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Strategy for Pre-Master Summary
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Strategy for Pre-Master325135-B-6
2021/2022
BLOCK 1
Chapter 1 / Clip weeks 1 - What is strategy and the strategic management process?
● Firm’s strategy: the theory of a firm about how to gain competitive advantages
● Strategic management process: the sequential set of analysis and choices that can increase the
likelihood that a firm will choose a good strategy, that is, a strategy that generates competitive
advantages.
1. This process begins when a firm decides its mission: its long-term purpose. Missions define both
what a firm aspires to be in the long run and what it wants to avoid in the meantime. Missions are
often written down in the form of mission statements.
○ Visionary firms: firms whose mission is central to all they do
2. Firms objectives: specific measurables targets a firm can use to evaluate the extent to which it is
realizing its mission
3. External analysis and Internal Analysis
a. External analysis: a firm identifies the critical threats and opportunities in its competitive
environment.
b. Internal analysis: helps a firm identify its organizational strengths and weaknesses
4. Strategic choices (when a firm is ready to choose its theory of how to gain competitive advantage)
a. Business-level strategies: actions firms take to gain competitive advantages in a single
market or industry (cost leadership, product differentiation, flexibility)
b. Corporate-level strategies: actions firms take to gain competitive advantages by
operating in multiple markets or industries simultaneously (vertical integration strategies,
diversification strategies, strategic alliance strategies, merger and acquisition strategies)
c. You want strategies that:
i. Support the firm’s mission
ii. Are consistent with a firm’s objectives
iii. Exploit opportunities in a firm’s environment with a firm’s strengths
iv. Neutralizes threats in a firm’s environment while avoiding a firm’s weaknesses
5. Strategy implementation: when a firm adopts organizational policies and practices that are
consistent with its strategy. Three specific organizational policies and practices are particularly
important in implementing a strategy:
a. A firm’s formal organizational structure
b. Its formal and information management control systems
c. Its employee compensation policies
6. Competitive advantage: situation that happens when a firm can create more economic value than
rival firms
a. 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
Economic value created example
1
, b. Temporary competitive advantage: competitive advantage that lasts for a very short
time
c. Sustained competitive advantage: competitive advantage that lasts for a long time
d. Competitive parity: firms that create the same economic value as their rivals
e. Competitive disadvantage: firms that generate less economic value than their rivals
● Measuring competitive advantage:
○ Accounting performance (1): from a firm’s published profit and loss and balance sheet
statements
■ Accounting ratios: numbers taken from a firm’s financial statements that are
manipulated in ways that describe various aspects of a firm’s performance
■ Profitability ratios: ratios with some measure of profit in the numerator and
some measure of firm size or assets in the denominator (revenue/assets)
■ Liquidity ratios: ratio that focus on the ability of a firm to meet its short-term
financial obligations (how easily an organization can pay short term debt)
■ Leverage ratios: ratios that focus on the level of a firm’s financial flexibility,
including its ability to obtain more debt (how easily you can get more money to
finance new projects)
■ Activity ratios: ratio that focus on the level of activity in a firm’s business (it is
about the smaller things in the organization)
■ With ratio analysis a firm can earn:
● Above average accounting performance: higher return on assets that the
industry
● Average accounting performance
● Below average accounting performance
○ Economic performance (2): it compares a firm’s level of return with its cost of capital.
■ Cost of capital: rate of return that a firm promises to pay its suppliers of capital
to induce them to invest in the firm (what investors want back as a percentage). If
your return on assets is higher than what investors want, then competitive
advantage (WACC < ROA < Industry av. ROA = here organization is performing
above expectations, but your competitors earn more)
■ Sources of capital:
● Debt
○ Cost of debt: the interest that firm must pay its debt holders to
induce those debt holders to lend money to a firm
2
, ● Equity
○ Cost of equity: 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 percentage a firm’s total capital
which is debt, times the cost of debt, plus the percentage of a firm’s total capital
that is equity, times the cost of equity
■ With this analysis a firm can be:
● Above normal economic performance (exceeding expectations)
● Normal economic performance
● Below normal economic performance: means that a firm’s debt and
equity holders will be looking for alternative ways to invest their money
(below expectations)
Clip 1
Economic value created: the difference between perceived benefits gained by a customer and the full
economic costs. It depends the industry that you are in if you are profitable.
More economic value more economic advantage.
● Shows the market with an equilibrium between what people want (demand) and the price. The
triangle and the square are the total economic value created (consumer surplus + producer surplus)
● Imperfect competition: products sold are not exactly the same
Chapter 2 - Evaluating a firm’s external environment - Clip 2
● Understanding a firm’s general environment: broad trends in the context within which a firm
operates that can have an impact on a firm’s strategic choices. It helps make more informed
strategic choices like discovering opportunities and threats, analyzing potential for profits and
understanding the nature of competition.
○ Level of analysis are:
■ General environment
■ Industry (part of task environment)
■ Strategic group: organizations that have similar strategic dimensions to your
organization
■ Individual firm (internal/competitor)
○ Strategic groups: Set of companies with similar strategies (strategy dimensions)
■ More competition within strategic groups than between strategic groups
■ Not all groups have the same profitability
■ Possible mobility barriers between groups
● The firm’s environment consists of six interrelated elements:
3
, ○ Technological change: a shift in the frontier of technological possibilities and the
underlying infrastructure
○ Demographic trends: the distribution of individuals in a society in terms of age, sex,
marital status, income, ethnicity, and other personal attributes that may determine buying
patters
○ Cultural trends: culture is the values, beliefs, and norms that guide behaviour in a
society
○ The economic climate: the overall health of the economic system within which a firm
operates (how capable people are at spending money)
■ Recession: when activity in an economy is low
■ Depression: a severe recession that lasts for several years
■ Business cycle: alternating pattern of prosperity followed by recession
○ Legal and political conditions: the law and legal system’s impact on business, together
with the general nature of the relationship between government and business
○ Specific international events: civil wars, political coup, terrorism, famines which have
an effect on the firms ability to generate a competitive advantage
● Industry definition
○ Industry: set of companies that fulfill a similar need with a similar production process
■ Challenging but vital
■ Determines to which force other players belong
■ Too narrow: actual competitors are labelled substitute or new entrant
■ Too broad: actual substitutes are labelled direct competitors
● The structure-conduct-performance (SCP) model of firm performance
○ Originally developed to spot anti-competitive conditions for antitrust purposes
○ Came to be used to assess the possibilities for above normal profits for firms within an
industry
○ Helps understand the relationship between a firm’s environment, behaviour and
performance. Basically a guy said the structure of the industry actually determines how
the companies behave in an area and that determines the profitability of the industry
4
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