Business strategy notes

THEME 2: GOALS, VALUE AND PERFORMANCE

Stakeholder approach the firm is a coalition of interest groups. This approach seeks to balance their different objectives.

Shareholder approach the firm exists to maximize the wealth of its owners, i.e. maximizes the present value of profits over the life of firm.

We assume that the primary goal of the firm is profit maximization.

From value maximizing approach to strategy formulation:

• Identify strategy alternatives
• Estimate cash flows associated with cash strategy
• Estimate cost of capital for each strategy
• Select the strategy which generates the highest NPV

More utility consumers get from the company's products or services, the more pricing options company has.

How profitable a company becomes depends on three basic factors:

1. Value/utility customers place on products
2. Price company charges for products
3. Costs of creating product

There is a dynamic relationship among utility, pricing, demand and

costs.
Competitive advantage profitability greater than average of all companies in the same industry.
Measures of profitability:
• Return On Invested Capital( ROIC) or Return On Capital Employed( ROCE)
• Net profit = total revenues – total costs
Ways to increase ROIC:
• Increase company’s ROS:
1. increase sales revenue more than costs
2. reduce cost of goods sold
3. reduce spending on SG&A
4. reduce R&D expenses
• Increase capital turnover:
1. reduce the amount of working capital
2. reduce the amount of fixed capital
Paradox of value: the companies that are most successful in creating long term shareholder value are typically those that:
• have a mission they give precedence to goals other than profitability and shareholder return
• have strong, consistent, ethical values
THEME 3: INDUSTRY ANALYSIS
Industry: a group of companies offering products or services that are close substitutes for each other and that satisfy the same.

Basic customer need. Sector a group of closely related industries. Market segment distinct groups of customers within a market that can be differentiated from each other on the basis of their distinct attributes and specific demands. The level of industry profitability is neither random nor entirely the result of industry-specific influences, it is determined by the industry's underlying economic characteristics industry structure.

Business environment of the firm consists of the external influences that affect its decisions and performance. How can managers monitor the vast array of possible influences?

• They need to distinguish the "vital" from the "merely important"
• Classification schemes like PEST can help

Industry environment is comprised of:

• Suppliers
• Competitors
• Customers

And it is influenced by:

• National/international economy
• Technology
• Government and politics
• Natural

1. environment
2. Demographic structure
3. Social structure

Porter's Five Forces competition framework

The stronger each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits. Strengths of forces may change as industry conditions change. A weak competitive force is viewed as an opportunity as it allows company to earn greater profits. A strong competitive force is viewed as a threat as it depresses industry profits.

Structural determinants of the competitive forces see the picture à

Two major lines of critique of Porter's model:

1. It omits important variables and cannot be applied to the dynamic and complex realities of many industries without significant modification.
2. The premise on which the model is based is flawed and not supported by strong empirical evidence.

Industry analysis can be used to:

• Explain differences in profitability between industries and changes in the profitability of a given

Resources (Tab.1)	Capabilities (Tab.2)

1. Tangible Resources:
   • Financial:
     • Borrowing capacity
     • Debt/equity ratio
     • Internal funds generation
     • Credit ranking
     • Net cash flow
   • Physical:
     • Plant and equipment
     • Market value of fixed assets
     • Size, location, technology flexibility
     • Land and buildings
     • Scale of plants
     • Raw materials
     • Alternative uses for fixed assets
2. Intangible Resources:
   • Technology:
     • Patent, copyrights, know-how
     • R&D facilities
     • Number of patents owned
     • Royalty income
     • R&D expenditure
     • R&D staff
   • Reputation:
     • Brands, customer loyalty, company reputation
     • Customer retention
     • Supplier loyalty
   • Human resources:
     • Training, experience, adaptability
     • Employee qualifications
     • Commitment and loyalty of employees
     • Pay rates
     • Turnover