24-07-2023

Strategy Formulation &

Implementation
Course Code ST506
Course credit 3
Program PGDM (HR)
Sessions 3 & 4 (Textbook chapters 1 & 2)

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Session 3
• Recap of the previous sessions

Session
• Reading 1 Discussion
• Describing strategy
• Starbucks case discussion

Flow
• Strategy as a quest for value (value-based approach of strategy)
• Best Buy case discussion

• Session 4
• Term Project details and deadlines
• Case Study Discussion

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Course Instructor: Prof. Akriti Jain

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Learnings of the previous

session?

Learnings so far….
• Framework of strategic analysis
• IBM example
• 1950s  adoption of Univac’s architecture  fit with its core competency
• 1970s  adoption of Apple’s PC architecture  misfit with its core competency due to
wrong assumptions of its environment
• Strategic Fit
• Alignment, consistency or compatibility between external environment, core
competency and positioning thinking

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Reading 1: The theory of business – P.F. Drucker (HBR)

• What do you understand by the term “Theory of Firm”? What are the specifications of a valid theory
of business?

• Can you think of any real-life examples where a lack of a coherent theory led to organizational
challenges or where companies had to revise their theories of business due to market disruptions?

• According to Peter Drucker, every business has a theory about how it creates value and makes
money. Can you think of any companies whose theories of business are widely recognized or
have become industry standards?

What is Strategy?

Strategy: a plan, method, or series of actions designed to achieve a specific goal or effect. — Wordsmyth Dictionary
(http://www.wordsmyth.net)

The determination of the long-run goals and

objectives of an enterprise, and the Strategy: “a cohesive Lost Boy: “Injuns! Let ’s go get ‘em!”
adoption of courses of action and the response to an important John Darling: “Hold on a minute. First we must have a
allocation of resources necessary for challenge.” strategy.”
carrying out these goals. ——Richard Rumelt, Good Lost Boy: “Uhh? What’s a strategy?”
— Alfred Chandler, Strategy and Structure Strategy / Bad Strategy John Darling: “It’s, er … it’s a plan of attack.”
(MIT Press, 1962) (Crown Business, 2011) — Walt Disney’s Peter Pan

“Strategy is the scope and direction of an organisation

over the long-term: which achieves advantage for the
organisation through its configuration of resources within a
challenging environment, to meet the needs of markets
and to fulfil stakeholder .”

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What is Strategy?

“Strategy is the scope and direction of an organisation over the

long-term: which achieves advantage for the organisation
through its configuration of resources within a challenging
environment, to meet the needs of markets and to fulfil
stakeholder.”

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What is Strategy?

‘Where’ are we
competing?

“Strategy is the scope and direction of an organisation over the

long-term: which achieves advantage for the organisation
through its configuration of resources within a challenging
environment, to meet the needs of markets and to fulfil
stakeholder.”

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Ryanair’s activity system

Low operating costs

Job
High aircraft No-frills product High labor flexibility
utilization offering productivity
Boeing Direct
737s only Single class, no sales
25-min.
turnaround Low prices; reserved seating only
Charges for all
additional No baggage
Point-to-point routes Internet-only
services transfer check-in

Secondary
airports

What is Strategy?

‘Where’ are we
heading?

‘Where’ are we
competing?

“Strategy is the scope and direction of an organisation over the

long-term: which achieves advantage for the organisation
through its configuration of resources within a challenging
environment, to meet the needs of markets and to fulfil
stakeholder.”

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What is Strategy?

‘Where’ are we
heading?

‘Where’ are we ‘How’ to perform

competing? better than the
competition?

“Strategy is the scope and direction of an organisation over the

long-term: which achieves advantage for the organisation
through its configuration of resources within a challenging
environment, to meet the needs of markets and to fulfil
stakeholder.”

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What is Strategy?

‘Where’ are we
heading?

‘Where’ are we ‘How’ to perform

competing? better than the
competition?

“Strategy is the scope and direction of an organisation over the

long-term: which achieves advantage for the organisation
through its configuration of resources within a challenging
environment, to meet the needs of markets and to fulfil
stakeholder.”

What are the expectations What external factors

of business affect the businesses ?
stakeholders? What resources are
required to be able to
compete?

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Describing Strategy:
Current Positioning, Future Direction
STRATEGY AS POSITIONING STRATEGY AS DIRECTION

Where are we competing? What do we want to become?

