Description
Module 02: Introduction
Attached Files:
Chapter 2 PowerPoint slides (1.257 MB)
In this module, we study the concept of strategy and introduce a basic framework for strategic analysis. Strategic analysis involves external analysis of the industry and competition, as well as internal analysis of company resources and capabilities. Strategy develops as a result of the information gathered, and since external and internal environments change over time, strategic planning is both dynamic and ongoing.
Learning Outcomes
Explain the evolution of strategy and its role in organizational success.
Apply the basic framework for strategy analysis.
Differentiate between shareholders’ goals versus stakeholders’ goals.
Demonstrate the ability to link organizational goals to measures of value.
Assess a firm’s performance and diagnose the sources of good or bad performance.
Readings Required:
Chapter 2 The Concept of Strategy & 2 Goals, Values, and Performance in Contemporary Strategy Analysis
Chapter PowerPoint slides in Contemporary Strategy Analysis
Richard P. Rumelt. (2022). Getting strategy wrong—and how to do it right instead. Retrieved from McKinsey Quarterly. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/getting-strategy-wrong-and-how-to-do-it-right-instead
Kingdom of Saudi Arabia (2020, February). Vision 2030. Retrieved from https://www.vision2030.gov.sa/media/rc0b5oy1/saudi_vision203.pdf (seminal)
Recommended:
Bernard Marr. (2022, August 16). 13 Easy Steps To Improve Your Critical Thinking Skills. Retrieved from Bernard Marr & Co. https://bernardmarr.com/13-easy-steps-to-improve-your-critical-thinking-skills/ (seminal)
Module 02: Critical Thinking Assignment
Strategy Planning (100 points)Review SV2030 and relate the strategic plan to the four common elements in successful strategy planning. For each element, analyze if the element meets the criteria.
Clear, consistent long-term goals
Profound understanding of the competitive environment
Objective appraisal of resources
Effective Implementation
After analyzing SV2030 consider how to measure success. Which two of the six performance measures do you think are the most useful indicators of how the transformation is measured? Is the transformation successful?
Your well-written paper should meet the following requirements:
Be 4 to 5 pages in length, which does not include the required title and reference pages, which are never a part of the content minimum requirements.
University academic writing standards and APA style guidelines.
Support your submission with course material concepts, principles, and theories from the textbook and at least two scholarly, peer-reviewed journal articles unless the assignment calls for more.
It is strongly encouraged that you submit all assignments into the Turnitin Originality Check before submitting it to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin Originality Check—Student Guide for step-by-step instructions.
Review the grading rubric to see how you will be graded for this assignment.
Unformatted Attachment Preview
CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 2
Goals, Values, and
Performance
1
Goals, Values, and Performance
OUTLINE
• Strategy as a quest for value
• Putting performance analysis into practice
• Beyond profit: values and corporate social responsibility
• Beyond profit: strategy and real options
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGY AS A QUEST FOR VALUE
What is Business For?
▪
Every business has a unique purpose—typically this reflects
the motives of the entrepreneurs who created these
businesses
E.g. Henry Ford (Ford Motor Company), Steve Jobs (Apple), Jack Ma
(Alibaba) were each motivated by a distinct vision.
▪
Common to every business enterprise: the desire/need to
create value
▪
Value is the monetary worth of a product. Hence, the purpose
of business is
1) to create value for customers
2) to appropriate some of that value in the form of profit—in
order to ensure the survival of the firm
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGY AS A QUEST FOR VALUE
Value for Whom? Shareholders vs Stakeholders
The shareholder approach
The stakeholder approach
The firm exists to maximize the
wealth of its owners
The firm is a coalition of interest groups
—it must create value for them all
For the purposes of strategy analysis we assume that the
primary goal of the firm is maximizing profit over its lifetime
Rationale:
1) Competition: To survive a firm must earn return on capital > cost of capital.
This is difficult when competition is strong.
2) Acquisition: Firms that do not maximize profits are vulnerable to
acquisition.
