PART 1:

STRATEGIC MANAGEMENT INPUTS

Chapter 1
Strategic management and
strategic competitiveness
 FIGURE 1.1

THE STRATEGIC
MANAGEMENT
PROCESS
 IMPORTANT DEFINITIONS
• Strategic competitiveness is achieved when a firm
successfully formulates and implements a value-
creating strategy.
• Strategy is an integrated and coordinated set of
commitments and actions designed to exploit core
competencies and gain a competitive advantage.
• Competitive advantage occurs when a firm
implements a strategy that creates superior value for
customers, which competitors are unable to duplicate
it or find too costly to imitate it.
 IMPORTANT DEFINITIONS
• RISK refers to an investor’s uncertainty about the
economic gains or losses that will result from a
particular investment.
• Above-average returns are returns in excess of what
an investor expects to earn from other investments
with a similar amount of risk.
• Average returns are returns equal to those an
investor expects to earn from other investments with
a similar amount of risk.
 THE STRATEGIC MANAGEMENT PROCESS
First: External environment and internal organisation are
analysed 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.
THE STRATEGIC MANAGEMENT PROCESS
• The strategic management process is a rational
approach firms use to achieve strategic
competitiveness and earn above-average returns.
• Formulation and implementation are the two types
of strategic actions that must be simultaneously
integrated to successfully employ the strategic
management process.
 THE COMPETITIVE LANDSCAPE
• Globalisation: emergence of a global economy
• Technology: rapid technological changes
• Industry boundaries blurring: For example, 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 per cent of NBC Universal and
Comcast owns the remaining 51 per cent.
• The effective use of the strategic management process
reduces the likelihood of failure for firms as they encounter
the conditions of today’s competitive landscape.
 THE COMPETITIVE LANDSCAPE
• Hypercompetition is characterised by:
– market instability and change
– rapidly escalating competition
– aggressive challengers
– strategic maneuvering to establish first (mover
advantage)
– technology industries.
• Two drivers: globalisation and technology
• Strategic flexibility is an important tool.
 THE COMPETITIVE LANDSCAPE:
THE GLOBAL ECONOMY
• 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 COMPETITIVE LANDSCAPE:
THE 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.
 THE COMPETITIVE LANDSCAPE:
STRATEGIC FOCUS
Guanxi:
• involves strong relationships in which each party
feels obligated to help the other
• is a key element of doing business in China
• is an important dimension of Chinese culture
• is important when conducting business in the West.
 THE COMPETITIVE LANDSCAPE:
TECHNOLOGY AND TECHNOLOGICAL CHANGES
• Technology is significantly altering the nature of
competition and enabling unstable competitive
environments.
• Categories of technology trends:
– Technology diffusion and disruptive
technologies
– Information age
– Increasing knowledge intensity
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
INTERNAL
I/O RESOURCE-
MODEL BASED MODEL
THE I/O MODEL OF ABOVE-AVERAGE RETURNS
Grounded in economics, the I/O model has four
underlying assumptions:
1. The external environment is assumed to impose
pressures and constraints that determine strategies
that will result in above-average returns.
2. Most firms competing within an industry or a
segment of that industry are assumed to control
similar strategically relevant resources and to pursue
similar strategies in light of those resources.
THE I/O MODEL OF ABOVE-AVERAGE RETURNS
3. 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.
4. Organisational decision makers are assumed to be
rational and committed to acting in the firm’s best
interests, as shown by their
profit-maximising behaviour.
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.
THE I/O MODEL OF ABOVE-AVERAGE RETURNS
• Firms can earn above-average returns with the following
strategies:
– cost leadership strategy, which produces standardised
goods or services at costs below those of competitors
– differentiation strategy, which produces 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.
THE I/O MODEL OF ABOVE-AVERAGE RETURNS
Research findings support the I/O model in that approximately
20 per cent of a firm’s profitability is explained by the industry
in which it chooses to compete.
However, this research also shows that 36 per cent 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 a 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 RETURNS
The resource-based model assumes that each organisation
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 a
firm’s unique resources, capabilities and core competencies
have more influence on selecting and using strategies than
does the firm’s external environment.
 THE RESOURCE-BASED MODEL OF
ABOVE-AVERAGE RETURNS
• A 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.
 THE RESOURCE-BASED MODEL OF
ABOVE-AVERAGE RETURNS
When 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 neutralise threats.
VALUABLE
• They are rare when possessed by few, if any,
RARE current and potential competitors.
• Resources are costly to imitate when other firms
cannot obtain them or are at a cost disadvantage.
COSTLY TO IMITATE
NON- • They are non-substitutable when they have no
structural equivalents.
SUBSTITUTABLE
 THE RESOURCE-BASED MODEL OF
ABOVE-AVERAGE RETURNS
The resource-based model has four underlying
assumptions:
1. Differences in firms’ performances across time are due
primarily to their unique resources and capabilities
rather than the industry’s structural characteristics.
2. Firms acquire different resources and develop unique
capabilities based on how they combine and use the
resources.
 THE RESOURCE-BASED MODEL OF
ABOVE-AVERAGE RETURNS
3. Resources and capabilities are not highly mobile
across firms.
4. The differences in resources and capabilities are
the basis of competitive advantages.

