Industrial Organization (IO) Theory.

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Name one company that has failed, according to the Industrial Organization (IO) Theory. What led to the failure of this company? How could the company have applied the Contingency Theory for a positive outcome?

A minimum of 250 words and two scholarly sources from the Bethel library.

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Fundamentals of Strategic Management 1 Chapter Outline 1-1 What Is Strategic Management? P 1-1a Intended and Realized Strategies O 1-1b Scientific and Artistic Perspectives on Strategic Management L1-2 Influence on Strategic Management K1-3 Strategic Decisions 1-4 Summary , Key Terms Review Questions and Exercises JPractice Quiz ANotes MReading 1-1 I E 8 5 6 4 B U 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 2 Chapter 1 T oday’s business world is global, Internet driven, and obsessed with speed. The challenges it creates for strategic managers are often complex, ambiguous, and unstructured. Add to this the constant allegations of top management wrongdoings, ethical blunders, and skyrocketing executive compensation, and it is easy to see why firm leaders are under greater pressure than ever to respond to strategic problems quickly, decisively, and responsibly. Hence, the need for effective strategic management has never been more pronounced than it is today. This text presents a framework for addressing these immediate strategic challenges. This chapter introduces the notion of strategic management, highlights its importance, and presents a five-step process for strategically analyzing an organization. The remaining chapters expand on the various steps in the process, with special emphasis on their application to ongoing enterprises. 1-1 What Is Strategic Management? Source: Comstock.com Strategy Top management’s plans to attain outcomes consistent with the organization’s mission and goals. Competitive advantage A state whereby a business unit’s successful strategies cannot be easily duplicated by its competitors. Strategic Management The continuous process of assessing its external environment and its internal strengths and weaknesses, formulating and implementing strategies, and exerting strategic control to achieve success. Strategy refers to top management’s plans to develop and sustain competitive advantage—a state whereby a firm’s successful strategies cannot be easily P duplicated by its competitors1—so that the organization’s mission is fulfilled.2 O it is assumed that an organization has a plan, its comFollowing this definition, petitive advantage is understood, and that its members understand the reason L for its existence. These assumptions may appear self-evident, but many strateK to fundamental misunderstandings associated with gic problems can be traced defining the strategy. Debates over the nature of the organization’s competitive , advantage, its mission, and whether a strategic plan is really needed can be widespread.3 Comments such as “We’re too busy to focus on developing a strategy” or “I’m not exactly sure J what my company is really trying to accomplish” can be overheard in many organizations. A is a broader term than strategy and is a process that Strategic management includes top management’s M analysis of the environment in which the organization operates prior to formulating a strategy, as well as the plan for implementation and control of Ithe strategy. The difference between a strategy and the strategic managementE process is that the latter includes considering what must be done before a strategy is formulated through assessing the success of an implemented strategy. The strategic management process can be summarized in five steps, each of which 8 is discussed in greater detail in subsequent chapters of the book (see Figure 1-1).4 5 1. External analysis: Analyze the opportunities and threats or constraints that exist in 6 environment, including industry and macroenvironmental the organization’s external forces. 4 2. Internal analysis: Analyze the organization’s strengths and weaknesses in its interB the appropriateness of its mission. nal environment. Consider 3. Strategy formulation: U Formulate strategies that build and sustain competitive advantage by matching the organization’s strengths and weaknesses with the environment’s opportunities and threats. 4. Strategy execution: Implement the strategies that have been developed. 5. Strategic control: Measure success and make corrections when the strategies are not producing the desired outcomes. Is it necessary to address these steps sequentially? The answer depends on one’s perspective. Outsiders analyzing a firm should apply a systematic approach that progresses through these steps in order. Doing so develops to a holistic understanding of the firm, its industry, and its strategic challenges. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Fundamentals of Strategic Management FIGURE 1-1 O rg a n i z a t i o n o f th e Book P O L K , J A M I E 8 5 6 In organizations, however, strategies are4being formulated, implemented, and controlled simultaneously while external B and internal factors are being assessed and reassessed. In addition, changes in one stage of the strategic management process will inevitably affect other stagesUas well. After a planned strategy is implemented, for example, it often requires modification as conditions change. Hence, because these steps are so tightly intertwined, insiders treat all of the steps as a single integrated, ongoing process.5 Consider the strategic management process at a fast-food restaurant chain. At any given time, top managers are likely assessing changes in consumer taste preferences and food preparation, analyzing the activities of competitors, working to overcome firm weaknesses, controlling remnants of a strategy implemented several years ago, implementing a strategy formulated several months ago, and formulating strategic plans for the future. Although each of these activities can 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 3 4 Chapter 1 Business Model The economic mechanism by which a business hopes to sell its goods or services and generate a profit. be linked to a distinct stage in the strategic management process, they occur simultaneously. An effective strategy is built on the foundation of the organization’s business model, the mechanism whereby the organization seeks to earn a profit by selling its goods. In a general sense, all firms seek to produce a product or service and sell it at a price higher than its production and overhead costs, thereby generating a profit. A business model is stated in greater detail, however. For example, a magazine publisher might adopt a “subscription model,” an “advertising model,” or perhaps some combination of the two. Profits would be generated primarily from readers in the former case whereas they would come primarily from advertisers in the latter case. Needless to say, identifying a firm’s business model is rarely difficult at a basic level, but can become more complex when considering intricate details. Progressive firms often devise innovative business models that extract revenue—and ultimately profits—from sources not identified by competitors. Developing a successful strategy for the firm is not an easy task. Realistically, a number of factors are typically associated with successful strategies, including the following: P 1. Strategic managers thoroughly understand the competitive environment in which the O organization competes. 