Acting Strategically, Thinking Critically a Casebook for Business Students

ACTING STRATEGICALLY, THINKING CRITICALLY A CASEBOOK FOR BUSINESS STUDENTS

by Michael J. Merenda, Ph. D. University of New Hampshire Bassim Hamadeh, CEO and Publisher Michael Simpson, Vice President of Acquisitions and Sales Jamie Giganti, Senior Managing Editor John Remington, Senior Field Acquisitions Editor Monika Dziamka, Project Editor Brian Fahey, Licensing Specialist Miguel Macias, Graphic Designer Kat Ragudos, Interior Designer

Copyright © 2016 by Michael J. Merenda. All rights reserved. No part of this publication may be reprinted, reproduced, transmitted, or utilized in any form or by any electronic, mechanical, or other means, now known or hereaft er invented, including photocopying, microfi lming, and recording, or in any information retrieval system without the written permis- sion of Cognella, Inc.

First published in the United States of America in 2016 by Cognella, Inc.

Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identifi cation and explanation without intent to infringe.

Printed in the United States of America

ISBN: 978-1-63487-981-1 (pbk) / 978-1-63487-982-8 (br) CONTENTS

PREFACE X ACKNOWLEDGMENTS XI

PART 1 CHAPTERS 1

CHAPTER 1 STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 2

TIM COOK’S APPLE 2

1. INTRODUCTION: SOME INITIAL QUESTIONS TO THINK ON 3 1.1 WHY STUDY STRATEGIC MANAGEMENT? 4

2. WHAT IS A STRATEGIC DECISION? 5

3. WHAT IS STRATEGY? 7 3.1 WHAT IS GLOBAL STRATEGY? 9 3.2 WHAT CONSTITUTES A GOOD STRATEGY? 10 3.3 WHAT IS THE PURPOSE OF STRATEGY? 11

4. WHAT IS A BUSINESS MODEL? 11 4.1 BUSINESS MODELS AND VALUE CREATION 12 4.2 HOW DO YOU KNOW IF A COMPANY’S BUSINESS MODEL IS WORKING? 12 4.3 FIRST STEP IN EVALUATING BUSINESS MODEL EFFECTIVENESS—FINANCIAL ANALYSIS 15

5. WHAT ARE THE KEY ELEMENTS OF STRATEGIC THINKING? 22

6. WHAT IS DYNAMIC STRATEGY? 24 6.1 WHAT IS CLOSED- VERSUS OPEN-SYSTEM LOGIC? 24 6.2 EMERGENT VERSUS DELIBERATE STRATEGY 25

7. WHAT IS STRATEGIC PLANNING? 25

8. WHAT IS STRATEGIC MANAGEMENT? 26

9. WHAT IS A STRATEGY SCHOOL? 27 9.1 STYLE (DESIGN) STRATEGY SCHOOL (CHAPTER 2) 28 9.2 COMPETITIVE-FORCES STRATEGY SCHOOL (CHAPTER 3) 30 9.3 RESOURCE-BASED VIEW (RBV) (CHAPTER 3) 30 9.4 LEARNING SCHOOL (CHAPTER 4) 30 9.5 ENTREPRENEURIAL SCHOOL (CHAPTER 4) 31

10. STRATEGIC MANAGEMENT PROCESS MODEL AND STRATEGY ALIGNMENT 31

11. REFLECTION 33

CONTENTS III CHAPTER 2 THE STRATEGIC MANAGEMENT PROCESS AND STYLE STRATEGY SCHOOL 38

TOM BRADY: MANAGING ONESELF—MORE PROBABLE THAN NOT 38

1. INTRODUCTION: SOME INITIAL QUESTIONS TO THINK ON 46

2. THE STRATEGIC MANAGEMENT CONCEPTUAL MODEL 47 2.1 STEP 1: ENVIRONMENTAL SCAN—EXTERNAL (OPPORTUNITIES AND THREATS) 48 2.2 STEP 2: ENVIRONMENTAL SCANNING—INTERNAL (STRENGTHS AND WEAKNESSES) 51 2.3 STEP 3: VISION AND MISSION 55 2.4 STEP 4: GOALS AND OBJECTIVES 56 2.5 STEP 5: STRATEGY FORMULATION AND CRAFTING 58 2.6 STEP 6: STRATEGY IMPLEMENTATION AND EXECUTION 57 2.7 STEP 7: MONITOR, EVALUATE, AND CONTROL (STRATEGIC CONTROL) 58

