Summary Strategic Management and Competitive Advantage: Concepts and Cases, Global Edition - Geïntegreerde Bedrijfseconomie (300429-B-6)
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Strategic Management and Competitive Advantage: Summary
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Tilburg University (UVT)
Bachelor Human Resources Studies
Strategic Management (761003B5)
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Strategic Management
Lecture 1
Chapter 1 What is Strategy and the Strategic Management Process
Learning objectives:
o Define strategy and describe the strategic management process
o Define competitive advantage and explain its relationship to economic value creation
o Describe 2 different approaches to measuring competitive advantage
o Explain the difference between emergent and intended strategies
o Discuss why it is important for you to study strategy and the strategic management process
1. DEFINE STRATEGY AND DESCRIBE THE STRATEGIC MANAGEMENT PROCESS
Strategy: a firm’s theory about how to gain competitive advantage. A good strategy is a strategy
that generates such advantages.
Each theory is based on a set of assumptions and hypotheses about the way competition in
an industry is likely to evolve and how that evolution can be exploited to earn a profit (the
greater these assumptions and hypotheses are, the more likely a firm will gain a
competitive advantage).
Strategic management process: a sequential set of analyses and choices that can increase the
likelihood that a firm will choose a good strategy.
Mission
Mission: what a firm aspires to be in the long run & what it wants to avoid in the meantime (long-
term purpose).
Written down in the form of mission statements
a. Some missions may not affect firm performance: even if a mission statement does say
something unique about a company, if that mission statement does not influence behavior
throughout an organization, it is unlikely to have much impact on a firm’s actions.
b. Some missions can improve firm performance: visionary firms (firms whose mission is
central to all they do) earned substantially higher returns. Their behavior is all based on the
mission.
c. Some missions can hurt firm performance: sometimes a firm’s mission will be very inwardly
focused and defined only with reference to personal values and priorities which are not
leading to a competitive advantage.
,Objectives
Objectives: specific measurable targets a firm can use to evaluate the extent to which it is realizing
its mission.
a. High-quality objectives are tightly connected to elements of a firm’s mission and are
relatively easy to measure and track over time.
b. Low-quality objectives either do not exist or are not connected to elements of a firm’s
mission, are not quantitative, or are difficult to measure or difficult to track over time
(cannot be used to evaluate how well a mission is being realized).
External and internal analysis
External analysis: a firm identifies the critical threats and opportunities in its competitive
environment & examines how competition in this environment is likely to evolve and what
implications that evolution has for the threats and opportunities a firm is facing.
Internal analysis: helps a firm identify its organizational strengths and weaknesses & helps a firm
understand which of its resources and capabilities are likely to be sources of competitive advantage
and which are less likely to be sources of such advantages & can be used to identify those areas of
its organization that require improvement and change.
Strategic choice
Strategic choice: a firm chooses its theory of how to gain competitive advantage.
1. Business-level strategies: actions firms take to gain competitive advantages in a single
market or industry.
a. Cost leadership (chapter 4)
b. Product differentiation (chapter 5)
c. Flexibility (chapter 6)
d. Tacit collusion (chapter 7)
2. Corporate-level strategies: actions firms take to gain competitive advantages by operating
in multikey markets or industries simultaneously.
a. Vertical integration strategies (chapter 8)
b. Diversification strategies (chapter 9 & 10)
c. Strategic alliance strategies (chapter 11)
d. Merger and acquisition strategies (chapter 12)
The objective when making a strategic choice is to choose a strategy that: (1) supports the firm’s
mission, (2) is consistent with a firm’s objectives, (3) exploits opportunities in a firm’s environment
with a firm’s strengths, and (4) neutralizes threats in a firm’s environment while avoiding a firm’s
weaknesses.
Strategy implementation
Strategy implementation: occurs when a firm adopts organizational policies and practices that are
consistent with its strategy. 3 Specific organizational policies and practices that are important in
implementing a strategy: (1) a firm’s formal organizational structure, (2) its formal and informal
management control systems, and (3) its employee compensation policies.
