Mastering Strategic Management Principles

Chapter 1: What Is Strategy?

Strategy is a set of goal-directed actions that a firm takes to gain and sustain superior performance relative to competitors. Strategies are:

• Long-term oriented (versus tactics)
• Difficult and costly to reverse
• Not a zero-sum game
• Win-win scenarios ("co-opetition": collaborative efforts among competitors for mutual gain; expanding the pie)
• Requiring trade-offs for strategic positioning

A good strategy is based on three elements:

1. A diagnosis of the competitive challenge (analysis of the firm’s internal and external environments).
2. A guiding policy to address the competitive challenge (formulation; results in corporate, business, and functional strategy).
3. A set of coherent actions to implement the firm’s guiding policy.

Competitive Advantage: Superior performance relative to other competitors in the same industry or the industry average. Competitive advantage is defined in a relative sense, not an absolute one.

Sustainable Competitive Advantage means the firm can outperform its competitors or the industry average over a prolonged period.

The purview of stakeholders: Organizations, groups, and individuals that can affect or can be affected by a firm’s actions. Maximizing shareholder value leads to societal impact and considering stakeholders (internal and external).

Stakeholder Strategy and Competitive Advantages

• An integrative approach to managing a diverse set of stakeholders to gain and sustain competitive advantage.
• Stakeholder management benefits firm performance:
  • Cooperative stakeholders reveal important information.
  • Increased trust lowers business transaction costs.
  • Can lead to greater adaptability and flexibility.
  • More predictable and stable returns.
  • Stronger reputation.

Afi Strategy Framework

Chapter 2: Strategic Leadership

Strategic leadership pertains to executives’ use of power and influence to direct the activities of others when pursuing an organization’s goals.

Effective Strategic Leadership: Power and influence; sets organizational goals, directs the activities of others towards the goals. How it works: information (environmental/organizational stimulus) -> managerial perception -> strategy formulation and implementation.

• Strategy formulation: Concerns the choice of strategy in terms of where and how to compete.
• Strategy implementation: Concerns the organization, coordination, and integration of how work gets done.

Three levels: Corporate level (top: where to compete, overall corporate value), business level (how to compete, general management, and competitive advantages), and functional level.

Vision: What do we want to accomplish ultimately?
Mission: How do we accomplish our goals?
Values: What commitments do we make, and what safeguards do we put in place to act both legally and ethically as we pursue our vision and mission?

Three Approaches to Strategic Management Process

• Strategy as strategic planning — A formal, top-down planning approach.
  • Pros: Provides a clear strategy process and lines of communication; affords coordination and control of various business activities; works well in stable environments.
  • Cons: Fairly rigid and inhibits flexibility; formulation is separate from implementation; information flows top-down (one-way); assumes that the future can usually be predicted based on past data.
• Strategy as scenario planning — A formal, top-down planning approach. Envisions different "what-if" plans (new laws, demographic shifts, changing economic conditions, technological advances) and generates a dominant plan while keeping other scenarios in reserve. Cons: Black Swan Events.
• Strategy as planned emergence — Combination of top-down and bottom-up approaches. Begins with a strategic plan, but is both top-down and bottom-up, and less formal.
  • Cons: Unclear strategy process and line of communication can lead to employee confusion and lack of focus; many ideas that bubble up from the bottom may not be worth pursuing; firms may lack a clear process of how to evaluate emergent strategies.

Twelve Common Decision-Making Biases

• Overconfidence Bias: Holding unrealistically positive views of oneself and one’s performance.
• Immediate Gratification Bias: Choosing alternatives that offer immediate rewards and that avoid immediate costs.
• Anchoring Effect: Fixating on initial information and ignoring subsequent information.
• Selective Perception: Selecting, organizing, and interpreting events based on the decision maker’s biased perceptions.
• Confirmation Bias: Seeking out information that reaffirms past choices and discounting contradictory information.
• Framing Bias: Selecting and highlighting certain aspects of a situation while ignoring other aspects.
• Availability Bias: Losing decision-making objectivity by focusing on the most recent events.
• Representation Bias: Drawing analogies and seeing identical situations when none exist.
• Randomness Bias: Creating unfounded meaning out of random events.
• Sunk Costs: Continuing an action or endeavor due to the unrecoverable resources—time, money, or effort—that have already been invested.
• Self-Serving Bias: Taking quick credit for successes and blaming outside factors for failures.
• Hindsight Bias: Mistakenly believing that an event could have been predicted once the actual outcome is known.

