Chapter 1

Strategic Management and

Strategic Competitiveness

Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson

©2000 South-Western College Publishing

Ch1
Strategic Competitiveness
Achieved when a firm successfully formulates
and implements a value-creating strategy

Sustained Competitive Advantage

Occurs when a firm develops a strategy that
competitors are not simultaneously implementing
Provides benefits which current and potential
competitors are unable to duplicate

Above-Average Returns
Returns in excess of what an investor expects to
earn from other investments with similar risk
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The Strategic Management Process
Involves the full set of:

Commitments Decisions Actions

which are required for firms to achieve:

Strategic Competitiveness
Sustained Competitive Advantage
Above-Average Returns
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 Chapter 2
Strategic External
Environment
The Strategic
Management
Inputs
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Process

Strategy Formulation Strategy Implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Business-Level Competitive Corporate-Level Corporate Structure
Strategic
Actions

Strategy Dynamics Strategy Governance & Control

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic

Strategic
Competitiveness
Feedback Above Average
Returns
Ch1
Chapter One: Key Themes
Challenge of Strategic Management

Changing Competitive Landscape

Two Models of Superior Profitability

• Industrial Organization Model
• Resource-Based Model

Key Stakeholder Groups

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Challenge of Strategic Management

Only 16 of the 100 largest U.S. companies at

the start of the 20th century are still
identifiable today!

In a recent year, 44,367 businesses filed for

bankruptcy and many more U.S. businesses failed

Competitive success is transient...unless care is

taken to preserve competitive position
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 Challenge of Strategic Management
Best Stocks of the Decade
The goals of achieving
strategic competitiveness
and earning above-
average returns are
challenging

The performance of
some companies more
than meets strategic
management's
challenge

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 21st Century Competitive Landscape
Fundamental nature of
competition is changing
• Rapid technological changes
• Rapid technology diffusions
• Dramatic changes in
information and
communication technologies
• Increasing importance of
knowledge
The pace of change
is relentless....
and increasing
Traditional industry
boundaries are
blurring, such as...
• Computers
• Telecommunications
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 21st Century Competitive Landscape

The global economy is Traditional sources of

changing
• People, goods, services and
ideas move freely across
geographic boundaries
• New opportunities emerge
in multiple global markets
• Markets and industries
become more
internationalized
competitive advantage
no longer guarantee
success
New keys to success
include:
• Flexibility
• Innovation
• Speed
• Integration

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21st Century Competitive Landscape
A country’s Country Competitiveness Rankings
1999 1998 Country Competitiveness Competitiveness
competitiveness is Index 1999 Index 1998
achieved through the 1
2
1
3
Singapore
United States
2.12
1.58
2.16
1.41
accumulation of 3 2 Hong Kong 1.41 1.91
4 6 Taiwan 1.38 1.19
individual firms’ 5 5 Canada 1.33 1.27
strategic 6
7
8
10
Switzerland
Luxembourg
1.27
1.25
1.10
1.05
competitiveness in 8 4 United Kingdom 1.17 1.29
the global economy 9
10
7
11
Netherlands
Ireland
1.13
1.11
1.13
1.05
11 15 Finland 1.11 0.70
12 14 Australia 1.04 0.79
13 13 New Zealand 10.1 0.84
Achieving improved 14 12 Japan 1.00 0.97
15 9 Norway 0.92 1.09
competitiveness 16 17 Malaysia 0.86 0.59
allows a country's 17 16 Denmark 0.85 0.61
18 30 Iceland 0.59 -0.18
citizens to have a 19 23 Sweden 0.58 0.25
higher standard of 20
21
20
18
Austria
Chile
0.37
0.57
0.37
0.57
living 22 19 Korea 0.46 0.39
23 22 France 0.44 0.25
24 27 Belgium 0.39 -0.03
25 24 Germany 0.37 0.15
26 25 Spain 0.16 0.02
Alternative Models of Superior Returns
Industrial Organization Resource-Based
Model Model
The External Environment Resources

An Attractive Industry Capability

Strategy Formulation Competitive Advantage

Assets and Skills An Attractive Industry

Strategy Implementation Strategy Implementation

Superior Returns Superior Returns

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I/O Model of Superior Returns

The Industrial Organization model

suggests that above-average returns
for any firm are largely determined
by characteristics outside the firm.

