Strategy and the Strategic Management Process

competitive advantage

the ability of a firm to create more economic value than a rival firm in the same industry

competitive disadvantage

When a firm creates less economic values as its rivals

competitive parity

When a firm creates the same economic value as its rivals

accounting measures in competitive advantage

oUse information from a firm's published profit and loss and balance sheet statements •Profitability (focus on profits) •Liquidity (focus on the ability of a firm to meet its short-term obligations) •Leverage (focus on financial flexibility) •Activity (focus on the level of activity) o*Need to compare to the industry average for these numbers to mean anything oROA: measures return of investment in a firm (larger is better) oROE: measures return of total equity investment in a firm (larger is better)

economic value in competitive advantage

the difference between the perceived benefits gained by the customer MINUS the costs of production

Step 5: Strategy Implementation

•You know a firm's strategy is really being implemented when you start to see changes in: oFormal organizational structure oFormal and informal management control systems oEmployee compensation practices •Deliberate or intended strategies assume that firms choose and implement their strategies exactly as described by the strategic management process. That is, they begin with a well-defined mission and objectives, they engage in external and internal analyses, they make their strategic choices, and then they implement. •Emergent strategies are theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshaped once they are initially implemented.

sustained competitive advantage

A competitive advantage that lasts a long time

economic measures in competitive advantage

oLook at the return of capital versus the cost of capital •(ie. How much $ did a firm return to its suppliers versus how much they promised them) oWeighted average cost of capital: debt*the cost of debt (the interest that a firm must pay its debt holders)

What defines good strategy?

oThere is always a rub! It is usually very difficult to predict how competition in an industry will evolve, and so it is rarely possible to know for sure that a firm is choosing the right strategy. oThis is why a firm's strategy is almost always a theory: It's a firm's best bet about how competition is going to evolve, and how that evolution can be exploited for competitive advantage. oThe Strategic Management Process reduces the likelihood of mistakes.

Step 1: Defining your Mission

•A mission statement often consists of: oVision oMission oValues •Vision statement: oDefines the optimal desired future state that an organization wants to achieve over time oActs as an inspirational tool for a company o"The Dream" •Vision Statements Should: oUnderstood and shared by members of the community oBroad enough to encompass a variety of local perspectives oInspiring and uplifting to everyone involved in your effort oEasy to communicate •Mission statement "A statement of purpose" oWHAT—what does an organization do? oWHO—who does is serve? oHOW—how it does what it does? •Often, mission statements are too broad - containing common elements - so much so that they are not effective in influencing organizational behavior. •Values oDescribes the desired culture oGets to HOW the organization will operate

Step 2: Objectives

•Because mission statements tend to be broad statements about values and purposes, organizations must further define MEASUREABLE OBJECTIVES that help it determine if and how effectively it is realizing it's mission. oGood objectives will be: •Linked to the mission •Easy to measure and track oLinking back to financial statements—if it doesn't have a line item in the budget, it probably isn't real!

Strategy

•Comes from Greek word strategia, which was used to describe the "art of the general" •Used in multiple fields and therefore viewed through multiple lenses •Definition→ The theory used by an organization to gain and sustain a competitive advantage oie. A Plan of Action obased on a set of assumptions about market conditions: •Organizational capabilities •Consumer needs, wants, and interests •How competition will evolve

Step 3: External and Internal Analysis

•External Analysis—Threats and Opportunities oHow is competition going to evolve? oWhat trends are emerging? •Technological •Environmental •Social •Economic •Demographic •Internal Analysis—Weaknesses and Strengths oWhat are our resources and capabilities? oWhere are we underperforming? •Examples of tools used: SWOT, Porter's Five Forces, Industry Model, The SCP Model, VRIO Framework

importance of understanding strategy

•It can give you the tools you need to evaluate the strategies of firms that may employ you. oYour career opportunities in a firm are largely determined by that firm's competitive advantage. Thus, in choosing a place to begin or continue your career, understanding a firm's theory of how it is going to gain a competitive advantage can be essential in evaluating the career opportunities. •Once employed, it is important to understand a firm's strategies and your role in implementing those strategies. This can be important for your personal success. •It is true that strategic choices are generally limited to experienced managers in large organizations, however, in smaller and entrepreneurial firms many employees end up being involved in the strategic management process.

Strategic Management Process

•Mission •Objectives •External and Internal Analysis •Strategic Choice •Strategy Implementation •Competitive Advantage

Step 4: Strategic Choice

•Once the firm has established what it does and what the conditions and capabilities are, it can make a strategic choice about how to proceed. •There are two types of strategic choices: oBusiness-Level--> A single good or service within an organization (Cost leadership, Productive differentiation) oCorporate-Level--> Activities performed by the entire firm (Vertical integration, Diversification) •Objective when making a strategic choice is to choose a strategy that: o1. Supports the firms mission o2. Is consistent with a firm's objectives o3. Exploits opportunities in a firm's environment with a firm's strengths o4. Neutralized threats in a firm's environment while avoiding a firm's weaknesses