Summary Strategic Management
(on the basis of lecture slides*)
Strategic Management and Competitive Advantage (Sixth Edition)
Jay B. Barney, William S. Hesterly
* Grey text was not discussed in lectures.
Table of content
Lecture 1 .................................................................................................................................................. 2
Chapter 1: What is strategy and the strategic management process? ............................................... 2
Chapter 2: Evaluating a firm’s external environment ......................................................................... 4
Lecture 2 .................................................................................................................................................. 8
Chapter 3: Evaluating a firm’s internal capabilities............................................................................. 8
Lecture 3 ................................................................................................................................................ 10
Chapter 4: Cost leadership ................................................................................................................ 11
Chapter 5: Product differentiation .................................................................................................... 13
Industry lifecycle ............................................................................................................................... 16
Lecture 4 ................................................................................................................................................ 17
Chapter 6: Flexibility and real options............................................................................................... 17
Chapter 7: Collusion .......................................................................................................................... 19
Lecture 5 ................................................................................................................................................ 21
Chapter 8: Vertical integration .......................................................................................................... 22
Lecture 6 and 7 ...................................................................................................................................... 23
Chapter 9: Corporate diversification ................................................................................................. 23
Measurement of corporate level strategy (Palich, Cardinal, and Miller).......................................... 26
Chapter 10: Organizing to implement corporate diversification ...................................................... 29
Lecture 8 (only in class): Strategy implementation ............................................................................... 31
Lecture 9 ................................................................................................................................................ 36
Chapter 11: Strategic alliances .......................................................................................................... 36
Lecture 10 .............................................................................................................................................. 39
Chapter 12: Mergers and acquisitions .............................................................................................. 39
Lecture 11 (only in class): International strategies ............................................................................... 44
1
,Lecture 1
Chapter 1: What is strategy and the strategic management process?
Strategy is about discovering and exploiting differences. Strategy is defined as its theory about how to
gain competitive advantages. The strategic management process is a sequential set of analyses and
choices that can increase the likelihood that a firm will choose a good strategy; that is, a strategy that
generates competitive advantages.
A firm has a competitive advantage when it can create more economic value than rival firms.
Economic value is simply the difference between what customers are willing to pay for a firm’s
products or services and the total cost of producing these products or services. A firm’s competitive
advantage can be temporary or sustained. A temporary competitive advantage is a competitive
advantage that lasts for a very short time. A sustained competitive advantage, in contrast, can last
much longer. Firms that create the same economic value as their rivals experience competitive parity.
Firms that generate less economic value than their rivals have a competitive disadvantage.
Economic value created is the difference between perceived benefits gained by a customer and the
full economic costs. See pictures below. Amount of quantity of a product and price of a product on
aces. The more expensive something becomes, the less people want to buy it (demand), as you can
see on the curve D. The block and triangle are the total economic value created. The triangle is the
consumer surplus and the block is the producer surplus. First picture is imperfect competition. In
perfect competition (left) there is no consumer and producer surplus created.
Competitive advantage is the difference in a firm’s economic value created and the economic value
created by its rivals.
2
,A firm’s accounting performance is a measure of its competitive advantage calculated by using
information form a firm’s published profit and loss and balance sheet statements. One way to use a
firm’s accounting statements to measure its competitive advantage is with accounting ratios.
Accounting ratios are simply numbers taken form a firm’s financial statements that are manipulated
in ways that describe various aspects of a firm’s performance.
These measures of firm accounting performance can be grouped into four categories:
1. Profitability ratios, ratio of the amount of revenues an organization has.
or ratios with some measure of profit in the numerator and some measure of firm size or assets
in the denominator;
2. Liquidity ratios, how easy an organization can pay back short term dept, how flexible they are
in their short-term money.
or ratios that focus on the ability of a firm to meet its short-term financial obligations;
3. Leverage ratios, how easily you can get more money to finance new things.
or ratios that focus on the level of a firm’s financial flexibility, including its ability to obtain
more debt;
4. Activity ratios, how quickly your inventory is used and … (some smaller things), about the
processes that are actually happening
or ratios that focus on the level of activity in a firm’s business.