This model largely focuses on

industry structure or attractiveness of
the external environment rather than
internal characteristics of the firm.

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 I/O Model of Superior Returns
External Action required:
Environment Study the external
environment, especially
General Environment the industry environment.
Industry Environment
Competitive
Environment

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 I/O Model of Superior Returns
External Action required:
Environment Locate an industry with
An Attractive high potential for above-
GeneralIndustry
Environment average returns.
Industry Environment
An industry whose
Competitive
structural characteristics
Environment
suggest above-average
returns are possible

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 I/O Model of Superior Returns
External Action required:
Environment Identify strategy called for
Attractive by the industry to earn
GeneralIndustry
Environment above-average returns.
Strategy
Industry Environment
An industry whose
Competitive Formulation
structural characteristics
Environment Selection of a strategy
suggest above-average
returns are linked with above-
possible
average returns in a
particular industry

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 I/O Model of Superior Returns
External Action required:
Environment Develop or acquire assets
Attractive and skills needed to
GeneralIndustry
Environment implement the strategy.
Strategy
Industry Environment
An industry whose
Competitive Formulation
structural characteristics
Environment Selection ofAssets
suggest above-average and Skills
a strategy
returns arelinked with above-
possible
Assetsinand
average returns a skills
required to implement
particular industry
a chosen strategy

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 I/O Model of Superior Returns
External Action required:
Environment Use the firm’s strengths
Attractive (its assets or skills) to
GeneralIndustry
Environment implement the strategy.
Strategy
Industry Environment
An industry whose
Competitive Formulation
structural characteristics
Environment Selection ofAssets
suggest above-average and Skills
a strategy
returns arelinked with above-
possible
average returns a Strategy
Assetsinand skills
required to
particular industry Implementation
implement
a chosen strategy
Selection of strategic
actions linked with
effective implementation
of the chosen strategy

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 I/O Model of Superior Returns
External Action required:
Environment Maintain selected strategy
Attractive in order to outperform
GeneralIndustry
Environment industry rivals.
Strategy
Industry Environment
An industry whose
Competitive Formulation
structural characteristics
Environment Selection ofAssets
suggest above-average and Skills
a strategy
returns arelinked with above-
possible
average returns a Strategy
Assetsinand skills
required to
particular industry Implementation
implement
a chosen strategy Superior Returns
Selection of strategic
actions linked with
Earning of above-
effective implementation
average
of the chosen returns
strategy

Ch1-
Resource-Based Model of Superior Returns

The Resource-Based model suggests

that above-average returns for any
firm are largely determined by
characteristics inside the firm.

This model focuses on developing or

obtaining valuable resources and
capabilities which are difficult or
impossible for rivals to imitate.

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Resource-Based Model of Superior Returns
Action required:
Resources Identify firm resources.
Study strengths and weak-
Inputs to a firm’s nesses relative to rivals.
production process.

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Resource-Based Model of Superior Returns
Action required:
Resources Determine what firm
Capability capabilities allow it to do
Inputs to a firm’s better than rivals.
production process.
Capacity for an integrated
set of resources to perform
a task or activity.

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Resource-Based Model of Superior Returns
Action required:
Resources Determine how firm’s
Capability resources and capabilities
Inputs to a firm’s may create competitive
production process.
Capacity Competitive
for an integrated advantage.
Advantage
set of resources to
integratively perform a
Ability of a firm to
task or activity.
outperform its rivals

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Resource-Based Model of Superior Returns
Action required:
Resources Locate an attractive
Capability industry.
Inputs to a firm’s
production process.
Capacity Competitive
for an integrated
Advantage
set of resources to
integratively perform An a Attractive
Ability of aIndustry
task or activity. firm to
outperform its rivals
Location of an
industry with
opportunities that can
be exploited by the
firm’s resources and
capabilities

