UvA, Theories of strategy, answers to study questions (fall, 2013)
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Course
Theories of strategy
Institution
Universiteit Van Amsterdam (UvA)
These are the answers to study questions of the course Theories of Strategy written down on autumn 2013. As answers to these questions accounted almost half of the final grade, I hope you find it useful.
Universiteit van Amsterdam
MSc Business studies
Course: Theories of strategy (fall 2013) by J.W.Stoelhorst
Answers to the study questions
1. Question: What is competitive advantage?
Answer: Even though the development of strategic management field is mostly based on issues
regarding competitive advantage of a firm, the concept, of what the competitive advantage is, is
still rather complex.
At first, trying to understand the meaning of competitive advantage of the firm we should look to
the neo-classical model of economics. Neo-classical economists are, however, more interested in
the welfare of the whole economics, rather than performance of an individual firm. Moreover, the
model is build on five rather strict (and on the other hand, not very realistic) assumptions, these
include:
(i) the large number assumption (a lot of players in the market, no one has power to
influence prices);
(ii) the homogeneity assumption (all consumers want the same);
(iii) the mobility assumption (resources are perfectly mobile);
(iv) the rationally assumption (complete information, everyone maximizes its utility/profit);
and
(v) transactions are costless. According to the model above, if all assumptions are fulfilled,
then the markets are perfectly competitive.
Theoretically, a firm in a perfectly competitive market has no room for competitive advantage as it
earns 0 economic profit. Thinking this direction further, we can reveal that any deviation from
perfect market conditions may create possibilities for competitive advantage of an individual firm.
Porter is the first scholar, who has started a systematic research of barriers to competition or,
expressing in other way round, the competitive advantage implications on firms’ performance.
However, such a way of thinking still does not answer what the competitive advantage is exactly.
It must be highlighted that when talking about competitive advantage it must be clearly stated:
(a) over whom a firm is having competitive advantage (i.e. do we measure a firm relatively to
other particular firm? Or to the whole market?);
(b) what is meant by value and what’s by cost; and
(c) competitive advantage must be separated from performance. The latter can be simply
explained by competitive advantage being the source for possible better performance, but not
the other way round.
,Such a development of though, also given the limitations of neo-classical model, led to the rapid
growth of the field resulting in different ideas and applications on the topics of competitive
advantage and competitive strategy. Just to mention a few, Porter in its early works developed four
generic strategies and discussed how firms could strive for competitive positions in the market.
Later, the Resource-based-view school tried to answer how do firms decide where and how to
compete keeping in mind that firms are different and arguing that resources are the ultimate
source of competitive advantage.
Adding to that, even though schools of thought in the field contributed to the topic of competitive
advantage in different angles, most of them would agree that competitive advantage of a firm has
to do with a different kind of barriers to the competition, either it is barriers related to the
environment (with a regard of different views of Positioning and RBV schools), or barriers to attain
some exclusive recourses as argued by RBV school, which later results in gained advantage over
rivals subsequently resulting in better performance of a firm.
Finally, a clear definition for the concept of competitive advantage cannot be given yet, and
probably it is so, because the field of competitive strategy is relatively young and the theories and
research topics are still very much fragmented. And of course, if researchers in the field would be
able to come up with a common definition of ‘competitive advantage’ this would definitely foster
the further research of competitive strategy and strategic management.
2. Question: How can the neoclassical theory of perfect competition inform theories of
competitive advantage?
Answer: In simple terms, theories of competitive advantage using scientific methods tries to
answer, why one firms outperforms others. The neoclassical theory of perfect competition can thus
be a fundament to start such a research.
The neoclassical theory of perfect competition is based on 5 basic and rather strict assumptions:
1. Large numbers assumption (meaning that there are a lot of buyers as also as a lot of sellers
in the market, every firm in the market is a price taker);
2. Homogeneity assumption (it assumes that all firms are alike, i.e. produces the same
standardised products);
3. Mobility assumption (all recourses are perfectly mobile, there are no barriers to enter or
exit the market);
4. Rationality assumptions (meaning that all economic agents have perfect information and
seek to maximise their own utility);
5. Transactions are costless.
Given these assumptions there is no room for competitive advantage as all firms in the perfectly
competitive markets earns 0 economic profit. Of course, as early scholars in the field of strategy
noticed such assumptions are sometimes very far from the reality. In general, any deviation from
, the abovementioned assumption can lead to imperfections in markets creating some source for
possible competitive advantage to the firms (or even industries).
In example, the IO economists concentrated on the total social welfare of the society. They noticed
that quite often the suppliers in some industries are finite or even limited to just a few. However, at
the same time they were earning profits and managed to limit entering the markets. Later, Porter
presented his work of 5 market forces. He looked from the perspective of management to help
them raise the barriers for competition, thus leading to supra-normal returns (differences among
industries).
In summary, mostly all theories of strategic management are based on the fundament of
neoclassical theory.
3. Question. What can you infer from each of the theories discussed by Conner (1991) about:
(a) The nature of the firm?
Answer:
Conner in its’ article of 1999 analyzed the resource based view (RBV) in the light of other schools of
thought. He questioned whether RBV proposes a new theory of the firm. Based on the comparisons
made by Corner, we can infer that the nature of the firm is viewed differently among scholars of
various strategic management schools. However, there are also several similarities between
theories.
RBV is similar to the neoclassical theory of economics in terms that both see firm as an input-
combiner. However, RBV goes deeper as it distinguishes that the size and scope of the firm is also
important. RBV states that the heart of a firm is the ability to acquire, sustain and combine
recourses better than competitors.
The Bain-type IO theory assumes that a firm acts as an output restrainer through its monopolistic or
oligopolistic nature. Theory says that in such way a long term ‘supra normal’ returns may be
achieved. However, it mostly concentrates on the industry structure and analyses a firm ‘as given’.
Schumpeter brings the concept of ‘creative destruction’ and emphasizes entrepreneurship. He
views firm as new ways for competing, which leads to spectacular ‘above-normal’ returns.
Chicago school of thought and transaction school of thought both sees firms as efficiency seekers.
Adding to that, Chicago school also emphasizes optimization of production and distribution in the
medium term.
(b) The causes of differences in performance among firms?
Answer:
According to the neo-classical theory of economics, all firms are assumed to be the price takers,
thus the difference in performance may only be achieved if market imperfections exist.
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