Strategy

Intrinsic motivation: You want to achieve something for pleasure. Something that you
want to achieve for yourself.

Attention
• Rare source.
• You are always dividing your attention between different things.
• Source of competitive advantage
• Doing a lot of things at the same time. It is impossible to pay attention to all the
things at the same time.

Strategy is about BIG QUESTIONS.

What is a firm without a strategy? Boat sailing adrift

Four dimensions:
1. How to think
2. How to analyze (depend on the internal and external environment)
3. How to decide
4. How to change

Strategy definition: “The means by which individuals or organizations achieve their

objectives.
Strategic management: The overall determination of the relationship between the
present and the future of the firm to create value, answering these three questions:
1. What are we? (A)
2. Where do we go from here? (B)
3. How we will do it? (C)

Value Creation: Systematic increase in the market value of the firm (systematic improve
in the market value of the firm over the time). Its something that you can observe over
the time.
• Broader sense: Create value to the society. Something that is important to
everyone.
 • Narrow: The part that is retained in the firm. The part that the firm capture
to itself. It is the creation of value to the stockholders (value appropriation
or value capture)
Note: The company disappears if the company does not capture some value to itself
(narrow) unless someone supports the firm.

Competitive advantage: Potential to do something to create value that others can hardly
copy/imitate.

Success
Two dimensions
What drives differentiated success?
-Survival: absolute success (success or fail)
-Profitability: relative success (degree of value creation that I am getting)

Some firms are at the top and others

are not.

Time series: the change of the

performance over time.

The objective function of the firm

Shareholder Theory: Managers duty is to make decisions to increase the total market
value of the firm.
Stakeholder Theory: Managers should make decisions by taking into consideration the
interest of all stakeholders.
THEORETICAL PRESPETCIVES (WHAT DRIVES SUCCESS)

Determinism
1. In this perspective what drives success is the perfect fit between the internal
characteristics of the firms and the external environment.
2. It can occur an exogenous chock (abrupt change in one or more elements of the
external environment).
3. Turn the fit into a misfit. There is no transformation inside the firm that justifies
the difference in performance.
4. Focus on exogenous factors and external environment (what explains differences
in performances of the firms).

Exogenous chock: Abrupt change in one or more elements of the external environment.

Strategic Choice
1. Endogenous factors.
2. What drives success is inside the firm (internal factors).
3. Related with the top management team (their knowledge, quality of the
decisions, quality of the team).
I/O (M Porter)
1. Differences in performance are due to primarily the choice of the industry. They
believe that it is the most important choice (what happen to the industry will
happen to your firm).
2. Secondly, they know that there are some firms that are in the same industry but
have different levels of performance, so they think that the reason why it happen
is due to the position (second most important factor). POSITION: TRIES TO
EXPLAIN WHY SOME FIRMS THAT ARE IN THE SAME INDUSTRY
HAVE DIFFERENT LEVELS OF PERFORMANCE

To choose the industry you should use the 5

forces framework since it gives you tools to
choose the most attractive industry.

To attain some positioning some assets and

skills are required, and you know that by
looking to the market.
RBT (J Barney)

Resources: inputs needed

Capabilities: Organizational abilities to exploit
one or more resources to fulfil a given task or
activity (ability of the firm to make use of the
resources in a distinctive way).
Core competencies: resources and capabilities
that can explain the differences in performances
and can provide a sustainable competitive
advantage.
Suitable: According to the core competencies.
You should chose the industry that is aligned
with your core competencies.

Core competencies: Correspond to the resources and capabilities that can provide a
sustainable competitive advantage and that can explain differences in performances.

RBT
1. To this theory, what drives you to success is the core competencies, which are
included in the internal factors of the firm (endogenous factors).
2. Having good resources and capabilities will drive success.
3. 2 firms with the exact same resources can have different performance due to
capabilities

PROBLEM: Some firms do not have CORE COMPETENCIES.

