Chapter 1 Strategic Management and Strategic Competitiveness

Colorado State University Copyright 2004 South-Western All rights reserved.

R. Dennis Middlemist

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Knowledge Objectives
Studying this chapter should provide you with the strategic management knowledge needed 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.
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Knowledge Objectives (contd)

Studying this chapter should provide you with the strategic management knowledge needed to:
Use the resource-based model to explain how firms can earn above-average returns. Describe strategic intent and strategic mission and discuss their value. Define stakeholders and describe their ability to influence organizations. Describe the work of strategic leaders. Explain the strategic management process.
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Definitions
Strategic Competitiveness
When a firm successfully formulates and implements a value-creating strategy

Sustainable Competitive Advantage

When competitors are unable to duplicate a companys 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 (contd)
Risk
An investors 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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The Strategic Management Process

Figure 1.1
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Current Competitive Landscape

A Perilous Business World
Investments required to compete on a global scale are enormous Consequences of failure are severe

Important Elements of Success

Developing strategy Implementing strategy

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Competitive Landscape
Strategic maneuvering among global and innovative combatants

Global economy
Rapid technological change

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Competitive Landscape: Hypercompetition

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

Hypercompetition

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Global Economy
Global Economy
Goods, people, skills, and ideas move freely across geographic borders Movement is relatively unfettered by artificial constraints Expansion into global arena complicates a firms competitive environment

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Global Economy (contd)

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

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Country Competitiveness Rankings (Population over 20 Million) Country

United States Australia Canada Malaysia Germany Taiwan United Kingdom France Spain Thailand Japan China Brazil China Korea

2002
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

2003
2 3 2 6 4 7 5 9 8 10 11 12 0 0 10

Country
Colombia Italy South Africa India India Brazil Philippines Romania Mexico Turkey Russia Poland Indonesia Argentina Venezuela

2002
16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

2003
20 14 16 0 17 15 18 0 19 23 21 22 25 26 24
Table 1.1
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SOURCE: From World Competitiveness Yearbook 2003, IMD, Switzerland. http://www.imd.ch.wcy.esummary, April. Reprinted by permission.

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Technology and Technological Changes

Rate of change of technology and speed at which new technologies become available
Perpetual innovationhow 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 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 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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I/O Model of Above-Average Returns

The industry in which a firm competes has a stronger influence on the firms 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 Model

1 External environment imposes pressures and constraints that determine strategies leading to above-average returns Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies Resources used to implement strategies are highly mobile across firms Organizational decision makers are assumed to be rational and committed to acting in the firms best interests (profit-maximizing)
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I/O Model of Above-Average Returns

External Environments
General Environment

1. Strategy dictated by the external environment of the firm (what opportunities exist in these environments?) 2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?)

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The External Environment

The I/O Model of Above-Average Returns

1. Study the external environment, especially the industry environment

The general environment The industry environment The competitor environment

Adapted from Figure 1.2

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The External Environment An Attractive Industry

The I/O Model of Above-Average Returns

2. Locate an attractive industry with a high potential for aboveaverage returns

An industry whose structural characteristics suggest above-average returns

Adapted from Figure 1.2
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The External Environment An Attractive Industry Strategy Formulation

The I/O Model of Above-Average Returns

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

Selection of a strategy linked with aboveaverage returns in a particular industry

Adapted from Figure 1.2

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The External Environment An Attractive Industry Strategy Formulation Assets and Skills

The I/O Model of Above-Average Returns

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

Assets and skills required to implement a chosen strategy

Adapted from Figure 1.2

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The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation

The I/O Model of Above-Average Returns

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

Selection of strategic actions linked with effective implementation of the chosen strategy
Adapted from Figure 1.2

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The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior Returns
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The I/O Model of Above-Average Returns

Superior returns: earning of above-average returns

Adapted from Figure 1.2

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Five Forces Model of Competition

An industrys 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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Five Forces Model of Competition (contd)

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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Resource-Based Model of 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 Returns (contd)

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 of Above-Average Returns (contd)

Firms Resources 1. Strategy dictated by the firms unique resources and capabilities 2. Find an environment in which to exploit these assets (where are the best opportunities?)

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Resources and Capabilities

Resources
Inputs into a firms production process
Capital Skills

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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equipment

of individual employees

Patents Finances Talented

managers

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The Resource-Based Model of Above-Average Returns

Resources 1. Identify the firms resources. Study its strengths and weaknesses compared with those of competitors

Inputs into a firms production process

Adapted from Figure 1.3

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The Resource-Based Model of Above-Average Returns

Resources 2. Determine the firms capabilities. What do the capabilities allow the firm to do better than its competitors.

Capability

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

Adapted from Figure 1.3

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The Resource-Based Model of Above-Average Returns

Resources 3. Determine the potential of the firms resources and capabilities in terms of a competitive advantage.

Capability Competitive Advantage

Ability of a firm to outperform its rivals

Adapted from Figure 1.3

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The Resource-Based Model of Above-Average Returns

Resources 4. Locate an attractive industry.

Capability Competitive Advantage An Attractive Industry

An industry with opportunities that can be exploited by the firms resources and capabilities

Adapted from Figure 1.3

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The Resource-Based Model of Above-Average Returns

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

Capability Competitive Advantage An Attractive Industry Strategy Implementation

Strategic actions taken to earn above-average returns

Adapted from Figure 1.3

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The Resource-Based Model of Above-Average Returns

Resources

Capability Competitive Advantage An Attractive Industry Strategy Implementation Superior Returns

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Superior returns: earning of above-average returns

Adapted from Figure 1.3

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Key Criteria of Resources and 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 Criteria of Resources and Capabilities

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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Core 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 Competitive Advantage

Valuable Allow the firm to exploit opportunities or Rare Possessed by few, if any, current and
potential competitors neutralize threats in its external environment

Costly to imitate When other firms cannot obtain them or

must obtain them at a much higher cost

Nonsubstitutable The firm is organized appropriately to obtain

the full benefits of the resources in order to realize a competitive advantage

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Resources and Capabilities, Core Competencies, and Outcomes

Valuable Core Competencies Competitive Advantage

Rare

Costly to Imitate

Value Creation

Nonsubstitutable
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Above Average Returns

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Strategic Intent
Internally focused The leveraging of a firms resources, capabilities and core competencies to accomplish the firms goals 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 Mission
Externally focused A statement of a firms unique purpose and the scope of its operations in product and market terms
Establishes a firms individuality and is inspiring and relevant to all stakeholders Provides general descriptions of the firms intended products and its markets

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Stakeholders
Individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firms performance Claims are enforced by the stakeholders ability to withhold essential participation

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The Three Stakeholder Groups

Figure 1.4
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Capital 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 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
Want secure jobs and desirable working conditions
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Organizational Stakeholders
Employees
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 Involvement
Two issues affect the extent of stakeholder involvement in the firm
How to divide returns to keep stakeholders involved? How to increase returns so everyone has more to share?

Organizational

Capital Market

Product Market

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Strategic Leaders
People 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 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 Industrys Profit Pools

Define the pools boundaries Estimate the pools overall size Estimate the size of the value-chain activity in the pool Reconcile the calculations

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Strategic Management Process

Study the external and internal environments Identify marketplace opportunities and threats Determine how to use core competencies Use strategic intent to leverage resources, capabilities and core competencies and win competitive battles Integrate formulation and implementation of strategies Seek feedback to improve strategies
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