Summary of all the chapters (1 - 11) of the book Strategic Management and Competitive Advantage by Jay B. Barney and William S. Hesterly (5th edition). The summary is in English, a few sentences (mainly in the beginning) are in Dutch. Some fellow students used my summary for the exam and all had gr...
Chapter 1 strategy and strategic management process
Classis strategic questions:
- How is this industry likely to evolve?
- What actions can be taken to change this situation?
- How can firms gain advantages in this industry?
- How sustainable are these advantages?
The process by which these, and other questions are answered, is the strategic
management process. The answers that firms develop for these questions help
determine the firm’s strategy.
Strategy and the Strategic Management Process
A firm’s ability to survive and prosper depends on choosing and implementing a
good strategy. There’s a lot of disagreement about what a good strategy is.
Defining strategy
A firm’s strategy:
- A theory about how to gain competitive advantages.
- These are based on a set of assumptions and hypotheses about the way
competition in the industry is likely to evolve and how the evolution can
be exploited to earn a profit.
- It’s a firm best bet about how competition is going to evolve and how that
evolution can be exploited for competitive advantage.
The strategic management process
Om tot de beste strategie te komen, wordt er gebruik gemaakt van the strategic
management process. Deze strategie zorgt ervoor dat er competitive advantages
worden behaald.
1
,A firm’s mission
- Long term purpose
- Defines what a firm aspires to be in the long run and what it wants to
avoid in the meantime.
- Often written in mission statements
A mission can cause 3 actions:
1) Some missions may not affect firm performance
- De meeste missies bevatten algemene omschrijvingen van het bedrijf,
zoals wat voor product/ dienst ze verkopen, in welke industrie ze dit
verkopen en hoe ze hierin concurreren.
- Velen vragen zich dan ook af of de missie wel waarde toevoegt aan een
bedrijf.
2) Some missions can improve firm performance
- Onderzoek heeft aangetoond dat visionary firms zoals Wal-Mart en
Disney met een missie weldegelijk winst oplevert. Deze bedrijven boeken
al jarenlang hoge winsten.
- Andere jarenlang goedlopende bedrijven als Ford en American Express
zijn hun missie uit het oog verloren maken hierdoor minder winst.
3) Some missions can hurt firm performance
- Een missie kan het bedrijf ook tegen werken, als het bijvoorbeeld bedacht
is o.b.v geloof/ wensen van de oprichters en niet aansluit bij de branche of
economische problemen waar een bedrijf tegen aan loopt.
Objectives
Specific measurable targets that a firm can use to evaluate the extent to which it
is realizing its mission.
- High quality objectives are tightly connected to a firm’s mission and can
be easily measured and tracked over time. A firm needs these to measure
the success of their mission.
- Low quality objectives do not exist or are not connected to a firm’s
mission.
External and internal analyses
The external and internal analyses occur more or less simultaneously.
External analysis
- Identify the critical threats and opportunities in its competitive
environment.
Internal analysis
- Helps the firm identifying its organizational strengths and weaknesses.
- Makes the firms understand which resources and capabilities will help to
achieve competitive advantage and which will not.
2
,Strategic choice
After the above-mentioned steps, a firm is ready to make a strategic choice. They
can now choose its theory of how to gain competitive advantage.
Two categories of strategic choices:
1) Business-level strategies
- The actions firms take to gain competitive advantage in a single market or
industry.
- Most common strategies: cost leadership and product differentiation
2) Corporate-level strategies
- Actions firms take to gain competitive advantage by operating in multiple
markets or industries simultaneously.
- Common strategies: vertical integration, diversification, strategic alliance,
merger and acquisition and global strategies
The objective when making a strategic choice is to choose a strategy that
supports a firm’s mission, is consistent with a firm’s objectives, exploits
opportunities in a firm with a firm’s strengths and neutralizes threats in a
firm’s environment while avoiding a firm’s weaknesses.
