Chapter 1: the concept of strategy
Common elements in successful strategies:
- Clear, consistent long term goals
- Profound understanding of the competitive environment
- Objective appraisal of resources
Lead to: effective implementation → successful strategy
SWOT framework: strengths, weaknesses, opportunities, threats
→ Basic strategy analysis framework is superior
Basic strategy analysis framework:
The firm The industry
Goals and values Strategy environment
Resources and Competitors
capabilities Customers
Structure and Suppliers
systems
Strategic fit: the consistency of a firm's strategy, with the external and internal environment.
- Activity system: when all decisions and actions that make the strategy are aligned
= the creation of a unique and differentiated position involving a different set of activities
Contingency theory: there is no single best way of organizing or managing →
depends on circumstances → the characteristics of that organizations environment
Strategy: the means by which individuals or organizations achieve their objectives
Strategy assists the effective management of organizations
1. By enhancing the quality of decision making
2. By facilitating coordination
3. By focusing organizations on the pursuit of long term goals
Three ways of strategy implementation:
1. Strategy as decision support
a. Simplifies: constraining the range of decision alternatives
b. Permitting the knowledge of different individuals to be pooled and integrated
c. Facilitates the use of analytic tools (the frameworks)
2. Strategy as a coordinating device: communication device
3. Strategy as target: sets aspirations
a. Strategic intent: creates an extreme misfit between resources and ambitions
1
, b. Top management challenges the organization to close the gap by building new
competitive advantages
Two major areas of firm’s strategy:
1. Corporate strategy: defines the scope of the firm in terms of industries and markets in
which it competes
a. Includes choices over diversification, vertical integration, allocation of resources
b. Responsibility of corporate top management
2. Business strategy: concerned with how the firm competes within particular
industry or market → competitive strategy
a. Responsibility of senior managers of divisions and subsidiaries
In other words: where to compete (industry attractiveness) vs how to compete (competitive
advantage)
Strategy is both static and dynamic
- Positioning → competing for the present
- Directioning → preparing for the future
Intended strategy: conceived by the leader or top management team
- Less a product, more an outcome of inspiration
Realized strategy: actual strategy that is implemented
- Only 10-30% of the intended strategy is realized
Emergent strategy: decisions that emerge from the complex processes in which individual
managers interpret the minted strategy and adapt it to changing circumstances.
Developing a strategy (four phases):
1. Setting the strategic agenda
a. Identify the current strategy
b. Appraise performance: how well is the current strategy performing?
2. Analyzing the situation
a. Diagnose performance
b. Analyze the industry
c. Analyze resources and capabilities
3. Formulating strategy
4. Implementing strategy
2
, Chapter 2: Goals, values and performance
Value (monetary worth of a product) can be created in two ways:
1. By production: physically transforming products that are less valuable into valuables
2. By commerce: Repositioning in time and space
Profit: revenue minus costs
Value: consumer surplus plus producer surplus
Consumer surplus: value received by customers is typically greater than the willingness to pay
Producer surplus: profits that accrue to the owners of the firm + rents received by input
owners
Stakeholder value maximization: stakeholder theory: the firms should operate in
interests of all its constituent groups → the goal of the firm: maximize total value
creation
Shareholder value maximization: shareholder capitalism: firms should operate in the interests
of their wonders + effectiveness of the market economy is dependent upon firms responding to
profit incentives. = shareholder + society interests are served best by maximizing profits.
Stakeholder approach two difficulties:
1. Measuring performance: estimating components of value creation is impossible
2. Corporate governance: how can managers' performance be assessed if top
management is to serve the interests of stakeholders.
Primary goal: to maximize the value of the enterprise through seeking maximum profits.
Three justifications
1. Competition: when this increases, a rate of profit has to be earned to survive
2. Threat of acquisition: managers that fail to maximize the profits tend to be replaced by
managers that do
3. Convergence of stakeholder interests: pursuing stakeholder interests results in effective
competitive advantage.
