Strategic Management

Explain the attribute of non-substitutability

o Two valuable firm resources are said to be substitutable when they can be exploited separately to achieve the same strategic advantage, e.g. one firm may have a top management team which could be a source of its competitive advantage and though this is rare, valuable and also cannot be imitated exactly by its competitor, the competitor may also put together a different top management team that also enables it to achieve a strategic advantage. In this case, the resources are substitutable, so a top management team cannot be a source of sustained competitive advantage; very different resources can also be sources of competitive advantage, e.g. one inspiring, visionary leader may be strategically equivalent to a formal planning system that pervades the firm

Denrell (2005) - example of "selection bias"

the idea of "cross-pollination" - having R&D teams with different expertise so they could combine insights from different fields creatively, rather than having scientific experts purely in one specialised field - proliferated. Fleming (2004) found that on average, the value of innovations coming out of diverse, cross-functional teams was lower than the value of innovations produced by a more homogeneous group of scientists; the innovations that the cross-functional teams produced tended to be very high-risk - either breakthroughs or failures; however, only looking at the value of breakthroughs means that a company risks in engaging in a very risky practice

Why do clusters lose their competitive advantage?

o A cluster's assets e.g. market info, employee skills, scientific expertise etc. may all become irrelevant due to innovation or substitution by a competitor o A shift in consumer demand could create a divergence between local needs and needs elsewhere o Threats to competition - over-consolidation between cluster members, tacit collusion, cartels and other restraints o Institutional stagnation - quality of universities / schools deteriorates, regulatory inflexibility or introduction of restrictive union rules slows improvement o Groupthink among cluster participants - if companies in a cluster are too inward looking, the whole cluster suffers from a collective inertia, making it harder for individual companies to embrace new ideas and perceive the need for radical innovation

Why are acquisition strategies important? - Hameslagh and Jemison (1987)

o Acquisitions must be viewed as a means to an end rather than an end in themselves and considered along other equally viable forms of corporate renewal such as internal development, JVs, licensing etc. o Acquisitions have to be judged in the context of their contributions to the firm's overall strategy

Explain the concept of asset erosion

o Asset erosion: Asset stocks may "decay" over time, e.g. technological obsolescence, loss in brand value with population renewal etc., which weakens the inherent asymmetry between firms having important asset stocks and those having lower asset stock levels; high levels of asset erosion mean imitability is more likely § A firm's dominant position may be sustainable even though its underlying asset base is subject to rapid decay if it faces lower "maintenance" costs than its competitor, which could be likely if it enjoys greater efficiency in asset accumulation due to asset mass efficiencies / inter-connectedness

Bonardi (2011) - what are the five key characteristics that predict a firm's success in its political strategy and the sustainability of its political resources as a source of competitive advantage?

o Can be based on some of the firm's critical economic assets - § Resources beyond what one may traditionally think of as "political" assets can actually be useful in the political sphere, e.g. EDF Energy, the French nuclear energy firm, has been tremendously successful in influencing policy choices regarding the use of nuclear energy instead of other sources in France and Europe; it has some overtly "political" assets such as its extensive regulatory affairs department but some of its economic assets also offer political benefits, e.g. EDF is part of a broad industrial strategy developed by the French government, which also includes other large companies such as reactor producer Areva; EDF counts 158k employees, 40k daily customers and 58 existing nuclear plants o Do not raise too high integration costs - § Integrating political resources on economic assets comes with trade-offs § What firms offer to policy-makers in exchange for the political resource might have negative impacts on their economic resources and firms need to make sure that any gains from political resources are not exceeded by the costs of integration § For example, market decisions such as whether or not to lay off workers can actually be a political resource, but instituting a "lay off freeze" for example to curry political avour can actually negatively the firm economically o Fit with the specific needs of key suppliers of public policy - § Different things that the firm can offer to policymakers may be valued differently depending on the kind of institutional system and the types of players, e.g. politician, bureaucrat, regulator etc. o Can generate credible commitments - § North (1990) and Dixit (1996) argue that political markets are characterised by very high transaction costs, which come from the fact that neither the interest groups nor the politicians / bureaucrats can be sure that what is transacted is really going to be delivered § Thus, firms can develop unique ways to provide credible commitments that they will actually deliver to the policy-makers what they have promised § The type of political resource offered can generate different credibility / contracting problems, e.g. votes can only be offered through vote promises and therefore generates high credible commitment problems, information also leads to a credibility problem since it is difficult to know the veracity of the information, money such as campaign donations creates the least contracting problems which might explain why it is used relatively often o Cannot be made ineffective by competitors' political strategies - § An important question to address is what the relative value of a firm's set of political resources is compared to the resources provided by other demanders of public policies § Competing in political markets can often involve a fair amount of cooperation among multiple demanders with different objectives, e.g. participating in industry associations

Example of how framing can mobilise assets

o Cisco deliberately framed Huawei and ZTE's presence in the US market as a national security issue, which meant that Cisco and their allies were able to make them look less attractive o The attractiveness derived from a simple asset that Huawei and ZTE cannot imitate - Cisco is American o The framing enabled them to sideline Huawei and ZTE's key strengths in terms of quality and price

Explain the prisoner's dilemma

o Conflict between the collective interest and self-interest is referred to as the prisoner's dilemma

Gnyawali and Park (2011) - terms of collaboration for Samsung and Sony

o Each party owned 50% of the joint venture o After their initial investment together, they continued to increase their investments implying that they at least thought they were benefitting from co-opetition in some way o They created value ("made the pie bigger") through cost sharing of the $6bn investment, economies of scale and standard setting (ensuring LCD became the dominant design of the market rather than PDP) o They cross-licensed their patents (11k patents from Samsung and 13k from Sony were allowed to be used by the other firm) which facilitated knowledge sharing and product development o However, they also tried to maintain their uniqueness and promote healthy competition in the market through "Differentiated Technology Patents" which were not cross-licensed such as Sony's PlayStation architecture and Samsung's home networking technology

Why diversify?

o Economies of scale and scope - shared activities and competencies o Market power - strengthen bargaining power, leverage existing strengths, mutual forbearance o Superior internal financial structure - leveraging internal resources with external capabilities o Risk reduction - for employees, managers but not shareholders

Examples of behavioural science applications to strategy

o Failure rate of M&A Is between 70% and 90% o Execs involved in M&A deals could avoid the "winner's curse" of overpaying using behavioural strategy o E.g. present at least 3 similar deals that failed or every manager has to present a "pre-mortem" by first imagining the deal has failed and then working backward to determine what could potentially lead to the failure o This prevents groupthink (herd behaviour), reminds people about the possible losses and attenuates the emotion associated with the fear of losing to competitors o Clifford Chance's hiring process is CV blind to counter the "Oxbridge recruitment bias"

Yaziji (2014) - benefits of collaborations with an NGO

o Fend off trouble: Yaziji recommends negotiations with the NGOs at the first sign of trouble, rather than getting defensive, can help fend off trouble and end up leading to cost-savings for the firm o Accelerate innovation: In the absence of a dire competitive threat, most companies content to make incremental improvements to their processes or products and by focusing on the wider effects of companies' practices rather than costs or profitability, the result can be radical solutions that improve some aspect of society or the environment while also increasing competitiveness o Foresee shifts in demand: NGOs often lead social movements and help them become more mainstream so keeping track of NGO activity can help firms stay ahead of trends o Shape legislation: NGOs have access to legislators and regulators that even corporate lobbyists may not, which they are sometimes willing to report to companies they trust; when legislation is a collaborative process between policymakers, NGOs and companies, the rules end up being better.

Example of how framing can shape what information matters?

o Frames allow firms to promote frames that stress aspects of an issue where the relevant information favours them and away from positions that harm them o A good example of this is the controversy over patents and access to affordable drugs in developing countries o The pharma industry frames the issue as "patent violations are a theft of intellectual property" while its critics - public health advocates, development organisations, governments of emerging economies etc. - frame it as "patent violations can help save lives" o Its critics have been somewhat successful as most global pharma companies now have elaborate corporate citizenship initiatives under which they give many millions of dollars worth of drugs away

How do clusters increase new business formation?

o Individuals working within a cluster can more easily perceive gaps in products or services around which they can build businesses o Barriers to entry are lower than elsewhere since the needed assets, skills, inputs, etc. are readily available at the local cluster location, waiting to be assembled into a new enterprise o Local financial institutions / investors who are already familiar with the cluster may require a lower risk premium on capital

Dahan et al. (2010) - strategic imperatives for corporate-NGO collaborations

o Innovative combinations of firm and NGO resources and skills o The importance of trust-building o Fit between the two organisations' goals o Supporting and understanding the local business infrastructure and environment

How does non-market strategy differ from market strategy?

o Non-market issues attract a broader set of participants o Important components of non-market strategies are implemented in public view o The logic of non-market action can be different from the logic of market action o In the non-market environment, issues are not resolved by voluntary agreements as in markets, but in most cases, by govt. institutions with the power to set and enforce the rules of the game

How can non-market approaches among firms vary?

o Pro-active - firm engineers and frames issue (shapes "public sentiment") o Anticipatory - firm prepares for and addresses issue o Responsive - firm is challenged o Damage control - firm is forced to act

Kahneman (2011) - Dual Systems Approach

o System 1 = fast, automatic, frequent, emotional, stereotypic, subconscious o System 2 = slow, effortful, infrequent, logical, calculating, conscious · Strategic analysis and game theory are mostly System 2 thinking, but System 1 thinking can also enter the strategic process

Rothaermel (2001) - why might a strategic alliance be mutually beneficial?

§ Although the generation of new technologies is pioneered by new entrants, these new players still need to cooperate with incumbent firms in order to commercialise the new technology § New entrants may be further motivated to cooperate with incumbents as alliances with established firms can bestow legitimacy and therefore, positive reputational effects § Incumbents also prefer cooperative arrangements over the acquisition of new entrants in order to internalise the new technology and maximise the value of their real options, while maintaining a distance from it in environments of high uncertainty

Explain the idea of a parenting advantage

§ Goold, Campbell et al. argue that if a parent company is to own a particular company, it must not only be able to add value to that business but it should be capable of adding more value than any other potential parent as otherwise, it would be better off selling the business to the company that can add the most value; this goes beyond Porter's "better off" test

What is a network structure?

§ In the network structure, workers either singly or in combination, can contribute to multiple organisational tasks and can be reconfigured and recombined as the tasks of the organisation change § E.g. Hamel's example of Morning Star, a tomato processor in California and the largest in the world, gaining $700m in annual sales § It has a well-articulated company mission, some procedural rules of order, but no formal bosses, no titles or formal job descriptions and peer-based competition

Bronnenberg, Dhar and Dubé (2009)

§ The paper aims to test empirically for a persistent effect of early entry on the market shares of branded consumer goods § They find evidence of a persistent "early entry" advantage for brands in 34 consumer packaged goods industries across 50 of the largest US cities § Current market shares are higher in markets closest to a brand's historic city of origin than in those farthest; there is a high probability that firms pursued a strategy of "outward expansion" and entered the markets closest to their place of origin first § For six industries where the order of entry among top brands in each market was known, they found an early entry effect on a brand's current market share and perceived quality across US cities § The strength of the early-entry effect typically predicts the rank order of market shares and perceived quality levels across cities

Moeller, Schlingemann and Stulz (2005)

· Acquiring firm shareholders lost 12 cents around acquisition announcements per dollar spent on acquisitions for a total loss of $240bn from 1998 through 2001, whereas they lost $7bn in all of the 1980s or 1.6 cents per dollar spend · The 1998-2001 aggregate dollar loss of acquiring-firm shareholders is so large because of sa small number of acquisitions with negative synergy gains by firms with extremely high valuations · Without these acquisitions, the wealth of acquiring-firm shareholders would have increased · Firms that make these acquisitions with large dollar losses perform poorly afterward

Benner (2007)

· Benner hypothesises based on past observations that the greater a firm's departure from its existing industry category as perceived by actors in the financial markets, the more negative a stock market reaction · This prediction is based on the fact that securities analysts typically cover companies within a given industry, grouping together firms that are deemed "comparable" · Researchers found that securities analysts are more likely to cover the stocks of firms whose strategies fit well within an industry category and are more likely to drop coverage when firms' strategies are complex, inconsistent with the industry category or straddle multiple categories and an absence in coverage leads to a discount in the stock price · Investors also categorise firms into "income" and "growth" categories, with income stocks perceived to have stable and predictable earnings while growth stocks pay no dividends and are expected to have little profit in the long term · Benner hypothesises that a firm categorised as "income" would be more likely to receive a negative stock market reaction to riskier activities in unrelated industries and firms categorised as "growth" would be more likely to receive a positive market reaction · These elements constitute a firm's "stock market identity" i.e. perception of the external financial markets on "what kind of firm / stock this is" · Benner hypothesises that ceteris paribus, the larger (smaller) the stock market identity gap created as a firm responds to technological change, the more negative (positive) the stock market reaction · Stock price decreases as a firm responds to a radical technological change will cause a reduction in responsiveness (i.e. investment in capabilities in the new technology and commercialisation of products incorporating the new technology) · Stock price decreases as a firm responds to a radical technological change will be associated with an increased likelihood of a spin-off from the original firm to respond to the new technology · During an era of ferment (?), negative stock market reactions as firms respond to a radical technological change will be associated with strategies and actions to position response to the new technology as a complement to the existing technology rather than a substitute · Negative stock market reactions as a firm responds to a radical technological change will trigger an increase in activities to change the firm's stock market identity, such as replacing the CEO or restructuring the organisation to signal an identity change

Felin (2014)

· Choice architecture = the interface - menu, ordering and structure of options - that is made available to employees within an organisation · General limitations of nudges: o Heuristics, which drive biases, can also be effective rules of thumb due to informational, temporal and cognitive limitations; thus, the idea of rationality or making the "correct" choice is only an artificial norm and not ecologically valid or practical always o Biases are based on averages and central tendencies, thus not recognising the vast heterogeneity that exists across individuals o Many biases have been studied in experimental settings which raises questions of their external validity and how much they can be generalised pragmatically to all contexts Highlights four practical areas in which managers can design effective choice architectures

Denrell (2005) - how can firms correct for selection bias?

· Denrell recommends collection as much data as possible on firm and industry failures so they can be systematically collated and analysed · Economic and statistical tools also exist which can help correct for selection bias, but these are grounded in assumptions which may or may not be appropriate given the context

Why do companies merge or acquire other businesses?

· Economies of scale and scope · Market power · Superior internal financial structure · Risk reduction · Bargain purchase price · Broader market access · Tech / IP acquisition · Fill some gap · Financial resilience - earnings "smoothing" · Short-term growth - pressure to turn-around / leap-frog strategy

Peteraf (1993) - Explain the concept of ex-post limits to competition

· Ex-post limits to competition: o The condition of heterogeneity must be durable and not a short-lived phenomenon for rents to be sustained o Subsequent to a firm gaining a superior position and earning rents, there must be forces which limit competition for those rents as competition may dissipate rents by increasing the supply of resources (eliminating Ricardian rents) or increasing output (eliminating monopoly rents) o Two critical factors which limit ex-post competition are imperfect imitability and imperfect substitutability

Faccio (2006) - stock market impact of "revolving door" announcements

· Faccio looks at stock price effects around the time of announcements that officers or large shareholders are entering politics, or that politicians are joining boards · A significant impact in corporate value is only found when those involved in business enter politics (rather than politicians entering business) · The stock price impact of a new connection is larger whenever a businessperson is elected as PM, rather than MP and whenever a large shareholder rather than an officer enters politics · General value of political connection = 1.43% CAR (cumulative abnormal return) · When businessperson enters politics = 2.29% CAR o Appointment as MP = 1.2% CAR o Appointment as Minister = 12.3% CAR · Political appointment on board = insignificant effect; why? One potential reason could be that it is only legal to extract rent in politics to business direction, otherwise it can be considered corruption

Powell, Lovallo and Fox, 2011 - four core research areas in behavioural strategy

· How does individual cognition scale to collective behaviour? o Decision researchers often assume that the strategic actions of firms reflect choices by a CEO or top management team o This assumption only holds if the firm is small, entrepreneurial, autocratic or family owned or if the decision falls outside the annual planning process o Research in behavioural strategy must avoid the trap of making simplistic assumptions about mental scaling · What are the psychological underpinnings of strategic management theory? o Assumption in strategic management is that firm heterogeneity stems from economic barriers, but behavioural science tells us that this can also be due to human cognition, emotions, learning, social interactions, institutions · Can behavioural strategy explain complex executive judgements? o ?? · Can we improve the psychological architecture of the firm? o What are the intended and unintended consequences of individual de-biasing in organisations? o E.g. conspicuously displaying the running costs of manufacturing equipment or designing work spaces that encourage people to seek alternative points of view

Hayward and Hambrick (1997) main findings

· On average, they found losses in acquiring firms' shareholder wealth following an acquisition · The greater the CEO hubris and acquisition premium, the greater the shareholder losses post-acquisition · Thus, CEO hubris has substantial practical consequences in addition to having potentially great theoretical significance in the study of strategic behaviour · Acquisition premium = the ratio of the ultimate price paid per target share divided by the price prior to takeover news

Mintzberg (1987) - strategy as plan

· Plan: The earliest definitions of strategy from Chandler, Sloan, Drucker etc. which revolved around it being a rational plan conceived before it was executed by the organisation o Strategies are "made in advance of the actions to which they apply, and they are developed consciously and purposefully"

Features of the rational economic decision-maker

· Rational self-interested utility maximisers are at the heart of standard economic and strategy theory, implying assumptions such as: o Rationality - Bayesian probability estimator o Self-interested behaviour o Responds predictively to incentives o Utility maximiser o Perfectly informed

Bach and Blake (2016)

· The IA3 framework takes "issues" as an exogenous factor in non-market strategy i.e. one that firms take as given and have to adapt their strategy to · Bach and Blake argue that the perception of issues can be shifted through "framing," which is a powerful strategic tool that enables firms to shape the structure of the nonmarket environment to their advantage · Frames help people understand and attach meaning to complex issues and events by focusing particular attention on - and attributing greater importance to - particular aspects of the issue and de-emphasising others · Framing is not about persuasion: persuasion involves changing beliefs through argumentation, while framing is about shaping / changing the weight assigned to different beliefs one may already hold by emphasising some considerations over others · Frames sort information into "relevant" versus "not relevant"

Armour & Teece (1978)

· The key result from this paper is that initially, firms who adopted the M-form had higher profits · This superior performance associated with M-Form is observed only in the 1955-1968 period and not in the 1969-1973 period, which is attributed to the widespread diffusion of this organisational form · The logic is that one would only expect the superior performance to last only while the innovative structure was diffusing through firms (because this means that some firms were still using inferior structures); once all firms for whom it was appropriate adopt the M-form do adopt it, the potential for differential superior performance is eliminated, since any further efficiency gains will be passed onto consumers in the form of lower prices rather than being impounded in profits

How is the relationship between CEO hubris and premiums affected when board vigilance is lacking? - Hayward and Hambrick (1997)

· The relationship between CEO hubris and further premiums is further strengthened when board vigilance is lacking - when the board has a high proportion of internal directors, the CEO is also the board chair and the company also has a small level of company stock holdings by outside members of the board The Board might be able to step in to restrain the CEO from paying large premiums that the CEO's hubris might have led to

What is the non-market environment?

· all relationships that do not unfold within markets but nevertheless affect the company's ability to reach its objectives Regulators, NGOs, third-parties etc.

Rumelt (1984)

"dispersion in the characteristic long-term rates of return within industries 5-8x as much as the variance in returns across industries"

Dunning and Krueger, 1999

Dunning-Krueger effect - those with the lowest skill levels in a given activity were also the most likely to overestimate their own level of skill (since they don't have the requisite level of knowledge to analyse their own lack of skill

How to formulate strategy based on analysis of the five forces - Porter (1979)

Once the strategist has an understanding of the "five forces" in their industry, the formulation of strategy involves the following three choices: Position the company so that its capabilities provide the best defence against the competitive forces - take the structure of the industry as given and match the strengths and weaknesses of the firm to it Influence the balance of the forces through strategic moves in order to improve the company's position Anticipate shifts in the factors underlying the forces and respond to them, with the hope of exploiting change by choosing a strategy appropriate for the new competitive balance before opponents recognise it

Mintzberg (1987) - strategy as perspective

Strategy as the organisation's internal understanding of its purpose, its "ingrained way of perceiving the world" or its "personality"

Definition of strategy. Rationale for the concept of strategy?

Strategy is long-term planning to meet desired goals, in a dynamic setting with constraints and much uncertainty. (De Neve, 2021) In other words, strategy is the bridge between "where I am" - positions and capabilities - and "where I want to be" - goals and outcomes; strategy tells you to "how to get there" - through what means and which decisions to make Rationale for the concept of strategy: Profitability differs between firms and industries. There must be a reason for this. · How do we explain the difference in performance? · How can firms increase their performance? · Is there some system, a "science of strategy", to guide decisions?

Honda case to illustrate emergent vs. deliberate strategies

The debate between the rational "design" school and the "emergent" school revolves around the following Honda case Honda made a successful entry into the US motorcycle market in the early 1960s and BCG lauded Honda for its "single-minded pursuit of a global strategy based on exploiting economies of scale and unassailable cost leadership" Subsequent interviews with Honda management revealed a haphazard, experimental approach with little analysis and no clear plan Mintzberg (1987) observes that: "Brilliant as its strategy may have looked after the fact, Honda's managers made almost every conceivable mistake until the market finally hit them over the head with the right formula."

Explain the concept of asset mass efficiencies

The idea that "success breeds success" - historical success translates into favourable initial asset stock positions which in turn facilitate further asset accumulation, e.g. high levels of asset-mass efficiencies makes imitability less likely

Ritala (2012) - when is co-opetition successful?

