5 Qstns of Strategy:

Where should we compete?

How will we get there?
How are we going to win in the market place?
How do we create value for our shareholder?
What is our sequence of moves?

Corporate decision classification

Vertical integration along value chain

(economies of scale)
Backward integration
Forward integration
Horizontal integration (economies of
scope)
Product related
Market related
Unrelated diversification

Porters 3 tests assumption

Competition occurs at the business unit level

Diversification adds costs and constraints to the
business units
Shareholders can diversify their own portfolios
Fundamental assumption - performance is a function
of the industry

Porter Test 1: Industry Attractiveness

Threat from suppliers.

Threat from buyers.
Threat entrants.
Threat from substitutes.
Intensity of competition.

Test 2: Cost of Entry

Does the cost of entry capitalize all future earnings?
Two modes of entry into new areas:
Acquisitions.
Cost of acquisition can be substantial and more than what is the market
price
Start up.
The very factors that make the industry attractive can make it very
costly to enter.
Test 3: Better Off Test
Will the business that has been acquired or started
be better off due to entry by the corporation?

 Questions to ask:
Is it a one time benefit?
Can the shareholders do diversify on their own?
Is company size a red herring for value?

Resource Based View

Fundamental assumption - superior
performance is a result of firm capabilities or
resources that are valuable, rare and
inimitable.
The focus is on the firm as opposed to the
industry. For instance, Disneys success is
due to the fact that it has a host of resources
and capabilities that are valuable, rare and
inimitable.

1. RBV: Test of Inimitability

Physical uniqueness
Gold mine
Path dependency
Time diseconomies e.g. neurosurgery, brand equity
Causal ambiguity
Culture
Economic deterrence
Credible commitments
2. RBV: Test of Durability
How quickly does the resource depreciate?
Longer lasting resources are more valuable e.g. A
patent that has a life remaining of 10 years is more
valuable than one that will last for 3 years
All resources or capabilities will dry up over time

3. RBV: Test of Appropriability

Who captures the value that the resource creates?
Resources may look inimitable and durable but they
are part of a system.
Owners of resources may not always capture the
profits generated from these resources.

4. RBV:Test of Substitutability
Can a unique resource be trumped by a different
resource?
Similar to notion of substitutes from porters test
5. RBV: Test of Competitive
Superiority
Whose resource is really better?
Is your core competence really a distinctive
competence?
Objective data v/s feel good measures
6. RBV - Why Diversify?
Investing in new resources

 Current resources are no longer valuable, rare

and inimitable
Upgrading of resources
Current resources will soon lose value, rarity
and inimitability
Leveraging of resources
Current resources can be more valuable, rare
and inimitable in a different industry context