Chapter 1: Strategic Management and Strategic Competitiveness

Strategic Competitiveness

Achieved by firms by formulating and implementing a value-creating strategy.

Strategy

an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage

The chosen strategy indicates:

what the firm will and will not do

Competitive Advantage

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.

How long does a competitive advantage last?

last depends on how quickly competitors can acquire the skills needed to duplicate the benefits of a firm’s value-creating strategy

Above-average returns

returns in excess of what an investor expects to earn from other investments with a similar amount of risk

Risk

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 it effectively, because doing so reduces investors’ uncertainty about the outcomes of their investment.

Average Returns

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.

Strategic Management Process

The full set of commitments, decisions, and actions firms take to achieve strategic competitiveness and earn above-average returns.

• A firm analyzes the external environment and its internal organization, then formulates and implements strategies to achieve a desired level of performance

The Competitive Landscape

The fundamental nature of competition in many of the world’s industries is changing

Managers must adopt a new mind-set that values:

• Flexibility

• Speed

• Innovation

• Integration

• The challenges flowing from constantly changing conditions

Hypercompetiton

A condition where competitors engage in intense rivalry, markets change quickly and often, and entry barriers are low.

• makes it difficult for firms to maintain a competitive advantage.

Two primary drivers of hypercompetition:

• The emergence of a global economy

• Rapid technological change

What causes hypercompetition?

• 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

Global Economy

One in which goods, services, people, skills, and ideas move freely across geographic borders

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

Globalization

The increasing economic interdependence among countries and their organizations as reflected in the flow of products, financial capital, and knowledge across country borders.

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

Global Supply Chain

A network of firms that spans multiple countries with the purpose of supplying goods and services.

Globalization has led to higher performance standards with respect to multiple competitive dimensions, including:

• Quality

• Cost

• Productivity

• Product introduction time

• Operational efficiency

Challenges of Globalization

• Workers flowing rather freely among global economies

• “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

Deglobalization

A reduction in participation in global supply and value chains.

Information Technologies

facilitate the integration of enterprises into the global supply chains.

Technology Diffusion

the speed at which new technologies become available to firms and when firms choose to adopt them.

Perpetual Innovation

a term used to describe how rapidly and consistently new, information-intensive technologies replace older ones.

Disruptive Technologies

technologies that destroy the value of an existing technology and create new markets.

Knowledge

consists of information, intelligence, and expertise

IT and Big Data is:

an intangible resource

Big Data

the data retrieved by firms that are increasing in volume, variety, and frequency.

Big Data Analytics

the process of examining huge amounts of data to uncover hidden patterns and other information that can be used to improve decision making.

Cloud Technologies

link computer servers through the internet mean that many of these processes can be performed offsite rather than on local computers.

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.

• involves coping with uncertainty and its accompanying risks.

• requires developing the capacity for continuous learning and adapting to a changing environment.

Corporate Social Responsibility

Today’s competitive environment is also marked by the need to incorporate social responsibility into a firm’s strategic management

Sustainability

a firm should not deplete or destroy natural elements upon which it depends for survival.

I/O Model

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

Challenges firms to find the most attractive industry in which to compete.

Porter’s Five Forces

• Suppliers

• Buyers

• Competitive rivalry among firms currently in the industry

• Product substitutes

• Potential entrants to the industry

Under the I/O Model, 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)

Under the I/O Model:

Managers’ strategic actions affect the firm’s performance as do the characteristics of the environment in which the firm competes.

Resources

inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers.

Resource-Based Model

assumes that each organization is a collection of unique resources and capabilities

Three Categories of Resources

• Physical capital

• Human capital

• Organizational capital

Capability

the capacity for a set of resources to perform a task or an activity in an integrative manner.

Core Competencies

capabilities that serve as a source of competitive advantage for a firm over its rivals.

Resources and capabilities have the potential to be the foundation for a competitive advantage when they are:

• Valuable

• Rare

• Costly to imitate

• Non-substitutable

Valuable Resources

allow a firm to take advantage of opportunities or neutralize threats in its external environment

Rare Resources

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

Stakeholders

individuals, groups, and organizations that can both influence and are affected by the objectives, actions, and outcomes of a firm.

Internal Stakeholders

include all a firm’s employees, including both non-managerial and managerial personnel.

External Stakeholders

a diverse group and include the major suppliers of a firm’s capital as well as product market stakeholders—the firm’s customers, suppliers, host communities, and any unions representing the workforce.

