MBA Summary: What Is Business Strategy?

If you Google For Business Strategy, you’ll find surprisingly little information about business strategy. To provide some more insight, here is high-level outline of my Kellogg MBA course notes on Business Strategy. While further reading is required, after reading this you should have a good framework for understanding “What Is Business Strategy?” in a nutshell.

Business strategy addresses a simple question:

How do you create, capture and sustain a competitive advantage?

1. Value Creation & Capture

What is value creation?

Value = (Benefit – Cost) * Quantity

Value = (Benefit – Price) * Quantity + (Price – Cost) * Quantity

Consumer Surplus = Benefit – Price

Economic Profit = Price – Cost

For a given price and quantity, you must do one of the following to create value:

  • Increase Benefit
  • Decrease Cost

2. Creating Value

What do you bring to the table?

 Added Value = ValueWITH – ValueWITHOUT

Added value is the upper bound of value capture.

You can capture value by creating (compete) or destroying (anti-trust) value.

3. Porter’s Five Competitive Forces That Shape Strategy

Given that half of profitability is industry dependent, how profitable is the industry?

The five forces are threat of entry, buyers, suppliers, substitutes/complements and rivalry. Below are examples of each force:

A. Entry

  • Barriers To Entry
  • Capital Costs = Not a Barrier To Entry
  • Patents
  • Legal
  • Minimum Efficient Scale
  • Network Effects
  • Reputation
  • Brand
  • Excess Capacity
  • Contracts
  • Exclusives
  • Learning / scale
  • Low growth
  • Limited Slots (e.g. Airport Terminals)
  • Long Lead Time
  • Complexity
  • Government
  • Backlogs

B. Substitutes/Complements

  • VHS –> DVD –> Netflix
  • Landline –> Cell Phone
  • Restaurant + Taxi Cab
  • Cars + Financing
  • Used vs. New

C. Buyers

  • Walmart
  • Ticketmaster
  • Online Banking

D. Suppliers

  • Concentration compared to buyers
  • Buyer switching costs
  • Buyer price sensitivity

E. Rivalry

  • Buyer Switching Costs (Limit)
  • Upgradable
  • Lumpy Orders
  • Homogeneous Product
  • Politics
  • Low Growth
  • Excess Capacity
  • Transparency
  • Neck & Neck
  • Follow-on revenue
  • Existing vs New Design

Competitive dynamics differ across industries and within an industry at different times.

4. Competitive Advantage

Within a given industry, how profitable is an individual firm?

Assets + Activities –> Advantage

  • What do you have?
  • What do you do with it?
  • What is unique?

5. Sustainability

Now that I have it, how do I keep it?

  • Unique
  • Appropriable
  • Prevent Imitation
  • Foresight

6. Adopting To Change

What do I do when the world changes?

How do my assets and activities translate into competitive advantage in a new context?

7. Vertical Strategies

When is vertical integration justified?

To figure this out, ask: Why can’t I do this with a contract?

  • Agency Problems
  • Foreclose Rivals
  • Relationships
  • Transaction Costs Are High

8. Synergy

1+1 = 3

Synergy is NOT the amount you overpay for an acquisition

9. Growth

What if you run out of room to grow?

  • Stop Growing
  • Expand (e.g. Geographically)
  • Change Contexts

10. Overall

Strategy isn’t an algorithm & it isn’t luck. If you see an opportunity, seize it.