Lecture 1(5th Aug 2010) Lecture 2(6th Aug 2010)

Strategic Management:
  Module 1:  Strategic Management
  Session 1:  Introduction
          Overview:  Eight content areas

1. Nature of Competition
2. The 21st Century Competitive Landscape
3. I/O Model of Above-Average Returns (AAR)
4. Resource-Based Model of AAR
5. Strategic Vision and  Mission
6. Stakeholders
7. Strategic Leaders
8. The Strategic Management Process

Nature of Competition:  Boeing vs. Airbus
Boeing
Historically a global leader in airplane manufacturing
Revenue from commercial aircraft division & gov’t contracts
Regained supremacy in 2006:  more 787 super jumbo orders vs. Airbus’s more efficient A-380
Changed strategy and design
Different production process
Smaller plane (787 Dreamliner) 
Airbus
EU Government owned and subsidized
Won competitor battle with Boeing between 2001 & 2005
Responded to customer demands with more efficient A-380 aircraft

Nature of Competition:  Basic concepts
 Strategic Competitiveness:
Achieved when a firm formulate & implements a value-creating strategy
Strategy Integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage

Competitive Advantage (CA):
Implemented strategy that competitors are unable to duplicate or find too costly to imitate

Above Average Returns(AAR):
Returns in excess of what investor expects in comparison to other investments with similar risk

Risk :Investor’s uncertainty about economic gains/losses resulting from a particular investment

Average Returns
Returns equal to what investor expects in comparison to other investments with similar risk

Strategic Management Process (SMP)
Full set of commitments, decisions and actions required for a firm to achieve strategic competitiveness and earn above average returns

The 21st Century Competitive Landscape:
Pace of change is rapid
Partnerships created by mergers & acquisitions (M&As)
Other CL characteristics:  Economies of scale, advertising budgets not as effective as before, change in managerial mind-set from “traditional” to more flexible and innovative

Introduction:  The Competitive Landscape (CL)
Hypercompetition – extremely intense rivalry among competing firms, characterized by
Escalating & increasingly aggressive competitive moves
Assumptions of market stability replaced with notion of INstability and change
Two primary drivers of the competitive landscape:

• The global economy 
• Technology

• The Global Economy

Goods, services, people, skills and ideas move freely across geographic borders
Europe, through the European Union (EU) is the world’s largest single market
EU vs U.S. GDP:   35% higher 
Emerging major competitive forces:  China & India
In summary:  globalization increased economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders

• Technology and Technological Changes

3 categories: 
1. Technology diffusion & disruptive technologies:
Technology diffusion 
Perpetual innovation: describes how new information-intensive technologies are replacing older forms
Speed to market may be primary competitive advantage
12 – 18 month timeframe to gather info re: competitor R&D
Disruptive technologies
Technologies that
Destroy value of existing technology
Create new markets

2.The information age
Dramatic changes over last several years
Major technological developments:  computers, phones, artificial intelligence, virtual reality
Internet provides infrastructure for information anytime, anywhere
 3:Increasing knowledge intensity
Defined as information, intelligence & expertise and is the basis of technology and its application
Gained through experience, observations and inferences
Strategic Flexibility – set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment

 Industrial Organizational (I/O) Model of Above-Average Returns (AAR)

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


 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 compete within a particular industry/segmentControl similar strategically relevant resources Pursue similar strategies in light of those resources

• Resources for implementing strategies are highly mobile across firms.Therefore any resource differences between firms will be short-lived

• Organizational decision makers are rational and committed to acting in the firm's best interests, as shown by their profit-maximizing behaviors

Five-Forces Model (Michael Porter)
The 5 Forces includes Suppliers, buyers, competitive rivalry, product substitutes and potential entrants
Reinforces the importance of economic theory
Analytical tool previously lacking in the field of strategy
Determines the nature/level of competition and profit potential in an industry
Suggests an industry’s profitability is an interaction between these 5 forces

Limitations
Only two strategies are suggested:

• Cost Leadership:THE low-cost leader

• Differentiation:Customer willing to pay the premium price for ‘being different’Internal resources & capabilities not considered

The Resource-Based Model of AAR  

Basic Premise - a firm's unique [internal] resources & capabilities, in combination, is the basis for firm strategy and AAR
Each firm’s performance difference across time emerges (vs industry’s structural characteristics)
Combined uniqueness should define the firms’ strategic actions
Resources are tangible and intangible

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 nonsubsitutable
Internal/firm-specific resources

• Physical:Things you can touch/feel = tangible

• Human:People / employees

• Organizational capital:Relative to the firm itself

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

Summary
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


Vision 
Picture of what the firm wants to be What the firm ultimately wants to achieve
An effective vision statement is the responsibility of the leader who should work with others to form it
Foundation for the mission

Mission

Specifics business(es) in which firm intends to compete and customers it intends to serve
More specific than the vision

Stakeholders

Basic Premise – a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors

Stakeholders are individuals and groups they can affect, and are affected by, the strategic outcomes/performance a firm achieves
Three (3) classifications :

Classifications of Stakeholders 

• Capital Market Stakeholders:
•  Share holders
• Major Suppliers(e.g. Banks and Creditors)

Expect returns commiserate with risk accepted by investments
Higher the dependency relationship, the more direct and significant firm’s response

• Product Market Stakeholders:
• Primary Customers
• Supplicers
• Host Communities
• Unions

              The 4 groups benefit due to competitive battles

• Organizational Stakeholders:
• Employees
• Managers
• Nonmanagers

       

Strategic Leaders
People located in different parts of the firm using the strategic management process to help the firm reach its vision and mission
Decisive and committed to nurturing those around them
Create and sustain organizational culture
Organizational culture emerges from & sustained by leaders
Complex set of ideologies, symbols and core values shared throughout the firm
Affects leaders/their work which in-turn shapes culture
Influences how the firm conducts business

The Work of Effective Strategic Leaders:
Work long hours.Must be able to “think seriously and deeply…about the purposes of the organizations they head or functions they perform, about strategies, tactics,…..and people…and about the important questions … they need to ask.”

Predicting Outcomes:  Profit Pools (PP)
Anticipates their decisions relative to the PP
Entails the total profits earned in an industry at all points along the value chain

Strategic Management Process
Rational approach used by firms to achieve strategic competitiveness and earn above average returns (AAR)