Competing For Advantage

Competing For Advantage
Part I – Strategic Thinking Chapter 1 – Introduction to Strategic Management

Strategy is “Strategos”
Objective – define and attainable Offensive – seize and exploit the opportunity Unity of command – directed in a single direction Mass – gather and direct sufficient resources Economy of force – invest resources efficiently Maneuver – create disadvantages for rivals Surprise – attack in unexpected ways Security – don’t let rivals gain the upper hand Simplicity – use clear, concise, uncomplicated plans From

Why do we need strategy? The reasons why firms succeed and fail is perhaps the central question in strategy

How are you going to get there?
Strategy defines…. Who are you? Where are you going? How are you going to get there? Alice: Which way should I go? Cat: That depends on where you are going. Alice: I don’t know where I am going. Cat: Then it doesn’t matter which way you go. Lewis Carroll, Though the Looking-Glass

Organizations should make two types of decisions
1) Strategic decisions 2) Strategically driven decisions Company A Company B Company C

Strategic Management Defined
decisions and actions required for the firm to create value and earn returns higher than those of competitors formulation and implementation of plans designed to achieve objectives unifying theme that gives coherence and direction to organizational/individual decisions game plan management has for positioning the company in its chosen market, competing successfully, satisfying customers, and achieving good business performance integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage What is a competitive advantage?

Competitive Advantage
When a firm implements a strategy that rivals can’t duplicate, or find it too expensive to do try to imitate

Competitive advantages become sustainable competitive advantages when rivals stop trying to replicate

What is the nature of today’s competitive landscape?

Changes in the Competitive Landscape
Hypercompetition results from the dynamics of strategic maneuvering among global and innovative combatants. It is a condition of rapidly escalating competition based on price-quality positioning, competition to create new know-how and establish first-mover advantage, and competition to protect or invade established product or geographic markets. In a hypercompetitive market, firms often aggressively challenge their competitors in the hopes of improving their competitive position and ultimately their performance.

Globalization of Markets and Industries
Reduced restraints on business transactions across national boundaries (such as tariffs) Difficulty in recognizing or determining boundaries of an industry (for example, the blur among television, telephone, and computer service providers) Greatly increased range of opportunities for acquiring resources (such as equipment, capital, raw material, or even employees) and for selling goods and services The global economy has significantly expanded and complicated the competitive environment for companies. (Slides 4 and 5 outline some of the ways in which the global economy has done this.)

Technological Trends Increasing rate of technological change and diffusion, and increasing speed at which technologies become available and are used Dramatic information technology changes of recent years, and different ways that information is being used Increasing knowledge intensity, the basis for technology and its application Three types of technological trends have impacted competition in today's business environment. Illustrations of each: Increased rate - Rapid introduction of Internet access into American homes compared to the time it took to introduce televisions or telephones into homes a few decades ago Information technology – Examples include personal computers, cell phones, artificial intelligence, virtual reality, and massive databases Knowledge intensity - Information, intelligence, and expertise are being acknowledged as corporate assets (Technological trends are discussed more fully in Chapter 6.)

The Competitive Field Hypercompetition resulting from the dynamics of strategic maneuvering among global and innovative competitors Increased performance standards in many areas, including quality, cost, productivity, product introduction time, and operational efficiency Continuous improvement in all areas is necessary for continued survival (Continued from slide 4.)

New Realities in the Competitive Landscape
Quick competitive information needs Shorter product life cycles Indistinguishable products Rapid technology replacement Availability of inexpensive information New business culture from electronic-business models Continuous learning is necessary How have these trends affected today's business environment? It is important for firms to quickly gather information about their competitors' research and development and subsequent product decisions Product life cycles are shorter Products can become somewhat indistinguishable New technologies are rapidly replacing existing technologies Access to significant quantities of relatively inexpensive information is now possible The pervasive influence of electronic-business models is creating a new business culture Continuous learning is necessary to provide businesses with the skills needed to adapt to changes in the environment

Disruptive Technologies
Value of existing technologies is destroyed Creative destruction process replaces existing technologies with new ones New markets are created Developing "disruptive technologies" has an impact on the marketplace: This type of innovation destroys the value of existing technologies This creative destruction process replaces existing technologies with new ones to create new markets

New Sources of Competitive Advantage
Speed to market Access and use of information Rapid diffusion of new, transformed knowledge throughout the company Innovation Integration of new conditions into organization mind set Global standard achievement Strategic flexibility New sources of competitive advantage have resulted from these technological and global trends: Speed to market The ability to effectively and efficiently access and use information The ability to capture intelligence, transform it into usable knowledge, and diffuse it rapidly throughout the company Innovation Effective integration of new conditions into the mindset of an organization Meeting and exceeding global standards Strategic flexibility

