Chapter 1: Strategic Management and Strategic Competitiveness

Chapter 1
Strategic Management and Strategic Competitiveness

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 Chapter 1: Strategic Management and Strategic Competitiveness

DEFINING STRATEGY

Strategic competitiveness is achieved when a firm successfully formulates and

implements a value-creating strategy. By implementing a value-creating strategy that
current and potential competitors are not simultaneously implementing and that
competitors are unable to duplicate, or find too costly to imitate, a firm achieves a
competitive advantage.

Strategy can be defined as an integrated and coordinated set of commitments and actions
designed to exploit core competencies and gain a competitive advantage.

So long as a firm can sustain (or maintain) a competitive advantage, investors will earn
above-average returns. Above-average returns represent returns that exceed returns that
investors expect to earn from other investments with similar levels of risk (investor
uncertainty about the economic gains or losses that will result from a particular
investment). In other words, above average-returns exceed investors’ expected levels of
return for given risk levels.

*Note
In the long run, firms must earn at least average returns and provide investors
with average returns if they are to survive. If a firm earns below-average returns
and provides investors with below-average returns, investors will withdraw their
funds and place them in investments that earn at least average returns.
a
In smaller new venture firms, performance is sometimes measured in terms of the
amount and speed of growth rather than more traditional profitability measures - new
ventures require time to earn acceptable returns.

A framework that can assist firms in their quest for strategic competitiveness is the
strategic management process, the full set of commitments, decisions and actions
required for a firm to systematically achieve strategic competitiveness and earn above-
average returns. This process is illustrated in Figure 1.1.

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FIGURE 1.1
The Strategic Management Process

Figure 1.1 illustrates the dynamic, interrelated nature of the elements of the strategic
management process and provides an outline of where the different elements of the
process are covered in this text.

Feedback linkages among the three primary elements indicate the dynamic nature of the
strategic management process: strategic inputs, strategic actions, and strategic outcomes.

 Analysis, in the form of information gained by scrutinizing the internal

environment and scanning the external environment, are used to develop the
firm's vision and mission.

 Strategic actions are guided by the firm's vision and mission, and are represented
by strategies that are formulated or developed and subsequently implemented or
put into action.

 Desired performance - strategic competitiveness and above-average returns -

result when a firm is able to successfully formulate and implement value-
creating strategies that others are unable to duplicate.

 Feedback links the elements of the strategic management process together and
helps firms continuously adjust or revise strategic inputs and strategic actions in
order to achieve desired strategic outcomes.

In addition to describing the impact of globalization and technological change on the

current business environment, this chapter also discusses two approaches to the strategic
management process. The first, the industrial organization model, suggests that the
external environment should be considered as the primary determinant of a firm’s
strategic actions. The second is the resource-based model, which perceives the firm’s
resources and capabilities (the internal environment) as critical links to strategic
competitiveness. Following the discussion in this chapter, as well as in Chapters 2 and 3,
students should see that these models must be integrated to achieve strategic
competitiveness.

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THE COMPETITIVE LANDSCAPE

The competitive landscape can be described as one in which the fundamental nature of
competition is changing in a number of the world’s industries. Further, the boundaries of
industries are becoming blurred and more difficult to define.

Consider recent changes that have taken place in the telecommunication and TV
industries - e.g., not only cable companies and satellite networks compete for
entertainment revenue from television, but telecommunication companies also are
stepping into the entertainment business through significant improvements in fiber-optic
lines. Partnerships further blur industry boundaries (e.g., MSNBC is co-owned by NBC,
which itself is owned by General Electric and Microsoft).

The contemporary competitive landscape thus implies that traditional sources of

competitive advantage - economies of scale and large advertising budgets - may not be
as important in the future as they were in the past. The rapid and unpredictable
technological change that characterizes this new competitive landscape implies that
managers must adopt new ways of thinking. The new competitive mind-set must value
flexibility, speed, innovation, integration, and the challenges that evolve from constantly
changing conditions.

