1. The Strategic Management Process
Chapter 1
Introduction to
Strategic Management
Chapter 2
Strategic Leadership
Strategic
Thinking
Chapter 3
The External
Environment
Chapter 4
The Internal
Organization
Strategic Intent
Strategic Mission
Strategic
Analysis
Chapter 5
Business-Level
Strategy
Chapter 6
Competitive Rivalry and
Competitive Dynamics
Chapter 7
Corporate-Level Strategy
Creating
Competitive
Advantage
Chapter 8
Acquisition and
Restructuring Strategies
Chapter 9
International Strategy
Chapter 10
Cooperative Strategy
Monitoring
And Creating
Entrepreneurial
Opportunities
Chapter 11
Corporate Governance
Chapter 12
Strategic Entrepreneurship

2. Introduction to Strategic Management
Chapter 1
Introduction to Strategic Management
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
Note to Instructors
We have included extra discussion notes for the I/O Model of Above-Average Returns. These
notes include additional materials that cover McDonalds and Starbucks and their strategies. These
notes are spread over the first few lecture notes pages where the model is first presented.
We have also included extra discussion notes for the Resource-Based Model of Above-Average
Returns. 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
a resource that is valuable, rare, hard to imitate and not substitutable. The notes are spread over the
first few lecture notes pages, beginning where the model is first presented.
©2004 by South-Western/Thomson Learning

3. Determinants of Firm Respectability
Strong and well-thought-out strategy
2. Maximize customer satisfaction and
loyalty
3. Business leadership
4. Quality products and services
5. Strong and consistent profits

4. 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 returns
Value Creation
What is achieved when a firm successfully formulates and implements a strategy that other companies are unable to duplicate or find too costly to imitate.

5. The Firm and Its Stakeholders
The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders
Groups who are affected by a firm’s performance and who have claims on its wealth
THE FIRM

6. The Firm and Its Stakeholders
Capital Market Stakeholders
Shareholders
Major suppliers of capital
Banks
Private lenders
Venture capitalists

7. Capital Market Stakeholders Product Market Stakeholders
The Firm and Its Stakeholders
Stakeholders
Capital Market Stakeholders
Product Market Stakeholders
Primary customers
Suppliers
Host communities
Unions

8. The Firm and Its Stakeholders
Capital Market Stakeholders
Product Market Stakeholders
Organizational Stakeholders
Employees
Managers
Nonmanagers

9. Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm
Capital Market
Organizational 1
How do you divide the returns to keep stakeholders involved?
Product Market

10. Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm
Capital Market
Organizational 2
How do you increase the returns so everyone has more to share?
Product Market

11. Competitive Landscape
Goods, services, people, skills, and ideas move freely across geographic borders
Emergence of global economy
Spread of economic innovations around the world
Hypercompetitive environments
Political and cultural adjustments are required
Fundamental nature of competition is changing

12. Competitive Landscape
Increasing rate of technological change and diffusion
Emergence of global economy
Rapid technological change
The information age
Increasing knowledge intensity
Hypercompetitive environments
Fundamental nature of competition is changing

13. Strategic Flexibility
A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment
Andrew Grove, Intel’s former CEO:
“Only paranoid companies survive and succeed.”

14. I/O Model of Above-Average Returns
1. External Environments
General
Environment
Global
Technological
Economic
Sociocultural
Political/Legal
Demographic
1. 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 Environment
I/O Model: McDonalds 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 there was a customer that 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. McDonalds is in fast-food and drive-thru restaurants and Starbucks
is in specialty coffee retail.
Competitor Environment

15. 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 returns
2. 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 resources
Four Assumptions of the I/O Model
Both Crock and Schultz identified the strategy that allowed their companies to achieve
high profits: McDonalds through the “assembly line” of their burgers  and Starbucks with
product marketing that created ambiance and consistency, a value perception that allowed
them to charge high premium for their coffee.

16. Four Assumptions of the I/O Model
3. Resources used to implement strategies are highly mobile across firms
4. Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors
Four Assumptions of the I/O Model (cont.)
Both McDonalds 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 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 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.

