Introduction to Strategic

Management

HCAD 5390
What is Strategy?

Strategy is the overall plan for

deploying resources to establish a
favorable position.
Tactic is a scheme for a specific
maneuver.
 Characteristics of strategic decisions…
– Important
– Involve a significant commitment of resources
– Not easily reversible
Basic Framework

External
The firm
Environment
Goals & Values
Competitors
Resources &
Strategy Customers
Capabilities
Suppliers
Structures &
Systems etc
Definitions

Strategic Management Process

The full set of commitments, decisions,
and actions required for a firm to create
value and earn above-average returns
Value Creation
What is achieved when a firm
successfully formulates and implements a
strategy that other companies are unable
to duplicate or find too costly to imitate.
Definitions
Average Returns
Returns that are equal to those an investor
expects to earn from other investments with
a similar amount of risk

Above-Average Returns
Returns that are in excess of what an investor
expects to earn from other investments with a
similar amount of risk
Definitions
Risk
An investor’s uncertainty about the
economic gains or losses that will result
from a particular investment
Competitive Landscape
Dynamics of strategic
maneuvering among
global and innovative
combatants

Price-quality
positioning, new know-
how, first mover
Hypercompetitive Protect or invade
environments established product or
Fundamental nature of geographic markets
competition is changing
Competitive Landscape
Goods, services, people,
Emergence of skills, and ideas move
global economy freely across geographic
borders

Spread of economic
innovations around the
world
Hypercompetitive Political and cultural
environments adjustments are
Fundamental nature of required
competition is changing
Competitive Landscape
Increasing rate of
Emergence of technological change and
global economy diffusion
Rapid technological The information age
change
Increasing knowledge
intensity
Hypercompetitive
environments
Fundamental nature of
competition is changing
Strategic Flexibility
A set of capabilities used to respond to
various demands and opportunities
existing in a dynamic and uncertain
competitive environment
It involves coping with uncertainty and the
accompanying risks
Strategic Flexibility
Organizational
slack

Strategic Strategic
reorientation Flexibility
flexibility

Capacity to
learn
I/O Model of Above-Average Returns
1. External Environments
General 1. Strategy dictated by the
Global external environment of
the firm (what
Industry
opportunities exist in
Environment
these environments?)
2. Firm develops internal
skills required by
Competitor external environment
Environment (what can the firm do
Technological about the opportunities?)
Environment
Four Assumptions of the I/O Model

1. The external environment is assumed to possess

pressures and constraints that determine the
strategies that would result in above-average returns
2. Most firms competing within a particular industry or
within a certain segment of it are assumed to control
similar strategically relevant resources and to pursue
similar strategies in light of those resources
Four Assumptions of the I/O Model

3. Resources used to implement strategies are highly

mobile across firms
4. Organizational decision makers are assumed to be
rational and committed to acting in the firm’s best
interests, as shown by their profit-maximizing
behaviors
 I/O Model of Above-Average Returns

Industrial Organization 1. Study the external

Model environment, especially the
industry environment
The External Environment • economies of scale
• barriers to market entry
• diversification
• product differentiation
• degree of concentration of
firms in the industry
 I/O Model of Above-Average Returns

Industrial Organization 2. Locate an attractive industry

Model with a high potential for
above-average returns
The External Environment

An Attractive Industry Attractive industry: one whose

structural characteristics
suggest above-average returns
 I/O Model of Above-Average Returns

Industrial Organization 3. Identify the strategy called

Model for by the attractive industry
to earn above-average returns
The External Environment

An Attractive Industry

Strategy Formulation Strategy formulation: selection

of a strategy linked with
above-average returns in a
particular industry
 I/O Model of Above-Average Returns

Industrial Organization 4. Develop or acquire assets and

Model skills needed to implement
the strategy
The External Environment

An Attractive Industry

Strategy Formulation

Assets and Skills Assets and skills: those assets

and skills required to
implement a chosen strategy
 I/O Model of Above-Average Returns

Industrial Organization 5. Use the firm’s strengths (its

Model developed or acquired assets
and skills) to implement the
The External Environment strategy
An Attractive Industry

Strategy Formulation

Assets and Skills

Strategy implementation: select
Strategy Implementation strategic actions linked with
effective implementation of the
chosen strategy
 I/O Model of Above-Average Returns

Industrial Organization
Model
The External Environment

An Attractive Industry

Strategy Formulation

Assets and Skills Superior returns: earning

of above-average returns
Strategy Implementation

Superior Returns
 Resource-based Model of Above Average
Returns

1. Firm’s Resources 1. Strategy dictated by the

firm’s unique resources
and capabilities
2. Find an environment in
which to exploit these
assets (where are the best
opportunities?)
Resource-based Model of Above Average Returns

