Strategic Management
STRATEGIC MANAGEMENT INPUTS
Module - 1
Strategic Management Management of Strategy
Competitiveness and Globalization: Concepts Seventh Concepts and Cases and Casesedition
Road Map 1. Define strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process. Competitive landscape and explain how globalization and technological changes shape it. Industrial organization (I/O) model to explain how firms can earn above-average returns. Resource-based model to explain how firms can earn aboveaverage returns. Describe vision and mission and discuss their value. Stakeholders and their ability to influence organizations. Describe the work of strategic leaders. Explain the strategic management process.
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2. 3. 4. 5. 6. 7. 8.
Meaning Strategy
A companies strategy is the managements action plan for running the business & conducting the operations. The companies strategy is all about how how management intends to grow the business, how it will build a loyal clientele & outcompete rivals, how each functional piece of the business will be
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Important Definitions
Strategy An integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. Competitive Advantage When a firm implements a strategy that its competitors are unable to duplicate or find too costly to try to imitate. No competitive advantage is permanent. Strategic Competitiveness When a firm successfully formulates and implements a value-creating strategy.
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The firms first step in the process is to analyze its external & internal environment to determine its resources, capabilities & core competencies the sources of its Strategic Inputs. With this information, the firm develops its vision & mission & formulates its strategy. To implement this strategy, the firm takes action towards achieving strategic competitiveness & above-average returns. Effective strategic actions takes place in the context of carefully integrated strategy formulation. Implementing actions results in desired strategic outcomes. It is a dynamic process, as ever-changing markets & competitive structure are coordinated with a firms continuously evolving strategic inputs.
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FIGURE 1.1
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Topics to be discussed
a) Current competitive Landscape b) Models that firms use to gather information & knowledge required to choose their strategy & how to implement them These models also serve as the foundation for forming strategic vision & mission. 1. Industrial Organization Model (I/O Model)
2. Resource-Based Model
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The nature of competition in many of the industries is changing . The pace of change is relentless & is increasing. Even determining the boundaries of industries has become challenging.
Example: Impact of advances in interactive computer network & telecommunication on entertainment industry.
Conventional sources of competitive advantage economies of scale, huge advertising budgets are not effective as they were once. Managers must adopt a new mind-set that values flexibility, speed, innovation, integration & the challenge that evolve from constantly changing conditions.
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Hypercompetition Definition
A condition of rapidly competition based on: Price-quality positioning escalating
Under hypercompetetion assumptions of market stability are replaced by notions of inheriting instability & changes. Several factors create hypercompetetion two primary drivers are emergence of global economy & rapid changing technology.
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Global Economy
Goods, people, skills, and ideas move freely across geographic borders. Movement is relatively unfettered by artificial constraints such as tariffs. Expansion into global arena complicates a firms competitive environment.
Short-term: Where is the fastest growth likely to occur? Long-term: Where will sustainable growth occur? Example : GE has HQ in US but expects to earn as much as 60% of its revenue growth from developing economies (China & India)
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Challenges understanding the cultural sensitivity , ever-increasing complexity in their operations as goods, services, people move freely across geographical boarders Liability of foreignnessthe risks of participating outside of a firms domestic country in the global economy the amount of time required for firms to learn how to compete in markets that are new to them.
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Disruptive Technologies Technologies that destroy the value of existing technology and create new markets. New markets created by iPods, PDAs, WiFi etc Perpetual Innovation The rapidity and consistency with which new, information-intensive technologies replace older ones. In computer industry Size of computers, features added over years etc
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Technological Changes
The Information Age The ability to effectively and efficiently access and use information has become an important source of competitive advantage.
Technology includes personal computers, cellular phones, artificial intelligence, virtual reality, massive databases, electronic networks, internet trade.
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Increasing Knowledge Intensity Knowledge as a critical organizational resource for creating an intangible competitive advantage. Knowledge can be gained through experience, observation & inference. Firm must develop & acquire knowledge integrate it into organization to create capability & then apply it to gain competitive advantage.
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Strategic flexibility: the set of capabilities used to respond to various demands and opportunities in dynamic and uncertain competitive environments Organizational slack: slack resources that allow the firm flexibility to respond to environmental changes To be strategically flexible on a continuous basis & to gain the competitive benefit of such flexibility a firm has to develop the capacity to learn. Continuous learning provides the firm with new & upto-date set of skills, which allow it to adopt to its environment as it encounters changes.
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I/O Model (Industrial Organization Model) explains the dominance of the External Environment: The industry in which a firm competes has a stronger influence on the firms performance than do the choices managers make inside their organizations. Industry Properties Determining Performance are: Economies of scale Barriers to market entry Diversification Product differentiation Degree of concentration of firms in the industry
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1. Strategy is dictated by the external environment of the firmwhat opportunities exist in these environments?
2. Firm develops internal skills required by external environmentwhat can the firm do about the opportunities?
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FIGURE 1.2
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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
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Strategy Formulation
3. Identify the strategy called for by the attractive industry to earn above-average returns. Strategy formulation: Selection of a strategy linked with above-average returns in a particular industry.
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4. Develop or acquire assets and skills needed to implement a chosen strategy. Assets and skills: those assets and skills required to implement a chosen strategy.
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5. Use the firms strengths (its developed or acquired assets and skills) to implement the strategy. Strategy implementation: select strategic actions linked with effective implementation of the chosen strategy.