17. Industrial Organization Model
I/O Model of Above-Average Returns
Industrial Organization Model
1. Study the external environment, especially the industry environment
economies of scale
barriers to market entry
degree of concentration of firms in the industry
etc.
The External Environment

18. Industrial Organization Model
I/O Model of Above-Average Returns
Industrial Organization Model
2. Locate an attractive industry with a high potential for above-average returns
The External Environment
An Attractive Industry
Attractive industry: one whose structural characteristics suggest above-average returns

19. Industrial Organization Model
I/O Model of Above-Average Returns
Industrial Organization Model
3. Identify the strategy called for by the attractive industry to earn above-average returns
The External Environment
An Attractive Industry
Strategy Formulation
Strategy formulation: selection of a strategy linked with above-average returns in a particular industry

20. Industrial Organization Model
I/O Model of Above-Average Returns
Industrial Organization Model
4. Develop or acquire assets and skills needed to implement the strategy
The External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Assets and skills: those assets and skills required to implement a chosen strategy

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

22. Industrial Organization Model
I/O Model of Above-Average Returns
Industrial Organization Model
The External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Superior returns: earning of above-average returns
Strategy Implementation
Superior Returns

23. Resource-based Model of Above Average Returns
1. Strategy dictated by the firm’s unique resources and capabilities
2. Find an environment in which to exploit these assets (where are the best opportunities?)
1. Firm’s Resources
The Firm
Resource-based model: Patents and Inventions
The 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, value and rarity are each necessary before inimitability and nonsubstitutability
might yield a sustainable competitive advantage (Priem & Butler, 2001).

24. Resource-based Model of Above Average Returns
1. Identify the firm’s resources-- strengths and weaknesses compared with competitors
Resources
Resources: inputs into a firm’s production process
Resource-based model: Patents and Inventions (cont.)
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).

25. Resource-based Model of Above Average Returns
2. Determine the firm’s capabilities--what it can do better than its competitors
Resources
Capability
Capability: capacity of an integrated set of resources to integratively perform a task or activity
Resource-based model: Patents and Inventions (cont.)
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.

26. Four Attributes of Resources and Capabilities (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
Resources and Capabilities
Costly to imitate
when other firms cannot obtain them or must obtain them at a much higher cost
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.
Nonsubstitutable
when there are no structural equivalents, i.e., no strategically equivalent resources

27. Resources and capabilities that meet these four criteria become:
Valuable
Rare
Core Competencies
Core Competencies
Resources and Capabilities
Costly to imitate
Nonsubstitutable

28. Core Competencies are the basis for a firm’s
Competitive advantage
Value Creation
Core Competencies
Ability to earn above-average returns

29. Competitive Advantage
Resource-based Model of Above Average Returns
Resource-based
Model
3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage
Resources
Capability
Competitive Advantage
Competitive advantage: ability of a firm to outperform its rivals

30. Resource-based Model of Above Average Returns
4. Locate an attractive industry
Resources
Capability
Competitive Advantage
An Attractive Industry
An attractive industry: an industry with opportunities that can be exploited by the firm’s resources and capabilities

31. 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 environment
Resources
Capability
Competitive Advantage
An Attractive Industry
Strategy formulation and implementation: strategic actions taken to earn above average returns
Strategy Form/Impl

32. Resource-based Model of Above Average Returns
Resources
Capability
Competitive Advantage
An Attractive Industry
Superior returns: earning of above-average returns
Strategy Form/Impl
Superior Returns

33. Four Assumptions of the Resource-Based Model
1. Differences in firms’ performances are primarily due to unique core competences rather than industry characteristics
2. Across time, firms acquire different resources and develop unique capabilities
3. Resources are not highly mobile across firms
4. Each firm is a unique collection of resources and capabilities
Four Assumptions of the I/O Model
Both Crock and Schultz identified the strategy that allowed their companies to achieve
high profits: McDonalds through the “assembly line” of their burgers  and Starbucks with
product marketing that created ambiance and consistency, a value perception that allowed
them to charge high premium for their coffee.

34. Strategic Intent & Mission
Winning competitive battles by leveraging the firm’s resources, capabilities, and core competencies
Strategic Mission
An application of strategic intent in terms of products to be offered and markets to be served