PART 1 STRATEGIC MANAGEMENT INPUTS CHAPTER 1 STRATEGIC

PART 1: STRATEGIC MANAGEMENT INPUTS CHAPTER 1: STRATEGIC MANAGEMENT & STRATEGIC COMPETITIVENESS Authored by: Marta Szabo White. Ph. D Georgia State University

THE STRATEGIC MANAGEMENT PROCESS FIGURE 1. 1 The Strategic Management Process © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

KNOWLEDGE OBJECTIVES ● Define strategic competitiveness, strategy, competitive advantage, aboveaverage returns, and the strategic management process. ● Describe the competitive landscape and explain how globalization and technological changes shape it. ● Use the industrial organization (I/O) model to explain how firms can earn aboveaverage returns. ● Use the resource-based model to explain how firms can earn above-average returns. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

KNOWLEDGE OBJECTIVES ● Describe vision and mission and discuss their value. ● Define stakeholders and describe their ability to influence organizations. ● Describe the work of strategic leaders. ● Explain the strategic management process. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPORTANT DEFINITIONS ● STRATEGIC COMPETITIVENESS achieved when a firm successfully formulates and implements a value-creating strategy ● STRATEGY - an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage ● COMPETITIVE ADVANTAGE - when a firm implements a strategy that creates superior value for customers; competitors are unable to duplicate it or find too costly to imitate it © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

IMPORTANT DEFINITIONS ● RISK - an investor’s uncertainty about the economic gains or losses that will result from a particular investment ● ABOVE-AVERAGE RETURNS - returns in excess of what an investor expects to earn from other investments with a similar amount of risk ● AVERAGE RETURNS - returns equal to those an investor expects to earn from other investments with a similar amount of risk © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