A term often used to describe the new realities of competition is hypercompetition, a

condition that results from the dynamics of strategic moves and countermoves among
innovative, global firms: a condition of rapidly escalating competition that is based on
price-quality positioning, efforts to create new know-how and achieve first-mover
advantage, and battles to protect or to invade established product or geographic markets
(discussed in more detail in Chapter 5).

The Global Economy

A global economy is one in which goods, services, people, skills, and ideas move freely
across geographic borders.

The emergence of this global economy results in a number of challenges and

opportunities. For instance, Europe is now the world’s largest single market (despite the

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difficulties of adapting to multiple national cultures and the lack of a single currency.
The European Union has become one of the world’s largest markets, with 700 million
potential customers.

Today, China is seen as an extremely competitive market in which local market-seeking

MNCs (multinational corporations) fiercely compete against other MNCs and local low-
cost producers. China has long been viewed as a low-cost producer of goods, but here’s
an interesting twist. China is now an exporter of local management talent. Procter &
Gamble actually exports Chinese management talent; it has been dispatching more
Chinese abroad than it has been importing expatriates to China.

The March of Globalization

Globalization is the increasing economic interdependence among countries as reflected

in the flow of goods and services, financial capital, and knowledge across country
borders. This is illustrated by the following:
 Financial capital might be obtained in one national market and used to buy raw
materials in another one.
 Manufacturing equipment bought from another market produces products sold in
yet another market.
 Globalization enhances the available range of opportunities for firms.

Global competition has increased performance standards in many dimensions, including

quality, cost, productivity, product introduction time, and operational efficiency.
Moreover, these standards are not static; they are exacting, requiring continuous
improvement from a firm and its employees. Thus, companies must improve their
capabilities and individual workers need to sharpen their skills. In the twenty-first
century competitive landscape, only firms that meet, and perhaps exceed, global
standards are likely to earn strategic competitiveness.

*Note
As a result of the new competitive landscape, firms of all sizes must re-think how
they can achieve strategic competitiveness by positioning themselves to ask
questions from a more global perspective to enable them to (at least) meet or
exceed global standards:
 Where should value-adding activities be performed?

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 Where are the most cost-effective markets for new capital?

 Can products designed in one market be successfully adapted for sale in others?
 How can we develop cooperative relationships or joint ventures with other firms
that will enable us to capitalize on international growth opportunities?

Although globalization seems an attractive strategy for competing in the current

competitive landscape, there are risks as well. These include such factors as:
 The “liability of foreignness” (i.e., the risk of competing internationally)
 Over-diversification beyond the firm’s ability to successfully manage operations in
multiple foreign markets

A point to emphasize: entry into international markets requires proper use of the strategic
management process.

Though global markets are attractive strategic options for some companies, they are not
the only source of strategic competitiveness. In fact, for most companies, even for those
capable of competing successfully in global markets, it is critical to remain committed to
and strategically competitive in the domestic market. And domestic markets can be
testing grounds for possibly entering an international market at some point in the future.

*Note
The risks that often accompany internationalization and strategies for minimizing
their impact on firms are discussed in more detail in Chapter 8.

*Note
As a result of globalization and the spread of technology, competition will
become more intense. Some principles to consider include the following:
 Customers will continue to expect high levels of product quality at competitive
prices.
 Global competition will continue to pressure companies to shorten product
development-introduction time frames.
 Strategically competitive companies successfully leverage insights learned both
in domestic and global markets, modifying them as necessary.
 Before a company can hope to achieve any measure of success in global markets,

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it must be strategically competitive in its domestic market.

Technology and Technological Changes

Three technological trends and conditions are significantly altering the nature of
competition:
 Increasing rate of technological change and diffusion
 The information age
 Increasing knowledge intensity

Technologic Diffusion and Disruptive Technologies

Both the rate of change and the introduction of new technologies have increased greatly
over the last 15 to 20 years.

A term that is used to describe rapid and consistent replacement of current technologies
by new, information-intensive technologies is perpetual innovation. This implies that
innovation must be continuous and carry a high priority for all organizations.

