Principles of Strategic

Management:
A
Comprehensive Approach
 Strategic Management

• Strategic Management: a set of managerial

decisions and actions that determines the
long-run performance of a corporation for
sustainable competitive advantage.
 Definitions of Strategy

• “Strategy can be defined as the determination of the basic

long-term goals and objectives of an enterprise, and the
adoption of courses of action and the allocation of resources
necessary for carrying out those goals.”
(Alfred D. Chandler,
Strategy and Structure)

• Strategy is: “The pattern or plan that integrates an

organization’s major goals, policies, and action sequences
into a cohesive whole. A well-formulated strategy helps to
marshal and allocate an organization’s resources into a
unique and viable posture based on its relative internal
competencies and shortcomings, anticipated changes in the
environment, and contingent moves by intelligent opponents.”

(James Brian Quinn, Logical Incrementalism)

 Good Strategy
• Good strategy, enables a firm to
achieve superior performance
and sustainable competitive
advantage relative to its
competitors.

• To achieve superior performance,

companies compete for resources:
New ventures compete for
financial and human capital,
existing companies compete for
profitable growth, charities
compete for donations, universities
compete for the best students and
professors, sports teams compete for
championships, while celebrities
compete for endorsements.
 What is competitive advantage?

• A firm that achieves superior performance relative to other

competitors in the same industry or the industry average has a
competitive advantage.
 Competitive advantage is always relative, not absolute.
 To assess competitive advantage, we compare firm performance to a benchmark
—that is, either the performance of other firms in the same industry or an industry
average.

• A firm that is able to outperform its competitors or the industry

average over a prolonged period has a sustainable competitive
advantage.
 Apple, for example, has enjoyed a sustainable competitive advantage over
Samsung in the smartphone industry for over a decade since its introduction of
the iPhone in 2007.
 What is competitive (dis)advantage?

• If a firm underperforms its rivals or the industry average, it has a

competitive disadvantage.
 For example, a 15 percent return on invested capital may sound like
superior firm performance. In the consulting industry, though, where the
average return on invested capital is often above 20 percent, such a return
puts a firm at a competitive disadvantage. In contrast, if a firm’s return on
invested capital is 2 percent in a declining industry, like newspaper
publishing, where the industry average has been negative (–5 percent) for
the past few years, then the firm has a competitive advantage.

• Should two or more firms perform at the same level, they have
competitive parity.
 Sustainable Competitive Advantage (SCA)
• Apple, for example, has enjoyed a sustainable competitive
advantage over Samsung in the smartphone industry for over a
decade since its introduction of the iPhone in 2007.
• Other phone makers such as Microsoft (which purchased Nokia)
and BlackBerry have all but exited the smartphone market, while
new entrants such as Xiaomi and Huawei of China are trying to
gain traction.
 What strategy is NOT?
• Grandiose Statements Are Not Strategy. “Our strategy is to win” or “We
will be No. 1.” Such statements of desire, on their own, are not strategy. They
provide little managerial guidance and often lead to goal conflict and confusion.
Moreover, such wishful thinking frequently fails to address economic
fundamentals.

• A Failure To Face A Competitive Challenge Is Not Strategy. If a firm

does not define a clear competitive challenge, employees have no way of
assessing whether they are making progress in addressing it. Blockbuster, for
example, failed to address the competitive challenges posed by new players
Netflix, Amazon, and Hulu.

• Operational Effectiveness, Competitive Benchmarking, Or Other

Tactical Tools Are Not Strategy. People casually refer to a host of different
policies and initiatives as some sort of strategy: pricing strategy, internet strategy,
alliance strategy, operations strategy, IT strategy, brand strategy, and so on. All
these elements may be a necessary part of a firm’s functional and global
initiatives to support its competitive strategy, but are not sufficient to achieve
competitive advantage.
Strategic Management
Internal Env.
External Env.
* PESTEL (STEEP) * Resources,
* Capabilities
* Porter’s 5 Forces * VRIO

SWOT

Business Level Corporate Level

* Cost-leadership * Growth
* Differentiation * Stability
* Focus * Retrenchment

Programs and
budgets

Structure Staff

Hardware of the firm Software of the firm

Evaluation
Feedback
 Analysis:
External Analysis
 11

Strategy Highlight
Airbnb: Disrupting the Hotel Industry

• In 2019, Airbnb had 5 million listings in over 81,000 cities in

190 countries, ranging from spare rooms to entire islands,
valued at $31 billion. With its “asset-light approach,” based
on its platform strategy, Airbnb offers accommodations than
the three biggest hotel chains combined: Marriott, Hilton, and
Intercontinental to compete in the global hotel industry.
– In 2010, Airbnb received funding from Sequoia Capital, a
prestigious capital firm in Silicon Valley, having provided
early-stage capital to firms such as Apple, Google, and
WhatsApp.

