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Strategic Management 6e. - Hitt, Hoskisson, and Ireland

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Chapter 1
Strategic
Management and
Strategic
Competitiveness
PowerPoint slides by:
R. Dennis Middlemist
Colorado State University
Copyright В© 2004 South-Western
All rights reserved.
Knowledge Objectives
• Studying this chapter should provide you
with the strategic management knowledge
needed to:
пѓ� Define strategic competitiveness competitive
advantage, and above-average returns.
пѓ� Describe the 21st-century competitive landscape
and explain how globalization and technological
changes shape it.
пѓ� Use the industrial organization (I/O) model to
explain how firms can earn above-average
returns.
Copyright В© 2004 South-Western. All rights reserved.
1–2
Knowledge Objectives (cont’d)
• Studying this chapter should provide you
with the strategic management knowledge
needed to:
пѓ� Use the resource-based model to explain how
firms can earn above-average returns.
пѓ� Describe strategic intent and strategic mission
and discuss their value.
пѓ� Define stakeholders and describe their ability to
influence organizations.
пѓ� Describe the work of strategic leaders.
пѓ� Explain the strategic management process.
Copyright В© 2004 South-Western. All rights reserved.
1–3
Definitions
• Strategic Competitiveness
пѓ� When a firm successfully formulates and
implements a value-creating strategy
• Sustainable Competitive Advantage
пѓ� When competitors are unable to duplicate a
company’s value-creating strategy
• Strategic Management Process
пѓ� The full set of commitments, decisions, and
actions required for a firm to achieve strategic
competitiveness and earn above-average returns
Copyright В© 2004 South-Western. All rights reserved.
1–4
Definitions (cont’d)
• Risk
� An investor’s uncertainty about the economic
gains or losses that will result from a particular
investment
• Average Returns
пѓ� Returns equal to those an investor expects to
earn from other investments with a similar
amount of risk
• Above-average Returns
пѓ� Returns in excess of what an investor expects to
earn from other investments with a similar
amount of risk
Copyright В© 2004 South-Western. All rights reserved.
1–5
The Strategic
Management
Process
Figure 1.1
Copyright В© 2004 South-Western. All rights reserved.
Copyright В© 2004 South-Western. All rights reserved.
1–6
Current Competitive Landscape
• A Perilous Business World
пѓ� Investments required to compete on a global
scale are enormous
пѓ� Consequences of failure are severe
• Important Elements of Success
пѓ� Developing strategy
пѓ� Implementing strategy
Copyright В© 2004 South-Western. All rights reserved.
1–7
Competitive Landscape
Strategic maneuvering
among global and
innovative
combatants
Global
economy
Rapid
technological
change
Copyright В© 2004 South-Western. All rights reserved.
1–8
Competitive Landscape: Hypercompetition
Hypercompetition
A condition of rapidly escalating
competition based on
• Price-quality positioning
Hypercompetition
• Competition to create
new know-how and
establish first-mover
advantage
• Competition to protect or
invade established
product or geographic
markets
Copyright В© 2004 South-Western. All rights reserved.
1–9
Global Economy
• Global Economy
пѓ� Goods, people, skills, and ideas move freely
across geographic borders
пѓ� Movement is relatively unfettered by artificial
constraints
� Expansion into global arena complicates a firm’s
competitive environment
Copyright В© 2004 South-Western. All rights reserved.
1–10
Global Economy (cont’d)
• Globalization
пѓ� Increased economic interdependence among
countries as reflected in the flow of goods and
services, financial capital, and knowledge across
country borders
пѓ� Increased range of opportunities for companies
competing in the 21st-century competitive
landscape
Copyright В© 2004 South-Western. All rights reserved.
1–11
Country Competitiveness Rankings (Population over 20 Million)
Country
United States
Australia
Canada
Malaysia
Germany
Taiwan
United Kingdom
France
Spain
Thailand
Japan
China
Brazil
China
Korea
2002
2003
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
2
3
2
6
4
7
5
9
8
10
11
12
0
0
10
SOURCE: From World Competitiveness Yearbook 2003, IMD, Switzerland.
http://www.imd.ch.wcy.esummary, April. Reprinted by permission.
Copyright В© 2004 South-Western. All rights reserved.
