If you Google For Business Strategy, you’ll find surprisingly little information about business strategy. To provide some more insight, here is how business strategy is taught in Northwestern’s Kellogg MBA program.
While further reading is required, after reading this you should have a good framework for understanding “What Is Business Strategy?” in a nutshell.
Business strategy addresses a simple question:
How do you create, capture and sustain a competitive advantage?
1. Value Creation & Capture
What is value creation?
Value = (Benefit – Cost) * Quantity
Value = (Benefit – Price) * Quantity + (Price – Cost) * Quantity
Consumer Surplus = Benefit – Price
Economic Profit = Price – Cost
For a given price and quantity, you must do one of the following to create value:
- Increase Benefit
- Decrease Cost
2. Creating Value
What do you bring to the table?
Added Value = ValueWITH – ValueWITHOUT
Added value is the upper bound of value capture.
You can capture value by creating (compete) or destroying (anti-trust) value.
3. Porter’s Five Competitive Forces That Shape Strategy
Given that half of profitability is industry dependent, how profitable is the industry?
The five forces are threat of entry, buyers, suppliers, substitutes/complements and rivalry. Below are examples of each force:
A. Entry
- Barriers To Entry
- Capital Costs = Not a Barrier To Entry
- Patents
- Legal
- Minimum Efficient Scale
- Network Effects
- Reputation
- Brand
- Excess Capacity
- Contracts
- Exclusives
- Learning / scale
- Low growth
- Limited Slots (e.g. Airport Terminals)
- Long Lead Time
- Complexity
- Government
- Backlogs
B. Substitutes/Complements
- VHS –> DVD –> Netflix
- Landline –> Cell Phone
- Restaurant + Taxi Cab
- Cars + Financing
- Used vs. New
C. Buyers
- Walmart
- Ticketmaster
- Online Banking
D. Suppliers
- Concentration compared to buyers
- Buyer switching costs
- Buyer price sensitivity
E. Rivalry
- Buyer Switching Costs (Limit)
- Upgradable
- Lumpy Orders
- Homogeneous Product
- Politics
- Low Growth
- Excess Capacity
- Transparency
- Neck & Neck
- Follow-on revenue
- Existing vs New Design
Competitive dynamics differ across industries and within an industry at different times.
4. Competitive Advantage
Within a given industry, how profitable is an individual firm?
Assets + Activities –> Advantage
- What do you have?
- What do you do with it?
- What is unique?
5. Sustainability
Now that I have it, how do I keep it?
- Unique
- Appropriable
- Prevent Imitation
- Foresight
6. Adopting To Change
What do I do when the world changes?
How do my assets and activities translate into competitive advantage in a new context?
7. Vertical Strategies
When is vertical integration justified?
To figure this out, ask: Why can’t I do this with a contract?
- Agency Problems
- Foreclose Rivals
- Relationships
- Transaction Costs Are High
8. Synergy
1+1 = 3
Synergy is NOT the amount you overpay for an acquisition
9. Growth
What if you run out of room to grow?
- Stop Growing
- Expand (e.g. Geographically)
- Change Contexts
10. Overall
Strategy isn’t an algorithm & it isn’t luck. If you see an opportunity, seize it.
To learn more about business strategy, consider reading the following:
- Playing To Win
- The Art of War
- HBR’s 10 Must Reads on Strategy
- Good To Great