Alternative Models of Superior Returns

Industrial Organization Model

The External Environment An Attractive Industry Strategy Formulation

Resource-Based Model
Resources Capability Competitive Advantage

Assets and Skills

Strategy Implementation Superior Returns

An Attractive Industry
Strategy Implementation

Superior Returns
Ch1-1

I/O Model of Superior 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.
Ch1-2

I/O Model of Superior Returns

External Environment
General Environment Industry Environment Competitive Environment

Action required: Study the external environment, especially the industry environment.

Ch1-3

I/O Model of Superior Returns

External Environment An Attractive GeneralIndustry Environment
Industry Environment An industry whose Competitive structural characteristics Environment above-average suggest returns are possible

Action required: Locate an industry with high potential for aboveaverage returns.

Ch1-4

I/O Model of Superior Returns

External Environment Attractive GeneralIndustry Environment Industry Environment Strategy An industry whose Formulation Competitive structural characteristics
Action required: Identify strategy called for by the industry to earn above-average returns.

Environment above-average a strategy Selection of suggest returns are linked with abovepossible average returns in a particular industry

Ch1-5

I/O Model of Superior Returns

Action required: External Develop or acquire assets Environment Attractive and skills needed to GeneralIndustry Environment implement the strategy. Strategy Industry Environment An industry whose Formulation Competitive structural characteristics Environment above-averageAssets and Skills Selection of a strategy suggest
returns arelinked with abovepossible Assets and average returns in a skills required particular industry to implement a chosen strategy

Ch1-6

I/O Model of Superior Returns

Action required: External Use the firms strengths Environment Attractive (its assets or skills) to GeneralIndustry Environment implement the strategy. Strategy Industry Environment An industry whose Formulation Competitive structural characteristics Environment above-averageAssets and Skills Selection of a strategy suggest
returns arelinked with abovepossible Assets and skills average returns in a Strategy required Implementation particular industry to implement a chosen strategy Selection of strategic actions linked with effective implementation of the chosen strategy

Ch1-7

I/O Model of Superior Returns

Action required: External Maintain selected strategy Environment Attractive in order to outperform GeneralIndustry Environment industry rivals. Strategy Industry Environment An industry whose Formulation Competitive structural characteristics Environment above-averageAssets and Skills Selection of a strategy suggest
returns arelinked with abovepossible Assets and skills average returns in a Strategy required Implementation particular industry to implement Superior Returns a chosen strategy Selection of strategic actions linked with Earning of aboveeffective implementation average returns of the chosen strategy

Ch1-8

Resource-Based Model of Superior Returns

The Resource-Based model suggests that above-average returns for any firm are largely determined by characteristics inside the firm. This model focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.
Ch1-9

Resource-Based Model of Superior Returns

Resources
Inputs to a firms production process.

Action required: Identify firm resources. Study strengths and weaknesses relative to rivals.

Ch1-10

Resource-Based Model of Superior Returns

Resources Capability Action required: Determine what firm capabilities allow it to do better than rivals.

Inputs to a firms production process. an integrated Capacity for set of resources to perform a task or activity.

Ch1-11

Resource-Based Model of Superior Returns

Resources Capability Action required: Determine how firms resources and capabilities may create competitive advantage.

Inputs to a firms Competitive production process. an integrated Capacity for set of resources to Advantage integratively perform a Ability task or activity. of a firm to outperform its rivals

Ch1-12

Resource-Based Model of Superior Returns

Resources Capability Action required: Locate an attractive industry.

Inputs to a firms Competitive production process. an integrated Capacity for set of resources to Advantage An integratively perform a Attractive Ability firm to task or activity. of aIndustry outperform its rivals Location of an industry with opportunities that can be exploited by the firms resources and capabilities

Ch1-13

Resource-Based Model of Superior Returns

Resources Capability Action required: Select strategy that best exploits resources and capabilities relative to opportunities in environs.

Inputs to a firms Competitive production process. an integrated Capacity for set of resources to Advantage An integratively perform a Attractive Ability firm to task or activity. of aIndustry outperform its rivalsStrategy Location of an industry Formulation with opportunities that and can be exploited by the Implementation firms resources and Strategic actions taken to capabilities earn above-average returns

Ch1-14

Resource-Based Model of Superior Returns

Resources Capability Action required: Maintain selected strategy in order to outperform industry rivals.

Inputs to a firms Competitive production process. an integrated Capacity for set of resources to Advantage An integratively perform a Attractive Ability firm to task or activity. of aIndustry outperform its rivalsStrategy Location of an industry Formulation with opportunities that and Superior can be exploited by the Implementation Returns firms resources and Strategic actions takenaboveEarning of to capabilities earn above-averagereturns average returns

Ch1-15

Resources and capabilities lead to Competitive Advantage when they are:

Valuable
allow the firm to exploit opportunities or neutralize threats in its external environment possessed by few, if any, current and potential competitors

Rare

Costly to Imitate when other firms either cannot obtain them

or must obtain them at a much higher cost

Nonsubstitutable the firm must be organized appropriately to

obtain the full benefits of the resources in order to realize a competitive advantage

Ch1-16

When these four criteria are met, Resources and Capabilities become:

Core Competencies

Core Competencies are resources and capabilities that can serve as a source of Competitive Advantage.
The Resource-Based model argues that Core Competencies are the basis for a firms Competitive Advantage, Strategic Competitiveness and Ability to Earn Above-average Returns.
Ch1-17

Strategic Intent
Winning competitive battles through deciding how to leverage internal resources, capabilities, and core competencies.

Strategic Mission
An application of strategic intent in terms of products to be offered and markets to be served.

Ch1-18

Strategic Intent
BUSINESS WEEKSS 10 Top Managers of the Year, 1999

The most effective strategists provide a vision (strategic intent) to effectively elicit the help of others in creating a firm's competitive advantage.

Name Minoru Arakawa

Company Nintendo America

Strategic Accomplishment Scored huge hit by bringing Pok mon to U.S. over objections of co-workers and negative market research From just 23 in Oct. 98, LVMHs U.S. shares have vaulted 280%, to about 87 Profits should jump 46%, to $2.3 billion for fiscal year 1999. Sales are expected to grow 25%, to $38 billion After his company was labeled racist, attracted minorities to key jobs, including treasurer Ira Hall, a former IBM executive Boosted stock price by around 100% last year, to about $54 Deals to broaden AOLs availability and services will help boost income 102% this fiscal year, to $800 million Broadened Cisco into strategic businesses such as software, consulting, and fiber-optic communications Reduced internal conflicts and spurred growth through management changes Acquired rival French oil company ELF Aquitaine for $44 billion. Shares up about 35% in 99, as profits expected to grow 20%, to $3.1 billion Turned toward more profitable data, Internet, and international operations

Bernard Arnault Arthur Blank

LVMH Home Depot

Peter Bijur

Texaco

Gordon Binder Steve Case

Amgen America Online

John Chambers

Cisco Systems

Jim Curvey Thierry Desmarest

Fidelity Investments Totalfina

Bernie Ebbers

MCI Worldcom

Ch1-19

Stakeholders:

Groups who are affected by a firms performance and who have claims on its wealth

The firm must maintain performance at an adequate level in order to maintain the participation of key stakeholders

Capital Market
Stock market/Investors Debt suppliers/Banks

Firm
Product Market
Primary Customers Suppliers

Organizational
Employees Managers Non-Managers
Ch1-20

Stakeholder Involvement
Each of the key stakeholders wants a piece of the same pie

How do you divide the pie in order to keep all of the stakeholders involved?

2
How do you increase the size of the pie so that there is more to go around?

Ch1-21