2. What is Strategy?
Strategy is the overall plan for
deploying resources to establish a
favorable position.
Tactic is a scheme for a specific
maneuver.
5. 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.
6. 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
8. 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
9. 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
10. 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
11. 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
13. I/O Model of Above-Average Returns
1. External Environments
General
al
ral
tur
ltu
cul
cu
cio
cio
So
So
Competitor
Environment
Technological
Environment
Ec
on o
mi
c
Industry
Environment
ic
ic
ph
ph
g ra
g ra
mo
mo
De
De
Po
liti
ca
l /L
ega
l
Global
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?)
14. 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
15. 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 firm’s best
interests, as shown by their profit-maximizing
behaviors
16. I/O Model of Above-Average Returns
Industrial Organization 1. Study the external
environment, especially the
Model
The External Environment
industry environment
• economies of scale
• barriers to market entry
• diversification
• product differentiation
• degree of concentration of
firms in the industry
17. I/O Model of Above-Average Returns
Industrial Organization 2. Locate an attractive industry
with a high potential for
Model
The External Environment
An Attractive Industry
above-average returns
Attractive industry: one whose
structural characteristics
suggest above-average returns
18. I/O Model of Above-Average Returns
Industrial Organization 3. Identify the strategy called
for by the attractive industry
Model
The External Environment
to earn above-average returns
An Attractive Industry
Strategy Formulation
Strategy formulation: selection
of a strategy linked with
above-average returns in a
particular industry
19. I/O Model of Above-Average Returns
Industrial Organization 4. Develop or acquire assets and
skills needed to implement
Model
The External Environment
the strategy
An Attractive Industry
Strategy Formulation
Assets and Skills
Assets and skills: those assets
and skills required to
implement a chosen strategy
20. I/O Model of Above-Average Returns
Industrial Organization 5. Use the firm’s strengths (its
developed or acquired assets
Model
The External Environment
and skills) to implement the
strategy
An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
Strategy implementation:
select strategic actions linked
with effective implementation
of the chosen strategy
21. 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
22. Resource-based Model of Above Average Returns
1. Firm’s Resources
1. Strategy dictated by the
firm’s unique resources
and capabilities
2. Find an environment in
which to exploit these
assets (where are the best
opportunities?)
23. Resource-based Model of Above Average Returns
Resource-based
Model
Resources
1. Identify the firm’s
resources-- strengths and
weaknesses compared with
competitorsinputs into a firm’s
Resources:
production process
24. Resource-based Model of Above Average Returns
Resource-based
Model
Resources
Capability
2. Determine the firm’s
capabilities--what it can do
better than its competitors
Capability: capacity of an
integrated set of resources to
integratively perform a task or
activity
25. Four Attributes of Resources and Capabilities
(Competitive Advantage)
Rare
Costly to imitate
Nonsubstitutable
Resources and Capabilities
Valuable
allow the firm to exploit opportunities or
neutralize threats in its external
environment
possessed by few, if any, current and
potential competitors
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
26. Resources and capabilities that meet these
four criteria become a source of:
Rare
Costly to imitate
Nonsubstitutable
Resources and Capabilities
Valuable
Core Competencies
27. Core Competencies are the basis for a firm’s
Competitive
advantage
Value Creation
Ability to earn
above-average
returns
Core Competencies
28. Resource-based Model of Above Average Returns
Resource-based
Model
Resources
3. Determine the potential of the
firm’s resources and
capabilities in terms of a
competitive advantage
Capability
Competitive Advantage
Competitive advantage: ability
of a firm to outperform its
rivals
29. Resource-based Model of Above Average Returns
Resource-based
Model
4. Locate an attractive industry
Resources
Capability
Competitive Advantage
An Attractive Industry
An attractive industry: an
industry with opportunities that
can be exploited by the firm’s
resources and capabilities
30. 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
31. 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
32. Strategic Intent & Mission
Strategic
Winning competitive battles by leveraging the firm’s
resources, capabilities, and core competencies
Strategic
Intent
Mission
An application of strategic intent in terms of products to be
offered and markets to be served
34. Strategic Management Process for Intended
Strategies
Missions
Missions
and Goals
and Goals
External
External
Analysis
Analysis
Strategic
Strategic
Choice
Choice
INTENDED STRATEGY
Organizing for
Organizing for
Implementation
Implementation
Internal
Internal
Analysis
Analysis
35. Strategic Management Process for Emergent
Strategies
External
External
Analysis
Analysis
Missions
Missions
and Goals
and Goals
Strategic Choice
Strategic Choice
Does It Fit?
Does It Fit?
EMERGENT STRATEGY
Organizational
Organizational
Grassroots
Grassroots
Internal
Internal
Analysis
Analysis
36. The Firm and Its Stakeholders
Stakeholders
Groups who are affected by a
The firm must maintain
firm’s performance and who
performance at an adequate
have claims on its wealth
level in order to retain the
participation of key
stakeholders
37. The Firm and Its Stakeholders
Stakeholders
Capital Market Stakeholders
Shareholders
Major suppliers of capital
•Banks
•Private lenders
•Venture capitalists
38. The Firm and Its Stakeholders
Stakeholders
Capital Market Stakeholders
Product Market Stakeholders
Primary customers
Suppliers
Host communities
Unions
39. The Firm and Its Stakeholders
Stakeholders
Capital Market Stakeholders
Product Market Stakeholders
Organizational Stakeholders
Employees
Managers
Nonmanagers
40. Values
Johnson
& Johnson’s credo
sets its responsibilities to:
1.
2.
3.
4.
J&J product users.
J&J employees.
Communities in which J&J
employees live and work.
J&J stockholders.
Source: Courtesy of Johnson & Johnson.