Country
Colombia
Italy
South Africa
India
India
Brazil
Philippines
Romania
Mexico
Turkey
Russia
Poland
Indonesia
Argentina
Venezuela
2002
2003
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
20
14
16
0
17
15
18
0
19
23
21
22
25
26
24
Table 1.1
1–12
Technology and Technological Changes
• Rate of change of technology and speed at
which new technologies become available
� Perpetual innovation—how rapidly and
consistently new, information-intensive
technologies replace older ones
пѓ� The development of disruptive technologies that
destroy the value of existing technology and
create new markets
Copyright В© 2004 South-Western. All rights reserved.
1–13
Technological Change
• The Information Age
пѓ� The ability to effectively and efficiently access
and use information has become an important
source of competitive advantage
пѓ� Technology includes personal computers,
cellular phones, artificial intelligence, virtual
reality, massive databases, electronic networks,
internet trade
Copyright В© 2004 South-Western. All rights reserved.
1–14
Technological Changes
• Increasing Knowledge Intensity
пѓ� Strategic flexibility: set of capabilities used to
respond to various demands and opportunities
in dynamic and uncertain competitive
environments
пѓ� Organizational slack: slack resources that allow
the firm flexibility to respond to environmental
changes
пѓ� Capacity to learn
Copyright В© 2004 South-Western. All rights reserved.
1–15
I/O Model of Above-Average Returns
• The industry in which a firm competes has a
stronger influence on the firm’s performance
than do the choices managers make inside
their organizations
пѓ� Industry properties include
пЃ¶ economies of scale
пЃ¶ barriers to market entry
пЃ¶ diversification
пЃ¶ product differentiation
пЃ¶ degree of concentration of firms in the industry
Copyright В© 2004 South-Western. All rights reserved.
1–16
Four Assumptions of the I/O Model
1
External environment imposes pressures and
constraints that determine strategies leading to
above-average returns
2
Most firms competing in an industry control similar
strategically relevant resources and pursue similar
strategies
3
Resources used to implement strategies are
highly mobile across firms
4
Organizational decision makers are assumed to be
rational and committed to acting in the firm’s best
interests (profit-maximizing)
Copyright В© 2004 South-Western. All rights reserved.
1–17
I/O Model of Above-Average Returns
External Environments
General
Environment
1. Strategy dictated by the
external environment of
the firm (what
opportunities exist in
these environments?)
2. Firm develops internal
skills required by
external environment
(what can the firm do
about the
opportunities?)
Copyright В© 2004 South-Western. All rights reserved.
1–18
The External
Environment
The I/O Model of
Above-Average Returns
1. Study the external
environment, especially the
industry environment
• The general environment
• The industry environment
• The competitor environment
Adapted from Figure 1.2
Copyright В© 2004 South-Western. All rights reserved.
1–19
The External
Environment
An Attractive
Industry
The I/O Model of
Above-Average Returns
2. Locate an attractive
industry with a high
potential for aboveaverage returns
• An industry whose
structural characteristics
suggest above-average
returns
Adapted from Figure 1.2
Copyright В© 2004 South-Western. All rights reserved.
1–20
The External
Environment
An Attractive
Industry
Strategy
Formulation
The I/O Model of
Above-Average Returns
3. Identify the strategy called for
by the attractive industry to
earn above-average returns
• Selection of a strategy
linked with aboveaverage returns in a
particular industry
Adapted from Figure 1.2
Copyright В© 2004 South-Western. All rights reserved.
1–21
The External
Environment
An Attractive
Industry
Strategy
Formulation
Assets and Skills
The I/O Model of
Above-Average Returns
4. Develop or acquire assets
and skills needed to
implement the strategy
• Assets and skills
required to implement a
chosen strategy
Adapted from Figure 1.2
Copyright В© 2004 South-Western. All rights reserved.
1–22
The External
Environment
An Attractive
Industry
Strategy
Formulation
Assets and Skills
Strategy
Implementation
The I/O Model of
Above-Average Returns
5. Use the firm’s strengths
(its developed or acquired
assets and skills) to
implement the strategy
• Selection of strategic
actions linked with
effective implementation
of the chosen strategy
Adapted from Figure 1.2
Copyright В© 2004 South-Western. All rights reserved.
1–23
The External
Environment
The I/O Model of
Above-Average Returns
An Attractive
Industry
Strategy
Formulation
Assets and Skills
Strategy
Implementation
Superior Returns
Copyright В© 2004 South-Western. All rights reserved.
• Superior returns: earning
of above-average returns
Adapted from Figure 1.2
1–24
Five Forces Model of Competition
• An industry’s profitability results from
interaction among
пѓ� Suppliers
пѓ� Buyers
пѓ� Competitive rivalry among firms currently in the
industry
пѓ� Product substitutes
пѓ� Potential entrants to the industry
Copyright В© 2004 South-Western. All rights reserved.
