part #1 the tools of strategic analysis chapter #1 what is strategy and the strategic management...
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Part #1 The tools of Part #1 The tools of Strategic AnalysisStrategic Analysis
Chapter #1Chapter #1
What is Strategy and the Strategic What is Strategy and the Strategic Management Process?Management Process?
Learning ObjectivesLearning ObjectivesDefine the concept of StrategyDefine the concept of StrategyDescribe the strategic management Describe the strategic management
processprocessDefine competitive advantage and its Define competitive advantage and its
relationship to firm performancerelationship to firm performanceDescribe the difference between emergent Describe the difference between emergent
and intended strategiesand intended strategiesDiscuss the importance of understanding a Discuss the importance of understanding a
firm’s strategy even if you are not a senior firm’s strategy even if you are not a senior manager in a firmmanager in a firm
Opening case: What hasOpening case: What has Napster wrought? Napster wrought?
How do we buy music?How do we buy music? Is Napster good or bad for the music Is Napster good or bad for the music
industry?industry?
Music Down loadersMusic Down loaders
NapsterNapster today todayKaZaAKaZaAeDonkeyeDonkeyBit TorrentBit Torrent
Down Load for a feeDown Load for a fee MusicNet siteMusicNet site
AOL/TimeWarner, Berlesman, Emi, and Real AOL/TimeWarner, Berlesman, Emi, and Real NetworksNetworks
Pressplay sitePressplay site Universal, SonyUniversal, Sony
MusicNow siteMusicNow site Rhapsody (listen.com) siteRhapsody (listen.com) site iTunes siteiTunes site
AppleApple
Monthly fees and a per song chargeMonthly fees and a per song charge
The music IndustryThe music Industry
What is happening to our industry?What is happening to our industry?What is our competition going to do next? What is our competition going to do next? How should we respond?How should we respond?What can we do to make money in our What can we do to make money in our
business?business?
Strategy and the Strategic Strategy and the Strategic Management processManagement process
A firm’s strategy is defined as its theory A firm’s strategy is defined as its theory about how to gain competitive advantagesabout how to gain competitive advantages
A “good strategy” is a strategy that actually A “good strategy” is a strategy that actually generates such advantagesgenerates such advantages
Strategies are theories because they are Strategies are theories because they are based on how a firm thinks competitors, based on how a firm thinks competitors, consumers and others will respondconsumers and others will respond
Strategic planning processStrategic planning process
Why should we plan?Why should we plan?Can we be successful without planning?Can we be successful without planning?The processThe process
MissionMissionObjectivesObjectivesExternal & Internal AnalysisExternal & Internal AnalysisStrategic ChoiceStrategic ChoiceStrategic ImplementationStrategic ImplementationCompetitive AdvantageCompetitive Advantage
Mission StatementsMission Statements
Missions define both what a firm aspires to Missions define both what a firm aspires to be in the long run, and what it wants to be in the long run, and what it wants to avoid in the mean time.avoid in the mean time.
Star TrekStar Trek
Anheuser-BuschAnheuser-Busch
DellDell
Ford Motor CompanyFord Motor Company
IBMIBM
The Oakland RaidersThe Oakland Raiders
What impact does a mission What impact does a mission statement have on the companystatement have on the company
No impact (Enron)No impact (Enron) Integrity: We work with the customers and Integrity: We work with the customers and
prospects openly, honestly and sincerely. prospects openly, honestly and sincerely. When we say we will do something, we will do When we say we will do something, we will do it; when we say we cannot or will not do it; when we say we cannot or will not do something, then we won’t do it.something, then we won’t do it.
