chapter 1 introduction to strategic management

Introduction to Strategic Management

MANA 5336

What is Strategy?

Strategy is the overall plan for deploying resources to establish a favorable position.

Tactic is a scheme for a specific maneuver.

Characteristics of strategic decisions…– Important– Involve a significant commitment of resources– Not easily reversible

Basic Framework

The firm

Goals & Values

Resources & Capabilities

Structures & Systems

External Environment

Competitors

Customers

Suppliers

etc

Strategy

Definitions

Strategic Management ProcessThe full set of commitments, decisions, and actions required for a firm to create value and earn above-average returns

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

Definitions

Returns that are in excess of what an investor expects to earn from other investments with a similar amount of risk

Above-Average Returns

Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk

Average Returns

Definitions

RiskAn investor’s uncertainty about the economic gains or losses that will result from a particular investment

Fundamental nature of competition is changing

Competitive Landscape

Hypercompetitive environments

Dynamics of strategic maneuvering among global and innovative combatants

Price-quality positioning, new know-how, first mover

Protect or invade established product or geographic markets

Fundamental nature of competition is changing

Hypercompetitive environments

Competitive Landscape

Emergence of global economy

Goods, services, people, skills, and ideas move freely across geographic borders

Spread of economic innovations around the world

Political and cultural adjustments are required

Hypercompetitive environments

Competitive Landscape

Emergence of global economy

Rapid technological change

Increasing rate of technological change and diffusion

The information age

Increasing knowledge intensity

Fundamental nature of competition is changing

Strategic Flexibility

A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment

It involves coping with uncertainty and the accompanying risks

StrategicFlexibilityStrategic

Flexibility

Strategic Flexibility

StrategicStrategicflexibilityflexibility

StrategicStrategicreorientationreorientation

Capacity toCapacity tolearnlearn

OrganizationalOrganizationalslackslack

Strategy dictated by the Strategy dictated by the external environment of external environment of the firm (what the firm (what opportunities exist in opportunities exist in these environments?)these environments?)

Firm develops internal Firm develops internal skills required by external skills required by external environment (what can environment (what can the firm do about the the firm do about the opportunities?)opportunities?)

GeneralGeneral

EnvironmentEnvironment

GlobalGlobal

TechnologicalTechnological

Eco

nom

ic

Eco

nom

ic

Sociocultural

Sociocultural

Polit

ical

/Leg

al

Polit

ical

/Leg

al Dem

ographic

Dem

ographic

1. External Environments

Industry Environment

Competitor Environment

I/O Model of Above-Average Returns

Four Assumptions of the I/O Model

The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returnsMost 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

Resources used to implement strategies are highly mobile across firms

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

Industrial Organization Industrial Organization ModelModel

I/O Model of Above-Average Returns

Study the external environment, especially the industry environmenteconomies of scalebarriers to market entrydiversificationproduct differentiationdegree of concentration of

firms in the industry

The External EnvironmentThe External Environment

I/O Model of Above-Average Returns

Locate an attractive industry with a high potential for above-average returns

Attractive industry: one whose structural characteristics suggest above-average returns

Industrial Organization Industrial Organization ModelModel

The External EnvironmentThe External Environment

An Attractive IndustryAn Attractive Industry

I/O Model of 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

Industrial Organization Industrial Organization ModelModel

The External EnvironmentThe External Environment

An Attractive IndustryAn Attractive Industry

Strategy FormulationStrategy Formulation

I/O Model of Above-Average Returns

Develop or acquire assets and skills needed to implement the strategy

Assets and skills: those assets and skills required to implement a chosen strategy

Industrial Organization Industrial Organization ModelModel

The External EnvironmentThe External Environment

An Attractive IndustryAn Attractive Industry

Strategy FormulationStrategy Formulation

Assets and SkillsAssets and Skills

I/O Model of Above-Average Returns

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

Industrial Organization Industrial Organization ModelModel

The External EnvironmentThe External Environment

An Attractive IndustryAn Attractive Industry

Strategy FormulationStrategy Formulation

Assets and SkillsAssets and Skills

Strategy ImplementationStrategy Implementation

I/O Model of Above-Average Returns

Industrial Organization Model

The External EnvironmentThe External Environment

An Attractive IndustryAn Attractive Industry

Strategy FormulationStrategy Formulation

Assets and SkillsAssets and Skills

Strategy ImplementationStrategy Implementation

Superior ReturnsSuperior Returns

Superior returns: earning of above-average returns

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 of Above Average Returns

1. Firm’s Resources1. Firm’s Resources

Identify the firm’s resources-- strengths and weaknesses compared with competitors

