Chapter 1: Strategic Management Overview - Vocabulary Flashcards

Strategy: Definition and Scope

• A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage.

• It has two parts:

  • Strategy as a plan: what we intend to accomplish and how we intend to allocate resources to achieve it.

  • Strategy as actions: the commitments and actions we take to implement that plan.

• Strategy formulation vs. strategy implementation: both are necessary and should be pursued simultaneously for success.

• The aim of leveraging strategy is to exploit core competencies.

• Core competencies are the distinctive capabilities that make a firm unique and difficult for others to replicate at the same level.

  • Examples: Apple’s ecosystem integration across devices (iPhone, iPad, Mac, and services) that enable seamless file sharing and cross-device functionality; Google/Samsung attempts without the same brand loyalty or integrated ecosystem.

  • Tesla’s scale in EV production as a core competency that rivals struggle to imitate.

• Competitive advantage:

  • It is the relative edge a firm has over its competitors, arising when core competencies are leveraged effectively.

  • If true core competencies are exploited, the firm achieves above-average financial returns.

  • Durable competitive advantage is difficult to sustain forever because competitors copy or approximate advantages over time.

  • When others copy the benefits, the advantage erodes; firms must develop new core competencies (ambidexterity).

• Ambidexterity: the ability to explore new opportunities while exploiting existing ones.

  • Example: Apple leveraging the revenue from iPhone/iPad/Mac to fund new ventures like Apple Vision Pro while continuing to exploit existing products.

• Competitive advantage and value creation:

  • Core competencies create value that customers are willing to pay for, enabling above-average returns.

  • Relative advantage means one firm has an edge over its competitors (e.g., Tesla vs. GM/Ford; Apple vs. Samsung/Google).

• Two-part outcome of strategy:

  • Competitive advantage is the outcome of leveraging core competencies.

  • Above-average returns are the financial manifestation of a durable competitive advantage.

• The external environment vs. internal resources debate:

  • External environment shapes opportunities and threats; internal resources determine a firm’s ability to exploit those opportunities.

  • No firm can rely on internal resources alone; external opportunities must be identified and matched with internal capabilities.

Core Concepts: Competitive Advantage, Core Competencies, and Value Creation

• Core competencies are what you have and do that others cannot copy at the same level.

  • They generate unique value and are difficult to imitate.

• Competitive advantage arises when a firm exploits its core competencies to create value that customers are willing to pay for, leading to above-average returns.

• The durability of competitive advantage is limited; firms must continuously develop new competencies while exploiting existing ones (ambidexterity).

• Examples of core competencies and values:

  • Apple: ecosystem integration across devices enables seamless experience and lock-in; hard for rivals to replicate at scale.

  • Tesla: scale and capabilities in EV production and battery technology create a competitive edge that others struggle to duplicate quickly.

• Relationship between resources and competitive advantage:

  • Resources (tangible and intangible) plus the capacity to use them (capabilities) generate core competencies.

  • A resource alone is not enough; it must be combined with capabilities to produce value.

The Strategic Management Process (ASP Model)

• The Strategic Management Process (ASP) comprises three core phases:

  • Analysis: analyze the external environment and the internal resource base.

  • Strategy development and implementation: formulate strategies and implement them concurrently (ambidexterity in action).

  • Performance: outcomes and results, with a feedback loop to inform future analysis.

• Visual model: Chapters 2 and 3 focus on analysis; Chapters 4–5 on formulation and implementation; Chapter 6+ on performance and feedback.

• Ambidexterity in practice: strategy formulation and implementation happen simultaneously to avoid cycles of high/low performance.

• Feedback loop: performance outcomes feed back into the analysis phase for continuous improvement.

• The value of strategy is in aligning internal resources with external opportunities to deliver sustained performance.

External Environment and Internal Resource Perspectives

• External environment and the IO (Industrial Organization) model:

  • The IO model emphasizes that the external environment largely determines firm performance; industry structure and external pressures drive profits.

  • Four underlying assumptions of the IO model:
    1) External environment imposes pressures and constraints that determine above-average returns.
    2) Firms in the same industry tend to have similar resources and strategies.
    3) Resources are highly mobile; value is transferable across firms.
    4) Organizational decision-makers are rational.

  • Implications: identify attractive industries and enter them; then assemble the assets and resources needed to compete.

• The RBV (Resource-Based View) model:

  • The RBV argues that internal resources and capabilities are the primary drivers of firm performance differences.

  • Four key ideas (plus VREN framework):
    1) Resource differences drive above-average returns.
    2) Firms possess different resources; resources are not identical across firms.
    3) Resources are not highly mobile (some can be copied, but core capabilities and tacit knowledge are sticky).
    4) Organizational decision-makers are not perfectly rational; incentives and internal structures matter.

• VREN framework (for RBV):

  • Value, Rarity, Inimitability, Non-substitutability are the criteria for determining whether a resource can sustain a competitive advantage.

• RBV vs IO in practice:

  • IO says best path is to find an attractive external market and fit resources to it.

  • RBV says start inside: identify unique resources and capabilities, then locate an industry where those can be leveraged for competitive advantage.

  • Most firms operate in a hybrid space, drawing on both external opportunities and internal capabilities.

• Contributions to profitability (empirical take):

  • IO model: roughly 20% of firm profitability attributed to external industry factors.

  • RBV: roughly 36% (or more) attributed to internal resource base and capabilities.

  • This suggests management matters; leveraging resources and capabilities effectively is crucial for sustained performance.

