FoBS: Week 1: INTRODUCTION TO STRATEGIC ANALYSIS & UNDERSTANDING COMPETITIVE MARKETS

Question 1

FoBS: What is Business Strategy?

Answer 1

Strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and noneconomic contribution it intends to make to its shareholders, employees, customers and communities.

Question 2

FoBS: what are the three elements of the simple business strategy schema?

Answer 2

Strategic Mission > Strategic Plan > Strategic Actions

Question 3

FoBS: What is a firms ‘Strategic Mission’?

Answer 3

A firm’s values and purpose (what is it trying to achieve) and the scope of its operations in product and market terms (e.g. what geography? Are we a global company?…)

Question 4

FoBS: What is a firms ‘Strategic Plan’?

Answer 4

How a firm positions itself in the market and develops and leverages internal resources and capabilities to accomplish its strategic mission.

Question 5

FoBS: Whate are a firms ‘Strategic Actions’?

Answer 5

Individual actions taken to execute the strategic plan in pursuit of the strategic mission. E.g. a new product development strategy, alliance with another company,

Question 6

FoBS: Given a business strategy, how do we get to strategic analysis?

Answer 6

Strategic analysts analyze and assess the strategy. The question for strategists is ‘how do we assess a strategy, how do we assess and analyze wether one is a good strategy?

Question 7

FoBS: What is strategic analysis?

Answer 7

The assessment of an organisation’s current competitive position and the identification of future valuable competitive positions and how to achieve them. There are a number of things we think about when doing strategic analysis:

• From a generalist’s perspective (integrative=> across the different business functions like marketing, hr,… , foundational)
• Using strategic reasoning (rivalry, dynamics, complexity)
• Grounded in analytics and data
• applying appropriate tools and frameworks.

Question 8

FoBS: What are the three sets of questions a strategists thinks about when analyzing a company? What do they hope to achieve?

Answer 8

Questions around:
-Values (What is the mission, what is the scope, what do they value)
-Opportunities (What does the market demand, Who else, if anyone, offers this value proposition?
-Capabilities (What are their strengths? Where might they have a competitive advantage?)
By answering these questions strategists hope to identify valuable competitive positions. And answer the critical question: How do they create and sustain value?

Question 9

FoBS: How can we answer/research questions about the values of a business?

Answer 9

Read the mission statement. E.G. Google’s mission is to organize the world’s information and make it universally accessible and useful.

Question 10

FoBS: What is a SWOT analysis?

Answer 10

Fill in: Strengths, Weaknesses, Opportunities, Threats of a firm.
Highlights the internal firm capabilities (strengths, weaknesses) and the external competitive environment (Opportunities and Threats).

Question 11

FoBS: What is a competitor analysis?

Answer 11

Simply going out and collecting competitive intelligence on your competitors and deriving the following:
-Performance metrics
-Capabilities
-Objectives/values
-Strategy
An important part is identifying relevant competitors (e.g. porsche should not analyse KIA…)

Question 12

FoBS: What is an environmental analysis?

Answer 12

THink through the following topics:

• Demographic trends
• Socio-cultural influences (e.g. smoking is frowned upon)
• Technological developments
• Macroeconomic Impact (is this business susceptible to the business cycle?)
• Political-legal pressures
• Global Trade issues

Question 13

FoBS: What is the ‘Strategists Challenge’?

Answer 13

The strategist’s challenge is to balance values, opportunities, and capabilities to identify desirable competitive positions that create and sustain value.

Question 14

FoBS: Give three basic tools of strategic analysis.

Answer 14

SWOT analysis, Competitor analysis, Environmental analysis.

Question 15

FoBS: What is the fundamental principle of business strategy? What is the strategists task?

Answer 15

“If everyone can do it, it’s hard to create and capture value from it”
Or
“In a perfectly competitive market, no firm realizes economic profits (rents)”

The existence of economic profits suggests some type of market inefficiency.

The strategists task is to identify ways in which firms may capitalize on these market imperfections.

Question 16

FoBS: What are Economic Profits (rents)

Answer 16

Returns in excess of what an investor expects to earn from investments of similar risk (i.e. in excess of the opportunity cost of capital)

Question 17

FoBS: What is the counterpart of economic profits?

Answer 17

Accounting profits

Question 18

FoBS: How can we measure Economic profit?

