Summary of corporate strategy, third edition written for Frank T. Rothaermel. Only the fifth chapter (Competitive advantage, firm performance and business models) is not covered in this summary. Furthermore, a very useful summary for corporate strategy and related courses. Comprehensive treatment o...
Summary corporate
strategy.
1.What is strategy?
Strategic management is the integrative management field that combines
analysis, formulation and implementation in the quest for competitive
advantage.
1.1. What strategy is: Gaining and Sustaining Competitive
Advantage.
Strategy is a set of goal-directed actions a firm takes to gain and sustain superior
performance relative to competitors. To achieve superior performance,
companies compete for resources: new ventures compete for financial and
human capital. Existing companies for profitable growth. A good strategy
consists of three elements:
1. A diagnosis of the competitive challenge.
2. A guiding policy to address the competitive challenge
3. A set of coherent actions to implement the firm’s guiding policy.
To assess competitive advantage, we compare firm performance to a
benchmark, which is either the performance of other firms in the same industry
or an industry average. A firm that achieves superior performance relative to
other competitors in the same industry or the industry average has a competitive
advantage. A firm that is able to outperform its competitors or the industry
average over a prolonged period of time has a sustainable competitive
advantage. If a firm underperforms its rivals or the industry average, it has a
competitive disadvantage. Should two or more firms perform at the same level,
they have competitive parity. To gain a competitive advantage, a firm needs to
provide either goods or services customers value more highly than those of its
competitors, or goods or services similar to the competitors at a lower price. The
rewards of superior value creation and capture are profitability and market
share.
Managers achieve a combination of value and cost through strategic positioning.
That is, they stake out a unique position within an industry that allows the firm to
provide value to customers, while controlling costs. The greater the difference
between value creation and cost, the greater the firm’s economic contribution
and the more likely it will gain competitive advantage. Since clear strategic
positioning requires trade-offs, strategy is as much about deciding what not to
do, as it is about deciding what to do. Underneath are three things which
strategy is not:
1. Grandiose statements
2. A failure to face a competitive advantage
3. Operational effectiveness, competitive benchmarking or other tactical
tools.
Firm performance is determined by two factors:
- Industry effects, which describe the underlying economic structure of the
industry.
- Firm effects which attributes firm performance to the actions managers
take.
,The structure of an industry is determined by elements common to all industries,
elements such as entry and exit barriers, numbers and size of companies and
types of product and services offered.
1.2. Stakeholders and competitive advantage
Companies with a good strategy generate value for society. Important to
consider are black swan events. A black swan event describes an impact which is
highly improbable but with a high impact. Two common features of black swan
events are pertinent to strategic management:
1. These events demonstrate that managerial actions can affect the
economic well-being of large numbers of people around the globe.
2. Stakeholders, which can or be affected by a firm’s actions, such as
organizations, groups and individuals.
Stakeholders have a vested claim of interest in the performance and continues
survival of a firm. Stakeholders can be grouped in either internal or external.
Internal stakeholders are stockholders, employees, and board members, where
external stakeholders are customers, suppliers, alliance partners, creditors,
unions, communities, governments at various levels and the media.
Stakeholder strategy is an integrative approach to managing a diverse set of
stakeholders effectively in order to gain and sustain competitive advantage.
The key challenge of stakeholder strategy is to effectively balance the needs of
various stakeholders. The firm needs to ensure that its primary stakeholders and
the same time for the other stakeholders achieve their objectives and are
satisfied. Stakeholder impact analysis provides a decision tool with which
managers can recognize, prioritize and address the needs of different
stakeholders. In each step, managers must pay particular attention to three
important stakeholder attributes: power, legitimacy and urgency.
- A stakeholder has power over a company when it can get the company to
do something that it would not otherwise do.
- A stakeholder has a legitimate claim when it is perceived to be legally
valid or otherwise appropriate.
- A stakeholder has an urgent claim when it requires a company immediate
attention and response.
Stakeholder analysis consists of five important steps:
1. Identify stakeholders. In this step, the firm focusses on stakeholders
that currently have or potentially can have material effect on a company.
2. Identify stakeholders’ interests: managers need to specify and assess
the interests and claims of the pertinent stakeholders using the power,
legitimacy and urgency criteria.
3. Identify opportunities and threats: since stakeholders have a claim on
the company, opportunities and threats are two sides of the same coin.
4. Identify social responsibilities: Corporate social responsibility (CSR)
helps to recognize and address the economical, legal, ethical and
philanthropical expectations that society has of the business enterprise at
a given point in time.
5. Address stakeholder concerns: in the last step in stakeholder analysis,
managers need to decide the appropriate course of action for the firm
given all of the preceding factors.