Resources: inputs into a firm’s production process

Resource-based Model of Above Average Returns

Resource-based Resource-based ModelModel

ResourcesResources

Determine the firm’s capabilities--what it can do better than its competitors

Capability: capacity of an integrated set of resources to integratively perform a task or activity

Resource-based Model of Above Average Returns

Resource-based Resource-based ModelModel

ResourcesResources

CapabilityCapability

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

Resource-based Model of Above Average Returns

Resource-based Resource-based ModelModel

ResourcesResources

CapabilityCapability

Competitive AdvantageCompetitive Advantage

Locate an attractive industry

An attractive industry: an industry with opportunities that can be exploited by the firm’s resources and capabilities

Resource-based Model of Above Average Returns

Resource-based Resource-based ModelModel

ResourcesResources

CapabilityCapability

Competitive AdvantageCompetitive Advantage

An Attractive IndustryAn Attractive Industry

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

Resource-based Model of Above Average Returns

Resource-based Resource-based ModelModel

ResourcesResources

CapabilityCapability

Competitive AdvantageCompetitive Advantage

An Attractive IndustryAn Attractive Industry

Strategy Form/ImplStrategy Form/Impl

Resource-based Model of Above Average Returns

Resource-based Resource-based ModelModel

ResourcesResources

CapabilityCapability

Competitive AdvantageCompetitive Advantage

An Attractive IndustryAn Attractive Industry

Strategy Form/ImplStrategy Form/Impl

Superior ReturnsSuperior Returns

Superior returns: earning of above-average returns

Strategic Intent & Mission

Strategic Intent 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

Emergent and Deliberate Strategies

IntendedStrategy

RealizedStrategy

DeliberateStrategy

UnrealizedStrategy

EmergentStrategy

From “Strategy Formation in an Adhocracy” by Henry Mintzberg and Alexandra McHugh, Administrative Science Quarterly,Vol. 30, No. 2, June 1985. Reprinted by permission of Administrative Science Quarterly.

Strategic Management Process for Intended Strategies

Missionsand Goals

Missionsand Goals

Strategic Choice

Strategic Choice

Organizing forImplementation

Organizing forImplementation

InternalAnalysis

InternalAnalysis

ExternalAnalysis

ExternalAnalysis

INTENDED STRATEGY

Strategic Management Process for Emergent Strategies

Missionsand Goals

Missionsand Goals

InternalAnalysis

InternalAnalysis

ExternalAnalysis

ExternalAnalysis

EMERGENT STRATEGY

Strategic ChoiceDoes It Fit?

Strategic ChoiceDoes It Fit?

OrganizationalGrassroots

OrganizationalGrassroots

Groups who are affected by a Groups who are affected by a firm’s performance and who firm’s performance and who have claims on its wealthhave claims on its wealth

The firm must maintain performance at an adequate level in order to retain the participation of key stakeholders

The Firm and Its Stakeholders

StakeholdersStakeholders

Capital Market StakeholdersCapital Market Stakeholders

The Firm and Its Stakeholders

ShareholdersShareholdersMajor suppliers of capitalMajor suppliers of capital

•BanksBanks•Private lendersPrivate lenders•Venture capitalistsVenture capitalists

StakeholdersStakeholders

Capital Market StakeholdersCapital Market Stakeholders

Product Market StakeholdersProduct Market Stakeholders

The Firm and Its Stakeholders

Primary customersPrimary customersSuppliersSuppliersHost communitiesHost communitiesUnionsUnions

StakeholdersStakeholders

Capital Market StakeholdersCapital Market Stakeholders

Product Market StakeholdersProduct Market Stakeholders

Organizational StakeholdersOrganizational Stakeholders

The Firm and Its Stakeholders

EmployeesEmployeesManagersManagersNonmanagersNonmanagers

StakeholdersStakeholders

Values

Johnson & Johnson’s credosets its responsibilities to:

1. J&J product users.

2. J&J employees.

3. Communities in which J&Jemployees live and work.

4. J&J stockholders.

Source: Courtesy of Johnson & Johnson.

Johnson & Johnson Credo*

First Responsibility Is to Those Who Use J&J Products

Next Come Its Employees Next, the Communities in Which the

Employees Live and Work Its Final Responsibility Is

to Its Stockholders

Functional

Business

Corporate

Global

Levels of StrategyLevels of Strategy