Introduction To Strategic Management

INTRODUCTION TO STRATEGIC MANAGEMENT Value Creation – achieved when a firm successfully formulates and implements a strategy that other companies are unable to duplicate or find to costly to imitate Strategic Management Process – The full set of commitments, decisions, and actions required for a firm to create value and generate above average returns THE 21ST CENTURY LANDSCAPE The March of Globalization In the 21st Century global landscape, only firms capable of meeting, if not exceeding global standards typically develop competitive advantage Firms in economies of Asia, such as South Korea, are becoming major competitors in global industries Risk of investments in international markets o Liability of foreignness o Requires careful planning and selection of appropriate markets to enter followed by developing the most effective strategies to successfully operate in those markets Benefits o Strategically competitive companies are those that have learned how to apply competitive insights gained locally (or domestically) on a global scale o In other words these companies do not impose homogeneous solutions in a pluralistic world Technology and Technological Change 1. Increasing Rate of Technological Change and Diffusion Perpetual Innovation – How rapidly and consistently new, information-intensive technologies replace older ones  The shorter product life cycles resulting from these rapid diffusions of new technologies place a competitive premium on being able to quickly introduce new goods and services into the marketplace o Many firms competing in the electronics industry do NOT apply for patents in order to prevent competitors from gaining access to the technological knowledge included in the patent application 2. The Information Age 3. Increasing Knowledge Intensity

Page 1 of 7

Knowledge (information, intelligence, and expertise) is the basis of technology and its application To earn above average returns, firms must be able to adapt quickly to changes in their competitive landscape Such adaptation requires that the firm develop strategic flexibility Strategic Flexibility – a set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment  Firms should develop strategic flexibility in all areas of their operations  To develop strategic flexibility many firms have to develop organizational slack: Slack resources that allow the firm some flexibility to respond to environmental changes

Page 2 of 7

THE I/O MODEL OF ABOVE-AVERAGE RETURNS The industrial organization (I/O) model of above average returns explains the dominant influence of the external environment on a firm’s strategic actions 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 4 assumptions o The external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns o Most firms competing in within a particular industry or within a certain segment of it are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources o Resources used to implement strategies are assumed to be highly mobile across firms o Organizational decision makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by there profit maximizing behaviors The I/O model challenges firms to locate the most attractive industry in which to compete The I/O model suggests that above-average returns are earned when firms implement the strategy dictated by the characteristics of: o The general environment o The industry environment o Competitor environment Steps in the I/O Model 1. Study the external environment, especially the industry environment o The general environment o The industry environment o Competitor environment 2. Locate an industry with high potential for above average returns 3. Identify the strategy called for by the attractive industry to earn above average returns 4. Develop or acquire assets and skills needed to implement the strategy 5. Use the firms strengths (its developed or acquired assets and skills) to implement the strategy THE RESOURCE-BASED MODEL OF ABOVE AVERAGE RETURNS The resource based model assumes that an individual firm’s unique collection of resources and capabilities is a primary influence on the selection and use of its strategy

Page 3 of 7

According to the model, differences in firms’ performances across time are due primarily to their unique resources and capabilities rather than the industry’s structural characteristics This model also assumes that across time, firms acquire different resources and develop unique capabilities Therefore, not all firms competing within a particular industry possess the same resources and capabilities The model assumes that resources are the basis of competitive advantage Resources – inputs into a firm’s productions process: o Capital equipment o Skills of individual employees o Patents o Finances o Talented managers In general competitive advantages are formed through the combination and integration of sets of resources Capabilities – The capacity for a set of resources to perform a task or an activity in an integrative manner The potential of resources and capabilities to become a competitive advantage when they are: o Valuable – They allow a firm to take advantage of opportunities or to neutralize threats in its external environment o Rare o Costly to imitate o Nonsubstitutable Core competencies – are resources and capabilities that serve as a source of competitive advantage for a firm over its rivals Dynamic core competencies are especially important in rapidly changing environments, such as those that exist in high tech industries The resource based model suggests that core competencies are the basis for a firm’s competitive advantage and its ability to earn above average returns Actual Model Steps 1. Identify the firm’s resources: a. Study its strengths and weaknesses compared with its competitors 2. Determine the firm’s capabilities a. What do the capabilities allow the firm to do better than its competitors? 3. Determine the potential of the firm’s resources and capabilities in terms of a competitive advantage 4. Locate an attractive industry

