Business Strategy

strategic issues are…

consequential, cost functional, usually requires external financing

consequential

survival of the firm could depend upon this

cross-functional

all departments are involved

situational analysis

where are we now?

strategic objectives

where do we want to go?

strategic choice

how are we going to get there?

how are strategies working?

balanced scorecard

mission statement

focuses on current activities

strategic vision

focuses on the firm’s future path

actionable variables

actionable, quantitative, comparative, divisional

the PESTEL model

political, economic, sociocultural, technological, environmental, and legal

five forces

substitute products, current competitors, potential new competitors, suppliers, buyers

example of a political force

tariffs, elections, price of oil

example of an economic force

interest rates, inflation rates, unemployment trends

example of a sociocultural force

number of births, deaths, divorces, and marriages

example of a technological force

artificial intelligence, e-commerce, 3D printing

example of an environmental force

climate change, water, air, electric vehicles

example of a legal force

minimum wage, labor laws, consumer laws

five forces: three steps

identify competitive pressures, evaluate the strength of each competitive force, determine collective strength

substitute products

attempts of companies outside the industry to win buyers over to their products

suppliers

pressure coming from supplier bargaining power and supplier-seller collaboration

new entrants (threat of entry)

pressure stemming from new rivals

buyers

pressure stemming from buyer bargaining power and seller-buyer collaboration

rivalry among competing sellers

jockeying for better market position, increased sales and market-share, and competitive advantage

weapons against competitive rivalry

lower prices, higher quality, stronger brand image

basis for sustainable competitive advantage, a “resource” must pass 5 tests:

valuable, rare, inimitable, non-substitutable, operationalizable (can be put into practical operation)

AQCD

actionable, quantitative, comparative, divisional

actionable

helpful in deciding what actions or strategies a firm should take

quantitative

including percentages, ratios, dollars, and numbers to the extent possible

comparative

reveals changes over time

divisional

what products and regions are doing well or not

overall low-cost provider strategy

lower cost & a broad cross-section of buyers

broad differentiation strategy

differentiation & a broad cross-section of buyers

focused on low-cost strategy

a narrow buyer segment & lower cost

focused differentiation strategy

differentiation & a narrow buyer segment

how to identify cost leaders

asset turnover is higher

cost leaders…

generate more sales on fewer assets

how to identify differentiators

gross profit margin is higher

differentiators…

distinct from competitors

measures of profitability

ROA, ROS, Asset Turnover

ROIC

return on investment capital

internal audit process

assessment of performance, benchmark, understanding core competencies, determine strengths and weaknesses

controversy around stock buybacks

the controversy is that share buybacks can artificially increase the stock price, making the company appear more valuable without actually improving its performance

retrenchment

cost and asset reduction to return declining sales

divestiture

selling a division or part of an organization

liquidation

selling the company’s assets for their tangible worth

defensive strategies

retrenchment, divestiture, liquidation

pause

digesting a previous large move

no change

everything is clicking

profit

weather tough times by supporting profits

when should a firm diversify?

present growth is diminishing, opportunities to expand into booming industries, powerful brand name

market penetration = existing products + existing markets

sell more of the company’s current products to the current customers

product development = new products + existing markets

create new products for customers the company already serves

market development = existing products + new markets

take current products and sell them to new customer groups or geographic areas

diversification = new products + new markets

enter a new market with a new product

forward integration

gaining ownership or increased control over distributors or retailers

backward integration

seeking increased control of a firm’s suppliers

horizontal integration

seeking increased control of a firm’s competitors

beware of full integration…

taper is better

assessment of performance

identify a long list of potential strengths and weaknesses

benchmark

determine if these capabilities are inferior or superior

understanding core competencies

identify special skills of the firm, consider need for new skills

determine strengths and weaknesses

apply test of competitive relevance

best-cost provider

low cost + differentiation… give customers better value for the price

quality of income ratio

how good are earnings?

key earnings metric for measurement

earnings per share

unintelligible footnotes usually indicate…

…untrustworthy management

horizontal analysis

analyzing trends in a financial statement for one company over time

vertical analysis

compare across companies, industries, and over time

why are notes so important in the firm’s 10-K?

bad news must be disclosed in the notes section, not in the statements

how do companies create value?

share price appreciation, dividends, stock buybacks

share price appreciation

makes stock worth more

dividends

pays part of its profits directly to shareholders in cash

stock buybacks

the company buys back its own shares, which potentially increases the value of remaining shares

sales growth by geography

by what % did sales in a specific location grow or shrink?

sales growth by segment

by what % did sales for a specific product/category grow or shrink?

total sales growth

by what % did the company’s total sales grow or shrink?