Strategy
Chapter 1: what is strategy and the strategic
management process?
1.1 Strategy and the strategic management process
Strategy: theory about how to gain competitive advantages.
These theories are based on a set of assumptions and hypotheses about
the way competition in an industry is likely to evolve and how that
evolution can be exploited to earn a profit.
The challenge is: it’s very difficult to predict how competition in an
industry will evolve. So it’s rarely possible to know for sure that a firm is
choosing the right strategy. Therefore, a strategy is almost always a
theory.
Strategic management process
It’s possible to reduce the likelihood that mistakes are being made in
choosing a strategy. The best way is to follow the strategic management
process. A sequential (opeenvolgend) set
of analyses and choices to increase
making a good choice.
1. Mission
A mission aspires to be in the long run and what it wants to avoid in the
meantime. (branche, core values)
Some missions may not affect firm performance:
Contain common elements such as branche, core values.
Some missions can improve firm performance
Permeates (doordringt) all that a firm’s does, like visionary firms
such as Disney. They enjoy long periods of high performance. Profit
maximizing is not their primary reason. Their primary reason for
existing is reflected in widely held set of values and beliefs that
inform day-to-day decision making.
Some missions can hurt firm performance
Missions that are very inwardly focused and defined by personal
values and priorities of founders and managers, independent
whether those values are consistent with the economic realities
facing a firm.
2. Objectives
Objectives are specific measurable targets a firm can use to evaluate the
extent to which it is realizing its mission.
High-quality objectives: tightly connected to a firm’s mission and
are relatively easy to measure and track over time.
low-quality objectives: either do not exist or are not connected to
elements of a firm’s mission, are not quantitative of are difficult to
measure of difficult to track over time.
,When there are no objectives, a firm is not that serious about realising part
of its mission statement.
3. External and internal analysis
External analysis
Identifies the critical threats and opportunities in its competitive
environment.
Examines how competition is likely to evolve and what implications
that has for the threats and opportunities.
Internal analysis
Helps identify its organizational strengths and weaknesses.
Which of its resources and capabilities are likely to be sources of
competitive advantage and which are less likely
Identify areas that require improvement and change
4. Strategic choice
In this step the firm is ready to make a strategic choice. To choose its
theory of how to gain competitive advantage.
Falls into two categories:
Business-level strategies
Actions firms take to gain competitive advantages in a single market
or industry. This strategy includes cost leadership, product
differentiation and flexibility.
Corporate-level strategies
Actions firms take to gain competitive advantages by operating in
multiple markets or industries. This includes: integration strategies,
diversification strategies, strategic alliance strategies and merger
and acquisition strategies.
Based on the strategic management process, when making a strategic
choice is to choose a strategy that: (1) supports a firm’s mission, (2) is
consistent with a firm’s objectives, (3) exploits opportunities in a firm’s
environment with a firm’s strengths and (4) neutralizes threats in a firm’s
environment while avoiding weaknesses.
5. Strategy implementation
Occurs when a firm adopts organizational policies and practices that are
consistent with its strategy.
Three specific organizational policies and practises that are
important in implanting a strategy:
1. A firm’s formal organizational structure
2. Its formal and informal management control systems
3. Its employee compensation policies
When these steps are consistent with a firm’s strategy, it’s more likely to
be able to implement those strategies.
,1.2 What is competitive advantage?
Competitive advantage: a firm has this when it can create more
economic value than rival firms.
Economic value: the difference between what customers are willing to
pay for a firm’s product or services and the total cost of producing these
items.
Consumer surplus: difference between what a consumer is willing to pay
vs. what it actually costs.
Producer surplus: difference between the price and costs.
Economic value created: difference between the value for the customer
and the costs.
So, a firm’s competitive advantage is the difference between the economic
value a firm can create and the economic value its rivals can create.
Economic value firm 1 – economic value firm 2 = competitive advantage
Temporary competitive advantage: short term
Sustained competitive advantage: can last much longer
Most competitive advantages are temporary.
Competitive parity: firms that create the same economic value as their
rivals (meeting expectations)
Competitive disadvantage: firm generates less economic value than
their rivals (failing expectations)
, Revisited SMP
1.3 Measuring Competitive advantage
The competitive advantage and economic value (dif. what a customer is
willing to pay and the full cost of producing) are not always easy to
measure. For example the benefits of firm’s product is a matter of a
customers perception.
2 approaches for measuring a firm’s competitive advantage.
Examining its accounting performance
Examining a firm’s economic performance
Accounting measures of competitive advantage
Is a measure of its competitive advantage calculated by using information
from a firm’s published profit and loss and balance sheet statements.
One way to use a firm’s accounting statements to measure its competitive
advantage is with accounting ratio’s. Accounting ratios are numbers
taken from a firm’s financial statements that are manipulated in ways that
describe various aspects of a firm’s performance (table 1.1 page 36).
These measures of accounting performance can be grouped in four
categories:
1. Profitability ratios
2. Liquidity ratios (short term financial obligations)
3. Leverage ratios (financial flexibility)
4. Activity ratios (level of activity)
The accounting ratios are compared with some standard (average of
accounting ratios in the same industry). Using ratio analysis, a firm earns:
Above-average accounting performance
Firm’s typically have competitive advantage
Average accounting performance
Firm’s enjoy competitive parity
Below-average accounting performance
Firm’s generally experience competitive disadvantage
Economic measures of competitive advantage
These are relatively easy to compute. Firms must make their accounting
statements available to the public.
