Lecture 1: Strategy, Value Creation & Capture, and Business Models

Required readings: VALUE CREATION AND VALUE CAPTURE: A MULTILEVEL

PERSPECTIVE

Session Objectives
At the end of this session you should be able to:
1) Describe the essence of strategic management.
2) Evaluate the existing business model of a real-world company with respect to its ability to
create and capture value.

What is strategy
Strategy: the central integrated, externally oriented concept of how we will achieve our objectives.
o A strategy consists of an integrated set of choices, but it isn’t a repository for every important
choice an executive face.
o A company’s mission and objective stand apart from and guide strategy, but is not
strategy itself.
o Because strategy addresses how the business intends to engage its environment, choices about
internal organizational arrangements are not part of strategy.
o E.g. compensation policies, information systems, or training programs  strategy.

Putting strategy in its place:  it’s not about the sequence it’s about the robustness.

Source: Hambrick & Fredrickson, 2005

The mission is not the same as the strategy of the company. The how behind the mission can be
broken down into smaller organizational objectives which will be already more measurable.
o The objectives are target specific, which means that an organization will have multiple and
different organizational objectives based on different stakeholders.
o There is always a political play within the organization on which organizational objective
have the most weight.
 Note: what are the REAL organizational objectives  do they differ from the marketed
organizational goal/ mission?

The elements of strategy  Strategic Diamond

A strategy has five elements, providing answers to five questions:
1) Arenas: where will we be active?
2) Vehicles: how will we get there?
3) Differentiators: how will we win in the marketplace?
4) Staging: what will be our speed and sequence of moves?
5) Economic logic: how will we obtain our returns?

1. Arenas: Where will we be active?

Determine the Arena by answering the following questions as specific
as possible:
o Which product categories
o Which channels?
o Which market segments?
o Which geographic areas?
o Which core technologies?
o Which value creation stages? (e.g., product design, manufacturing, selling, servicing,
distribution)
In choosing arenas, the strategist needs to indicate not only where the business will be
active, but also how much emphasis will be placed on each. (e.g., some market
segments might be more important than others).

2. Vehicles: How will we get there?

The means by which arenas are entered matters greatly. The means for attaining the needed presence
in a particular product category, market segment, geographic area, or value-creation stage should be
the result of deliberate strategic choice.
o Internal development?
o Joint ventures?
o Strategic alliances
o Licensing?
o Franchising?
o Mergers & acquisitions?

3. Differentiators: how will we win?

In a competitive world, winning is the result of differentiators.
o Image?
o Customization?
o Price?
o Styling?
o Reliability?
o Speed to market?
Achieving a compelling marketplace advantage does not necessarily mean that the company has to be
at the extreme on one differentiating dimension; rather, sometimes having the best combination of
differentiators confers a tremendous marketplace advantage. The critical issue for strategists is to
make up-front, deliberate choices.
o In selecting differentiators, strategists should give explicit preference to those few forms of
superiority that are mutually reinforcing (e.g., image and product styling), consistent with the
firm’s resources and capabilities, and, of course, highly valued in the arenas the company has
targeted.

4. Staging: what will be our speed and sequence of major moves?

o Speed of expansion?
o Sequence of initiatives?
o Interval between events?

Decisions about staging can be driven by a number of factors;

o Resources: are there enough resources to outset the envisioned initiative?
o Urgency: some elements of a strategy may face brief windows of opportunity, requiring that
they be pursued first and aggressively.
o Credibility: attaining certain thresholds – in specific arenas, differentiators, or vehicles – can
be critically valuable for attracting resources and stakeholders that are needed for other parts
of the strategy.
o Pursuit of early wins.

5. Economic logic: how will returns be obtained?

At the heart of a business strategy must be a clear idea of how profits (above the firm’s cost of capital)
will be generated. The economic logics are not fleeting or transitory. They are rooted in the firms’
fundamental and relatively enduring capabilities.
o Lowest costs through scale advantages?
o Lowest cost through scope and replication advantages?
o Premium prices due to proprietary product features?
o Premium prices due to unmatchable services?

Strategic diamond as a whole – conclusions

o All five elements are important enough to require intentionality.
o The elements call for choice, preparation and investment.
o All five require certain capabilities that cannot be generated spontaneously.
o All five elements must align and support each other.
o Only after the specification of all five strategic elements that the strategist is in the best
position to turn to designing all the other supporting activities.

o The five elements of the strategy diamond can be considered the hub or central
nodes for designing a comprehensive, integrated activity system. 10
o Strategy is the interaction of all these elements.

o Strategy is not primarily about planning. It is about intentional, informed, and

integrated choices.