1–25
Five Forces Model of Competition (cont’d)
• Firms earn above average returns by
пѓ� Producing standardized products or services
пѓ� Manufacturing differentiated products for which
customers are willing to pay a price premium
Copyright В© 2004 South-Western. All rights reserved.
1–26
Resource-Based Model of Above-Average
Returns
• Each organization is a collection of unique
resources and capabilities that provides the
basis for its strategy and that is the primary
source of its returns
• Capabilities evolve and must be managed
dynamically
Copyright В© 2004 South-Western. All rights reserved.
1–27
Resource-Based Model of Above-Average
Returns (cont’d)
• Differences in firms’ performances are due
primarily to their unique resources and
capabilities rather than structural
characteristics of the industry
• Firms acquire different resources and
develop unique capabilities
Copyright В© 2004 South-Western. All rights reserved.
1–28
Resource-Based Model of Above-Average
Returns (cont’d)
Firm’s Resources
1. Strategy dictated by the
firm’s unique resources
and capabilities
2. Find an environment in
which to exploit these
assets (where are the
best opportunities?)
Copyright В© 2004 South-Western. All rights reserved.
1–29
Resources and Capabilities
• Capabilities
• Resources
� Inputs into a firm’s
production process
пЃ¶ Capital
equipment
пЃ¶ Skills
of individual
employees
пЃ¶ Patents
пЃ¶ Finances
пЃ¶ Talented
managers
Copyright В© 2004 South-Western. All rights reserved.
пѓ� Capacity of a set of
resources to perform
in an integrative
manner
пѓ� A capability should
not be
пЃ¶ So simple that it is
highly imitable
пЃ¶ So complex that it
defies internal
steering and
control
1–30
The Resource-Based Model of
Above-Average Returns
Resources
1. Identify the firm’s resources.
Study its strengths and
weaknesses compared with
those of competitors
• Inputs into a firm’s
production process
Adapted from Figure 1.3
Copyright В© 2004 South-Western. All rights reserved.
1–31
The Resource-Based Model of
Above-Average Returns
Resources
Capability
2. Determine the firm’s
capabilities. What do the
capabilities allow the firm to
do better than its competitors.
• Capacity of an integrated
set of resources to
integratively perform a
task or activity
Adapted from Figure 1.3
Copyright В© 2004 South-Western. All rights reserved.
1–32
The Resource-Based Model of
Above-Average Returns
Resources
Capability
Competitive
Advantage
3. Determine the potential of the
firm’s resources and
capabilities in terms of a
competitive advantage.
• Ability of a firm to
outperform its rivals
Adapted from Figure 1.3
Copyright В© 2004 South-Western. All rights reserved.
1–33
The Resource-Based Model of
Above-Average Returns
Resources
Capability
Competitive
Advantage
An Attractive
Industry
4. Locate an attractive
industry.
• An industry with
opportunities that can
be exploited by the
firm’s resources and
capabilities
Adapted from Figure 1.3
Copyright В© 2004 South-Western. All rights reserved.
1–34
The Resource-Based Model of
Above-Average Returns
Resources
Capability
Competitive
Advantage
An Attractive
Industry
Strategy
Implementation
5. Select a strategy that best
allow the firm to utilize its
resources and capabilities
relative to opportunities in
the external environment.
• Strategic actions taken to
earn above-average
returns
Adapted from Figure 1.3
Copyright В© 2004 South-Western. All rights reserved.
1–35
The Resource-Based Model of
Above-Average Returns
Resources
Capability
Competitive
Advantage
An Attractive
Industry
Strategy
Implementation
Superior Returns
Copyright В© 2004 South-Western. All rights reserved.
• Superior returns: earning
of above-average returns
Adapted from Figure 1.3
1–36
Key Criteria of Resources and Capabilities
Valuable
пѓ� Resources and capabilities are valuable when
they allow a firm to take advantage of
opportunities or neutralize threats in external
environment
• Rare
пѓ� Resources and capabilities are rare when
possessed by few, if any, current and potential
competitors
Copyright В© 2004 South-Western. All rights reserved.
1–37
Key Criteria of Resources and Capabilities
• Costly to Imitate
пѓ� Resources and capabilities are costly to imitate
when other firms either cannot obtain them or
are at a cost disadvantage in obtaining them
• Nonsubstitutable
пѓ� Resources and capabilities are nonsubstitutable
when they have no structural equivalents
Copyright В© 2004 South-Western. All rights reserved.
