Session 2:

An Overview of Strategic Management

Introduction
In many industries, persistent performance differences exist among seemingly similar enterprises.

6.75

4.25
3.75

General Dynamics

3.25

Textron
2.75
2.25
1.75
1.25

Market-to-Book Ratio

Market-to-Book Ratio

6.25
5.75

Texas Instruments

5.25
4.75
4.25
3.75

Intel

3.25
2.75
2.25
1.75

2011

2012

2013

Year

2014

2015

2016

2011

2012

2013

Year

2014

2015

2016

Introduction

Strategic management as a
research discipline

Why do some firms

outperform others ?

What Is Strategy?

Porter (1986):
Strategy is a combination of the ends (goals) for which the firm is striving and the
means (policies) by which it is seeking to get there.

Competitive strategy is about being different. It means deliberately choosing a different set
of activities to deliver a unique mix of value.

The Frameworks for Competitive Positioning

Developing mission,
vision, and objectives
Analyzing external
environment

Analyzing internal
environment

Defining the strategies

Implementing the
strategies

Feedback
Evaluating and
controlling the
strategies

The Frameworks for Competitive Positioning

Any organization strategy that you develop

needs to include gaining a through understanding
of the external environment that the organization
is operating in as well as the company's strengths
and weaknesses.

Porters five forces analysis

(Porter 1979)

Resource-based view of the firm

(Wernerfelt 1984; Barney 1991 )

Porters Five Forces Analysis

Porters Five Forces

Competition is often looked at too narrowly by

managers as they primarily focus on their direct
competitors.
Yet apart from direct rivalry, other forces
including threat of entry, threat of substitution,
and bargaining power of buyers and suppliers
play substantial roles in shaping competition in
each industry.
All five competitive forces jointly determine the
intensity of industry competition and profitability,
and the strongest force or forces become crucial
from the point of view of strategy formulation.

Suppliers
bargaining power

Threat of
entry

Rivalry among
existing competitors

Bargaining power of
buyers

Threat of
substitution

1- Rivalry Among Existing Competitors

The intensity of rivalry refers to the extent to which

firms in an industry respond to each others
competitive moves to impose their positions, obtain
advantage, and gain market share. Rivalry occurs
because one (or more competitors) either feels the
pressure or sees the opportunity to improve
position. In most industries, competitive moves by
one firm have noticeable effects on its competitors
and thus may incite retaliation or efforts to counter
the move; that is, firms are mutually dependent.
Intense rivalry increases as a result of
numerous or equally balanced competitors,
slow industry growth,
product commoditization,
low switching costs.

1- Rivalry Among Existing Competitors (continued)

Rivalry among existing competitors typically manifests itself in price competition,
advertising battles, product introductions, and increased customer service or warranties.

Some forms of competition, notably price competition, are highly unstable and quite likely
to leave the entire industry worse off from the standpoint of profitability. Price cuts are
quickly and easily matched by rivals, and once matched they lower revenues for all firms.
Advertising battles, on the other hand, may well expand demand or enhance the level of
product differentiation in the industry for the benefit of all firms.

2- Threat Of Entry

Threat of entry refers to the ease with which new

players can enter to the industry. New entrants to
an industry bring new capacity, the desire to gain
market share, and often substantial resources.
Prices can be bid down or incumbents' costs
inflated as a result, reducing profitability. The
threat of entry into an industry depends on:
the barriers to entry that are present,
the reaction from existing competitors that
the entrant can expect.

2- Threat Of Entry (continued)

Barriers to entry
Capital requirements: The need to invest large financial resources in order to compete
creates a barrier to entry, particularly if the capital is required for risky or unrecoverable
up-front advertising or research and development (R&D).
Product differentiation: If incumbents in a market benefit from brand identification and
customer loyalty, entrants are forced to substantially invest in differentiating their
offerings to obtain market share.
Switching costs: If the costs of switching from one supplier's product to another's are
high, then new entrants must offer a major improvement in cost or performance in order
to persuade customers to switch from their current suppliers.
Incumbents reactions: Established firms with substantial resources to fight back,
including excess cash and unused borrowing capacity are more likely to retaliate to entry.
Takeovers and predatory pricing are examples of actions taken by incumbents to deter
entry.

3- Threat of Substitution
Substitute products/services tend to have a common application and context of use such that one
product/service can replace the other in usage and satisfy the same needs (Aaker and Keller 1990).
The presence of readily available and competitively priced substitutes limits the potential returns of an
industry by placing a ceiling on the prices firms can profitably charge. The impact of substitutes can
be summarized as the industry's overall elasticity of demand.

4- Bargaining Power of Buyers

Bargaining power of buyers reflects customers ability to negotiate lower prices, higher quality, or more services,
all at the expense of industry profitability. Buyer power is high if:
customers typically purchase large volumes relative to suppliers sales;
the purchased products represent a significant fraction of the customers costs;
products are highly standardized (i.e., substitutes are readily available);
or switching costs are low.

5- Bargaining Power of Suppliers

Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the
quality of purchased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry.
Supplier power is high if:
it is dominated by a few companies and is more concentrated than the industry it sells to. Suppliers selling to
more fragmented buyers will usually be able to exert considerable influence in prices, quality, and terms.

the supplier group's products are differentiated or it has built up switching costs. Differentiation or switching
costs facing the buyers cut off their options to play one supplier against another. If the supplier faces
switching costs the effect is the reverse.

