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WEEK 1
Meeting 1.1: Economic foundations of strategy
1. Stoelhorst J.W. ([1997] 2008), Thinking about Strategy, 3d edition. Teaching note, University of Amsterdam
(26 pages, reading time app...
Block 1: Introduction
Meeting 1.1: Economic foundations of strategy
Block 2: Positional views
Meeting 1.2: Porter and the industrial organization view
Meeting 2.1: The ‘High Church’ of the resource-based view
Meeting 2.2: Cooperative game theory and the added value view
Meeting 3.1: Applications I
Block 3: Dynamic views
Meeting 3.2: The ‘Low Church’ of the resource-based view
Meeting 4.1: Dynamic views of competitive advantage
Meeting 4.2: Applications II
Meeting 5.1: Schumpeterian competition
Meeting 5.2: Competitive strategy in technology-driven industries
Meeting 6.1: Applications III
Block 4: Stakeholder theory
Meeting 6.2: A stakeholder view of competitive advantage
,Block 1: Introduction
The first block will introduce the economic foundations of competitive strategy theories.
Meeting 1.1: Economic foundations of strategy
We will look into the economic foundations of competitive strategy theories. Much of competitive
strategy theory revolves around the concept of ‘competitive advantage’. Theories of competitive
advantage are best understood as highlighting deviations from the model of perfect competition that
is the theoretical benchmark in neoclassical economics. This is the case because perfect competition
specifies a (purely theoretical) environment in which there is no room for competitive advantage. It
follows that competitive advantage can only occur in environments that deviate from perfect
competition. This theoretical insight underlies much, if not all, of competitive strategy theory.
1. Introduction
Theories of strategy aims to answer: ‘How can we explain differences in performance among firms?’
The explanations make use of the concept of competitive advantage.
2. A short overview of the strategy field
Stoelhorst J.W. ([1997] 2008) - Thinking about Strategy
There are five schools of thought:
1960s: The design school: general management perspective, strategy formation should be a
deliberate process of conscious thought. Focus on confronting internal and external situation of firm
(environmental fit and distinctive competence).
1970s: The planning school: strategy lies in top of organization. Strategies result from conscious
formal process of planning (inflexible).
Anseff’s model focuses on that chances of successful growth diminish as a firm looks for growth in
activities farther away from its current products and markets.
1980s: The positioning school
How do you position your firm’s products in the product market? Use strategy by finding a position.
This is the early Porter view. He puts the content of strategy central. Porter uses insides from IO and
translates this into business analysis.
,Industrial organization economics
IO states that industry structure determines much of the performance of firms within an industry.
The main theoretical framework in IO was the S-C-P paradigm:
- Structure: structure of the industry
- Conduct: refers to the (strategic) behaviour of individual firms
- Performance: different possible dimensions on which industries and firms can differ from
each other (for example profitability or innovativeness).
IO economists study competition from the perspective of overall welfare.
The basic idea in economics is that welfare for society as a whole is maximized when markets are
perfectly competitive (large numbers, homogeneity, mobility and rationality assumptions hold). They
aim their research at policy makers in government: try to derive government policies to reduce
barriers to competition and make markets more competitive.
In summary, IO has two main goals: (1) understand the relationship between industry structure and
profitability and (2) understand barriers to competition in order to advise governments about
policies to reduce these barriers in order to increase social welfare.
Porter
Porter aimed his work at managers. Managers aim to pursue supra-normal profits in order to protect
their firms from the forces of competition. He used IO insights to derive strategies to increase the
profitability of individual firms by raising barriers to competition.
- Five forces model: threat of entry, competitive rivalry, threat of substitutes, bargaining
power of buyers and bargaining power of suppliers. Industries where the five forces are
weak are more attractive than industries where they are strong → help managers think
about the S of industry structure.
- Porter’s three generic strategies (cost leadership, differentiation and focus) can be used to
secure favourable positions in the industry, where the firm is better protected from the five
forces compared to competitors → help managers think about the C of conduct
- P of performance → firms will be profitable if they occupy favourable positions in attractive
industries.
Summary of the concept of strategy in the positioning school:
1. Strategies as fit: find optimal fit between firm and environment by taking favourable
competitive positions in attractive industries
2. There are barriers to competition: protect firms from forces that would reduce profit
3. Strategies are generic positions in the market
4. The essence of strategy is analysis: analyse external environment. Identify attractive
industries, favourable positions within these industries and then form generic strategies that
allow the firm to occupy these positions.
Weakness of the positioning school: approach strategy from the point of economic theory → seeing
the firm as a black box.
1990s: The resource-based school
The focus is on resources firm’s employ to produce their products. The main interest of the resource-
based school is to understand the relationship between differences among firms in terms of their
resources, competencies and capabilities on the one hand and performance differentials among
these firms on the other hand. RBV is concerned with competitive strategy; how do firms achieve
competitive advantage?
, According to Barney (1991) the characteristics that make resources a source of sustained competitive
advantage are:
- Valuable
- Rare
- Inimitable
- Non-substitutable
→ firms will be able to make supra-normal profits when it has valuable resources that other firms do
not have.
Prahalad & Hamel (1990)
- Pay attention to the dynamics of competition (how is CA developed over time?)
- Core competencies: ‘the collective learning of the organization, especially how to coordinate
diverse production skills and integrate multiple streams of technology’
Competence is called ‘core’ when it adds value for buyers in end products, it’s difficult to
imitate and it gives access to a variety of markets.
Overlap between Prahalad & Hamel and Barney: valuable and difficult to imitate
Difference: Prahalad & Hamel talk about multi-business firms (across business units) whereas RBV
Barney talks about strategy at the level of business unit
1980s onward: The process school
Strategies is a process of collective learning.
Three aspects of strategic management can be distinguished:
1. The process: where do strategies come from? How do firms develop strategies and how
could they do so more effectively? How do we get to a good strategy?
2. The content: which strategies can give firms a competitive advantage? What is a good
strategy? This helps in explaining what constitutes differences in performance between
firms.
3. The context: how do specific organizational or environmental contexts affect the process or
content of strategy? Do different organizations or industries require different strategies or
different ways of developing these strategies?
The standard model of strategy
1. Strategic analysis: internal and external analysis. Result: SWAT that leads to identification of
strategic issues that the firm faces. It highlights the main questions that a firm needs to
confront to meet its objectives.
2. Strategic choice: generate strategic options or possible strategies to deal with the strategic
issues. The firm should consider the suitability, acceptability and feasibility.
3. Strategy implementation: the chosen strategy is brown down into detailed plans, then
responsibilities and budgets are assigned and finally performance measures to control the
implementation of the strategy are chosen.
Types of strategy
Corporate strategy:
- Where to compete
- Parent level
- Portfolio decisions
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