,2. Strategic leadership: managing the strategy
process.
2.1. Vision, mission and values
An effective strategic management process lays the foundation for sustainable
competitive advantage. Therefore, strategic leadership is needed, which is the
executives’ use of power and influence to direct the activities of others when
pursuing an organization’s goals. The first step in this process is to define a
firm’s vision, mission and values.
- A firm’s vision is about what a firm wants to accomplish. A vision further
captions an organizations aspiration and spells out what it ultimately
wants to accomplish. An effective vision pervades the organization with a
sense of winning and motivates employees at all levels to aim for the
same target, while leaving room for the individual and team contribution.
- A firm’s mission is about how a firm wants to accomplish the goals. A
mission is about what an organization actually does, which is the products
and services it plans to provide and the markets in which it will compete.
To be effective, firms need to back up their visions and missions with
strategic commitments, which are actions to achieve the mission that are
costly, long-term oriented, and difficult to reverse.
- Values are about commitments an organization makes to act both legally
and ethically to pursue the mission and vision. An organizations values
should be clearly articulated in the strategy process. A core values
statement is a statement of principles to guide an organization as it works
to achieve its vision and fulfill its mission, for both internal conduct and
external interactions. It often includes explicit ethical considerations. Such
as statement matters because it provides touchstones for employees to
understand the company culture.
The effectiveness of vision statements differs based on type. Customer-oriented
vision statements allow companies to adapt to changing environments. Product-
oriented vision statements often constrain this ability. This is because customer-
oriented vision statements focus employees to think about how best to solve a
problem for a consumer. A product-oriented vision defines a business in terms of
a good or service produced, while a customer-oriented vision defines a business
in terms of providing solutions to customer needs. Customer oriented visions
identify a critical need but leave open the means of how to meet that need. A
positive relationship between vision statements and firm performance is more
likely to exist under certain circumstances:
- The visions are customer oriented
- Internal stakeholders are invested in defining the vision
- Organizational structures such as compensation systems align with the
firm’s vision statement.
Organizational core values are ethical standards and norms that govern the
behavior of individuals within a firm or organization. Strong ethical values have
two important functions. First, they form a solid foundation on which a firm can
build its vision and mission and thus lay the groundwork for long-term success.
Second, values serve as the guardrails put in place to keep the company in track
when pursuing its vision and mission in its quest for competitive advantage.
, 2.2. Strategic leadership
Strategic leadership describes the executives successful use of power and
influence to direct the activities of others when pursuing an organization’s goals.
According to the upper-echelons theory, organizational outcomes including
strategic choices and performance levels reflect the values of the top
management team.
Strategy formulation concerns the choice of strategy in terms of where and how
to compete. In contrast, strategy implementation concerns the organization,
coordination and integration of how work gets done. In short it concerns the
execution of strategy. Strategy formulation can be broken down into three areas:
- Corporate strategy, which concerns questions about where to compete in
terms of industry, markets and geography.
- Business strategy, which concerns the question of how to compete. Could
be through cost leadership, differentiation, or value innovation.
- Functional strategy, which concerns the question of how to implement a
chosen business strategy.
Business strategy occurs within strategic business units (SBU’s), which are
standalone divisions of a larger organization, each which its own profit and loss
responsibility. Within each strategic business unit there are various functions.
Each functional manager is responsible for decisions and actions within a single
functional area.
2.3. The strategic management process
When strategizing for competitive advantage, managers rely on strategic
planning, scenario planning and strategy as planned emerge, outlined below.
Top-down strategic planning:
Is a rational process through which executives attempt to program future
success. In this approach, all strategic intelligence and decision-making
responsibilities are concentrated in the office of the CEO. One major shortcoming
is that the formulation of strategy is separate from implementation and thinking
about strategy is separate from doing it. Another shortcoming is that we simply
cannot know the future.
Scenario planning:
In this strategy, top management envisions different what if scenarios to
anticipate plausible features in order to derive strategic responses. Scenario
planning takes place at both the corporate and business levels of strategy.
Scenario planning addresses both optimistic and pessimistic futures and
managers than formulate strategic plans they could activate and implement
should the envisioned optimistic or pessimistic scenarios begin to appear. The
goal is to create a number of detailed and executable strategic plans. This allows
the strategic management process to be more flexible and more effective than
the more static planning approach with one master plan.
In the formulation phase of scenario planning, management teams develop
different strategic plans to address possible future scenarios. In the
implementation stage, managers execute the dominant strategic plan, the option
that top managers decide most closely matches the current reality. If the
situation changes, managers can quickly retrieve and implement any of the
alternate plans developed in the formulation stage.
Strategy as planned emergence: top down and bottom up:
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