The shorter product life cycles that result from rapid diffusion of innovation often
means that products may be replicated within very short time periods, placing a
competitive premium on a firm’s ability to rapidly introduce new products into the
marketplace. In fact, speed-to-market may become the sole source of competitive
advantage. In the computer industry during the early 1980s, hard disk drives would
typically remain current for four to six years, after which a new and better product
became available. By the late 1980s, the expected life had fallen to two to three years.
By the 1990s, it was just six to nine months.

The rapid diffusion of innovation may have made patents a source of competitive
advantage only in the pharmaceutical and chemical industries. Many firms do not file
patent applications to safeguard (for at least a time) the technical knowledge that would
be disclosed explicitly in a patent application.

Disruptive technologies (in line with the Schumpeterian notion of “creative destruction”)

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can destroy the value of existing technologies by replacing them with new ones. Current
examples include the success of iPods, PDAs, and Wi-Fi.

The Information Age

Changes in information technology have made rapid access to information available to

firms all over the world, regardless of size. Consider the rapid growth in the following
technologies: personal computers (PCs), cellular phones, computers, personal digital
assistants (PDAs), artificial intelligence, virtual reality, and massive databases. These
examples show how information is used differently as a result of new technologies. The
ability to access and use information has become an important source of competitive
advantage in almost every industry.
 There have been dramatic changes in information technology in recent years.
 The number of PCs is expected to grow to 2.3 billion by 2015.
 The declining cost of information technology.
 The Internet provides an information-carrying infrastructure available to
individuals and firms worldwide.

The ability to access a high level of relatively inexpensive information has created
strategic opportunities for many information-intensive businesses. For example, retailers
now can use the Internet to provide shopping to customers virtually anywhere.

Increasing Knowledge Intensity

It is becoming increasingly apparent that knowledge - information, intelligence, and

expertise - is a critical organizational resource, and increasingly, a source of competitive
advantage. As a result,
 Many companies are working to convert the accumulated knowledge of employees
into a corporate asset;
 Shareholder value is increasingly influenced by the value of a firm’s intangible
assets, such as knowledge;
 There is a strong link between knowledge and innovation.

*Note

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Intangible assets are discussed more fully in Chapter 3.

*Note
This means that to achieve competitive advantage in the information-intensive
competitive landscape, firms must move beyond accessing information to
exploiting information by:
 Capturing intelligence
 Transforming intelligence into usable knowledge
 Embedding it as organizational learning
 Diffusing it rapidly throughout the organization

The implication of this discussion is that to achieve strategic competitiveness and earn
above-average returns, firms must develop the ability to adapt rapidly to change or
achieve strategic flexibility.

Strategic flexibility represents the set of capabilities - in all areas of their operations -
that firms use to respond to the various demands and opportunities that are found in
dynamic, uncertain environments. This implies that firms must develop certain
capabilities, including the capacity to learn continuously, that will provide the firm
with new skill sets. However, those working within firms to develop strategic
flexibility should understand that the task is not an easy one, largely because of inertia
that can build up over time. A firm’s focus and past core competencies may actually
slow change and strategic flexibility.

*Note
Firms capable of rapidly and broadly applying what they learn achieve strategic
flexibility and the resulting capacity to change in ways that will increase the
probability of succeeding in uncertain, hypercompetitive environments. Some firms
must change dramatically to remain competitive or return to competitiveness. How
often are firms able to make this shift? Overall, does it take more effort to make
small, periodic changes, or to wait and make more dramatic changes when these
become necessary?

*Note
Firms that pay attention to technology-related trends are more likely to

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succeed in rapidly changing business environment. Technology-related trends

and conditions can be placed into three categories: technology diffusion and
disruptive technologies, the information age, and increasing knowledge
intensity. Through these categories, technology is significantly altering the
nature of competition and contributing to highly dynamic competitive
environments as a result of doing so.

Two models describing key strategic inputs to a firm's strategic actions are discussed
next: The Industrial Organization (or externally focused) model and the Resource-Based
(or internally focused) model.