Testing the Quality of Your Strategy – Sensitivity analysis

Key Evaluation Criteria
1. Does your strategy fit with what’s going on in the environment?
o Is there healthy profit potential where you’re headed? Does your strategy align with the key
success factors of your chosen environment?
2. Does your strategy exploit your key resources?
 o With your particular mix of resources, does this strategy give you a good head start on
competitors? Can you pursue this strategy more economically than competitors?
3. Will your envisioned differentiators be sustainable?
o Will competitors have difficulty matching you? If not, does your strategy explicitly include a
ceaseless regimen of innovation and opportunity creation?
4. Are the elements of your strategy internally consistent?
o Have you made choices of arenas, vehicles, differentiators, and staging, and economic logic?
Do they all fit and mutually reinforce each other?
5. Do you have enough resources to pursue this strategy?
o Do you have the money, managerial time and talent, and other capabilities to do all you
envision? Are you sure you’re not spreading your resources too thinly, only to be left with a
collection of feeble positions?
6. Is your strategy implementable?
o Will your key constituencies allow you to pursue this strategy? Can your organization make it
through the transition? Are you and your management team able and willing to lead the
required changes?

Value creation & Capture  Economic logic

Economic logic: how to create return?  By creating value and capturing it.

Value creation
What is value creation?
Two types of value: use value and exchange value.
o Use value: refers to the specific quality of a new job, task, product, or service as perceived by
users in relation to their needs, such as the speed or quality of performance on a new task or
the aesthetics or performance features of a new product or service.
o Such judgments are subjective and individual specific, they pertain to the individual
consumer.
o = Willingness to pay (WTP).
o Exchange value: either the monetary amount realized at a single point in time, when the
exchange of the new task, good, service, or product takes place, or the amount paid by the user
to the seller for the use value of the focal task, job, product, or service.
o Exchange value is only realized for the firm if an exchange between buyer and seller
takes place.
o Value creation: Viewed together, these definitions suggest that value creation depends on the
relative amount of value that is subjectively realized by a target user (or buyer) who is the
focus of value creation—whether individual, organization, or society—and that this subjective
value realization must at least translate into the user’s willingness to exchange a monetary
amount for the value received.

Consumer surplus (“value for money”): WTP – Exchange Value.

o A consumer will assess value based on the consumer surplus.
o A consumer will choose the option/ product that maximizes the consumer surplus
 Objective: To create value maximize consumer surplus!

Two key value creation strategies

o Differentiation strategies  Increase WTP
o Cost leadership strategies  Decrease price
Value capture:
Value capture is defined as the process of retaining a percentage of the value provided by a new idea,
product or service in every transaction.
o Value captured = price – costs
o Competition and barriers Isolating Mechanisms are the two key concepts that operate across
all levels (individual, organizational and societal) determining who captures the new value.
o Value capture from exchange value depends on the isolating mechanisms & bargaining
relationships between buyer and sellers.

Value capture: bargaining power.  Competition

o Competition: Limited supply + high demand
o Value must be shared with competitors
o Circular relationship between competition and value creation.
o Illustrates value slippage – when the party creating the value does not retain all the new value
that is created.

Value capture from (i) customers and from (ii) resource suppliers comparisons with other suppliers
and buyers.
o Exchanges are a function of the perceived bargaining relationships between buyer and sellers.

Value capture: Non -imitable product  Barriers

Ability to capture value depends on barriers to imitation of products or services.
o Casual ambiguity (secret)
o Re: real drivers of corporate success for outsiders
o Re: firm’s true assets used to produce product/service
o Re: relationships between assets
o Time-compression diseconomies (first mover advantage)
o Inefficiencies/higher costs than occur when product is developed relatively faster.
o Time-compression costs outweigh benefit of catching up with first-mover.
o Isolating mechanisms any knowledge, physical, or legal barrier that may prevent replication
of the value creating new task, products, or services by a competitor.
o Unique position
o Nature of relationships with others
o Specialized knowledge
o No substitutable resources
o Specialized knowledge advantage

Business models
business model: an organization’s plan for making a profit and creating value for its customers.
o It describes how an organization creates, delivers, and captures value in economic, social,
cultural, or other contexts.

