1-1 Chapter 1 – Strategic Management & Competitiveness.

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Chapter 1 – Strategic Management & Competitiveness

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The Strategic Management Process

Chapter 10Corporate

Governance

Chapter 11OrganizationalStructure and

Controls

Chapter 13Strategic

Entrepreneurship

Strategy Implementation

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Agenda1. What is strategy?

2. Current competitive landscape

3. I/O model of above-average returns

4. Resource-based model of above-average returns

5. Strategic management process

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Greek origin: stratos = army, agos = leader

Strategy as “the basic characteristics of the match an organization achieves with its environment” (Hofer & Schendel, 1978, Strategy Formulation: Analytical Concepts; the field’s first textbook).

Strategy as “the basic characteristics of the match an organization achieves with its environment.” (Hofer & Schendel, 1978, Strategy formulation: Analytical concepts; the field’s first textbook)

Strategy as “plan, pattern, position, perspective, and ploy” (Henry Mintzberg, 1987, Five P’s for Strategy).

Strategy as “plan, pattern, position, perspective, and ploy.” (Henry Mintzberg, 1987, Five P’s for Strategy)

Strategy as a “pattern of objectives, purposes, or goals, and major policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be” (Kenneth Andrews, 1971, The Concept of Corporate Strategy).

Strategy as a “pattern of objectives, purposes, or goals, and major policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.” (Kenneth Andrews, 1971, The concept of corporate strategy)

Strategy is “the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.” Sun Tzu (400-300 b.c.)

Strategy is “the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.” (Sun Tzu, approx. 500 BC)

“Everyone has a strategy until you get punched in the mouth” (Mike Tyson).

“Everyone has a plan ‘till they get punched in the mouth.” (Mike Tyson)

What is Strategy?

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StrategyStrategy has been defined as “the match an organization achieves between

its internal resources and skills […] and

the opportunities and risks created by its external environment.”

Source: Hofer, C. W. & Schendel, D. (1978). “Strategy formulation: Analytic concepts”, St. Paul, MN: West: 12.

“Know yourself, know your opponents; encounter a hundred battles, win a hundred victories.”

Sun Tzu, “The Art of War”, approx. 500 BC

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Goals of StrategyAbove-Average Returns

Returns in excess of what an investor expects to earn from other investments with a similar amount of risk

Example: The theoretical value of a firm is the discounted present value of all its future free cash flows.

Accordingly a shortcut stock price formula is simply a growing perpetuity (Gordon Model):

So to increase a firms stock price, the growth rate has to increase, because the current growth rate is already factored into the price!.

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

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Strategy: Deliberate and Emergent

Source: Mintzberg, H., Ahlstrand, B., & Lampel, J. (1998). “Strategy safari”, London, UK: Prentice Hall: 12.

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Agenda

1. What is strategy?





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Changes in the Competitive Landscape

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Today’s Competitive Environment

Global economyGlobal economy

Rapid Rapid technological technological

changechange

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Global EconomyGlobal 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

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

Global Global economyeconomy

Rapid Rapid technologictechnological changeal change

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World’s Largest Economic Entities

Source: Peng, M. W. (2006). “Global Strategy”, Mason, OH: South-Western: 23.

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Technological ChangesRate 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 (Schumpeterian innovation)



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Technological ChangesMoore’s Law (Gordon Moore, co-founder of Intel):

At our rate of technological development, the complexity of an integrated circuit (i.e. number of transistors per square inch), with respect to minimum component cost will double every 24 months.

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Technological Changes

Source: New York Times, February 10, 2008

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Source: Hitt, M. A., Keats, B. W., & DeMarie, S. M. (2006). “Navigating in the new competitive landscape: Building strategic flexibility and competitive advantage in the

21st century”, Academy of Management Executive, 12(4): 22-42.

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SWOT Analysis

StrengthsStrengths

WeaknessesWeaknesses

OrganizationalOrganizationalanalysisanalysis

OpportunitiesOpportunities

ThreatsThreats

EnvironmentalEnvironmentalanalysisanalysis

How does a strategy allow us to exploit our strengths, avoid or fix our weaknesses, exploit our opportunities, and neutralize our threats?

Strategic choicesStrategic choices

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I/O Model Focus

StrengthsStrengths




ThreatsThreats


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I/O Model: Above-Average Returns

Strategy dictated by the external environment of the firm (what opportunities exist in these environments?)

