Chapter 1: Strategic Management and Strategic Competitiveness

Chapter 1
Strategic Management and Strategic Competitiveness
KNOWLEDGE OBJECTIVES

1. Define strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic
management process.
2. Describe the competitive landscape and explain how globalization and technological changes shape it.
3. Use the industrial organization (I/O) model to explain how firms can earn above-average returns.
4. Use the resource-based model to explain how firms can earn above average-returns.
5. Describe vision and mission and discuss their value.
6. Define stakeholders and describe their ability to influence organizations.
7. Describe the work of strategic leaders.
8. Explain the strategic management process.

Define strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic

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management process.

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Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating

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strategy. By implementing a value-creating strategy that current and potential competitors are not
simultaneously implementing and that competitors are unable to duplicate, or find too costly to imitate, a firm

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achieves a competitive advantage.
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Strategy can be defined as an integrated and coordinated set of commitments and actions designed to exploit
core competencies and gain a competitive advantage.

So long as a firm can sustain (or maintain) a competitive advantage, investors will earn above-average returns.
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Above-average returns represent returns that exceed returns that investors expect to earn from other
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investments with similar levels of risk (investor uncertainty about the economic gains or losses that will result
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from a particular investment). In other words, above average-returns exceed investors' expected levels of return
for given risk levels.

In smaller new venture firms, performance is sometimes measured in terms of the amount and speed of growth
rather than more traditional profitability measures – new ventures require time to earn acceptable returns.
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A framework that can assist firms in their quest for strategic competitiveness is the strategic management
process, the full set of commitments, decisions and actions required for a firm to systematically achieve
strategic competitiveness and earn above-average returns. This process is illustrated in Figure 1.1.
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FIGURE 1.1 - The Strategic Management Process

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Figure 1.1 illustrates the dynamic, interrelated nature of the elements of the strategic management process and
provides an outline of where the different elements of the process are covered in this text.

Feedback linkages among the three primary elements indicate the dynamic nature of the strategic management
process: strategic inputs, strategic actions and strategic outcomes.
Strategic inputs, in the form of information gained by scrutinizing the internal environment and scanning
the external environment, are used to develop the firm's vision and mission.
Strategic actions are guided by the firm's vision and mission, and are represented by strategies that are
formulated or developed and subsequently implemented or put into action.
Desired strategic outcomes—strategic competitiveness and above-average returns—result when a firm is
able to successfully formulate and implement value-creating strategies that others are unable to duplicate.
Feedback links the elements of the strategic management process together and helps firms continuously

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 Chapter 1: Strategic Management and Strategic Competitiveness

adjust or revise strategic inputs and strategic actions in order to achieve desired strategic outcomes.

2 Describe the competitive landscape and explain how globalization and technological changes shape it.

THE COMPETITIVE LANDSCAPE

The competitive landscape can be described as one in which the fundamental nature of competition is changing
in a number of the world’s industries. Further, the boundaries of industries are becoming blurred and more
difficult to define.

The twenty-first century competitive landscape thus implies that traditional sources of competitive advantage—
economies of scale and large advertising budgets—may not as important in the future as they were in the past.
The rapid and unpredictable technological change that characterizes this new competitive landscape implies that
managers must adopt new ways of thinking. The new competitive mind set must value flexibility, speed,
innovation, integration, and the challenges that evolve from constantly changing conditions.

A term often used to describe the new realities of competition is hypercompetition, a condition that results from

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the dynamics of strategic moves and countermoves among innovative, global firms: a condition of rapidly
escalating competition that is based on price-quality positioning, efforts to create new know-how and achieve

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first-mover advantage, and battles to protect or to invade established product or geographic markets (that will be

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discussed in more detail in Chapter 5).

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The Global Economy
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A global economy is one in which goods, services, people, skills and ideas move freely across geographic
borders.
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The emergence of this global economy results in a number of challenges and opportunities. For instance,
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Europe is now the world’s largest single market (despite the difficulties of adapting to multiple national cultures
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and the lack of a single currency. The European Union has a gross domestic product (GDP) that is over 35%
greater than that of the U.S., with 700 million potential customers.

