strategy, frameworks

What is strategy?

The set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors.

How does competing to be unique differ from competing to be the best?

Competing to be unique means choosing a distinctive way to create value; competing to be the best means competing against rivals on the same dimensions.

What are the three elements of a good strategy?

A diagnosis of the competitive challenge, a guiding policy to address it, and coherent actions to implement that policy.

What does diagnosing a competitive challenge involve?

Analyzing the firm’s external and internal environments to identify the central challenge it must address.

What is a guiding policy, and how is it implemented?

A guiding policy sets the approach to addressing the competitive challenge; coherent, mutually consistent actions put it into practice.

What should not be confused with strategy?

Grandiose statements, goals that fail to address a competitive challenge, operational effectiveness, benchmarking, and tactical tools.

What is competitive advantage?

Superior performance relative to competitors in the same industry or the industry average.

What are the two main ways to achieve competitive advantage through strategic positioning?

Differentiation: delivering superior value while controlling costs. Cost leadership: offering similar value at a lower cost.

How does a good strategy create value for customers and the firm?

It provides products or services customers value at an affordable price while keeping costs low enough to earn a profit; customers and the firm each capture part of the value created.

Why must strategic leaders consider stakeholders?

Stakeholders have an interest in the firm’s performance and continued survival, and good strategy creates value for shareholders and other stakeholders.

What is the purpose of the PESTEL framework, and what does it stand for?

It identifies external opportunities and threats by analyzing Political, Economic, Socio-cultural, Technological, Ecological, and Legal factors.

How do political factors differ from legal factors in PESTEL?

Political factors concern government processes and actions that influence firms; legal factors concern their formal outcomes, including laws, regulations, mandates, and court decisions.

What do economic factors in PESTEL include?

Macroeconomic conditions such as economic growth, employment, interest rates, price stability, and exchange rates.

What do socio-cultural factors capture?

Changes in society’s cultures, norms, and values.

What do technological factors capture?

The application of knowledge to create new products and processes.

What do ecological factors concern?

Environmental issues such as resource constraints, global warming, and climate change, which can create both opportunities and threats.

What is an industry?

A group of incumbent companies that face broadly the same set of suppliers and buyers.

How do industry effects differ from firm effects in explaining performance?

Industry effects arise from the industry’s economic structure; firm effects arise from the actions taken by a firm’s strategic leaders.

What is the purpose of Porter’s Five Forces framework?

To assess an industry’s profit potential and identify how a firm can position itself to gain and sustain competitive advantage.

What are Porter’s Five Forces?

Threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and rivalry among existing competitors.

How does the strength of the Five Forces affect industry profitability?

Stronger forces generally reduce industry profit potential because they increase competition or allow other parties to capture more economic value.

What does the threat of entry describe, and why does it reduce profit potential?

It describes the risk of new competitors entering an industry; potential entry pressures incumbents’ prices, costs, and market shares.

What are the main barriers to entry?

Supply-side economies of scale, demand-side scale benefits such as network effects, customer switching costs, capital requirements, incumbency advantages, unequal access to distribution, restrictive government policies, and credible retaliation.

How do powerful suppliers reduce industry profitability?

They capture more value by charging higher input prices or reducing the quality of inputs or services.

When is supplier bargaining power high?

When suppliers are relatively concentrated, offer differentiated inputs with few substitutes, impose high switching costs, depend little on the industry’s revenues, or can credibly integrate forward.

How do powerful buyers reduce industry profitability?

They demand lower prices or higher quality and service, reducing producers’ revenues or increasing their costs.

When is buyer bargaining power high?

When buyers are few or large relative to producers, products are standardized, switching costs are low, buyers have good information, or buyers can credibly integrate backward.

What do forward integration by suppliers and backward integration by buyers mean?

Forward integration means suppliers enter the industry they supply; backward integration means buyers begin producing what they previously purchased from the industry.

What is a substitute, and how does it affect industry profit potential?

A substitute is a product or service from outside the industry that meets a similar customer need; it limits the prices industry firms can charge.

When is the threat of substitutes high?

When substitutes offer an attractive price-performance trade-off and buyers face low switching costs.

What is rivalry among existing competitors, and how can it reduce profits?

It is the intensity with which incumbents compete for market share; price cuts reduce revenues, while spending to attract customers can increase costs.

What conditions tend to intensify rivalry?

Many competing firms, slow industry growth, limited differentiation, diverse competitors, high fixed costs or strategic commitments, excess capacity, perishable products, and high exit barriers.

Why do exit barriers intensify rivalry?

They keep firms competing in an industry even when returns are poor, sustaining excess capacity and pressure on prices.

How does industry concentration generally affect competitive forces?

Greater concentration tends to reduce rivalry and can strengthen firms’ bargaining position against suppliers and buyers, depending on relative concentration.

How is the concentration ratio CRn calculated and interpreted?

CRn is the sum of the market shares of the n largest firms. A higher value indicates greater concentration; CR4 uses the four largest firms.

How is the Herfindahl Index calculated, and how does it differ from CRn?

HI is the sum of the squared market shares of all firms. Unlike CRn, it considers the whole industry and gives greater weight to larger firms.

What concentration ranges are used in the slides for CR4 and HI?

Low concentration: CR4 below 0.40 and HI below 0.15. Moderate concentration: CR4 from 0.40 to 0.70 and HI from 0.15 to 0.25. High concentration: CR4 above 0.70 and HI above 0.25.

Why is high industry concentration alone insufficient to establish high profitability?

Profitability depends on all five competitive forces, so other pressures can outweigh the effects of concentration.

What are complements, and how do they affect profit potential?

Complements are products, services, or competencies that add value when used with the primary offering; they can increase demand and enhance profit potential.

What is industry consolidation, and how can it affect profitability?

Consolidation reduces the number of competitors, often through mergers and acquisitions, and can increase profitability by reducing rivalry.

What is industry convergence?

The process through which formerly unrelated industries begin satisfying the same customer need, often because of technological advances; it can create entirely new industries.

What are the four stages of the industry life cycle, and how does competition typically change?

Introduction: few competitors. Growth: many entrants. Maturity: shake-out and consolidation. Decline: many exits.

Why should external analysis be repeated over time?

Industry structures and external conditions change, so repeated analysis reveals evolving opportunities, threats, and competitive pressures.

What is a strategic group?

A set of companies within an industry that pursue similar strategies in seeking competitive advantage.

How is a strategic group map constructed, and what does it explain?

Firms are plotted on two key strategic dimensions and clustered by similarity; the map helps explain performance differences within the same industry.

What are the main implications of strategic group membership?

Rivalry is strongest within a group; external conditions and competitive forces affect groups differently, so some groups are more profitable than others.

What are mobility barriers?

Costly strategic commitments that are difficult to reverse and restrict firms’ movement between strategic groups.