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Summary - Strategic management (6012B0425Y)
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Summary of 56 pages for the course Strategic management at UvA (Summary of lectures)
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Week 1 – Introduction to strategic management and external analysisWhat is trategy?
A strategy is a detailed plan for achieving success in situations such as war, politics, industry, or
support, or the skill of planning for such situations
Three key principles
1. Strategy is the creation of a unique and valuable position, involving a different set of
activities, it comes from three sources:
a. Serving few needs of many customers
b. Serving broad needs of few customers
c. Serving broad needs of many customers in a narrow market
2. Strategy requires you to make trade-offs in competing – to choose what not to do
a. Some competitive activities are not compatible
3. Strategy involves creating ‘fit’ among a company’s activities
a. Fit had to do with the ways a company’s activities interact and reinforce one another
Porter’s definitions → strategy is the creation of unique and valuable positions, involving a different
set of activities
Book definition → a strategy is an integrated and coordinated set of commitments, decisions, and
actions designed to exploit and develop core competencies and gain a competitive advantage.
Competitive advantage → a firm has a competitive advantage when it implements a strategy
competitors are unable to duplicate or find too costly to try to imitate.
Strategic management process, which is the full set of commitments, decisions, and actions required
for a firm to achieve strategic competitiveness and above-average returns.
Above average returns: Returns in excess of what an investor expects to earn form other
investments with a similar amount risk.
Average returns: Returns equal to those an investor expects to earn form other investments
with a similar amount of risk.
Strategic competitiveness: achieved when a firm successfully formulated and implements a value-
creating strategy.
Risk: an investor’s uncertainty about the economic gains or losses that will result from a particular
investment.
Operational effectiveness
Operational effectives: Performing activities better — that is, faster, or with fewer inputs and
defects— than rivals. This can be done via:
(1) Outsourcing
(2) Reducing the number of defects
(3) Business process reengineering or change management
Being good at production is not enough for a strategy. A strategy is about a combination of activities
You can't just be better than your competitors; efficiency is something that you can learn and
imitate. You need to have a unique set of activities that cannot easily be imitated.
Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is
distinctive about a company. ... (by) performing different activities from rivals, or performing similar
activities in different ways. (Porter, 1996). This is done via three sources:
, (1) Variety-based positioning or product-focused positioning: Based on the choice of product
or service varieties rather than specific customer segments. You focus on a specific
product.
(2) Needs-based positioning or customer-need positioning: erving most or all needs of a
particular group of customers. You focus on a specific group of people
(3) Access-based positioning or access-focused positioning: Segmenting customers who are
accessible in different ways. You focus on where the company can be accessed from.
In today’s highly competitive and dynamic markets, strategic positioning is not enough in itself in
the long term unless a unique combination of activities is created! Can be imitated as well!
• Trade-offs naturally emerge.
• Strategy is about combining activities.
• Activity fit is important!
• Activities are reminders of the strategy.
• Strategy without activities is just a statement
Two underlying models
I/O model → competitive advantage comes from factors outside
RBC model → competitive advantage comes from factors inside
I/O Model of above average returns: explains the external environment’s dominant influence on a
firm’s strategic actions.
• The model specifies that the industry or segment of an industry in which a company chooses
to compete has a stronger influence on performance than doe the choices managers make
inside their organizations.
• The focus is on external aspects
• The assumptions are
o The external environment is assumed to impose pressures and constraint that
determine the strategies that would result in above-average returns
o Most firms competing within an industry or within a segment are assumed to control
similar strategically relevant resources and to pursue similar strategies in light of
those resources
o Resources used to implement strategies are assumed to be highly mobile across
firms, so, any resource differences that might develop between firms will be short-
lived
o Organizational decision-makers are assumed to be rational and committed to acting
in the firm’s best interest, as shown by their profit-maximizing behaviors
Resource-based view of above average returns: assumes that each organization is a collection of
unique resources and capacities. The uniqueness of its resources and capabilities is the basis of a
firm’s strategy and its ability to earn above-average returns
• Resources: imputes into a firm’s production process (human, physical, and organizational
capital)
• Resources have a greater likelihood of being a source of competitive advantage when they
are formed into a capability
o Capability: the capacity for a set of resources to perform a task or an activity in an
integrated manner. They evolve over time and must be managed dynamically in
pursuit of above-average returns
o Core competencies: resources and capabilities that serve as a source of competitive
advantage for a firm over its rivals.
