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The Strategic Management Process
Chapter 10Corporate
Governance
Chapter 11OrganizationalStructure and
Controls
Chapter 13Strategic
Entrepreneurship
Strategy Implementation
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Agenda1. What is strategy?
2. Current competitive landscape
3. I/O model of above-average returns
4. Resource-based model of above-average returns
5. Strategic management process
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Greek origin: stratos = army, agos = leader
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 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)
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 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)
“Everyone has a strategy until you get punched in the mouth” (Mike Tyson).
“Everyone has a plan ‘till they get punched in the mouth.” (Mike Tyson)
What is Strategy?
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StrategyStrategy 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.”
Source: Hofer, C. W. & Schendel, D. (1978). “Strategy formulation: Analytic concepts”, St. Paul, MN: West: 12.
“Know yourself, know your opponents; encounter a hundred battles, win a hundred victories.”
Sun Tzu, “The Art of War”, approx. 500 BC
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Goals of StrategyAbove-Average Returns
Returns in excess of what an investor expects to earn from other investments with a similar amount of risk
Example: The theoretical value of a firm is the discounted present value of all its future free cash flows.
Accordingly a shortcut stock price formula is simply a growing perpetuity (Gordon Model):
So to increase a firms stock price, the growth rate has to increase, because the current growth rate is already factored into the price!.
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
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Strategy: Deliberate and Emergent
Source: Mintzberg, H., Ahlstrand, B., & Lampel, J. (1998). “Strategy safari”, London, UK: Prentice Hall: 12.
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Agenda
1. What is strategy?
2. Current competitive landscape
3. I/O model of above-average returns
4. Resource-based model of above-average returns
5. Strategic management process
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Today’s Competitive Environment
Global economyGlobal economy
Rapid Rapid technological technological
changechange
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Global EconomyGlobal 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 Global economyeconomy
Rapid Rapid technologictechnological changeal change
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Global Global economyeconomy
Rapid Rapid technologictechnological changeal change
World’s Largest Economic Entities
Source: Peng, M. W. (2006). “Global Strategy”, Mason, OH: South-Western: 23.
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Technological ChangesRate 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 Global economyeconomy
Rapid Rapid technologictechnological changeal change
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Global Global economyeconomy
Rapid Rapid technologictechnological changeal change
Technological ChangesMoore’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.
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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.
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SWOT Analysis
StrengthsStrengths
WeaknessesWeaknesses
OrganizationalOrganizationalanalysisanalysis
OpportunitiesOpportunities
ThreatsThreats
EnvironmentalEnvironmentalanalysisanalysis
How does a strategy allow us to exploit our strengths, avoid or fix our weaknesses, exploit our opportunities, and neutralize our threats?
Strategic choicesStrategic choices
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Agenda1. What is strategy?
2. Current competitive landscape
3. I/O model of above-average returns
4. Resource-based model of above-average returns
5. Strategic management process
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I/O Model Focus
StrengthsStrengths
WeaknessesWeaknesses
OrganizationalOrganizationalanalysisanalysis
OpportunitiesOpportunities
ThreatsThreats
EnvironmentalEnvironmentalanalysisanalysis
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I/O Model: Above-Average Returns
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?)
External EnvironmentsGeneral
Environment
““Outside-in”Outside-in”
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The I/O Model ofAbove-Average Returns
The External Environment
1. Study the external environment, especially the industry environment.
The general environmentThe industry environmentThe competitor
environment
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An Attractive Industry
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
The I/O Model ofAbove-Average Returns
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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
The I/O Model ofAbove-Average Returns
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Assets and Skills
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
The I/O Model ofAbove-Average Returns
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Strategy Implementation
Selection of strategic actions linked with effective implementation of the chosen strategy
The External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
5. Use the firm’s strengths (its developed or acquired assets and skills) to implement the strategy.
The I/O Model ofAbove-Average Returns
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Superior Returns
The External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
Superior returns: Earning Superior returns: Earning of above-average returnsof above-average returns
The I/O Model ofAbove-Average Returns
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Agenda
1. What is strategy?
2. Current competitive landscape
3. I/O model of above-average returns
4. Resource-based model of above-average returns
5. Strategic management process
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Resource-Based Model Focus
StrengthsStrengths
WeaknessesWeaknesses
OrganizationalOrganizationalanalysisanalysis
OpportunitiesOpportunities
ThreatsThreats
EnvironmentalEnvironmentalanalysisanalysis
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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
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Resource-Based Model – cont’d
Strategy dictated by the firm’s unique resources and capabilities
Find an environment in which to exploit these assets (where are the best opportunities?)
