strategic management- chapter one€¦ · ppt file · web view2012-08-27 · knowledge objectives...

Authored by:Marta Szabo White. Ph.DGeorgia State University

PART 1: STRATEGIC

MANAGEMENT INPUTS

CHAPTER 1: STRATEGIC MANAGEMENT & STRATEGIC COMPETITIVENESS

©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE STRATEGIC MANAGEMENT PROCESSFIGURE 1.1

The Strategic

Management Process


KNOWLEDGE OBJECTIVES● Define strategic competitiveness,

strategy, competitive advantage, above-average returns, and the strategic management process.

● Describe the 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 model to explain how firms can earn above-average returns.


KNOWLEDGE OBJECTIVES

● Describe vision and mission and discuss their value.

● Define stakeholders and describe their ability to influence organizations.

● Describe the work of strategic leaders.

● Explain the strategic management process.


IMPORTANT DEFINITIONS

● STRATEGIC COMPETITIVENESS - achieved when a firm successfully formulates and implements a value-creating strategy ● STRATEGY - an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage

● COMPETITIVE ADVANTAGE - when a firm implements a strategy that creates superior value for customers; competitors are unable to duplicate it or find too costly to imitate it


IMPORTANT DEFINITIONS

● RISK - an investor’s uncertainty about the economic gains or losses that will result from a particular investment ● ABOVE-AVERAGE RETURNS - returns in excess of what an investor expects to earn from other investments with a similar amount of risk

● AVERAGE RETURNS - returns equal to those an investor expects to earn from other investments with a similar amount of risk


INABILITY TO EARN AVERAGE RETURNS resulted first in decline and,

eventually, failure

●Enjoyed considerable success early on●Tried to enrich its traditional approach with more marketing and more attractive stores, demonstrating a lack of market understanding ● Declining book sales for large chain store retailers● Should have been entrepreneurial, innovative, and market-oriented

BORDERS - OPENING CASE - FAILURE EXAMPLE

OPENING CASEONCE A “GIANT,” BORDERS BECAME A “WEAKLING”

ON ITS KNEES


THE STRATEGIC MANAGEMENT PROCESS

■ FIRST: External environment and internal organization are analyzed to determine resources, capabilities, and core competencies—the sources of “strategic inputs.”

■ NEXT: Vision and mission are developed; strategies are formulated.

■ THEN: Strategies are implemented with the goal of achieving strategic competitiveness and above-average returns.

■ DYNAMIC PROCESS: Continuously changing markets and industry conditions must match evolving strategic inputs.



Rational: the approach firms use to achieve strategic competitiveness and earn above-average returns

FORMULATION and IMPLEMENTATION:the two types of strategic actions that must be simultaneously integrated to successfully employ the strategic management process



PART I: STRATEGIC INPUTS

• Chapters 2, 3 Vision/Mission

• Chapters 4, 5, 6, 7, 8 & 9

• Chapters 10, 11, 12 & 13

The text is

divided into

three parts.


THE COMPETITIVE LANDSCAPE

■ GLOBALIZATION - emergence of a global economy■ TECHNOLOGY - rapid technological changes

■ INDUSTRY BOUNDARIES BLURRING

■ EXAMPLES - computer networks and telecommunications have blurred the boundaries of the entertainment industry

■ MSNBC is co-owned by NBC Universal and Microsoft

■ General Electric owns 49 percent of NBC Universal and Comcast owns the remaining 51 percent

■ STRATEGIC MANAGEMENT PROCESS - effective use of the strategic management process reduces the likelihood of failure for firms as they encounter the conditions of today’s competitive landscape



■ HYPERCOMPETITION - characterized by

■ Market instability and change ■ Rapidly escalating competition ■ Aggressive challengers ■ Strategic maneuvering to establish

first- mover advantage ■ Technology industries

■ TWO DRIVERS- GLOBALIZATION- TECHNOLOGY

■ Strategic flexibility - important tool


■ Goods, services, people, skills, and ideas move freely across geographic borders■ New opportunities and challenges emerge