Resource-based 1. Identify the firm’s resources--

Model strengths and weaknesses
compared with competitors
Resources
Resources: inputs into a firm’s
production process
Resource-based Model of Above Average Returns

Resource-based 2. Determine the firm’s

Model capabilities--what it can do
better than its competitors
Resources

Capability Capability: capacity of an

integrated set of resources to
integratively perform a task or
activity
 Four Attributes of Resources and Capabilities
(Competitive Advantage)

Valuable allow the firm to exploit opportunities or

neutralize threats in its external

Resources and Capabilities

environment

Rare possessed by few, if any, current and

potential competitors

Costly to imitate when other firms cannot obtain them or

must obtain them at a much higher cost

Nonsubstitutable the firm is organized appropriately to

obtain the full benefits of the resources in
order to realize a competitive advantage
 Resources and capabilities that meet
these four criteria become a source of:

Valuable

Resources and Capabilities

Rare
Core Competencies
Costly to imitate

Nonsubstitutable
Core Competencies are the basis for a firm’s

Competitive
advantage

Value Creation
Core Competencies
Ability to earn
above-average
returns
Resource-based Model of Above Average Returns

Resource-based 3. Determine the potential of the

Model firm’s resources and
capabilities in terms of a
Resources competitive advantage
Capability

Competitive Advantage Competitive advantage: ability

of a firm to outperform its
rivals
Resource-based Model of Above Average Returns

Resource-based 4. Locate an attractive industry

Model
Resources

Capability

Competitive Advantage

An Attractive Industry An attractive industry: an

industry with opportunities that
can be exploited by the firm’s
resources and capabilities
Resource-based Model of Above Average Returns

Resource-based 5. Select a strategy that best

Model allows the firm to utilize its
resources and capabilities
Resources relative to opportunities in
Capability the external environment

Competitive Advantage

An Attractive Industry
Strategy formulation and
Strategy Form/Impl implementation: strategic
actions taken to earn above
average returns
Resource-based Model of Above Average Returns

Resource-based
Model
Resources

Capability

Competitive Advantage

An Attractive Industry Superior returns: earning

of above-average returns
Strategy Form/Impl

Superior Returns
Strategic Intent & Mission

 Strategic Intent
 Winning competitive battles by leveraging the firm’s
resources, capabilities, and core competencies

 Strategic Mission
 An application of strategic intent in terms of products to be
offered and markets to be served
 Emergent and Deliberate
Strategies

Intended Deliberate Realized

Strategy Strategy Strategy

Unrealized Emergent
Strategy Strategy

From “Strategy Formation in an Adhocracy” by Henry Mintzberg and Alexandra McHugh, Administrative Science Quarterly,
Vol. 30, No. 2, June 1985. Reprinted by permission of Administrative Science Quarterly.
Strategic Management Process for Intended
Strategies
Missions
and Goals

External Strategic Internal

Analysis Choice Analysis

INTENDED STRATEGY

Organizing for
Implementation
Strategic Management Process for Emergent
Strategies
External Missions Internal
Analysis and Goals Analysis

Strategic Choice
Does It Fit?

EMERGENT STRATEGY

Organizational
Grassroots
 The Firm and Its Stakeholders

Stakeholders

Groups
The firmwho
mustaremaintain
affected by a
firm’s performance
performance and who
at an adequate
have
level claims
in orderontoits
retain
wealth
the
participation of key
stakeholders
The Firm and Its Stakeholders
Stakeholders
Capital Market Stakeholders
Shareholders
Major suppliers of capital
•Banks
•Private lenders
•Venture capitalists
The Firm and Its Stakeholders

Stakeholders

Capital Market Stakeholders

Primary customers
Product Market Stakeholders Suppliers
Host communities
Unions
The Firm and Its Stakeholders

Stakeholders

Capital Market Stakeholders

Product Market Stakeholders

Employees
Organizational Stakeholders Managers
Nonmanagers
Values

Johnson & Johnson’s credo

sets its responsibilities to:
1. J&J product users.
2. J&J employees.
3. Communities in which J&J
employees live and work.
4. J&J stockholders.

Source: Courtesy of Johnson & Johnson.

Johnson & Johnson Credo*

 First Responsibility Is to Those Who

Use J&J Products
 Next Come Its Employees
 Next, the Communities in Which the
Employees Live and Work
 Its Final Responsibility Is
to Its Stockholders
Levels of Strategy
•Functional-Level Strategy

– Manufacturing
– Marketing
– Materials Management
– Research and Development
– Human Resources
• Business-Level Strategy

– Cost Leadership
– Differentiation
– Market Niche Focus
• Global Strategies

– Multidomestic
– International
– Global
– Transnational
• Corporate-Level Strategy

– Vertical Integration
– Diversification
– Strategic Alliances
– Acquisitions
– New Ventures
– Business Portfolio
Restructuring