Stakeholder Theory and Corporate Social Responsibility

• Stakeholder theory: organizations are responsible to the people and groups that affect or are affected by their actions.

  • Stakeholders can be internal (employees) or external (suppliers, communities, unions, nations).

  • Primary stakeholders are those with direct involvement; secondary stakeholders have less direct influence.

• Stakeholder conflict: stakeholders vary in power, legitimacy, and urgency.

  • Firms respond preferentially to stakeholders with higher power, legitimacy, and urgency.

  • Management often operates on a priority basis, focusing on the most influential stakeholders first.

• CSR and DEI (non-market strategies):

  • CSR and DEI align with stakeholder expectations and can influence buyer behavior and public perception.

  • The decision to act socially can be market-driven (responding to buyer preferences) or benevolent (values-driven action).

• Sustainability and non-market considerations: governance, emissions, living wages, and labor practices vary across regions and influence stakeholder expectations.

Vision, Mission, and Values; Strategic Leadership; and Organizational Culture

• Vision statements:

  • Broad, aspirational, concise, and often future-focused.

  • Designed to inspire and guide decisions across all levels.

  • Examples:

  • Amazon: "to be the Earth's most customer centric company."

  • Ford: "to become the world's most trusted company."

  • Vision should influence daily decisions and align with long-term goals, even if not easily measurable.

• Mission statements:

  • More concrete and industry-specific than a vision.

  • Describes what the organization does, for whom, and how it differentiates itself.

  • Examples:

  • IKEA: "to offer a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them."

  • Procter & Gamble (P&G): "to provide branded products and services of superior quality and value that improve the lives of the world's consumers now and for generations to come."

• Values:

  • The cultural beliefs and norms that permeate the organization; guide behavior and decision-making.

  • Values contribute to the organization’s culture, which is a powerful intangible resource.

• Strategic leaders:

  • Typically senior executives (C-suite) but include anyone who leads others.

  • Responsible for guiding the organization toward its vision and fulfilling its mission.

• Organizational culture:

  • The shared ideology, symbols, and routines that define how work gets done.

  • Highly valuable intangible resource; difficult to imitate and reproduce in another organization.

  • A strong culture can be a major source of competitive advantage when aligned with strategy.

Putting It All Together: The Strategic Management Process and Flow

• The ASP model (Analysis, Strategy, Performance) describes how strategy is developed and executed over time:

  • Analysis: examine internal resources and external environment.

  • Strategy: formulate and implement strategies concurrently (ambidexterity in action).

  • Performance: evaluate outcomes and use feedback to adjust analysis and strategy.

• The big picture flow:

  • External environment analysis and internal resource assessment feed into vision, mission, and values.

  • These guide strategy formulation and implementation, with performance outcomes feeding back into analysis for continuous improvement.

• External environment factors shaping strategy:

  • Hyper-competition: intensified, faster rivalry with lower entry barriers due to digitalization.

  • Globalization and regionalization: global trade dynamics, tariffs, supply chain interdependence, and a shift toward regional sourcing to hedge risk.

  • Liability of foreignness: outsiders face learning curves and regulatory hurdles; locals have advantages in knowledge and relationships.

  • Technology diffusion and disruptive technologies: rapid spread of new tech and the potential to render existing technologies obsolete (e.g., Walkman/cameras replaced by smartphones, cars replacing horse-drawn carriages).

  • Big data and analytics: value comes from turning data into actionable insights, not just data collection; demand for data analytics capabilities.

  • Strategic flexibility: ability to adapt and respond to market changes quickly and effectively.

  • Social responsibility: CSR and DEI efforts influence brand image, stakeholder relations, and potentially market opportunities.

Practical Implications and Takeaways

• No single model fully explains firm performance; most firms operate as hybrids of IO and RBV perspectives.

• Strategy is not just planning; effective strategy requires disciplined execution to convert plans into actions.

• Ambidexterity is essential for sustained success: continue exploiting current core competencies while developing new ones.

• Understanding core competencies and how to protect them (through complexity, tacit knowledge, and organizational culture) is crucial for maintaining competitive advantage.

• Vision, mission, and values should align with organizational culture and strategic actions to guide decisions at all levels.

Quick Reference: Key Terms

• Core competencies: distinctive capabilities that are hard to imitate and create value.

• Competitive advantage: an edge over competitors, leading to above-average returns.

• Ambidexterity: simultaneously exploiting existing capabilities and exploring new opportunities.

• IO model: external environment-focused view of firm performance.

• RBV (Resource-Based View): internal resources and capabilities drive firm performance.

• VREN: Value, Rare, Inimitable, Non-substitutable; criteria for durable resources.

• Stakeholders: individuals or groups that affect or are affected by the organization (internal and external; primary and secondary).

• Vision: broad, aspirational, future-oriented guiding statement.

• Mission: specific, action-oriented statement about the organization’s purpose.

• Values: cultural norms and principles that guide behavior.

• Strategic leadership: individuals who guide, influence, and direct organizational actions toward strategic objectives.

• Organizational culture: shared assumptions, values, and behaviors that shape how work gets done.

• Hyper-competition: rapidly changing, intense competition with low barriers to entry.

• Liability of foreignness: additional costs and risks when operating in a foreign environment.

• Strategic flexibility: ability to adapt strategy in response to changing conditions.

• Big data: large-scale data analytics used to derive meaningful insights for decision-making.

• Social responsibility: actions toward stakeholders and society beyond immediate financial performance.