Hi everybody. Time is passing fast when you're having fun. Welcome to Week 3 of our strategy book. So far, we have familiarized ourselves with Porter's Five Forces and learned how to analyze the attractiveness of an industry. This industry structure analysis has traditionally been the core of any class on strategic analysis and clearly serves as a good starting point in figuring out how your industry looks like. However, there are few limitations that we should be aware of and that suggests that we cannot exclusively rely on analyzing the industry environment, if we want to design the strategy for our firm. For starters, when you do a five forces analysis, you essentially look at the industry at a specific point in time. You get a snapshot of how the structural elements look like. Yet, how did the industry got there? Where might it go from here? Which if you are plotting to create or maintain a competitive advantage are rather crucial questions. In fact, much of what we observe at the structure of an industry at some point in time is a result of the actions of firms. For instance, if many firms decided to enter an attractive, fast-growing industry, such as making cell phones, it should not surprise that the resulting market looks like a crowded, perfect competition, and the average firm actually has scanned if any profits. Conversely, some firms might create innovations in products or services, that allow them to occupy a difficult, to attack niche. The resulting industry structure then shows that there's some monopoly position. In other words, the industry structure is more outcome than input. If you want to understand the true causalities, we need to start thinking in terms of how industry is actually evolve over time. In the very first video, we'll delve into that topic a bit more. There are other problems if an exclusive conservation of the external environment. For instance, an external analysis with the emphasis on power relationships et cetera, essentially focuses on value appropriation. That is, who the supplier, you or the buyers, gets the largest chunk of the value that is created in an industry. Yet, how that value is created in the first place is not a primary focus here. Related to that, imagine you do a five forces analysis and find an attractive industry, that you are not yet part of. What do you do next? Simply enter it. If that was so easy, well, then wouldn't everybody be able to enter and thus drives down profits and create a perfectly competitive setting? There seems to be a bit of a fallacy involved here. An industry that you can simply enter cannot be attractive or taking the other way around. For an industry to be attracted in the first place, we need some strong barriers to entry. Actually, combine these last two points and think about this. Who creates value? Those products and services customers love not in the first place? Does an entry barrier affect each firm in the same way? For instance, imagine an industry like breakfast cereals. A barrier to entry there, has historically been the established brand image of the incumbents in Kellogg's. The fact that newcomers would have to spend disproportional of advertising to catch up there by, not realizing a good return on investment. However, think of two different one of the entrance here. Nestle and Goldman Sachs. I think it is pretty clear which of these two would have a harder time to enter the cereal industry. Both have a great brand, but by a Nestle's brand is clearly associated with food. Goldman Sachs's brand, has no food cred whatsoever. The missing element here does seems to be the firm itself. Think of the SWOT analysis that you studied in the previous segment. The five forces covered the OT, opportunities and threat part pretty well as they analyze the environment, but seemed to gloss over the firm internal SW, the strengths and weaknesses part. That means, we have our work cut out. To get a full strategic analysis and avoid those fallacies that I mentioned, we need to take a deep look at what allows firms to create unique products and services in the first place. We will start this journey with a video on learning in which we first consider how humans developed skills and then apply pretty much the same idea to how companies develop their own well operating routines. In another video, we will then explore various competitive implications of these issues and grant these ideas in the recent insights of the resource-based view that, has arisen as somewhat of an anti-thesis to the externally focused earlier strategic analysis. A little interactive case on the value chain, will allow you to think through the issues of capabilities and resources at various parts of the firm even more. The final video offer some sorts from my side on how these things apply in real competitive settings. Have fun.