Chapter 1: what is strategy and the strategic
management process?
1.1 Strategy and the strategic management process
Strategy: theory about how to gain competitive advantages.
These theories are based on a set of assumptions and hypotheses about
the way competition in an industry is likely to evolve and how that
evolution can be exploited to earn a profit.
The challenge is: it’s very difficult to predict how competition in an
industry will evolve. So it’s rarely possible to know for sure that a firm is
choosing the right strategy. Therefore, a strategy is almost always a
theory.
Strategic management process
It’s possible to reduce the likelihood that mistakes are being made in
choosing a strategy. The best way is to follow the strategic management
process. A sequential (opeenvolgend) set
of analyses and choices to increase
making a good choice.
1. Mission
A mission aspires to be in the long run and what it wants to avoid in the
meantime. (branche, core values)
Some missions may not affect firm performance:
Contain common elements such as branche, core values.
Some missions can improve firm performance
Permeates (doordringt) all that a firm’s does, like visionary firms
such as Disney. They enjoy long periods of high performance. Profit
maximizing is not their primary reason. Their primary reason for
existing is reflected in widely held set of values and beliefs that
inform day-to-day decision making.
Some missions can hurt firm performance
Missions that are very inwardly focused and defined by personal
values and priorities of founders and managers, independent
whether those values are consistent with the economic realities
facing a firm.
2. Objectives
Objectives are specific measurable targets a firm can use to evaluate the
extent to which it is realizing its mission.
High-quality objectives: tightly connected to a firm’s mission and
are relatively easy to measure and track over time.
low-quality objectives: either do not exist or are not connected to
elements of a firm’s mission, are not quantitative of are difficult to
measure of difficult to track over time.
,When there are no objectives, a firm is not that serious about realising part
of its mission statement.
3. External and internal analysis
External analysis
Identifies the critical threats and opportunities in its competitive
environment.
Examines how competition is likely to evolve and what implications
that has for the threats and opportunities.
Internal analysis
Helps identify its organizational strengths and weaknesses.
Which of its resources and capabilities are likely to be sources of
competitive advantage and which are less likely
Identify areas that require improvement and change
4. Strategic choice
In this step the firm is ready to make a strategic choice. To choose its
theory of how to gain competitive advantage.
Falls into two categories:
Business-level strategies
Actions firms take to gain competitive advantages in a single market
or industry. This strategy includes cost leadership, product
differentiation and flexibility.
Corporate-level strategies
Actions firms take to gain competitive advantages by operating in
multiple markets or industries. This includes: integration strategies,
diversification strategies, strategic alliance strategies and merger
and acquisition strategies.
Based on the strategic management process, when making a strategic
choice is to choose a strategy that: (1) supports a firm’s mission, (2) is
consistent with a firm’s objectives, (3) exploits opportunities in a firm’s
environment with a firm’s strengths and (4) neutralizes threats in a firm’s
environment while avoiding weaknesses.
5. Strategy implementation
Occurs when a firm adopts organizational policies and practices that are
consistent with its strategy.
Three specific organizational policies and practises that are
important in implanting a strategy:
1. A firm’s formal organizational structure
2. Its formal and informal management control systems
3. Its employee compensation policies
When these steps are consistent with a firm’s strategy, it’s more likely to
be able to implement those strategies.
,1.2 What is competitive advantage?
Competitive advantage: a firm has this when it can create more
economic value than rival firms.
Economic value: the difference between what customers are willing to
pay for a firm’s product or services and the total cost of producing these
items.
Consumer surplus: difference between what a consumer is willing to pay
vs. what it actually costs.
Producer surplus: difference between the price and costs.
Economic value created: difference between the value for the customer
and the costs.
So, a firm’s competitive advantage is the difference between the economic
value a firm can create and the economic value its rivals can create.
Economic value firm 1 – economic value firm 2 = competitive advantage
Temporary competitive advantage: short term
Sustained competitive advantage: can last much longer
Most competitive advantages are temporary.
Competitive parity: firms that create the same economic value as their
rivals (meeting expectations)
Competitive disadvantage: firm generates less economic value than
their rivals (failing expectations)
, Revisited SMP
1.3 Measuring Competitive advantage
The competitive advantage and economic value (dif. what a customer is
willing to pay and the full cost of producing) are not always easy to
measure. For example the benefits of firm’s product is a matter of a
customers perception.
2 approaches for measuring a firm’s competitive advantage.
Examining its accounting performance
Examining a firm’s economic performance
Accounting measures of competitive advantage
Is a measure of its competitive advantage calculated by using information
from a firm’s published profit and loss and balance sheet statements.
One way to use a firm’s accounting statements to measure its competitive
advantage is with accounting ratio’s. Accounting ratios are numbers
taken from a firm’s financial statements that are manipulated in ways that
describe various aspects of a firm’s performance (table 1.1 page 36).
These measures of accounting performance can be grouped in four
categories:
1. Profitability ratios
2. Liquidity ratios (short term financial obligations)
3. Leverage ratios (financial flexibility)
4. Activity ratios (level of activity)
The accounting ratios are compared with some standard (average of
accounting ratios in the same industry). Using ratio analysis, a firm earns:
Above-average accounting performance
Firm’s typically have competitive advantage
Average accounting performance
Firm’s enjoy competitive parity
Below-average accounting performance
Firm’s generally experience competitive disadvantage
Economic measures of competitive advantage
These are relatively easy to compute. Firms must make their accounting
statements available to the public.
