Basic Principles of Strategic Management

Basic Principles of Strategic Management Review for Final – Business 189 Stuff that’s worth remembering

Distinctive competence • Very important strengths, unique to the particular firm, that create competitive advantage • Built from resources and capabilities • Resource = possessions of the firm • Tangible – factories • Intangible – brand names • Capability = skills at putting resources to productive use

A competence = a bundle of resources and capabilities that does something fundamental and hard to imitate • A competence is said to be distinctive when it gives or has clear potential to give the firm competitive advantage

Strategies – actions and plans to attain one or more business goals

Levels of strategy • Corporate level • What businesses should we be in? • What are our basic attitudes to them? • Business level • Strategy for a unit that operatesan entire business • Functional level • Strategy for a unit that performs a particular function for a business unit (or for the organization as a whole)

Business people spend most time at business & functional levels • The critical goal is usually competitive advantage • Higher returns than others in their industry • The ultimate goal is sustained competitive advantage • For this, hard-to-imitate competencies are critical

Business model • Management’s theory of how it will attain competitive advantage • Or, especially when considering corporate-level strategy, simply high profits

The basic model Good business model Good strategies Distinctive competences you can defend High profits – Higher return than competitors

Deliberate vs. emergent strategy • Emergent strategy = actions that happen without planning • Deliberate strategy can be considered in terms of • Strategy formulation • Strategy implementation

Strategic Intent • Big goal • Widely shared at all levels in the organization • Pursued for a long period • with both deliberate and emergent strategies

Internal analysis Value to customer • Value creation Consumer surplus Price Profit margin Cost, including cost of capital

Value chain • The distinctive competence can be anywhere on the value chain • In primary activities or support activities • Barriers to imitation • Very diverse • But capabilities that are hard to explain are typically hard to imitate

Inertia • Icarus paradox

External analysis • Industry – firm and its close competitors • Sector • Segment • Stages in industry evolution • 5-forces analysis

Globalization • The competitive advantages of national industries • Factor endowments • Demand conditions • Related and supporting industries • Rivalry

Measuring success • Return on invested capital • Return on equity

Those are the central ideas • The rest of the course examined issues in • Functional level strategy • Business-level strategy • Technology strategy • Global strategy • Corporate strategy • Managed change • Corporate governance • Ethics

Issues in functional-level strategy • Economies of scale • The experience curve – a combination of • Economies of scale and • Learning effects

Issues in business-level strategy • Product/service differentiation • Market segmentation • Generic strategies • Cost leadership • Differentiation • Focus • Focused cost leadership • Focused differentiation

Pursuing both cost leadership and differentiation • Difficulties (“stuck in the middle”) • Possible benefits • Strategic groups • Game theory – look forward / reason back

Issues in technology industries • Standards • Setting standards • Strategies for winning format wars • Killer applications • Razor and blade • Cooperation with competitors • Costs in high tech industries

First-mover advantages, disadvantages • Disruptive technology – why existing firms neglect new technology that produces cheap products

Global strategies • Basic choices of strategies • International strategy – transferring existing competences abroad • Multidomestic strategy – responsiveness everywhere • Global strategy – cost reductions through centralization • Transnational strategy – seeking simultaneous cost reductions, competency transfer, responsiveness

I did not prepare slides on corporate strategy because I thought slides could not easily summarize it. • However, lecture notes on corporate strategy are on the web site – • Click on Business 189, then Lecture Notes, then Section 18: Corporate Strategy 1. • Note the diagrams I planned to put on the Board are at the end of the file • Section 19: Corporate Strategy 2 may also be helpful.

A basic change process • Unfreeze • Movement • Refreeze

Key issues in corporate governance • Stakeholders • Internal • External • Stockholders (the owners) • The agency problem • Information assymetry • Corporate governance • Annual meeting • Board of Directors • Stock options • Takeover threats

Ethical decision – one a reasonable stakeholder can support • Unethical decision – one you’d prefer to hide

Basic Principles of Strategic Management