It helps;
o to align the organization’s vision, mission, and goals with its actions and decisions,
o to communicate the company’s value proposition and competitive advantage to its customers
and stakeholders,
o to identify and evaluate the opportunities and threats in the external environment and the
strengths and weaknesses in the internal environment,
o to design and implement effective strategies that leverage the company’s resources,
capabilities, and partnerships.
Business model vs. Strategy

Strategy: a collection of five interrelated and mutually reinforcing choices that specify where, how,
and when a firm will compete achieve its objectives in competitive circumstances
 focuses on the competitive advantage of a firm to reach its goal within a specific industry
or market.

Business Model: a description of how a firm creates, delivers, and captures values for its customers,
partners, and stakeholders.
 Focuses on the value creation and capture of a firm across different industries to markets
 So, the business model is not the strategy, the business model focusses on the economic
logic of a strategy.
 The business models describe the architecture of the firm with respect to value creation and
value capture.

Why business models?

1. A potential source of competitiveness and abnormal returns.
2. Dimension of innovation that can complement traditional product, process, and original
innovation processes.
3. Need to reconfigure Business Models in response to macro- economic transformations, e.g.
digitalization, or legal obligations.
4. Possibility to use Business Models to create social and environmental value besides economic
value.
 Also applicable to nonprofit organizations.

Elements of business model design

 focus on creating and capturing value

Two parts to each business model:

1. Set of relations and activities of the firm  These activities follow each other up! It’s a cycle!
1.1. Customer segments: This is the identification of the specific groups of customers that the
company targets and serves (e.g. demographics, preferences, behaviors, and needs).
1.2. Value proposition: (i) What the product or service does to fulfill the customers’ needs, (ii)
why it is desirable to them, and (iii) how it differs from its competitiors.
1.3. Business Channels: The means by which the company reaches and communicates with its
customer segments (both physical and digital channels, such as websites, social media, stores,
distributors, etc.).
1.4. Customer relationships: The type of relationship that the company establishes and
maintains with its customer segments.
1.5. Revenue streams: The source and method of generating income from the value proposition
offered to the customer segments. E.g. different types of pricing mechanisms.
1.6. Key resources: The most important assets that the company requires to create and deliver its
value proposition to its customer segments
1.7. Key activities: The most important actions that the company performs to create and deliver
its value proposition to its customer segments.
1.8. Key partners: The network of external entities that the company collaborates with to create
and deliver its value proposition to its customer segments.
1.9. Cost structure: The major expenses that the company incurs to create and deliver its value
proposition to its customer segments. Fixed vs. variable costs.
 Relation to delivering value to your customer an capturing value for the firm
2. Outcome of activities
 Create value for customers, entice payments, and convert payments into profits.

Business model types illustration

Business model evaluation
 For a given strategy, to what extend does your business model maximize (i) your customers’ value
and (ii) to what extent does it capture that value?
o Conclusion: business model focusses only on the economic logic of the strategic diamond.

Sources of value creation

 Complementarities: getting value out of one product in combination with an other product.
 Novelty & appropriateness

Mechanisms of Value capture

Evaluate business model based on tree characteristics

You can tell if a business model will be effective and is a good one if it meets three criteria.
1. Is it aligned with company goals?
a. The choices made while designing a business model should deliver consequences that
enable an organization to achieve its goal.
2. It is self-reinforcing?
a. The choices that executives make while creating a business model should complement
one another; there must be intentional consistency.
3. Is it robust?  against outside/ intern shocks
a. A good business model should be able to sustain its effectiveness over time by
fending off four threats. They are;
i. Imitation; can competitors replicate your business model?
ii. Holdup: can customers, suppliers, or other players capture the value you
create by flexing their bargaining power?
iii. Slack; organizational complacency
iv. Substitution: can new products decrease the value customers perceive in your
product or services?
 Although the period of effectiveness may be shorter nowadays than it once was,
robustness is still a critical parameter.
Lecture 2: The Resources based view and Dynamic Capabilities
Required readings: Firm Resources and Sustained Competitive Advantage & Dynamic
Capabilities What Are They?

Session objectives:
1) Describe the difference between resources and dynamic capabilities.
2) Explain why VRIO/N resources alone may not lead to a sustainable competitive advantage.
3) Understand the interplay between dynamic capabilities and resources to create sustained
competitive advantage.

