Strategy is how a firm creates, captures, & sustains economic value.

Strategy is focused on achieving certain goals;

Strategy involves allocation of resources;
Strategy implies consistency, integration, or cohesiveness of decisions and
actions.
Strategy is unique among the functions of business
-it must coordinate all functions - it is concerned directly with the long-term
profitability of the enterprise - it is concerned with both value creation and value
capture - it requires considering rivals’ goals and behaviors and the impact of the
organizations own actions on rivals’ subsequent choices

Valuable Strategy aphorisms

• Strategy is the brain & central nervous system of the organization
– it derives perception from the extremities of the organization
– it gives controlling impulses to the entire organization
– its consequences are dispositive for organizational success/failure
• Managers should feel both the benefits and the constraints of a firm’s strategic
choices
– strategy drives both what a firm does and, at least equally importantly,
what it does not do
• Strategy is the smallest set of core choices to optimally guide other choices.

Porter’s view
Operational effectiveness refers to the extent to which we perform similar
activities better than rivals
Strategy
([Link] [Link] Irganization [Link] [Link] Position)
 refers to performing different activities from rivals or performing
them in a different way
 choose the right configuration of activities, incentives, systems
 make the right trade-offs
 strategy rests on unique activities

Corporate strategy defines the scope of the firm in terms of the industries
and markets in which it competes.
Business strategy or competitive strategy is concerned with how the firm
competes within a particular industry or market.
Inside Productivity Frontier- possible to improve operational
effectiveness through capability development
Vision –Where we want to be?
•A Vision Statement is a sentence or short paragraph providing a broad,
aspirationalimage of the future.
•It describes what the company believes is the ideal situation for itself.
Mission –What we want to achieve? Why do we exist?
•A Mission Statement reflects businesses' core purpose, identity, values and
principle business aims.
•It is the basic statement of organization’s purpose.
”Best in Class“ is the slogan used by Baker Hughes.
SWOT Analysis:(Strengths: Weaknesses: Opportunities: Threats/Risks)
1)Environment Analysis(external factors)
2)InternalAnalysis (organizational capabilities)
Most used frameworks for internal analysis (McKinsey7S or Higgins8S)
Nash Equilibrium: Applying Game Theory to Strategy
PARTS (Players, Added Values ,Rules of the Game, Tactics, Scope)
Warren Buffett: “When an industry with a reputation for difficult
economics meets a manager with a reputation for excellence, it is usually
the industry that keeps its reputation intact.”

Determinants of INDUSTRY Profitability:

([Link] Power , [Link] of New Entrants, [Link] among existing
competitors, [Link] of substitutes and [Link] Power)

By developing performance measures across four balanced perspectives:

1)Financial perspective 2)Customer perspective 3)Internal business perspective
4)Learning and growth perspective

BSC helps to track financial results now, while building capacity for
future growth.

Strategic Objectives: 1) Portfolio• Collection of investments and projects to manage and

execute changes to achieve strategic objectives.2)Program • Temporary organizational structure to
manage, execute, control and coordinate projects to deliver outcomes and benefits for achieving
strategic objectives. 3)Project • Temporary organizational structure to deliver one or more business
processes or products.

Operations Management : Doing similar things better than our competitors.

[Link] Creation: economists think of value creation as an economic act that

lowers existing costs or raises willingness-to-pay for some set of customers.
[Link] capture: refers to the economic rents (benefits or profits) that an
organization or individual obtains
Both rarely same: the individual or organization that creates value does not
necessarily capture the full value it creates! why? –others get some, too... who are
they? (–rivals / imitator –suppliers –buyers)
( B-P= Consumer Surplus / (P-C= Producer Surplus / B-C=Value Created )
The relationship between value creation and value capture varies widely
across industries, markets, location, and time.

