Business Strategy: Key Concepts, Porter's Framework, and Competitive Advantage

Fact #1 of Strategy: The ultimate goal of business strategy

To maximize the rate of return (profitability) on invested capital, not the volume of total profits.

What Michael Porter argues about a firm that tries to follow all industry 'best practices'

They are unlikely to achieve a sustained competitive advantage because they are doing the same activities as everyone else, leading to competitive parity.

The necessary consequence of a strategy failing as a 'Coordinating Mechanism'

Different functional areas pursue inconsistent priorities, leading to organizational friction and the firm becoming 'Stuck in the Middle'.

Fact #5 of Strategy: Tradeoffs

Tradeoffs are the essence of business strategy. Firms must choose to perform activities differently than rivals and explicitly limit what they offer.

Classification of 'Slow decision-making due to a highly decentralized structure' in a SWOT analysis

Weakness (Harmful and Internal attribute of the firm).

Classification of 'New government regulation favoring a core product' in a SWOT analysis

Opportunity (Helpful and External attribute of the environment).

Sustained Competitive Advantage (SCA)

Earning a persistently higher rate of return than the industry average for an extended period.

Fact #2 of Strategy

Strategy is a Coordinating Mechanism that aligns all functional areas (e.g., R&D, Marketing, Operations) toward a single, consistent goal.

Porter's definition of Strategy

Choosing to perform activities differently than rivals do or to perform different activities from rivals.

Porter's Competitive Positioning Matrix (The two dimensions)

1. Competitive Advantage (Cost or Premium Price/Differentiation); 2. Competitive Scope (Broad or Narrow)

Strategic Position: Cost Leadership (Broad Scope)

Serving a wide market and achieving a competitive advantage by having the lowest cost structure in the industry.

Strategic Position: Differentiation (Narrow Scope/Focus)

Serving a small, targeted market segment and charging a premium price by offering unique product features or services.

The 'Stuck in the Middle' position

A firm that fails to make clear strategic choices, resulting in an average cost structure and average perceived value (price), leading to average/poor profitability.

The Five Forces in Porter's Framework (List them)

1. Threat of New Entrants; 2. Bargaining Power of Suppliers; 3. Bargaining Power of Buyers; 4. Threat of Substitute Products or Services; 5. Rivalry Among Existing Competitors

Impact of a High Threat of New Entrants on Industry Profitability

The average profitability of the industry will be driven down as new capacity is added, and incumbents are forced to lower prices or increase investment to compete.

Two typical factors that lead to a low Barrier to Entry

1. Low capital requirement to start; 2. Lack of strong brand loyalty among customers; 3. Little/no proprietary technology to overcome

Impact of High Bargaining Power of Buyers on Industry Profitability

Buyers can demand lower prices or higher quality, which extracts profits from the industry, lowering the average rate of return.

Threat of Substitutes (definition)

Products or services that meet the same basic need as the industry's product but come from a different industry (e.g., video calls substituting for business travel).

Strategy's core output (beyond the rate of return)

The creation of a unique and valuable position, involving a different set of activities than rivals.

SWOT Analysis: Internal Factors

Strengths (Helpful) and Weaknesses (Harmful). These are attributes of the organization itself.

SWOT Analysis: External Factors

Opportunities (Helpful) and Threats (Harmful). These are attributes of the environment (e.g., market, regulation).

Fact #3 of Strategy

Strategy requires an explicit consideration of rivals and the ways in which competition is changing in the industry.

What is necessary to achieve a Sustainable Competitive Advantage, according to Porter

A system of tailored activities that are difficult for rivals to imitate and that creates value in a way that is unique to the firm.

Difference between Total Profit and Rate of Return (Profitability)

Rate of return is a measure of efficiency (profit per unit of capital), whereas total profit is just a measure of volume.

Definition of an Industry's Profit Potential (Porter)

The average rate of return on invested capital across the industry, determined by the collective strength of the Five Forces.