Chapter 1: Strategic Management and Strategic Competitiveness

1. 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?

2. 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

3. Nature of Competition: Basic concepts • Above Average Returns • Returns in excess of what investor expects in comparison to other investments with similar risk • Risk • Investor’s 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

4. The Strategic Management Process

5. Industrial Organizational (I/O) Model of Above-Average Returns (AAR)

6. 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)

7. The Resource-Based Model of AAR

8. 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 firm’s resources and capabilities that serve as sources of competitive advantage over its rival

9. 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 industry’s 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

10. 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 firm’s 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

11. 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 firm’s performance • Must minimally meet the expectations of each stakeholder group • AAR make this easier to do • 3 Major Stakeholder Groups

12. The Three Stakeholder Groups

13. 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

14. Strategic Leaders • The Work of Effective Strategic Leaders • Work long hours • Must be able to think strategically • ”think seriously and deeply…about the purposes of the organizations they head or functions they perform, about strategies, tactics,…..and people…and 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

15. The Strategic Management Process

16. 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

17. 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 organization’s 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

18. 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

19. 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 short–term financial obligations • Current ratio, quick ratio

20. Major Approaches to Measuring Performance • Leverage Ratios • Ratios that focus on the level of a firm’s indebtedness • Debt to assets, debt to equity, times interest earned • Activity Ratios • Ratios that focus on the level of activity in a firm’s business • Inventory turnover, average collection period

21. 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