- Product market scope - Vision statement
- Geographical scope • What do we want to achieve?
- Vertical scope - Mission statement
- Performance goals
• How are we competing?
• How will we get there?
- What is the basis of our
- Guidelines for development
competitive advantage?)
- Priorities for capital
expenditure, R&D
- Growth modes: organic
growth, M&A, alliances
COMPETING FOR THE PREPARING FOR THE
PRESENT FUTURE

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CASE 7
Starbucks Corporation

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Using the definition of 'Strategy as scope' and 'Strategy as

Direction', and based on the case-study facts related to
Starbucks' positioning and direction, articulate in one-two
sentences the strategy of Starbucks. [one submission per
student]

ⓘ Start presenting to display the poll results on this slide.

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Starbucks current Scope & Positioning?

How company ensures to achieve this positioning?

Which direction the company strives to head in the future?

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Goals, values & performance

What is Business For?

What is the purpose of organisation?

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In one word, what is the purpose of

organisations? Why do organisations exist?

ⓘ Start presenting to display the poll results on this slide.

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What is the purpose of organisation?

The strategic aim of a business is to earn a return on capital, and if in any particular
case the return in the long run is not satisfactory, then the deficiency should be
corrected, or the activity abandoned for a more favorable one.
- ALFRED P. SLOAN Jr PRESIDENT AND THEN CHAIRMAN OF GENERAL MOTORS, 1923 TO 1956.

“Profits are to business as breathing is to life. Breathing is essential to life but is not
the purpose for living. Similarly, profits are essential for the existence of the
corporation, but they are not the reason for its existence. “
DENNIS BAKKE, FOUNDER AND FORMER CEO, AES CORPORATIO

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What is the purpose of organisation?

Newport News “We shall build good ships here—at a profit if we can—at a
Shipbuilding loss if we must—but always good ships”

Nike’s “To bring inspiration and innovation to every athlete* in

mission the world. (*If you have a body, you are an athlete.)”

Ranbaxy’s “to become research based international

mission pharmaceutical company”

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Complement with core ‘values’  precepts that organisation

believes in

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What is the purpose of organisation?

“We shall build good ships here—at a profit if we can—at a

Newport News Shipbuilding loss if we must—but always good ships”

Create ‘value’  more than just profitability

“To bring inspiration and innovation to every athlete* in
Nike’s mission the world. (*If you have a body, you are an athlete.)”

“to become research based international

Ranbaxy’s mission pharmaceutical company”

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Strategy as a Quest for Value

What is value?

How to measure value?

Value for whom?

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Value = difference between willingness to pay and

willingness to sell

Willingness-to-pay (WTP)

Profit or producer's
surplus

Value created

Willingness-to-sell (WTS)

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Strategy as a Quest for Value

Willingness-to-pay (WTP)
Customer’s Delight

Consumer Surplus

Price

Value created by company

Willingness-to-sell (WTS)

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Strategy as a Quest for Value

Willingness-to-pay (WTP)

Customer’s Delight
or Consumer Surplus

Price Value captured by company

Profit or producer's
surplus

Tax Value created by company

Surplus to input providers

Employee satisfaction

Real cost of production

Willingness-to-sell (WTS)

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Strategy as a Quest for Value

Value-Based Strategy  How to maximise value? 

Increasing WTP & decreasing WTS

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• One of the largest electronics retail chains

Strategy as a Quest for
in America
Valuein 1960 by Richard Schultz
• Founded
• Late 1990 – Threat from Amazon & Wal-
Mart
• •One of the–largest
2008-09 electronics
Financial crisis retail chains
in America
• 2010-11 - Negative income, ROIC in 2011 =
• Founded in 1960 by Richard Schultz
-16.7%
• Late 1990 – Threat from Amazon & Wal-
2013 – New CEO – Hubert Jolly
•Mart
• 2008-09 – Financial crisis
• 2010-11 - Negative income, ROIC in 2011 =
-16.7%
• 2013 – New CEO – Hubert Jolly

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Strategy as a quest for value - Best Buy’s Renew Blue plan -

(1042) Will Best Buy Survive Amazon? – YouTube [7:23 – 11:05]

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Strategy as a quest for value - Best Buy’s Renew Blue plan

