For this discussion, you will explore the relationship between financial analysis and strategic analysis in a review of the case study Case 9: Starbucks Corporation, p.462 (from your textbook) A case study is a puzzle to be solved, so before reading and answering the specific questions, develop your proposed solution by following these five steps: Read the case study to identify the key issues and underlying issues. These issues are the principles and concepts of the course modules which apply to the situation described in the case study. Record the facts from the case study which are relevant to the principles and concepts of the course modules. The case may have extraneous information not relevant to the current module. Your ability to differentiate between relevant and irrelevant information is an important aspect of case analysis, as it will inform the focus of your answers. Describe in detail the actions that would address or correct the situation. Consider how you would support your solution with examples from experience or current real-life examples or cases from textbooks. Complete this initial analysis and then read the discussion questions. Typically, you will already have the answers to the questions, but with a broader consideration. At this point, you can add the details and/or analytical tools required to solve the case. In an original post, present a well-written answer and diagnosis for the following case study questions: Examine the reasons why Starbucks’ strategy has been so successful. Examine the threats to Starbucks’ success in the future. How does Starbucks link organizational goals to measures of value? How does Starbucks link organizational goals to measures of performance?Guideline: 1-
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CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 1
The Concept of Strategy
1
The Concept of Strategy
OUTLINE
• The role of strategy in success
• A framework for strategy analysis
• The evolution of strategic management
• What is strategy? How do we describe it?
• How is strategy made?
• Strategy and not-for-profit organizations
Copyright © 2019 John Wiley & Sons, Inc.
THE ROLE OF STRATEGY IN SUCCESS
Ingredients of Success
QUEEN ELIZABETH &
THE HOUSE OF WINDSOR
LADY GAGA &
THE HOUSE OF GAGA
GOALS
Life-long dedication to role of
monarch and head of state
UNDERSTANDING
THE
ENVIRONMENT
Alert to the changing political and Awareness of:
social environment .
• new economics of the music business
Sensitive to the mood and needs • marketing potential of social
of the British people
networking
• needs of Generation Y
RESOURCE
APPRAISAL
Recognized lack of formal
authority and need to exploit
traditional loyalties and informal
influence
Exploited her innate theatricality,
eccentricity, design capability, and
musical skills
IMPLEMENTATION
Resolute commitment; strong
self-discipline; building an
effective family team supported
by loyal professionals
Devotion to living the Lady Gaga
character; engagement in continually
creating new images for herself
Copyright © 2019 John Wiley & Sons, Inc.
Single-minded quest for stardom
through her Lady Gaga persona
THE ROLE OF STRATEGY IN SUCCESS
What Makes a Successful Strategy?
Successful strategy
EFFECTIVE IMPLEMENTATION
Long-term,
simple and
agreed
objectives
Copyright © 2019 John Wiley & Sons, Inc.
Profound
understanding of
the competitive
environment
Objective
appraisal of
resources
THE BASIC FRAMEWORK FOR STRATEGY ANALYSIS
Strategy as the Link between the
Firm and its Environment
THE FIRM
THE
INDUSTRY
ENVIRONMENT
• Goals &
Values
• Resources &
Capabilities
• Structure &
Systems
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGY
STRATEGY
• Competitors
• Customers
• Suppliers
THE BASIC FRAMEWORK FOR STRATEGY ANALYSIS
Ryanair’s activity system
Low operating costs
High aircraft
utilization
Boeing
737s only
25-min.
turnaround
Point-to-point routes
Secondary
airports
Copyright © 2019 John Wiley & Sons, Inc.
No-frills product
offering
Low prices;
Charges for all
additional
services
High labor
productivity
Single class, no
reserved seating
No baggage
transfer
Job
flexibility
Direct
sales
only
Internet-only
check-in
A BRIEF HISTORY OF BUSINESS STRATEGY
1950s:
Financial budgeting
• Operational budgeting
• DCF capital budgeting
1960s & early 1970s:
Corporate planning
• Corporate plans based on medium-term
economic forecasts
The Evolution of
Late 1970 & 1980s:
Strategic
3 key changes:
Emergence of Strategic Management
1. Changing concept
of strategy
Management
• Strategy
as a quest for profit
2. Changing processes
of strategy
formulation
• Industry
analysis and
competitive positioning
New tools of strategy analysis
21st3.
century:
Adapting to Turbulence
•
•
•
•
Adapting to and exploiting
digital
The quest for flexibility &
strategic innovation
Strategic alliances
Social and environmental
responsibility
Copyright © 2019 John Wiley & Sons, Inc.
1990s:
The Quest for Competitive Advantage
•
•
•
Emphasis on resources & capabilities
Shareholder value maximization
Refocusing, outsourcing, delayering, cost
cutting
STRATEGY TODAY
What is Strategy?
• Distinguishing strategy from tactics:
– Strategy is the overall plan for deploying resources to
establish a favorable position.
– Tactic is a scheme for a specific maneuver
• Characteristics of strategic decisions:
– Important.
– Involve a significant commitment of resources.
– Not easily reversible
© 2017 Robert M. Grant, www.contemporarystrategyanalysis.com
STRATEGY TODAY
Definitions of Strategy
Strategy: a plan, method, or series of actions designed to achieve a
specific goal or effect.
— Wordsmyth Dictionary (http://www.wordsmyth.net)
The determination of the long-run
goals and objectives of an
enterprise, and the adoption of
courses of action and the allocation
of resources necessary for
carrying out these goals.
Strategy: “a cohesive
response to an important
challenge.”
