Lecture Outline

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Lecture Outline
Strategic Management and Competitive
Advantage Jay B. BarneyWilliam S. Hesterly
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Chapter 1
What is Strategy and the Strategic Management
Process?
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Chapter Objectives (1 of 2)

• Define the concept of strategy.
• Describe the strategic management process.
• Define competitive advantage and its relationship
  to economic value creation.
• Define two different measures of competitive
  advantage.
• Explain the difference between emergent and
  intended strategies.

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Chapter Objectives (2 of 2)

• Discuss the importance of understanding a firms
  strategy even if you are not a senior manager in
  a firm.
• Describe how the strategic management process can
  be extended to include international business
  activities.

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Defining Strategy
Definition of Strategy
A strategy is a theory about how to gain
competitive advantages. A good strategy is a
strategy that actually generates such advantages.
A firms strategy is defined as follows
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Example of StrategyPanera Bread
Fast Food With Counter Service
Casual Dining With Table Service

• Panera Bread
• New theory.
• Fast casual

Advantage Fast Disadvantage Tiresome Food
Advantage Good food Disadvantage Slow
Good Food With Counter Service
Advantage Fast Advantage Good Food
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Panera BreadIs the Strategy Generating a
Competitive Advantage?
Performance Measure Panera
Average for Restaurant Industry
Gross Profit Margin
55.03
24.51
8.36
7.98
Net Profit Margin
Net Profit Margins of Other Restaurants
Wendys
1.33
McDonalds
12.27
Outback Steakhouse
4.60
Darden
5.51
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Central Questions that Strategic Managers Must
Address
Do we have a coherent theory for obtaining a
competitive advantage? (Segway Example)
What is happening in our industry? (Seagate
Example)
Do we have unique capabilities that makes it
hard for our competitors to copy us?
What is our competition going to do? (Apple
IPhone Example)
How should we respond?
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Strategy is Like a Game of Chess
Strategy is somewhat like a game of chess, and is
all about positioning your own pieces to gain
advantage.
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Illustration of Strategy as a Mechanism of
Preparedness and Action
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Advantages of Engaging in the Strategic
Management Process(1 of 4)

• Provides a Sense of Purpose for a Firm
• A strategic plan includes a mission statement or
  a corporate mantra. The sentiments represented
  in these statements provide a sense of purpose
  for a firm.
• Johnson Johnson Example
• Three things that motivate employees the most
• Group cohesion

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Advantages of Engaging in the Strategic
Management Process(2 of 4)

• Aids In Decision Making
• Having a strategic plan enables the leaders of a
  firm to ensure that day-to-day decisions fit with
  the long-term interests of the organization.
• Does the decision push us further towards meeting
  our objectives or further away from them?

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Advantages of Engaging in the Strategic
Management Process(3 of 4)

• Brings Everyone in the Company Together
• Having a strategic plan encourages everyone in a
  company to work together to achieve common aims.
• Army of one

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Advantages of Engaging in the Strategic
Management Process(4 of 4)

• Focus On Forward Thinking
• The planning function forces managers to think
  ahead and consider resource needs and potential
  opportunities or threats that the organization
  may face in the future.

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Strategic Management Process
External Analysis
Strategic Choice
Strategy Implementation
Competitive Advantage
Mission
Objectives
Internal Analysis
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A Firms Mission

• Mission
• A firms mission is its long-term purpose.
• Missions defined both what a firm aspires to be
  in the long run and what it wants to avoid in the
  meantime.
• Mission Statement
• Missions are often written down in the form of
  mission statements.

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Examples of Mission Statements(1 of 3)
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Examples of Mission Statements(2 of 3)
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Examples of Mission Statements(3 of 3)
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Objectives

• Objectives
• Specific measurable targets a firm can use to
  evaluate the extent to which it is realizing its
  mission.
• High Quality Objectives
• Are tightly connected to elements of a firms
  mission and are relatively easy to measure and
  track over time.
• Low Quality Objectives
• Either do not exist or are not connected to
  elements of a firms mission, are not
  quantitative, and are difficult to measure or
  difficult to track over time.

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3M ExampleTying of Firms Objectives to its
Mission
Mission Statement
Objectives

Satisfying our customers with superior quality
and value

Growth in earnings per share averaging 10 or
better per year

Providing investors with an attractive return
through sustained, high-quality growth

A return on employed capital of 27 or better

Respecting our social and physical environment

At least 30 sales from products that are no more
than four years old

Being a company that employees are proud to be
part of
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External and Internal Analysis

• External Analysis
• An identification of the critical threats and
  opportunities in the competitive environment.
• Examines how competition in this environment is
  likely to evolve and what implications that
  evolution has for the threats and opportunities a
  firm is facing.
• Internal Analysis
• Helps identify a firms strengths and weaknesses.
• Helps a firm identify which of its resources and
  capabilities are likely to be sources of
  competitive advantage.
• Identify areas that need improvement and change.

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Making Well Informed Strategic Choices
External Analysis
Strategic Choice
Strategy Implementation
Competitive Advantage
Mission
Objectives
Internal Analysis
Armed with a mission, objectives, and completed
external and internal analyses, a firm is ready
to make its strategic choices.
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Video CaseIllustrating One Firms Pretense for
Making Strategic Choices
Stu Leonards Grocery Store
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Business Level Strategies

• Business-Level Strategies
• Are actions firms take to gain competitive
  advantage in a single market or industry.
• The two most common business-level strategies are
  cost leadership (Chapter 4) and product
  differentiation (Chapter 5).

