Chapter 1: What is Strategy and the Strategic Management Process?

Strategy
defined as theory about how to gain competitive advantages.
Good Strategy
strategy that actually generates such advantages.
Disney’s Theory
how to gain a competitive advantage in the apps industry is to leverage characters from its movie business.
Rovio’s Theory
to develop entirely new content for its apps
Strategic Management Process
sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy; that is, a strategy that generates competitive advantages.

1) mission 2) objectives 3) external/internal analysis 4) strategic choice 5) strategic implementation 6) competitive advantage

Mission
a firm’s long-term purpose. Define both what a firm aspires to be in the long run and what it wants to avoid in the meantime.
Mission Statements
the form that missions are often written down in
Visionary Firms
firms whose mission is central to all they do have enjoyed long periods of high performance.
Objectives
specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.
High-quality Objectives
tightly connected to elements of a firm’s mission and are relatively easy to measure and track over time.
Low-quality Objectives
either do not exist or are difficult to measure or difficult to track over time. Can’t be used by management to evaluate how well a mission is being realized.
External Analysis
A firm identifies the critical threats and opportunities in its competitive environment. It also examines how competition in this environment is likely to evolve and what implications that evolution has for the threats and opportunities a firm is facing.
Internal Analysis
helps a firm identify its organizational strengths and weaknesses. It also helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage and which are less likely to be sources of such advantages.
Business-level Strategies
what actions firms take to gain competitive advantages in a single market or industry.

Cost Leadership & Product Differentiation

Corporate-level Strategies
actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously.

Vertical Integration Strategies, Diversification Strategies, Strategic Alliance Strategies, Merger & Acquisition Strategies, & Global Strategies

Strategy implementation
occurs when a firm adopts organizational policies and practices are particularly important in implementing a strategy: a firm’s formal organizational structure, its formal and informal management control systems, and its employee compensation policies.
Competitive advantage
a firm has this when it is able to create more economic value than rival firms.
Economic Value
simply the difference between the perceived benefits gained by a customer that purchases a firm’s products or services and the full economic cost of these products or services.
Temporary Competitive Advantage
a competitive advantage that lasts for a very short period of time
Sustained Competitive Advantage
lasts much longer than temporary competitive advantage.
Competitive Parity
what firms experience when they create the same economic value as their rivals
Competitive Disadvantage
what firms have that generate less economic value than their rivals
Competitive Advantage
When a firm creates more economic value than its rivals
Temporary Competitive Advantages
Competitive advantages that last a short time
Sustained Competitive Advantages
Competitive advantages that last a long time
Temporary Competitive Disadvantages
Competitive disadvantages that last a short time
Sustained Competitive Disadvantages
Competitive disadvantages that last
Accounting Performance
Measure of its competitive advantage calculated by using information from a firm’s published profit and loss and balance sheet statements.
Accounting Ratios
simply numbers taken from a firm’s financial statements that are manipulated in ways that describe various aspects of a firm’s performance.
Business Model
That set of activities that a firm engages in to create and appropriate economic value
Business Model Canvas
key partners, cost structure, key activities, key resources, value propositions, revenue streams, customer relationship, channels, customer segments
Value Propositions
statements about how it will attempt to create value for its customers, customer problems it is trying to solve through its business operations, which customers it will focus on, and so forth.
ROA
profit after taxes
/
total assets

A measure of return on total investment in a firm. Larger is usually better.

ROE
profit after taxes
/
total stockholder’s equity

A measure of return on total equity investment in a firm. Larger is usually better.

Gross Profit Margin
sales-cost of goods sold
/
sales

A measure of sales available to cover operating expenses and still generate a profit. Larger is usually better.

Earnings Per Share (EPS)
profits (after taxes) – preferred stock dividends
/
number of shares of common stock outstanding

A measure of profit available to owners of common stock. Larger is usually better

Price Earnings Ratio (p/e)
current market price/share
/
after-tax earnings/share

A measure of anticipated firm performance — a high p/e ratio rands to indicate that the stock market anticipates strong future performance. Larger is usually better.

