Strategic Management Midterm

Strategy is about achieving success. Strategy is the overall plan for deploying resources
to establish a favorable position.
• Characteristics of strategic decisions
1. Important
2. Involve a significant commitment of resources
3. Not easily reversible

Figure 1.2 The basic framework: Strategy as a link between the firm and its
environment

Sources of superior profitability

The task of business strategy, then, is to determine how the firm will deploy its
resources within its environment and so satisfy its long-term goals, and how it will
organize itself to implement that strategy.
Corporate strategy: Industry atractiveness

Strategic fit is the link between the firm and its external environment. This refers to the
consistency of a firm’s strategy, 1°, with the firm’s external environment and, 2°, with
its internal environment, especially with its goals and values and resources and
capabilities.

The concept of strategic fit is one component of a set of ideas known as contingency
theory.
Why Do Firms Need Strategy?

Strategy assists the effective management of organizations, first, by enhancing the

quality of decision making, second, by facilitating coordination, and, third, by focusing
organizations on the pursuit of long-term goals.
1. Strategy as Decision Support Gives coherence to the decisions of an individual
or organization.
 2. Strategy as a Coordinating Device Coordinate the actions of different
organizational members.
3. Strategy as Target Strategy is forward looking. It is concerned not only with
how the firm will compete now but also with what the firm will become in the
future.

Where Do We Find Strategy?

A company’s strategy can be found in three places: in the heads of managers, in their
articulations of strategy in speeches and written documents, and in the decisions through
which strategy is enacted.

Midberg
 Fallacy of prediction
  Fallacy of detachement
 Fallacy of formalization

Summary sesión 1
The key lessons from this chapter are:

◆ Strategy is a key ingredient of success both for individuals and organizations. A

sound strategy cannot guarantee success, but it can improve the odds. Successful
strategies tend to embody four elements: clear, long-term goals; profound understanding
of the external environment; astute appraisal of internal resources and capabilities; and
effective implementation.
◆ The above four elements form the primary components of strategy analysis: goals,
industry analysis, analysis of resources and capabilities, and strategy implementation
through the design of structures and systems.
◆ Strategy is no longer concerned with detailed planning based upon forecasts; it is
increasingly about direction, identity, and exploiting the sources of superior
profitability.
◆ To describe the strategy of a firm (or any other type of organization) we need to
recognize where the firm is competing, how it is competing, and the direction in which
it is developing.
◆ Developing a strategy for an organization requires a combination of purpose-led
planning (rational design) and a flexible response to changing circumstances
(emergence).
◆ The principles and tools of strategic management have been developed primarily for
business enterprises; however, they are also applicable to the strategic management of
not-for-profit organizations, especially those that inhabit competitive environments

SESSION 2 & 3

What is an industry?

A particular industry consists of all the people and activities involved in making a
particular product or providing a particular service.

Industry analysis

The business environment of the firm consists of all the external influences that impact
its decisions and its performance.
Environmental influences can be classified by source, for example, into political,
economic, social, and technological factors—what is known as PESTEL Analysis.
PESTLE analysis is important but it focuses on very broad and generic aspects, and it
does not explain clearly their link to firms’ performance and strategies

Structure – Conduct – Performance (S-C-P)

Structure, Conduct and Performance paradigm (SCP) is used as an analytical
framework, to make relations amongst market structure, market conduct and market
performance. Purpose: understanding how industry structure drives competition, which
determines the level of industry profitability.

1. Structure: those set of variables that are relatively stable over time and affect
the behaviour of sellers and/or buyers.
2. Conduct: the way in which buyers and sellers behave, both amongst
themselves, and amongst each other.
3. Performance: It is measured by comparing the results of firms along the
industry in efficiency terms, and different ratios are used to assess different
profitability levels.

Hence, the profits earned by the firms in an industry are determined by three factors:
● the value of the product to customers
● the intensity of competition
● the bargaining power of industry members relative to their suppliers and buyers.

Sector Analysis main objectives are

1. Assess industry attractiveness: To understand how industry structure drives

competition, which determines the level of industry profitability
2. Identify Key Success Factors
3. Use evidence on changes in industry structure to forecast future profitability
4. Formulate strategies in relationship with industry structure to improve industry
profitability

5 Forces of Porter

The five forces model of analysis was developed by Michael Porter to analyze the
competitive environment in which a product or company works.
There are five forces that act on any product/ brand/ company:

1. The threat of entry: competitors can enter from any industry, channel, function,
form or marketing activity.

2. Supplier power: what is the power of suppliers in this industry? How will their
actions affect costs, supplies and developments?

