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Strategy - Lecture Summary
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Summary of the lectures for the course strategy given by Dr. S. Jong
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Summary of the lecturesStrategy
October 3, 2018
Contents
1 Firms and their competitive environment 2
1.1 Industry analysis - Porter’s Five Forces . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Industry analysis - Value chain analysis . . . . . . . . . . . . . . . . . . . . . . 4
1.3 Disruptive versus sustaining innovations . . . . . . . . . . . . . . . . . . . . . 5
2 Organizational capabilities 7
2.1 People as a source of competitive advantage . . . . . . . . . . . . . . . . . . . 7
2.2 Organizing new product development . . . . . . . . . . . . . . . . . . . . . . . 11
2.3 Leveraging external resources . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3 Capitalizing on intellectual assets 16
3.1 Business model design in markets for know-how . . . . . . . . . . . . . . . . . 16
3.2 The dynamics of competitive advantage . . . . . . . . . . . . . . . . . . . . . . 16
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Strategy
1 Firms and their competitive environment
To build a sustainable business, firms must cultivate a competitive advantage. The competitive
advantage within an industry is tied to the firm’s ability to command a higher relative price
or to operate at lower relative costs, in other words, the company’s profitability or surplus.
The Wedge Between Willingness To Pay (WTP) and costs form a company’s surplus or
profit.
This profit is being driven by two things:
Industry effect on firm profitabiltiy: the competitive dynamics of a specific industry.
These dynamics can, for example, be analyzed by a Porter’s Five Forces analysis.
Firm effect on firm profitability: The variations in the organization of activities by
firms within an industry.
Therefore, competitive advantage can originate from both the industry’s as well as the firm’s
tructure. We perform competitive analysis by using different frameworks to identify the com-
petitive advantages arising from both of them:
Porter’s Five Forces analysis: used to analyze the competitive advantages of an
industry. The analysis explains the industry price and costs. See section 1.1.
Value chain analysis: used to analyze the competitive advantages of firm. The analysis
explains the firm’s relative price and costs. See section 1.2.
SWOT analysis
• Strengths: characteristics of the business or project that give it an advantage over
others.
• Weaknesses: characteristics that place the business or project at a disadvantage
relative to others.
• Oppotunities: elements that the business or project could exploit to its advantage.
• Threats: elements in the environment that could cause trouble for the business or
projects.
1.1 Industry analysis - Porter’s Five Forces
1. Threat of entry
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1.1 Industry analysis - Porter’s Five Forces Strategy
* Supply-side economies of scale
Firms that produce larger volumes enjoy lower costs per unit, because they can spread
out fixed costs more, employ more efficient technology or command better terms from
suppliers.
* Demand-side benefits of scale
Occur when a buyer’s willingsness to pay for a company’s product increases with the
number of other buyers that also patronize with the company. Also referred to as
network effects.
* Customer switching costs
* Capital requirements
Capital may be necessary not only for fixed costs, but also to extend customer credit,
build inventories, and fund start-up losses.
* Incumbency advantages independent of size
No matter their size, incumbents may have cost or quality advantages not available
to potential rivals. Examples are proprietary technology, access to best raw materials,
preemption of most favorable geographic locations, etc.
* Unequal access to distribution channels
* Restrictive government policy
* Expected retaliation
2. The power of suppliers
Powerful suppliers capture more of the value for themselves by charging higher prices,
limiting quality or services, or shifting costs to industry participants. A supplier group
is powerful if:
• More concentrated than the industry it sells to.
• Soes not depend heavily on the industry for its revenues.
• Industry participants face switching costs in changing suppliers.
• Offer products that are differentiated.
• No substitute for what the supplier group provides.
• Can credibly threaten to integrate forward into the industry.
3. The power of buyers
Powerful customers can capture more value by forcing down prices, demanding better
quality or more service, and generally playing industry participants off against one an-
other, all at the expense of industry profitability. A customer group has negotiating
leverage if:
• There are few buyers, or each one purchases in large volumes.
