What is strategy Creating value for shareholders

What is strategy? : Creating value for shareholders and stakeholders Paul C. Godfrey Mark H. Hansen Marriott School of Management Brigham Young University

Walt Disney Company 1984 Profits: $242 Million Theme Park Operations: 77 percent of profits Consumer Products: 22 percent of profits Filmed Entertainment: 1 percent of profits

Walt Disney Company Hired Michael Eisner - 1984 1. Increased admission prices at theme parks 1984 - $186 m 1989 - $787 m 2. Focused on movie studios (character development) 1984 - $2. 42 m 1994 - $845 m 3. Diversified into television (ABC), hotels, retail stores, sport team, cruise line, publishing, consumer products, licensing, etc. (Huey & Mc. Gowan, 1995) Market Cap: 1984 = $2 billion 1994 = $28 billion

What is Strategy? • Strategy is the search for a sustainable competitive advantage over rivals – the search for economic rents • Competitive advantage as shareholder value: – “above-average performance in the long run” (Porter, 1985) – “sustained superior financial performance” (Barney, 1986) – “persistent high relative profitability” (Thomas, 1986) • Competitive advantage as stakeholder value: – “a value-creating strategy not simultaneously being implemented by any current or potential competitors” (Barney, 1991) – the ability of a an enterprise to “create more economic value than the marginal (breakeven) competitor in its product market” (Peteraf & Barney, 2003)

Competitive Advantage The Ability to Create More Economic Value Than Competitors • there must be something different about a firm’s offering vis-à-vis competitors’ offerings • if all firms’ strategies were the same, no firm would have a competitive advantage • competitive advantage is the result of doing something different and/or better than competitors

What is Shareholder Value? • Shareholder value is the share price of the firm • The primary responsibility of management – Milton Friedman (1970): The social responsibility of business is to make a profit • Share price allows comparisons between companies with and across industries/sectors • Share price is based on the future expected returns (dividends and capital appreciation) of the firm

What is stakeholder value? • Stakeholder value is how much a product, service, employment or other relationship is worth relative to other things stakeholders could do • Value creation (broadly defined) is the strategic objective of the firm – Competitive Advantage is the ability of a an enterprise to “create more economic value than the marginal (breakeven) competitor in its product market” (Peteraf & Barney, 2003) • Stakeholder value captures the value of the firm relative to its nearest competitors (opportunity costs) • Stakeholder value and shareholder value are related, but not the same

Economic Value: The traditional view Economic Value Consumer Surplus Price Producer Surplus (profit) Economic Cost of Inputs

Economic Value: An expanded view Economic Value Consumer Surplus Price Producer Surplus (profit) (Marginal Customer Reservation Price) Economic Cost Supplier Surplus Employee Surplus Other Surpluses Sum of Reservation Prices Minimum Cost of Input Stakeholders’ Participation This view suggested by Jones and Wicks (2008)

Two models of shareholder value Economic Value Consumer Surplus Producer Surplus (profit) Supplier Surplus Employee Surplus Other Surpluses Sum of Reservation Prices Re-slice the pie The pie Grow the pie

Re-slice the pie Grow the pie • Economic value is fixed • Economic value is variable • Competition • Co-opetition • Win-lose relationships • Win-win relationships • Spillovers not possible • Spillovers critical • Key objective: Identify relevant reservation prices • Key objective: creating incentives to innovate • Shareholder value at the expense of stakeholder value • Shareholder value along with stakeholder value • Examples: Auto industry, ca 1970; Airline industry, while regulated • Examples: Auto industry, SUV & cross-over offerings; Airline industry, Southwest Airlines, industry after deregulation

Business and economic value • Marketing: – From creating customer demand to uncovering value opportunities • Human Resources: – From compliance and gate-keeping to creating specific assets and knowledge spillovers • Supply Chain Management: – From weeding out inefficiency to creating alliances and value spillovers • Culture: – From “touchy-feelies” to concrete expectations/ norms for excellence

What is Strategy? • Strategy has to do with choosing among alternative paths for translating goals into action in ways that create competitive advantage • Strategy is long term • Strategy is the heart of economic value • Strategy involves attitudes, activities, and assets • Strategy differs from operational effectiveness • Operational effectiveness can not grow the pie • Strategy is about NOT DOING certain things • Strategy is a “map” of where you want to go, what you have, and what you need to get there

The Strategy Puzzle External Fit Scope Added Value Internal Fit

Added Value • How does the business add value to its customers? • How does the business add value to other stakeholders? • Does the value added justify the cost of the product? • What benefits accrue from doing business with the firm (input or output)? Added Value

External Fit • What is the structure of the industry? • How is the industry related to the general economy? Other industries? • What competitive dynamics drive the industry? • What strategic positions are available? Which are attainable? External Fit

Scope • What businesses is the corporation in? • What businesses could the corporation enter? • Which new businesses would add value to existing customers? • Can new products or services give the firm access to new customers? Scope

Internal Fit • How does the firm structure its operations? • How is authority spread in the organization? • What is the firm’s culture? What are the shared values? • What level of alignment exists between the internal elements of the firm? Internal Fit

Strategic Position External Fit Added Value • How does the firm position itself in the industry to maximize its economic value? • 08 January— 22 February • Industries: Soft Drinks, Construction Materials, Motorcycles, Airlines

Strategic Leverage • How can the firm parlay its existing resources in to new value-added businesses? • 24 February— 26 March • Companies: Intel, Ciba. Geigy, Arauco, Newell, OSI, Google Scope Added Value

Strategic Alignment • How should the firm structure its internal operations in order to maximize its value added? Added Value • MBA 682 • Strategy Implementation & General Management Internal Fit

Managing Me, Inc. • The most important firm you will ever direct is you – Professionally – Personally – Marriage & Family • What role will strategy play for you?