THE I/O MODEL OF ABOVE AVERAGE RETURNS

The I/O or Industrial Organization model adopts an external perspective to explain that
forces outside of the organization represent the dominant influences on a firm's strategic
actions. In other words, this model presumes that the characteristics of and conditions
present in the external environment determine the appropriateness of strategies that are
formulated and implemented in order for a firm to earn above-average returns. In short,
the I/O model specifies that the choice of industries in which to compete has more
influence on firm performance than the decisions made by managers inside their firm.

The I/O model is based on the following four assumptions:

1. The external environment - the general, industry, and competitive environments
impose pressures and constraints on firms and determine strategies that will result in
superior returns. In other words, the external environment pressures the firm to adopt
strategies to meet that pressure while simultaneously constraining or limiting the
scope of strategies that might be appropriate and eventually successful.
2. Most firms competing in an industry or in an industry segment control similar sets of
strategically relevant resources and thus pursue similar strategies. This assumption
presumes that, given a similar availability of resources, most firms competing in a
specific industry (or industry segment) have similar capabilities and thus follow
strategies that are similar. In other words, there are few significant differences among
firms in an industry.
3. Resources used to implement strategies are highly mobile across firms. Significant
differences in strategically relevant resources among firms in an industry tend to
disappear because of resource mobility. Thus, any resource differences soon disappear
as they are observed and acquired or learned by other firms in the industry.

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4. Organizational decision-makers are assumed to be rational and committed to acting

only in the best interests of the firm. The implication of this assumption is that
organizational decision-makers will consistently exhibit profit-maximizing behaviors.

According to the I/O model, which was a dominant paradigm from the 1960s through the
1980s, firms must pay careful attention to the structured characteristics of the industry in
which they choose to compete; searching for one that is the most attractive to the firm,
given the firm's strategically relevant resources. Then, the firm must be able to
successfully implement strategies required by the industry's characteristics to be able to
increase their level of competitiveness. The five forces model is an analytical tool used to
address and describe these industry characteristics.

FIGURE 1.2
The I/O Model of Above-Average Returns

Based on its four underlying assumptions, the I/O model prescribes a five-step process
for firms to achieve above-average returns:

1. Study the external environment - general, industry, and competitive - to determine

the characteristics of the external environment that will both determine and constrain
the firm's strategic alternatives.
2. Locate an industry (or industries) with a high potential for returns based on the
structural characteristics of the industry. A model for assessing these characteristics,
the Five Forces Model of Competition, is discussed in Chapter 2
3. Based on the characteristics of the industry in which the firm chooses to compete,
strategies that are linked with above-average returns should be selected. A model or
framework that can be used to assess the requirements and risks of these strategies
(the generic strategies are called cost leadership & differentiation) are discussed in
detail in Chapter 4.
4. Acquire or develop the critical resources - skills and assets - needed to successfully
implement the strategy that has been selected. A process for scrutinizing the internal
environment to identify the presence or absence of critical skills is discussed in
Chapter 3. Skill-enhancement strategies, including training and development, are
discussed in Chapter 11.

5. The I/O model indicates that above-average returns will accrue to firms that
successfully implement relevant strategic actions that enable the firm to leverage its

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strengths (skills and resources) to meet the demands or pressures and constraints of
the industry in which it has elected to compete. The implementation process is
described in Chapters 10 through 13.

The I/O model has been supported by research indicating:

 20% of firm profitability can be explained by industry characteristics
 36% of firm profitability can be attributed to firm characteristics and the actions
taken by the firm
 Overall, this indicates a reciprocal relationship - or even an interrelationship -
between industry characteristics (attractiveness) and firm strategies that result in
firm performance
THE RESOURCE-BASED MODEL OF ABOVE-AVERAGE RETURNS

The resource-based model adopts an internal perspective to explain how a firm's unique
bundle or collection of internal resources and capabilities represent the foundation on
which value-creating strategies should be built.

Resources are inputs into a firm's production process, such as capital equipment,
individual employee's skills, patents, brand names, finance, and talented managers.
These resources can be tangible or intangible.

