Seminar in Business Policy and Strategy Day One Lecture Outline Class Roster & Familiarity Probe Instructor Introduction WSJ and other Periodical Subscriptions Introduce Books Winning Fortune Magazine The World is Flat Wall Street Journal Class Web Page and Syllabus Introduce Capstone Simulation Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy Definitions Strategy – an integrated set of commitments and actions designed to exploit core competencies and gain a competitive advantage Strategic Management - the process of intentionally organizing a full set of commitments, decisions and actions to achieve competitive advantage and superior returns I/O Model of Strategic Management Resource Based Model of Strategic Management NEXT Fall, 2007 St. Norbert College Seminar in Policy and Strategy

I/O Model of Above-Average Returns I/O = Industry/Organizational 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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

I/O Model of Strategic Management Study External Environment Identify an Attractive Industry Formulate Appropriate Strategies Acquire necessary Assets and Skills to Implement Strategies Implement Strategies Above Average Returns Fall, 2007 St. Norbert College Seminar in Policy and Strategy

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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Resource Based Model of Strategic Management Identify Assets and Skills Determine Capabilities Shape Competitive Advantages Identify an Attractive Industry Formulate and Implement Appropriate Strategies Above Average Returns Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Definitions Continued 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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy 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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Definitions Continued Strategic Mission and Vision See Chapter One, WINNING Externally focused Mission describes a firm’s unique purpose and the scope of its operations in product and market terms Establishes a firm’s individuality and is inspiring and relevant to all stakeholders Provides general descriptions of the firm’s intended products and its markets Vision describes some milestone that the firm will reach in the future - an aspiration Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Definitions Continued Strategic Intent Internally focused The leveraging of a firm’s resources, capabilities and core competencies to accomplish the firm’s goals Exists when all employees and levels of a firm are committed to the pursuit of a specific, significant performance criterion Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Definitions Continued Resources – inputs to the firm’s production process (i.e. – capital, individual skills, patents, managers, etc.) Tangible and Intangible Capability – capacity for a set of resources to perform a task or activity Stakeholders – people who are affected by a firms performance and who have a claim on the firms performance Fall, 2007 St. Norbert College Seminar in Policy and Strategy

The Three Stakeholder Groups Fall, 2007 St. Norbert College Seminar in Policy and Strategy

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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Organizational Stakeholders Employees Expect a dynamic, stimulating and rewarding work environment Are satisfied by a company that is growing and actively developing their skills Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Stakeholder Involvement Two issues affect the extent of stakeholder involvement in the firm How to divide returns among stakeholders? Capital Market Organizational How to increase returns so everyone has more to share? Product Market Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy SWOT Analysis Strengths, Weaknesses (internal) Opportunities and Threats (External Assessing the internal Strengths and Weaknesses and matching them with external Opportunities and Threat Fall, 2007 St. Norbert College Seminar in Policy and Strategy

The Context of Internal Analysis Effective analysis of a firm’s internal resources and capabilities (learning what the firm can do) requires: Fostering an organizational setting in which experimentation and learning are expected and promoted Using a global mind-set Thinking of the firm as a bundle of heterogeneous resources and capabilities that can be used to create an exclusive market position Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Resources and Capabilities Inputs into a firm’s production process Capital equipment (T) Skills of individual employees (I) Patents (T) Finances (T) Talented managers (I) 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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Resources, Capabilities and Core Competencies Tangible resources Financial resources Physical resources Technological resources Organizational resources Intangible resources Human resources innovation resources Reputation resources Resources Are a firm’s assets, including people and the value of its brand name Represent inputs into a firm’s production process, such as: Capital equipment Skills of employees Brand names Financial resources Talented managers Resources Are the source of a firm’s capabilities Are broad in scope Cover a spectrum of individual, social and organizational phenomena Alone, do not yield a competitive advantage Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy Tangible Resources Financial Resources • The firm’s borrowing capacity • The firm’s ability to generate internal funds Organizational Resources • The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems Physical Resources • Sophistication and location of a firm’s plant and equipment • Access to raw materials Technological Resources • Stock of technology, such as patents, trade-marks, copyrights, and trade secrets Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy Intangible Resources Human Resources • Knowledge • Trust • Managerial capabilities • Organizational routines Innovation Resources • Ideas • Scientific capabilities • Capacity to innovate Reputational Resources • Reputation with customers • Brand name • Perceptions of product quality, durability, and reliability • Reputation with suppliers • For efficient, effective, supportive, and mutually beneficial interactions and relationships Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Resources, Capabilities and Core Competencies The foundation of many capabilities lies in: The unique skills and knowledge of a firm’s employees The functional expertise of those employees Capabilities are often developed in specific functional areas or as part of a functional area Capabilities Are the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired end state Emerge over time through complex interactions among tangible and intangible resources Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Resources, Capabilities and Core Competencies Activities that a firm performs especially well compared to competitors Activities through which the firm adds unique value to its goods or services over a long period of time Core Competencies Resources and capabilities that serve as a source of a firm’s competitive advantage: Distinguish a company competitively and reflect its personality Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy Core Competencies There are four key criteria of resources and capabilities that, when met, become core competencies Managerial competencies are especially important Core competencies serve as a source of competitive advantage (VRCN) Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Four Key Criteria of Resources and Capabilities (VRCN) 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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Four Key Criteria of Resources and Capabilities (VRCN) 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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Building Sustainable Competitive Advantage Four Criteria of Sustainable Competitive Advantage Valuable Rare Costly to imitate Nonsubstituable Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Resources and Capabilities, Core Competencies, and Outcomes Valuable Core Competencies Rare Competitive Advantage Costly to Imitate Value Creation Nonsubstitutable Above Average Returns Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Competitive Advantage Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively Acquired Bundled Leveraged Over time, the benefits of any value-creating strategy can be duplicated by competitors Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Competitive Advantage (cont’d) Sustainability of a competitive advantage is a function of The rate of core competence obsolescence due to environmental changes The availability of substitutes for the core competence The difficulty competitors have in duplicating or imitating the core competence Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Creating Competitive Advantage Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy Creating Value By exploiting their core competencies or competitive advantages, firms create value Value is measured by A product’s performance characteristics The product’s attributes for which customers are willing to pay Defined as “What the customer wants, When the customer wants it, Where the customer wants it, at a Price the customer is willing to pay” Fall, 2007 St. Norbert College Seminar in Policy and Strategy