These ratios, by themselves, say very little about a firm. To determine how a firm is performing, its
accounting ratios must be compared with the average of accounting ratios of other firms in the same
industry. A firm earns above-average accounting performance when its performance is greater than
the industry average. A firm earns average accounting performance when its performance is equal to
the industry average. A firm earns below-average accounting performance when its performances is
less than the industry average.
Economic measures of competitive advantage compare a firm’s level of return to its cost of capital
instead of to the average level of return in the industry. There are two broad categories of sources of
capital:
1. Debt: capital from banks and bondholders;
a. The cost of debt is equal to the interest that a firm must pay its debt holders to induce
those debt holders to lend money to a firm.
2. Equity: capital from individuals and institutions that purchase a firm’s stock.
a. The cost of equity is equal to the rate of return a firm must promise its equity holders to
induce these individuals and institutions to invest in a firm.
3
, A firm’s weighted average cost of capital (WACC) is simply the percentage of a firm’s total capital
which is debt, dimes the cost of debt, plus the percentage of a firm’s total capital that is equity, times
the cost of equity.
𝑊𝐴𝐶𝐶 = (𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡 ÷ 𝑓𝑖𝑟𝑚′ 𝑠 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒) × 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡
+ (𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 ÷ 𝑓𝑖𝑟𝑚′ 𝑠 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒) × 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
Above average
Above normal
Competitive advantage accounting
economic performance
performance
Average accounting Normal economic
Competitive parity
performance performance
Below average
Competitive Below normal
accounting
disadvantage economic performance
performance
Intended strategies versus emergent strategies:
Chapter 2: Evaluating a firm’s external environment
Levels of analysis (from high to low):
- General environment
- Industry (part of task environment, task environment is where the industry does their
business, also the people that live close to your organisation)
- Strategic group
- Individual firm (internal/competitor)
Any analysis of the threats and opportunities facing a firm must begin with an understanding of the
general environment within which a firm operates. This general environment consists of broad trends
in the context within which a firm operates that can have an impact on a firm’s strategic choices. The
general environment is broader than the industry. The general environment consists of six interrelated
elements, which focus all on trends (things that are changing):
4
(on the basis of lecture slides*)
Strategic Management and Competitive Advantage (Sixth Edition)
Jay B. Barney, William S. Hesterly
* Grey text was not discussed in lectures.
Table of content
Lecture 1 .................................................................................................................................................. 2
Chapter 1: What is strategy and the strategic management process? ............................................... 2
Chapter 2: Evaluating a firm’s external environment ......................................................................... 4
Lecture 2 .................................................................................................................................................. 8
Chapter 3: Evaluating a firm’s internal capabilities............................................................................. 8
Lecture 3 ................................................................................................................................................ 10
Chapter 4: Cost leadership ................................................................................................................ 11
Chapter 5: Product differentiation .................................................................................................... 13
Industry lifecycle ............................................................................................................................... 16
Lecture 4 ................................................................................................................................................ 17
Chapter 6: Flexibility and real options............................................................................................... 17
Chapter 7: Collusion .......................................................................................................................... 19
Lecture 5 ................................................................................................................................................ 21
Chapter 8: Vertical integration .......................................................................................................... 22
Lecture 6 and 7 ...................................................................................................................................... 23
Chapter 9: Corporate diversification ................................................................................................. 23
Measurement of corporate level strategy (Palich, Cardinal, and Miller).......................................... 26
Chapter 10: Organizing to implement corporate diversification ...................................................... 29
Lecture 8 (only in class): Strategy implementation ............................................................................... 31
Lecture 9 ................................................................................................................................................ 36
Chapter 11: Strategic alliances .......................................................................................................... 36
Lecture 10 .............................................................................................................................................. 39
Chapter 12: Mergers and acquisitions .............................................................................................. 39
Lecture 11 (only in class): International strategies ............................................................................... 44
1
,Lecture 1
Chapter 1: What is strategy and the strategic management process?
Strategy is about discovering and exploiting differences. Strategy is defined as its theory about how to
gain competitive advantages. The strategic management process is a sequential set of analyses and
choices that can increase the likelihood that a firm will choose a good strategy; that is, a strategy that
generates competitive advantages.