Competitive advantage vs. value creation

and capture
Competitive advantage: when company is able to
outperform competition with similar goals.

o Differentiation or cost leadership create

value. Value Capture Value Creation.
o A firm has a competitive advantage (CA)
when it outperforms its competitors that have
the same/ similar goal(s).
o Creation of superior value is a necessary
condition for CA. But without capturing that
value, a firm cannot sustain itself.
Firms need to implement strategies that
continue to create and capture over time value
in order to sustain CA.

The resource-Based View

Resources as basis of any strategy

Strategy making (resources based view perspective): resource allocation
o Resources lay at the heart of strategy

o
Resources and strategy
implementation
Competitive Advantage (CA): "when
[a firm] is able to implement a value
creating strategy not simultaneously
being implemented by any current or
potential competitors.” (Barney 1991)

Capability: "an organizationally

embedded, non-transferable, firm-
specific resource whose purpose is to
improve the productivity of the other
resources possessed by the firm."
(Barney 2001)

Resource: "all assets, capabilities

organizational processes, firm
attributes, information, knowledge,
etc. controlled by a firm that enable
the firm to conceive of and implement
strategies.” (Barney 2001)

Resource based view (RBV) and

competitive advantage (CA)
o The resources are
heterogenous and
immobile, there not
distributed homogenous
around the market.

VRIO/VRIN
Valuable
o Customer value:
Resource should enable a
firm to respond to
environmental
opportunities and threats
in a way that meets
customer needs and
preferences more
effectively than
competitors.
o Efficiency and effectiveness: Resource enhances a firm’s efficiency and effectiveness
o Profit potential: Resources increase firm’s potential to capture value/ make a profit.
Rare
o Scarce in the market
o Unique attributes
Inimitable
o Causal ambiguity
 o Isolating mechanisms
o Diseconomies of time compression
o Network effects or economies of scale
o Unique organizational culture and processes
Organized to capture value  internal view re: value capture:
organizational to capture value
o Business model elements
o Pricing mechanisms
Non-substitutable  External view re: value capture
o No comparable goods/ services exist

RBV and strategy formulation

A firm does better than rivals to the extent that it has unique,
value- generating resources (i.e. that others do not have)

Focus of strategy must be on identifying, developing and

leveraging VRIO/N resources.

Implications are considerable: Strategy formulation is guided

by resource evaluation and not industry conditions, for
example:
o Which resources should be developed; for example
through R&D or business diversification?
o What is the role of acquisitions and strategic
alliances?
o What types of firms are desirable to acquire?

Conclusion RBV
o Strategy is the outcome of resource allocation
decision
o The RBV is a theory design to assess the sources of competitive advantage
o In the RBV you don’t take in consideration market forces or competition.
o Firm centric explanation
o In the RBV, competitive advantage depends on the deployment of VRI/N resources

Sustained competitive advantage

Managing strategic resources
Gaining and sustaining competitive advantage:
o A business’s strategy should develop and exploit valuable, rare, costly-to-imitate, and non-
substitutable resources.
o If you think statically about vrin resources it won’t explain sustained competitive advantage.
o Competitive advantage is not always sustained:
o Of the 500 firms of the S&P 500 in 1957 only 74 firms are left in the S&P 500 in
1997.
o But owning just survivors would have yielded a 20% lower return than owning the
S&P 500.
 o

How did these ‘survivors’ sustain their competitive advantage  Usually: Luck!
o People want to see patterns in data (Kahneman)
o Stochastic processes routinely yield lo streaks of seemingly exceptional outcomes (random
walk theory)
o Not correcting for luck yields a frighteningly high number of false positives (Henderson et al.
2012)
o Over a 20 year window, you cann be certain unless firms are in the top 10% in terms of ROI at
least 13 times.

R&D Luck:
o Invest in molecules which turn out to be successful;
o Serendipitous (unplanned) discoveries & successes;
Trading luck:
o Purchasing resources that appreciate in value shortly after;
o Selling off assets that experience a drop in val shortly later;
Compatibility luck:
o Picking the right platform technology to join;
o Invest in technology compatible with emergin industry recipes;
Positioning luck:
o First-mover advantages in a market which turn out to grow fast;

Goals of strategic management

1. Identify opportunities to create value in dynamic
competitive environments.
a. Industry or market selection and positioning as
explanation to identi opportunities (e.g., Porter’s
five forces)
b. Strategy consists of capturing monopoly rents by
entering the m profitable industry and market posi
vis-a-vis competitors and suppliers
c. Industry-based perspective couldn’t explain
competitive challenges within industries or markets
(like successful challenge of international (e.g.
Japane firms to established US industry leader (e.g.
GM))
 2. Build the resources and capabilities you need to take advantage of the opportunities
a. The role of firm-specific strategic resources
b. Why focus on the firm-level

c.