■ Competitive environments are broader and increasingly more complex


THE GLOBAL ECONOMY


THE COMPETITIVE

LANDSCAPETHE GLOBAL ECONOMY

■ The European Union has become one of the world’s largest markets, with 700 million potential customers■ China has become the second largest economy in the world surpassing Japan ■ India, the world’s largest democracy, has an economy that now ranks as the fourth largest in the world


Huawei also needs Guanxi

in the United States


STRATEGIC FOCUS

GUANXI■ Strong relationships in which each party feels obligated to help the other■ Key element of doing business in China■ Building strong relationships is an important dimension of Chinese culture; Guanxi is also important when conducting business in the United States


THE COMPETITIVE

LANDSCAPETHE GLOBAL ECONOMY ■ Hypercompetitive business environment

challenges firms to reconsider which markets to compete in; this positioning is more critical than ever

■ GE - headquartered in the U.S., yet up to 60% of its revenue growth through 2015 will be generated from rapidly developing economies such as China and India■ Jeffrey Immelt - suggests that we have entered a new economic era in which the global economy will be more volatile and emerging economies such as Brazil, China, and India will be the major drivers of growth


Globalization is increasing economic

interdependence among countries

and their organizations as reflected in the

flow of goods and services, financial

capital, and knowledge across country borders.

Globalization is the product of a large number of firms competing

against one another in an

increasing number of global

economies.

Highly globalized firms must

anticipate ever-increasing

complexities in their operations

as goods, services, people, etc. move freely

across geographic borders.

THE COMPETITIVE LANDSCAPETHE MARCH OF

GLOBALIZATION


Globalization has led to higher performance standards in quality, cost, productivity,

product introduction time, and operational efficiency. These

standards translate and

impact domestic-only firms as well.

Free flow of resources among global economies,

global sourcing for firms, global purchasing for

customers, and a global forum for workers all serve as a key source of

competitive advantage for

firms.

Firms must learn that in this twenty-first

century competitive

landscape, only firms capable of meeting, if not

exceeding, global standards, have the capability to

earn above-average returns.

THE COMPETITIVE LANDSCAPETHE MARCH OF

GLOBALIZATION


Significant time is required for firms to learn how to compete in new

markets, and performance may suffer during this

time.

With globalization,

firms may over-diversify

internationally, which can have strong negative

effects on a firm’s overall

performance.

It is critical for firms competing

globally to remain strategically

committed to and competitive in both domestic

and international markets.

THE COMPETITIVE LANDSCAPETHE RISKS OF

GLOBALIZATION


THREE CATEGORIES for TECHNOLOGY TRENDS

Technology is significantly altering the nature of competition and enabling unstable competitive

environments■Technology Diffusion & Disruptive Technologies■ Information Age■ Increasing Knowledge Intensity


TECHNOLOGY AND TECHNOLOGICAL CHANGES


Technology Diffusion - Category 1

■ Technology Diffusion – the speed at which new technologies become available and are used; has increased substantially over the past 15 to 20 year. ■ Examples of technology diffusion: How long it took to get the following into 25 percent of U.S. homes:

● Telephone — 35 years● TV — 26 years ● Radio — 22 years ● PCs — 16 years ● Internet — 7 years




Technology Diffusion - Category

1Perpetual Innovation

■ Perpetual Innovation - describes how rapidly and consistently new, information-intensive technologies replace older ones

■ Competitive Premium - the shorter product life cycles resulting from rapid diffusions of new technologies place a competitive premium on being able to quickly introduce new, innovative goods and services

■ Competitive Advantage - speed to market with innovative products is a primary source of competitive advantage





Perpetual Innovation■ Innovations must be derived from an understanding of global standards and global expectations in terms of product functionality

■ Apple - an excellent example of radical innovation by a large established firm ■ Technology Diffusion - to diffuse the technology and enhance the innovation value, firms need to be innovative in incorporating the new technology into their product