OPENING CASE ONCE A “GIANT, ” BORDERS BECAME A “WEAKLING” ON ITS KNEES INABILITY TO EARN AVERAGE RETURNS resulted first in decline and, eventually, failure BORDERS - OPENING CASE FAILURE EXAMPLE ●Enjoyed considerable success early on ●Tried to enrich its traditional approach with more marketing and more attractive stores, demonstrating a lack of market understanding ● Declining book sales for large chain store retailers ●Should have been entrepreneurial, innovative, and market-oriented © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE STRATEGIC MANAGEMENT PROCESS ■ FIRST: External environment and internal organization are analyzed to determine resources, capabilities, and core competencies—the sources of “strategic inputs. ” ■ NEXT: Vision and mission are developed; strategies are formulated. ■ THEN: Strategies are implemented with the goal of achieving strategic competitiveness and above-average returns. ■ DYNAMIC PROCESS: Continuously changing markets and industry conditions must match evolving strategic inputs. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE STRATEGIC MANAGEMENT PROCESS Rational: the approach firms use to achieve strategic competitiveness and earn above-average returns FORMULATION and IMPLEMENTATION: the two types of strategic actions that must be simultaneously integrated to successfully employ the strategic management process © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE STRATEGIC MANAGEMENT PROCESS PART I: STRATEGIC INPUTS xt e Th d e d i v is di ree th into rts. pa PART II: STRATEGIC ACTIONSSTRATEGY FORMULATION PART III: STRATEGIC ACTIONSSTRATEGY IMPLEMENTATION • Chapters 2, 3 Vision/Mission • Chapters 4, 5, 6, 7, 8 & 9 • Chapters 10, 11, 12 & 13 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE ■ GLOBALIZATION - emergence of a global economy ■ TECHNOLOGY - rapid technological changes ■ INDUSTRY BOUNDARIES BLURRING ■ EXAMPLES - computer networks and telecommunications have blurred the boundaries of the entertainment industry ■ MSNBC is co-owned by NBC Universal and Microsoft ■ General Electric owns 49 percent of NBC Universal and Comcast owns the remaining 51 percent ■ STRATEGIC MANAGEMENT PROCESS - effective use of the strategic management process reduces the likelihood of failure for firms as they encounter the conditions of today’s competitive © 2013 Cengage Learning. Alllandscape Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE ■ HYPERCOMPETITION - characterized by ■ Market instability and change ■ Rapidly escalating competition ■ Aggressive challengers ■ Strategic maneuvering to establish firstmover advantage ■ Technology industries ■ TWO DRIVERS - GLOBALIZATION - TECHNOLOGY ■ Strategic flexibility - important tool © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE THE GLOBAL ECONOMY ■ Goods, services, people, skills, and ideas move freely across geographic borders ■ New opportunities and challenges emerge ■ Competitive environments are broader and increasingly more complex © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE THE GLOBAL ECONOMY ■ The European Union has become one of the world’s largest markets, with 700 million potential customers ■ China has become the second largest economy in the world surpassing Japan ■ India, the world’s largest democracy, has an economy that now ranks as the fourth largest in the world © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE STRATEGIC FOCUS Huawei also needs Guanxi in the United States GUANXI ■ Strong relationships in which each party feels obligated to help the other ■ Key element of doing business in China ■ Building strong relationships is an important dimension of Chinese culture; Guanxi is also important when conducting business in the United States © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE THE GLOBAL ECONOMY ■ Hypercompetitive business environment challenges firms to reconsider which markets to compete in; this positioning is more critical than ever ■ GE - headquartered in the U. S. , yet up to 60% of its revenue growth through 2015 will be generated from rapidly developing economies such as China and India ■ Jeffrey Immelt - suggests that we have entered a new economic era in which the global economy will be more volatile and emerging economies such as Brazil, China, and India will be the major drivers of growth © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE THE MARCH OF GLOBALIZATION Globalization is increasing economic interdependence among countries and their organizations as reflected in the flow of goods and services, financial capital, and knowledge across country borders. Globalization is the product of a large number of firms competing against one another in an increasing number of global economies. Highly globalized firms must anticipate everincreasing complexities in their operations as goods, services, people, etc. move freely across geographic borders. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE THE MARCH OF GLOBALIZATION Globalization has led to higher performance standards in quality, cost, productivity, product introduction time, and operational efficiency. These standards translate and impact domesticonly firms as well. Free flow of resources among global economies, global sourcing for firms, global purchasing for customers, and a global forum for workers all serve as a key source of competitive advantage for firms. Firms must learn that in this twenty-first century competitive landscape, only firms capable of meeting, if not exceeding, global standards, have the capability to earn above-average returns. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE THE RISKS OF GLOBALIZATION Significant time is required for firms to learn how to compete in new markets, and performance may suffer during this time. With globalization, firms may overdiversify internationally, which can have strong negative effects on a firm’s overall performance. It is critical for firms competing globally to remain strategically committed to and competitive in both domestic and international markets. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES THREE CATEGORIES for TECHNOLOGY TRENDS Technology is significantly altering the nature of competition and enabling unstable competitive environments ■Technology Diffusion & Disruptive Technologies ■ Information Age ■ Increasing Knowledge Intensity © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 ■ Technology Diffusion – the speed at which new technologies become available and are used; has increased substantially over the past 15 to 20 year. ■ Examples of technology diffusion: How long it took to get the following into 25 percent of U. S. homes: ● Telephone — 35 years ● TV — 26 years ● Radio — 22 years ● PCs — 16 years ● Internet — 7 years © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Perpetual Innovation ■ Perpetual Innovation - describes how rapidly and consistently new, information-intensive technologies replace older ones ■ Competitive Premium - the shorter product life cycles resulting from rapid diffusions of new technologies place a competitive premium on being able to quickly introduce new, innovative goods and services ■ Competitive Advantage - speed to market with innovative products is a primary source of competitive advantage © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Perpetual Innovation ■ Innovations must be derived from an understanding of global standards and global expectations in terms of product functionality ■ Apple - an excellent example of radical innovation by a large established firm ■ Technology Diffusion - to diffuse the technology and enhance the innovation value, firms need to be innovative in incorporating the new technology into their product © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Perpetual Innovation ■ Rapid Technology Diffusion - now may take only 12 to 18 months for firms to gather information about research and development and product decisions for their competitors ■ Patents - may be an effective protection of proprietary technology in a small number of industries, e. g. , pharmaceuticals ■ Proprietary Strategies - many firms often do not apply for patents to prevent competitors from gaining access to the technological knowledge included in the patent application, e. g. , the electronics industry © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Disruptive Technologies ■ Disruptive Technologies - technologies that destroy the value of an existing technology and create new markets, many times representing radical or breakthrough innovation ■ Examples: i. Pods, i. Pads, Wi. Fi, and the browser ■ Industry Incumbents Harmed or Destroyed – a disruptive or radical technology creates a new industry, thereby destroying the existing industry; with superior resources, experience, and access to the new technology, some incumbents may be able to adapt © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Technology and Innovation Strategic Focus: Apple ■ Apple’s “legendary” market power, phenomenal growth rate, and impressive financial performance stem from its new technology development and innovation ■ Imitators - Apple is expected to retain at least 80% of the tablet computer market even with the many imitative products on the market ■ International- Apple’s stores in China handle 40, 000 people daily, four times the average flow of U. S. customers © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Technology Diffusion - Category 1 Technology and Innovation Strategic Focus: Apple ■ Versatility - Apple provides an example of technological entrepreneurship across multiple industries ■ Disruptive Technologies ● Innovation and industry transformation, e. g. , i. Pod, i. Pad, and the i. Phone ● i. Pod and the complementary i. Tunes have revolutionized how music is sold and used by consumers ● i. Pad, in conjunction with Amazon’s Kindle, is changing the publishing industry; moving to electronic books © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES The Information Age - Category 2 ■ Dramatic Changes - in information technology have occurred in recent years, e. g. , personal computers, cellular phones, artificial intelligence, virtual reality, massive databases, and multiple social networking sites ■ Competitive Advantage - the ability to effectively and efficiently access and use information has become an important source of competitive advantage in virtually all industries ■ Information Technology - enables small firms to be flexible and competitive in the global arena © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES The Information Age - Category 2 ■ Change - both the pace of change in information technology and its diffusion will continue to increase ■ Cost - the declining costs of information technologies and the increased accessibility to them are evident in the current competitive landscape ■ Internet - contributing factor to hypercompetition ■ Speed and Diffusion - the global proliferation of computers increases the speed and diffusion of information technologies and enables a level playing field © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity Category 3 ■ Knowledge - information, intelligence, and expertise are the basis of technology and its application ■ Competitive Advantage - in the 1980 s, the basis of competition shifted from hard assets to intangible resources; knowledge is a critical organizational resource and an increasingly valuable source of competitive advantage ■ Intangible Resource – knowledge gained through experience, observation, and inference is an intangible resource; the value of intangible resources is growing as a proportion of total shareholder value © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity Category 3 ■ Strategic Competitiveness - enhanced for the firm that develops the ability to capture intelligence, transform it into usable knowledge, and diffuse it rapidly throughout the firm ■ Competitive Advantage - firms must develop (e. g. , through training programs) and acquire (e. g. , by hiring educated and experienced employees) knowledge, integrate it into the organization to create capabilities, and then apply it to gain a competitive advantage © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity Category 3 ■ Knowledge Spillovers - knowledge falls into competitor’s hands, e. g. , hiring of professional staff/managers by competitors ■ Knowledge Diffusion - because of the potential for spillovers, firms must act quickly to use their knowledge in productive ways ■ Strategic Flexibility - facilitates knowledge diffusion to where it has value © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE COMPETITIVE LANDSCAPE TECHNOLOGY AND TECHNOLOGICAL CHANGES Increasing Knowledge Intensity Category 3 STRATEGIC FLEXIBILITY ■ Set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment ■ Enables the capacity to learn ■ Facilitates coping with hypercompetition, uncertainty, and risk ■ Firms should try to develop strategic flexibility in all areas of operations © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