The paper aims to empirically find the main conditions in which a coopetition strategy can be viewed as beneficial: o Under contexts of high market uncertainty as firms that share risks and costs with their competitors are able to increase their innovation and market performance under these conditions; however, when market uncertainty is low, a co-opetition strategy may not provide added value o Co-opetition is beneficial for both innovation and market performance under situations of high network externalities - when the value of a product or service changes as the number of users using it increases (e.g. Facebook experiences network externalities since the more users it has, the more valuable Facebook becomes for all users) o Under situations with low competition intensity - a firm with lots of competitors is likely to be unable to collaborate with many of them effectively and efficiently

Bertrand et. al (2014)

Two opposing views of what lobbyists do: Lobbyists can be argued to be issue experts - since legislators and others involved in policy-making may not be as well-educated on a particular issue, lobbyists can perform the role of information transmission Second view of lobbyists as providing access to lawmakers for private companies, because of their personal connections to lawmakers 'Pure expertise' view of lobbyists does not fit the data well Maintaining connections to lawmakers is an important part of what lobbyists do according to the data - but this may not necessarily be about unethical or illegal practices The high price tag associated with lobbying services suggests that their services cannot just be acting as transmitters of information Connected lobbyists bring a complementary resource to firms - reputation, credibility or political savvy Some evidence supports the view that at least a subset of lobbyists have expertise Politicians listen to a larger share of lobbyists with opposing views to themselves, indicating that the role of lobbyists involves information transmission to some extent, rather than pure "quid pro quo"

Lieberman and Montgomery 1988 - disadvantages of being a first-mover

- Late-movers can "free-ride" on first-mover investments - Late-movers benefit from resolution of technological and market uncertainty - Late-movers can exploit technological discontinuities that provide "gateways" for new entry - "Incumbent inertia" can set in making it difficult for them to adapt to environmental change

Grant's definition of competitive advantage

A firm's potential to earn a higher rate of profit than its direct competitors

Kahneman and Tversky, 1974 - anchoring and adjustment

Anchoring effect: Decisions are often made by anchoring around an easily available number or piece of information and adjusting from there, e.g. suggested donations, priming survey questions etc.

Hapeslagh and Jemison (1987)

Debunk some prevalent myths about acquisitions: · Acquisitions don't succeed, acquisition strategies do · Shareholders are the least important constituency · Managers try to capture rather than create value · Strategic analysis plays only a small role in successful acquisition strategies · Companies do not learn all they can from their mistakes

Banerjee, 1992

Herd behaviour: decision-making is influenced by the decisions that we observe others making

Tieyang et al. (2009)

Mutual forbearance hypothesis = with multi-market contact, there is less incentive to retaliate aggressively, to intensify rivalry etc

Kahneman and Tversky, 1974 - endowment bias

Owned objects are valued more highly

Brandenburger and Nalebuff (1995)

PARTS framework for how firms can apply game theoretical principles in strategic decision-making Players Added Values Rules Tactics Scope

Apart from heterogeneity, what else determines profits in an industry?

Profits are also determined by appropriability (how much of the profits accrues to each constituent stakeholder group), which arises due to imperfect mobility (high-profit generating resource can always be transferred to a different firm) Another factor which affects profit-generation is the "limitability" of competition for input factors

(Kahneman, 2012)

Psychological heuristic in which people judge an experience based on how they felt at its peak and its end, rather than based on the total sum or average of every moment of the experience; the effect occurs regardless of whether the experience is pleasant or unpleasant

Koszegi and Rabin, 2006

Reference dependent utility: utility tends to be measured against a reference point, not in absolute terms, e.g. Olympic silver medallists report lower levels of subjective well-being than bronze medallists, because the reference point for silver medallists is the gold medal, while for the bronze medallists, it's winning nothing

How do substitute products affect the profit potential of an industry?

Substitute products limit the profit potential of an industry by imposing a ceiling on the prices it can charge for a particular product

Grant (2019) - when is it better for a firm to rely on internal resources and capabilities over positioning?

The greater the rate of change in a firm's external environment, the more likely it is that internal resources and capabilities will be the foundation of competitive advantage rather than positioning

Johnson, Whittington and Scholes (2011)

Typically, as the industry matures, focus shifts from differentiation competition to price competition

Besanko et al. (2017) - what are the four main types of organisational structure?

U-form (unitary functional structure) M-form (multidivisional form) Matrix structure Network structure

Example of a firm with a perfectly immobile resource (leading to imperfect imitability)

a competitive advantage of the Laphroaig distillery and its 10-year-old, single malt whiskey is its spring on the Isle of Islay, which supplies water flavoured by peat and sea spray, which their competitors cannot replicate

Explain the concept of causal ambiguity

as originally set out by Lipmann and Rumelt, the stochastic nature of some processes may result in our inability to identify relevant variables as well as inability to control them, which leaves them immune to imitation, e.g. R&D investment increases the probability of hitting the "jackpot" in the pharma industry, but this does not rule out the role of chance

Denrell (2005) - reverse causality

data may reveal a strong association between the strength of a company's culture and its performance which may lead managers to conclude that culture causes high performance, when in reality it could be the other way round also

Peteraf (1993)

explores the underlying economics of the RBV model of competitive advantage, arguing that there are four factors which lead to sustained competitive advantage, integrating insights from different RBV theories: o Heterogeneity of resources (leading to monopoly or Ricardian rents) o Ex-post limits to competition (leading to rents being sustained) o Imperfect mobility of resources (leading to rents being sustained within the firm) o Ex-ante limits to competition (leading to rents not being offset by costs)

Define the value attribute

it allows the firm to exploit opportunities or neutralise threats in its environment that allow it to increase efficiency or effectiveness

What are the main problems with studying diversification?

o Endogeneity - whether a firm diversifies or not is not independent of its past performance o Undersampling of failure - few studies are entirely comprehensive o Causality - diversification not always the only cause of increased / decreased profitability

Why are shareholders the least important constituency?

o Much of the empirical evidence from financial economics suggests that acquisitions create value primarily for the shareholders of the acquired firm rather than the acquirer o Managers, employees, investment bankers, commercial bankers and lawyers are much closer to the acquisition process than shareholders are, which means shareholder views might not be adequately represented and these parties may act in their own self-interest

Explain overhead / bureaucracy costs

o There is a natural limit to what can be produced internally, however. Coase notices a "decreasing returns to the entrepreneur function", including increasing overhead costs and increasing propensity for an overwhelmed manager to make mistakes in resource allocation. o This leads to an upper limit on how big firms can grow

(Weinstein, 1980)

optimism and over-confidence: tendency to overestimate our likelihood of experiencing positive events and underestimate our likelihood of experiencing negative events

U-form

§ A single unit is responsible for each business function, e.g. finance, marketing, production, purchasing etc. § This type of division of labour allows for specialisation in business tasks

Example of how variations in the institutional frameworks of different political economies affects corporate strategy

· e.g. impact of an exchange-rate shock on British (LME) vs German (CME) export-oriented firms: o German firms maintain prices and accept lower returns to preserve market share: § German firms can sustain a decline in profits because CME financial system places less emphasis on current profitability § Market share relatively more important as labour institutions favour long-term strategies and don't allow for easy firing o British firms tended to pass along price increases to overseas customers to maintain profitability: § British firms have to maintain profitability because structure of financial markets in a LME links the firm's access to capital and ability to resist takeover to current profitability § British firms can sustain the loss of market share because flexible labour markets allow them to lay off workers easily

Explain the concept of inter-connectedness

Accumulating increments in an existing stock may depend not just on the level of that stock, but also on the level of other stocks, e.g. to the extent that new product developments find their origin in customer suggestions, it may be harder to develop technological know-how for firms who do not have an extensive service network - in this case, the difficulty of building one stock is related, not to the initial level of that stock, but to the low initial level of another stock which is its complement; high levels of inter-connectedness makes imitability less likely

Alternative definitions of strategy

Chandler (1962) - The determination of the long‐run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals Rumelt (2011) - Strategy: a cohesive response to an important challenge

What controls how powerful a buyer is?

Concentrated or purchases in large volumes, which can make them particularly powerful in a high fixed costs industry (buyers are not dispersed) Products it purchases from industry are standard with several alternative suppliers; can play companies against each other The product sold by the industry is a big proportion of total costs - this means they are likely to be very price sensitive for the product and will "shop around" for best deals Buyer earns low profits, which creates an incentive for cost-cutting Industry's product unimportant to quality of buyers' products - e.g. oil field equipment malfunction can lead to large losses so buyers of such equipment will be less price sensitive Buyers pose a credible threat of integrating backwards to make the industry's product Retailers can gain significant bargaining power over manufacturers when they can influence purchasing decision

Why is firm success a function of past success?

Successful firms have better access to talent, capital and opportunities which leads to further success The isolating mechanisms of "non-imitability" and "non-substitutability" are the main impediments to competitive advantage being eroded

Lecture summary of distribution of firm performance

many firms enter, many firms exit, some firms grow but it's nearly random, some make extraordinary profits but they never last

Porter (1979)

"The essence of strategy formulation is coping with competition" Competition doesn't just revolve around other players in the industry, but suppliers, customers, potential entrants etc. can all be thought of as competition The state of competition in an industry can be illustrated by the Porter's Five Forces framework and the strength of these forces in a given industry determines the profit potential of that industry The goal of a corporate strategist is to find a position in the industry where the company can best defend itself against these competitive forces or take advantage of them The five forces are: - Threat of entrants - Powerful suppliers - Powerful buyers - Substitute products - "Jockeying for position" - rivalry among existing competitors

Examples of measures firms take to avoid substitutability

Guarding against substitution is encouraging employees to think of and develop radical ideas as is practiced in Silicon Valley, e.g. Google operates a 70/20/10 rule where employees are encouraged to spend 70% of their time on their core business, 20% on working with another team and 10% on moonshots

Porter (1996) - what is strategy?

Strategy is the creation of a unique and valuable position, involving a different set of activities. If there were only one ideal position, there would be no need for strategy. Companies would face a simple imperative - win the race to discover and pre-empt it. The essence of strategic positioning is to choose activities that are different from rivals'. If the same set of activities were best to produce all varieties, meet all needs, and access all customers, companies could easily shift among them and operational effectiveness would determine performance

Denrell (2005) - how does good performance reinforce itself? how does this cause a problem with selection bias?

good performance often feeds on itself so that current accomplishments are unfairly magnified by past achievements, i.e. initial success leads to a "head start" in subsequent competitive situations which increases the likelihood of success in those; thus, successful firms may not be successful due to some recently implemented strategy but just as a result of their past success

Porter (1996) - what is "strategic fit"? why does it lead to competitive advantage?

o strategy is about combining activities so as to be "internally consistent" and "mutually reinforcing" - this is what leads to a competitive advantage o E.g. Southwest Airlines' competitive advantage, Porter argues, comes from the way that all its activities fit and reinforce each other; the activity map shows the links between the internally consistent and mutually reinforcing activities o The strategic fit of activities also makes it more likely that a competitive advantage is sustainable o A group of interlinked activities is a lot harder to imitate than one specific operational advantage, branding element, technological advantage etc.

Rumelt, Schendel and Teece (1991)

sets out the concepts from economic theory that have served as the basis for strategic management Industrial organisation economics arose as a way of explaining the empirical relationship that had been observed between market share and profitability - structure-conduct-performance paradigm (Bain and Mason, 1959) problem of persistent profit was a source of conflict between economics and strategy: under perfect competition, economists would assume that supernormal profits are driven down by competitors to the level where all firms in the industry are making normal profits; however, empirical observation suggests that there are "sticky," inertial differences between firms' performances; if a firm does well, it is likely to do well tomorrow; high profits seem to be consistent in a way that economics could not explain Transaction cost theory (Williamson, 1981) and (Coase, 1932) Agency theory - divorce of ownership from control (Berle and Means, 1932) Game theory - von Neumann and Morgenstern (1944) and Nash (1950) Evolutionary economics - Nelson and Winter (1982) based on Alchian (1951)

Processual school of strategy

sit between the Classical theorists and Evolutionary theorists: they share the Evolutionary scepticism about "rational economic man" and the implications of that assumption but do not accept that markets will always ensure the profit-maximising outcome is selected Processuals took the internal complexity of organisations seriously rather than assuming that once the strategy emerged fully formed from the mind of the leader, it could be passed on as orders and would be unquestioningly obeyed by the rest of the organisation Based on the work of Simon (1957), Cyert and March (1963) formalised a theory of "bounded rationality" which stated that agents are unable to consider more than a handful of options at a time, reluctant to embark on unlimited searches for relevant information, biased in their interpretation of data and prone to accept the first satisfactory option that presents itself rather than insisting on the best Cyert and March (1963) also set out the theory of "political bargaining" involved in the process of strategy formation within firms - firms are not united in optimising a single utility but is composed on coalitions of individuals who bring their own personal objectives and cognitive biases to the organisation A process of bargaining occurs between all members of the organisation to arrive at a set of joint goals more or less acceptable to all - this involves compromises and what Cyert and March (1963) term "policy sidepayments" in return for agreement, e.g. the Production Director may accept a reduced investment programme in order to secure some new machines while supporting the Technical Director's bid for a new R&D strategy in order to keep her on side Strategy is the result of political compromise and not calculated profit-maximisation - this is known as the "behavioural theory of the firm" The processual school disagrees with the Classical sequence of "formulation first, implementation second" and argues that "strategy is discovered in action" through a process of repeated experimentation and learning rather than pre-formulating plans before execution

Mintzberg (1987) 5 P's

· Mintzberg created the "Five Ps" framework, defining strategy as plan, ploy, pattern, position and perspective

Powell (2003)

· Powell's statistical research on performance shows that the degree of competitive dominance in business does not differ substantially from the dominance found in other competitive domains (games, sports, talent contests) · This distribution of competitive dominance can be described by statistical laws and generating processes that involve a great deal of randomness

Porter and McGahan (1977)

· Tries to replicate Rumelt's (1991) experiment to explain variance in profitability within industry, with a larger, more recent data set and finds the following for the relative importance of various effects: o Year effects: 2% o Industry effects: 19% o Corporate effects: 4% o Segment-specific effects: 32% (segment = business unit as in Rumelt) · They also add that industry-specific effects are more persistent over time than business-specific or corporate effects, consistent with the view that industry structure changes relatively slowly (McGahan and Porter, 1997)

Bruderl, Preisendorfer, Zeigler (1992)

· examines variables that influence organisation survival derived from the theories of human capital and organisational ecology · It focuses on three groups of factors that influence survival rates according to theory: individual characteristics of the founder; attributes, structural characteristics and strategies of the business; conditions characterising the environment of the new firm · General human capital (mean years of schooling and mean years of work experience) are positively correlated with survival rates · There is a concave (U-shaped) relationship between work experience and survival rate, with the turning point reached at 25 years of experience · Among specific human capital experiences, industry experience is the most important effect and strongly correlated with survival rates · In terms of organisational characteristics, follower firms have much higher survival rates than newcomers · Affiliated firms, however, have lower survival chances than independent businesses · Failure rates are significantly associated with small size, leaving no support for the idea that a new business should begin on a small scale and build up step-by-step

Porter (1980)

· presented the "generic strategies" of cost and differentiation, but also the "focus" strategy which cut across the two; the cost leadership strategy involves aiming for cost-minimisation and being the lowest cost producer within the industry, e.g. Aldi (whether this is passed onto the consumer in the form of lower prices or used as profit is a different question), the differentiation strategy involves distinguishing the product or service from those of competitors, e.g. Apple; the focus strategy can be both a cost focus or a differentiation focus and this involves focusing on a specific niche / market segment within the industry rather than targeting the product at the whole industry, e.g. Rolls Royce (though the distinction is highly blurred) · He argued that those firms which are "stuck in the middle" would perform worse than those who chose one of the generic strategies, which was a subject of much debate during the 80s and a lot of strategists saw the appropriate strategy as a continuum of trade-offs between cost and differentiation

Kim and Mauborgne (2005)

"Blue ocean" strategy o argue that the best value-creating opportunities for businesses lie not in existing industries following conventional approaches to competing ("red oceans") but seeking uncontested market space - "blue oceans" o "Blue oceans" could be entirely new industries created by technological innovation (such as AI and nanotechnology) but more likely to be the creation of new market space within existing industries through: § Creating new customer segments for existing products, e.g. Tesla's Powerwall battery for electrical storage in the home § Reconceptualisation of existing products, e.g. Mark Zuckerberg's reconceptualisation of a printed Facebook of class members as an online interactive social platform § Novel recombinations of product attributes or reconfiguration of the conventional industry value chain o The key characteristic of "blue ocean strategies" is being able to transcend the industry assumptions regarding trade-offs and offer products with attributes that are commonly seen as mutually exclusive

Coff (1999) - what does the separation of ownership and control lead to?

"Internal stakeholders" e.g. management, employees can typically appropriate significantly more rent than shareholders due to the separation of ownership and control meaning that shareholders are usually at a disadvantage

What are the key questions managers need to consider when looking at whether an acquisition will work out?

"Nothing can be said or learned about acquisition in general" and all analysis must be context-dependent § Type of acquisition: Managers should consider four questions to help them with their decision-making: · Why are we acquiring? - defensive / offensive motives · Who is acquiring? - does the initiative for the acquisition and responsibility for subsequent management lie with corporate / divisional management · What do we know about the business? - entry into completely new field vs step-out from existing business? Horizontal acquisition of competitor? § Type of synergy: · These could be resource sharing, functional skill transfer, financial transfer, strategic logic · Is the relatedness between both firms such that resource sharing is possible? Tangible resources and intangible resources can be shared · Are functional competencies in the acquired firm really similar enough to allow for value creation through functional skill transfer? - e.g. R&D may be too specialised for the acquirer for it to be applicable to the acquired firm · Are financial requirements complementary enough to create economic value through financial transfers in order to allow the firms to grow at a faster rate than possible using its own cash generational potential only? · Is the strategic logic of both businesses similar enough that top management can ensure adequate strategic control and improve the general management of acquired company? § Degree of interdependence: · The realisation of benefits from the acquisition depends on the extent to which the interdependence between the two firms is managed and this decision involves a trade-off between the benefits of the integration and benefits of autonomy · Although it is a common assumption that the more closely related two companies are, the greater the economic benefits of merging, the empirical evidence is inconclusive · Implementation issues should be discussed earlier on in the process

Evolutionary school of strategy

"markets, not managers, choose the prevailing strategies within a particular environment" o Alchian (1950) used the biological principle of evolution to propose the evolutionary theory of the firm - "the most appropriate strategies within a given market emerge as competitive processes allow the relatively better performers to survive and flourish while the weaker performers are irresistibly squeezed out of the ecological niche" Since strategising is ineffective, firms should focus on "an abundance of diverse new initiatives from which the environment can select the best" o According to Sanchez and Sudharshan (1992), it was this Darwinian approach that guided Sony in its strategy during the 1980s when it launched more than 160 different Walkman versions

Rothaermel (2001) - empirical results

1. the relationship between an incumbent's strategic alliances with providers of the new technology and the incumbent's new product development is curvilinear (U-shaped, which he expects due to bounded rationality as detailed above) 2. following radical technological change, an incumbent's "exploitation" alliances have a greater impact than its "exploration" alliances on the incumbent's new product development, when the incumbent firm possesses the complementary assets necessary to the commercialisation of the new technology

What is a complementor? Example

A complement to a product or service is any other product or service which makes it more attractive Classic example is software and hardware - faster hardware incentivises people to upgrade to more powerful software, and having powerful software forces people to upgrade to hardware that can run that software effectively GM, Hudson, Packard and Willys Overland - automobile manufacturers - decided to pave roads themselves as there weren't enough of them to make travel by car attractive; once they built enough of them and people started to realise that paved roads were convenient / necessary, they lobbied local governments to pave more roads and this in turn, led to increased demand for their cars Other examples - GM and Ford Motors issuing loans to encourage people to buy their cars; selling cars also helps GM and Ford sell loans - their revenues were roughly split evenly between loans and cars; Michelin tyres produces the Michelin guidebook encouraging people to take longer routes (and wear down their tyres) Complements are always reciprocal Some businesses fail because they don't take complementarity into account - Alfa Romeo and Fiat struggled to sell in the US because the US didn't have enough qualified mechanics and they would have trouble finding spare parts

Example of "regulatory opportunity"

Although most firms are already concerned with "regulatory risk" and "reputation," they also need to look at "regulatory opportunities." · Obtaining competitive advantages can often require non-market strategies, e.g. Toyota lobbies access for Prius on California carpool lanes, Google obtaining regulatory approval for driverless car, US sugar industry benefits from import quotas

Describe the horizontal links on the value net. Example?

COMPLEMENTOR - a player is a complementor if customers value your product more when they also have the other player's product than when they have your product alone To identify them, focus on the customer and ask: What else would my customers buy to make my product more valuable to them? COMPETITOR - a player is a competitor if customers value your product less when they have the other player's product Again, when identifying, the emphasis should be on who else is solving customer problems that your product is targeting, rather than basing it along traditional industry lines - the customer only cares about solving their problem, not which industry the company solving it is from E.g. Microsoft and Citibank both working on the problem of how people will transact in the future, online transfers etc. and on this front, they could end up being direct competitors even though they are from different industries

Brandenburger and Nalebuff (1996) - Explain the idea of co-opetition

Companies are complementors in making markets and competitors in dividing them; so they can cooperate with each other for some mutual benefit, before they compete to appropriate this benefit

How can complementors make markets?

