CHP 1 - Strategic Management - 6e

Chapter 1
Strategic
Management and
Strategic
Competitiveness
PowerPoint slides by:

R. Dennis Middlemist
Colorado State University
Copyright © 2004 South-Western

All rights reserved.
Knowledge Objectives
 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.
Copyright © 2004 South-Western. All rights reserved. 1–2
Knowledge Objectives (cont’d)
 Define stakeholders and describe their ability to
influence organizations.
 Describe the work of strategic leaders.
 Explain the strategic management process.

Case of Bharti Airtel
• started in 1995 became the leading telecom
company in India by 2010.
• It’s performance suggests that it has become
highly competitive as it registered above
average returns in the telecom sector in India
consistently.
• BSNL, which was an arm of the ministry of
telecommunications, which is the policy maker.
• How did the Bharti Airtel Ltd. Achieved this
position?
Bharti Airtel case
• Strategy indicates what the firm will do as well as what

the firm will not do.
• BTVL/ Bharti Airtel focuses single business :
telecommunications, mobile telephony segment, GSM
technology, reinforcing presence in basic, broadband,
internet service and international telecom business.
• Continuous innovation to stay ahead in competition
• Not to diversify in any other unrelated business
• Idea cellular solely in GSM mobile business
• BSNL also has its presence in all areas of telecom,
but its dependence on basic services continues to be
1–5
very high.
Bharti Airtel
• Reliance telecom is into both GSM and CDMA,
with more strength in the letter.
• Thus all the players tries to gain competitive
advantage by pplaying the game differently.
• The firm must demonstrate how its game is
different.
• Ford Motor Commpany devoted efforrts from its
competitiors. It is “greener” and more
technically adavanced than its competitors,
such as General Motors and Chrysler group
LLC
• It could achieve because it uses strategic
management process as the foundation for its
commitments, decisions and the actions it took when
pursuing strategic competitiveness and above
average terms.
• Strategic Competitiveness
 When a firm successfully formulates and implements a
value-creating strategy
• Above-average Returns
 Returns in excess of what an investor expects to earn
from other investments with a similar amount of risk
Definitions
• Sustainable Competitive Advantage
 When competitors are unable to duplicate or is difficult
and costly to try to duplicate (imitate) a company’s
value-creating strategy
 The speed with which competitors are able to acquire
the skills needed to duplicate determines how long the
competitive advantage will last.
• 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
Strategy
• Strategy is
an integrated and co-ordinated set of commitments

and actions
to
achieve competitive advantage
using
core competencies.

• A company’s strategy consists of the competitive
moves and business approaches that managers are
employing to compete successfully, improve
performance, and grow the business.
• Strategy is about competing differently from rivals –

doing what competitors don’t do or even better, doing
what they can’t do! Every strategy needs a distinctive
element that attracts customers and produces a
competitive edge.

Definitions (cont’d)
• A company achieves sustainable competitive
advantage when it can meet customer needs
more effectively or efficiently than rivals and
when the basis for this is durable, despite the
best efforts of competitors to match or surpass
this advantage.
• Strategic Management Process
 The full set of commitments, decisions, and
actions required for a firm to achieve strategic
competitiveness and earn above-average returns

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

Air Deccan: unable to Reach the cruising Height
• The pioneers of the low cost aviation in India was
sold in December, 2007 to kingfisher Airlines
• Mistakes made during the implementing the
strategy was primary causes of failure and
subsequent disappearance of its highly visible
brand from the Indian skyline.
• Focus on short term profit was a problem.
• Kingfisher Red promoted a lot by Vijay Malia but
fell between two stools: costlier than the low cost
airlines but poorer in service than full service
airlines.
Air Deccan: unable to Reach the cruising Height
• Air Deccan’s share of 16 % at the time of liquidation
did not go to Kingfisher, but it went to Spicejet and
Indigo.
• Kingfisher get only 8 percent from Deccan while
Spicejet increased from 9.2 percent to 13.3 percent
between 2007-08 to 2009-10.
• Indigo increased from 8.8 to 16.4 per cent over the
same time.
• The low cost airlines continued their no frills, low cost
model, with punctual and reliable services that
attracted a substantial clientele. The concept was not
flawed but the strategy to put that in place that went
1–14
wrong, both for Air Deccan and Kingfisher.

Current Competitive Landscape
• A Dangerous Business World
 Investments required to compete on a global
scale are enormous
 Consequences of failure are severe
• Important Elements of Success

 Developing strategy
 Implementing strategy

Competitive Landscape
Strategic turning
among global and
innovative
competitors
Global
economy
Rapid
technological
change

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

Global Economy (cont’d)
• 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

Country Competitiveness Rankings (Population over 20 Million)
Country 2002 2003 Country 2002 2003