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Resource-Based Model of Superior Returns
Action required:
Resources Select strategy that best
Capability exploits resources and
Inputs to a firm’s capabilities relative to
production process.
Capacity Competitive
for an integrated opportunities in environs.
Advantage
set of resources to
integratively perform An a Attractive
Ability of aIndustry
task or activity. firm to
outperform its rivalsStrategy
Location of an
Formulation and
industry with
Implementation
opportunities that can
be exploited by the
Strategic
firm’s resources andactions taken to
earn above-average
capabilities
returns

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Resource-Based Model of Superior Returns
Action required:
Resources Maintain selected strategy
Capability in order to outperform
Inputs to a firm’s industry rivals.
production process.
Capacity Competitive
for an integrated
Advantage
set of resources to
integratively perform An a Attractive
Ability of aIndustry
task or activity. firm to
outperform its rivalsStrategy
Location of an
Formulation and
industry with
opportunities Superior Returns
Implementation
that can
be exploited by the
Strategic
firm’s resources andactions
Earningtaken to
of above-
earn above-average
capabilities average returns
returns

Ch1-
Resources and capabilities lead to
Competitive Advantage when they are:

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 either cannot obtain them

or must obtain them at a much higher cost

Nonsubstitutable the firm must be organized appropriately to

obtain the full benefits of the resources in
order to realize a competitive advantage
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When these four
criteria are met,
Resources and Core Competencies
Capabilities
become:

Core Competencies are resources and capabilities

that can serve as a source of Competitive Advantage.

The Resource-Based model argues that Core

Competencies are the basis for a firm’s Competitive
Advantage, Strategic Competitiveness and Ability to
Earn Above-average Returns.
Ch1-
Strategic Intent
Winning competitive battles through deciding
how to leverage internal resources, capabilities,
and core competencies.

Strategic Mission
An application of strategic intent in terms of
products to be offered and markets to be served.

Ch1-
 Strategic Intent
BUSINESS WEEKS’S 10 Top Managers of the Year, 1999
Name Company Strategic Accomplishment
The most Minoru Arakawa Nintendo America Scored huge hit by bringing Pokė mon to U.S.
effective over objections of co-workers and negative
market research
strategists provide Bernard Arnault LVMH From just 23 in Oct. ’98, LVMH’s U.S. shares
have vaulted 280%, to about 87
a vision (strategic Arthur Blank Home Depot Profits should jump 46%, to $2.3 billion for
fiscal year 1999. Sales are expected to grow
intent) to 25%, to $38 billion

effectively elicit Peter Bijur Texaco After his company was labeled racist, attracted
minorities to key jobs, including treasurer Ira
the help of others Gordon Binder Amgen
Hall, a former IBM executive
Boosted stock price by around 100% last year, to
in creating a about $54
Steve Case America Online Deals to broaden AOL’s availability and services
firm's competitive will help boost income 102% this fiscal year, to
$800 million
advantage. John Chambers Cisco Systems Broadened Cisco into strategic businesses such
as software, consulting, and fiber-optic
communications
Jim Curvey Fidelity Investments Reduced internal conflicts and spurred growth
through management changes
Thierry Desmarest Totalfina Acquired rival French oil company ELF
Aquitaine for $44 billion. Shares up about 35%
in ’99, as profits expected to grow 20%, to $3.1
billion
Bernie Ebbers MCI Worldcom Turned toward more profitable data, Internet,
and international operations
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Stakeholders: Groups who are affected by a firm’s
performance and who have claims on its
wealth

The firm must maintain

performance at an adequate level in
order to maintain the participation Capital Market
of key stakeholders

Firm Stock market/Investor

Debt suppliers/Banks

Product Market
Organizational
Primary Customers
Suppliers Employees
Managers
Non-Managers
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Stakeholder Involvement
Each of the key stakeholders
wants a piece of the same pie

1 How do you divide

the pie in order to
keep all of the
stakeholders
involved?
2
How do you increase
the size of the pie so
that there is more to
go around?

Ch1-
 Chapter 2
Strategic External
Environment
The Strategic
Management
Inputs
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Process

Strategy Formulation Strategy Implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Business-Level Competitive Corporate-Level Corporate Structure
Strategic
Actions

Strategy Dynamics Strategy Governance & Control

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic

Strategic
Competitiveness
Above Average
Feedback
Returns
Ch1-