Session 2 Vision

Strategic Management

Session 2

1Slides by Bobby Hajjaj

Week 1: Introduction + Strategy, Vision, & Value

Week 2: History of Strategic Management + Game

theory

Week 3: Competitive Advantage

Week 4: Industry analysis

Week 5: Macro environment & Uncertainty

Week 6: Corporate strategy & Diversification

Week 7: Global Strategy

Week 8: Managing the Multibusiness Company

Week 9: Strategic planning

Week 10: Review

Course Structure


Session1: i) Defining strategy

ii) Scope of strategy

iii) Vision, mission, goals

iv) NPV & EVA – measure of value

Today’s agenda


What is strategy?


STRATEGY is . . .

The determination of the long-term goals of an enterprise, the adoption of courses of action, and the allocation of resources for achieving these goals

The pattern or plan that integrates an organization’s major goals,policies and actions into a cohesive whole

A plan of action

Textbook definitions


"You can become a master of strategy by training alone with a sword, so that you can understand the enemy's stratagems, his strength and resources, and come to appreciate how to apply strategy to beat ten thousand enemies."

-Miyamoto Musashi {Book of Five Rings}“Know the other and know yourself:Triumph without peril.Know nature and know the situation:Triumph completely.”

- Sun Tzu {The Art of War}

The Masters


Domain of Strategy

• The organization as a whole - Integrates finance, marketing, research, operations

• The organization’s general direction - Vision, mission, goals, objectives, broad courses of action

• Performance for all measures and time horizons - Shareholder returns, profits, market share, community

• Stakeholder interests - Investors, employees, customers, communities, regulators

• Competition - Competitive advantage, innovation, imitation, resources, skills


The Strategist

Strategist as GENERAL - Battle plans, troops, weapons, enemies, tactics, positioning

Strategist as ARCHITECT - Design, creativity, function, blueprints, negotiation, execution

Strategist as CHESSMASTER - Analysis, problem-solving, moves, advantages, contingencies

Strategist as ORCHESTRA CONDUCTOR - Coordination, improvisation, fit, harmony in diversity

Strategist as EXPEDITION LEADER - Map, destination, compass, milestones, adversity, experience


Multiple Audiences Multiple InterestsInvestors Financial returnsEmployees Challenge, Security, Training Customers Quality, Price, Access, FeaturesSuppliers Terms, Reliability, PartnershipConsultants Relationships, Learning, ProfitCompetitors Predictability, Stability, RespectRegulators Compliance, InformationCommunity Contribution, Citizenship

Stakeholder interests


“The best way to maximise shareholder value is not to shoot for it directly: if you go out to be happy, you probably won't be. I think the way Whole Foods does it is going to be the way everyone does it in 20 years." John MacKey, Founder and CEO, Whole Foods Market, Financial Times, 29 December, 2004


http://www.theadvocates.org/celebrities/john-mackey.jpg

Multiple Audiences Multiple ObjectivesInvestors Perform, Inform, RetainEmployees Direct, Develop, EncourageCustomers Attract, Assist, Retain, PartnerSuppliers Develop, Negotiate, PartnerConsultants Inform, Learn, InfluenceCompetitors Monitor, Signal, MisdirectRegulators Learn, Communicate, InfluenceCommunity Contribute, Exchange resources

Stakeholders and organizational objectives


Strategy as Content

• Vision, mission, goals• Products and services• Customer groups

• Geographic coverage

• Price, cost, quality positions

• Resources• Competitors• Key issues and how to address them 12Slides by Bobby Hajjaj

THE FIRM

•Goals and values

•Resources and capabilities

•Structure and systems

THE FIRM

•Goals and values

•Resources and capabilities

•Structure and systems

THE INDUSTRY ENVIRONMENT

•Competitors

•Customers

•Suppliers

THE INDUSTRY ENVIRONMENT

•Competitors

•Customers

•Suppliers

StrategyStrategy

The Big Picture

Strategy: link between the firm and its

environment13Slides by Bobby Hajjaj

Successful strategy

Successful strategy

Long-term simple and

agreed objectives

Long-term simple and

agreed objectives

Profound understanding of the competitive

environment

Profound understanding of the competitive

environment

Objective appraisal of resources

Objective appraisal of resources

The Process:

Simplified

EFFECTIVE IMPLEMENTATIONEFFECTIVE IMPLEMENTATION


VisionVision GoalsGoals AnalysisAnalysis DecisionDecision ActionAction

ExternalExternal InternalInternal

SynthesisSynthesis

• Values• Purposes

• Mission• Goals• Objectives

• Industry analysis• Key success factors• Competitive position• Opportunities & threats

• Resources and capabilities• Functional area analysis• Financial analysis• Strengths & weaknesses

• Risk analysis• Negotiation• Strategic choice

• Structure• Culture• Processes• Systems• Deployments

• Competitive advantage• Strategic alternatives

DATADATA

Strategy as ProcessFormulation Implementation


VisionVision

IdeologyIdeologyIntentionIntention

Core purposeCore purposeCore valuesCore valuesStrategic intentStrategic intentMissionMission

- guiding principles- few in number (3 to 5)

- reason for being- outlives strategies

- definition of the business- inspiring stretch goals

- vivid description- a success word-picture

Defining Strategic Vision


Strategic intent Definition of the organization• We produce and distribute chocolates and confectionaries globally (Hershey, 1965)• We are an integrated global food provider (Hershey, 1985)