Strategy implementation
This last step of the strategic management process is very likely to be a source of
competitive advantage.
Strategy implementation occurs when a firm adopts organizational policies and
practices that are consistent with its strategy.
Three specific organizational policies and practices are particularly important:
1) A firm’s formal organizational structure
2) Formal and informal management control systems
3) Employee compensation policies
What is competitive advantage?
When a firm is able to create more economic value than rival firms. Economic
value is the difference between the perceived benefits (perception) gained by a
customer that purchases a firm’s products or services and the full economic costs
of these products or services.
Stel bedrijf A maakt €180,- winst per verkocht product en bedrijf B €150, - voor
hetzelfde product. Dan heeft A een competitive advantage over B van €30, -.
Vb. met burgers:
Waarde van een burger in ogen consument €50
Prijs van de burger €37,50
Productiekosten €15
Economic value created = 35 (50-15)
3
,Het bedrijf heeft een goede waarde rondom de burger gecreëerd, waardoor ze
een hoge prijs voor hun burger kunnen vragen. Een concurrent heeft dit wellicht
niet, waardoor zij minder voor hun product kunnen vragen. Dan ontstaat er
competitive advantage tussen de 2 bedrijven. Vb. mensen betalen meer voor een
product van Apple.
3 options in competitive advantage for a firm:
1) Competitive advantage (winner)
The firm creates more economic value than its rivals
- Temporary competitive advantage lasts for a very short period of time.
- A sustained competitive advantage can last much longer.
2) Competitive parity (break-even)
Firms that create the same economic value as their rivals experience
3) Competitive disadvantage (loser)
Firms that generate less economic value than their rivals
- Temporary competitive disadvantage
- Sustained competitive disadvantage
Research made relevant
Waring found out that the following conditions contribute to sustained
competitive advantage:
1) Firms that operate in informational complex industries
2) Require customers to know a great deal in order to use an industry’s
products
3) Require a great deal of R&D
4) Have significant economic of scale (EOS)
The final strategic management process:
Business canvas model
An alternative way to describe the strategic management process is by the
business canvas model. This model contains 9 activities of the firm. In the
centre are the “value properties”. This box explains how the firm will create
value for its customers. This box is very close to identifying a firm’s strategy.
4
, The value properties have important implications for the key activities, key
resources and key partners. These 3 boxes contribute to accomplishing the
value properties.
The value properties also help determine the customer relationships, the
channels and customer segments.
If all these 6 activities support the value properties then these activities improve
a firm’s cost structure and revenue streams. The difference between firm’s
revenues and costs is the economic value created by a firm.
The canvas is a convenient way to summarize a wide variety of firm activities,
how those activities are related to each other and how they ultimately affect a
firm’s costs and revenues.
Measuring competitive advantage
It’s hard to measure the competitive advantage of a firm. That’s why two
approaches have emerged: accounting performance and economic
performance.
Accounting measures of competitive advantage
A measure of its competitive advantage calculated by using information from a
firm’s published profit and loss and balance sheet statement. Since every firm
uses the same accounting standards and principles, it’s easy to compare the
accounting performance of many firms with each other.
One way to use a firm’s accounting statements to measure its competitive
advantage is through the use of accounting ratios. There are 4 categories:
1) Profitability ratios
Measure profit, firm size or assets
2) Liquidity ratios
The ability to meet short-term financial obligations
3) Leverage ratios
Focus on the level of a firm’s financial flexibility
4) Activity ratios
Focus on the level of activity in a firm’s business
These outcomes don’t say much about the performance of a company. Therefore,
the accounting ratios must be compared with some standard: for example the
standard accounting ratios in that industry. Then the outcome for the firm can
be:
1) Above average accounting performance
The firm generally experiences (sustained) competitive advantages.
2) Average accounting performance
3) Below average accounting performance
The firm generally experiences competitive disadvantages.
5
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