The expectations of U.S. firms for global business are changing rapidly.
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GE expects as much as 60 percent of its revenue growth between 2005 and 2015 to be generated by
competing in rapidly developing economies (e.g., China and India).
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The March of Globalization

Globalization is the increasing economic interdependence among countries as reflected in the flow of goods and
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services, financial capital, and knowledge across country borders. This is illustrated by the following:
Financial capital might be obtained in one national market and used to buy raw materials in another one.
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Manufacturing equipment bought from another market produces products sold in yet another market.
Globalization enhances the available range of opportunities for firms.

Wal-Mart is trying to achieve boundary-less retailing with global pricing, sourcing, and logistics. Today, Wal-
Mart is the world’s largest retailer (with over 6,200 total units).

Because Toyota initially emphasized product reliability and superior customer service, the company’s products
are in high demand across the globe. Due to the demand for its products, Toyota’s competitive actions have
forced its global competitors to make reliability and service improvements in their operations.

Global competition has increased performance standards in many dimensions, including quality, cost,
productivity, product introduction time, and operational efficiency. Moreover, these standards are not static;
they are exacting, requiring continuous improvement from a firm and its employees. Thus, companies must

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 Chapter 1: Strategic Management and Strategic Competitiveness

improve their capabilities and individual workers need to sharpen their skills. In the twenty-first century
competitive landscape, only firms that meet, and perhaps exceed, global standards are likely to earn strategic
competitiveness.

While globalization seems an attractive strategy for competing in the current competitive landscape, there are
risks as well. These include such factors as:
the ―liability of foreignness‖ (i.e., the risk of competing internationally)
overdiversification beyond the firm’s ability to successfully manage operations in multiple foreign markets

A point to emphasize: entry into international markets requires proper use of the strategic management process.

While global markets are attractive strategic options for some companies, they are not the only source of
strategic competitiveness. In fact, for most companies, even for those capable of competing successfully in
global markets, it is critical to remain committed to and strategically competitive in the domestic market. And,
domestic markets can be testing grounds for possibly entering an international market at some point in the
future.

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Technology and Technological Changes

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Three technological trends and conditions are significantly altering the nature of competition:

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increasing rate of technological change and diffusion
the information age

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increasing knowledge intensity
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Technologic Diffusion and Disruptive Technologies

Both the rate of change and the introduction of new technologies have increased greatly over the last 15 to 20
years. A term that is used to describe rapid and consistent replacement of current technologies by new,
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information-intensive technologies is perpetual innovation. This implies that innovation—to be discussed in

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more detail in Chapter 13—must be continuous and carry a high priority for all organizations.
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The shorter product life cycles that result from rapid diffusion of innovation often means that products may
be replicated within very short time periods, placing a competitive premium on a firm’s ability to rapidly
introduce new products into the marketplace. In fact, speed-to-market may become the sole source of
competitive advantage. In the computer industry during the early 1980s, hard disk drives would typically
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remain current for four to six years, after which a new and better product became available. By the late
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1980s, the expected life had fallen to two to three years. By the 1990s, it was just six to nine months.

The rapid diffusion of innovation may have made patents a source of competitive advantage only in the
pharmaceutical and chemical industries as many firms do not file patent applications to safeguard (for at least a
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time) the technical knowledge that would be disclosed explicitly in a patent application.
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Disruptive technologies (in line with the Schumpeterian notion of ―creative destruction‖) can destroy the value
of existing technologies by replacing them with new ones. Current examples include the success of iPods,
PDAs and WiFi.

The Information Age

Changes in information technology have made rapid access to information available to firms all over the world,
regardless of size. Consider the rapid growth in the following technologies: personal computers (PCs), cellular
phones, computers, personal digital assistants (PDAs), artificial intelligence, virtual reality, and massive data
bases. These examples show how information is used differently as a result of new technologies. The ability to
access and use information has become an important source of competitive advantage in almost every industry.
There have been dramatic changes in information technology in recent years
The number of PCs is expected to grow to 278 million by 2010.

