Strategic Management
Master 2018 – 2019, KU Leuven
Prof. Bruno Cassiman
1
,1. WHAT IS STRATEGY?......................................................................................................................3
Strategy..........................................................................................................................................3
2. VALUE CREATION AND VALUE CAPTURE........................................................................................5
Formulas.........................................................................................................................................5
Key questions for strategy..............................................................................................................7
Return on invested capital..............................................................................................................7
Economic value...............................................................................................................................8
Performance differences.................................................................................................................8
Different average returns across industries....................................................................................8
3. THE BUILDING BLOCKS...................................................................................................................9
Strategy building blocks.................................................................................................................9
Enterprise value..............................................................................................................................9
Industry specific............................................................................................................................10
Firm specific..................................................................................................................................11
Steps for developing a sustainable competitive advantage..........................................................12
Scope............................................................................................................................................12
Activities.......................................................................................................................................12
Resources & capabilities...............................................................................................................14
Business model.............................................................................................................................16
Sustainability of competitive advantage......................................................................................16
Testing the strategy......................................................................................................................17
4. CORPORATE STRATEGY................................................................................................................19
Corporate strategy.......................................................................................................................19
Steps to build a corporate strategy..............................................................................................19
Portfolio management.................................................................................................................19
Company structure.......................................................................................................................22
5. STRATEGY PROCESS.....................................................................................................................23
Execution challenges....................................................................................................................23
6. EXTRA..........................................................................................................................................23
CAGE framework..........................................................................................................................23
2
, 1. What is strategy?
Strategy
Characteristics
Strategy = smallest set of choices to optimally guide other choices
About choice
o Different companies take different actions in similar situations
o Due to different backgrounds etc.
o Porter
Strategy is a choice
Trade-off between WTP (operational effectiveness) & low cost position (strategic
positioning)
Theory:
About the future
o With clear objectives
o E.g. maximize enterprise value, maximize number of people reached, …
Coordinating framework
o Aligned with competitive environment, objectives & firm-specific factors
o Consistency
All activities are in line with the strategic position
Integrated
o Financial planning with functional strategies (marketing, operational, financial, …) and
with day-to-day operations
Long-run
Types of strategy
Corporate strategy
o Does it make sense to have these different departments
o About where to compete and where not
Competitive strategy
= Business strategy
o How to compete & be successful in the business
Functional strategy
o How can function contribute to creating value
o Marketing strategy, operational strategy, financial strategy, … should all be aligned
Strategic framework: dimensions
Vision
Values
Strategy
Targets
3
, Stages of a strategy
Strategic analysis
Strategy formulation
Strategy approval
o By board of directors
Strategy implementation
Strategic control
Renewal of strategy
4
, 2. Value creation and value capture
Formulas
Value created
¿ WTP−costs
Value captured by the client
¿ WTP−purchase price
Value captured by the firm
¿ purchase price−costs
Added value of a player (p1)
¿ max created value with all players−max created value without p 1
Net present value (NPV)
¿ valueof the product− purchase price
¿ production volume value+ NPV of yearly savings∈ perpetuity− purchasing price
NPV of A in perpetuity
A
¿
discount rate
→ With discount rate given and in absolute numbers (e.g. 0.20)
Net operating profit after taxes (NOPAT)
Sales
- Costs (of the business)
= EBITDA
- Depreciation
= EBIT
- Taxes
= NOPAT
Gives the net profitability of a business
Interests should be included
The costs of the business are COGS & operating expenses
Net operating profit less adjusted taxes (NOPLAT)
NOPAT
- Tax advantage as a result of debt financing
= NOPLAT
Interests are deductible of taxes
This advantage must be eliminated from the results
o Makes firms with different financial structures comparable
o Tax advantages have nothing to do with how the business is operating
Return on sales (= margin)
NOPLAT
¿
sales
Capital turn (= resource utilization)
sales
¿
invested capital
Return on invested capital (ROIC)
¿ return on sales∗capital turns (= margin * resource utilization)
