Chapter 1

Strategic Management and Strategic Competitiveness

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

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Knowledge Objectives
• Studying this chapter should provide you with the strategic management knowledge needed 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.
Copyright © 2004 South-Western. All rights reserved. 1–2

Knowledge Objectives (cont’d)
• Studying this chapter should provide you with the strategic management knowledge needed to:
 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.  Describe the work of strategic leaders.  Explain the strategic management process.
Copyright © 2004 South-Western. All rights reserved. 1–3

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. 1–4

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.

1–5

1–6 .1 Copyright © 2004 South-Western. Copyright © 2004 South-Western. All rights reserved. All rights reserved.The Strategic Management Process Figure 1.

All rights reserved.Current Competitive Landscape • A Perilous 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 Copyright © 2004 South-Western. 1–7 .

All rights reserved. 1–8 .Competitive Landscape Strategic maneuvering among global and innovative combatants Global economy Rapid technological change Copyright © 2004 South-Western.

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 advantage • Competition to protect or invade established product or geographic markets Copyright © 2004 South-Western. All rights reserved. 1–9 Hypercompetition .

people. and ideas move freely across geographic borders  Movement is relatively unfettered by artificial constraints  Expansion into global arena complicates a firm’s competitive environment Copyright © 2004 South-Western. skills. All rights reserved. 1–10 .Global Economy • Global Economy  Goods.

1–11 . All rights reserved. financial capital.Global Economy (cont’d) • Globalization  Increased economic interdependence among countries as reflected in the flow of goods and services. and knowledge across country borders  Increased range of opportunities for companies competing in the 21st-century competitive landscape Copyright © 2004 South-Western.

wcy. Copyright © 2004 South-Western. http://www. IMD. . Reprinted by permission.ch. Switzerland. All rights reserved.Country Competitiveness Rankings (Population over 20 Million) Country United States Australia Canada Malaysia Germany Taiwan United Kingdom France Spain Thailand Japan China Brazil China Korea 2002 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 2003 2 3 2 6 4 7 5 9 8 10 11 12 0 0 10 Country Colombia Italy South Africa India India Brazil Philippines Romania Mexico Turkey Russia Poland Indonesia Argentina Venezuela 2002 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 2003 20 14 16 0 17 15 18 0 19 23 21 22 25 26 24 Table 1.imd.esummary.1 1–12 SOURCE: From World Competitiveness Yearbook 2003. April.

Technology and Technological Changes • Rate of change of technology and speed at which new technologies become available  Perpetual innovation—how rapidly and consistently new. All rights reserved. 1–13 . 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.

cellular phones.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. internet trade Copyright © 2004 South-Western. electronic networks. virtual reality. artificial intelligence. massive databases. All rights reserved. 1–14 .

All rights reserved. 1–15 .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.

1–16 . All rights reserved.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. .Four Assumptions of the I/O Model 1 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 Resources used to implement strategies are highly mobile across firms 2 3 4 Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests (profit-maximizing) 1–17 Copyright © 2004 South-Western.

1–18 . All rights reserved. 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?) Copyright © 2004 South-Western.I/O Model of Above-Average Returns External Environments General Environment 1.

especially the industry environment • The general environment • The industry environment • The competitor environment Adapted from Figure 1.2 Copyright © 2004 South-Western. Study the external environment. 1–19 . All rights reserved.The External Environment The I/O Model of Above-Average Returns 1.

2 Copyright © 2004 South-Western. 1–20 . Locate an attractive industry with a high potential for aboveaverage returns • An industry whose structural characteristics suggest above-average returns Adapted from Figure 1. All rights reserved.The External Environment An Attractive Industry The I/O Model of Above-Average Returns 2.

Identify the strategy called for by the attractive industry to earn above-average returns • Selection of a strategy linked with aboveaverage returns in a particular industry Adapted from Figure 1.2 Copyright © 2004 South-Western.The External Environment An Attractive Industry Strategy Formulation The I/O Model of Above-Average Returns 3. 1–21 . All rights reserved.

2 Copyright © 2004 South-Western. All rights reserved.The External Environment An Attractive Industry Strategy Formulation Assets and Skills The I/O Model of Above-Average Returns 4. 1–22 . Develop or acquire assets and skills needed to implement the strategy • Assets and skills required to implement a chosen strategy Adapted from Figure 1.

2 Copyright © 2004 South-Western. 1–23 .The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation The I/O Model of Above-Average Returns 5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy • Selection of strategic actions linked with effective implementation of the chosen strategy Adapted from Figure 1. All rights reserved.

