Chapter 1: Strategic Management and Strategic Competitiveness
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Chapter 1
Strategic Management and Strategic Competitiveness
LEARNING OBJECTIVES
1. Define strategic competitiveness, strategy, competitive advantage, above-average returns,
and the strategic management process.
2. Describe the competitive landscape and explain how globalization and technological changes
shape it.
3. Use the industrial organization (I/O) model to explain how firms can earn above-average
returns.
4. Use the resource-based model to explain how firms can earn above average-returns.
5. Describe vision and mission and discuss their value.
6. Define stakeholders and describe their ability to influence organizations.
7. Describe the work of strategic leaders.
8. Explain the strategic management process.
CHAPTER OUTLINE
Opening Case: Alibaba – An Online Colossus in China Goes Global
THE COMPETITIVE LANDSCAPE
The Global Economy
Technology and Technological Changes
Strategic Focus: Starbucks – “Juicing” its Earnings per Store through technology Innovations
THE I/O MODEL OF ABOVE-AVERAGE RETURNS
THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS
VISION AND MISSION
Vision
Mission
STAKEHOLDERS
Classifications of Stakeholders
Strategic Focus: The Failure of BlackBerry to Develop an Ecosystem of Stakeholders
STRATEGIC LEADERS
The Work of Effective Strategic Leaders
Predicting Outcomes of Strategic Decisions: Profit Pools
THE STRATEGIC MANAGEMENT PROCESS
SUMMARY
REVIEW QUESTIONS
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LECTURE NOTES
OPENING CASE
Alibaba: An Online Colossus in China Goes Global
China now has world’s largest number of internet users and Alibaba is China’s largest
ecommerce company (23 percent owned by Yahoo and 36 percent by Japan’s SoftBank).
In 2014, when Alibaba completed its initial public offering (IPO) on the New York Stock
Exchange, it immediately became worth more than Amazon and eBay combined, and has
a larger market capitalization than Wal-Mart. Transactions of goods on Alibaba’s websites
account for more than two percent of China’s GDP in 2012.
Teaching Note
1
Define strategic competitiveness, strategy, competitive advantage,
above-average returns, and the strategic management process.
DEFINING STRATEGY
Strategy can be defined as an integrated and coordinated set of commitments and actions
designed to exploit core competencies and gain a competitive advantage.
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So long as a firm can sustain (or maintain) a competitive advantage, investors will earn
above-average returns. Above-average returns represent returns that exceed returns that
investors expect to earn from other investments with similar levels of risk (investor
uncertainty about the economic gains or losses that will result from a particular investment).
In other words, above average-returns exceed investors’ expected levels of return for given
risk levels.
In smaller new venture firms, performance is sometimes measured in terms of the amount
and speed of growth rather than more traditional profitability measures – new ventures
require time to earn acceptable returns.
A framework that can assist firms in their quest for strategic competitiveness is the strategic
management process, the full set of commitments, decisions and actions required for a firm
to systematically achieve strategic competitiveness and earn above-average returns. This
process is illustrated in Figure 1.1.
FIGURE 1.1
The Strategic Management Process
Figure 1.1 illustrates the dynamic, interrelated nature of the elements of the strategic
management process and provides an outline of where the different elements of the process
are covered in this text.
Feedback linkages among the three primary elements indicate the dynamic nature of the
strategic management process: strategic inputs, strategic actions, and strategic outcomes.
• Analysis, in the form of information gained by scrutinizing the internal environment and
scanning the external environment, are used to develop the firm’s vision and mission.
• Strategic actions are guided by the firm’s vision and mission, and are represented by
strategies that are formulated or developed and subsequently implemented or put into
action.
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• Desired performance – strategic competitiveness and above-average returns – result when
a firm is able to successfully formulate and implement value-creating strategies that others
are unable to duplicate.
• Feedback links the elements of the strategic management process together and helps firms
continuously adjust or revise strategic inputs and strategic actions in order to achieve
desired strategic outcomes.
In addition to describing the impact of globalization and technological change on the current
business environment, this chapter also discusses two approaches to the strategic
management process. The first, the industrial organization model, suggests that the external
environment should be considered as the primary determinant of a firm’s strategic actions.
