Chapter 1; What is strategy and the strategic management process?
Strategy: firm’s theory how to gain competitive advantages (theory because uncertainty)
Based on a set of assumptions and hypotheses about the way competition in an industry
is likely to evolve and how that evolution can be exploited to earn a profit
Strategic management process: sequential set of analyses and choices that can increase the
likelihood that a firm will choose a good strategy strategy that creates CA
- Mission: what a firm aspires to be the long run and what it wants to avoid in the
meantime
often written down in the form of mission statements
- Objectives: specific measurable targets, used to evaluate the if it’s realizing its missions
- External analysis: identify critical (external) threats and opportunities in its competitive
environment
- Internal analysis: identity organizational (internal) strengths and weaknesses
- Strategic choice:
o Business-level: cost leadership, product differentiation
o Corporate level: vertical integration, strategic alliances, diversification, M&A
Competitive advantage: create more economic value than rival firms
Economic value: difference between what customers are willing to pay and total cost of
producing this product or service
Economic value created: the difference between perceived benefits gained by a customer
and the full economic costs
Triangle: consumer surplus
Square: producer surplus
If marginal cost (MC) and average
total cost (ATC) meet, that is the
quantity that will be sold. The block
and the triangle in the left picture
represent the total value created.
Consumer surplus = value – price
Producer surplus = price – cost
Economic value created = value – cost OR consumer surplus + producer surplus
Hamburger example: Value = €40,- Price = €30,- Cost = €15,-
- Consumer surplus = €40 - €30 = €10
- Producer surplus = €30 - €15 = €15
- Economic value created = €40 - €15 = €25
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,Imperfect competition means that the products that are sold are not exactly the same
(heterogeinity). With perfect competition there is no economic value created, with
homogeniety products (i.e., oil, grain, sugar, etc.)
Competitive advantage: temporary (lasts short) vs. sustained (lasts much longer)
Competitive disadvantage: temporary (lasts short) vs. sustained (lasts much longer)
Competitive parity: when a firm creates the same economic value
Measuring competitive advantage always measured relative to other firms
Accounting measures: (using firm’s profit and loss balance sheet)
- Profit ratios: ratios about the amount of revenue an organizations has, about profitability
- Liquidity ratio: ratios about the ability to meet short-term financial obligations
- Leverage ratio: ratios on level of firm’s financial flexibility, including the ability to obtain
more debt
- Activity ratio: all the rest, how quickly inventory is used, etc.
Economic measures:
- Cost of debts: interest a firm must pay to its debt holders
- Cost of equity: rate of return a firm must promise to its equity holders
- The weighted average cost of capital (WACC): a percentage that investors want from you.
If the return on asset is higher than investors want from you, you have a competitive
advantage. For example: WACC < ROA < Industry Avg. ROA ( here your competitors are
earning more than you, so it’s not a positive thing)
How to measure accounting/ economic performance: (highly correlated)
Competitive advantage above-average accounting perf above normal economic perf
Competitive parity average accounting perf normal economic perf
Competitive disadvantage below-average accounting perf Below normal economic
perf
Emergent strategies: theories of how to gain CA in an industry that emerge over time or that
have been radically reshaped once they are initially implemented (i.e., Marriot and J&J)
Chapter 2; evaluating a firm’s external environment
Levels of analysis: individual firm strategic group industry general environment
General external environment consists of: (trends or things that are changing)
- Technological change: shift in the frontier of technological possibilities and the
underlying infrastructure
- Demographic trends: age, sex, marital status income, ethnicity and other personal
attributes that might affect buying patterns
- Cultural trends: values, beliefs and norms that guide behavior in society
- Economic climate: the overall health of the economic systems within which a firm
operates
- Legal and political conditions: the law and legal system's impact on business, together
with the general nature of the relationship between government and business
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,- Specific international events: events like (civil) wars, political coup, terrorism, famines
