Business Policy & Strategic Management

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Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.

CHAPTER

1 Strategic Management

and Strategic Competitiveness

Current textbook

Supplemental textbook

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LEARNING OBJECTIVES 1-1 Define strategic competitiveness, strategy, competitive advantage, above-average

returns, and the strategic management process. Discuss the three stages - formulation, implementation, and evaluation. ***

1-2 Describe the competitive landscape and explain how globalization and technological changes shape it.

1-3 Use the industrial organization (I/O) model to explain how firms can earn above- average returns.

1-4 Use the resource-based model to explain how firms can earn above-average returns.

1-5 Describe vision and mission and discuss their value. 1-6 Define stakeholders and describe their ability to influence organizations. 1-8 Explain the strategic management process.

Discuss the connection between business and military strategy

the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives

Strategic planning

A company’s game plan

Strategic Management

Source: Strategic Management, Fred David, Pearson.

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Chapter Introduction (slide 1 of 5)

• Firms achieve strategic competitiveness by formulating and implementing a value-creating strategy. • A strategy is an integrated and coordinated set of

commitments and actions designed to exploit core competencies and gain a competitive advantage.

• When choosing a strategy, firms make choices among competing alternatives as the pathway for deciding how they will pursue strategic competitiveness.

• The chosen strategy indicates what the firm will and will not do.

v What new businesses to enter v What businesses to abandon v Whether to expand operations or diversify v Whether to enter international markets v Whether to merge or form a joint venture v How to avoid a hostile takeover v Whether to cease all business operations

Strategic Decisions

Make your next move your best move

Source: Strategic Management, Fred David, Pearson.

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Chapter Introduction (slide 2 of 5)

• A firm has a competitive advantage when by implementing a chosen strategy, it creates superior value for customers and when competitors are not able to imitate the value the firm’s products create or find it too expensive to attempt imitation. • No competitive advantage is permanent.

• How long a competitive advantage will last depends on how quickly competitors can acquire the skills needed to duplicate the benefits of a firm’s value-creating strategy.

Chapter Introduction (slide 3 of 5)

• Above-average returns are returns in excess of what an investor expects to earn from other investments with a similar amount of risk. • Risk is an investor’s uncertainty about the economic

gains or losses that will result from a particular investment.

• The most successful companies learn how to manage risk effectively.

Chapter Introduction (slide 4 of 5)

• Firms without a competitive advantage or those that do not compete in an attractive industry earn, at best, average returns. • Average returns are returns equal to those an

investor expects to earn from other investments possessing a similar amount of risk.

• Over time, an inability to earn at least average returns results first in decline and, eventually, failure.

Chapter Introduction (slide 5 of 5)

• The strategic management process is the full set of commitments, decisions, and actions firms take to achieve strategic competitiveness and earn above-average returns. • The process involves analysis, strategy, and

performance (the A-S-P model). • A firm analyzes the external environment and its internal

organization, then formulates and implements strategies to achieve a desired level of performance.

Figure 1.1 The Strategic Management Process

There are several ways to illustrate

Current textbook

Strategic Management Process There are several ways to illustrate

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Strategic Management Process There are several ways to illustrate

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Strategy formulation

Strategy implementation

Strategy evaluation

Stages of Strategic Management

Source: Strategic Management, Fred David, Pearson.

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Strategy Formulation – developing a vision and mission – identifying external opportunities and threats – determining internal strengths and weaknesses – establishing long-term objectives – generating alternative strategies – choosing particular strategies to pursue

Stages of Strategic Management

PLAN

Source: Strategic Management, Fred David, Pearson.

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Strategy Implementation vrequires a firm to establish annual objectives,

devise policies, motivate employees, and allocate resources so that formulated strategies can be executed

voften called the action stage

Stages of Strategic Management

Source: Strategic Management, Fred David, Pearson.

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Strategy Evaluation vDetermining which strategies are not working well vThree fundamental activities:

vreviewing external and internal factors that are the bases for current strategies

vmeasuring performance vtaking corrective actions

Stages of Strategic Management

EVALUATE

Source: Strategic Management, Fred David, Pearson.

