2 Definitions Strategic Management Process Value Creation The full set of commitments, decisions, and actions required for a firm to create value and earn above-average returnsValue 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.
3 Definitions Average Returns Above-Average Returns Returns that are equal to those an investor expects to earn from other investments with a similar amount of riskAbove-Average ReturnsReturns that are in excess of what an investor expects to earn from other investments with a similar amount of risk
4 DefinitionsRiskAn investor’s uncertainty about the economic gains or losses that will result from a particular investment
5 Competitive Landscape Dynamics of strategic maneuvering among global and innovative combatantsPrice-quality positioning, new know-how, first moverCompetitive environmentsProtect or invade established product or geographic marketsFundamental nature of competition is changing
6 Competitive Landscape Goods, services, people, skills, and ideas move freely across geographic bordersEmergence of global economySpread of economic innovations around the worldCompetitive environmentsPolitical and cultural adjustments are requiredFundamental nature of competition is changing
7 Competitive Landscape Increasing rate of technological change and diffusionEmergence of global economyRapid technological changeThe information ageIncreasing knowledge intensityCompetitive environmentsFundamental nature of competition is changing
8 Strategic Flexibility A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environmentIt involves coping with uncertainty and the accompanying risks
10 I/O Model of Above-Average Returns 1. External EnvironmentsGeneralEnvironmentGlobalTechnologicalEconomicSocioculturalPolitical/LegalDemographic1. 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?)Industry EnvironmentI/O Model: McDonalds and StarbucksRespectively, in both cases the CEOs Ray Crock and Howard Schultz were examiningthe industry in which they worked. Crock was a sales rep for a firm that built maltedmilkshake machines. Schultz was a sales rep for a company that made home espressomachine accessories. Both noticed that there was a customer that was purchasing a largevolume of these machines. They made trips to the locations of these stores and noticedthat each was in an emerging industry that had high-growth potential and higher-than-averageprofit margins. McDonalds is in fast-food and drive-thru restaurants and Starbucksis in specialty coffee retail.Competitor Environment
11 Four Assumptions of the I/O Model 1. The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns2. Most 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 resourcesFour Assumptions of the I/O ModelBoth Crock and Schultz identified the strategy that allowed their companies to achievehigh profits: McDonalds through the “assembly line” of their burgers and Starbucks withproduct marketing that created ambiance and consistency, a value perception that allowedthem to charge high premium for their coffee.
12 Four Assumptions of the I/O Model 3. Resources used to implement strategies are highly mobile across firms4. Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviorsFour Assumptions of the I/O Model (cont.)Both McDonalds and Starbucks then spent time and capital to acquire and develop theskills needed to implement the business strategy. Crock became a business partner of theMcDonald brothers and sold franchise agreements for them. Schultz took a position in themarketing department of Starbucks. Each later purchased the firm and used what they hadlearned to rapidly expand the company. Crock was able to use McDonalds quality, consistency,rapid assembly system, and drive-thru concepts to continue to realize high profits.Schultz was able to use the Starbucks image, ambiance concept, and marketingstrengths to rapidly expand.One interesting note: Initially, Schultz started a Seattle coffeehouse chain (Il Giorande)that competed with Starbucks. His marketing manager was so adamant that Starbuckswas a better concept capable of “going global” that Schultz sold his originalcoffeehouse chain and purchased Starbucks.
