CHAPTER 1: STRATEGIC MANAGEMENT & 1) External environment and internal organization are

STRATEGIC COMPETITIVENESS analyzed to determine resources, capabilities, and

core competencies—the sources of “strategic inputs.”
2) Vision and mission are developed; strategies are
formulated.
3) Strategies are implemented with the goal of achieving
strategic competitiveness and above-average returns.

Dynamic Process

Continuously changing markets and industry conditions

must match evolving strategic inputs.

Rational

The approach firms use to achieve strategic

competitiveness and earn above-average returns.

Formulation and Implementation

The two types of strategic actions that must be

simultaneously integrated to successfully employ the
strategic management process

The text is divided into three parts:

Part I: Strategic Inputs

- Chapters 2, 3 Vision/Mission

Part II: Strategic Actions - Strategy Formulation

IMPORTANT DEFINITIONS
- Chapters 4, 5, 6, 7, 8 & 9
Strategic Competitiveness
Part III: Strategic Actions - Strategy Implementation
- achieved when a firm successfully formulates and
implements a value-creating strategy - Chapters 10, 11, 12 & 13

Strategy THE COMPETITIVE LANDSCAPE

- an integrated and coordinated set of commitments Globalization - emergence of a global economy

and actions designed to exploit core competencies Technology - rapid technological changes
and gain a competitive advantage
Industry Boundaries Blurring
Competitive Advantage
Examples:
- when a firm implements a strategy that creates
superior value for customers; competitors are unable  computer networks and telecommunications have
to duplicate it or find too costly to imitate blurred the boundaries of the entertainment industry
 msnbc is co-owned by nbc universal and microsoft
Risk  general electric owns 49 percent of nbc universal and
- an investor’s uncertainty about the economic gains or comcast owns the remaining 51 percent
losses that will result from a particular investment Strategic Management Process
Above-average Returns - effective use of the strategic management process
- returns in excess of what an investor expects to earn reduces the likelihood of failure for firms as they
from other investments with a similar amount of risk encounter the conditions of today’s competitive
landscape
Average Returns
Hyper competition characterized by:
- returns equal to those an investor expects to earn
from other investments with a similar amount of risk  Market instability and change
 Rapidly escalating competition
THE STRATEGIC MANAGEMENT PROCESS  Aggressive challengers
  Strategic maneuvering to establish first- mover Firms must learn that in this twenty-first century
advantage competitive landscape, only firms capable of meeting, if not
 Technology industries exceeding, global standards, have the capability to earn above-
average returns.
Two drivers
RISKS OF GLOBALIZATION
a) Globalization
b) Technology  Significant time is required for firms to learn how to
compete in new markets, and performance may suffer
Strategic flexibility - important tool during this time.
 With globalization, firms may over-diversify
THE GLOBAL ECONOMY
internationally, which can have strong negative
 Goods, services, people, skills, and ideas move freely effects on a firm’s overall performance.
across geographic borders  It is critical for firms competing globally to remain
 New opportunities and challenges emerge strategically committed to and competitive in both
 Competitive environments are broader and domestic and international markets.
increasingly more complex TECHNOLOGY AND TECHNOLOGICAL
 The European Union has become one of the world’s CHANGES
largest markets, with 700 million potential customers Three categories for technology trends
 China has become the second largest economy in the
world surpassing Japan Technology is significantly altering the nature of
 India, the world’s largest democracy, has an competition and enabling unstable competitive environments
economy that now ranks as the fourth largest in the
1. Technology Diffusion & Disruptive Technologies
world
2. Information Age
 Hypercompetitive business environment challenges
3. Increasing Knowledge Intensity
firms to reconsider which markets to compete in; this
positioning is more critical than ever TECHNOLOGY DIFFUSION
 GE - headquartered in the U.S., yet up to 60% of its
revenue growth through 2015 will be generated from - the speed at which new technologies become
rapidly developing economies such as China and available and are used; has increased substantially
India over the past 15 to 20 year.
 Jeffrey Immelt - suggests that we have entered a Examples of technology diffusion:
new economic era in which the global economy will
be more volatile and emerging economies such as How long it took to get the following into 25 percent of U.S.
Brazil, China, and India will be the major drivers of homes:
THE MARCH OF GLOBALIZATION  Telephone — 35 years
 TV — 26 years
Globalization is increasing economic
 Radio — 22 years
interdependence among countries and their organizations as
reflected in the flow of goods and services, financial capital,  PCs — 16 years
and knowledge across country borders.  Internet — 7 years

