Lecture 1
Two underlying models
Psychology involved?
● I/O model
○ Analyze the external environment => More interested in the external
environment of the organization
○ Find an attractive industry
■ Find something valuable => gatekeep it from the competitors
○ What happens outside the organizations
■ What matters is the fact that they try to control it
○ Formulate strategy -> develop required assets -> implement strategy
○ Assumptions: resources are mobile; rational decision-making, firm
strategies are similar in nature => Porter's five forces
The information age started => Companies do not go looking for markets anymore
● Resource-based view
○ Focus on the internal aspects
○ Find an attractive industry that can be exploited by firm's resources
○ Formulate & implement strategy -> achieve above-average returns
○ Assumptions: heterogenous firm resources, immobile resources, rational
decision-making => VRIN model
○ Biggest difference: not all firm's resources are the same
How can we identify opportunities and threats?
=> Analyze macro and industry environment
Macro environment
● General environment analysis: identifying forces in the macro environment that
are (mostly) beyond a firm's control
○ Political/legal factors (stability, taxation,..)
○ Economic factors (growth rates, interests rates,…)
○ Socio-cultural factors (workforce diversity, work/life,…)
○ Technological factors (speed of change,…)
○ Demographic factors (population, age, ethic,…)
○ Global factors (political events,…)
○ Environmental factors (pollution, resource depletion,…)
● Scenario planning: think of scenarios and make decisions accordingly
○ Autonomous driving (example)
Industry environment
● An industry is a group of firms that are active within the same/similar product on the
same market. But when are products "similar" (what are the industry
boundaries?)
● Porter's Five Forces Model: Looking at these 5 factors to see if the industry is
attractive or not (The 5 forces that shape industry competition)
, ○ 1 - Degree of rivalry:
■ Rivalry: how intense is the competition
■ Rivalry is high if:
•Large number of competitors
•Low switching costs
•Slow rate of industry growth
•High exit barriers
● 2 - Supplier power
○ The suppliers are very powerful. You have to work and confront with them all
the time
○ Supplier power is high if:
•Concentration of suppliers is higher than the industry to which it sells.
•Importance of input is high
•High switching costs (from one supplier to another)
•Forward integration possibility is high (e.g., NEC starts selling electric cars.)
● 3 - Buyer power
○ Group of consumers that the industry sells to
○ Buyer power is high if:
•A few buyers buy a large portion
•Low product differentiation
•Low switching costs
•Backward integration
● 4 - Risk of new entrants
○ When new companies of the industry come in
○ Threat new entrants is low if:
Time and cost of entry is high
There is economies of scale effect
Technology protection exists
High switching costs
● 5 - Risk of substitutes
○ Trickiest part
○ Not competition, but rather something that fulfills the same need but from
outside the industry
○ Threat of substitutes is high if:
Better price/quality ratio
Low switching costs
● Conclusion after industry analysis: Five Forces all LOW => INDUSTRY IS
ATTRACTIVE (vice versa)
CONCLUDE
● Definition of strategy: strategy is creating fit among company's activities to achieve
competitiveness by formulating and implementing a value creating strategy
● Inputs to strategy could come from external or internal factors
● To analyze macro environment => General environment analysis
● To analyze an industry => Porter's Five Forces
, Lecture 2
Examining internal drivers of strategy
Why do firms who operate in the same industry and same market differ in performance?
=> Components of Internal Analysis
●
● Outsourcing activities can be risky
Key definitions
● Value:
○ Value is measured by a product’s or a service’s performance characteristics
and by its attributes for which customers are willing to pay.
○ In the context of resources and capabilities, they are valuable when they help
firms to exploit opportunities or neutralize threats in the external
environment
● Resources:
○ Inputs to firm’s product and services.
● Capabilities:
○ Tasks; skill at using resources
-> “What can we do (with those resources)?”
● Core competencies:
○ Resources and capabilities that serve as a source of competitive advantage for
a firm over its rivals
-> A firm’s “crown jewels”
● Competitive advantage:
○ A firm has a competitive advantage when it implements a strategy
competitors are unable to duplicate or find too costly to try to imitate it.
