Strategy and organization
Week 1: Competitive strategy
What should a non-diversified firm or the SBU of a diversified firm do ?
Lecture 1:
Content: what is a good strategy (resource based school and positioning school)
Process: where does it come from (design school and planning school)
Context: refers to the environment of the firm
Performance does not emerge naturally. It requires some kind of coordination, a strategy.
Strategy is A plan of actions, usually with a limited time horizon: a plan about how firms
reach their goals.
Firms create their goal by the creation of value. This could be done on
- Individual level (talent rather than strategy)
- Firm-level (Assets rather than strategy).
The mostest argument suggests that firms with the most talent and assets will create more
value than their competitors.
*Findings show that assets do not necessarily lead to better performance.
E.g. The relationship between acquisitions and firm performance is negative and the
relationship between diversification and firm performance is mixed
Strategy is needed for
- (Reduce) uncertainty
- Time limitation
- Cognitive limitation (bounded rationality)
- Irrational behavior
- Asymmetric information
- Structure and organization
(planning)
- How to reach the goal…
The standard model of strategy
1. Strategic analysis
- External (O and T)
1
, - Internal (S and W)
2. Strategic choice
3. Strategic implementation
Theory is trying to explain a phenomenon, why does something happen. Theory of strategy
is going to explain
- Why how and when do some firms outperform/ outcompete others
- Why how and when does a firm that outperforms/outcompetes others do so
consistently
- Theories of strategy describe when, how, and why a plan of action leads to value
creation
- Firm that creates the most value outcompetes/ outperforms other firms.
There are two dominant theoretical approaches for competitive strategies:
1. Positioning Theory of Porter
Main view: There must be more in the environment than just price competition
2. Resource based view (Barney)
1: Porter, M. (1979), How competitive forces shape strategy, Harvard
Business Review, (March-April), pp. 137-145. Porter 1979.pdf
The essence of strategy formulation is coping with competition.The nature and degree of
competition in an industry hinge on five forces:
1. The threat of new entrants
2. The bargaining power of customers
3. The bargaining power of suppliers
4. The threat of substitute products or services
5. The jockeying among current contestants
The collective strengths are of greatest importance because these forces determine the
ultimate profit of an industry ,ranging from intense (No company earns spectacular returns
on investments, e.g. industries in tires, metal cans and steel) to mild (Room for quite high return,
e.g. oil fields, soft drinks, toiletries).
The strategist’s goal is to find a position in the industry where the company can best defend
itself against these forces or can influence them in its favor. Every industry has an underlying
structure of a set of fundamental economic and technical characteristics. In order to position
2
,the company best within its industry environment, the strategist must learn what makes the
environment tick.
1. Threat of entry
The seriousness of the threat of entry depends on the barriers present and on the reaction of
existing competitors. There are six major sources of barriers to entry:
- Economies of scale These economies deter (scare) entry by forcing the aspirant either
to come in on a large scale or to accept a cost disadvantage. E.g. computer industry
- Product differentiation Brand identification creates a barrier by forcing entrants to
spend heavily to overcome customer loyalty.
- Capital requirements The need to invest large financial resources in order to
compete creates a barrier to entry, particularly if the capital is required for
unrecoverable expenditures in up-front advertising or R&D.
- Cost disadvantage independent of size Entrenched companies may have cost
advantages not available to potential rivals
- Access to distribution channels Secure distribution for the product or services
- Government policy The government can limit or even foreclose entry to industries
with licencies requirements, limits on access to raw materials. Or an indirect role by
affecting barriers through controls.
The potential rivals expectations of existing customers will also influence its decision
whether to enter. Second thoughts could be caused by the incumbents (betrokken partijen):
- possess substantial resources to fight back. E.g. excess cash, borrowing power,
productive capacity or clout with distribution channels and customers.
- Seem likely to cut prices because of a desire to keep market shares’
- Industry growth is slow
Changing conditions:
1. The threat of entry changes if the conditions change,
2. Strategic decisions involving a large segment of an industry can have a major impact
on the conditions determining the threat of entry.
2. Powerful buyers and suppliers
Suppliers can exert bargaining power by raising prices or reducing the quality of purchased
goods and services. A supplier group is powerful if:
- It is dominated by a few companies and is more concentrated than the industry it sells
to.
