University of Amsterdam
MSc Business Administration 2020/2021
Theories of Strategy
Lecturer: J.W. Stoelhorst
– Full Exam Preparation: Explained Key Concepts (80 in total) -
Key concepts
1. The positioning school of strategy
The first positioning wave is linked to insights derived from military strategy. The second
positioning wave is linked to the work of the strategy consultants. Much like Porter’s work, these
earlier positioning approaches also consider strategy in terms of building favorable positions in
a particular context (for instance, a dominant market share in a growing market). The positioning
school, which also tends to focus on explanations of performance differences in terms of
industry structure, rather than in terms of differences between firms. This may lead to a
relatively deterministic view of strategy, where the environment is seen as the main reason of
the success of firms and managerial actions do not seem to matter all that much. The resource-
based school was in large part developed as a reaction to this view.
2. The resource-based school of strategy
The resource-based school can be seen as a reaction to the outside-in approach to strategy
developed in the positioning school. The focus of the positioning
conduct an in-depth internal analysis remained underdeveloped.5 The resource-based school
sought to fill this gap. Unlike the positioning school its primary focus is not on products that firms
sell but on the resources that they employ to produce their products. The main interest of the
resource-based school 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. The resource-based view (RBV) of the firm
takes a very different view. Its premises are the following (Foss, 1997):
-Firms differ from each other
-These differences are relatively stable
-These differences lead to differences in performance
RBV opens the black box of the firm and looks at how differences in the resources that firms
control can help explain why some firms perform better than others (e.g. Wernerfelt, 1984;
Barney 1991; Peteraf, 1993). The approach to strategy of the RBV goes back to the work of
economist Edith Penrose. In her book The Theory of the Growth of the Firm (1959), she defines
firms as ‘… a collection of resources bound together in an administrative framework’ (1995, p.xi).
This puts the resources of firms and the way in which these resources are managed center stage.
3. Competitive advantage
, There is disagreement or confusion about whether competitive advantage means winning the
game or having enough distinctive resources to maintain a position in the game, according to
Rumelt (2003).
4. Neoclassical economics
In the neoclassical model of market, the mobility assumption means that all firms have access to
all the resources that are necessary to enter a market. In combination with the assumptions that
demand is homogeneous and that everybody has full information and is perfectly rational, it
should come as no surprise economists are not all that interested in what happens inside firms.
Given the assumptions of the neoclassical model, all firms in a particular market necessarily will
be the same. They will produce similar products on the basis of similar resources and can only
compete on price.
5. Perfect competition
The market will reach an equilibrium between supply and demand at a price level where all
suppliers make minimal profit: just enough to sustain their activities. This price level is also the
price level that maximizes overall welfare by allocating scarce resources to their most valued
use. Any profit above what is strictly necessary to sustain a firm’s operations is seen as ‘supra-
normal’. Such supra-normal profit comes at the expense of consumers and from the perspective
of overall welfare this should be avoided. The best way to do avoid the welfare loss of supra-
normal profits is to bring markets closer to the ideal of perfect competition. Imperfect
competition there are no opportunity costs left on the game. In the model of perfect
competition, competition is 1) price competition and 2) entry and exit competition. Firms
are black boxes, unitary agents and are seen as implementing a given production function
and as rationally responding to prices. In perfect competition humans are fully rational and
self-interested.
6. Accounting profit
AP=Sales Revenue-Accounting Cost
7. Economic profit
EP= Sales Revenue-Economic Cost=Accounting Profit- (Economic Cost-Accounting Cost)
8. Opportunity costs
The concept of op.cost provides the best basis for good economic decisions when the firm
must choose among competing alternatives. This concept says that the economic cost of
deploying resources in a particular activity is the value of the best forgone alternative use of
those resources. When a firm’s accounting earnings do not cover this op.cost, the firm will
earn a positive accounting profit but a negative economic profit.
9. Rent
Rents are not only valuable and useful; rents are unique and hard to copy so no other firm can
use them. Rents are the gains from the resources that you have. If you have a unique, valuable,
costly to copy resource (e.g. a unique machinery that makes candies at 0 cost) you gain from
that resource like no other firm can because only you have that machinery.
10. Bain type industrial organization
IO economists study competition from the perspective of overall welfare. The focus of their
research is to help governments keep markets competitive and their research findings inform anti-
trust legislation. The central goal of IO research is therefore to (1) understand the relationship
, between industry structure and profitability,4 and (2) to understand barriers to competition in order
to advise governments about policies to reduce these barriers in order to increase social welfare.
11. Schumpeterian industrial organization
Schumpeter (1950) was an economist who emphasized the crucial role of entrepreneurs in shaping
markets and industries through acts of innovation. In Hamel and Prahalad’s work (1989, 1994),
these ideas take the form of a very voluntaristic view of strategy. Whereas the positioning school
thinks of strategy in terms of ‘fit’, Prahalad and Hamel (1993) think of it in terms of ‘stretch’.
Rather than analyzing the existing competitive environment, managers should become
entrepreneurs that change this environment in their favor. The message is: don’t be a rule taker,
be a rule maker.
12. Chicago school industrial organization
Second wave of the IO in the 1970s: the Chicago School
During the 1970s, the SCP paradigm is called into question: no conclusive empirical support.
The Chicago school (Posner, Bork, Peltzman, Stigler...) came about in reaction to the SCP
approach. For them, the market regulation mechanism is free competition between companies.
Little action is carried out on market structure. Firms are able to do things better than their
competitors (process efficiencies)
13. Monopoly
Power over price from one seller. We have many buyers. It is bad for social welfare.
14. Oligopoly
We have a small group of sellers (cartel) i.e. construction firms in the NL
15. Monopolistic competition
We have many sellers and buyers. Firms are able to differentiate their products and their
profits, and have some power over price (i.e. Apple, Dell)
16. The S C P model
Up until the late 1970s, the main theoretical framework in IO was the so-called S-C-P paradigm
(for ‘Structure-Conduct-Performance). ‘Structure’ refers to the structure of the industry, ‘conduct’
refers to the (strategic) behavior of individual firms, and ‘performance’ to different possible
dimensions on which industries and firms can differ from each other, such as profitability or
innovativeness. The basic idea in this approach to IO is that industry structure determines much
of the performance of the firms within an industry, but that individual firms can do better or worse
than the industry average by choosing successful strategies.
17. Porter’s five forces and generic strategies
Porter’s well-known 5-forces model (threat of entry, competitive rivalry, threat of
substitutes, bargaining power of buyers, and bargaining power of suppliers) is his way to
help managers understand the ‘S’ of industry structure. The basic idea is that stronger forces
lead to more pressure on the profit margins of the firm’s in the industry. Industries where the
five forces are weak are therefore more attractive than industries where the forces are strong.
Porter’s three generic strategies (cost leadership, differentiation, and focus) are his
way to help managers think about the ‘C’ of conduct. The basic idea is that these strategies
can be used to secure favorable positions within the industry: positions in which the firm in
question is better protected from the five forces than its competitors. Border thought that
firms had to choose between cost leadership or differentiation and cannot do both at the
same time. This was questioned and demolished afterwards by empirical evidence.
