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Strategic Management II
TOPIC A: INTRODUCTION AND UNDERSTANDING CORPORATE PERFORMANCE
Final exam 40%
Theory class participation 10%
Course project 25%
What is strategic management about? And why should we care?
We associate strategy to the top management of the company. It’s important to care about to get a
competitive advantage; we have to understand why some companies perform better than others.
PERFORMANCE AND THE ROLE OF LUCK When you set up a firm, you have to see environment and look who is successful. We can depend on luck (the game of the coins 50% probability), the first ones and the lasts ones would have more advantage to be better and worse, because there are switching costs. It is difficult to understand when a firm is doing well, and it is not always a good idea to copy other companies, it doesn’t give you for sure an advantage when you perform like other firms.
When resources are cumulative or when strategies/actions have a lot of risk/ noise then, observed performance is not always a reliable indicator of skill. In fact, there could be cases where extreme performers are less skillful than average performance.
PERFORMANCE FEEDBACK& EVOLUTION PROBLEMS WITH INFERENCES ABOUT PERFORMANCE Degree of engagement: negative correlation, there are companies that are performing above the line positively and others bad.
We don’t pay attention to firms who are performing bad, we just care about the ones that are successful and this is negative to understand strategy.
PERFORMANCE & SURVIVOR BIAS Strategic Management II PERFORMANCE & REGRESSION TO THE MEAN Punishing peoples works well (after the punishment the company works better) whereas rewarding people doesn’t work so well.
When there is luck, randomness, people move around the mean.
PERFORMANCE & CONFOUNDING EFFECTS Correlation doesn’t imply causation.
PERFORMANCE & SUPERSTITIOUS LEARNING It is something that affects performance. You do some actions that bring good results, but maybe the actual effect is that the actions don’t cause the positive results.
FIRM PERFORMANCE EXPLAINED Resource-based view (valuable & difficult to imitate resources) + Industry characteristics (Porter)= Firm performance.
According to Porter, the five forces affect to performance: suppliers, ... The performance of air companies is bad according to porter (suppliers) because they pay to much money for a plane. With the 5 forces we can see how attractive is the market, the 5 forces matter.
The resource-based view says that the 5 forces are not so important because it considers internal factors to understand performance, not external as porter.
THE RESOURCE-BASED VIEW OF THE FIRM Valuable, rare, inimitable, non-substitutable resources à competitive advantage & performance heterogeneity.
We can see that the brand of Apple is valuable, but how do they manage to achieve this? Strategic Management II How much would you pay for a bottle of water? It depends, if you haven’t drunk for a long time, you would pay anything.
STRATEGIC FACTOR MARKETS & COMPETITION FOR RESOURCES Going… Going… HOW FIRMS UNDERPAU FOR RESOURCES? HOW FIRMS OVERPAY FOR RESOURCES? The winner’s curse! It’s all about superior expectations! Superior expectations à VRIN resources à Superior profitability t-1 t t,t+1 What about complementarity or uniqueness? Firms have to overpay for resources.
If you have private/unique information, you are able to underpay HOW DO FIRMS IMPROVE THEIR FORESIGHT? How these companies obtain unique information. Firms shouldn’t just implement the strategy and ignore what happens in the environment.
‘The Medici effect’ – rich family and influential, they created the first bank system.
Unique assets – they are assets or resources that other firms don’t have. Firms need to acquire these resources. A patent that to be used you need another patent that has another firm and you don’t have.
Are all assets traded? What about appropriable & firm-specific assets? In the business world there are some things that we cannot sell, that there cannot be a transaction, such as some kind of knowledge or culture of a firm, or the reputation of the firm. If you are a new firm and you buy the brand of Apple, consumers won’t associate maybe the same quality and reputation of the new company automatically, it is an imperfect transaction: not al the characteristics are transferred.
ACCUMULATION OF ASSET STOCKS It is difficult to follow this, to replicate other firms.
Strategic Management II What factors prevent other firms from replicating asset stocks? ‘Success breeds success’ - once your firm has achieved a good position, then it is easier.
Causal ambiguity – something that it is not really clear, uncertain, I don’t understand the cause of something. Firms have the ability, but the competitors are not sure of how to imitate this. Because of this, the competitive advantages exist.