Capabilities are the capacity for a set of resources to perform - in combination - a task or
activity.

*Note
Thus, according to the resource-based model, a firm's resources and capabilities -
found in its internal environment - are more critical to determining the
appropriateness of strategic actions than are the conditions and characteristics of
the external environment. So, strategies should be selected that enable the firm to
best exploit its core competencies, relative to opportunities in the external
environment. One example of this is the experience of Amazon that used its
capabilities to market and distribute books using the Internet successfully to
capture a 20-month first-mover advantage in this new marketplace. However,
Amazon’s capabilities may be imitable. In fact, many experts expect that Barnes
& Noble will continue to be a formidable competitor due to its extensive
resources.

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Core competencies are resources and capabilities that serve as a source of competitive
advantage for a firm. Often related to functional skills, core competencies - when
developed, nurtured, and applied throughout a firm - may result in strategic
competitiveness.

FIGURE 1.3
The Resource-Based Model of Above-Average Returns

The resource-based model of above-average returns is grounded in the uniqueness of a

firm's internal resources and capabilities. The five-step model describes the linkages
between resource identification and strategy selection that will lead to above-average
returns.

1. Firms should identify their internal resources and assess their strengths and
weaknesses. The strengths and weaknesses of firm resources should be assessed
relative to competitors.

2. Firms should identify the set of resources that provide the firm with capabilities that
are unique to the firm, relative to its competitors. The firm should identify those
capabilities that enable the firm to perform a task or activity better than its
competitors.

3. Firms should determine the potential for their unique sets of resources and
capabilities to outperform rivals in terms of returns. Determine how a firm’s
resources and capabilities can be used to gain competitive advantage.

4. Locate an attractive industry. Determine the industry that provides the best fit
between the characteristics of the industry and the firm’s resources and capabilities.

5. To attain a sustainable competitive advantage and earn above-average returns, firms

should formulate and implement strategies that enable them to exploit their resources
and capabilities to take advantage of opportunities in the external environment better
than their competitors.

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Resources and capabilities can lead to a competitive advantage when they are valuable,
rare, costly to imitate, and non-substitutable.

 Resources are valuable when they support taking advantage of opportunities or

neutralizing external threats.

 Resources are rare when possessed by few, if any, competitors.

 Resources are costly to imitate when other firms cannot obtain them inexpensively
(relative to other firms).
 Resources are non-substitutable when they have no structural equivalents.
VISION AND MISSION

Vision
Vision is a picture of what the firm wants to be, and in broad terms, what it wants to
ultimately achieve. Vision is “big picture” thinking with passion that helps people feel
what they are supposed to be doing.

Vision statements:

 Reflect a firm’s values and aspirations

 Are intended to capture the heart and mind of each employee (and hopefully, many of
its other stakeholders)

 Tend to be enduring, whereas its mission can change in light of changing

environmental conditions

 Tend to be relatively short and concise, easily remembered

 Rely on input from multiple key stakeholders

Examples of vision statements:

 Our vision is to be the world’s best quick service restaurant. (McDonald’s)

 To make the automobile accessible to every American (Ford’s vision when

established by Henry Ford)

The CEO is responsible for working with others to form the firm’s vision. However,
experience shows that the most effective vision statement results when the CEO involves
a host of people to develop it.

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A vision statement should be clearly tied to the conditions in the firm’s external and
internal environments and it must be achievable. Moreover, the decisions and actions of
those involved with developing the vision must be consistent with that vision.

Mission

A firm's mission is an externally focused application of its vision that states the firm's
unique purpose and the scope of its operations in product and market terms.

As with the vision, the final responsibility for forming the firm’s mission rests with the
CEO, though the CEO and other top-level managers tend to involve a larger number of
people in forming the mission. This is because middle- and first-level managers and
other employees have more direct contact with customers and their markets.

A firm's vision and mission must provide the guidance that enables the firm to achieve
the desired strategic outcomes - strategic competitiveness and above-average returns -
illustrated in Figure 1.1 that enable the firm to satisfy the demands of those parties
having an interest in the firm's success: organizational stakeholders.