3. STYLE STRATEGY SCHOOL 58 3.1 SWOT ANALYSIS (STRENGTHS, WEAKNESSES, OPPORTUNITIES, AND THREATS) 59 3.2 HOW TO CONDUCT A SWOT ANALYSIS 61

4. COMPETING MODELS OF THE FIRM: SINGLE-SOVEREIGN AND MULTIPLE-SOVEREIGN MODELS 64 4.1 SINGLE-SOVEREIGN MODEL OF THE FIRM 64 4.2 MULTIPLE-SOVEREIGN MODEL OF THE FIRM 65 4.3 AGENCY AND STEWARDSHIP THEORY 66 4.4 STAKEHOLDER ANALYSIS 67 4.5 STEPS IN STAKEHOLDER ANALYSIS 68

5. BUSINESS ETHICS 70 5.1 WHY IS IT SO DIFFICULT TO DISTINGUISH RIGHT FROM WRONG? 71 5.2 ETHICAL UNIVERSALISM 72 5.3 ETHICAL RELATIVISM 72 5.4 UNITED NATIONS SOCIAL CONTRACT 72 5.5 ETHICAL PRINCIPLES 72

6. LEVELS OF CORPORATE SOCIAL RESPONSIBILITY 73

7. SUSTAINABLE BUSINESS DECISIONS AND BUSINESS STRATEGY 74

8. REFLECTION 75

IV ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS CHAPTER 3 CRAFTING STRATEGY—SITUATIONAL ANALYSIS, COMPETITIVE FORCES, AND RESOURCE-BASED VIEW STRATEGY SCHOOLS 78

SIZING UP THE PLAYERS IN MOBILE ADVERTISING 78

1. INTRODUCTION: SOME INITIAL QUESTIONS TO THINK ON 82

2. WHY UNDERTAKE AN EXTERNAL ENVIRONMENTAL ANALYSIS? 83

3. WHY UNDERTAKE AN INTERNAL ENVIRONMENTAL ANALYSIS? 83

4. COMPETITIVE-FORCES STRATEGY SCHOOL 83

5. FORCES DRIVING POSITIONING, INFLUENCING, AND EXPLOITING (PIE) 84 5.1 BARGAINING POWER OF BUYERS (AN INDUSTRY’S CHANNELS OF DISTRIBUTION AND CUSTOMERS) 87 5.2 BARGAINING POWER OF SUPPLIERS (AN INDUSTRY’S FACTOR INPUTS) 88 5.3 THREAT OF NEW ENTRANTS (POTENTIALLY NEW PLAYERS TO AN EXISTING INDUSTRY) 88 5.4 THREAT OF SUBSTITUTE PRODUCTS OR SERVICES (PRODUCTS OR SERVICES WITH A POTENTIALLY BETTER CUSTOMER-VALUE PROPOSITION) 88 5.5 INTENSITY OF RIVALRY AMONGST EXISTING COMPETITORS 89 5.6 OTHER MACROFACTORS DRIVING THE FIVE FORCES 89

6. STEPS IN CONDUCTING A COMPETITIVE-FORCES ANALYSIS 90 6.1 IDENTIFY THE “FOCAL” FIRM AND “FOCAL” INDUSTRY FOR ANALYSIS 90 6.2 IDENTIFY POTENTIAL NEW ENTRANTS 91 6.3 IDENTIFY BUYERS 91 6.4 IDENTIFY SUBSTITUTE PRODUCTS 91 6.5 IDENTIFY SUPPLIERS 91 6.6 IDENTIFY IMPACT OF NEW TECHNOLOGIES AND INNOVATION 92 6.7 IDENTIFY THE AVAILABILITY OF COMPLEMENTS 92 6.8 IDENTIFY INSTITUTIONAL, SOCIAL, LEGAL, AND POLITICAL FACTORS 92 6.9 EVALUATE AND ASSESS THE COMPETITIVE FORCES 92 6.10 DRAW CONCLUSIONS 93

7. BLUE-OCEAN STRATEGY 93

8. GENERIC STRATEGIES 96 8.1 OVERALL COST LEADERSHIP 96 8.2 OVERALL DIFFERENTIATION 96 8.3 COST-FOCUSED 97 8.4 FOCUSED DIFFERENTIATION 97 8.5 BEST-COST OR VALUE STRATEGY 98

CONTENTS V 9. RESOURCE-BASED VIEW (RBV) STRATEGY SCHOOL 98 9.1 VIRO TEST FOR ASSESSING A FIRM’S SUSTAINABLE COMPETITIVE ADVANTAGE 99