What is Strategy? Strategy is not doing similar activities better than your rivals – that’s operational effectiveness continual improvement not a sustainable advantage industry-wide cost reductions do not lead to increased profitability examples: PCs, automobiles, airlines

What is Strategy? 1) Strategy is performing different activities or performing similar activities in a different way Strategy is about positioning a) Variety-based positioning offering a unique choice of goods/services - Chic-fil-a, GameStop b) Needs-based positioning serving most/all of a particular group of customers’ needs - Babies R Us c) Access-based positioning serving a set of customers that require unique access – Kinkos, Movie Gallery, Superette

What is Strategy? Tradeoffs arise from
2) Strategy is about choosing a position which requires tradeoffs, choosing what not to do without tradeoffs, all firms would imitate Tradeoffs arise from inconsistent image/reputation different activities, products, equipment, employees, skills, systems, machines priorities, internal coordination, and control

What is Strategy? 3) Strategy is about combining activities as advantages come from fit and reinforcing Operational effectiveness is about excellence in individual activities Fit/integration increases sustainability by reducing imitability

What is Strategy? 4) The desire to grow is most threatening to an effective strategy Blurs uniqueness Creates compromises Reduces fit Erodes original advantages

Three Perspectives on Value Creation
Industrial/Organization (I/O) Economic Model Resource-Based View Stakeholder Approach Three Perspectives on Value Creation - Three strategic management models are used to organize the critical concepts and activities central to the strategic management process and to creating value (or above-average returns) for the firm.

The Industrial/Organization (I/O) Model of Above-Average Returns
Basic Premise of the I/O Model – to explain the dominant influence of the external environment on a firm's strategic actions and performance The Industrial/Organization (I/O) Model of Above-Average Returns - This model for strategy development predicts value creation when strategy selection is dictated by the characteristics of the general, industry, and competitive environments. Four underlying assumptions to the model are identified and the Porter's Five-Forces Model is introduced. (Industry characteristics further developed in Chapter 3.)

Underlying Assumptions That the external environment imposes pressures and constraints that determine the strategies resulting in above-average returns That most firms competing within a particular industry or industry segment control similar strategically relevant resources and pursue similar strategies in light of those resources There are four underlying assumptions to the I/O model. They are presented on slides 18 and 19. (See Additional Notes at the end of the slide 19.)

Underlying Assumptions (cont.) That resources for implementing strategies are highly mobile across firms, and that due to this mobility any resource differences between firms will be short lived There are four underlying assumptions to the I/O model. They are presented on slides 18 and 19. Additional Discussion Notes for the I/O Model - These notes include additional materials that cover the assumptions underlying the model. Two examples of the McDonald’s and Starbucks organizations and their strategies are provided to illustrate the model. Four Assumptions of the I/O Model Both Crock and Schultz identified the strategy that allowed their companies to achieve high profits—McDonald’s through the “assembly line” of its burgers and Starbucks with product marketing that created ambiance and consistency, value perception that allowed it to charge higher premiums for its coffee. Both McDonald’s and Starbucks then spent time and capital to acquire and develop the skills needed to implement the business strategy. Crock became a business partner of the McDonald brothers and sold franchise agreements for them. Schultz took a position in the marketing department of Starbucks. Each later purchased the firm and used what they had learned to rapidly expand the company. Crock was able to use quality, consistency, rapid assembly system, and drive-thru concepts of McDonald’s to continue to realize high profits. Schultz was able to use the Starbucks image, ambiance concept, and marketing strengths 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 Starbucks was a better concept capable of “going global” that Schultz sold his original coffeehouse chain and purchased Starbucks. I/O Model: McDonald’s and Starbucks Respectively, in both cases the CEOs Ray Crock and Howard Schultz were examining the industry in which they worked. Crock was a sales rep for a firm that built malted milkshake machines. Schultz was a sales rep for a company that made home espresso machine accessories. Both noticed that one particular customer was purchasing a large volume of these machines. They made trips to the locations of these stores and noticed that each was in an emerging industry that had high-growth potential and higher-than-average profit margins. McDonald’s is in fast-food and drive-thru restaurants, and Starbucks is in specialty coffee retail.

