STRATEGIC MANAGEMENT

Course Leader: Berihun Muchie (PhD)

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Copyright © 2021
Yardstick International College

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CHAPTER ONE
PART I
Introduction to Strategic Management

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Why strategic management is important?

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Definitions
Strategic Management Process
● The full set of commitments, decisions, and actions required for a firm to
create value and earn above-average returns

Value Creation
● What is achieved when a firm successfully formulates and implements a
strategy that other companies are unable to duplicate or find too costly to
imitate.

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Definitions
Average Returns
● Returns that are equal to those an investor expects to earn from other
investments with a similar amount of risk

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

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Definitions
Risk
● An investor’s uncertainty about the economic gains or losses that will
result from a particular investment

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Competitive Landscape
● Dynamics of strategic maneuvering among global and innovative
combatants
● Price-quality positioning, new know- how, first mover
● Protect or invade established product or geographic markets

Hypercompetitive
environments

Fundamental nature of
competition is changing
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Competitive Landscape
● Goods, services, people, skills, and ideas move freely across geographic
borders
● Spread of economic innovations around the world
● Political and cultural adjustments are required

Emergence of
global economy

Hypercompetitive
environments

Fundamental nature of
competition is changing
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Competitive Landscape
● Increasing rate of technological change and diffusion
● The information age
● Increasing knowledge intensity

Emergence of
global economy
Rapid technological
change

Hypercompetitive
environments

Fundamental nature of
competition is changing
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Strategic Flexibility
● A set of capabilities used to respond to various demands and
opportunities existing in a dynamic and uncertain competitive
environment
● It involves coping with uncertainty and the accompanying risks

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Strategic Flexibility
Organizational
slack

Strategic Strategic
reorientation Flexibility

Capacity to
learn

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Two Models of Superior Returns
● Industrial organization (I/O) model
● Resource-based Model

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I/O Model of Above-average Returns
● The Industrial Organization model suggests that above-average returns
for any firm are largely determined by characteristics outside the firm.

● This model largely focuses on industry structure or attractiveness of the

external environment rather than internal characteristics of the firm.

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I/O Model of Above-average Returns
● Strategy dictated by the external environment of the firm (what
opportunities exist in these environments?)
● Firm develops internal skills required by external environment (what can
the firm do about the opportunities?)
1. External Environments
General

Global De
m
al

og
eg

ra
/L

Industry ph
al

ic
ic

Environment
lit
Po

ic
om
Competitor
So
c

on
io

Environment
cu

Ec
l tu
ra
l

Technological
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Environment
Four Assumptions of the I/O Model
1. The external environment is assumed to possess pressures and
constraints that determine the strategies that would result in
above-average returns
2. Most firms competing within a particular industry or within a certain
segment of it are assumed to control similar strategically relevant
resources and to pursue similar strategies in light of those resources

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Four Assumptions of the I/O Model
3. Resources used to implement strategies are highly mobile across firms
4. Organizational decision makers are assumed to be rational and
committed to acting in the firm’s best interests, as shown by their
profit-maximizing behaviors

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I/O Model of Above-average Returns
1. Study the external environment, especially the industry environment
● economies of scale
● barriers to market entry
● diversification
● product differentiation
● degree of concentration of firms in the industry

Industrial Organization Model

The External Environment

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I/O Model of Above-average Returns
2. Locate an attractive industry with a high potential for above-average
returns

● Attractive industry: one whose structural characteristics suggest

above-average returns

Industrial Organization Model

The External Environment

An Attractive Industry

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I/O Model of Above-average Returns
● 3. Identify the strategy called for by the attractive industry to earn
above-average returns
● Strategy formulation: selection of a strategy linked with
● above-average returns in a particular industry

Industrial Organization Model

The External Environment

An Attractive Industry
Strategy Formulation

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I/O Model of Above-average Returns
4. Develop or acquire assets and skills needed to implement the strategy
● Assets and skills: those assets and skills required to implement a chosen
strategy

Industrial Organization Model

The External Environment

An Attractive Industry
Strategy Formulation
Assets and Skills

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I/O Model of Above-average Returns
5. Use the firm’s strengths (its developed or acquired assets and skills) to
implement the strategy
● Strategy implementation: select strategic actions linked with effective
implementation of the chosen strategy

Industrial Organization Model

The External Environment

An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
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I/O Model of Above-average Returns

Industrial Organization Model

The External Environment
An Attractive Industry
Superior
Strategy Formulation returns: earning
Assets and Skills of
above-average
Strategy Implementation returns
Superior Returns

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THANK YOU!

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