chapter 1 - introduction to strategic management
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Introduction to Strategic Management
MANA 5336
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What is Strategy?
Strategy is the overall plan for deploying resources to establish a favorable position.
Tactic is a scheme for a specific maneuver.
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Characteristics of strategic decisions…– Important– Involve a significant commitment of resources– Not easily reversible
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Basic Framework
The firm
Goals & Values
Resources & Capabilities
Structures & Systems
External Environment
Competitors
Customers
Suppliers
etc
Strategy
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Definitions
Strategic Management ProcessThe full set of commitments, decisions, and actions required for a firm to create value and earn above-average returns
Value CreationWhat is achieved when a firm successfully formulates and implements a strategy that other companies are unable to duplicate or find too costly to imitate.
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Definitions
Returns that are in excess of what an investor expects to earn from other investments with a similar amount of risk
Above-Average Returns
Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk
Average Returns
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Definitions
RiskAn investor’s uncertainty about the economic gains or losses that will result from a particular investment
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Fundamental nature of competition is changing
Competitive Landscape
Hypercompetitive environments
Dynamics of strategic maneuvering among global and innovative combatants
Price-quality positioning, new know-how, first mover
Protect or invade established product or geographic markets
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Fundamental nature of competition is changing
Hypercompetitive environments
Competitive Landscape
Emergence of global economy
Goods, services, people, skills, and ideas move freely across geographic borders
Spread of economic innovations around the world
Political and cultural adjustments are required
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Hypercompetitive environments
Competitive LandscapeEmergence of global
economy
Rapid technological change
Increasing rate of technological change and diffusion
The information age
Increasing knowledge intensity
Fundamental nature of competition is changing
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Strategic Flexibility
A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment
It involves coping with uncertainty and the accompanying risks
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StrategicFlexibilityStrategic
Flexibility
Strategic Flexibility
StrategicStrategicflexibilityflexibility
StrategicStrategicreorientationreorientation
Capacity toCapacity tolearnlearn
OrganizationalOrganizationalslackslack
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Strategy dictated by the Strategy dictated by the external environment of external environment of the firm (what the firm (what opportunities exist in opportunities exist in these environments?)these environments?)
Firm develops internal Firm develops internal skills required by external skills required by external environment (what can environment (what can the firm do about the the firm do about the opportunities?)opportunities?)
GeneralGeneral
EnvironmentEnvironment
GlobalGlobal
TechnologicalTechnological
Econ
omic
Econ
omic
Sociocultural
Sociocultural
Polit
ical/L
egal
Polit
ical/L
egal Dem
ographic
Demographic
1. External Environments
Industry Environment
Competitor Environment
I/O Model of Above-Average Returns
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Four Assumptions of the I/O Model
The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returnsMost firms competing within a particular industry or within a certain segment of it are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources
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Four Assumptions of the I/O Model
Resources used to implement strategies are highly mobile across firmsOrganizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors
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Industrial Organization Industrial Organization ModelModel
I/O Model of Above-Average Returns
Study the external environment, especially the industry environmenteconomies of scalebarriers to market entrydiversificationproduct differentiationdegree of concentration of
firms in the industry
The External EnvironmentThe External Environment
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I/O Model of Above-Average Returns
Locate an attractive industry with a high potential for above-average returns
Attractive industry: one whose structural characteristics suggest above-average returns
Industrial Organization Industrial Organization ModelModel
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
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I/O Model of Above-Average Returns
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
Industrial Organization Industrial Organization ModelModel
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
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I/O Model of Above-Average Returns
Develop or acquire assets and skills needed to implement the strategy
Assets and skills: those assets and skills required to implement a chosen strategy
Industrial Organization Industrial Organization ModelModel
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
Assets and SkillsAssets and Skills
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I/O Model of Above-Average Returns
Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy
Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy
Industrial Organization Industrial Organization ModelModel
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
Assets and SkillsAssets and Skills
Strategy ImplementationStrategy Implementation
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I/O Model of Above-Average Returns
Industrial Organization Model
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
Assets and SkillsAssets and Skills
Strategy ImplementationStrategy Implementation
Superior ReturnsSuperior Returns
Superior returns: earning of above-average returns
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Strategy dictated by the firm’s unique resources and capabilities
Find an environment in which to exploit these assets (where are the best opportunities?)
