1. Basic Questions

2. Answers to Basic Questions Will Provide Foundation for Remainder of Course
How Do Companies Create Shareholder Value?
How Do Companies Make Money (Profits)?
What Are the Components of a Strategy?
How Do We Craft a Strategy?

3. Shareholder Value is Created by Earning Returns in Excess of Your Cost of Capital
Time
WACC
CAP
Competitive Forces Drive Returns
Down to the Cost of Capital
Shareholder
Value

4. Competitive Forces Drive Down Returns
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980 10 20 30 40
ROI (%)
Average Rate of Return for Top and Bottom 50% of Companies in PIMS Database
Source: “Commitment: The Dynamic of Strategy” by Pankaj Ghemawat

5. Higher Returns and an Extended CAP Add Value
Time
WACC
CAP
Incremental Value
Incremental Value
Shareholder
Value

6. Current Valuations Imply Long Period of High Returns
Source: MarketGuide, 12Feb00
31x Revenue; ½ Value
CAP
Returns
WACC
Shareholder
Value

7. Economic Value is Strongly Correlated to Shareholder Value
Economic Profit =
Operating Profit - Capital Charge
Single-Period Measure (Historical)
NOPLAT - (Capital Invested x WACC) =
Five Ways to Increase Economic Profit (Value Drivers)
Increase Returns on Existing Capital
Increase Revenues
Reduce Operating Costs
Increase Returns on New Capital
Reduce Existing Capital
Reduce Cost of Capital

8. Dell’s Business Model Leverages Each Value Driver
Increase Revenues
Built-to-Order Equipment Increases Demand
Reduce Operating Costs
Mail Order and Web-Based Channels Reduce Costs
Increase Returns on New Capital
Economies of Scale in Production Reduce Unit Costs
Reduce Existing Capital
Financing Model Reduces Working Capital
Reduce Cost of Capital
Timing of Cash Flows Reduce Default Risk

9. The Strength of Dell’s Business Model is Evident
Half the Revenue
Twice the Value
Source: Marketguide.com, 16Feb00

10. High-Value Companies Design Their Businesses to Focus on Profit
The Four Dimensions of Business Design
Customer Selection
Which customers derive real value from our product & service offerings?
Which customers will allow us to make a profit?
Which customers do we not want to serve?
Value Capture
How do we capture, as profit, a portion of the value we create for customers?
What is our profit model (direct & indirect)?
Strategic Control
How do we protect our profit stream?
Strength of Strategic Control is a Critical Design Element
Scope
What products and services do we sell?
Which business activities do we perform?
Adapted from The Profit Zone, by Adrian Slywotzky

11. There are Many Sources of Profit...
Return: High
CAP: Short
Profit Margin
Time
New Product
Profit Margin
Complementary
Product
Base
Installed
Buyers
Business
Sellers
Switchboard
Just as product designs become technologically obsolete, business designs become economically obsolete.
To maintain its profitability, a company must continually change its business design.
Profit/Transaction
Transaction Size
Transaction Scale
Base
Business
Other Components
Market Leverage
Profit
Time
Customer-Focused Solutions
Return: High
CAP: High
de Facto Standard
Operating Profit
Absolute Market Share
…But Each Has a Different Return/CAP Characteristic
Adapted from The Profit Zone, by Adrian Slywotzky

12. Traditional Definition of Strategy is Too Limited
Five Ps of Strategy
Strategy is a Plan (Intended)
A Course of Action to Achieve a Desired Outcome
Strategy is a Pattern (Realized)
Consistency in Behavior Over Time
Perfect realization implies brilliant foresight, not to mention an unwillingness to adapt to unexpected events. No realization suggests a certain mindlessness. Real world strategies inevitably involve some thinking ahead and some adaptation en route.
Traditional Definition of Strategy
Top Management’s Plans to Attain Outcomes Consistent with the Organization’s Mission and Goals.
Strategy is a Position (Market Focus)
Conscious Selection of Markets and Activities
Strategy is a Perspective (Internal Focus)
Organization’s Fundamental Way of Doing Things
As position, strategy looks down, to the X that marks the spot where the product meets the customer. It also looks out, to the marketplace. As perspective, strategy looks in, inside the organization, but it also looks up—to the grand vision of the enterprise.
Strategy is a Ploy (Competitive Focus)
Specific Maneuver Intended to Outwit a Competitor
Adapted from Strategy Safari, by Henry Mintzberg

13. Existing Strategic Frameworks Are Not Appropriate for High-Tech Markets
Five
Forces
Generic
Strategy
Matrix
Core
Competence
Strategic
Intent
Value
Disciplines
Value
Migration

14. The Business of John Rockefeller...
Early 20th Century Industry: Raw Materials-Based
Scarce Resources
Destructive Consumption
Decreasing Returns
Routine Work
Management Focus: Prediction & Control
Management Goal: Optimization & Scale

15. ...is Not the Business of Bill Gates.
Late 20th Century Industry: Knowledge-Based
Unlimited Resources
Constructive Consumption
Increasing Returns
Non-Routine Work
Management Focus: Uncertainty
Management Goal: Adaptation & Domination

16. New Science Provides the Raw Material for Our New Lenses
Lenses for Examining Complex Systems Must Have Three Characteristics
Must Examine the Whole System
Must Be Dynamic
Must Account for Non-Linearity
Course Will Present & Apply New Frameworks that are Especially Useful for Crafting Strategies for High-Tech Markets