Competitive strategies

Intro

• Objectives:
  • Sector analysis
  • Financial performance of a company
  • Type and sources of competitive advantage
  • Directions of firm growth
  • Case study methodology

What strategy is: Where to compete? How to compete? Strategy is a conscious plan that offers value to the firm: it creates value from the economic transaction and to capture value. A necessary condition to create and capture value is to understand the environment in which the company operates and its position. Not only, strategy is also a pattern of behaviour, a series of rules that should be implemented in order to create consensus. Finally, strategy is the ability to understand future directions (perceptions) with a correct framework: for this reason it can be divided into current and future strategy.

Strategy, performance and financial measures

Value creation and value capture

Chapter one highlighted that strategy answers where and how to compete, with the aim of creating competitive advantage. Value is created when the maximum price that the customer is willing to pay to consume a particular product is greater than the average cost that the firm sustains to produce that particular product. There are three driving forces of value creation and capture: the maximum price the customer is willing to pay, the market price and the average cost.

Accounting and financial measures

How to measure the firm’s ability to create/capture value and build competitive advantage? We have two categories of measures: short-term and long-term ones.

• Short-term:
  • ROI
  • ROA
  • ROE

Social performance and economic performance

A firm is not evaluated on its financial performance alone. Especially in recent years, increasing attention has been paid to its social image. Corporate social responsibility (CSR) studies highlight the importance of “doing well by doing good”. Strong economic performance cannot be maintained with a poor social image; good social relationships are in danger if the economic returns of the firm are in crisis.

Sector analysis

Michael Porter, 1970. Sector characteristics are mostly responsible for the level of value creation, and the firm’s position explains how much of this value the firm will capture.

• 5 Forces:
  • Actual competition in the sector: the higher is the number of competitors, the lower is the possibility of obtaining stable profits. We can calculate the market share with data on sales of each firm. These are quantitative infos, but also qualitative infos are fundamental, such as “are the main clients firms or individuals?” or “is competition oriented toward price or quality?”
  • Future competition in the sector: