Business Strategy

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Business Strategy
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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
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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

• Diversified into television (ABC), hotels, retail
  stores,
• sport team, cruise line, publishing, consumer
• products, licensing, etc. (Huey McGowan,
  1995)

Market Cap 1984 2 billion 1994 28
billion
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What is Strategy?

• A Game Plan
• A firms theory about how to gain Competitive
  Advantage

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Definition of Strategy

• Strategy is the direction and scope of an
  organisation over the long term, which achieves
  advantage in a changing environment through its
  configuration of resources and competences with
  the aim of fulfilling stakeholder expectations.
• (Johnson et al, 2005)

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The Strategic Management Process
External Analysis
Strategic Choice
Strategy Implementation
Competitive Advantage
Mission
Objectives
Internal Analysis
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Competitive Advantage
The Ability to Create More Economic Value Than
Competitors
there must be something different about a
firms 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
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Competitive Advantage
Competitive Advantage
Economic Returns
Advantage
Above Normal
exceeding expectations
Parity
Normal
meeting expectations
Disadvantage
Below Normal
failing expectations
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Competitive Advantage
Measuring Competitive Advantage
Two Classes of Measures
1) Accounting Measures
ROA, ROS, ROE, etc. that exceed
industry averages
2) Economic Measures
earning a return in excess of the cost of
capital
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Accounting Ratios

• Profitability
• Liquidity
• Performance
• Gearing

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Ratios

• Advantages
• Limitations

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Economic Measures

• The Cost of Capital
• rate of return that companies pay to suppliers of
  capital inn order to induce them to invest
• Debt and Equity
• WACC

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Cost of Equity

• CAPM (Capital Asset Pricing Model)
• Exp. (Rf) beta(Rerp)
• Rf risk free- eg Gov bond
• Rerp Risk premium(Exp-Rf)
• Beta risk of investment compared to overall
  market risk

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Cost of Equity

• Example
• McDonalds-
• Rerp 3
• Beta .97
• Rf 5
• Exp 5 .97(3) 7.91

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Why Study Strategy?

• Organisations that engage in strategic management
  generally perform better than those that dont
  (Bain Co.)
• Clearer sense of strategic vision for the firm
• Sharper focus on what is strategically important
• Improved understanding of a rapidly changing
  environment (Wheelen Hunger (2004)