The Challenge of Internal Analysis Strategic decisions in terms of the firm’s resources, capabilities, and core competencies Are non-routine Have ethical implications Significantly influence the firm’s ability to earn above-average returns Fall, 2007 St. Norbert College Seminar in Policy and Strategy

The Challenge of Internal Analysis (cont’d) To develop and use core competencies, managers must have Courage Self-confidence Integrity The capacity to deal with uncertainty and complexity A willingness to hold people (and themselves) accountable for their work Fall, 2007 St. Norbert College Seminar in Policy and Strategy

The Context of External Analysis Effective analysis of a firm’s External Environment (learning what the firm might be able to do) requires assessing the Characteristics of the External Environmental Components General Environment Industry Environment Competitor Environment Fall, 2007 St. Norbert College Seminar in Policy and Strategy

The External Environment Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy General Environment Dimensions in the broader society that influence and industry and the firms within it Economic Sociocultural Global Technological Political/legal Demographic Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Opportunities and Threats Opportunity A condition in the general environment that if exploited, helps a company achieve strategic competitiveness Threat A condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy Industry Environment Industry Defined A group of firms producing products that are close substitutes Firms that influence one another Includes a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Industry Environment Porter’s Five-Forces Model Fall, 2007 St. Norbert College Seminar in Policy and Strategy

The Five Forces of Competition Model Fall, 2007 St. Norbert College Seminar in Policy and Strategy

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 Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Interpreting Industry Analyses Low entry barriers Suppliers and buyers have strong positions Unattractive Industry Strong threats from substitute products Intense rivalry among competitors Low profit potential Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Interpreting Industry Analyses High entry barriers Suppliers and buyers have weak positions Attractive Industry Few threats from substitute products Moderate rivalry among competitors High profit potential Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Competitor Environment All of the companies that the firm competes against. Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Competitor Analysis Components Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Seminar in Policy and Strategy Outsourcing The purchase of a value-creating activity from an external supplier Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities By forming and emphasizing fewer capabilities A firm can concentrate on those areas in which it can create value Specialty suppliers can perform outsourced capabilities more efficiently Support activities: Provide the support necessary for the primary activities to take place Procurement - Activities completed to purchase the inputs needed to produce a firm’s products (raw materials and supplies, machines, laboratory equipment, etc.) Technological development - Activities completed to improve a firm’s product and the processes used to manufacture it (process equipment, basic research, product design, etc) Human resource management - Activities involved with recruiting, hiring, training, developing, and compensating all personnel Firm infrastructure - Activities that support the work of the entire value chain (general management, planning, finance, accounting, legal, government relations, etc.) Effectively and consistently identify external opportunities and threats Identify resources and capabilities Support core competencies Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent or inferior Value chain - Shows how a product moves from raw-material stage to the final customer, To be a source of competitive advantage, a resource or capability must allow the firm:To perform an activity in a manner that is superior to the way competitors perform it, or To perform a value-creating activity that competitors cannot complete Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Strategic Rationales for Outsourcing Improve business focus Lets a company focus on broader business issues by having outside experts handle various operational details Provide access to world-class capabilities The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications See next Note Page for ways to best invoke outsourcing Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Strategic Rationales for Outsourcing Accelerate business re-engineering benefits Achieves re-engineering benefits more quickly by having outsiders—who have already achieved world-class standards—take over process Sharing risks Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Frees resources for other purposes Redirects efforts from non-core activities toward those that serve customers more effectively Greatest value - Outsource only to firms possessing a core competence in terms of performing the primary or supporting the outsourced activity Evaluating resources and capabilities - Do not outsource activities in which the firm itself can create and capture value Environmental threats and ongoing tasks - Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks Nonstrategic team of resources - Do not outsource capabilities that are critical to the firm’s success, even though the capabilities are not actual sources of competitive advantage Firm’s knowledge base - Do not outsource activities that stimulate the development of new capabilities and competencies Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Outsourcing vs. Offshoring Outsourcing - the process of contracting with another organization to accomplish a non-critical responsibility more efficiently for a firm, either domestically or overseas Payroll, Distribution, Fabrication Offshoring - the process of outsourcing to firms in foreign countries Generally involves the competitive advantage of exploiting cheaper labor In the U. S., 90% of jobs outsourced go to other domestic organizations, only 10% are sent off shore Fall, 2007 St. Norbert College Seminar in Policy and Strategy

Strategic Management Process Review the QuickMBA Discussion Study the external and internal environments Identify marketplace opportunities and threats Identify organizational resources and capabilities Develop core competencies from the resources and capabilities Use strategic intent to leverage resources, capabilities and core competencies into competitive advantages Integrate formulation and implementation of strategies Seek feedback to improve strategies Fall, 2007 St. Norbert College Seminar in Policy and Strategy