Globalization is the product of a large number of Perpetual Innovation

firms competing against one another in an increasing number Perpetual Innovation
of global economies.
- describes how rapidly and consistently new,
Highly globalized firms must anticipate ever- information-intensive technologies replace older ones
increasing complexities in their operations as goods, services,
people, etc. move freely across geographic borders. Competitive Premium
Globalization has led to higher performance - the shorter product life cycles resulting from rapid
standards in quality, cost, productivity, product introduction diffusions of new technologies place a competitive
time, and operational efficiency. These standards translate and premium on being able to quickly introduce new,
impact domestic-only firms as well. innovative goods and services
Free flow of resources among global economies, Competitive Advantage
global sourcing for firms, global purchasing for customers,
and a global forum for workers all serve as a key source of - speed to market with innovative products is a primary
competitive advantage for firm. source of competitive advantage
Innovations must be derived from an understanding of global ■ Disruptive Technologies
standards and global expectations in terms of product
functionality o innovation and industry transformation, e.g., iPod,
iPad, and the iPhone
Apple o IPod and the complementary iTunes have
revolutionized how music is sold and used by
- an excellent example of radical innovation by a large
consumers
established firm
o iPad, in conjunction with Amazon’s Kindle, is
Technology Diffusion changing the publishing industry; moving to
electronic books
- to diffuse the technology and enhance the innovation
value, firms need to be innovative in incorporating THE INFORMATION AGE
the new technology into their product
Dramatic Changes
Rapid Technology Diffusion
In information technology have occurred in recent years, e.g.,
- now may take only 12 to 18 months for firms to personal computers, cellular phones, artificial intelligence,
gather information about research and development virtual reality, massive databases, and multiple social
and product decisions for their competitors networking sites

Patents Competitive Advantage

- may be an effective protection of proprietary The ability to effectively and efficiently access and use
technology in a small number of industries, e.g., information has become an important source of competitive
pharmaceuticals advantage in virtually all industries

Proprietary Strategies Information Technology

- many firms often do not apply for patents to prevent Enables small firms to be flexible and competitive in the
competitors from gaining access to the technological global arena
knowledge included in the patent application, e.g., Change
the electronics industry
Both the pace of change in information technology and its
Disruptive Technologies diffusion will continue to increase
- technologies that destroy the value of an existing Cost
technology and create new markets, many times
representing radical or breakthrough innovation The declining costs of information technologies and the
increased accessibility to them are evident in the current
Examples: iPods, iPads, WiFi, and the browser competitive landscape
Industry Incumbents Harmed or Destroyed Internet
- a disruptive or radical technology creates a new Contributing factor to hyper competition
industry, thereby destroying the existing industry;
with superior resources, experience, and access to the Speed and Diffusion
new technology, some incumbents may be able to
The global proliferation of computers increases the speed and
adapt
diffusion of information technologies and enables a level
Strategic Focus: Apple playing field

■ Apple’s “legendary” market power, phenomenal growth INCREASING KNOWLEDGE INTENSITY

rate, and impressive financial performance stem from its new
Knowledge
technology development and innovation
Information, intelligence, and expertise are the basis of
■ Imitators - Apple is expected to retain at least 80% of the
technology and its application
tablet computer market even with the many imitative products
on the market Competitive Advantage
■ International- Apple’s stores in China handle 40,000 people In the 1980s, the basis of competition shifted from hard assets
daily, four times the average flow of U.S. to intangible resources; knowledge is a critical organizational
resource and an increasingly valuable source of competitive
■ Versatility - Apple provides an example of technological
advantage
entrepreneurship across multiple industries
Intangible Resource 2) Most firms competing within an industry or within a
segment of that industry are assumed to control similar
Knowledge gained through experience, observation, and strategically relevant resources and to pursue similar strategies
inference is an intangible resource; the value of intangible in light of those resources.
resources is growing as a proportion of total shareholder value
3) Resources used to implement strategies are assumed to be
Strategic Competitiveness highly mobile across firms, so any resource differences that
Enhanced for the firm that develops the ability to capture might develop between firms will be short-lived.
intelligence, transform it into usable knowledge, and diffuse it 4) Organizational decision-makers are assumed to be rational
rapidly throughout the firm and committed to acting in the firm’s best interests, as shown
Competitive Advantage by their profit-maximizing behavior.

