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Mini Summary Theories of Strategy
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Mini svNeoclassical economics and perfect competition: zero economic
profit: 5 assumptions:
The large numbers assumption
The homogeneity assumption
The mobility assumption
The rationality assumption
The transaction cost assumption
Allocative efficiency: maximization of individual freedom and collective
welfare
Zero economic profit
Perfect competition is about free competition
Price competition
Entry and exit
Perfect competition: theoretical benchmark
Additional schools of thought in economics that influences strategic
management:
Positioning school & Bain type IO school (market power as source)
Resource based school (resources as source)
Chigago school (process efficiencies as source)
Ricardian school (costly to copy resources as source)
Schumpeteriam school (innovation as source)
The positioning school of Michael Porter
Bain type industrial organization (IO) economics to managerial frameworks
To inform governments with ani-trust policies to counter market
power in industries and increase social welfare.
Porter switched it up and used these frameworks for profit
maximization and decreasing competition
S-C-P paradigm:
Structure (of industry)
Conduct (key decisions, strategies firms)
Performance
Porter makes paradigm similar to SCP paradigm:
Total industry structure (five forces)
Inter industry structure (strategic groups)
Firm conduct (generic strategies of individual firms)
Porters Five Forces:
1. The intensity of competitive rivalry
, 2. Threats of new entrants
3. Threats of substitutes
4. Bargaining power of suppliers
5. Bargaining power of buyers
Strong forces of competition -> more competition -> less profitable
Weak forces -> less competition -> more profitable
Barriers to competition:
Entry barriers
Exit barriers
Inter industry competition:
Strategic groups: compete more directly
Mobility barriers (offer dual protection: to new entrants and other
strategic groups)
Firm conduct: generic strategies/key decisions of individual firms.
Accroding to Porter there are 3:
Cost leadership
Differentiation
Focus (specific market/product)
The positioning school of porter is about relating higher or lower
performances of firms to three explanations:
1. The industry effect
2. The strategic group effect
3. The firm effect
Essence of Porters work: firms should obtain a market power position that
allows them some control over the price instead of being a price taker.
The High Church resource-based view (Wernerfelt)
Stays close to neoclassical economic foundations and equilibrium
reasoning.
Two reasonings for the start of the RBV
If all firms use Porter they will all find similar outcomes -> increase
of competition -> less profitable and attractive the industry gets
There is a gap in Porters framework: it is not clear what sources
firms have to get into a superior position
RBV: if a firm has superior resources (heterogeneity) than they can obtain
a position as a cost leader. These resources cannot be imitated by
competitors because they are too costly in terms of factor market
competition.
The idea of heterogeneity comes from Ricardian rents; firms having
superior productive resources that are limited in supply, which results in
these firms having lower average and marginal costs then other firms that
, results in earning more profits. These firms make more profit because the
equilibrium price is lower than the marginal costs.
Marginal costs: how much it costs to make one more item
Equilibrium costs: where supply and demand are balanced, no oversupply
or demand
RBV view: a firm does not have to obtain a market power position but
needs to control superior productive resources for which they did not pay
full economic value (ex. Landlords in the grain industry).
RBV of Jay Barney
VRIN indicators: what makes it a superior resource
1. Value
2. Rareness
3. Imitability
4. Substitutability
3 categories of firm resources according to Barney:
Physical capital resources
Human capital resources
Organizational capital resources
Barney:
Competitive advantage: create value strategy not yet used by other
firms
Sustained competitive advantage: create value strategy that cannot
be imitated by other firms
o To have potential for a sustained competitive advantage a firm
needs to complement the VRIN indicators.
Firm resource heterogeneity + firm resource immobility
VRIN indicators
Sustained competitive advantage
Firm resource heterogeneity: different firms have different types and
quality resources
Firm resource immobility: these resources are difficult to transfer to other
firms
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