Competing for Advantage

1. Competing for Advantage Chapter 1 Introduction to Strategic Management PART I STRATEGIC THINKING

2. Introduction to Strategic Management • Key Terms • Competitive advantage Derived from the successful formulation and execution of strategies which differ and create more value than competitor strategies • Strategic management process The full set of commitments, decisions, and actions required for a firm to create value and earn returns that are higher than those of competitors

3. The Competitive LandscapeThe US Airline Industry - An Illustration • De-regulation 1978 • Low-cost, limited route carriers • Terrorist attacks • Volatile economic conditions • Global alliances • High level of consolidation

4. The Competitive LandscapeMajor Trends • Globalization • Economic volatility • Rapid technological change

5. Globalization of Markets and Industries • Key Terms • Globalization Increasing economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders • Hypercompetition Extremely intense rivalry among firms, characterized by escalating and aggressive competitive moves among market challengers

6. Globalization of Markets and Industries • Artificial constraints on business transactions across national boundaries (such as tariffs) have been eliminated. • Restraints on the transfer of resources (such as equipment, capital, raw material, and even employees) across markets have decreased significantly. • The range of competitive opportunities available to firms has greatly increased.

7. Globalization of Markets and Industries (cont.) • Hypercompetition has resulted from the dynamics of strategic maneuvering among global and innovative competitors in a volatile economy. • Performance standards have increased in many areas, including quality, cost, productivity, product introduction time, and operational efficiency. • Continuous improvement in all areas is necessary for continued survival.

8. Economic Volatility • National debt levels • Financial market instability • Government actions to reduce debt • Unanticipated crises

9. Technological Trends • Increasing rate of technological change and diffusion. • Dramatic changes in information technology and ways in which information is used. • Increasing knowledge intensity.

10. Disruptive Technologies • Destroys the value of existing technologies • Creative destruction process replaces existing technologies with new ones to create new markets

11. Knowledge-Based Competitive Advantages Business survival now depends on the ability to: • Capture intelligence • Transform it into useable knowledge, and • Diffuse it rapidly throughout the company

12. Effect of Technology on the Competitive Landscape • Quick competitive information needs • Shorter product life cycles • Indistinguishable products • Rapid technology replacement • Inexpensive information available • New business culture from electronic-business models • Continuous learning necessary

13. Changes in the Competitive Landscape

14. Sources of Competitive Advantage • Speed to market • Access to and use of information • Rapid diffusion of new, transformed knowledge throughout the company • Innovation • Integration of new conditions into the mind set of the organization • Achieving or exceeding global standards • Improved capabilities and skills through the pursuit of higher performance standards • Strategic flexibility

15. Coping with Hypercompetitive Influences • Key Terms • Strategic flexibility A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment

16. Sources of Strategic Flexibility • Continuous learning • Strategic thinking • Strategic leadership

17. Early Influences on the Strategy Concept • Key Terms • Agency theory A viewpoint which argues that agency problems exist when managers take actions that are in their own best interests rather than those of shareholders • Transactions costs economics Examination of the efficiency of economic activity which instructs firms to purchase required resources through a market transaction unless particular conditions exist that make creating them internally more efficient

18. Modern Strategic Management • Key Terms • Deterministic perspective Strategy formulation argument that firms should adapt to their environments (establishing "fit") because the environmental situation determines the most effective strategies for achieving success • Enactment Principle that challenges the inevitability of deterministic forces in the environment by recognizing the potential of human action to influence organizational results

19. Foundational Concepts • The need for businesses to establish goals, formulate strategies to achieve them, set implementation and evaluation plans and controls to meet stated goals. • The integration of the external market factors into business planning. • The wisdom of balancing the conflicting needs of businesses' internal and external stakeholders. • The importance of an economic approach to identify market opportunities. • The importance of having or acquiring the resources and capabilities to achieve organizational objectives.

20. Foundational Concepts (cont.) • The idea that political strategies should be used in addition to rational-deductive strategy development to address stakeholder interests and facilitate the achievement of organizational goals. • The use of organizational learning processes to achieve strategic success. • The use of agency theory to focus on shareholder returns as a primary criterion for firm success. • The use of transactions costs economics to determine whether to produce or acquire the resources needed by businesses.

21. Three Perspectives on Value Creation • Industrial/Organization (I/O) Economic Model • Resource-Based View • Stakeholder Approach

22. The Industrial/Organization (I/O) Model of Above-Average Returns • The model explains the dominant influence of the external environment on a firm's strategic actions and performance. “The model specifies that the industry in which a firm chooses to compete has a stronger influence on the firm’s performance than do the choices managers make inside their organizations.”

23. Underlying Assumptions of the (I/O) Model • The external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns. • Most firms competing within a particular industry or industry segment are assumed to control similar strategically relevant resources and to pursue similarstrategies in light of those resources.