3. Buyer power: there may be few buyers for the product, which could mean that they
would drive down prices and dictate business terms.
4. Threat of substitutes: can another substitute the product? Tea for coffee

5. Competitive rivalry: all the four forces may come together to produce this force.

Porter : Lessons and limitations- OF S-C-P

Lessons
• Forecasting Industry Profitability
 Past profitability a poor indicator of future profitability
 If we can forecast changes in industry structure we can predict likely impact on
competition and profitability
• Strategies to Improve Industry Profitability
 What structural variables are depressing profitability?
 Which can be changed by individual or collective strategies?
• Key Success Factors as a way to understand better industry competitiveness

Limitations
 1. Excessive importance on Industry structure
2. Difficulty of defining industry limits.
3. No interaction among Competitors
4. Static View

Session 5

Two ways to segment an industry:

A) Based on market variables: Segmentation

1°- Identify key variables and categories – 2° - Construct a segmentation matrix

-3°- Analyze segment attractiveness -4°- Identify KSFs in each segment -5°- Analyze
benefits of broad vs. narrow scope

B) Based on firms strategies : Strategic Groups

A strategic group is a group of firms in an industry that follow the same or similar
strategies

Differentiation vs Segmentation

Differentiation: Concerns choices of how a firm distinguishes its offerings from those
of its competitors
Segmentation: Concerns choices of which customers, needs, localities a firm targets
Broad Scope Differentiation – Appealing to what is common between different
customers
Focused Differentiation – Appealing to what distinguishes different customer groups

Session 6

When the industry environment is volatile, internal resources and capabilities offer a
more stable basis for strategy than an industry or market focus.
Resources and capabilities are the primary sources of profitability.

We have shifted the focus of our attention from the external environment of the firm to
its internal environment. We have observed that internal resources and capabilities
offer a sound basis for building strategy. Indeed, when a firm’s external environment
is in a state of flux, internal strengths are likely to provide the primary basis upon
which it can define its identity and its strategy.
In this session we have followed a systematic approach to identifying the resources and
capabilities that an organization has access to and then have appraised these resources
and capabilities in terms of their potential to offer a sustainable competitive advantage
and, ultimately, to generate profit.
Having built a picture of an organization’s key resources and capabilities and having
identified areas of strength and weakness, we can then devise strategies through
which the organization can exploit its strengths and minimize its vulnerability to its
weaknesses. Figure 5.10 summarizes the main stages of our analysis.
At its core, resource and capability analysis asks what is distinctive about a firm in
terms of what it can do better than its competitors and what it cannot. This involves not
only analysis of balance sheets, employee competencies, and benchmarking data, but
also insight into the values, ambitions, and traditions of a company that shape its
priorities and identity.

Session 8

The role of CEO

Strategy = Creating success = Creating value
For:
 Shareholders

For the purposes of strategy analysis we assume that the primary goal of the firm is
profit maximization.
Value added—the difference between the value of a firm’s output and the cost of its material
inputs.

Value Added = Sales revenue from output − Cost of material inputs

= Wages/Salaries + Interest + Rent + Royalties/License fees + Taxes + Dividends + Retained profit

The value created by firms is distributed among different parties: employees (wages and salaries),
lenders (interest), landlords (rent), government (taxes), owners (profit) and customers (consumer
surplus).

How that value is defined and measured distinguishes those who argue that the firms should
operate primarily in the interests of owners (shareholders) from those who argue for a stakeholder
approach. Our approach is pragmatic: shareholder and stakeholder interests tend to converge and,
where they diverge, the pressure of competition limits the scope for pursuing stakeholder interests
at the expense of profit, hence my conclusion that long-run profit— or its equivalent, enterprise
value—is appropriate both as an indicator of firm performance and as a guide to strategy
formulation.

The stakeholder approach

• The firm is a coalition of interest groups – it seeks to balance their different
objectives.
The shareholder approach
• The firm exists to maximize the wealth of its owners.
• For the purposes of strategy analysis we assume that the primary goal of the firm is
profit maximization.
Rationale:
1. Boards of directors are legally obliged to pursue shareholder interest.
2. To replace assets firm must earn return on capital > cost of capital, (difficult when
competition strong).
3. Firms that do not reach stockmarket value will be acquired.

