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

1984Profits: $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 Increased admission prices at theme parks $186 m $787 m 2. Focused on movie studios (character development) $2.42 m $845 m 3.Diversified into television (ABC), hotels, retail stores, sport team, cruise line, publishing, consumer products, licensing, etc. (Huey & McGowan, 1995) Walt Disney Company 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 Consumer Surplus Producer Surplus (profit) Cost of Inputs Economic Value Price Economic Cost

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

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

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

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 Added Value ScopeInternal 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 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 External Fit Added Value

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 Added Value Scope

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