1 strategic management1 dr s m tariq zafar dr s m tariq zafar chapter 1

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Strategic ManagementStrategic Management1 1

Dr S M Tariq ZafarDr S M Tariq ZafarChapter 1Chapter 1

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When we have completed this chapter When we have completed this chapter you should be able to: 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.

– Describe strategic intent and strategic mission and discuss their value.

– Define stakeholders and describe their ability to influence organizations.

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Learning Objectives (cont’d)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.

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Let’s start by asking … some Let’s start by asking … some keykey questions! questions!

1. What is a management strategy course all about?

2. Just what is strategy?

3. What is happening in the business strategic environment?

4. What is the industrial organization (IO) model?

5. What is the resource-based model?

6. Who are a firm’s key stakeholders?

7. What affects do firm stakeholders have on strategy?

8. Who is it who creates “strategy” in organizations?

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Some Important DefinitionsSome 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.

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Definitions (cont’d)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.

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Figure 1.1Figure 1.1

Hitt’s Strategic Hitt’s Strategic Management Management

ProcessProcess

Copyright © 2004 South-Western. All rights reserved.

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Current Competitive LandscapeCurrent 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!]

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Global Global economyeconomy

Rapid Rapid technological technological

changechange

Competitive LandscapeCompetitive Landscape

Strategic maneuvering among global and

innovative combatants

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Competitive Landscape: HypercompetitionCompetitive Landscape: Hypercompetition

HypercompetitionHypercompetition

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.

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Our Global EconomyOur 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.

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The Global Economy (cont’d.)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.

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Technology and Technology and Technological ChangesTechnological 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.

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Technological ChangeTechnological 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.

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Technological ChangesTechnological 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

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Two Approaches toTwo Approaches toAbove-Average Returns . . .Above-Average Returns . . .

• Hitt’s I/O Model of strategic planning . . .

• The Resource-Based Model of strategic planning . . .

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Hitt’s I/O Model of Hitt’s I/O Model of Above-Average ReturnsAbove-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

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Four Assumptions of the I/O ModelFour Assumptions of the I/O Model

External environment imposes pressures and constraints that determine strategies leading to above-average returns.

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2Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies.

Resources used to implement strategies are highly mobile across firms.3

4Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests (profit-maximizing.).

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I/O Model of Above-Average ReturnsI/O Model of Above-Average Returns

1.1. Strategy is dictated by Strategy is dictated by the external environment the external environment of the firm of the firm (what (what opportunitiesopportunities exist in exist in these environments?)these environments?)

2.2. Firm develops internal Firm develops internal skills required by external skills required by external environment environment (what can (what can the firm the firm dodo about the about the opportunities?)opportunities?)

External EnvironmentsGeneral

Environment

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The I/O Model ofThe I/O Model ofAbove-Average ReturnsAbove-Average Returns

Adapted from Figure 1.2Adapted from Figure 1.2

The External Environment

1.1. Study the external Study the external environment, especially environment, especially the industry environment.the industry environment.

• The general The general environmentenvironment

• The industry The industry environmentenvironment

• The competitor The competitor environmentenvironment

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An Attractive Industry 2.2. Locate an attractive Locate an attractive

industry with a high industry with a high potential for above-potential for above-average returns.average returns.

• An industry whose An industry whose structural structural characteristics suggest characteristics suggest above-average returns.above-average returns.




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3.3. Identify the strategy called Identify the strategy called for by the attractive for by the attractive industry to earn above-industry to earn above-average returns.average returns.

• Selection of a Selection of a strategy linked with strategy linked with above-average above-average returns in a particular returns in a particular industry.industry.


An Attractive Industry

Strategy Formulation


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Assets and Skills


4.4. Develop or acquire Develop or acquire assets and skills needed assets and skills needed to implement the to implement the strategy.strategy.

• Assets and skills Assets and skills required to required to implement a chosen implement a chosen strategy.strategy.





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Strategy Implementation


5. 5. Use the firm’s strengths Use the firm’s strengths (its developed or (its developed or acquired assets and acquired assets and skills)skills) to implement the to implement the strategy.strategy.

• Selection of strategic Selection of strategic actions linked with actions linked with effective effective implementation of the implementation of the chosen strategy.chosen strategy.




Assets and Skills


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Superior Returns





Assets and Skills


• Superior returns: Superior returns: earning of above-earning of above-average returns.average returns.


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Michael Porter’sMichael Porter’s Five Forces Model Five Forces Model of Competitionof 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

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Porter’s Five Forces Model of Competition (cont’d.)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.

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The Resource-Based ModelThe Resource-Based Model of Above-Average Returnsof 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.

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Resource-Based Model of Above-Average Resource-Based Model of Above-Average Returns (cont’d.)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.

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Resource-Based Model Resource-Based Model of Above-Average Returns (cont’d.)of Above-Average Returns (cont’d.)