Explanatory problem with RBV  static perspective

Addressing rapid market change  RBV lacks a logic of change

In dynamic industries:
o RVB does not explain the duration of current competitive advantage.
o Does not explain the sources of future competitive advantage.
o Tightly bundled resources are problematic because of regular resource addition, release or
recombination.

Boundary condition: RBV breaks down in dynamic industries, where the challenge is to sustain CA,
given its duration cannot be predicted.

What’s the problem with RBV?

o RBV does not explain how and why certain firms have CA in situations of rapid and
unpredictable change.

Observing rapidly changing (high-tech) industries:

o Accumulating valuable assets (often combined with an aggressive intellectual property policy)
typically not enough to create sustained CA
 Had Resources but NOT the Capabilities
 resources alone is not enough
o High performers demonstrated timely responsiveness, rapid and flexible product innovation,
and managerial capability to coordinate and redeploy resources

Acquisitions become:
1. A purchase of a bundle of resources in an imperfect market.
2. An opportunity to trade otherwise non- marketable resources.

Conclusion: strategic resources

o Industry-based view suggests that market power and positioning are the source of competitive
advantage.
o Resource-based view emphasizes heterogeneity in firm-specific resources (factor markets).
o Resource-base view cannot explain why firms that have strategic resources may not
outperform its rivals in dynamic markets.
o Because it’s a static view
  Dynamic capabilities can explain this!

Dynamic capabilities
Dynamic capabilities: specific organizational processes by which managers alter their firms’
resources base to generate value-creating strategies.

Types of dynamic capabilities

1. Reconfigure resources
2. Gain and release resources
3. Integrate resources

Reconfigure resources
o Resource allocation processes (distribute scarce resources, e.g. financial or human capital)
o Strategic integration of department (connect various parts of the firm t create synergies)

Gain and release resources

o Knowledge creation routines
o Alliance and acquisition processes (bring new resources)

Integrate resources
o Product development processes (individuals combine various skills t create products and
services).
o Strategic decision-making processes (managers pool various skills / expertise to make
strategic choices).

DC exhibit commonalities across effective firms. What does this mean in practice?

Although dynamic capabilities are uniq and idiosyncratic processes, emerging from path-dependent
firm trajectories, they have common (generic) features that are associated with effective processes
across firms

More or less effective ways to deal with issue (best practices), for example:
o Cross-functional teams (i.e. people with different backgrounds) improve product development
o Pre-acquisition routines assessing cultural similarity and vision consistency among firms

What are the Implications of Commonalities’ Existence?

1. Equifinalit y: There are multiple paths to th same dynamic capabilities:
a. Start from different points, take unique paths, end up with similar DC, and thus makes
imperfect imitability and mobility irrelevant to DCs (managers can discove them on
their own)
2. Substitutability and fungibility (interchangeability):
a. DCs can differ in form and details as lon the important commonalities are presen
b. Commonalities imply the efficacy of DC across industries (fungibility/mobility)
3. DC alone not likely to be a source of sustained CA(only rare and valuable).
a. RBV perspective: DC alone is not enough  you need vrin resources and DC’s
4. Scale of idiosyncratic firm effects overstate

Dynamic capabilities and the future of work

Will AI and Robotics have a Net (1) Negativ or (2) Positive Effect o
Employment?
Key Findings
Robot adopting firms:
o Increased productivity, turnover, and non-manager hiring;
o Reduced number of middle managers: not cost-cutting but quality driven as AI/robots can
directly replace certain managerial tasks;
o Decision rights allocation changed, and span of control increased (of top managers).

Middle management:
o Support critical to realization and success of strategic proposals;
o Key mediating role in interpreting operational results and communicating them to top
managers;
o Local and middle management learning critical to effective change in resource allocation
o Middle management as dynamic capability

Conclusion: Dynamic capabilities

o Dynamic capabilities alone cannot become a source of competitive advantage.
o Firms need to bundle dynamic capabilities with VRIN-resource to obtain a sustainable
competitive advantage.
o At least in the short term, hu labor as the source of distance dynamic capabilities will be
complementary to AI and robotics as a strategic resource