Positive impact (visionary firms)Positive impact (visionary firms)Negative (Ben & Jerry’s)Negative (Ben & Jerry’s)
Visionary firmsVisionary firms
3M3M , American Express, Boeing, Citicorp, , American Express, Boeing, Citicorp, Ford, General Electric, Hewlett-Packard, Ford, General Electric, Hewlett-Packard, IBM, Johnson & Johnson, Marriott, Merck, IBM, Johnson & Johnson, Marriott, Merck, Motorola, Nordstrom, Philip Morris, Proctor Motorola, Nordstrom, Philip Morris, Proctor & Gamble, Sony, Wal-Mart, Walt Disney& Gamble, Sony, Wal-Mart, Walt Disney
Are there any on this list that surpriseAre there any on this list that surprise
Ben & Jerry’sBen & Jerry’s
Counter CultureCounter Culture Compensation Compensation
packagepackage Industry mergersIndustry mergers Acquired by UnileverAcquired by Unilever
ObjectivesObjectives
SpecificSpecificMeasurableMeasurableTimeTime3M objectives3M objectives
Growth in earnings per share 10% per yearGrowth in earnings per share 10% per year27% return on employed capital27% return on employed capital30% of sales from newer products (4 years)30% of sales from newer products (4 years)
Low Quality objectivesLow Quality objectives
Do not exist (dodge ball)Do not exist (dodge ball)Not quantitativeNot quantitativeDifficult to measureDifficult to measureDifficult to track over timeDifficult to track over time
External and Internal AnalysisExternal and Internal Analysis
Chapter 2 Chapter 2 External AnalysisExternal Analysis
Threats and OpportunitiesThreats and Opportunities
Chapter 3Chapter 3 Internal AnalysisInternal Analysis
Strengths and WeaknessesStrengths and Weaknesses
Strategic ChoiceStrategic Choice
Business Level StrategiesBusiness Level StrategiesActions firms take to gain competitive Actions firms take to gain competitive
advantages in a single market or industryadvantages in a single market or industryTwo most commonTwo most common
Cost leadership (Chapter 4)Cost leadership (Chapter 4)Product Differentiation (Chapter 5)Product Differentiation (Chapter 5)
Strategic ChoiceStrategic Choice
Corporate level strategiesCorporate level strategiesAre actions firms take to gain competitive Are actions firms take to gain competitive
advantages by operation in multiple markets advantages by operation in multiple markets or industries simultaneouslyor industries simultaneously
Common Corporate level strategiesCommon Corporate level strategiesVertical Integration (chapter six)Vertical Integration (chapter six)Strategic alliance strategies (chapter seven)Strategic alliance strategies (chapter seven)Diversification strategies (chapter eight)Diversification strategies (chapter eight)Mergers and acquisition strategies (chapter 9)Mergers and acquisition strategies (chapter 9)
Choosing a strategyChoosing a strategy
Supports the firm’s missionSupports the firm’s mission Is consistent with a firm’s objectivesIs consistent with a firm’s objectivesExploits opportunities in a firm’s Exploits opportunities in a firm’s
environment with a firm’s strengthsenvironment with a firm’s strengthsNeutralizes threats in a firm’s environment Neutralizes threats in a firm’s environment
while avoiding a firm’s weaknesseswhile avoiding a firm’s weaknesses
Strategy ImplementationStrategy Implementation
Firm StrategiesFirm StrategiesCorporate StrategiesCorporate StrategiesOther issuesOther issues
Organizational StructureOrganizational StructureControl ProcessesControl ProcessesCompensation PolicyCompensation Policy
Competitive AdvantageCompetitive Advantage Competitive AdvantageCompetitive Advantage
When a firm is creating value in a market or industry When a firm is creating value in a market or industry in ways that few other competitors currently are:in ways that few other competitors currently are:
Sustained Competitive AdvantageSustained Competitive Advantage And when those competitors find it very costly to And when those competitors find it very costly to
imitate these actionsimitate these actions Competitive parityCompetitive parity
When a firm is creating value in a market or industry When a firm is creating value in a market or industry in ways similar to that of many of its competitorsin ways similar to that of many of its competitors
Competitive disadvantage:Competitive disadvantage: When a firm fails to create value in a market or When a firm fails to create value in a market or
industry in ways that at leas some of its competitors industry in ways that at leas some of its competitors are:are:
How sustainable are competitive How sustainable are competitive advantages?advantages?