10. S-CURVE AND EXPERIENCE CURVE 101 10.1. EXPERIENCE OR LEARNING CURVES 103

11. PRODUCT-PORTFOLIO ANALYSIS 103

12. WHAT IS VALUE? 106

13. COMMONLY CONSIDERED STRATEGIES 107 13.1 MAINTENANCE OR “CONTINUE AS IS” STRATEGIES 107 13.2 OFFENSIVE OR “GROWTH STRATEGIES” 108 13.3 DEFENSIVE STRATEGIES 108

14. IS YOUR COMPANY’S COMPETITIVE ADVANTAGE SUSTAINABLE? 111

15. REFLECTION 111

CHAPTER 4 STRATEGIC LEADERSHIP AND EXECUTION: LEARNING AND ENTREPRENEURSHIP STRATEGY SCHOOLS 114

EXECUTING A KNOWLEDGE-MANAGEMENT STRATEGY AND PHILOSOPHY AT BUCKMAN LABORATORIES 114

1. INTRODUCTION: SOME INITIAL QUESTIONS TO THINK ON 116

2. STRATEGY IMPLEMENTATION, EXECUTION, AND STRATEGIC CONTROL 117 2.1 STRATEGY IMPLEMENTATION 118 2.2 STRATEGY EXECUTION 118 2.3 STRATEGIC CONTROL 118

3. CHALLENGES ASSOCIATED WITH STRATEGY IMPLEMENTATION AND EXECUTION 119 3.1 ORGANIZATIONAL SIZE 119 3.2 OPERATIONAL SCOPE AND DIVERSITY 120 3.3 COMPLEXITY OF PRODUCTS, SERVICES, AND BUSINESS MODELS 120

4. ALIGNING NEWLY CRAFTED STRATEGIES: STRATEGY IMPLEMENTATION, EXECUTION, AND CONTROL 120

5. IMPLEMENTATION—WHO, WHAT, WHY, AND WHEN? 121 5.1 WHO ARE THE LEADERS OF THE STRATEGIC CHANGE? 121 5.2 WHAT ARE THE CHANGES TO EXISTING STRATEGIES? 121 5.3 WHY ARE CHANGES NEEDED TO EXISTING STRATEGIES? 121 5.4 WHEN WILL CHANGES BE MADE? 121

6. EXECUTION: LEARNING AND LEADING 121 6.1 CHANGE CAN BE INCREMENTAL, STRATEGIC, OR TRANSFORMATIVE 122

VI ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS 6.2 TECHNICAL AND ORGANIZATIONAL LEARNING 122

7. STRATEGIC CONTROL: REINVEST, RENEW, RELAUNCH 123

8. WHAT NEEDS TO BE ALIGNED IN STRATEGY IMPLEMENT AND EXECUTION? 124 8.1 STRATEGIC INTENT 124 8.2 VISION 125 8.3 MISSION 125 8.4 GOALS AND OBJECTIVES 125 8.5 VALUES 125 8.6 CULTURE 126 8.7 ORGANIZATIONAL STRUCTURE—STRUCTURE “ALWAYS” FOLLOWS STRATEGY 126

9. THE LEARNING-STRATEGY SCHOOL 127 9.1 LEARNING BY DOING 127 9.2 BUILDING LEARNING COMMUNITIES BASED ON INFORMATION SUPERIORITY 127 9.3 FIVE DISCIPLINES OF A LEARNING ORGANIZATION 128 9.4 THE LEADER’S ROLE IN THE LEARNING ORGANIZATION 128

10. ENTREPRENEURSHIP-STRATEGY SCHOOL 129 10.1 THE INNOVATOR’S DILEMMA? 129 10.2 STRATEGY AS CREATIVE DESTRUCTION 130 10.3 INTUITION, IMPROVISATION, AND IMAGINATION 130 10.4 FIRST-MOVER ADVANTAGE 130 10.5 FOSTERING CREATIVITY AND ENTREPRENEURSHIP 130

11. STRATEGIC LEADERSHIP 136 11.1 TRADITIONAL LEADERSHIP DEFINED 137 11.2 TRANSACTIONAL LEADERS 138 11.3 CHARISMATIC LEADERS 138 11.4 TRANSFORMATIONAL LEADERS 139