Resource-based Model of Above Average Returns
1. Firm’s Resources1. Firm’s Resources
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Identify the firm’s resources-- strengths and weaknesses compared with competitors
Resources: inputs into a firm’s production process
Resource-based Model of Above Average Returns
Resource-based Resource-based ModelModel
ResourcesResources
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Determine the firm’s capabilities--what it can do better than its competitors
Capability: capacity of an integrated set of resources to integratively perform a task or activity
Resource-based Model of Above Average Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
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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
Resource-based Model of Above Average Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
Competitive AdvantageCompetitive Advantage
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Locate an attractive industry
An attractive industry: an industry with opportunities that can be exploited by the firm’s resources and capabilities
Resource-based Model of Above Average Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
Competitive AdvantageCompetitive Advantage
An Attractive IndustryAn Attractive Industry
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Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment
Strategy formulation and implementation: strategic actions taken to earn above average returns
Resource-based Model of Above Average Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
Competitive AdvantageCompetitive Advantage
An Attractive IndustryAn Attractive Industry
Strategy Form/ImplStrategy Form/Impl
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Resource-based Model of Above Average Returns
Resource-based Resource-based ModelModel
ResourcesResources
CapabilityCapability
Competitive AdvantageCompetitive Advantage
An Attractive IndustryAn Attractive Industry
Strategy Form/ImplStrategy Form/Impl
Superior ReturnsSuperior Returns
Superior returns: earning of above-average returns
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Strategic Intent & Mission
Strategic Intent Winning competitive battles by leveraging the firm’s
resources, capabilities, and core competencies
Strategic Mission An application of strategic intent in terms of products to be
offered and markets to be served
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Emergent and Deliberate Strategies
IntendedStrategy
RealizedStrategy
DeliberateStrategy
UnrealizedStrategy
EmergentStrategy
From “Strategy Formation in an Adhocracy” by Henry Mintzberg and Alexandra McHugh, Administrative Science Quarterly,Vol. 30, No. 2, June 1985. Reprinted by permission of Administrative Science Quarterly.
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Strategic Management Process for Intended Strategies
Missionsand Goals
Strategic Choice
Organizing forImplementation
InternalAnalysis
ExternalAnalysis
INTENDED STRATEGY
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Strategic Management Process for Emergent Strategies
Missionsand Goals
InternalAnalysis
ExternalAnalysis
EMERGENT STRATEGY
Strategic ChoiceDoes It Fit?
OrganizationalGrassroots
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Groups who are affected by a Groups who are affected by a firm’s performance and who firm’s performance and who have claims on its wealthhave claims on its wealth
The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders
The Firm and Its Stakeholders
StakeholdersStakeholders
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Capital Market StakeholdersCapital Market Stakeholders
The Firm and Its Stakeholders
ShareholdersShareholdersMajor suppliers of capitalMajor suppliers of capital
•BanksBanks•Private lendersPrivate lenders•Venture capitalistsVenture capitalists
StakeholdersStakeholders
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Capital Market StakeholdersCapital Market Stakeholders
Product Market StakeholdersProduct Market Stakeholders
The Firm and Its Stakeholders
Primary customersPrimary customersSuppliersSuppliersHost communitiesHost communitiesUnionsUnions
StakeholdersStakeholders
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Capital Market StakeholdersCapital Market Stakeholders
Product Market StakeholdersProduct Market Stakeholders
Organizational StakeholdersOrganizational Stakeholders
The Firm and Its Stakeholders
EmployeesEmployeesManagersManagersNonmanagersNonmanagers
StakeholdersStakeholders
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Values
Johnson & Johnson’s credosets its responsibilities to:
1. J&J product users.2. J&J employees.3. Communities in which J&J
employees live and work.4. J&J stockholders.
Source: Courtesy of Johnson & Johnson.
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Johnson & Johnson Credo*
First Responsibility Is to Those Who Use J&J Products
Next Come Its Employees Next, the Communities in Which the
Employees Live and Work Its Final Responsibility Is
to Its Stockholders
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Functional
BusinessCorporate
Global
Levels of StrategyLevels of Strategy