3) Convergence of interests: long run profitability requires satisfied
customers, motivated employees, and good relations with governments
and communities.
Hence: Strategy analysis is concerned with identifying and
accessing the sources of profit available to the firm
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGY AS A QUEST FOR VALUE
Value Creation
A. Value created: total
customer value less
real cost of production
B. Value created:
consumer surplus plus
producer surplus
PROFIT, CASH FLOW, AND ENTERPRISE VALUE
What is Profit? Different Measures Give
Different Rankings (data for 2017)
Company
Market
capitalization Net income
($ billion)
($ billion)
ROS
(%)
ROE
(%)
ROA
(%)
Return to
shareholders
(%)
Apple
824
48.4
26.9
39.0
16.3
+46.8
Amazon
689
3.0
2.3
9.6
3.1
+27.4
Alibaba
480
6.2
29.8
21.9
9.1
+94.1
JPMorgan Chase
397
24.4
50.2
9.5
1.4
+24.6
ExxonMobil
358
19.7
5.2
11.8
5.7
–5.8
Wal-Mart Stores, Inc.
310
13.6
4.1
14.9
11.9
+45.2
Toyota
204
15.8
7.6
13.2
4.1
+5.8
Copyright © 2019 John Wiley & Sons, Inc.
PROFIT, CASH FLOW, AND ENTERPRISE VALUE
Linking Profit to Enterprise Value
Profit maximization an ambiguous goal:
– Total profit vs. Rate of profit
– Over what time period?
– What measure of profit?
– Accounting profit versus economic profit
Estimating the value of the enterprise:
Net present value of free cash flows:
Where:
V
Ct
WACC
Copyright © 2019 John Wiley & Sons, Inc.
V=
Σt
Ct
(1 + WACC)t
market value of the firm.
free cash flow in time t
weighted average cost of capital
PROFIT, CASH FLOW, AND ENTERPRISE VALUE
Value Maximization and Strategy Choice
In principle, DCF approach to enterprise value maximization
is the correct approach to choosing a strategy:
▪ Identify strategy alternatives
▪ Estimate cash flows and cost of capital for each strategy
▪ Select the strategy which generates the highest NPV.
But in practice:
▪ Difficult to estimate cash flows more than 2 or 3 years ahead
▪ Hence, value maximization may encourage short-termism.
Implications for strategy analysis:
▪ Simple guidelines can approximate value maximization, e.g.
a) On existing assets—seek to maximize rate of return
b) On new investment—seek rate of return > cost of capital
▪ Use qualitative strategy analysis to evaluate future profit potential.
Copyright © 2019 John Wiley & Sons, Inc.
PROFIT, CASH FLOW, AND ENTERPRISE VALUE
Profitability Ratios
Ratio
Formula
Return on Capital
Employed (ROCE)
Operating profit, before
interest, after tax,
Equity + Debt
Return on Equity
(ROE)
Return on Assets
(ROA)
Gross margin
Operating margin
Net margin
Notes
The return on the capital invested in a
business. ROCE is also known as return on
invested capital. The numerator can be is
operating profit or earnings (EBIT).
Measures the firm’s success in using
Net income
shareholders’ capital to generate profits that
Shareholders’ equity
are available to remunerate investors.
The numerator should be the return on all the
Operating profit
company’s assets—e.g. operating profit,
Total assets
EBITDA (earnings before interest, tax,
depreciation, and amortization), or EBIT
(earnings before interest and tax).
Sales – cost of material inputs Gross margin measures how much value a firm
adds value to the goods and services it buys in.
Sales
Operating profit / Sales
Net income / Sales
Copyright © 2019 John Wiley & Sons, Inc.
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.
PROFIT, CASH FLOW, AND ENTERPRISE VALUE
Enterprise Value and Shareholder Value
Enterprise value =
Market capitalization of equity
+ Market value of debt
Reasons for preferring maximization of enterprise
value over maximization of shareholder value:
• Not always easy to distinguish debt from equity
• Shareholder value maximization has become discredited
by its misapplication by managers (e.g. in emphasizing
short-term profits and in seeking to manipulate reported
earnings).