Firms must develop (e.g., through training programs) and Five Forces Model of competition
acquire (e.g., by hiring educated and experienced employees) - is an analytical tool used to help firms find the
knowledge, integrate it into the organization to create industry that is the most attractive, as measured by its
capabilities, and then apply it to gain a competitive advantage. profitability potential.
Knowledge Spillovers - suggests that an industry’s profitability (i.e., its rate
of return on invested capital relative to its cost of
Knowledge falls into competitor’s hands, e.g., hiring of capital) is a function of interactions among the Five
professional staff/managers by competitors Forces: suppliers, buyers, rivalry, product substitutes,
and potential entrants to the industry.
Knowledge Diffusion
I/O MODEL of ABOVE-AVERAGE RETURNS
Because of the potential for spillovers, firms must act quickly
to use their knowledge in productive ways Firms Can Earn Above-Average Returns:
Strategic Flexibility - facilitates knowledge diffusion to Cost Leadership Strategy – producing standardized goods or
where it has value services at costs below those of competitors
STRATEGIC FLEXIBILITY Differentiation Strategy - producing differentiated goods or
services for which customers are willing to pay a price
■ Set of capabilities used to respond to various demands and
premium
opportunities existing in a dynamic and uncertain competitive
environment The I/O model suggests that above-average returns
are earned when firms are able to effectively study the
■ enables the capacity to learn
external environment as the foundation for identifying an
■ Facilitates coping with hyper competition, uncertainty, and attractive industry and implementing the appropriate strategy.
risk
Research findings support the I/O model, in that
■ Firms should try to develop strategic flexibility in all areas approximately 20% of a firm’s profitability is explained by the
of operations industry in which it chooses to compete.

TWO MODELS OF STRATEGIC DECISION MAKING However, this research also shows that 36% of the
variance in firm profitability can be attributed to the firm’s
Firms use two major models to help develop their characteristics and actions.
vision and mission and then choose one or more strategies in
pursuit of strategic competitiveness and above-average These findings suggest that the External AND
returns. Internal environments influence the company’s ability to
achieve strategic competitiveness and earn above-average
External – IO Model returns.
Internal – Resource-Based Model

THE I/O MODEL OF ABOVE-AVERAGE RETURNS

Grounded in economics, the I/O model has four underlying

assumptions:

1) The external environment is assumed to impose pressures

and constraints that determine the strategies that would result
in above-average returns.
 There are four criteria that if resources and capabilities fulfill,
then they become Core Competencies:

1. Valuable
They are valuable when they allow a firm to take
advantage of opportunities or neutralize threats.
2. Rare
They are rare when possessed by few, if any, current
and potential competitors.
3. Costly to Imitate
Resources are costly to imitate when other firms
cannot obtain them or are at a cost disadvantage.
4. Non-substitutable
They are non-substitutable when they have no
structural equivalents.

Four Underlying Assumptions

RESOURCE-BASED MODEL OF ABOVE-AVERAGE 1) Differences in firms’ performances across time are due
RETURNS primarily to their unique resources and capabilities rather than
The resource-based model assumes that each the industry’s structural characteristics.
organization is a collection of unique resources and 2) Firms acquire different resources and develop unique
capabilities. capabilities based on how they combine and use the resources.
The uniqueness of its resources and capabilities is the 3) Resources and capabilities are NOT highly mobile across
basis of a firm’s strategy and its ability to earn above-average firms.
returns.
4) The differences in resources and capabilities are the basis of
The core assumption of the resource-based model is competitive advantages.
that the firm’s unique resources, capabilities, and core
competencies have more influence on selecting and using Above-average returns are earned when the firm uses
strategies than does the firm’s external environment. its valuable, rare, costly-to-imitate, and non- substitutable
resources and capabilities to compete against its rivals in one
There are four components to the Resource-Based Model: or more industries.
1. Resources
Resources are inputs into a firm’s
production process, such as capital equipment, the
skills of individual employees, patents, finances, and
talented managers.