The Industrial/ Organization (I/O) Model of Above-Average Returns
The I/O model suggests that above-average returns are earned when firms implement the strategy dictated by the characteristics of the general, industry, and competitor environments. Companies that develop or acquire the internal skills needed to implement strategies required by the external environment are likely to succeed, while those that do not are likely to fail. Hence, this model suggests that external characteristics rather than the firm’s unique internal resources and capabilities primarily determine returns. Research findings support the I/O model. They show that approximately 20 percent of a firm’s profitability is determined by the industry or industries in which it chooses to operate. This research also shows, however, that 36 percent of the variance in profitability could be attributed to the firm’s characteristics and actions. The results of the research suggest that both the environment and the firm’s characteristics play a role in determining the firm’s profitability. Thus, there is likely a reciprocal relationship between the environment and the firm’s strategy that affects the firm’s performance. As the research suggests, successful competition mandates that a firm build a unique set of resources and capabilities within the industry or industries in which the firm competes. Study the external environment, especially the industry environment. Economies of scale Barriers to entry Diversification Product differentiation Degree of concentration in the industry Locate an attractive industry with a high potential for above-average returns. One whose characteristics suggest above-average returns Identify the strategy called for by the attractive industry to earn above-average returns. Strategy formulation: selection of a strategy linked with above-average returns in a particular industry Develop or acquire assets and skills needed to implement the strategy. Assets and skills: those assets and skills required to implement chosen strategy Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy. Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy. Result - Superior returns: earning of above-average returns.

Michael Porter’s Five-Forces Model Reinforces the importance of economic theory Offers an analytical approach that was previously lacking in the field of strategy Describes the forces that determine the nature/level of competition and profit potential in an industry Suggests how an organization can use the analysis to establish a competitive advantage Michael Porter’s Five-Forces Model makes four contributions to the I/O Model: It reinforces the importance of economic theory It offers an analytical approach that was previously lacking in the field of strategy It describes the forces that determine the nature/level of competition and profit potential in an industry It suggests how an organization can use the analysis to establish a competitive advantage

Limitations Only two strategies are suggested: Cost Leadership Differentiation Internal resources and capabilities are not considered There are two major limitations to the I/O Model: At its basic level, the model only suggests two strategies for establishing a defensible competitive position (cost-leadership and differentiation). The model does not address the need to develop or acquire unique internal resources and capabilities to aid in success. Research shows that both the environment and internal conditions play a role in determining a firm's profitability.

The Resource-Based Model of Above-Average Returns
Basic Premise of the Resource-Based Model – to propose that a firm's unique resources and capabilities should define its strategic actions and be used effectively to exploit opportunities in the external environment to ensure successful performance

Underlying Assumptions That the internal environment imposes pressures and constraints that determine the strategies resulting in above-average returns That most firms competing within a particular industry or industry segment control unique strategically relevant resources and pursue dissimilar strategies in light of those resources There are four underlying assumptions to the I/O model. They are presented on slides 18 and 19. (See Additional Notes at the end of the slide 19.)

Underlying Assumptions (cont.) That resources for implementing strategies are not highly mobile across firms, and that due to this immobility any resource differences between firms can be sustainable There are four underlying assumptions to the I/O model. They are presented on slides 18 and 19. Additional Discussion Notes for the I/O Model - These notes include additional materials that cover the assumptions underlying the model. Two examples of the McDonald’s and Starbucks organizations and their strategies are provided to illustrate the model. Four Assumptions of the I/O Model Both Crock and Schultz identified the strategy that allowed their companies to achieve high profits—McDonald’s through the “assembly line” of its burgers and Starbucks with product marketing that created ambiance and consistency, value perception that allowed it to charge higher premiums for its coffee. Both McDonald’s and Starbucks then spent time and capital to acquire and develop the skills needed to implement the business strategy. Crock became a business partner of the McDonald brothers and sold franchise agreements for them. Schultz took a position in the marketing department of Starbucks. Each later purchased the firm and used what they had learned to rapidly expand the company. Crock was able to use quality, consistency, rapid assembly system, and drive-thru concepts of McDonald’s to continue to realize high profits. Schultz was able to use the Starbucks image, ambiance concept, and marketing strengths 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 Starbucks was a better concept capable of “going global” that Schultz sold his original coffeehouse chain and purchased Starbucks. I/O Model: McDonald’s and Starbucks Respectively, in both cases the CEOs Ray Crock and Howard Schultz were examining the industry in which they worked. Crock was a sales rep for a firm that built malted milkshake machines. Schultz was a sales rep for a company that made home espresso machine accessories. Both noticed that one particular customer was purchasing a large volume of these machines. They made trips to the locations of these stores and noticed that each was in an emerging industry that had high-growth potential and higher-than-average profit margins. McDonald’s is in fast-food and drive-thru restaurants, and Starbucks is in specialty coffee retail.

