Study guide

Theories of strategy - Key Concepts

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Theories of Strategy

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Universiteit Van Amsterdam (UvA)

List of key concepts (as shown in the study guide provided by the professor of the course) with all definitions and extra important information as provided in the lectures to answer the outlines and the open ended question in the exam. This list of key concepts also includes information from class ...

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Meeting 1.1: Economic foundations of strategy

1. The positioning school of strategy
a. Prescriptive school
b. Porter's Competitive Strategy (1980), industrial organization (IO), S-C-P model, perfect
competition
c. Strategy content at the center. Instead of having unique design strategies, positioning selects
generic ones by selecting favorable positions in attractive industries
d. It added an external analysis and developed theoretically grounded ideas about the source of
performance differences among firms
2. The resource-based school of strategy
a. Prescriptive school
b. Primary focus: The resources that firms employ to produce their products and how these
explain differences in firm performance
c. Differences with neoclassical/perfect competition
i. Firms differ from each other and these differences are relatively stable and lead to
differences in performance
3. Competitive advantage
a. AMBIGUOUS CONCEPT
b. Should be disentangled from performance (financial returns ≠ CA)
c. Should be clear over whom a firm has an advantage
d. Something to do with value creation (and value appropriation)
e. Something to do with creating value in excess of costs
f. Financial returns should be the product of having an advantage
4. Neoclassical economics
a. All agents are perfectly rational and have full information
b. Limitations:
i. Firm treated as a unitary agent and black box
ii. Preferences are seen as given → no dynamics, external shocks no dynamics, external shocks
iii. Technology is given as a given
iv. No room for increasing returns
5. Perfect competition
a. Zero economic profit
b. Assumptions:
i. Large number assumption: Decreasing return, large number of buyers and sellers,
firms are price takers, no firm has market power
ii. Homogeneity assumption: Homogeneous demand, standardized products
iii. Mobility assumption: Free entry and exit
iv. Rationality assumption: Everyone has complete info
v. Transaction cost assumption: Transactions are costless
c. Zero profits = zero economic profits, not zero accounting profit
6. Accounting profit
a. Sales revenue-accounting cost
7. Economic profit
a. Happens if and when there's no opportunity costs left on the table
b. Sales revenue - economic cost = accounting profit - economic cost
c. Economic profit is the result of collective level resources (and only collective level resources)
(including complementarities, resources owned by the firm as a legal person and scale of
operation)
8. Opportunity costs (aka economic cost)
a. The value of the best forgone alternative use of the resources
9. Rent = profit
a. Payment in excess to the production costs
10. Bain-type industrial organization

, a. Firm as an output restrainer, where the source of performance differentials is market power.
Managers need to develop advantageous market positions
b. Main limitation on size and scope is governmental intervention
11. Schumpeterian industrial organization
a. Emphasis on the entrepreneur's role in shaping markets and industries through innovation
12. Chicago school industrial organization
a. Emphasis on efficiency-based explanations

Meeting 1.2: Porter and the industrial organization view
1. Monopoly: There's only one supplier
2. Oligopoly: Few suppliers
3. Monopolistic competition: Many sellers w/ differentiated products which lead to changes in price
4. Perfect competition: Many sellers w/ undifferentiated products
5. Monopoly rent: Occurs in connection w/ the sale of goods at monopoly prices in excess of their value
a. "Result from a deliberate restriction of output rather than an inherent scarcity of resource
supply"
6. Monopolistic (differentiation) rent: Supplier's have the same opportunity cost, but buyers have
different wtp
7. The S-C-P model
a. Structure-Conduct-Performance
b. Basis of the positioning school (Porter bases himself on this to develop his 5 forces)
8. Porter’s five-forces: Framework used to explain an industry's structure. If a force goes up, economic
profit goes down
a. Industry competitors (intensity of rivalry)
b. Threat of new entrants
c. Threat of substitutes
d. Bargaining power of buyers
e. Bargaining power of suppliers
9. Strategic groups: Firms that resemble one another closely and are likely to respond in the same way to
disturbances, to recognize their mutual dependence, and to be able to anticipate each other's
reactions
10. Entry barriers: Characteristics common to the industry that insulate all member firms equally from
potential entrants
11. Mobility barriers: Barriers of entry among strategic groups that provide some firms in the industry w/
persistent advantages over others and protect them from (quick) imitation and losing their CA

Meeting 2.1: The ‘High Church’ of the resource-based view
1. Factor market competition
a. Difference in performance arises when a firm has more accurate expectations about the future
value of a particular strategy than others
i. Imperfections in the factor market
b. Barney (1986) introduces a factor market theory which explains how firms may obtain an
economic profit while getting resources b/c of info asymmetries, expectations and luck
2. Ricardian (efficiency) rent: An above normal return (a source of economic profit) that is 'price
determined'
a. Source: Heterogeneous resources that are scarce and in fixed (inelastic) supply
3. Barney’s VRIN/VRIO criteria
a. VRIN (1991): Valuable, Rare, Inimitable, Non-substitutable
b. VRIO (1995): Valuable, Rare, Inimitable, Organization
4. Peteraf’s four criteria
a. Heterogeneity (explains CA)
i. Refers to the superiority of some resources over others
b. Ex post limits to competition (explains sustainable CA)
i. Forces which limit competition for rents after gaining a superior position
c. Ex ante limits to competition (explains CA)
i. Entry/mobility barriers that limit competition

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