Management & Strategy 431 BUSINESS STRATEGY: GOALS & EXPECTIONS What I hope that you will be...

Management & Strategy 431BUSINESS STRATEGY:

GOALS & EXPECTIONS

What I hope that you will be well-equipped to do after this course:

1. Evaluate business decisions made by firms, based on how the

firms’ profitability will be affected by their decisions.

2. Propose valuable new strategic initiatives for firms, based on

their prospects for profitability.

3. Lead more effectively, by understanding and communicating

the underlying reasons why policies will be successful.

Course Overview

Part I: Strategy Assessment: Analytical Frameworks and Diagnostic Tools

• Industry Profitability – Boeing / Airbus

• Competitive Advantage – Enterprise Rent-A-Car

Part II: Strategy Formulation: Economic Fundamentals for Successful Initiatives

• Sustainability – Nucor

• Strategic Positioning for Competitive Advantage – Supermercados Disco

• Vertical Integration – Soft Drink (Coke/Pepsi) Bottling Industry

• Competition & Cooperation: Game Theory – Intel

• Economics & Strategy: An Introduction – Performance Indicator

• Firm Scope and Synergies – Disney

Strategy Introduction

• “Big Picture” Orientation:

• The Set of Objectives and Policies that Collectively Determine How a Firm Generates Wealth for its Owners




• Foundation of Economic Principles:

– Overarching Objective: Maximize Profits*




• Foundation of Economic Principles:

– Overarching Objective: Maximize Profits*

– Policies must be somehow tied to increasing average prices, decreasing average costs, or increasing quantity

– Unpacking Profits Revenues – Costs or

(Avg. Price – Avg. Cost) × Quantity

Supply — Firms’ Costs to Produce Goods and Services

• Total Costs = Fixed Costs + Variable Costs

• Average Costs = UnitsofNumber

Costs Total ; Marginal Costs = Q

TC

• Returns-to-Scale = Effect of Quantity on Average Costs

Supply — Firms’ Costs to Produce Goods and Services

• Total Costs = Fixed Costs + Variable Costs

• Average Costs = UnitsofNumber

Costs Total ; Marginal Costs = Q

TC

• Returns-to-Scale = Effect of Quantity on Average Costs

Implication for Strategy: Profit Evaluation is Complicated by Functional Relationship between Quantity and Costs:

Profits = (Avg. Price – Avg. Cost) × Quantity

Pricein Change %

Quantityin Change %

PPQQ

Demand — Consumer Preferences for Goods and Services

> 1: Demand is “Elastic”

< 1: Demand is “Inelastic”

Quantity Demanded

Pri

ce o

f Pro

du

ct

Pricein Change %

Quantityin Change %

PPQQ

Demand — Consumer Preferences for Goods and Services

> 1: Demand is “Elastic”

< 1: Demand is “Inelastic”

Quantity Demanded

Pri

ce o

f Pro

du

ct

Implication for Strategy: Profit Evaluation is Complicated by Functional Relationship between Quantity and Price:

Profits = (Avg. Price – Avg. Cost) × Quantity

“B”

“P”

“C”

(B - P) = “Consumer Surplus”

(P - C) = “Producer Surplus”or

“Value Captured”

(B -

C)

= “

Valu

e

Cre

ate

d”

Maximum Consumer is “Willing to Pay” for the Product

Price the Consumer Ultimately Paysfor the Product

Production CostSpent by the Firm

on the Product

“Q”Number of Consumers whoPurchase the Firm’s Product

Value Creation and Capture

1. “Operational Effectiveness” is necessary, but not sufficient:

“B”

Deliv

ere

d t

o

Consu

mers

Firm’s Production Cost “C”

HIGH LOW

HIGH

LOW

Best Practices • Delivering a given “B”at as Low a “C” as possible

or• Delivering as high a “B” as

possible for a given “C”

Inside Productivity FrontierPossible to Improve Operational

Effectiveness by Adopting Better Practices

Some Basic Intuitions for Effective Strategy

1. Be efficient – it is better to be operationally effective than not

“B”

Deliv

ere

d t

o

Consu

mers


HIGH LOW

HIGH

LOW




Inside Productivity FrontierPossible to Improve Operational

Effectiveness by Adopting Better Practices


1. Be efficient – it is better to be operationally effective than not

“B”

