Chapter 1
Strategic Management and Strategic Competitiveness
CHAPTER OVERVIEW
LEARNING OBJECTIVES
1-4 VISION AND MISSION
1-4a Vision
1-4b Mission
MINI-CASE
ADDITIONAL QUESTIONS AND EXERCISES
INSTRUCTOR’S NOTES FOR MINDTAP
What Would You Do?
CHAPTER OVERVIEW
This chapter is an introductory chapter. Its purpose is to define critical concepts and
introduce the main components of strategic management and strategic competitiveness.
This chapter serves to establish the context within which subsequent chapters fit.
Chapter 1: Strategic Management and Strategic Competitiveness
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1-3
Chapter 1 begins by introducing several key concepts that will be woven throughout the
text. The most important of these is the strategic management process, which is the set of
commitments, decisions, and actions firms take to achieve strategic competitiveness so
they can earn above-average returns. The process begins with performing both internal
and external analyses, after which a firm can determine how to create superior value for
customers in ways that cannot be imitated, thus creating a competitive advantage.
The next two sections of the chapter explore two different models firms can use to
determine the best strategies for achieving above-average returns. The older industrial
organization model, or I/O model, assumes that the external environment imposes
pressures and constraints that determine the best strategies. This model is also based on
the idea that firms possess the same types of resources and can thus choose to compete in
the most attractive industries. A more contemporary model is the resource-based model,
which is based on the idea that every firm has unique resources, capabilities, and core
competencies, thus the internal environment has greater impact on a firm’s selection of the
best strategies.
The final two sections wrap up the chapter with a discussion of how strategic leaders at all
levels and in all areas of a firm can help drive the strategic direction of the organization.
The text then goes on to detail how each subsequent chapter of the book will reveal
various aspects of the strategic management process: Part 1, analyses used to develop
Chapter 1: Strategic Management and Strategic Competitiveness
strategies; Part 2, strategies firms choose to use; and Part 3, the implementation of
strategies.
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
Lecture Notes
Chapter Introduction: You may want to begin this lecture with a general comment that
Chapter 1 provides an overview of the strategic management process. This chapter
introduces a number of key terms and models that students will study in more detail in
Chapters 2 through 13. Stress the importance of students paying careful attention to the
concepts introduced in this chapter so that they are well-grounded in strategic
management concepts before proceeding further.
OPENING CASE
The Honest Co.: Can It Become an Iconic Global Brand?
Co-founded by actress and parent Jessica Alba, The Honest Co. launched in 2011 with a
mission to be a wellness brand offering safe, effective, reliable products, such as diapers,
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Teaching Note
To initiate discussion, ask students to distinguish between The Honest Co.’s vision and
1
Define strategic competitiveness, strategy, competitive advantage,
above-average returns, and the strategic management process.
STRATEGIC FOCUS
Competitive Advantage as a Source of Strategic Competitiveness
Every firm needs to possess some kind of competitive advantage, something that sets the
Teaching Note
The boxed feature offers several examples of competitive advantage. For example,
DEFINING STRATEGY
Strategic competitiveness is achieved when a firm successfully formulates and
Strategy can be defined as an integrated and coordinated set of commitments and actions
designed to exploit core competencies and gain a competitive advantage.
So long as a firm can sustain (or maintain) a competitive advantage, investors will earn
Chapter 1: Strategic Management and Strategic Competitiveness
return for given risk levels. Firms without a competitive advantage or those that do not
compete in an attractive industry earn, at best, average returns, equal to those an investor
expects to earn from other investments possessing a similar amount of risk.
Teaching Note
Point out that in the long run, firms must earn at least average returns and provide
above-average performances.
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.
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
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• Feedback links together the elements of the strategic management process 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
2
Describe the competitive landscape and explain how
globalization and technological changes shape it.
1-1 THE COMPETITIVE LANDSCAPE
The competitive landscape can be described as one in which the fundamental nature of
competition is changing in a number of the world’s industries. Further, the boundaries of
industries are becoming blurred and more difficult to define.
Consider recent changes that have taken place in the telecommunication and TV
The contemporary competitive landscape thus implies that traditional sources of
competitive advantage—economies of scale and large advertising budgets—may not be as
important in the future as they were in the past. The rapid and unpredictable technological
change that characterizes this new competitive landscape implies that managers must
adopt new ways of thinking. The new competitive mindset must value flexibility, speed,
innovation, integration, and the challenges that evolve from constantly changing
conditions.
Chapter 1: Strategic Management and Strategic Competitiveness
1-1a 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.
Today, China is seen as an extremely competitive market in which local market-seeking
Teaching Note
The relative competitiveness of nations can be found in the World Economic Forum’s
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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Global competition has increased performance standards in many dimensions, including
quality, cost, productivity, product introduction time, and operational efficiency.
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?
