The Scope Of Strategic Management

J. Constable has defined the area addressed by strategic management as "the management processes and decisions which determine the long-term structure and activities of the organization". This definition incorporates five key themes: * Management process. Management process as relate to how strategies are created and changed. * Management decisions. The decisions must relate clearly to a solution of perceived problems (how to avoid a threat; how to capitalize on an opportunity). * Time scales. The strategic time horizon is long. However, it for company in real trouble can be very short. * Structure of the organization. An organization is managed by people within a structure. The decisions which result from the way that managers work together within the structure can result in strategic change. * Activities of the organization. This is a potentially limitless area of study and we normally shall centre upon all activities which affect the organization. These all five themes are fundamental to a study of the strategic management field and are discussed further in this chapter and other part of this thesis.

The Resource-Based Model

The Resource-Based model adopts an internal perspective to explain how a company's unique bundle or collection of internal resources and capabilities represent the foundation upon which value-creating strategies should be built. Resources are inputs into a company's production process, such as capital equipment, individual employee's skills, patents, brand names, finance and talented managers. These resources can be tangible or intangible. Capabilities are the capacity for a set of resources to integratively-or in combination-perform a task or activity. Thus, according to the Resource-Based model, a company's resources and capabilities are more critical to determining the appropriateness of strategic actions than are the conditions and characteristics of the external environment. Thus, strategies should be selected that enable the company to best exploit its core competencies, relative to opportunities in the external environment. Figure: Five steps of the Resource-Based Model

The Resource-Based model of above-average returns is grounded in the uniqueness of a company's internal resources and capabilities. The five-step model describes the linkages between resource identification and strategy selection that will lead to above-average returns as shown in the figure above. 1. Companies should identify their internal resources and assess their strengths and weaknesses. The strengths and weaknesses of company resources should be assessed relative to competitors. 2. Companies should identify the set of resources that provide the company with capabilities that are unique to the firm, relative to its competitors. The company should identify those capabilities that enable the company to perform a task or activity better than its competitors. 3. Companies should assess or determine the potential for their unique sets of resources and capabilities to outperform its competitors in terms of returns. Determine how a company's resources and capabilities can be used to gain competitive advantage. 4. Locate and compete in an attractive industry. Determine the industry that provides the best fit between the characteristics of the industry and the company's resources and capabilities. 5. To attain a sustainable competitive advantage and earn above-average returns, companies should formulate and implement strategies that enable them to better exploit their resources and capabilities to take advantage of opportunities in the external environment than can their competitors. However, taking advantage of or exploiting resources and capabilities in the new competitive landscape may not always result in a company achieving a sustainable competitive advantage and above-average returns. The potential to achieve a sustainable competitive advantage will be realised when company resources and capabilities are: Valuable, allowing the company to exploit opportunities or neutralise threats in the external environment Rare or possessed by few, if any, current and potential competitors Costly to imitate such that other companies will be able to obtain them only at a cost disadvantage relative to companies that already have them Non-substitutable as there are no strategic equivalents Core competencies are resources and capabilities that serve as a source of competitive advantage over a company's rivals and represent the dominant influences on the appropriateness of a company's strategic actions.

One strategy that may enable a company to transform or develop its resources and capabilities into core competencies is to organise itself to take advantage of them through firm-specific patterns of combinations of its human resources. Using these resources companies may be able to better utilise their managerial competencies to better organise and manage diverse, complex operations, develop and communicate a strategic intent and mission or to reengineer products to better meet changing customer expectations.