41. 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
I/O Model: McDonalds and Starbucks
Respectively, in both cases the CEOs Ray Crock and Howard Schultz were examining
the industry in which they worked. Crock was a sales rep for a firm that built malted
milkshake machines. Schultz was a sales rep for a company that made home espresso
machine accessories. Both noticed that there was a customer that was purchasing a large
volume of these machines. They made trips to the locations of these stores and noticed
that each was in an emerging industry that had high-growth potential and higher-than-average
profit margins. McDonalds is in fast-food and drive-thru restaurants and Starbucks
is in specialty coffee retail.
Four Assumptions of the I/O Model
Both Crock and Schultz identified the strategy that allowed their companies to achieve
high profits: McDonalds through the “assembly line” of their burgers and Starbucks with
product marketing that created ambiance and consistency, a value perception that allowed
them to charge high premium for their coffee.
Four Assumptions of the I/O Model (cont.)
Both McDonalds and Starbucks then spent time and capital to acquire and develop the
skills needed to implement the business strategy. Crock became a business partner of the
McDonald brothers and sold franchise agreements for them. Schultz took a position in the
marketing department of Starbucks. Each later purchased the firm and used what they had
learned to rapidly expand the company. Crock was able to use McDonalds quality, consistency,
rapid assembly system, and drive-thru concepts to continue to realize high profits.
Schultz was able to use the Starbucks image, ambiance concept, and marketing
strengths to rapidly expand.
One interesting note: Initially, Schultz started a Seattle coffeehouse chain (Il Giorande)
that competed with Starbucks. His marketing manager was so adamant that Starbucks
was a better concept capable of “going global” that Schultz sold his original
coffeehouse chain and purchased Starbucks.
Resource-based model: Patents and Inventions
The resource-based view (RBV) of the firm is hedged on two axiomatic assumptions. First,
resources are distributed heterogeneously across firms, and second, these resources cannot
be transferred between firms without cost. These axioms lend themselves to two additional
tenets (cf., Barney, 1991): (a) Resources that simultaneously enhance a firm’s market
effectiveness (valuable) and are not widely dispersed (rare) can produce competitive
advantage; and (b) when such resources are concurrently expensive to imitate (inimitable)
and costly to substitute (nonsubstitutable), the competitive advantage is sustainable.
Thus, value and rarity are each necessary before inimitability and nonsubstitutability
might yield a sustainable competitive advantage (Priem & Butler, 2001).
Resource-based model: Patents and Inventions (cont.)
Despite its face validity and rapid diffusion throughout the management literature, there
have only been limited empirical tests of RBV’s tenets (cf., Priem & Butler, 2001). To
echo Miller and Shamsie (1996, p. 519), “the concept of resources remains an amorphous
one that is rarely operationally defined or tested for its performance implications in different
competitive environments.” Many managers use RBV’s terms with little specificity
or attention to causal relationships. Researchers have identified several types of valuable
and rare resources that could generate rents. Some examples include information technology
(Powell, 1997), strategic planning (Powell, 1992), organizational alignment
(Powell, 1992a), human resources management (Lado & Wilson, 1994; Wright &
McMahan, 1992), trust (Barney & Hansen, 1994), organizational culture (Oliver, 1997),
administrative skills (Powell, 1993), expertise of top management (Castanias & Helfat,
1991), and even Guanxicomplex networks (Tsang, 1998).
Resource-based model: Patents and Inventions (cont.)
The degree to which RBV is likely to help managers depends on the extent to which it
can be used to achieve competitive advantage. Hence, recently, Markman and his colleagues
have attempted to clarify three basic questions: (1) Can a single resource be simultaneously
valuable, rare, inimitable, and nonsubstitutable? (2) Can an inimitable and
nonsubstitutable resource be measured? And (3) To what extent is an inimitable and nonsubstitutable
resource associated with competitive advantage?
Using five-year data from 85 large, publicly traded pharmaceutical companies,
Markman and his colleagues advance the view that a single resource-patented invention
could qualify as simultaneously valuable, rare, hard to imitate, and difficult to substitute.
In other words, the answer to the first question is yes; some patents are valuable, rare,
inimitable, and nonsubstitutable resources. The answers to the second and third questions
are “yes” as well. That is, controlling for assets, sales, and investment in R&D, they
found that a patent’s quality and scope are significantly related to competitive advantage
as captured by new products and, to some extent, to profitability.
Four Attributes of Resources and Capabilities
(Competitive Advantage)
Despite these findings and the intuitive appeal of RBV, challenges remain. Priem and Butler
(2001) noted that a resource that is valuable, rare, hard to imitate, and not substitutable
is also difficult to assess, manipulate, or deploy, and therefore difficult to exploit. Their
analytical assessment spurred an important debate regarding RBV’s practical utility. For
example, tacit knowledge, organizational learning, workflow, time, interorganizational
ties, communications, and human interactions might be seen as hard to imitate and nonsubstitutable
resources, but such resources are neither necessarily rare nor inevitably
valuable. Thus, while many “things” might be classified as resources, intangibles are less
amenable to managerial manipulation, rendering their associations with competitive advantage
tenuous. For example, tacit knowledge is frequently conceptualized as a source
of competitive advantage, yet we don’t know how (and at what rate) managers create and
use that which is inherently unknowable. Personnel, machinery, land, technical procedures,
and financial capital are relatively easy to quantify resources. Brand names, however,
and organizational knowledge, learning, and culture are extremely difficult to craft,
use, measure, and manage. In sum, the practical utility of RBV to managers remains
weak as long as we fail to explicitly parameterize and measure the extent to which certain
resources are valuable, rare, inimitable, and nonsubstitutable.