TWO MODELS OF STRATEGIC DECISION MAKING Firms use two major models to help develop their vision and mission and then choose one or more strategies in pursuit of strategic competitiveness and above-average returns. EXTERNA L INTERNAL I/O MODEL RESOURC E-BASED MODEL © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE I/O MODEL OF ABOVE-AVERAGE RETURNS Grounded in economics, the I/O model has Four Underlying Assumptions First, the external environment is assumed to impose pressures and constraints that determine the strategies that would result in above-average returns. Second, 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. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE I/O MODEL of ABOVE-AVERAGE RETURNS Third, resources used to implement strategies are assumed to be highly mobile across firms, so any resource differences that might develop between firms will be short-lived. Fourth, organizational decision-makers are assumed to be rational and committed to acting in the firm’s best interests, as shown by their profitmaximizing behavior. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE I/O MODEL of ABOVEAVERAGE RETURNS The Five Forces Model of competition is an analytical tool used to help firms find the industry that is the most attractive, as measured by its profitability potential. The Five Forces Model suggests that an industry’s profitability (i. e. , its rate of return on invested capital relative to its cost of capital) is a function of interactions among the Five Forces: suppliers, buyers, rivalry, product substitutes, and potential entrants to the industry. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE I/O MODEL of ABOVE-AVERAGE RETURNS FIRMS CAN EARN ABOVE-AVERAGE RETURNS: ● Cost Leadership Strategy – producing standardized goods or services at costs below those of competitors ● Differentiation Strategy - producing differentiated goods or services for which customers are willing to pay a price premium The I/O model suggests that above-average returns are earned when firms are able to effectively study the external environment as the foundation for identifying an attractive industry and implementing the appropriate strategy. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE I/O MODEL OF ABOVE-AVERAGE RETURNS Research findings support the I/O model, in that approximately 20% of a firm’s profitability is explained by the industry in which it chooses to compete. However, this research also shows that 36% of the variance in firm profitability can be attributed to the firm’s characteristics and actions. These findings suggest that the External AND Internal environments influence the company’s ability to achieve strategic competitiveness and earn above-average returns. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE I/O MODEL OF ABOVE-AVERAGE RETURNS FIGURE 1. 2 The I/O Model of Above Average Returns © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS The resource-based model assumes that each organization is a collection of unique resources and capabilities. The uniqueness of its resources and capabilities is the basis of a firm’s strategy and its ability to earn above-average returns. The core assumption of the resource-based model is that the firm’s unique resources, capabilities, and core competencies have more influence on selecting and using strategies than does the firm’s external environment. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS There are FOUR components to the Resource- Based Model: ● Resources ● Capabilities ● Core Competencies ● Competitive Advantage There are FOUR criteria that if resources and capabilities fulfill, then they become Core Competencies: ● Valuable ● Rare ● Costly to Imitate ● Nonsubstitutable © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS • Resources are inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers. • A firm’s resources are either tangible or intangible and are classified into three categories: physical, human, and organizational capital. • Resources alone may not yield a competitive advantage. Many resources can either be imitated or substituted over time, therefore, it is difficult to achieve and sustain a competitive advantage based on resources alone. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE RESOURCE-BASED MODEL of ABOVE-AVERAGE RETURNS A capability is the capacity for a set of resources to perform a task or an activity in an integrative manner. KEY WORD: INTEGRATIVE Capabilities evolve over time and must be managed dynamically in pursuit of above-average returns. Core competencies are resources and capabilities that serve as a source of competitive advantage. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS When these four criteria are met, resources and capabilities become core competencies: VALUABLE • They are valuable when they allow a firm to take advantage of opportunities or neutralize threats. RARE • They are rare when possessed by few, if any, current and potential competitors. COSTLY TO IMITATE NONSUBSTITUTABLE • Resources are costly to imitate when other firms cannot obtain them or are at a cost disadvantage. • They are nonsubstitutable when they have no structural equivalents. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS Four Underlying Assumptions First, differences in firms’ performances across time are due primarily to their unique resources and capabilities rather than the industry’s structural characteristics. Second, firms acquire different resources and develop unique capabilities based on how they combine and use the resources. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE RESOURCE-BASED MODEL of ABOVE-AVERAGE RETURNS Third, that resources and capabilities are NOT highly mobile across firms. Fourth, that the differences in resources and capabilities are the basis of competitive advantages. Above-average returns are earned when the firm uses its valuable, rare, costly-to-imitate, and non- substitutable resources and capabilities to compete against its rivals in one or more industries. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS FIGURE 1. 3 The Resource. Based Model of Above Average Returns © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