Complementors can together foster greater demand than would have existed individually for their products This explains the phenomenon of clustering to some extent - you would expect firms to spread out over the country but in reality similar competitors tend to cluster around the same geographic location The 'bunching' effect occurs due to the following reasons: having greater choice in one location increases convenience and makes it more likely that customers will set out to purchase the good in question in the first place consumers can also be confident that goods will be priced competitively and of good quality - a store with inferior prices / quality will likely go out of business when located next to similar competitors more convenient for a customer to find complementary products, e.g. chairs and tables can be found in different shops close to each other - "making it easier to find chairs helps sell tables and vice versa" Overall, companies are complementors in making markets and competitors in dividing them up

Priem & Butler, 2001

Criticisms of RBV: - it is tautological, i.e. that it is circular as it begins by assuming the very thing that is meant to be proven by the argument, e.g. ·substituting Barney's definitions for valuable, rare and imperfectly imitable strategies into his theoretical statement that "valuable and rare organisational resources can be a source of sustained competitive advantage" and his definition of competitive advantage as a firm "implementing a value creating strategy not simultaneously being implemented by any current or potential competitors" leads to tautologies such as "uncommon organisational attributes that enable firms to conceive of and implement value-creating strategies can be a source of implementing a value-creating strategy not simultaneously being implemented by any current or potential competitors." - he does not emphasise that the determination of what makes a resource valuable is exogenous to the RBV model since it is the environmental conditions that make a resource valuable or not - Barney does not parameterise "rare" - i.e. he doesn't put a number on exactly how rare is rare, so the assertion actually cannot be empirically tested - equifinality: the idea that different resource configurations / combinations can achieve the same level of competitive advantage under a more "traditional" definition of CA as "systematically creating above average returns" - The VRIN attributes are not susceptible to managerial manipulation - P&B observe that many attributes of resources that make them likely to be sources of sustained strategic advantage - such as path dependence and social complexity - make them unmanipulable by management - The definition of resources includes basically any firm attribute rather than specifying a list of resources that firms need to develop to gain a strategic advantage, which limits the prescriptive potential of the RBV - The theory is static and not dynamic more dynamic research is needed into "where the conditions under which resources are developed / acquired in one period have implications for the strategic advantages of firms in subsequent periods"

Mintzberg & Waters (1985)

Details the distinction between "deliberate" and "emergent" strategies and emphasises that it is not a clear-cut dichotomy between the two but that strategies exist along a spectrum between pure deliberate and pure emergent strategies.

Explain the "Tactics" element of the PARTS strategy

Due to the uncertainty inherent in business decisions (e.g. not everyone will agree on who the players are, what their added values are or the rules), firms can use "tactics" to change other players' perceptions of the rules to their advantage § The Post had raised its price to 50 cents and the Daily News held at 40, which meant that the Post was losing subscribers and advertising revenue § The Daily News did not follow suit as they thought Murdoch could not afford to pull it off for very long and they also believed that the fact that they retained demand was due to their superior product and not due to dime price advantage § Murdoch sought to "lift the fog" and change Daily News' perception of the rules by lowering the price of the Post from 50p to 25p on Staten Island § The result was that sales of the Post doubled - the added value of the Daily News clearly wasn't very high § Thus, the Daily News realised it would be better off pricing at exactly the same point as the Post rather than get involved in a price war and began to price at 50 cents

Explain the concept of second movers benefitting from resolution of technological / market uncertainty

Entry in an uncertain market (where demand conditions for a product are not known, for example) involves a high degree of risk Early entry can be attractive when the firm can influence the way that the uncertainty is resolved, e.g. being able to set industry standards in its favour Teece (1986) argues that in many new product markets, uncertainty is resolved through the emergence of a "dominant design" e.g. Model-T Ford, which imitators start to adopt after which competition often shifts to price, thereby conveying greater advantage on firms possessing low skills in low-cost manufacturing

Why is substitution of asset stocks a problem?

Even if imitation is not a major threat, asset stocks may still be vulnerable to substitution by different asset stocks, which threatens to render the original asset stock obsolete, e.g. capitalising on its stock of R&D, Canon was able to "design service out of the product" and substitute superior product design for the extensive service network that Xerox had, rendering this network redundant

Lieberman and Montgomery (1988)

First-mover advantages are defined as the ability of pioneering firms to earn positive economic profits (profits in excess of the cost of capital) This advantage arises within a multi-stage process, where in the first stage, an asymmetry is generated, allowing one firm to gain a head start over its rivals, which means the firm can exploit this position of advantage to enhance the magnitude or durability (or both) of its first-mover profits The arising of first-mover advantage could be due to unique resources / foresight or simply due to luck The mechanisms leading to first-mover advantage are: - technological leadership - pre-emption of assets - buyer switching costs - buyer choice uncertainty

Whittington (2001)

Four basic theories or perspectives on strategy: Classical Processual Evolutionary Systemic

Dyer and Singh (2001)

Goes beyond the RBV and argues that a firm's critical resources that lead to sustained competitive advantage can lie outside the boundaries of the firm and may be embedded in interfirm resources and routines Taking the firm as the sole unit of analysis may limit the explanatory power of models like the RBV Identifies four potential sources of inter-organisational competitive advantage

Why does heterogeneity in profits arise in an industry according to RBV?

Heterogeneity arises because of incomplete factor markets as firms cannot acquire all methods of production to reproduce identical processes and output (i.e. these factors are non-tradeable) Isolating mechanisms are used to sustain resource heterogeneity: o Non-imitability o Non-substitutability

Hotelling (1929)

Hotelling presents the "principle of minimum differentiation" which posits that in certain markets it can be rational for producers to make their products as similar as possible leading to the phenomenon of "bunching" - where all competitors become very similar and tend to the average in some dimension of strategic decision-making This is opposed to the idea of product differentiation as the source of sustained competitive advantage

What could influence a rival's perception of potential retaliation?

If incumbents possess substantial resources such as excess cash / unused borrowing power, productive capacity etc. if incumbents seem likely to cut prices and even be willing to absorb short-term losses If the financial performance of all parties involved would decline as a result of new entrant

Gnyawali and Park (2011) - impact of co-opetition

Impact of co-opetition: o Allowed both firms to increase market share and attain industry leadership, going from 3rd and 4th LCD TV makers before collaboration (behind Sharp and Phillips) to 1st and 2nd place at the end of 2008

Brandenburger and Nalebuff (1996) - Intel case study

Intel benefits when Microsoft pushes forward in software development (as increases demand for more advanced hardware); Microsoft benefits when Intel develops faster chips / processor as people with this more likely to get software upgrades But Intel feels Microsoft doesn't share the same sense of urgency - Intel develops better hardware quicker than Microsoft can develop proportionately advanced software To keep increasing revenues, customers need to find a constant need to upgrade; also the market can become saturated if no need for upgrade, which would allow other chip manufacturers to catch up So Intel decided to invest in the development of software applications that require massive processing capabilities - to create a market for their existing product E.g. $100mn investment in ProShare - video conferencing software Intel's strategy was to look for other companies to invest along with them as ProShare could also create a demand for their products Phone companies were keen as video conferencing capabilities received and transmitted more data than traditional phone lines could ordinarily handle Little demand for the high-capacity ISDN lines could be solved through creating demand for ProShare Compaq also agreed to include ProShare on its PCs to increase the value of their PCs for business customers All the players here recognised the complementarities available and utilised this to their advantage

Jacobsen (1988)

Inter-firm profitability differences do persist usually over a decade or more, implying that "isolating mechanisms" for sustained competitive advantage can be effective

Barney (1991)

Key reference for RBV: · Much of the strategic research focused on the impact of a firm's environment on its competitive position has placed little emphasis on the differences in individual firms' attributes in determining performance · This work, rooted in industrial organisation economics, has adopted two key simplifying assumptions: o Firms within an industry are identical in terms of the strategically relevant resources that they control and the strategies they pursue o If resource heterogeneity does develop within industries, they will be short-lived as the resources that firms use to implement their strategies are highly mobile (they can be bought and sold through factor markets) · The RBV substitutes two alternate assumptions in analysing sources of competitive advantage and analyses the implications of these: o Firms within an industry may be heterogeneous with respect to the strategic resources they control o Resources may not be perfectly mobile across firms so heterogeneity can be long-lasting

Example of firm which focused too much on positioning and suffered as a result

Kodak is a classic example of being focused on positioning rather than the firm's internal capabilities - when the dominance of the market for photo products was threatened by digital imaging, Kodak invested billions into digital technologies, but in 2012 was forced into bankruptcy; one could argue that they might have been better off developing applications of their chemical-based capabilities to plastics, industrial coatings etc.?

Hall and Soskice (2001) - Types of political economies

Liberal market economies Coordinated market economies

(Kahneman and Tversky, 1974) - loss aversion

Loss aversion probabilities of gains and losses are not valued symmetrically and "losses loom larger than gains"

Boulding and Christen (2001)

Managers' expectations of performance may influence their choice of strategies and thus confounding the effect of those strategies, e.g. Boulding and Christen (2001) illustrate the phenomenon of companies with good products and strong distribution capabilities choosing to enter new markets early and the product and distribution leading to high returns, but managers interpret this as being caused by early entry - first-mover advantage

Example of Hotelling principle in action

McDonalds and Burger King frequently choose to locate right next to each other (Talwalkar, 2012)

Benefits of internal labour markets

Mobile internal labour markets which enable employees to transfer across different divisions of the firm can lead to efficiencies · The costs associated with hiring and firing can be reduced · The broader set of career opportunities available in the diversified corporation can also attract a higher calibre of employee · There are less informational asymmetries in hiring from the internal labour market into a different part of the business than there is from the external labour market

Porter (1979) - explain the concept of threat of entrants

New entrants can drive down profits in an industry if they are able to compete on price or quality High barriers to entry = low threat of entry Retaliation from entrenched competition (e.g. potential for price warfare) = low threat of entry

What factors can increase rivalry among existing competitors?

Numerous competitors who are roughly equal in size and power Industry growth is slow, which causes fights for market share Product / service lacks differentiation / switching costs so competitors can 'raid' each other's customers more easily High fixed cost / perishable product - temptation to cut prices to compete High exit barriers such as specialised assets / management loyalty There are also opportunities for collusion (tacit and explicit such as price-fixing)

Gilbert and Newbery 1982

Pre-emptive patenting: when a firm with monopoly power attempts to protect this monopoly power by patenting new technologies before potential competitors, which leads to the creation of patents that are neither used not licensed to others ("sleeping patents") The most famous example of this is the anti-trust case against Xerox, where the SCM corporation claimed $500m in damages on its claim that Xerox had, among other anticompetitive behaviour, maintained a "patent thicket" (of 2000+ patents) where some inventions were used while others where neither used nor licensed to others in order to deter new entrants; IBM had famously been sued by Xerox for accidentally infringing on 20 of these patents when it launched its photocopier They formulate a model which posits that the monopolist will pre-empt if the cost is less than the profits gained by preventing entry (profits accrue from preventing entry because entry is assumed to bring about a reduction of total industry outputs below the monopoly level) Pre-emptive patenting may be unnecessary if potential entrants can be deterred more cheaply by other strategies such as investments into plant / expanded capacity Pre-emption can be too costly if an established firm has a sufficient comparative disadvantage in research or production and uncertainty about the expectations and resulting investment activities of potential rivals may lead an established firm to choose an R&D strategy that allows entry by optimistic firms institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power

Fudenberg and Tirole (1984)

Provide the following taxonomy for the industry / firm-specific factors which favour over or under-investment · "Toughness" refers to ability to compete on price · The fat-cat approach is overinvestment that accommodates entry by committing the incumbent to play less aggressively post-entry (as in the advertising example, because they have a large captive market, they will under-react to new entrants in pricing) · The lean and hungry look is strategic underinvestment in order to appear tougher and deter entry (i.e. not having invested resources into acquiring a captive market, which makes the incumbent appear more willing to compete on price) · The puppy dog approach is when incumbents make themselves look "small and friendly" - this is desirable if making the strategic commitment makes them tough, but also makes their competitors tough · The top dog approach is the approach most often cited in theory, as described by Spence and Dixit, of overinvesting to deter entry by erecting barriers of entry either through economies of scale which enables limit pricing, for example

Describe the vertical links on the value net. Example?

SUPPLIERS - other players can complement or compete with you in attracting suppliers' resources A player is your complementor if it's more attractive for a supplier to supply resources to you when it is also supplying to the other player rather than supplying you alone A player is your competitor if it's less attractive for a supplier to supply resources to you when it is also supplying the other player Capital providers and employees are also suppliers in a way A lot of companies will be both complementors and competitors on the supply-side E.g. Delta and American Airlines are competitors for airport facilities, but they are also complementors when it comes to their supplier Boeing, as when Boeing develops newer generations of airplanes / other advanced products, it is much cheaper to spread development costs over both Delta and AA rather than just one of them individually; greater demand also helps Boeing move down learning curve faster, lowering costs even further (and other economies of scale) This is especially relevant in markets for knowledge-based products due to the high upfront costs involved, followed by cheap variable costs to increase output

Dierickx and Cool 1989

Strategic asset stocks (like reputation, expertise) are accumulated over time rather than acquired in "strategic factor markets"; this accumulation occurs by choosing appropriate paths of flows like marketing / R&D budgets Imitability depends on characteristics of asset stock accumulation such as: o Time compression diseconomies o Asset mass efficiencies o Inter-connectedness o Asset erosion o Causal ambiguity § the firm must choose "appropriate time paths of flow variables" to "build required stocks of assets" where assets = resources § i.e. strategic asset "stocks" i.e. resources like reputation and expertise are accumulated by choosing appropriate time paths of flows (e.g. deciding the timings of allocating flows to marketing / R&D budget)

What controls how powerful a supplier is?

Supplier's industry more concentrated than the industry they are supplying to (suppliers are not dispersed) Switching costs which can arise from over-reliance on suppliers Time / shoe-leather cost of finding new suppliers Heavy investment in or adapting to a supplier's machinery or process for doing things (sunk costs) Integration such as production lines being connected to suppliers manufacturing facilities Lack of alternative suppliers in the industry Poses a credible threat of integrating forward into the industry's business Industry is not an important customer of the supplier group, so their fortunes are not tied

Example of firms which exemplify RBV

The 3M corporation is a great example of the difference between a resource-based vs positional strategy: It originally began as Minnesota Mining and Manufacturing, when it predominantly focused on sandpaper, later expanding to over 55,000 different industrial, office, medical and household products; however, it refuses to define itself as a conglomerate, instead stating that its vast product range rests on a cluster of technological capabilities that it has systematically developed for more than a century Microsoft is another good example as its initial success with the MS-DOS operating system for the IBM PC and then Windows was followed by expansions into software applications, e.g. the MS Office suite of products, Internet services (e.g. Xbox Live) and cloud-based computing. It was able to expand into these due to its software development, marketing and partnering capabilities.

Acemoglu (2013)

The announcement of Timothy Geithner as nominee for Treasury secretary in Nov 2008 produced a cumulative abnormal return for financial firms with which he had a connection 6% increase in share price after the first full day of trading and 12% after 10 full trading days When it looked like he would not become Treasury secretary due to tax issues, firms associated with him actually suffered from abnormal negative returns Why would market participants expect benefits for Geithner-connected firms? May have expected some form of explicit corruption to take place - not a possibility in the US "Cultural capture" - may have believed that Geithner's policy preferences were generally consistent with the interests of the financial institutions with which he was connected - i.e. his time spent at these institutions has influenced his worldview to the point where even if he isn't deliberately trying to benefit them, he will be more favourable to larger financial institutions, for example - unlikely as this would indicate all financial firms to benefit equally, but only those specifically associated with Geithner experienced abnormal financial return "Social connections meets the crisis" hypothesis - the idea that connections would matter during a time of crisis and increased policy discretion - immediate action with limited oversight would have to be taken, so politicians rely on close acquaintances from different fields with relevant expertise, perhaps including private sector - e.g. UK govt. PPE contracts controversy during COVID - most convincing explanation based on the data

Why might incumbent inertia occur?

The firm being locked-in to a specific set of fixed assets · i.e. a company with heavy sunk costs in fixed plant or marketing channels that ultimately prove sub-optimal may find it rational to "harvest" these investments rather than attempt to transform itself radically (Tang, 1988) · the appropriate decision between adaptation and harvesting depends on how costly it is to convert the firm's existing assets to alternative uses The firm being reluctant to cannibalise on existing product lines: · This is a rational profit-maximising response but one that could lead to organisational decline over time · Arrow (1962) first presented the argument that incumbent monopolists are less likely to innovate since innovation destroys rents on the firm's existing products · Conner (1988) argues that the incumbent's optimal strategy is to develop an improved product but to delay its market introduction until challenged by the appearance of a rival product The firm becoming organisationally inflexible · From an organisational theory perspective, Hannan and Freeman (1984) outline factors which limit adaptive response by incumbents, which include the development of organisational routines and standards which become embedded and internal political dynamics which can contribute to organisational inertia · Examples of such organisational inertia include: Henry Ford's decision to persist in producing the Model T, despite the growing prominence of GM (Wayne, 1974) and the decline of the major potato chip producer in the UK (Bevan, 1974) due to the fact that they failed to realise that the challenger had invented a whole new segment - selling to women and children in supermarkets, rather than the existing served market of men in pubs

how can pre-emption of assets lead to first-mover advantage? factors which lead to advantage not emerging?

The first-mover firm gains an advantage by acquiring scarce assets before rivals do, or at market prices which lower than those which will prevail later in the evolution of the market, which they may be able to do through superior information / strategy-making or luck These resources can be input factors or locations in the geographic / product characteristics space If these assets are mobile but face high switching costs, the firm will be able to appropriate more of the rent that could potentially accrue to them Spatial pre-emption aims to take advantage of the fact that there is only "room" for a limited number of profitable firms This arises due to the fact that the first-mover can select the most attractive niches and take strategic actions that limit the amount of space available for subsequent entrants (both geographic and in terms of niches available for product differentiation) One example of "product space pre-emption" is the US breakfast cereal market in the 70s, who tacitly colluded to sustain their extremely high profit rates by pre-empting supermarket shelf space and producing new brands of cereal to occupy those spaces Pre-emptive investment into plant and equipment can act as a signal to new entrants that the incumbent plans to increase output following entry, which raises the prospect of lower prices across the industry and deters new entrants In terms of economies of scale benefits for first movers due to pre-emptive asset acquisition, Schmalensee (1981) shows that in most realistic industry settings, they provide only minor entry barriers and potential for enhanced profits; only in industries such as utilities which are natural monopolies with very high minimum efficient scale do economies of scale provide large barriers to entry

What are the different barriers to entry?

Types of barrier to entry: Economies of scale - new entrants cannot compete on low per unit cost due to incumbent's EoS in production; EoS can exist in R&D, marketing, distribution etc. Product differentiation - strong brand image / loyalty is a barrier to entry, e.g. the Hoover brand being associated with vacuum cleaners; industries in which this is very important include investment banking, OTC drugs, soft drinks, cosmetics Capital requirements - smaller entrants may struggle, particularly relevant if: high spending required on a sunk cost, e.g. R&D spending in the pharmaceutical industry huge set-up costs in some industries, e.g. mining, computer manufacturing minimum efficient scale is large ("natural monopolies") and new entrants cannot compete without massive capital investment but not necessarily a barrier to entry, if firm has good access to capital markets Cost advantages unrelated to EoS - e.g. the experience curve, proprietary technology or governmental access that competitors don't have access to Access to distribution channels - limited wholesale or retail channels are obvs a barrier to entry; sometimes to overcome new entrant may have to create their own distribution channel, e.g. Timex watches in the 1950s (can probs find more recent example) Government policy - can ban / heavily restrict / companies from entering certain industries; regulation can also have indirect effects

Barney (1991) - VRIN

Valuable, Rare, Imperfectly imitable, Non-substitutable

What is a value net?

a schematic map which can be used to visualise all players in the game, representing all the agents in relation to a product / company and the interdependencies among them

What is a matrix structure? Example? When is a matrix preferred to M-form?

an organization combines functional and divisional chains of command in a grid so that there are two command structures-vertical and horizontal. § An example of the matrix structure in action was Pepsi, which nationally coordinated manufacturing to help achieve economies of scale in production, but also undertook regional coordination as this increased their effectiveness in negotiating with large purchasers, justifying organisation along geographic lines § For a matrix structure to work, both dimensions have to be equally important as otherwise, if one dimension takes precedent, the preferred structure would be multidimensional

Faccio (2006) - stats about corporate-political connections

corporate political connections are relatively widespread and exist in 35 of the 47 countries analysed · "Connected" firms represent 7.72% of the world's stock market capitalisation · Political connections are a lot more common in some countries, e.g. Russia where 87% of the Russian stock market cap is represented by "connected" firms

Explain the "Rules" element of the PARTS strategy?

firms can change the rules of the game; rules determine how the game is played by limiting the possible reactions to any action and analysing the effect of a rule involves "looking forward and reasoning backward" A Meet-the-Competition-Clause (MCC) can also be a rule that governs industry dynamics, making them favourable to all players · In the carbon dioxide market, CO2 is clearly a commodity with very little distinguishing the products of different firms · Producers institute a Meet-the-Competition clause into their contracts with customers, which enable them to earn more than their added value · With an MCC, lowering the price would trigger a "race to the bottom" which benefits none of the competitors; the incumbent benefits as no one undercuts them and the challenger also benefits as they have a precedent to set a higher price

Explain the concept of time compression diseconomies

inefficiencies that occur when things are done faster, so that as the time allowed to develop a competence shortens, the cost of developing the competence will increase exponentially; thus additional costs are incurred by firms seeking to quickly reach a given level of an asset stock; thus, this is an impediment for firms trying to imitate a rival's resources, e.g. maintaining a given rate of R&D spending over a particular time interval produces a larger increment to the stock of R&D know-how than maintaining twice this rate of R&D spending over half the time interval.