Dennis Mueller (longitudinal study)Dennis Mueller (longitudinal study) Firms that perform well in early time periods also Firms that perform well in early time periods also
performed well in later time periodsperformed well in later time periods Geoffrey WaringGeoffrey Waring
Some industries have competitive advantages that Some industries have competitive advantages that are easier to maintainare easier to maintain
Information complex, require customers to know a great deal, Information complex, require customers to know a great deal, require a great deal of research and development, significant require a great deal of research and development, significant economies of scaleeconomies of scale
Peter RobertsPeter Roberts Studied the pharmaceutical industry Studied the pharmaceutical industry
Economic performanceEconomic performance
WACCWACCCost of CapitalCost of Capital
Interest the firm must pay its debt holdersInterest the firm must pay its debt holdersCost of equityCost of equity
Return the firm must promise its equity Return the firm must promise its equity holdersholders
Standard and Poor’s Standard and Poor’s
Calculating WACCCalculating WACC
Firm’s debt ratingFirm’s debt ratingMarginal Tax rateMarginal Tax rateBetaBetaRisk free and market rates of returnRisk free and market rates of return Information about a firm’s capital structureInformation about a firm’s capital structure
Numerical exampleNumerical example
Firms’ rating BBB 7.5%Firms’ rating BBB 7.5%Marginal tax rate 39%Marginal tax rate 39%
After tax cost of debt isAfter tax cost of debt is(1-.39)(7.5) or 4.58%(1-.39)(7.5) or 4.58%
Beta (how highly correlated the price of Beta (how highly correlated the price of firm’s equity is in comparison to the overall firm’s equity is in comparison to the overall stock market) Published for publicly stock market) Published for publicly traded companies (1.2)traded companies (1.2)
Risk free rate of return historically has Risk free rate of return historically has been three percentbeen three percent
Market rate of return 8.5 %Market rate of return 8.5 %
Capital asset pricing modelCapital asset pricing model
Cost of equity Cost of equity Risk free rate of Return + (Market rate of Risk free rate of Return + (Market rate of
return – Risk free)Betareturn – Risk free)BetaPlugging in the numbersPlugging in the numbers
3 + (8.5 – 3)*1.2 = 9.63 + (8.5 – 3)*1.2 = 9.6
Capital StructureCapital Structure
Debt 1 million (20%)Debt 1 million (20%)Equity 4 million (80%)Equity 4 million (80%)Plugging in the numbers Plugging in the numbers
20%*(4.58) + 80%*(7.68) = 8.5920%*(4.58) + 80%*(7.68) = 8.59
Accounting performance Accounting performance Profitability ratiosProfitability ratios
ROA ROA Profits after taxes/total assetsProfits after taxes/total assets
A measure of return on total investment in a firm. A measure of return on total investment in a firm. Larger is usually betterLarger is usually better
Return on Equity Return on Equity Profits after taxes/total stockholders equityProfits after taxes/total stockholders equity
A measure of return on total equity investment in A measure of return on total equity investment in the firm. Larger is usually betterthe firm. Larger is usually better
More profitability ratiosMore profitability ratiosGross profit marginGross profit margin
(Sales – costs of goods sold)/Sales(Sales – costs of goods sold)/SalesA measure of sales available to cover operating A measure of sales available to cover operating
expenses and still generate a profit. Larger is expenses and still generate a profit. Larger is usually better.usually better.
Earnings per shareEarnings per share (profits after taxes-preferred stock (profits after taxes-preferred stock
dividends)/number of shares of common stock dividends)/number of shares of common stock outstandingoutstandingA measure of profit available to owners of common A measure of profit available to owners of common
stock. Larger is usually betterstock. Larger is usually better
Still more profitability ratiosStill more profitability ratiosPrice earnings ratioPrice earnings ratio
Current market price per share/after tax earning Current market price per share/after tax earning per shareper shareA measure of anticipated firm performance– high p/e A measure of anticipated firm performance– high p/e
ratio tends to indicate that the stock market ratio tends to indicate that the stock market anticipates strong future performance. Larger is anticipates strong future performance. Larger is usually betterusually better
Cash flow per shareCash flow per share (After-tax profits + Depreciation)/ number of (After-tax profits + Depreciation)/ number of
common shares outstandingcommon shares outstandingA measure of funds available to fund activities above A measure of funds available to fund activities above
current level of costs. Larger is usually bettercurrent level of costs. Larger is usually better
Liquidity ratiosLiquidity ratiosCurrent ratioCurrent ratio
Current assets/Current liabilitiesCurrent assets/Current liabilitiesA measure of the ability of a firm to cover its current A measure of the ability of a firm to cover its current
liabilities with assets than can be converted to cash in liabilities with assets than can be converted to cash in the short run. Recommended in the range of 2 to 3the short run. Recommended in the range of 2 to 3