TWO MODELS OF STRATEGIC DECISION MAKING Evidence indicates that both models yield insights that are linked to successfully selecting and using strategies. EXTERNA L INTERNAL I/O MODEL RESOURC E-BASED MODEL © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

VISION • Vision is a picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve. • A vision statement is short and concise, making it easy to remember. • It articulates the ideal description of the organization and gives shape to its intended future. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

VISION • A firm’s vision tends to be enduring, whereas its mission can change in light of changing environmental conditions. • vision statements reflect a firm’s values and aspirations and are intended to capture the heart and mind of each stakeholder. • Executives and top-level managers must formulate and implement strategies consistent with the vision. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

VISION Examples: Our vision is to be the world’s best quick service restaurant. (Mc. Donald’s) To make the automobile accessible to every American. (Ford Motor Company’s vision when established by Henry Ford) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MISSION • The vision is the foundation for the firm’s mission. • The firm’s mission is more concrete than its vision. • A mission specifies the business or businesses in which the firm intends to compete and the customers it intends to serve. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MISSION Examples: Be the best employer for our people in each community around the world and deliver operational excellence to our customers in each of our restaurants. (Mc. Donald’s) Our mission is to be recognized by our customers as the leader in applications engineering. We always focus on the activities customers desire; we are highly motivated and strive to advance our technical knowledge in the areas of material, part design, and fabrication technology. (LNP, a GE Plastics Company) © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MISSION • Similar to the vision, a mission should establish a firm’s individuality and should be inspirational to all stakeholders. • A firm’s vision and mission are critical aspects of the strategic inputs required to engage in strategic actions that help achieve strategic competitiveness and earn aboveaverage returns. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

VISION, MISSION AND ETHICS The probability of forming an effective mission increases when employees have a strong sense of the ethical standards that guide their behaviors. Business ethics are a vital part of: ●VISION ●MISSION • Deciding what a firm wants to become • Deciding who it intends to serve and how it wants to serve those individuals and groups © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STAKEHOLDERS Are there individuals, groups, and organizations who have a stake in the organization ● Who can affect the firm’s vision and mission? ● Are affected by the strategic outcomes achieved? ● Have enforceable claims on the firm’s performance? Competitive Advantage Firms effectively managing stakeholder relationships outperform those that do not. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STAKEHOLDERS • Organizations are not equally dependent on all stakeholders, so not every stakeholder has the same level of influence. • The more critical and valued a stakeholder’s participation, the greater a firm’s dependence on it, which gives the stakeholder more potential influence over the firm. • Managers must find ways to accommodate or insulate the organization from the demands of stakeholders controlling critical resources. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CLASSIFICATION OF STAKEHOLDERS Three groups of stakeholders: Capital market stakeholders ● Shareholders and the major suppliers of a firm’s C capital Product market stakeholders ● A firm’s primary customers, suppliers, host communities, and unions representing the workforce Organizational stakeholders ● Firm’s employees, including both non-managerial and managerial personnel © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CLASSIFICATION OF STAKEHOLDERS FIGURE 1. 4 The Three Stakeholder Groups © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CLASSIFICATION OF STAKEHOLDERS Trade-offs must be made in situations where the objectives of various stakeholder groups differ or conflict. Conflict examples: ● Shareholders – individuals and groups who have invested capital in a firm in the expectation of earning a positive return on their investments. These stakeholders’ rights are grounded in laws governing private property and private enterprise. ● Consumers – interests are maximized when the quality and reliability of a firm’s products are improved, but without high prices. ● High returns to customers might come at the expense of lower returns for capital market stakeholders and vice -versa. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MANAGING STAKEHOLDER CONFLICT • First, a firm must thoroughly identify and understand all important stakeholders. • Second, it must prioritize them, in case it cannot satisfy all of them. • Power is the most critical criterion in prioritizing stakeholders. • Other criteria might include the urgency of satisfying each particular stakeholder group and the degree of importance of each to the firm’s above-average returns. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ST A ER KEH OL PR D IOR ITI ES MANAGING STAKEHOLDER CONFLICT POWER URGENCY IMPORTANC E © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

