WEEK 1 (ch. 1-2) - WHAT IS STRATEGY AND THE STRATEGIC MANAGEMENT PROCESS?
Strategy
A firm’s strategy is defined as its theory about how to gain competitive advantages. A good
strategy is a strategy that generates such advantages. A firm’s strategy is therefore the best bet
about how competition is going to evolve and how that evolution can be exploited for competitive
advantage.
Strategic Management Process
The strategic management process is a sequential set of analyses and choices that can
increase the likelihood that a firm will choose a good strategy.
● Mission → firm’s long-term purpose. Missions define both what a firm aspires to be in the
long run and what it wants to avoid in the meantime. Missions are often written down in the
form of mission statements.
● Objectives → specific measurable targets a firm can use to evaluate the extent to
which it is realizing its mission. High-quality objectives are tightly connected to elements of
a firm’s mission and are relatively easy to measure and track.
● External and Internal Analysis
○ External analysis → a firm identifies the critical threats and opportunities in
its competitive environment. It also examines how competition in this
environment is likely to evolve and what implications that evolution has for the
threats and opportunities a firm is facing.
○ Internal analysis → helps a firm identify its organizational strengths and
weaknesses. It also helps a firm understand which of its resources and
capabilities are likely to be sources of competitive advantage. Finally, internal
analysis can be used by firms to identify those areas of its organization that require
improvement and change.
● Strategic Choice → a firm’s theory of how to gain competitive advantage
○ Business-level strategies → actions firms take to gain competitive
advantages in a single market or industry. These strategies include cost
leadership, product differentiation and flexibility.
○ Corporate-level strategies → are actions firms take to gain competitive
advantages by operating in multiple markets or industries simultaneously.
, These strategies include vertical integration strategies, diversification strategies,
strategic alliance strategies, and merger and acquisition strategies.
Based on the strategic management process, the objective when making a strategic
choice is to choose a strategy that: (1) supports the 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 a firm’s weaknesses.
Competitive Advantage
In general, a firm has competitive advantage when it can create more economic value than rival
firms. Economic value is simply the difference between what customers are willing to pay for a
firm’s products or services (Attention! The economic value has nothing to do with the actual price
of a product) and the total cost of producing these products or services. Thus, the size of a firm’s
competitive advantage is the difference between the economic value a firm can create and the
economic value its rivals can create.
Competitive Advantage can be Temporary or Sustainable
- Competitive advantage typically results in high profits
- High profits attract competition
- Competition limits the duration of competitive advantage in most cases
Thus most competitive advantage is Temporary
- Competitors imitate the advantage or offer something better
- We can measure competitive advantage using (1) accounting measures and
(2) economic measures of competitive advantage
, - Accounting Measures of Competitive Advantage
A firm’s Accounting Performance is a measure of its competitive advantage calculated by using
information from a firm’s published profit and loss and sheet statements. The application of
these standards and principles makes it possible to compare the accounting performance of one
firm to the accounting performance of other firms.
One way to use a firm’s accounting statements to measure its competitive advantage is
with accounting ratios. Accounting Ratios are simply numbers taken from a firm’s financial
statements that are manipulated in ways that describe various aspects of a firm’s performance.
- Economic Measures of Competitive Advantage
The Cost of Capital is the rate of return that a firm promises to pay its suppliers of capital to
induce them to invest in the firm. Economic measures of competitive advantage compare a
firm’s level of return to its cost of capital: Debt (capital from banks and bondholders) and Equity
(capital from individuals and institutions that purchase a firm’s stock).
, Intended vs Emergent Strategies
Emergent strategies → 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
EVALUATING A FIRM’S EXTERNAL ENVIRONMENT
Why do we perform an External Analysis?
Make more informed strategic choices:
- Discover opportunities and threats (should be trends = a change in the environment that
affects the firm)
- Analyze potential for profits
- Understand the nature of competition
Levels of analysis
- General environment → factors outside the industry (political coup in a country)
- Industry → what industry are we competing in? What are the valuable aspects?
- Strategic group → companies within an industry that have similar business models or
similar combinations of strategies
- Individual firm → elements that make up strategic groups
Understanding a firm’s General Environment
The general environment consists of six interrelated elements:
1. Technological change → a shift in the frontier of technological possibilities and the
underlying infrastructure
2. Demographic trends → age, sex, marital status income, ethnicity and other personal
attributes that might affect buying patterns
3. Cultural trends → values, beliefs and norms that guide behavior in society
4. Economic climate → overall health of the economic systems within which a firm
operates
5. Legal and political conditions → the law and legal system’s impact on business,
together with the general nature of the relationship between government and business
6. Specific international events → events like (civil) wars, political coups, terrorism,
famines which have an effect on the firm’s ability to generate a competitive advantage
Strategy
A firm’s strategy is defined as its theory about how to gain competitive advantages. A good
strategy is a strategy that generates such advantages. A firm’s strategy is therefore the best bet
about how competition is going to evolve and how that evolution can be exploited for competitive
advantage.
