Chapter 1: Strategic Management and Strategic Competitiveness

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Chapter 1 Strategic Management and Strategic
Competitiveness

• Overview
• Nature of Competition
• I/O Model of Above-Average Returns (AAR)
• Resource-Based Model of AAR
• Strategic Vision and Mission
• Stakeholders
• Strategic Leaders
• The Strategic Management Process
• What is Performance?

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Nature of Competition Basic concepts

• Strategy
• Integrated and coordinated set of commitments and
  actions designed to exploit core competencies and
  gain a competitive advantage
• Competitive Advantage (CA)
• When a firm implements a strategy that
  competitors are unable to duplicate or find too
  costly to imitate
• Strategic Competitiveness
• Achieved when a firm successfully formulates
  implements a value-creating strategy

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Nature of Competition Basic concepts

• Above Average Returns
• Returns in excess of what investor expects in
  comparison to other investments with similar risk
• Risk
• Investors uncertainty about economic
  gains/losses resulting from a particular
  investment
• Average Returns
• Returns equal to what investor expects in
  comparison to other investments with similar risk
• Strategic Management Process (SMP)
• Full set of commitments, decisions and actions
  required for a firm to achieve strategic
  competitiveness and earn above average returns

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The Strategic Management Process
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Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
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Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)

• 4 Underlying Assumptions
• External environment imposes pressures and
  constraints that determine the strategies
  resulting in AAR
• Most firms that compete within a particular
  industry control similar resources and pursue
  similar strategies
• Resources for implementing strategies are highly
  mobile across firms thus any resource
  differences will be short-lived
• Organizational decision makers are rational and
  committed to acting in the firm's best interests,
  as shown by their profit-maximizing behaviors
• Limitations
• Only two strategies are suggested
• Cost Leadership or Differentiation
• Internal resources capabilities are not
  considered
• AAR are earned when a firm implements the
  strategy dictated by external environment
  (general, industry, and competitor)

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The Resource-Based Model of AAR
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The Resource-Based Model of AAR

• Resources
• Inputs into a firm's production process
• Includes capital equipment, employee skills,
  patents, high-quality managers, financial
  condition, etc.
• Basis for competitive advantage When resources
  are valuable, rare, costly to imitate, and
  nonsubstitutable
• 3 categories of internal/firm-specific resources
• Physical, Human, Organizational capital
• Capability
• Capacity for a set of resources to perform a task
  or activity in an integrative manner
• Core Competency
• A firms resources and capabilities that serve as
  sources of competitive advantage over its rival

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The Resource-Based Model of AAR

• Basic Premise - a firm's unique resources
  capabilities is the basis for firm strategy and
  AAR
• Each organization is a bundle of unique resources
  and capabilities
• Performance difference between firms emerge over
  time due to these unique resources and
  capabilities (versus industrys structural
  characteristics)
• Combined uniqueness should define the firms
  strategic actions
• A firm has superior performance because of
• Unique resources and capabilities, and the
  combination makes them different, and better,
  than their competition driving the competitive
  advantage

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Vision and Mission

• Purpose to inform stakeholders of what the firm
  is, what it seeks to accomplish, and who it seeks
  to serve
• Vision
• Picture of what the firm wants to be and, in
  broad terms, what it ultimately wants to achieve
• Gives the firm direction
• The responsibility of a firm's top strategic
  leader the CEO
• CEO works with others to form a firms strategic
  vision
• Serves as foundation for mission
• Mission
• Specifies the business(es) or industries in which
  a firm intends to compete and the customers it
  intends to serve
• More specific than the vision
• Mission and vision provide foundation for
  strategy formulation and implementation

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Stakeholders

• Basic Premise a firm can effectively manage
  stakeholder relationships to create a competitive
  advantage and outperform its competitors
• Stakeholders are individuals and groups who can
  affect, and are affected by, the strategic
  outcomes achieved and who have enforceable claims
  on a firms performance
• Must minimally meet the expectations of each
  stakeholder group
• AAR make this easier to do
• 3 Major Stakeholder Groups

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The Three Stakeholder Groups
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Strategic Leaders

• People (primarily managers) located in different
  parts of the firm using the strategic management
  process to help the firm reach its vision and
  mission
• Decisive and committed to firms efforts to
  achieve their desired strategic outcomes
• Create and sustain organizational culture
• Can exist at different organizational levels
• Corporate, business, functional, operating

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Strategic Leaders

• The Work of Effective Strategic Leaders
• Work long hours
• Must be able to think strategically
• think seriously and deeplyabout the purposes of
  the organizations they head or functions they
  perform, about strategies, tactics,..and
  peopleand about the important questions they
  need to ask.
• Set ethical tone for organization
• Try to predict the outcomes of their strategic
  decisions before they are implemented
• Involved in internal and external analyses,
  development of vision and mission, and strategy
  formulation and implementation

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The Strategic Management Process
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What is Performance?

• Performance is central to the study and practice
  of strategy
• Organizational performance is complicated
• Numerous definitions, approaches, and types of
  performance
• Can be an elusive concept
• Examples
• Goal attainment - Vision/mission, objectives
• Effectiveness A hospital curing sick people
• Quality Customer service
• Efficiency - Inputs versus outputs
• Financial/accounting/economic Returns ROA, EPS
• Can also vary by type of firm
• For-profit versus not-for-profit
• Publicly traded?
• Government

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Major Approaches to Measuring Performance

• Firm Survival
• A firm that survives over a relatively extended
  period of time must be generating at least normal
  economic performance
• Stakeholders View
• An organizations performance should be evaluated
  relative to the preferences and desires of
  stakeholders that provide resources to a firm
• Different stakeholders can have different
  interests and different criteria for evaluating
  performance
• May need to choose which stakeholders to satisfy
• Must minimally satisfy the interests of each
  stakeholder group

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Major Approaches to Measuring Performance

• Simple Accounting Measures
• Most popular approach
• Publicly available for many firms
• They communicate a great deal of information
• Most often rely on ratio analysis
• 4 Major categories of ratios
• Profitability
• Liquidity
• Leverage
• Activity

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Major Approaches to Measuring Performance

• Profitability Ratios
• Ratios with some measure of profit in the
  numerator and some measure of firm size or assets
  in the denominator
• ROA, ROE, margins, EPS, p/e ratio
• Liquidity Ratios
• Ratios that focus on the ability of a firm to
  meet its shortterm financial obligations
• Current ratio, quick ratio

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Major Approaches to Measuring Performance

• Leverage Ratios
• Ratios that focus on the level of a firms
  indebtedness
• Debt to assets, debt to equity, times interest
  earned
• Activity Ratios
• Ratios that focus on the level of activity in a
  firms business
• Inventory turnover, average collection period

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The Relative Nature of Performance

• Performance is always relative to other firms
• Performance should be compared to industry
  average(s)
• AAR are above industry average
• Normal and below normal returns
• Industry adjustments
• Some industries are more profitable than others
• Can adjust for industry performance and compare
  performance levels across industries
• Can also adjust for risk
• Looking at trends can also be useful
• From earlier
• I/O Model - Pick attractive industry(ies) to
  compete in
• Resource-Based Model - Develop unique bundles of
  resources and capabilities