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 Chapter 1: Strategic Management and Strategic Competitiveness

The Internet provides an information-carrying infrastructure available to individuals and firms worldwide.

The ability to access a high level of relatively inexpensive information has created strategic opportunities for
many information-intensive businesses. For example, retailers now can use the Internet to provide shopping to
customers virtually anywhere.

Increasing Knowledge Intensity

It is becoming increasingly apparent that knowledge—information, intelligence and expertise—is a critical

organizational resource, and increasingly, a source of competitive advantage. As a result,
many companies are working to convert the accumulated knowledge of employees into a corporate asset
shareholder value is increasingly influenced by the value of a firm’s intangible assets, such as knowledge

The implication of this discussion is that, to achieve strategic competitiveness and earn above-average returns,
firms must develop the ability to adapt rapidly to change or achieve strategic flexibility.

Strategic flexibility represents the set of capabilities—in all areas of their operations—that firms use to

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respond to respond to the various demands and opportunities that are found in dynamic, uncertain

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environments. This implies that firms must develop certain capabilities, including the capacity to learn

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continuously, which will provide the firm with new skill sets. However, those working within firms to

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develop strategic flexibility should understand that the task is not an easy one, largely because of inertia that
can build up over time. A firm’s focus and past core competencies may actually slow change and strategic

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flexibility.
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Two models describing key strategic inputs to a firm's strategic actions are discussed next: the Industrial
Organization (or externally-focused) model and the Resource-Based (or internally-focused) model.

3 Use the industrial organization (I/O) model to explain how firms can earn above-average returns.
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THE I/O MODEL OF ABOVE AVERAGE RETURNS

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The I/O or Industrial Organization model adopts an external perspective to explain that forces outside of the
organization represent the dominant influences on a firm's strategic actions. In other words, this model
presumes that the characteristics of and conditions present in the external environment determine the
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appropriateness of strategies that are formulated and implemented in order for a firm to earn above-average
returns. In short, the I/O model specifies that the choice of industries in which to compete has more influence
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on firm performance than the decisions made by managers inside their firm.

The I/O model is based on the following four assumptions:

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1. The external environment—the general, industry and competitive environments impose pressures and
constraints on firms and determines strategies that will result in superior returns. In other words, the
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external environment pressures the firm to adopt strategies to meet that pressure while simultaneously
constraining or limiting the scope of strategies that might be appropriate and eventually successful.
2. Most firms competing in an industry or in an industry segment control similar sets of strategically relevant
resources and thus pursue similar strategies. This assumption presumes that, given a similar availability of
resources, most firms competing in a specific industry (or industry segment) have similar capabilities and
thus follow strategies that are similar. In other words, there are few significant differences among firms in an
industry.
3. Resources used to implement strategies are highly mobile across firms. Significant differences in
strategically relevant resources among firms in an industry tend to disappear because of resource mobility.
Thus, any resource differences soon disappear as they are observed and acquired or learned by other firms in
the industry.
4. Organizational decision-makers are assumed to be rational and committed to acting only in the best interests

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 Chapter 1: Strategic Management and Strategic Competitiveness

of the firm. The implication of this assumption is that organizational decision-makers will consistently
exhibit profit-maximizing behaviors.

According to the I/O model—which was a dominant paradigm from the 1960s through the 1980s—firms must
pay careful attention to the structured characteristics of the industry in which they choose to compete, searching
for one that is the most attractive to the firm, given the firm's strategically relevant resources. Then, the firm
must be able to successfully implement strategies required by the industry's characteristics to be able to increase
their level of competitiveness. The five forces model is an analytical tool used to address and describe these
industry characteristics.

FIGURE 1.2 The I/O Model of Above-Average Returns

Based on its four underlying assumptions, the I/O model prescribes a five-step process for firms to achieve
above-average returns:

1. Study the external environment—general, industry and competitive—to determine the characteristics of the

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external environment that will both determine and constrain the firm's strategic alternatives.