Resources vs Capabilities
● When resources have been purposefully integrated to achieve a specific task or set of
tasks => they become capabilities
● Example:
○ Resources: software developers, marketing employees, IT infrastructure,
money, etc
■ Tangible resources
, ■ Intangible resources
○ Capabilities: being able to hire successful developers, successful development
of sophisticated graphics.
● Not all resources/capabilities/competencies are a source of competitive advantage
=> which one? => VRIN analysis
I/O model looks at factors outside the firm, while RBV model looks at factors inside the firm
to achieve competitive advantage
VRIN model
● Analyze one resource/capability => throughout the analysis, focus on that ONE
resource or capability you selected
● A strategy tool for analyzing whether a resource or capability has the capacity to help
a firm to achieve superior performance
○ Valuable: Does it allow the firm to exploit opportunities or neutralize threats
in the external environment?
○ Rare: Is the resource or capability possessed by only a few, if any,
competitors?
○ Inimitable (costly/hard to imitate): Is the resource or capability costly to
imitate?
1. Unique historical conditions
2. Causally ambiguous
3. Social complexity
● Nonsubstitutable: Are there no strategic equivalent resources or capabilities?
● Resources or capabilities are valuable if they enable a firm to:
1. Take advantage of opportunities (market demand),
2. Neutralize threats in its environment.
● Resources or capabilities are rare if they are possessed by only a few, if any,
competitors.
● Inimitable and non-substitutable (VRIN) = Competitive advantage vs. sustainable
competitive advantage… (lecture)
○ Inimitability (= same features)
■ Resources
○ Non-substitutability (=same benefits)
■ Capability
Value chain analysis
● Is about internal analysis
● To explore sources of competitive advantage (in terms of activities)
● Porter's value chain:
○ Chain of activities that firms engage in from conception of products, via
production and marketing, to eventual sales to customers
○ It takes a process view of organizations as a system of activities
Two underlying models
Psychology involved?
● I/O model
○ Analyze the external environment => More interested in the external
environment of the organization
○ Find an attractive industry
■ Find something valuable => gatekeep it from the competitors
○ What happens outside the organizations
■ What matters is the fact that they try to control it
○ Formulate strategy -> develop required assets -> implement strategy
○ Assumptions: resources are mobile; rational decision-making, firm
strategies are similar in nature => Porter's five forces
The information age started => Companies do not go looking for markets anymore
● Resource-based view
○ Focus on the internal aspects
○ Find an attractive industry that can be exploited by firm's resources
○ Formulate & implement strategy -> achieve above-average returns
○ Assumptions: heterogenous firm resources, immobile resources, rational
decision-making => VRIN model
○ Biggest difference: not all firm's resources are the same
How can we identify opportunities and threats?
=> Analyze macro and industry environment
Macro environment
● General environment analysis: identifying forces in the macro environment that
are (mostly) beyond a firm's control
○ Political/legal factors (stability, taxation,..)
○ Economic factors (growth rates, interests rates,…)
○ Socio-cultural factors (workforce diversity, work/life,…)
○ Technological factors (speed of change,…)
○ Demographic factors (population, age, ethic,…)
○ Global factors (political events,…)
○ Environmental factors (pollution, resource depletion,…)
● Scenario planning: think of scenarios and make decisions accordingly
○ Autonomous driving (example)
Industry environment
● An industry is a group of firms that are active within the same/similar product on the
same market. But when are products "similar" (what are the industry
boundaries?)
● Porter's Five Forces Model: Looking at these 5 factors to see if the industry is
attractive or not (The 5 forces that shape industry competition)
, ○ 1 - Degree of rivalry:
■ Rivalry: how intense is the competition
■ Rivalry is high if:
•Large number of competitors
•Low switching costs
•Slow rate of industry growth
•High exit barriers
● 2 - Supplier power
○ The suppliers are very powerful. You have to work and confront with them all
the time
○ Supplier power is high if:
•Concentration of suppliers is higher than the industry to which it sells.