Earning above-average returns often is not mentioned in mission statements. The reasons
for this are that all firms want to earn above-average returns and that desired financial
outcomes result from properly serving certain customers while trying to achieve the
firm’s intended future. In fact, research has shown that having an effectively formed
vision and mission has a positive effect on performance (growth in sales, profits,
employment, and net worth).

STAKEHOLDERS

Stakeholders are the individuals and groups who can affect and are affected by the
strategic outcomes achieved and who have enforceable claims on a firm's performance.

Classification of Stakeholders

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The stakeholder concept reflects that individuals and groups have a "stake" in the
strategic outcomes of the firm because they can be either positively or negatively
affected by those outcomes and because achieving the strategic outcomes may be
dependent on the support or active participation of certain stakeholder groups.

FIGURE 1.4
The Three Stakeholder Groups

Figure 1.4 provides a definition of a stakeholder and illustrates the three general
classifications and members of each stakeholder group:
 Capital market stakeholders
 Product market stakeholders
 Organizational stakeholders

Stakeholder Groups, Membership and Primary Expectation or Demand

Stakeholder group Membership Primary expectation/demand

Capital market Shareholders Wealth enhancement
Lenders Wealth preservation
Product market Customers Product reliability at lowest possible price
Suppliers Receive highest sustainable prices
Host communities Long-term employment, tax revenues,
minimum use of public support services
Unions Ideal working conditions and job security for
membership
Organizational Employees Secure, dynamic, stimulating, and rewarding
work environment

*Note
From reviewing the primary expectations or demands of each stakeholder group,
it becomes obvious that a potential for conflict exists. For instance, shareholders
generally invest for wealth-maximization purposes and are therefore interested in
a firm's maximizing its return on investment or ROI. However, if a firm increases
its ROI by making short-term decisions, the firm can negatively affect employee

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or customer stakeholders.

If the firm is strategically competitive and earns above-average returns, it can afford to
simultaneously satisfy all stakeholders. When earning average or below-average returns,
tradeoffs must be made. At the level of average returns, firms must at least minimally
satisfy all stakeholders. When returns are below average, some stakeholders can be
minimally satisfied, while others may be dissatisfied.

For example, reducing the level of research and development expenditures (to increase
short-term profits) enables the firm to pay out the additional short-term profits to
shareholders as dividends. However, if reducing R&D expenditures results in a decline
in the long-term strategic competitiveness of the firm's products or services, it is possible
that employees will not enjoy a secure or rewarding career environment (which violates
a primary union expectation or demand for job security for its membership). At the same
time, customers may be offered products that are less reliable at unattractive prices,
relative to those offered by firms that did not reduce R&D expenditures.

Thus, the stakeholder management process may involve a series of tradeoffs that is
dependent on the extent to which the firm is dependent on the support of each affected
stakeholder and the firm's ability to earn above-average returns.

*Note
Stakeholder management has introduced some interesting notions into business
practice. For example, business schools typically teach that there are three main
stakeholder groups (owners, customers, and employees) and that they should be
tended to in that order. That is, it is important to begin with the idea that the
primary purpose of the firm is to maximize shareholder wealth (i.e., tend to the
interests of the owners first). Then it is common to introduce notions such as,
“The customer is always right.” This suggests that customer interests are to be
tended to next. Finally, we get around to looking to the needs of employees, if
resources make that possible. This is the standard approach, but some firms have
turned this idea on its head. For example, Southwest Airlines has been extremely
successful by taking great efforts to select the right employees and treat them
well, which then spills over into appropriate treatment of the customer. As you
might guess, the company assumes that these emphases will naturally lead to
positive outcomes for stockholders as well (as has been the case).

STRATEGIC LEADERS

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Who are strategic leaders?

Although it depends on the size of the organization, all organizations have a CEO or top
manager and this individual is the primary organizational strategist in every
organization. `Small organizations may have a single strategist: the CEO or owner. Large
organizations may have few or several top-level managers, executives, or a top
management team. All of these individuals are organizational strategists.

