Competing For Advantage

Part I – Strategic Thinking

Chapter 1 – Introduction to Strategic Management

Strategy is “Strategos”

Objective – define and attainable Offensive – seize and exploit the opportunity Unity of command – directed in a single direction Mass – gather and direct sufficient resources Economy of force – invest resources efficiently Maneuver – create disadvantages for rivals Surprise – attack in unexpected ways Security – don’t let rivals gain the upper hand Simplicity – use clear, concise, uncomplicated plans

From http://www.wpi.edu/Academics/Depts/MilSci/Resources/prinwar.html

Why do we need strategy?

The reasons why firms succeed and fail is perhaps the central question in strategy

Strategy defines….

Who are you?Where are you going?

How are you going to get there?

Alice: Which way should I go?Cat: That depends on where you are

going.Alice: I don’t know where I am going.Cat: Then it doesn’t matter which way you

go. Lewis Carroll, Though the Looking-Glass

Organizations should make two types of decisions

1) Strategic decisions

2) Strategically driven decisions

Company A Company B Company C

Strategic Management Defined

decisions and actions required for the firm to create value and earn returns higher than those of competitors

formulation and implementation of plans designed to achieve objectives

unifying theme that gives coherence and direction to organizational/individual decisions

game plan management has for positioning the company in its chosen market, competing successfully, satisfying customers, and achieving good business performance

integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage

What is a competitive advantage?

Competitive Advantage

When a firm implements a strategy that rivals can’t duplicate, or find it too expensive to do try to imitate

Competitive advantages become sustainable competitive advantages when rivals stop trying to replicate

What is the nature of today’s competitive landscape?

Changes in the Competitive Landscape

Globalization of Markets and Industries

Reduced restraints on business transactions across national boundaries (such as tariffs)

Difficulty in recognizing or determining boundaries of an industry (for example, the blur among television, telephone, and computer service providers)

Greatly increased range of opportunities for acquiring resources (such as equipment, capital, raw material, or even employees) and for selling goods and services

Increasing rate of technological change and diffusion, and increasing speed at which technologies become available and are used

Dramatic information technology changes of recent years, and different ways that information is being used

Increasing knowledge intensity, the basis for technology and its application

Technological Trends

The Competitive Field

Hypercompetition resulting from the dynamics of strategic maneuvering among global and innovative competitors

Increased performance standards in many areas, including quality, cost, productivity, product introduction time, and operational efficiency

Continuous improvement in all areas is necessary for continued survival

New Realities in the Competitive Landscape

Quick competitive information needs Shorter product life cycles Indistinguishable products Rapid technology replacement Availability of inexpensive information New business culture from electronic-

business models Continuous learning is necessary

Disruptive Technologies

Value of existing technologies is destroyed

Creative destruction process replaces existing technologies with new ones

New markets are created

New Sources of Competitive Advantage

Speed to market Access and use of information Rapid diffusion of new, transformed

knowledge throughout the company Innovation Integration of new conditions into

organization mind set Global standard achievement Strategic flexibility

What is Strategy?

Strategy is not doing similar activities better than your rivals – that’s operational effectiveness continual improvement not a sustainable

advantage industry-wide cost reductions do not lead to

increased profitability examples: PCs, automobiles, airlines

What is Strategy?

1) Strategy is performing different activities or performing similar activities in a different way

Strategy is about positioning

a) Variety-based positioning offering a unique choice of goods/services - Chic-fil-a,

GameStop

b) Needs-based positioning serving most/all of a particular group of customers’ needs -

Babies R Us

c) Access-based positioning serving a set of customers that require unique access –

Kinkos, Movie Gallery, Superette

What is Strategy?

2) Strategy is about choosing a position which requires tradeoffs, choosing what not to do without tradeoffs, all firms would imitate

Tradeoffs arise from inconsistent image/reputation different activities, products, equipment,

employees, skills, systems, machines priorities, internal coordination, and control

What is Strategy?

3) Strategy is about combining activities as advantages come from fit and reinforcing

Operational effectiveness is about excellence in individual activities

Fit/integration increases sustainability by reducing imitability

What is Strategy?

4) The desire to grow is most threatening to an effective strategy Blurs uniqueness Creates compromises Reduces fit Erodes original advantages

Three Perspectives on Value Creation

Industrial/Organization (I/O) Economic Model

Resource-Based View Stakeholder Approach

The Industrial/Organization (I/O) Model of Above-Average Returns

Basic Premise of the I/O Model – to explain the dominant influence of the external environment on a firm's strategic actions and performance

The Industrial/Organization (I/O) Model of Above-Average Returns

Underlying Assumptions That the external environment imposes

pressures and constraints that determine the strategies resulting in above-average returns

That most firms competing within a particular industry or industry segment control similar strategically relevant resources and pursue similar strategies in light of those resources

The Industrial/Organization (I/O) Model of Above-Average Returns

Underlying Assumptions (cont.) That resources for implementing strategies

are highly mobile across firms, and that due to this mobility any resource differences between firms will be short lived

The Industrial/ Organization (I/O) Model of Above-Average Returns

The Industrial/Organization (I/O) Model of Above-Average Returns

Michael Porter’s Five-Forces Model Reinforces the importance of economic

theory Offers an analytical approach that was

previously lacking in the field of strategy Describes the forces that determine the

nature/level of competition and profit potential in an industry

Suggests how an organization can use the analysis to establish a competitive advantage

The Industrial/Organization (I/O) Model of Above-Average Returns

Limitations Only two strategies are suggested:

Cost Leadership Differentiation

Internal resources and capabilities are not considered

The Resource-Based Model of Above-Average Returns

Basic Premise of the Resource-Based Model – to propose that a firm's unique resources and capabilities should define its strategic actions and be used effectively to exploit opportunities in the external environment to ensure successful performance

The Resource-Based Model of Above-Average Returns

Underlying Assumptions That the internal environment imposes

pressures and constraints that determine the strategies resulting in above-average returns

That most firms competing within a particular industry or industry segment control unique strategically relevant resources and pursue dissimilar strategies in light of those resources

The Resource-Based Model of Above-Average Returns

Underlying Assumptions (cont.) That resources for implementing strategies

are not highly mobile across firms, and that due to this immobility any resource differences between firms can be sustainable

The Resource-Based Model of Above-Average Returns

The Stakeholder Model of Responsible Firm Behavior and Firm Performance

Basic Premise of the Stakeholder Model – to propose that a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors

The Three Stakeholder Groups

Secondary Stakeholders

Government entities and administrators

Activists and advocacy groups Religious organizations Other nongovernmental

organizations

The Stakeholder Model of Responsible Firm Behavior and Firm Performance

Ways Stakeholder Relationships Contribute to Competitive Advantage

Timely and high quality strategic intelligence is gathered to improve a firm's strategic decisions

A trustworthy reputation draws valuable customers, suppliers, and business partners to acquire or develop competitive resources

A trustworthy reputation attracts investors to offer financial resources

Firms that have fair and respectful treatment of employee relationships attract high-quality human resources

Ways Stakeholder Relationships Contribute to Competitive Advantage

Transactions costs associated with making and enforcing agreements can be reduced

Implementation of strategies can be enhanced by improving commitment from stakeholders who are involved with strategic decisions

Responsible behavior can protect a firm from the expense and risk associated with negative actions (such as adverse regulations, legal suits and penalties, consumer dissatisfaction, employee work outages, or bad press)

It’s all about prioritizing…