Chapter 2 Understanding Strategies

Chapter Objectives To study and understand the goals in any organization To understand strategies at two levels- The corporate level and The business unit level

GOALS - Profitability Profitability- most important goal, broadest is a product of two ratios: 1. profit margin percentage X 2. investment turnover i.e. (revenues-expenses/revenues) X (revenues/investment) Result is Return on Investment (ROI)= ((revenue-expenses)/investment)

Q) Profitability refers to profits in long run What does profitability depict? Does the company’s goal, change its interpretation of profitability equation?

GOALS - Maximizing Shareholder Value Q) Maximizing Shareholder Value means what? Is earning maximum and increasing profitability same? Maximizing shareholder value may be a major goal but not the only goal

GOALS- Risk Risk also means POSSIBILITIES The risk-taking varies from company to company, among personalities and managers Some companies make it very clear that the primary responsibility is to preserve company’s assets

GOALS -Multiple Stakeholder Approach Organizations deal in – capital market, product market, factor market The firm has responsibilities to all these multiple stakeholders

The Concept of Strategy Strategies describe the general direction in which an organization plans to move to attain its goals Core Competencies Industry Opportunities Strategies

Corporate Level Strategy Two Levels Of Strategy Corporate Level Business Unit Level Corporate Level Strategy Is about being in the right mix of businesses Concerns of questions like where to compete than how

Corporate-level Strategies McDonald’s High P&G Degree of Relatedness Textron Low High Extent of Diversification

Contd… Single Industry Firms Unrelated Diversified Firms

Business Unit Strategies Depends on two interrelated aspects: Its mission Its competitive advantage Business Unit Mission The BCG Model build, hold, harvest, divest Business Unit Competitive Advantage Porter’s Five Force Model Value Chain for Business