What are the responsibilities of strategic leaders?

Top managers play decisive roles in firms’ efforts to achieve their desired strategic
outcomes. As organizational strategists, top managers are responsible for deciding how
resources will be developed or acquired, at what cost, and how they will be used or
allocated throughout the organization. Strategists also must consider the risks of actions
under consideration, along with the firm’s vision and managers’ strategic orientations.

Organizational strategists also are responsible for determining how the organization does
business. This responsibility is reflected in the organizational culture, which refers to
the complex set of ideologies, symbols, and core values shared throughout the firm and
that influences the way it conducts business. The organization’s culture is the social
energy that drives - or fails to drive - the organization.

The Work of Effective Strategic Leaders

Though it seems simplistic, performing their role effectively requires strategists to work
hard, perform thorough analyses of available information, be brutally honest, desire high
performance, exercise common sense, think clearly, ask questions, and listen. In
addition, strategic leaders must be able to “think seriously and deeply … about the
purposes of the organizations they head or functions they perform, about the strategies,
tactics, technologies, systems, and people necessary to attain these purposes and about
the important questions that always need to be asked.” Additionally, effective strategic
leaders work to set an ethical tone in their firms.

Strategists work long hours and face ambiguous decision situations, but they also have
opportunities to dream and act in concert with a compelling vision that motivates others
in creating competitive advantage.

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Predicting Outcomes of Strategic Decisions: Profit Pools

Top-level managers try to predict the outcomes of their strategic decisions before they
are implemented, but this is sometimes very difficult to do. Those firms that do a better
job of anticipating the outcomes of strategic moves will obviously be in a better position
to succeed. One way to do this is by mapping out the profit pools of an industry. Profit
pools are the total profits earned in an industry at all points along the value chain. Four
steps are involved:
1. Define the pool’s boundaries
2. Estimate the pool’s overall size
3. Estimate the size of the value-chain activity in the pool
4. Reconcile the calculations

THE STRATEGIC MANAGEMENT PROCESS

*Note
The final section of this chapter reviews Figure 1.1 (The Strategic Management
Process), providing both an outline of the process and the framework for the next
12 chapters.

Chapters 2 and 3 provide more detail regarding the strategic inputs to the strategic
management process: analysis of the firm's external and internal environments that
must be performed so that sufficient knowledge is developed regarding external
opportunities and internal capabilities. This enables the development of the firm's
vision and mission.

Chapters 4 through 9 discuss the strategy formulation stage of the process. Topics
covered include:
 Deciding on business-level strategy, or how to compete in a given business
(Chapter 4)
 Understanding competitive dynamics, in that strategies are not formulated and
implemented in isolation but require understanding and responding to

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competitors' actions (Chapter 5)

 Setting corporate-level strategy, or deciding in which industries or businesses the
firm will compete, how resources will be allocated, and how the different
business units will be managed (Chapter 6)
 The acquisition of business units and the restructuring of the firm’s portfolio of
businesses (Chapter 7)
 Selecting appropriate international strategies that are consistent with the firm's
resources, capabilities and core competencies, and external opportunities
(Chapter 8)
 Developing cooperative strategies with other firms to gain competitive advantage
(Chapter 9)
The final sections of the text, Chapters 10–13, examine actions necessary to
effectively implement strategies. Effective implementation has a significant impact on
firm performance. Topics covered include:
 Methods for governing to ensure satisfaction of stakeholder demands and
attainment of strategic outcomes (Chapter 10)
 Structures that are used and actions taken to control a firm's operations (Chapter
11)
 Patterns of strategic leadership that are most appropriate given the competitive
environment (Chapter 12)
 Linkages among corporate entrepreneurship, innovation, and strategic
competitiveness (Chapter 13)

*Note
You should realize that none of the chapters stand alone, just as no single step or
facet of the strategic management process stands alone. If the strategic
management process is to result in a firm being strategically competitive and
earning above-average returns, all facets of the process must be treated as both
interdependent and interrelated.

Summer SY 2020-2021