Cash Flow Per Share
after-tax profit + depreciation
/
number of common shares stock outstanding

A measure of funds available to fund activities above current level of costs. Larger is usually better.

Profitability Ratios
Ratios with some measure of profit in the numerator and some measure of firms size or assets in the denominator

1. ROA
2. ROE
3. Gross profit margin
4. EPS
5. p/e
6. Cash flow per share

Liquidity Ratios
ratios that focus on the ability of a firm to meet its short-term financial obligations

1. Current ratio
2. Quick ratio

Current Ratio
current assets
/
current liabilities

A measure of the ability of a firm to cover its current liabilities with assets that can be converted into cash in the short term. Recommended in the range of 2 to 3.

Quick Ratio
current assets – inventory
/
current liabilities

A measure of the ability of a firm to meet its short-term obligations without selling off its current inventory. A ratio of 1 is thought to be acceptable in many industries

Leverage Ratios
ratios that focus on the level of a firm’s financial flexibility, including its ability to obtain more debt

1. Debt to assets
2. Debt to equity
3. Times interest earned

Debt To Assets
total debt
/
total equity

A measure of the extent to which debt has financed a firm’s business activities. Generally recommended less than 1.

Debt To Equity
total debt
/
total equity

A measure of the use of debt versus equity to finance a firm’s business activities. Generally recommended less than 1.

Times Interest Earned
profit before interest and taxes
/
total interest charges

A measure of how much a firm’s profits can decline and still meet its interest obligations. Should be well above 1

Activity Ratios
ratios that focus on the level of activity in a firm’s business

1. Inventory Turnover
2. Accounts receivable turnover
3. average collection period

Inventory Turnover
sales
/
inventory

A measure of the speed with which a firm’s inventory is turning over

Accounts Receivable Turnover
annual credit sales
/
accounts receivable

A measure of the average time it takes a firm to collect on credit sales

Average Collection Period
accounts receivable
/
average daily sales

A measure of the time it takes a firm to receive payment after a sale has been made

Above Average Accounting Performance
when its performance is greater than the industry average. Such firms typically have competitive advantages, sustained or otherwise.
Average Accounting Performance
when its performance is equal to the industry average. These firms generally enjoy only competitive parity.
Below Average Accounting Performance
when its performance is less than the industry average. These firms generally experience competitive disadvantages
Cost Of Capital
the rate of return that a firm promises to pay its suppliers of capital to induce them to invest in the firm.
Economic Measures Of Competitive Advantage
compare a firm’s level of return to its cost of capital instead of to the average level of return in the industry.
Debt
capital from banks and bondholders
equity
capital from individuals and institutions that purchase a firm’s stock.
Cost Of Debt
equal to the interest that a firm must promise its equity holders
Cost Of Equity
equal to the rate of return a firm must promise its equity holders in order to induce these individuals and institutions to invest in a firm.
Weighted Average Cost Of Capital (WACC)
simply the percentage of a firm’s total capital, which is debt times the cost of equity.
Above Normal Economic Performance
will be able to use its access to cheap capital to grow and expand its business.
Normal Economic Performance
a firm that earns its cost of capital
Below Normal Economic Performance
implies that a firm’s debt and equity holders will be looking for alternative ways to invest their money, someplace where they can earn at least what they expect to earn; that is, normal economic performance.
Privately Held
if it has stock that is not traded on public stock markets or if it is a division of a larger company.
Emergent Strategies
Theories of how to gain competitive advantage in an industry that emerge over time or that have been radically reshape once they are initially implemented.
Unrealized Strategy
an intended strategy a firm does not actually implement.
Intended Strategy
a strategy a firm thought it was going to pursue.
Deliberate Strategy
an intended strategy a firm actually implements.
Realized Strategy
the strategy a firm is actually pursuing.