Summary + lecture notes strategy 2017; Iris Stougie
Chapter 1 + week 1:
Learning Objectives:
1) Define strategy
2) Describe the strategic management process
3) Define competitive advantage and explain its relationship to economic value creation
4) Describe two different measures of competitive advantage
5) Explain the difference between emergent and intended strategies
6) Discuss the importance of understanding a firm’s strategy
Definition of strategy (LO 1)
Strategy is defined as its theory about how to gain competitive advantages. A good strategy therefore
generates such advantages.
The Strategic Management Process (LO 2)
“is a sequential set of analyses and choices that can increase the likelihood that a firm will choose a
good strategy”. The process is visualised below.
Competitive advantage and value creation (LO 3)
A firm has competitive advantage when it can create more value than rival firms. Competitive
disadvantages happen when a firm creates less economic value than its rivals. Parity is when a firm
creates the same economic value as its rival. With CA, economic value is created by a firm:
Economic value
,Calculating economic value created:
Total perceived customer benefits (what the customer is willing to pay for the product or service) –
total costs (for the company) = economic value created.
Slide 4: economic value created
D= Demand curve
P= Price
Q= Quantity
MR: marginal revenue
MC: marginal cost
Understand from these graphs: what is the price of the product, and the quantity of that; that is
optimised. At what price, and at which quantity, do we make the most profit?
The square is the economic value created.
With perfect competition, there is no producer and no customer surplus. There is no competitive
advantage.
A firm´s competitive advantage can be temporary or sustained. Temporary competitive advantage
lasts for a very short period, whereas sustained competitive advantage can last much longer.
Two different measures of competitive advantage (LO 4)
1) Accounting measures of competitive advantage
Accounting ratios such as: Return on Assets, Return on Equity, Gross Profit Margin,
Current Ratio, Quick Ratio, Debt to Equity and so forth
These ratios are divided in four categories (profitability ratios, liquidity ratios,
leverage ratios and activity ratios).
Ratios as these should be compared to an industry average. If a firm earns above
average accounting performance, then the firm’s performance is greater than that of
the average. However, when its below, the firm is doing bad.
2) Economic measures of competitive advantage
Compare a firm’s level of return to its costs of capital
Divided into two broad categories of capital: debt (capital from banks and
bondholders) and equity (capital from individuals and institutions that buy the firm’s
stocks).
Cost of debt = interest that a firm must pay its debtholders
Cost of equity = the rate of return a firm must promise its equity holders
Weighted average cost of capital (WACC) = debt total cost of debt + equity cost
of equity
This is conceptually the level of performance a firm must attain to satisfy the
economic objectives of its two critical stakeholders. So, if the firm earns > cost of
capital, then the firm is doing good and attracting new capital. Other way around, the
firm is doing bad and his stakeholders are probably considering going elsewhere.
Big difference between these two:
Accounting measures do not consider the cost of capital a firm employs to produce and sell
its products. Economic measures do.
If the firm is privately held, it is difficult to measure its economic measures of CA.
Economic measures of CA sometimes seem (debatably) exaggerate the importance of these
two stakeholders measured, leaving the others in disadvantage.
IN THE EXAM: slide 5: calculate product surplus, consumer surplus and the economic value created!
, It is not necessary to know all the formulas by heart -> but need to understand what it is
about and how to calculate with them SLIDE 8 measurements competitive advantage
The idea with economic measures is the question: how much are investors willing to invest in
your company compared to how profitable you are? They consider cost of debt and cost of
equity.
WACC < ROA < Industry average ROA -> Okay: this firm can pay his WACC with his ROA, but is not
keeping up with the average ROA of the industry.
Internal analysis: checking what your firm can do, based on its own things.
Difference emergent and intended strategies (LO 5)
Emergent strategies are those theories of how to gain competitive advantage in an industry that
emerge over time or that have been radically reshaped once they are initially implemented.
Intended Realized
Deliberate
strategy: A strategy: The
strategy: An
strategy a firm intended strategy strategy a firm
thought it was a firm actually is actually
going to pursue implements pursuing
Unrealized Emergent strategy:
strategy: An A strategy that
intended strategy a emerges over time
firm does not or that has been
actually implement radically reshaped
once implemented
Importance of Strategy (LO 6)
3 compelling reasons:
1. Can give you tools you need to evaluate the strategies of firms that may employ you.
2. Understanding your role in implementing strategies can be important for personal success
3. You will get involved in the strategic management process.
Chapter 1 + week 1:
Learning Objectives:
1) Define strategy
2) Describe the strategic management process
3) Define competitive advantage and explain its relationship to economic value creation
4) Describe two different measures of competitive advantage
5) Explain the difference between emergent and intended strategies
6) Discuss the importance of understanding a firm’s strategy
Definition of strategy (LO 1)
Strategy is defined as its theory about how to gain competitive advantages. A good strategy therefore
generates such advantages.
