Summary Strategy and Organisation all articles (article 1 to 26)
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Course
Strategy and organisation (6012S0017Y)
Institution
Universiteit Van Amsterdam (UvA)
Detailed summary of all articles for the course Strategy & Organisation (Pre-master Business Administration). The summary also includes all the important images.
Summary Strategy and Organisation ‘Article 1; How competitive forces shape strategy
(Porter, 1979)’
Nature and degree of competition in industry hinge on five forces: threat of new entrants, bargaining
power of customers, bargaining power of suppliers, threat of substitute products or services, and
jockeying among current contestants. Awareness of these forces can help companies to stake out a
position in its industry that is less vulnerable to attack. Essence of strategy formulation is coping with
competition -> competition isn’t manifested only in other players, but competition in an industry is
rooted in its underlying economics and competitive forces -> customers, suppliers, potential entrants,
and substitute products are all competitors. Collective strength of forces determines the profit potential
of an industry -> profit potential ranges from intense (industries like tires and steel where no company
earns spectacular returns on investment) to mild (oil field services and soft drinks where there is room
for quite high returns). The weaker the forces collectively, the greater the opportunity for superior
performance. Nevertheless, corporate strategist’s goal is to find position in industry where company
can best defend itself against these forces and can influence them in its favour. Knowledge of
underlying sources of competitive pressure provides groundwork for strategic agenda of action,
highlight critical strengths and weaknesses of company, clarify areas where strategic changes may
yield the greatest payoff, and are helpful in considering areas for diversification.
Strongest competitive forces determine the probability of an industry -> are of greatest importance in
strategy formulation (tanker industry -> buyers, tires -> OEM buyers and competitors, steel ->
competitors and substitutes). Competitive forces:
Threat of new entrants: new entrants bring new capacities, desire to gain market share, and
substantial resources. Level of threat depends on the barriers present and on reaction from existing
competitors (high barriers and newcomer can expect sharp reprisal from entrenched competitors ->
newcomer will not pose a serious threat of entering). Sources of barriers to entry:
1. Economies of scale: aspirant is forced to come in on a large scale or to accept a cost
disadvantage. Economies of scale can also act as hurdles in distribution, utilization of sales
force, financing, and nearly any other part of business.
2. Product differentiation: brand identification creates barrier by forcing entrants to spend heavily
to overcome customer loyalty (especially among hedonic products).
3. Capital requirements: need to invest large financial resources in order to compete creates a
barrier to entry (huge capital requirements limit pool of likely entrants).
4. Cost disadvantages independent of size: entrenched companies may have cost advantages
(effects learning curve, proprietary technology, access to best raw materials sources, assets
purchased at pre-inflation prices, government subsidies, or favourable locations).
5. Access to distribution channels: new entrant must secure distribution of product or service ->
displace competition from established distribution channels (supermarket shelf). The more
limited the wholesale or retail channels are, the more existing competitors have these tied up
-> tougher to entry industry.
6. Government policy: government can limit or foreclose entry to industries with controls (license
requirements, limits on access to raw materials).
Decision whether to enter is also influenced by reaction of existing competitors, previous lashed out at
new entrants, substantial resources of incumbents to fight back, likeliness of cutting prices to keep
market shares or because of industrywide excess capacity, and slow industry growth (decline of
financial performance of all involved parties). Threat of entry changes as conditions change and
strategic decisions involving a large segment of an industry can have a major impact on the conditions
determining the threat of entry (raise advertising levels of many U.S. wine producers -> raising
economies of scales).
,Bargaining power of suppliers: suppliers can exert bargaining power on participants in industry by
raising prices or reducing quality of purchased goods and services. Power of each supplier or buyer
group depends on number of characteristics of its market situation and on relative importance of its
sales or purchases to industry compared with its overall business. Supplier group is powerful if:
It’s dominated by a few companies and is more concentrated than the industry it sells to.
Its product is unique or at least differentiated, or if it has built up switching costs (fixed costs
buyers face in changing suppliers -> specialized additional equipment, learned how to operate
supplier’s equipment, connection production lines to suppliers manufacturing facilities).
It’s not obliged to compete with other products for sale to the industry.
It poses a credible threat of integrating forward into the industry’s business.