What are the major issues with the concept of first-mover advantage? - Lieberman and Montgomery (1988)

o "Pioneering" opportunities arise endogenously and are not controlled by the firm and firms usually gain first-mover advantages through a mix of proficiency and luck - hard to distinguish between a firm achieving first-mover advantage through superior technological innovations / market research vs. sheer luck o Selection bias: > When first-mover opportunities are generated by chance, firms that draw less attractive opportunities may choose not to enter or they may exit quickly and not be observed > Thus, we cannot reliably attribute superior performance to first-mover advantage as it could be some third endogenous variable which is causing both the firm to be an early-mover and achieve high profits In general, how large a discontinuity from existing practice is required to cross the threshold for definition as a pioneer? § Also, should the criterion for first-movership be actual market entry or the initiation of preliminary research? (the standard definition seems to be market entry which is reasonable) § Finally, over what period of time should the existence of "first-mover advantage" be measured? i.e. a pioneer with patent protection whose economic profits fall to zero at the patent expiration date may actually be less profitable across its lifetime than a later mover

Classical school of strategy

o "top-down, planned and rational approach to strategy-making" o Profitability is the supreme goal of business, stemming from Adam Smith-style neoclassical economic assumptions and exemplified in Sloan's statement that "the strategic aim of business is to earn a return on capital, and if in any particular case the return in the long run is not satisfactory, the deficiency should be corrected or the activity abandoned." Sloan (1963) o It emphasises a rational, formalised plan - the "factual approach to business judgement" (Sloan, 1963) and the conception of the plan precedes execution o This emphasis on deliberately rationalising a plan was partly due to the lack of precedents that existed in strategy formulation Sloan could fall back on - GM was one of the first large corporations of its kind: "short on experience, we were long on logic" o At GM, Sloan used the term "policy" to refer to strategy and stated that the deliberate construction of a "policy" in advance was essential to the "progress and stability" of the business and emphasised the delineation of the functions of "policy creation" and "policy execution" by setting up an Executive Committee at GM whose sole purpose was creating "policy" while divisional managers were in charge of policy execution (these managers were strictly excluded from EC and decision-making regarding policy oddly)

Nagel (1995)

o A large number of players have to state simultaneously a number in the closed interval [0,100] and the winner is the person whose chosen number is closest to the mean of all chosen numbers multiplied by a given parameter p, where p is a predetermined positive parameter of the game - common knowledge o The payoff to the winner is a fixed amount, which is independent of the stated number and 'p' and if there is a tie, the prize is divided equally among the winners o The game aims to assess how a player's mental process incorporates the behaviour of the other players in conscious reasoning o Subjects are shown to engage in a finite "depth of reasoning" about the actions of other players o A subject with a zero-order belief is said to selects a strategy at random without forming any beliefs about others' actions or picks a number that is salient to them (e.g. 50) o First-order beliefs involve the belief that other players will play with "zero-order beliefs" i.e. pick a number at random, and the first-order belief player takes this into account in their guess o Second-order belief players reason that all players play with first-order beliefs o This continues on until the nth order belief player accounts for the beliefs of the (n-1)th player o The experiment finds that the guessing process is "driven by iterative, naïve best replies rather than by an elimination of dominated strategies" o The process of iteration is finite rather than infinite (i.e. players stop after some arbitrary 'k' levels of reasoning rather than deducing all the way to the optimal dominant strategy - 0)

Powell & Arregle (2007) - example of x-errors

o A well-known business school did not keep records of its alumni and failed to contact them for 40 years o Consultants working for an electrical utility discovered that management already had a 500-pg strategic plan and just were unable to implement it o From 1995 to 2005, Jeep, the leader in SUV brand recognition, introduced no new products despite a doubling of the SUV market

Explain the informational benefits of flexibility

o Although the scenario described above in the Stackelberg model demonstrates the benefits of commitment, a key underlying assumption here is that firms have perfect information about market conditions and costs, rivals' goals and capabilities and can observe each other's actions o In reality, however, strategic commitments are almost always made under conditions of uncertainty o This implies that there could be some value in preserving flexibility by keeping one's future options open and must be considered o Firms can preserve strategic flexibility by splitting a single large commitment into smaller commitments, e.g. Walmart bought its superstores to Mexico by only opening a few stores in select metropolitan areas, which was a result of its limited resources but also to gain more information about market conditions before proceeding with the store rollout o These small, incremental commitments to expansion would not have had a "Stackelberg" effect in reducing competitors' expansion plans, but would have benefitted Walmart by allowing them to learn about market conditions o However, this line of thinking leads to the question of if important decisions are to be delayed in order to learn about market conditions, when is the best time to make a strategic commitment? Key decisions cannot be postponed indefinitely and firms will lose considerable profits that it cannot recapture

Samuelson, 1988

o Due to loss aversion / the endowment effect / the need to reduce "cognitive cost", there is a tendency for people to prefer things to stay the same or pick the default option (Samuelson, 1988), e.g. countries with automatic enrolment for organ donation have much higher organ donation rates as very few people "opt out"

Bach and Blake (2016)'s strategic recommendations with regards to framing

o Appeal to key audiences and be consistent - exposing different audiences to different frames dilutes the effect of framing and reduces its credibility; however, if frames contradict individuals' values, then they are unlikely to be effective o Frame early - there may be first-mover advantages to framing as a dominant frame can stick in the minds of key stakeholders o Maintain empirical credibility - Frames must be consistent with events and evidence that audiences are familiar with o Select frames to increase your non-market influence - Firms will benefit most when they clearly identify which of the non-market dimensions they primarily wish to affect through framing

Powell, Lovallo and Fox, 2011 - definition of behavioural strategy

o Behavioural strategy merges cognitive and social psychology with strategic management theory and practice. It aims to bring realistic assumptions about cognition, emotions and social behaviour to the strategic management of organisations and thereby to to enrich strategy theory, empirical research and real-world practice

Porter (1998) - how do clusters increase productivity for participating firms?

o Better access to employees and suppliers - § There will already be an existing pool of specialised and experienced employees (e.g. from a surrounding university / other institution) and this can lower their search and transaction costs in recruiting § A cluster also signals opportunity and reduces the risk of relocation for employees which can help attract talent § Clusters can also offer a deep and specialised supplier base, which minimises the need for inventory, eliminates import costs and delays § Local reputation is more salient as customers are mostly local, which reduces the risk that suppliers will overprice or renege on commitments o Access to specialised information - § Extensive market, technical and competitive information accumulates within a cluster and its members will have preferred access to it § Personal relationships and community ties can foster trust and facilitate the flow of information o Complementarities - § Linkages among cluster members results in a whole greater than the sum of its parts § E.g. in tourism, the quality of a visitor's experience depends not only on appeal of the primary attraction but also on the quality and efficiency of complementary businesses such as hotels, restaurants, etc. or buyers visiting a shopping mall can see many vendors in a single trip § This mutual dependency means that good performance by one cluster member can boost the performance of others o Access to institutions and public goods - § Investments made by government or other public institutions such as public spending on infrastructure or education (public goods) - can enhance productivity in a cluster § Investments by companies into training programs, infrastructure, quality centres, labs, etc. can also contribute to increased productivity across the whole sector o Better motivation and measurement - § Local rivalry is highly motivating as competitive pressure is amplified within a cluster § Managers are better able to compare costs and employees' performance with other local companies

Grant (2019) - what is business model innovation?

o Business model innovation has been used to describe the introduction of novel approaches for creating or capturing value within an industry o Empirical research by IBM (2006) suggests that business model innovation is a more potent profit generator than either product or process innovation o The study by IBM identified three generic types of business model innovations: § New industry models - reconfiguration of the conventional industry value chain, e.g. Dell's direct sales model for PCs, Zara's vertically-integrated fast-fashion model § New revenue models - changing the target audience / pricing strategy, e.g. Rolls Royce introduced "Power by the Hour" where instead of buying jet engines outright, airlines could pay usage-based fees for engines, maintenance, spares and support services § New enterprise models - reconfiguring enterprise boundaries and partner relationships, e.g. the iPhone outsourced the manufacturing of smartphones and the network of application providers they partnered with created a new model of the smartphone business o Examples of significant business model innovations include: § Free content supported by paid advertising § Platform business models, which act as an interface between two sets of users usually buyers and sellers, e.g. eBay § Shared-ownership models, e.g. Airbnb § Franchising § Consumer cooperatives § Microfinance § Tied products - i.e. razor-and-blades / coffee-machine-and-pods model - below-cost pricing of the durable item and premium pricing of consumables associated with the item § Mail order o Conceiving of a business model innovation can be done through "analogous" thinking, i.e. be a firm like X in industry Y, but driving through changes and drumming up interest from incumbents can be challenging due to the dominant logic existing in the industry and "status quo" bias

Explain TCT

o Coase noted that there are a number of transaction costs to using the market: § the cost of obtaining a good or service via the market is actually more than just the price of the good. Other costs include: · search and information costs · bargaining costs · keeping trade secrets · policing and enforcement costs § These can all potentially add to the cost of procuring something with a market. This suggests that firms will arise when they can arrange to produce what they need internally and somehow avoid these costs.

How might co-operation be achieved in a prisoner's dilemma? Explain tit-for-tat and grim trigger strategies

o Conflict between the collective interest and self-interest is referred to as the prisoner's dilemma o Repeating the game may allow firms to move away from the dominant strategy and sustain cooperation over long time periods using tit-for-tat or grim trigger strategies o Tit-for-tat strategy = each participant mimics the action of their opponent after co-operation in the first round i.e. punishes after an episode of non-cooperation, but returns to co-operation after defection ends o Grim trigger strategy = once a participant defects, the other players never cooperate with them again i.e. punishment is infinite

Corporate vs. Business Strategy

o Corporate strategy is essentially "where to compete" - this aims to define the scope of the firm with regards to which industries or market segments it competes in; corporate strategy guides decisions such as diversification, mergers / acquisitions and overall allocation of resources between different parts of the firm o Business / competitive strategy is more concerned with how the firm competes within a given industry and how it can establish a competitive advantage over rivals within the industry

Sibony, Lovallo, Powell (2017) - how should firms design investment processes to counter behavioural biases?

o Designing investment processes to calibrate risk - § Formality = have an established, codified process for evaluating investments § Layering = have multiple layers that an investment needs to get through before it is executed § Closure = have clear and stringent voting or decision roles § More formalisation, layering and closure should help counteract the effects of excess optimism, overconfidence and risk-seeking § E.g. private equity firm found that there level of risk was unacceptably high despite having the stringent closure measure of only needing 2 votes to veto a proposal, so they went with the even more stringent closure policy of needing 1 vote to veto, which lead to even more risk as there was less debate about a given investment due to the fact that no one wanted to be the "sole voice" of objection; as a result, they increased the number of votes required to veto to 4, which meant that people formed coalitions and this led to livelier debates

Bach and Blake (2016) - example of successful issue framing

o E.g. prior to 2011, the issue of processing and selling the trimmings left over from larger cuts of beef had been framed in terms of safety and nutritional value and they were called "Lean Finely Textured Beef" pioneered by the firm Beef Products Inc; LFTB involves removing fat from trimmings using heat and centrifuges and then killing bacteria with ammonia gas o The celebrity chef Jamie Oliver spoke out forcefully against this in his cooking show; at this team, a memo also leaked of USDA microbiologist calling it "pink smile" o The uproar was immediate as millions became instantly aware of "pink slime" in their ground beef and within days, an online petition to ban it received more than 250k signatures o Although initially, very few people were concerned with LFTB, the media coverage had reframed the issue around social acceptability and thereby brought in new actors who were previously disinterested

Example of how framing can help shape how actors perceive their own interests?

o E.g. when the Australian government tried to impose a tax on mining revenues of multinational companies by shifting the system from taxes paid based on volume of minerals extracted towards being based on profits generated by seeking to introduce a 40% levy on profits o The government framed this issue as being about a fairer distribution of mining revenues, arguing that it was Australians that "owned" the resources and so should receive a fair share of revenues for them - an approach it expected would have a broad appeal o The mining industry quickly launched a coordinated, nationwide, multi-million dollar media campaign to move stakeholders' attention away from fairness and toward the potential costs of the RSPT o They adopted "Keep Mining Strong" as their slogan implying that the new tax would deter future mining investments and that the industry was the bedrock of the Australian economy o The campaign deliberately raised "sovereign risk" as an issue since the tax was going to apply to existing investment projects; this language is often associated with irresponsible government rent seeking, expropriation and even default in developing countries so was a pernicious line of attack o This line of attack was so successful, it actually ended up with support waning for Kevin Rudd as PM and Julia Gillard replacing him

Peteraf (1993) - explain the idea of heterogeneity of resources

o Efficiency (Ricardian) rents: A basic assumption of the RBV as originally set out by Barney (1991), resources and capabilities involved in production are heterogenous across firms Productive factors in use have different levels of "efficiency" which means that firms endowed with more "efficient" resources are able to produce more economically (lower cost) and / or better able to satisfy customer needs and wants Firms with superior resources will earn "rents" (profits), firms with marginal resources can only expect to breakeven This heterogeneity leads to Ricardian / efficiency rents, where the argument is as follows: § Firms with superior resources have lower average costs than other firms § Low cost firms have somewhat inelastic supply curves so they cannot expand output rapidly, regardless of how high the price may be (the resources they have are quasi-fixed) § High prices induce other higher-cost, lower-efficiency competitors to enter the market, who will enter and produce so long as P > MC § High-cost firms breakeven while low-cost, high-efficiency firms will earn the supernormal profits in the industry due to their scarce resources § These heterogenous resources have to be valuable, rare and imperfectly imitable as described by Barney (1991) o Monopoly rents: § Heterogeneity of resources also leads to firms being able to gain monopoly rents § While Ricardian rents arise due to efficiency, monopoly rents arise as a result of a deliberate restriction in output rather than an inherent scarcity of resource supply § They are able to gain monopoly rents as they face downward-sloping demand curves which enables them to restrict output to increase total revenues (up to a point) § In an industry with monopolistic / oligopolistic characteristics, where monopoly rents can be gained, firms within the industry have some specific resource which cannot be imitated by competitors outside of the industry (this intra-industry heterogeneity in resources creates barriers to entry - similarities between positional view and RBV) § Homogenous firms within an industry may also earn monopoly rents through Cournot / collusive behaviour, but again, this creates a barrier to entry between those within the industry and those outside of it, which can be viewed as intra-industry heterogeneity in resources

Lieberman and Montgomery 1988 - how can technological leadership lead to first-mover advantage? Factors which lead to the advantage not emerging?

o First-movers can gain advantage through sustainable leadership in technology, with the driving forces being: "Learning" or "experience" curve effects, where unit production costs fall with cumulative output, generating a sustainable cost advantage if this learning can be kept proprietary and act as a barrier to entry o Inter-firm diffusion of technology can occur, which would diminish the first-mover advantages arising from the learning curve, e.g. Mansfield (1985) found that process technology leaks more slowly than product technology, but competitors typically gain access to detailed information on both within a year of development Success in patent / R&D races: pre-emptive patenting, in which a firm with an early head-start in research exploits its lead to deter rivals from entering the patent-race o Such patent races seem to only be important in particular industries, e.g. pharmaceuticals, mainly due to the fact that there is heavy regulatory involvement and new entrants have to go through the same regulatory procedures as the first movers o In other industries patents confer weak protection as they are easy to "invent around" o Mansfield et al. (1981) found that, on average, imitators could duplicate patented innovations for about 65% of the innovators cost and 60% of the patented innovations were imitated within 4 years o Bresnahan (1985) details the case of Xerox, who frequently used patents as an entry barrier by patenting tangentially related alternative technologies rather than those related directly to the Xerography process; when IBM, for example, released its own photocopier, Xerox successfully sued them for infringing on 20 of their 2000+ patents; later, their competitors used anti-trust actions to force them into compulsory licensing of these patents

Gnyawali and Park (2011) - Sony and Samsung co-opetition - why did they decide to collaborate?

o For many years, Samsung and Sony engaged in fierce competition, with Samsung's key mission being to unseat Sony as the world's top electronics maker o Despite this fierce rivalry, the two firms established a joint venture in 2004 to develop and produce 7th generation LCD panels for flat screen TVs with an initial investment of $1bn from each firm, which they tripled when they moved onto creating the 8th-gen tech in a few years o The two firms are largely matched in size and resources and have overlapping products and markets worldwide and so offer an interesting study of co-opetition o In the TV industry, efforts of firms to introduce new technologies had shortened product lifecycles as the industry was shifting from analogue to digital technology o The digital era also required huge capital expenditures for the mass production of flat panel displays o Technological convergence - bringing previously unrelated technologies together into one single device, e.g. when the smartphone brought together multiple different single-use devices, e.g. calculator, watch, camera, etc. - also forced firms to develop new products such as LED TV and 3D TV o Feelings of vulnerability in the face of changing industry and technological dynamics led the firms to join hands with competitors o Sony needed to address a critical gap in its capabilities through this collaboration - it had leadership in the traditional CRT TV market but lagged behind in the rapidly growing flat-screen market o This required it to have a stable supply of LCD panels and Samsung was one of the strongest LCD panel producers at the time (though not the largest LCD TV maker) o For Samsung, securing a large partner like Sony was critical to achieving economies of scale o Thus, it is clear that each firm had unique characteristics and capabilities that the other one needed: Sony benefitted from Samsung's capabilities in LCD tech, while Samsung benefitted from Sony in terms of TV making expertise, brand name and large and continued demand for LCD panels o In addition to the above complementarities, the two rivals also shared the massive capital investment needed to develop and produce LCD panels, with a total investment of $6bn

Example of firm which obscured its superior performance to prevent imitation

o George Stalk, former MD of BCG: "one way to throw competitors off balance is to mask high performance so rivals fail to see your success until it is too late" § Few food processors realised the profitability of canned cat and dog food until the UK Monopolies Commission revealed that the leading firm Pedigree earned an ROCE of 47% § Related to the theory of limit pricing in economics - firm in a strong market position sets prices at a level that fails to attract new entrants

How is strategy made? Mintzberg (1985)

o Henry Mintzberg is a leading critic of rational, analytic approaches to strategy design. He differentiates between (Mintzberg, 1985): Intended strategy - strategy conceived by the leader / top management team; this could be through a process of rational deliberation but often also involves inspiration / negotiation / bargaining / compromise among those involved in strategy-making process Realised strategy - strategy that is actually implemented eventually ends up being only 10-30% of what was intended Emergent strategy - the primary determinant of what ends up being realised as a result of the interactions between strategy and the environment that a firm operates in as individual managers adapt the strategy to these circumstances "The notion that strategy is something that should happen way up there, far removed from the details of running and organisation on a daily basis, is one of the greatest fallacies of conventional strategic management" - Mintzberg (1994)

Explain the rarity attribute

o If a particular valuable firm resource is possessed by a large number of firms, then each of these firms have the capability of exploiting that resource in the same way, thereby implementing a common strategy that gives no one firm a competitive advantage; non-rare resources can allow a firm to create competitive parity (be equal to its competitors) but not a competitive advantage § As long as the number of firms in an industry with a valuable resource is less than the number of firms required to produce perfect competition dynamics in that industry, that resource can produce a competitive advantage

Hotelling (1929) - original example? how can it be generalised?

o Imagine there are two competing shops along the length of a street running north and south, with customers spread equally along the street o Both shops are identical in every way - product and price - and the only dimension on which they differ is where they choose to locate on the street o Each customer will always choose the nearer shop as it is disadvantageous to travel to the farther o If there was only one shop, the optimal location from the shop owners' point-of-view is anywhere along the street but the social welfare function would be maximised when the shop is at the point which minimises the distance people need to travel, implying that the social optimum is halfway along the length of the street o When there are two shops, Hotelling's law predicts that they will locate next to each other and both locate at the halfway point, such that each shop serves half the market, with one drawing customers from the north and the other from the south o The social optimum in the case of two shops would be if they were both one quarter of the way along the street from each end as this would mean they each draw half the customers, but the customers make a shorter journey o However, the shops would not be willing to do this independently as it would then allow the other to relocate and capture more than half the market § The example of the "street" can be generalised to all dimensions of product differentiation - size, colour, etc. - and the above case where the two shops are side-by-side is analogous to two products that are identical to each other in terms of characteristics § The phenomenon is present in many markets, particularly commodities which results in less variety for the consumer

Ghemawat (1985) - in what contexts does the experience curve benefit the business?

o Industry life stages: § Experience curve effects are much higher in the early stages of a product's life cycle as cumulated output doubles very rapidly at this stage § E.g. in a rapidly developing industry like fiber optics, cumulated output is doubling in less than 2 years, but in the mature vacuum cleaner industry, this requires nearly 20 years; so exploiting the experience curve can reduce costs by a quarter in the fiber optics industry and only by 2-3% in the vacuum cleaner industry o Technological risk: § The earliest product life-cycle stage offers opportunities for massive cost reduction by exploiting the experience curve but can also be a trap for the unwary, with the most common mistake being massive investments into the "wrong" technology § The lower risk strategy is to forgo a head start and experience-related cost advantages and wait until this uncertainty is resolved § The higher risk, higher-return strategy is to invest heavily and try to make a technology or design dominant in an industry o Price sensitivity: § Cutting prices in price sensitive industries lead to huge jumps in demand compared to non-price sensitive industries § This additional demand accelerates the company's progress down the experience curve by permitting rapid increases in cumulated output o Competitor analysis: § Trying to exploit an experience curve strategy is recommended against competitors with under-capitalised business units, with high-cost positions and corporate parents who do not understand experience curve logic § Competitors to avoid an experience curve strategy against have good cost positions, substantial financial resources and a history of following aggressive experience curve strategies § A price war with a "strong" competitor is likely to benefit only the consumer o Government intervention: § Government impacts the feasibility of experience curve strategies through competition policy and cost of capital § Cost of capital is vital as aggressive expansion to pursue experience curve strategies require huge amounts of capital in the early stages and is influenced by the government through subsidies, tax rates, depreciation policies and interest rates § US government policy has also criticised experience curve strategies as a predatory attempt to monopolise the market, e.g. the FTC attempted to force DuPont to share its cost reductions in the titanium dioxide industry with all its competitors

How does the Stackelberg model in microeconomics demonstrate the effects of strategic commitment?

o Instead of choosing quantities simultaneously, firm 1 can commit to a given level of quantity through a method such as building a new factory or signing a contract with workers / suppliers prior to firm 2 taking similar actions o In this model, firm 1's decision to expand output will lead to firm 2 contracting its output

Examples of corporate-NGO partnerships

o Microsoft collaborated with One Laptop per Child to make a version of MS Windows available on the low-cost XO laptops that the non-profit was distributing around the world o In India, Unilever teamed up with NGOs to create Shakti, a rural network employing 31k women that sells products adapted to customers in more than 100k rural villages that traditional retailers in India do not have access to o EDF is bringing electricity to rural areas through a range of partnerships: its Energy Access program involves collaboration with the World Bank, UN agencies, other MNC donors and NGOs to create small, locally-run companies to provide electricity

What are the three complementary views on competitive advantage?

o Positional: whom are you competing with? Is the industry attractive? How should you enter / defend? The main framework is Porter's Five Forces This line of thinking is used to assess the long-run profitability of an industry and identify the key external constraints to profitability o Resource-based: what have you got to work with? What are your strategic capabilities: resources, technologies, people? And can they lead to sustained competitive advantage? o Value system: what value can you add or gain? How can you work with stakeholders to co-produce value ("co-opetition")?

