What is Strategy lecture 8 Flashcards
what are the Fundamental Questions of Strategy
How will we create value?
How will we capture value?
How will we deliver value?
Economic profits (excess returns) exist when:
– Revenues – Costs (including cost of capital) > 0 – Financial statements don’t reflect cost of capital
What affects cost of capital?
– Risk of future returns
– Risk increases required returns
give a summary
- Firm - decision rights over bundle of resources
- Financial capital used to build & buy resources
- There is a cost of financial capital – WACC
- Economic sustainability = ALL costs paid – Including cost of capital
What undermines economic sustainability?
Insights from Competitive Markets
how does Competition drives ROCE to WACC (or lower)
Profitable situations don’t last long
Necessary conditions for competitive markets:
- Easy to enter
* Easy to imitate or substitute
Competitive markets make economic profits difficult or simple?
difficult
Why are some firms more successful than others?
competitive advantage
what is competitive advantage the basis for
economic sustainability– this requires competitive advantage
explain competitive advantage
Must create and capture more economic value than rivals
Capital providers want ______ competitive advantage
sustained
Ability to cover costs of capital over time
Strategy identifies:
How a firm can develop & sustain competitive advantage
what are the Two Perspectives on Economic Profits
industrial organization and resource-based view
explain Industrial Organization
External factors drive profits
Industry structure: entry barriers, substitutes and compliments, bargaining power
STRUCTURE AFFECTS COMPETITION
explain the resource-based view
Internal factors drive profits
Resources & capabilities that create value are hard to imitate and difficult to acquire
SCARCITY DRIVES VALUE CAPTURE
explain Arenas: Where a firm will compete
The customers, geographies, products & value chain stages pursued
explain vehicles
The means by which a firm enters arenas of choice (build, buy or borrow)
explain how a firm will compete in its arenas
economic logic
what is economic logic
The creation of a
unique value-creating position
•Focused on increasing WTP,
reducing costs or both
• For a particular set of customers, relative to a set of rivals
what are the parts to Competitive Advantage
V= Max. willingness to pay P= Market Price C= Cost of Production (including capital cost) V-P= Consumer Surplus (Value proposition) P-C= Profit Margin V-C= Value Created (surplus + profit)
what are the 3 challenges associated with competitive advantage
Challenge 1: Maximize value created (V-C) relative to rivals
Challenge 2: Provide more consumer surplus than rivals Challenge 3: Capture more of value created
With a convincing customer value proposition does wha
- Incentive to buy = greater consumer surplus
* WTP – (price + user costs)
Strategy involves performing…
different activities or similar activities differently that fit the external competitive environment
explain how Strategy involves trade-offs in how & where to compete
- Costs vs. WTP; market segments
* Choosing what not to do is strategic
Decisions involving trade-offs are strategic since they require what
commitment
Commitments make imitation difficult
explain Internal fit:
Integrative pattern of internally-consistent decisions, resources & activities
to sustain the creation & capture of more value than rivals (competitive advantage)
Competitive advantage rests in system of what
complementary activities & resources
• Systemic nature makes imitation difficult
explain Sustainable advantage requires barriers to imitation
Trade-offs, complexity, causal ambiguity, preemption
In sum, a strategy is what
a theory about how to create and capture economic value
Reflected in an
integrated set of choices about where and how to compete
give a Sample strategy statement format
• In the ___________ business, our strategy is to…
[strategic objective]…
• …by offering [description of offering] to [target
customers] in [target geographic location]…
• …through [unique value proposition]…
• …using [unique activities/resources/capabilities]
