Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.

CHAPTER1Strategic Management and Strategic Competitiveness

LEARNING OBJECTIVES

Studying this chapter should provide you with the strategic management knowledge needed to:

1-1Define strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process.

1-2Describe the competitive landscape and explain how globalization and technological changes shape it.

1-3Use the industrial organization (I / O) model to explain how firms can earn above-average returns.

1-4Use the resource-based model to explain how firms can earn above-average returns.

1-5Describe vision and mission and discuss their value.

1-6Define stakeholders and describe their ability to influence organizations.

1-7Describe the work of strategic leaders.

1-8Explain the strategic management process.

Chapter Introduction (slide 1 of 5)

Firms achieve strategic competitiveness by formulating and implementing a value-creating strategy.

A strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage.

When choosing a strategy, firms make choices among competing alternatives as the pathway for deciding how they will pursue strategic competitiveness.

The chosen strategy indicates what the firm will and will not do.

Chapter Introduction (slide 2 of 5)

A firm has a competitive advantage when by implementing a chosen strategy, it creates superior value for customers and when competitors are not able to imitate the value the firm’s products create or find it too expensive to attempt imitation.

No competitive advantage is permanent.

How long a competitive advantage will last depends on how quickly competitors can acquire the skills needed to duplicate the benefits of a firm’s value-creating strategy.

Chapter Introduction (slide 3 of 5)

Above-average returns are returns in excess of what an investor expects to earn from other investments with a similar amount of risk.

Risk is an investor’s uncertainty about the economic gains or losses that will result from a particular investment.

The most successful companies learn how to manage risk effectively.

Doing so reduces investors’ uncertainty about the outcomes of their investment.

Chapter Introduction (slide 4 of 5)

Firms without a competitive advantage or those that do not compete in an attractive industry earn, at best, average returns.

Average returns are returns equal to those an investor expects to earn from other investments possessing a similar amount of risk.

Over time, an inability to earn at least average returns results first in decline and, eventually, failure.

Chapter Introduction (slide 5 of 5)

The strategic management process is the full set of commitments, decisions, and actions firms take to achieve strategic competitiveness and earn above-average returns.

The process involves analysis, strategy, and performance (the A – S – P model).

A firm analyzes the external environment and its internal organization, then formulates and implements strategies to achieve a desired level of performance.

Figure 1.1 The Strategic Management Process

1-1 The Competitive Landscape (slide 1 of 2)

The fundamental nature of competition in many of the world’s industries is changing.

Firms must understand the strategic implications and integrate digitalization (the process of converting something to digital form) effectively into their strategies.

Conventional sources of competitive advantage such as large advertising budgets and economies of scale are not as effective as they once were in helping firms earn above-average returns.

Managers must adopt a new mind-set that values:

Flexibility

Speed

Innovation

Integration

The challenges flowing from constantly changing conditions

1-1 The Competitive Landscape (slide 2 of 2)

Hyper competition is a condition where competitors engage in intense rivalry, markets change quickly and often, and entry barriers are low.

Hyper competition makes it difficult for firms to maintain a competitive advantage.

It is a condition of rapidly escalating competition based on:

Price-quality positioning

Competition to create new know-how and establish first-mover advantage

Competition to protect or invade established product and/or geographic markets

Two primary drivers of hyper competition:

The emergence of a global economy

Rapid technological change

1-1a The Global Economy (slide 1 of 2)

A global economy is one in which goods, services, people, skills, and ideas move freely across geographic borders.

The global economy significantly expands and complicates a firm’s competitive environment.

The March of Globalization

Globalization is the increasing economic interdependence among countries and their organizations as reflected in the flow of products, financial capital, and knowledge across country borders.

Globalization is a product of a large number of firms competing against one another in an increasing number of global economies.

The increasing opportunities available in emerging economies is a major driver of growth in the size of the global economy.

1-1a The Global Economy (slide 2 of 2)

Globalization has led to higher performance standards with respect to:

Quality

Cost

Productivity

Product introduction time

Operational efficiency

Globalization is not without risks.

“Liability of foreignness”

The amount of time required to learn to compete in new markets

Entering too many global markets either simultaneously or too quickly

Entry into international markets, even for firms with substantial experience in the global economy, requires effective use of the strategic management process.

1-1b Technology and Technological Changes (slide 1 of 4)

Three categories of technology-related trends and conditions that affect today’s firms:

Technology diffusion and disruptive technologies

The information age

Increasing knowledge intensity

Technology Diffusion and Disruptive Technologies

Technology diffusion is the speed at which new technologies become available to firms and when firms choose to adopt them.

Perpetual innovation describes how rapidly and consistently new, information-intensive technologies replace older ones.

Disruptive technologies are technologies that destroy the value of an existing technology and create new markets.

Examples: Wi-Fi, i Pads, the web browser

1-1b Technology and Technological Changes (slide 2 of 4)

The Information Age

Data and information are vital to firms’ efforts to:

Understand customers and their needs

Implement strategies in ways that satisfy customers’ needs

Implement strategies in ways to satisfy the interests of all other stakeholders

The most successful firms envision information technology-derived innovations as opportunities to identify and serve new markets rather than as threats to the markets they serve currently.