Basic Five Forces Questions: 1)At what level does Porter intend us to use the
Five Forces? industry! 2) If we do a Five Forces analysis, what do we learn? it
helps us understand whether an industry’s incumbents are likely to earn high/low
economic rents (profits)
NOTE: Five Forces Analysis helps understand expected industry profitability for
incumbent firms!
The Two dimensions of the Five Forces:
1) The Power of Buyers, Suppliers, and Industry Rivalry determines who
gets the profits that the industry could potentially generate.
2) The Threat of Entry and Threat of Substitutes determine whether the
industry value chain can generate any profits at all
The Five Forces Framework…is based on premise that competition in an
industry is rooted in the underlying economics, competitive forces or
structures that collectively determine the profit potential of the industry
-helps assess the long-run profit potential of an industry
*We can view the Five Forces through the lens of microeconomic analysis:
-the key issues associated with entry, rivalry, & substitutesask whether
potential profits get competed away by new firms in the industry, current
firms, or alternative products.
Firms can use Five Forces analysis to…
-help make decisions to ensure favorable industry structure
-help identify which firms have advantages within industries (like Coke & Pepsi do!
-help choose positions within industries
Industry structure can change over time!
■As a result of…-technological changes -government policies -consumer
preferences -changes in the structure of related industries
■One of the best ways to think about how world events will impact the
industry is to think about how those changes will affect industry structure
Industry structure determines long-term average profitability!
The Horizontal Dimension: Who captures benefits?
The Power of Buyers, Suppliers, and Industry Rivalry determines who gets
the profits that the industry could potentially generate.

What can Suppliers do to industry? -strong suppliers can raise industry

average costs (or deliver lower quality)
-weak suppliers can be forced to accept lower cost (or to deliver higher quality)
Can Suppliers exert power over firms in the industry?
If YES–they can raise the costs that industry firms face
If NO –then industry will be able to keep costs low

What can Buyers do to industry? -strong buyers can force you to keep prices
low (or deliver higher quality)
-weak buyers can be forced to accept high prices (or low quality)
Can Buyers exert power over firms in the industry?
if YES–then firms will be forced to charge low prices
if NO –then firm can charge high pricesto the buyers
Difference between Substitutes and Rivals
Rivals = all firms that are compete within the industry
Substitutes = products that are outside the industry
Firm profitability is heavily influenced by its industry
Industry profitability -Not simply high vs low tech, or high vs low capital
-It depends on the microeconomic, strategic, and institutional environment
in which a firm operates -The Five Forces framework gives us a way to do
this.
The First Job of Company : is to create & capture economic value.

Economic Models of Industry Profit: (Perfect competition-Taxi, Monopolistic

competition-restaurants, Oligopoly-SoftDrinks and Monopoly-PatendedDrugs)

Monopolists raise prices & limit output!this is good for company profits,
but…bad for consumers------because they have to pay higher prices and get lower
quality
Oligopolists do similar thing - oligopoly exists when there are only a few firms in an
industry. An industry with 3, 4, 5, or 6 firms is probably an oligopoly. The more firms
the industry has, the less likely it is to act like an oligopoly.

Why do you think that this Turnover has occurred?

(Industry- Business Unit Strategy - Corporate Strategy - Game Theory & Dynamics)
 Operational Effectiveness: Assimilating, attaining, and extending best
practice in activities by
■ Advancing the use and exploitation of up‐to‐date equipment, inputs,
information technology, and management techniques to improve
products and processes
Strategic Positioning : Creating a unique and sustainable
competitive position.

Tradeoffs • are incompatibilities between strategic positions

that create the need for choice
• Strategic tradeoffs lie at the heart of sustainability

• Competitive advantage comes from creating (& capturing) more value

than your competitors
– from higher willingness‐to‐pay or lower costs
• Strategy can create competitive advantage by
– having resources or capabilities that are unique
– making tradeoffs that are difficult or unattractive to competitors
• Finding a “lonely place” on the Strategic Frontier
– gives a ‘local monopoly’ for those underserved customers
– weakens competitors ability to erode margins
• Moving the frontier out can be profitable, but risky