The Resource-Based View (RBV) of the Firm

RBV Framework

Porters strategic development process starts by looking at the relative position of a firm in a specific
industry. This is, we start by considering the firms environment and then try to assess what strategy is the
one that may maximize the firms performance.
The RBV, by contrast, can be seen as an inside-out process of strategy formulation. The RBV is a business
management tool used to determine the strategic resources available to a company. When the external
environment is subject to rapid change, internal resources and capabilities offer a more secure basis for
strategy than market focus. The RBV states that firms possess idiosyncratic bundles of resources, even if
they operate within the same industry. This heterogeneity in resources implies that some firms are more
skilled in performing certain tasks, because they access valuable, rare, inimitable, and non-substitutable
resources (Peteraf and Barney 2003). Due to difficulty of trading these unique resources across firms, their
benefits persist over time (Barney and Hesterly 2012). Deploying valuable resources that are rare and costly
to imitate enables firms to generate sustainable competitive advantage (Barney and Clark 2007).

RBV Framework (continued)

The resource-based view of the firm (RBV) provides an important framework for explaining and
predicting the basis of a firms competitive advantage and performance.
Resources
Identify and classify the firms resources, and assess their
effectiveness relative to competitors. Identify opportunities
for better utilization of resources.
Capabilities
Identify the firms capabilities, or its capacity in deploying
these resources to accomplish an activity or achieve a desired
outcome. Identify the resources inputs to each capability
Competitive Advantages:
Appraise the rent-generating potential of capabilities in terms
of creating sustainable competitive advantage and the
appropriability of their returns.
Strategy
Select the strategy which best exploits the firms capabilities
relative to the external environment.

Identify resource gaps. Invest in

upgrading and augmenting the firms
resource base.

Resources
According to the RBV, a firms resources are the stocks of available economic or productive factors owned or
controlled by the firm. Resources can be classified into two broad categories:

Tangible resources that include physical assets such as real estate,

production facilities, raw materials, vehicles, and inventory, among
others. Tangible resources are the easiest to value, and often are the only
resources that appear on a firms balance sheet.

Intangible resources that include assets like brand names, patents,

organizational culture, and technological knowledge. These assets often
play an important role in creating sustainable competitive advantage and
firm value.

Capabilities
Capabilities refer to a firms capacity to deploy and coordinate different resources, usually in
combination, using organizational processes, to accomplish an activity or achieve a desired outcome
(Amit & Shoemaker, 1993). They are information-based, intrinsically intangible processes that are
firm specific and are developed over time through complex interactions among the firms resources.
They can abstractly be thought of as intermediate goods generated by the firm to provide enhanced
productivity of its resources, as well as strategic flexibility and protection for its final product or
service. Innovativeness, customer management, data processing and interpretation, execution risk
assessment and mitigation are some examples of organizational capabilities.

A capability has two distinctive characteristics:

It is firm-specific since it is embedded in the organization and its processes, while an ordinary
resource is not. This firm-specific character of capabilities implies that if an organization is
completely dissolved, then its capabilities would also disappear, while in contrast, its
resources could survive in the hands of a new owner;
Its primary purpose is to enhance the effectiveness and productivity of resources that a firm
possesses in order to accomplish its targets, acting as intermediate goods .

Competitive Advantage

A firm achieves a sustained competitive advantage (SCA) when it is creating more economic value
than the marginal firm in its industry and when other firms are unable to duplicate the benefits of this
strategy. In other words, a firm is said to have a competitive advantage when it is implementing a
value-creating strategy not simultaneously implemented being implemented by any current or
potential competitors and when these other firms are unable to duplicate the benefits if this strategy.

The VRIO Framework

The VRIO (Barney and Hesterly 2012) framework includes four dimensions
for assessing whether a resource has the potential to generate SCA:

Value

The resource must enable a firm to develop and implement strategies that have the
effect of lowering a firms net costs and/or increase a firms net revenues though
exploiting an external opportunity and/or neutralizing an external threat

Rareness

The resource must be controlled by a small number of competing firms, implying that
the resource is scarce relative to demand for its use or what it produces.

Inimitability

The resource must be substantially costly to obtain or develop for competing firms.
Imperfectly imitable resources suggest that firms without that resource cannot obtain it
through direct duplication or substitution.

Organization

A firm must be organized to exploit the full competitive potential of its resources and
capabilities. That is, poor organizational processes, policies, and procedures may
undermine a resources potential competitive advantage.

Generic Value-Chain Analysis

An important approach to identifying competitive advantages and capabilities in a firm is through value-chain analysis. A value chain is made up of primary
activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) and support activities (firm infrastructure, human resource
management, technology development, and procurement). Firms try to gain competitive advantage by increasing the value to customers in one or more activities
relative to competitors.

Supportive Activities
Firm Infrastructure
Human Resource Management
Product and Technology Development
Procurement

Profitability

Inbound Logistics:

Operations:

Marketing and
Sales:

Outbound
Logistics:

Services:

managing
suppliers,
inspecting raw
materials and
component parts,
warehousing

manufacturing,
packaging,
production control,
quality control

Sales force
operations,
Advertising and
promotion, Market
research

Distribution,
invoicing,
Dealer/distributor
relations

Order processing,
training,
maintenance

Primary Activities

-Strategic value analysis

-Strategic cost analysis