1–38
Core Competencies
• When the four key criteria of resources and
capabilities are met, they become core
competencies
• Core competencies serve as a source of
competitive advantage
• Managerial competencies are especially
important
Copyright В© 2004 South-Western. All rights reserved.
1–39
How Resources and Capabilities Provide
Competitive Advantage
Valuable Allow the firm to exploit opportunities or
neutralize threats in its external environment
Rare Possessed by few, if any, current and
potential competitors
Costly to imitate When other firms cannot obtain them or
must obtain them at a much higher cost
Nonsubstitutable The firm is organized appropriately to obtain
the full benefits of the resources in order to
realize a competitive advantage
Copyright В© 2004 South-Western. All rights reserved.
1–40
Resources and Capabilities, Core
Competencies, and Outcomes
Valuable
Core
Competencies
Rare
Competitive
Advantage
Costly to Imitate
Value Creation
Nonsubstitutable
Above Average
Returns
Copyright В© 2004 South-Western. All rights reserved.
1–41
Strategic Intent
• Internally focused
• The leveraging of a firm’s resources,
capabilities and core competencies to
accomplish the firm’s goals
• Exists when all employees and levels of a
firm are committed to the pursuit of a
specific, significant performance criterion
Copyright В© 2004 South-Western. All rights reserved.
1–42
Strategic Mission
• Externally focused
• A statement of a firm’s unique purpose and
the scope of its operations in product and
market terms
� Establishes a firm’s individuality and is inspiring
and relevant to all stakeholders
� Provides general descriptions of the firm’s
intended products and its markets
Copyright В© 2004 South-Western. All rights reserved.
1–43
Stakeholders
• Individuals and groups who can affect, and
are affected by, the strategic outcomes
achieved and who have enforceable claims
on a firm’s performance
• Claims are enforced by the stakeholder’s
ability to withhold essential participation
Copyright В© 2004 South-Western. All rights reserved.
1–44
The Three
Stakeholder
Groups
Figure 1.4
Copyright В© 2004 South-Western. All rights reserved.
1–45
Capital Market Stakeholders
• Shareholders and lenders expect the firm to
preserve and enhance the wealth they have
entrusted to it
• Returns should be commensurate with the
degree of risk to the shareholder
Copyright В© 2004 South-Western. All rights reserved.
1–46
Product Market Stakeholders
• Customers
пѓ� Demand reliable products at low prices
• Suppliers
пѓ� Seek loyal customers willing to pay highest
sustainable prices for goods and services
• Host communities
пѓ� Want companies willing to be long-term
employers and providers of tax revenues while
minimizing demands on public support services
• Union officials
пѓ� Want secure jobs and desirable working
conditions
Copyright В© 2004 South-Western. All rights reserved.
1–47
Organizational Stakeholders
• Employees
пѓ� Expect a dynamic, stimulating and rewarding
work environment
пѓ� Are satisfied by a company that is growing and
actively developing their skills
Copyright В© 2004 South-Western. All rights reserved.
1–48
Stakeholder Involvement
• Two issues affect the extent of stakeholder
involvement in the firm
пѓ� How to divide returns
to keep stakeholders
involved?
пѓ� How to increase
Organizational
returns so everyone
has more to share?
Capital
Market
Product
Market
Copyright В© 2004 South-Western. All rights reserved.
1–49
Strategic Leaders
• People responsible for the design and
execution of strategic management
processes
• Decisions they make include
пѓ� How resources will be developed or acquired
пѓ� At what price resources will be obtained
пѓ� How resources will be used
Copyright В© 2004 South-Western. All rights reserved.
1–50
Organizational Culture
• The complex set of
пѓ� Ideologies
пѓ� Symbols
пѓ� Core values
that are shared throughout the firm,
that influence how the firm conducts
business
Copyright В© 2004 South-Western. All rights reserved.
1–51
Mapping an Industry’s Profit Pools
• Define the pool’s boundaries
• Estimate the pool’s overall size
• Estimate the size of the value-chain activity
in the pool
• Reconcile the calculations
Copyright В© 2004 South-Western. All rights reserved.
1–52
Strategic Management Process
• Study the external and internal environments
• Identify marketplace opportunities and threats
• Determine how to use core competencies
• Use strategic intent to leverage resources,
capabilities and core competencies and win
competitive battles
• Integrate formulation and implementation of
strategies
• Seek feedback to improve strategies
Copyright В© 2004 South-Western. All rights reserved.
1–53
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