Meeting 1.1: Economic foundations of strategy
Study question 1. How can the neoclassical theory of perfect competition inform theories of competitive advantage?
- Many theories try to explain what CA is; how firms can be better than others. Differences in performance among firms
come from the possession of CA
- Neo theory of perf competition is theoretical benchmark to explain theories of CA/compare markets real world
- Neoclassical theory of perfect competition assumes perfect circumstances:
A perfect competitive market according to neo. model is when 5 assumptions (LHMRT):
1. Large numbers; of sellers buyers; firms are price takers door many customers and decreasing returns
2. Homogeneity; demand is homogeneous and standardized products so no differentiation
3. Mobility; resources perfectly mobile; free entry exit of firms in markets
4. Rationality; all agents full information and maximize utility profit (homo economicus)
5. Transaction cost; all transactions are costless
+ firm seen as black box and unitary agents + humans are homo economicus (fully rational and self-interested)
➔ to get whole system in general equilibrium; no opp. Costs left and maximized social welfare because of free entryexit
The neoclassical theory of perfect competition:
- “all firms earn same” / compete for same customers → no above normal returns + lead to equilibrium (competition
for demand and supply that) / no room for CA
- Only competition is on price and on entry/exit but verder no sources of CA (zie assumptions) → firms performance is
ZERO economic profit (all firms earn the same / equilibrium / allocative efficiency reached)
Perfect competition has anything/nothing to say about CA:
Theory nothing to say about CA (because in perfect competitive market no differences in performance 0 eco profit)
But: any deviation from assumption → IS source of CA that lead to difference in performance (anything to say)
➔ Neo classical theory of perfect competition give a set of conditions (that can be sources of) CA to deviate from to achieve
economic surplus. Any deviation can lead to obtaining CA, which in turn may result in improved performance.
1
, Meeting 1.2: Porter and the industrial organization view I (Porter’s early work)
Study question 2. How does Porter’s early view on strategy explain differences in performance among firms?
- Porter (1981) Early Work to understand competitive strategy and explain differences in perf.
- Build on Bain Type IO (S-C-P for focus on industry structure) but own twist is analyzing industries/firm conduct with 5
Forces and Generic Strategies
- 3 factors that explain differences in performance among firms: 5 forces, strategic groups, generic strategies
5 Forces (Porter 1979) (that effect the firm from outside)
- Framework to analyse attractiveness of industries for long-term profitability → to occupy superior positions → and
the determining factors for industry’s profit potential
- Identifying the threat of new entrants; bargaining power buyers/suppliers; threat of substitutes -VRIN-; rivalry among existing firms =
Higher forces; less attractive industry ; less profitable
- At the industry level!! That affect average profitability of firms = industry-effect (Stoelhorst 2008)
- ➔ well-positioned firms can achieve market power (power over price (principle)) and lead to economic profit!
(Stoelhorst, 2018)
Strategic groups (effect)
- Identifying strategic groups (look at industry structure in terms of strategic groups + mobility barriers in between).
Firms within groups have same strategies door similar key decision variables
- Strategic groups can create high mobility barriers for competitors (limited entry/exit industry). Higher barriers within a
strategic group → protected from rivalry → less substitutes → high bargaining power → better
performance/profitability of firms within strategic groups!
Add Firm Level Effect with cost-leadership & differentiation + Focus for eco profit
- Generic strategies create CA for firms and thus differences in performance
- Differentiated product → be in a differentiated position than competitors door firm’s activities more efficient/better
→ better performance
- Positions of differentiation and/or low cost, positively affect relative profitability of individual firms within industry or
within a strategic group (the firm effect)
SO Porter’s early view multiple ways to explain performance differences. For better performance; higher barriers to
competition; locate yourself within a strategic group with high mobility barriers and develop generic strategic positions
2
Study question 1. How can the neoclassical theory of perfect competition inform theories of competitive advantage?
- Many theories try to explain what CA is; how firms can be better than others. Differences in performance among firms
come from the possession of CA
- Neo theory of perf competition is theoretical benchmark to explain theories of CA/compare markets real world
- Neoclassical theory of perfect competition assumes perfect circumstances:
A perfect competitive market according to neo. model is when 5 assumptions (LHMRT):
1. Large numbers; of sellers buyers; firms are price takers door many customers and decreasing returns
2. Homogeneity; demand is homogeneous and standardized products so no differentiation
3. Mobility; resources perfectly mobile; free entry exit of firms in markets
4. Rationality; all agents full information and maximize utility profit (homo economicus)
5. Transaction cost; all transactions are costless
+ firm seen as black box and unitary agents + humans are homo economicus (fully rational and self-interested)
➔ to get whole system in general equilibrium; no opp. Costs left and maximized social welfare because of free entryexit
The neoclassical theory of perfect competition:
- “all firms earn same” / compete for same customers → no above normal returns + lead to equilibrium (competition
for demand and supply that) / no room for CA
- Only competition is on price and on entry/exit but verder no sources of CA (zie assumptions) → firms performance is
ZERO economic profit (all firms earn the same / equilibrium / allocative efficiency reached)
Perfect competition has anything/nothing to say about CA:
Theory nothing to say about CA (because in perfect competitive market no differences in performance 0 eco profit)
But: any deviation from assumption → IS source of CA that lead to difference in performance (anything to say)
➔ Neo classical theory of perfect competition give a set of conditions (that can be sources of) CA to deviate from to achieve
economic surplus. Any deviation can lead to obtaining CA, which in turn may result in improved performance.
1
, Meeting 1.2: Porter and the industrial organization view I (Porter’s early work)
Study question 2. How does Porter’s early view on strategy explain differences in performance among firms?
- Porter (1981) Early Work to understand competitive strategy and explain differences in perf.
- Build on Bain Type IO (S-C-P for focus on industry structure) but own twist is analyzing industries/firm conduct with 5
Forces and Generic Strategies
- 3 factors that explain differences in performance among firms: 5 forces, strategic groups, generic strategies
5 Forces (Porter 1979) (that effect the firm from outside)
- Framework to analyse attractiveness of industries for long-term profitability → to occupy superior positions → and
the determining factors for industry’s profit potential
- Identifying the threat of new entrants; bargaining power buyers/suppliers; threat of substitutes -VRIN-; rivalry among existing firms =
Higher forces; less attractive industry ; less profitable
- At the industry level!! That affect average profitability of firms = industry-effect (Stoelhorst 2008)
- ➔ well-positioned firms can achieve market power (power over price (principle)) and lead to economic profit!
(Stoelhorst, 2018)
Strategic groups (effect)
- Identifying strategic groups (look at industry structure in terms of strategic groups + mobility barriers in between).
Firms within groups have same strategies door similar key decision variables
- Strategic groups can create high mobility barriers for competitors (limited entry/exit industry). Higher barriers within a
strategic group → protected from rivalry → less substitutes → high bargaining power → better
performance/profitability of firms within strategic groups!
Add Firm Level Effect with cost-leadership & differentiation + Focus for eco profit
- Generic strategies create CA for firms and thus differences in performance
- Differentiated product → be in a differentiated position than competitors door firm’s activities more efficient/better
→ better performance
- Positions of differentiation and/or low cost, positively affect relative profitability of individual firms within industry or
within a strategic group (the firm effect)
SO Porter’s early view multiple ways to explain performance differences. For better performance; higher barriers to
competition; locate yourself within a strategic group with high mobility barriers and develop generic strategic positions
2