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Corporate-Level Strategies

• Corporate Level Strategies
• Are actions firms take to gain competitive
  advantage by operating in multiple markets or
  industries simultaneously.
• Common corporate strategies include
• Vertical integration strategies (Chapter 6)
• Diversification strategies (Chapters 7 and 8)
• Strategic alliances strategies (Chapter 9
• Mergers and acquisition strategies (Chapter 10)

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Choosing a Strategy

• Objectives When Making a Strategic Choice
• Choose a strategy that
• Supports the firms mission
• Is consistent with a firms objectives
• Exploits opportunities in a firms environment
  with a firms strengths
• Neutralizes threats in a firms environment
  while avoiding a firms weaknesses.

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Strategy Implementation

• Strategy Implementation
• Occurs when a firm adopts organizational policies
  and practices that are consistent with its
  strategy.
• Organizational policies and practices
  particularly important in implementation a
  strategy
• Organizational structure
• Management controls
• Employee compensation policies

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What is Competitive Advantage?

• Competitive Advantage
• A firm has a competitive advantage when it is
  able to create more economic value than rival
  firms.
• Economic Value
• Is simply the difference between the perceived
  benefits gained by a customer that purchases a
  firms products or services and the full economic
  cost of these products and services.

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Nature of Competitive Advantage?(1 of 2)

• How to Create Competitive Advantage
• There must be something different about a firms
  offerings vis-à-vis competitions offerings
• If all firms strategies were the same, no firm
  would have a competitive advantage
• Competitive advantage is the result of doing
  something different and/or better than
  competitors

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Nature of Competitive Advantage?(2 of 2)
If you have the same strategy as your competitors
Your strategy is a wash
If the strategy is different but is easily copied
It provides only a temporary advantage
If the strategy is different but is hard to copy
It is strong and sustainable
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Examples of What Competitive Advantage Might Be
All About(1 of 2)

• Superior products
• As in the case of Upper Crust Pizza
• Superior service
• As in the case of Gary Drug
• Superior customer knowledge
• As in the case of Google
• Superior partners
• Partners can add power to an enterprise
  (Google/SeatGuru)

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Examples of What Competitive Advantage Might Be
All About(2 of 2)

• Superior strategy
• What are the clever things a firm does to
  outmaneuver the competition (as in the case of
  Dell Computer)
• Superior process
• Captured through a head start or early mover
  advantage.
• Superior culture
• What makes a company a great place to work in the
  eyes of its employees (as in the case of
  Southwest Airlines)

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Competitive AdvantageTwo Approaches

• Ways That Competitive Advantage is Accomplished
• Preference for the firms output
  (differentiation)
• People choose the firms output over others
• People are willing to pay a premium
• Example Nordstrom's
• Cost advantages compared to competitors (cost
  leadership)
• Lower costs of production/distribution
• Example Wal-Mart

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Types of Competitive Advantage

• Temporary Competitive Advantage
• Competitive advantage that lasts for a very short
  period of time.
• Sustained Competitive Advantage
• Competitive advantage that lasts much longer.
• Competitive Parity
• Firms that create the same economic value as
  their rivals.
• Competitive Disadvantage
• Firms that generate less economic value than
  their rivals.

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Measuring Competitive Advantage

• Two Classes of Measures
• Accounting Measures
• ROA, ROS, ROE, etc. that exceed industry averages
• Economic Measures
• Earning a return in excess of the cost of capital.

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Competitive Advantage and Economic Returns
Competitive Advantage
Economic Returns
Advantage
Above Normal
exceeding expectations
Parity
Normal
meeting expectations
Disadvantage
Below Normal
failing expectations
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Emergent Versus Intended Strategies(1 of 2)

• Intended Strategies
• The strategic management process (as show earlier
  in the chapter) leads managers to intended
  strategies
• Emergent Strategies
• However, conditions often change or new
  information becomes available
• Managers respond and adopt emergent strategies

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Emergent Versus Intended Strategies(2 of 2)
Illustration of an Emergent Strategy
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The Strategic Management Process in the
International Setting(1 of 2)

• Things to Consider
• Important questions remain the same, but the
  answers may be different.
• A firm would still ask about social trends, but
  social trends may be moving in different
  directions in different markets.
• Cultural and infrastructure differences must be
  taken into account throughout the strategic
  management process .

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The Strategic Management Process in the
International Setting(2 of 2)

• Adopting a Global View
• Managers need to learn to think about strategy in
  a global context.
• Observed phenomena have different meaning in
  different parts of the world.
• Many firms explicitly encourage international
  experience
• You need to know how the competition sees the
  world.

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The Strategic Management Process(1 of 2)

• Summary
• Firms could achieve competitive parity and
  survive
• They would face a flat demand curve
• Their cost structure would be the industry
  average
• They would need to adapt their strategy over time
  just to survive
• They would fail if they didnt adapt their
  strategy

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The Strategic Management Process(2 of 2)

• Summary
• This course is not about mere survival, it is
  about thrivingachieving competitive advantage.
• The strategic management process helps managers
  achieve competitive advantage
• Competitive advantage depends on differences
• Strategy is about discovering and exploiting
  these differences

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Strategic Management and Your Career

• Applying Strategy to Your Career
• First, it can give you the tools you need to
  evaluate the strategies of firms that may employ
  you.
• Second, once you are working for a firm,
  understanding that firms strategies, and your
  role in implementing those strategies, can be
  very important to your personal success.
• Finally, while it is true that strategic choices
  are generally limited to very experienced senior
  managers in large organizations, in smaller and
  entrepreneurial firms many employees end up being
  involved in the strategic management process.

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Strategy Matters!

• Strategy Matters
• Strategy is often the difference between
• Success and failure, between mediocrity and
  excellence
• A great manager and an average manager
• Stumbling through life and moving ahead with
  purpose