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Summary - Strategic Management (BT2114)
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Summary of all lectures and literature for the course Strategic Management
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Week 1Chapter 1: what is strategy?
Strategic management is the integrative management field that combines analysis, formulation, and
implementation in the quest for 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. In any
competitive situation, a good strategy enables a firm to achieve superior performance relative to its
competitors. But what is a good strategy?
1. A diagnosis of the competitive challenge: through analysis of the firm’s external and internal
environments (part 1 of AFI framework)
2. A guiding policy to address the competitive challenge: through strategy formulation,
resulting in the firm’s corporate, business and functional strategies (part 2 of AFI framework)
3. A set of coherent actions to implement the firm’s guiding policy: through strategy
implementation (part 3 of AFI framework)
After the diagnosis of the competitive challenge, the firm needs to formulate an effective guiding
policy in response. The formulated strategy needs to be consistent, often backed up with strategic
commitments -> big changes that cannot be easily reversed. Without consistency in a firm’s guiding
policy, employees become confused and cannot make effective day-to-day decisions that support
the overall strategy. Also, the stakeholders become frustrated. A clear guiding policy needs to be
implemented with a set of coherent actions.
Competitive advantage is always relative, not absolute. To assess competitive advantage, we
compare firm performance to a benchmark: 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
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.
Important here is that strategy is about creating superior value, while containing the cost to create
it, or by offering similar value at lower cost. Managers achieve these through strategic positioning:
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 more likely it will gain competitive advantage.
However, strategic positioning requires trade-offs.
,The key to successful strategy is to combine a set of activities to stake out a unique strategic
position within an industry. Competitive advantage has to come from performing different activities
or performing the same activities differently than rivals. Ideally, these reinforce each other rather
than create trade-offs.
Since strategic positioning requires trade-offs, strategy is as much about deciding what not to do,
as it is about deciding what to do. Because resources are limited, managers must carefully consider
their strategic choices in the quest for competitive advantage. Operational effectiveness, marketing
skills and other functional expertise all strengthen a unique strategic position, but these do not
substitute for competitive strategy.
To gain a deeper understanding of strategy, it is helpful to think about what strategy is not:
1. Grandiose statements are not strategy: little guidance and lead to goal conflict and
confusion. Such wishful thinking frequently fails to address economic fundamentals. An
effective vision and mission can lay the foundation upon which to craft a good strategy. This
foundation must be backed up, however, by strategic actions that allow the firm to address a
competitive challenge with clear consideration of economic fundamentals (value and costs)
2. A failure to face a competitive challenge is not strategy: employees have no way of
assessing whether they are making process in addressing it
3. Operational effectiveness, competitive benchmarking or other tactical tools are not strategy
The first step to gain and sustain a competitive advantage is to define an organization’s vision,
mission and values. Managers must ask the following questions:
1. Vision: what do we want to accomplish ultimately?
2. Mission: how do we accomplish our goals?
3. Values: what commitments do we make, and what guardrails do we put in place, to act both
legally and ethically as we pursue our vision and mission?
The vision is the first principle, because it succinctly identifies the primary long-term objective of
the organization. Strategic leaders need to begin with the end in mind. Early on strategic success is
created twice. Leaders create the vision in the abstract by formulating strategies that enhance the
chances of gaining and sustaining competitive advantage, before any actions of strategy
implementation are taken in a second round of strategy creation.
A vision captures an organization’s 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 individual and team contributions.
Employees in visionary companies tend to feel part of something bigger than themselves. An
inspiring vision helps employees find meaning in their work. Beyond monetary rewards, it allows
employees to experience a greater sense of purpose. People have an intrinsic motivation to make
the world a better place through their work activities. This greater individual purpose in turn can
lead to higher organizational performance. Basing actions on its vision, a firm will build the
necessary resources and capabilities through continuous organizational learning to translate into
reality what begins as a stretch goal or strategic intent (learning from failure).
To provide meaning for employees in pursuit of the organization’s ultimate goals, vision statements
should be forward-looking and inspiring.
,Organizations establish a mission, which describes what an organization actually does: the
products and services it plans to provide, and the markets in which it will compete.
- A vision defines what an organization wants to accomplish ultimately, and thus the goals
can be described by the infinitive forms of the verb starting with “to”
- A mission describes what an organization does: it defines how the vision is accomplished
and is often introduced with the preposition “by”
To be effective, firms need to back up their visions and missions with strategic commitments, in
which the enterprise undertakes credible actions. Such commitments are costly, long-term oriented,
and difficult to reverse. To achieve competitive advantage, companies need to make strategic
commitments informed by economic fundamentals of value creation.
The effectiveness of vision statements differs by type. Customer-oriented vision statements allow
companies to adapt to changing environments. Product-oriented vision statements often constrain
this -> customer-oriented statements focus employees to think about how best to solve a problem
for a customer. Product-oriented statements focus employees on improvising existing products and
services without consideration of underlying customer problems to be solved.
A product-oriented vision defines a business in terms of a good or service provided. These tend to
force managers to take a more myopic view of the competitive landscape.
A customer-oriented vision defines a business in terms of providing solutions to customer needs.
Companies who use this can more easily adapt to changing environments. In contrast, companies
who define themselves based on product-oriented statements tend to be less flexible and thus
more likely to fail. The lack of an inspiring needs-based vision can cause the long-range problem of
failing to adapt to a changing environment.
Customer-oriented visions identify a critical need but leave open the means of how to meet that
need -> needs may change, and the means of meeting those may change with it.
It is critical that an organization’s vision should be flexible to allow for change and adaptation.
Empirical research shows that sometimes vision statements and firm performance are associated
with one another. A positive relationship between vision statements and firm performance is more
likely to exist under certain circumstances:
1. The visions are customer-oriented
2. Internal stakeholders are invested in defining the vision
3. Organizational structures like compensation systems align with the firm’s vision statement
An effective vision statement can lay the foundation upon which to craft the strategy that creates
competitive advantage.
An organization’s values also need to be clearly articulated in the strategy process. A core values
statement matters because it provides touchstones for the employees to understand the company
culture. It offers principles that employees at all levels can use to deal with complexity and to
resolve conflict. Such statements can help provide the organization’s employees with a moral
compass.
Organizational core values are the ethical standards and norms that govern the behavior of
individuals within a firm or organization. Strong ethical values have two important functions. First,
, ethical standards and norms underlay the vision statement and provide stability to the strategy,
thus laying the groundwork for long-term success. Second, once the company is pursuing its vision
and mission in its quest for competitive advantage, they serve as guardrails to keep the company on
track.
Values help individuals make choices that are both ethical and effective in advancing the company’s
goals. Without commitment and involvement from top managers, any statement of values remains
merely a public relations exercise. Organizational core values must be lived with integrity. Strategic
leaders have a strong influence in setting an organization’s vision, mission and values. This is the
first step in the entire strategic management process, which is captured in the AFI strategy
framework.
A successful strategy details a set of actions that managers take to gain and sustain a competitive
advantage. Effectively managing the strategy process is the result of three tasks:
1. Analyze (A): focus on strategic leadership and strategy process, as well as finding the
competitive advantage
2. Formulate (F): business, corporate and global strategies
3. Implement (I): focus mostly on organizational design, corporate governance and ethics
These are the pillars of research and knowledge about strategic management. The interdependent
relationships of these are captured in the AFI strategy framework. This explains and predicts
differences in firm performance, and helps managers formulate and implement a strategy that can
result in superior performance. In each of the three tasks, managers focus on specific questions.
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