Introduction to Strategic Management

HCAD 5390

What is Strategy?
Strategy is the overall plan for deploying resources to establish a favorable position. Tactic is a scheme for a specific maneuver.

Characteristics of strategic decisions

Important Involve a significant commitment of resources Not easily reversible

Basic Framework
The firm Goals & Values Resources & Capabilities Structures & Systems Strategy External Environment

Competitors
Customers Suppliers

etc

Definitions
Strategic Management Process
The full set of commitments, decisions, and actions required for a firm to create value and earn above-average returns

Value Creation
What is achieved when a firm successfully formulates and implements a strategy that other companies are unable to duplicate or find too costly to imitate.

Definitions
Average Returns
Returns that are equal to those an investor expects to earn from other investments with a similar amount of risk

Above-Average Returns
Returns that are in excess of what an investor expects to earn from other investments with a similar amount of risk

Definitions
Risk
An investors uncertainty about the economic gains or losses that will result from a particular investment

Competitive Landscape
Dynamics of strategic maneuvering among global and innovative combatants Price-quality positioning, new knowhow, first mover Hypercompetitive environments Fundamental nature of competition is changing Protect or invade established product or geographic markets

Competitive Landscape
Emergence of global economy Goods, services, people, skills, and ideas move freely across geographic borders Spread of economic innovations around the world Hypercompetitive environments Fundamental nature of competition is changing Political and cultural adjustments are required

Competitive Landscape
Emergence of global economy Rapid technological change Increasing rate of technological change and diffusion The information age Increasing knowledge intensity Hypercompetitive environments Fundamental nature of competition is changing

Strategic Flexibility
A set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment It involves coping with uncertainty and the accompanying risks

Strategic Flexibility
Organizational slack

Strategic reorientation

Strategic Flexibility flexibility

Capacity to learn

I/O Model of Above-Average Returns

1. External Environments General
Global

Industry Environment

1. Strategy dictated by the external environment of the firm (what opportunities exist in these environments?)
2. Firm develops internal skills required by external environment (what can the firm do about the opportunities?)

Competitor Environment
Technological

Environment

Four Assumptions of the I/O Model

1. The external environment is assumed to possess pressures and constraints that determine the strategies that would result in above-average returns 2. Most firms competing 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

Four Assumptions of the I/O Model

3. Resources used to implement strategies are highly mobile across firms 4. Organizational decision makers are assumed to be rational and committed to acting in the firms best interests, as shown by their profit-maximizing behaviors

I/O Model of Above-Average Returns Industrial Organization Model

The External Environment 1. Study the external environment, especially the industry environment economies of scale barriers to market entry diversification product differentiation degree of concentration of firms in the industry

I/O Model of Above-Average Returns Industrial Organization Model

The External Environment An Attractive Industry 2. Locate an attractive industry with a high potential for above-average returns Attractive industry: one whose structural characteristics suggest above-average returns

I/O Model of Above-Average Returns Industrial Organization Model

The External Environment An Attractive Industry 3. Identify the strategy called for by the attractive industry to earn above-average returns

Strategy Formulation

Strategy formulation: selection of a strategy linked with above-average returns in a particular industry

I/O Model of Above-Average Returns Industrial Organization Model

The External Environment An Attractive Industry 4. Develop or acquire assets and skills needed to implement the strategy

Strategy Formulation
Assets and Skills Assets and skills: those assets and skills required to implement a chosen strategy

I/O Model of Above-Average Returns Industrial Organization Model

The External Environment An Attractive Industry 5. Use the firms strengths (its developed or acquired assets and skills) to implement the strategy

Strategy Formulation
Assets and Skills Strategy Implementation Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy

I/O Model of Above-Average Returns Industrial Organization Model

The External Environment An Attractive Industry

Strategy Formulation
Assets and Skills Strategy Implementation Superior Returns Superior returns: earning of above-average returns

Resource-based Model of Above Average Returns

1. Firms Resources

1. Strategy dictated by the firms unique resources and capabilities 2. Find an environment in which to exploit these assets (where are the best opportunities?)

