Strategy Chapter 1
The strategic management process is a sequential set of analyses and choices that can
increase the likelihood that a firm will choose a good strategy; that is, a strategy that
generates competitive advantages.
how should we change and go
It depends on the industry where you are in if you are profitable.
How to create and keep a competitive advantage.
Strategic choice = to choose its theory of how to gain competitive advantage.
2 categories: Business-level strategy and corporate-level strategy.
Objective when making a strategic choice is to choose a strategy that:
Supports the firm’s mission
is consistent with a firm’s objectives
Exploit opportunities in a firm’s environment with firm’s strengths
Neutralizes threats in a firm’s environment while avoiding firm’s weaknesses
A firm has a competitive advantage when it is able to create more economic value than rival
firms. Economic value = difference perceived benefits (gained by customer purchases) and
the full economic cost (of the purchase)
Goal: you create more EVC than your competitors. If you do this you will have an
competitive advantage
temporary competitive advantage is a competitive advantage that lasts for a very short
period of time. A sustained competitive advantage can last much longer.
Imperfect competition: products that are sold are not exactly the same
Perfect competition (oil, sugar)
Customer surplus = value – price △
Producer surplus = price – costs
EVC = value – costs △
value = what you are willing to pay
Measuring competitive advantage (always
1. Accounting measures (measures competitive advantage 2. Economic measures (compare a firm’s level
using various ratios calculated from a firm’s profit and of return to its cost of capital instead of to the
loss and balance sheet statements.) average level of return in the industry. )
Profit ratios (revenues/profitability) (higher the better) The cost of debt
Liquidity ratios (how easily pay back short-term debts) The cost of equity (eigen vermogen)
Leverage ratios (how easily you can get more money to Weighted average cost of capital WACC %
finance your new debt or investments. Financial flexibility)
Activity ratios (rest. How quickly inventory is used.
Smaller things in organizations. activities)
+ Relatively easy to calculate
- Important cost not included: the cost of the capital a firm
employs to produce and sell its products.
,The correlation between economic and accounting measures of competitive advantage is
high.
Competitive advantage Economic returns
Advantage Above normal Exceeding expectations
Parity (same) Normal Meeting expectations
Disadvantage Below normal Failing expectations
Level of analysis
General environment outside
Industry (part of task environment) outside
Strategic group (similar strategic dimensions as
your organization) (there might be entry barriers)
inside
Individual firm (internal/competitor) inside
,Chapter 2 External
External analysis
Why? Make more informed strategic choices
Discover opportunities and threats (trends)
Analyze potential for profits
Understand the nature of competition
General environment
Concepts of the general environment (changing trends outside the industry)
Demographics: Age, sex, status income, ethnicity and other personal attributes that
might affect buying patterns. (only numbers)
Culture: Values, beliefs and norms that guide behavior in society.
Economic climate: the overall health of the economic systems within which a firm
operates. (ex: regression)
Legal and political conditions: the law and legal systems impact on business,
together with the general nature of the relationship between government and
business.
Specific internal events (ecological): events like (civil) wars, political coup,
terrorism, famines which have an effect on the firm’s ability to generate a competitive
advantage
Technological change: a shift in the frontier of technological possibilities and the
underlying infrastructure.
SCP model = Structured conduct performance 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 force model
Industry analysis – 5 force model
Higher threat lower average profits
Industry = set of companies that fulfil a similar need with a similar production process
Challenging but vital
Determines to which force other players belong
Too narrow
actual competitors are labelled substitute or new entrant
your company is a monopolist
All other players are potential entrants or substitutes
Too broad
actual substitutes are labelled direct competitors
your company is a powerless price taker
All other players are direct competitors
To many competitors that you can’t make any profit
Industry conditions that generate a high treat of existing competitors
Large number of competitors
, Slow or declining industry growth
Low product differentiation (leading to low customer loyalty and switching costs)
Industry capacity added in large increments
Industry conditions that generate a high treat of new competitors (not yet active)
High industry growth rate. Industry growth
Low barriers of entry. The lower the entry barriers to easier for new entrants.
o Economies of scale
o Product differentiation
o Government regulation of entry
o Retaliation of incumbent
o Proprietary technology
o Managerial know-how
o Favorable access to raw materials
o Leaning-curve cost advantages
Industry conditions that generate a high threat of substitute products (substitutes are form a
different industry but fulfil similar needs) (where can the customer also spend their money
on)
High potential of fulfilling the same need (high quality)
Low switching costs for customers
Industry conditions that facilitate supplies power/leverage
Small number of firms in supplier’s industry
Highly differentiate product
Lack of close substitutes for suppliers’ products
Local firm is an insignificant customer of supplier
High switching costs for focal firm
Industry conditions that facilitate buyer power/influence
Small number of buyers
Low level of differentiation
Low switching costs
Complementors as a 6th force (have a positive effect, make the apply bigger)
Customers 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
Examples: Airline industry – hotel industry | consoles – video games
Drawbacks 5 forces
Averages with big variance
Unclear weight separate forces
Highly dependent on industry definition
Oversimplification / not complete
Catch 22 = You’re dammed if you do, your dammed if you don’t.