Dyer and Singh (2001) - what mechanisms preserve "relational rents"?

o Inter-organisational asset interconnectedness - § Inter-organisational asset interconnectedness will occur in cumulative increments on an existing stock of assets held by a firm or its alliance partner § E.g. a Nissan seat supplier built its plant on the property adjacent to a Nissan assembly plant and once this site-specific investment was made, they realised it would actually be cost-effective to build a conveyor built to transport parts between them and so both of them invested together into building this § This demonstrates the potential "snowball" effect in relation-specific investments as initial investments make subsequent investments more likely o Partner scarcity - § The creation of relational rents depends on a firm's ability to find a partner firm with: · Complementary strategic resources · A relational capability (i.e. a willingness / ability to partner with other firms) § Late movers could find that all potential partners with the necessary complementary strategic resources have already entered into alliances with other firms § In foreign markets, firms may lack the local market knowledge, contacts and distribution network needed to facilitate market entry § Potential partners could simply lack the relationship-building skills necessary or process building capabilities to make effective governance mechanisms § E.g. when Toyota tried entering the US market and aimed to build partnerships, they found that "many US suppliers do not understand our way of doing business. They do not want us to visit their plants and they are unwilling to share the information we require. This makes it very difficult for us to work with them effectively." o Resource indivisibility - § Partners may combine resources or jointly develop capabilities in such a way that the resulting resources are idiosyncratic and indivisible § Alliance partners combine resources and capabilities in such a way that they co-evolve over time and these conditions of mutual coevolution of capabilities of the partner firms can serve as preserver of rents from the partnership § However, a key strategic implication is that the partners' resources and capabilities may coevolve and change over time, thereby restricting each firm's ability to control and redeploy the resources - there is the potential for strategic inflexibility which should be considered o Institutional environment - § An environment that encourages or fosters trust among trading partners may facilitate the creation of relational rents § The strategic implication of this mechanism is that firms may need to locate operations in particular institutional environments in order to realise the benefits associated with "extra-hybrid institutions"

Example of appropriation

o Investment banking is a great example of the impact of rent appropriation on eventual firm profits o Goldman Sachs possesses outstanding capabilities in merger and acquisition services, underwriting and proprietary trading. These capabilities combine employee skills, IT infrastructure, corporate reputation, and the company's systems and culture. All but the first of these are owned by the company. However, the division of returns between employees and owners suggests that employees have the upper hand in appropriating rents. In 2016, total employee compensation was $11.7 billion—an average of $338,576 per employee; net after‐tax profit was $7.1 billion out of which shareholders received $1.1 billion in dividends. o Several "boutique" IB firms such as PWP and Moelis have actually started as a result of employees walking out of the larger incumbents to start their own firms, taking the core resource of their clients and networks with them

Sibony, Lovallo, Powell (2017) - what are the three types of decisions made in firms and what are the behavioural tendencies in these situations?

o Investment decisions - e.g. acquisition, product launch, capital expenditure - the key question is whether to invest or not § Behavioural tendency in investment situations is risk-seeking in large one-off decisions and risk-aversion in small sequential decisions § The biases present could be overconfidence, delusional optimism, competition neglect o Resource allocation decisions - e.g. corporate SBUs, department budgets, project teams - decision is how much to allocate § Behavioural tendency towards inertia and status quo leading to an inability to reallocate § Biases present are anchoring, status quo bias, escalation o "Blue sky" decisions - e.g. new strategies, new markets, organisation design - decision is what is possible: § Behavioural tendency to looking at too few options, familiar options and premature satisficing § Biases present are inside view, halo effect

Dyer and Singh (2001) - what are the four sources of inter-organisational competitive advantage?

o Investments in relation-specific assets § A firm could seek competitive advantages by creating assets that are specialised in conjunction with the assets of an alliance partner, e.g. Samsung and Sony's collaborative investment into mass production plants for LCD TVs leveraged each other's strengths to improve on each of their vulnerabilities o Substantial knowledge exchange, including the exchange of knowledge that results in joint learning § E.g. cross-licensing of patents between firms by Samsung and Sony o Combining of complementary, but scarce, resources / capabilities (typically through multiple functional interfaces), e.g. Samsung and Sony o Lower transaction costs than competitor alliances, owing to more effective governance mechanisms § Governance influences the willingness of alliance partners to engage in value-creation activities rather than acting opportunistically § Governance can be third-party enforcement of agreements (e.g. legal contracts) or self-enforcing agreements in which "no third party intervenes to determine whether a violation has taken place" § Self-enforcing agreements can take the form of "commitment devices" or hostages, which can be financial (e.g. equity) or symmetric investments in specialised or co-specialised assets, which constitute a visible collateral bond that aligns the economic incentives of exchange partners § Self-enforcing agreements can be more effective due to the fact that the value of the economic hostage will decrease in value if a party is opportunistic and this provides both parties an incentive to behave in a trustworthy fashion § In general, self-enforcing agreements tend to be more cost-effective than third-party enforcement mechanisms due to a) avoiding contracting costs, b) avoiding monitoring costs, c) allowing agreements to be adjusted "on the fly" as circumstances change d) self-enforcing contracts are not subject to the time limits of traditional third-party contracts

Yaziji (2014) - what are the 4 key strengths of NGOs that corporations can benefit from?

o Legitimacy - both Americans and Europeans said they found NGO spokespeople more credible than either a company's CEO or PR rep according to Edelman o Awareness of Social Forces - if companies keep a tab on the first stirrings of unrest from NGOs, they could potentially modify their practices and avoid bad publicity and economic harm o Distinct Networks - most companies' networks probably belong to one of the groups mentioned in Porter's Five Forces, whereas NGOs' networks consist of other NGOs, donors, regulators, lobbyists etc. which means partnering with them can be an excellent way to gain access to the information circulating within their networks o Specialised Technical Expertise - more sophisticated NGOs are filled with lawyers, policy analysis and scientists, who possess knowledge that the companies being targeted lack.

What options exist apart from diversification? What makes these challenging?

o Licensing o Outsourcing o Partnering o Joint venturing · But these can be difficult because of transaction costs, assets "tied up" in specific ways

Why do managers try to capture rather than create value?

o Managers sometimes focus on the short-term benefits of capturing value by tax benefits of acquisition or selling off parts of acquired firms for quick, predictable returns o Although value creation is emphasised in acquisition documents, which talk of synergies, the actual deal is structured to capture rather than create value as the short-term benefits are more clearly definable

Dahan et al. (2010) - what competencies and resources can NGOs bring to corporate-NGO partnerships?

o Market expertise o Legitimacy with clients / customers o Access to civil society players and governments o Access to local expertise o Sourcing and distribution systems

Simon (1957)

rationality of individuals is limited by the information they have, the cognitive limitations of their minds and the finite amount of time they have to make a decision; individuals are "satisficers" rather than "maximisers" and only apply rationality after having reduced options through heuristics and mental shortcuts

Bach and Allen (2010) - four factors leading to the increased importance of non-market strategy

o Multiple audiences: Companies with a global presence have to navigate many distinct non-market environments that are characterised by conflicting socio-political values, e.g. Yahoo's passing on of e-mail files from a Chinese dissident to Chinese authorities in 2004; the company claimed it was merely complying with local law but got sued in the US, publicly reprimanded by Congress and blasted by activists o The globalisation of nongovernmental organisations: Non-market actors have become adept at using modern communication technologies such as the Internet and social media more effectively than multinationals o New regulatory hurdles: Regulations are far from uniform across markets, e.g. antitrust policy is a lot more stringent in Europe than it is in the US o Competitive edge: taking a differentiated position on political or other issues can be a source of competitive advantage, e.g. BP, stuck in a commodity business with little control over prices and few opportunities for differentiation, took a big political gamble by becoming the first major oil company to acknowledge global warming publicly and take action such as diversification into renewable energy sources, internal carbon trading to reduce emissions and aggressive advertising to highlight company's actions

Felin (2014) - four practical areas in which managers can design effective choice architectures

o Nudge hiring - § Individuals struggle with objectively assessing themselves, e.g. Dunning-Krueger effect, so CVs and cover letters could be inaccurate; Clifford Chance has introduced a CV-blind process to account for this § Granovetter (1995) - The strength of weak ties - naturally the set of candidates that apply to and are selected within an organisation are shaped by the set of individuals within the informal networks and relationships of individuals already in the organisation; this can be useful as it leads to more cohesive cultures, but also a source of bias and can increase "groupthink" / herd mentality, e.g. FTX's Sam Bankman-Fried hired mostly his friends and friends-of-friends which led to risk management at the company being a joke o Nudge training and development § Educate employees and biases and their sources, which could help them reduce them § However, research suggesting that individuals have a "bias blind spot" i.e. they are unable to see biases in themselves (Pronin, Lin and Ross, 2022) o Nudge human capital and organisation § Perhaps the organisational context amplifies certain biases and inherently corrects others § E.g. "deindividuation" is likely in the context of larger organisations, where individuals take on less responsibility in the face of poor outcomes and larger credit for good outcomes o Nudge strategy and innovation § Think about which biases are more likely to be prevalent in your organisational structure, and correct for this, e.g. flat structures such as polyarchy are less likely to have status quo bias, but increase risk-seeking behaviour and vice versa for strict hierarchies

Yaziji (2014) - what factors put a company at risk of NGO involvement?

o Offers lifesaving or life-threatening products o Confronts changing social mores o Produces significant spilllover effects o Enjoys high-brand awareness, which makes it a bigger target o Is based on new technologies, which means that the regulation around these areas may be nascent and NGOs feel that they have to step in o Does business in different regions with differing ethical norms

Montgomery (1994) - empirical research on diversification

o On average, firms with higher levels of diversification are less profitable than firms with lower levels of diversification o Acquisitions often do not lead to increases in corporate wealth and may be later reversed o There is a lot of evidence for the idea that managerial motives such as hubris plays a role in corporate diversification, which is consistent with the agency theory o There is also some evidence for the idea that firms which diversify around specific resources are more profitable than those that diversify more broadly, supporting the resource view o There is very little evidence in support of the market-power view o The benefits of diversification may have changed significantly between the 60s and 90s; e.g. professional management personnel and systems, which could have been a capability that was a source of critical competitive advantage across the conglomerate firms of the 60s, had become widely diffused, making it a redundant source of competitive advantage; capital markets were more fluid by the 90s, perhaps allowing investors to diversify away risk better (??); permissive antitrust regulation opened up competitive possibilities that were not hitherto possible

Camerer and Lovallo (1999) hypotheses on situations where overconfidence-driven excess entry may be high

o Overconfidence and excess entry is likely to be higher in situations where the criterion for success is more vague since ambiguity permits excess optimism o People will prefer performance-based incentives schemes more often than standard theory predicts - when the risk is high their overconfidence might lead them to believe that they can bear the odds and so they prefer riskier contracts o Reference group neglect implies that when agents compete on the basis of skill, they will be insufficiently sensitive to the quality of the competition o In hierarchical tournaments where "winners" at one level advance to the next, reference group neglect predicts that overconfidence will get stronger and stronger as people advance as people take their winning of one round as positive evidence of their own abilities

Porter (1996) - first order vs. second order vs. third order fit

o Porter differentiates between: § "first order" fit which relates to activities being simply internally consistent § "second order" fit which is about activities being mutually reinforcing (mutually reinforcing means that the benefits from undertaking one activity are enhanced by the presence of another, e.g. the value of having a flexible production system is enhanced by offering customisable products and emphasising this in the marketing § "third order" fit which involves "optimisation of effort" which includes factors such as: · Coordination and information exchange across activities to eliminate redundancy and minimise wasted effort · Product design choices, for example, can eliminate the need for after-sale service or make it possible for customers to perform service activities themselves. · Coordination with suppliers or distribution channels can eliminate the need for · some in-house activities, such as end-user training. · Not entirely sure what this means, but I think the idea is making sure that no activity is redundant; pursue the activity that can eliminate others 2nd or 3rd order activity systems are a lot more difficult to imitate than 1st-order systems - it is a lot harder for outsiders to entangle exactly how activities reinforce each other

Faccio (2006) - what are the sources of value in being politically connected? under what circumstances do political connections lead to corporate value?

o Preferential treatment from government-owned enterprises, e.g. banks or regulators o Lighter taxation o Preferential treatment in competition for government contracts o Relaxed regulatory oversight of connected company o More stringent oversight of competitors · But politicians themselves will appropriate some of the rents generated through the connection so the corporate value of the connection is only enhanced when the marginal benefit of the connection outweighs the marginal cost

Pros and cons of internal capital

o Pros: § Internal audit produces better information § Divisional managers incentivised to reveal § Incentive to detect problems § Less hesitancy about confidentiality o Cons: § Bureaucracy § Malign influence § Weak incentives § Budgetary pressure

Future frontiers of strategy

o Randomised controlled trials can help reconcile the notion of planned vs. unplanned strategy o "Experimental strategy" and "evidence-based management" could be the next frontier

Explain real options theory

o Real options theory can provide an answer: although the mathematics proving this is complex, the key principle in ROT is that an investment project that gives the firm the option to delay is more valuable than one for which the firm faces a "now-or-never" choice of investing or not investing. o A real option arises when a decision-maker has the opportunity to tailor a decision to information that is unknown today but will be revealed in the future o An example of real options arising in the business setting is in the mid-90s, when Anheuser-Busch purchased minority investments in multiple brewers in different developing nations, such as Groupo Modelo in Mexico and Asia Brewery in the Philippines; by taking small stakes in each of these companies, AB was able to learn about different markets and identify those that merited larger investments, which was a more profitable strategy than immediate large-scale investment o Economists Arnold and Shockley estimate that the modest investments of a few million dollars in each brewery had real options value of hundreds of millions of dollars

Types of non-market strategies

o Representation - if firm's stakeholders are constituents of officeholder then build support for objectives by representing stakeholder interests, e.g. drug companies, hybrid cars, Google on privacy, driverless cars § Reverse representation = mobilise stakeholders for non-market action through grass roots campaigns, coalition building, public advocacy etc. o Majority building - recruit the needed votes in a legislature to enact or defeat a policy proposal; recruit votes through providing politically valuable support, vote trading o Information provision - focus on providing information to government officeholders and receiving info from them; strategic provision of information is the principal component of lobbying, testimony in legislative / regulatory proceedings

Example of how framing can help move issues to the most relevant arena

o Reuters earned most of its revenue through financial information services (FIS) and by 2006, it was the market leader in China's rapidly expanding FIS market operating with few govt. restrictions o Reuters learned that senior govt. officials were pushing Xinhua, the Chinese state-owned news agency, to gain a foothold in the global FIS market and make Reuters' FIS products redundant o Xinhua was even designated the country's new FIS regulator and banned competitors such as Reuters, Dow Jones and Bloomberg o The Western media and US regulators framed the issue as to do with "restrictions on freedom of information" and attacked China and Xinhua o Reuters, however, refrained from this line of attack and instead focused on internal discussions with government officials and Xinhua o They deliberately reframed the issue as being not about restrictions on the freedom of information but rather about trade and economic competitiveness, arguing that new rules would put Chinese FIS users at a competitive disadvantage and threatened the development of modern financial markets in China o This also played into a split within the Chinese government between hardline supporters of the CCP vs economic modernisers o The EU and US were able to bring a WTO suit under violations of its trading rules (framing the issue as being about information would not have allowed it to do so as this is outside the WTO's remit) o After this, China agreed to create an independent market regulator and lifted the restrictions on foreign FIS distribution

Porter (1998) - how do clusters increase innovation?

o Sophisticated buyers are often part of a cluster, so companies inside clusters usually have a better window on the market than isolated competitors do, e.g. companies based in Silicon Valley plug into customer needs at a pace unmatched elsewhere o Clusters also provide the capacity and flexibility to act rapidly, by allowing companies to source what they need to implement innovations more quickly o Companies within a cluster can experiment at lower cost and delay large commitments until they are more assured that a given innovation will pan out; a company relying on distant suppliers will face greater challenges in every activity it coordinates with other organisations o The fact that competitive pressure is also more salient contributes to higher rates of innovation

What are strategic substitutes and strategic complements?

o Strategic substitutes: § When one firm chooses more of one action and in response, its rivals cut back on the same action, these actions are said to be strategic substitutes, e.g. quantity choice in the Stackelberg model o Strategic complements: § When one firm chooses more of an action and its rivals also choose more, these actions are said to be strategic complements, e.g. when one firm raises price, its rivals will also raise prices making these actions strategic complements o Reaction functions can be used to demonstrate whether actions are strategic substitutes or complements: § A downward-sloping reaction curve suggests that actions are strategic substitutes, while an upward sloping reaction curve suggests that they are complements

Toyota's non-market strategy

o Toyota was the market leader in hybrid cars, but stretched the competitive playing field beyond the market o It successfully lobbied in California to include its flagship Prius hybrid model in a program granting low-emissions vehicles access to the state's carpool lanes, even with only a single occupant o Support from environmental groups made it easy for legislators to endorse the proposal while costing the state of California next to nothing and allowing it to burnish its environmental credentials o The company also won Prius owners the right to park for free at public meters in LA and other cites o This skilful non-market management deftly complemented its existing strategy of selling the product primarily to upper-middle-class, eco-conscious professionals, allowing it to reinforce its competitive advantage

Why do firms need strategy? - Grant (2019)

o Strategy as decision-support: > Gives coherence to the individual decisions taken within individuals in an organisation > Acts as a "heuristic" / simplification tool for decision-making by constraining the range of options (picking a strategy is also choosing not to pursue other things) which can help as humans suffer from bounded rationality o Strategy as coordinating device: > Strategy can be a form of communication to unify members across disparate parts of large organisations o Strategy as target > Strategy concerned not only with competition in the present but what firm will become in the future > Forward-looking strategies focused on the development of the firm can serve as aspirational targets that motivate the team and establish direction for the firm's future > Hamel and Prahalad (1989) talk about "strategic intent" - they argue successful companies create an extreme misfit between resources and ambitions and management teams then challenge employees to close this gap by building new competitive advantages > Collins and Porras (1995) argue that a key habit of companies in the US that have been sector leaders for 50+ years is setting "Big Hairy Ambitious Goals"; the most famous example of this was JFK's goal for NASA's space program: "before this decade is out, to put a man on the moon and return him safely to Earth" > However, goals without guidelines on attaining them are meaningless / delusional

Why do clusters emerge?

o Surrounding institutions, e.g. several clusters in Massachusetts had their origins in research done at Harvard / MIT; the telemarketing cluster in Omaha, Nebraska owes much to the decision of the US Air Force to locate its Strategic Air Command there, which required the installation of fiber-optic telecommunications cables for the first time o Locational advantages - the Dutch transportation cluster is due to Holland's central location in Europe and an extensive network of waterways o Unusual / sophisticated / stringent local demand - Israel's cluster in irrigation equipment and other agricultural technologies reflects the nation's strong desire for self-sufficiency in food and a scarcity of water and hot o Prior existence of supplier industries, e.g. the gold equipment cluster near San Diego arose due to the prevalence of the aerospace industry that existed there, which meant that they had a pool of suppliers for castings and advanced materials o One or two innovative companies stimulate the growth of many others, e.g. Medtronic helped create the Minneapolis medical-device cluster o Once a cluster begins to form, a self-reinforcing cycle promotes its growth, especially when local institutions are supportive and local competition is vigorous o Intersection of clusters - cluster development can occur at the intersection of clusters, where insights, skills and technologies from various fields merge, e.g. Germany has distinct clusters in both home appliances and household furniture, but at the intersection of these is the "built-in kitchens and appliances" cluster

Pitfalls in studying the determinants of performance

o Survival bias - "History is written by the victors" i.e. there is an under-sampling of failure o Direction of causality is hard to pinpoint - conclusions based on reverse and reciprocal causality are common o Unobserved heterogeneity - i.e. omitted variable bias, e.g. attributing high performance to early entry (first mover advantage), when it may be that some third factor such as being a firm with strong distribution network and good products leads to both early entry and high performance

Vodafone's non-market strategy

o The European Commission began a quest to lower cross-border roaming charges within the EU, which had been a lucrative source of income for all mobile phone operators o Most players simply voiced strong opposition, but Vodafone embarked on a skilled two-prong strategy: it created Vodafone Passport as an opt-in program for frequent border crossers that applies home rates to a call made from another country in exchange for a flat 99p per call fee o The program proved immensely popular and they used this as evidence that binding regulations were not necessary to bring down prices o Although it proved unsuccessful as the European Commission eventually introduced binding rules, this pre-emptive non-market strategy gave Vodafone an edge over its competitors

Hayward and Hambrick 1997 - four main indicators of CEO hubris that are positively correlated with the sizes of the acquisition premia paid

o The acquiring company's recent performance - § This contributes to hubris as there is a strong propensity to credit leaders with success even when such success could be objectively attributed to other factors and such favourable attributions become sources of individual self-esteem and interorganisational prestige § Successful managers have been found to place undue faith in their leadership, even becoming caricatures of their former selves o Recent media praise for the CEO - § There is a propensity for the media to attribute to organisational outcomes to individual leaders and are often portrayed as "heroic" and "larger-than-life" § Chen and Meindl (1991) find that the media remains faithful to these pre-formed favourable images, even when material information about the CEO's performance diverges o A measure of the CEO's self-importance - § CEO's have demonstrable accomplishments which could feed into their egos § De Vries and Miller (1984) talk of the personality traits required for leadership and entrepreneurship and many entrepreneur CEOs are likely to be affected by an overconfident sense of belief in their own abilities and perhaps even delusions of grandeur - they might even be prerequisites in these positions rather than being caused by being in such a position A composite factor of the above 3 variables

Why does strategic analysis play only a small role in successful acquisition strategies?

o The process of making the acquisition and integrating it determine the success of the acquisition as much as the original purpose and the quality of strategic analysis which fed into the initial rationale o It is difficult for an acquisition to achieve its intended purpose because of the diversity of people involved due to the diversity of people involved (and the diversity of their motives), time pressures and ambiguity of the original stated purpose (created by both parties who agree to disagree on major points due to their dissimilar interests and pressure to reach an agreement) o Although the transaction may enable managers to capture economic value, such value is created only after an agreement is signed and depends entirely upon the two firms' working together over time o Acquisitions can destroy non-economic value for groups other than shareholders by leading to loss of job security, status, career opportunities etc.

