Competing for Advantage Chapter 1 Introduction to Strategic Management PART I STRATEGIC THINKING
Introduction to Strategic Management • Key Terms • Competitive advantage Derived from the successful formulation and execution of strategies which differ and create more value than competitor strategies • Strategic management process The full set of commitments, decisions, and actions required for a firm to create value and earn returns that are higher than those of competitors
The Competitive LandscapeThe US Airline Industry - An Illustration • De-regulation 1978 • Low-cost, limited route carriers • Terrorist attacks • Volatile economic conditions • Global alliances • High level of consolidation
The Competitive LandscapeMajor Trends • Globalization • Economic volatility • Rapid technological change
Globalization of Markets and Industries • Key Terms • Globalization Increasing economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders • Hypercompetition Extremely intense rivalry among firms, characterized by escalating and aggressive competitive moves among market challengers
Globalization of Markets and Industries • Artificial constraints on business transactions across national boundaries (such as tariffs) have been eliminated. • Restraints on the transfer of resources (such as equipment, capital, raw material, and even employees) across markets have decreased significantly. • The range of competitive opportunities available to firms has greatly increased.
Globalization of Markets and Industries (cont.) • Hypercompetition has resulted from the dynamics of strategic maneuvering among global and innovative competitors in a volatile economy. • Performance standards have increased in many areas, including quality, cost, productivity, product introduction time, and operational efficiency. • Continuous improvement in all areas is necessary for continued survival.
Economic Volatility • National debt levels • Financial market instability • Government actions to reduce debt • Unanticipated crises
Technological Trends • Increasing rate of technological change and diffusion. • Dramatic changes in information technology and ways in which information is used. • Increasing knowledge intensity.
Disruptive Technologies • Destroys the value of existing technologies • Creative destruction process replaces existing technologies with new ones to create new markets
Knowledge-Based Competitive Advantages Business survival now depends on the ability to: • Capture intelligence • Transform it into useable knowledge, and • Diffuse it rapidly throughout the company
Effect of Technology on the Competitive Landscape • Quick competitive information needs • Shorter product life cycles • Indistinguishable products • Rapid technology replacement • Inexpensive information available • New business culture from electronic-business models • Continuous learning necessary
Sources of Competitive Advantage • Speed to market • Access to and use of information • Rapid diffusion of new, transformed knowledge throughout the company • Innovation • Integration of new conditions into the mind set of the organization • Achieving or exceeding global standards • Improved capabilities and skills through the pursuit of higher performance standards • Strategic flexibility
Coping with Hypercompetitive Influences • Key Terms • Strategic flexibility A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment
Sources of Strategic Flexibility • Continuous learning • Strategic thinking • Strategic leadership
Early Influences on the Strategy Concept • Key Terms • Agency theory A viewpoint which argues that agency problems exist when managers take actions that are in their own best interests rather than those of shareholders • Transactions costs economics Examination of the efficiency of economic activity which instructs firms to purchase required resources through a market transaction unless particular conditions exist that make creating them internally more efficient
Modern Strategic Management • Key Terms • Deterministic perspective Strategy formulation argument that firms should adapt to their environments (establishing "fit") because the environmental situation determines the most effective strategies for achieving success • Enactment Principle that challenges the inevitability of deterministic forces in the environment by recognizing the potential of human action to influence organizational results
Foundational Concepts • The need for businesses to establish goals, formulate strategies to achieve them, set implementation and evaluation plans and controls to meet stated goals. • The integration of the external market factors into business planning. • The wisdom of balancing the conflicting needs of businesses' internal and external stakeholders. • The importance of an economic approach to identify market opportunities. • The importance of having or acquiring the resources and capabilities to achieve organizational objectives.
Foundational Concepts (cont.) • The idea that political strategies should be used in addition to rational-deductive strategy development to address stakeholder interests and facilitate the achievement of organizational goals. • The use of organizational learning processes to achieve strategic success. • The use of agency theory to focus on shareholder returns as a primary criterion for firm success. • The use of transactions costs economics to determine whether to produce or acquire the resources needed by businesses.
Three Perspectives on Value Creation • Industrial/Organization (I/O) Economic Model • Resource-Based View • Stakeholder Approach
The Industrial/Organization (I/O) Model of Above-Average Returns • The model explains the dominant influence of the external environment on a firm's strategic actions and performance. “The model specifies that the industry in which a firm chooses to compete has a stronger influence on the firm’s performance than do the choices managers make inside their organizations.”
Underlying Assumptions of the (I/O) Model • The external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns. • Most firms competing within a particular industry or industry segment are assumed to control similar strategically relevant resources and to pursue similarstrategies in light of those resources.
