Introduction to Strategic Management HCAD 5390. What is Strategy? Strategy is the overall plan for deploying resources to establish a favorable position.

Introduction to Strategic Management

HCAD 5390

What is Strategy?

Strategy is the overall plan for deploying resources to establish a favorable position.

Tactic is a scheme for a specific maneuver.

Characteristics of strategic decisions…– Important– Involve a significant commitment of resources– Not easily reversible

Basic Framework

The firm

Goals & Values

Resources & Capabilities

Structures & Systems

External Environment

Competitors

Customers

Suppliers

etc

Strategy

Definitions

Strategic Management ProcessStrategic Management ProcessThe full set of commitments, decisions, The full set of commitments, decisions, and actions required for a firm to create and actions required for a firm to create value and earn above-average returnsvalue and earn above-average returns

Value CreationValue CreationWhat is achieved when a firm What is achieved when a firm successfully formulates and implements a successfully formulates and implements a strategy that other companies are unable strategy that other companies are unable to duplicate or find too costly to imitate.to duplicate or find too costly to imitate.

Definitions

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

Above-Average ReturnsAbove-Average Returns

Returns that are equal to those an investor Returns that are equal to those an investor expects to earn from other investments with expects to earn from other investments with a similar amount of riska similar amount of risk

Average ReturnsAverage Returns

DefinitionsRiskRisk

An investor’s uncertainty about the An investor’s uncertainty about the economic gains or losses that will result economic gains or losses that will result from a particular investmentfrom a particular investment

Fundamental nature of competition is changing

Competitive Landscape

Hypercompetitive Hypercompetitive environmentsenvironments

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




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



Emergence of global economy

Rapid technological change

Increasing rate of technological change and diffusion

The information age

Increasing knowledge intensity


Strategic Flexibility

A set of capabilities used to respond to A set of capabilities used to respond to various demands and opportunities various demands and opportunities existing in a dynamic and uncertain existing in a dynamic and uncertain competitive environmentcompetitive environment

It involves coping with uncertainty and the It involves coping with uncertainty and the accompanying risksaccompanying risks

StrategicFlexibilityStrategic

Flexibility

Strategic Flexibility

StrategicStrategicflexibilityflexibility

StrategicStrategicreorientationreorientation

Capacity toCapacity tolearnlearn

OrganizationalOrganizationalslackslack

1.1. 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?)

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

GeneralGeneral

EnvironmentEnvironment

GlobalGlobal

TechnologicalTechnological

Eco

nom

ic

Eco

nom

ic

Sociocultural

Sociocultural

Polit

ical

/Leg

al

Polit

ical

/Leg

al Dem

ographic

Dem

ographic

1. External Environments

Industry Environment

Competitor Environment

I/O Model of Above-Average Returns

Four Assumptions of the I/O Model

1.1. The external environment is assumed to possess The external environment is assumed to possess pressures and constraints that determine the pressures and constraints that determine the strategies that would result in above-average returnsstrategies that would result in above-average returns

2.2. Most firms competing within a particular industry or Most firms competing within a particular industry or within a certain segment of it are assumed to control within a certain segment of it are assumed to control similar strategically relevant resources and to pursue similar strategically relevant resources and to pursue similar strategies in light of those resourcessimilar strategies in light of those resources

Four Assumptions of the I/O Model

3.3. Resources used to implement strategies are highly Resources used to implement strategies are highly mobile across firmsmobile across firms

4.4. Organizational decision makers are assumed to be Organizational decision makers are assumed to be rational and committed to acting in the firm’s best rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing interests, as shown by their profit-maximizing behaviorsbehaviors

Industrial Organization Industrial Organization ModelModel


1.1. Study the external Study the external environment, especially the environment, especially the industry environmentindustry environment• economies of scaleeconomies of scale• barriers to market entrybarriers to market entry• diversificationdiversification• product differentiationproduct differentiation• degree of concentration of degree of concentration of

firms in the industryfirms in the industry

The External EnvironmentThe External Environment


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

Attractive industry: one whose Attractive industry: one whose structural characteristics structural characteristics suggest above-average returnssuggest above-average returns



An Attractive IndustryAn Attractive Industry


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

Strategy formulation: selection Strategy formulation: selection of a strategy linked with of a strategy linked with above-average returns in a above-average returns in a particular industryparticular industry




Strategy FormulationStrategy Formulation


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

Assets and skills: those assets Assets and skills: those assets and skills required to and skills required to implement a chosen strategyimplement a chosen strategy





Assets and SkillsAssets and Skills


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

Strategy implementation: Strategy implementation: select strategic actions linked select strategic actions linked with effective implementation with effective implementation of the chosen strategyof the chosen strategy






Strategy ImplementationStrategy Implementation


Industrial Organization Model





Strategy ImplementationStrategy Implementation

Superior ReturnsSuperior Returns

Superior returns: earning of above-average returns

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

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

Resource-based Model of Above Average Returns

1. Firm’s Resources1. Firm’s Resources

1.1. Identify the firm’s Identify the firm’s resources-- strengths and resources-- strengths and weaknesses compared with weaknesses compared with competitorscompetitorsResources: inputs into a firm’s Resources: inputs into a firm’s production processproduction process