Nelson & Winter (1982)

o Traditional economic theory assumes that firms respond instantaneously in shifting their strategies to exogenous changes (assuming that they can even "work out" what the new profit-maximising equilibrium is in the first place) o Nelson and Winter reject the rigidities of the assumptions behind maximisation and equilibrium: § Firms are motivated by profits, but do not maximise of some known choice set § Efficient firms tend to drive out inefficient ones, but not instantaneously § Equilibrium is never attained; external conditions are continuously changing so firms adapt to these slowly o Firms' routines are analogous to individuals' skills (and extending their biological metaphor, to genes) o These routines are based on tacit knowledge which is difficult to analyse and imitate as a lot of it can be environment or context-dependent o Routines are heritable (routines today look like routines yesterday) and selectable (firms with more profitable routines win out) - routines are "selected" by the environment? o Routines are developed and bettered with repetition and practice, such that the current capability of the firm is a function of its history, making it impossible to simply copy best practice even when it is observed. o Regarding selectability, successful firms may have routines that are robust to exogenous changes (suitable for a wide range of conditions, precluding the need to optimise) or the routine may be particularly good in search situations so that the firm is able to reoptimise very well in the face of exogenous changes o Rumelt et al. state that "firms grope towards better methods with only a partial understanding of the causal structure of their own capabilities and of the technological opportunities set"

Explain the attribute of imperfect imitability

o Valuable and rare resources can create a competitive advantage, but this can only be sustained if it cannot be duplicated by competitors. The three main reasons for imperfect imitability are: § The ability of a firm to obtain a resource is dependent on unique historical conditions that cannot be replicated by other firms (the idea of path dependence described by economists) § The link between the resources possessed by a firm and its competitive advantage are causally ambiguous, i.e. since competitors cannot figure out exactly what is causing the competitive advantage, they may not want to risk investing in the creation of the resource § Demsetz (1973) argues that it is nearly impossible to understand why one firm outperforms another consistently § Both the firm in possession of the advantage and (all) those without it need to be faced with the same level of causal ambiguity about the resource for it to be a source of sustained competitive advantage (otherwise, the firms not in possession of it could feasibly gain it through extensive study or talent poaching) - (Lippman and Rumelt, 1982) § Tacit knowledge could be a contributor to causal ambiguity (Nelson and Winter, 1982) § Finally, the resources possessed may be socially complex, e.g. intangible assets such as culture which may not be formally documented but pervade the firm as tacit knowledge, which makes it difficult to replicate

Dyer, Kale and Singh (2004) - stats on acquisition failures

o companies' share prices fall by between 0.34% and 1% in the ten days after they announce acquisitions o acquiring firms experience a wealth loss of 10% over five years after the merger completion o research suggests that 40-55% of alliances break down prematurely and inflict financial damage on both partners o 48% of alliances end in failure in less than 24 months

Hall and Soskice (2001) - features of coordinated market economies

o coordinate by way of incomplete and relational contracting, monitoring and networks that rely more on collaborative (rather than competitive) relationships § Have training systems (vocational) that emphasise high skill level and company-specific technical skills § Dense networks of inter-corporate linkages and relational contracts and a corporate governance that insulates firms against hostile takeover and reduces sensitivity to current profits § Encourages long employment tenures (with industry and firm-specific skills) and inter-firm and employee relations § The above factors foster incremental innovation

Hall and Soskice (2001) - features of liberal market economies

o coordinate their actions through competitive market forces and formal contracting § Financial markets emphasise current profitability § Corporate structur3es concentrate unilateral control at the top § Deprives workforce of security conducive to full cooperation in innovation § Easy hiring and firing make it rational for employees to concent5rate more heavily on their personal career (as opposed to firm success) and on development of general (transferable) skills § Competitiveness and strict contract law discourages inter-firm collaboration and incremental development but fluid labour markets (let people go if new product line is unprofitable) § This fosters radical innovation

Explain the "Scope" element of the PARTS strategy

o firms can change the "boundaries" of the game by strategically thinking about what the best game is for them to compete in § While its competitor Sega introduced a 16-bit gaming system to the market, Nintendo decided to stick to 8-bit § If Nintendo had also decided to jump into the 16-bit market, it would have meant lowering prices in the new market; lowered prices in the 16-bit market, which was a substitute for the 8-bit games, would have reduced sales in the 8-bit market, and effectively would have led to Nintendo cannibalising its sales further - a calculated trade-off

Brandenburger and Nalebuff (1995) - explain the 'players' element of the PARTS framework - example?

o firms should not accept the players of a game as fixed and can choose to change the players: § E.g. NutraSweet, the brand name of a low-calorie sweetener based on aspartame, was used in soft drinks such as Diet Coke and Pepsi § It was manufactured by Monsanto and was incredibly profitable with a 70% gross margin and could not be imitated due to patent protection § Coke encouraged a competitor, the Holland Sweetener Company, to enter the market by building an aspartame plant in Europe in 1985 in anticipation of the patent expiration § Monsanto fought back aggressively with deep price cuts and contractual relationships with customers in order to deny HSC a toehold in the market § Despite its initial support of HSC, both Coke and Pepsi ended up signing long-term contracts with Monsanto prior to the patent expiration in the US § What could explain this behaviour? Neither Coke or Pepsi really wanted to switch to generic aspartame, but wanted to get NutraSweet at a much better price, which it accomplished as a result of the price cuts that Monsanto had made in order to out-compete HSC § In terms of HSC's strategic rationale, its entry into the market was clearly worth a lot to Coke and Pepsi, and it would have been reasonable for them to demand compensation for entering - "pay me to play" - in the form of a fixed payment or a guaranteed contract, but once it had already entered free of charge, the gains it could actually make were highly limited § The new contracts that Coke and Pepsi signed with Monsanto led to $200m in savings for them

Brandenburger and Nalebuff (1995) - explain the "added values" element of the PARTS framework

o firms shouldn't just accept the added values of each of the games as fixed but can try to change it; firms can either increase their own added value or less intuitively, try to reduce the added value of others § An example of a firm raising its own added value as well as bringing up the added values of other competitors through a "win-win" strategy is that of Trans World Airlines' decision in 1993 to remove 5-40 seats per plane to give passengers in coach more legroom § This led to increased customer satisfaction for TWA and increased their customer loyalty / repeat purchase § However, as others copied this strategy, it did not necessarily negate TWA's efforts as excess capacity was a problem in the industry anyway which led to competitions along the lines of price § By encouraging an industry-wide reduction in capacity to increase legroom, Cozzi, TWA's CEO, managed to move the whole industry away from self-destructive price competition § Nintendo offers a good example of a firm which lowered the value of others in the value net, allowing it to appropriate more of its own added value § With regards to its complementors of outside game developers, it reduced their added value by developing their own in-house software and game development capability instituting a license program for them; by restricting the number of these licenses, the added value of those that did get the licenses was lowered; it also developed "Mario" as a leading character, which reduced the added value of other comic book franchises / series, from which Nintendo had to frequently license characters

Why do characteristics of buyer choice under uncertainty lead to a first-mover advantage?

o imperfect information regarding product quality means buyers may rationally stick with the first brand that they encounter that performs the job satisfactorily Porter (1976) argues that this sort of brand loyalty may be particularly strong for low-cost "convenience goods" where the benefits of finding a superior brand are seldom great enough to justify the additional search costs that must be incurred; early-mover firms are able to establish a reputation for quality that can be transferred to additional products through umbrella branding and other tactics The psychology literature also suggests that the first product introduced received disproportionate attention in the mind of the consumer, with late entrants needing to have a truly superior product or advertise much more frequently / creatively to be noticed by the consumer Pioneers such as Coca-Cola and Kleenex have become prototypical of the products they sell, occupying a unique position in the consumer's mind and becoming bywords for the underlying products; their large market shares tend to persist because perceptions and preferences are difficult to alter, once formed Bond and Lean (1977) found that physicians ignored "me-too" products even if they were offered at lower prices and with marketing support

Systemic school of strategy

organisations possess the ability to plan forward and act effectively within their environments but that the rationales underlying strategy are peculiar to particular sociological contexts, such as national or local culture and the relationship between the firm and related institutions such as governments o Whitley (1999) showed that differences between countries' social systems in southeast Asia affected the type and structure of firms that existed there, e.g. in South Korea, a traditionally strong state promoted the creation of vast national conglomerates (chaebol) while in nearby Taiwan, a weaker state presence meant that there was ab entrepreneurial economy comprising of small and medium-sized firms o The notion of "strategy" itself may be culturally peculiar, with Pascale (1982) reporting that the Japanese lack a word for "corporate strategy" o In fact, much of the Classical school is based on the thinking of American executives and scholars and largely on the subject of two companies - Du Pont and GM - owned by the same family! o Wilks (1990) argues that the conceptions of what strategy involves can be constrained by underlying cultural notions. For example, in the US and UK, where the state takes a less dominant role, there is an individualistic free-enterprise model of strategy that denigrates explicit reliance on the state, while in France and Germany, enlisting the resources of the state is seen as a natural and important part of strategic management o Thus, in America, conformity to the Classical school, exemplified by managers engaging in rational long-term planning may be a necessity to achieve legitimacy given that the cultural imperatives are profit-maximisation and regarding the free market as an article of faith, even if the long-term planning achieves little to directly benefit the firm

McKinsey Global Survey (2012)

the stakeholder with the most impact on a company's value were firstly, customers and secondly governments / regulators, ahead of employees, investors, suppliers etc.

Why do buyer switching costs create a first mover advantage?

these mean that late entrants must invest extra resources to attract customers away from the first-mover firm; these switching costs can stem from: § Initial transaction costs, e.g. search / "shoe leather" costs involved in finding a new supplier and the time costs / disruption involved in making the switch § Supplier-specific learning by the buyer i.e. over time, the buyer adapts to characteristics of the product and its supplier so finds it costly to change over to another brand § Contractual switching cost deliberately created by the seller to raise switching costs, e.g. Tesco's Clubcard

How can economies of scope be achieved through diversification? Example?

§ "When using a resource across multiple activities uses less of that resource than when the activities are carried out independently § Scope economies are reductions in costs that arise from increasing the output of multiple products § E.g. diversification by cable companies into telecoms and broadband and by telephone companies into TV, broadband and music streaming are motivated by the desire to spread the costs of networks and billing systems over as many services as possible § Economies of scope can also exist in intangible resources, e.g. exploiting a strong brand across multiple products - brand extension - as Starbucks does through its cafés, packaged cold drinks, espresso machines, CDs etc. § Organisational capabilities can also be transferred across diversified parts of the firm, e.g. LVMH is the world's biggest and most diversified supplier of branded, luxury goods owning brands such as Hennessey, Moët, Céline, Sephora etc. and its capabilities in design, market analysis, advertising and promotion, retail management and craftsmanship can be deployed across these brands

Barney (1986) - organisational culture

· A firm's culture can be a source of sustainable competitive advantage if that culture is valuable, rare and imperfectly imitable · Firms with valuable, rare and imperfectly imitable cultures should nurture these cultures and those that don't cannot expect their sustained superior financial performance to come from their culture and look for alternative sources · Efforts to deliberately change their cultures will not generate sustained superior performance even if they may incorporate some new attributes

Example of firms which dissuaded imitation by conveying to competitors that it would be unprofitable through deterrence / pre-emption

§ A firm may avoid competition by persuading potential rivals that imitation will be unprofitable § Deterrence involves making threats that competitive incursions will be resisted vigorously and for it to work, threats must be clearly signalled, backed by commitment and credible § E.g. following the expiration of its NutraSweet patents in 1987, Monsanto fought an aggressive price war against the Holland Sweetener Company, which, although costly, gave Monsanto a reputation for aggression that deterred would-be entrants into the market § Pre-emption involves occupying existing and potential strategic niches to reduce the range of investment opportunities that are open to challengers § E.g. proliferation of product varieties by market leaders leaving few niches for new entrants and smaller rivals to occupy; investing in underutilised production capacity to discourage rivals, e.g. part of Monsanto's strategy to protect the NutraSweet business was heavy investments in aspartame plants; patent proliferation can limit competitors' innovation opportunities, e.g. when IBM launched its own photocopier, Xerox sued it as IBM had unknowingly infringed upon 22 of these patents

Porter's 3 Essential Tests for Diversification

§ Attractiveness test - industries chosen for diversification must be structurally attractive or capable of being made attractive § Cost-of-entry test - cost of entry must not capitalise (exceed) all future profits, e.g. HP offers a classic example - it diversified into IT services because of its greater attractiveness than IT hardware by acquiring software firms EDS and Autonomy; however, it ended up paying a 30% premium for EDS and a 60% premium for Autonomy and eventually ended up writing off $16bn against the balance sheet values of these companies § Better-off test - either the new unit must gain competitive advantage from its link with the corporation or vice versa, e.g. most of Virgin's diversification has been into industries where avg. profitability has been low or non-existent such as airlines, wireless, telecoms, gym clubs, passenger rail etc. but Virgin has created competitive advantage through transferring its brand and customer service capabilities

Porter (1998) - clusters

§ Clusters are geographic concentrations of interconnected companies and institutions in a particular field § "Critical masses - in one place - of unusual competitive success in particular fields," e.g. Silicon Valley, Hollywood, Wall Street, etc. § Clusters can include suppliers, customers, competitors and even governments and other institutions § "Clusters promote both competition and cooperation. Rivals compete intensely to win and retain customers. Without vigorous competition, a cluster will fail. Yet there is also cooperation, much of it vertical, involving companies in related industries and local institutions. Competition can coexist with cooperation because they occur on different dimensions and among different players." § How do clusters affect competition? o Increases the productivity of firms based in the area o Drives the direction and pace of innovation o Stimulating the formation of new businesses (which expands the strength of the cluster itself) § "A cluster allows each member to benefit as if it had greater scale or as if it had joined with others formally - without requiring it to sacrifice its flexibility"

Tough vs. soft commitments

§ Conceptually, a "tough" commitment is one which is bad for competitors, while a "soft" commitment is good for competitors § Capacity expansion, for example, is a tough commitment as it limits the opportunity for competitors to gain share § Elimination of production facilities represents a soft commitment § In Bertrand competition, a commitment to reduce prices through a well-publicised advertising campaign, for example, represents a tough commitment § Tough commitments have a profitable effect if they involve strategic substitutes, e.g. the firm increasing its quantity, for example, would lead to a rival reducing quantity (i.e. Stackelberg) § Tough commitments have a negative effect on profits if they involve strategic complements, e.g. the firm decreasing its price, for example, would lead to a rival also lowering its prices § In practice, working out whether a commitment is likely to be a complement or substitute will require economic insight and experience of how firms have reacted to a given strategic move in the past § Soft commitments will have a profitable effect if they involve strategic complements, e.g. if Burger King finds that McDonalds is stubbornly matching its ad dollars, it might benefit by reducing its own ad spending

How should firms design blue sky processes to calibrate innovation?

§ Debate = broaden the rules of debate (implicitly and explicitly), e.g. research shows that investment managers tend to prefer glamour stocks that are "rhetorically safe" - supported by reasons their superiors accept - over less familiar choices that yield higher returns at lower risk · Examples of firms who do this well - Amazon expects people to "have backbone, disagree and commit" and Google insists on "discord plus deadline" § Participation = broaden participation within the debate, often to outside sources · Gaming company Valve extensively uses crowdsourcing, incentivising gamers to propose new products and using an internal system of "social proofs" in which people form coalitions around new ideas and marshal evidence to demonstrate their market potential § Incentives = do not disincentive dissent

Ghemawat (1985)

§ Despite the fact that many managers see the experience curve as out of date due to its somewhat simplistic promises of success in every business and its failure to deliver in many contexts, Ghemawat argues that the "debunking" of the curve has gone too far § Experience curve strategies can improve competitive performance in some clearly defined situations and successful use of the curve requires an understanding of why and how it works and when to apply it

Montgomery (1994) - market-power view of diversification

§ Diversified firms will thrive at the expense of non-diversified ones not because they are any more efficient, but because they benefit from conglomerate power, which can manifest through: · Cross-subsidisation: when a firm uses its profits from one market to support predatory pricing activities in another · Mutual forbearance: where competitors meeting each other in multiple markets recognise their interdependence and compete less vigorously · Reciprocal buying: where interrelationships among large, diversified firms foreclose markets to smaller competitors § Total conglomerate power is a function of the firm's market power in each of its individual markets § This view predicts a positive relationship between diversification and performance

Rothaermel (2001) - when might a strategic alliance disadvantage an incumbent?

§ Due to bounded rationality, however, an increase in the number of alliances probably leads to an incumbent firm's transaction costs rising up to and possibly beyond the point where gains from additional alliances are outweighed by costs

How can diversifying enable economies from internalising transactions?

§ Economies of scope can arise from sharing and transferring resources and capabilities among different businesses, but a firm does not have to own these businesses for economies of scope to arise § Economies of scope can be exploited through simply selling or licensing a particular resource or capability to another company § E.g. Starbucks' initial foray into the grocery market was through other firms, e.g. Unilever and PepsiCo produced Tazo tea beverages, Nestlé produced Starbucks ice cream and Kraft distributed Starbucks' packaged coffee § Whether a firm chooses to exploit economies of scope in resources and capabilities internally through diversification or externally through contracts with independent companies depends on: · Transaction costs involved in licensing / selling the resource / capability - o Costs incurred in drafting / negotiating / monitoring / enforcing a contract · Does the firm have other resources / capabilities required for successful diversification? E.g. In fragrances, D&G, the Italian fashion house, licenses its brand to Procter and Gamble, which produces and markets D&G fragrances since D&G lacks the resources and capabilities needed to design, produce and globally distribute fragrances

M-form. Benefits?

§ Encompasses a set of autonomous divisions based on a product line usually, with each division consisting of its own business functions, e.g. finance, marketing, production etc. § Williamson identified the distinction between the two and wrote that the M-form arose as a result of problems of inefficiency and agency that arise in U-form firms as they increase in size and complexity § Division managers who obtain more operational experience make the key decisions, which improves decision-making § It reduces agency problems by fostering an internal capital market in which division managers compete for discretionary corporate funds on the basis of unit results § Better performance measures means that pay-for-performance contracts will be more effective at motivating managerial effort and reducing agency costs

Grant (2019) - how should firms deal with weaknesses?

§ Grant argues that firms should outsource and mostly remain focused on exploiting strengths, e.g. Nike only undertakes product design, marketing and overall "systems integration" but the actual production of shoes is contracted out to external contractors § Clever strategy formulation can allow a firm to negate its weaknesses and turn it into a strength, e.g. Harley Davidson cannot compete with Honda, Yamaha etc. on technology so it decided to compete by making its outmoded technology its "virtue" fitting with the authentic retro / vintage quality of its motorbikes and branding, which appealed to its niche of consumers

Which industries tend to diversify for growth?

§ In stagnant or declining industries, there is a limit to how much profit firms can make and how much they can grow - "firms are prisoners of their industry" § This tends to happen in low-growth, cash flow-rich industries, e.g. tobacco and oil - ExxonMobil diversified into copper and coal mining, motors, computers etc. RJR Nabisco turned from a tobacco company into diversified consumer products company § In both of the above cases, diversification destroyed shareholder value § Diversification has typically been successful in generating revenue growth but usually harmed profitability, e.g. Eastman Kodak and Blockbuster

Advantages and disadvantages of internal capital markets in the diversified firm

§ In the case of financial capital, where the diversified firm possesses an internal capital market in which the different businesses compete for investment funds, the internal capital market I has two key advantages over the external capital market: · By maintaining a balanced portfolio of cash-generating and cash-using businesses, diversified firms can avoid the costs of using the external capital market, including the margin between borrowing and lending rates and the costs of issuing new debt and equity · Diversified companies have better access to information on the prospects of their different businesses than that typically available to external financiers § However, a key disadvantage of the internal capital market is that investment allocations within the company are a highly politicised process in which financial considerations are subordinated to turf battles; empirical evidence suggests that diversified firms are more likely to cross-subsidise poorly performing divisions and less likely to transfer cash to the divisions with the best prospects

Rothaermel (2001)

§ Incumbent firms often face severe difficulties in adapting to radical technological change § E.g. the advent of the PC destroyed as wide an array of products as typewriters, word-processing systems while creating opportunities for PC manufacturers, their suppliers and producers of complementary products like software and printers - the "gale of creative destruction" § The key action such incumbents take is not trying to develop the new technologies but gaining access to it through licensing agreements, strategic alliances, joint ventures and acquisitions and collaborating with new entrants to not only adapt but innovate successfully Incumbents can gain an advantage through exploiting complementary assets via inter-firm cooperation

Explain the concept of second mover "free riding"

§ Late entrants can leverage on existing R&D, buyer education and infrastructure development undertaken by incumbents § Imitation costs are lower than innovation costs in most industries § Innovators enjoy an initial period of monopoly that is not available to imitator firms § The free-rider effect occurs through the spillover of information in R&D, learning-based productivity improvements due to technological diffusion and in the labour market, as late-movers can exploit employee screening and training that have been undertaken by the early movers § Teece (1986) argues that the magnitude of free-rider effects depends partly on the ownership of assets that are complementary or "co-specialised" with the underlying innovation, e.g. EMI (the record label conglomerate) developed the first CT scanner, but lost in the marketplace because the firm lacked a technology infrastructure and marketing base in the medical field; contrastingly, late-movers such as IBM in personal computers or Matsushita in VCRs were able to leverage their existing assets in areas such as marketing, distribution and customer reputation to ensure that their late entry led to success

Fang, Denrell and Chater (2017)

· MINDSPACE framework for making better decisions in strategic contexts: o Messenger - we are heavily influenced by who communicates information to us o Incentives - our responses to incentives are shaped by predictable mental shortcuts such as strongly avoiding losses and mental accounting o Norms - we are strongly influenced by what others do o Defaults - we "go with the flow" of pre-set options o Salience - our attention is drawn to what is novel and seems relevant to us o Priming - our acts are often influenced by sub-conscious cues o Affect - our emotional associations can powerfully shape our actions o Commitments - we seek to be consistent with our public promises and reciprocate acts o Ego - we act in ways that make us feel better about ourselves

Is risk reduction for shareholders a legitimate goal of diversification?