Groupthink: Eight Symptoms (Irving Janis)

• Type I: Overestimations of the group — its power and morality
  • Illusions of invulnerability creating excessive optimism and encouraging risk taking.
  • Unquestioned belief in economic morality of the group, causing members to ignore the consequences of their actions.
• Type II: Closed-mindedness
  • Rationalizing warnings that might challenge the group's assumptions.
  • Stereotyping those who are opposed to the group as weak, evil, biased, spiteful, impotent, or stupid.
• Type III: Pressures toward uniformity
  • Illusion of unanimity among group members (silence is taken for agreement).
  • Self-censorship of ideas that deviate from the apparent group consensus.
  • Direct pressure to conform placed on any member who questions the group, couched in terms of "disloyalty".
  • Mind-guarding: Self-appointed members who shield the group from dissenting information.

Chapter 3: External Analysis

The PESTEL Framework
A firm’s macroenvironment factors in six segments:

• Political factors: Government pressures, subsidies and incentives, lobbying, differences in countries, states, and regions.
• Economic factors: Growth rates, employment levels, interest rates, price stability, currency exchange.
• Sociocultural factors: Hofstede’s Cultural Dimensions (Individualism versus Collectivism, Power Distance, Uncertainty Avoidance, Masculinity versus Femininity, Long-term Orientation, Indulgence versus Restraint).
• Technological factors: Innovation in products and processes, diffusion, research and development.
• Ecological factors: Global warming, sustainability, pollution.
• Legal factors: Court system, legislation, hiring laws, (de-)regulation.

Porter’s Five Forces Model helps strategic leaders understand the profit potential of different industries and how they can position their firms to gain and sustain competitive advantage:

1. Threat of New Entrants
2. Bargaining Power of Buyers
3. Threat of Substitutes
4. Bargaining Power of Suppliers
5. Competitive Rivalry Among Existing Competitors

Strategic Groups: A set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage.

• Competitive rivalry is strongest between firms that are within the same strategic group.
• The external environment and the five forces affect strategic groups differently.
• Some strategic groups are more profitable than others.

Chapter 4: Internal Analysis

Core Competencies: Unique strengths embedded deep within a firm that allow it to create more economic value by creating higher value for the customer or offering products/services at a lower cost.

Resource-Based View: Firms are defined as heterogeneous bundles of resources that are key to superior firm performance. Resources fall into two categories: tangible and intangible.

Two Critical Assumptions of the Resource-Based View:

• Resource Heterogeneity: A firm is a unique bundle of resources, capabilities, and competencies.
• Resource Immobility: Resources are "sticky" and do not move easily between firms.

The VRIO Framework: To be the basis of a competitive advantage, a resource must be:

• Valuable
• Rare
• Costly to imitate
• Organized to capture the value of the resource

Isolating Mechanisms are barriers to imitation that prevent rivals from competing away a firm's advantage:

• Better expectations of future resource value
• Path dependence
• Causal ambiguity
• Social complexity
• Intellectual property (IP) protection

Core Rigidity: Former core competency turned into a liability as a result of an environmental change.

Dynamic Capabilities: A firm’s ability to create, deploy, modify, reconfigure, upgrade, and leverage resources over time, especially relevant in high-tech and fast-shifting markets.

Value Chain Framework and Strategic Activity Systems

• Primary Activities (add value directly): Supply chain management, operations, distribution, marketing and sales, after-sales service.
• Support Activities (add value indirectly): Research and development (R&D), information systems, human resources, accounting and finance, firm infrastructure.

SWOT Analysis: Strengths, Weaknesses, Opportunities, Threats.

Chapter 5: Competitive Advantage

Three Traditional Frameworks

• Accounting Performance: Standardized accounting metrics to assess competitive advantage and compare performance, though they are historical and focus mainly on tangible assets.
• Shareholder Value Creation: External and forward-looking performance measures based on risk capital, total return to shareholders, and market capitalization.
• Economic Value Creation: A firm has a competitive advantage when it creates more economic value (the difference between a buyer's willingness to pay and the firm's total cost) than rivals.

Two Integrative Frameworks

• Balanced Scorecard: Links customers, value creation, core competencies, and shareholders.
  
• Triple Bottom Line: Three dimensions fundamental to sustainable strategy (Profits, People, Planet).

What Is a Business Model? The translation of strategy into actions, detailing a firm’s competitive tactics, initiatives, and how it intends to make money.

Popular business models:

• Razor-razor-blades: Pay for replacements.
• Subscription: Pay for access.
• Pay as you go: Pay for what you consume.
• Freemium: Pay for extra features/add-ons.
• Wholesale: Products sold at a discount.
• Agency: Products sold on commission.
• Bundling: More than one product sold at a discount.