Week 1: Introduction and External analysis
Videoclip 1: Chapter 1 - Competitive advantage
Economic Value Created
“Economic value created” is the difference between perceived benefits gained
by a customer and the full economic costs
D=Demand, P=Price, MC=Marginal Cost, ATC=Average Total Costs
Left: Demand-curve is going down, higher price = less demand
MC and ATC cross: average total cost is the minimum; amount quantity
that will be solved
Total of economic value created (block + triangle):
Triangle: consumer surplus
Block (bottom): producer surplus
Economic Value created Example
Value = 40 euros (how much are people willing to pay)
Price = 30 euros
Cost = 15 euros
Consumer Surplus (value – price): 40 – 30 = 10 euros
Producer Surplus (price – cost): 30 – 15 = 15 euros
Economic value created (consumer + producer surplus or value – cost): 40
– 15 = 25 euros
Visualization of competitive advantage
Difference in a firm’s economic value created and the economic value created by
its rivals
1
,Green is bigger competitive advantage
2
,Measuring competitive advantage
Always measured relative to other firms
Accounting Measures (Usually easy to calculate)
Profit ratios (revenue/assets or sometimes employees)
Liquidity ratios (how flexible in short-term money, paying short-term
debts)
Leverage ratios (how easily get more money to finance new investments)
Activity ratios (how quickly inventory is used; smaller things; processes)
Competitive advantage: Higher return on assets (ROA) than industry average
return on assets
Economic measures % (Typically not included in accounting measures)
The cost of debt
The cost of equity
Weighted average cost of capital (WACC) Percentage that investors
want back from the busines. If your returnal asset is higher than what
investors want competitive advantage
Exam example:
WACC < ROA < Industry Avg. ROA
- WACC<ROA: in economic measures firm is performing above
expectations
- ROA<Industry: in accounting measures not positive, competitors on
average earn more
Competitive advantage Economic returns
Advantage Above normal
Exceeding expectations
Parity Normal
Meeting expectations
Disadvantage Below normal
Failing expectations
Organization with competitive advantage other organizations are pulled to
these activities, also coming in, more competition, performance goes down on
the long run an organization can only expect parity
Example: Netflix
Intended versus emergent strategies
3
, How did it happen that a strategy emergent over time?
Videoclip 2: External analysis – Strategy
Why external analysis?
Make more informed strategic choices
Discover opportunities and threats (should be trends)
Analyze potential for profits
Understand the nature of competition
Levels of analysis
General environment (biggest outside border)
Industry (part of task environment; are also the people that live close to
organization e.g., Efteling wanted more land, people living around don’t
want that)
Strategic group (similar strategic dimensions as your organization; e.g.,
Albert Heijn and Lidl)
Individual firm (internal/competitor)
Mobility barriers: Barriers between strategic groups that make it harder to join
another strategic group.
Videoclip 3: General external environmeneral environment
General External environment
Focus on trends/changes. Broader than the industry itself!
Example:
1. Boeing: airplanes went down
really bad for the industry,
but it should not be something
that is in the general
environment
2. Soft drink industry: political
organizations want to do
something about sugar in food
general environment
Concepts of the general
environment (DESTEP)
Demographics: Only numbers! Age, sex, marital status, income, ethnicity
and other personal attributes that might affect buying patterns (happens a
lot that something that’s in demographics is also in another category, e.g.,
number of divorces also in economic, cultural)
Culture: values, beliefs and norms that guide behavior in society
Economic climate: the overall health of the economic systems within
which a firm operates (e.g., recession, threat for a lot of organizations, but
opportunity for Aldi/Lidl)
Political and legal conditions: the law and legal system’s impact on
business, together with the general nature of the relationship between
government and business
4
Videoclip 1: Chapter 1 - Competitive advantage
Economic Value Created
“Economic value created” is the difference between perceived benefits gained
by a customer and the full economic costs
D=Demand, P=Price, MC=Marginal Cost, ATC=Average Total Costs
Left: Demand-curve is going down, higher price = less demand
MC and ATC cross: average total cost is the minimum; amount quantity
that will be solved
Total of economic value created (block + triangle):
Triangle: consumer surplus
Block (bottom): producer surplus
Economic Value created Example
Value = 40 euros (how much are people willing to pay)
Price = 30 euros
Cost = 15 euros
Consumer Surplus (value – price): 40 – 30 = 10 euros
Producer Surplus (price – cost): 30 – 15 = 15 euros
Economic value created (consumer + producer surplus or value – cost): 40
– 15 = 25 euros
Visualization of competitive advantage
Difference in a firm’s economic value created and the economic value created by
its rivals
1
,Green is bigger competitive advantage
2
,Measuring competitive advantage
Always measured relative to other firms
Accounting Measures (Usually easy to calculate)
Profit ratios (revenue/assets or sometimes employees)
Liquidity ratios (how flexible in short-term money, paying short-term
debts)
Leverage ratios (how easily get more money to finance new investments)
Activity ratios (how quickly inventory is used; smaller things; processes)
Competitive advantage: Higher return on assets (ROA) than industry average
return on assets
Economic measures % (Typically not included in accounting measures)
The cost of debt
The cost of equity
Weighted average cost of capital (WACC) Percentage that investors
want back from the busines. If your returnal asset is higher than what
investors want competitive advantage
Exam example:
WACC < ROA < Industry Avg. ROA
- WACC<ROA: in economic measures firm is performing above
expectations
- ROA<Industry: in accounting measures not positive, competitors on
average earn more
Competitive advantage Economic returns
Advantage Above normal
Exceeding expectations
Parity Normal
Meeting expectations
Disadvantage Below normal
Failing expectations
Organization with competitive advantage other organizations are pulled to
these activities, also coming in, more competition, performance goes down on
the long run an organization can only expect parity
Example: Netflix
Intended versus emergent strategies
3
, How did it happen that a strategy emergent over time?
Videoclip 2: External analysis – Strategy
Why external analysis?
Make more informed strategic choices
Discover opportunities and threats (should be trends)
Analyze potential for profits
Understand the nature of competition
Levels of analysis
General environment (biggest outside border)
Industry (part of task environment; are also the people that live close to
organization e.g., Efteling wanted more land, people living around don’t
want that)
Strategic group (similar strategic dimensions as your organization; e.g.,
Albert Heijn and Lidl)
Individual firm (internal/competitor)
Mobility barriers: Barriers between strategic groups that make it harder to join
another strategic group.
Videoclip 3: General external environmeneral environment
General External environment
Focus on trends/changes. Broader than the industry itself!
Example:
1. Boeing: airplanes went down
really bad for the industry,
but it should not be something
that is in the general
environment
2. Soft drink industry: political
organizations want to do
something about sugar in food
general environment
Concepts of the general
environment (DESTEP)
Demographics: Only numbers! Age, sex, marital status, income, ethnicity
and other personal attributes that might affect buying patterns (happens a
lot that something that’s in demographics is also in another category, e.g.,
number of divorces also in economic, cultural)
Culture: values, beliefs and norms that guide behavior in society
Economic climate: the overall health of the economic systems within
which a firm operates (e.g., recession, threat for a lot of organizations, but
opportunity for Aldi/Lidl)
Political and legal conditions: the law and legal system’s impact on
business, together with the general nature of the relationship between
government and business
4
