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Complete Strategy Summary for Premaster Strategic Management
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Summary Strategic Management and Competitive Advantage: Concepts and Cases, Global Edition - Geïntegreerde Bedrijfseconomie (300429-B-6)
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Samenvatting boek Geïntegreerde Bedrijfseconomie
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Strategic Management and Competitive Advantage: Summary
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Strategy notesWeek 1
Mission:
Does not necessarily affect a firm’s performance but is shows the long-therm purpose of the
firm to keep on track and avoid what it wants to avoid.
Objectives:
Mission is a broad statement of its purpose and values, its objectives are specific measurable
targets a firm can use to evaluate the extent to which it is realizing its mission.
External analysis:
Identifying critical threats and opportunities in its competitive environment.
Internal analysis:
Identifying its strengths and weaknesses and it helps a firm understanding which of its
resources and capabilities are likely to be sources of C.A. Finally, it can be used by firms to
identify those areas of its organization that require improvement and change.
Strategic Choice:
Business-level strategies are actions firms take to gain competitive advantages in a single
market or industry.
- Cost leadership
- Product differentiation
- Flexibility
Corporate-level strategies are actions firms take to gain competitive advantages by
operating in multiple markets or industries simultaneously.
- Vertical integration
- Diversification strategies
- Strategic alliances
- Merger and Acquisition
Strategy implementation:
Occurs when a firm adopts organizational policies and practices that are consistent with its
strategy.
1. Firm’s formal organizational structure
, 2. Formal and informal management control systems
3. Its employee compensation policies
Competitive advantage:
When a firm can create more economic value than rival firms. Economic value is simply the
difference between what customers are willing to pay for a firm’s products or services and
the total cost of producing these products or services.
Imperfect competition = price and demand differ
Perfect competition = no economic value created, with homogeneity products. -> f.e. with
materials (oil, grain etc)
,! Economic value created:
f.e.
Value = $40 Consumer surplus = $40 (value) -$30 = $10
Price = $30 Producer surplus = $30 (price) -$15 (cost) = $15
Cost = $15 Economic value created = $40 - $15 = $25
Accounting performance: is a measure of its C.A. calculated by using information from a
firm’s published profit and loss and balance sheet statements.
Measurement C.A.
Accounting ratios:
We do not need to know the formulas by harm.
Profitability ratios: How much revenue has a firm?
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠
- ROA = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
= A measure of return on total investment in a firm (Larger = better)
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠
- ROE = 𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 = A measure of return on total equity investment in a firm.
Larger is usually better
𝑆𝑎𝑙𝑒𝑠−𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
- Gross profit Margin = 𝑆𝑎𝑙𝑒𝑠
= A measure of sales available to cover
operating expenses and still generate a profit. Larger is usually better
𝑝𝑟𝑜𝑓𝑖𝑡𝑠 (𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠)−𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠𝑡𝑜𝑐𝑘 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑠
- Earnings per share (EPS) = # 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
= A measure of profit
available to owners of common stock. Larger is usually better
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒/𝑠ℎ𝑎𝑟𝑒
- Price earnings ratio (p/e) = 𝐴𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠/𝑠ℎ𝑎𝑟𝑒
= A measure of anticipated firm
performance – a high p/e ratio tends to indicate that the stock market anticipates strong
future performance. Larger is usually better
𝑎𝑓𝑡𝑒𝑟−𝑡𝑎𝑥 𝑝𝑟𝑜𝑓𝑖𝑡 + 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
- Cashflow per share = = A measure of funds
# 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑠𝑡𝑜𝑐𝑘 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
available to fund activities above current level of costs. Larger is usually better
! Liquidity ratios: How easily can a firm pay back short-term debts
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
- Current ratio = = A measure of ability of a firm to cover its current liabilities
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
with assets that can be converted into cash in the short term. Range of 2 – 3
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠−𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
- Quick ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= A measure of the ability of a firm to meet its short-
term obligations without selling off its current inventory. A ratio of 1 is thought to be
acceptable in many industries
Leverage ratios: How easily can you get more money to finance investments f.e.
𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
- Debt to assets = 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 = A measure of the extent to which debt has financed a firm’s
business activities. The higher, the greater the risk of bankruptcy
𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
- Debt to equity = 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 = A measure of the use of debt vs. equity to finance a firm’s
business activities. Generally recommended < 1
𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠
- Times interest earned = 𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐ℎ𝑎𝑟𝑔𝑒𝑠
= A measure of how much a firm’s
profits can decline and still meet its interest obligations. Generally recommended > 1
Activity ratios: How quickly your inventory is used (not very important I guess?)