, • Shift to internal resources
• Assumes that not all resources are the same: organization form the same industry have
different resources – firm heterogeneity
• Differences in performances across time occur because of firm’s unique resources and
capabilities rather than because of the industry’s structural characteristics –
resources/capabilities are imperfectly mobile
o It also assumes that firms acquire different resources and develop unique
capabilities based on how they combine and use the resources and that the
differences in resources and capabilities are the basis of competitive advantage.
Identifying opportunities and threats – macro environment
Understand what is going on, what is happening in the world. You analyze the context you will be
operating in
The general environment is composed of
dimensions in the broader society that
influence an industry and firms within it.
General environment analysis: Identifying
forces in the macro environment that are
(mostly) beyond a firm’s control. PESTEL
MODEL:
• Political/legal factors → stability,
taxation
• Economic factors → growth rates,
interest rates
• Socio-cultural factors → workforce
diversity, work/life
• Technological factors → speed of change
• Demographic factors → population, age, ethic mix
• Global factors → political events
• Environmental factors → pollution, resources depletion
Industry environment
An industry is a group of firm(s) that are active with the same/similar products on the same market.
Industry environment is the set of factors that directly influences a firm and its competitive actions
and competitive responses.
The greater a firm’s capacity to favorable influence its industry environment, the greater the
likelihood that the firm will earn above average returns
There are five factors – porter’s five forces
• Threat of new entrants
• The power of suppliers
• The power of buyers
• The threat of product substitutes
• The intensity of competitors
Porter’s Five Forces Model:
• Analyses whether an industry is effective or not
• Assesses characteristics of the industry and thus the attractiveness
(1) Degree of rivalry
a. Rivalry is high if:
i. Large number of competitors
, ii. Low switching cost
iii. Slow rate of industry growth
iv. High exit barriers
(2) Supplier power
a. Supplier power is high if:
i. Concentration of suppliers is higher than the industry to which it sells.
ii. Importance of input is high
iii. High switching costs (from one supplier to another)
iv. Forward integration possibility is high (e.g., NEC starts selling electric cars.
(3) Buyer power
a. Buyer power is high if:
i. A few buyers buy a large portion
ii. Low product differentiation
iii. Low switching costs
iv. Backward integration
(4) Risk of new entrants
a. Threat new entrants is low if:
i. Time and cost of entry is high
ii. There is economies of scale effect
iii. Technology protection exists
iv. High switching costs
(5) Risk of substitutes
a. A substitute is any product that can satisfy the same demand as the products of the
focal industry
b. Threat of substitutes is high if:
i. Better price/quality ratio
ii. Low switching costs
Conclusion
• All LOW?
o Industry is attractive! Stay in or enter the industry
• All HIGH?
o Industry is not attractive! Improve position or leave the industry (unless there are
important synergies between business units)
External environmental analysis
Three parts
(1) Scanning: identifying early signals of environmental changes and trends
a. Must be aligned with organizational context
b. It is important when a firm competes in an industry with a high rate of change and
technological or legal uncertainty
c. Provides the firm with information and provide knowledge about markets and about
how to successfully commercialize new technologies the firm has developed
(2) Monitoring: detecting meaning through ongoing observations of environmental changes and
trends
a. Critical is the firm’s ability to detect meaning in different environmental events and
trends
b. Requires firms to identify important stakeholders as the foundations for serving their
unique need
c. Can provide the firm with information and provide knowledge about markets and
about how to successfully commercialize new technologies the firm has developed
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