Figure 1.3 shows the resource-based model of superior returns. Instead of focusing on the accumulation of resources necessary to successfully use the strategy dictated by conditions and constraints in the external environment (I/O model), the resource-based view suggests that a firm’s unique resources and capabilities provide the basis for a strategy. The strategy chosen should allow the firm to effectively use its competitive advantages to exploit opportunities in its external environment. Identify the firm’s resources – strengths and weaknesses compared with competitors. Resources: inputs into a firm’s production process Determine the firm’s capabilities – what it can do better than its competitors. Capability: capacity of an integrated set of resources to integratively perform task or activity Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage. Competitive advantage: ability of a firm to outperform its rivals Locate an attractive industry. Attractive industry: an industry with opportunities that can be exploited by the firm’s resources and capabilities Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment. Strategy formulation and implementation: strategic actions taken to earn above-average returns Results – Superior returns: earning of above-average returns. Additional Discussion Notes for the Resource-Based Model - These notes include additional material that discusses two axiomatic assumptions. First, resources are distributed heterogeneously across firms, and second, these resources cannot be transferred between firms without cost. Research references are included and extensive discussion here may help you present this concept. There is also discussion regarding “inventions” as an example of resources that are valuable, rare, hard to imitate, and not substitutable. Resource-based model: Patents and Inventions Resource-based view (RBV) of the firm is hedged on two axiomatic assumptions. First, resources are distributed heterogeneously across firms, and second, these resources cannot be transferred between firms without cost. These axioms lend themselves to two additional tenets (cf., Barney, 1991): (a) Resources that simultaneously enhance a firm’s market effectiveness (valuable) and are not widely dispersed (rare) can produce competitive advantage; and (b) when such resources are concurrently expensive to imitate (inimitable) and costly to substitute (nonsubstitutable), the competitive advantage is sustainable. Thus, both value and rarity are necessary before inimitability and nonsubstitutability might yield a sustainable competitive advantage (Priem & Butler, 2001). Despite its face validity and rapid diffusion throughout the management literature, there have only been limited empirical tests of RBV’s tenets (cf., Priem & Butler, 2001). To echo Miller and Shamsie (1996, p. 519), “the concept of resources remains an amorphous one that is rarely operationally defined or tested for its performance implications in different competitive environments.” Many managers use RBV’s terms with little specificity or attention to causal relationships. Researchers have identified several types of valuable and 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 Guanxicomplex networks (Tsang, 1998). The degree to which RBV is likely to help managers depends on the extent to which it can be used to achieve competitive advantage. Hence, recently, Markman and his colleagues have attempted to clarify three basic questions: (1) Can a single resource be simultaneously valuable, rare, inimitable, and nonsubstitutable? (2) Can an inimitable and nonsubstitutable resource be measured? And (3) To what extent is an inimitable and nonsubstitutable resource 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 invention could 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 questions are “yes” as well. That is, controlling for assets, sales, and investment in R&D, they found that a patent’s quality and scope are significantly related to competitive advantage as captured by new products and, to some extent, to profitability. Four 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 substitutable is also difficult to assess, manipulate, or deploy, and therefore difficult to exploit. Their analytical assessment spurred an important debate regarding RBV’s practical utility. For example, tacit knowledge, organizational learning, workflow, time, interorganizational ties, communications, and human interactions might be seen as hard to imitate and nonsubstitutable resources, but such resources are neither necessarily rare nor inevitably valuable. Thus, while many “things” might be classified as resources, intangibles are less amenable to managerial manipulation, rendering their associations with competitive advantage tenuous. For example, tacit knowledge is frequently conceptualized as a source of competitive advantage, yet we don’t know how (and at what rate) managers create and use 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 remains weak as long as we fail to explicitly parameterize and measure the extent to which certain resources are valuable, rare, inimitable, and nonsubstitutable.

The Stakeholder Model of Responsible Firm Behavior and Firm Performance
Basic Premise of the Stakeholder Model – to propose that a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors

The Three Stakeholder Groups
There are three stakeholder groups of primary interests to a firm: Capital Market Stakeholders – major suppliers of capital Banks Private Lenders Venture Capitalists Product Market Stakeholders Primary customers Suppliers Host Communities Unions Organizational Stakeholders Employees Managers Nonmanagers

Secondary Stakeholders
Government entities and administrators Activists and advocacy groups Religious organizations Other nongovernmental organizations There is a second tier of stakeholders (secondary to primary stakeholder groups) that should not be ignored.