1-1b Technology and Technological Changes (slide 3 of 4)

Increasing Knowledge Intensity

Knowledge:

Consists of information, intelligence, and expertise

Is the basis of technology and its application

Is acquired through experience, observation, and inference

Is developed by firms through training programs

Is acquired by firms by hiring educated and experienced employees

Must be integrated into the organization to create capabilities and then applied to gain a competitive advantage

Is necessary to create innovations

1-1b Technology and Technological Changes (slide 4 of 4)

Strategic flexibility is a set of capabilities firms use to respond to various demands and opportunities existing in today’s dynamic and uncertain competitive environment.

Strategic flexibility:

Is not easy to build, largely because of inertia that can build over time

Requires developing the capacity for continuous learning and applying quickly the new and up-to-date skill sets achieved from learning

Increases the probability of dealing successfully with uncertain, hypercompetitive environments

1-2 The I / O Model of Above-Average Returns (slide 1 of 3)

The logic of the I / O model is that the profitability potential of an industry or a segment of it as well as the actions firms should take to operate profitably are determined by a set of industry characteristics, including:

Economies of scale

Barriers to market entry

Diversification

Product differentiation

The degree of concentration of firms in the industry

Market frictions

The I / O model suggests that returns are influenced more so by the characteristics of the external environment than a firm’s unique internal resources and capabilities.

1-2 The I / O Model of Above-Average Returns (slide 2 of 3)

Four underlying assumptions of the I / O model:

The external environment imposes pressures and constraints that determine the strategies that would result in above-average returns.

Most firms competing within an industry or within a segment of that industry are assumed to control similar strategically relevant resources and to pursue similar strategies in light of those resources.

Firms assume that their resources are highly mobile, meaning that any resource differences that might develop between firms will be short-lived.

Organizational decision makers are rational individuals who are committed to acting in the firm’s best interests, as shown by their profit-maximizing behaviors.

The I / O model challenges firms to find the most attractive industry in which to compete.

1-2 The I / O Model of Above-Average Returns (slide 3 of 3)

The five forces model of competition is an analytical tool firms use to find the industry that is most attractive.

The five forces model suggests that:

An industry’s profitability is a function of interactions among:

Suppliers

Buyers

Competitive rivalry among firms currently in the industry

Product substitutes

Potential entrants to the industry

Firms can earn above-average returns by producing either:

Standardized products at costs below those of competitors (a cost leadership strategy)

Differentiated products for which customers are willing to pay a price premium (a differentiation strategy)

Figure 1.2 The I / O Model of Above-Average Returns

1-3 The Resource-Based Model of Above-Average Returns (slide 1 of 4)

The resource-based model of above-average returns assumes that each organization is a collection of unique resources and capabilities.

The uniqueness of resources and capabilities is the basis of a firm’s strategy and its ability to earn above-average returns.

1-3 The Resource-Based Model of Above-Average Returns (slide 2 of 4)

Resources are inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers.

Firms typically classify resources into three categories:

Physical capital

Human capital

Organizational capital

Resources have a greater likelihood of being a competitive advantage when integrated to form a capability.

A capability is the capacity for a set of resources to perform a task or an activity in an integrative manner.

Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals.

1-3 The Resource-Based Model of Above-Average Returns (slide 3 of 4)

Four underlying assumptions of the resource-based model:

Differences in firms’ performances across time are due primarily to their unique resources and capabilities rather than the industry’s structural characteristics.

Firms acquire different resources and develop unique capabilities based on how they combine and use the resources.

Resources and capabilities are not highly mobile across firms.

Differences in resources and capabilities are the basis of competitive advantage.

As a source of competitive advantage, a capability must not be easily imitated but also not too complex to understand and manage.

Figure 1.3 The Resource-Based Model of Above-Average Returns

1-3 The Resource-Based Model of Above-Average Returns (slide 4 of 4)

Resources and capabilities have the potential to be the foundation for a competitive advantage when they are:

Valuable (allow a firm to take advantage of opportunities or neutralize threats in its external environment)

Rare (possessed by few, if any, current and potential competitors)

Costly to imitate (are difficult for other firms to obtain)

Non-substitutable (have no structural equivalents)

1-4 Vision and Mission

A key purpose of vision and mission statements is to inform stakeholders of:

What the firm is

What it seeks to accomplish

Who it seeks to serve

The vision and mission provide the foundation the firm needs to choose and implement one or more strategies.

1-4a Vision

Vision is a picture of what the firm wants to be and, in broad terms, what it wants to achieve.

A vision statement:

Articulates the ideal description of an organization and gives shapes to its intended future

Tends to be relatively short and concise

An effective vision:

Stretches and challenges people

Is developed by the C E O and other top-level managers, employees, suppliers, and customers

Is consistent with the decisions and actions of those involved with developing it

Conditions in the firm’s external environment and internal organization influence the forming of a vision statement.