Resource-based Model of Above Average Returns Resource-based Model

Resources 1. Identify the firms resources-strengths and weaknesses compared with competitors Resources: inputs into a firms production process

Resource-based Model of Above Average Returns Resource-based Model

Resources Capability 2. Determine the firms capabilities--what it can do better than its competitors Capability: capacity of an integrated set of resources to integratively perform a task or activity

Four Attributes of Resources and Capabilities (Competitive Advantage)

Valuable
Resources and Capabilities

allow the firm to exploit opportunities or neutralize threats in its external environment
possessed by few, if any, current and potential competitors

Rare

Costly to imitate Nonsubstitutable

when other firms cannot obtain them or must obtain them at a much higher cost the firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage

Resources and capabilities that meet

these four criteria become a source of:

Valuable
Resources and Capabilities

Rare

Core Competencies

Costly to imitate Nonsubstitutable

Core Competencies are the basis for a firms

Competitive advantage
Value Creation Ability to earn above-average returns

Core Competencies

Resource-based Model of Above Average Returns Resource-based Model

Resources Capability 3. Determine the potential of the firms resources and capabilities in terms of a competitive advantage

Competitive Advantage

Competitive advantage: ability of a firm to outperform its rivals

Resource-based Model of Above Average Returns Resource-based Model

Resources Capability 4. Locate an attractive industry

Competitive Advantage
An Attractive Industry

An attractive industry: an industry with opportunities that can be exploited by the firms resources and capabilities

Resource-based Model of Above Average Returns Resource-based Model

Resources Capability 5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment

Competitive Advantage
An Attractive Industry Strategy Form/Impl

Strategy formulation and implementation: strategic actions taken to earn above average returns

Resource-based Model of Above Average Returns Resource-based Model

Resources Capability

Competitive Advantage
An Attractive Industry Strategy Form/Impl Superior Returns Superior returns: earning of above-average returns

Strategic Intent & Mission

Strategic Intent

Winning competitive battles by leveraging the firms resources, capabilities, and core competencies

Strategic Mission

An application of strategic intent in terms of products to be offered and markets to be served

Emergent and Deliberate Strategies

Intended Strategy Deliberate Strategy Realized Strategy

Unrealized Strategy

Emergent Strategy

From Strategy Formation in an Adhocracy by Henry Mintzberg and Alexandra McHugh, Administrative Science Quarterly, Vol. 30, No. 2, June 1985. Reprinted by permission of Administrative Science Quarterly.

Strategic Management Process for Intended Strategies

Missions and Goals

External Analysis

Strategic Choice

Internal Analysis

INTENDED STRATEGY

Organizing for Implementation

Strategic Management Process for Emergent Strategies

External Analysis

Missions and Goals

Internal Analysis

Strategic Choice Does It Fit?

EMERGENT STRATEGY

Organizational Grassroots

The Firm and Its Stakeholders

Stakeholders
Groups The firm who must are maintain affected by a firms performance performance at an adequate and who have level claims in order on toits retain wealth the participation of key stakeholders

The Firm and Its Stakeholders

Stakeholders
Capital Market Stakeholders
Shareholders Major suppliers of capital Banks Private lenders Venture capitalists

The Firm and Its Stakeholders

Stakeholders
Capital Market Stakeholders
Primary customers Suppliers Host communities Unions

Product Market Stakeholders

The Firm and Its Stakeholders

Stakeholders
Capital Market Stakeholders

Product Market Stakeholders Employees Managers Nonmanagers

Organizational Stakeholders

Values
Johnson
1.
2. 3.

& Johnsons credo sets its responsibilities to:

J&J product users. J&J employees. Communities in which J&J employees live and work. J&J stockholders.

4.

Source: Courtesy of Johnson & Johnson.

Johnson & Johnson Credo*

First Responsibility Is to Those Who Use J&J Products Next Come Its Employees Next, the Communities in Which the Employees Live and Work Its Final Responsibility Is to Its Stockholders

Levels of Strategy

Functional-Level Strategy

Manufacturing Marketing Materials Management Research and Development Human Resources

Business-Level Strategy

Cost Leadership Differentiation Market Niche Focus

Global Strategies

Multidomestic International Global Transnational

Corporate-Level Strategy

Vertical Integration Diversification Strategic Alliances Acquisitions New Ventures Business Portfolio Restructuring