Strategic management
Part 1: the tools of strategic analysis
Chapter 1: What Is Strategy and the Strategic Management Process?
Strategy = how to gain competitive advantage
→ but how competition emerges and develops is unsure → so strategy is a firm’s
best bet about how competition is going to evolve and how that evolution can be
exploited for competitive advantage.
Strategic management process = a sequential set of analyses and choices that
can increase the likelihood that a firm will choose a good strategy
Mission = why do we exist = long-time purpose = what it wants to be in the long-run
and what it wants to avoid in the meantime = broad statements of its purpose and
values
Objectives = specific measurable targets a firm can use to evaluate the extent to
which it is realizing its mission
External analysis = identifying critical threats and opportunities in the competitive
environment, examines evolvement of competition and its implications
Internal analysis = identifies its organizational strengths and weaknesses, helps to
understand which resources and capabilities are likely to be sources of competitive
advantage and which are less likely. Also used to identify areas that require
improvement or change.
Strategic choices:
- Business-level strategies: actions to gain competitive advantages in a
single market or industry (cost leadership, product differentiation, flexibility
and real options, collusion)
- Corporate-level strategies: to gain competitive advantages by operating in
multiple markets or industries simultaneously (vertical integration,
diversification, strategic alliances + merger and acquisition etc.)
➔ Choose a strategy that: (1) supports the firm’s mission; (2) is consistent with a
firm’s objectives; (3) exploits opportunities in a firm’s environment with a firm’s
strengths; and (4) neutralizes threats in a firm’s environment while avoiding a
firm’s weaknesses
,Implement strategy: adopt organizational policies and practices that are consistent
with its strategy → (1) a firm’s formal organizational structure; (2) its formal and
informal management control systems; and (3) its employee compensation policies
Competitive advantage = create more economic value than rival firms → economic
value = difference between what customer is willing to pay and cost of producing
→ can be assessed by accounting performance or economic performance
→ competitive parity = same economic value as rivals → due to imitation
Revised strategic management process framework:
Assessing competitive advantage:
- Accounting measures
o Profit and loss + balance sheet
o Ratios (ROA, ROE, gross profit margin, liquidity and solvability ratios)
→ should be benchmarked against other firms or against standards
(financial numbers of last year)
o = easy to compute → information is publicly available
o Limitation: doesn’t take into account Cost of Capital (return promised to
suppliers of invested capital)
- Economic measures
o Compares a firm’s level of return to its cost of capital
o Cost of debt and cost of equity, also WACC
, Chapter 2: evaluating a firm’s external environment
General environment = broad trends in context within which a firm operates that
have impact on a firm’s strategic choices
Understanding this general environment can help a firm identify some of the threats
and opportunities it faces
Society is better off with very competitive industries:
- Firms must strive for low cost, keep quality high and innovate to survive
➔ Results in S-C-P model → this model analyzes threats and opportunities in
the competitive environment
Part 1: the tools of strategic analysis
Chapter 1: What Is Strategy and the Strategic Management Process?
Strategy = how to gain competitive advantage
→ but how competition emerges and develops is unsure → so strategy is a firm’s
best bet about how competition is going to evolve and how that evolution can be
exploited for competitive advantage.
Strategic management process = a sequential set of analyses and choices that
can increase the likelihood that a firm will choose a good strategy
Mission = why do we exist = long-time purpose = what it wants to be in the long-run
and what it wants to avoid in the meantime = broad statements of its purpose and
values
Objectives = specific measurable targets a firm can use to evaluate the extent to
which it is realizing its mission
External analysis = identifying critical threats and opportunities in the competitive
environment, examines evolvement of competition and its implications
Internal analysis = identifies its organizational strengths and weaknesses, helps to
understand which resources and capabilities are likely to be sources of competitive
advantage and which are less likely. Also used to identify areas that require
improvement or change.
Strategic choices:
- Business-level strategies: actions to gain competitive advantages in a
single market or industry (cost leadership, product differentiation, flexibility
and real options, collusion)
- Corporate-level strategies: to gain competitive advantages by operating in
multiple markets or industries simultaneously (vertical integration,
diversification, strategic alliances + merger and acquisition etc.)
➔ Choose a strategy that: (1) supports the firm’s mission; (2) is consistent with a
firm’s objectives; (3) exploits opportunities in a firm’s environment with a firm’s
strengths; and (4) neutralizes threats in a firm’s environment while avoiding a
firm’s weaknesses
,Implement strategy: adopt organizational policies and practices that are consistent
with its strategy → (1) a firm’s formal organizational structure; (2) its formal and
informal management control systems; and (3) its employee compensation policies
Competitive advantage = create more economic value than rival firms → economic
value = difference between what customer is willing to pay and cost of producing
→ can be assessed by accounting performance or economic performance
→ competitive parity = same economic value as rivals → due to imitation
Revised strategic management process framework:
Assessing competitive advantage:
- Accounting measures
o Profit and loss + balance sheet
o Ratios (ROA, ROE, gross profit margin, liquidity and solvability ratios)
→ should be benchmarked against other firms or against standards
(financial numbers of last year)
o = easy to compute → information is publicly available
o Limitation: doesn’t take into account Cost of Capital (return promised to
suppliers of invested capital)
- Economic measures
o Compares a firm’s level of return to its cost of capital
o Cost of debt and cost of equity, also WACC
, Chapter 2: evaluating a firm’s external environment
General environment = broad trends in context within which a firm operates that
have impact on a firm’s strategic choices
Understanding this general environment can help a firm identify some of the threats
and opportunities it faces
Society is better off with very competitive industries:
- Firms must strive for low cost, keep quality high and innovate to survive
➔ Results in S-C-P model → this model analyzes threats and opportunities in
the competitive environment