A firm’s resources are either tangible or

intangible and are classified into three categories:
physical, human, and organizational capital.
Resources alone may not yield a competitive
advantage. Many resources can either be imitated or
substituted over time, therefore, it is difficult to
achieve and sustain a competitive advantage based on
resources alone.
2. Capabilities
- is the capacity for a set of resources to perform a task
or an activity in an integrative manner.
KEY WORD: INTEGRATIVE
- evolve over time and must be managed dynamically
in pursuit of above-average returns.
3. Core Competencies
- are resources and capabilities that serve as a source of
competitive advantage.
4. Competitive Advantage
 The probability of forming an effective mission
increases when employees have a strong sense of the ethical
Evidence indicates that both models yield insights standards that guide their behaviors.
that are linked to successfully selecting and using strategies.
Business ethics are a vital part of:
VISION
Vision – deciding what a firm wants to become
 It is a picture of what the firm wants to be and, in broad
terms, what it wants to ultimately achieve. Mission - Deciding who it intends to serve and how it wants to
 A vision statement is short and concise, making it easy serve those individuals and groups
to remember.
STAKEHOLDERS
 It articulates the ideal description of the organization and
gives shape to its intended future. - Are there individuals, groups, and organizations who have a
 A firm’s vision tends to be enduring, whereas its mission stake in the organization
can change in light of changing environmental
conditions.  Who can affect the firm’s vision and mission?
 Vision statements reflect a firm’s values and aspirations  Are affected by the strategic outcomes achieved?
and are intended to capture the heart and mind of each  Have enforceable claims on the firm’s performance?
stakeholder.
Competitive Advantage
 Executives and top-level managers must formulate and
implement strategies consistent with the vision. Firms effectively managing stakeholder relationships
outperform those that do not.
Examples:
Organizations are not equally dependent on all
Our vision is to be the world’s best quick service
stakeholders, so not every stakeholder has the same level of
restaurant. (McDonald’s)
influence.
To make the automobile accessible to every
The more critical and valued a stakeholder’s
American. (Ford Motor Company’s vision when
participation, the greater a firm’s dependence on it, which
established by Henry Ford)
gives the stakeholder more potential influence over the firm.
MISSION
Managers must find ways to accommodate or insulate
 The vision is the foundation for the firm’s mission. the organization from the demands of stakeholders controlling
 The firm’s mission is more concrete than its vision. critical resources.
 A mission specifies the business or businesses in Classification of Stakeholders
which the firm intends to compete and the customers
it intends to serve. Three groups of stakeholders:

Examples: Capital Market Stakeholders

Be the best employer for our people in each Shareholders and the major suppliers of a firm’s capital
community around the world and deliver operational
excellence to our customers in each of our restaurants. Product Market Stakeholder
(McDonald’s) A firm’s primary customers, suppliers, host communities, and
Our mission is to be recognized by our customers as unions representing the workforce
the leader in applications engineering. We always focus on the Organizational Stakeholder
activities customers desire; we are highly motivated and strive
to advance our technical knowledge in the areas of material, Firm’s employees, including both non-managerial and
part design, and fabrication technology. (LNP, a GE Plastics managerial personnel
Company)

 Similar to the vision, a mission should establish a

firm’s individuality and should be inspirational to all
stakeholders.
 A firm’s vision and mission are critical aspects of the
strategic inputs required to engage in strategic actions
that help achieve strategic competitiveness and earn
above-average returns.