Underlying Assumptions of the (I/O) Model (cont.) • Resources used to implement strategies are assumed to be highly mobile across firms. Because of resource mobility, any resource differences that might develop between firms will be short lived. • Organizational decision makers are assumed to be rational and committed to acting in the firm's best interests, as shown by their profit-maximizing behaviors.
Michael Porter’s Five Forces Model The model suggests that an industry’s profitability is a function of interactions among: • Suppliers • Buyers • Competitive rivalry among industry participants • Product substitutes • Potential entrants to the industry
Michael Porter’s Contributions to the I/O Model • Reinforces the importance of economic theory • Offers an analytical approach that was previously lacking in the field of strategy • Describes the forces that determine the nature/level of competition and profit potential in an industry • Suggests how an organization can use the analysis to establish a competitive advantage
Limitations of the I/O) Model • Only 2 strategies are suggested. • Cost Leadership • Differentiation • Internal resources and capabilities are not considered.
The Resource-Based Model of Above-Average Returns • The model proposes that a firm's unique collection of resources and capabilities is the primary influence on the selection and use of a strategy or strategies to exploit opportunities in the external environment which result in successful performance.
The Resource-Based Model of Above-Average Returns • Key Terms • Distinctive competencies Firm attributes that allow it to pursue a strategy better than other firms • Resources Inputs into a firm's production process • Capability Capacity for a set of resources to perform a task or activity in an integrative manner • Core competencies Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals
Assumptions of the Resource-Based Model • Capabilities evolve and must be managed dynamically in pursuit of value creation and higher firm performance. • Across time, firms acquire different resources and develop unique capabilities. • Resources may not be easily transferable across firms. • The differences in resources are the basis of competitive advantage.
Relevance of Resources to Strategic Management Models • Resources serve as the foundation for the establishment of competencies. • Resources facilitate the implementation of a product market strategy.
Types of Resources in the Resource-Based Model • Physical • Human • Organizational capital Resources may be either tangible or intangible.
Two Types of Core Competencies • Managerial competencies • Product-related competencies
Criteria for Providing a Competitive Advantage • Valuable • Rare • Costly to imitate • Nonsubstitutable
The Stakeholder Model of Responsible Firm Behavior and Firm Performance • The model proposes that a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors.
The Stakeholder Model of Responsible Firm Behavior and Firm Performance • Key Terms • Stakeholders Individuals and groups who can affect, and are affected by, the strategic outcomes a firm achieves and who have enforceable claims on a firm's performance • Strategic intelligence The information firms collect from their network of stakeholders to deal with diverse and cognitively complex competitive situations and to stimulate innovation
Secondary Stakeholders • Government entities and administrators • Activists and advocacy groups • Religious organizations • Other non-governmental organizations
Critical Problem Facing Management Today There is a general lack of public trust for big businesses and their managers.
Challenges of the Stakeholder Model • Anticipating and managing additional costs associated with treating stakeholders in the manner suggested by stakeholder theory • Determining how much value to allocate without “giving away the store” • Determining how to allocate value (or returns) commensurate with stakeholder contribution • Establishing trust and mutual satisfaction of goals to increase the level of strategic intelligence available to the firm’s strategic leaders
Ways Stakeholder Relationships Contribute to Competitive Advantage • Timely and high quality strategic intelligence can be gathered to improve a firm's strategic decisions. • A trustworthy reputation draws valuable customers, suppliers, and business partners which enable the firm to gain superior resources and opportunities. • A trustworthy reputation attracts investors who offer financial resources. • Fair and respectful treatment of employees attracts high quality human resources essential in today’s competitive environment.
Ways Stakeholder Relationships Contribute to Competitive Advantage • Transactions costs associated with making and enforcing agreements can be reduced. • Implementation of strategies can be enhanced by improving commitment from stakeholders who are involved with strategic decisions. • Responsible behavior can protect a firm from the expense and risk associated with negative actions (such as adverse regulation, legal suits and penalties, consumer dissatisfaction, employee work outages, and bad press.)
Strategic Thinking • Key Terms • Strategic thinking competency The knowledge, skills, and abilities needed to detect market opportunities, formulate a vision to capitalize on these opportunities, and engineer feasible strategies to realize organizational and stakeholder value • Strategic Intent Organizational term used to describe a dream that challenges and energizes a company -- a vision which elicits the help of others in creating a firm’s competitive advantage
Strategic Thinking • Intent focused • Comprehensive • Opportunistic • Considers multiple time horizons • Hypothesis driven • Involves risk
Encouraging Strategic Thinking • Employ top managers who are champions of change. • Establish systems and processes which capture new ideas as they occur. • Train managers and employees in strategic thinking methods and processes. • Foster an environment which rewards risk taking. • Provide flexibility in strategic management processes to allow incorporation of new ideas with potential.
The Strategic Management Process • Key Terms • Strategic management process The full set of commitments, decisions, and actions required for a firm to create value and earn returns that are higher than those of competitors