Answer 18

1) Tobin’s Q: aka the market to book ratio. What investors think the firm is worth versus the book value of the assets it owns. Directly measures ‘rents’ above those to physical inputs. Difficult to calculate because it requires knowledge of assets replacement value….
2) Discounted Cash Flow (DCF): Cash flows are those dollars that flow to the bottom line after profits and future investments. We are interested in the stream of those cash flows moving forward into the future. What we do is we discount these future cash flows. The idea of discounting is based on the idea that money today is worth more then money in the future, so we value the cash flows that you generate today more then those into the future. By this discounting we capture the notion of opportunity costs (If i had this money today, could i invest it in a better vehicle?). A positive net present value indicates rents over and above returns to all inputs.

Question 19

FoBS: discuss Time value of money

Answer 19

The time value of money is the principle that the purchasing power of money can vary over time; money today might have a different purchasing power than money a decade later. The value of money at a future point in time might be calculated by accounting for interest earned or inflation accrued. The time value of money is the central concept in finance theory. However, the explanation of the concept typically looks at the impact of interest, and for simplicity, assumes that inflation is neutral.

Question 20

FoBS: discuss Present Value of money

Answer 20

E.g. if you have 100$ today, it will be worth 5% (interest) more in a year.
If you are offered 110$ a year from now, you can calculate the present value (today). The discount rate is 5% (see interest) so the present value is 110/1,05 = 104,76$

Question 21

FoBS: discuss Discounted Cash Flow

Answer 21

In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values (PVs)—the sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or price of the cash flows in question

Question 22

FoBS: Discuss the discount rate

Answer 22

The discount rate used is generally the appropriate weighted average cost of capital (WACC), that reflects the risk of the cashflows. The discount rate reflects two things:

Time value of money (risk-free rate) – according to the theory of time preference, investors would rather have cash immediately than having to wait and must therefore be compensated by paying for the delay
Risk premium – reflects the extra return investors demand because they want to be compensated for the risk that the cash flow might not materialize after all

Question 23

FoBS: Why does the demand curve go down?

Answer 23

Because when we charge more for a product, less people will demand it.

Question 24

FoBS: Why does the supply curve go up?

Answer 24

Because as you raise the price, you need to provide more, sell more, to justify selling that higher price.

Question 25

FoBS: Where should a (price taker) firm set its price to maximize profits? What happens in a perfectly competitive market?

Answer 25

You you set the price where price equals marginal costs.

In a perfectly competitive market, the profits are competed away. There are no more economic rents. However it is still possible to have accounting profits, because no new firms will enter the market (and drive down prices to zero accounting profits) because it isn’t worth their effort.

Question 26

FoBS: Are markets perfectly competitive?

Answer 26

No.

• Average industry returns vary even after controlling for risk (some industries are more profitable then others).
• Returns among companies within industries vary even more.
• Returns for individual companies vary over time.

Question 27

FoBS: Why do analysts have to identify the sources behind economic rents?

Answer 27

When you’re presented with a project that appears to have a positive NPV net present value, don’t just accept the calculations at face value. They may reflect simple estimation errors in forecasting future cash flows. Probe behind cash flow estimates and try to identify the source of economic rents. Positive NPV for a product is believable only if you believe that company has some special advantage.

Question 28

FoBS: What are the three different types of economic rents?

Answer 28

• Monopoly rents (industrial organization view)
• Ricardian Rents (resource based view)
• Schumpetarian Rents (Dynamic capabilities view)

Question 29

FoBS: Describe Monopoly Rents

Answer 29

Industrial organization view. Monopoly rents exist when there are some barriers to entry. In essence, that industry structure matters. e.g. you need a license to sell the product.

Question 30

FoBS: Describe Ricardian Rents

Answer 30

Resource Based View. Revolves around the notion that there are barriers to imitation. e.g. patents.
Firm capabilities and structure matters. e.g. you may have lower costs to produce a product then your competitor (competitive advantage).

Question 31

FoBS: Discuss Schumpeterian Rents

Answer 31

Dynamic capabilities view. Revolves around the idea that markets are dynamic, that innovation matters. Technologies evolve and are replaced over time. E.g. a first mover advantage with a new technology, you achieve economic rents for a while until the competition catches up. (e.g. apple)