The second is the resource-based model, which perceives the firm’s resources and
capabilities (the internal environment) as critical links to strategic competitiveness.
Following the discussion in this chapter, as well as in Chapters 2 and 3, students should see
that these models must be integrated to achieve strategic competitiveness.
2
Describe the competitive landscape and explain how
globalization and technological changes shape it.
THE COMPETITIVE LANDSCAPE
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A term often used to describe the new realities of competition is hypercompetition, a
condition that results from the dynamics of strategic moves and countermoves among
innovative, global firms: a condition of rapidly escalating competition that is based on price-
quality positioning, efforts to create new know-how and achieve first-mover advantage, and
battles to protect or to invade established product or geographic markets (discussed in more
detail in Chapter 5).
The Global Economy
A global economy is one in which goods, services, people, skills, and ideas move freely
across geographic borders.
The emergence of this global economy results in a number of challenges and opportunities.
For instance, Europe is now the world’s largest single market (despite the difficulties of
adapting to multiple national cultures and the lack of a single currency. The European Union
has become one of the world’s largest markets, with 700 million potential customers.
Teaching Note
The relative competitiveness of nations can be found in the World Economic Forum’s
Global Competitiveness Report, which can be accessed for free on the Internet. It is
useful to assemble these data into an overhead or PowerPoint slide and show it in
class. Students find it interesting to see where their country stands relative to the
others listed. Allow enough time for them to see these numbers and sort out what it all
means.
The March of Globalization
Globalization is the increasing economic interdependence among countries as reflected in the
flow of goods and services, financial capital, and knowledge across country borders. This is
illustrated by the following:
• Financial capital might be obtained in one national market and used to buy raw materials
in another one.
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• Manufacturing equipment bought from another market produces products sold in yet
another market.
• Globalization enhances the available range of opportunities for firms.
Global competition has increased performance standards in many dimensions, including
quality, cost, productivity, product introduction time, and operational efficiency. Moreover,
these standards are not static; they are exacting, requiring continuous improvement from a
firm and its employees. Thus, companies must improve their capabilities and individual
workers need to sharpen their skills. In the twenty-first century competitive landscape, only
firms that meet, and perhaps exceed, global standards are likely to earn strategic
competitiveness.
Teaching Note
As a result of the new competitive landscape, firms of all sizes must re-think how they
can achieve strategic competitiveness by positioning themselves to ask questions from
a more global perspective to enable them to (at least) meet or exceed global standards:
• Where should value-adding activities be performed?
• Where are the most cost-effective markets for new capital?
• Can products designed in one market be successfully adapted for sale in others?
• How can we develop cooperative relationships or joint ventures with other firms
that will enable us to capitalize on international growth opportunities?
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minimizing their impact on firms are discussed in more detail in Chapter 8.
Teaching Note
As a result of globalization and the spread of technology, competition will become
Three technological trends and conditions are significantly altering the nature of competition:
• Increasing rate of technological change and diffusion
• The information age
• Increasing knowledge intensity
Technologic Diffusion and Disruptive Technologies
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The rapid diffusion of innovation may have made patents a source of competitive advantage
only in the pharmaceutical and chemical industries. Many firms do not file patent
applications to safeguard (for at least a time) the technical knowledge that would be disclosed
ability to access and use information has become an important source of competitive
advantage in almost every industry.
• There have been dramatic changes in information technology in recent years.
• The number of PCs is expected to grow to 2.3 billion by 2015.
• The declining cost of information technology.
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Teaching Note
This means that to achieve competitive advantage in the information-intensive
competitive landscape, firms must move beyond accessing information to exploiting
information by:
• Capturing intelligence
• Transforming intelligence into usable knowledge
• Embedding it as organizational learning
• Diffusing it rapidly throughout the organization
The implication of this discussion is that to achieve strategic competitiveness and earn
above-average returns, firms must develop the ability to adapt rapidly to change or achieve
strategic flexibility.