United States 1 2 Colombia 16 20
Australia 2 3 Italy 17 14
Canada 3 2 South Africa 18 16
Malaysia 4 6 India 19 0
Germany 5 4 India 20 17
Taiwan 6 7 Brazil 21 15
United Kingdom 7 5 Philippines 22 18
France 8 9 Romania 23 0
Spain 9 8 Mexico 24 19
Thailand 10 10 Turkey 25 23
Japan 11 11 Russia 26 21
China 12 12 Poland 27 22
Brazil 13 0 Indonesia 28 25
China 14 0 Argentina 29 26
Korea 15 10 Venezuela 30 24
SOURCE: From World Competitiveness Yearbook 2003, IMD, Switzerland.
http://www.imd.ch.wcy.esummary, April. Reprinted by permission.
Table 1.1
Technology and Technological Changes
• Rate of change of technology and speed at which new
technologies become available
 It took the telephone 57 years to reach 25% in 2007 and 68 % in 2010
 Mobile phones 15 years reached to 65%
 Tv 10 years to reach 25 %and in 2009 60%
 Internet penetration had reached 8 % and expected to reach 25 % by
2015
• Perpetual innovation—how rapidly and consistently new,
information-intensive technologies replace older ones
 Patents are effective way of protecting proprietary technology in a small
number of industries like pharmaceuticals.
 Electronics industry do not go for patents to keep competitors away
from access to the technological knowledge included in the patent
application.
1–21
• The development of disruptive technologies that destroy
the value of existing technology and create new markets
 iPods, wifi and the browser
• 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 and multiple social
networking sites are a few examples of how information is used
differently as a result of technological developments.
 Internet creating hypercompetition
 ITCs access to the internet on smaller devices such as cell phones is
having an ever growing impact on competition in a number of
Industries. 1–22
• 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 change

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
• External environment is the dominant factor in influencing

the strategy formulation
1–24
Four Assumptions of the I/O Model
External environment imposes pressures and constraints
1 that determine strategies leading to above-average returns
Most firms competing in an industry control similar

2 strategically relevant resources and pursue similar
strategies
Resources used to implement strategies are highly mobile

3 across firms
Organizational decision makers are assumed to be rational

4 and committed to acting in the firm’s best interests (profit-
maximizing)
1–25
I/O Model of Above-Average Returns
External Environments 1. Strategy dictated by the
external environment of
General
Environment
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?)

The I/O Model of
Above-Average Returns
The External
Environment
1. Study the external environment,

especially the industry
environment
• The general environment

• The industry environment
• The competitor environment
Adapted from Figure 1.2

1–27
The I/O Model of
The External
Environment
An Attractive 2. Locate an attractive industry

Industry with a high potential for above-
average returns
• An industry whose
structural characteristics
suggest above-average
returns

1–28
The I/O Model of
The External
Environment
An Attractive 3. Identify the strategy called for

Industry 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
The External
Environment
An Attractive 4. Develop or acquire assets

Industry 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
The External
Environment
An Attractive 5. Use the firm’s strengths

Industry (its developed or acquired
assets and skills) to
Strategy implement the strategy
Formulation
• Selection of strategic
Assets and Skills
actions linked with
effective implementation
Strategy
Implementation
of the chosen strategy

The I/O Model of
The External
Environment
An Attractive
Industry
Strategy
Formulation
Assets and Skills

• Superior returns: earning
of above-average returns
Strategy
Implementation
Superior Returns
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
• Firms earn above average returns by
 Producing standardized products or services
 Manufacturing differentiated products for which customers
are willing to pay a price premium
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
• 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 1–34
Resource-Based Model of Above-Average
Returns (cont’d)
Firm’s Resources 1. Strategy dictated by the

firm’s unique resources
and capabilities
2. Find an environment in
which to exploit these
assets (where are the
best opportunities?)

Resources and Capabilities
• Resources • Capabilities
 Inputs into a firm’s  Capacity of a set of
production process resources to perform
in an integrative
 Capital equipment manner
 Skills
of individual  A capability should
employees not be
 Patents  So simple that it is
highly imitable
 Finances
 So complex that it
 Talented defies internal
managers steering and
control
1–36
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
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
Non-substitutable
 Resources and capabilities are non-substitutable when they have
no structural equivalents
Core Competencies
• Core Competencies are resources and
capabilities that serves as a source of
competitive advantage for a firm over its rivals
• 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
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
Resources and Capabilities, Core
Competencies, and Outcomes
Core
Valuable
Competencies
Competitive
Rare
Advantage
Costly to Imitate Value Creation
Above Average
Nonsubstitutable
Returns

The Resource-Based Model of
Resources
1. Identify the firm’s resources.

Study its strengths and
weaknesses compared with
those of competitors
• Inputs into a firm’s

production process

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

Resources
Capability 3. Determine the potential of the

firm’s resources and
capabilities in terms of a
Competitive competitive advantage.
Advantage
• Ability of a firm to
outperform its rivals

Resources
Capability 4. Locate an attractive

industry.
Competitive • An industry with

Advantage
opportunities that can
An Attractive be exploited by the
Industry firm’s resources and
capabilities

Resources
Capability 5. Select a strategy that best

allow the firm to utilize its
resources and capabilities
Competitive relative to opportunities in
Advantage the external environment.
An Attractive • Strategic actions taken to

Industry earn above-averagae
Strategy returns
formulation and
Implementation
Resources
Capability
Competitive
Advantage
An Attractive
Industry • Superior returns: earning
Strategy formulation of above-average returns
and Implementation
Superior Returns Adapted from Figure 1.3