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2. Select an industry (or industries) with a high potential for returns based on the structural characteristics of

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the industry. A model for assessing these characteristics, the Five Forces Model of Competition, will be
discussed in Chapter 2.

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3.
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Based on the characteristics of the industry in which the firm chooses to compete, strategies that are linked
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with above-average returns should be selected. A model or framework that can be used to assess the
requirements and risks of these strategies (the Generic Strategies called cost leadership & differentiation)
will be discussed in detail in Chapter 4.
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4. Acquire or develop the critical resources—skills and assets—needed to successfully implement the strategy
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that has been selected. A process for scrutinizing the internal environment to identify the presence or
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absence of critical skills will be discussed in Chapter 3. Skill-enhancement strategies, including training
and development, will be discussed in Chapter 11.

5. The I/O model indicates that above-average returns will accrue to firms that successfully implement
relevant strategic actions that enable the firm to leverage its strengths (skills and resources) to meet the
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demands or pressures and constraints of the industry in which they have elected to compete. The
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implementation process will be described in Chapters 10 through 13.

The I/O model has been supported by research indicating:

20% of firm profitability can be explained by industry characteristics
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36% of firm profitability can be attributed to firm characteristics and the actions taken by the firm
Overall, this indicates a reciprocal relationship—or even an interrelationship—between industry
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characteristics (attractiveness) and firm strategies that result in firm performance

4 Use the resource-based model to explain how firms can earn above average-returns.
THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS

The resource-based model adopts an internal perspective to explain how a firm's unique bundle or collection of
internal resources and capabilities represent the foundation upon which value-creating strategies should be built.

Resources are inputs into a firm's production process, such as capital equipment, individual employee's skills,
patents, brand names, finance and talented managers. These resources can be tangible or intangible.

Capabilities are the capacity for a set of resources to perform—integratively or in combination—a task or
activity.

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 Chapter 1: Strategic Management and Strategic Competitiveness

Core competencies are resources and capabilities that serve as a source of competitive advantage for a firm.
Often related to functional skills (e.g., marketing at Philip Morris), core competencies—when developed,
nurtured, and applied throughout a firm—may result in strategic competitiveness.

FIGURE 1.3 The Resource-Based Model of Above-Average Returns

The resource-based model of above-average returns is grounded in the uniqueness of a firm's internal resources
and capabilities. The five-step model describes the linkages between resource identification and strategy
selection that will lead to above-average returns.

1. Firms should identify their internal resources and assess their strengths and weaknesses. The strengths and
weaknesses of firm resources should be assessed relative to competitors.

2. Firms should identify the set of resources that provide the firm with capabilities that are unique to the firm,
relative to its competitors. The firm should identify those capabilities that enable the firm to perform a task
or activity better than its competitors.

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3. Firms should determine the potential for their unique sets of resources and capabilities to outperform rivals

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in terms of returns. Determine how a firm’s resources and capabilities can be used to gain competitive

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advantage.

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4. Locate and compete in an attractive industry. Determine the industry that provides the best fit between the

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characteristics of the industry and the firm’s resources and capabilities.
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5. To attain a sustainable competitive advantage and earn above-average returns, firms should formulate and
implement strategies that enable them to exploit their resources and capabilities to take advantage of
opportunities in the external environment better than their competitors.
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Resources and capabilities can lead to a competitive advantage when they are valuable, rare, costly to imitate,
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and non-substitutable.
Resources are valuable when they support taking advantage of opportunities or neutralizing external threats.
Resources are rare when possessed by few, if any, competitors.
Resources are costly to imitate when other firms cannot obtain them inexpensively (relative to other firms).
Resources are non-substitutable when they have no structural equivalents.
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5 Describe vision and mission; discuss their value.