Max Willingness to Pay (MWTP), Consumer Surplus and Value Added

Maximum Willingness-to-Pay: Price at which the consumer is indifferent between

buying the product and not buying.
Consumer Surplus: is the difference between the maximum price the consumer is
willing to pay and the prevailing market price.
 Consumer surplus needs to be positive for the purchase to occur.
 If there is a choice between two or more products consumer will choose the one
with the largest consumer surplus.

A widely used measure of economic profit is economic value added (EVA).

EVA = Consumer surplus+Producer surplus

= B – C = (B - P) + (P - C)
B = Maximum Willingness to Pay.
P = Price of the product
C = Cost of making the product
Competitive advantage
One firm possesses a competitive advantage over its rivals when it earns a persistently
higher rate of profits than its rivals

 If B-C is positive the product is economically viable.

 The firm with the highest competitive advantage is the one with highest B-C

ReturnOnAsset =Operating profit/Total asset

ReturnOnEquity=Net Income/Shareholders Equity

If the company is quoted on a stock market, we can use its MARKET VALUE as a
good proxy for performance: market value = share price × number of shares

TOBIN’S Q, which is equal to total market value of a firm/ actual cost of capital.
 If Q > 1, the firm’s value is higher than its tangible assets, so the evaluation of
its intangible assets is positive. –
 If Q < 1, there is something wrong, because the market values the firm less than
its tangible assets.

Even if we believe that the primary objective of the firm should be longrun profit
maximization, no firm can ignore its relationship with society.
 Sesion 9- Competitive advantage

The analysis of the emergence and the sustainability is essential to properly evaluate
the ability of a firm to deliver a Competitive Advantage
RBV: The resource-based view is a managerial framework used to determine
the strategic resources with the potential to deliver comparative advantage to a
firm.

Differentiation

Techniques for analyzing products

• Multidimensional Scaling: Maps consumer perceptions of competing products along

key differentiating variables
• Conjunct Analysis: Uses estimates of consumer preferences for particular product
attributes to forecast demand for new products that comprise different bundles of
product attributes
• Hedonic Price Analysis: Estimates the price that consumers will pay for particular
product attributes
• Value Curve Analysis: Maps competing products according to bundles of attributers
in order to identify opportunities for new products with a different combination of
attributes
A firm can achieve a higher rate of profit (or potential profit) over a rival in one of two ways:

 identical product or service at a lower cost

 it can supply a product or service that is differentiated in such a way that the customer is
willing to pay a price premium that exceeds the additional cost of the differentiation.

Products with integrity perform superbly, provide good value, and satisfy
customers' expectations in every respect, including such intangibles as their
look and feel.

The Sources of Cost Advantage

 Session 12 & 13 : Game Theory

Strategy requires a comprehension of the competitive process.

– S-C-P: Industry analysis has limitations.
– RBV : The internal perspective does not help much here either.

The idea behind Game Theory is to simulate the game so we can understand better
each scenario and hence take a more informed decision

What is a game?
– A set of players
– A set of possible decisions (also called strategies)
– A set of calculates/estimated results (also called pay-offs)

Payoff Matrix

A strategy is a dominant strategy for a player if it yields the best payoff (for that
player) no matter what strategies the other players choose.
If all players have a dominant strategy, then it is natural for them to choose the
dominant strategies and we reach a dominant strategy equilibrium.

A Nash Equilibrium is a set of best-response strategies. For a two-player game, a Nash

equilibrium is an outcome where player 2's strategy is the best response to player 1's
strategy and player 1's strategy is a best response to player 2's strategy.

An outcome is Pareto optimal if there is no other outcome which would give both
players a higher payoff or would give one player the same payoff and the other player a
higher payoff. The NE in the Prisoner’s Dilemma is not Pareto Optimal.
1. Competition and Cooperation – Game theory can show conditions where cooperation
is more advantageous than competition
2. Deterrence – Changing the payoffs in the game in order to deter a competitor from
certain actions
3. Commitment – Irrevocable deployments of resources that give credibility to threats
4. Signalling – Communication to influence a competitor’s decision