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Business level strategy - summary of all articles - by Michel Dagli
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Summary by Michel Dagli,INHOUD
Week 1 introduction ............................................................................................................................................... 3
Slides week 1 ....................................................................................................................................................... 3
Porter, M.E. (1991), Towards a dynamic theory of strategy. .............................................................................. 8
Week 2 analyses of external environment. Competitive dynamics ...................................................................... 12
Boyd, J. L. and Bresser, R. K. 2008. Performance implications of delayed competitive responses: evidence
from the U.S. retail industry. ............................................................................................................................. 12
Nadkarni, S., Chen, T. and Chen, J. 2016. The clock is ticking! Executive temporal depth, industry velocity, and
competitive aggressiveness. ............................................................................................................................. 15
Week 3 Analysis of internal environment: RBV, KBV and dynamic capabilities ................................................... 19
Slides week 3 ..................................................................................................................................................... 19
Sirmon, D.G. et al. 2010. The dynamic interplay of capability strengths and weaknesses: investigating the
bases of temporary competitive advantage. .................................................................................................... 20
O Schilke, 2014. On the contingent value of dynamic capabilities for competitive advantage: The nonlinear
moderating effect of environmental dynamism ............................................................................................... 25
Week 4 Corporate social responsibility and competitive advantage .................................................................... 29
Flammer C. 2013. Corporate Social Responsibility and Shareholder Reaction: The Environmental Awareness
of Investors........................................................................................................................................................ 29
Hawn, O. and Ioannou, I. 2016. Mind the gap: The interplay between external and internal actions in the case
of corporate social responsibility ...................................................................................................................... 32
Week 5 Human capital and competitive advantage ............................................................................................. 36
Hatch, N.W. and Dyer, J.H. (2004), Human capital and learning as a source of sustainable competitive
advantage.......................................................................................................................................................... 36
Riley, S. M., Michael, S. C. and Mahoney, J. T. 2017. Human capital matters: Market valuation of firm
investments in training and the role of complementary assets........................................................................ 40
Week 6 Innovation and competitive advantage ................................................................................................... 44
Cassiman and Veugelers 2006. In Search of Complementarity in Innovation Strategy: Internal R&D and
External Knowledge Acquisition. ....................................................................................................................... 44
Klingebiel, R. and Joseph, J. (2016), Entry timing and innovation strategy in feature phones. ........................ 48
,WEEK 1 INTRODUCTION
SLIDES WEEK 1
Strategy objectives
We assume that the general objective of strategy is: achieving sustainable competitive advantage leading to
above-average economic performance
“The fundamental basis of above-average performance in the long run is sustainable competitive advantage.”
M. Porter (1985, p. 11)
What is competitive advantage?
- Competitive Advantage
o A firm has a competitive advantage if it is able to
create more economic value than rival firms
- Economic Value
o It is the difference between the perceived benefits
gained by a customer that purchases a firm’s products
or services and the full economic cost of these
products and services
Sustainable competitive advantage
A firm possesses a sustainable competitive advantage when it has value creating processes and positions that
cannot be duplicated or imitated by other firms and that lead to the consistent production of above average
returns.
So what drives profitability?
External versus internal factors
- M. Porter (1979): Attractive industry + favourable competitive positioning → superior
profitability
o Locate within attractive industries
o Adopt strategies that modify industry conditions and competitor behavior to moderate
competition
▪ But: Empirical results → industry factors account for a relatively small proportion of
inter-firm profit differentials
- J. Barney (1991): Resources and capabilities of a firm may be more reliable sources of competitive
advantage than market focus (Reference: J. Barney (1991) “Firm resources and sustained competitive
advantage,” Journal of Management, 17: 99 – 120)
,Porter’s Five Forces model (FFM)
“Industry choice matters for the future profitability of the company” M. Porter
“The Five forces that shape the strategy” , (13’11), Jun 30, 2008
(https://www.youtube.com/watch?v=mYF2_FBCvXw)
Porter, M.E. (2008) "The Five Competitive Forces That Shape Strategy", Harvard
Business Review, January 2008, pp. 79–93.