12. WHAT DOES IT TAKE TO BE A SUCCESSFUL CEO AND LEADER? 140

13. REFLECTION 140

CHAPTER 5 CRITICAL INQUIRY AND CASE STUDY 146

JOSEPH’S GOURMET PASTA & SAUCES: AT A CROSSROADS 146

1. INTRODUCTION: SOME INITIAL QUESTIONS TO THINK ON 152

2. WHAT IS A CASE? 153 2.1 CASE PRINCIPLES 154

CONTENTS VII 2.2 ACTIVE LEARNING 154

3. CRITICAL THINKING, KNOWLEDGE, AND CASE STUDY 155

4. HOW TO APPROACH A CASE ANALYSIS 156 4.1 GENERIC CASE QUESTIONS 156

5. CASE GUIDELINES 157 5.1 EVALUATING THE QUALITY AND EFFECTIVENESS OF CRITICAL-THINKING SKILLS 157 5.2 THE STUDENT’S ROLE IN CASE STUDY 158 5.3 THE INSTRUCTOR’S ROLE IN CASE STUDY 158

6. EVIDENCE, ANALYTICAL DESIGN, AND INFOGRAPHICS 158 6.1 PRINCIPLE #1: COMPARISONS 159 6.2 PRINCIPLE #2: CAUSALITY 159 6.3 PRINCIPLE #3: MULTIVARIATE ANALYSIS 159 6.4 PRINCIPLE #4: INTEGRATION OF EVIDENCE 160 6.5 PRINCIPLE #5: DOCUMENTATION 160 6.6 PRINCIPLE #6: CONTENT COUNTS MOST OF ALL 160

7. STEPS IN CASE ANALYSIS 162 7.1 INTERNAL AND EXTERNAL SITUATIONAL ANALYSIS 162 7.2 PRESSING ISSUES, QUESTIONS, AND CENTRAL PROBLEM IDENTIFICATION 163 7.3 OFFER CREDIBLE ALTERNATIVES 164 7.4 WEIGH THE PROS AND CONS FOR EACH ALTERNATIVE 164 7.5 MAKE RECOMMENDATIONS 165 7.6 IMPLEMENTATION AND EXECUTION 166 7.7 PROVIDE SUPPORTING ANALYSIS AND EXHIBITS (INTERNAL AND EXTERNAL SITUATIONAL ASSESSMENT) 166

8. CASE PRESENTATION RUBRIC 167

9. REFLECTION: A WORD ON EVIDENCE 169

VIII ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS PART 2 CASES 173

1. BREWING A BETTER WORLD: SUSTAINABLE SUPPLY CHAIN MANAGEMENT AT GREEN MOUNTAIN COFFEE ROASTERS 175 By Ross Gittell, Matt Magnusson, and Michael J. Merenda