Figure: Views of Competitive Advantage Compared

The I-O Model

The I/O or Industrial Company model adopts an external perspective. It starts with an assumption that forces external to the company represent the dominant influences on a company's strategic actions. In other words, this model presumes that the characteristics of and conditions present in the external environment determine the appropriateness of strategies that are formulated and implemented in order for a company to earn above-average returns. In short, the I/O model specifies that the choice of industries in which to compete has more influence on company performance than the decisions made by managers inside their firm. The I/O model is based on the following assumptions: The external environment-the general, industry and competitive environments imposes pressures and constraints on companies and determines strategies that will result in superior returns. In other words, the external environment pressures the company to adopt strategies to meet that pressure while simultaneously constraining or limiting the scope of strategies that might be appropriate and eventually successful. Most companies competing in an industry or in an industry segment control similar sets of strategically relevant resources and thus pursue similar strategies. This assumption presumes that, given a similar availability of resources, the majority of companies competing in a specific industry-or in a segment of the industry-have similar capabilities and thus follow strategies that are similar. In other words, there are few significant differences among companies in an industry. Resources used to implement strategies are highly mobile across firms. Significant differences in strategically relevant resources among companies in an industry tend to disappear because of resource mobility. Thus, any resource differences soon disappear as they are observed and acquired or learned by other companies in the industry. The I/O model was a dominant paradigm from the 1960s through the 1980s. According to this model companies must pay careful attention to the characteristics of the industry in which they choose to compete, searching for one that is the most attractive to the firm, given the company's strategically relevant resources. Then the company must be able to successfully implement strategies required by the industry's characteristics to be able to increase their level of competitiveness. The five forces model is an analytical tool used to address and describe these industry characteristics.

Figure: Five step Process of the I/O Model Based on its underlying assumptions, the I/O model prescribes a five-step process for companies to achieve above-average returns as shown in the figure above: 1. Study the external environment-general, industry and competitive-to determine the characteristics of the external environment that will both determine and constrain the company's strategic alternatives. Select an industry (or industries) with a high potential for returns based on the structural characteristics of the industry. Based on the characteristics of the industry, in which the company chooses to compete, strategies that are linked with above-average returns should be selected. A model or framework that can be used to assess the requirements and risks of these strategies, the Generic Strategies (cost leadership and differentiation), will be discussed in detail later.

2.

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Acquire or develop the critical resources-skills and assets-needed to successfully implement the strategy that has been selected. The I/O model indicates that above-average returns will accrue to companies that successfully implement relevant strategic actions that enable the company to leverage its strengths (skills and resources) to meet the demands or pressures and constraints of the industry in which they have elected to compete.

5.

Distinctive competencies
Also known as core capabilities or core competencies, distinctive competencies are the talents and collective experience that are inherent within the work force of a given company. These essential characteristics are considered highly desirable, since they provide the business with what it needs to be competitive in the marketplace, provide value to customers, and ultimately achieve the goals and aims of the company. There is no one ideal combination of these talents and experience, since the tools needed by different companies will vary. Distinctive competencies are also somewhat difficult for the competition to copy or imitate. This difficulty may stem from finding it hard to attract employees with similar levels and types of competency, or an inability to obtain individuals who can also bring the same level of experience to the business effort. In either case, competitors find it hard to create the same mixture of resources, and thus are not able to execute the same type of business plans with similar success.
Definition

A distinctive competency is a competency unique to a business organization, a competency superior in some aspect than the competencies of other organizations, which enables the production of a unique value proposition in the function of the business. A distinctive competency is the basis for the development of an unassailable competitive advantage. The uniqueness differentiates this competency from all others, whether a core competency or simply a competency.

Sources of distinctive competency -Distinctive competencies, the basis for competitive advantage, can come from technology, industry position, market relations, cost, business processes, manufacturing processes, people, customer satisfaction, or just being first. The insightful integration of complementary elements of the business model is the strongest form of competitive advantage known. This is because it is so difficult for competitors to understand and even more difficult to replicate, especially when the business model elements of value, purpose, vision, culture, and identity are intertwined in a powerful business solution.

Examples of distinctive competency -Toyota has a distinctive competency in lean manufacturing. GE has a distinctive competency in management development. These companies also have core competencies, core to their particular lines of business. They also have competencies necessary to operate their business but of not of strategic significance, such as payroll, the processes used to pay their employees. On the other hand, a company like ADP, which provides payroll and benefits services, certainly has payroll processing as a core competency, if not a distinctive competency. Competency and advantage -For a business to develop and sustain a competitive advantage, it must have some sort of competitive advantage, based on a distinctive competency, which enables it to produce a unique value proposition. A distinctive competency is a competency that is maintainable in the face of competition. It is not imitable, at least for a while. This can be thought of as an ""unfair advantage"". In a dynamic environment, ultimately distinctive competencies, or the uniqueness of the value proposition produced using them, becomes less distinct or less unique. Therefore, in order to sustain advantage, competencies must be dynamic, evolving to more favorable forms in order to sustain advantage over the long haul. Dynamic capability refers to the development of competencies, both in reaction to the environment and deliberately as part of learning and knowledge development. See dynamic capability for a perspective on the development of capability, i.e. competency. Distinctive competency should be explicitly defined to insure that it is profoundly understood, it should be protected from loss to competitors whether through trade secrets, intellectual property, or simply by making it such an integral component of an overall competitive business model that it cannot be replicated. Leadership must nurture, tune, and renew the distinctive competency in order to have it remain distinctive.

