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Strategic Management B&M – summary of the book, pre-recordedlectures and online sessions.
Brenda Giethoorn
06-06-2021
WEEK 1
Chapter 1: The Concept of Strategy
The common factors in successful
strategies are →
These same ingredients of successful
strategies—clear goals, understanding
the competitive environment, resource
appraisal, and effective
implementation—form the key
components of our analysis of business
strategy.
The basic framework for strategy as a
link between the firm and its
environment. The four elements of a
successful strategy shown in the
successful strategy figure are recast into
two groups—the firm and the industry environment—with strategy forming a link between the two.
This view of strategy as a link between the firm and its industry environment has close similarities with
the widely used SWOT framework. Strategic fit views strategy as a link between the firm and its
industry environment has close similarities with the widely used SWOT framework.
An effective strategy is one in which all the decisions and actions that make up the strategy are aligned
with one another to create a consistent strategic position and direction of development. This notion of
internal fit is central to Michael Porter’s conceptualization of the firm as an activity system. Porter
states that “Strategy is the creation of a unique and differentiated position involving a different set of
activities”.
The concept of strategic fit is one component of a set of ideas known as contingency theory.
Contingency theory postulates that there is no single best way of organizing or managing. Strategic
decisions, whether in military or business spheres, share three common characteristics:
- They are important;
- They involve a significant commitment of resources;
- They are not easily reversible.
The game theory, the objective of war is (usually) to defeat the enemy, has revolutionized the study of
competitive interaction, not just in business but in politics, military studies, and international relations
as well.
While new techniques of discounted cash flow analysis allowed more rational choices over individual
investment projects, firms lacked systematic approaches to their long-term development. Corporate
planning (also known as long-term planning) was developed during the late 1950s to serve this purpose.
During the 1990s, the focus of strategy analysis shifted from the sources of profit in the external
environment to the sources of profit within the firm. The resource-based view of the firm identified
the resources and capabilities of the firm as its main source of competitive advantage and the primary
1
,basis for formulating strategy. This emphasis on internal resources and capabilities has encouraged firms
to identify how they are different from their competitors and to design strategies that exploit these
differences.
Evolution of strategic management →
Strategy involves setting goals, allocating resources, and
establishing consistency and coherence among decisions
and actions. Strategy can be used as:
- Decision support. It simplifies decision-making by
constraining the range of decision alternatives, permits
the knowledge of different individuals to be pooled
and integrated, and facilitates the use of analytic tools.
- Coordination device. Once formulated, strategy can
be translated into goals, commitments, and
performance targets that ensure that the organization
moves forward in a consistent direction.
- Target. A forward-looking strategy establishes
direction for the firm’s development and sets
aspirations that can motivate and inspire members of
the organization.
The strategic intent describes the desired strategic position to describe this desired strategic position.
Collis and Rukstad identify four types of statement through which companies communicate their
strategies:
- The mission statement describes organizational purpose; it addresses “Why we exist.”
- A statement of principles or values outlines “What we believe in and how we will behave.”
- The vision statement projects “What we want to be.”
- The strategy statement articulates the company’s competitive game plan, which typically describes
objectives, business scope, and advantage.
Strategic choices can be distilled into two basic questions:
- Where to compete? Corporate strategy defines the scope of the firm in terms of the industries and
markets in which it competes.
- How to compete? Business strategy is concerned with how the firm competes within a particular
industry or market. Hence, this area of strategy is also referred to as competitive strategy.
The answers to these questions define the two major areas of a firm’s strategy. The distinction between
corporate strategy and business strategy corresponds to the organizational structure of most large
companies. Corporate strategy is the responsibility of corporate top management. Business strategy
is primarily the responsibility of the senior managers of divisions and subsidiaries.
Describing firm strategy →
Intended strategy is strategy as conceived
of by the leader or top management team.
Realized strategy is the actual strategy that
is implemented, and is only partly related to
that which was intended. Emergent
strategy are the decisions that emerge from
the complex processes in which individual
managers interpret the intended strategy and
adapt it to changing circumstances.