Large, inspiring stretch goals • Become the Harvard Business School of Australia (AGSM)• Become number one or two in every market we serve (GE)

Mission Vivid description of achieving the goal• We will be the first Japanese company to enter the U.S. market. We will succeed with innovations where U.S. companies have failed, such as the transistor radio. Our brand will be known around the world, and will signify innovation and quality that rival the world’s best. Made in Japan will mean something fine, not shoddy. (Sony, 1950s)

Intention


Core ValuesA few (3 to 5) enduring, guiding principles• Being a pioneer; elevating Japanese culture; doing the impossible (Sony)• Freedom of choice; winning a good fight; individual initiative (Philip Morris)• Sincerity; imagination and dreams; fanatical attention to detail (Disney)• Social responsibility; science-based innovation; honesty and integrity (Merck)

Core Purpose The organization’s (non-financial) reason for being• To solve problems innovatively (3M)• To preserve and improve human life (Merck)• To make people happy (Disney)• To experience the emotion of winning and crushing competitors (Nike)

Ideology


VisionWe will provide knowledge and take action to ensure the national security of the United States and the preservation of American life and ideals.

MissionWe are the eyes and ears of the nation and at times its hidden hand. We accomplish this mission by:

• Collecting intelligence that matters

• Providing relevant, timely, and objective all-source analysis

• Conducting covert action at the direction of the President to preempt threats or achieve United States policy objectives

http://www.cia.gov/cia/information/mission.html

The CIA


http://www.aiub.edu/HtmlViewer2.aspx?FileName=/staticpages/aiub/introduction.htm

AIUB


VisionAMERICAN INTERNATIONAL UNIVERSITY-BANGLADESH (AIUB) envisions promoting professionals and excellent leadership catering to the technological progress and development needs of the country.

MissionAMERICAN INTERNATIONAL UNIVERSITY-BANGLADESH (AIUB) is committed to provide quality and excellent computer-based academic programs responsive to the emerging challenges of the time. It is dedicated to nurture and produce competent world class professional imbued with strong sense of ethical values ready to face the competitive world of arts, business, science, social science and technology.

http://www.aiub.edu/HtmlViewer2.aspx?FileName=/staticpages/aiub/introduction.htm

Intention IdeologyThe “what” (products, markets, resources) -----The “why” Market-responsive ---------------------------------------------------- Motivationally compellingEconomically sound -------------------------------------------------- Emotionally inspiringBased on competitive advantages ---------------------------------- Based on core beliefs Changing --------------------------------------------------------------- EnduringCreated ----------------------------------------------------------------- DiscoveredImplemented ----------------------------------------------------------- Lived What you intend to do ---------------------------------------------- Who you areUnique, differentiated ----------------------------------------------- Inspiring, but not uniqueAbandoned under adversity ---------------------------------------- Maintained under adversityAchievable -------------------------------------------------------------- Never realized - only pursuedThe organization’s brain -------------------------------------------- The organization’s soul

Intention vs. Ideology


Do we remember the basics?

Which investments should the firm make?– Business entry/exit decisions– Resource allocation• How should the firm finance its decisions?– Debt, Equity, Convertible bonds, etcWhen capital is scarce, where should it be allocated?• How does one value a new investment?– Does it have the appropriate risk/return characteristics?• How should one evaluate project risk?• What sort of return should we demand for a given level of Risk?


• Interest rates are always quoted for one year• If deposit at R% for t years with compounding frequency f,

• As f gets very large (f → ), return and DF approach:∝

Net Present Value

In general:

Investment rule: Accept positive NPV investments 23Slides by Bobby Hajjaj

FCF = Revenue – Cost – CAPEX – ΔWC – Tax

– CAPEX = capital expenditure– ΔWC = changes in working capital

• In accounts you often find Earnings before Interest andafter Tax (EBIAT) (after tax ‘profit’)

• FCF = EBIAT – CAPEX – ΔWC + DEP

– DEP = depreciation

Future cash flows


Implications for NPV

– If markets reflect information then there is no point in attempting to fool them.

– You are rewarded for making good investments and punished for making bad investments

– NPV calculation tells you how to find the good ones

More of the basics


CAPM: relating risk to return


Current market value

Value as is

Total potential

value

Value with internal

improvements

Value with internal

improvements and disposals

Value with growth, internal improvements and disposals

Maximum opportunityPerceptions

gap

Operating improvement

Disposal/ new owners

New growth opportunities

Financial engineering

Company value for Industrial Inquirer


Equity value (market cap)

Market value of

debt

Minority interest

Pension provisions

Other claims

Sum of all values on enterprise profit or clash flow equals

Total enterprise value

Core enterprise value

Non-core assets

Equity Value vs. Enterprise Value


Accounting profit to Economic profit

EVA (economic value added) is a measure of economic profit, which is the pure surplus available after all inputs have been paid for.

EVA = Net operating profits after tax - Weighted average cost of capital

EVA = NOPAT – WACC


Enterprise value = Present value of future cash flows

Or

EV = invested capital + present value of future EVAs

From Economic profit to Enterprise value


Accounting profit to Economic profit


Valuing the Firm’s options

When a company invests in a implementing new strategy: view each phase in that implementation as acquiring an option on

investing on the next phase.

Merck: “When you make an initial investment in a research project, you are playing an entry fee for a right, but you are not

obligated to continue that research at a later time.”


A value metrics framework


Source: Adapted from T. Copeland, et.al., Valuation, 3rd edition, New York: Wiley, 2000

That’s it for today folks.


Session 2 Vision

Documents