Submitted by: Submitted by jamesthepeachli
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Category: Business and Industry
Date Submitted: 03/01/2012 07:10 AM
HARVARDiausiNEss!scHOOL
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REV: MARCH 26, 2007
FELIX OBERHOLZER-GEE DENNIS YAO
Strategies Beyond the Market
The strategist's job description is simple enough: devise and implement strategies that allow your company to achieve and sustain superior performance. Attaining these goals, however, has proven difficult because strategists play against a powerful opponent-well-functioning markets. Where product markets work well, competition drives prices toward companies' marginal cost of output, leaving returns that often barely cover the cost of capital. Rule number one in the strategist's playbook is thus to seek out and even create situations in which markets cannot deploy their full force.
Sources of Superior Returns
Research in strategic management emphasizes three building blocks on which managers rely to attain superior returns. Michael Porter stresses the importance of an attractive industry structure and a favorable competitive position.1 Analyzing the five forces-buyer power, supplier power, barriers to entry, the threat of substitutes, and rivalry-allows strategists to identify attractive industries. Each force is associated with reasons why markets faii.2 For instance, in industries with high barriers to entry, oligopolistic competition often results in higher prices and above-average performance. A similar argument can be made with respect to attractive competitive positions. Cost leaders and differentiators often exploit market imperfections to attain superior performance. For example, WalMart built its early stores in rural locations that were just large enough to support a single discount retailer. The significant fixed cost in discount retailing prevented the company's competitors from entering these markets and allowed Wal-Mart to earn superior returns. A second school of thought in strategic management focuses on companies' resources. Birger Wernerfelt argues that unique competitive positions-Wal-Mart's cost leadership or Zara's...