Copyright © 2019 John Wiley & Sons, Inc.
PUTTING PERFORMANCE ANALYSIS INTO PRACTICE
Profitability Ratios
Ratio
Formula
Return on Capital
Employed (ROCE)
Operating profit, before
interest, after tax,
Equity + Debt
Return on Equity
(ROE)
Return on Assets
(ROA)
Gross margin
Operating margin
Net margin
Notes
The return on the capital invested in a
business. ROCE is also known as return on
invested capital. The numerator can be is
operating profit or earnings (EBIT).
Measures the firm’s success in using
Net income
shareholders’ capital to generate profits that
Shareholders’ equity
are available to remunerate investors.
The numerator should be the return on all the
Operating profit
company’s assets—e.g. operating profit,
Total assets
EBITDA (earnings before interest, tax,
depreciation, and amortization), or EBIT
(earnings before interest and tax).
Sales – cost of material inputs Gross margin measures how much value a firm
adds value to the goods and services it buys in.
Sales
Operating profit / Sales
Net income / Sales
Copyright © 2019 John Wiley & Sons, Inc.
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.
PUTTING PERFORMANCE ANALYSIS INTO PRACTICE
Performance Diagnosis: Disaggregating ROA
COGS/Sales
Sales
Margin
Depreciation/Sales
SGA expense/Sales
ROA
Fixed asset turnover
(Sales/PPE)
Inventory Turnover
(Sales/Inventories)
Sales/Asset
s
Creditor Turnover
(Sales/Receivables)
Turnover of other items
of working capital
Copyright © 2019 John Wiley & Sons, Inc.
PUTTING PERFORMANCE ANALYSIS INTO PRACTICE
Disaggregating
ROA for UPS (U)
and Fedex (F)
Labor costs/Sales
U: 54.8% F: 36.3%
Fuel costs/Sales
U: 7.5% F: 5.8%
Operating
Margin
U: 11.2%
F: 6.3%
Maintenance/Sales
U: 2.3% F: 4.2%
Depreciation/Sales
U: 3.4% F: 5.2%
ROA
Other costs/Sales
U: 16.7%
F: 7.6%
U: 21.4% F: 42.5%
PPE turnover
Sales/Assets
U: 1.49
F: 1.21
U: 3.02 F: 2.03
Receivables turnover
U: 10.23 F: 6.80
Cash turnover
U: 9.51 F: 15.50
Copyright © 2019 John Wiley & Sons, Inc.
PUTTING PERFORMANCE ANALYSIS INTO PRACTICE
Linking Value Drivers to
Performance Targets
Margin
Sharehold
er
value
creation
Economi
c
Profit
Sales
Targets
cogs/
sales
Developmen
t
Cost/Sales
ROCE
Inventory
Turnover
Capital
Turnover
Capacity
Utilization
Cash
Turnover
CEO
Corporate/Div
isions
Function
s
Order Size
Customer Mix
Sales/Account
Customer Churn
Rate
Deficit Rates
Cost per Delivery
Maintenance cost
New product
development time
Indirect/Direct
Labor
Customer
Complaints
Downtime
Accounts Payable
Time
Accounts
Receivable Time
Depts. &
Teams
PUTTING PERFORMANCE ANALYSIS INTO PRACTICE
Balanced Scorecard for a Regional Airline
Simplified Strategy
Map
Financial
Increase
Profitability
Lower
Cost
Performance
Measures
Targets
Initiatives
• Market Value
• Seat Revenue
• Plane Lease Cost
• 25% per year
• 20% per year
• 5% per year
• Optimize routes
• Standardize planes
• FAA on-time
arrival rating
• Customer ranking
• No. customers
• First in industry
• 98% satisfaction
• % change
• Quality management
• Customer loyalty
program
• On Ground Time
• On-Time Departure
•
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