STRATEGIC MANAGEMENT Alex Miller THIRD EDITION © The McGraw-Hill Companies, Inc., 1998

The Content of Strategy Chapter One The Content of Strategy Slide 1-1 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998

The Architecture of Strategy FINANCIAL PERFORMANCE Economic Value Added Profitability Growth Financial Risks COMPETITIVE ADVANTAGE Differentiation Low Cost Quick Response STRUCTURAL POSITION Rivalry Entrants Substitutes PROCESS EXECUTION Product Development Demand Management Order Fulfillment Customers Suppliers ENTERPRISE SYNERGIES Core Competencies Market Power Shared Infrastructure Balanced Cash Flows Transnational Advantage ORGANIZATIONAL CAPACITY Leadership Learning Slide 1-2 Levers Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998

Managers Are Responsible to a Diverse Set of Stakeholders and Have Responsibilities to All of Them Stockholders Owners/ Local Community Associations Trade Suppliers Managers Customers The Public at Large Governments Employees Slide 1-3 Exh. 1.1 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998

A Firm’s Financial Performance Depends on Its Competitiveness Differentiation Economic Value Added Market Value Added Competitive Advantage Cost Leadership Quick Response Value Captured for Investors Value Created for Customers Slide 1-4 Exh. 1.4 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998

Two Hypothetical Examples of EVA Analysis Weighted Average Cost of Capital Value Created (Destroyed) After-Tax Operating Profit minus = 67% equity Weighted average cost @ 12% $175 million Operating profit 10% Firm A 33% debt @ 6% Firm A’s Created Value - $75 million x$800 million Total capital Taxes $100 million $80 million $20 million minus = 25% equity Weighted average cost @ 20% $200 million Operating profit 11% Firm B 75% debt @ 8% Firm B’s Destroyed Value - $80 million x$2000 million Total capital Taxes $120 million $220 million ($100) million minus = Slide 1-5 Exh. 1.7 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998