SUMMARY: STRATEGIC MANAGEMENT AND
COMPETITIVE ADVANTAGE (5 TH EDITION)
CHAPTER 1 – WHAT IS STRATEGY?
Learning objectives:
o Define strategy
o Describe the strategic management process
o Define competitive advantage and explain its relationship to economic value
creation
o Describe two different measures of competitive advantage
o Explain the differences between emergent and intended strategies
o Discuss the importance of understanding a firm’s strategy even if you are not a
senior manager in the firm.
Strategy = a theory about how to gain competitive advantages. A good strategy is a
strategy that actually generates such advantages. The best way to avoid mistakes
when pursuing a strategy is choosing the strategy carefully and thereby following the
strategic management process = a sequential set of analyses and choices that can
increase the likelihood that a firm will chose a good strategy; that is, a strategy that
generates a competitive advantage.
The strategic management process begins when a firms defines its mission. A firm’s
mission is its 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. Some missions may not affect firm performance; if
the mission statement does not influence behavior throughout an organization, it is
unlikely to have an impact on the firm’s actions. Some missions can improve firm
performance; firms whose mission is central to all they do: visionary firms. Some
,missions can even hurt firm performance; e.g. if it’s inwardly focused and defined
only in reference to personal values and priorities of founders or top managers.
Whereas a firm’s mission is a broad statement of its purpose and values, it’s
objectives are 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. Low-quality
objectives either do not exist or are not connected to elements of a firm’s mission
and are difficult to measure and track over time.
The next two phases of the strategic management process – external analysis and
internal analysis - occur more or less simultaneously. 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.
Whereas external analysis focusses on the environmental threats and opportunities
facing the firm, internal analysis helps a firm identify its organizational strengths and
weaknesses. It also helps to understand which of tis resources and capabilities are
likely to be sources of competitive advantage and which are less likely.
Armed with a mission, objectives and a completed external and internal analyses, a
firm is ready to make its strategic choices; it’s ready to choose its theory of how to
gain a competitive advantage. The strategic choices available to firms fall into two
large categories:
o Business-level strategies: actions firms take to gain competitive advantage in a
single market or industry. The two most common business-level strategies are
cost leadership and product differentiation.
o Corporate-level strategies: actions firms take to gain competitive advantage
by operating in multiple markets or industries simultaneously. Common
corporate-level strategies include vertical integration strategies, diversification
strategies, strategic alliance strategies, merger and acquisition strategies and
global 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.
Strategy implementation occurs when a firm adopts organizational policies and
practices that are consistent with its strategy. Three specific organizational policies
are important in implementing a strategy: a firm’s formal organizational structure, its
formal and informal management control systems, and its employee compensation
policies.
, Competitive advantage = when a firm is able to create more economic value than
rival firms. Economic value = the difference between the perceived benefits gained
by a customer that purchases firm’s products or services and the full economic costs
of these products or services. Thus, the size of a firm’s competitive advantage is the
difference between the economic value a firm is able to create and the economic
value its rivals are able to create. A firm’s competitive advantage can be temporary
or sustained. Temporary competitive advantage = a competitive advantage that lasts
for a very short period of time. A sustained competitive advantage can last much
longer. Firms that create the same economic value as their rivals’ experience
competitive parity. Finally, firms that generate less economic value than their rivals
have a competitive disadvantage.
Two different measures of competitive advantage:
v Accounting performance
Accounting performance is a measure of its competitive advantage calculated
by using information from a firm’s published profit and loss and balance
sheets statements. The latter documents are typically created using widely
accepted accounting standards and principles. The application of these
standards and principles makes it possible to compare the accounting
performance of firms. One way to use a firm’s accounting statements to
measure its competitive advantage is through the use of accounting ratios =
simply numbers taken from a firm’s financial statements that are manipulated
in ways that describe various aspects of a firm’s performance. The most
common accounting ratio’s used are: (1) profitability ratios: ratios with some
measure of profit in the numerator and some measure of firm size or assets in
the dominator, (2) liquidity ratios: ratios that focus on the ability of a firm to
meet its short-term financial obligations, (3) leverage ratios: ratios that focus
on the level of a firm’s financial flexibility, including its ability to obtain more
debt, (4) activity ratios: ratios that focus on the level of activity in a firm’s
business. In order to determine how a firm is performing, you need to
compare these ratios. Using ratio analysis, a firm earns above average
accounting performance when it performance is greater than the industry
average (such firms have a competitive advantage). Elsewise, they either have
average accounting performance of below average accounting performance.
The great advantage of accounting measures is that they are easy to compute. All
publicly traded firms must make their accounting systems available to the public. A
limitation of using accounting measures is that an important component of costs is
not included in most accounting measures: the cost of capital = the rate of return
that a firm promise to pay its suppliers of capital to induce them to invest in the firm.
