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Samenvatting: Strategy and Non-Market Environment MBA

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Course
Strategy and Non-Market Environment (MANMST025)

Institution
Radboud Universiteit Nijmegen (RU)

Alle lecture slides Samenvatting van de volgende artikelen: Background readings Porter. M. 1985. Chapter 1: Competitive strategy: The core concepts. In: M. Porter, Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press: 1-30. Discussion readings Baron, ...

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Uploaded on October 25, 2023
Number of pages 90
Written in 2023/2024
Type Summary

strategy
international business
porter
voinea
market environment
nonmarket environment
strategic management
csr
cpa
mne

Institution
Radboud Universiteit Nijmegen (RU)
Education
Business Administration: Business Administration / International Business Administration
Course
Strategy and Non-Market Environment (MANMST025)

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Strategy and Nonmarket Environment
Session 1: Introduc0on to the Strategy and Non-Market Environment
Background reading: Compe22ve Advantage, crea2ng and sustaining superior
performance chapter 1: The Core Concepts (M. Porter, 1985)
Compe((on determines the appropriateness of a ﬁrm’s ac(vi(es that can contribute to its
performance, such as innova(ons, a cohesive culture, or good implementa(on.

Compe&&ve strategy: the search for a favorable compe((ve posi(on in an industry. It aims to
establish a proﬁtable and sustainable posi(on against the forces that determine industry
compe((on.

Two central ques(ons underlie the choice of compe((ve strategy:
- What is the aDrac(veness of the industry?
- What are the determinants of rela(ve compe((on posi(on?

Both industry aDrac(veness and compe((ve posi(on can be shaped by a ﬁrm. While industry
aDrac(veness is partly a reﬂec(on of factors the ﬁrm has liDle control over (5-forces). At the
same (me, a ﬁrm can clearly improve or erode its posi(on through its choice of strategy
(generic strategies).

Porter’s 5-forces à industry aDrac(veness: The ﬁve forces determine industry proﬁtability
because they inﬂuence prices, costs, and required investments of ﬁrms in an industry (the
elements of ROI).

5-forces:
- Threat of new entrants
- Bargaining power of buyers
- Threat of subs(tute products or services
- Bargaining power of suppliers
- Rivalry among exis(ng ﬁrms

Industry structure and buyer needs: sa(sfying buyer needs may be a prerequisite for industry
proﬁtability. The crucial ques(on in determining proﬁtability is whether ﬁrms can capture the
value they create for buyers, or whether this value is competed away to others.

Industry structure determines who keeps what propor(on of the value a product creates for
buyers:
- If a product provides liDle value, there is liDle value to be captured by ﬁrms.
- If a product provides a lot of value, industry structure becomes crucial.

Industry structure and the supply/demand balance: proﬁts are a func(on of the balance
between supply and demand à high demand – low supply = high proﬁtability.

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,Yet the long-term proﬁtability is strongly inﬂuenced by industry structure. Even though, short-
term ﬂuctua(ons in supply and demand can aﬀect short-term proﬁtability, industry structure
underlies long-term proﬁtability.

The consequences of an imbalance between supply and demand also diﬀers widely depending
on industry structure. Industry structure is also the proﬁtability of excess demand. Industry
structure is fundamental to both speed of adjustment of supply to demand and the
rela(onship between capacity u(liza(on and proﬁtability.

Posi(oning determines whether a ﬁrm’s proﬁtability is above or below the industry average.

Generic strategies à compe((ve advantage (lower cost – diﬀeren(a(on) vs. compe((ve
scope (broad – narrow)
- Cost leadership (broad target – lower cost): the ﬁrm sets out to become the low-cost
producer in its industry. A cost leader must achieve parity or proximity in the bases of
diﬀeren(a(on rela(ve to its compe(tors.
o Parity = cost advantage translated into higher proﬁts
o Proximity = price discount to achieve an acceptable market share
- Diﬀeren&a&on (broad target – diﬀeren&a&on): the ﬁrm seeks to be unique in its
industry. The logic of the diﬀeren(a(on strategy requires that a ﬁrm choose aDributes
in which to diﬀeren(ate itself that are diﬀerent from its rivals.
- Focus strategy (narrow target):
o Cost focus: cost advantage in its target segment
o Diﬀeren5a5on focus: diﬀeren(a(on in its target segment
- Stuck in the middle: a ﬁrm that engages in each generic strategy but fails to achieve
any of them is “stuck in the middle” à no compe((ve advantage.

Cost is strongly aﬀected by share of interrela(onships. If one ﬁrm can open up a big market
share advantage, the cost advantages of share in some ac(vi(es allow the ﬁrm to incur added
costs elsewhere and s(ll maintain net cost leadership, or share reduces the cost of
diﬀeren(a(ng rela(ve to compe(tors.