Primary Stakeholders

directly involved in the value-creating processes of the firm and include:

• Suppliers

• Employees

• Customers

• The communities in which the firm operates

• Financiers such as the firm’s shareholders and banks

Secondary Stakeholders

can both influence and are influenced by what the firm does, but they do not contribute directly to the value the firm creates.

Vision

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

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 CExdO and other top-level managers, employees, suppliers, and customers.

• is consistent with the decisions and actions of those involved with developing it.

Mission

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

Mission Characteristics:

• 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.

Values

define what should matter most to managers and employees when they make and implement strategic decisions.

Characteristics of Values

• help guide what is rewarded and reinforced in the organization.

• are a practical application of business ethics.

• can help a firm define its purpose and answer the fundamental question of what the firm stands for.

• should help determine the way stakeholders are treated and their priority in important decisions.

Core Values

sometimes incorporated into a firm’s mission statement, but many firms put them in separate statements to reinforce to stakeholders what they stand for.

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.

Strategic Leaders

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.

Successful strategic leaders are:

• Decisive

• Committed to nurturing those around them

• Committed to helping the firm create value for all stakeholder groups

Operational Effectiveness (OE)

Performing similar activities better than rivals perform them to maximize input utilization. It includes efficiency, speed, and quality control.

Strategic Positioning

Performing different activities from rivals, or performing similar activities in different ways to deliver unique value.

Variety-Based Positioning

A strategic position based on producing a specific subset of an industry’s products or services rather than customer segments.

Needs-Based Positioning

Targeting a specific group of customers with differing needs that require a highly tailored set of activities to serve them best.

Access-Based Positioning

Segmenting customers who have similar needs but require a different configuration of activities to reach them due to geography or scale.

The Role of Activities

The basic units of competitive advantage. All differences in cost or price derive from how a company's unique value chain activities are performed.

Strategic Trade-offs

Choosing what not to do. Trade-offs occur when activities are incompatible, meaning more of one thing necessitates less of another, which deters imitators.

First-Order Fit

Simple consistency between each individual functional activity and the overall corporate strategy.

Second-Order Fit

A dynamic where a company's distinct activities are actively reinforcing one another.

Third-Order Fit

Optimization of effort across activities to eliminate redundancies, minimize wasted effort, and maximize coordination.

The Growth Trap

The tendency for managers to chase incremental revenue by broadening their position, which ultimately blurs uniqueness and reduces fit.

The Role of Leadership

General management's core discipline: defining a unique position, making tough trade-offs, forging fit, and teaching others to say "no".

The Resource-Based View (RBV)

A model analyzing internal characteristics to explain long-lasting performance variance, assuming firm strategic resources are heterogeneous and immobile.

Resource Heterogeneity

The structural assumption that competing firms within an industry or strategic group control significantly different bundles of strategic resources.

Resource Immobility

The structural assumption that strategic resource differences between firms are stable over time because they cannot be easily bought, sold, or transferred in factor markets.

Firm Resources

All assets, capabilities, organizational processes, firm attributes, information, and knowledge controlled by a firm to improve efficiency and effectiveness.

Sustained Competitive Advantage

Implementing a value-creating strategy not simultaneously utilized by current or potential rivals, where competitors are unable to duplicate the strategy's benefits.

Valuable Resources (V)

Firm attributes that allow an organization to conceive of or implement business strategies that directly exploit external opportunities or neutralize environmental threats.

Rare Resources (R)

Strategic assets or resource bundles that are possessed by fewer firms than the number needed to generate perfect competitive market dynamics.

Unique Historical Conditions

A source of imperfect imitability stating that a firm's ability to acquire or exploit resources depends directly upon its unique path and place in time and space

Causal Ambiguity

A source of imperfect imitability where the explicit link between controlled firm resources and sustained competitive advantage is not understood by any industry participant.

Social Complexity

A source of imperfect imitability occurring when competitive advantages are rooted in highly intricate social phenomena that are fundamentally beyond direct engineering or influence.

Substitutability (S)

The viability of alternative, strategically equivalent resources that can be separately exploited to execute the identical business strategy.

Efficiency Rents vs. Monopoly Rents

Under RBV, above-normal returns are viewed as economic efficiency gains from deploying superior internal resource endowments rather than anti-competitive market manipulation.