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 The Firm within Its External Environment,
Industry, and Strategic Group, Subject to
PESTEL Factors

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 PESTEL Framework
• Political (market and non-market) • Technological
 Government pressures  Innovation in products
 Subsidies and incentives and processes
 Lobbying and contributions  Machine learning and AI
 Differences in countries, states,  Diffusion
and regions  Research & development

• Economic • Ecological
 Growth rates  Global warming
 Employment levels  Sustainability
 Interest rates  Pollution (e.g., BP's oil spill)
 Currency exchange rates
• Legal
• Sociocultural  Court system
 Norms, culture, values  Legislation
 Demographics  Hiring laws
 Lifestyle changes  (De-)regulation
 Subway, Whole Foods benefit
 14

Strategy Highlight
Blockbuster’s Bust

• Blockbuster was not only in the video rental business but it

was also the undisputed industry leader from the mid-1980s
to the early 2000s. At its peak, Blockbuster opened a new
store every 17 hours for a total of 9,000 stores across the
United States, and earned $6 billion in annual revenue.
• But in 2010, Blockbuster filed for bankruptcy. What went
wrong? Blockbuster was unable to respond to technological
changes, receiving threats from cable networks and then
from Netflix, which went public in 2002 at a valuation of $310
million, and then to stream content. In 2019, Netflix was
valued at close to $160 billion.

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Industry Structure and Firm Strategy: The Five
Forces Model

The following five forces determine the profit potential of an industry

and shape a firm’s competitive strategy:

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 External Analysis
gives us the
Opportunities and
Threats outside the
firm.
 Analysis:
Internal Analysis
Inside the Firm: Core Competencies,
Resources, and Capabilities

© McGraw Hill
 What Are Core Competencies?

• Unique strengths

• Embedded deep within a firm

• Enables a firm to differentiate its products

and services from those of its rivals

• Results in:
– Creating higher value for the customer or
– Offering products and services at lower cost
• Based on structures, processes, and routines

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 Resource-Based View

Resource-based view; a model that sees certain

types of resources as key to superior firm
performance.

In the resource-based view of the firm, a resource

includes any assets as well as any capabilities and
competencies that a firm can draw upon when
formulating and implementing strategy.
 The Resource-based View
• Google Example
 Tangible resources valued at $59 billion

 Intangible brand valued at over $300 billion (p.126)

 Googleplex has both tangible and intangible aspects

• Competitive Advantage More Likely…..

 From intangible resources (e.g., networks)
 The VRIO Decision Tree

Tata cars…
Crocs…
Xerox…

© McGraw Hill
Dynamic Capabilities

A firm’s ability to:

• Create, deploy, modify, reconfigure, upgrade, and leverage its resources

over time (e.g., Apple’s capabilities enabled it to redefine the markets for
mobile devices and computing; in particular in music, smartphones, and
media content).

Helps prevent a core rigidity

• A former core competency that turned into a

liability as the environment changed.

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© McGrawinHill
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 23
Dynamic Capabilities at IBM

Current disruptions:

• Cloud computing

• Systems of engagement

• Big data and analytics

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© McGrawinHill
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 5-25

VRIO for Tesla…

 The Value Chain
• Primary Activities
 Add value directly in transforming inputs into outputs

• Support Activities
 Indirectly add value: Provide support to the primary activities

• Managers can see how competitive advantage flows from a system of

activities (using activity-based accounting).
Using SWOT Analysis To Generate Insights from
External and Internal Analysis

SWOT, A framework that allows managers to synthesize

insights obtained from an internal analysis of the company’s
strengths and weaknesses (S and W) with those from an
analysis of external opportunities and threats (O and T) to
derive strategic implications.

Internal strengths (S) and weaknesses (W) concern

resources, capabilities, and competencies.

External opportunities (O) and threats (T) are in the firm’s

general environment and can be captured by PESTEL and
Porter’s five forces analyses.
Using SWOT Analysis To Generate Insights from
External and Internal Analysis
Using SWOT Analysis To Generate Insights from
External and Internal Analysis
 Formulation:
Business Strategies
Business Strategy and Competitive Advantage
• A business-level strategy is an integrated and coordinated
set of commitments and actions designed to provide value to
customers and to gain a competitive advantage by utilizing
core competencies in specific individual product markets.

Cost
Advantage

Similar Product
Competitive At Lower Cost
Advantage

Differentiation
Advantage
Price Premium
From Unique
Product
 32

Strategic Position and Competitive Scope:

Generic Business Strategies
 33

What Is A Blue Ocean Strategy?

