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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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Chapter 1: Strategic Management and Strategic Competitiveness


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chapter 1 strategic management and strategic competitiveness
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?
nature of competition basic concepts
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
nature of competition basic concepts3
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
industrial organizational i o model of above average returns aar
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)
the resource based model of aar
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
the resource based model of aar9
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
vision and mission
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
stakeholders
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
strategic leaders
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
strategic leaders14
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
what is performance
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
major approaches to measuring performance
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
major approaches to measuring performance18
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
major approaches to measuring performance19
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
major approaches to measuring performance20
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
the relative nature of performance
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