Frontal Attack
In a pure frontal attack, the attacker matches its opponents product, advertising, price, and distribution. The principle of force says that the side with the greater manpower (resources) will win. A modified frontal attack, such as cutting price vis- -vis the opponents, can work if the market leader does not retaliate and if the competitor convinces the market that its product is equal to the leaders. Helene Curtis is a master at convincing the market that its brandssuch as Suave and Finesse are equal in quality but a better value than higher priced brands.

The Experience Curve

In the 1960's, management consultants at The Boston Consulting Group observed a consistent relationship between the cost of production and the cumulative production quantity (total quantity produced from the first unit to the last). Data revealed that the real value-added production cost declined by 20 to 30 percent for each doubling of cumulative production quantity: The Experience Curve is defined as: Costs of value added activities, net of inflation, will characteristically decline 25 to 30 percent each time the total accumulated experience has been doubled. In other words, as a company has increased experience in producing a specific product, costs associated with that product correlate with a decrease 25-30% per year (when quantified, experience is usually expressed in number of cumulative units produced). A graph of this relationship would plot as a straight line in logarithmic coordinates as shown in the following figure. This correlation is best thought of as a trendline, and is the result of a decrease of each element of cost associated with the product. These elements include R&D, sales expense, advertising, and overhead (in contrast to the Learning Curve analysis which only incorporates costs associated with labor and production). These elements will of course all decrease at their own specific rates (and with their own specific starting points in time), the aggregation of which will can be approximated with the Experience Curve trendline. Of course this reduction in cost as volume increases does not happen automatically. The relationship is the result of conscious actions taken by management to actively bring down costs over time, usually in the face of competitive pressures. Thus, one can think of the Experience Curve relationship as the result of a company fully realizing its potential. In this vein, many business concepts are essentially subsets of the Experience Curve. For example, scale effects, the learning curve, substitution effects, and critical mass of knowledge are all manifestations of (or arguably explanations for) the Experience Curve. Failure of companies to enjoy benefits brought about by the Experience Curve can be the result of any number of factors, including inadequate investment by the company in the product at hand, or mismanagement by company leadership.

The Experience Curve

The vertical axis of this logarithmic graph is the real unit cost of adding value, adjusted for inflation. It includes the cost that the firm incurs to add value to the starting materials, but excludes the cost of those materials themselves, which are subject the experience curves of their suppliers.

Note that the experience curve differs from the learning curve. The learning curve describes the observed reduction in the number of required direct labor hours as workers learn their jobs. The experience curve by contrast applies not only to labor intensive situations, but also to process oriented ones. The experience curve relationship holds over a wide range industries. In fact, its absence would be considered by some to be a sign of possible mismanagement. Cases in which the experience curve is not observed sometimes involve the withholding of capital investment, for example, to increase short-term ROI. The experience curve can be explained by a combination of learning (the learning curve), specialization, scale, and investment.

Implications for Strategy

The experience curve has important strategic implications. If a firm is able to gain market share over its competitors, it can develop a cost advantage. Penetration pricing strategies and a significant investment in advertising, sales personnel, production capacity, etc. can be justified to increase market share and gain a competitive advantage. When evaluating strategies based on the experience curve, a firm must consider the reaction of competitors who also understand the concept. Some potential pitfalls include:

The fallacy of composition holds: if all other firms equally pursue the strategy, then none will increase market share and will suffer losses from over-capacity and low prices. The more competitors that pursue the strategy, the higher the cost of gaining a given market share and the lower the return on investment. Competing firms may be able to discover the leading firm's proprietary methods and replicate the cost reductions without having made the large investment to gain experience. New technologies may create a new experience curve. Entrants building new plants may be able to take advantage of the latest technologies that offer a cost advantage over the older plants of the leading firm.