The industry isn’t an important customer of the supplier group (industry is important customer
-> suppliers want to protect industry through reasonable pricing and assistance in activities).
Bargaining power of customers: customers can force down prices, demand higher quality or more
service, and play competitors off against each other (all at the expense of industry profits). Buyer
group is powerful if:
It’s concentrated or purchases in large volumes (large-volume buyers are forces if heavy fixed
costs characterize industry).
The products it purchases from the industry are standard or undifferentiated -> buyers can
always find alternative suppliers -> play one company against another.
The products it purchases from the industry form a component of its product and represent a
significant fraction of its cost (product is small fraction of buyer’s costs -> less price sensitive).
It earns low profits, which create great incentive to lower its purchasing costs (highly profitable
buyers are less price sensitive, because item is small fraction of their costs).
The industry’s product is unimportant to the quality of the buyers’ products or services ->
buyers are less price sensitive if quality of buyer’s products is affected by industry’s product.
The industry’s product doesn’t save the buyer money -> buyer is rarely price sensitive if
industry’s product can pay for itself many times over -> buyer is interested in quality
(investment baking and public accounting -> errors can be costly).
The buyers pose a credible threat of integrating backward to make the industry’s product.
Consumers tend to be more price sensitive if they are purchasing products that are undifferentiated,
expensive relative to their incomes, and of a sort where quality is not particularly important. Buying
power of retailers is determined by same rules and the influence on consumers’ purchasing decisions
(audio components, jewellery, sporting goods). Company’s choice of suppliers to buy from or buyers
group to sell to should be viewed as a crucial strategic decision -> improve strategic posture by finding
suppliers or buyers who posses the least power to influence it adversely. Most common is situation of
company being able to choose whom it will sell to (buyer selection). Rarely all buyer groups a
company sells to have equal power (less power -> less price sensitive). Company can sell to powerful
buyers and still have above-average profitability, because of low-costs or unique features product.
Lack of low cost position or unique product -> selling to everyone is self-defeating, because the more
sales it achieves, the more vulnerable it becomes -> sell only to less potent customers. Power of
supplier and buyer rises or declines as factors that creates power change with time or as a result of
company’s strategic decisions.
Threat of substitute products or services: substitute products or services limit the potential of an
industry. The more attractive the price-performance trade-off offered by substitute products, the
stronger the lid placed on the industry’s profit potential. Substitutes limit profit in normal times, but also
in boom times. Substitute product that are subject to trends improving their price-performance trade-off
with the industry’s product or substitute products that are produced by industries earning high profits
deserve most attention strategically.
Jockeying among current contestants: rivalry among existing competitors takes the familiar form of
jockeying for competition (using price competition, product introduction, advertising slugfests). Intense
rivalry is related to presence of following factors:
, Competitors are numerous or are roughly equal in size and power.
Industry growth is slow -> fights for market share that involve expansion-minded members.
Product or service lacks differentiation or switching costs.
Fixed costs are high or product is perishable -> strong temptation to cut prices (paper).
Capacity is normally augmented in large increments.
Exit barriers are high -> companies keep competing even if they earn low or even negative
returns on investment.
The rivals are diverse in strategies, origins, and personalities -> different ideas about how to
compete and continually run head-on into each other in the process.
Industry matures -> growth rate changes -> declining profits and often a shakeout. Company must live
with many of these factors (built into industry economics), but can improving matters through strategic
shifts (raise buyers’ switching costs, increase product differentiation). Focus on selling efforts in
fastest-growing segments of industry or on market areas with lowest fixed costs can reduce impact of
industry rivalry.
Formulation of strategy
Once forces are assessed, company can identify strengths and weaknesses -> crucial strengths and
weakness from strategic standpoint are company’s posture vis-à-vis the underlying causes of each
force. Then the strategist can devise plan of action that include:
Positioning the company: matching company’s strengths and weakness to industry structure.
Strategy can be viewed as building defences against the competitive forces or as finding
positions in industry where forces are weakest. Knowledge of capabilities will highlight areas
where company should conform competition and where avoid it (Dr Pepper -> avoiding
largest-selling drink segment -> extraordinary service and other efforts to distinguish).