- The intensity of competition within an industry is determined by:
o Bargaining power of suppliers
o Bargaining power of buyers
o Threat of new entries into the industry
o Threat of substitute products from a different industry
o Competition from industry incumbents
▪ depends on concentration, diversity of competitors, product differentiation,
excess capacity, exit barriers, fixed costs
Analyzing competitors: strategic groups
M. Porter: “Industry choice matters for the future profitability of a company”
- Questions:
o Do all companies in the same industry have the same strategy?
o Within a given industry, what are the main dimensions along which the strategies of firms can
differ?
o By positioning companies along those dimension, is it possible to identify groups of
companies?
- Strategic groups:
o Strategic dimensions: product range, geographical
breadth, distribution channels, product quality,
vertical integration, etc.
o Yet, most empirical findings: not big difference
between profitability between and within strategic
groups
o Strategic group analysis can be used to identify
different strategic niches within an industry
Do differences between firms matter?
- If performance is determined by industry structure (Porter,
1970s), all firms in the same industry should perform similarly?
- Rumelt (1991, SMJ):
o What is the % of the variance in rate of returns of
various business units accounted for by different
factors?
,How can we explain why some companies outperform others in the same industry?
Potential of resources and capabilities to earn profit
Depends on three factors:
- ability to establish a competitive advantage
(CA)
- ability to sustain that CA
- ability to appropriate the returns from that CA
Establishing competitive advantage
- Scarcity
o Resource which is essential to compete, but widely available in the industry – not a sufficient
basis for CA
o Oil and gas exploration: new technologies such as directional drilling or 3-D seismic analysis
are critical for competing, but widely available from oilfield service or IT companies
- Relevance
o Resource or capability must assist in creating value for customers, or surviving competition
o Retail banking moved towards automated teller machines and online transactions → retail
branch networks became less relevant for customer service
Sustaining competitive advantage
- Durability of resources and capabilities
o Capital equipment and proprietary technologies – short durability
o Reputation (Coca-Cola, Apple) - long durability
- Whether rivals can imitate the CA that these resources and capabilities offer: transfer or replicate
o Easily transferable - finance, raw materials, components, employees with standardized skills
o Immobile - geographical immobility of natural resources, large items of capital equipment;
complementarity between resources (resource may loose its productivity when separated
from its “home” team (e.g. brand reputation); organizational capabilities are less mobile than
resources
o Easily replicable - financial innovations, CA in retailing (store layout, extended opening hours,
design)
o Difficult to replicate - capabilities based on complex organizational routines, e.g. FedEx
national, next-day delivery service; just-in-time scheduling and quality services by Japanese
companies
,Appropriating the returns to competitive advantage
The less clearly defined are property rights in resources and capabilities → the greater the importance of
relative bargaining power in dividing the returns
- Team-based organizational capabilities
o The more deeply embedded are individual skills and knowledge within organizational
routines, the weaker the employee is relative to the firm
o The closer an organizational capability is identified with the expertise of individual
employees, the better able employees are to appropriate returns
▪ Movie stars and film studios; football clubs and top players
Some important premises
- Competition occurs at the business unit level
- When a firm enters other businesses, it inevitably(also) creates additional costs and constraints
Corporate vs. Competitive advantage
Corporate advantage:
- Does ownership of the business create benefits
somewhere in the corporation? Are those benefits
greater than the costs?
- The extent to which a corporation / group enhances
the competitive advantage of its component
businesses, over and above that of the best
alternative ownership structure
In sum – Business strategy
Business strategy defines how firms will create and sustain competitive advantage
- evaluating external opportunities and threats
- evaluating the firm’s internal environment (i.e., resources and capabilities)
- proposing strategic choices guided by the analysis
,Fundamentals for this course!