——Richard Rumelt, Good Strategy
/ Bad Strategy (Crown Business,
2011)
— Alfred Chandler, Strategy and Structure
(MIT Press, 1962)
Lost Boy:
John Darling:
Lost Boy:
John Darling:
“Injuns! Let ’s go get ‘em!”
“Hold on a minute. First we must have a strategy.”
“Uhh? What’s a strategy?”
“It’s, er … it’s a plan of attack.”
— Walt Disney’s Peter Pan
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGY TODAY
Why Do Firms Need Strategy?
Strategy as Decision
Support
Improves the quality
of decision making
Strategy as Coordination
and Communication
Creates consistency
and unity
Strategy as Target
Copyright © 2019 John Wiley & Sons, Inc.
Improves performance by setting
high aspirations
STRATEGY TODAY
Sources of Superior Profitability
INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT
ABOVE THE
COST OF
CAPITAL
How do we make
money?
Which businesses
should we be in?
COMPETITIVE
ADVANTAGE
How should we
compete?
Copyright © 2019 John Wiley & Sons, Inc.
CORPORATE
STRATEGY
BUSINESS
STRATEGY
STRATEGY TODAY
Describing Strategy:
Current Positioning, Future Direction
•
STRATEGY AS POSITIONING
STRATEGY AS DIRECTION
Where are we competing?
– Product market scope
– Geographical scope
– Vertical scope
What do we want to become?
– Vision statement
How are we competing?
– What is the basis of our
competitive advantage?)
COMPETING FOR THE
PRESENT
Copyright © 2019 John Wiley & Sons, Inc.
•
What do we want to achieve?
– Mission statement
– Performance goals
•
How will we get there?
– Guidelines for development
– Priorities for capital
expenditure, R&D
– Growth modes: organic
growth, M&A, alliances
PREPARING FOR THE
FUTURE
HOW IS STRATEGY MADE? THE STRATEGY PROCESS
Strategic Making: Design or Process?
Strategy as Design
Strategy as Process
Planning and
rational choice
Many decision makers
responding to multitude of
external and internal forces
INTENDED
STRATEGY
REALIZED
STRATEGY
EMERGENT
STRATEGY
Mintzberg’s Critique of Formal Strategic Planning:
•The fallacy of prediction—the future is unknown
•The fallacy of detachment—impossible to divorce formulation from
implementation
•The fallacy of formalization—inhibits flexibility, spontaneity,
intuition and learning.
Copyright © 2019 John Wiley & Sons, Inc.
HOW IS STRATEGY MADE? THE STRATEGY PROCESS
Applying Strategy Analysis
Setting the strategic
agenda
Analyzing the situation
Formulating
strategy
Implementing
strategy
Formulate
strategy
Implement
strategy
Industry
analysis
Identify
the
current
strategy
Appraise
performance
Diagnose
performance
Analysis of
resources &
capabilities
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGIC MANAGEMENT OF NOT-FOR-PROFIT ORGANIZATIONS
Applying Strategy Analysis to Not-For-Profits
Examples
Organizations in
competitive
environments that
charge users
Royal Opera House
Organizations in
competitive
environments that
provide free services
Salvation Army
Organizations sheltered from
competition
European Central Bank
Guggenheim Museum Habitat for Humanity
New York Police Dept.
Stanford University
World Health Organization
Linux
Analysis of goals
and performance
Identifying mission, goals, and performance indicators and ensuring
consistency among them is a key area of strategy analysis for all non-profits
Analysis of the
competitive
environment
Main tools of
Main arena for
competitive analysis competition and
are the same as for
competitive strategy is
for-profit firms
the market for funding
Identifying and exploiting distinctive resources
and capabilities critical to design strategies
that create competitive advantage
Analysis of
resources and
capabilities
Strategy
implementation
Not important. However,
agencies compete for public
funding.
Analysis of resources and
capabilities essential in
determining priorities and
designing strategies
The basic principles of organizational design, performance management, and
leadership are common to all organizational types
Copyright © 2019 John Wiley & Sons, Inc.
Summary
? The role of strategy in success
? Strategy important to the success of individuals and organizations
? Successful strategies embody clear goals; insight into the external
environment; appraisal of internal resources; sound implementation
? The framework for strategy analysis
? Links the firm to its external environment
? The evolution of strategic management
? Strategy was concerned with detailed planning; now its is about
direction, identity, and exploiting the sources of superior profitability
? What is strategy? How do we describe it?
? Strategy describes where a firm is competing, how it is competing, and
the direction in which it is developing
? How is strategy made?
? Through combining purposeful planning (rational design) and flexible
responses to changing circumstances (emergence).
? Strategic management of not-for-profit organizations
? Most of the tools of strategy analysis are applicable
• Copyright © 2019 John Wiley & Sons, Inc.
16
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=
?t
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).
Net income
Measures the firm’s success in using
shareholders’ capital to generate profits that
Shareholders’ equity
are available to remunerate investors.
Operating profit
The numerator should be the return on all the
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).
Net income
Measures the firm’s success in using
shareholders’ capital to generate profits that
Shareholders’ equity
are available to remunerate investors.
Operating profit
The numerator should be the return on all the
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/Assets
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
Shareholder
value
creation
Economic
Profit
CEO
Sales
Targets
cogs/
sales
Development
Cost/Sales
ROCE
Inventory
Turnover
Capital
Turnover
Corporate/Divisions
Capacity
Utilization
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
Cash
Turnover
Accounts
Receivable Time
Functions
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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