Willingness-to-pay (WTP)

Willingness-to-sell (WTS)

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Strategy as a Quest for Value

Increased sale expertise, faster shipping,
• Best Buy changed the role of easy pickup, improved online presence
physical stores for four functions Willingness-to-pay (WTP)

• Point of sale

• Store-within-a store concept

• Pick-up locations

• mini warehouse
Willingness-to-sell (WTS)
Vendor showrooms, better trained staff,
employee engagement

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Strategy as a Quest for Value

Willingness-to-pay (WTP)

Customer’s Delight
or Consumer Surplus

Price Value captured by company

Profit or producer's
surplus

Tax Value created by company

Surplus to input providers

Employee satisfaction

Real cost of production

Willingness-to-sell (WTS)

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Value for Whom? Shareholders vs Stakeholders

The stakeholder The shareholder

approach approach

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Value for Whom? Shareholders vs Stakeholders

The stakeholder approach The shareholder approach

Difficulty in measuring performance Returns on capital employed -> for survival

No single objective function Returns to equity holder  if failed, get acquired

Converge the stakeholder &

shareholder interest

Corporate Social Responsibility

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Linking Profit to Enterprise Value

Profit maximization an ambiguous goal:
• Short-term or Long-term
• Before vs after tax profit
• Total profit vs. Rate of profit
• Over what time period?
• What measure of profit?
• Accounting profit versus economic profit

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Linking Profit to Enterprise Value

Profit maximization an ambiguous goal:
• Short-term or Long-term
• Before vs after tax profit
• Total profit vs. Rate of profit EV = reflects the stock market
• Over what time period? value of equity & debts
• What measure of profit?
• Accounting profit versus economic profit
 Present value of all stream of
profit
Estimating the value of the enterprise:
Net present value of free cash flows: V= Σt Ct
(1 + WACC)t

Where: V market value of the firm.

Ct free cash flow in time t
WACC weighted average cost of capital

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Profitability Ratios
Ratio Formula Notes

Return on Capital Operating profit, before interest, after The return on the capital invested in a business. ROCE is also
Employed (ROCE) tax, known as return on invested capital. The numerator can be is
Equity + Debt operating profit or earnings (EBIT).

Return on Equity (ROE) Net income Measures the firm's success in using shareholders’ capital to
Shareholders’ equity generate profits that are available to remunerate investors.

Return on Assets (ROA) Operating profit The numerator should be the return on all the company’s
Total assets assets—e.g. operating profit, EBITDA (earnings before interest,
tax, depreciation, and amortization), or EBIT (earnings before
interest and tax).
Gross margin Sales – cost of material inputs Gross margin measures how much value a firm adds value to
Sales the goods and services it buys in.
Operating margin Operating profit / Sales Operating margin and net margin measure a firm's ability to
extract profit from its sales, but influenced by differences in
capital intensity between different types of business.
Net margin Net income / Sales

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A B
Revenue growth (2014-17) 54.2% ..
Operating margin (average 2016- 14.7% ..
17)*
ROE (average 2016-17)+ 10.8% ..
ROA (average 2016-17)** 8.3%
ROCE (average 2016-17)++ 9.4%
Increase in share price (10 years) 315%
Notes:
*Operating income/Total revenue
+Net income/Average shareholders’ equity
** Operating income/Average total assets
++(Net income + interest/Shareholders’ equity + Long-term
debt)

Fixed asset turnover

(Sales/PPE)

Inventory Turnover
(Sales/Inventories)

ROA Creditor Turnover

(Sales/Receivables)

Turnover of other items

of working capital

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Topic Summary
1. Strategy as a quest for value
 Creating value is the core purpose of business: but value for whom: shareholders or all stakeholders?
 For the purpose of strategy formulation, it’s helpful to view firms as seeking to maximize lifetime profits
2. Putting performance analysis into practice
 Starting point for strategy formulation is to appraise the firm’s current performance
and diagnose sources of underperformance
 Setting performance targets: better to target the drivers of long-term performance
than the performance indicators themselves.
3. Beyond profit: values and corporate social responsibility
 Values and principles valuable in shaping an organization’s character and
and identity, motivating employees, and reinforcing unity and direction
 CSR not only a goal in itself, it help a firm create long-term profit through
 Enhancing adaptability, reputation, and legitimacy.

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