VISION AND MISSION

Vision is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve. Vision
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is ―big picture‖ thinking with passion that helps people feel what they are supposed to be doing.
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Vision statements:
reflect a firm’s values and aspirations
are intended to capture the heart and mind of each employee (and, hopefully, many of its other stakeholders)
tend to be enduring while it is missions can change in light of changing environmental conditions
tend to be relatively short and concise, easily remembered

Examples of vision statements:

Our vision is to be the world’s best quick service restaurant. (McDonald’s)
Our mission is to be recognized by our customers as the leader in applications engineering. We always
focus on the activities customers desire; we are highly motivated and strive to advance our technical
knowledge in the areas of material, part design and fabrication technology. (LNP, a GE Plastics Company)
We must be a great company with great people. (LG Electronics)

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 Chapter 1: Strategic Management and Strategic Competitiveness

The CEO is responsible for working with others to form the firm’s vision. However, experience shows that the
most effective vision statement results when the CEO involves a host of people to develop it.

A vision statement should be clearly tied to the conditions in the firm’s external and internal environments and it
must be achievable. Moreover, the decisions and actions of those involved with developing the vision must be
consistent with that vision.

Mission

A firm's mission is an externally focused application of its vision that states the firm's unique purpose and the
scope of its operations in product and market terms.

As with the vision, the final responsibility for forming the firm’s mission rests with the CEO, though the CEO
and other top-level managers tend to involve a larger number of people in forming the mission. This is because
middle- and first-level managers and other employees have more direct contact with customers and their
markets.

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A firm's vision and mission must provide the guidance that enables the firm to achieve the desired strategic

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outcomes—strategic competitiveness and above-average returns—illustrated in Figure 1.1 that enable the firm

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to satisfy the demands of those parties having an interest in the firm's success: organizational stakeholders.

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Earning above-average returns often is not mentioned in mission statements. The reasons for this are that all

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firms want to earn above-average returns and that desired financial outcomes result from properly serving

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certain customers while trying to achieve the firm’s intended future. In fact, research has shown that having an
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effectively formed vision and mission has a positive effect on performance (growth in sales, profits,
employment and net worth).
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6 Define stakeholders and describe their ability to influence organizations.

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STAKEHOLDERS

Stakeholders are the individuals and groups who can affect and are affected by the strategic outcomes achieved
and who have enforceable claims on a firm's performance.
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Classification of Stakeholders
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The stakeholder concept reflects that individuals and groups have a "stake" in the strategic outcomes of the firm
because they can be either positively or negatively affected by those outcomes and because achieving the
strategic outcomes may be dependent upon the support or active participation of certain stakeholder groups.
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Stakeholder Groups, Membership and Primary Expectation or Demand

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Stakeholder group Membership Primary expectation/demand

Capital market Shareholders Wealth enhancement
Lenders Wealth preservation
Product market Customers Product reliability at lowest possible price
Suppliers Receive highest sustainable prices
Host communities Long-term employment, tax revenues, minimum use
of public support services
Unions Ideal working conditions and job security for
membership
Organizational Employees Secure, dynamic, stimulating, and rewarding work
environment

If the firm is strategically competitive and earns above average returns, it can afford to simultaneously satisfy

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 Chapter 1: Strategic Management and Strategic Competitiveness

all stakeholders. When earning average or below-average returns, tradeoffs must be made. At the level of
average returns, firms must at least minimally satisfy all stakeholders. When returns are below average, some
stakeholders can be minimally satisfied, while others may be dissatisfied.

For example, reducing the level of research and development expenditures (to increase short-term profits)
enables the firm to pay out the additional short-term profits to shareholders as dividends. However, if reducing
R&D expenditures results in a decline in the long-term strategic competitiveness of the firm's products or
services, it is possible that employees will not enjoy a secure or rewarding career environment (which violates a
primary union expectation or demand for job security for its membership). At the same time, customers may be
offered products that are less reliable at unattractive prices, relative to those offered by firms that did not reduce
R&D expenditures.

Thus, the stakeholder management process may involve a series of trade-offs that is dependent on the extent to
which the firm is dependent on the support of each affected stakeholder and the firm's ability to earn above-
average returns.

