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Chapter 1: Strategic Management and Strategic Competitiveness


Chapter 1: Strategic Management and Strategic Competitiveness Overview: Nature of Competition I/O Model of Above-Average Returns (AAR) Resource-Based Model of AAR – PowerPoint PPT presentation

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Title: Chapter 1: Strategic Management and Strategic Competitiveness

Chapter 1 Strategic Management and Strategic
  • Overview
  • Nature of Competition
  • I/O Model of Above-Average Returns (AAR)
  • Resource-Based Model of AAR
  • Strategic Vision and Mission
  • Stakeholders
  • Strategic Leaders
  • The Strategic Management Process
  • What is Performance?

Nature of Competition Basic concepts
  • Strategy
  • Integrated and coordinated set of commitments and
    actions designed to exploit core competencies and
    gain a competitive advantage
  • Competitive Advantage (CA)
  • When a firm implements a strategy that
    competitors are unable to duplicate or find too
    costly to imitate
  • Strategic Competitiveness
  • Achieved when a firm successfully formulates
    implements a value-creating strategy

Nature of Competition Basic concepts
  • Above Average Returns
  • Returns in excess of what investor expects in
    comparison to other investments with similar risk
  • Risk
  • Investors uncertainty about economic
    gains/losses resulting from a particular
  • Average Returns
  • Returns equal to what investor expects in
    comparison to other investments with similar risk
  • Strategic Management Process (SMP)
  • Full set of commitments, decisions and actions
    required for a firm to achieve strategic
    competitiveness and earn above average returns

The Strategic Management Process
Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
  • 4 Underlying Assumptions
  • External environment imposes pressures and
    constraints that determine the strategies
    resulting in AAR
  • Most firms that compete within a particular
    industry control similar resources and pursue
    similar strategies
  • Resources for implementing strategies are highly
    mobile across firms thus any resource
    differences will be short-lived
  • Organizational decision makers are rational and
    committed to acting in the firm's best interests,
    as shown by their profit-maximizing behaviors
  • Limitations
  • Only two strategies are suggested
  • Cost Leadership or Differentiation
  • Internal resources capabilities are not
  • AAR are earned when a firm implements the
    strategy dictated by external environment
    (general, industry, and competitor)

The Resource-Based Model of AAR
The Resource-Based Model of AAR
  • Resources
  • Inputs into a firm's production process
  • Includes capital equipment, employee skills,
    patents, high-quality managers, financial
    condition, etc.
  • Basis for competitive advantage When resources
    are valuable, rare, costly to imitate, and
  • 3 categories of internal/firm-specific resources
  • Physical, Human, Organizational capital
  • Capability
  • Capacity for a set of resources to perform a task
    or activity in an integrative manner
  • Core Competency
  • A firms resources and capabilities that serve as
    sources of competitive advantage over its rival

The Resource-Based Model of AAR
  • Basic Premise - a firm's unique resources
    capabilities is the basis for firm strategy and
  • Each organization is a bundle of unique resources
    and capabilities
  • Performance difference between firms emerge over
    time due to these unique resources and
    capabilities (versus industrys structural
  • Combined uniqueness should define the firms
    strategic actions
  • A firm has superior performance because of
  • Unique resources and capabilities, and the
    combination makes them different, and better,
    than their competition driving the competitive

Vision and Mission
  • Purpose to inform stakeholders of what the firm
    is, what it seeks to accomplish, and who it seeks
    to serve
  • Vision
  • Picture of what the firm wants to be and, in
    broad terms, what it ultimately wants to achieve
  • Gives the firm direction
  • The responsibility of a firm's top strategic
    leader the CEO
  • CEO works with others to form a firms strategic
  • Serves as foundation for mission
  • Mission
  • Specifies the business(es) or industries in which
    a firm intends to compete and the customers it
    intends to serve
  • More specific than the vision
  • Mission and vision provide foundation for
    strategy formulation and implementation

  • Basic Premise a firm can effectively manage
    stakeholder relationships to create a competitive
    advantage and outperform its competitors
  • Stakeholders are individuals and groups who can
    affect, and are affected by, the strategic
    outcomes achieved and who have enforceable claims
    on a firms performance
  • Must minimally meet the expectations of each
    stakeholder group
  • AAR make this easier to do
  • 3 Major Stakeholder Groups

The Three Stakeholder Groups
Strategic Leaders
  • People (primarily managers) located in different
    parts of the firm using the strategic management
    process to help the firm reach its vision and
  • Decisive and committed to firms efforts to
    achieve their desired strategic outcomes
  • Create and sustain organizational culture
  • Can exist at different organizational levels
  • Corporate, business, functional, operating

Strategic Leaders
  • The Work of Effective Strategic Leaders
  • Work long hours
  • Must be able to think strategically
  • think seriously and deeplyabout the purposes of
    the organizations they head or functions they
    perform, about strategies, tactics,..and
    peopleand about the important questions they
    need to ask.
  • Set ethical tone for organization
  • Try to predict the outcomes of their strategic
    decisions before they are implemented
  • Involved in internal and external analyses,
    development of vision and mission, and strategy
    formulation and implementation

The Strategic Management Process
What is Performance?
  • Performance is central to the study and practice
    of strategy
  • Organizational performance is complicated
  • Numerous definitions, approaches, and types of
  • Can be an elusive concept
  • Examples
  • Goal attainment - Vision/mission, objectives
  • Effectiveness A hospital curing sick people
  • Quality Customer service
  • Efficiency - Inputs versus outputs
  • Financial/accounting/economic Returns ROA, EPS
  • Can also vary by type of firm
  • For-profit versus not-for-profit
  • Publicly traded?
  • Government

Major Approaches to Measuring Performance
  • Firm Survival
  • A firm that survives over a relatively extended
    period of time must be generating at least normal
    economic performance
  • Stakeholders View
  • An organizations performance should be evaluated
    relative to the preferences and desires of
    stakeholders that provide resources to a firm
  • Different stakeholders can have different
    interests and different criteria for evaluating
  • May need to choose which stakeholders to satisfy
  • Must minimally satisfy the interests of each
    stakeholder group

Major Approaches to Measuring Performance
  • Simple Accounting Measures
  • Most popular approach
  • Publicly available for many firms
  • They communicate a great deal of information
  • Most often rely on ratio analysis
  • 4 Major categories of ratios
  • Profitability
  • Liquidity
  • Leverage
  • Activity

Major Approaches to Measuring Performance
  • Profitability Ratios
  • Ratios with some measure of profit in the
    numerator and some measure of firm size or assets
    in the denominator
  • ROA, ROE, margins, EPS, p/e ratio
  • Liquidity Ratios
  • Ratios that focus on the ability of a firm to
    meet its shortterm financial obligations
  • Current ratio, quick ratio

Major Approaches to Measuring Performance
  • Leverage Ratios
  • Ratios that focus on the level of a firms
  • Debt to assets, debt to equity, times interest
  • Activity Ratios
  • Ratios that focus on the level of activity in a
    firms business
  • Inventory turnover, average collection period

The Relative Nature of Performance
  • Performance is always relative to other firms
  • Performance should be compared to industry
  • AAR are above industry average
  • Normal and below normal returns
  • Industry adjustments
  • Some industries are more profitable than others
  • Can adjust for industry performance and compare
    performance levels across industries
  • Can also adjust for risk
  • Looking at trends can also be useful
  • From earlier
  • I/O Model - Pick attractive industry(ies) to
    compete in
  • Resource-Based Model - Develop unique bundles of
    resources and capabilities