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Theories of Strategy (ToS) summary
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Summary Theories of Strategy1.1 Economic foundations of strategy
Key concept From What
Economic foundations of strategy
The positioning school of Porter Early What is a good strategy?
strategy Work Sources of advantage CA superior financial performance
Bain-type IO
Porter build on Bain-type IO to explain differences in performance. With Five
Forces to analyse industry stucture, Strategic Groups (intra-industry structure)
and Generic Strategies (individual firm conduct) to think about firm profitability ;
Porter’s and Baintype IO analysis of how to compete on industry level
The resource-based Ricardian Firs can do things better than competitors because of costly-to-copy resources
school (and (High Church)
Schumpeterian/
Chicago)
Downplays importance of industry structure (Porter’s Five Forces), but put
emphasis on difference in firms within industries
Neoclassical economics Neoclassical theory of perfect competition: the firm as combiner of inputs.
There are no sources of (competitive) advantage, all firms are identical and earn
zero economic profit.
Perfect competition 5 assumptions: LHMRT, no room for performance difference (CA); so all firms
earn ZERO economic profit. Model about outcomes, not about explanations.
Accounting profit Revenue – costs whereas
Economic profit Accounting profit – opportunity costs
Opportunity costs Costs of best alternative option; economics strive for no opportunity cost left-
overs so the maximized social welfare because of allocative efficiency (each
scarce resource ends up in most productive use. NO opp. Costs left is outcome of
perfect competition.
Rent Rent is about who appropriates value (dus ricardian, monopolistic etc.) en past
meer bij de positional views
Profit is also about creating new value (dus meer dynamic, profit beslaat dus
beiden: rent (appropriation) en daarbij value creation)
Bain-type Industrial About structure-conduct-performance to analyse industries profitability.
Organization
The firm as output restrainer
Firm exists to restrain productive output through monopoly power or collusions
(samenwerkingen) so that market price drives up and profit increases.
Schumpeterian Industrial
Organization
Chicago School Industrial
Organization
Porter and industrial organization view (Porter’s Early work)
Monopoly One seller , many buyers
Oligopoly Small number of large sellers
Monopolistic Multiple sellers, one buyer; many producers sell differentiated products so WtP
competition of buyer differ per seller! (perfect competition
but without the homogeneity assumption)
Perfect Competition many sellers that offer a homogeneous [ similar ] product
S-C-P model Bain-type IO Structure-Conduct-Performance to analyse on industry structure; about which
industry type is on average more profitable
Porter’s Five Forces Industry-level analysis to evaluate industries’ attractiveness
Threat of New Entrants, Bargaining power of suppliers, Bargaining power of
buyers, Threat of Substitutes, Rivalry among existing competitors
Stronger forcers, less attractive, less profit margins
Porter’s Generic Porter Firm conduct / firm-level effect: create a position of differentiation or cost-
Strategies leadership to increase performance and profitability
Strategic groups Porter Porter’s contribution to Bain type I/O to think about structure within an industry
in terms of strategic groups and the possible mobility barriers between the
, groups.
Entry Barriers A positive barrier to competition
A difficult to enter industry is profitable industry
Threat of New Entrants (5forces); higher barriers, smaller threat for existing
players in industry
Mobility Barriers Mobility barriers between strategic groups within an industry, positively affect
the average profitability of the firms in those groups (strategic-group effect)
Monopoly Rent Bain type IO / limited in supply, one supplier???
Porter
Monopolistic From monopolistic competition: when there is differentiation
(differentiation) rent
Porter and the industrial organization view (Porter’s later work)
Porter Value Chain Porter Primary and support Activities of firms to get into positions that give positive
economic profit (position of differentiation / position of cost-leadership)
Porter’s Diamond Porter Shift of level of analysis: from industries/firms/managers to avoid competition
1990 TO governments how to support competition to create superior positions within
industries that lead to CA of whole nation
Firm strategy, structure, rivalry / related and supporting industries / demand
conditions / factor conditions
Cross-sectional (Early) vs Moving from cross-sectional problem (Snapshot cross-sectional positional
longitudinal problem analysis of a given set of conditions/positions of firms), to the longitudinal
(Later Porter) problem (how do firms get into those positions with which primary and
supporting activities?)
o . Snapshot cross-sectional positional analysis of a given set of
conditions/positions of firms
o Longitudinal problem = Later work “How do firms get into
these positions with which primary and support activities?”