Perpetual Innovation ■ Rapid Technology Diffusion - now may take only 12 to 18 months for firms to gather information about research and development and product decisions for their competitors ■ Patents - may be an effective protection of proprietary technology in a small number of industries, e.g., pharmaceuticals ■ Proprietary Strategies - many firms often do not apply for patents to prevent competitors from gaining access to the technological knowledge included in the patent application, e.g., the electronics industry





Disruptive Technologies ■ Disruptive Technologies - technologies that destroy the value of an existing technology and create new markets, many times representing radical or breakthrough innovation ■ Examples: iPods, iPads, WiFi, and the browser ■ Industry Incumbents Harmed or Destroyed – a disruptive or radical technology creates a new industry, thereby destroying the existing industry; with superior resources, experience, and access to the new technology, some incumbents may be able to adapt





Technology and Innovation Strategic Focus: Apple ■ Apple’s “legendary” market power, phenomenal growth rate, and impressive financial performance stem from its new technology development and innovation ■ Imitators - Apple is expected to retain at least 80% of the tablet computer market even with the many imitative products on the market ■ International- Apple’s stores in China handle 40,000 people daily, four times the average flow of U.S. customers





Technology and Innovation Strategic Focus: Apple ■ Versatility - Apple provides an example of technological entrepreneurship across multiple industries ■ Disruptive Technologies

● Innovation and industry transformation, e.g., iPod, iPad, and the iPhone

● iPod and the complementary iTunes have revolutionized how music is sold and used by consumers

● iPad, in conjunction with Amazon’s Kindle, is changing the publishing industry; moving to electronic books




The Information Age - Category 2

■ Dramatic Changes - in information technology have occurred in recent years, e.g., personal computers, cellular phones, artificial intelligence, virtual reality, massive databases, and multiple social networking sites ■ Competitive Advantage - the ability to effectively and efficiently access and use information has become an important source of competitive advantage in virtually all industries ■ Information Technology - enables small firms to be flexible and competitive in the global arena




The Information Age - Category 2

■ Change - both the pace of change in information technology and its diffusion will continue to increase ■ Cost - the declining costs of information technologies and the increased accessibility to them are evident in the current competitive landscape ■ Internet - contributing factor to hypercompetition ■ Speed and Diffusion - the global proliferation of computers increases the speed and diffusion of information technologies and enables a level playing field




Increasing Knowledge Intensity - Category 3

■ Knowledge - information, intelligence, and expertise are the basis of technology and its application ■ Competitive Advantage - in the 1980s, the basis of competition shifted from hard assets to intangible resources; knowledge is a critical organizational resource and an increasingly valuable source of competitive advantage ■ Intangible Resource – knowledge gained through experience, observation, and inference is an intangible resource; the value of intangible resources is growing as a proportion of total shareholder value.





■ Strategic Competitiveness - enhanced for the firm that develops the ability to capture intelligence, transform it into usable knowledge, and diffuse it rapidly throughout the firm ■ Competitive Advantage - firms must develop (e.g., through training programs) and acquire (e.g., by hiring educated and experienced employees) knowledge, integrate it into the organization to create capabilities, and then apply it to gain a competitive advantage





■ Knowledge Spillovers - knowledge falls into competitor’s hands, e.g., hiring of professional staff/managers by competitors ■ Knowledge Diffusion - because of the potential for spillovers, firms must act quickly to use their knowledge in productive ways ■ Strategic Flexibility - facilitates knowledge diffusion to where it has value





STRATEGIC FLEXIBILITY ■ Set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment ■ Enables the capacity to learn ■ Facilitates coping with hypercompetition, uncertainty, and risk ■ Firms should try to develop strategic flexibility in all areas of operations




TWO MODELS OF STRATEGIC DECISION MAKING

Firms use two major models to help develop their vision and mission and then choose one or more strategies in pursuit of strategic competitiveness and above-average returns.

EXTERNAL

I/OMODEL


THE I/O MODEL OF ABOVE-AVERAGE RETURNS

Grounded in economics, the I/O model has

First, the external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns.

Second, most firms competing within an industry or within a segment of that industry are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources.