Types of profit
1. Accounting profit
a. Gross profit: sales revenue - cost of bought in materials and components
b. Operating profit: gross profit - operating expenses
c. Net profit: operating profit after dedication of all expenses and charges
2. Economic profit
a. Pure profit; economic rent
b. Operating profit - (weighted average cost of capital x capital employed)
c. More realistic than accounting profit
d. EVA: economic value added
3
Common elements in successful strategies:
- Clear, consistent long term goals
- Profound understanding of the competitive environment
- Objective appraisal of resources
Lead to: effective implementation → successful strategy
SWOT framework: strengths, weaknesses, opportunities, threats
→ Basic strategy analysis framework is superior
Basic strategy analysis framework:
The firm The industry
Goals and values Strategy environment
Resources and Competitors
capabilities Customers
Structure and Suppliers
systems
Strategic fit: the consistency of a firm's strategy, with the external and internal environment.
- Activity system: when all decisions and actions that make the strategy are aligned
= the creation of a unique and differentiated position involving a different set of activities
Contingency theory: there is no single best way of organizing or managing →
depends on circumstances → the characteristics of that organizations environment
Strategy: the means by which individuals or organizations achieve their objectives
Strategy assists the effective management of organizations
1. By enhancing the quality of decision making
2. By facilitating coordination
3. By focusing organizations on the pursuit of long term goals
Three ways of strategy implementation:
1. Strategy as decision support
a. Simplifies: constraining the range of decision alternatives
b. Permitting the knowledge of different individuals to be pooled and integrated
c. Facilitates the use of analytic tools (the frameworks)
2. Strategy as a coordinating device: communication device
3. Strategy as target: sets aspirations
a. Strategic intent: creates an extreme misfit between resources and ambitions
1
, b. Top management challenges the organization to close the gap by building new
competitive advantages
Two major areas of firm’s strategy:
1. Corporate strategy: defines the scope of the firm in terms of industries and markets in
which it competes
a. Includes choices over diversification, vertical integration, allocation of resources
b. Responsibility of corporate top management
2. Business strategy: concerned with how the firm competes within particular
industry or market → competitive strategy
a. Responsibility of senior managers of divisions and subsidiaries
In other words: where to compete (industry attractiveness) vs how to compete (competitive
advantage)
Strategy is both static and dynamic
- Positioning → competing for the present
- Directioning → preparing for the future
Intended strategy: conceived by the leader or top management team
- Less a product, more an outcome of inspiration
Realized strategy: actual strategy that is implemented
- Only 10-30% of the intended strategy is realized
Emergent strategy: decisions that emerge from the complex processes in which individual
managers interpret the minted strategy and adapt it to changing circumstances.
Developing a strategy (four phases):
1. Setting the strategic agenda
a. Identify the current strategy
b. Appraise performance: how well is the current strategy performing?
2. Analyzing the situation
a. Diagnose performance
b. Analyze the industry
c. Analyze resources and capabilities
3. Formulating strategy
4. Implementing strategy
2
, Chapter 2: Goals, values and performance
Value (monetary worth of a product) can be created in two ways:
1. By production: physically transforming products that are less valuable into valuables
2. By commerce: Repositioning in time and space
Profit: revenue minus costs
Value: consumer surplus plus producer surplus
Consumer surplus: value received by customers is typically greater than the willingness to pay
Producer surplus: profits that accrue to the owners of the firm + rents received by input
owners
Stakeholder value maximization: stakeholder theory: the firms should operate in
interests of all its constituent groups → the goal of the firm: maximize total value
creation
Shareholder value maximization: shareholder capitalism: firms should operate in the interests
of their wonders + effectiveness of the market economy is dependent upon firms responding to
profit incentives. = shareholder + society interests are served best by maximizing profits.
Stakeholder approach two difficulties:
1. Measuring performance: estimating components of value creation is impossible
2. Corporate governance: how can managers' performance be assessed if top
management is to serve the interests of stakeholders.
Primary goal: to maximize the value of the enterprise through seeking maximum profits.
Three justifications
1. Competition: when this increases, a rate of profit has to be earned to survive
2. Threat of acquisition: managers that fail to maximize the profits tend to be replaced by
managers that do
3. Convergence of stakeholder interests: pursuing stakeholder interests results in effective
competitive advantage.
Types of profit
1. Accounting profit
a. Gross profit: sales revenue - cost of bought in materials and components
b. Operating profit: gross profit - operating expenses
c. Net profit: operating profit after dedication of all expenses and charges
2. Economic profit
a. Pure profit; economic rent
b. Operating profit - (weighted average cost of capital x capital employed)
c. More realistic than accounting profit
d. EVA: economic value added
3