1-4b Mission

A mission specifies the businesses in which the firm intends to compete and the customers it intends to serve.

A mission:

Is more concrete than a firm’s vision

Should establish a firm’s individuality

Should be inspiring and relevant to all stakeholders

Deals more directly with product markets and customers

Should be developed by the C E O, top-level managers, and other organizational members

Has a higher probability of being effective when employees have a strong sense of ethics

1-5 Stakeholders

Stakeholders are individuals, groups, and organizations that can affect the firm’s vision and mission, are affected by the strategic outcomes achieved, and have enforceable claims on the firm’s performance.

Because firms are not equally dependent on all stakeholders at all times, stakeholders possess different degrees of ability to influence an organization.

Greater dependence gives the stakeholder more potential influence over a firm’s commitments, decisions, and actions.

1-5a Classifications of Stakeholders (slide 1 of 4)

Firms can separate the parties involved with their operations into at least three groups:

Capital market stakeholders

Product market stakeholders

Organizational stakeholders

The most obvious stakeholders, at least in U. S. organizations, are shareholders—individuals and groups who have invested capital in a firm in the expectation of earning a positive return on their investments.

Figure 1.4 The Three Stakeholder Groups

1-5a Classifications of Stakeholders (slide 2 of 4)

When earning above-average returns, a firm generally has the resources to satisfy the interests of all stakeholders.

When earning only average returns, the firm must satisfy each stakeholder group’s minimal expectations.

A firm earning below-average returns must make trade-offs to minimize the amount of support it loses from unsatisfied stakeholders.

Capital Market Stakeholders

Shareholders and lenders expect a firm to preserve and enhance their wealth.

Expected returns are correlated with the investments’ degree of risk:

Low-risk investments = lower returns

High-risk investments = higher returns

1-5a Classifications of Stakeholders (slide 3 of 4)

Product Market Stakeholders

Customers seek reliable products at the lowest possible prices.

Suppliers seek loyal customers who are willing to pay the highest sustainable prices for products.

Host communities (the national, state / province, and local government entities with which the firm interacts) want companies willing to be long-term employers and providers of tax revenue without placing excessive demands on public support services.

Unions seek secure jobs and desirable working conditions for members.

Product market stakeholders are generally satisfied when a firm’s profit margin reflects at least a balance between the returns to capital market stakeholders and the returns in which they share.

1-5a Classifications of Stakeholders (slide 4 of 4)

Organizational Stakeholders

Employees:

Expect the firm to provide a dynamic, stimulating, and rewarding work environment

Generally prefer to work for a growing company in which they can develop their skills

Are critical to organizational success when they learn how to use new knowledge productively

Leaders:

Must use the firm’s human capital successfully to serve the day-to-day needs of stakeholders

Help a firm’s employees understand competition in the global competitive landscape through international assignments

1-6 Strategic Leaders (slide 1 of 2)

Strategic leaders are people located in different areas and levels of the firm using the strategic management process to select actions that help the firm achieve its vision and fulfill its mission.

Strategic leaders are:

Decisive

Committed to nurturing those around them

Committed to helping the firm create value for all stakeholder groups

In general, C E Os are responsible for making certain that their firms use the strategic management process properly.

The most effective C E Os and top-level managers understand how to delegate strategic responsibilities to people throughout the firm.

1-6 Strategic Leaders (slide 2 of 2)

Organizational culture affects strategic leaders and their work.

Organizational culture refers to the complex set of ideologies, symbols, and core values that individuals throughout the firm share and that influence how the firm conducts business.

It is the social energy that drives—or fails to drive—the organization.

1-6a The Work of Effective Strategic Leaders

Prerequisites to an individual’s success as a strategic leader:

Hard work

Thorough analyses

A willingness to be brutally honest

A penchant for wanting the firm and its people to achieve success

Tenacity

Strategic leaders must:

Have a strong strategic orientation while embracing change in today’s dynamic competitive landscape

Be innovative

Promote innovation in their organization to deal with change effectively

Have a global mind-set

APPENDIX

NOTE TO INSTRUCTOR: Choose from the following questions (also found in the text at the end of the chapter)

to conduct in-class discussions around key chapter concepts.

Discussion:

What are strategic competitiveness, strategy, competitive advantage, above-average returns, and the strategic management process?

Discussion:

What are the characteristics of the current competitive landscape? What two factors are the primary drivers of this landscape?

Discussion:

According to the I/O model, what should a firm do to earn above-average returns?

Discussion:

What does the resource-based model suggest a firm should do to earn above-average returns?

Discussion:

What are vision and mission? What is their value for the strategic management process?

Discussion:

What are stakeholders? How do the three primary stakeholder groups influence organizations?

Discussion:

How would you describe the work of strategic leaders?

Discussion:

What are the elements of the strategic management process? How are they interrelated?

Hitt13e_PPT_Ch01.pptx

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