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Strategy - summary including whole book and all lectures - by Michel Dagli
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SUMMARY ALL CHAPTERS INCLUDING LECTURESMICHEL DAGLI
2022
,INHOUD
THE TOOLS OF STRATEGIC ANALYSIS....................................................................................................... 2
Chapter 1: What is strategy and the strategic management process? ............................................................... 3
Chapter 2: Evaluating firm’s external environment ............................................................................................ 8
Chapter 3: Evaluating a firm’s internal capabilities ........................................................................................... 10
BUSINESS LEVEL STRATEGIES ................................................................................................................. 14
Chapter 4: Cost leadership ................................................................................................................................ 15
Chapter 5: Product differentiation .................................................................................................................... 20
Charles Snow about the Miles and Snow typology (week 3 lecture) ............................................................ 24
Chapter 6: Flexibility and real options .............................................................................................................. 25
Chapter 7: Collusion .......................................................................................................................................... 30
CORPORATE STRATEGIES ....................................................................................................................... 33
Chapter 8: Vertical Integration.......................................................................................................................... 34
Vertical integration lecture week 5, Aswin van Oijen ................................................................................... 34
Vertical integration from the Book: .............................................................................................................. 36
Chapter 9: Corporate Diversification ................................................................................................................ 39
Corporate diversification lecture week 6, Aswin van Oijen .......................................................................... 39
Corporate diversification from the book ...................................................................................................... 42
lecture week 7, Aswin van Oijen ................................................................................................................... 47
Which Corporate-Level Strategy Generally Performs Best according to Palich, Cardinal, and Miller .......... 52
Chapter 10: Organizing to implement Corporate Diversification ..................................................................... 55
Lecture week 9 Strategy Implementation Through Structure and Controls, Aswin van Oijen ..................... 55
Organizing to implement Corporate Diversification from the book ............................................................. 59
Chapter 11: Strategic Alliances ......................................................................................................................... 64
Lecture week 10 Alliances (extra) ................................................................................................................. 70
Chapter 12: Mergers and Acquisitions .............................................................................................................. 73
Lecture week 11 M&A (extra) ....................................................................................................................... 80
Week 12 International strategies ...................................................................................................................... 82
,THE TOOLS OF STRATEGIC ANALYSIS
,CHAPTER 1: WHAT IS STRATEGY AND THE STRATEGIC MANAGEMENT PROCESS?
Strategy is defined as its theory about how to gain competitive advantages. The strategic
management process is a sequential set of analyses and choices that can increase the likelihood that a
firm will choose a good strategy; that is, a strategy that generates competitive advantages.
The strategic management process begins when a firm defines its mission. A firm’s mission is 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.
Whereas a firm’s mission is a broad statement of its purpose and values, its objectives are specific measurable
targets a firm can use to evaluate the extent to which it is realizing its mission.
By conducting an external analysis, a firm identifies the critical threats and opportunities in its
competitive environment. It also 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.
Whereas external analysis focuses on the environmental threats and opportunities facing a firm,
internal analysis helps a firm identify its organizational strengths and weaknesses. It also helps a firm
understand which of its resources and capabilities are likely to be sources of competitive advantages
and which are less likely to be sources of such advantages.
The strategic choices available to firms fall into two large categories: business-level strategies and
corporate-level strategies.
- Business-level strategies are actions firms take to gain competitive advantages in a single
market or industry.
- Corporate-level strategies are actions firms take to gain competitive advantages by
operating in multiple markets or industries simultaneously.
Strategy implementation occurs 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 firm’s formal organizational structure;
- Its formal and informal management control systems;
- Its employee compensation policies
,A firm has a competitive advantage when it can create more economic value than rival firms.
Economic value is simply 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. A firm’s competitive advantage can be
temporary or sustained:
- A temporary competitive advantage is a competitive advantage that lasts for a very short time.
- A sustained competitive advantage, in contrast, can last much longer.
Firms that create the same economic value as their rivals experience competitive parity.
Firms that generate less economic value than their rivals have a competitive disadvantage
ATC = average total cost MC= marginal cost, if they cross each other, where MC is on his minimum, that is the
amount of quantity that will be sold. The total green area means the total value created. (MR= marginal
revenue)
- The triangle is the consumer surplus
- The square is the producer surplus.
Imperfect competition: the products that are being sold but are not exactly the same
Perfect competition: products that are sold are the same. (like oil and sugar) Firms in a perfectly competitive
world earn zero profit in the long-run. While firms can earn accounting profits in the long-run, they cannot earn
economic profits. / perfect competition occurs when all companies sell identical products, market share does
not influence price, companies are able to enter or exit without barriers, buyers have perfect or full
information, and companies cannot determine prices
,Measuring competitive advantages
These two below are always measured relative to other firms:
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. One way to use a firm’s accounting
statements to measure its competitive advantage is with accounting ratios. Accounting ratios are simply
numbers taken from a firm’s financial statements that are manipulated in ways that describe various aspects of
a firm’s performance.