,2. DEFINE COMPETITIVE ADVANTAGE AND EXPLAIN ITS RELATIONSHIP TO ECONOMIC VALUE
CREATION
Competitive advantage: when a firm creates more economic value than its rivals.
a. Temporary competitive advantages: competitive advantages that last short time (most of
the advantages because competitors imitate the advantage or offer something better)
b. Sustained competitive advantages: competitive advantages that last a long time
− How a firm can beat its competitors?
− Depends on differences
− Strategy is about discovering and exploiting these differences
− Competitive advantage usually results in high profits → profits attract competition →
competition limits the duration of competitive advantage in most cases)
Economic value: the difference between what customers are willing to pay for a firm’s products or
services and the total cost of producing these products or services.
Competitive parity: when a firm creates the same economic value as its rivals.
Competitive disadvantage: when a firm creates less economic value than its rivals.
a. Temporary competitive disadvantages: competitive disadvantages that last a short time
b. Sustained competitive disadvantages: competitive disadvantages that last a long time
When does a firm have a competitive advantage?
− A firm has a competitive advantage when it creates more economic
value than rival firms → customer has a total perceived benefit.
a. Cost: costs for the producer to make a certain product.
b. Value captured (= producer surplus) = difference between the price
and the costs.
c. Value created (= consumer surplus) = difference between how
much consumer is willing to pay and actual price.
d. Total economic value created = value created + value captured
3. 2 DIFFERENT APPROACHES TO MEASURING COMPETITIVE ADVANTAGE
Approach 1: 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. A firm’s profit
and loss and balance sheet statements are typically created using widely accepted accounting
standards and principles. The application of these standards and principles makes it possible to
compare the accounting performance of one firm to the accounting performance of other firms
(can be difficult when firms use different standards).
1. Use accounting ratios: numbers taken from a firm’s financial statements that are
manipulated in ways that describe various aspect of a firm’s performance.
a. Profitability ratios: ratios with some measure of profit in the numerator and some
measure of firm size or assets in the denominator.
b. Liquidity ratios: ratios that focus on the ability of a firm to meet its short-term
financial obligations.
c. Leverage ratios: ratios that focus on the level of a firm’s financial flexibility.
d. Activity ratios: ratios that focus on the level of activity in a firm’s business.
, To determine how a firm is performing: a firm’s accounting ratios are being compared with some
standard. Ratio-analysis:
a. Above-average accounting performance: when its performance is greater than the industry
average → competitive advantage
b. Average accounting performance: when its performance is equal to the industry average
→ competitive parity
c. Below-average accounting performance: when its performance is less than the industry
average → competitive disadvantage
Approach 2: economic measures of competitive advantage
One important component of cost is typically not included in most accounting measures of
competitive advantage → the cost of capital: the rate of return that a firm promises to pay its
suppliers of capital to induce them to invest in the firm.
Economic measures of competitive advantage compare a firm’s level of return to its cost of capital
instead of to the average level of return in the industry. 2 Categories of sources of capital:
1. Debt (capital from banks and bondholders) → cost of debt: equal to the interest that a firm
must pay its debt holders (adjusted for taxes) to induce those debt holders to lend money
to a firm.
2. Equity (capital from individuals and institutions that purchase a firm’s stock) → cost of
equity: equal to the rate of return a firm must promise its equity holders to induce these
individuals and institutions to invest in a firm.
Weighted average cost of capital (WACC): the % of a firm’s total capital = debt x cost of
debt + equity x cost of equity
To determine a firm’s cost of capital: level of performance.
a. Above-normal economic performance: firm that earns above its cost of capital and is likely
to attract addition capital because debt holders and equity holders will be scramble to
make additional funds available for this firm.
b. Normal economic performance: this is the level of performance that most of a firm’s equity
and debt holders expect. These firms gain access to the capital they need to survive and
growth opportunities may be somewhat limited.
c. Below-normal economic performance: a firm’s debt and equity holders will be looking for
alternative ways to invest their money, someplace where they can earn at least what they
expect to earn.
4. EXPLAIN THE DIFFERENCE BETWEEN EMERGENT AND INTENDED STRATEGIES
Intended strategy: an idea about what the strategy should be.
Deliberate strategy process: realizing the strategy.
Unrealized strategy: part of the intended strategy will be lost/not realized.
Emergent strategy process: new ideas originally not included in the intended strategy that
somehow is incorporated in the actual realized strategy.
Realized strategy
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