ANA OCÁRIZ SÁNCHEZ

STRATEGIES FOR COMPETING IN INDUSTRIES AND MARKETS

Table of Contents
COURSE STRUCTURE..............................................................................................................................2
1 – THE CONCEPT OF STRATEGY............................................................................................................3
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1 – THE CONCEPT OF STRATEGY

Strategy = A unifying theme that gives coherence and direction to the actions and decisions of an
individual or an organization

It is not a detailed plan or program of instructions

Strategy analysis has two basic components:

1. Analysis of external environment of the firm (Industry Analysis)

2. Analysis of internal environment of the firm (Analysis of the firm’s resources and
capabilities)

Characteristics of a strategy conductive to success:

- Goals that are consistent and long term

- Profound understanding of the competitive environment
- Objective appraisal of resources
- Effective implementation

Basic Framework:

Characteristics 1, 3, 4 Characteristic 2

The structure and systems of the firm can make a reference to the “effective implantation”
characteristic of a ‘good strategy’. Linking this with the rest of the bullet points, we can see all of the
characteristics of a good strategy are found in this framework.

This is often compared to the SWOT Analysis, however, according to the textbook, classifying in
Internal and External analysis is “superior”.

Therefore, business strategy can be said is used to “determine how the firm will deploy its resources
within its environment and so satisfy its long-term goals, and how it will organize itself to implement
that strategy”.

Strategic Fit
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Strategic Fit = The consistency of a firm’s strategy, first, with the firm’s external environment and,
second, with its internal environment, especially with its goals and values and resources and
capabilities.

Main reasons for decline and failure:

- Lack of consistency with either internal or external environments

- Not aligning strategies with internal resources and capabilities.

Effective strategies are ones where functional strategies and individual decisions are aligned with
one another to create a consistent strategic position and direction of development.

This concept refers to Michael Porter’s conceptualization of the firm as an activity system.

Michael Porter’s Activity System

Michael Porter conceptualizes a firm as an activity system:

“Strategy is the creation of a unique and differentiated

position involving a different set of activities”

The key is in how these activities fit together to form a consistent, mutually reinforcing system.

Contingency Theory = There is no single best way of organizing or managing. The best way to design,
manage, and lead an organization depends upon circumstances – in particular the characteristics of
that organization’s environment.

Why do we need strategy

1. Decision Support  Unifying pattern/theme that gives coherence to decision

Bounded Rationality = Cognitive limitations that constrain all humans

2. Coordinating Device  Coordinates the actions of multiple organizational members

Allows for movement forward in a consistent direction  Strategy is translated into goals,
commitments, performance targets, etc.

3. Targets  Strategy establishes direction for the firm’s development and its aspirations

Strategic Intent = Describes the desired strategic position of the company

Where to find a firm’s strategy

 Intended Strategy: Mission Statement, Statement of principle/values, Vision Statement,

Strategy Statement
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 Realized Strategy: Where the company invests money, what technologies it has developed,
what new products have been released / major project investments, what top management
was hired, etc.

Strategic Choices

Choices can be divided into 2 basic questions:

1. Where to compete
2. How to compete

Where to Compete

 Usually, the responsibility of corporate top

management assisted by the Head of Corporate Strategy/CEO Office

Example: Should we expand out business out of Spain? Integrate Vertically? New low-cost brand?

How to Compete

Refers to how the firm competes within a particular industry or market

 Primarily responsibility of the senior managers of divisions and subsidiaries

Example: How can we offer a more digitalized experience to our customers? Should we sell our
product in indirect or direct channels?