2. APPLE, INC. 2014 AND THE GLOBAL SMARTPHONE INDUSTRY 193 By Michael J. Merenda

3. HALF A CENTURY OF SUPPLY CHAIN MANAGEMENT AT WAL-MART 211 By Ken Mark

4. TESLA MOTORS: EVALUATING A GROWTH COMPANY 233 By Maureen McNichols, Anne Casscells, and Jaclyn Foroughi

5. CHANGING THE CULTURE AT YAHOO!: MARISSA MAYER’S CHALLENGE 253 By Adapa Srinivasa Rao and Debapratim Purkayastha

6. BROADBAND 2030: THE NETWORKED FUTURE 265 By Rouzbeh Yassini

CONTENTS IX PREFACE

his book is divided into two parts. Th e fi ve chapters in Part One provide a founda- T tion in core strategy concepts, strategic schools of thought, analytical tools, and frameworks to help prepare business students to act strategically and think critically. Each chapter in Part One contains an opening minicase and several “Th inking Critically” exercises. Two types of these exercises are presented: company specifi c and individual specifi c. Chapter 1 provides an overview of strategy: its purpose and importance, the basic elements of strategic thinking, competitive advantage, resource capabilities, business models, fi nancial analysis, the fi ve schools of strategic thought (i.e. style, competitive forces, resource-based view, learning, and entrepreneurship schools), the strategic management process model, and what it means to act strategically and think critically. Chapter 2 covers the strategic management process model in greater depth, along with examinations of the style (or design) school of thought, SWOT (Strengths, Weaknesses, Opportunities, and Th reats), two models of corporate governance (single-sovereign and multiple-sovereign), stakeholder analysis, business ethics, corporate social responsibility, and sustainable business practices. Chapter 3 focuses on environmental analysis (external and internal) and strategy craft ing through the competitive forces school (external situational analysis) and the resource-based school (internal situational analysis). Several types of strategies and actions are presented: Blue Ocean Strategy, Porter’s generic strategies, and several maintenance, off ensive, and defensive strategies. Th e chapter also discusses analytical tools and frameworks: fi ve forces analysis, the VIRO (Valuable, Imitable, Rare, and Organizational) test, the S-curve, the experience curve, and the product portfolio matrix. Chapter 4 provides an overview of the learning and entrepreneurial strategy schools and the challenges involved with strategy implementation, execution, and alignment. It covers the critical role that strategic leaders play in executing strategy and managing organizational change. Th ree kinds of leaders (transactional, charismatic, and transformative) and three types of organizational change (incremental, strategic, and transformative) are discussed, along with strategic intent, the competitive advantage life cycle, creative destruction, fi rst-mover advantage, gap analysis, and new-venture assessment. Chapter 5 emphasizes the importance of evidence-based research to case study and student learning by presenting the steps necessary for conducting and analyzing cases. Th e “Th inking Critically” exercises in the chapter focus on these steps, suggesting ways that the numerous strategy concepts and analytical tools discussed in the previous four chapters can be used by students when analyzing and preparing cases. To act strategically and think critically, students need to take an active role—“learning by doing.” Th e Socratic method in individual learning, along with applying and actively using strategy concepts, are emphasized. Part Two contains fi ve timely, in-depth, comprehensive case studies and one thought-provoking white paper on the future of broadband. All the cases have been classroom tested and contain adequate information for students to apply the strategy concepts and tools found in Part One of the book. Many of the cases build on the “Th inking Critically” exercises found in Part One and off er instructors the opportunity to use and develop their own “Th inking Critically” exercises. Th e focus of the Apple, Inc. 2014 and the Global Smartphone Industry case is on the competitive forces school (Chapter 3). It highlights Tim Cook’s challenges in sustaining Apple’s competitive advantage aft er the death of Apple’s founder Steve Jobs. Th e Changing the Culture at Yahoo!: Marissa Mayer’s Challenge case is designed to enable students to analyze and assess the problems faced by Yahoo! and its new CEO. Mayer is under the gun to meet the board and stockholders’ expectations, turn the company’s declining revenues around, and create a sustainable competitive advantage for the company. Th ere is suffi cient information in the case for students to analyze and assess the eff ectiveness of Mayer’s strategic attempts to improve performance, examining her actions through the lenses of the style school (Chapter 2), the competitive forces and resource-based schools (Chapter 3), and the learning school (Chapter 4). Th e Half

X ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS a Century of Supply Chain Management at Walmart case looks at the company’s several sources of competitive advantage and lends itself to an in-depth analysis of its value chain. Th e case is best suited for use with the resource-based and competitive forces schools (Chapter 3). Tesla Motors: Evaluating a Growth Company is an interesting entrepreneurial venture case that will attract a great deal of student interest and discussion. Elon Musk, Tesla’s CEO and serial entrepreneur, and his entry in the premium electric vehicle market. Th e case highlights the company’s highly innovative and diff erentiated business model and troubles meeting costs and customer orders. Th e case is designed to enable students to assess the merits of Musk’s revolutionary, high-risk, Blue Ocean Strategy (Chapter 3). Tesla ‘s unique theory of strategy (Chapter 1) challenges traditional automo- bile industry standards, assumptions and rivals. Th e case emphasizes evaluating business model eff ectiveness (Chapter 1); SWOT and stakeholder analyses (Chapter 2); investors’ expectations, external environmental analysis (Chapter 3) and the learning and entrepreneurship schools of strategic thought (Chapter 4). Th e Brewing a Better World: Sustainable Supply Chain Management at Green Mountain Coff ee Roasters (GMCR) case highlights the challenges of managing a global supply chain (coff ee) and the confl icts in executing its sustainable business strategy. Its focus is on the style school (Chapter 2) and resourced-based school (Chapter 3). Th e fi nal case, A 2030 Vision for Broadband, is a white paper from the Center for Broadband Excellence. It provides a concise introduction to the future possibilities of broadband and its importance in an information- based economy. Th e case is a thought piece on netcentric-oriented strategies in a globally connected world. Two examples—Amazon, a network-centered, transformative organization; and the growth in the “Internet of things,” connecting everything from cars to hats—are off ered to show how the Internet is changing industry forces and strategies. Th e case lends itself to an external environmental analysis and an identifi cation of industry change drivers and key success factors (Chapter 3).