2
,Developing a strategy for a business
typically involves four main stages:
Chapter 2: Goals, Values, and Performance
Value is the monetary worth of a product or asset. Value can be created in two ways: by production
and by commerce.
Value creation = Total customer value - Real costs of production.
Total customer value is measured by their willingness to pay, not what they actually pay. The
difference is called consumer surplus. Producer surplus is comprised of the profits that accrue to the
owners of the firm together with earnings by input owners in excess of the minimum they require. The
value created by firms is distributed among different parties: customers receive consumer surplus,
owners receive profits, government receives taxes etc.
There are two parties of interest the firm should consider:
- Stakeholder value maximization, stakeholder theory proposes that the firm should operate in the
interests of all its constituent groups.
- Shareholder value maximization, shareholder capitalism is based upon two principles, first, that
firms should operate in the interests of their owners.
Pursuing the interests of all stakeholders is inherently appealing, yet, in practice the stakeholder
approach encounters two serious difficulties that has to do with measuring performance, and
corporate governance.
Three justifications to rationalize the unedifying focus on money-making:
- Competition: competition erodes profitability. As competition increases, the interests of different
stakeholders converge around the goal of survival.
- Threat of acquisition: management teams that fail to maximize the profits of their companies tend
to be replaced by teams that do.
- Convergence of stakeholder interests: there is likely to be more community of interests than
conflict of interests among different stakeholders.
Profit is the surplus of revenues over costs available for distribution to the owners of the firm. There
are different types of profit:
- Accounting Profit is measured at different levels:
o Gross profit is sales revenue less the cost of bought-in materials and components.
o Operating profit (or operating income) is the gross profit less operating expenses, before
deduction of interest and taxes.
o Net profit (or net income) is profit after the deduction of all expenses and charges.
- Economic Profit is pure profit. A major problem of accounting profit is that it combines two types
of returns: the normal return to capital, which rewards investors for the use of their capital, and
economic profit, which is the surplus available after all inputs (including capital) have been paid
for. Economic profit is a purer measure of profit that measures more precisely the surplus value a
firm generates. To distinguish it from accounting profit, economic profit is often referred to as rent
or economic rent. Economic profit is calculated by deducting the cost of capital from operating
profit.
3
, - Cash Flow shows the firm’s flows of cash transactions: operating cash flow is the cash generated
by the firm’s operations; free cash flow is operating cash flow less capital investment.
The value of an enterprise (V) is the sum of its free cash flows (C) in each year t, discounted at the
enterprise’s cost of capital. The relevant cost of capital is the weighted average cost of capital
(WACC) that averages the cost of equity and the cost of debt:
Enterprise value = Market capitalization of equity - Market value of debt
Focusing on the value of the enterprise as a whole helps emphasize the fundamental drivers of firm
value over the distractions and distortions that result from a preoccupation with stock market value.
There are four key areas where our analysis of profit performance can guide strategy:
1. In appraising a firm’s (or business unit’s) performance.
Assessing how well that strategy is doing in terms of the performance of the firm. The next stage is
diagnosis— identifying the sources of unsatisfactory performance. Forward-Looking
Performance Measures: Stock Market Value, to evaluate the performance of a firm in value
creation, we can compare the change in the market value of the firm relative to that of competitors
over a period. Because of the volatility of stock market values, assessments of firm performance for
the purposes of appraising the current strategy or evaluating management effectiveness tend to use
accounting measures of performance, Backward-Looking Performance Measures: Accounting
Ratios. Profitability ratios:
2. In diagnosing the sources of poor performance.
If profit performance is unsatisfactory, we need to
identify the sources of poor performance so that
management can take corrective actions. The main tool
of diagnosis is disaggregation of return on assets (or
return on capital employed) in order to identify the
fundamental value drivers. A starting point is to
disaggregate return on assets into sales margin and
asset turnover. We can then further disaggregate both
sales margin and asset turnover into their component
items →
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