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:
- Barriers To Entry
- Capital Costs = Not a Barrier To Entry
- Minimum Efficient Scale
- Network Effects
- Excess Capacity
- Learning / scale
- Low growth
- Limited Slots (e.g. Airport Terminals)
- Long Lead Time
- VHS –> DVD –> Netflix
- Landline –> Cell Phone
- Restaurant + Taxi Cab
- Cars + Financing
- Used vs. New
- Online Banking
- Concentration compared to buyers
- Buyer switching costs
- Buyer price sensitivity
- Buyer Switching Costs (Limit)
- Lumpy Orders
- Homogeneous Product
- Low Growth
- Excess Capacity
- 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?
Now that I have it, how do I keep it?
- Prevent Imitation
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
- Transaction Costs Are High
1+1 = 3
Synergy is NOT the amount you overpay for an acquisition
What if you run out of room to grow?
- Stop Growing
- Expand (e.g. Geographically)
- Change Contexts
Strategy isn’t an algorithm & it isn’t luck. If you see an opportunity, seize it.