2. Strategic managers understand the organization’s resources and how they translate L into strengths and weaknesses. K 3. The strategy is consistent with the mission and goals of the organization. 4. Plans for putting the, strategy into action are designed with specificity before it is implemented. 5. Possible future changes in the proposed strategy (i.e., strategic control) are evaluated before the strategy isJ adopted. Careful consideration A of these factors reinforces the interrelatedness of the steps in the strategic management M process. Each factor is most closely associated with one of the five steps, yet they fit together like pieces of a puzzle. The details associated with the successIfactors—and others—will be discussed in greater detail in future chapters. E Top managers make effective strategic decisions when they remain informed of issues that affect their industries, as well as the business world in general. Information vital to effective strategic decision making can be found in a variety 8 of publications. In addition to the business sections of most major newspapers, 5 publications such as Fortune, Business Week, Industry Standard, Strategy+Business, and Wall Street Journal 6report on a wide variety of strategic management topics (see Table 1-1). Not only are these concepts of interest to top managers, but they are also a concern for 4 employees, supervisors, and middle managers of all organizations. An appreciation B of the organization’s strategy helps all of its members relate their work assignments more closely to the direction of the organization. U Strategic management is not limited to for-profit organizations. Top managers of any organization, regardless of profit or nonprofit status, must understand the organization’s environment and its capabilities and develop strategies to assist the enterprise in attaining its goals. Drexel University President Constantine Papadakis, for example, is widely considered to be a leading strategic thinker among university top executives. The innovative Greek immigrant promotes Drexel through aggressive marketing, while campaigning for an all-digital library without books. In many respects, he manages the university in the same way that other executives manage profit-seeking enterprises. Interestingly, his salary in 2005 was about $900,000 per year—not including 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Fundamentals of Strategic Management TA B L E 1-1 5 S e l e c t O n li ne Sou rces of Bu si n ess St rat eg y N ew s Publication Contact Information Business Week E-Commerce Times Economist Fast Company Forbes Fortune Industry Standard Strategy+Business Wall Street Journal www.businessweek.com www.ecommercetimes.com www.economist.com (payment required for full access) www.fastcompany.com www.forbes.com www.fortune.com www.thestandard.com(e-commerce) www.strategy-business.com (payment required for full access) http://wsj.com (payment required for full access) income from outside sources—making him one of the highest paid university presidents in the country.6 1-1a Intended and Realized Strategies P A critical challenge facing organizations is the reality that strategies are not always O Mintzberg introduced two terms to implemented as originally planned. Henry help clarify the shift that often occurs between L the time a strategy is formulated and the time it is implemented. An intended strategy, that which management K originally planned, may be realized just as it was planned, in a modified form, or even in an entirely different form. Occasionally, the strategy that management , intends is actually realized, but the intended strategy and the realized strategy, which is what management actually implements, usually differ.7 Hence, the origiJ or undesirable results, or it may be nal strategy may be realized with desirable modified as changes in the firm or the environment become known. A The gap between the intended and realized strategies usually results from M events, better information that was unforeseen environmental or organizational not available when the strategy was formulated, or an improvement in top manI agement’s ability to assess its environment. Although it is important for managers E a realistic and thorough assessment to formulate responsible strategies based on of the firm and its environment, things invariably change along the way. Hence, it is common for such a gap to exist, creating the need for constant strategic action 8 if a firm is to stay on course. Instead of resisting modest strategic changes when new information is discovered, managers should search for new information and 5 be willing to make such changes when necessary. This activity is part of strategic 6 control, the final step in the strategic management process. Intended Strategy The original strategy top management plans and intends to implement. Realized Strategy The strategy top management actually implements. 