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1-1 The Competitive Landscape (slide 1 of 2)

• The fundamental nature of competition in many of the world’s industries is changing. • Firms must understand the strategic implications and integrate

digitalization (the process of converting something to digital form) effectively into their strategies.

• Conventional sources of competitive advantage such as large advertising budgets and economies of scale are not as effective as they once were in helping firms earn above-average returns.

• Managers must adopt a new mind-set that values: • Flexibility • Speed • Innovation • Integration • The challenges flowing from constantly changing conditions

1-1 The Competitive Landscape (slide 2 of 2)

• Hypercompetition is a condition where competitors engage in intense rivalry, markets change quickly and often, and entry barriers are low. • Hypercompetition makes it difficult for firms to maintain a

competitive advantage. • It is a condition of rapidly escalating competition based on:

• Price-quality positioning • Competition to create new know-how and establish first-mover

advantage • Competition to protect or invade established product and/or

geographic markets • Two primary drivers of hypercompetition:

1. The emergence of a global economy 2. Rapid technological change

1-1a The Global Economy (slide 1 of 2)

• A global economy is one in which goods, services, people, skills, and ideas move freely across geographic borders.

• The global economy significantly expands and complicates a firm’s competitive environment.

The March of Globalization • Globalization is the increasing economic interdependence among

countries and their organizations as reflected in the flow of products, financial capital, and knowledge across country borders.

• Globalization is a product of a large number of firms competing against one another in an increasing number of global economies.

• The increasing opportunities available in emerging economies is a major driver of growth in the size of the global economy.

1-1a The Global Economy (slide 2 of 2)

• Globalization has led to higher performance standards with respect to: • Quality • Cost • Productivity • Product introduction time • Operational efficiency

• Globalization is not without risks. • “Liability of foreignness” • The amount of time required to learn to compete in new markets • Entering too many global markets either simultaneously or too quickly

• Entry into international markets, even for firms with substantial experience in the global economy, requires effective use of the strategic management process.

1-1b Technology and Technological Changes (slide 1 of 4)

• Three categories of technology-related trends and conditions that affect today’s firms: 1. Technology diffusion and disruptive technologies 2. The information age 3. Increasing knowledge intensity

Technology Diffusion and Disruptive Technologies • Technology diffusion is the speed at which new technologies

become available to firms and when firms choose to adopt them. • Perpetual innovation describes how rapidly and consistently new,

information-intensive technologies replace older ones. • Disruptive technologies are technologies that destroy the value of an

existing technology and create new markets. • Examples: Wi-Fi, iPads, the web browser

1-1b Technology and Technological Changes (slide 2 of 4)

The Information Age • Data and information are vital to firms’ efforts to:

• Understand customers and their needs • Implement strategies in ways that satisfy customers’ needs • Implement strategies in ways to satisfy the interests of all other

stakeholders • The most successful firms envision information

technology-derived innovations as opportunities to identify and serve new markets rather than as threats to the markets they serve currently.

1-1b Technology and Technological Changes (slide 3 of 4)

Increasing Knowledge Intensity • Knowledge:

• Consists of information, intelligence, and expertise • Is the basis of technology and its application • Is acquired through experience, observation, and inference • Is developed by firms through training programs • Is acquired by firms by hiring educated and experienced

employees • Must be integrated into the organization to create capabilities

and then applied to gain a competitive advantage • Is necessary to create innovations

1-1b Technology and Technological Changes (slide 4 of 4)

• Strategic flexibility is a set of capabilities firms use to respond to various demands and opportunities existing in today’s dynamic and uncertain competitive environment. • Strategic flexibility:

• Is not easy to build, largely because of inertia that can build over time

• Requires developing the capacity for continuous learning and applying quickly the new and up-to-date skill sets achieved from learning

• Increases the probability of dealing successfully with uncertain, hypercompetitive environments

1-2 The I/O Model of Above-Average Returns (slide 1 of 3)

• The logic of the I/O model is that the profitability potential of an industry or a segment of it as well as the actions firms should take to operate profitably are determined by a set of industry characteristics, including: • Economies of scale • Barriers to market entry • Diversification • Product differentiation • The degree of concentration of firms in the industry • Market frictions

• The I/O model suggests that returns are influenced more so by the characteristics of the external environment than a firm’s unique internal resources and capabilities.