- Its products is uniqua or at least differentiated or if it has built up switching costs
(fixed costs buyers face in changing suppliers).
3
, - It is not obliged to contend with other products for sale to the industry.
- It poses a credible threat of integrating forward into the industry’s business: a check
against the industry’s ability to improve the terms on which is purchases.
- The industry is not an important customer of the supplier groups. If it is important to
customers, suppliers fortunes will be closely tied to the industry and they will want to
protect the industry.
Customers can force down prices, demand higher quality or more service and play
competitors off against each other. A buyer is powerful if:
- It is concentrated or purchased in large volumes.
- The products purchased are standard or undifferentiated. (always alternatives)
- The products purchased form a component of its product and represent a significant
fraction of its cost. The buyer is price sensitive.
- It earns low profits → lower its purchasing costs
- The industry’s product does not save the buyer money
- Pose a credible threat of integrating backward to make the industry’s product.
*retailers have one addition:’powerful if they can influence consumer decision’
Strategic action: finding suppliers or buyers who possess the least power to influence the
strategy adversely/negatively. ‘buyer selection’. If the power of buyers/suppliers rises the
company might be unable to differentiate its products.
3. Substitute products
By placing a ceiling on pricing, substitutes limit the potential of an industry by threatening
growth and suffering in earnings. Solution: Upgrade the quality or Differentiate.
Substitute products that deserve the most attention strategically are those that: (A) Are
subject trends improving their price-performance tradeoff with the industry’s product and (B)
Are produced by industries earning high profits
4. Jockeying for position
Rivalry among existing competitors takes the familiar form of jockeying for position - using
tactics like price competition, product introduction, and advertising slugfests. The intense
rivalry is related to the presence of a number of factors.
- Competitors are numerous/ roughly equal in size/power.
- Industry growth is slow.
- The product or service lacks differentiation/switching costs.
- Fixed costs are high or the product is perishable, creating strong temptation to cut
prices.
- Exit barriers are high.
- The rivals are diverse in strategies, origins, and “personalities.”
4
Week 1: Competitive strategy
What should a non-diversified firm or the SBU of a diversified firm do ?
Lecture 1:
Content: what is a good strategy (resource based school and positioning school)
Process: where does it come from (design school and planning school)
Context: refers to the environment of the firm
Performance does not emerge naturally. It requires some kind of coordination, a strategy.
Strategy is A plan of actions, usually with a limited time horizon: a plan about how firms
reach their goals.
Firms create their goal by the creation of value. This could be done on
- Individual level (talent rather than strategy)
- Firm-level (Assets rather than strategy).
The mostest argument suggests that firms with the most talent and assets will create more
value than their competitors.
*Findings show that assets do not necessarily lead to better performance.
E.g. The relationship between acquisitions and firm performance is negative and the
relationship between diversification and firm performance is mixed
Strategy is needed for
- (Reduce) uncertainty
- Time limitation
- Cognitive limitation (bounded rationality)
- Irrational behavior
- Asymmetric information
- Structure and organization
(planning)
- How to reach the goal…
The standard model of strategy
1. Strategic analysis
- External (O and T)
1
, - Internal (S and W)
2. Strategic choice
3. Strategic implementation
Theory is trying to explain a phenomenon, why does something happen. Theory of strategy
is going to explain
- Why how and when do some firms outperform/ outcompete others
- Why how and when does a firm that outperforms/outcompetes others do so
consistently
- Theories of strategy describe when, how, and why a plan of action leads to value
creation
- Firm that creates the most value outcompetes/ outperforms other firms.
There are two dominant theoretical approaches for competitive strategies:
1. Positioning Theory of Porter
Main view: There must be more in the environment than just price competition
2. Resource based view (Barney)
1: Porter, M. (1979), How competitive forces shape strategy, Harvard
Business Review, (March-April), pp. 137-145. Porter 1979.pdf
The essence of strategy formulation is coping with competition.The nature and degree of
competition in an industry hinge on five forces:
1. The threat of new entrants
2. The bargaining power of customers
3. The bargaining power of suppliers
4. The threat of substitute products or services
5. The jockeying among current contestants
The collective strengths are of greatest importance because these forces determine the
ultimate profit of an industry ,ranging from intense (No company earns spectacular returns
on investments, e.g. industries in tires, metal cans and steel) to mild (Room for quite high return,
e.g. oil fields, soft drinks, toiletries).