A firm has a competitive advantage when it can create more economic value than rival firms.
Economic value is simply the difference between what customers are willing to pay for a firm’s
products or services and the total cost of producing these products or services. A firm’s competitive
advantage can be temporary or sustained. A temporary competitive advantage is a competitive
advantage that lasts for a very short time. A sustained competitive advantage, in contrast, can last
much longer. Firms that create the same economic value as their rivals experience competitive parity.
Firms that generate less economic value than their rivals have a competitive disadvantage.
Economic value created is the difference between perceived benefits gained by a customer and the
full economic costs. See pictures below. Amount of quantity of a product and price of a product on
aces. The more expensive something becomes, the less people want to buy it (demand), as you can
see on the curve D. The block and triangle are the total economic value created. The triangle is the
consumer surplus and the block is the producer surplus. First picture is imperfect competition. In
perfect competition (left) there is no consumer and producer surplus created.
Competitive advantage is the difference in a firm’s economic value created and the economic value
created by its rivals.
2
,A firm’s accounting performance is a measure of its competitive advantage calculated by using
information form a firm’s published profit and loss and balance sheet statements. One way to use a
firm’s accounting statements to measure its competitive advantage is with accounting ratios.
Accounting ratios are simply numbers taken form a firm’s financial statements that are manipulated
in ways that describe various aspects of a firm’s performance.
These measures of firm accounting performance can be grouped into four categories:
1. Profitability ratios, ratio of the amount of revenues an organization has.
or ratios with some measure of profit in the numerator and some measure of firm size or assets
in the denominator;
2. Liquidity ratios, how easy an organization can pay back short term dept, how flexible they are
in their short-term money.
or ratios that focus on the ability of a firm to meet its short-term financial obligations;
3. Leverage ratios, how easily you can get more money to finance new things.
or ratios that focus on the level of a firm’s financial flexibility, including its ability to obtain
more debt;
4. Activity ratios, how quickly your inventory is used and … (some smaller things), about the
processes that are actually happening
or ratios that focus on the level of activity in a firm’s business.
These ratios, by themselves, say very little about a firm. To determine how a firm is performing, its
accounting ratios must be compared with the average of accounting ratios of other firms in the same
industry. A firm earns above-average accounting performance when its performance is greater than
the industry average. A firm earns average accounting performance when its performance is equal to
the industry average. A firm earns below-average accounting performance when its performances is
less than the industry average.
Economic measures of competitive advantage compare a firm’s level of return to its cost of capital
instead of to the average level of return in the industry. There are two broad categories of sources of
capital:
1. Debt: capital from banks and bondholders;
a. The cost of debt is equal to the interest that a firm must pay its debt holders to induce
those debt holders to lend money to a firm.
2. Equity: capital from individuals and institutions that purchase a firm’s stock.
a. The cost of equity is equal to the rate of return a firm must promise its equity holders to
induce these individuals and institutions to invest in a firm.
3
, A firm’s weighted average cost of capital (WACC) is simply the percentage of a firm’s total capital
which is debt, dimes the cost of debt, plus the percentage of a firm’s total capital that is equity, times
the cost of equity.
𝑊𝐴𝐶𝐶 = (𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡 ÷ 𝑓𝑖𝑟𝑚′ 𝑠 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒) × 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡
+ (𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 ÷ 𝑓𝑖𝑟𝑚′ 𝑠 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒) × 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
Above average
Above normal
Competitive advantage accounting
economic performance
performance
Average accounting Normal economic
Competitive parity
performance performance
Below average
Competitive Below normal
accounting
disadvantage economic performance
performance
Intended strategies versus emergent strategies:
Chapter 2: Evaluating a firm’s external environment
Levels of analysis (from high to low):
- General environment
- Industry (part of task environment, task environment is where the industry does their
business, also the people that live close to your organisation)
- Strategic group
- Individual firm (internal/competitor)
Any analysis of the threats and opportunities facing a firm must begin with an understanding of the
general environment within which a firm operates. This general environment consists of broad trends
in the context within which a firm operates that can have an impact on a firm’s strategic choices. The
general environment is broader than the industry. The general environment consists of six interrelated
elements, which focus all on trends (things that are changing):
4
