Strategy - introduction1 What is strategy? Strategy: A firm’s theory of how to compete successfully. –It describes the goal directed actions a firm intends to take to gain and sustained competitive advantage. –It is about deciding what to do and what NOT to do. –It requires long-term commitments that are often not easily reversible. Strategy choice are made in the presence of imperfect information and imperfect knowledge (strategic choice could be incorrect).

Strategic Management Process Mission -> objectives -> external/internal analysis (SWOT) -> strategic choice -> strategic implementation -> performance Strategy - introduction2 Vision/Mission: A firm’s long-run purpose. It defines what a firm aspires to be in the long run and what it wants to avoid in the meantime. Strategic Management Process: a sequential set of analyses and choices that can increase the likelihood that a firm will make good strategic choice.

Examples of mission statement Amazon: Amazon’s vision is to be earth’s most customer centric company; to build a place where people can come to find and discover anything they might want to buy online. Google: Google’s mission is to organize the world‘s information and make it universally accessible and useful. Strategy - introduction3 Apple: Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and Internet Ikea's mission is to offer a wide range of home furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them YouTube: YouTube’s mission is to provide fast and easy video access and the ability to share videos frequently

Strategy - introduction4 Competing successfully Competitive strategy is about being different. Competitive advantage : A firm implementing a value creating strategy not simultaneously being implemented by any current or potential competitors. A firm has a competitive advantage when it creates greater economic value than rival firms. Competitive parity: a firm’s actions create economic value but several other firms are doing the same things. Sustained competitive advantage: A firm implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy. –Doing different things –Doing similar things differently

Strategy - introduction5 Level of strategy: Functional level strategy Business level strategy Corporate level strategy International strategy The objective of strategy is the creation of a sustainable competitive advantage resulting in superior economic returns.

Strategy - introduction6 Defining performance Comparing the added value with the resources used. –Normal economic performance –Below normal economic performance –Above normal economic performance

Strategy - introduction7 Measuring firm performance Simple accounting measures of historical performance Profitability ratios –Gross profit margin = (sales – cost of costs sold)/sales –ROA (return on assets): Profits after tax / total assets –ROE (return on equity): Profits after tax / total stockholder’s equity (gauge a firm’s efficiency in using resources) –Earning per share (EPS): (Profits – preferred dividend)/# of common shares –Cash flow per share: (after tax profits + depreciation)/# of common shares –Revenue / Employee

Strategy - introduction8 Measuring firm performance Liquidity ratios –Current ratio: current assets/current liabilities –Quick ratio: (current assets – inv)/current liabilities Leverage ratios –Debt to assets Activities ratios –Inv turnover = Sales / Inventory –Accounts receivable turnover = annual credit sales/accounts receivable –Average collection period = accounts receivable/average daily sales An integration of these indicators (e.g., Altman’s Z score)

Strategy - introduction9 Limitations of simple accounting measures

Strategy - introduction10 Adjusted accounting measures Market value added (MVA): Market value of firm – book value (the amount that investors have contributed) Tobin’s q : (market value of firm) / (replacement cost of firm = opportunity costs of the capital, book value of total assets) –difficult to calculate for older firms –q>1 means that a firm is generating above-normal performance –Intangible assets are not taken considered. Firm Market value = market value of common stock + market value of preferred stock + book value of a firm’s short term debt + book value of a firm’s long term debt.

Strategy - introduction11 Measuring firm performance Survival: Indicating that a firm is generating at least normal economic performance Limitations:

Strategy - introduction12 Competitive advantages seem to persist longer

Empirical studies show that –Industry effects account for 20% of a firm’s profitability –Firm effects: 30~45% –Other effects: 35~50% Strategy - introduction13

Strategy - introduction14 Causes for above-normal rates of return: The I/O model of above-average returns explain the dominant influence of external environment on firm’s strategic actions. The firm’s performance is believed to be determined primarily by a range of an industry’s properties, including economies of scale, barrier to entry, etc. The resource-based model of above-average returns difference in firm’s performances across time are driven primarily by their unique resources and capabilities rather than by an industry’s structural characteristics.