Differences in firms’ performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry
Firm’s Resources
THE FIRM
““Inside-out”Inside-out”
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Criteria for Resources and Capabilities That Become Core Competencies
Core Core CompetenciesCompetencies
Core Core CompetenciesCompetencies
ValuableValuableValuableValuable RareRareRareRare
Costly to ImitateCostly to ImitateCostly to ImitateCostly to ImitateNonsubstitutableNonsubstitutableNonsubstitutableNonsubstitutable
Allow the firm to exploit opportunities or neutralize threats in its external environment
Possessed by few, if any, current and potential competitors
When other firms cannot obtain them or must obtain them at a much higher cost
The firm is organized to obtain the full benefits of the resources
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Resources
1. Identify the firm’s resources. Study its strengths and weaknesses compared with those of competitors.
Inputs into a firm’s production process
The RBV Model of Above-Average Returns
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Capability 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
The RBV Model of Above-Average Returns
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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
Competitive Advantage
Capability
Resources
The RBV Model of Above-Average Returns
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An Attractive Industry
4. Locate an attractive industry.
An industry with opportunities that can be exploited by the firm’s resources and capabilities
Competitive Advantage
Capability
Resources
The RBV Model of Above-Average Returns
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Strategy Implementation
Strategic actions taken to earn above-average returns
An Attractive Industry
Competitive Advantage
Capability
Resources
5. Select a strategy that best allow the firm to utilize its resources and capabilities relative to opportunities in the external environment.
The RBV Model of Above-Average Returns
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Superior Returns
Superior returns: Earning Superior returns: Earning of above-average returnsof above-average returns
Strategy Implementation
An Attractive Industry
Competitive Advantage
Capability
Resources
The RBV Model of Above-Average Returns
1-38Superior Returns
Strategy Implementation
An Attractive Industry
Competitive Advantage
Capability
Resources
The RBV Model
Superior Returns
The External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
The I/O Model
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SWOT Analysis
StrengthsStrengths
WeaknessesWeaknesses
OrganizationalOrganizationalanalysisanalysis
OpportunitiesOpportunities
ThreatsThreats
EnvironmentalEnvironmentalanalysisanalysis
Framework: RBV Model Framework: I/O Model
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Agenda1. What is strategy?
2. Current competitive landscape
3. I/O model of above-average returns
4. Resource-based model of above-average returns
5. Strategic management process
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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
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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)
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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
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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)
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From Intent & Mission to Action
Mission/IntentMission/Intent Fundamental purposes
ObjectivesObjectives Measurable performance targets
StrategiesStrategies Means to accomplish objectives
Tactics/PoliciesTactics/Policies Actions to implement strategies
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Two issues affect the extent of stakeholder involvement in the firm
How to divide returns to keep stakeholdersinvolved?
How to increase returns so everyone has more to share?
Stakeholder Management
Capital MarketCapital Market
Product Market
Product Market
OrganizationalOrganizational
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Strategic Management Process1. Study the external and internal environments
2. Identify marketplace opportunities and threats
3. Determine how to use strengths (core competencies) and avoid/improve weaknesses
4. Leverage resources, capabilities, and core competencies and win competitive battles
5. Integrate formulation and implementation of strategies
6. Seek feedback to improve strategies
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Strategic LeadersStrategic Leaders
People located in different parts of the firm who are using the strategic management process to help the firm reach its vision and mission.
Prerequisites for Effective Strategic Leadership
Hard work
Thorough analyses
Honesty
Desire for accomplishment
Common sense