13 Industrial Organization Model I/O Model of Above-Average ReturnsIndustrial Organization Model1. Study the external environment, especially the industry environmenteconomies of scalebarriers to market entrydiversificationproduct differentiationdegree of concentration of firms in the industryThe External Environment
14 Industrial Organization Model I/O Model of Above-Average ReturnsIndustrial Organization Model2. Locate an attractive industry with a high potential for above-average returnsThe External EnvironmentAn Attractive IndustryAttractive industry: one whose structural characteristics suggest above-average returns
15 Industrial Organization Model I/O Model of Above-Average ReturnsIndustrial Organization Model3. Identify the strategy called for by the attractive industry to earn above-average returnsThe External EnvironmentAn Attractive IndustryStrategy FormulationStrategy formulation: selection of a strategy linked with above-average returns in a particular industry
16 Industrial Organization Model I/O Model of Above-Average ReturnsIndustrial Organization Model4. Develop or acquire assets and skills needed to implement the strategyThe External EnvironmentAn Attractive IndustryStrategy FormulationAssets and SkillsAssets and skills: those assets and skills required to implement a chosen strategy
17 Industrial Organization Model I/O Model of Above-Average ReturnsIndustrial Organization Model5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategyThe External EnvironmentAn Attractive IndustryStrategy FormulationAssets and SkillsStrategy implementation: select strategic actions linked with effective implementation of the chosen strategyStrategy Implementation
18 Industrial Organization Model I/O Model of Above-Average ReturnsIndustrial Organization ModelThe External EnvironmentAn Attractive IndustryStrategy FormulationAssets and SkillsSuperior returns: earning of above-average returnsStrategy ImplementationSuperior Returns
19 Resource-based Model of Above Average Returns 1. Strategy dictated by the firm’s unique resources and capabilities2. Find an environment in which to exploit these assets (where are the best opportunities?)1. Firm’s ResourcesThe FirmResource-based model: Patents and InventionsThe resource-based view (RBV) of the firm is hedged on two axiomatic assumptions. First,resources are distributed heterogeneously across firms, and second, these resources cannotbe transferred between firms without cost. These axioms lend themselves to two additionaltenets (cf., Barney, 1991): (a) Resources that simultaneously enhance a firm’s marketeffectiveness (valuable) and are not widely dispersed (rare) can produce competitiveadvantage; and (b) when such resources are concurrently expensive to imitate (inimitable)and costly to substitute (nonsubstitutable), the competitive advantage is sustainable.Thus, value and rarity are each necessary before inimitability and nonsubstitutabilitymight yield a sustainable competitive advantage (Priem & Butler, 2001).
20 Resource-based Model of Above Average Returns 1. Identify the firm’s resources-- strengths and weaknesses compared with competitorsResourcesResources: inputs into a firm’s production processResource-based model: Patents and Inventions (cont.)Despite its face validity and rapid diffusion throughout the management literature, therehave only been limited empirical tests of RBV’s tenets (cf., Priem & Butler, 2001). Toecho Miller and Shamsie (1996, p. 519), “the concept of resources remains an amorphousone that is rarely operationally defined or tested for its performance implications in differentcompetitive environments.” Many managers use RBV’s terms with little specificityor attention to causal relationships. Researchers have identified several types of valuableand rare resources that could generate rents. Some examples include information technology(Powell, 1997), strategic planning (Powell, 1992), organizational alignment(Powell, 1992a), human resources management (Lado & Wilson, 1994; Wright &McMahan, 1992), trust (Barney & Hansen, 1994), organizational culture (Oliver, 1997),administrative skills (Powell, 1993), expertise of top management (Castanias & Helfat,1991), and even Guanxicomplex networks (Tsang, 1998).
21 Resource-based Model of Above Average Returns 2. Determine the firm’s capabilities--what it can do better than its competitorsResourcesCapabilityCapability: capacity of an integrated set of resources to integratively perform a task or activityResource-based model: Patents and Inventions (cont.)The degree to which RBV is likely to help managers depends on the extent to which itcan be used to achieve competitive advantage. Hence, recently, Markman and his colleagueshave attempted to clarify three basic questions: (1) Can a single resource be simultaneouslyvaluable, rare, inimitable, and nonsubstitutable? (2) Can an inimitable andnonsubstitutable resource be measured? And (3) To what extent is an inimitable and nonsubstitutableresource associated with competitive advantage?Using five-year data from 85 large, publicly traded pharmaceutical companies,Markman and his colleagues advance the view that a single resource-patented inventioncould qualify as simultaneously valuable, rare, hard to imitate, and difficult to substitute.In other words, the answer to the first question is yes; some patents are valuable, rare,inimitable, and nonsubstitutable resources. The answers to the second and third questionsare “yes” as well. That is, controlling for assets, sales, and investment in R&D, theyfound that a patent’s quality and scope are significantly related to competitive advantageas captured by new products and, to some extent, to profitability.