ACKNOWLEDGM ENTS

Th is book has been in the making throughout my academic career. It represents a confl uence of several streams of thought and experiences that have nourished my career and guided my eff orts. For me, my students have been the lifeblood that has fueled my learning. To my strategy students: thank you for allowing me into the classroom and for giving me the opportunity to work and learn with you. I am extremely grateful to so many individuals who have helped me throughout the process of writing this book. First, I would like to thank the Cognella academic team for their encouragement, support, and able assistance: John Remington (Senior Field Acquisitions Editor), Jamie Giganti (Senior Managing Editor), Monika Dziamka (Project Editor), Allie Kiekhofer (Associate Production Editor), Rose Tawy (Acquisitions Manager), and Brian Fahey (Licensing Specialist). I want to thank my faculty colleagues, Manley Irwin, Lee Mizusawa, and Audrey Ashton-Savage. Lee Irwin has inspired me throughout my academic career. His passion for learning, along with his curi- ous mind, work ethic, and accomplishments, have set the example and inspired my writing. Lee Mizusawa reviewed several of my draft chapters, making helpful comments and edits. I am especially grateful to Audrey Ashton-Savage, who skillfully reviewed and edited all the chapters. Her encouragement and quick turnaround of chapters were the catalysts that helped to make this book possible. Nancy Palmer, my able and diligent administrative assistant, worked selfl essly and tirelessly over several years on my draft notes and manuscript, oft en translating my incomprehensible handwriting. Th is book would not have come to fruition without her expertise and encouraging words. I owe so much to my loving wife, Claire. She was the light that guided me throughout the book-writing journey. When I was down, she picked me up, and when I was stuck, she inspired me to move on. Th is book has indeed been a lifelong journey, and she has traveled it with me. I am forever indebted to you—thank you.

CONTENTS XI CHAPTER 1 STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT

TIM COOK’S APPLE

n July 2014, Tim Cook, Apple’s CEO, announced I that Apple would off er iPhones with 4.7- and 5.5-inch screen sizes (iPhone 6 and iPhone 6 Plus), signifi cantly larger than the company’s current models. Th e larger-screen iPhones were developed in response to Samsung’s and other manufacturers’ models with large screens that utilize the Android OS (operating system). Large-screen Android smartphones featuring a display larger than fi ve inches sold at a premium price—an area that had been dominated by Apple. More than 98 percent of Android smartphones sold globally were priced at the equivalent of $400 or more. Under cofounder Steve Jobs, Apple was one of the world’s most innovative and successful companies by 2011. Jobs’s passion was to build a lasting and enduring organization. Under his leadership, Apple introduced game-changing products and services across an array of industries. Chief among the game-changing products was the iPhone. Never before did one fi rm change the competitive dynamics so drastically in so many industries, from computers to mobile phones, music, tablets, movies, photography, electronic components, newspa- pers, and print media, among many others. Jobs wanted to build a company that would survive changes in its leadership and the dynamism of competitive markets. Jobs’s untimely death in October 2011 raised questions about Apple’s future. Would Apple’s CEO, Tim Cook, be able to sustain the company’s strong fi nancial performance and its competitive advantage over rivals? Apple’s fi nancial performance and hit parade of spectacu- lar new products under Jobs made it the most valuable

2 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS global company in terms of market capitalization at the time of his death. No one expected Apple to continue to perform at such a high level, but the decline in its stock price and market capitalization raised questions about Cook’s leadership and ability to sustain such a high level of success. Under Cook, Apple’s string of successive big-hit, innovative product introductions had slowed, and Apple was again at a crossroads. Even aft er Cook’s three years at the helm, industry analysts and others wondered whether Apple would prosper or suff er under his leadership.

SOURCES:

Fisher, Dan, “Apple and the Fear of Flopping.” News.cnet.com, July 18, 2013. Gallagher, Dan. “Apple’s Cook Can’t Aff ord to Miss a Beat.” Wall Street Journal, May 29, 2014. Gallagher, Dan. “Apple Takes Its Business Seriously.” Wall Street Journal, July 16, 2014: .C1. Isaacson, Walter. Steve Jobs. Simon & Schuster: New York, 2011; Wakabayashi, Daisuke, “Tim Cook’s Vision for ‘His’ Apple Begins to Emerge.” Wall Street Journal, July 7, 2014. Wakabayashi, Daisuke, Bensinger, Greg and Barr, Alistar, “Apple Boss Makes His Boldest Bets Yet.” Wall Street Journal, September 10, 2014: A1–A2.