Strategic flexibility represents the set of capabilities – in all areas of their operations – that
firms use to respond to the various demands and opportunities that are found in dynamic,
uncertain environments. This implies that firms must develop certain capabilities,
including the capacity to learn continuously, that will provide the firm with new skill sets.
However, those working within firms to develop strategic flexibility should understand
that the task is not an easy one, largely because of inertia that can build up over time. A
firm’s focus and past core competencies may actually slow change and strategic
flexibility.
Teaching Note
Firms capable of rapidly and broadly applying what they learn achieve strategic
flexibility and the resulting capacity to change in ways that will increase the probability
of succeeding in uncertain, hypercompetitive environments. Some firms must change
dramatically to remain competitive or return to competitiveness. How often are firms able
to make this shift? Overall, does it take more effort to make small, periodic changes, or to
wait and make more dramatic changes when these become necessary?
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in sales is mainly due to an increase in applications of technology. To facilitate this
increase in sales per store, Starbucks has been ramping up its digital tools such as mobile-
payment platforms.
3
Use the industrial organization (I/O) model to explain how firms
can earn above-average returns.
THE I/O MODEL OF ABOVE AVERAGE RETURNS
Teaching Note
1. The external environment – the general, industry, and competitive environments impose
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that might be appropriate and eventually successful.
2. Most firms competing in an industry or in an industry segment control similar sets of
3. Resources used to implement strategies are highly mobile across firms. Significant
4. Organizational decision-makers are assumed to be rational and committed to acting only
in the best interests of the firm. The implication of this assumption is that organizational
decision-makers will consistently exhibit profit-maximizing behaviors.
According to the I/O model, which was a dominant paradigm from the 1960s through the
FIGURE 1.2
The I/O Model of Above-Average Returns
Based on its four underlying assumptions, the I/O model prescribes a five-step process for
firms to achieve above-average returns:
1. Study the external environment – general, industry, and competitive – to determine the
2. Locate an industry (or industries) with a high potential for returns based on the structural
3. Based on the characteristics of the industry in which the firm chooses to compete,
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framework that can be used to assess the requirements and risks of these strategies (the
generic strategies are called cost leadership & differentiation) are discussed in detail in
Chapter 4.
5. The I/O model indicates that above-average returns will accrue to firms that successfully
implement relevant strategic actions that enable the firm to leverage its strengths (skills
and resources) to meet the demands or pressures and constraints of the industry in which
it has elected to compete. The implementation process is described in Chapters 10
through 13.
4
Use the resource-based model to explain how firms can earn
above average-returns.
THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS
Teaching Note
The recommended teaching strategy for this section is similar to that suggested for
the I/O model. First explain the assumptions of the resource-based model. Then use
Figure 1.3 to introduce linkages in the resource-based model and provide the
background for an expanded discussion of the model in Chapter 3.
The resource-based model adopts an internal perspective to explain how a firm’s unique
bundle or collection of internal resources and capabilities represent the foundation on which
value-creating strategies should be built.
Resources are inputs into a firm’s production process, such as capital equipment, individual
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employee’s skills, patents, brand names, finance, and talented managers. These resources can
be tangible or intangible.
Capabilities are the capacity for a set of resources to perform – in combination – a task or
1. Firms should identify their internal resources and assess their strengths and weaknesses.
2. Firms should identify the set of resources that provide the firm with capabilities that are
3. Firms should determine the potential for their unique sets of resources and capabilities to
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5. To attain a sustainable competitive advantage and earn above-average returns, firms
should formulate and implement strategies that enable them to exploit their resources and
capabilities to take advantage of opportunities in the external environment better than
their competitors.
Resources and capabilities can lead to a competitive advantage when they are valuable, rare,
costly to imitate, and non-substitutable.
5
Describe vision and mission and discuss their value.
VISION AND MISSION
Teaching Note
Refer students to Figure 1.1 that indicates the link or relationship between identifying
a firm’s internal resources and capabilities and the conditions and characteristics of
the external environment with the development of the firm’s vision and mission.
Vision
Vision is a picture of what the firm wants to be, and in broad terms, what it wants to
ultimately achieve. Vision is “big picture” thinking with passion that helps people feel what
they are supposed to be doing.