Four Underlying Assumptions


Third, resources used to implement strategies are assumed to be highly mobile across firms, so any resource differences that might develop between firms will be short-lived.

Fourth, organizational decision-makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behavior.

THE I/O MODEL of ABOVE-AVERAGE RETURNS


The Five Forces Model of competition is an analytical tool used to help firms find the industry that is the most attractive, as measured by its profitability potential.

The Five Forces Model suggests that an industry’s profitability (i.e., its rate of return on invested capital relative to its cost of capital) is a function of interactions among the Five Forces: suppliers, buyers, rivalry, product substitutes, and potential entrants to the industry.



FIRMS CAN EARN ABOVE-AVERAGE RETURNS:● Cost Leadership Strategy – producing standardized goods or services at costs below those of competitors

● Differentiation Strategy - producing differentiated goods or services for which customers are willing to pay a price premium

The I/O model suggests that above-average returns are earned when firms are able to effectively study the external environment as the foundation for identifying an attractive industry and implementing the appropriate strategy.




Research findings support the I/O model, in that approximately 20% of a firm’s profitability is explained by the industry in which it chooses to compete.

However, this research also shows that 36% of the variance in firm profitability can be attributed to the firm’s characteristics and actions.

These findings suggest that the External AND Internal environments influence the company’s ability to achieve strategic competitiveness and earn above-average returns.



FIGURE 1.2

The I/O Model of Above

Average Returns


THE RESOURCE-BASED MODEL OF

ABOVE-AVERAGE RETURNSThe resource-based model assumes that each organization is a collection of unique resources and capabilities.

The uniqueness of its resources and capabilities is the basis of a firm’s strategy and its ability to earn above-average returns.

The core assumption of the resource-based model is that the firm’s unique resources, capabilities, and core competencies have more influence on selecting and using strategies than does the firm’s external environment.



ABOVE-AVERAGE RETURNSThere are FOUR components to the Resource- Based Model:● Resources● Capabilities● Core Competencies● Competitive AdvantageThere are FOUR criteria that if resources and capabilities fulfill, then they become Core Competencies:● Valuable● Rare● Costly to Imitate● Nonsubstitutable



ABOVE-AVERAGE RETURNS•Resources are inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers. •A firm’s resources are either tangible or intangible and are classified into three categories: physical, human, and organizational capital. •Resources alone may not yield a competitive advantage. Many resources can either be imitated or substituted over time, therefore, it is difficult to achieve and sustain a competitive advantage based on resources alone.


THE RESOURCE-BASED MODEL of ABOVE-

AVERAGE RETURNSA capability is the capacity for a set of resources to perform a task or an activity in an integrative manner.

Capabilities evolve over time and must be managed dynamically in pursuit of above-average returns.

Core competencies are resources and capabilities that serve as a source of competitive advantage.

KEY WORD: INTEGRATIVE



ABOVE-AVERAGE RETURNSWhen these four criteria are met, resources and capabilities become core competencies:

• They are valuable when they allow a firm to take advantage of opportunities or neutralize threats.

RARE• They are rare when possessed by

few, if any, current and potential competitors.

COSTLY TO IMITATE

• Resources are costly to imitate when other firms cannot obtain them or are at a cost disadvantage. NON-

SUBSTITUTABLE

• They are nonsubstitutable when they have no structural equivalents.



ABOVE-AVERAGE RETURNS

First, differences in firms’ performances across time are due primarily to their unique resources and capabilities rather than the industry’s structural characteristics.

Second, firms acquire different resources and develop unique capabilities based on how they combine and use the resources.

Four Underlying Assumptions


THE RESOURCE-BASED MODEL of ABOVE-

AVERAGE RETURNSThird, that resources and capabilities are NOT highly mobile across firms.Fourth, that the differences in resources and capabilities are the basis of competitive advantages.

Above-average returns are earned when the firm uses its valuable, rare, costly-to-imitate, and nonsubstitutable resources and capabilities to compete against its rivals in one or more industries.