- Business level strategy is about how firms can create a long-run competitive advantage in a business
unit
o How firms create, capture and sustain their competitive advantage
▪ How firms make money!
- This involves a careful assessment of the external environment (including competitors, changing
industry and environmental conditions) and an understanding of the resources and capabilities of the
firm
o As you read through the papers – think about how different BLS topics we discuss relate to:
▪ Creating value relative to competitors
▪ Capturing value relative to competitors (and relate this to costs)
▪ Sustaining this value capture over a long period of time
,PORTER, M.E. (1991), TOWARDS A DYNAMIC THEORY OF STRATEGY.
This paper reviews the progress of the strategy field towards developing a truly dynamic theory of strategy. It
separates the theory of strategy into the causes of superior performance at a given period in time (termed the
cross-sectional problem) and the dynamic process by which competitive positions are created (termed the
longitudinal problem). The cross-sectional problem is logically prior to a consideration of dynamics, and better
understood. The paper then reviews three promising streams of research that address the longitudinal
problem. These still fall short of exposing the true origins of competitive success. One important category of
these origins, the local environment in which a firm is based, is described. Many questions remain unanswered,
however, and the paper concludes with challenges for future research.
Determinants of firm success: the early answers
Past researches in the field of strategy, identified three key elements for a firm’s success:
1. A successful company develops and implements internally consistent set of goals and functional
policies that collectively shape its position in the market.
2. These internally consistent goals and policies should be aligned with the firm's strengths and
weaknesses and with the external (industry) opportunities and threats. Since both the firm capabilities
and the external environment are subject to change, a successful firm maintains a dynamic strategy
not a static one.
3. Lastly, a successful firm focuses on the creation and exploitation of its own unique strengths that will
lead it to have a competitive advantage
The challenges for a theory of strategy
The early research offered no theory for examining the firm and its competitive environment at all; instead
strategy formulation took place through applying the broad principles. As current researchers try to build
theory of strategy, they always face four principal issues:
Approach to theory building:
Construction of models and development of frameworks are two approaches to build theory but they are not
mutually exclusive. Both of these approaches present advantages and disadvantages.
- using a model is a very convenient way to simplify a complex reality however the problem of using
models. No one model embodies or even approaches embodying all the variables of interest, and
hence the applicability of any model's findings are almost inevitably restricted to a small subgroup of
firms or industries whose characteristics fit the model's assumptions.
- A framework, such as the competitive forces approach to analyzing industry structure, encompasses
many variables and seeks to capture much of the complexity of actual competition. However, the
equilibrium of variables in a framework is imprecise and the interactions among them cannot be
rigorously drawn.
Chain of causality:
Any theory of strategy struggles with the issue of how far back in the chain of causality to go. The answer may
well be different for different purposes. A theory that aims very early in the chain may be intractable or lack
operationality. Also, aspects of the firm that are variable in the long run may be fixed or sticky in the short run.
Conversely, a theory oriented later in the chain may be overly limiting and miss important possibilities.
Time horizon:
The time period over which to measure and understand competitive success is another challenge researchers
face while building a theory of strategy. Should we be building theories that explain success over two or three
,years, over decades, or over centuries? Clearly, the likelihood of significant environmental change will differ, as
will the exogenous and endogenous variables.
Empirical testing:
Empirical testing is vital both for frameworks and models but constitutes a major issue since testing of models
and frameworks is difficult. The need for more and better empirical testing will be a chronic issue in dealing
with this subject.
Towards a theory of strategy
To explain the competitive success of firms, we need a theory of strategy which links environmental
circumstances and firm behavior to market outcomes. The proposed framework aims to build a careful link
between the underlying choices a firm makes in terms of its industry, positioning, and configuration of
activities and market outcome.
Industry structure
At the broadest level (see figure 2), firm success is a function of two areas: the attractiveness of the industry
(the 5 forces) in which it competes and its relative position in that industry (competitive advantage).
