CHAPTER 1: Strategic Management & Strategic Competitiveness

1. PART 1: STRATEGIC MANAGEMENT INPUTS CHAPTER 1: Strategic Management & Strategic Competitiveness

2. THE STRATEGIC MANAGEMENT PROCESS FIGURE 1.1 The Strategic Management Process

3. KNOWLEDGE OBJECTIVES

4. KNOWLEDGE OBJECTIVES

5. IMPORTANT DEFINITIONS ● STRATEGIC COMPETITIVENESS -achieved when a firm successfully formulates and implements a value-creating strategy ● STRATEGY -an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage ● COMPETITIVE ADVANTAGE - when a firm implements a strategy that creates superior value for customers; competitors are unable to duplicate it or find too costly to imitate it

6. IMPORTANT DEFINITIONS ●RISK -an investor’s uncertainty about the economic gains or losses that will result from a particular investment ● ABOVE-AVERAGE RETURNS -returns in excess of what an investor expects to earn from other investments with a similar amount of risk ●AVERAGE RETURNS - returns equal to those an investor expects to earn from other investments with a similar amount of risk

7. OPENING CASE • ONCE A “GIANT,” BORDERS BECAME A “WEAKLING” ON ITS KNEES INABILITY TO EARN AVERAGE RETURNS resulted first in decline and, eventually, failure ●Enjoyed considerable success early on ●Tried to enrich its traditional approach with more marketing and more attractive stores, demonstrating a lack of market understanding ●Declining book sales for large chain store retailers ●Should have been entrepreneurial, innovative, and market-oriented BORDERS - OPENING CASE - FAILURE EXAMPLE

8. THE STRATEGIC MANAGEMENT PROCESS ■ FIRST:External environment and internal organization are analyzed 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.

9. THE STRATEGIC MANAGEMENT PROCESS Rational: the approach firms use to achieve strategic competitiveness and earn above-average returns FORMULATION and IMPLEMENTATION: the two types of strategic actions that must be simultaneously integrated to successfully employ the strategic management process

10. THE STRATEGIC MANAGEMENT PROCESS The text is divided into three parts.

11. THE COMPETITIVE LANDSCAPE ■ GLOBALIZATION - emergence of a global economy ■ TECHNOLOGY - rapid technological changes ■ INDUSTRY BOUNDARIES BLURRING ■ EXAMPLES -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 percent of NBC Universal and Comcast owns the remaining 51 percent ■ STRATEGIC MANAGEMENT PROCESS - effective use of the strategic management process reduces the likelihood of failure for firms as they encounter the conditions of today’s competitive landscape

12. THE COMPETITIVE LANDSCAPE ■ HYPERCOMPETITION - characterized by ■ Market instability and change ■ Rapidly escalating competition ■ Aggressive challengers ■ Strategic maneuvering to establish first- mover advantage ■ Technology industries ■ TWO DRIVERS - GLOBALIZATION - TECHNOLOGY ■ Strategic flexibility - important tool

13. 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

14. 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

15. THE COMPETITIVE LANDSCAPE STRATEGIC FOCUS Huawei also needs Guanxi in the United States GUANXI ■ Strong relationships in which each party feels obligated to help the other ■ Key element of doing business in China ■ Building strong relationships is an important dimension of Chinese culture; Guanxi is also important when conducting business in the United States

16. THE COMPETITIVE LANDSCAPE THE GLOBAL ECONOMY ■ Hypercompetitive business environment challenges firms to reconsider which markets to compete in; this positioning is more critical than ever ■ GE- headquartered in the U.S., yet up to 60% of its revenue growth through 2015 will be generated from rapidly developing economies such as China and India ■ Jeffrey Immelt - suggests that we have entered a new economic era in which the global economy will be more volatile and emerging economies such as Brazil, China, and India will be the major drivers of growth

17. THE COMPETITIVE LANDSCAPE THE MARCH OF GLOBALIZATION

18. THE COMPETITIVE LANDSCAPE THE MARCH OF GLOBALIZATION

19. THE COMPETITIVE LANDSCAPE THE RISKS OF GLOBALIZATION

20. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES THREE CATEGORIES for TECHNOLOGY TRENDS Technology is significantly altering the nature of competition and enabling unstable competitive environments ■Technology Diffusion & Disruptive Technologies ■Information Age ■ Increasing Knowledge Intensity

21. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 ■ Technology Diffusion – the speed at which new technologies become available and are used; has increased substantially over the past 15 to 20 year. ■ Examples of technology diffusion: How long it took to get the following into 25 percent of U.S. homes: ● Telephone — 35 years ● TV — 26 years ● Radio — 22 years ● PCs — 16 years ● Internet — 7 years

22. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Perpetual Innovation ■Perpetual Innovation - describes how rapidly and consistently new, information-intensive technologies replace older ones ■ Competitive Premium - the shorter product life cycles resulting from rapid diffusions of new technologies place a competitive premium on being able to quickly introduce new, innovative goods and services ■ Competitive Advantage - speed to market with innovative products is a primary source of competitive advantage

23. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Perpetual Innovation ■Innovations must be derived from an understanding of global standards and global expectations in terms of product functionality ■ Apple - an excellent example of radical innovation by a large established firm ■ Technology Diffusion - to diffuse the technology and enhance the innovation value, firms need to be innovative in incorporating the new technology into their product

24. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Perpetual Innovation ■Rapid Technology Diffusion - now may take only 12 to 18 months for firms to gather information about research and development and product decisions for their competitors ■ Patents - may be an effective protection of proprietary technology in a small number of industries, e.g., pharmaceuticals ■ Proprietary Strategies - many firms often do not apply for patents to prevent competitors from gaining access to the technological knowledge included in the patent application, e.g., the electronics industry

25. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Disruptive Technologies ■Disruptive Technologies - technologies that destroy the value of an existing technology and create new markets, many times representing radical or breakthrough innovation ■ Examples: iPods, iPads, WiFi, and the browser ■ Industry Incumbents Harmed or Destroyed – a disruptive or radical technology creates a new industry, thereby destroying the existing industry; with superior resources, experience, and access to the new technology, some incumbents may be able to adapt

26. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Technology and Innovation Strategic Focus: Apple ■ Apple’s “legendary” market power, phenomenal growth rate, and impressive financial performance stem from its new technology development and innovation ■ Imitators - Apple is expected to retain at least 80% of the tablet computer market even with the many imitative products on the market ■ International- Apple’s stores in China handle 40,000 people daily, four times the average flow of U.S. customers

27. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Technology and Innovation Strategic Focus: Apple ■ Versatility - Apple provides an example of technological entrepreneurship across multiple industries ■ Disruptive Technologies ● Innovation and industry transformation, e.g., iPod, iPad, and the iPhone ● iPod and the complementary iTunes have revolutionized how music is sold and used by consumers ● iPad, in conjunction with Amazon’s Kindle, is changing the publishing industry; moving to electronic books

28. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES The Information Age - Category 2 ■ Dramatic Changes - in information technology have occurred in recent years, e.g., personal computers, cellular phones, artificial intelligence, virtual reality, massive databases, and multiple social networking sites ■ Competitive Advantage - the ability to effectively and efficiently access and use information has become an important source of competitive advantage in virtually all industries ■ Information Technology - enables small firms to be flexible and competitive in the global arena

29. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES The Information Age - Category 2 ■ Change - both the pace of change in information technology and its diffusion will continue to increase ■ Cost - the declining costs of information technologies and the increased accessibility to them are evident in the current competitive landscape ■ Internet - contributing factor to hypercompetition ■ Speed and Diffusion - the global proliferation of computers increases the speed and diffusion of information technologies and enables a level playing field

30. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity - Category 3 ■ Knowledge - information, intelligence, and expertise are the basis of technology and its application ■ Competitive Advantage - in the 1980s, the basis of competition shifted from hard assets to intangible resources; knowledge is a critical organizational resource and an increasingly valuable source of competitive advantage ■ Intangible Resource – knowledge gained through experience, observation, and inference is an intangible resource; the value of intangible resources is growing as a proportion of total shareholder value .

31. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity - Category 3 ■ Strategic Competitiveness - enhanced for the firm that develops the ability to capture intelligence, transform it into usable knowledge, and diffuse it rapidly throughout the firm ■ Competitive Advantage - firms must develop (e.g., through training programs) and acquire (e.g., by hiring educated and experienced employees) knowledge, integrate it into the organization to create capabilities, and then apply it to gain a competitive advantage

32. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity - Category 3 ■ Knowledge Spillovers - knowledge falls into competitor’s hands, e.g., hiring of professional staff/managers by competitors ■Knowledge Diffusion - because of the potential for spillovers, firms must act quickly to use their knowledge in productive ways ■ Strategic Flexibility - facilitates knowledge diffusion to where it has value

33. THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity - Category 3 STRATEGIC FLEXIBILITY ■ Set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment ■ Enables the capacity to learn ■ Facilitates coping with hypercompetition, uncertainty, and risk ■ Firms should try to develop strategic flexibility in all areas of operations

34. 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.

35. THE I/O MODEL OF ABOVE-AVERAGE RETURNS Grounded in economics, the I/O model has First, the external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns. Second, most firms competing within an industry or within a segment of that industry are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources. Four Underlying Assumptions

36. THE I/O MODEL of ABOVE-AVERAGE RETURNS Third, 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. Fourth, organizational decision-makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profit-maximizing behavior.

37. 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.

38. THE I/O MODEL of ABOVE-AVERAGE RETURNS FIRMS CAN EARN ABOVE-AVERAGE RETURNS: ● Cost Leadership Strategy – producing standardized goods or services at costs below those of competitors ● Differentiation Strategy -producing 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.

39. THE I/O MODEL OF ABOVE-AVERAGE RETURNS Research findings support the I/O model, in that approximately 20% of a firm’s profitability is explained by the industry in which it chooses to compete. However, this research also shows that 36% 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 the company’s ability to achieve strategic competitiveness and earn above-average returns.

40. THE I/O MODEL OF ABOVE-AVERAGE RETURNS FIGURE 1.2 The I/O Model of Above Average Returns

41. THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS • The resource-based model assumes that each organization 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 the firm’s unique resources, capabilities, and core competencies have more influence on selecting and using strategies than does the firm’s external environment.

42. THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS • There are FOUR components to the Resource- Based Model: • ● Resources • ● Capabilities • ● Core Competencies • ● Competitive Advantage • There are FOUR criteria that if resources and capabilities fulfill, then they become Core Competencies: • ● Valuable • ● Rare • ● Costly to Imitate • ● Nonsubstitutable

43. THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS • Resourcesare inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers. • A firm’s resources are either tangible or intangible and are classified into three categories: physical, human, and organizational capital. • Resources alone may not yield a competitive advantage. Many resources can either be imitated or substituted over time, therefore, it is difficult to achieve and sustain a competitive advantage based on resources alone.

44. THE RESOURCE-BASED MODEL of ABOVE-AVERAGE RETURNS • Acapability 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. KEY WORD: INTEGRATIVE

45. THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS • When these four criteria are met, resources and capabilities become core competencies:

46. THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS Four Underlying Assumptions First, differences in firms’ performances across time are due primarily to their unique resources and capabilities rather than the industry’s structural characteristics. Second, firms acquire different resources and develop unique capabilities based on how they combine and use the resources.

47. THE RESOURCE-BASED MODEL of ABOVE-AVERAGE RETURNS Third, that resources and capabilities are NOT highly mobile across firms. Fourth, that the differences in resources and capabilities are the basis of competitive advantages. • Above-average returns are earned when the firm uses its valuable, rare, costly-to-imitate, and non- substitutable resources and capabilities to compete against its rivals in one or more industries.

48. THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS FIGURE 1.3 The Resource-Based Model of Above Average Returns

49. TWO MODELS OF STRATEGIC DECISION MAKING • Evidence indicates that both models yield insights that are linked to successfully selecting and using strategies.

50. VISION • Vision is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve. • A vision statement is short and concise, making it easy to remember. • It articulates the ideal description of the organization and gives shape to its intended future.