which influence the firm’s ability to generate a competitive advantage
Structure-conduct-performance model:
- Industry structure: number of competing firms, homogeneity of products, cost of entry
and exit
- Firm conduct: strategies firms pursue to gain competitive advantage
- Performance:
o Firm level: competitive disadvantage, parity, temporary or sustained CA
o Society: productive and allocative efficiency,
level of employment, progress
SCP-model:
- Originally developed to spot anti-competitive
conditions for anti-trust purposes
- Came to be used to assess the possibilities for above
normal profits for firms within an industry
5 forces model
Porters’ five forces model (industry profitability, not individual)
1. Threat from existing competitors: conditions that generate a high threat of existing
competitors
- Large number of competitors that are roughly the same size
- Slow or declining industry growth
- Low product differentiation (leading to low customer loyalty and switching costs)
- Industry capacity added in large increments (oversupply leads to price cuts)
2. Threat from new competition: conditions that generate a high threat of new entrants
- High industry growth rate (industry becomes more attractive for new competition)
- Low barriers of entry:
o Economies of scale
o Product differentiation
o Government regulation of entry
o Retaliation of incumbent
o Proprietary (i.e., secret or patented) technology
o Managerial know-how (taken for granted knowledge/ information needed)
o Favorable access to raw materials
o Learning-curve cost advantages
3. Threat from substitutes: conditions that generate a high threat of substitutes
- High potential of fulfilling the same need (high quality i.e., from LP to CD)
- Low switching costs for customers (i.e., from Pepsi or Coke to milk)
4. Threat of supplier leverage: industry conditions that facilitate supplier power
- Small number of firms in supplier’s industry
- Suppliers sell unique highly differentiated product
- Lack of close substitutes for suppliers’ products
- Focal firm is an insignificant customer of supplier
- High switching costs for focal firm
5. Threats from buyer’s influence: industry conditions that facilitate buyer power
- Small number of buyers
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, - Low level differentiation
- Low switching costs
(6) Complementors as a sixth force
- Customer value the focal firm’s products more when the customers also own the product
of the other firm
- Complementors increase the size of the market
I.e., game consoles complementor: the games you can play.
Drawbacks five forces:
- Averages with big variance (low industry profitability, but one star i.e., Facebook)
- Unclear weight separate forces
- Highly dependent on industry definition
- Oversimplification / not complete
- Catch 22: five forces is very hard to make if your industry is very complex, but five forces
is also the most important if your industry is very complex.
if it is easy to create the 5 forces, everyone can probably do it and it will be less significant
Strategic groups: Set of companies with similar strategies (strategy dimensions)
I.e., Aldi and Lidl Lidl and AH are NOT in the same strategic group
- More competition within strategic groups than between strategic groups (i.e., Aldi – Lidl)
- Not all groups have the same profitability (i.e., particular strategy makes more revenue)
- Possible mobility barriers between groups, to go from one group to another
Industry: set of companies that fulfill a similar need with a similar production process
- Determines to which force other players belong
- Too narrow: actual competitors are labelled substitute or new entrant (i.e., Greek tapas)
- Too broad: actual substitutes are labelled direct competitors (i.e., milk and Pepsi)
Chapter 3
Resources
- All the tangible and intangible assets of a firm
tangible: factories, products / intangible: reputation, teamwork among managers
- Used to conceive of and implement strategies, used to make products
Resource categories:
- Financial: i.e., cash, retained earnings
- Physical: i.e., plant and equipment, geographic location, data, patents
- Human: i.e., skills and abilities of individuals, judgement, intelligence
- Organizational: i.e., reporting structures, relationships, culture
Resource based view (RBV) critical resource assumptions:
- Resource heterogeneity: different firms may have different resources (i.e., more skilled)
- Resource immobility: gaining resources is not without cost (hard to transfer)
o It may be costly for firms without certain resources to acquire or develop them
o Some resources may not spread from firm to firm easily
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