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Theories of Strategy 7,5!
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Theories of StrategyLecture 1.1
Theories of Strategy course
Theme: Competition
Research question: How can we explain differences in performance among firms?
Practical Implications: What can managers do the increase the (relative) performance of their firms.
Primary
Understand the principles of competition; theories of competitive advantage; practical relevance
Secondary
Understand the nature of theory; nature of research.
‘A higher level of confusion’
Assessed
1. Group assignment 1 (study question) -> week 3!
2. Group assignment 2 (case analysis)
3. 60% exam
Foundations of competitive strategy
Problem statement
Competitive advantage: how can we explain differences in performance?
The economic turn
Perfect competition as a theoretical benchmark
School of thought in (micro) economics
SOURCES -> COMPETITIVE ADVANTAGE -> DEPENDENT VARIABLE = PERFORMANCE
Performance issues
1. Relative
2. Which measure are we taking?
Theories focused on: Profit; Accounting & Economic; Economic Profit
Economic VS accounting costs
- Accounting statements are designed to serve an audience outside the firm, they are not necessarily
appropriate for internal decision making (income you don’t have)
- Business decisions require the measurement of economic costs, which are based on the concept of
opportunity. This concept provides the best basis for economic
decisions when the firm must choose among competing
alternatives.
Three layers of theory
Economics Strategic Management Management
Neoclassical economics:
,A fundamental principle
Perfect competition
What will be the performance of firms in a perfectly competitive market?
- Zero economic profit
The model of perfect competition: 5 assumptions
- The large numbers assumption
o Decreasing returns; a large number of buyers and sellers; firms are price takers
- The homogeneity assumption
o Demand is homogeneous; standardized products
- The mobility assumption
o Resources are perfectly mobile; free entry and exit
- The rationality assumption
o Buyers and sellers have complete information and maximize their utility and profit
- The transaction cost assumption
o Transactions are costless
Principes of strategy: perfect competition
When the assumptions of the model of perfect competition are met, there is no room for performance
differences; all firms earn zero economic profit
Corollary: any
CASE – The Antitrust ‘case’
Why this case?
Companies working together –Avoiding to working against consumers –
- Main idea Antitrust policy: protect consumers against power of companies in general. To get
together and work together to against different interests. Governance trying to interfere to
regulare. Reduce the power.
- Right side: let markets do the work and don’t worry to much; It is only temporary; Bigger firms are
more productive & making more products; more efficients.
- Left side: no no there is a lot of market power.
- Antitrust about policy, goverance; Anti = against trusts, type of business organisations late 90s.
these trusts became every powerfull & large.
- Big firms who became to powerfull; governance trying to regulate the competitions; markets;
interfer what some people will claim; Collecti
- Use they make most profit. Measure; willing to pay; Maximum ultility; other side of perfect
competition; three markets; Maxium collective welfare. Additions assumptions.
- Regulate market; work hard to make markets more competitive to create more warefell.
- Libitarians the end; let the market do they work. What else are we getting what is good? We get
individual freedom, no sent of control and collective warefell.
- Assumptions; human behaviour; markets;
Chicago school
Firms are production and distribution efficiency-seekers. Size and scope of the firm reflect extend to which
production and distribution efficiencies are achieved. Focus more on the intermediaite (not long) term, so
entry
Paper article – Gasolie
, - Marketpower;
- What does the marketpower help to do? Creeting uncertaintetlys; scarsitiy; price go up; make
more money for himself and for the war;
Why this
Link to perfect competition thinking
Link to different schools of thoughts in economics
It teaches us something about the real world
Next meeting: Link to the SCP Paradigm underlying Porter’s work (Positioning school)
Questions
- How do the various views on atintrust mentioned in the case relate to the schools of thought?
Chichago school of Law; Chicago school of Economics; & Bain Type because market power.
- Is competition a good think or a bed thing?
Good more for it; for us as consumer; general ware fell; without
- What seems to be the underlying idea of competition in the discussion of antitrust?
Entry and exit; if there is temporarlity a positive economic profit in a certain industry, that will
immediatetly attrack entry and vice versa. Because of this the whole system comes intro a general
equilibrium.
, Lecture 1.2
Competition
How can we explain differences in performances among firms?
Zero economic profit
Assumptions
Accounting cost & Economic proft & Opportunity costs
Entry & Exit;
The model Of perfect competitions
5 assiumptions
o Large numbers essential for perfect competitions; suppliers and buyers. Market power
o Homogeneity different generics, focus; cost leadership; differentiation;
o Mobility porter strategics groups
o Rationaly
o Transaction cost
Sources of advantage competitive advantage performance
No sources of advantage 5A Identitical firms Zero economic profit
Antitrust -> increase competitors; authorities get worried; protect consumer, prices go up, value is divided;
money goes also in the pocket of employees; total pie schrimps; reduce innovation; matter who gets what,
value approcation; comment good defined ‘our interest’, more competition, prices stay low, consumers
experiences stay high, profits reduce zero economic profit; enough profit for investors.
Porter
How to avoid competition to increase private profit;
Main elements
Structure conduct performance
Structure Conduct performance
Concentration Controlling output Profitability
Barriers to entry Collusion (working together Efficiency
- Absolute cost advantage against others)
- Product differentiation innovation
- Economies of scale Predatory pricing (low prices)
Advertising
r&D
Structure conduct performance
Five forces generic strategies profitability
Generic strategies
Cost leadership (is 1)
Differentiation (more)
Focus -> you don’t address the large market;
Stuck in the middle.
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