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

Strategic Vision and Mission
• Formed in light of the information and insights gained from
studying a firm’s internal and external environment.
• Vision is a picture of what the firm wants to be and in broad
terms what it wants to ultimately achieve.
• Mission specifies the business in which the firm intends to
compete and the customers it intends to serve.
• Vision and mission provide direction to the firm and signal
important descriptive information to shareholders.
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
The Three
Stakeholder
Groups
Figure 1.4
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

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
Organizational Stakeholders
• Employees
 Expect a dynamic, stimulating and rewarding work
environment
 Are satisfied by a company that is growing and
actively developing their skills
Stakeholder Involvement
• Two issues affect the extent of stakeholder
involvement in the firm
 How to divide returns
to keep stakeholders
involved?
 How to increase Capital
Organizational
returns so everyone Market
has more to share?
Product
Market

Stakeholders
• Stakeholders have enforceable claims on the
company’s performance.
• When earning above average returns, a firm has the
resources it needs to at minimum, simultaneously
satisfy the interest of all.
• When earning only average returns, the firm must
carefully manage its stakeholders in order to retain
their support.
• A firm earning below average returns must minimize
the amount of support it loses from unsatisfied
stakeholders.
Strategic Leaders
• Strategic leaders are people located in different
parts of the firm using the strategic management
process to help the firm reach its vision and
mission.
• It is important for all strategic leaders and
especially the CEO and other members of the top
management team to work hard, conduct through
analyses of situations facing the firm, be brutally
and consistently honest, and ask the right
questions of the right people at the right time.
• People responsible for the design and execution of
strategic management processes 1–56
Strategic Leaders
• Decisions they make include
 How resources will be developed or acquired
 At what price resources will be obtained
 How resources will be used
• It predict the potential outcomes of their strategic
decisions. To do this, they must first calculate profit
pools in their industry that are linked that are linked to
value chain activities. Predicting the potential
outcomes of their strategic decisions reduces the
likelihood of the firm formulating and implementing
ineffective strategies.
Four steps to identify profit pools
1. Define the pool’s boundaries
2. Estimate the pool’s overall size
3. Estimate the size of the value-chain activity in the pool
4. Reconcile the calculations

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Chapter 1

PowerPoint slides by:

Copyright © 2004 South-Western

Copyright © 2004 South-Western. All rights reserved. 1–3

• Strategy indicates what the firm will do as well as what

an integrated and co-ordinated set of commitments

Copyright © 2004 South-Western. All rights reserved. 1–9

• Strategy is about competing differently from rivals –

Copyright © 2004 South-Western. All rights reserved. 1–10

Copyright © 2004 South-Western. All rights reserved. 1–11

Copyright © 2004 South-Western. All rights reserved.

wrong, both for Air Deccan and Kingfisher.

• Important Elements of Success

Copyright © 2004 South-Western. All rights reserved. 1–15

Copyright © 2004 South-Western. All rights reserved. 1–16

Copyright © 2004 South-Western. All rights reserved. 1–18

Copyright © 2004 South-Western. All rights reserved. 1–19

Country 2002 2003 Country 2002 2003

• The Information Age

 Strategic flexibility: set of capabilities used to respond to various

 Organizational slack: slack resources that allow the firm flexibility to

Copyright © 2004 South-Western. All rights reserved. 1–23

• External environment is the dominant factor in influencing

Most firms competing in an industry control similar

Resources used to implement strategies are highly mobile

Organizational decision makers are assumed to be rational

Copyright © 2004 South-Western. All rights reserved. 1–26

1. Study the external environment,

• The general environment

Adapted from Figure 1.2

An Attractive 2. Locate an attractive industry

Adapted from Figure 1.2

An Attractive 3. Identify the strategy called for

Adapted from Figure 1.2

An Attractive 4. Develop or acquire assets

Adapted from Figure 1.2

An Attractive 5. Use the firm’s strengths

Adapted from Figure 1.2

Assets and Skills

• Each organization is a collection of unique resources

Firm’s Resources 1. Strategy dictated by the

Copyright © 2004 South-Western. All rights reserved. 1–35

Valuable Allow the firm to exploit opportunities or

Rare Possessed by few, if any, current and

Costly to imitate When other firms cannot obtain them or

Nonsubstitutable The firm is organized appropriately to obtain

Costly to Imitate Value Creation

Copyright © 2004 South-Western. All rights reserved. 1–40

1. Identify the firm’s resources.

• Inputs into a firm’s

Adapted from Figure 1.3

Capability 2. Determine the firm’s

Adapted from Figure 1.3

Copyright © 2004 South-Western. All rights reserved. 1–42

Capability 3. Determine the potential of the

Adapted from Figure 1.3

Copyright © 2004 South-Western. All rights reserved. 1–43

Capability 4. Locate an attractive

Competitive • An industry with

Adapted from Figure 1.3

Capability 5. Select a strategy that best

An Attractive • Strategic actions taken to

Superior Returns Adapted from Figure 1.3