SUMMARY

Three reasons to differentiate I/O and RBT

1)Starting point
a. I/O: External environment: looking outside the firm since the most important
choice is the choice of the industry.
b.RBT: Internal environment: looking inside the firm, since the first thing to do is
choose the resources and capabilities in our firm to find the core competencies.
2)The question implied by each of the 2 models:
a. I/O: Where do we like to be?
b. RBT: Where are we able to be?
3)Competitive advantage: Is there a mandatory link between mechanisms of each
model and competitive advantage?
a.NO: I/O : potentially others can do the same
b.YES: RBT: hard to copy/imitate. There is only a link between core competencies and
competitive advantage if you have core competencies.
Evidence (studies)
Business specific factors
Firm effects: Differences in performance in a given period due to differences in firm’s
internal factors.
• The differences between firms are due to internal factors and therefore if
you have different internal factors, the firm will have different
performances (even though they are in the same industry).

Industry factors: Differences in performance in a given period due to different industry

membership.
• Within the same industry the differences between firms are small since
they converge to the industry average level of performance.
• Between different industries, the differences are large (see the industries
that are more attractive and the ones who are not so attractive).
PESTLE

Political/Legal: labor regulation; government stability; environment protection laws;

specific incentive plans; anti-trust regulation.
Economic: inflation; interest rates; unemployment; wages; exchange rate fluctuations;
savings; disable income.
Sociocultural and demographic: life style; life expectancy; work-life balance;
consumer behavior; population growth rates.
Technological: Patent protection R&D; automatization; information processing and
communication; technologies.
Stakeholders: Everyone that is affected by the firm.
5 FORCES
FRAMEWORK TO EVALUATE THE ATTRACTIVENESS OF THE INDUSTRY (to
see if the industry is relevant or not)
It is not a model or a theory

Forces more intense: Industry is less attractive

Forces no intense: Industry is more attractive

Threats of new entrants

Entry barriers
• Supply-side economies of scale (do not benefit of economies of scale. When you enter
you do not benefit of benefits of scale and others benefit. There are others that produce
more)
• Demand-side benefits of sale (the more people buy, the more will want to buy it. More
people using it, more people will want to use it)
• Customer switching costs (the fact that you must pay to end the contract. You don’t
want to pay to change the contract. You don’t want to change if you have to pay to do
it)
• Capital requirements (large amount of money for starting the business)
• Access to distribution channels
Government policies
Expectable retaliation
• Incumbents services repasses

• Incumbents excess of cash or other resources

• Likelihood of price cuts
• Slow industry growth

Bargaining power of suppliers

High power if:
The supplier group does not depend heavily on the industry for its revenue
• Industry players face significant switching costs
• Suppliers products are differentiated
• Suppliers products have no substitutes
• Forward integration threat is credible (supplier starts producing the product that the
customer produces)

Threat of substitute products or services:

“Substitute”: A product or service that performs the same or similar function as an
industry’s product by a different mean.
The threat of a substitute is high if:
It offers an attractive price-performance tradeoff to the industry’s product
The buyer’s cost of switching to the substitute is low.
Bargaining power of buyers
A buyer group has negotiations leverage if
• There are few buyers
• Products are standardized or undifferentiated
• Buyers face few switching costs
• Backward integration threat is credible
A buyer group is price sensitive if
• The product is important in the buyer’s total costs
• The buyer groups earn low profits
• The quality of the buyer’s product is little affected by the industry’s product

Rivalry among existing competitors

The intensity of rivalry is greatest if:
• Seller concentration is low
• Industry growth is slow
• There is excess capacity
• Exit barriers are high

Note: Rivalry is especially destructive if firms compete safety on price competition.

It is more likely when:
• Products or services of rivals are heavily identical
• Few switching costs
• High fixed costs and low marginal costs
• Capacity expansion requires large increments
• The product is perishable

Exit barriers- Why not just leave?

Economic reasons (pay work compensation)
Reputation reasons (exiting one industry, looking bad in another one)
Emotional reasons “I have been in this business for 30 years”