Relative position
On a lower level, we see the importance of the firm’s ability to create and maintain a sustainable competitive
advantage in order to have an attractive position in its industry. Competitive advantages can be divided into
two basic types: lower cost than rivals, or the ability to differentiate and
command a premium price that exceeds the extra cost of doing so.
Activities
Below this level, it is explained to us how competitive advantage is created
though activities and value systems (value chain): A firm is a collection of
discrete, but interrelated economic activities such as products being
assembled, salespeople making sales visits, and orders being processed.
Drivers
On the last level, we discover the importance of drivers; If competitive
advantage comes from discrete activities, how does that happen? Why are some firms able to perform
particular activities at lower cost or in ways that create superior value than others? The answer to this question
can be found in the concept of drivers. The most important drivers of competitive advantage in an activity
include its scale, cumulative learning in the activity, linkages between the activity and others, the ability to
share the activity with other business units, the pattern of" capacity utilization in the activity over the relevant
cycle, the activity's location, the timing of investment choices in the activity etc. Drivers constitute the
underlying sources of competitive advantage, and make competitive advantage operational.
, The origins of competitive advantage
Strategy is not a race to occupy one desirable position, but a more textured (structured) problem in which
many positions can be chosen or created. Success requires the choice of a relatively attractive position given
the industry structure, the firm's circumstances and the positions of competitors. It also requires bringing all
the firm's activities into consistency with the chosen position.
- The focus of the research has also been on what makes some industries, and some positions within
them, more attractive than others? Answering this question led to the research of cross-sectional
problem (at a specific point in time). The cross-sectional frameworks address the choice of strategy
given whatever array of capabilities the firm and its rivals possess at a point in time and can feasibly
develop in the future. It’s about understanding what exactly underpins a desirable position.
- Another question to answer was why do some firms achieve favourable positions vis-a-vis the drivers
in the value chain? This question advanced the studies the of longitudinal problem (over an extended
period of time). The answer of this problem is firstly seen in the firm’s initial conditions, like pre-
existing reputations and skills and in-place activities as a result of their history, which understandably
influence the firm’s feasible choices as well as constrain them. The second reason why firms might
achieve favourable positions is through pure managerial choices, or choices independent of initial
conditions, putting aside for the moment the process by which the choices were made. These
managerial choices, which are made under uncertainty about the future, define the firm's concept for
competing (positioning), its configuration of activities, and the supporting investments in assets and
skills.
Towards a dynamic theory
Many scholars have been researching on how do we can make progress towards a truly dynamic theory of
strategy. There are three promising proposals that have been explored in recent years:
- Game theoretical models: These models have helped researchers understand better the logical
consequences of choices over some important strategy variables. In particular, these models highlight
the importance of information and beliefs about competitive reaction and the conditions required for
a set of internally consistent choices among rivals.
- Commitment and uncertainty: Strategy is manifested (expressed) in a relatively few investment
decisions made under uncertainty that are hard to reverse, and which tend to define choices in other
areas of the firm. Researchers highlight the importance of such choices, and argue that they should
consume much of the attention in strategy analyses. Analysis of such decisions must begin with cross-
sectional frameworks. In choosing among feasible positions, there is also a need to carefully examine
their sustainability and the influence of uncertainty in choosing among them.
- Resource based-view: The promise (commitment) of the resource view for the strategy field is the
effort to address the longitudinal problem, or the conditions that allow firms to achieve and sustain
favourable competitive positions over time. The greatest value of the resource view is in assessing
opportunities for diversification, provided the resource and activity views are integrated. It cannot be
separated from the cross-sectional determinants of competitive advantage. Stress on resources must
complement but not substitute.
The origins of the origins
In order to understand why firms choose and successfully implement the right strategies, and why their
internal activities and assets are what they are, we have to address four important issues;
- First, a theory must deal simultaneously with both the firm itself as well as the industry and broader
environment in which it operates. The environment both constrains and influences outcomes, which
the more introspective resource view neglects.
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