§ Modern financial theory has debunked this is a legitimate goal § According to CAPM, the risk that is relevant to determining the price of a security is not the overall risk of the security's return (variance), but the systematic risk - risk which affects all firms in the market § The firm-specific risk should not matter, since shareholders themselves can diversify their portfolio of companies to reduce this risk and companies do not have to undertake this themselves § If firms could diversify themselves for a lower transaction cost than investors can diversify their portfolios then it would make sense for firms to diversify into different industries § However, the transaction costs of diversifying through acquisitions are so much higher due to the high costs paid to financial and legal advisers and the premium paid to acquire the company § Thus, bringing different businesses under common ownership does not create shareholder value through risk reduction § Diversification may even fail to lower firm-specific risk at times § Diversification may reduce credit risk since it could reduce cyclical fluctuations in cash, which could permit the firm to carry a higher level of debt and this increases shareholder value due to the tax advantages of debt

Explain the concept of technological discontinuities that provide "gateways" for new entry

§ New entrants can exploit "technological discontinuities" to displace existing incumbents through the process of creative destruction, as outlined by Schumpeter (1961) § The replacement technology often appears when the old technology is still growing so it may be difficult for the incumbent to perceive the threat and take adequate preventative steps, e.g. American Viscose's failure to recognise the potential of polyester as a replacement of rayon or the failure of steam locomotive manufacturers to respond to the invention of diesel (Cooper and Schendel, 1976) - this is closely related to the idea of incumbent inertia § Customer needs are also dynamic and may create opportunities for late movers if the first mover is unable to be alert and respond

How should firms design resource allocations to calibrate agility?

§ Participation = altering patterns of participation in resource allocation decisions by selection of participants with experience across several departments or lines of business, participant in close proximity to customers / suppliers or those not usually directly involved in the budgeting process § Information = design new measurement and reporting systems focused on proportions of reallocation among divisions or departments; § Incentives = tying compensation to firm level outcomes rather departmental or divisional growth § These measures will reduce the tendency towards the status quo bias and anchoring based on past investment decisions

Montgomery (1994) - resource view of diversification

§ Rent-seeking firms diversify in response to excess capacity in productive factors § As long as expansion provides a way of more profitably employing its underutilised resources, a firm has an incentive to expand § If a firm's underutilised resources can be efficiently sold in the market, the rationale for diversification no longer exists - thus, market failure is a pre-condition for this view to hold

Grant (2019) - are RBV and positional view different versions of the same theory?

§ The distinction between industry attractiveness and resources and capabilities as the sources of competitive advantage and superior performance stem from the differences in the economic theories and concepts underpinning them § Economists distinguish between two types of profit (rent): monopoly rents - profits arising as a result of exploiting market power; efficiency (Ricardian) rents - profits arising from superior (more efficient) resources which are limited in supply § Obviously, the RBV emphasises the Ricardian rent while positional view emphasises monopoly rents § However, distinguishing between these two types of rent / profits is less clear in practice than principle since the Porter's Five Forces framework seems to suggest that industry attractiveness often derives from the ownership of strategic resources § Barriers to entry, for example, are typically the result of patents, brands, know-how, distribution channels, learning, etc. all of which can be said to be resources possessed by the firm Analogously, how "valuable" a resource is determined exogenously to the RBV, by a firm's environment

Ghemawat (1985) - examples of "mindless" application of experience curve

§ The experiences of DuPont and Ford serve as examples of when mindless application of the experience curve can go wrong § In 1972, DuPont decided to exploit the experience curve to pre-empt competitors in the titanium dioxide industry by investing $410m over 7 years, but by the end of this period, capacity use in the industry plummeted from 88%-64$ and DuPont's return on sales dropped to half its level of 7.5% § Ford is another famous example as they cut costs on the Model T extensively by increasing its output every year from 1910 to 1921; market share had soared from 10-55% and though it proved initially profitable, Ford had sown the seeds of its own downfall as consumer demand began to shift towards comfort and styling rather than price § Ford refused to change models as General Motors did, but eventually customer preferences forced it to close down its plants while it retooled for a new model, leading it to lose $200m and suffer an irreversible decline in market share

Montgomery (1994) - agency view of diversification

§ This view emphasises the benefits that a firm's managers will reap at the expense of its shareholders § A self-interested manager might pursue excessive expansion and direct a firm's diversification in a way that increases the firm's demands for his or her particular skills - managerial entrenchment § Shareholders can efficiently diversify their portfolios to account for business risk, but managers cannot diversify away their employment risk as easily - diversified expansion can improve their personal positions while not benefitting the firm's shareholders

Yaziji (2014)

· "Companies view non-governmental organisations as pests, or worse. But joining them can be more productive than swatting them, and just might give your company an advantage." · NGOs now have the skills, resources, insights and depths of popular support that make it unqise for companies to confront them head-on · E.g. NGOs such as Oxfam and MSF effectively incited a PR disaster for American pharmaceutical firms such as GSK, Merck etc. and forced them to withdraw a lawsuit challenging a South African law that undercut patent enforcement of their AIDS drugs. · These companies might have avoided such outcomes by partnering with NGOs as opposed to flatly opposing them.

Rosenzweig (2007)

· A phenomenon initially analysed by psychologist Thorndike (1920), the "halo effect" refers to the tendency for positive impressions of a person / company / brand / product in one area to positively influence one's opinions or feelings in other areas · Rosenzweig (2007) examines the prevalence of the "halo effect" in the analysis of business performance · When a company is doing well, with rising sales, high profits, and a surging stock price, observers naturally infer that it has a smart strategy, a visionary leader, motivated employees, excellent customer orientation, a vibrant culture, and so on. When that same company suffers a decline—when sales fall and profits shrink—many people are quick to conclude that the company's strategy went wrong, its people became complacent, it neglected its customers, its culture became stodgy, and more. · An example of the "halo" effect is the treatment of Cisco Systems by the business press and management theorists - in the 90s, the company was praised for its "brilliant strategy, its superb management of acquisitions, and its laser-like customer focus"; however, when the tech bubble burst, "Cisco was suddenly derided for a flawed strategy, sloppy acquisition management and poor customer relations" even though the strategy that Cisco had been pursuing had hardly changed during its period of good and bad performance · Popular books in business / management, such as "In Search of Excellence" by Peters and Waterman (1982) and Built to Last (1994) by Collins and Porras which claim to explain the roots of business success have often fallen prey to the "halo" effect since they primarily base their data either only on successful firms of the period (selection bias) or base it on anecdotal sources such as journalists' analyses, interviews with management etc. which are themselves prone to the "halo" effect

Porter (1996) - what does a sustainable strategic position require?

· A sustainable strategic position requires trade-offs: o Strategy is just as much as about what a company chooses not to do as what they do - "Trade-offs are essential to strategy. They purposefully limit what a company offers" o Trade-offs arise from differences in image and consumer perception (i.e. a mass-market brand would struggle to reposition itself as high-end) and activities that a firm already undertakes (i.e. different positioning requires different product configurations, employee skill levels, equipment etc. - there is a sunk cost associated with all of this and firms can't easily switch to something else) o Competitors may try to re-position the entire firm to match a more successful firm (if possible for them given the trade-offs arising from their previous activity mix - according to Porter, this is very difficult - why?) o Firms could also try to "straddle" - i.e. match the benefits of the successful position while maintaining its existing position - this is usually unsuccessful as the activity mix is internally inconsistent ("pulling in different directions") - e.g. Continental Lite in Porter, but can think of more modern example? Example of Southwest Airlines Activity Map

Kohli and Shah (2006)

· Analyse data on approximately 1000 brands in 91 product categories of food and sporting goods sold in the US · They find that the pattern of market shares for each of the product categories is well-represented by the power law (Zipf's law); some of the product categories are fundamentally different such as rifles and food · Zipf's law also performs better than the alternative model of the exponential form · The power law and Zipf's law have differing implications - the power law predicts that the ratio of market shares for two successively ranked brands becomes smaller as one progresses from higher-ranked to lower-ranked brands, while the exponential form predicts that this ratio will stay constant

Ariely (2008)

· Biases may lead us to be "predictably irrational" (Ariely, 2008), i.e. deviate rationality in a way that is systematic and can be analysed, which means that measures can be put in place to prevent irrational behaviour or exploit it · By integrating human psychology, we can complement standard economics to better understand economic behaviour and informing strategy and policy-making

Roland and Xu (2006)

· Building on March and Simon's (1993) definition of the firm as "systems of coordinated action among individuals and groups" · They show that the M-form is able to promote innovation not only through full-scale innovation but also through small-scale experimentation i.e. it enables experimentation in one part of the organisation before implementing it in the entire organisation · The U-form chooses to engage in only full-scale experimentation, so it lacks flexibility in experimentation · When innovations are uncertain in the sense that they have a low probability of success, the M-form is more efficient that the U-form because of its flexibility · The M-form reduces the cost of experimentation by allowing small-scale experimentation which gives an option value of waiting to learn about the quality of the blueprint; it allows an alternative between "no change" and "all change" - "incremental change" · On the other hand, when innovations have a high probability of success, the U-form is more efficient than the M-form because of economies of scale made possible by greater specialisation

Camerer & Lovallo (1999)

· Camerer and Lovallo set up a lab experiment with basic features of business entry situations · The rate of success of subjects depends on their relative skill in comparison to other entrants · Most subjects believed that the total profit earned by all entrants will be negative, but that their own profit would be positive · In the experiment, when subjects were told that their post-entry payoffs depended on their own abilities, they overestimated their chances of relative survival and entered more frequently into the competition, compared to a control condition in which payoffs did not depend on skill · This relates to the idea of reference group neglect, which is summarised by this quote from Joe Roth, chairman of Walt Disney: o "If you only think about your business, you think 'I've got a good marketing department, a good story department, we're going to go out and do this.' And you don't think that everybody else is thinking the same way." Overconfidence leads to optimism, which leads to excess entry

Chatterjee and Hambrick (2007)

· Chatterjee and Hambrick used measures of CEO narcissism such as prominence of CEO photograph in annual reports, their prominence in press releases, their use of first-person singular pronouns in interviews and compensation relative to second-highest paid firm executive to examine the effect of CEO narcissism on a firm's strategy and performance · Results of an empirical study of 111 CEOs in the computer hardware and software industries in 1992-2004 show that narcissism in CEOs is positively related to strategic dynamism and grandiosity and number and size of acquisitions, but engenders extreme and fluctuating organisational performance · The results suggest that narcissistic CEOs favour big bold actions that attract attention resulting in big wins or big losses but that in these industries, their firms' performance is generally no better or worse than firms with non-narcissistic CEOs

What affects the size of a firm?

· Coase argues that the size of a firm (as measured by how many contractual relations are "internal" to the firm and how many "external") is a result of finding an optimal balance between the competing tendencies of the costs outlined above. In general, making the firm larger will initially be advantageous, but the decreasing returns indicated above will eventually kick in, preventing the firm from growing indefinitely. · Other things being equal, therefore, a firm will tend to be larger: o the less the costs of organizing and the slower these costs rise with an increase in the transactions organized. o the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organized. o the greater the lowering (or the less the rise) in the supply price of factors of production to firms of larger size.

Coase (1937)

· Coase tries to explain why the economy is populated by a number of business firms, instead of consisting exclusively of a multitude of independent, self-employed people who contract with one another. · Given that "production could be carried on without any organization [i.e. firms] at all", Coase asks, why and under what conditions should we expect firms to emerge? · Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task. · The traditional economic theory of the time suggested that, because the market is "efficient" (i.e. those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire. · In contrast to the literature of his time, Coase noted two variables. The first leads to creation of the firm; the second places an upper limit on its size: transaction costs and bureaucracy costs

Coff (1999) - what factors predict whether a stakeholder is able to successfully appropriate rent?

· Coff reviews the determinants of bargaining power to predict when stakeholders will be in a position to appropriate rent: o Stakeholders are capable of unified action - union bargaining power stems from its ability to get workers to act in concert simultaneously, though this can be hard to implement in practice (prisoner's dilemma situation); if stakeholders can act as a cohesive unit, their threat of exit will be more serious and more credible o Access to information - stakeholders who control information can release only enough to make the outcome they desire the obvious choice; at the extreme, stakeholders may not even know that rent exists o Replacement cost to the firm if a stakeholder exits - the cost that a firm would bear if a strategically important stakeholder were to leave, which includes the cost of finding a replacement, costs that the firm may incur while they don't have the stakeholder with them (due to reductions in efficiency, for example), investments that need to be made to bring a new employee up the learning curve o Cost of exiting to the stakeholder - the stakeholder may face high switching costs, in which case, their threat of exit is not as credible and reduces their bargaining power

Coff 1999

· Competitive advantage doesn't always lead to higher levels of firm performance and how much of the rents created by competitive advantage accrues to the firm and its shareholders depends on how much of it is appropriated by other stakeholders, e.g. management, employees etc. · Coff argues that the factors which lead to a resource-based advantage will also predict who will appropriate rent · For example, knowledge-based assets are promising due to their firm-specificity, social complexity and causal ambiguity making them hard to imitate; however, the roles of internal stakeholders in generating this may afford them a great deal of bargaining power relative to investors, e.g. if one Nobel Prize winning scientist was behind much of the firm's knowledge-based assets, then the fact that they are somewhat mobile between different firms means that they have a great deal of bargaining power and can appropriate a large amount of rent by commanding a very high salary · Performance is the outcome of a two-stage game, with the first stage being rent generation and the second being rent appropriation

Liebeskind (2000)

· Diversification internalises transactions of goods and services but also transactions of capital, which means that the value of diversification will depend on whether internal capital markets are relatively efficient or inefficient · Williamson (1975) originally argued that internal capital markets in diversified firms can allocate capital more efficiently than external capital markets and reduce wasteful investment at a lower cost (less information asymmetries, uncertainty, external capital markets can be too cyclical and prone to investment fads) · Others have argued that internal capital markets can result in more over and underinvestment than external capital markets due to biases, standards, stickiness in bureaucratic resource allocation rules within diversified firms, resulting in a misallocation of capital

Dyer, Kale and Singh (2004) - main argument

· Dyer et al. argue that executives don't treat acquisitions and alliances as alternative mechanisms and deciding to do one is an active choice not to do the other - and thus don't compare the two strategies properly · Acquisition deals are competitive, based on market prices and risky while alliances are cooperative, negotiated and not so risky - this might bias firms towards alliances even when an acquisition is more beneficial · A company's initial experience can also turn into "blinders" - if a firm pulls off an alliance, it will insist on entering into alliances even when circumstances demand acquisitions · Organisational structures can also be a barrier, e.g. an M&A group might report to the head of finance which handles acquisition activity, while a separate unit headed by the business development director looks after alliances - this prevents companies from comparing the advantages and disadvantages of the strategies · Dyer, Kale and Singh provide a framework for when to ally and when to acquire

Barney (1986) - why can environmental analysis not be expected to improve the expectations of some firms better than others?

· Environmental analysis cannot be expected to improve the expectations of some firms better than others, and thus cannot be a source of more accurate expectations about the future value of a strategic resource · The reason for this, according to Barney, is that the same firms analysing the same publicly available information on the environment using the same publicly available methodology (such as Porter's Five Forces) is likely to lead to them coming to similar conclusions. This means there will be limited uncertainty about the potential for a given resource to generate sustained competitive advantage and firms will likely bid the "same amount" for it · However, analysing a firm's skills and capabilities can be a source of more accurate expectations. Thus, from the point of view of firms seeking greater than normal economic performance, strategic choices should flow mainly from the analysis of its unique skills and capabilities, rather than from the analysis of its competitive environment.

Peteraf (1993) - explain the concept of ex-ante limits to competition

· Ex-ante limits to competition: o "Ex-ante limits" means prior to any firm's establishing a superior resource position, there must be limited competition for that position o If all equally endowed firms know that they can gain access to a superior resource by occupying a certain location to enable them to have an inimitable resource position over their rivals, then fierce competition will ensue for the location until the anticipated returns are "competed" away i.e. the price for that location will be bid up by the firms upto the point where there is only a "normal" return on it and cost = benefit - this is what Barney (1986) refers to a perfectly competitive factor market o A superior resource can only be a source of above normal returns if some firm had the foresight / good fortune to acquire it in the absence of competition o Thus, profits come from ex-ante uncertainty o Ex-ante limits to competition ensure that rents are not offset by costs

Chan, Karceski, Lakonishok (2003)

· Expectations about long-term earnings growth are crucial to valuation models and cost of capital estimates · The study analyses historical long-term growth rates across a broad cross section of stocks and tests for persistence and predictability in growth · Based on market valuations and analysts' forecasts there is a belief among market participants that future earnings growth is highly predictable, whereas economic intuition suggests that there should not be much consistency in a firm's profitability growth as increased competition in the market drives down profits and the prospect of future growth · The median estimate of the growth rate of operating performance from this study corresponded closely to the growth rate of GDP over the sample period · Although there are instances where firms can achieve spectacular growth, these are relatively rare - only about 10% of firms grow at a rate in excess of 18% per year over 10 years · Sales growth shows some persistence but there is essentially no difference in persistence or predictability in growth earnings across all firms · Security analysts' long-term growth estimates tend to be overoptimistic and contribute very little to predicting realized growth over longer horizons. Market valuation ratios have little ability to discriminate between firms with high or low future earnings growth.

Holburn and Bergh (2014)

· Firm performance depends on the design and implementation of both market and non-market strategies · Although these two components have been analysed independently, the actions that firms undertake in one arena affect the optimal strategy in the other · They use the US utility industry to show how firms design their market and non-market strategies in concert by looking at how they used political strategies to protect the economic rents generated by M&A (part of their market strategy) against dissipation by regulators · Their general thesis is that firms engaged in valuable market transactions like M&A will simultaneously invest more in political activities when there is a greater risk of government dissipation through regulatory mechanisms of economic rents · They find through statistical analysis of political campaign contributions by electric utilities over a 9-yr time frame (with controls for firm-level characteristics) that firms significantly increased their campaign contributions during the 12-month period before the public announcement and regulatory review of a proposed corporate merger · This short-term spike in donations suggests that firms pursue a transactional strategy favouring a quid pro quo approach (though they may be pursuing a "relational" strategy simultaneously)

Axtell (2001)

· Firms sizes in industrial countries are highly skew such that small numbers of large firms coexist alongside larger numbers of smaller firms · Such skewness has been robust over time, being insensitive to changes in political and regulatory environments, immune to waves of M&A and unaffected by surges of new firm entry and bankruptcies · Axtell's analysis of firm sizes uses the entire population of tax-paying firms in the US, rather than previous analyses which used very limited samples of small firms and thus arrived at the conclusion that firm sizes could be described by log-normal distributions · Axtell shows that the Zipf distribution characterises firm sizes: the probability of a firm being larger than size 's' is inversely proportional to 's' - a result which can be shown to hold for multiple years and various definitions of firm size the normal distribution does not characterise firm sizes

Powell & Arregle (2007)

· Firms sometimes fail to capture valuable opportunities, fail to imitate imitable resources and do not solve their "solvable" problems · The persistence of random errors creates intra-industry performance variance that is usually attributed to the competitive advantages of successful firms · Powerll and Arregle argue that firms compete on two axes / dimensions: the axis of competitive advantage, where performance is driven by the inimitable resources and capabilities of high-performing firms, and the axis of errors, where performance is driven by failures to attend to the activities, resources and opportunities that are equally available to all firms · They define a specific class of errors called "x-errors" - the strategy theory equivalent of x-inefficiency for microeconomics, with the following characteristics: 1. It involves acts of omission or commission by one or more organisational members (as described in the Ghemawat framework of errors) 2. It is value-destroying (avoiding the error generates more value than committing the error) 3. It is avoidable (the omission or commission is a choice) 4. Avoiding the error does not generate competitive advantages (avoiding it is a hygiene or parity factor, not a valuable, scarce, difficult to imitate activity) 5. The error is recognisable ex ante (in hindsight) as an error · These errors are unlike those caused by bounded rationality, causal ambiguity or the political processes involved in firm decision-making, but occur when organisations "blunder, lapse or misjudge"

Peteraf (1993) - explain the concept of imperfect mobility

· Imperfect mobility: o Perfectly immobile resources cannot be traded - this could be resources for which property rights are ill-defined or where it is difficult to work out the value of the asset, e.g. intangible goods such as brand (but it is technically mobile since brand value can be gained through an acquisition?) o Imperfectly mobile resources can be traded but firms may not choose to trade them as they are more valuable within the firm that currently employs them than they would be at a different firm i.e. specialised to firm-specific needs (asset specificity) o Sunk costs / switching costs and loss aversion may make firms unlikely to trade assets that they are already endowed with o Cospecialised assets - which have higher economic value when employed together - may also be less likely to be sold to avoid separating the two o Transaction costs associated with their transfer may also be too high to justify it

What is the role of game theory in strategy?

· In perfectly competitive markets, firms do not consider likely reactions of their rivals to their output decisions (firms are price-takers) · In monopolistic settings, firms are not price-takers but their output decisions can influence prices and in these settings, game theory can lead to optimal decision-making

Fisman (2001)

· Indonesian economy faced downward spiral at the end of 1997 - investor panic and massive outflow of foreign capital due to fears that capital that had flowed into Indonesia and other Southeast Asian countries had not been used for productive investments · The role of political connections in driving investment towards those with connections rather being determined by underlying productivity of the investments was highlighted · Difficulties in attempting to value political connections: · where political decision-making is decentralised, defining political connectedness can be challenging, e.g. in India, analysing a firm's political associations would require info on its relationships with numerous government decision-making bodies and would need a way of aggregating those connections · business-politics relations can be a taboo topic and may not be discussed openly · difficulty in knowing what measure to use to estimate the value of connections: simple measures of profitability may not be enough - e.g. well-connected firms may be experiencing huge political rents but low profitability due to the costs of pursuing political rent-seeking · Indonesia is a good case study to overcome some of these difficulties due to its highly centralised and stable political structure · Data suggests that when rumours spread about President Suharto's ill health, politically dependent firms, with strong ties to Suharto, lost more value in share price than less politically-connected firms · This suggests that a large proportion of a firm's value can be derived from political rents · This analysis can also be translated to other countries - Indonesia is only 45th out of 54th on the "Perceived Corruption Ranking" - more corrupt countries include India, Russia, Pakistan, Nigeria etc. · If perceived corruption is a reasonable proxy for political rents, then we can assume that political connections would play an important role in many major world economies.