• The “liability of foreignness” (i.e., the risk of competing internationally)
• Over-diversification beyond the firm’s ability to successfully manage operations in
multiple foreign markets
Teaching Note
Indicate that the risks that often accompany internationalization and strategies for
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
more intense. Some principles to consider include the following:
• Customers will continue to expect high levels of product quality at competitive prices.
Chapter 1: Strategic Management and Strategic Competitiveness
1-1b Technology and Technological Changes
Three technological trends and conditions are significantly altering the nature of
competition:
• Increasing rate of technological change and diffusion
Technologic Diffusion and Disruptive Technologies
Both the rate of change and the introduction of new technologies have increased greatly
over the last 15 to 20 years.
The shorter product life cycles that result from rapid diffusion of innovation often means
that products may be replicated within very short time periods, placing a competitive
premium on a firm’s ability to rapidly introduce new products into the marketplace. In
fact, speed-to-market may become the sole source of competitive advantage. In the
disclosed explicitly in a patent application.
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The Information Age
Changes in information technology have given firms all over the world, regardless of size,
rapid access to information. Consider the rapid growth in the following technologies:
personal computers (PCs), cellular phones, computers, personal digital assistants (PDAs),
artificial intelligence, virtual reality, and massive databases. These examples show how
information is used differently as a result of new technologies. The ability to access and
Increasing Knowledge Intensity
It is becoming increasingly apparent that knowledge—information, intelligence, and
expertise—is a critical organizational resource, and increasingly, a source of competitive
advantage. As a result,
• Many companies are working to convert the accumulated knowledge of employees into a
Chapter 1: Strategic Management and Strategic Competitiveness
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
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,
Teaching Note
Firms capable of rapidly and broadly applying what they learn achieve strategic
Two models describing key strategic inputs to a firm’s strategic actions—the Industrial
Organization (or externally focused) model and the Resource-Based (or internally
focused) model—are discussed next.
1-2 THE I/O MODEL OF ABOVE-AVERAGE RETURNS
Teaching Note
The recommended teaching strategy for this section is to first discuss the assumptions
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1. The external environment imposes pressures and constraints on firms that determine
strategies that will result in above-average returns. In other words, the external
environment pressures the firm to adopt strategies to meet that pressure while
simultaneously constraining or limiting the scope of strategies that might be appropriate
and eventually successful.
2. Most firms competing in an industry or in an industry segment control similar sets of
strategically relevant resources and thus pursue similar strategies. This assumption
According to the I/O model, which was a dominant paradigm from the 1960s through the
1980s, firms must pay careful attention to the structured characteristics of the industry in
which they choose to compete, searching for one that is the most attractive to the firm,
Chapter 1: Strategic Management and Strategic Competitiveness
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
characteristics of the external environment that will both determine and constrain the
firm’s strategic alternatives.
2. Locate an industry (or industries) with a high potential for returns based on the structural
4. Acquire or develop the critical resources—skills and assets—needed to successfully
implement the strategy that has been selected. A process for scrutinizing the internal
environment to identify the presence or absence of critical skills is discussed in Chapter
3. Skill-enhancement strategies, including training and development, are discussed in
Chapter 11.
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
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1-3 THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE
RETURNS
Teaching Note
The recommended teaching strategy for this section is similar to that suggested for the
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,
Capabilities are the capacity for a set of resources to perform, in combination, a task or
activity.
Teaching Note
Thus, according to the resource-based model, a firm’s resources and capabilities, found
in its internal environment, are more critical to determining the appropriateness of
Core competencies are resources and capabilities that serve as a source of competitive
advantage for a firm. Often related to functional skills, core competencies—when
developed, nurtured, and applied throughout a firm—may result in strategic
competitiveness.
Chapter 1: Strategic Management and Strategic Competitiveness
FIGURE 1.3
The Resource-Based Model of Above-Average Returns
The resource-based model of above-average returns is grounded in the uniqueness of a
firm’s internal resources and capabilities. The five-step model describes the linkages
between resource identification and strategy selection that will lead to above-average
returns.
1. Firms should identify their internal resources and assess their strengths and weaknesses.
The strengths and weaknesses of firm resources should be assessed relative to
competitors.
2. Firms should identify the set of resources that provide the firm with capabilities that are
Resources and capabilities can lead to a competitive advantage when they are valuable,
rare, costly to imitate, and non-substitutable.
• Resources are valuable when they support taking advantage of opportunities or
neutralizing external threats.
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1-4 VISION AND MISSION
Teaching Note
1-4a 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.
Vision statements:
• Reflect a firm’s values and aspirations
• Are intended to capture the heart and mind of each employee (and hopefully, many of its
other stakeholders)
• Our vision is to be the world’s best quick-service restaurant. (McDonald’s)
• To make the automobile accessible to every American (Ford’s vision when established by
Henry Ford)
The CEO is responsible for working with others to form the firm’s vision. However,