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Chapter 1: Strategic Management and Strategic Competitiveness
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?
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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
Above Average Returns Returns in excess of what investor expects in comparison to other
investments with similar risk
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The Strategic Management Process
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Industrial Organizational (I/O) Model of Above-Average Returns (AAR)
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 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 for competing in an industry:
Cost Leadership or Differentiation Internal resources & capabilities are not considered
AAR are earned when a firm implements the strategy dictated by external environment (general, industry, and competitor)
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Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
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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 nonsubstitutable
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 firm’s resources and capabilities that serve as sources of competitive
advantage over its rival
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The Resource-Based Model of AAR
Basic Premise - a firm's unique resources & capabilities is the basis for firm strategy and AAR
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 industry’s structural characteristics)
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 advantage
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The Resource-
Based Model of
AAR
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Vision and Mission
Purpose: Chart the company’s long-term direction (vision) Describe the company’s purpose (mission) Give the firm a strong identity Create a roadmap of the company’s future Kind of company to become – direction we are headed
Indicates the long-term course management has charted for the company
Together mission and vision provide foundation for strategy formulation and implementation
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Vision and Mission
Mission Also called business purpose or business definition Addresses “who we are and what we do” Outlines the organization’s activities and business
make-up More specific than the vision Focuses on present business and purpose
Businesses and industries company is in now Customer needs currently being served
Should pin down the company’s real area of business interest
Serves as a boundary for what to do and not do
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Vision and Mission
Vision Concerns future business path – “where we are going” The kind of company we are trying to become Customer needs to be satisfied in the future A guiding concept for the organization Charts a company’s future strategic course – defines
the business makeup in 5 to 10 years Requires the exercise of strategic thinking and
management foresight The responsibility of a firm's top strategic leader – the
CEO Serves as foundation for mission
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Vision and Mission
Why is it important to develop vision and mission? Provides a clear long-term direction for the organization Guides employee actions and gives them and the
organization a sense of purpose Guides managerial decision-making Helps stakeholders (who, how) understand your
business (investors, bank-loans, outside legitimacy)
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Stakeholders
Basic Premise – a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors
Stakeholders – individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance
Must minimally meet the expectations of each stakeholder group
Above average returns (AAR) makes this easier to do 3 Major Stakeholder Groups
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The Three Stakeholder Groups
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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 mission The Work of Effective Strategic Leaders
Must be able to think strategically Involved in internal and external analyses,
development of vision and mission, strategy formulation and implementation, and constant review, evaluation, and adjustment
Create and sustain organizational structure and culture Can exist at different organizational levels
Corporate, business, functional, operating
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The Strategic Management Process
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What is Performance?
Performance is central to the study and practice of strategy Organizational performance is complicated Numerous definitions, approaches, and types of performance Can be an elusive concept Examples:
Goal attainment - Vision/mission, objectives Effectiveness – A hospital curing sick people Quality – Customer service Efficiency - Inputs to outputs Financial/accounting/economic returns – ROA, EPS
Can also vary by type of firm For-profit versus not-for-profit Publicly traded? Government
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Measuring Performance
Stakeholders View An organization’s 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 performance
May need to choose which stakeholders to satisfy Must minimally satisfy the interests of each stakeholder
group
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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
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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
short–term financial obligations Current ratio, quick ratio
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Measuring Performance
Leverage Ratios Ratios that focus on the level of a firm’s
indebtedness Debt to assets, debt to equity, times interest earned
Activity Ratios Ratios that focus on the level of activity in a firm’s
business Inventory turnover, average collection period
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The Relative Nature of Performance
Performance is always relative to other firms Performance should be compared to industry average(s)
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 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