Session 1 Flashcards
What are the key characteristics of strategic decisions?
- Important
- Involve a significant commitment of resources
- Not easily reversible
How can strategy be defined? (2 Definitions)
- The strategy statement articulates the company’s competitive game plan, which typically describes objectives, business scope, and competitive advantage.
- Recommended strategies tend to avoid precise specifications of what is to be done but articulate the primary basis for a firm’s competitive advantage and how it will compete.
What is NOT considered strategy?
- Mission statement
- Goals
- Tactics (Strategy is the overall plan for deploying resources; a tactic is a scheme for a specific maneuver)
- Key performance indicators (KPIs)
- Operational effectiveness
- Best practices
- Brands, slogans, taglines
What is “Strategy as Position,” and what does it involve?
Strategy as Position (Competing in the Present)
Where are we competing?
- Product market scope
- Geographical scope
- Vertical scope
How are we competing?
- What is the basis of our competitive advantage?
What is “Strategy as Direction,” and what does it involve?
Strategy as Direction (Preparing for the Future)
What do we want to become?
- Vision statement
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
What is the ultimate goal of corporate and business strategy?
- The ultimate goal is ensuring that returns exceed the cost of capital, meaning the business is creating value.
- This can be measured as the Rate of Profit Above the Cost of Capital => how do we make money
What is Corporate Strategy, and what does it involve?
Answers the question: “Which businesses should we be in?”
=> Determines the overall profit potential of an industry.
Some industries are inherently more profitable due to:
- Demand
- Barriers to entry
- Regulations
- Competitive intensity
What is Business Strategy, and what does it involve?
Answers the question: “How should we compete?”
=> Even in a profitable industry, firms must differentiate themselves to capture value.
Competitive advantage comes from:
- Cost leadership (being the cheapest)
- Differentiation (unique products)
- Focus (niche markets)
Why do we need strategy? (Three key roles)
- Strategy as Decision Support: Guides structured, consistent, and long-term decision-making.
- Strategy as Coordination & Communication: Aligns the organization, fostering unity and efficiency.
- Strategy as Target: Sets ambitious goals to drive performance and competitiveness.
What is Strategy as Design?
- Based on rational planning and deliberate choice.
- Firms set clear objectives and formulate strategies to achieve them.
- Leads to an intended strategy—what the company plans to execute.
What is Strategy as Process?
- Instead of a rigid plan, strategy evolves through continuous adaptation.
- Many decision-makers across different levels respond to internal and external forces.
- Emergent strategy arises when firms react to changes, even if they weren’t originally planned.
What is Realized Strategy, and why is it important?
- The final realized strategy is a mix of the intended strategy and the emergent strategy.
- Some planned strategies fail or change, while new strategies emerge based on real-world conditions.
- Firms need a balance between deliberate planning (intended strategy) and flexibility to adjust (emergent strategy).
What are Mintzberg’s three critiques of formal strategic planning?
- Fallacy of Prediction – The future is unknown.
- Fallacy of Detachment – It is impossible to separate strategy formulation from implementation.
- Fallacy of Formalization – Overly rigid planning inhibits flexibility, spontaneity, intuition, and learning.
What is a goal, and what is its purpose in an organization?
A goal is a desired outcome that an organization aims to achieve over a specific period.
Purpose of goals:
- Direction – Provides a roadmap for the organization’s future.
- Coordination – Aligns efforts across departments and teams.
- Motivation – Inspires employees by setting clear targets.
What are the different types of organizational goals?
- Strategic Goals – Long-term objectives aligning with mission and vision.
- Tactical Goals – Mid-term goals supporting strategic objectives.
- Operational Goals – Short-term targets for daily operations.
Where do goals come from? (Six steps in goal setting)
- Analyze the Environment (Internal/External) – SWOT analysis to assess strengths, weaknesses, opportunities, and threats.
- Mission/Vision – Define core purpose (mission) and long-term aspirations (vision).
- Strategy Formulation – Set strategic plans (corporate and business strategy).
- Goal Formulation – Break strategy into specific, measurable objectives (SMART goals).
- Implementation – Translate goals into actionable initiatives at different levels.
- Measurement – Define key performance indicators (KPIs) to track progress.
What are SMART goals?
- Specific – Clearly defined and unambiguous.
- Measurable – Quantifiable to track progress.
- Achievable – Realistic given the organization’s resources.
