1. Chapter 1: Strategic Management and Strategic Competitiveness
Overview:
Nature of Competition
I/O Model of Above-Average Returns (AAR)
Resource-Based Model of AAR
Strategic Vision and Mission
Stakeholders
Strategic Leaders
The Strategic Management Process
What is Performance?

2. Nature of Competition: Basic concepts
Strategy
Integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage
Competitive Advantage (CA)
When a firm implements a strategy that competitors are unable to duplicate or find too costly to imitate
Strategic Competitiveness
Achieved when a firm successfully formulates & implements a value-creating strategy
Above Average Returns
Returns in excess of what investor expects in comparison to other investments with similar risk

3. The Strategic Management Process

4. Industrial Organizational (I/O) Model of Above-Average Returns (AAR)
Underlying Assumptions
External environment imposes pressures and constraints that determine the strategies resulting in AAR
Most firms that compete within a particular industry control similar resources and pursue similar strategies
Resources for implementing strategies are highly mobile across firms
Organizational decision makers are rational and committed to acting in the firm's best interests, as shown by their profit-maximizing behaviors
Limitations
Only two strategies are suggested for competing in an industry:
Cost Leadership or Differentiation
Internal resources & capabilities are not considered
AAR are earned when a firm implements the strategy dictated by external environment (general, industry, and competitor)

5. Industrial Organizational (I/O) Model of Above-Average Returns (AAR)

6. The Resource-Based Model of AAR
Resources
Inputs into a firm's production process
Includes capital equipment, employee skills, patents, high-quality managers, financial condition, etc.
Basis for competitive advantage: When resources are valuable, rare, costly to imitate, and nonsubstitutable
3 categories of internal/firm-specific resources
Physical, Human, Organizational capital
Capability
Capacity for a set of resources to perform a task or activity in an integrative manner
Core Competency
A firm’s resources and capabilities that serve as sources of competitive advantage over its rival

7. The Resource-Based Model of AAR
Basic Premise - a firm's unique resources & capabilities is the basis for firm strategy and AAR
Each organization is a bundle of unique resources and capabilities
Performance difference between firms emerge over time due to these unique resources and capabilities (versus industry’s structural characteristics)
Combined uniqueness should define the firms’ strategic actions
A firm has superior performance because of
Unique resources and capabilities, and the combination makes them different, and better, than their competition – driving the competitive advantage

8. The Resource-Based Model of AAR

9. Vision and Mission Purpose:
Chart the company’s long-term direction (vision)
Describe the company’s purpose (mission)
Give the firm a strong identity
Create a roadmap of the company’s future
Kind of company to become – direction we are headed
Indicates the long-term course management has charted for the company
Together mission and vision provide foundation for strategy formulation and implementation

10. Vision and Mission Mission
Also called business purpose or business definition
Addresses “who we are and what we do”
Outlines the organization’s activities and business make-up
More specific than the vision
Focuses on present business and purpose
Businesses and industries company is in now
Customer needs currently being served
Should pin down the company’s real area of business interest
Serves as a boundary for what to do and not do

11. Vision and Mission Vision
Concerns future business path – “where we are going”
The kind of company we are trying to become
Customer needs to be satisfied in the future
A guiding concept for the organization
Charts a company’s future strategic course – defines the business makeup in 5 to 10 years
Requires the exercise of strategic thinking and management foresight
The responsibility of a firm's top strategic leader – the CEO
Serves as foundation for mission

12. Vision and Mission Why is it important to develop vision and mission?
Provides a clear long-term direction for the organization
Guides employee actions and gives them and the organization a sense of purpose
Guides managerial decision-making
Helps stakeholders (who, how) understand your business (investors, bank-loans, outside legitimacy)

13. Stakeholders
Basic Premise – a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors
Stakeholders – individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance
Must minimally meet the expectations of each stakeholder group
Above average returns (AAR) makes this easier to do
3 Major Stakeholder Groups

14. The Three Stakeholder Groups

15. Strategic Leaders
People (primarily managers) located in different parts of the firm using the strategic management process to help the firm reach its vision and mission
The Work of Effective Strategic Leaders
Must be able to think strategically
Involved in internal and external analyses, development of vision and mission, strategy formulation and implementation, and constant review, evaluation, and adjustment
Create and sustain organizational structure and culture
Can exist at different organizational levels
Corporate, business, functional, operating

16. The Strategic Management Process

17. What is Performance?
Performance is central to the study and practice of strategy
Organizational performance is complicated
Numerous definitions, approaches, and types of performance
Can be an elusive concept
Examples:
Goal attainment - Vision/mission, objectives
Effectiveness – A hospital curing sick people
Quality – Customer service
Efficiency - Inputs to outputs
Financial/accounting/economic returns – ROA, EPS
Can also vary by type of firm
For-profit versus not-for-profit
Publicly traded?
Government

18. Measuring Performance
Stakeholders View
An organization’s performance should be evaluated relative to the preferences and desires of stakeholders that provide resources to a firm
Different stakeholders can have different interests and different criteria for evaluating performance
May need to choose which stakeholders to satisfy
Must minimally satisfy the interests of each stakeholder group

19. Measuring Performance
Simple Accounting Measures
Most popular approach
Publicly available for many firms
They communicate a great deal of information
Most often rely on ratio analysis
4 Major categories of ratios
Profitability
Liquidity
Leverage
Activity

20. Measuring Performance
Profitability Ratios
Ratios with some measure of profit in the numerator and some measure of firm size or assets in the denominator
ROA, ROE, margins, EPS, p/e ratio
Liquidity Ratios
Ratios that focus on the ability of a firm to meet its short–term financial obligations
Current ratio, quick ratio

21. Measuring Performance
Leverage Ratios
Ratios that focus on the level of a firm’s indebtedness
Debt to assets, debt to equity, times interest earned
Activity Ratios
Ratios that focus on the level of activity in a firm’s business
Inventory turnover, average collection period

22. The Relative Nature of Performance
Performance is always relative to other firms
Performance should be compared to industry average(s)
AAR are above industry average
Normal and below normal returns
Industry adjustments
Some industries are more profitable than others
Can adjust for industry performance and compare performance levels across industries
Looking at trends can also be useful
From earlier
I/O Model - Pick attractive industry(ies) to compete in
Resource-Based Model - Develop unique bundles of resources and capabilities