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Complete summary of all lecture slides and articles used in theories of strategy feb-march 2016 University of Amsterdam
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Theories of Strategy, UvA 2016Overview topics
‘High Church ‘Low Church’
Acquisition of (external, Integration of (external Integration of (internal, Integration/building/
tangible) resources tangible) intangible) resources (re)configuration from
Barney 1986 resources/competences Grant 1996 internal/external,
(resource factor) Prahalad&Hamel 1990 Tangible/intangible tangible/intangible resources
Markets need to be Competences vs. knowledge resources in rapidly changing
imperfect (information) resources Efficiency, environments
Barney 1991 Flow vs. stocks effectiveness, Stalk, Evans & Schulman 1992
Characteristics Dierickx &Cool flexibility Competing on
resources to sustain Inimitability (time capabilities
CA (valuable, rare, compression, asset Maddok 2001
inimitable, non- mass efficiency, Resource-picking
substitutional) interconnectedness, Capability-building
Petraf 1993 asset erosion, casual
Immobility, ambiguity)
heterogeneity, ex-
ante, ex-post
Stable/static markets, limited Dynamic capability view
Competence/Capability view Knowledge-based view
role of barriers sensing, seizing, reconfiguring
,Theme of the course: What drives differences in performance among firms? Why some firms outperform others? How do we
measure success?
A note on theory in Strategy
What is the explanandum of theories of strategy: Performance (the value you create).. but how do we measure that
(depends on goals and who’s interested)
Types of theory:
Descriptive: Strategy is..
Explanatory
Predictive
The PIMS principle:
In the long run, the most important factor affecting performance is the relative quality of an SBU’s products and
services.
Market share and profitability are strongly related.
, High investment intensity acts as a powerful drag on profitability.
Many ‘dogs’ and ‘question marks’ generate cash while many ‘cash cows’ are dry.
Vertical integration is a profitable strategy for some businesses, but not for others.
Most of the factors that boost ROI also contribute to long-term value.
Models (examples):
The Ansof matrix: risk profile for an investment, how, or where to invest in a new market? Managers tend to go for low
risk (short term) investments, while strategy focusses on long term investments which are more risky.
The BCG matrix: product life-cycle, market share/numbers
Porter’s five forces model: forces that reduce the potential results (profitability). Looks only toward market figures (so
biased). The more profitable, the more attractive, the less forces.
Porter’s generic strategies: Cost leadership, Differentiation, Focus. In the industry, structure X leads to performance X.
Attractive tool for managers, but biased toward risk aversion, due to profitability numbers.
Competitive advantage
Principles of competition = sources of competitive advantage
Has something to do with advantage over competitors.
Something that helps you outperform your competitors.
Has something to do with differences in performance. builds capabilities and resources, which leads to superior
performance
Different aspects that come together and create unique resources, value etc. for a firm.
A differentiation strategy that creates higher perceived value to your customers than your competitors. When
perceived the same value, costs benefit becomes an advantage.
There is not one perception that explains the concept you need to know the rules of the game (environment,
customer value etc.) to be able to create competitive advantage.
1. Is an ambiguous concept. Requires different perspectives.
We would need holistic (multiple) theories to be fully
explained.
2. It should be disentangled from performance.
3. It should be clear what is meant by value (they From a shareholder’s perspective (what do they want,
are creating). what are we offering).
The closer you are to matching your actual value with
, the perceived value of you offering, the better!
4. It should be clear what is meant by cost. Firms should be as efficient as possible.
5. It should be clear over whom a firm has Now and in the future (potential competitors)
competitive advantage.
The Neoclassical Model
Artificial market to explain the assumptions of the perfect market (perfect competition). Model represent the beginning of
economic theories (source of competitive advantage).
Principle: When the assumptions of the model of perfect competition are met there is no room for performance differences:
all firms earn zero economic profit.
Corollary: Any deviation from the assumptions of the model of perfect competition is a possible source of competitive
advantage that can lead to performance differentials.
The large numbers Decreasing returns; a large number of buyers and sellers, firms are price takers. No monopoly
assumption in buyers and suppliers. It is not possible to create higher(supra-normal) profits.
The homogeneity Demand is homogeneous; standardized products. No diversification.
assumption
The mobility assumption Resources are perfectly mobile; free entry and exit. Separation of resources is not possible.
The rationality Buyers and sellers have complete information and maximize their utility and profit. All actors
assumption are rational, convincing is not possible.
The transaction cost Transactions are costless. Transaction cost: all costs that are not directly related to the
assumption transaction itself (before the actual deal).
Limitations of the Neoclassical model:
1. The firm is treated as a black box.
2. Preferences are seen as given.
3. Technology are seen as given.
4. There is no room for increasing returns.
5. The firm is treated as a unitary agent.
, 6. Static equilibrium logic (preferences and technological possibilities are treated as given)
(Partial) solution:
1. Knowledge, capabilities and dynamic capabilities view.
,Week 1 Article summary – main massages
Stoelhorst, 2008 Process (the role of management in strategy): Strategy formulation and formation
Thinking about strategy Content (the relationship between the firm and its environment): Strategy analysis
Context (the dynamics of competition): Integration
Prescriptive: Strategy should be
Descriptive: Strategy is
Deterministic view: the environment determine the optimal strategy for a firm.
