What is Strategy lecture 8

Question 1

what are the Fundamental Questions of Strategy

Answer 1

How will we create value?
How will we capture value?
How will we deliver value?

Question 2

Economic profits (excess returns) exist when:

Answer 2

– Revenues – Costs (including cost of capital) > 0 – Financial statements don’t reflect cost of capital

Question 3

What affects cost of capital?

Answer 3

– Risk of future returns

– Risk increases required returns

Question 4

give a summary

Answer 4

• 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

Question 5

What undermines economic sustainability?

Answer 5

Insights from Competitive Markets

Question 6

how does Competition drives ROCE to WACC (or lower)

Answer 6

Profitable situations don’t last long

Question 7

Necessary conditions for competitive markets:

Answer 7

• Easy to enter

* Easy to imitate or substitute

Question 8

Competitive markets make economic profits difficult or simple?

Answer 8

difficult

Question 9

Why are some firms more successful than others?

Answer 9

competitive advantage

Question 10

what is competitive advantage the basis for

Answer 10

economic sustainability– this requires competitive advantage

Question 11

explain competitive advantage

Answer 11

Must create and capture more economic value than rivals

Question 12

Capital providers want ______ competitive advantage

Answer 12

sustained

Ability to cover costs of capital over time

Question 13

Strategy identifies:

Answer 13

How a firm can develop & sustain competitive advantage

Question 14

what are the Two Perspectives on Economic Profits

Answer 14

industrial organization and resource-based view

Question 15

explain Industrial Organization

Answer 15

External factors drive profits
Industry structure: entry barriers, substitutes and compliments, bargaining power

STRUCTURE AFFECTS COMPETITION

Question 16

explain the resource-based view

Answer 16

Internal factors drive profits
Resources & capabilities that create value are hard to imitate and difficult to acquire

SCARCITY DRIVES VALUE CAPTURE

Question 17

explain Arenas: Where a firm will compete

Answer 17

The customers, geographies, products & value chain stages pursued

Question 18

explain vehicles

Answer 18

The means by which a firm enters arenas of choice (build, buy or borrow)

Question 19

explain how a firm will compete in its arenas

Answer 19

economic logic

Question 20

what is economic logic

Answer 20

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

Question 21

what are the parts to Competitive Advantage

Answer 21

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)

Question 22

what are the 3 challenges associated with competitive advantage

Answer 22

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

Question 23

With a convincing customer value proposition does wha

Answer 23

• Incentive to buy = greater consumer surplus

* WTP – (price + user costs)

Question 24

Strategy involves performing…

Answer 24

different activities or similar activities differently that fit the external competitive environment

Question 25

explain how Strategy involves trade-offs in how & where to compete

Answer 25

* Costs vs. WTP; market segments | * Choosing what not to do is strategic

Question 26

Decisions involving trade-offs are strategic since they require what

Answer 26

commitment Commitments make imitation difficult

Question 27

explain Internal fit:

Answer 27

Integrative pattern of internally-consistent decisions, resources & activities to sustain the creation & capture of more value than rivals (competitive advantage)

Question 28

Competitive advantage rests in system of what

Answer 28

complementary activities & resources • Systemic nature makes imitation difficult

Question 29

explain Sustainable advantage requires barriers to imitation

Answer 29

Trade-offs, complexity, causal ambiguity, preemption

Question 30

In sum, a strategy is what

Answer 30

a theory about how to create and capture economic value Reflected in an integrated set of choices about where and how to compete

Question 31

give a Sample strategy statement format

Answer 31

• 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]