What is Strategy?

Strategic Competitiveness: Achieved when a firm successfully formulates and implements a value creating
strategy

Strategy: An integrated and coordinated set of commitments and actions designed to exploit core
competencies and gain a competitive advantage

- Strategy helps to explain why:

- some industries are very profitable and others are not
- there is variance between firms on profitability
- profitability of industries varies across countries
- The alignment between the firms resources, external environment, and strategy explains the
difference in performance
- The goal of strategy is to sustain competitive advantages and earn above average returns

Competitive Advantage: When a firm implements a strategy that creates superior value for customers and
that competitors are unable to duplicate or find it too costly to try to imitate

Above Average Returns: Returns in excess of what an investor expects to earn from other investments with a
similar amount of risk

Strategic Flexibility: A set of capabilities used to respond to various demands and opportunities existing in a
dynamic and uncertain competitive environment

Levels of Strategy

1. Business Level Strategy: Positioning of the firm in a given product market

2. Competitive Strategy: Actions and responses to competition

3. Corporate Strategy: Expanding the scope of the firm on products or geographic markets

4. International Strategy: Expanding and competing across borders

The I/O Model of AAR

1. External Environment: Study the external environment, specifically the industry environment (P5F)

2. Attractive Industry: Locate an industry with high potential for above average returns

3. Strategy Formulation: Identify the strategy called for by the industry to earn above-average returns

4. Assets: Develop or acquire the assets and skills needed to implement the chosen strategy

5. Implementation: Use the firm’s strengths (acquired assets and skills) to implement the strategy

6. Earn above average returns

 - The IO model focuses on the external environment as the dominant influence on a firm’s strategic
actions
- The industry that a firm competes in has a stronger influence on performance than the choices that
managers make within the firm
- IO model generally suggests that firms pursue either a cost leadership or a differentiation strategy to
earn AARs
- IO model holds four underlying assumptions:
- The external environment imposes pressures that determine the strategies that would result
in AARs
- Most firms competing in an industry have similar resources and pursue similar strategies in
light of those resources
- Resources used to implement strategies are mobile across firms, so any difference in
resources are short lived
- Decision makers are rational and committed to the firms best interest (profit maximising)

The Resource-Based Model of AAR

1. Resources: Identify the firm's resources and understand its strengths and weaknesses relative to
competitors

2. Capability: Determine the firm's capabilities, what it does better than competitors

3. Competitive Advantage: Determine the potential of the firm’s resources and capabilities in terms of a
competitive advantage

4. Industry: Locate an attractive industry

5. Strategy Formulation and Implementation: Select a strategy that is aligned with the firm’s resources and
capabilities relative to opportunities in the environment

6. Earn above average returns

Resources: Inputs into a firm’s production process, such as capital equipment, the skills of employees, etc.

- Not all resources can create a competitive advantage, they must be:
- Valuable: Allow a firm to take advantage of opportunities or neutralize threats in the
environment
- Rare: Possessed by few, if any, competitors
- Costly to Imitate: Other firms cannot obtain them or can do so only at a cost disadvantage
- Non-Substitutable: No structural equivalents

Capability: The capacity for a set of resources to perform a task or an activity in an integrative manner

Core Competencies: Capabilities that serve as a source of a competitive advantage for a firm over it’s rivals

- The RB model assumes that an organization is a collection of resources and capabilities and the
uniqueness of that is the basis of strategy and AAR
- Resources must be turned into capabilities which create core competencies
Vision and Mission

Vision: A picture of what the firm wants to be and, in broad terms, what it wants to ultimately achieve

- A vision should
- challenge its people
- reflect the firm’s values and aspirations
- be developed by all stakeholders to be effective
- recognize the firm's internal and external competitive environments
- be supported by upper management decisions and actions

Mission: Specifies the business in which the firm intends to compete and the customers it intends to serve

- A mission should:
- have a more concrete and near-term focus on current product markets and customers than
the firm’s vision
- should be inspiring and relevant to all stakeholders

- Internal and external analyses allow for the creation of a vision and mission
- Together, the vision and mission provide the foundation that a firm needs to choose and implement
strategies

Stakeholders

Stakeholders: Persons or groups that affect or are affected by an organization’s decisions, policies, and
operations

Market (Primary) Stakeholders: Those that engage in economic transactions with the firm as it carries out its
primary purpose of providing goods and services

Nonmarket (Secondary) Stakeholders: Those who—although do not engage in direct economic exchange with
the firm—are affected by or can affect its actions

- Many firms focus on three main groups of stakeholders, in the following order of priority
- Capital Market Stakeholders: Shareholders and suppliers of capital
- Product Market Stakeholders: Primary customers, suppliers, unions, etc.
- Organizational Stakeholders: Employees