Must establish a competitive advantage over its competitive rivals  Competitive Strategy

Describing Strategy

Current Positioning / Future Direction

Strategic intent creates a gap between resources and ambitions

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Strategy Making

Analysis in Strategy Making

Strategy Analysis:

- Improves decision process, but won’t give answers

- Assists in identifying and understanding the main issues
- Helps manage complexity
- Enhances flexibility and innovation by supporting learning
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2 – GOALS, VALUES AND PERFORMANCE

Value = Monetary worth of a product or asset

Creating Value:

1. Production: Physically transforming products that are less valuable into products that are
more valuable
2. Commerce: Repositioning products in time and space

Speculation = Transferring products from a point in time where a product is valued less to a point in
time where it is valued more

Value Creation=Total Customer Value−Real Costs of Production

Value creation exceeds profit  Value received by customers is greater than the amount they pay
(value is measured by a customer’s willingness to pay, not the price of the item)

Consumer Surplus = Difference between the customer’s willingness to pay and the actual value/price
of the product

Maximum Willingness-to-Pay = Price at which the consumer is indifferent between buying

the product and not buying it

Producer Surplus = Profits coming from the difference of the producers’ willingness to produce at
and the actual production level (Producer was willing to sell for 2 but he sold it for 3 so his surplus is
1)

Competitive Advantage = When a firm creates and delivers more economic value than their rivals
(Highest price customer is willing to pay before switching to substitute – firm’s costs) and capture a
portion of this value in the form of profits

Earns a persistently higher rate of profits than its rivals

Sustainable Competitive Advantage = When the firm is able to sustain it over time against the forces
of competition

Who to Create Value for

1. Stakeholders
Represents maximizing total value creation (sum of consumer and producer surplus
as well as external benefits to society)
 Difficult to measure performance (estimating the surpluses and
externalities)
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 Corporate Governance  Who evaluates whether top management is doing

a good job or not  less accountable managers as they serve their own
interests
2. Shareholders
Firms only operate in the interest of their owners, and the effectiveness of the
market economy will be dependent upon firms responding to profit incentives 
Interest and society and shareholders are maximized

Strategy analysis will assume that the primary goal of the firm is profit maximization

Profits and Enterprise Value

Types of profit:

1. Accounting Profit = Gross profit, Operating Profit, Net profit, etc.

2. Economic Profit = Pure profit (“Rent” or “Economic Rent”)
Economic Value Added = Net Operating Profit after tax – (WACC * Capital)
It is the surplus available after all inputs (including capital) have been paid

Why economic profit is better than accounting profit?

- More realistic performance indicator

- Improves allocation of capital between the different businesses of the firm by considering
the real costs of more capital-intensive businesses

Firms are valued using the same methodology as investments:

FCFF = Free Cash Flows in year t

Enterprise Value = Market Capitalization of Equity `Market Value of debt

Performance Analysis

Forward Looking: Look at the stock market value

Look at the stream of profit (cashflow) over the rest of its life

Backward looking: Look at the accounting ratios

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Profitability ratios – They require a benchmark

- Avoid basing any firm evaluation on just one measure (triangulate different measures and
analyze all components of performance measures)
- Pay attention to comparisons of measures between firms in different industries
- Pay attention to firms that are multi-business organizations (they compete in multiple
sectors and countries)
- Be aware that financial measures are subject to several measurement errors (Must
complement the financial stats with information)

Financial Analysis is backward looking while Strategic Analysis helps understand critical factors
impacting firm’s success in the future

Setting performance targets: They need to be consistent with long-term goals, linked to strategy,
and relevant to the tasks and responsibilities of individual organizational members

Approaches to setting Targets

1. Financial Disaggregation  Focus on Profitability

Basically, take a profitability ratio, such as ROA, or ROE, and break it down into different specific
activities and sections, and then identify which ones aren’t working

Careful, pursuing short term profitability undermines long term profit maximization

Du Pont Formula  Separates ROE into sales margin and capital turnover to identify specific
activities of poor performance

2. Balanced Scorecards

Combining financial targets with strategic and operational targets  Provides an integrated
framework for balancing financial and strategic goals and cascading performance measures down
the organization to individual business units and departments
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Answers Questions:

- Financial: How do we look at shareholders?

- Customer: How do customers see us?
- Internal: What must we excel at?
- Learning: Can we continue to improve and develop?

Provides actionable targets that link the strategy of the business to the creation of value both for
shareholders and other stakeholders

3. Strategic Profit Drivers  Focus purpose over profit  Avoid blind goal targeting and
counter-productive targets
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3 – INDUSTRY ANALYSIS AND STRUCTURE

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