Theories of Strategy 2020/2021 Key Concepts from lectures and literature

1. How can the neoclassical theory of perfect competition inform theories of competitive advantage?

Answer: • Theoretical benchmark  neoclassical theory of perfect competition • Assumes perfect circumstances where the firm is seen as a black box and unitary agent, meaning that the productive knowledge and value appropriation within the firm are excluded or ignored. • Assumptions are: o the large number assumption o homogeneity assumption o mobility assumption o rationality assumption o transaction cost assumption • Impossible to have sustained competitive advantage, achievement of above normal returns is impossible • Only competition on price and entry or exit • Zero economic profit (accounting profit still possible) • Any deviation a source for competitive advantage, therefore possibility for profit

2. How does Porter’s early view on strategy (see Ghemawat, 1999; Porter, 1979; lecture materials) explain differences in performance among firms?

Answer: Key points: • Early work: 5-forces, strategic groups, generic strategies • Bain type I/O : S-C-P- paradigm • Industry effect: attractiveness of industry (5-forces), threat of new entrants, threat of substitutes, buyer power, supplier power, rivalry within the industry • Strategic groups: clusters of firm which hold similar strategies in terms of key decision variables  mobility barriers • Firm effect: generic strategies: cost leadership, differentiation, focus

3. What are the similarities and differences between Porter’s early work and Porter’s later work and how does this change the explanation of differences in performance among firms that he offers?

Answer: Key Points: • Porters early work o Five forces: bargaining power of suppliers, buyer, threat of new entrants and substitutes, rivalry within the industry  barriers to competition o Strategic groups: cluster of firms within the industry who follow the same or similar strategies in terms of key decision variables, mobility barriers o Generic strategies: explain firm conduct. Cost leadership, differentiation, focus • Earn profit with a position of market power, less competition • Identify attractive industries and acquire superior positions • Porters later work: from positional to analysis of underlying activities o Cross-sectional  longitudinal • More towards a dynamic view o Value chain: Perfomance explained by activities within the firm, value drivers and cost drivers. Differentiation or cost leadership depends on activities in the firm o Diamond: country level analysis, targets governments. Factor conditions, demand conditions, Firm strategy, structure and rivalry and related and supporting industries.

4. What are the similarities and differences between the explanations of differences in performance given by the High Church of the resource-based view and Porter’s early work?

Answer: Key Points: • Compare with neoclassical benchmark, both deviations • Porter’s early work: 5-forces, generic strategies, strategic groups: Outside-in • High Church RBV: Inside-out • Barney VRIN: valuable, rare, inimitable, non-substitutable • Peteraf: heterogeneity in the industry, ex ante and ex post limits to competition, immobility o Similarity: both require imperfect competition • Heterogeneity in resources create mobility barriers that lead to sustained competitive advantage (RBV) • Imperfect competition leads to mobility barriers between strategic groups which can act like an entry barrier for that strategic group  more attractive industry, creates profitability • Firm = black box. RBV unit of analysis = input  resources (inside-out). Porter unit of analysis = output  products (outside-in) • Firm level analysis (imperfect factor market) vs positioning in the industry (avoiding competition by positioning in an attractive place) • Inside out (RBV) resources source of CA • Outside in (Porter) industry source of CA

5. How does the added value view of strategy (Brandenburger & Stuart, 1996 and Brandenburger, 2002) explain performance differences among firms?

Answer: Key Points: • How is value divided among players in the market? • Market is a vertical chain of players • Performance measured through earned profits. Positive value added = profit • No static equilibrium, but game theoretic equilibrium • Value appropriation by firms, assumptions: o Unrestricted bargaining o Bargaining takes place at the same time o The outcome will be the coalition that creates the most value o Rational to sell at opportunity costs (or higher) or buy at willingness to pay (or lower) • Calculate the added value: drop in total value created when a certain player is omitted from the game • Positive added value result of favorable symmetry: differentiation, low cost • Four value-based strategies – ways to achieve a favorable strategy 1. Firm finds a way to raise willingness-to-pay of buyer for is products (often differentiation) 2. Or buyers have lower willingness-to-pay for other firms’ products (asymmetry in opportunity costs may arise) 3. Firms find a way to lower the opportunity costs of suppliers providing resources 4. Or suppliers end up with a higher opportunity costs of providing resources to other firms

6. What advice for managers that want to increase the performance of their firm can you derive from the added value view?

Answer: Key Points: • Explains process of value creation and appropriation in a vertical chain of players participating in a game • Managers  maximize ability to appropriate value: 2 ways 1. Create and sustain competitive advantage • Raise willingness-to-pay for buyers (differentiation) • Lower willingness-to-pay from buyers for other firms • Lower opportunity costs from suppliers of providing resources to the firm • Raise opportunity costs from suppliers of providing resources to other firms 2. Prices are negiotated • Competitive bargaining: based on economic position, favorable position in market strengthens market power  relates to rents • Pure bargaining: no economic basis, bargaining skills on informal institutions, relates to economic profit