5
Master 2018 – 2019, KU Leuven
Prof. Bruno Cassiman
1
,1. WHAT IS STRATEGY?......................................................................................................................3
Strategy..........................................................................................................................................3
2. VALUE CREATION AND VALUE CAPTURE........................................................................................5
Formulas.........................................................................................................................................5
Key questions for strategy..............................................................................................................7
Return on invested capital..............................................................................................................7
Economic value...............................................................................................................................8
Performance differences.................................................................................................................8
Different average returns across industries....................................................................................8
3. THE BUILDING BLOCKS...................................................................................................................9
Strategy building blocks.................................................................................................................9
Enterprise value..............................................................................................................................9
Industry specific............................................................................................................................10
Firm specific..................................................................................................................................11
Steps for developing a sustainable competitive advantage..........................................................12
Scope............................................................................................................................................12
Activities.......................................................................................................................................12
Resources & capabilities...............................................................................................................14
Business model.............................................................................................................................16
Sustainability of competitive advantage......................................................................................16
Testing the strategy......................................................................................................................17
4. CORPORATE STRATEGY................................................................................................................19
Corporate strategy.......................................................................................................................19
Steps to build a corporate strategy..............................................................................................19
Portfolio management.................................................................................................................19
Company structure.......................................................................................................................22
5. STRATEGY PROCESS.....................................................................................................................23
Execution challenges....................................................................................................................23
6. EXTRA..........................................................................................................................................23
CAGE framework..........................................................................................................................23
2
, 1. What is strategy?
Strategy
Characteristics
Strategy = smallest set of choices to optimally guide other choices
About choice
o Different companies take different actions in similar situations
o Due to different backgrounds etc.
o Porter
Strategy is a choice
Trade-off between WTP (operational effectiveness) & low cost position (strategic
positioning)
Theory:
About the future
o With clear objectives
o E.g. maximize enterprise value, maximize number of people reached, …
Coordinating framework
o Aligned with competitive environment, objectives & firm-specific factors
o Consistency
All activities are in line with the strategic position
Integrated
o Financial planning with functional strategies (marketing, operational, financial, …) and
with day-to-day operations
Long-run
Types of strategy
Corporate strategy
o Does it make sense to have these different departments
o About where to compete and where not
Competitive strategy
= Business strategy
o How to compete & be successful in the business
Functional strategy
o How can function contribute to creating value
o Marketing strategy, operational strategy, financial strategy, … should all be aligned
Strategic framework: dimensions
Vision
Values
Strategy
Targets
3
, Stages of a strategy
Strategic analysis
Strategy formulation
Strategy approval
o By board of directors
Strategy implementation
Strategic control
Renewal of strategy
4
, 2. Value creation and value capture
Formulas
Value created
¿ WTP−costs
Value captured by the client
¿ WTP−purchase price
Value captured by the firm
¿ purchase price−costs
Added value of a player (p1)
¿ max created value with all players−max created value without p 1
Net present value (NPV)
¿ valueof the product− purchase price
¿ production volume value+ NPV of yearly savings∈ perpetuity− purchasing price
NPV of A in perpetuity
A
¿
discount rate
→ With discount rate given and in absolute numbers (e.g. 0.20)
Net operating profit after taxes (NOPAT)
Sales
- Costs (of the business)
= EBITDA
- Depreciation
= EBIT
- Taxes
= NOPAT
Gives the net profitability of a business
Interests should be included
The costs of the business are COGS & operating expenses
Net operating profit less adjusted taxes (NOPLAT)
NOPAT
- Tax advantage as a result of debt financing
= NOPLAT
Interests are deductible of taxes
This advantage must be eliminated from the results
o Makes firms with different financial structures comparable
o Tax advantages have nothing to do with how the business is operating
Return on sales (= margin)
NOPLAT
¿
sales
Capital turn (= resource utilization)
sales
¿
invested capital
Return on invested capital (ROIC)
¿ return on sales∗capital turns (= margin * resource utilization)
5