•Importance of input is high
•High switching costs (from one supplier to another)
•Forward integration possibility is high (e.g., NEC starts selling electric cars.)
● 3 - Buyer power
○ Group of consumers that the industry sells to
○ Buyer power is high if:
•A few buyers buy a large portion
•Low product differentiation
•Low switching costs
•Backward integration
● 4 - Risk of new entrants
○ When new companies of the industry come in
○ Threat new entrants is low if:
Time and cost of entry is high
There is economies of scale effect
Technology protection exists
High switching costs
● 5 - Risk of substitutes
○ Trickiest part
○ Not competition, but rather something that fulfills the same need but from
outside the industry
○ Threat of substitutes is high if:
Better price/quality ratio
Low switching costs
● Conclusion after industry analysis: Five Forces all LOW => INDUSTRY IS
ATTRACTIVE (vice versa)
CONCLUDE
● Definition of strategy: strategy is creating fit among company's activities to achieve
competitiveness by formulating and implementing a value creating strategy
● Inputs to strategy could come from external or internal factors
● To analyze macro environment => General environment analysis
● To analyze an industry => Porter's Five Forces
, Lecture 2
Examining internal drivers of strategy
Why do firms who operate in the same industry and same market differ in performance?
=> Components of Internal Analysis
●
● Outsourcing activities can be risky
Key definitions
● Value:
○ Value is measured by a product’s or a service’s performance characteristics
and by its attributes for which customers are willing to pay.
○ In the context of resources and capabilities, they are valuable when they help
firms to exploit opportunities or neutralize threats in the external
environment
● Resources:
○ Inputs to firm’s product and services.
● Capabilities:
○ Tasks; skill at using resources
-> “What can we do (with those resources)?”
● Core competencies:
○ Resources and capabilities that serve as a source of competitive advantage for
a firm over its rivals
-> A firm’s “crown jewels”
● Competitive advantage:
○ A firm has a competitive advantage when it implements a strategy
competitors are unable to duplicate or find too costly to try to imitate it.
Resources vs Capabilities
● When resources have been purposefully integrated to achieve a specific task or set of
tasks => they become capabilities
● Example:
○ Resources: software developers, marketing employees, IT infrastructure,
money, etc
■ Tangible resources
, ■ Intangible resources
○ Capabilities: being able to hire successful developers, successful development
of sophisticated graphics.
● Not all resources/capabilities/competencies are a source of competitive advantage
=> which one? => VRIN analysis
I/O model looks at factors outside the firm, while RBV model looks at factors inside the firm
to achieve competitive advantage
VRIN model
● Analyze one resource/capability => throughout the analysis, focus on that ONE
resource or capability you selected
● A strategy tool for analyzing whether a resource or capability has the capacity to help
a firm to achieve superior performance
○ Valuable: Does it allow the firm to exploit opportunities or neutralize threats
in the external environment?
○ Rare: Is the resource or capability possessed by only a few, if any,
competitors?
○ Inimitable (costly/hard to imitate): Is the resource or capability costly to
imitate?
1. Unique historical conditions
2. Causally ambiguous
3. Social complexity
● Nonsubstitutable: Are there no strategic equivalent resources or capabilities?
● Resources or capabilities are valuable if they enable a firm to:
1. Take advantage of opportunities (market demand),
2. Neutralize threats in its environment.
● Resources or capabilities are rare if they are possessed by only a few, if any,
competitors.
● Inimitable and non-substitutable (VRIN) = Competitive advantage vs. sustainable
competitive advantage… (lecture)
○ Inimitability (= same features)
■ Resources
○ Non-substitutability (=same benefits)
■ Capability
Value chain analysis
● Is about internal analysis
● To explore sources of competitive advantage (in terms of activities)
● Porter's value chain:
○ Chain of activities that firms engage in from conception of products, via
production and marketing, to eventual sales to customers
○ It takes a process view of organizations as a system of activities
