Strategic Management:

Concepts and Cases

Part I: Strategic Management Inputs

Chapter 1: Strategic Management and Strategic
Competitiveness

1
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
 Returns in excess of what investor expects in
comparison to other investments with similar risk
2
Nature of Competition: Basic
concepts (Cont’d)
 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

3
 Company’s Business Model
Management’s model of how strategy will allow the
company to gain competitive advantage and
achieve above average returns
A business model encompasses how the company will:
 Select its customers  Deliver those goods and
 Define and differentiate its services to the market
product offerings  Organize activities within
 Create value for its the company
customers  Configure its resources
 Acquire and keep  Achieve and sustain a high
customers level of profitability
 Produce goods or services  Grow the business over
 Lower costs time
4
 Industrial
Organizational
(I/O) Model of
Above-Average
Returns (AAR)

5
 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

6
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/segment
 Control 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
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 Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)

 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

8
 The
Resource-
Based
Model of
AAR

9
The Resource-Based Model of AAR (Cont’d)

 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

10
The Resource-Based Model of AAR (Cont’d)

 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 (N=3)
 Physical
 Things you can touch/feel = tangible
 Human
 People / employees
 Organizational capital
 Relative to the firm itself 11
 The Resource-Based Model of AAR (Cont’d)

 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
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 The Five Steps of the
Strategic Management Process
 Select the corporate mission and the major
corporate goals.
 Analyze the external competitive environment to
identify opportunities and threats.
 Analyze the organization’s internal environment to
identify its strengths and weaknesses.
 Select strategies that:
 Build on the organization’s strengths and correct its weaknesses
– in order to take advantage of external opportunities and
counter external threats
 Are consistent with organization’s mission and major goals
 Are congruent and constitute a viable business model
 Implement the strategies.
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 Vision and Mission

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

 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

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The vision of Ford is “to become the world’s
leading consumer company for automotive
products and services.”

15
 Values and Goals
 The values of a company should state:
 How managers and employees should conduct
themselves
 How they should do business
 What kind of organization they need to build to
help achieve the company’s mission
 Organizational culture
 The set of values, norms, and standards that control
how employees work to achieve an organization’s
mission and goals
 A goal is a precise and measurable desired
future state that a company must realize if it is to
attain its vision or mission.
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 Emergent and Deliberate Strategies

Source: Adapted from H. Mintzberg and

A. McGugh, Administrative Science
Quarterly, Vol. 30. No. 2, June 1985. 17
 Intended and Emergent Strategies
 Intended or Planned Strategies
 Strategies an organization plans to put into action
 Typically the result of a formal planning process
 Unrealized strategies are the result of unprecedented changes
and unplanned events after the formal planning is completed
 Emergent Strategies
 Unplanned responses to unforeseen circumstances
 Serendipitous discoveries and events may emerge that can open
up new unplanned opportunities
 Must assess whether the emergent strategy fits the company’s
needs and capabilities
 Realized Strategies
 The product of whatever intended strategies are actually put into
action and of any emergent strategies that evolve
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 Strategic Management:
Concepts and Cases

Part I: Strategic Management Inputs

Chapter 2: The External Environment:
Opportunities, Threats, Industry Competition
and Competitor Analysis
19
 External Environment Analysis

 Opportunity
 General environment condition that, if exploited, helps a
company achieve strategic competitiveness

 Threat
 General environment condition that may hinder a

company's efforts to achieve strategic

competitiveness

20
 External Environment:
General, Industry and Competitor
 Three External Environments include:
 General
 Industry
 Competitor

21
 External Environment:
General, Industry and Competitor (Cont’d)

 The General Environment

 The broader society dimensions that influence an industry
and the firms within it
 Grouped into 6 dimensions OR ‘environmental segments’
Each segment composed of elements

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The External Environment

23
 External Environment:
General, Industry and Competitor (Cont’d)

 Industry Environment
 Set of factors directly influencing
 A firm’s competitive actions/responses
 Relates to Porter’s 5 Forces – see upcoming slides
 Competitor analysis: gather and interpret competitor
information
 Competitor Environment
 Gives details about
 A firm’s direct and indirect competitors
 The competitive dynamics expected to impact a firm's
efforts to generate above-average returns
24
 Industry Environment Analysis:
Defining an Industry
 Industry
 A group of companies offering products or services that are close
substitutes for each other and that satisfy the same basic customer
needs
 Industry boundaries may change as customer needs evolve and
technology changes
 Sector
 A group of closely related industries
 Market Segments
 Distinct groups of customers within an industry
 Can be differentiated from each other with distinct attributes and
specific demands
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The Computer Sector: Industries
and Segments

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The Five Forces of Competition Model

27
 How the Five Forces Shape
Competition within an Industry
The stronger that each of these five forces is, the more
limited is the ability of established companies to raise
prices and earn greater profits within their industry.
 A weak competitive force
 may be viewed as an opportunity as it
allows company to earn greater profits
 A strong competitive force
 may be viewed as a threat as it depresses
industry profits
 Strength of forces may change as
industry conditions change

28
 Industry Environment Analysis (Cont’d)

 Porter’s 5 Forces
 1/5: New entrants
 Can threaten market share of existing competitors

 May bring additional production capacity

 Function of two factors

 1: Barriers to entry
 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of scale
 Gov’t policy
 2: Expected retaliation
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 Industry Environment Analysis (Cont’d)

 Porter’s 5 Forces
 2/5: Bargaining power of suppliers
 They are powerful when …
1. Few large companies and more concentrated than the
industry to which they sell
2. No substitutes
3. Industry firms not significant customer to supplier gp
4. Supplier’s goods are critical to buyer’s success
5. High switching costs due to effectiveness of supplier’s
products
6. Threat of forward integration

30
 Industry Environment Analysis (Cont’d)

 Porter’s 5 Forces
 3/5: Bargaining power of buyers
 They are powerful when …
1. Purchase large portion of industry’s total output
2. Product sales accounts for significant seller annual revenue
3. Low switching costs (to other industry product)
4. Industry products are undifferentiated or standardized and
threat of backward integration

31
 Industry Environment Analysis (Cont’d)

 Porter’s 5 Forces
 4/5: Threat of substitute products
 Goods or services outside of given industry perform
same or similar functions (I.e., sugar vs. sugar
substitute such as NutraSweet)
 5/5: Intensity of Rivalry Among Competitors
 Numerous or equally balanced competitors
 Slow industry growth
 High fixed costs or high storage costs
 Lack of differentiation or low switching costs
 High strategic stakes
 High exit barriers 32
 Industry Environment Analysis (Cont’d)

 Porter’s 5 Forces
 5/5: Intensity of Rivalry Among Competitors
 High exit barriers (Cont’d)
1. Specialized assets
2. Fixed costs of exit (i.e., labor agreements)
3. Strategic interrelationships (i.e., one business depends on
another)
4. Emotional barriers (i.e., loyalty to employees, etc.)
5. Government and social restrictions

33
 Strategic Groups
 Strategic Groups
 Set of firms emphasizing similar strategic dimensions
to use a similar strategy
 Implications
 Because firms within a group compete (offer similar
products) rivalry can be intense – the greater the rivalry
the greater the threat to each firm’s profitability
 Strengths of the 5 forces differs across strategic groups
 The closer the strategic groups, in terms of strategy,
the greater the likelihood of rivalry.

34
Strategic Groups in the
Pharmaceutical Industry

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