4 1-1b Scientific and Artistic Perspectives B on Strategic Management U Top executives should take one of two different perspectives on the approach to strategic management. Most strategy scholars have endorsed a scientific perspective, whereby strategic managers are encouraged to systematically assess the firm’s external environment and evaluate the pros and cons of myriad alternatives before formulating strategy. The business environment is seen as largely objective, analyzable, and at least somewhat predictable. As such, strategic managers should follow a systematic process of environmental, competitive, and internal analysis and build the organization’s strategy on this foundation. According to this perspective, strategic managers should be trained, highly skilled analytical thinkers capable of digesting a myriad of objective data and 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 6 Chapter 1 translating it into a desired direction for the firm. “Strategy scientists” tend to minimize or reject altogether the role of imagination and creativity in the strategy process, and are not generally receptive to alternatives that emerge from any process other than a comprehensive, analytical approach. Others, however, have a different view. According to the artistic perspective on strategy, the lack of environmental predictability and the fast pace of change render elaborate strategy planning as suspect at best. Instead, strategists should incorporate large doses of creativity and intuition in order to design a comprehensive strategy for the firm.8 Mintzberg’s notion of a craftsman—encompassing individual skill, dedication, and perfection through mastery of detail—embodies the artistic model. The strategy artist senses the state of the organization, interprets its subtleties, and seeks to mold its strategy like a potter molds clay. The artist visualizes the outcomes associated with various alternatives and ultimately charts a course based on holistic thinking, intuition, and imagination.9 “Strategy artists” may even view strategic planning exercises as time poorly spent and may not be as likely as those in the science school to make the effort necessary to maximize the value of a formal planning process.10 This text acknowledges P the validity of the artistic perspective but emphasizes the scientific view. Creativity and innovation are important and encouraged, but O into organizational success when they occur as part are most likely to translate of a comprehensive approach to strategic management. Nonetheless, the type of L formal, systematic strategic planning proposed in this text is not without its critics. Some charge that K such models are too complex to apply, or that they apply only to businesses in highly certain environments.11 Others emphasize that the , stages in the process are so closely interrelated and that considering them as independent steps may be counterproductive. Still others, such as Mintzberg, argue that planning models J stifle the creativity and imagination that is central to formulating an effective strategy.12 Although these views have merit, the compreA proposed herein is presented as a proper foundation hensive, systematic model for understanding theM strategic management process. It does not, however, preclude the application of other approaches. 1-2 I E Influence on Strategic Management The roots of the strategic management field can be traced to the 1950s when the discipline was originally 8 called “business policy.” Today, strategic management is an eclectic field, drawing upon a variety of theoretical frameworks. Three promi5 nent perspectives are summarized in Table 1-2 and discussed in this section. TA B L E 1-2 Theoretical Perspective 6 Th eoret 4 i cal Persp ect i ves on B Primary Influence U on Firm Performance Industrial organization (IO) theory Resource-based theory Contingency theory Structure of the industry Firm’s unique combination of strategic resources Fit between the firm and its external environment Fi rm Perf orman ce How Perspective Is Applied to the Case Analysis Industry analysis portion of the external environment Analysis of internal strengths and weaknesses Strengths, weaknesses, opportunities, and threats (SWOT) analysis and SW/OT matrix 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Fundamentals of Strategic Management Industrial organization (IO), a branch of microeconomics, emphasizes the influence of the industry environment upon the firm. The central tenet of industrial organization theory is the notion that a firm must adapt to influences in its industry to survive and prosper; thus, its financial performance is primarily determined by the success of the industry in which it competes. Industries with favorable structures offer the greatest opportunity for firm profitability.13 Following this perspective, it is more important for a firm to choose the correct industry within which to compete than to determine how to compete within a given industry. Recent research has supported the notion that industry factors tend to play a dominant role in the performance of most firms, except for those that are the notable industry leaders or losers.14 IO assumes that an organization’s performance and ultimate survival depend on its ability to adapt to industry forces over which it has little or no control. According to IO, strategic managers should seek to understand the nature of the industry and formulate strategies that feed off the industry’s characteristics.15 Because IO focuses on industry forces alone, strategies, resources, and competencies are assumed to be fairly similar among competitors within a given industry. If one firm deviates from the industry norm P and implements a new, successful strategy, then other firms will rapidly mimic the higher performing firm by purchasing O talent that have made the leading the resources, competencies, or management firm so profitable. Hence, although the IOLperspective emphasizes the industry’s influence on individual firms, it is also possible for firms to influence the strategy K structure of the industry.16 of rivals, and in some cases even modify the Perhaps the opposite of the IO perspective, , resource-based theory views performance primarily as a function of a firm’s ability to utilize its resources.17 Although environmental opportunities and threats are important, a firm’s unique resources comprise the key variables that allow it to develop J a distinctive competence, enabling the firm to distinguish itself from its rivals and create competitive advantage. A and intangible assets, such as capi“Resources” include all of a firm’s tangible tal, equipment, employees, knowledge, M and information.18 An organization’s resources are directly linked to its capabilities, which can create value and ultiI mately lead to profitability for the firm. Hence, resource-based theory focuses E the competitive environment. primarily on individual firms rather than on If resources are to be used for sustained competitive advantage—a firm’s ability to enjoy strategic benefits over an extended time—those resources must be 8 and without strategically relevant valuable, rare, not subject to perfect imitation, substitutes.19 Valuable resources are those 5 that contribute significantly to the firm’s effectiveness and efficiency. Rare resources are possessed by only a few 6 competitors, and imperfectly imitable resou ...
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