Resource-based view (High Church)
High Church RBV Barney 1986 Firm as a black box (resources (factors) turned into products; factor market
Barney 1991 imperfections and product market imperfections; equilibrium reasoning
Peteraf 1993 (Ricardian logic)
Peteraf&Barney
2003
Low Church RBV DierickxCool No equilibrium reasoning; no firm as black box; but about dynamic capabilities
Grant and knowledge (not resources)
Teece et al ‘97 Capabilities view (Dierickx); Knowledge-based view (Grant); Dynamic capbilities
view (teece)
Barney?
Product market Wernerfelt side Factor market competition (competition on resources in the market – RBV –
competition vs Factor of coin High Church Barney)
market competition Product market competition (… - Positioning view)
Ricardian (efficiency) rent High Church Firms can earn an economic profit without having market power if they control
superior resources for which they did not pay the full economic cost. if there
is a cost advantage is Ricardian (efficiency). RBV thinking; ownership of
heterogeneous resources for which the owner did not pay the full economic cost
Barney’s VRIN/VRIO Barney 1991 Resources are source of sustainable CA when they are:
criteria - Valuable: resources adding value by exploiting opportunities?
- Rare: how many competitors possess the resource?
- Inimitable: have competitors a cost disadvantage in obtaining it’
x Organization: is firm organized to exploit competitive potential of the
resource?
- Non-substitutable:
Peteraf’s four criteria Peteraf 1993 Criteria for sustainable competitive advantage:
- Heterogeneity
- Ex-post limits to competition
- Ex-ante limits to competition
- Imperfect mobility
CGT and Added Value View
,Cooporative game theory Value is appropriated; prices are negotiated by pure bargaining and stable
coalitions give an game theoretic equilibrium
Value creation and value Brandenburger Value-added view
appropriation & Stuart, 1996
Willingness-to-pay
Opportunity costs
Added Value The added value of a player is the drop in the value created if you take the
player out of the game.
Zero-sum vs win-win Value-added Zero-sum game = value appropriation by dividing the pie that takes a form of
games view bargaining; competition by players
Win-win game = players that cooperate and create value together
PARTS model Brandenburger Framework for Value Added View in practice:
& Nalebuff Players; added-value; rules; tactics; scope to look at specific cases about
1995 cooptition
Value Net Brandenburger A map to map out who the players in the game are (P van players); to
& Nalebuff understand why big players in competitive games are profitable.
1995 Customers, company, suppliers; Substitutors, Complementors
Feasibility condition Which coalition will be formed depends on the feasibility: players cannot divide
more money than there is in the pie they created
Stability condition Which coalition will be formed depends on stability. Coalitions that are stable
will only get an equilibrium in the end
Adding-up condition ????
The Schumpeterian View (Uncertainty and profit)
Creative destruction Entrepreneurs destroy existing/old economic structure and create new one,
creates more value/welfare and moves us further [capitalism idea]
Equilibrium
Disequilibrium Altijd kansen voor entrepreneur (discovering opportunities)
Entrepreneurial Austrian view Strategy formulation and profits come from entrepreneurial discovery; moving
discovery market away from equilibrium by discovering opportunities for profit.
Competition is about entrepreneurial discovery.
Bounded rationality Logical incrementalism is een omschrijving van strategy process, waarbij
managers bounded rationality hebben (beperkte denken) en reality niet
stuurbaar is aangezien het ook wordt beïnvloed door onverwachtse factoren
(politiek bijv.).
