Topic 1: Introduction to Strategy

MANY CHANGES IN COMPETITIVE MARKET, e.g.,

Retailing will have challenges:
• Printed mail catalogue sales
• TV shopping channels
• Internet shopping (Amazon, e-bay)
TO BE SUCCESSFUL, MANAGER MUST
• See future opportunities
• Have a clear vision of what needs to be done
• Develop strong management/organizational systems
– To implement vision
 TO STAY COMPETITIVE,
WHAT STRATEGY TO FOLLOW
• Decide on the MISSION of the business
– “What is our business?” and
– “What should it be?”
• Set objectives
• Develop strategies/plans
• Make decisions today for results tomorrow
 WHY IS STRATEGY IMPORTANT?
• Without strategy, an organization
– Is like a ship with no rudder
– Managers have no road map
– There is no game plan
• Strategy is the result of
– Analytical thinking
– Commitment of resources to action
• Strategy is NOT a
– box of trick
– bundle of techniques
A firm’s strategy -- how to achieve high level of performance
in the markets and industries within which it is operating.

A firm’s strategy - based on its mission or on its main purpose

and long-term objectives.

To have higher performance required an understanding both:

- the economic logic from which strategy is derived and
- understanding of the organizational logic through which a
strategy is implemented.
Economic value = the difference between willingness of a firm’s customers
to pay and firm’s cost of developing and selling its products or services.

A firm that creates a higher economic value than competitors

gain competitive advantage.
Competitive advantage can be one of these type:
(1) contemporary, (2) sustained, (3) and parity.
 The Ultimate Dependent Variable
It is all about adding value – PERFORMANCE!! The
pursuit of a competitive advantage.
Classes of measurement on performance:
 Accounting measures (simple and adjusted) – evaluate
historical performance

 Market measures – predict future performance ?????

 Strategic measures – assess competitiveness; indirectly

financial
 Accounting measure based on various ratios from two
accounting reports:(1) Profit-and-loss Statement and (2) Balance
Sheet

Profit-and- Loss Statement

Net sales xx
Costs of goods sold(xx)
Selling & other expenses (xx)
------
Interest income xx
Interest expense (xx)
Provision for income taxes (xx)
Other income xx
Net income xx
 Balance Sheet

Assets Liabilities & Equity

Operating cash xx Short-term debt xx
Accounts receivable xx Accounts payablexx
Inventories xx Accrued liabilities xx
Other current assets xx Total current liabilities xx
Total current assets xx Long-term debt xx
Gross prop., plant&equip. xx Deferred income tax xx
Accumulated depre. (xx) Retained earningsxx
Book value of fixed assets xx Preferred &Com stock xx
Goodwill xx Other long term Liabilities xx
Other operating assets xx Total liabilities &equities xx
Total assets xx Share outstanding xx
 Ratio Analysis

Profitability Ratios:
Return on total assets (ROA) = profit after tax/t. assets ,
Return on equity (ROE) = profit after tax/t. equity,
Gross profit margin = (Sales - cost of good sold) / Sales,
Earnings per share (EPS), Price earnings(p/e), and Cash flow
per share
Liquidity Ratios:
Current ratio = current assets/current liabilities
Quick ratio = (current assets – inventory)/current liabilities
 Ratio analysis

Leverage Ratios:
Debt to assets, Debt to equity, Time interest
earned
Activities Ratios:
Inventory turnover, Acc. receivable turnover,
Aver. coll.period
 Ratio analysis can help to analyze the success,
failure, and progress of a business.

Ratio analysis enables the business owner/manager to

spot trends in a business and to compare its
performance with others in similar bus. and industry.

Ratio analysis may provide the all-important early

warning indications that allow you to solve your
business problems before your business is detroyed
by them.
 Stakeholders’ Alternatives

Of all the measures of firm performance share

a common objective of a firm – maximizing
the wealth of it shareholders.
Shareholders are just one of several different
stakeholders.
Stakeholders: (1) shareholders (residuals
claimants), (2) agency (management), (3)
lenders, workers.
Strategic Management Process
External Analysis
Mission Objectives &
Internal Analysis

Strategic Choice Strategic Implementation

Competitive Advantages
Example: Financial Problem
A company needed to raise $1million to finance
the implementation of a market development
strategy. Their common stock sells for $50 per
share, and 100, 000 shares are outstanding. The
prime interest rate is 10% and the co.’s tax rate is
50%. EBIT for next year is expected to be $2m,
$4m, or $8m if the economy experiences a
recession, stays the same, or significantly
improves, respectively.
 Financial Decisions: Solution
Common Stock Debt Financing Combination
Financing (borrowing) (50/50)
(issuing new shares
Financial Recession Normal Boom Recession Normal Boom Recession Normal Boom
Data
EBIT
$2.00 $4.00 $8.00 $2.00 $4.00 $8.00 $2.00 $4.00 $8.00
Interest 0 0 0 0.10 0.10 0.10 0.05 0.05 0.05
EBT 2 4 8 1.9 3.9 7.9 1.95 3.95 7.95
Taxes 1 2 4 0.95 1.95 3.95 0.975 1.975 3.975
EAT 1 2 4 0.95 1.95 3.95 0.975 1.975 3.975
#Shares
0.12 0.12 0.12 0.1 0.1 0.1 0.11 0.11 0.11
EPS
8.33 16.66 33.33 9.5 19.5 39.5 8.86 17.95 36.14
 Adjusted Accounting Measure of
Performance (using past data)
• There many measures such as
– Return on Invested Capital (ROIC)
– Economic Profit (EP)
– Market Value Added (MVA)
– Tobin’s q
Example: Tobin’s is an estimate of the replacement value of a
firm’s total assets.
Tobin’s q = firm market value) / book value of total assets.
Note that firm market value = mkt value of common stock +
mkt value of preferred stock + book value of a firm’s short-
term debt + book value of a firm’s long-term debt.
Strategy & Competitive Advantage

A company can outperform (perform

better than) rivals only when it
establishes a difference and
preserves it.
 Examples of strategic fit
• Southwest Airlines
Understand what long-term
goals need to be; based on
internal and external
• Wal-Mart analysis. Additionally
involves the means how to
achieve the goals (i.e., the
• McDonalds strategy) and understanding
the limits (i.e., the scope) of
the strategy. (Reference
Collis & Rukstad)
• Proctor & Gamble
 Wal-Mart’s success (owned by two
brothers) based on these strategies
1. Locating many of its stores in relatively rural
cities. Charge price 6% higher than urban shop,
customers do not have to go to city.
2. Developed the most effective and cost-
efficient distribution networks in the retail
industry. Minimize inventories.
3. Create organizational culture and a way of
doing business that inspired and motivated his
employers.
 A Dynamic Model of Strategy
• What comprises a firm’s realized strategy?

Intended/deliberate strategy
minus
Unrealized elements
plus
Emergent components .
 The 21 Century Landscape
st

• Major issues of the 21st century:

Competition due to globalization
Technology
The industry with no boundaries
Government and business