Strategic Management Process
The strategic management process is a sequential set of analyses and choices that can
increase the likelihood that a firm will choose a good strategy.
● Mission → firm’s long-term purpose. Missions define both what a firm aspires to be in the
long run and what it wants to avoid in the meantime. Missions are often written down in the
form of mission statements.
● Objectives → specific measurable targets a firm can use to evaluate the extent to
which it is realizing its mission. High-quality objectives are tightly connected to elements of
a firm’s mission and are relatively easy to measure and track.
● External and Internal Analysis
○ External analysis → a firm identifies the critical threats and opportunities in
its competitive environment. It also examines how competition in this
environment is likely to evolve and what implications that evolution has for the
threats and opportunities a firm is facing.
○ Internal analysis → helps a firm identify its organizational strengths and
weaknesses. It also helps a firm understand which of its resources and
capabilities are likely to be sources of competitive advantage. Finally, internal
analysis can be used by firms to identify those areas of its organization that require
improvement and change.
● Strategic Choice → a firm’s theory of how to gain competitive advantage
○ Business-level strategies → actions firms take to gain competitive
advantages in a single market or industry. These strategies include cost
leadership, product differentiation and flexibility.
○ Corporate-level strategies → are actions firms take to gain competitive
advantages by operating in multiple markets or industries simultaneously.
, These strategies include vertical integration strategies, diversification strategies,
strategic alliance strategies, and merger and acquisition strategies.
Based on the strategic management process, the objective when making a strategic
choice is to choose a strategy that: (1) supports the 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 a firm’s weaknesses.
Competitive Advantage
In general, a firm has competitive advantage when it can create more economic value than rival
firms. Economic value is simply the difference between what customers are willing to pay for a
firm’s products or services (Attention! The economic value has nothing to do with the actual price
of a product) and the total cost of producing these products or services. Thus, the size of a firm’s
competitive advantage is the difference between the economic value a firm can create and the
economic value its rivals can create.
Competitive Advantage can be Temporary or Sustainable
- Competitive advantage typically results in high profits
- High profits attract competition
- Competition limits the duration of competitive advantage in most cases
Thus most competitive advantage is Temporary
- Competitors imitate the advantage or offer something better
- We can measure competitive advantage using (1) accounting measures and
(2) economic measures of competitive advantage
, - Accounting Measures of Competitive Advantage
A firm’s Accounting Performance is a measure of its competitive advantage calculated by using
information from a firm’s published profit and loss and sheet statements. The application of
these standards and principles makes it possible to compare the accounting performance of one
firm to the accounting performance of other firms.
One way to use a firm’s accounting statements to measure its competitive advantage is
with accounting ratios. Accounting Ratios are simply numbers taken from a firm’s financial
statements that are manipulated in ways that describe various aspects of a firm’s performance.
- Economic Measures of Competitive Advantage
The Cost of Capital is the rate of return that a firm promises to pay its suppliers of capital to
induce them to invest in the firm. Economic measures of competitive advantage compare a
firm’s level of return to its cost of capital: Debt (capital from banks and bondholders) and Equity
(capital from individuals and institutions that purchase a firm’s stock).
, Intended vs Emergent Strategies
Emergent strategies → 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
EVALUATING A FIRM’S EXTERNAL ENVIRONMENT
Why do we perform an External Analysis?
Make more informed strategic choices:
- Discover opportunities and threats (should be trends = a change in the environment that
affects the firm)
- Analyze potential for profits
- Understand the nature of competition
Levels of analysis
- General environment → factors outside the industry (political coup in a country)
- Industry → what industry are we competing in? What are the valuable aspects?
- Strategic group → companies within an industry that have similar business models or
similar combinations of strategies
- Individual firm → elements that make up strategic groups
Understanding a firm’s General Environment
The general environment consists of six interrelated elements:
1. Technological change → a shift in the frontier of technological possibilities and the
underlying infrastructure
2. Demographic trends → age, sex, marital status income, ethnicity and other personal
attributes that might affect buying patterns
3. Cultural trends → values, beliefs and norms that guide behavior in society
4. Economic climate → overall health of the economic systems within which a firm
operates
5. Legal and political conditions → the law and legal system’s impact on business,
together with the general nature of the relationship between government and business
6. Specific international events → events like (civil) wars, political coups, terrorism,
famines which have an effect on the firm’s ability to generate a competitive advantage