1-2 The I/O Model of Above-Average Returns (slide 2 of 3)

• Four underlying assumptions of the I/O model: 1. The external environment imposes pressures and constraints that

determine the strategies that would result in above-average returns. 2. 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.

3. Firms assume that their resources are highly mobile, meaning that any resource differences that might develop between firms are short-lived.

4. Organizational decision makers are rational individuals who are committed to acting in the firm’s best interests, as shown by their profit- maximizing behaviors.

• The I/O model challenges firms to find the most attractive industry in which to compete.

1-2 The I/O Model of Above-Average Returns (slide 3 of 3)

• The five forces model of competition is an analytical tool firms use to find the industry that is most attractive. • The five forces model suggests that:

• An industry’s profitability is a function of interactions among: 1. Suppliers 2. Buyers 3. Competitive rivalry among firms currently in the industry 4. Product substitutes 5. Potential entrants to the industry

• Firms can earn above-average returns by producing either: • Standardized products at costs below those of competitors (a

cost leadership strategy) • Differentiated products for which customers are willing to pay a

price premium (a differentiation strategy)

Figure 1.2 The I/O Model of Above-Average Returns

1-3 The Resource-Based Model of Above-Average Returns (slide 1 of 4)

• The resource-based model of above-average returns assumes that each organization is a collection of unique resources and capabilities. • The uniqueness of resources and capabilities is the

basis of a firm’s strategy and its ability to earn above- average returns.

1-3 The Resource-Based Model of Above-Average Returns (slide 2 of 4)

• Resources are inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers. • Firms typically classify resources into three categories:

1. Physical capital 2. Human capital 3. Organizational capital

• Resources have a greater likelihood of being a competitive advantage when integrated to form a capability. • A capability is the capacity for a set of resources to perform a

task or an activity in an integrative manner. • Core competencies are capabilities that serve as a source of

competitive advantage for a firm over its rivals.

1-3 The Resource-Based Model of Above-Average Returns (slide 3 of 4)

• Four underlying assumptions of the resource-based model: 1. Differences in firms’ performances across time are due primarily

to their unique resources and capabilities rather than the industry’s structural characteristics.

2. Firms acquire different resources and develop unique capabilities based on how they combine and use the resources.

3. Resources and capabilities are not highly mobile across firms. 4. Differences in resources and capabilities are the basis of

competitive advantage. • As a source of competitive advantage, a capability must

not be easily imitated but also not too complex to understand and manage.

Figure 1.3 The Resource-Based Model of Above-Average Returns

1-3 The Resource-Based Model of Above-Average Returns (slide 4 of 4)

• Resources and capabilities have the potential to be the foundation for a competitive advantage when they are: • Valuable (allow a firm to take advantage of opportunities or

neutralize threats in its external environment) • Rare (possessed by few, if any, current and potential

competitors) • Costly to imitate (are difficult for other firms to obtain) • Non-substitutable (have no structural equivalents)

1-4 Vision and Mission

• A key purpose of vision and mission statements is to inform stakeholders of: • What the firm is • What it seeks to accomplish • Who it seeks to serve

• The vision and mission provide the foundation the firm needs to choose and implement one or more strategies.

1-4a Vision

• Vision is a picture of what the firm wants to be and, in broad terms, what it wants to achieve.

• A vision statement: • Articulates the ideal description of an organization and gives shapes to

its intended future • Tends to be relatively short and concise

• An effective vision: • Stretches and challenges people • Is developed by the CEO and other top-level managers, employees,

suppliers, and customers • Is consistent with the decisions and actions of those involved with

developing it • Conditions in the firm’s external environment and internal

organization influence the forming of a vision statement.

1-4b Mission

• A mission specifies the businesses in which the firm intends to compete and the customers it intends to serve.

