1. 1 Strategic Management1 Dr S M Tariq Zafar Dr S M Tariq Zafar Chapter 1

2. 2 When we have completed this chapter you should be able 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. –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.

3. 3 Learning Objectives (cont’d) -Use the resource-based model to explain how firms can earn above-average returns. -Describe the work of strategic leaders. -Explain the strategic management process.

4. 4 Let’s start by asking … some key questions! 1.What is a management strategy course all about? 2.Just what is strategy? 3.What is happening in the business strategic environment? 4.What is the industrial organization (IO) model? 5. 5.What is the resource- based model? 6. 6.Who are a firm’s key stakeholders? 7. 7.What affects do firm stakeholders have on strategy? 8. 8.Who is it who creates “strategy” in organizations?

5. 5 Some Important Definitions Strategic Competitiveness –When a firm successfully formulates and implements a value-creating strategy. Sustainable Competitive Advantage –When competitors are unable to duplicate a company’s 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.

6. 6 Definitions (cont’d) Risk –An investor’s 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.

7. 7 Figure 1.1 Hitt’s Strategic Management Process Copyright © 2004 South-Western. All rights reserved.

8. 8 Current Competitive Landscape It’s a “tough” world out there! A Perilous Business World for the “faint hearted”... –Investments required to compete on a global scale are enormous. –Consequences of failure are severe/ Important Elements of Success –Developing an effective strategy [game plan!] –Implementing that strategy [executing the plan!]

9. 9 Global economy Rapid technological change Competitive Landscape Strategic maneuvering among global and innovative combatants

10. 10 Competitive Landscape: Hypercompetition 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.

11. 11 Our Global Economy The Global Economy is … –Goods, people, skills, and ideas move freely across geographic borders. –Movement is relatively unfettered by artificial constraints. –Expansion into global arena complicates a firm’s competitive environment.

12. 12 The Global Economy (cont’d.) Globalization provides: –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.

13. 13 Country Competitiveness Rankings (with populations over 20 Million) Country20022003 United States12 Australia23 Canada32 Malaysia46 Germany54 Taiwan67 United Kingdom75 France89 Spain98 Thailand1010 Japan1111 China1212 Brazil130 China140 Korea1510 Country20022003 Colombia1620 Italy1714 South Africa1816 India190 India2017 Brazil2115 Philippines2218 Romania230 Mexico2419 Turkey2523 Russia2621 Poland2722 Indonesia2825 Argentina2926 Venezuela3024 SOURCE: From World Competitiveness Yearbook 2003, IMD, Switzerland. http://www.imd.ch.wcy.esummary, April. Reprinted by permission. Table 1.1

14. 14 Technology and Technological Changes Rate of change of technology and speed at which new technologies become available –Perpetual innovation—how 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.

15. 15 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.

16. 16 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

17. 17 Two Approaches to Above-Average Returns... Hitt’s I/O Model of strategic planning... The Resource-Based Model of strategic planning...

18. 18 Hitt’s I/O Model of Above-Average Returns The industry in which a firm competes has a stronger influence on the firm’s 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

19. 19 Four Assumptions of the I/O Model External environment imposes pressures and constraints that determine strategies leading to above- average returns. 12 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. 34 Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests (profit-maximizing.).

20. 20 I/O Model of Above-Average Returns 1.Strategy is 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?) External Environments General Environment

21. 21 The I/O Model of Above-Average Returns Adapted from Figure 1.2 The External Environment 1.Study the external environment, especially the industry environment. The general environmentThe general environment The industry environmentThe industry environment The competitor environmentThe competitor environment

22. 22 An Attractive Industry 2.Locate an attractive industry with a high potential for above- average returns. An industry whose structural characteristics suggest above-average returns.An industry whose structural characteristics suggest above-average returns. The External Environment The I/O Model of Above-Average Returns Adapted from Figure 1.2

23. 23 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 above- average returns in a particular industry.Selection of a strategy linked with above- average returns in a particular industry. The External Environment An Attractive Industry Strategy Formulation Adapted from Figure 1.2

24. 24 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.Assets and skills required to implement a chosen strategy. The External Environment An Attractive Industry Strategy Formulation Adapted from Figure 1.2

25. 25 Strategy Implementation The I/O Model of Above-Average Returns 5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy. Selection of strategic actions linked with effective implementation of the chosen strategy.Selection of strategic actions linked with effective implementation of the chosen strategy. The External Environment An Attractive Industry Strategy Formulation Assets and Skills Adapted from Figure 1.2

26. 26 Superior Returns The I/O Model of Above-Average Returns The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior returns: earning of above-average returns.Superior returns: earning of above-average returns. Adapted from Figure 1.2

27. 27 Michael Porter’s Five Forces Model of Competition An industry’s profitability results from interaction among: –Suppliers –Buyers –Competitive rivalry among firms currently in the industry –Product substitutes –Potential entrants to the industry

28. 28 Porter’s Five Forces Model of Competition (cont’d.) Firms earn above average returns by: –Producing standardized products or services. –Manufacturing differentiated products for which customers are willing to pay a price premium.