(Knightian) uncertainty Entrepreneurship (doing new things) can lead to profit under conditions of
uncertainty (uncertainty creases possibility for profit). We don’t know all
possible states of the world (calculations are not possible) and it requires trial
and error (learning) to reduce uncertainty (see what works/profitable is/not)
entrepreneurs can be source of profit with uncertainty
Schumpeterian Entrepreneurial Profit driven by uncertainty and can be competed away in product/factor
(pure/entrepreneurial) Knightian markets after the uncertainty is gone (experiments are visibly successful).
profits Schumpeterian Competition in factor markets (landowner) or product markets, is going to
Profit compete away this temporary entrepreneurial profit
Pure profit is a temporary source of economic profit that accrues to a
configuration of resources and that can be competed/bargained away in product
and/or resource markets. = pure profit from a combination of resources
Resources brought together by entrepreneurs putting together new resources
and bringing it into the market under condition of uncertainty
The Resource-based view (Low Church: KBV)
Knowledge based view = knowledge and capabilities are key for competitive advantage. Source of CA is the knowledge
underlying a firm’s capabilities (to integrate tacit and explicit knowledge) (Grand, 1996)
Resource stock vs. flows Dierickx Cool Asset stock = resources that firms control in a particular moment in time
11989 Asset flows = a process by which firms accumulating their resources = FOCUS!
Tacit vs. explicit Tacit knowledge = difficult to articulate,write and hard to immitate for
knowledge competitors. Integration of tacit knowledge (firm as collection of human
resources as integrated system) as source of CA.
Individual vs.
organizational (collective)
knowledge
, Organizational routines
Organizational Grant Look at organizational capabilities to understand sources of CA; the logistic
capabilities Stalk Evans processes in an integrated way give Walmart successes
Shulman 1992
‘A firm’s ability to perform repeatedly a productive task which relates either
directly or indirectly to a firm’s capacity for creating value through effecting the
transformation of inputs into outputs’
led to KBV
Core competencies Prahalad Hamel Core competencies are the collective learning of the organization, especially how
1990 to coordinate diverse production skills and integrate multiple streams of
technology’ = core competencies (like technological knowledge) that feed the
whole firm (SBU’s) by being ahead of competitors by the underlying core
competencies of the firm
Core rigidities Core competencies and core capabilities can turn into core rigidities: when
competitive environment changes, the things where companies where good at
(technological knowledge or their organiational processes) can hold the
company back by the cognition of managers and hangen in successes
The Resource-Based
View (Low Church: DCV)
Dynamic capabilities Teece et al Dynamic capabilities are ‘the firm’s ability to integrate, build, and reconfigure
1997 internal and external competencies to address rapidly changing environments.
How firms can create/maintain CA in changing environment. Focus on dynamics,
what happens within the firm
A firm HAS a dynamic capability if it has routines for generating variations,
selection variations and retaining those variations. Rests on higher-order
routines and is the ability to adapt to maintain/increase its fit to the
environment!
“ A dynamic capability is the capacity of an organization to purposefully create,
extend, or modify its resource base; to explain superior performance but ground
it with the evaluationary theory
Processes, positions, and Teece 1997 A loose framework of dynamic capabilities view .
paths But dynamic capabilities view adds focus on the processes by which firms
develop CA! If firm has a path history and the position it is in, the firm can do
certain things and may not be able to do other things… focus on the processes
by which firms are able (from their path dependent positions) to adapt to
changing environmental circumstances to maintain/increase/recreate it’s
Competitive Advantage!
Positional vs temporal Positional competitive advantage rests on positional asymmetries leading to
competitive advantage differences in value appropriation (rent) – It results from a firm’s operational
routines and capabilities
Temporal competitive advantage rests on learning asymmetries leading to
differences in value creation (and differences in pure profit) and it results from a
firm’s learning routines and its dynamic capability
Variation-selection- Underlying routines for dynamic capabilities for learning asymmetries that leads
retention to temporal CA. Routines that allow a firm to learn and adapt give CA
Adaptive fit To the environment
3Rs Stoelhorst & how a firm configure its resources, roles, rules by its operational and dynamic
Bridoux capabilities (VRIN and FAF criteria). Terugkoppelen aan ‘retention’ van variation-
Evolutionary selection-retention.
RBT
Positional CA CA that rests on positional asymmetries (door Market Imperfections) leading to
differences in value appropriation (rent); door firm’s operational routines and
capabilities (producing products/services)
Temporal CA CA rests on learning asymmetries leading (door V-S-R processes) to differences
in value creation (and differences in pure profit); resulting from firm’s learning
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