Business Strategy Note
Here are my midterm notes for my Business Strategy class at Kellogg PTMBA program.
Sum up all concepts
Firms may use their resources to shape the competitive game in a way that makes the five forces more attractive.
Value Creation and Capture
Economic Profit = (AP-AC) Q
Where AC always includes opportunity cost.
‘B’ Consumer’s max willingness to pay
Consumer Surplus = ‘B’ – ‘P’ = value the consumer captures
Value Created = ‘B’ – ‘C’ = total value created
Firm Value Captured = ‘P’ – ‘C’
AC curve – Quantity X axis, Average Cost Y axis
Productivity frontier curve – ‘C’ on X axis, ‘B’ on Y axis,
5 Force Analysis
Rivalry: large number of firms, high inventory costs, high fixed costs, lack of differentiation, slow industry growth, high strategic stakes, diverse competitors, capacity in large increments, lack of switching costs
Threat of Substitutes: are there substitute products?
Barriers to entry: economies of scale, high capital needs, incumbent reputation, switiching costs, learning curve, limited access to distribution, government regualtions, network effects, proprietary technology
Supply Power: few suppliers, few substitues for input, costly to switch, suppliers have many other customers, input is more important for buyers, supplier is able to forward integrate
Buyer Power: one buyer purchased a large share of my output, buyer earns low profits, buyer purchased few other products, buy has full information, easy to switch, buyer can backwards integrate (produce it themselves)
Resource Based View
TEST1: Is it distinctly superior? Can it generate profits? Greater ‘B’-‘C’ in market where it will be used?
TEST2: Can it be reproduced, moved, or imitated? Truely unique? Legal restrictions? Histroical dependence (brand)? (look for isolating mechanicsm also called ex-post barrier) such as learning curve, firm reputation, switching costs, firm-consumer relationship, network effect
TEST3: Is this firm the best economic use of resource? Is it cospecialized? Transfer cost higher than its value? Otherwise well pay more than its value to try to keep it, Am I able to aquire the resource for less than the expected total value to me?
Appropriable quasi Rent = value of resouce to us – value of resource to next highest bidder, most rent we can capture
Ex-ante limits to competition – anything that prevents the price bid from reaching full value of the resource
It is hard to manage or create resources into existance, if you can do it why can’t anybody?
Game Theory
Main parts: players, actions, payoffs
Compeition vs. cooperation, the effect of commitment to a course of action such as sunk costs
Industry level effects – least profitable in one industry may still be more than best profitable in antoher industry
To determine Nash equlibrium, where no one has incentive to move to another decision, find the dominant or at least the dominated strategies
Cooperation can be hard when:lots of firms, no history of trust, hidden prices, and bad market conditions