1.1. Strategy is dictated by the Strategy is dictated by the firm’s unique resources firm’s unique resources and capabilities.and capabilities.

2.2. Find an environment in Find an environment in which to exploit these which to exploit these assetsassets (where are the (where are the bestbest opportunities?)opportunities?)

Firm’s Firm’s ResourcesResources

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Resources and CapabilitiesResources and Capabilities

• Resources– 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

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The Resource-Based Model The Resource-Based Model of Above-Average Returnsof Above-Average Returns


Resources

1.1. Identify the firm’s Identify the firm’s resources. resources. Study its Study its strengths and weaknesses strengths and weaknesses compared with those of compared with those of competitors.competitors.

• Inputs into a firm’s Inputs into a firm’s production processproduction process

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Capability 2.2. Determine the firm’s Determine the firm’s capabilities. What do the capabilities. What do the capabilities allow the firm to capabilities allow the firm to do better than its do better than its competitorscompetitors..

• Capacity of an Capacity of an integrated set of integrated set of resources to resources to integratively perform a integratively perform a task or activity.task or activity.

Resources

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3.3. Determine the potential of Determine the potential of the firm’s resources and the firm’s resources and capabilities in terms of a capabilities in terms of a competitive advantage.competitive advantage.

• Ability of a firm to Ability of a firm to outperform its rivals.outperform its rivals.

Competitive Advantage

Capability

Resources

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4.4. Locate an attractive Locate an attractive industry.industry.

• An industry with An industry with opportunities that opportunities that can be exploited by can be exploited by the firm’s resources the firm’s resources and capabilities.and capabilities.


Capability

Resources

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5. 5. Select a strategy that Select a strategy that best allow the firm to best allow the firm to utilize its resources and utilize its resources and capabilities relative to capabilities relative to opportunities in the opportunities in the external environment.external environment.

• Strategic actions Strategic actions taken to earn above-taken to earn above-average returns.average returns.



Capability

Resources

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Adapted from Figure 1.3Adapted from Figure 1.3Superior Returns

• Superior returns: Superior returns: earning of above-earning of above-average returnsaverage returns




Capability

Resources

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Key CriteriaKey Criteria of Resources and of Resources and Capabilities . . .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.

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

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The all-important The all-important Core CompetenciesCore 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.

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How Resources and Capabilities Provide How Resources and Capabilities Provide Competitive Advantage . . .Competitive Advantage . . .

The firm is organized appropriately to The firm is organized appropriately to obtain the full benefits of the resources obtain the full benefits of the resources in order to realize a competitive in order to realize a competitive advantage.advantage.

ValuableValuable Allow the firm to exploit opportunities Allow the firm to exploit opportunities or neutralize threats in its external or neutralize threats in its external environment.environment.

RareRare Possessed by few, if any, current and Possessed by few, if any, current and potential competitors.potential competitors.

Costly to Costly to imitateimitate

When other firms cannot obtain them When other firms cannot obtain them or must obtain them at a much higher or must obtain them at a much higher cost.cost.

NonsubstitutaNonsubstitutableble

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Resources and Capabilities, Core Resources and Capabilities, Core Competencies, and OutcomesCompetencies, and Outcomes

Core Core CompetenciesCompetencies

Competitive Competitive AdvantageAdvantage

Value CreationValue Creation

Above Average Above Average ReturnsReturns

ValuableValuable

RareRare

Costly to Costly to ImitateImitate

NonsubstitutablNonsubstitutablee

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Strategic IntentStrategic 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.

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Strategic MissionStrategic 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.

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StakeholdersStakeholders

• 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.

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The Three The Three Stakeholder Stakeholder

GroupsGroups

Figure 1.4Figure 1.4

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Capital Market StakeholdersCapital 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.

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Product Market StakeholdersProduct 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.

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Organizational StakeholdersOrganizational 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.

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Stakeholder InvolvementStakeholder Involvement

• Two issues affect the extent of stakeholder involvement in the firmHow to divide returns How to divide returns

to keep stakeholdersto keep stakeholdersinvolved?involved? Capita

l Marke

tProduc

t Market

Organizational

How to increase How to increase returns so everyone returns so everyone has more to share?has more to share?

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Strategic LeadersStrategic 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.

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Organizational CultureOrganizational Culture

• The complex set of– Ideologies– Symbols– Core values

that are shared throughout the firm,that influence how the firm conducts business.

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Mapping an Industry’s Mapping an Industry’s Profit PoolsProfit 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.

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The The Strategic ManagementStrategic Management Process Process

1. Study the external and internal environments.

2. Identify marketplace opportunities and threats.

3. Determine how to use core competencies.

4. Use strategic intent to leverage resources, capabilities and core competencies and win competitive battles.

5. Integrate formulation and implementation of strategies.

6. Seek feedback to improve strategies.

1 strategic management1 dr s m tariq zafar dr s m tariq zafar chapter 1

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