Above-average returns are earned when

a firm uses its valuable, rare, costly-to-
imitate and non-substitutable resources
and capabilities to compete against its
rivals in one or more industries.
 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
INTERNAL
I/O RESOURCE-
MODEL BASED MODEL
 VISION
• A vision is a picture of what a firm wants to be and, in
broad terms, what it wants to ultimately achieve.
• Executives and top-level managers must formulate
and implement strategies consistent with the vision.
• A firm’s vision tends to be enduring, whereas its
mission can change in light of changing environmental
conditions.
 VISION STATEMENT
• A vision statement articulates the ideal
description of the organisation and gives shape to
its intended future. It is short and concise, making
it easy to remember.
• Vision statements reflect a firm’s values and
aspirations and are intended to capture the heart
and mind of each stakeholder.
EXAMPLES OF VISION STATEMENTS
‘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)
 MISSION
• The vision is the foundation for a firm’s mission.
• A 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.
 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.
 EXAMPLES OF MISSION STATEMENTS
‘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 recognised 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
 STAKEHOLDERS

Stakeholders:
• are individuals, groups and organisations that have a
stake in the organisation
• can affect a firm’s vision and mission
• are affected by the strategic outcomes achieved
• have enforceable claims on a firm’s performance.

Competitive advantage: Firms effectively managing

stakeholder relationships outperform those that do not.
 STAKEHOLDERS
• Organisations 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 organisation from the demands of stakeholders
controlling critical resources.
 CLASSIFICATION OF STAKEHOLDERS
There are three groups of stakeholders:
• Capital market stakeholders: shareholders and the
major suppliers of a firm’s capital
• Product market stakeholders: a firm’s primary
customers, suppliers, host communities and unions
representing the workforce
• Organisational stakeholders: a firm’s employees,
including both non-managerial and managerial
personnel.
 FIGURE 1.4

THE FOUR
STAKEHOLDER
GROUPS
 CLASSIFICATION OF STAKEHOLDERS
• Trade-offs must be made in situations where the objectives
of various stakeholder groups differ or conflict. For example:
– Shareholders are 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 maximised 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.
 MANAGING STAKEHOLDER CONFLICT
• First, a firm must thoroughly identify and understand
all important stakeholders.
• Second, it must prioritise them in case it cannot
satisfy all of them.
– Power is the most critical criterion in prioritising
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.
MANAGING STAKEHOLDER CONFLICT

POWER

URGENCY

IMPORTANCE
 PRODUCT MARKET STAKEHOLDERS
• Though all product market stakeholders are
important, the other product market stakeholders are
of little value if there are no customers.
• Customers demand reliable products at the lowest
possible prices.
• Host communities want companies that are willing to
be long-term employers and providers of tax revenue
but that do not place 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.
 ORGANISATIONAL STAKEHOLDERS
• Employees expect a 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.
 ORGANISATIONAL 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.
 STRATEGIC LEADERS
• Strategic leaders are people located in different areas
and levels of a firm who use the strategic management
process to select strategic actions that help the firm
achieve its vision and fulfil its mission.
• Successful strategic leaders are decisive, committed to
nurturing those around them and committed to
helping the firm create value for all stakeholder
groups.
 STRATEGIC LEADERS
Increasingly, CEOs
delegate strategic
• Globalisation
responsibilities to
include decision • Rapid technological
makers closest to change
the action due to • Increasing importance
of knowledge
the changing The global
competitive • People as sources of
landscape. economy competitive
advantage