22 Four Attributes of Resources and Capabilities (Competitive Advantage) Valuableallow the firm to exploit opportunities or neutralize threats in its external environmentRarepossessed by few, if any, current and potential competitorsResources and CapabilitiesCostly to imitatewhen other firms cannot obtain them or must obtain them at a much higher costFour Attributes of Resources and Capabilities(Competitive Advantage)Despite these findings and the intuitive appeal of RBV, challenges remain. Priem and Butler(2001) noted that a resource that is valuable, rare, hard to imitate, and not substitutableis also difficult to assess, manipulate, or deploy, and therefore difficult to exploit. Theiranalytical assessment spurred an important debate regarding RBV’s practical utility. Forexample, tacit knowledge, organizational learning, workflow, time, interorganizationalties, communications, and human interactions might be seen as hard to imitate and nonsubstitutableresources, but such resources are neither necessarily rare nor inevitablyvaluable. Thus, while many “things” might be classified as resources, intangibles are lessamenable to managerial manipulation, rendering their associations with competitive advantagetenuous. For example, tacit knowledge is frequently conceptualized as a sourceof competitive advantage, yet we don’t know how (and at what rate) managers create anduse that which is inherently unknowable. Personnel, machinery, land, technical procedures,and financial capital are relatively easy to quantify resources. Brand names, however,and organizational knowledge, learning, and culture are extremely difficult to craft,use, measure, and manage. In sum, the practical utility of RBV to managers remainsweak as long as we fail to explicitly parameterize and measure the extent to which certainresources are valuable, rare, inimitable, and nonsubstitutable.Nonsubstitutablethe firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage
23 Resources and capabilities that meet these four criteria become a source of: ValuableRareCore CompetenciesCore CompetenciesResources and CapabilitiesCostly to imitateNonsubstitutable
24 Core Competencies are the basis for a firm’s Competitive advantageValue CreationCore CompetenciesAbility to earn above-average returns
25 Competitive Advantage Resource-based Model of Above Average ReturnsResource-basedModel3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantageResourcesCapabilityCompetitive AdvantageCompetitive advantage: ability of a firm to outperform its rivals
26 Resource-based Model of Above Average Returns 4. Locate an attractive industryResourcesCapabilityCompetitive AdvantageAn Attractive IndustryAn attractive industry: an industry with opportunities that can be exploited by the firm’s resources and capabilities
27 Resource-based Model of Above Average Returns 5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environmentResourcesCapabilityCompetitive AdvantageAn Attractive IndustryStrategy formulation and implementation: strategic actions taken to earn above average returnsStrategy Form/Impl
28 Resource-based Model of Above Average Returns ResourcesCapabilityCompetitive AdvantageAn Attractive IndustrySuperior returns: earning of above-average returnsStrategy Form/ImplSuperior Returns
29 Strategic Intent & Mission Winning competitive battles by leveraging the firm’s resources, capabilities, and core competenciesStrategic MissionAn application of strategic intent in terms of products to be offered and markets to be served
30 The Firm and Its Stakeholders The firm must maintain performance at an adequate level in order to retain the participation of key stakeholdersGroups who are affected by a firm’s performance and who have claims on its wealthTHE FIRM
31 The Firm and Its Stakeholders Capital Market StakeholdersShareholdersMajor suppliers of capitalBanksPrivate lendersVenture capitalists
32 Capital Market Stakeholders Product Market Stakeholders The Firm and Its StakeholdersStakeholdersCapital Market StakeholdersProduct Market StakeholdersPrimary customersSuppliersHost communitiesUnions
33 The Firm and Its Stakeholders Capital Market StakeholdersProduct Market StakeholdersOrganizational StakeholdersEmployeesManagersNonmanagers
34 Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firmCapital MarketOrganizational1How do you divide the returns to keep stakeholders involved?Product Market
35 Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firmCapital MarketOrganizational2How do you increase the returns so everyone has more to share?Product Market
36 Organizational Strategists Serve as a major source of competitive advantageAre held responsible by stakeholdersMake decisions regarding development, acquisition, cost and use of resourcesAssess risks of strategic actions
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