The strategic management process is a sequential set of analyses and choices that can
increase the likelihood that a firm will choose a good strategy; that is, a strategy that
generates competitive advantages.
how should we change and go
It depends on the industry where you are in if you are profitable.
How to create and keep a competitive advantage.
Strategic choice = to choose its theory of how to gain competitive advantage.
2 categories: Business-level strategy and corporate-level strategy.
Objective when making a strategic choice is to choose a strategy that:
Supports the firm’s mission
is consistent with a firm’s objectives
Exploit opportunities in a firm’s environment with firm’s strengths
Neutralizes threats in a firm’s environment while avoiding firm’s weaknesses
A firm has a competitive advantage when it is able to create more economic value than rival
firms. Economic value = difference perceived benefits (gained by customer purchases) and
the full economic cost (of the purchase)
Goal: you create more EVC than your competitors. If you do this you will have an
competitive advantage
temporary competitive advantage is a competitive advantage that lasts for a very short
period of time. A sustained competitive advantage can last much longer.
Imperfect competition: products that are sold are not exactly the same
Perfect competition (oil, sugar)
Customer surplus = value – price △
Producer surplus = price – costs
EVC = value – costs △
value = what you are willing to pay
Measuring competitive advantage (always
1. Accounting measures (measures competitive advantage 2. Economic measures (compare a firm’s level
using various ratios calculated from a firm’s profit and of return to its cost of capital instead of to the
loss and balance sheet statements.) average level of return in the industry. )
Profit ratios (revenues/profitability) (higher the better) The cost of debt
Liquidity ratios (how easily pay back short-term debts) The cost of equity (eigen vermogen)
Leverage ratios (how easily you can get more money to Weighted average cost of capital WACC %
finance your new debt or investments. Financial flexibility)
Activity ratios (rest. How quickly inventory is used.
Smaller things in organizations. activities)
+ Relatively easy to calculate
- Important cost not included: the cost of the capital a firm
employs to produce and sell its products.
,The correlation between economic and accounting measures of competitive advantage is
high.
Competitive advantage Economic returns
Advantage Above normal Exceeding expectations
Parity (same) Normal Meeting expectations
Disadvantage Below normal Failing expectations
Level of analysis
General environment outside
Industry (part of task environment) outside
Strategic group (similar strategic dimensions as
your organization) (there might be entry barriers)
inside
Individual firm (internal/competitor) inside
,Chapter 2 External
External analysis
Why? Make more informed strategic choices
Discover opportunities and threats (trends)
Analyze potential for profits
Understand the nature of competition
General environment
Concepts of the general environment (changing trends outside the industry)
Demographics: Age, sex, status income, ethnicity and other personal attributes that
might affect buying patterns. (only numbers)
Culture: Values, beliefs and norms that guide behavior in society.
Economic climate: the overall health of the economic systems within which a firm
operates. (ex: regression)
Legal and political conditions: the law and legal systems impact on business,
together with the general nature of the relationship between government and
business.
Specific internal events (ecological): events like (civil) wars, political coup,
terrorism, famines which have an effect on the firm’s ability to generate a competitive
advantage
Technological change: a shift in the frontier of technological possibilities and the
underlying infrastructure.
SCP model = Structured conduct performance 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 force model
Industry analysis – 5 force model
Higher threat lower average profits
Industry = set of companies that fulfil a similar need with a similar production process
Challenging but vital
Determines to which force other players belong
Too narrow
actual competitors are labelled substitute or new entrant
your company is a monopolist
All other players are potential entrants or substitutes
Too broad
actual substitutes are labelled direct competitors
your company is a powerless price taker
All other players are direct competitors
To many competitors that you can’t make any profit
Industry conditions that generate a high treat of existing competitors
Large number of competitors
, Slow or declining industry growth
Low product differentiation (leading to low customer loyalty and switching costs)
Industry capacity added in large increments
Industry conditions that generate a high treat of new competitors (not yet active)
High industry growth rate. Industry growth
Low barriers of entry. The lower the entry barriers to easier for new entrants.
o Economies of scale
o Product differentiation
o Government regulation of entry
o Retaliation of incumbent
o Proprietary technology
o Managerial know-how
o Favorable access to raw materials
o Leaning-curve cost advantages
Industry conditions that generate a high threat of substitute products (substitutes are form a
different industry but fulfil similar needs) (where can the customer also spend their money
on)
High potential of fulfilling the same need (high quality)
Low switching costs for customers
Industry conditions that facilitate supplies power/leverage
Small number of firms in supplier’s industry
Highly differentiate product
Lack of close substitutes for suppliers’ products
Local firm is an insignificant customer of supplier
High switching costs for focal firm
Industry conditions that facilitate buyer power/influence
Small number of buyers
Low level of differentiation
Low switching costs
Complementors as a 6th force (have a positive effect, make the apply bigger)
Customers 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
Examples: Airline industry – hotel industry | consoles – video games
Drawbacks 5 forces
Averages with big variance
Unclear weight separate forces
Highly dependent on industry definition
Oversimplification / not complete
Catch 22 = You’re dammed if you do, your dammed if you don’t.