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Superior Returns
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Firms earn above-average returns by: Cost leadership Producing standardized products or services Differentiation Manufacturing differentiated products for which customers are willing to pay a price premium I/O Model suggest that: Above-average returns are earned when firm implement the strategy dictated by the characteristics of the general industry & competitors environments.
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Research findings support the I/O Model 20% of a firms profitability can be explained by the industry in which it choose to compete. However, 36% of the variance in profitability could be attributed to the firms characteristics & actions. These findings suggest that both environment & firms characteristics play a role in determining the firms specific level of profitability. Thus, a reciprocal relationship lies between the environment & the firms strategy.
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Model Assumptions Each organization is a collection of unique resources and capabilities that provides the basis for its strategy and that is the primary source of its returns. Capabilities evolve and must be managed dynamically. Differences in firms performances are due primarily to their unique resources and capabilities rather than structural characteristics of the industry. Firms acquire different resources and develop unique capabilities.
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Capabilities
Capacity of a set of resources to perform in an integrative manner A capability should not be:
So simple that it is highly imitable. So complex that it defies internal steering and control.
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Core Competencies
When the four key criteria of resources and capabilities are met, they become core competencies. Managerial competencies are especially important. Core competencies serve as a source of competitive advantage, create value, and provide the opportunity for above-average returns.
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Valuable
Rare
Core Competencies
Nonsubstitutable
Costly to Imitate
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be the basis for competitive advantage. This potential is realized when resources & capabilities are : valuable, rare, costly to imitate & non substitutable
Valuable: Allow the firm to exploit opportunities or neutralize threats in its external environment Rare: Possessed by few, if any, current and potential competitors Costly to imitate: When other firms cannot obtain them or must obtain them at a much higher cost Non Substitutable: The firm is organized appropriately to obtain the full benefits of the resources in order to realize a competitive advantage
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Strategy:
Competitive Advantage
Resources Capabilities Core Competencies
1. Strategy is dictated by the firms unique resources and capabilities. 2. Find an environment in which to exploit these assets (where are the best opportunities?)
Environment
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FIGURE 1.3
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3. Determine the potential of the firms resources and capabilities in terms of a competitive advantage.
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Attractive industry: an industry with opportunities that can be exploited by the firms resources and capabilities.
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Strategy formulation and implementation: strategic actions taken to earn above average returns.
5. Select a strategy that best allows the firm to utilize its resources and capabilities relative to opportunities in the external environment.
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Superior Returns
Resource-Based Model
Focuses on the inside of the firm
Successful strategy formulation and implementation actions result only when the firm properly uses both models.
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Vision
A enduring picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve. Stretches and challenges people and evokes emotions and dreams. Effective vision statements are: Developed by a host of people from across the organization. Clearly tied to external and internal environmental conditions. Consistent with strategic leaders decisions and actions.
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Provides a panoramic view of where we are going , Charts a strategic path Is distinctive and specific to a particular organization
Avoids use of generic language that is dull and boring and that could apply to most any company
Captures the emotions of employees and steers them in a common direction Is challenging and a bit beyond a companys immediate reach
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objectives
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Mission
Specifies the business or businesses in which the firm intends to compete and the customers it intends to serve. Is more concrete than the firms vision. Is more effective when it fosters strong ethical standards. Above-average returns are the fruits of the firms efforts to achieve its vision and mission.
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The mission statement of a firm focuses on its present business purpose - who we are and what we do
Current product and service offerings Customer needs being served Technological and business capabilities
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Vision To be the most admired Integrated Power and Energy Company delivering sustainable value to all stakeholders Mission We will become the most admired Company delivering sustainable value by: Being the supplier and partner of choice Achieving excellence in safety, operations and project management Focusing on the culture of sustainability Ensuring growth and delivering value to the stakeholders Caring for the community
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STAKEHOLDERS
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Stakeholders
Individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firms performance.
Claims on the firms performance are enforced by the stakeholders ability to withhold participation essential to the firms survival. The more critical and valued a stakeholders participation, the greater a firms dependency on it.
Managers must find ways to either accommodate or insulate the organization from the demands of stakeholders controlling critical resources.
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FIGURE
1.4
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Stakeholder Involvement
Two issues affect the extent of stakeholder involvement in the firm: How to divide returns to keep stakeholders involved? How to increase returns so everyone has more to share?
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Stakeholders
Capital Market Stakeholders Capital Market Stakeholders Shareholders Major suppliers of capital Banks Private lenders Venture capitalists
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Stakeholders (contd)
Capital Market Stakeholders Product Market Stakeholders Product Market Stakeholders
Customers
Suppliers Host communities Unions
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Suppliers
Seek loyal customers willing to pay sustainable prices for goods and services highest
Host communities
Want companies willing to be long-term employers and providers of tax revenues while minimizing demands on public support services
Union officials
Want secure jobs and desirable working conditions
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Stakeholders (contd)
Capital Market Stakeholders Product Market Stakeholders Organizational Stakeholders Organizational Stakeholders Employees Managers Non-managers
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Organizational Stakeholders
Employees Expect a dynamic, stimulating and rewarding work environment. Are satisfied by a company that is growing and actively developing their skills.
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Strategic Leaders
Strategic Leaders People located in different parts of the firm who are using the strategic management process to help the firm reach its vision and mission. Prerequisites for Effective Strategic Leadership Hard work Thorough analyses Honesty Desire for accomplishment Common sense
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Points covered:
Stakeholders in Business Competitive landscape The I/O Model Resource-based Model of Above Average Return, Vision, Mission and Purpose Definitions: Strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process etc Strategic Management process
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