• Successfully combining differentiation and
cost-leadership activities

• Uses value innovation to reconcile trade-offs

• The metaphor of blue ocean means:

– Untapped market space
– The creation of additional demand
– The opportunity for highly
profitable growth
34
 35

Blue Ocean: How IKEA Did It

• Eliminate
– Sales people
– After sales service
• Reduce
– Warranties
• Raise
– Offers tens of
thousands of home
furnishing items
• Create
– New way to shop for
furniture
 Formulation:
Corporate Strategies
 What is Corporate Strategy?

• Corporate strategy
 Corporate strategy is the way a company creates value through
the configuration and coordination of its multi-market activities
 Quest for competitive advantage when competing in multiple
industries

• Corporate strategy concerns the scope of the firm:

 What stages of the industry value chain (vertical integration)?
 What range of products and services (horizontal integration)?
 What geographic markets (regional, national,
and/or global) to compete in?

8–37
 38

Cost of Integration: External and Internal

Transactions

• Integration requires some transaction costs

• Transactions can be within or external to a firm
• External transaction costs
– Searching for a firm individual to contract with
– Negotiating, monitoring, and enforcing the contract
• Internal transaction costs
– Recruiting and retaining employees
– Paying salaries and benefits
– Setting up a shop floor
– Providing office space and computers, etc.

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 Firms vs. Markets: Make or Buy?
• Should a firm do things in-house (to make)? Or obtain
externally (to buy)?

• If Cin-house < Cmarket, then the firm should vertically integrate

 Example: Google hires programmers

to write code in-house rather than contracting out

 Firms and markets have

distinct advantages and disadvantages

8–39
Alternatives on the Make-or-Buy Continuum

© McGraw Hill
 41

Strategic Outsourcing

• Moving one or more internal value chain activities

outside the firm’s boundaries to other firms in the
industry value chain

• Example: Off-shoring

• Most active sectors of off-shoring:

– Banking and financial services
– Information Technology (IT)
– Health Care

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 Motivations For Product/Geographic
Diversification

• Value Enhancing Motives:

 Increase market power
 Multi-point competition
 R&D and new product development
 Developing New Competencies (Stretching)
 Transferring Core Competencies (Leveraging)
 Utilizing
excess capacity (e.g., in distribution)
 Economies of Scope
 Leveraging Brand-Name
 Encouraging firm-specific skills by reducing
employment risk
Restructuring the Corporate Portfolio:
The Boston Consulting Group Growth–Share
Matrix
 Implementation:
Structure and Staff
 How to Organize for Competitive Advantage

• Organizational design
 Structure
 Processes
 Procedures

• Key components:
 Structure
 Culture
 Control

• Structure follows strategy (or inefficiency results)

 Consider the inefficiency of Pepsi Restaurants' overly decentralized
structure, which did not follow their related diversification strategy
 46

Organizational Inertia

• A firm’s resistance to change the status quo

• Can lead to the firm’s subsequent failure
• The pattern of a firm:
– Mastery of the current environment
– Success as measured by financial measurements
– Structures, measures, and systems to manage size
– Organizational inertia results from shifts
in the internal and external environment

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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 Key Elements of Organizational Structure

• Organizational structure determines

 Work efforts of individuals and teams
 Resource distribution

• Key building blocks

 Specialization
 Formalization
 Centralization
 Hierarchy
 48

Firm Strategy and Structure

• Are interdependent
• Impact a firm’s performance
• Changes over time as the firm grow in:
– Size and complexity
• Successful new ventures generally grow:
– First by increasing sales
– Then by obtaining larger geographic reach
– Finally by diversifying
• Through vertical integration
• Entering into related and unrelated businesses
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 Changing Organizational Structures and
Increasing Complexity as Firms Grow

© McGraw Hill
 50

Closed vs. Open Innovation

• Closed Innovation
– New products discovered, developed, and commercialized internally

• Open Innovation
– Ideas and innovation can originate from external sources
• Customers, Suppliers, Universities, Start-ups, Competitors

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 Strategy Highlight 51

Sony vs. Apple: Whatever Happened to

Sony?

In 2001:

•Apple’s Market Cap: $7 billion

•Sony’s Market Cap: $55 billion (almost 8x larger)

Where they were focused:

•Sony: preventing CD piracy, protecting

copyright

•Apple: developing digital rights

management
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 Strategy Highlight 52

Sony vs. Apple: Whatever Happened to

Sony?

Approach:
•Sony: closed innovation
•Apple: open innovation

Results in 2018:

•Sony’s Market Cap: $65 billion

•Apple’s Market Cap: $1 trillion

Copyright © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Strategic Management
Internal Env.
External Env.
* PESTEL (STEEP) * Resources,
* Capabilities
* Porter’s 5 Forces * VRIO

SWOT

Business Level Corporate Level

* Cost-leadership * Growth
* Differentiation * Stability
* Focus * Retrenchment

Programs and
budgets

Structure Staff

Hardware of the firm Software of the firm

Evaluation
Feedback