• The industry’s products are standardized or undifferentiated.
• They face few switching costs in changing vendors.
• They can credibly threaten to integrate backward and produce product themselves.
A buyer group is price sensitive if:
• The product it purchases represents a significant fraction of its budget.
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1.2 Industry analysis - Value chain analysis Strategy
• The buyer group is under pressure to trim its purchasing costs.
• The quality of buyers’ products/services is little affected by industry’s product.
• The industry’s product has little effect on the buyer’s other costs.
4. Threat of substitutes
A substitute performs the same or a similar function as an industrys product by a
different means. A substitution can be downstream or indirect. The threat of a substitute
is high if:
• It offers an attractive price-performance trade-off to the industry’s product.
• The buyer’s cost of switching to the substitute is low.
5. Rivalry among existing competitors
The intensity of rivalry is greatest if:
• Numerours competitors or competitors are roughly equal in size and power.
• Industry growth is slow. Slow growth precipitates fights for market share.
• Exit barriers are high. These arise due to things as specialized assets or manage-
ment’s devotion to a particular business.
• Rivals are highly committed to the business and have aspirations for leadership.
• Firms cannot read each other’s signals well due to different approaches or goals.
Rivalry is especially destructive to profitability if it gravitates solely to price because
price competition transfers profits directly from an industry to its customers. Price
competition is most liable to occur if:
• Products or services are nearly identical and buyers have few switching costs.
• Fixed costs are high and marginal costs are low. Creates pressure to cut prices
below average costs to steal customers while still covering fixed costs.
• Capacity must be expanded in large increments to be efficient.
• The product is perishable → sell a product while it still has value.
1.2 Industry analysis - Value chain analysis
The Value chain represents the internal activities a firm engages in when transforming inputs
into outputs. Value chain analysis is a process where a firm identifies its primary and support
activities that add value to its final product and then analyze these activities to reduce costs
or increase differentiation.
Mapping activity systems that characterize a company’s value chain consists of the following
steps:
1. Identify critical strategic themes that define a firm’s competitive advantage
2. Collate the activities and processes that support firms’ efforts within these themes.
3. Draw the relationships that interlink these critical strategic themes, activities, and pro-
cesses in a map of the firms activity system.
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1.3 Disruptive versus sustaining innovations Strategy
Strategy is formed by activites
According to Porter’s article ”What is strategy?” strategy is based on a firm’s activities.
Operational Effectiveness focusses on performing similar activities better than rivals. How-
ever, strategy means deliberately performing activities differently of choosing a different set
of activities to deliver a unique mix of value. These strategic positions can be either variety-
based, needs-based or access-based. Next, for this strategic positioning to be sustainable,
trade-offs must be made to prevent imitation by competitors. This means deciding what not to
do. Lastly, activities must relate to one another, called fit. There are three types of fit: con-
sistent activities, reinforcing activities and optimizing activities. Fit again improves
sustainability, because it makes the strategic positioning harder for competitors to copy. This
network of activities can be depicted using activity system mappings shown above.
Operational effectiveness Strategy
Activities Perform same activities as rivals, Perform different activities from rivals
but execute better
Value created Meet same needs at lower cost Meet different needs and/or same
needs at lower costs
Advantage Cost advantage, but hard to sus- Sustainably higher prices and/or
tain lower costs
Competition Be the best, compete on execu- Be unique, compete on strategy
tion
1.3 Disruptive versus sustaining innovations
Sustaining innovations: Innovations that make a product or service perform better
in ways that customers in the mainstream market already value.
Disruptive innovations: Innovations that create an entirely new market through the
introduction of a new kind of product or service. This product or service is initially
placed at the bottom of the market, and then relentlessly moves up the market, eventually
displacingestablish competitors.
Sustaining innovations are nearly always developed and introduced by established market
leaders. However, those same companies never introduce, or cope well with, disruptive innova-
tions. The Resources, Processes, Values (RPV) framework shows what an organization
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