VISION, MISSION AND ETHICS

 Often large shareholders prefer that the firm
minimize its use of debt because of the risk of debt, its cost,
Trade-offs must be made in situations where the objectives of and the possibility that debt holders have first call over
various stakeholder groups differ or conflict. shareholders on the firm’s assets in case of default.
Conflict Examples: Product Market Stakeholder
Shareholders  Though all product market stakeholders are
– individuals and groups who have invested capital in a firm in important, without customers, the other product
the expectation of earning a positive return on their market stakeholders are of little value.
investments. These stakeholders’ rights are grounded in laws  Customers demand reliable products at the lowest
governing private property and private enterprise. possible prices.
 Host communities want companies willing to be
Consumers long-term employers and providers of tax revenue
without placing excessive demands on public support
– interests are maximized when the quality and reliability of a
services.
firm’s products are improved, but without high prices.
 Suppliers seek loyal customers who are willing to
High returns to customers might come at the expense pay the highest sustainable prices for the goods and
of lower returns for capital market stakeholders and vice- services they receive.
versa.  Union officials are interested in secure jobs, under
highly desirable working conditions, for the
Managing Stakeholder Conflict employees they represent.
1) A firm must thoroughly identify and understand all  Product market stakeholders are generally satisfied
important stakeholders. when a firm’s profit margin reflects at least a balance
between the returns to capital market stakeholders
2) It must prioritize them, in case it cannot satisfy all of them. and goals of product market stakeholders.
3) Power is the most critical criterion in prioritizing Organizational Stakeholder
stakeholders.
 Employees expect the firm to provide a dynamic,
4) Other criteria might include the urgency of satisfying each stimulating, and rewarding work environment.
particular stakeholder group and the degree of importance of  Employees are usually satisfied working for a
each to the firm’s above-average returns. company that is:
 Growing
Stakeholder Priorities
 Actively developing their skills to be
Power  Urgency  Importance effective team members
 Meeting or exceeding global work standards
Challenges:  International assignments help cultivate employee
When earning above-average returns, a firm can more easily skills for the global competitive landscape.
satisfy multiple stakeholders simultaneously.  The process of managing expatriate employees and
helping them build knowledge can have significant
When earning only average returns, a firm is unable to effects on a firm’s global competence.
maximize the interests of all stakeholders, thus stakeholders  To be successful, strategic leaders must effectively
should be at least minimally satisfied. leverage a firm’s human capital.
Cultural differences and societal values also influence Strategic Leaders
stakeholder priorities.
Strategic leaders are people located in different areas
Capital Market Stakeholders and levels of the firm using the strategic management process
to select strategic actions that help the firm achieve its vision
Balancing Conflicting Shareholder Goals
and fulfill its mission.
The returns that shareholders expect are
Successful strategic leaders are decisive, committed
commensurate with the degree of risk accepted with those
to nurturing those around them, and are committed to helping
investments.
the firm create value for all stakeholder groups.
Challenging for managers:
Increasingly, CEOs delegate strategic responsibilities
● Some shareholders want short-term to include decision-makers closest to the action due to the
increases in returns changing competitive landscape:

● Others desire building long-term competitiveness The global economy

  Globalization
 Rapid technological change
 Increasing importance of knowledge
 People as sources of competitive advantage

STRATEGIC LEADERS AND ORGANIZATIONAL

CULTURE

Visionary Strategic Leaders emphasize not only maximizing

shareholder wealth, but maximizing the interests of all
stakeholders, underscoring a civic and personal commitment
to corporate citizenship.

Organizational culture affects strategic leaders and their

work. In turn, strategic leaders’ decisions and actions shape a
firm’s culture.

Organizational culture is the social energy that drives—or fails

to drive—the organization, the ideologies, symbols, and
shared core values.

The Work of Effective Strategic Leaders

Successful Strategic Leadership Characteristics

 Hard working
 Embraces dynamic competitive landscape
 Brutally honest
 Tenacious
 Penchant for wanting the firm and its people to
accomplish more
 Strong strategic orientation
 Innovative thinker
 Exploratory learning of new and unique forms of
knowledge
 Exploitative learning, which adds incremental
knowledge to existing knowledge bases
 Global mindset
 Dreams that challenges and energizes a company,
i.e., vision