The Stakeholder Model of Responsible Firm Behavior and Firm Performance
Research supports the idea that firms that effectively manage stakeholder relationships outperform those that do not. This research implies that stakeholder relationships can be managed in such a way as to create competitive advantage (see Figure 1.5). The firm: Must maintain performance at an adequate level to retain the participation of key stakeholders Must determine how to divide the returns to keep stakeholders involved Must determine how to increase returns so everyone has more to share

Ways Stakeholder Relationships Contribute to Competitive Advantage
Timely and high quality strategic intelligence is gathered to improve a firm's strategic decisions A trustworthy reputation draws valuable customers, suppliers, and business partners to acquire or develop competitive resources A trustworthy reputation attracts investors to offer financial resources Firms that have fair and respectful treatment of employee relationships attract high-quality human resources Stakeholder relationships based on trust and mutual satisfaction of goals contribute to building a competitive advantage and improved business performance. Competitive advantage may come from a variety of sources. A firm that has excellent stakeholder relationships based on trust and mutual satisfaction of goals is more likely to obtain knowledge from them that can be used to make better strategic decisions. A firm’s ability to create value and earn high returns is compromised when strategic leaders fail to respond appropriately and quickly to changes in the complex global competitive environment. Also, strategic intelligence, the information firms collect from their network of stakeholders, can be used to help a firm deal with diverse and cognitively complex competitive situations. Evidence suggests that trust can be a source of competitive advantage, thereby supporting an organizational commitment to treat stakeholders fairly and with respect. Firms with trustworthy reputations draw customers, suppliers, and business partners to them. This can enhance firm performance by increasing the number of attractive business transactions from which a firm can select. Consequently, the firm may find it easier to acquire or develop competitive resources. For instance, investors may be more likely to buy shares in a company with a trustworthy reputation. In addition, workers may be attracted to employers who are known to treat their employees well. In addition to the resource advantages, the transaction costs associated with making and enforcing agreements are reduced because there is less need for elaborate contractual safeguards and contingencies. Of course, excellent stakeholder relationships also can enhance implementation of strategies because people are more committed to a course of action when they believe they have had some influence on the decision to pursue it, even if it is not exactly what they wanted the firm to do. Responsible behavior with regard to stakeholders such as government regulators, consumers, and employees can lead to intangible assets that buffer and protect a firm from negative actions such as adverse regulation, legal suits and penalties, consumer retaliation, strikes, walkouts, and bad press.

Ways Stakeholder Relationships Contribute to Competitive Advantage
Transactions costs associated with making and enforcing agreements can be reduced Implementation of strategies can be enhanced by improving commitment from stakeholders who are involved with strategic decisions Responsible behavior can protect a firm from the expense and risk associated with negative actions (such as adverse regulations, legal suits and penalties, consumer dissatisfaction, employee work outages, or bad press) Stakeholder relationships based on trust and mutual satisfaction of goals contribute to building a competitive advantage and improved business performance. Competitive advantage may come from a variety of sources. A firm that has excellent stakeholder relationships based on trust and mutual satisfaction of goals is more likely to obtain knowledge from them that can be used to make better strategic decisions. A firm’s ability to create value and earn high returns is compromised when strategic leaders fail to respond appropriately and quickly to changes in the complex global competitive environment. Also, strategic intelligence, the information firms collect from their network of stakeholders, can be used to help a firm deal with diverse and cognitively complex competitive situations. Evidence suggests that trust can be a source of competitive advantage, thereby supporting an organizational commitment to treat stakeholders fairly and with respect. Firms with trustworthy reputations draw customers, suppliers, and business partners to them. This can enhance firm performance by increasing the number of attractive business transactions from which a firm can select. Consequently, the firm may find it easier to acquire or develop competitive resources. For instance, investors may be more likely to buy shares in a company with a trustworthy reputation. In addition, workers may be attracted to employers who are known to treat their employees well. In addition to the resource advantages, the transaction costs associated with making and enforcing agreements are reduced because there is less need for elaborate contractual safeguards and contingencies. Of course, excellent stakeholder relationships also can enhance implementation of strategies because people are more committed to a course of action when they believe they have had some influence on the decision to pursue it, even if it is not exactly what they wanted the firm to do. Responsible behavior with regard to stakeholders such as government regulators, consumers, and employees can lead to intangible assets that buffer and protect a firm from negative actions such as adverse regulation, legal suits and penalties, consumer retaliation, strikes, walkouts, and bad press.

It’s all about prioritizing…

Competing For Advantage

Similar presentations

Presentation on theme: "Competing For Advantage"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Competing For Advantage

Similar presentations

Presentation on theme: "Competing For Advantage"— Presentation transcript:

Similar presentations

About project

Feedback