MANAGING STAKEHOLDER CONFLICT CHALLENGES: When earning above-average returns, a firm can more easily satisfy multiple stakeholders simultaneously. When earning only average returns, a firm is unable to maximize the interests of all stakeholders, thus stakeholders should be at least minimally satisfied. Cultural differences and societal values also influence stakeholder priorities. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CAPITAL MARKET STAKEHOLDERS BALANCING CONFLICTING SHAREHOLDER GOALS The returns that shareholders expect are commensurate with the degree of risk accepted with those investments. CHALLENGING FOR MANAGERS: ● Some shareholders want short-term increases in returns ● Others desire building long-term competitiveness Often large shareholders prefer that the firm minimize its use of debt because of the risk of debt, its cost, and the possibility that debt holders have first call over shareholders on the firm’s assets in case of default. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

PRODUCT MARKET STAKEHOLDERS • Though all product market stakeholders are important, without customers, the other product market stakeholders are of little value. • Customers demand reliable products at the lowest possible prices. • Host communities want companies willing to be long-term employers and providers of tax revenue without placing excessive demands on public support services. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

PRODUCT MARKET STAKEHOLDERS • Suppliers seek loyal customers who are willing to pay the highest sustainable prices for the goods and services they receive. • Union officials are interested in secure jobs, under highly desirable working conditions, for the employees they represent. • 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 goals of product market stakeholders. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ORGANIZATIONAL STAKEHOLDERS • Employees expect the firm to provide a dynamic, stimulating, and rewarding work environment. • Employees are usually satisfied working for a company that is: ● Growing ● Actively developing their skills to be effective team members ● Meeting or exceeding global work standards © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

ORGANIZATIONAL STAKEHOLDERS • International assignments help cultivate employee skills for the global competitive landscape. • The process of managing expatriate employees and helping them build knowledge can have significant effects on a firm’s global competence. • To be successful, strategic leaders must effectively leverage a firm’s human capital. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC LEADERS • Strategic leaders are people located in different areas and levels of the firm using the strategic management process to select strategic actions that help the firm achieve its vision and fulfill its mission. • Successful strategic leaders are decisive, committed to nurturing those around them, and are committed to helping the firm create value for all stakeholder groups. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC LEADERS Increasingly, CEOs delegate strategic responsibilities to include decision-makers closest to the action due to the changing competitive landscape: The global economy • Globalization • Rapid technological change • Increasing importance of knowledge • People as sources of competitive advantage © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

STRATEGIC LEADERS AND ORGANIZATIONAL CULTURE • Visionary Strategic Leaders emphasize not only maximizing shareholder wealth, but maximizing the interests of all stakeholders, underscoring a civic and personal commitment to corporate citizenship. • Organizational culture affects strategic leaders and their work. In turn, strategic leaders’ decisions and actions shape a firm’s culture. • Organizational culture is the social energy that drives—or fails to drive—the organization, the ideologies, symbols, and shared core values. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE WORK OF EFFECTIVE STRATEGIC LEADERS SUCCESSFUL STRATEGIC LEADERSHIP CHARACTERISTICS • Hard working ● Embraces dynamic competitive landscape • Brutally honest • Tenacious • Penchant for wanting the firm and its people to accomplish more • Strong strategic orientation © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

THE WORK OF EFFECTIVE STRATEGIC LEADERS SUCCESSFUL STRATEGIC LEADERSHIP CHARACTERISTICS • Innovative thinker • Exploratory learning of new and unique forms of knowledge • Exploitative learning, which adds incremental knowledge to existing knowledge bases • Global mindset • Dreams that challenges and energizes a company, i. e. , vision © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.