- Relevant – Aligned with the organization’s mission and market conditions.
- Time-Bound – Set within a specific timeframe.
What are the five pitfalls of goal setting?
- Ambiguity – Poorly defined goals cause confusion, misalignment, and lack of direction.
- Resource Constraints – Limited financial, human, or operational resources prevent full execution.
- Resistance – Organizational inertia and employee pushback slow or block new goals.
- Conflicting Goals – Different departments or stakeholders may have competing objectives.
- Dynamism – Market, technology, or external changes can make goals obsolete.
What is the purpose of a business?
- Every business has a unique purpose, often reflecting the founder’s motives.
- Common to all businesses: The need to create value.
- Value = The monetary worth of a product.
The two key purposes of business:
- Create value for customers.
- Capture part of that value as profit to ensure the firm’s survival.
What are the two key views of value creation?
Profit Calculation (Firm Perspective)
- Profit = Revenue - Cost
- Businesses generate profit by charging customers a price higher than production costs.
Total Value Created (Economic Perspective)
- Value created = Consumer surplus + Producer surplus
- Consumer surplus: The difference between what consumers are willing to pay and what they actually pay.
- Producer surplus: The portion of revenue that exceeds production costs, including profit and payments to input providers (e.g., wages, rent, raw materials).
What are the two main approaches to defining a firm’s purpose?
- The Shareholder Approach – The firm exists to maximize the wealth of its owners.
- The Stakeholder Approach – The firm is a coalition of interest groups and must create value for all stakeholders.
What is the primary assumption in strategy analysis regarding a firm’s goal?
The primary goal of the firm is maximizing profit over its lifetime.
Rationale:
- Competition – A firm must earn a return on capital that exceeds its cost of capital to survive.
- Acquisition – Firms that do not maximize profits are vulnerable to acquisition.
- Convergence of Interests – Long-term profitability requires satisfied customers, motivated employees, and good relations with governments and communities.
What is the primary concern of strategy analysis?
To identify and access the sources of profit available to the firm.
What does the Case of Boeings decline show?
- Boeings Case shows that long-term profitability is not achieved by focusing purely on profit but by prioritizing the factors that create profit
- This case illustrates how over-prioritizing shareholder value without considering long-term business fundamentals can undermine a company’s competitive advantage.
What are the benefits of Corporate Values and Corporate Social Responsibility (CSR)?
Corporate Values and CSR contribute to superior organizational performance by:
- Motivating Employees: Increases engagement and productivity by aligning employees with the company’s values and purpose.
- Reinforcing Strategic Direction: Ensures business decisions align with long-term strategic goals.
- Enhancing Organizational Unity: Creates a cohesive work environment, improving collaboration and reducing internal conflicts.
Companies that integrate ethical principles and CSR initiatives into their business models achieve long-term sustainability and reputation benefits.
Why is enterprise value maximation a clearer goal than profit maximation?
Profit Maximization is hard to define due to varying profit measures, timeframes, and accounting vs. economic perspectives.
Enterprise Value is based on the Net Present Value (NPV) of free cash flows:
- It considers the time value of money
- It ensures firms maximize long-term value, not just short-term profits
What are the three steps of the DCF Approach to maximizing enterprise value?
The Discounted Cash Flow (DCF) approach helps firms select the best strategy for enterprise value maximization:
- Identify strategy alternatives
- Estimate cash flows and the cost of capital
- Select the strategy with the highest NPV
What are some practical challenges in maximizing enterprise value?
- Forecasting cash flows beyond 2-3 years is difficult
- Short-term decision-making (short-termism) can occur due to uncertain long-term predictions
Since long-term forecasting is difficult, what are some simpler guidelines firms can follow?
- For existing assets: Maximize rate of return
- For new investments: Ensure return > cost of capital
⇒ Additionally, qualitative analysis should be used for long-term evaluation.
What is Enterprise Value, and why is it useful?
EnterpriseValue = MarketCapitalizationofEquity + MarketValueofDebt
- Represents the total value of a firm, including both equity (ownership) and debt (borrowed capital).
- Useful for evaluating the entire company’s worth, not just what belongs to shareholders.
Why is enterprise value maximization preferred over shareholder value maximization?
Why Prefer Enterprise Value Maximization?
- Debt and equity are often intertwined, making valuation complex.
- Shareholder value maximization can encourage short-term focus and earnings manipulation.