Resource-based Resource-based ModelModel

ResourcesResources

2.2. Determine the firm’s Determine the firm’s capabilities--what it can do capabilities--what it can do better than its competitorsbetter than its competitors

Capability: capacity of an Capability: capacity of an integrated set of resources to integrated set of resources to integratively perform a task or integratively perform a task or activityactivity



ResourcesResources

CapabilityCapability

Four Attributes of Resources and Capabilities (Competitive Advantage)

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

ValuableValuable allow the firm to exploit opportunities or allow the firm to exploit opportunities or neutralize threats in its external neutralize threats in its external environmentenvironment

RareRare possessed by few, if any, current and possessed by few, if any, current and potential competitorspotential competitors

Costly to imitateCostly to imitate when other firms cannot obtain them or when other firms cannot obtain them or must obtain them at a much higher costmust obtain them at a much higher cost

NonsubstitutableNonsubstitutable

Res

ourc

es a

nd C

apab

ilit

ies

Res

ourc

es a

nd C

apab

ilit

ies

Core CompetenciesCore Competencies

Resources and capabilities that meet these four criteria become a source of:

ValuableValuable

RareRare

Costly to imitateCostly to imitate

NonsubstitutableNonsubstitutable


Res

ourc

es a

nd C

apab

ilit

ies

Res

ourc

es a

nd C

apab

ilit

ies

Core Competencies are the basis for a firm’s

Competitive Competitive advantageadvantage

Value CreationValue Creation

Ability to earn Ability to earn above-average above-average

returnsreturns


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

Competitive advantage: ability Competitive advantage: ability of a firm to outperform its of a firm to outperform its rivalsrivals



ResourcesResources


Competitive AdvantageCompetitive Advantage

4.4. Locate an attractive industryLocate an attractive industry

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



ResourcesResources




5.5. Select a strategy that best Select a strategy that best allows the firm to utilize its allows the firm to utilize its resources and capabilities resources and capabilities relative to opportunities in relative to opportunities in the external environmentthe external environment

Strategy formulation and Strategy formulation and implementation: strategic implementation: strategic actions taken to earn above actions taken to earn above average returnsaverage returns



ResourcesResources




Strategy Form/ImplStrategy Form/Impl



ResourcesResources




Strategy Form/ImplStrategy Form/Impl

Superior ReturnsSuperior Returns

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

Strategic Intent & Mission

Strategic IntentStrategic Intent Winning competitive battles by leveraging the firm’s Winning competitive battles by leveraging the firm’s

resources, capabilities, and core competenciesresources, capabilities, and core competencies

Strategic MissionStrategic Mission An application of strategic intent in terms of products to be An application of strategic intent in terms of products to be

offered and markets to be servedoffered and markets to be served

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.

Strategic Management Process for Intended Strategies

Missionsand Goals

Missionsand Goals

Strategic Choice

Strategic Choice

Organizing forImplementation

Organizing forImplementation

InternalAnalysis

InternalAnalysis

ExternalAnalysis

ExternalAnalysis

INTENDED STRATEGY

Strategic Management Process for Emergent Strategies

Missionsand Goals

Missionsand Goals

InternalAnalysis

InternalAnalysis

ExternalAnalysis

ExternalAnalysis

EMERGENT STRATEGY

Strategic ChoiceDoes It Fit?

Strategic ChoiceDoes It Fit?

OrganizationalGrassroots

OrganizationalGrassroots

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 The firm must maintain performance at an adequate performance at an adequate level in order to retain the level in order to retain the participation of key participation of key stakeholdersstakeholders

The Firm and Its Stakeholders

StakeholdersStakeholders

Capital Market StakeholdersCapital Market Stakeholders


ShareholdersShareholdersMajor suppliers of capitalMajor suppliers of capital

•BanksBanks•Private lendersPrivate lenders•Venture capitalistsVenture capitalists



Product Market StakeholdersProduct Market Stakeholders


Primary customersPrimary customersSuppliersSuppliersHost communitiesHost communitiesUnionsUnions



Product Market StakeholdersProduct Market Stakeholders

Organizational StakeholdersOrganizational Stakeholders


EmployeesEmployeesManagersManagersNonmanagersNonmanagers


Values

Johnson & Johnson’s credosets its responsibilities to:

1. J&J product users.

2. J&J employees.

3. Communities in which J&Jemployees live and work.

4. J&J stockholders.

Source: Courtesy of Johnson & Johnson.

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

Functional

Business

Corporate

Global

Levels of StrategyLevels of Strategy

•Functional-Level Strategy

– Manufacturing– Marketing– Materials Management– Research and Development– Human Resources

• Business-Level Strategy

– Cost Leadership– Differentiation– Market Niche Focus

• Global Strategies

– Multidomestic– International– Global– Transnational

• Corporate-Level Strategy

– Vertical Integration– Diversification– Strategic Alliances– Acquisitions– New Ventures– Business Portfolio

Restructuring

Introduction to Strategic Management HCAD 5390. What is Strategy? Strategy is the overall plan for deploying resources to establish a favorable position.

Documents

strategy slide

external environment

strategy strategy

risk average returns

attractive industry

reversible slide

organizationalslack

strategy assets