Quick ratioQuick ratio (Current assets – Inventory)/Current liabilities(Current assets – Inventory)/Current liabilities
A ratio of 1 is thought to be acceptable in many industriesA ratio of 1 is thought to be acceptable in many industries
Leverage RatiosLeverage Ratios
Debt to assetsDebt to assetsTotal debt/Total AssetsTotal debt/Total Assets
A measure of the extent to which debt has been A measure of the extent to which debt has been used to finance a firm’s business activities. The used to finance a firm’s business activities. The higher, the greater the risk of bankruptcyhigher, the greater the risk of bankruptcy
Debt to equityDebt to equityTotal debt/Total equityTotal debt/Total equity
A measure of the use of debt versus equity to A measure of the use of debt versus equity to finance a firm’s business activities. Generally less finance a firm’s business activities. Generally less than 1than 1
1 more leverage ratio1 more leverage ratio
Times interest earnedTimes interest earnedProfits before taxes and interest/total interest Profits before taxes and interest/total interest
chargeschargesA measure of how much a firm’s profits can decline A measure of how much a firm’s profits can decline
and still meet its interest obligations. Should be and still meet its interest obligations. Should be well above 1well above 1
Activity ratiosActivity ratios
Inventory turnoverInventory turnoverSales/InventorySales/Inventory
A measure of the speed with wich a firm’s A measure of the speed with wich a firm’s inventory is turning overinventory is turning over
Accounts receivable turnoverAccounts receivable turnoverAnnual credit sales/accounts receivableAnnual credit sales/accounts receivable
A measure of the average time it takes a firm to A measure of the average time it takes a firm to collect on credit salescollect on credit sales
One last activity ratioOne last activity ratio
Average collection periodAverage collection periodAccounts receivable/average daily salesAccounts receivable/average daily sales
A measure of the time it takes a firm to receive A measure of the time it takes a firm to receive payment after a sale has been madepayment after a sale has been made
Enron turning debt into revenueEnron turning debt into revenue Shell GameShell Game Three playersThree players
Enron, Bank, off-shore company owned by bankEnron, Bank, off-shore company owned by bank Step 1Step 1
Enron agrees to sell a large amount of oil and gas to off-shore Enron agrees to sell a large amount of oil and gas to off-shore company over timecompany over time
Step 2Step 2 Off-shore company agrees to pay Enron up frontOff-shore company agrees to pay Enron up front
Step 3Step 3 Off-shore company turns over oil and gas contract to bankOff-shore company turns over oil and gas contract to bank
Step 4Step 4 Bank would sell it back to Enron for a fixed price over timeBank would sell it back to Enron for a fixed price over time
Oil and Gas trades cancelled each other Oil and Gas trades cancelled each other out—since Enron bought back everything out—since Enron bought back everything it sold (no oil or gas was even moved from it sold (no oil or gas was even moved from Enron)Enron)
Enron obtained large upfront payment and Enron obtained large upfront payment and paid back over time in effect a loanpaid back over time in effect a loan
Showed up as revenue to meet Wall Showed up as revenue to meet Wall Street’s performance expectationsStreet’s performance expectations
Stake holdersStake holders
Firm’s equity and debt holdersFirm’s equity and debt holdersSuppliersSuppliersCustomersCustomersEmployeesEmployeesCommunitiesCommunitiesAgency problemAgency problemCompeting goalsCompeting goals
Emergent Vs. Intended StrategiesEmergent Vs. Intended Strategies
Intended strategyIntended strategyDeliberate StrategyDeliberate StrategyUnrealized StrategyUnrealized Strategy
Realized StrategyRealized StrategyEmergent strategyEmergent strategy
Fed EX (Deliberate)Fed EX (Deliberate)Johnson & Johnson (Baby Powder and Johnson & Johnson (Baby Powder and
Band Aids)Band Aids)Marriott (airport food)Marriott (airport food)PEZ PEZ Calvin BallCalvin Ball
Lebron JamesLebron James
Reebok and AdidasReebok and Adidas 40 billboards40 billboards
Michael JordanMichael Jordan 2.5 million (5 years)2.5 million (5 years) 2.6 billion in sales2.6 billion in sales
Tiger WoodsTiger Woods 100 million (5 years)100 million (5 years)
What might be?What might be? US market 8 billionUS market 8 billion
Why do you need to know about Why do you need to know about Strategy?Strategy?
Studying strategy and the strategic management Studying strategy and the strategic management process can give you the tools you need to process can give you the tools you need to evaluate the strategies of firms that may employ evaluate the strategies of firms that may employ you.you.
Once you are working for a firm, understanding Once you are working for a firm, understanding that firm’s strategies, and your role in that firm’s strategies, and your role in implementing those strategies, can be very implementing those strategies, can be very important for your personal success.important for your personal success.
You may be involved in the planning process for You may be involved in the planning process for smaller and entrepreneurial firmssmaller and entrepreneurial firms
Mini caseMini case
Coke launches C2Coke launches C2