The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior Returns Copyright © 2004 South-Western. All rights reserved. The I/O Model of Above-Average Returns • Superior returns: earning of above-average returns Adapted from Figure 1.2 1–24 .

1–25 .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.

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

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 Copyright © 2004 South-Western. All rights reserved. 1–27 .

All rights reserved. 1–28 .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 Copyright © 2004 South-Western.

Resource-Based Model of Above-Average Returns (cont’d) Firm’s Resources 1. Strategy dictated by the firm’s unique resources and capabilities 2. 1–29 . All rights reserved. Find an environment in which to exploit these assets (where are the best opportunities?) Copyright © 2004 South-Western.

All rights reserved. .Resources and Capabilities • Resources  Inputs into a firm’s production process  Capital  Skills • 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 1–30 equipment of individual employees  Patents  Finances  Talented managers Copyright © 2004 South-Western.

3 Copyright © 2004 South-Western. Study its strengths and weaknesses compared with those of competitors • Inputs into a firm’s production process Adapted from Figure 1. All rights reserved. Identify the firm’s resources.The Resource-Based Model of Above-Average Returns Resources 1. 1–31 .

All rights reserved. What do the capabilities allow the firm to do better than its competitors. Capability • Capacity of an integrated set of resources to integratively perform a task or activity Adapted from Figure 1.3 Copyright © 2004 South-Western. 1–32 . Determine the firm’s capabilities.The Resource-Based Model of Above-Average Returns Resources 2.

All rights reserved.3 Copyright © 2004 South-Western. 1–33 .The Resource-Based Model of Above-Average Returns Resources 3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage. Capability Competitive Advantage • Ability of a firm to outperform its rivals Adapted from Figure 1.

All rights reserved.The Resource-Based Model of Above-Average Returns Resources 4.3 Copyright © 2004 South-Western. 1–34 . Capability Competitive Advantage An Attractive Industry • An industry with opportunities that can be exploited by the firm’s resources and capabilities Adapted from Figure 1. Locate an attractive industry.

The Resource-Based Model of Above-Average Returns Resources Capability Competitive Advantage An Attractive Industry Strategy Implementation 5. All rights reserved.3 Copyright © 2004 South-Western. 1–35 . • Strategic actions taken to earn above-average returns Adapted from Figure 1. Select a strategy that best allow the firm to utilize its resources and capabilities relative to opportunities in the external environment.

All rights reserved.The Resource-Based Model of Above-Average Returns Resources Capability Competitive Advantage An Attractive Industry Strategy Implementation Superior Returns Copyright © 2004 South-Western.3 1–36 . • Superior returns: earning of above-average returns Adapted from Figure 1.

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. All rights reserved. 1–37 . if any. current and potential competitors Copyright © 2004 South-Western.

All rights reserved.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. 1–38 .

1–39 . All rights reserved.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.

1–40 . All rights reserved. current and potential competitors neutralize threats in its external environment 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 Copyright © 2004 South-Western. if any.How Resources and Capabilities Provide Competitive Advantage Valuable Allow the firm to exploit opportunities or Rare Possessed by few.

Above Average Returns 1–41 .Resources and Capabilities. All rights reserved. and Outcomes Valuable Core Competencies Competitive Advantage Rare Costly to Imitate Value Creation Nonsubstitutable Copyright © 2004 South-Western. Core Competencies.

All rights reserved. 1–42 . significant performance criterion Copyright © 2004 South-Western. 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.Strategic Intent • Internally focused • The leveraging of a firm’s resources.

1–43 .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.

Stakeholders • Individuals and groups who can affect. 1–44 . 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. and are affected by.

The Three Stakeholder Groups Figure 1. All rights reserved.4 Copyright © 2004 South-Western. 1–45 .

1–46 . All rights reserved.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.

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. 1–47 .

Organizational Stakeholders • Employees  Expect a dynamic. All rights reserved. 1–48 . stimulating and rewarding work environment  Are satisfied by a company that is growing and actively developing their skills Copyright © 2004 South-Western.

1–49 . All rights reserved.Stakeholder Involvement • Two issues affect the extent of stakeholder involvement in the firm  How to divide returns to keep stakeholders involved?  How to increase Organizational returns so everyone has more to share? Product Market Capital Market Copyright © 2004 South-Western.

All rights reserved. 1–50 .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.

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. 1–51 . All rights reserved.

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 Copyright © 2004 South-Western. All rights reserved. 1–52 .

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. All rights reserved. 1–53 . capabilities and core competencies and win competitive battles • Integrate formulation and implementation of strategies • Seek feedback to improve strategies Copyright © 2004 South-Western.

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