Chapter 1

Adnan Anwar

Strategic Management and Strategic competitiveness

 Strategic competitiveness: is achieved when a firm successfully formulates and

implements a value creating strategy.

Value = Benefits
Cost

 Sustainable competitive advantage: a value creating strategy that a firm

implement that others are unable to duplicate or find too costly to imitate.

 The speed with which others are able to duplicate a value creating strategy by the
firm, determines its duration of the competitive advantage.

 Understanding how to exploit its competitive advantage is necessary for a firm to

earn above-average returns.

 Above-average returns: return in excess of what an investor expects to earn

from other investments with a similar amount of risk.

 Risk: investor’s uncertainty about the economic gains or losses from a particular
investment.

 Average return: returns equal to those an investor expects to earn from other
investment with similar amount of risk.

 In long run, an inability to earn at least average return results in failure.

Strategic Management Process: it is the full set of commitments, decisions, and actions
required for a firm to achieve strategic competitiveness and earn above average returns.

 Effective strategic decisions are a prerequisite to achieving the desired outcomes

of strategic competitiveness and above-average returns.
 Relevant strategic inputs from analysis of internal and external environments are
necessary for effective strategy formulation.

 Matching internal resources, capabilities, and competencies with ever changing

market conditions (sources of strategic inputs) is the process of strategic
management. The process also demands effective strategic actions after careful
analysis of inputs in the context of strategic formulation and implementation
results in the desired outcomes.
The external environment
Strategic intent
Strategic mission
The internal environment

Strategy formulation Strategic Implementation

Corporate level strategy Organizational Structure & Control
Business level strategy Strategic Leadership
Functional strategies Corporate Entrepreneurship
Cooperative strategy Corporate Governance
International strategy
Acquisition

 Conventional sources of competitive advantage such as economies of scale and

huge advertising budgets are not as effective in modern competitive landscape.

 Managers must adopt new mindset that values flexibility, speed, innovation,
integration that evolves from changing conditions.

 Several factors have created hypercompetitive environment in the global market.

Two main factors are:

Emergence of global economy

Technology

 Strategic Flexibility: It is a set of capabilities firms use to respond to various

demands and opportunities that are part of dynamic and uncertain competitive
environment. To achieve this, firms have to develop slack. Slack resources allow
the firm some flexibility to respond to environmental changes.

 Two models use by firms to generate the strategic input needed to successfully
formulate and implement strategies and to maintain strategic flexibility.

The I/O (Industrial Organization) model of Above-Average Return

 The model assumes that the industry in which a firm chooses to compete has a
stronger influence on the firm’s performance than do the choices managers make
inside the organization.
  The firm’s performance is believed to be determined primarily by a range of an
industry’s properties and they are:
1. Economies of scale
2. Barrier to market entry
3. Diversification
4. Product Differentiation
5. Degree of competition

The I/O model has 4 underlying assumptions:

1. External environment is assumed to impose pressures and constraints which
determine the strategies that would result in above average return.
2. Most firms in the industry are assumed to control similar strategically relevant
resources.
3. Resources are quite mobile across firms
4. Organizational decision makers are rational and committed to act in the best
interest.

 Companies that develop or acquire internal skills needed to implement strategies

required by external environment are likely to succeed.
I/O Model
1. External Environment
General environment
Industry environment
Competitor environment

2. An Attractive industry
Locate industry of above average returns

3. Strategy formulation

4. Assets and skills

Develop or acquire assets and skills to implement strategy

5. Strategy implementation

6. Superior return
The Resource Based Model of Above Average Return

 This model assumes that each firm is a collection of unique resources and
capabilities that provides the basis for its strategies and is the source of above-
average return. Thus according to this model, differences in firm’s performances
across time are driven primarily by their unique resources and capabilities rather
than by industry’s structural characteristics.

 Instead of focusing on the accumulation of resources to implement the strategies

dictated by conditions and constraints in the external environment (I/O), the
resource based model suggest that firm’s unique resources and capabilities
provide the basis for a strategy.

 Resources are inputs into a firm’s production process, such as capital equipment,
skills of individual employees, patents, finance. Firms resources can be divided
into three categories:
1. Physical
2. Human
3. Organizational

 Resources are tangible or intangible in nature.

 Individual resource may not yield a competitive advantage. For example modern
equipment can only become source of competitive advantage when its results
yield superior return for customers. (Amazon)

 Therefore, it is through the combination and integration of sets of resources that

competitive advantages are formed.

 A Capability is the capacity for a set of resources to integratively perform a task

or an activity.

 Not all resources and capabilities have the potential to be source of competitive
advantage. They become source of competitive advantage when they are
1. Rare
2. Valuable
3. Costly to imitate
4. Nonsubstitutable

 When these four criteria are met, resources and capabilities become core
competencies. Core competencies are resources and capabilities that serve as a
source of competitive advantage. Core competencies when developed and
nurtured may result in strategic competitiveness.
The Resource Based Model

1. Resources
Inputs into firm’s production process
 Study strengths and weaknesses compared to competitors

2. Capability
Capacity of an integrated set of resources to perform a task or activity
 What do firm’s capability allows the firm to do better than rivals

3. Competitive advantage
Ability of a firm to outperform its rivals

4. An Attractive industry

5. Strategy formulation & implementation

6. Above Average Return

Strategic Intent
 Strategic intent is the leveraging of a firm’s internal resources, capabilities, and
core competencies to accommodate the firm’s goals in the competitive
environment.

 Strategic intent exists when all employees and levels of a firm are committed to
the pursuit of a specific performance criterion. For example, Intel intends to
become the premier building block supplier to the computer industry.

 Strategic intent is internally focused. It concentrates on building core

competencies on which firm can base its strategic actions.

 Strategic mission flows from strategic intent. Externally focused, strategic

mission yield the insights required to formulate and implement the firm’s
strategies. It is a statement of a firm’s unique purpose and scope of its operation in
product and market terms.

 Stakeholders: are individuals and groups who can affect, and are affected by, the
strategic outcomes achieved and who have enforceable claims on a firm’s
performance.
  Classification of stakeholders
1. Capital market stake holders
Shareholders
Major suppliers of capital (banks)

2. Product market stakeholders

Primary customers
Suppliers
Unions

3. Organizational stakeholders
Employees
Managers
No managers

Organizational Culture: It refers to the complex set of ideologies, symbols, and core
values shared throughout the firm and that influences the way it conduct business.