29. 29 The 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.

30. 30 Resource-Based Model of Above-Average Returns (cont’d.) 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.

31. 31 Resource-Based Model of Above-Average Returns (cont’d.) 1.Strategy is dictated by the firm’s unique resources and capabilities. 2.Find an environment in which to exploit these assets (where are the best opportunities?) Firm’s Resources

32. 32 Resources and Capabilities Resources –Inputs into a firm’s production process: Capital equipment Skills of individual employees Patents Finances Talented managers 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

33. 33 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 Resources 1.Identify the firm’s resources. Study its strengths and weaknesses compared with those of competitors. Inputs into a firm’s production processInputs into a firm’s production process

34. 34 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 Capability 2.Determine the firm’s capabilities. What do the capabilities allow the firm to do better than its competitors. Capacity of an integrated set of resources to integratively perform a task or activity.Capacity of an integrated set of resources to integratively perform a task or activity. Resources

35. 35 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 3.Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage. Ability of a firm to outperform its rivals.Ability of a firm to outperform its rivals. Competitive Advantage Capability Resources

36. 36 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 An Attractive Industry 4.Locate an attractive industry. An industry with opportunities that can be exploited by the firm’s resources and capabilities.An industry with opportunities that can be exploited by the firm’s resources and capabilities. Competitive Advantage Capability Resources

37. 37 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 Strategy Implementation 5. Select a strategy that best allow the firm to utilize its resources and capabilities relative to opportunities in the external environment. Strategic actions taken to earn above-average returns.Strategic actions taken to earn above-average returns. An Attractive Industry Competitive Advantage Capability Resources

38. 38 The Resource-Based Model of Above-Average Returns Adapted from Figure 1.3 Superior Returns Superior returns: earning of above-average returnsSuperior returns: earning of above-average returns Strategy Implementation An Attractive Industry Competitive Advantage Capability Resources

39. 39 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.

40. 40 Key Criteria of Resources and Capabilities [con’t.] 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.

41. 41 The all-important 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.

42. 42 How Resources and Capabilities Provide Competitive Advantage... The firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage. Valuable Allow the firm to exploit opportunities or neutralize threats in its external environment. Rare Possessed by few, if any, current and potential competitors. Costly to imitate When other firms cannot obtain them or must obtain them at a much higher cost. Nonsubstitutable

43. 43 Resources and Capabilities, Core Competencies, and Outcomes Core Competencies Competitive Advantage Value Creation Above Average Returns Valuable Rare Costly to Imitate Nonsubstitutable

44. 44 Strategic Intent Its internally focused. It requires the leveraging of a firm’s resources, capabilities and core competencies to accomplish the firm’s goals. It only exists when all employees and levels of a firm are committed to the pursuit of a specific, significant performance criterion.

45. 45 Strategic Mission Is externally focused. Is a statement of a firm’s unique purpose and the scope of its operations in product and market terms. –It establishes a firm’s individuality and is inspiring and relevant to all stakeholders. –It provides general descriptions of the firm’s intended products and its markets.

46. 46 Stakeholders Are all those individuals, groups and entities who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance. Stakeholder claims are enforced by their ability to withhold essential participation.

47. 47 The Three Stakeholder Groups Figure 1.4

48. 48 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.

49. 49 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 and their members –Want secure jobs and desirable working conditions.

50. 50 Organizational Stakeholders Employees [The “worker-bees!”] –Expect a dynamic, stimulating and rewarding work environment. –Are satisfied by a company that is growing and actively developing their skills.

51. 51 Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firm  How to divide returns to keep stakeholders involved? Capital Market Product Market Organizational  How to increase returns so everyone has more to share?

52. 52 Strategic Leaders People in the enterprise who are 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.

53. 53 Organizational Culture The complex set of –Ideologies –Symbols –Core values that are shared throughout the firm, that influence how the firm conducts business.

54. 54 Mapping an Industry’s Profit Pools Define the pool’s boundaries. Estimate the pool’s overall size. Estimate the size of the value-chain activity in the pool. Reconcile the calculations.

55. 55 The Strategic Management Process 1.Study the external and internal environments. 2.Identify marketplace opportunities and threats. 3.Determine how to use core competencies. 4.Use strategic intent to leverage resources, capabilities and core competencies and win competitive battles. 5.Integrate formulation and implementation of strategies. 6.Seek feedback to improve strategies.