ABOVE-AVERAGE RETURNS

FIGURE 1.3

The Resource-

Based Model of Above Average Returns


TWO MODELS OF STRATEGIC DECISION MAKING

Evidence indicates that both models yield insights that are linked to successfully selecting and using strategies.

EXTERNAL

I/OMODEL


VISION

• Vision is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve.

• A vision statement is short and concise, making it easy to remember.

• It articulates the ideal description of the organization and gives shape to its intended future.


• A firm’s vision tends to be enduring, whereas its mission can change in light of changing environmental conditions.

• vision statements reflect a firm’s values and aspirations and are intended to capture the heart and mind of each stakeholder.

• Executives and top-level managers must formulate and implement strategies consistent with the vision.

VISION


Examples: Our vision is to be the world’s best quick service restaurant. (McDonald’s)

To make the automobile accessible to every American. (Ford Motor Company’s vision when established by Henry Ford)

VISION


MISSION

• The vision is the foundation for the firm’s mission.

• The firm’s mission is more concrete than its vision.

• A mission specifies the business or businesses in which the firm intends to compete and the customers it intends to serve.


MISSIONExamples: Be the best employer for our people in each community around the world and deliver operational excellence to our customers in each of our restaurants. (McDonald’s)

Our mission is to be recognized by our customers as the leader in applications engineering. We always focus on the activities customers desire; we are highly motivated and strive to advance our technical knowledge in the areas of material, part design, and fabrication technology. (LNP, a GE Plastics Company)


MISSION

• Similar to the vision, a mission should establish a firm’s individuality and should be inspirational to all stakeholders.

• A firm’s vision and mission are critical aspects of the strategic inputs required to engage in strategic actions that help achieve strategic competitiveness and earn above-average returns.


VISION, MISSION AND ETHICS

The probability of forming an effective mission increases when employees have a strong sense of the ethical standards that guide their behaviors.

●VISION • Deciding what a firm wants to become

●MISSION

• Deciding who it intends to serve and how it wants to serve those individuals and groups

Business ethics

are a vital part

of:


HORT STAKEHOLDERS

Are there individuals, groups, and organizations who have a stake in the

organization● Who can affect the firm’s vision and mission?● Are affected by the strategic outcomes achieved? ● Have enforceable claims on the firm’s performance?

Competitive Advantage Firms effectively managing stakeholder

relationships outperform those that do not.


HORT STAKEHOLDERS

• Organizations are not equally dependent on all stakeholders, so not every stakeholder has the same level of influence. • The more critical and valued a stakeholder’s participation, the greater a firm’s dependence on it, which gives the stakeholder more potential influence over the firm. • Managers must find ways to accommodate or insulate the organization from the demands of stakeholders controlling critical resources.


Three groups of stakeholders:C

● Shareholders and the major suppliers of a firm’s capital

● A firm’s primary customers, suppliers, host communities, and unions representing the workforce

● Firm’s employees, including both non-managerial and managerial personnel

CLASSIFICATION OF STAKEHOLDERS

Capital market stakeholders

Product market stakeholders

Organizational stakeholders



FIGURE 1.4

The Three Stakeholder

Groups


Trade-offs must be made in situations where the objectives of various stakeholder groups differ or conflict.

● Shareholders – individuals and groups who have invested capital in a firm in the expectation of earning a positive return on their investments. These stakeholders’ rights are grounded in laws governing private property and private enterprise. ● Consumers – interests are maximized when the quality and reliability of a firm’s products are improved, but without high prices. ● High returns to customers might come at the expense of lower returns for capital market stakeholders and vice-versa.


Conflict examples:


S MANAGING STAKEHOLDER CONFLICT

• First, a firm must thoroughly identify and understand all important stakeholders. • Second, it must prioritize them, in case it cannot satisfy all of them. • Power is the most critical criterion in prioritizing stakeholders. • Other criteria might include the urgency of satisfying each particular stakeholder group and the degree of importance of each to the firm’s above-average returns.


