Chapter 1 – Strategic Management & Competitiveness

Chapter 1 – Strategic Management & Competitiveness

The Strategic Management Process Strategy Implementation Chapter 10CorporateGovernance Chapter 11OrganizationalStructure andControls Chapter 13StrategicEntrepreneurship

Knowledge Objectives • Studying this chapter should provide you with the strategic management knowledge needed to: • Define strategy, above-average returns, strategic competitiveness, and sustainable competitive advantage • 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 (RBV) model to explain how firms can earn above-average returns

Knowledge Objectives – cont’d • Studying this chapter should provide you with the strategic management knowledge needed to: 5. Describe vision and mission and discuss their value 6. Define stakeholders and describe their ability to influence organizations 7. Explain the strategic management process

Agenda • What is strategy? • Current competitive landscape • I/O model of above-average returns • Resource-based model of above-average returns • Strategic management process

Strategy as “the basic characteristics of the match an organization achieves with its environment.” (Hofer & Schendel, 1978, Strategy formulation: Analytical concepts; the field’s first textbook) Strategy as “the basic characteristics of the match an organization achieves with its environment” (Hofer & Schendel, 1978, Strategy Formulation: Analytical Concepts; the field’s first textbook). Strategy as “plan, pattern, position, perspective, and ploy.” (Henry Mintzberg, 1987, Five P’s for Strategy) Strategy as “plan, pattern, position, perspective, and ploy” (Henry Mintzberg, 1987, Five P’s for Strategy). Strategy is “the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.” (Sun Tzu, approx. 500 BC) Strategy is “the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.” Sun Tzu (400-300 b.c.) Strategy as a “pattern of objectives, purposes, or goals, and major policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be.” (Kenneth Andrews, 1971, The concept of corporate strategy) Strategy as a “pattern of objectives, purposes, or goals, and major policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be” (Kenneth Andrews, 1971, The Concept of Corporate Strategy). “Everyone has a plan ‘till they get punched in the mouth.” (Mike Tyson) “Everyone has a strategy until you get punched in the mouth” (Mike Tyson). What is Strategy? • Greek origin: stratos = army, agos = leader

Strategy • Strategy has been defined as “the match an organization achieves between • its internal resources and skills […] and • the opportunities and risks created by its external environment.” “Know yourself, know your opponents; encounter a hundred battles, win a hundred victories.” Sun Tzu, “The Art of War”, approx. 500 BC Source: Hofer, C. W. & Schendel, D. (1978). “Strategy formulation: Analytic concepts”, St. Paul, MN: West: 12.

Goals of Strategy • Above-Average Returns • Returns in excess of what an investor expects to earn from other investments with a similar amount of risk • 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

And without a strategy… Artist: Mary Chapin Carpenter Song: The BugAlbum: Come On, Come On Well it's a strange old game you learn it slowOne step forward and it's back you goYou're standing on the throttleYou're standing on the brakeIn the groove 'til you make a mistakeSometimes you're the windshieldSometimes you're the bugSometimes it all comes together babySometimes you're just a fool in loveSometimes you're the Louisville SluggerSometimes you're the ballSometimes it all comes togetherSometimes you're gonna lose it allOne day you got the glory and then you got noneOne day you're a diamond and then you're a stoneEverything can change in the blink of an eyeSo let the good times roll before we say goodbye

Strategy: Deliberate and Emergent Source: Mintzberg, H., Ahlstrand, B., & Lampel, J. (1998). “Strategy safari”, London, UK: Prentice Hall: 12.

Changes in the Competitive Landscape

Some Examples… Source: IN (June 2006): 27.

Today’s Competitive Environment Global economy Rapid technological change

Global economy Rapid technological change Global Economy • Global Economy • 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 • Globalization • 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

Global economy Rapid technological change World’s Largest Economic Entities Source: Peng, M. W. (2006). “Global Strategy”, Mason, OH: South-Western: 23.

Global economy Rapid technological change 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 (Schumpeterian innovation)

Global economy Rapid technological change Technological Changes • Moore’s Law (Gordon Moore, co-founder of Intel): • At our rate of technological development, the complexity of an integrated circuit (i.e. number of transistors per square inch), with respect to minimum component cost will double every 24 months.

Global economy Rapid technological change Technological Changes • Moore’s Law – Application “It took the telephone 35 years to get into 25 percent of all homes in the United States. It took TV 26 years. It took radio 22 years. It took PCs 16 years. It took the Internet 7 years.” (Hammonds, K. H. (2001). “What is the state of the new economy?”, Fast Company: 101-104)

Source: Hitt, M. A., Keats, B. W., & DeMarie, S. M. (2006). “Navigating in the new competitive landscape: Building strategic flexibility and competitive advantage in the 21st century”, Academy of Management Executive, 12(4): 22-42.