Bach & Allen (2010) - explain the elements of the IA3 framework

· Issues: o A company's non-market environment is organised around issues and the firm should only take actions on the issue if the issue's resolution could significantly affect the company's ability to create and / or appropriate value o This applies to both the upside and downside, i.e. it is not just a matter of neutralising threats but recognising issues whose favourable resolution would generate a new opportunity · Actors: o Once the issue is identified, this can be used to work out the "interested parties" - with an economic or ideological stake in the issue - and any conflicts among them o Organised groups - such as farmers demanding agricultural subsidies, for example - matter the most in politics and are usually far more powerful than unorganised actors - e.g. consumers who eventually have to foot the bill for these subsidies through higher taxes for example, even though the number of consumers >>> number of farmers · Interests: o Building on the identification of actors who care about the issue, the next critical question is what these actors actually want i.e. § what motivates them and what they hope to achieve? § How critical is the issue for them? § How homogeneous is the outlook of those in the group? Do all members feel the same way or are they split on the issue which provides an opening for engagement? · Arenas: o Non-market issues can play out in multiple settings from courtrooms and regulatory proceedings to parliamentary committee hearings and industry forums all the way to the news, the blogosphere etc. o Knowing where actors are meeting matters as the rules vary across the different settings o E.g. Shell lost the battle over the future of the abandoned Brent Spar oil rig as it failed to appreciate that Greenpeace had shifted the arena away from the realm of British environmental regulation where the company's scientific argument had proved compelling to the public domain where Greenpeace's emotional appeal was far more effective · Information: o Money is the currency of markets and information is the currency of the non-market environment o Managers need to understand what information will move the issue in the particular arena of interest o E.g. public opinion data will be more effective in lobbying critical members of a congressional committee, for example, than in a courtroom or regulatory hearing o Owners of critical information often have a decisive advantage; since politics is all about persuasion, having the right kind of information for the issue and arena in question is the key to success · Assets: o Other assets apart from information do matter for a firm to prevail in a given arena, e.g. § a company's reputation and trustworthiness are essential if it wants to influence an issue in the public domain § a broad network of contacts and the ability to assemble and mobilise coalitions quickly can be critical assets; conversely, association with the wrong actors can be a liability

Besanko et al. (2017)

· Microeconomic models of competition - the Cournot and Bertrand models - are static models, i.e. they look at competitive decision-making as occurring simultaneously and don't take into account the effect of strategic decisions unfolding over time · Adding time as a dimension that affects strategic options, allows us to infer the strategic benefits of commitment, the informational benefits of flexibility and work out a framework for analysing commitments · Strategic commitments are those that alter the strategic decisions of rivals; if a commitment is to provoke a response, it has to be: o Irreversible (so it can carry commitment weight) o Visible (so competitors have something to react to) o Understandable (so competitors have something to react to) o Credible (so rivals believe that the firm will actually carry out the commitment) · A famous example of a strategic commitment is Hernan Cortes' conquest of the Aztec Empire in Mexico, when he ordered his men to burn all their ships upon landing in Mexico; by eliminating their only option of retreat, Cortes was able to commit his men to battle

Dahan et al. (2010)

· Multinational corporations face a range of challenges when entering developing countries, including the need to adapt their business models to the emerging markets' cultural, economic, institutional and geographic features · Where they lack the tangible resources or intangible knowledge needed to address these challenges, MNCs may consider collaborating with non-profit NGOs to help facilitate new modes of value creation · In such cross-sector partnerships, parties contribute complimentary capabilities along each stage of the value chain to develop products and services that neither could produce alone, creating and delivering value in novel ways while minimising costs and risks

Yaziji (2014) - why are NGOs especially powerful today?

· NGO attacks pose very different challenges from those mounted by business competitors since NGOs can turn a firms' strengths into weaknesses - the larger and better-known a company is the more likely it is to be a juicy target. · The rise of social media has further emboldened NGOs who can now create PR disasters through their laptops · The number of NGOs with global concerns has quadrupled over the past decade, a fact partly reflected in the 20x increase over the last 10 years in mentions of NGOs generally in the Wall Street Journal and the Financial Times · To NGOs and advocacy groups, simple compliance with all applicable laws is not the end of a corporation's responsibilities - if the laws themselves are insufficiently protective

Porter (1996) - what did he say about operational effectiveness? why?

· Operational effectiveness is not strategy and the firm is an "activity system" o OE and strategy are both essential to superior performance but OE on its own is necessary but not sufficient o Operational effectiveness means performing similar activities as competitors in a better way ("better" could be cost efficiency but also less defects or bringing products to market more quickly) o Strategic positioning on the other hand means performing different activities to competitors or performing similar activities in a different way and the firm as a whole can be seen as an "activity system" o Operational effectiveness is easy to imitate (according to Porter) because "best practices" diffuse very quickly through the industry o OE was the key reason that Japanese companies posed a threat to Western ones in the 80s as it enabled them to offer lower cost and superior quality at the same time o However, this soon turned into "races down identical paths that no one can win" in the sense that competitors exploited all available operational methods to achieve maximum efficiency and ran out of ways in which to differentiate themselves o "OE competition shifts the bar outward for everyone and leads to absolute improvements for the whole industry while giving relative improvements for no one"

Villalonga (2004)

· Presents an alternative view to Berger and Ofek (1995) who showed empirically that there was a diversification discount - that diversified firms trade at a discount when the imputed values of their individual business segments are considered and compared to single-business equivalents - a finding which has been interpreted as evidence that diversification destroys value · Graham, Lemmon and Wolf (2002) show that half or more of the discount appears due to the fact that segments acquired by diversifying firms were also discounted prior to their acquisition and the fact that both diversifying firms and their targets frequently trade at a discount prior to acquisition · Villalonga uses a new database that covers the whole US economy between 1989-1996 to construct alternative measures of diversification - the new data set was superior to the old due to the fact that the segment data used in prior studies, typically grouped into each segment different activities and different combinations of activities for different firms (????) · The use of the new data source where segment data yields a discount reveals that diversified firms trade at a large and statistically significant premium relative to specialised firms in the same industries

Barney (1986) - Strategic Factor Markets

· Strategic factor markets are a market where the resources required to implement a strategy are acquired · If strategic factor markets are perfect, then the cost of acquiring strategic resources will approximately equal the economic value of those resources once they are used to implement product market strategies · Even if such strategies create imperfectly competitive product markets, they will not generate above normal economic performance for a firm, because their full value would have been anticipated when the resources necessary for implementation were acquired · However, strategic factor markets will be imperfectly competitive when different firms have different expectations about the future value of a strategic resource. In these settings, firms may obtain above normal economic performance from acquiring strategic resources and implementing strategies. · Firms can attempt to develop better expectations about the future value of strategic resources by analysing their competitive environments or by analysing skills and capabilities they already control.

Mintzberg (1987) - strategy as ploy

· Strategies can be long-term plans or short-term "ploys" or maneuvers i.e. tactics which form part of a larger plan o E.g. a corporation may threaten to expand plant capacity to discourage a competitor from entering the market. Here the threat is the strategy o But, as Rumelt notes, it's difficult to differentiate between strategy and tactics - "one firm's strategy may be another's tactics"; furthermore, the distinction may change over time - what is pursued as a "tactic" may actually end up being crucial for long-term strategy

Mintzberg (1987) - Strategy as pattern

· Strategy is a pattern which can be identified or recognised in a stream of actions, whether they were intentional (i.e. formalised as a plan and then executed) or not (if they simply emerged by chance, error or "logical incrementalism"). Mintzberg uses this idea to differentiate between intended, realised, emergent and deliberate strategies o Intended = strategies that are formalised as plans and that the organisation intends to pursue o Realised = the strategy that organisations end up pursuing, which may differ from the intended strategy for a variety of reasons o Deliberate = when strategies are intended and realised, they are said to be deliberate o Emergent = when patterns or consistencies in an organisation's actions that are unintended but realised, they are said to be emergent - they emerged from the complex interactions within an organisation and between the organisation and its environment

Mintzberg (1987) - strategy as position

· Strategy is the "mediating force" that acts as a means of locating an organisation within its "environment" - a link between the internal and external context o This notion of strategy is compatible with the idea of strategy as plan (deliberate) or pattern (emergent) as the ideal position could have arisen through rational planning or due to the markets

Rumelt (1982)

· The benefits of diversification stem from the economies of shared factors of production and the impacts of diversification on organisational efficiency · Rumelt sets out three conditions required for economies of scope to occur: o Increasing returns to scale in the use of an essential factor of production o Transaction costs prevent an efficient market in the relevant factors, forcing integration o Limits on obtaining increased factor utilisation by expanding the output of any single end-product · The "relatedness" of the various divisions in a business depend on the nature of the factors they share and also on the degree to which the association between the factor and the businesses using it is idiosyncratic

Coase (1960) "The Problem of Social Cost"

· The classic (Pigou's) approach in economics to externalities has been something like this: If a plant's pollution causes $100 in damage every year, tax it $100 until it fixes it. If installing a scrubber will cost $90, the plant will install the scrubber to end the taxation. · Coase points out the problem: if A [the plant] hurts B [the surrounding community], then compelling A to repay B simply allows B to hurt A. Pigou is not socially efficient. · So Coase would add this to the story with the polluting plant: Perhaps the people living around the plant could move away from the pollution for only $40 total [for everybody]. Then the socially optimal solution [i.e. efficient, not equitable] is to have the people move (which costs only $40). Just as continued pollution imposes a cost of $100 on the community, forcing the plant to pay this cost unilaterally allows the community to overcharge the plant (by 100-40 = $60). So A hurts B, but forced restitution allows B to hurt A. In a world without transactions costs, the parties will negotiate some sort of side payment or something [This solution assumes no transactions costs.] · RESULT without transaction costs: If rights are assigned and there are not transactions costs, then the externalities will be internalized (e.g. a side payment in the above example). You will renegotiate the property rights since there aren't transactions costs for doing so. The externality cost is priced and dealt with. · RESULT with transactions costs: Well, now it starts to matter who has the property rights. You'll look at your options: bargain as above, use the courts to enforce your right, or internalize by putting A and B into a single firm. As transactions costs rise, you become far less likely to internalize the externality on your own. Transactions costs can rise in many ways: too many people involved, too hard to identify who is involved, too hard to determine the cost of the externality, etc. WHEN TRANSACTIONS COSTS RISE, YOU MUST MOVE TOWARD HIGHER LEVELS OF CENTRALIZATION IN ORDER TO DEAL WITH EXTERNALITIES. You might need to move up from the market to the firm, or to the state.

Porter (1981) - contributions of IO economics to strategy

· The positional view, as espoused by Porter, stems from the Bain/Mason paradigm of industrial organisation (Bain, 1968; Mason, 1953) · This consisted of the structure-conduct-performance framework, which is the idea that it is the basic conditions of a particular economic regime that define the structures of the market, which influence the conduct of firms, the latter then has an impact on their performance and those of the industry. · E.g. in a "perfectly competitive" market structure, there is an "infinite" number of homogenous firms and no barriers to entry; thus, a firm which raises prices will be undercut by one of the existing huge numbers of competitors or a new entrant, which means that they will choose to price their products at marginal cost (conduct) meaning that supernormal profits are impossible in the industry and all firms making normal profits (performance) · IO literature was predominantly written with society at its frame of reference and policy prescriptions aimed to improve social welfare, i.e. reduce an individual firm's return on investment by reducing supernormal profits - thus, its uptake in SM was initially limited · IO theory took the industry as its unit of analysis while practitioners generally took the "firm" as its unit of analysis · IO theory implicitly assumed that all firms in an industry are identical in an economic sense, except for differences in their size

Wu, Li and Li (2013)

· The study investigates the effect of corporate political connections on IPO performance in an emerging economy · It examines how CEO political connections affect the IPO performance of 428 firms in China from 2000-2004 · The empirical results show that CEO political connections have a positive impact on firms' ability to raise capital from public markets · The results show that CEO political connections with the central government (CCP) play a more important role in IPO performance than political connections with regional governments · The positive effect of central political connections on IPO performance is weaker in market-restricted regions but stronger in highly regulated industries · Reasons driving this effect: o Firms must send signals to potential investors and demonstrate their ability to cope with "regulatory risk" and uncertainty o Corporate political connections can act as an information conduit between the government and the firm and can familiarise the firm with political processes o By appointing former govt. officials as top executives, firms can become more familiar with explicit and implicit political rules and processes, thus reducing information asymmetry, operational uncertainty and transaction costs when interacting with government agencies o Top managers with former affiliates to either central or regional governments can help firms favourable reshape their political environments through lobbying activities

Pallich, Cardinal and Miller (2000)

· There is very little agreement concerning the nature of the diversification-performance relationship with both theoretical and empirical disagreements · This paper synthesises findings from three decades of research to address major theoretical issues that remain open to debate · They derive three competing models from the literature and empirically assess these using meta-analytic data from 55 previous studies · The results suggest that the diversification-performance linkage can be represented by an inverted U-shape, implying that moderate levels of diversification yield higher levels of performance than either limited or extensive diversification · Performance increases as firms shift from single-business strategies to related diversification but performance decreases as firms change from related to unrelated diversification · The three models they aim to test were: o The linear model - based primarily on the market-power view - more diversification is better because it enables the firm to gain more conglomerate power o The inverted-u model o The intermediate model

Leuchinger and Moser (2014)

· They analyse stock market reactions to announcements of political appointments from the private sector and corporate appointments of former US government officials using data on corporate affiliations and political appointments of all Senate-confirmed US Defense Department appointees, spanning across six administrations from George Bush Sr. to Barack Obama · For political appointments, they find positive one and two day average abnormal returns of 0.77% and 0.78% respectively · Price movements are generally stronger for appointments of former board members (rather than employees / officers), top pay-grades in the DoD, appointees nominated by a Democratic administration (why?) and where the announcement was unanticipated · For corporate appointments, the corresponding figures are 0.72% and 1.03% though these results are less statistically strong

Berger and Ofek (2016)

· They estimate diversification's effect on firm value by computing stand-alone values for individual business segments · They use segment-level data to estimate the valuation effect of diversification and examine the potential sources of value gains / losses · The results suggest that diversified firms have values that were on average, during 1986-91, 13%-15% below the sum of the implied values for each individual segments · They also document that segments of diversified firms have lower operating profitability than single-line businesses · The method they used to work this out was to take samples of conglomerate firms, calculate values for non-conglomerate firms in the same industries (Sales, Assets, EBIT) · They find that the loss of value is considerably lower for related diversifications rather than unrelated · One of the potential causes of the loss in value has been identified as potentially overinvestment in segments from industries with limited investment opportunities · Another cause could be the cross-subsidisation of poorly performing divisions by better-performing divisions · The value loss is slightly offset by the decrease in taxes associated with having multiple divisions under one entity (but estimates suggest this effect is as small as 0.1% of sales) · The tax shield effect arises due to the increased interest tax shields resulting from higher debt capacity and the ability of multi-segment firms to immediately realise tax savings by offsetting losses in some segments against profits in others

Capron and Pistre 2002

· They examine the relationship between acquirer abnormal returns and the respective resource contributions of the target and acquirer · They find that value creation does not ensure value capture for the acquirer · The methodology used is combining an event study with a survey of post-acquisition resource transfer between acquirer and target on a sample of 101 firms, they find that acquirers do not earn abnormal returns when they only receive resources from the target · In this case, it is likely that multiple bidders, who could have equally captured these resources, competed away all the abnormal returns from the successful bidder · In contrast, they find that acquirers can expect to earn abnormal returns when they transfer their own resources to the target (jointly / independently of the use of target's resources) as in this case, it is likely that the acquirer controls unique resources, which prevents the competitive bidding from unfolding fully · The results suggest that the value captured by the acquirer depends on the respective distribution of resources among the competing bidders · For the acquirer to earn abnormal returns, the difference between the first and second most capable acquirers matters more than the absolute value creation per se · As the bidding firm's capabilities become similar, the value captured by the bidder shrinks and the target captures most of the value (though this implication could not be directly tested due to data limitations)

Hayward and Hambrick 1997

· They examine the role of CEO hubris - their exaggerated sense of self-confidence - in explaining the large size of some premiums paid for acquisitions In a sample of 106 large acquisitions, they find that there were four main indicators of CEO hubris, that were highly associated with the size of premiums paid

Bach & Allen (2010)

· They set out the IA3 framework to guide the creation of non-market strategies, which is meant to be the equivalent of Porter's Five Forces for non-market strategies · It ensures that companies can work out a proactive as opposed to a reactive non-market strategy Elements of the IA3 strategy - issue, arena, actors, interests, information, assets

Waring (1996)

· This empirical study shows a wide variation in the persistence rates for within-industry profit differences · Earlier studies which estimated one rate of persistence for the total profitability of all firms were taking a misleading average · In some of the manufacturing industries examined, industry-level convergence rates are zero within one year, while others show almost total convergence within the same time span · The study shows which industry factors determine the persistence rates and how relatively important each factor is; these attributes explain a significant amount of the variation in persistence across manufacturing industries · The factors included skill, the degree of unionisation, consumer purchases as a % of output, the number of firms, economies of scale and R&D intensity · These factors support theories of information impediments to imitation (i.e. the resource based / capabilities approach), relative labour power, switching costs (barrier to exit for consumers), economies of scale and relative competition (i.e. the positional view)

Hambrick and Jen (2007)

· This paper attempts to arrive at a definition for "strategic management" by using statistical analysis of papers within the field and related fields - economics, marketing, organisational theory - to work out its "distinctive lexicon" - the words / concepts most frequently used in "strategic management" papers Their definition of strategy is: "The field of strategic management deals with the major intended and emergent initiatives taken by general managers on behalf of owners involving utilisation of resources to enhance the performance of firms in their external environments"

Denrell (2005)

· Trying to work out the "secrets of business success" by focusing solely on studying existing successful businesses or managers leads to selection bias - relying on samples that are not representative of the whole population · Popular business / management books / ideas are underpinned by a systematic under-sampling of failure · The theoretically correct way to discover what makes a business successful is to look at both thriving and floundering companies · Selection bias is even more pernicious within management since good performance is rewarded by survival, which means that the failures to be studied aren't even accessible · Any sample of existing companies, by definition, consists of largely successful ones · Managers in emerging industries are therefore less likely to fall prey to selection bias since evidence of failure can be all around them, e.g. during the dotcom boom of the 2000s; however, when an industry matures and the failure rates fall off, theorists need to be extremely careful not to draw conclusions based only on the successes · The effect of selection bias is more prevalent than people think since the "winnowing" process in most industries is incredibly dramatic - some studies show that 50% of all new businesses fail during the first 3-5 years · Selection bias isn't just a problem for companies but for the proliferation of ideas in general management; if a given idea works well for some companies, it maybe taken as evidence of the idea causing high performance, when in reality the failures who applied the same idea are ignored · When managers draw conclusions from incomplete data, this can lead to engaging in risky and flawed business practices

Rumelt (1991)

· Variance in business-unit profitability within one sample of businesses is explained as follows: o 8% industry effects o 1% corporate effects o 46% business unit effects o 8% industry-year effects o 37% residual error · The effects are defined as follows: o "industry effect" - persistent industry-specific impacts on observed rates of return driven by competitive forces (e.g. Porter's Five Forces) - conditions of entry, growth rates, asset utilisation rates, demand-capacity conditions o "corporate effect" - impacts on observed rates of return that arise from differences in the quality of monitoring and control, differences in resource sharing and other types of synergy, differences in accounting policy (looking at the whole firm with multiple business units rather than just one) o "business-unit effect" - impacts on observed rates of return that arise from factors such as business-specific skills, resources, reputations, learning, patents and other intangible contributions · These empirical results imply that industry matters very little compared to what the positional view predicts and that much of the variance in profitability is actually explained by firm-specific resources and capabilities

Hall and Soskice 2001 - what does the success of firms depend on?

· Varying rules and regulations can have varying effects on firms in competitive settings and there are strategic complementarities between firms and the political economy · The success of firms depend on its interaction with the following institutions that resolve coordination problems: o Vocational training and education as firms need particular skill sets o Wage bargaining - industrial relations to define wages and productivity levels o Corporate governance - to access finance o Inter-firm relations - suppliers and clients

Kahneman and Lovallo (1993)

· When individuals face uncertain prospects in experimental situations, they tend to exhibit biases such as narrow decision frames, risk aversion and near proportionality, which can also affect them in organisational contexts, particularly managers who have to make uncertain investment and resource-allocation decisions · Risk aversion: people behave according to the prospect theory graph, so illustrate loss averse behaviour · Near-proportionality of risk-taking: there is almost as much risk aversion when stakes are small as when they are large; this doesn't make sense because: o Small gambles do not raise issues of survival or ruin, which provide a rationale for aversion to large risks o Small gambles are usually more common, offering more opportunities for the risk-reducing effects of statistical aggregation · Narrow decision frames: people tend to consider decision problems one at a time, often isolating the current problem from other choices that may be pending and from future opportunities to make similar decisions o If more opportunities to take the uncertain choice are available in the future, this offers opportunities for the risk-reducing effects of statistical aggregation · Overall, these three biases lead to people making timid choices

Bonardi (2011)

· elements of the RBV framework used to analyse a firm's sustainable competitive advantage in economic markets cannot be directly to transposed to the analysis of political resources · Resources that are valuable, rare, imperfectly imitable and non-substitutable do effect in the political sphere, but these usually cannot explain why certain firms are more able to shape public policy and achieve superior financial performance as a result · Thus, explaining the factors that cause a political resource to be the source of sustained competitive advantage require looking beyond the RBV framework

Faccio (2006) - what are the characteristics of countries with high levels of corporate-political connections?

· looks at a group of approx. 20k publicly traded (large) companies in 47 countries to answer the questions of what the characteristics of countries which have widespread political connections are and whether these connections actually add value · Connections are particularly common in countries that are: o Perceived as being highly corrupt o Impose restrictions on foreign investments by their citizens o More transparent systems (this is likely to be due to the fact that there is greater access to information about political conflicts of interest in such economies)