Voluntaristic view: firms can actively influence the environment through their strategy.
Inside-out: focus on the characteristics of the firm itself.
Outside-in: focus on the characteristics of the industry.
Positioning school – Strategy as fit (1980’s): industry determines performance (outside-in).
Focus on the products that the firm sells.
Resource-based school – Strategy as stretch (1990’s): resources determine performance
(inside-out). The main interest is to understand the relationship between differences among firms in
terms of their resources, competencies, and capabilities on the one hand, and performance
differentials among these firms on the other hand. (characteristics resources for competitive
advantage: valuable, rare, inimitable, non-substitutable)
Firms differ from each other.
These differences are relatively stable.
These differences lead to differences in performance.
Rumelt, 2003 Reviewing the use of the term competitive advantage (common use of the theme is value creation):
What in the world is First school; value is created by favourable terms of trade in product markets. That is, sales
competitive advantage? in which revenues exceed costs.
Porter: competitive advantage means having low costs, differentiation advantage, or
a successful focus strategy. CA grows fundamentally out of value a firm is able to
create for its buyers that exceeds the firm’s cost of creating it.
Saloner/Shepard/Podolny: most forms of CA mean either that a firm can produce
some service or product that its customers value than those produced by competitors
or that it can produce its service or product at a lower cost than its competitors.
Second school: advantages is revealed by “supra-normal” returns.
Petraf: CA is sustained above normal returns.
, Barney: firms have CA when its actions in an industry or market create economic
value and when few competing firms are engaging in similar actions. When it
generates greater than expected value from the resources it employs.
Ghemawhat/Rivkin: a firm that earns superior financial returns within its industry
over the long run is said to have CA over its rivals.
Besanko/Dranove/Shanley: when a firm earns a higher rate of economic profit than
the average rate of economic profit of other firms competing within the same market.
Kay: Distinctive capabilities as ones derived from characteristics that others lack and
which are also sustainable and appropriable. A distinctive capability becomes a CA
when it is applied in an industry or brought to a market.
Dierikx/Cool: CA is not obtainable from freely tradable assets.
Third school: ties advantage to stock market performance.
Various strategist: measure CA in terms of shareholder returns.
Areas of confusion:
1. How value should be conceptualized or measured.
2. The meaning of rents.
3. The appropriate use of the opportunity cost concept.
4. Whether CA means winning the game or having enough distinctive resources to maintain a
position in the game.
Conclusion: The strategy area is in need of a clear definition of competitive advantage, or it needs
to stop employing a concept that cannot be defined.
Besanko, Dranove, What will be the performance of firms in a perfectly competitive market?
Shanley, 2000 Economic costs (versus accounting costs)
Economics of strategy Business decisions require the measurement of economic cost, which are based on the
opportunity cost. This concept says the economic cost of deploying the resources in a
particular activity is the value of the best forgone alternative. Opp. cost provides a
good basis for economic decisions.
Accounting cost must be objective and verifiable (historical costs)
Economic profit (versus accounting profit)
Opportunity costs are not excluded from accounting costs. When a firm’s accounting
earnings do not cover the opportunity costs, the firm will earn a positive accounting
profit, but a negative economic profit.
, Accounting profit= sales – accounting cost, Economic profit= sales – economic cost
The firm’s ultimate objective is to make as large a profit as possible. Thus, when determining the
amount it wants to sell, the firm simultaneously determines the price it can charge from its demand
curve. This is where the concepts of marginal revenue and marginal cost become useful.
“Marginals” are rates of change (change in cost or revenue per on-unit change in output).
Firms that base their strategies on products that can be easily imitated or skills and resources that
can be easily acquired put themselves at risk to the forces that are highlighted by the theory of
perfect competition. To attain competitive advantage, a firm must secure a position in the market
that protects itself from imitation and entry.
Firms in a perfectly competitive industry produce identical products, and must charge the
same price.
Free entry exhausts all opportunities for making profit.
Zero economic profit means that investors are earning returns on their investment that re
commensurate (evenredig) with what they could earn from their next best opportunity.
Conner, 1991 Focus a resource-based approach to strategic management:
A historical comparison A firms ability to attain and keep profitable market positions depends on its ability to gain and
of Resource-based defend advantageous positions in underlying resources important to production and distribution.
theory and Five schools Strategic concept: a firm’s competitive position is define by a bundle of unique resources and
of thought within relationships and that the task of general management is to adjust and renew these resources and
industrial economics relationships as time, competition, and change erode their value.
Five theories of the firm from I/O Economics:
(why does the firm exist, and what determines their scale and scope?) We take as a given that the
ultimate purpose of the firms is to maximize profits. Thus these approaches do not differ with
regard to the firm’s fundamental objective, but rather regard to the primary means through which
firms attempt to realize this objective.
Neoclassical perfect competition theory – firm as combiner of inputs
In a perfect model, the firm exists to combine resources to produce an end product.
In the neoclassical model, firms produce by teaming two inputs: labor and capital.
Firms are identical because perfect information together with a specifiable production
function assure that each firm has equal access to product technology; perfect
information plus resource mobility and divisibility assures that each firm is able to
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