The strategist’s goal is to find a position in the industry where the company can best defend
itself against these forces or can influence them in its favor. Every industry has an underlying
structure of a set of fundamental economic and technical characteristics. In order to position
2
,the company best within its industry environment, the strategist must learn what makes the
environment tick.
1. Threat of entry
The seriousness of the threat of entry depends on the barriers present and on the reaction of
existing competitors. There are six major sources of barriers to entry:
- Economies of scale These economies deter (scare) entry by forcing the aspirant either
to come in on a large scale or to accept a cost disadvantage. E.g. computer industry
- Product differentiation Brand identification creates a barrier by forcing entrants to
spend heavily to overcome customer loyalty.
- Capital requirements The need to invest large financial resources in order to
compete creates a barrier to entry, particularly if the capital is required for
unrecoverable expenditures in up-front advertising or R&D.
- Cost disadvantage independent of size Entrenched companies may have cost
advantages not available to potential rivals
- Access to distribution channels Secure distribution for the product or services
- Government policy The government can limit or even foreclose entry to industries
with licencies requirements, limits on access to raw materials. Or an indirect role by
affecting barriers through controls.
The potential rivals expectations of existing customers will also influence its decision
whether to enter. Second thoughts could be caused by the incumbents (betrokken partijen):
- possess substantial resources to fight back. E.g. excess cash, borrowing power,
productive capacity or clout with distribution channels and customers.
- Seem likely to cut prices because of a desire to keep market shares’
- Industry growth is slow
Changing conditions:
1. The threat of entry changes if the conditions change,
2. Strategic decisions involving a large segment of an industry can have a major impact
on the conditions determining the threat of entry.
2. Powerful buyers and suppliers
Suppliers can exert bargaining power by raising prices or reducing the quality of purchased
goods and services. A supplier group is powerful if:
- It is dominated by a few companies and is more concentrated than the industry it sells
to.
- Its products is uniqua or at least differentiated or if it has built up switching costs
(fixed costs buyers face in changing suppliers).
3
, - It is not obliged to contend with other products for sale to the industry.
- It poses a credible threat of integrating forward into the industry’s business: a check
against the industry’s ability to improve the terms on which is purchases.
- The industry is not an important customer of the supplier groups. If it is important to
customers, suppliers fortunes will be closely tied to the industry and they will want to
protect the industry.
Customers can force down prices, demand higher quality or more service and play
competitors off against each other. A buyer is powerful if:
- It is concentrated or purchased in large volumes.
- The products purchased are standard or undifferentiated. (always alternatives)
- The products purchased form a component of its product and represent a significant
fraction of its cost. The buyer is price sensitive.
- It earns low profits → lower its purchasing costs
- The industry’s product does not save the buyer money
- Pose a credible threat of integrating backward to make the industry’s product.
*retailers have one addition:’powerful if they can influence consumer decision’
Strategic action: finding suppliers or buyers who possess the least power to influence the
strategy adversely/negatively. ‘buyer selection’. If the power of buyers/suppliers rises the
company might be unable to differentiate its products.
3. Substitute products
By placing a ceiling on pricing, substitutes limit the potential of an industry by threatening
growth and suffering in earnings. Solution: Upgrade the quality or Differentiate.
Substitute products that deserve the most attention strategically are those that: (A) Are
subject trends improving their price-performance tradeoff with the industry’s product and (B)
Are produced by industries earning high profits
4. Jockeying for position
Rivalry among existing competitors takes the familiar form of jockeying for position - using
tactics like price competition, product introduction, and advertising slugfests. The intense
rivalry is related to the presence of a number of factors.
- Competitors are numerous/ roughly equal in size/power.
- Industry growth is slow.
- The product or service lacks differentiation/switching costs.
- Fixed costs are high or the product is perishable, creating strong temptation to cut
prices.
- Exit barriers are high.
- The rivals are diverse in strategies, origins, and “personalities.”
4