The Strategic Management Process (LO 2)
“is a sequential set of analyses and choices that can increase the likelihood that a firm will choose a
good strategy”. The process is visualised below.
Competitive advantage and value creation (LO 3)
A firm has competitive advantage when it can create more value than rival firms. Competitive
disadvantages happen when a firm creates less economic value than its rivals. Parity is when a firm
creates the same economic value as its rival. With CA, economic value is created by a firm:
Economic value
,Calculating economic value created:
Total perceived customer benefits (what the customer is willing to pay for the product or service) –
total costs (for the company) = economic value created.
Slide 4: economic value created
D= Demand curve
P= Price
Q= Quantity
MR: marginal revenue
MC: marginal cost
Understand from these graphs: what is the price of the product, and the quantity of that; that is
optimised. At what price, and at which quantity, do we make the most profit?
The square is the economic value created.
With perfect competition, there is no producer and no customer surplus. There is no competitive
advantage.
A firm´s competitive advantage can be temporary or sustained. Temporary competitive advantage
lasts for a very short period, whereas sustained competitive advantage can last much longer.
Two different measures of competitive advantage (LO 4)
1) Accounting measures of competitive advantage
Accounting ratios such as: Return on Assets, Return on Equity, Gross Profit Margin,
Current Ratio, Quick Ratio, Debt to Equity and so forth
These ratios are divided in four categories (profitability ratios, liquidity ratios,
leverage ratios and activity ratios).
Ratios as these should be compared to an industry average. If a firm earns above
average accounting performance, then the firm’s performance is greater than that of
the average. However, when its below, the firm is doing bad.
2) Economic measures of competitive advantage
Compare a firm’s level of return to its costs of capital
Divided into two broad categories of capital: debt (capital from banks and
bondholders) and equity (capital from individuals and institutions that buy the firm’s
stocks).
Cost of debt = interest that a firm must pay its debtholders
Cost of equity = the rate of return a firm must promise its equity holders
Weighted average cost of capital (WACC) = debt total cost of debt + equity cost
of equity
This is conceptually the level of performance a firm must attain to satisfy the
economic objectives of its two critical stakeholders. So, if the firm earns > cost of
capital, then the firm is doing good and attracting new capital. Other way around, the
firm is doing bad and his stakeholders are probably considering going elsewhere.
Big difference between these two:
Accounting measures do not consider the cost of capital a firm employs to produce and sell
its products. Economic measures do.
If the firm is privately held, it is difficult to measure its economic measures of CA.
Economic measures of CA sometimes seem (debatably) exaggerate the importance of these
two stakeholders measured, leaving the others in disadvantage.
IN THE EXAM: slide 5: calculate product surplus, consumer surplus and the economic value created!
, It is not necessary to know all the formulas by heart -> but need to understand what it is
about and how to calculate with them SLIDE 8 measurements competitive advantage
The idea with economic measures is the question: how much are investors willing to invest in
your company compared to how profitable you are? They consider cost of debt and cost of
equity.
WACC < ROA < Industry average ROA -> Okay: this firm can pay his WACC with his ROA, but is not
keeping up with the average ROA of the industry.
Internal analysis: checking what your firm can do, based on its own things.
Difference emergent and intended strategies (LO 5)
Emergent strategies are those theories of how to gain competitive advantage in an industry that
emerge over time or that have been radically reshaped once they are initially implemented.
Intended Realized
Deliberate
strategy: A strategy: The
strategy: An
strategy a firm intended strategy strategy a firm
thought it was a firm actually is actually
going to pursue implements pursuing
Unrealized Emergent strategy:
strategy: An A strategy that
intended strategy a emerges over time
firm does not or that has been
actually implement radically reshaped
once implemented
Importance of Strategy (LO 6)
3 compelling reasons:
1. Can give you tools you need to evaluate the strategies of firms that may employ you.
2. Understanding your role in implementing strategies can be important for personal success
3. You will get involved in the strategic management process.
