Week 1 - What is Strategy

• Power (1985);

  1. Make it costly for new entrants; asymmetric costs can be utilised by incumbents - increase costs, but less for you than for them
  2. Introduce products and reduce prices in competitor segments
• Survival Bias:

  The tendency to consider only existing or ‘surviving’ firms and stocks when measuring the performance of a portfolio. Stocks that have ceased to exist are not included

  • ‘History is written by the victors’
  • Under-sampling of failure
• Causes of Endogeneity:

  • Spurious Correlation
  • Reverse causality / simultaneity
  • Unobserved heterogeneity
• Epple (1990); Learning Curves in Manufacturing:

  • Factors affecting learning in organisations:

  1. Formulating manufacturing strategy
  2. Production scheduling
  3. Training
  4. Pricing and Marketing
  5. Predicting competitors’ costs
• Shaw (2007); Death, Taxes, and Reversion to the Mean

  ”We learn from history, that man can never learn anything from history” Georg Hegel

  • Empirically been little luck identifying the factors behind sustainably high returns
  • Rarity of generating high returns systematically for a long time in a free market system

  Industry Effects:

  • Only viewing overrepresented industries to explain persistent high returns is flawed; it fails to consider the full industry populations. For industries with large variances, some companies will look good simply by virtue of distribution
• Malcom Gladwell (2009); Outliers.


  “People don’t rise from nothing”
• Michael Porter (1996); What is Strategy?

  Operational effectiveness is not strategy

  “A company can outperform rivals only if it establishes a difference that it can preserve”

  • It must deliver greater value, or create comparable lower cost
• Michael Porter (1996); What is Strategy?

  Operational Effectiveness means performing similar activities better than rivals perform them. OE includes efficiency in production, and better utilisation of inputs.Strategic Positioning means performing different activities from rivals’, or performing similar activities in different ways.
• Michael Porter (1996); What is Strategy?

  The Three Distinct Sources of Strategic Positions:

  1. Variety-Based Positioning: An array of options that offer predictable performance at cheap prices.
  2. Needs-Based Positioning: Targeting segments of customers. A wide array of customized services
  3. 3. Access-Based Positioning: Access can be a function of geography or scale, segmenting by access.
• Porter (1985):

  Strategy as cost-leadership, differentiation, and focus
• Michael Porter (1996); What is Strategy?

  Trade-offs are essential to strategy
• Henry Mintzberg (1985); Of Strategies, Deliberate and Emergent

  Deliberate: Realized as intendedEmergent: Patterns or consistencies realized despite, or in the absence of, intention

  The centralisation of vision and the level of executive control, plus the predictability of the environment dictate how much a strategy is to be deliberate or emergent.
• Richard Whittington (2001); What is Strategy and Does it Matter?

  Classical: Deliberate strategy. Primary goal is establishing competitive advantage

  Evolutionary: market environment is too complex and unpredictable.

  Strategy as emergent, where success comes from adaptability

  Processual: Emphasises the limitations of formal planning, and instead strategy should evolve around culture. Emergent strategy

  Systemic: strategies are shaped by the social, cultural, and economic context. Deliberate strategy, aimed at playing by local rules
• Teece and Rumelt (1991); Strategic Management and Economics

  Concept Map: Visually represents the relationship between concepts and ideas

  Three Forces that helped strategy to flourish:

  1. Hostility and instability of the market environment
  2. Continued expansion of strategy consulting practices (BCG)
  3. Maturation and dominance of the diversified firm
• Teece and Rumelt (1991); Strategic Management and Economics

  The 1980s saw the rice of Economic Thinking in the field of Strategic Management • Porter’s Competitive Strategy (1980)Mobility barriers, industry analysis, and generic strategies.

  • The resource-based view of the firm also began in the 1980s
• Teece and Rumelt (1991); Strategic Management and Economics

  5 Forces of economic thinking in strategic management:

  1. The need to interpret performance data
  2. The experience curve
  3. Persistent profit analysis
  4. Nature of economics
  5. Nature of the business school
• Teece and Rumelt (1991); Strategic Management and Economics

  “The single most significant impact of economics in strategic management has been to radically alter explanations of success”

  • Explaining persistent profits: CAPM, EMH
  • RBV of the firm
  • Competitive / Industry positioning view
• Teece and Rumelt (1991); Strategic Management and Economics

  Changing the nature of success:

  1. Uncertainty
  2. Bounded Rationality
  3. Opportunism
  4. Asset Specificity
• Mintzberg (1990); The Design School

  Reconsidering the basic premise of strategic management

  • Analysis of the CEO-as-strategist
  • The CEO should set simple and practical strategy establishing a fit between internal capabilities and the external environment, and thestrategy should be articulated clearly and fully formed before implementation

  Establish fit
• Denrell (2015); Selection Bias and the Perils of Benchmarking

  • Selection Bias; Generalisations about business success from studying existing companies
  • Tendency to overvalue risky business practices
• Michael Porter (1981); The Contributions of Industrial Organisation to Strategic Management

  A firm’s performance in the marketplace depends critically on the characteristics of the industry environment in which it competesIndustry Structure —> Strategy —> Performance...

  Performance —> Strategy —> Industry Structure
• Jacobson (1988); The Persistence of Abnormal Returns

  Factors that can slow the convergence process:

  1. Vertical Integration
  2. Market Share
  3. Intensity of marketing expenditure

  Firms starting out at extreme levels of profitability have a greater-than-expected probability of remaining there; normal distribution
• Jacobson (1988); The Persistence of Abnormal Returns

  • The time-series behaviour of ROI:

  • Hypotheses that ROI has a unit root can be rejected; whilst abnormal returns decay slowly, they do decay
• Wensley (1997)

  “No variable counts for more than 10% of variation in business performance”
• Rozenweig (2007); Misunderstanding the Nature of Company Performance


  The Halo Effect: The basic human tendency to make specific inferences based on general impressions

  • Erroneous judgements made retrospectively in light of new information
  • A single characteristic may define our impression of a whole brand