What is strategy?:Creating value for

shareholders and stakeholders

Paul C. GodfreyMark H. Hansen

Marriott School of Management

Brigham Young University

1984 Profits: $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 - 1984

1. Increased admission prices at theme parks1984 - $186 m 1989 - $787 m

2. Focused on movie studios (character development)1984 - $2.42 m 1994 - $845 m

3. Diversified into television (ABC), hotels, retail stores,sport team, cruise line, publishing, consumerproducts, 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 EconomicValue Than Competitors

• there must be something different about a firm’soffering vis-à-vis competitors’ offerings

• if all firms’ strategies were the same, no firmwould have a competitive advantage

• competitive advantage is the result of doingsomething 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

t

tt

t

t

r

P

r

DivP

)()(

110

0

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

ConsumerSurplus

ProducerSurplus(profit)

Cost of Inputs

Economic Value

Price

Economic Cost

Economic Value: An expanded view

ConsumerSurplus

Producer Surplus(profit)

Minimum Cost of InputStakeholders’ 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

ConsumerSurplus

Producer Surplus(profit)

Supplier Surplus

Employee Surplus

Other Surpluses

Sum of Reservation Prices

ConsumerSurplus

Producer Surplus(profit)

Supplier Surplus

Employee Surplus

Other Surpluses

Sum of Reservation Prices

Economic Value

ConsumerSurplus

Producer Surplus(profit)

Supplier Surplus

Employee Surplus

Other Surpluses

Sum of Reservation

Prices

Re-slice the pie Grow the pieThe 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

Scope Internal 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 FitAdded 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?