Influencing the balance of the forces through strategic moves (improving company’s position):
company can devise strategy that takes the offensive when dealing with forces that drive
industry competition (innovations in marketing -> differentiation of product).
Exploiting industry change: anticipating shifts in the factors underlying the forces and
responding to them. Product life-cycle pattern -> growth rates change, product differentiation
decline as business becomes more mature, and companies tend to integrate vertically -> it’s
critical whether they affect the sources of competition (vertical integration -> raising economies
of scale -> raising barriers to entry). Trends that affect most important sources of competition
in industry and elevate new causes to forefront have highest priority from strategic standpoint.
Framework for analysing industry competition has direct benefits in setting diversification strategy ->
provides road map for answering question: what is potential of this business?
Multifaceted rivalry
Numerous authorities have stressed the need to look beyond product to function in defining a
business, beyond national boundaries to potential international competition, and beyond the ranks of
one’s competitors today to those that may become competitors tomorrow -> proper definition of
company’s industry has become an endlessly debated subject. Motives behind this debate are desire
to exploit new markets, and fear of overlooking latent sources of competition that someday may
threaten the industry. Key to growth (and survival) is to stake out a position that is less vulnerable to
attack from head-to-head opponents, whether established or new, and less vulnerable to erosion from
the direction of buyers, suppliers, and substitute goods.
, Summary Strategy and Organisation ‘Article 2; Firm resources and sustained competitive
advantage (Barney, 1991)’
Introduction
Article examines link between firm resources and sustained competitive advantage. Purpose is to
specify the conditions under which firm resources can be source of sustained competitive advantage.
Understanding sources of sustained competitive advantage has become major area of research in
strategic management (most research focused on isolating firm’s opportunities and threats, describing
strengths and weaknesses, or analysing how these are matched to choose strategies). Recent work
focus on analysing firm’s opportunities and threats in its competitive environment (five forces model).
Assumptions environmental models of competitive advantage:
Firms within an industry or strategic group are identical in terms of the strategically relevant
resources they control and the strategies they pursue.
If heterogeneity develops in an industry or group, this heterogeneity will be very short lived
because the resources that firms use to implement their strategies are highly mobile.
Resource-based view of competitive advantage cannot build on these assumptions (examines link
between firm’s internal characteristics and performance) -> assumptions resource-based view:
Firms within an industry or group may be heterogenous with respect to the strategic resources
they control.
Resources may not be perfectly mobile across firms -> heterogeneity can be long lasting.
Defining key concepts
Firm resources: all assets, capabilities, organizational processes, firm attributes, information,
knowledge et cetera controlled by a firm that enable the firm to conceive of and implement strategies
that improve efficiency and effectiveness (strengths that firm can use to conceive of and implement
strategies). Possible firm resources can be classified into three categories:
Physical capital resources (physical technology, equipment, location, access to raw materials).
Human capital resources (training, experience, judgement, intelligence, relationships, insight
of individual managers and workers).
Organizational capital resources (formal reporting structure, planning system, controlling
system, coordinating systems, informal relations among groups within firm and between firm
and environment).
These attributes enable firm to conceive of and implement strategies that improve efficiency and
effectiveness.
Competitive advantage: firm is implementing a value creating strategy not simultaneously being
implemented by any current or potential competitors. Sustained competitive advantage: firm is
implementing a value creating strategy not simultaneously being implemented by any current or
potential competitors and other firms are unable to duplicate the benefits of this strategy. So,
competitive advantage includes also potential competitors. Sustained competitive advantage doesn’t
depend upon the period of calendar time during which a firm enjoys a competitive advantage, but last
for long period of calendar time (doesn’t refer to period of calendar time that firm enjoys competitive
advantage). Whether competitive advantage is sustained depends upon possibility of competitive
duplication -> competitive advantage is sustained if it continues to exist after efforts to duplicate that
advantage have stopped -> equilibrium definition of sustained competitive advantage. Sustained
doesn’t imply that it will last forever, but suggests that it will not be competed away through the
duplications efforts of other firms (changes in economic structure -> source sustained competitive
advantage no longer valuable for firm -> Schumpeterian Shocks: redefine which shocks are resources
and which shocks aren’t).
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