Once these investments are made, a firm can use this capital to produce and sell
COMPETITIVE ADVANTAGE (5 TH EDITION)
CHAPTER 1 – WHAT IS STRATEGY?
Learning objectives:
o Define strategy
o Describe the strategic management process
o Define competitive advantage and explain its relationship to economic value
creation
o Describe two different measures of competitive advantage
o Explain the differences between emergent and intended strategies
o Discuss the importance of understanding a firm’s strategy even if you are not a
senior manager in the firm.
Strategy = a theory about how to gain competitive advantages. A good strategy is a
strategy that actually generates such advantages. The best way to avoid mistakes
when pursuing a strategy is choosing the strategy carefully and thereby following the
strategic management process = a sequential set of analyses and choices that can
increase the likelihood that a firm will chose a good strategy; that is, a strategy that
generates a competitive advantage.
The strategic management process begins when a firms defines its mission. A firm’s
mission is its 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. Some missions may not affect firm performance; if
the mission statement does not influence behavior throughout an organization, it is
unlikely to have an impact on the firm’s actions. Some missions can improve firm
performance; firms whose mission is central to all they do: visionary firms. Some
,missions can even hurt firm performance; e.g. if it’s inwardly focused and defined
only in reference to personal values and priorities of founders or top managers.
Whereas a firm’s mission is a broad statement of its purpose and values, it’s
objectives are 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. Low-quality
objectives either do not exist or are not connected to elements of a firm’s mission
and are difficult to measure and track over time.
The next two phases of the strategic management process – external analysis and
internal analysis - occur more or less simultaneously. 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.
Whereas external analysis focusses on the environmental threats and opportunities
facing the firm, internal analysis helps a firm identify its organizational strengths and
weaknesses. It also helps to understand which of tis resources and capabilities are
likely to be sources of competitive advantage and which are less likely.
Armed with a mission, objectives and a completed external and internal analyses, a
firm is ready to make its strategic choices; it’s ready to choose its theory of how to
gain a competitive advantage. The strategic choices available to firms fall into two
large categories:
o Business-level strategies: actions firms take to gain competitive advantage in a
single market or industry. The two most common business-level strategies are
cost leadership and product differentiation.
o Corporate-level strategies: actions firms take to gain competitive advantage
by operating in multiple markets or industries simultaneously. Common
corporate-level strategies include vertical integration strategies, diversification
strategies, strategic alliance strategies, merger and acquisition strategies and
global 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.
Strategy implementation occurs when a firm adopts organizational policies and
practices that are consistent with its strategy. Three specific organizational policies
are important in implementing a strategy: a firm’s formal organizational structure, its
formal and informal management control systems, and its employee compensation
policies.
, Competitive advantage = when a firm is able to create more economic value than
rival firms. Economic value = the difference between the perceived benefits gained
by a customer that purchases firm’s products or services and the full economic costs
of these products or services. Thus, the size of a firm’s competitive advantage is the
difference between the economic value a firm is able to create and the economic
value its rivals are able to create. A firm’s competitive advantage can be temporary
or sustained. Temporary competitive advantage = a competitive advantage that lasts
for a very short period of time. A sustained competitive advantage can last much
longer. Firms that create the same economic value as their rivals’ experience
competitive parity. Finally, firms that generate less economic value than their rivals
have a competitive disadvantage.
Two different measures of competitive advantage:
v Accounting performance
Accounting performance is a measure of its competitive advantage calculated
by using information from a firm’s published profit and loss and balance
sheets statements. The latter documents are typically created using widely
accepted accounting standards and principles. The application of these
standards and principles makes it possible to compare the accounting
performance of firms. One way to use a firm’s accounting statements to
measure its competitive advantage is through the use of accounting ratios =
simply numbers taken from a firm’s financial statements that are manipulated
in ways that describe various aspects of a firm’s performance. The most
common accounting ratio’s used are: (1) profitability ratios: ratios with some
measure of profit in the numerator and some measure of firm size or assets in
the dominator, (2) liquidity ratios: ratios that focus on the ability of a firm to
meet its short-term financial obligations, (3) leverage ratios: ratios that focus
on the level of a firm’s financial flexibility, including its ability to obtain more
debt, (4) activity ratios: ratios that focus on the level of activity in a firm’s
business. In order to determine how a firm is performing, you need to
compare these ratios. Using ratio analysis, a firm earns above average
accounting performance when it performance is greater than the industry
average (such firms have a competitive advantage). Elsewise, they either have
average accounting performance of below average accounting performance.
The great advantage of accounting measures is that they are easy to compute. All
publicly traded firms must make their accounting systems available to the public. A
limitation of using accounting measures is that an important component of costs is
not included in most accounting measures: the cost of capital = the rate of return
that a firm promise to pay its suppliers of capital to induce them to invest in the firm.
Once these investments are made, a firm can use this capital to produce and sell