Deliv

ere

d t

o

Consu

mers


HIGH LOW

HIGH

LOW





2. Be unique – avoid combinations of B&C already chosen

“B”

Deliv

ere

d t

o

Consu

mers


HIGH LOW

HIGH

LOW





3. Stay unique – incorporating tradeoffs and complementarities

“B”

Deliv

ere

d t

o

Consu

mers


HIGH LOW

HIGH

LOW





3. Sustainability: Protection Against the Imitators that a Unique Proposition Will Inevitably Attract

Tradeoffs

Incompatibilities Make it Difficult for Established Firms to Imitate Strategies that are

Successful Elsewhere

ComplementaritiesMutually Reinforcing Elements

of Strategy thatPerpetuate Competitive Advantage

Modern business environment (employee turnover, consultants/benchmarking, IT, etc.) facilitates diffusion of profitable strategies.


Mini-Case: Building a Bail Bonds Empire


• Bail System: Individual arrested for crime puts down deposit in exchange for freedom prior to trial.

• Bail Bond Industry: Firms make deposit for accusedin exchange for 10% of bond amount.


• Bail System: Individual arrested for crime puts down deposit in exchange for freedom prior to trial.

• Bail Bond Industry: Firms make deposit for accusedin exchange for 10% of bond amount.

• Profits for Bail Bond Firm:

Revenues - Costs


H & H’s Profitable Operation Based on Expertisein Finding and Returning No-Shows Efficiently


IDEA: Enhance the profitability of the organizationby increasing the scale of the operation.



• Aggressively attract more clients upfront

• Expand geographically through acquisitions




• Aggressively attract more clients upfront

• Expand geographically through acquisitions

Question: Under what conditions will increasing the size of H & H lead to higher profits?



Revenues: (10% payment) * (# of clients) ↑

Costs: (Full Bond Amount) * (# of no shows you can’t find) +(costs associated with finding the no-shows)


Question: How is the REST of the Profit FunctionAffected by Additional Scale of Operation??





Revenue:





Revenue: Payment Plans for 10%

Revenues: (10% payment) ↓ * (# of clients) ↑





# of No-Shows:







Costs: (Full Bond Amount) * (# of no shows you can’t find) ↑ +(costs associated with finding the no-shows)


# of No-Shows: Have to Accept Riskier Clients



Finding Costs:








Finding Costs: Different Clients May Raise Costs


Costs: (Full Bond Amount) * (# of no shows you can’t find) +(costs associated with finding the no-shows) ↑



Lessons: Implications of Strategy on Entire Profit Function Must be Considered



Costs may go down with large quantities ifthere are compelling economies-of-scale.




Prices may fall to attract enough customersto achieve costs savings.




Prices may fall to attract enough customersto achieve costs savings.

Additional risk is likely involved with “clients”who weren’t previously served by H & H.

Scope of the Corporation: What Opportunities Should the Firm be Involved In?

Which inputs should a firm make itself and which should it purchase from outside vendors?

Should the firm market its own goods and servicesor rely and outside wholesalers and retailers?

What lines of business should a company be in?

Simple Rule: • Invest if BABA

• Divest if BABA

Extending the Boundaries of the Firm

Quest for “Synergies” in the combination: We will try to be veryprecise – a synergy is that factor(s) which causes profits to be

higher when activities are combined within the same organization.

Integration Mini Case

Auto-Insurance/Body Repair Shops:

• Independent body shops act as suppliers to auto insurers

• Customers who have accidents find body shops to repairdamage – naïve shoppers?

• Insurers complain that fraudulent, shoddy repairs costs $$$

Progressive’s Strategy: Would an integrated firm that insureddrivers and repaired cars be a more profitable alternative?

Auto-Insurance/Body Repair Shops:

• Independent body shops act as suppliers to auto insurers

• Customers who have accidents find body shops to repairdamage – naïve shoppers?

• Insurers complain that fraudulent, shoddy repairs costs $$$

(auto insurance + repair) vs. (auto insurance) + (repair)

Integration Mini Case

Management & Strategy 431 BUSINESS STRATEGY: GOALS & EXPECTIONS What I hope that you will be...

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