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,Generic strategies and industry evolu(on
Changes in industry structure can aﬀect the bases on which generic strategies are built and
thus alter the balance among them. Structural change can shit the rela(ve balance among the
generic strategies in an industry. For example, early in history the automo(ve industry focused
on diﬀeren(a(on strategies. Technological and market changes create the poten(al for Henry
Ford to change the rules of compe((on by adop(ng a classic cost leadership strategy.

Generic strategies and organiza(onal structure
Cost leadership usually implies (ght control systems, overhead minimiza(on, pursuit of scale
economies, and dedica(on to the learning curve. These could be counterproduc(ve for a ﬁrm
aDemp(ng to diﬀeren(ate itself through a constant stream of crea(ve new products.

Generic strategies and the strategic planning process
Many diversiﬁed ﬁrms categorize business units by using a system such as build, hold, or
harvest. Another common prac(ce in strategic planning is to use market share to describe a
business unit’s compe((ve posi(on.

Discussion reading: Integrated strategy: market and non-market components (Baron,
D.P., 1995)
The environment of a business is composed of market and nonmarket components, and any
approach to strategy formula(on must integrate both market and nonmarket considera(ons.

Market strategies must be tailored to the structure and dynamics of the market environment
and to the competencies of the ﬁrm, and similarly a nonmarket strategy must also be tailored
to the ﬁrm's nonmarket competencies and the characteris(cs of its market and nonmarket
environments.

Non-market environment: The non-market environment consists of the social, poli(cal, and
legal arrangements that structure the ﬁrm’s interac(ons outside of, and in conjunc(on with,
markets.

The market environment: includes those interac(ons between the ﬁrm and other par(es that
are intermediated by markets or private agreements.

Market strategy: a concerted paDern of ac(ons taken in the market environment to create
value by improving economic performance (e.g. entry mode).

The nonmarket environment: includes those interac(ons that are intermediated by the
public, stakeholders, government, the media and public ins(tu(ons.

Nonmarket strategy: a concerted paDern of ac(ons taken in the nonmarket environment to
create value by improving its overall performance. One purpose of a nonmarket strategy is to
shape the ﬁrm's market environment.

The nonmarket environment consists of the social, poli(cal, and legal arrangements that
structure the ﬁrm's interac(ons outside of, and in conjunc(on with, markets. Four I’s:

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, - Issues: what nonmarket strategies address; open a foreign market
- Ins&tu&ons the relevant set of bodies that the ﬁrm must interact with
- Interests individuals and groups with preferences about, or a stake in, an issue
- Informa&on what the interested par(es know or believe about the rela(on between
ac(ons and consequences and about the preferences and capabili(es of the interested
par(es.

Importance of nonmarket strategies
1. Nonmarket strategies are more important the more opportuni(es are controlled by
governments (nonmarket environment) and are less important when markets control
opportuni(es.
2. Nonmarket strategies are more important the more direct challenges from interest and
ac(vist groups there are.

Since many nonmarket issues arise from market ac(vity, one approach is to view nonmarket
strategies as complements to market strategies that in some cases can be used to address
directly the ﬁve market forces Porter iden(ﬁes:
- Threat of new entrants/compe&&ve advantage: Nonmarket strategies not only can
help realize compe((ve advantage, but they can also help oﬀset compe((ve
disadvantage. In both ways, it helps defending against rivals.
- Current rivalry: nonmarket strategies can be used more broadly to structure the rules
of market compe((on. Consequently, some market strategies are pursued by
industries rather than by individual ﬁrms and hence do not provide a compe((ve
advantage against industry rivals.
- Subs&tutes/new entrants: Nonmarket strategies can be essen(al in crea(ng market
opportuni(es and defending against subs(tutes and new entrants.
- Bargaining power of buyers/suppliers: Nonmarket strategies can also address threats
arising from the bargaining power of buyers and suppliers.
- Drawback of using nonmarket strategies to address Porter’s ﬁve forces: ins(tu(ons in
which regulatory policies are decided are quite diﬀerent from the ins(tu(on of
markets.

An alternate approach is to consider nonmarket factors as a sixth force to be defended
against. Drawback: does not suﬃciently emphasize the interac(on between the ﬁve forces
and nonmarket issues. Furthermore, nonmarket ac(on can be directed at crea(ng or realizing
market opportuni(es for ﬁrms.

Most eﬀec&ve approach: integrate nonmarket analysis and strategy formula(on into the
strategy process and focus both on speciﬁc nonmarket issues that aﬀect the ﬁrm and on
nonmarket ac(on as complements to, or subs(tutes for, market ac(ons:

The nonmarket environment is endogenous and not exogenous (i.e., ﬁrms can inﬂuence the
nonmarket environment);

Nonmarket issues have eﬀects at two levels:
- The ﬁrm
- The industry

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