © 2004 South-Western. All rights reserved.

13. Current Competitive Landscape
It’s a “tough” world out there! A Perilous Business World for the “faint hearted” . . .
Investments required to compete on a global scale are enormous.
Consequences of failure are severe/
Important Elements of Success
Developing an effective strategy [game plan!]
Implementing that strategy [executing the plan!]

14. Competitive Landscape
Strategic maneuvering among global and innovative combatants
Global economy
Rapid technological change

15. Competitive Landscape: Hypercompetition
Hypercompetition A condition of rapidly escalating competition based on:
Hypercompetition
Price-quality positioning.
Competition to create new know-how and establish first-mover advantage.
Competition to protect or invade established product or geographic markets.

16. Our Global Economy The Global Economy is …
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.

17. The Global Economy (cont’d.)
Globalization provides:
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.

18. Country Competitiveness Rankings (with populations over 20 Million)
United States 1 2
Australia 2 3
Canada 3 2
Malaysia 4 6
Germany 5 4
Taiwan 6 7
United Kingdom 7 5
France 8 9
Spain 9 8
Thailand 10 10
Japan 11 11
China 12 12
Brazil 13 0
China 14 0
Korea 15 10
Country
Colombia 16 20
Italy 17 14
South Africa 18 16
India 19 0
India 20 17
Brazil 21 15
Philippines 22 18
Romania 23 0
Mexico 24 19
Turkey 25 23
Russia 26 21
Poland 27 22
Indonesia 28 25
Argentina 29 26
Venezuela 30 24
SOURCE: From World Competitiveness Yearbook 2003, IMD, Switzerland. April. Reprinted by permission.
Table 1.1

19. 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.

20. 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.

21. 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

22. Two Approaches to Above-Average Returns . . .
Hitt’s I/O Model of strategic planning . . .
The Resource-Based Model of strategic planning . . .

23. Hitt’s 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

24. Four Assumptions of the I/O Model1
External environment imposes pressures and constraints that determine strategies leading to above-average returns.
Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies. 2 3
Resources used to implement strategies are highly mobile across firms.
Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests (profit-maximizing.). 4

25. I/O Model of Above-Average Returns
External Environments
Strategy is 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

26. 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
Adapted from Figure 1.2

27. 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.
Adapted from Figure 1.2

28. 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.
Adapted from Figure 1.2

29. 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 required to implement a chosen strategy.
Assets and Skills
Adapted from Figure 1.2

30. 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
Adapted from Figure 1.2

31. 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
Adapted from Figure 1.2

32. Michael Porter’s 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

33. Porter’s Five Forces Model of Competition (cont’d.)
Firms earn above average returns by:
Producing standardized products or services.
Manufacturing differentiated products for which customers are willing to pay a price premium.

34. The Resource-Based Model of Above-Average Returns
Each organization is a collection of unique resources and capabilities that provides the basis for its strategy and that is the primary source of its returns.
Capabilities evolve and must be managed dynamically.

35. Resource-Based Model of Above-Average Returns (cont’d.)
Differences in firms’ performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry.
Firms acquire different resources and develop unique capabilities.

36. Resource-Based Model of Above-Average Returns (cont’d.)
Firm’s Resources
1. Strategy is dictated by the firm’s unique resources and capabilities.
2. Find an environment in which to exploit these assets (where are the best opportunities?)
The Firm

37. Resources and Capabilities
Inputs into a firm’s production process:
Capital equipment
Skills of individual employees
Patents
Finances
Talented managers
Capabilities
Capacity of a set of resources to perform in an integrative manner.
A capability should not be:
So simple that it is highly imitable
So complex that it defies internal steering and control

38. The Resource-Based 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
Adapted from Figure 1.3

39. The Resource-Based 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.
Adapted from Figure 1.3

40. The Resource-Based 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.
Adapted from Figure 1.3

41. The Resource-Based 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
Adapted from Figure 1.3

42. The Resource-Based 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
Adapted from Figure 1.3

43. The Resource-Based Model of Above-Average Returns
Resources
Capability
Competitive Advantage
An Attractive Industry
Superior returns: earning of above-average returns
Strategy Implementation
Superior Returns
Adapted from Figure 1.3

44. 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.

45. Key Criteria of Resources and Capabilities [con’t.]
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.

46. The all-important 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.

47. How Resources and Capabilities Provide 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
The firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage.

48. Resources and Capabilities, Core Competencies, and Outcomes
Valuable
Core Competencies
Rare
Competitive Advantage
Costly to Imitate
Value Creation
Nonsubstitutable
Above Average Returns

49. Strategic Intent Its internally focused.
It requires the leveraging of a firm’s resources, capabilities and core competencies to accomplish the firm’s goals.
It only exists when all employees and levels of a firm are committed to the pursuit of a specific, significant performance criterion.

50. Strategic Mission Is externally focused.
Is a statement of a firm’s unique purpose and the scope of its operations in product and market terms.
It establishes a firm’s individuality and is inspiring and relevant to all stakeholders.
It provides general descriptions of the firm’s intended products and its markets.

51. Stakeholders
Are all those individuals, groups and entities who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance.
Stakeholder claims are enforced by their ability to withhold essential participation.

52. The Three Stakeholder Groups
Figure 1.4

53. 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.

54. 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 and their members
Want secure jobs and desirable working conditions.

55. Organizational Stakeholders
Employees [The “worker-bees!”]
Expect a dynamic, stimulating and rewarding work environment.
Are satisfied by a company that is growing and actively developing their skills.

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

57. Strategic Leaders
People in the enterprise who are 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.

58. Organizational Culture
The complex set of
Ideologies
Symbols
Core values
that are shared throughout the firm,
that influence how the firm conducts business.

59. Mapping an Industry’s Profit Pools
Define the pool’s boundaries.
Estimate the pool’s overall size.
Estimate the size of the value-chain activity in the pool.
Reconcile the calculations.

60. The 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.