Page 4 of 7

5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment STRATEGIC INTENT AND STRATEGIC MISSION Resulting from analyses of a firm’s external environment and internal organization is the information required to form a strategic intent and develop a strategic mission Strategic Intent – Internal Focus Strategic Intent – The leveraging of a firm’s resources, capabilities and core competencies to accomplish the firm’s goals in the competitive environment Performing well demands that the firm also identify its competitors strategic intent Strategic Mission – External Focus Strategic Mission – a statement of a firm’s unique purpose and scope of its operations in product and market terms A strategic mission provides general descriptions of the products a firm intends to produce and the markets its will serve using its core competencies An effective strategic mission establishes a firm’s individuality and is inspiring and relevant to all stakeholders Together, strategic intent and strategic mission yield the insights required to formulate and implement strategies STAKEHOLDERS Stakeholders – The individuals and groups who can affect, and are affected by the strategic outcomes achieved and who have enforceable claims on the firm’s performance Claims on the firm’s performance are enforced through the stakeholder’s ability to withhold participation essential to the organization’s survival, competitiveness and profitability Stakeholder relationships can be a managed to be a source of competitive advantage Effective managers must find ways to either accommodate or insulate the organization from the demands of stakeholders controlling critical resources Classification of Stakeholders 3 groups of stakeholders:

Page 5 of 7

o Capital Market Stakeholders – shareholders and the major suppliers of a firm’s capital  Dissatisfied lenders may impose stricter covenants on subsequent borrowing of capital  Dissatisfied shareholders can reflect their dissatisfaction by selling stock o Product Market Stakeholders – The firm’s primary customers, suppliers, host communities, and unions) o Organizational Stakeholders – All of the firm’s employees – managerial/nonmanagerial  Employees expect the firm to provide a dynamic, stimulating, and rewarding work environment Each stakeholder group expects those making strategic decisions in a firm to provide the leadership through which its valued objectives will be accomplished High returns to customers might come at the expense of lower returns negotiated with capital market shareholders Steps to manage conflicts of interest between stakeholders: o Identify all relevant stakeholders o Prioritize stakeholders  Power is the most important attribute when prioritizing stakeholders  Other criteria include: Urgency in satisfying each group Degree of importance of each group to firm With the capability and flexibility provided by above average returns, a firm can more easily satisfy multiple stakeholders simultaneously ORGANIZATIONAL STRATEGISTS Organizational Strategists – People responsible for the design and execution of strategic management processes Strategic leaders are involved in a variety of types of decisions including those concerned with: o How resources will be developed or acquired o Price the firm will pay, o How they will be used o How info flows in the company o Strategies selected o Scope of operations In making these decisions strategic leaders must assess the risk involved in taking the actions being considered Organizational Culture – The complex set of ideologies, symbols, and core values that are shared throughout the firm and that influence how the firm conducts business

Page 6 of 7

The Work of Effective Strategists Factors involved in become an effective strategist o Hard work o Thorough analysis o Honesty o Think clearly o Ask the right questions o Etc Predicting Outcomes of Strategic Decisions Top level managers attempt to predict the outcomes of strategic decisions they make before they are implemented One of the means of helping managers understand the potential outcomes of their decisions is to map their industry’s profit pools, which involves the following steps: 1. 2. 3. 4.

Define the pool’s boundaries Estimate the pool’s overall size Estimate the size of the value chain activity in the pool Reconcile the calculations

Profit Pool – entails that total profits earned in an industry at all points along the value chain Analyzing the profit pool in the industry may help the firm see something others are unable to see by helping the firm understand the primary sources of profits in an industry After these sources have been identified, managers must link the profit potential identified to specific strategies

Page 7 of 7