S MANAGING STAKEHOLDER CONFLICT

POWER

URGENCY

IMPORTANCE

STAK

EHOL

DER

PR

IORI

TIES


CHALLENGES:When earning above-average returns, a firm can more easily satisfy multiple stakeholders simultaneously.

When earning only average returns, a firm is unable to maximize the interests of all stakeholders, thus stakeholders should be at least minimally satisfied.

Cultural differences and societal values also influence stakeholder priorities.

MANAGING STAKEHOLDER CONFLICT


BALANCING CONFLICTING SHAREHOLDER GOALS

The returns that shareholders expect are commensurate with the degree of risk accepted with those investments.CHALLENGING FOR MANAGERS:

● Some shareholders want short-term increases in returns

● Others desire building long-term competitiveness Often large shareholders prefer that the firm minimize its use of debt because of the risk of debt, its cost, and the possibility that debt holders have first call over shareholders on the firm’s assets in case of default.

CAPITAL MARKET STAKEHOLDERS


• Though all product market stakeholders are important, without customers, the other product market stakeholders are of little value.

• Customers demand reliable products at the lowest possible prices.

• Host communities want companies willing to be long-term employers and providers of tax revenue without placing excessive demands on public support services.

PRODUCT MARKET STAKEHOLDERS


• Suppliers seek loyal customers who are willing to pay the highest sustainable prices for the goods and services they receive.

• Union officials are interested in secure jobs, under highly desirable working conditions, for the employees they represent.

• Product market stakeholders are generally satisfied when a firm’s profit margin reflects at least a balance between the returns to capital market stakeholders and goals of product market stakeholders.

PRODUCT MARKET STAKEHOLDERS


• Employees expect the firm to provide a dynamic, stimulating, and rewarding work environment. • Employees are usually satisfied working for a company that is: ● Growing

● Actively developing their skills to be effective team members

● Meeting or exceeding global work standards

ORGANIZATIONAL STAKEHOLDERS


• International assignments help cultivate employee skills for the global competitive landscape.• The process of managing expatriate employees and helping them build knowledge can have significant effects on a firm’s global competence.• To be successful, strategic leaders must effectively leverage a firm’s human capital.

ORGANIZATIONAL STAKEHOLDERS


• Strategic leaders are people located in different areas and levels of the firm using the strategic management process to select strategic actions that help the firm achieve its vision and fulfill its mission.

• Successful strategic leaders are decisive, committed to nurturing those around them, and are committed to helping the firm create value for all stakeholder groups.

STRATEGIC LEADERS


STRATEGIC LEADERS

The global

economy

•Globalization•Rapid technological change•Increasing importance of knowledge•People as sources of competitive advantage

Increasingly, CEOs delegate strategic responsibilities to include decision-makers closest to the action due to the changing competitive landscape:


• Visionary Strategic Leaders emphasize not only maximizing shareholder wealth, but maximizing the interests of all stakeholders, underscoring a civic and personal commitment to corporate citizenship.

• Organizational culture affects strategic leaders and their work. In turn, strategic leaders’ decisions and actions shape a firm’s culture.

• Organizational culture is the social energy that drives—or fails to drive—the organization, the ideologies, symbols, and shared core values.

STRATEGIC LEADERS AND ORGANIZATIONAL CULTURE


THE WORK OF EFFECTIVE STRATEGIC LEADERS

SUCCESSFUL STRATEGIC LEADERSHIP CHARACTERISTICS

• Hard working● Embraces dynamic competitive

landscape • Brutally honest• Tenacious • Penchant for wanting the firm and its

people to accomplish more• Strong strategic orientation


THE WORK OF EFFECTIVE STRATEGIC LEADERS

SUCCESSFUL STRATEGIC LEADERSHIP CHARACTERISTICS

• Innovative thinker • Exploratory learning of new and unique

forms of knowledge • Exploitative learning, which adds

incremental knowledge to existing knowledge bases

• Global mindset• Dreams that challenges and energizes a

company, i.e., vision

strategic management- chapter one€¦ · ppt file · web view2012-08-27 · knowledge objectives...

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