24. Underlying Assumptions of the (I/O) Model (cont.) • Resources used to implement strategies are assumed to be highly mobile across firms. Because of resource mobility, any resource differences that might develop between firms will be short lived. • 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.

25. The Industrial/Organization (I/O) Model of Above-Average Returns

26. Michael Porter’s Five Forces Model The model suggests that an industry’s profitability is a function of interactions among: • Suppliers • Buyers • Competitive rivalry among industry participants • Product substitutes • Potential entrants to the industry

27. Michael Porter’s Contributions to the I/O 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

28. Limitations of the I/O) Model • Only 2 strategies are suggested. • Cost Leadership • Differentiation • Internal resources and capabilities are not considered.

29. The Resource-Based Model of Above-Average Returns • The model proposes that a firm's unique collection of resources and capabilities is the primary influence on the selection and use of a strategy or strategies to exploit opportunities in the external environment which result in successful performance.

30. The Resource-Based Model of Above-Average Returns • Key Terms • Distinctive competencies Firm attributes that allow it to pursue a strategy better than other firms • Resources Inputs into a firm's production process • Capability Capacity for a set of resources to perform a task or activity in an integrative manner • Core competencies Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals

31. Assumptions of the Resource-Based Model • Capabilities evolve and must be managed dynamically in pursuit of value creation and higher firm performance. • Across time, firms acquire different resources and develop unique capabilities. • Resources may not be easily transferable across firms. • The differences in resources are the basis of competitive advantage.

32. Relevance of Resources to Strategic Management Models • Resources serve as the foundation for the establishment of competencies. • Resources facilitate the implementation of a product market strategy.

33. Types of Resources in the Resource-Based Model • Physical • Human • Organizational capital Resources may be either tangible or intangible.

34. Two Types of Core Competencies • Managerial competencies • Product-related competencies

35. Criteria for Providing a Competitive Advantage • Valuable • Rare • Costly to imitate • Nonsubstitutable

36. The Resource-Based Model of Above-Average Returns

37. The Stakeholder Model of Responsible Firm Behavior and Firm Performance • The model proposes that a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors.

38. The Stakeholder Model of Responsible Firm Behavior and Firm Performance • Key Terms • Stakeholders Individuals and groups who can affect, and are affected by, the strategic outcomes a firm achieves and who have enforceable claims on a firm's performance • Strategic intelligence The information firms collect from their network of stakeholders to deal with diverse and cognitively complex competitive situations and to stimulate innovation

39. The Three Stakeholder Groups

40. Secondary Stakeholders • Government entities and administrators • Activists and advocacy groups • Religious organizations • Other non-governmental organizations

41. Critical Problem Facing Management Today There is a general lack of public trust for big businesses and their managers.

42. The Stakeholder Model of Responsible Firm Behavior and Firm Performance

43. Challenges of the Stakeholder Model • Anticipating and managing additional costs associated with treating stakeholders in the manner suggested by stakeholder theory • Determining how much value to allocate without “giving away the store” • Determining how to allocate value (or returns) commensurate with stakeholder contribution • Establishing trust and mutual satisfaction of goals to increase the level of strategic intelligence available to the firm’s strategic leaders

44. Ways Stakeholder Relationships Contribute to Competitive Advantage • Timely and high quality strategic intelligence can be gathered to improve a firm's strategic decisions. • A trustworthy reputation draws valuable customers, suppliers, and business partners which enable the firm to gain superior resources and opportunities. • A trustworthy reputation attracts investors who offer financial resources. • Fair and respectful treatment of employees attracts high quality human resources essential in today’s competitive environment.

45. 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 regulation, legal suits and penalties, consumer dissatisfaction, employee work outages, and bad press.)

46. Strategic Thinking • Key Terms • Strategic thinking competency The knowledge, skills, and abilities needed to detect market opportunities, formulate a vision to capitalize on these opportunities, and engineer feasible strategies to realize organizational and stakeholder value • Strategic Intent Organizational term used to describe a dream that challenges and energizes a company -- a vision which elicits the help of others in creating a firm’s competitive advantage

47. Strategic Thinking • Intent focused • Comprehensive • Opportunistic • Considers multiple time horizons • Hypothesis driven • Involves risk

48. Encouraging Strategic Thinking • Employ top managers who are champions of change. • Establish systems and processes which capture new ideas as they occur. • Train managers and employees in strategic thinking methods and processes. • Foster an environment which rewards risk taking. • Provide flexibility in strategic management processes to allow incorporation of new ideas with potential.

49. The Strategic Management Process • Key Terms • Strategic management process The full set of commitments, decisions, and actions required for a firm to create value and earn returns that are higher than those of competitors

50. The Strategic Management Process