Chapter 1 Strategic Management and Competitiveness PDF

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Chapter 1: Strategic Management and Strategic Competitiveness  Strategic competitiveness: achieved when firm successfully formulates and implements a valuecreating strategy. Strategy: integrated/coordinate set of commitments and actions designed to exploit core competencies and gain competitive advantage. o When choosing strategy, firms make choices among competing alternatives as pathway for deciding how they will pursue strategic competitiveness.  Chosen strategy indicates what the firm will do as well as what the firm will not do.  To adapt to local environments, companies make major changes.  Firm has competitive advantage when it implements a strategy that creates superior value for customers and that its competitors are unable to duplicate or find too costly to imitate. o Organization can be confident that its strategy has resulted in one or more useful competitive advantages only after competitors’ efforts to duplicate its strategy have ceased/failed.  Firms must understand that no competitive advantage is permanent. The speed with which competitors are able to acquire the skills needed to duplicate benefits of firms’ value-creating strategy determines how long the competitive advantage will last.  Above-average returns: returns in excess of what an investor expects to earn from other investments will similar amount of risk. o Risk: investor’s uncertainty about economic gains or losses that will result from particular investment. Most successful companies learn how to effectively manage risk.  Effectively managing risks reduces investors’ uncertainty about results of their investments.  Returns are measured in terms of accounting figures (returns on assets, return on equity, or return on sales). Returns can be measured on basis of stock market returns such as monthly returns.  Understanding how to exploit a competitive advantage is important for firms seeking to earn aboveaverage returns. Firms w/out competitive advantage or that are not competing in attractive industry earn, at best, average returns. o Average returns: returns equal to those an investor expects to earn from other investments with a similar amount of risk.  Inability to earn at least average returns results first in decline and eventually failure.  There are no guarantees of permanent success. Overconfidence can lead to excessive risk taking.  Strategic Management Process: full set of commitments, decisions, and actions required for firm to achieve strategic competitiveness and earn above-average returns. o Process involves analysis, strategy and performance. o First step is to analyze its external environment and internal organization to determines its resources, capabilities, and core-competencies-which its strategy likely will be based.  With info gained from external/internal analyzes, firm develops its vision/mission and formulates one or more strategies. Firm takes actions to enact each strategy with intent of achieving strategic competitiveness and above-average returns (performance).  Effective strategic actions that take place in context of carefully integrated strategy formulation and implementation efforts result in positive performance. o Dynamic strategic mgmt. process must be maintained as ever-changing markets and competitive structures are coordinated with firm’s continuously evolving strategic inputs.  Next, we examine two models that firms use to gather info and knowledge required to choose and effectively implement their strategies. Insights gained from models serve as foundation for forming firms’ vision and mission.

o First model (industrial organization or I/O) suggests that external environment is primary determinant of firm’s strategic actions.  Identifying and operating effectively in attractive industry or segment of industry are keys to competitive success. o Second model (resource-based) suggest firm’s unique resources and capabilities are critical link to strategic competitiveness (internal organization). 1.2 The I/O Model of Above-Average Returns  Industrial organization (I/O) model of above-average returns explains external environment’s dominant influence on firm’s strategic actions. o Specifics industry or segment of industry in which company chooses to compete has stronger influence on performance than do choices managers make inside their organizations.  Firm’s performance is believed to be determined primarily by range of industry properties (economies of scale, barriers of market entry, diversification, product differentiation, degree of concentration of firms in industry, and market frictions). o Grounded in economics, I/O model has four underlying assumptions:  External environment is assumed to impose pressures/constraints that determine strategies that would result in above-average returns  Most firms competing w/in industry or segment of that industry are assumed to control similar strategically relevant resources and pursue similar strategies in light of those resources.  Resources used to implement strategies are assumed to be highly mobile across firms, so any resource differences that might develop b/w firms will be short-lived.  Organizational decision makers are assumed to be rational and committed to acting in firm’s best interests, shown by profit-maximizing behaviors. o Challenges firms to find most attractive industry in which to compete. o B/c most firms are assumed to have similar valuable resources that are mobile across companies, their performance generally can be increased only when they operate in industry with highest profit potential and learn how to use their resources to implement the strategy required by industry’s strategical characteristics.  To do so, they must imitate each other.  The five forces model of competition is an analytical tool to help firms find industry that is most attractive for them. o The model encompasses several variables and tries to capture complexity of competition. o Suggest that industry’s profitability (rate of return on invested capital relative to its cost of capital) is function of interactions among five forces: suppliers, buyers, competitive rivalry among firms currently in industry, product substitutes, and potential entrants to industry.  Firms use five forces model to identify attractiveness of industry and most advantageous position for firm to take in that industry, given industry’s specific characteristics.  Model suggests that firms can earn above-average returns by producing either standardized good/services at costs below those of competitors (cost-leadership strategy) or by producing differential goods/services for which customers are willing to pay price premium (differentiation strategy).  I/O model suggests that above-average returns are earned when firms can effectively study external environment as foundation for identifying attractive industry and implementing appropriate strategy. o Companies that develop/acquire internal skills needed to implement strategies required by external environment are likely to succeed, while those that do not are likely to fail.