𝑆𝑎𝑙𝑒𝑠
- Inventory turnover = = A measure of the speed with which a firm’s inventory is
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
turning over. In many industries, higher inventory turnover is better
𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
- Accounts receivable = = A measure of the average time it takes a firm to
𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
collect on credit sales. In many industries, faster accounts receivable turnover is better
, 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
- Average collection = 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑠𝑎𝑙𝑒𝑠 = A measure of the time it takes a firm to receive
payment after a sale has been made. In many industries, shorter collection periods are better
Ratios compared to the average of the industry.
Above-average/average/below-average accounting performances
! Weighted average cost of capital (WACC) = percentage that your investors want from you
(interests)
Exactly: the percentage of a firm’s total capital which is debt, times the cost of debt, plus the
percentage of a firm’s total capital that is equity, times the cost of equity. -> (market value of
a debt/firm’s market value) * after tax cost of debt + (market value of equity/firm’s market
value) * cost of equity
WACC < ROA < Industry Avg. ROA
WACC -> ROA = Economic performance
Industry avg. ROA = Accounting performance
Above-normal economic performance: easier to fix more capital from both debt and equity
holders.
Normal economic performance:
Below-normal economic performance: debt and equity holders will be looking towards
other firms.
!!
Chapter 2: External analysis
Levels of analysis:
From outside in:
1. General environment
2. Industry -> part of task environment
3. Strategic group -> f.e. AH en Jumbo
, 4. Individual firm -> (internal/competitors)
General environment
DESTEP/PESTEL
- Demographic trends: age, sex, marital status, ethnicity and other personal attributes that
might affect buying patterns (purely numbers)
- Cultural trends: values, beliefs and norms that guide behavior in society (what people think)
- Economic climate: the overall health of the economic systems within which a firm operates
- Legal/political conditions: the law and legal system’s impact on business, together with the
general nature of the relationship between government and business
- Specific international events: events like the civil war, political coups, coronavirus, terrorism,
tsunami
- Technological change: a shift in frontier of technological possibilities and the underlying
infrastructure (boundaries are broadening)
! SCP model -> 5 forces
Structure-conducted-performance model
➔ Made to spot anti-competitive conditions for anti-trust purposes
➔ 5 forces
5 Forces industry profitability -> Goal: to determine the profitability of an industry
(Exam possible question: case, how big is the threat of new competitors?):
Threat from existing competitors: firms that have either recently started operating in an
industry or that threaten to begin operations in an industry soon.
Industry conditions that generate a high threat of existing competitors:
- Large numbers of competitors
- Slow or declining industry growth
- Low product differentiation (leading to low customer loyalty and switching costs) I.e. Apple
vs Android are different products so consumers doesn’t switch so easy
- Industry capacity added in large increments -> too much production to gain economies of
scale
, Threat of new competition (who might enter this industry? Not just new companies, also
existing):
Industry conditions that generate a high threat of new entrants:
- High industry growth rate
- Low barriers of entry (it’s easier for organizations to enter the industry)
1. Economies of scale
2. Product differentiation (customer loyalty)
3. Government regulation of entry (governments may decide to increase cost of entry
into an industry)
4. Retaliation of incumbent (wanneer zittende bedrijven elkaar kapot willen maken is
het makkelijker om toe te treden)
5. Proprietary technology
6. Managerial know-how
7. Favorable access to raw materials
8. Learning-curve cost advantages
Threat of substitute product (are products which are not in the industry that your active in,
but they do have an effect on the profitability that you’re in): The products or services
provided by a firm’s direct competitors meet approximately the same customer needs in the
same ways
Substitutes are from a different industry but fulfil similar need
- Coke and Pepsi are rivals, milk is a substitute for both.
Industry conditions that generate a high threat of substitutes:
• High potential of fulfilling the same need (high quality)
• Low switching costs for customers
Finding substitutes is quite hard, but always see things through the eyes of the group which
are spending the money (example lesson: the contractors for renovating the university
8:30/14:32)
Threat of suppliers: Suppliers can threaten the performance of firms in an industry by
increasing the price of their supplies or by reducing the quality of those supplies.
Industry conditions that facilitate supplier power:
• Small number of firms in supplier’s industry (organizations have power over you)
• Suppliers sell unique or highly differentiated product
• Lack of close substitutes for suppliers’ products/suppliers are not threatened by
substitutes
• Focal firm is an insignificant customer of supplier
• High switching costs for focal firm
Threat from buyers influence
Industry conditions that facilitate buyer power:
• Small number of buyers (buyers can be threatening)
• Low level differentiation
• Low switching costs
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