Strengths Organizationalanalysis Environmentalanalysis Weaknesses Opportunities Threats Strategic choices How does a strategy allow us to exploit our strengths, avoid or fix our weaknesses, exploit our opportunities, and neutralize our threats? SWOT Analysis

Organizationalanalysis Environmentalanalysis Strengths Weaknesses Opportunities Threats I/O Model Focus

Example: Vonage’s IPO Prospectus • “An investment in our common stock involves a high degree of risk. The following risks […] should be carefully considered before participating in this offering: • Our history of net operating losses and our need for cash to finance our growth; • The competition we face, including from companies with greater financial resources; • Differences between our service and traditional telephone services; • Uncertainties relating to regulation of VoIP services; • System disruptions or flaws in our technology; • Our ability to manage our rapid growth; and • The risk that VoIP does not gain broader acceptance.” Source: Form S1 http://www.sec.gov/Archives/edgar/data/1272830/000104746906001567/a2167036zs-1.htm (07/01/2007)

I/O Model: 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

Strategy dictated by the external environment of the firm (what opportunities exist in these environments?) Firm develops internal skills required by external environment (what can the firm do about the opportunities?) I/O Model: Above-Average Returns External Environments General Environment “Outside-in”

The External Environment The I/O Model ofAbove-Average Returns • Study the external environment, especially the industry environment. • The general environment • The industry environment • The competitor environment

The External Environment An Attractive Industry The I/O Model ofAbove-Average Returns • 2. Locate an attractive industry with a high potential for above-average returns. • An industry whose structural characteristics suggest above-average returns

The External Environment An Attractive Industry Strategy Formulation The I/O Model ofAbove-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

The External Environment An Attractive Industry Strategy Formulation Assets and Skills The I/O Model ofAbove-Average Returns • 4. Develop or acquire assets and skills needed to implement the strategy. • Assets and skills required to implement a chosen strategy

The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation The I/O Model ofAbove-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

The External Environment An Attractive Industry Strategy Formulation Assets and Skills Strategy Implementation Superior Returns The I/O Model ofAbove-Average Returns • Superior returns: Earning of above-average returns

Porter’s Five Forces Model • 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

Porter’s Five Forces Model – cont’d • Firms earn above-average returns by • Producing standardized products or services (Cost Leadership Strategy) • Manufacturing differentiated products for which customers are willing to pay a price premium (Product Differentiation Strategy)

Organizationalanalysis Environmentalanalysis Strengths Weaknesses Opportunities Threats Resource-Based Model Focus

Resource-Based Model • Each organization is a collection of unique resources and capabilities that provides the basis for its strategy • Capabilities evolve and must be managed dynamically (acquired and/or developed) • Differences in firms’ performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry

Strategy dictated by the firm’s unique resources and capabilities Find an environment in which to exploit these assets (where are the best opportunities?) Resource-Based Model – cont’d Firm’s Resources THE FIRM “Inside-out”

Resources The RBV Model of Above-Average Returns • Identify the firm’s resources. Study its strengths and weaknesses compared with those of competitors. • Inputs into a firm’s production process

Resources Capability The RBV Model of Above-Average Returns • 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

Resources Capability Competitive Advantage The RBV Model of Above-Average Returns • 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

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

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

Resources Capability Competitive Advantage An Attractive Industry Strategy Implementation Superior Returns The RBV Model of Above-Average Returns • Superior returns: Earning of above-average returns

Vision • Picture of what the firm wants to be and ultimately achieve • Reflects a firm’s values and aspirations • “Big Picture” thinking with passion that helps people feel what they are supposed to be doing • Should be tied to the conditions in the firm’s external and internal environments

Vision - Examples • “We must be a great company with great people” (LG Electronics) • “Our vision is to be the world’s best quick service restaurant” (McDonald’s) • “To make the automobile accessible to every American” (Ford Morot Company’s vision from Henry Ford) • “We want to become the Harvard of the West Coast” (Stanford University)

Mission • Externally focused application of its vision • A statement of a firm’s unique purpose and the scope of its operations in product and market terms • Provides general descriptions of the firm’s intended products and its markets • Establishes a firm’s individuality and is inspiring and relevant to all stakeholders

Mission - Examples • “To bring people together anytime and anywhere” (AT&T) • “To experience the emotion of competition, winning, and crushing competitors” (Nike) • “To give ordinary folk the chance to buy the same things as rich people” (Wal-Mart) • “To make people happy” (Disney) • “Putting a Coke within arm's reach of every consumer in the world” (Coca-Cola)

Mission/Intent Fundamental purposes Objectives Measurable performance targets Strategies Means to accomplish objectives Tactics/Policies Actions to implement strategies From Intent & Mission to Action

Chapter 1 – Strategic Management & Competitiveness