Meeting 1.1: Economic foundations of strategy
-Neoclassical economics
-Perfect competition
-Accounting profit
-Economic profit
-Opportunity costs
-Rent
-Bain-type industrial organization
-Chicago school industrial organization
-Schumpeterian industrial organization
1. What is competitive advantage?
Providing a very clear and consistent definition of the competitive advantage concept is
elusive given that there is a lot of confusion about this concept. The strategic management
field is therefore using economics to sharpen their thinking on the competitive advantage
concept.
More precise, the strategic management field started to look at neoclassical economics and
the perfect competition model to define the competitive advantage concept. This perfect
competition model is a theoretical world in which there are no differences in performance
between firms given that all firms make zero economic profits, and all resources are being
used at their most optimal way (read: allocative efficiency).
The strategic management field applied this perfect competition model to create a theoretical
benchmark to the real world in which there actually are differences between firms and firms
making economic profits. Hence, if we now face any situation in which there are differences
in the performances between firms, resulting in above zero economic profits for a firm, the
source of that above zero economic profits can be defined as a competitive advantage. That is,
any deviation from the perfect competition model can be a source and explanation of the
competitive advantage concept.
Building on this definition, there, however, are multiple perspectives that have different ideas
on what exactly are the sources for these deviations from the perfect competition model and
above zero economic profits of a firm – innovation, superior resources, market power
positions.
In conclusion, we can say that although – the exact sources of a competitive advantages may
be seen different within different perspectives – the concept of a competitive advantage stands
for any deviation from the perfect competition model in which a firm is earning above zero
economic profits that causes differences in the performances between firms.
, Meeting 1.2: Porter and the industrial organization view I (Porter’s early work)
-Monopoly (market power)
-Oligopoly (market power)
-Monopolistic competition (market power)
-Perfect competition
-The S-C-P model
-Porter’s five-forces
-Porter’s generic strategies
-Strategic groups
-Entry barriers
-Mobility barriers
-Monopoly rent
-Monopolistic (differentiation) rent
2. What is the role of the concept of ‘strategic groups’ in the explanation of performance
differences among firms in Porter’s early work (Porter, 1979, 1981 – see also Ghemawat,
1999)?
Porter (1979) built his positioning school on the Bain-type industrial organization school
(market power) that was focused on advising governments about social welfare by increasing
competition and lowering market power (monopoly’s). The Bain-type IO school did this by
looking at above normal profitable industries in terms of the industry structure and the
conduct of the firms within the industry (S-C-P model).
Porter turned this Bain-type IO school on its head by translating its findings into managerial
frameworks for creating strategic management objectives in terms of decreasing and
limiting competition. More precise, Porter, based on the Bain-type IO findings, tried to
explain the average profitability and attractiveness of industries based on its structure
(industry effect) and firm conduct (firm effect).
Porter, however, did not only emphasized the overall industry structure (as Bain-type IO did),
but added another determinant to the S-C-P model by looking at the inter-industry
competition for determining the profitability and attractiveness of the industry. Specifically,
Porter stated that there might be strategic groups – firms with similar business models and
adopted strategies - within an industry that do compete more intensely with each other than
they do compete with firms outside their strategic group – firms with a different business
model and strategy.
This variation in the intensity of the competition according to Porter was due to mobility
barriers that offer dual protection to firms within strategic groups by creating entry
barriers for new entrants and mobility barriers for firms from other strategic groups.
In sum, Porter added another useful concept of competition within an industry to the S-C-P
model to provide better insights for determining the average profitability of industries as
looking at the strategic groups can provide an explanation for why some firms and its
particular adopted strategies can lead to performances differences and above normal profits.
-Neoclassical economics
-Perfect competition
-Accounting profit
-Economic profit
-Opportunity costs
-Rent
-Bain-type industrial organization
-Chicago school industrial organization
-Schumpeterian industrial organization
1. What is competitive advantage?
Providing a very clear and consistent definition of the competitive advantage concept is
elusive given that there is a lot of confusion about this concept. The strategic management
field is therefore using economics to sharpen their thinking on the competitive advantage
concept.
More precise, the strategic management field started to look at neoclassical economics and
the perfect competition model to define the competitive advantage concept. This perfect
competition model is a theoretical world in which there are no differences in performance
between firms given that all firms make zero economic profits, and all resources are being
used at their most optimal way (read: allocative efficiency).
The strategic management field applied this perfect competition model to create a theoretical
benchmark to the real world in which there actually are differences between firms and firms
making economic profits. Hence, if we now face any situation in which there are differences
in the performances between firms, resulting in above zero economic profits for a firm, the
source of that above zero economic profits can be defined as a competitive advantage. That is,
any deviation from the perfect competition model can be a source and explanation of the
competitive advantage concept.
Building on this definition, there, however, are multiple perspectives that have different ideas
on what exactly are the sources for these deviations from the perfect competition model and
above zero economic profits of a firm – innovation, superior resources, market power
positions.
In conclusion, we can say that although – the exact sources of a competitive advantages may
be seen different within different perspectives – the concept of a competitive advantage stands
for any deviation from the perfect competition model in which a firm is earning above zero
economic profits that causes differences in the performances between firms.
, Meeting 1.2: Porter and the industrial organization view I (Porter’s early work)
-Monopoly (market power)
-Oligopoly (market power)
-Monopolistic competition (market power)
-Perfect competition
-The S-C-P model
-Porter’s five-forces
-Porter’s generic strategies
-Strategic groups
-Entry barriers
-Mobility barriers
-Monopoly rent
-Monopolistic (differentiation) rent
2. What is the role of the concept of ‘strategic groups’ in the explanation of performance
differences among firms in Porter’s early work (Porter, 1979, 1981 – see also Ghemawat,
1999)?
Porter (1979) built his positioning school on the Bain-type industrial organization school
(market power) that was focused on advising governments about social welfare by increasing
competition and lowering market power (monopoly’s). The Bain-type IO school did this by
looking at above normal profitable industries in terms of the industry structure and the
conduct of the firms within the industry (S-C-P model).
Porter turned this Bain-type IO school on its head by translating its findings into managerial
frameworks for creating strategic management objectives in terms of decreasing and
limiting competition. More precise, Porter, based on the Bain-type IO findings, tried to
explain the average profitability and attractiveness of industries based on its structure
(industry effect) and firm conduct (firm effect).
Porter, however, did not only emphasized the overall industry structure (as Bain-type IO did),
but added another determinant to the S-C-P model by looking at the inter-industry
competition for determining the profitability and attractiveness of the industry. Specifically,
Porter stated that there might be strategic groups – firms with similar business models and
adopted strategies - within an industry that do compete more intensely with each other than
they do compete with firms outside their strategic group – firms with a different business
model and strategy.
This variation in the intensity of the competition according to Porter was due to mobility
barriers that offer dual protection to firms within strategic groups by creating entry
barriers for new entrants and mobility barriers for firms from other strategic groups.
In sum, Porter added another useful concept of competition within an industry to the S-C-P
model to provide better insights for determining the average profitability of industries as
looking at the strategic groups can provide an explanation for why some firms and its
particular adopted strategies can lead to performances differences and above normal profits.
