CHAPTER 1: What is Strategy and the Strategic Management Process?
Objective 1.1: Define strategy and describe the strategic management
process
Defining strategy
A firm’s strategy is defined as its theory about how to gain competitive advantages. A good
strategy is a strategy that generates such advantages.
The Strategic Management Process
The strategic management process is a sequential (i.e. successive order) set of analyses and
choices that can increase the likelihood that a firm will choose a good strategy.
o A firm’s mission
The long-term purpose of a firm. A mission can have a different effect on firm’s
performances. Some missions may not affect firm performance, some missions can improve
firm performance and some missions can hurt firm performances.
o Objectives
Specific measurable targets a firm can use to evaluate the extent to which it is realizing its
mission.
o External and internal analysis
By conducting an external analysis, a firm identifies the critical threats and opportunities in
its competitive environment. By conducting an internal analysis, a firm identifies its
organizational strength and weaknesses.
o Strategic choice
The strategic choices available to firms fall into two large categories: business-level
strategies and corporate-level strategies. Business-level strategies are actions firms take to
gain competitive advantages in a single market or industry. Corporate-level strategies are
actions firms take to gain competitive advantages by operating in multiple markets or
industries simultaneously.
o Strategy implementation
The implementation of the strategy occurs when a firm adopts organizational policies and
practices that are consistent with its strategy.
,Objective 1.2: Define competitive advantage and explain its relationship to economic value
creation
What is competitive advantage?
In general, a firm has a competitive advantage when it can create more economic value that
rival firms. Economic value is simply the difference between what the customers are willing
to pay for a firm’s products or services and the total cost of producing these products or
services.
Thus, the size of firm’s competitive advantage is the difference between the economic value
a firm can create and the economic value its rivals can create.
A firm’s competitive advantage can be temporary or sustained. A temporary competitive
advantage is a competitive advantage that can last for a very short time. A sustained
competitive advantage, in contrast, can last much longer.
Firms that create the same economic value as their rivals experience competitive parity.
Firms that generate less economic value than their rivals have a competitive disadvantage.
Objective 1.3: Describe two different approaches to measuring competitive advantage
Accounting measures of competitive advantage
A firm’s accounting performance is a measure of its competitive advantage calculated by
using information from a firm’s published profit and loss and balance sheet statements.
One way to use a firm’s accounting statements to measure its competitive advantage is with
accounting ratios. Accounting ratios are simply numbers taken from a firm’s financial
statements that are manipulated in ways that describe various aspects of a firm’s
performances (see table on the next page).
The measures of a firm accounting performance can be grouped into four categories: (1)
profitability ratios, (2) liquidity ratios, (3) leverage ratios and (4) activity ratios.
Of course, these ratios, by themselves, say very little about a firm. To determine how a firm
is performing, its accounting ratios must be compared with some standard. In general, that
standard is the average of accounting ratios of other firms in the same industry.
, Using ratios analysis, a firm earns above-average accounting performances when its
performances is greater than the industry average → competitive advantage.
A firm earns average accounting performances when its performance is equal to the
industry average → competitive parity.
A firm earns below-average accounting performances when its performances is less than
the industry average → competitive disadvantage.
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