7 Describe the work of strategic leaders.

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STRATEGIC LEADERS

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Who are strategic leaders?

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While it is dependent on the size of the organization, all organizations have a CEO or top manager and this
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individual is the primary organizational strategist in every organization. Small organizations may have a single
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strategist: the CEO or owner. Large organizations may have few or several top-level managers, executives or a
top management team. All of these individuals are organizational strategists.

What are the responsibilities of strategic leaders?

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Top managers play decisive roles in firms’ efforts to achieve their desired strategic outcomes. As organizational
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strategists, top managers are responsible for deciding how resources will be developed or acquired, at what cost
and how they will be used or allocated throughout the organization. Strategists also must consider the risks of
actions under consideration, along with the firm’s vision and managers’ strategic orientations.

Organizational strategists also are responsible for determining how the organization does business. This
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responsibility is reflected in the organizational culture, which refers to the complex set of ideologies, symbols,
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and core values shared throughout the firm and that influences the way it conducts business. The organization’s
culture is the social energy that drives—or fails to drive—the organization.

The Work of Effective Strategic Leaders

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While it seems simplistic, performing their role effectively requires strategists to work hard, perform thorough
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analyses of available information, be brutally honest, desire high performance, exercise common sense, think
clearly, and ask questions and listen. In addition, strategic leaders must be able to ―think seriously and deeply
… about the purposes of the organizations they head or functions they perform, about the strategies, tactics,
technologies, systems, and people necessary to attain these purposes and about the important questions that
always need to be asked.‖ Additionally, effective strategic leaders work to set an ethical tone in their firms.
Strategists work long hours and face ambiguous decision situations, but they also have opportunities to dream
and act in concert with a compelling vision that motivates others in creating competitive advantage.

Predicting Outcomes of Strategic Decisions: Profit Pools

Top-level managers try to predict the outcomes of their strategic decisions before they are implemented, but this
is sometimes very difficult to do. Those firms that do a better job of anticipating the outcomes of strategic
moves will obviously be in a better position to succeed. One way to do this is by mapping out the profit pools
of an industry. Profit pools are the total profits earned in an industry at all points along the value chain.

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 Chapter 1: Strategic Management and Strategic Competitiveness

Four steps are involved:

1. Define the pool’s boundaries
2. Estimate the pool’s overall size
3. Estimate the size of the value-chain activity in the pool
4. Reconcile the calculations

8 Explain the strategic management process.

THE STRATEGIC MANAGEMENT PROCESS

Chapters 2 and 3 will provide more detail regarding the strategic inputs to the strategic management process:
assessments of the firm's external and internal environments that must be performed so that sufficient
knowledge is developed regarding external opportunities and internal capabilities. This enables the
development of the firm's vision and mission.

Chapters 4 through 9 discuss the strategy formulation stage of the process. Topics covered include:
Deciding on business-level strategy, or how to compete in a given business (Chapter 4)

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Understanding competitive dynamics, in that strategies are not formulated and implemented in isolation but
require understanding and responding to competitors' actions (Chapter 5)

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Setting corporate-level strategy, or deciding in which industries or businesses the firm will compete, how

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resources will be allocated and how the different business units will be managed (Chapter 6)
The acquisition of business units and the restructuring of the firm’s portfolio of businesses (Chapter 7)

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Selecting appropriate international strategies that are consistent with the firm's resources, capabilities and
core competencies, and external opportunities (Chapter 8)
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Developing cooperative strategies with other firms to gain competitive advantage (Chapter 9)
The final section of the text, Chapters 10-13, examines actions necessary to effectively implement
strategies:
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Methods for governing to ensure satisfaction of stakeholder demands and attainment of strategic outcomes
(Chapter 10)
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Structures that are used and actions taken to control a firm's operations (Chapter 11)
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Patterns of strategic leadership that are most appropriate given the competitive environment (Chapter 12)
Linkages among corporate entrepreneurship, innovation and strategic competitiveness (Chapter 13)
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