Strategic management summary
Strategic Management and Competitive Advantage (Sixth Edition)
Jay B. Barney, William S. Hesterly
Table of content
Chapter 1: What is strategy and the strategic management process? ................................................... 2
Chapter 2: Evaluating firm’s external environment ................................................................................ 4
Chapter 3: Evaluating a firm’s internal capabilities................................................................................. 7
Chapter 4: Cost leadership .................................................................................................................... 10
Chapter 5: Product differentiation ........................................................................................................ 12
Chapter 6: Flexibility and real options................................................................................................... 14
Chapter 7: Collusion .............................................................................................................................. 17
Chapter 8: Vertical Integration .............................................................................................................. 19
Chapter 9: Corporate Diversification..................................................................................................... 21
Chapter 10: Organizing to implement Corporate Diversification ......................................................... 25
Chapter 11: Strategic Alliances.............................................................................................................. 28
Chapter 12: Mergers and Acquisitions .................................................................................................. 29
1
,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:
1. A firm’s formal organizational structure;
2. Its formal and informal management control systems;
3. 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.
2
,A firm’s accounting performance is a measure of its competitive advantage calculated by using
information form 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 form 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:
1. Profitability ratios, or ratios with some measure of profit in the numerator and some measure
of firm size or assets in the denominator;
2. Liquidity ratios, or ratios that focus on the ability of a firm to meet its short-term financial
obligations;
3. Leverage ratios, or ratios that focus on the level of a firm’s financial flexibility, including its
ability to obtain more debt;
4. Activity ratios, or 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 compare a firm’s level of return to its cost of capital
instead of to the average level of return in the industry. There are two broad categories of sources of
capital:
1. Debt: capital from banks and bondholders;
a. 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.
2. Equity: capital from individuals and institutions that purchase a firm’s stock.
a. 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, dimes 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
3
, Above average
Above normal
Competitive advantage accounting
economic performance
performance
Average accounting Normal economic
Competitive parity
performance performance
Below average
Competitive Below normal
accounting
disadvantage economic performance
performance
Intended strategies versus emergent strategies:
Chapter 2: Evaluating firm’s external environment
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:
1. Technological change;
a. A shift in the frontier of technological possibilities and the underlying infrastructure.
2. Demographic trends;
a. 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.
3. Cultural trends;
a. Culture is the values, beliefs, and norms that guide behaviour in a society.
4. Economic climate;
a. 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
4
Strategic Management and Competitive Advantage (Sixth Edition)
Jay B. Barney, William S. Hesterly
Table of content
Chapter 1: What is strategy and the strategic management process? ................................................... 2
Chapter 2: Evaluating firm’s external environment ................................................................................ 4
Chapter 3: Evaluating a firm’s internal capabilities................................................................................. 7
Chapter 4: Cost leadership .................................................................................................................... 10
Chapter 5: Product differentiation ........................................................................................................ 12
Chapter 6: Flexibility and real options................................................................................................... 14
Chapter 7: Collusion .............................................................................................................................. 17
Chapter 8: Vertical Integration .............................................................................................................. 19
Chapter 9: Corporate Diversification..................................................................................................... 21
Chapter 10: Organizing to implement Corporate Diversification ......................................................... 25
Chapter 11: Strategic Alliances.............................................................................................................. 28
Chapter 12: Mergers and Acquisitions .................................................................................................. 29
1
,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:
1. A firm’s formal organizational structure;
2. Its formal and informal management control systems;
3. 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.
2
,A firm’s accounting performance is a measure of its competitive advantage calculated by using
information form 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 form 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:
1. Profitability ratios, or ratios with some measure of profit in the numerator and some measure
of firm size or assets in the denominator;
2. Liquidity ratios, or ratios that focus on the ability of a firm to meet its short-term financial
obligations;
3. Leverage ratios, or ratios that focus on the level of a firm’s financial flexibility, including its
ability to obtain more debt;
4. Activity ratios, or 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 compare a firm’s level of return to its cost of capital
instead of to the average level of return in the industry. There are two broad categories of sources of
capital:
1. Debt: capital from banks and bondholders;
a. 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.
2. Equity: capital from individuals and institutions that purchase a firm’s stock.
a. 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, dimes 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
3
, Above average
Above normal
Competitive advantage accounting
economic performance
performance
Average accounting Normal economic
Competitive parity
performance performance
Below average
Competitive Below normal
accounting
disadvantage economic performance
performance
Intended strategies versus emergent strategies:
Chapter 2: Evaluating firm’s external environment
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:
1. Technological change;
a. A shift in the frontier of technological possibilities and the underlying infrastructure.
2. Demographic trends;
a. 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.
3. Cultural trends;
a. Culture is the values, beliefs, and norms that guide behaviour in a society.
4. Economic climate;
a. 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
4