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

External EnvironmentsGeneral

Environment

““Outside-in”Outside-in”

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The I/O Model ofAbove-Average Returns

The External Environment

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

The general environmentThe industry environmentThe competitor

environment

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An Attractive Industry

2. Locate an attractive industry with a high potential for above-average returns.

An industry whose structural characteristics suggest above-average returns



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

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



Strategy Formulation


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Assets and Skills

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

Assets and skills required to implement a chosen strategy





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




Assets and Skills

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


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Superior Returns




Assets and Skills


Superior returns: Earning Superior returns: Earning of above-average returnsof above-average returns


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Agenda

1. What is strategy?





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Resource-Based Model Focus

StrengthsStrengths




ThreatsThreats


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Resource-Based Model• Each organization is a collection of unique resources

and capabilities that provides the basis for its strategy

• Capabilities evolve and must be managed dynamically (acquired and/or developed)

• Differences in firms’ performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry

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Resource-Based Model – cont’d

Strategy dictated by the firm’s unique resources and capabilities

Find an environment in which to exploit these assets (where are the best opportunities?)

Differences in firms’ performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry

Firm’s Resources

THE FIRM

““Inside-out”Inside-out”

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Criteria for Resources and Capabilities That Become Core Competencies

Core Core CompetenciesCompetencies

Core Core CompetenciesCompetencies

ValuableValuableValuableValuable RareRareRareRare

Costly to ImitateCostly to ImitateCostly to ImitateCostly to ImitateNonsubstitutableNonsubstitutableNonsubstitutableNonsubstitutable

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

Possessed by few, if any, current and potential competitors

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

The firm is organized to obtain the full benefits of the resources

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Resources

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

Inputs into a firm’s production process

The RBV Model of Above-Average Returns

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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


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

Ability of a firm to outperform its rivals

Competitive Advantage

Capability

Resources


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4. Locate an attractive industry.

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


Capability

Resources


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Strategic actions taken to earn above-average returns



Capability

Resources

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


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Superior Returns

Superior returns: Earning Superior returns: Earning of above-average returnsof above-average returns




Capability

Resources


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Capability

Resources

The RBV Model

Superior Returns




Assets and Skills


The I/O Model

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SWOT Analysis

StrengthsStrengths




ThreatsThreats


Framework: RBV Model Framework: I/O Model

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Vision• Picture of what the firm wants to be and ultimately

achieve

• Reflects a firm’s values and aspirations

• “Big Picture” thinking with passion that helps people feel what they are supposed to be doing

• Should be tied to the conditions in the firm’s external and internal environments

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Vision - Examples• “We must be a great company with great people”

(LG Electronics)

• “Our vision is to be the world’s best quick service restaurant” (McDonald’s)

• “To make the automobile accessible to every American” (Ford Morot Company’s vision from Henry Ford)

• “We want to become the Harvard of the West Coast” (Stanford University)

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Mission• Externally focused application of its vision

• A statement of a firm’s unique purpose and the scope of its operations in product and market terms

• Provides general descriptions of the firm’s intended products and its markets

• Establishes a firm’s individuality and is inspiring and relevant to all stakeholders

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Mission - Examples• “To bring people together anytime and anywhere”

(AT&T)

• “To experience the emotion of competition, winning, and crushing competitors” (Nike)

• “To give ordinary folk the chance to buy the same things as rich people” (Wal-Mart)

• “To make people happy” (Disney)

• “Putting a Coke within arm's reach of every consumer in the world” (Coca-Cola)

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From Intent & Mission to Action

Mission/IntentMission/Intent Fundamental purposes

ObjectivesObjectives Measurable performance targets

StrategiesStrategies Means to accomplish objectives

Tactics/PoliciesTactics/Policies Actions to implement strategies

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The Three Stakeholder Groups

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Two issues affect the extent of stakeholder involvement in the firm

How to divide returns to keep stakeholdersinvolved?

How to increase returns so everyone has more to share?

Stakeholder Management

Capital MarketCapital Market

Product Market

Product Market

OrganizationalOrganizational

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Strategic Management Process1. Study the external and internal environments

2. Identify marketplace opportunities and threats

3. Determine how to use strengths (core competencies) and avoid/improve weaknesses

4. Leverage resources, capabilities, and core competencies and win competitive battles

5. Integrate formulation and implementation of strategies

6. Seek feedback to improve strategies

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Strategic LeadersStrategic Leaders

People located in different parts of the firm who are using the strategic management process to help the firm reach its vision and mission.

Prerequisites for Effective Strategic Leadership

Hard work

Thorough analyses

Honesty

Desire for accomplishment

Common sense

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To Do’sPurchase class text (from PSU bookshop or online) – ensure that it includes the cases!

Turn in a one page personal bio

Review HIH Chapters 1-3

Form your Case Analysis Groups and Let Me Know Who They Are.

Meet with your Case Analysis Group

1-1 Chapter 1 – Strategic Management & Competitiveness.

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