These measures of firm accounting performance can be grouped into four categories: (see table 1.1)
- Profitability ratios, are ratios with some measure of profit in the numerator and some measure of firm
size or assets in the denominator;
- Liquidity ratios, are ratios that focus on the ability of a firm to meet its short-term financial
obligations;
- Leverage ratios, determine the amount of debt the business has taken on the assets or equity of the
business. A high ratio indicates that the company has taken on a larger debt than its capacity and will
not be able to service the obligations with the ongoing cash flows.
- Activity ratios, are ratios that focus on the level of activity in a firm’s business.
These ratios, by themselves, say very little about a firm. To determine how a firm is performing, its accounting
ratios must be compared with the average of accounting ratios of other firms in the same industry.
- A firm earns above-average accounting performance when its performance is greater than the
industry average.
- A firm earns average accounting performance when its performance is equal to the industry average.
- A firm earns below-average accounting performance when its performances is less than the industry
average.
Economic Measures of Competitive Advantage
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. The cost of capital is the rate of return that a firm promises to
pay its suppliers of capital to induce them to invest in the firm. Once these investments are made, a firm can
use this capital to produce and sell products and services (crowd funding)
There are two broad categories of sources of capital:
- Debt: capital from banks and bondholders;
o The cost of debt is equal to the interest that a firm must pay its debt holders to induce those
debt holders to lend money to a firm.
- Equity: capital from individuals and institutions that purchase a firm’s stock.
o The cost of equity is equal to the rate of return a firm must promise its equity holders to
induce these individuals and institutions to invest in a firm.
A firm’s weighted average cost of capital (WACC) is simply the percentage of 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.
𝑊𝐴𝐶𝐶 = (𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡 ÷ 𝑓𝑖𝑟𝑚′𝑠 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒) × 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡
+ (𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 ÷ 𝑓𝑖𝑟𝑚′𝑠 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒) × 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
,- ROI: Return on investment: If you have an high ROI, you earn more than your competitors, which will
lead to competitive advantage.
- ROA: Return on assets
- ROE: Return on equity
,The correlation in figure 1.5 is high. Firms that perform well using one of the measures usually perform well
using the other.
WACC < ROA < Industry average ROA
- WACC is lower than your ROA (Good, because the costs of your money are cheaper than what you
make for it.)
- ROA is lower than Industry average ROA (that is bad, because you get less money for it than you
rivals.)
- → So you earn above normal economic performance, but below average accounting performance.
Intended strategies are the strategies that an organization hopes to execute while emergent strategies are
strategies implemented by identifying unforeseen outcomes from the execution of strategy and then learning
to incorporate those unexpected outcomes into future corporate plans.
,CHAPTER 2: EVALUATING FIRM’S EXTERNAL ENVIRONMENT
Market: collection of customers
Industry: all the producers, set of companies that fulfil a similar need with a similar production process
Levels of analysis:
- General environment (MACRO) (DESTEP)
- Industry (MESO) (S-C-P and 5 forces)
- Strategic group (lidl + aldi and AH + Jumbo)
- Individual firm (MIRCO) (internal / competitor)
Any analysis of the threats and opportunities facing a firm must begin with an understanding of the general
environment within which a firm operates. This general environment consists of broad trends in the context
within which a firm operates that can have an impact on a firm’s strategic choices. The general environment
consists of six interrelated elements (DESTEP/PESTEL):
- Technological change;
o A shift in the frontier of technological possibilities and the underlying infrastructure.
- Demographic trends;
o Demographics is the distribution of individuals in a society in terms of age, sex, marital status,
income, ethnicity, and other personal attributes that may determine buying patterns. (always
in numbers)
- Social-cultural trends;
o Culture is the values, beliefs, and norms that guide behaviour in a society.
- Economic climate;
o Economic climate is the overall health of the economic systems within which a firm operates.
When activity in an economy is relatively low, the economy is said to be in recession. A
severe recession that lasts for several years is known as a depression. This alternating pattern
of prosperity followed by recession, followed by prosperity, is called the business cycle.
- Political and legal conditions;
o These are the laws and the legal system’s that impact on business, together with the general
nature of the relationship between government and business.
- Ecological (Specific international events)
o These include events such as civil wars, political coups, terrorism, wars between countries,
famines, tsunami, environmental developments and country of regional economic recessions.
, The structure-conduct-performance (S-C-P) model was originally developed to spot anti-competitive
conditions for anti-trust purposes. Came to be used to assess the possibilities for above normal profits for firms
within an industry.
- The term structure in this model refers to industry structure, measured by such factors as the number
of competitors in an industry, the heterogeneity of products in an industry, the costs of entry and exit
in an industry, and so forth.
- Conduct refers to the strategies that firms in an industry implement.
- Performance in this model has two meanings:
o The performance of individual firms;
o The performance of the economy.
To a firm seeking competitive advantages, an environmental threat is any individual, group, or organization
outside a firm that seeks to reduce the level of that firm’s performance. Threats increase a firm’s costs,
decrease a firm’s revenues, or in other ways reduce a firm’s performance. The five common (general)
environmental threats / 5 forces (on industry level) are:
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