Model suggests that returns are determined primarily by external characteristics rather than by firm’s unique internal resources and capabilities. o Managers’ strategic actions affect firms’ performance in addition to or in conjunction with external environment influences. External environment and firms’ resources, capabilities, core competencies, and competitive advantages influence company’s ability to achieve strategic competitiveness and earn above-average returns. I/O model assumes firm’s strategy is set of commitments and actions flowing from characteristics of industry in which firm has decided to compete. 

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1.3 The Resource-Based Model of Above-Average Returns  *assumes that each organization is collection of unique resources/capabilities. o Uniqueness of its resources and capabilities is basis of firm’s strategy and its ability to earn above-average returns,  Resources: inputs into firm’s production process, classified into three categories: physical, human, and organizational capital. They are either tangible or intangible in nature. o Individual resources aloe may not yield competitive advantage. Resources have greater likelihood of being source of competitive advantage when they are formed in a capability: capacity for set of resources to perform task or activity in integrative manner. o Core competencies: capabilities that serve as source of competitive advantage for firm over its rivals. Often visible in form of organizational functions.  According to resource-based model, differences in firms’ performances across time are due primarily to their unique resources and capabilities rather than industry’s structural characteristics o Model assumes firms acquire different resources and develop unique capabilities based on how they combine and use resources; that resources and capabilities are not highly mobile across firms and differences in resources/capabilities are basis of competitive advantage.  Through continued use, capabilities become stronger and more difficult for competitors to understand/imitate.  As source of competitive advantage, capability must not be easily imitated but also not too complex to understand/manage.  Resource-based model of superior returns suggests that strategy firm chooses allows it to use its competitive advantages in attractive industry. o Not all firm’s resources and capabilities have potential to be foundation for competitive advantage.  This potential is realized when resources and capabilities are valuable, rare, costly to imitate, and non-substitutable.  Resources are valuable when they allow firm to take advantage of opportunities or neutralize threats in its external environment.  They are rare when possessed by few, if any, current/potential competitors.  Resources are costly to imitate when other firms either can’t obtain them or are at a cost disadvantage in obtaining them compared with firm that already possessed them.  They are not-substitutable when they have no structural equivalents. Many resources can either be imitated/substituted over time. o It is difficult to achieve and sustain competitive advantage based on resources alone. Individual resources are often integrated to produce configurations to build capabilities and have the four attributes.  When four criteria are met, resources/capabilities become core competencies.

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Research shows that both industry environment and firm’s internal assets that firm’s performance over time. To form vision/mission and select one or more strategies and determine how to implement them, firms use both I/O model and resource-based models. o These models complement each other in that one (I/O) focuses outside firm while the other (resource-based) focuses inside firm.

1.7 The Strategic Management Process  *rational approach firms use to achieve strategic competitiveness and earn above-average returns.  A-S-P process: o The firm’s analyses (A) provide foundation for choosing one or more strategies (S) and deciding which one(s) to implement.  Formulation and implementation must be simultaneously integrated for successful strategic mgmt. process. Integration occurs as decision maker review implementation issues when choosing strategies and consider possible changes to firm’s strategies while implementing current strategy. o Strategic mgmt. process calls for disciplined approaches to serve as foundation for developing competitive advantage. It has a major effect on performance (P) of firm.  Performance is reflected in firm’s ability to achieve strategic competitiveness and earn above-average returns....