• A mission: • Is more concrete than a firm’s vision • Should establish a firm’s individuality • Should be inspiring and relevant to all stakeholders • Deals more directly with product markets and customers • Should be developed by the CEO, top-level managers, and other

organizational members • Has a higher probability of being effective when employees have

a strong sense of ethics

1-5 Stakeholders

• Stakeholders are individuals, groups, and organizations that can affect the firm’s vision and mission, are affected by the strategic outcomes achieved, and have enforceable claims on the firm’s performance.

• Because firms are not equally dependent on all stakeholders at all times, stakeholders possess different degrees of ability to influence an organization. • Greater dependence gives the stakeholder more potential

influence over a firm’s commitments, decisions, and actions.

1-5a Classifications of Stakeholders (slide 1 of 4)

• Firms can separate the parties involved with their operations into at least three groups: 1. Capital market stakeholders 2. Product market stakeholders 3. Organizational stakeholders

• The most obvious stakeholders, at least in U.S. organizations, are shareholders—individuals and groups who have invested capital in a firm in the expectation of earning a positive return on their investments.

Figure 1.4 The Three Stakeholder Groups

1-5a Classifications of Stakeholders (slide 2 of 4)

• When earning above-average returns, a firm generally has the resources to satisfy the interests of all stakeholders.

• When earning only average returns, the firm must satisfy each stakeholder group’s minimal expectations.

• A firm earning below-average returns must make trade-offs to minimize the amount of support it loses from unsatisfied stakeholders.

Capital Market Stakeholders • Shareholders and lenders expect a firm to preserve and enhance

their wealth. • Expected returns are correlated with the investments’ degree of risk:

• Low-risk investments = lower returns • High-risk investments = higher returns

1-5a Classifications of Stakeholders (slide 3 of 4)

Product Market Stakeholders • Customers seek reliable products at the lowest possible prices. • Suppliers seek loyal customers who are willing to pay the highest

sustainable prices for products. • Host communities (the national, state/province, and local

government entities with which the firm interacts) want companies willing to be long-term employers and providers of tax revenue without placing excessive demands on public support services.

• Unions seek secure jobs and desirable working conditions for members.

• Product market stakeholders are generally satisfied when a firm’s profit margin reflects at least a balance between the returns to capital market stakeholders and the returns in which they share.

1-5a Classifications of Stakeholders (slide 4 of 4)

Organizational Stakeholders • Employees:

• Expect the firm to provide a dynamic, stimulating, and rewarding work environment

• Generally prefer to work for a growing company in which they can develop their skills

• Are critical to organizational success when they learn how to use new knowledge productively

• Leaders: • Must use the firm’s human capital successfully to serve the day-to-day

needs of stakeholders • Help a firm’s employees understand competition in the global

competitive landscape through international assignments

1-6 Strategic Leaders (slide 1 of 2)

• Strategic leaders are people located in different areas and levels of the firm using the strategic management process to select actions that help the firm achieve its vision and fulfill its mission.

• Strategic leaders are: • Decisive • Committed to nurturing those around them • Committed to helping the firm create value for all stakeholder groups

• In general, CEOs are responsible for making certain that their firms use the strategic management process properly.

• The most effective CEOs and top-level managers understand how to delegate strategic responsibilities to people throughout the firm.

1-6 Strategic Leaders (slide 2 of 2)

• Organizational culture affects strategic leaders and their work. • Organizational culture refers to the complex set of

ideologies, symbols, and core values that individuals throughout the firm share and that influence how the firm conducts business.

• It is the social energy that drives—or fails to drive— the organization.

v A fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with an assumption of competition, whereas military strategy is based on an assumption of conflict

v Both business and military organizations must adapt to change and constantly improve to be successful o War is a matter of life or death, the road either to survival or ruin o Know your enemy and know yourself o Skillful leaders don’t let a strategy inhibit creative counter-movement

Comparing Business and Military Strategy

Excerpts from Sun Tzu’s The Art of War Writings

Source: Strategic Management, Fred David, Pearson.

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