1. INTRODUCTION: SOME INITIAL QUESTIONS TO THINK ON

• What is a strategic decision? • What is strategy? • What is global strategy? • What is the purpose of strategy, and why is it important? • What is a business model? • How do you know if a company’ business model is working? • What are the elements of strategic thinking? • What is dynamic strategy? • How does strategy relate to sustainable competitive advantage? • What is a strategy school? • What does the strategic management process entail? • What is strategic fi t? Alignment? Matching?

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 3 Have you ever wondered what it would be like to be a Steve Jobs?1 Tim Cook? What were their career paths, and how did they get to be CEO of Apple? You are about to embark on a challenging and enriching journey that will take you through the boardrooms and offi ces of numerous managers empowered with the authority and responsibility for the well-being and health of their organizations. In doing this, we ask you to stop and think about what it is you would like to learn and why it is so necessary to study others who have also embarked on similar journeys, but usually without the benefi t or protection of the classroom. Th e focus in this chapter is on introducing the “concept of strategy” and how it can be applied to the study of organizations and their strategic positioning and management in the twenty-fi rst century. By studying strategy concepts and strategy cases, you will begin to develop a richer understanding and appreciation of just what it is like to be a Steve Jobs or Tim Cook. A strategic manager’s primary responsibility is to critically think about and act on the pressing questions and challenges facing the organization. Put simply, do you have an interest in studying or observing the key strategists and decision makers in organizations and why some top managers are consistently recognized as among the best at what they do? Why are some managers the newsmakers and leaders, not only in their own organizations, but also in society? Moreover, what exactly is it that these top managers and strategists actually do? What are some of the strategy tools, concepts, and theories available to help them guide and position their organizations for success?

1.1 WHY STUDY STRATEGIC MANAGEMENT?

It is evident that, as an area of study, strategic management has come of age. What is more important is that, as we advance into the twenty-fi rst century, strategic management will continue to play a vital role in the competi- tiveness of organizations, the welfare of society, and the lives of the women and men who make organizational success possible. It is important to study strategy and strategic management because:

• Everyone in the organization needs to play an active direct or supporting role in the strategic management of the organization for the organization to be successful. • Understanding what it is to be a more eff ective and knowledgeable strategic decision maker is important for you personally so that your work performance will be more valued and rewarded accordingly.2 • Managing strategically better prepares the organization for creating, managing, and exploiting rapidly changing environments. • Managing strategically improves organizational performance. • Managing strategically helps the organization better manage diverse activities that need to be coordinated and focused on for achieving organizational purpose. • Learning to act strategically and think critically can help you in both your career and your life.

Th e study of strategy and strategic management is also important because its primary purpose and focus are on satisfactorily answering the following pressing questions, which all organizations need to ask regularly:

a. What is the overall current fi nancial and strategic health and performance of the organization? b. What should it be? What might it be? c. If the fi nancial and strategic health is not what it should or might be, then what strategic actions need to happen to correct the situation?

Failure to recognize and act on these questions in a timely manner puts the organization at serious strategic and fi nancial risk.

4 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS Thinking PERSONAL STRATEGY AND LEADERS YOU ADMIRE Crtitically Questions a. Do you have a personal strategy? What is it? Quickly write down those things in your life that excite you the most and those things that wear you down. Any revealing insights about how you spend your time? b. Do you know someone you admire for her their clarity in thinking and their positive attitude about life? Who is this person, and what personal attributes do you like about this person’s thinking and attitude?

2. WHAT IS A STRATEGIC DECISION?

A strategic decision is one that, if not achieved, could seriously aff ect the long-term viability of the fi rm. In comparison, a tactical decision aff ects the day-to-day implementation of actions required to reach the goals of strategy. A strategic decision has at least one of the following characteristics:

• It involves unusual risk and a high potential for failure. Th ink about the risks involved with Elon Musk and his Silicon Valley startup company, Tesla Motors. Starting a new car company from scratch is not tried oft en in the United States. Th e last time one was truly successful was about a hundred years ago. Tesla faces some unusual hurdles. Musk not only plans to change the world over to electric cars through the multi-billion-dollar startup; he also plans to partner with Panasonic to build advanced lithium-ion batteries at a “gigafactory” in Nevada which could cost up to $5 billion. He plans on manufacturing lots of electric cars and lithium-ion batteries. He also plans to sell his lithium-ion batteries for use in solar- energy panels. His factory will be larger than the whole of the world’s current capacity for manufacturing lithium-ion batteries. Th ere are almost innumerable barriers to the realiza- tion of Musk’s vision for a sustainable future with electric cars and solar energy. Not the least of these fears are the current low-cost panels and lithium-ion batteries currently being produced in China. He also runs the risk that superior product-technology platforms will make both his lithium-ion batteries and his electric cars obsolete before either venture can achieve economies of scale to lower cost and become profi table.3 • It involves unusual benefi ts in the event of success. When Steve Jobs took over Apple Computer in 1997, he changed the company name to just Apple, Inc. and announced that he was target- ing consumers, not just businesses, for his Mac computers and other high-technology products and services. Jobs inspired Apple’s consumer products and services, such as iPhones, iTunes, iTouch, iPad, iStore, iTV, and a host of other services, thus making Apple the world’s most valuable company (by market capitalization) at $618 billion. By 2013, Apple surpassed Coca-Cola as the world’s number one brand, with brand equity valued at $98.3 billion.4 • It involves unusual commitment of critical resources (money, management, physical capacity, and know-how) over long periods of time. To execute his bold strategies, Musk must commit substantial dollars to factories; professional, technical, and management talent; operating staff ; and a host of other critical resources. To be successful, Tesla also has to invest in a network of global retail stores and other distribution channels to sell and service his innovative electric cars. Th e company is unveiling a new network of superchargers—refueling stations that can top off the batteries in its cars in under an hour. So far, Tesla has built a small number of vehicles for the high-end market. Now it wants to go mainstream. Musk

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 5 has to build a network of battery-charging stations across the countries where his cars will be sold. In 2013, Tesla sold twenty-three thousand cars. Th e gigafactory, which would start production in 2017, would make enough batteries for fi ve hundred thousand electric cars by 2020 (it would produce enough batteries annually to store thirty-fi ve gigawatt hours of electricity—hence the name). Battery companies normally announce factories only aft er they are funded and a site is selected. Th ey typically scale up gradually. Not Musk. His commitment to build Tesla Motors, including its gigafactory and physical infrastructure, requires a signifi cant commitment of technical, fi nancial, human, and physical resources.5 • It tends to change the competitive dynamics and nature of industries. Amazon has transformed several industries as one of the world’s most successful e-commerce companies. Under its founder and strategic leader Jeff Bezos, Amazon now rivals Walmart as a discount retail store, Apple as a device maker, and IBM as a data services provider. Bezos’s diligence in getting Amazon.com’s strategy right, with his constant focus on monitoring, adjusting, and adapting the company’s strategy, has made it the fastest-growing e-commerce company, taking market share away from rivals. Amazon has aggressively entered additional markets with a smartphone called Fire, three new Kindle Fire tablets, eight million square feet of new fulfi llment-center capacity, and 1,382 newly deployed Kiva robots which roam Amazon’s warehouses delivering pallets of products to human workers. While not always getting it right the fi rst time or providing short-run profi ts to Wall Street analysts’ satisfaction, Bezos’s diligence in monitoring and adjusting Amazon.com’s strategic decisions has turned the company into an $81.7 billion e-commerce behemoth.6 • It requires leadership at all levels of the organization and ongoing support from everyone in the fi rm. General Motors Company’s chief executive, Mary Barra, spent much of her fi rst nine months as CEO bogged down in a scandal over decade-old failures in the company’s handling of deadly ignition-switch defects. Barra started working for General Motors at the age of eighteen as a co-op student in 1980. In January 2014, she became GM’s CEO. During her fi rst year, she issued eighty-four safety recalls involving more than thirty million cars. Ms. Barra now hopes to move past the scandal and GM’s decades of weak accountability and profi tability, declining US market share, and bankruptcy. A high priority for Ms. Barra is changing GM’s culture and mindset. Commenting at an investors’ meeting, Barra stated, “I hate the word culture … culture is really just how we all behave.” She stressed to investors that all GM employees need to behave diff erently—starting with herself, her top management team, and all employees. For GM to be successful, everyone in the company needed to get on board with Berra’s plans and vision. Barra was even tough on herself, commenting: “In the past … I was too nice.” At a meeting with GM’s top three hundred executives, Barra told them that they could no longer confuse steady progress with winning. She told the executives that GM must do what it takes to be “the world’s most valued automotive company,” a measure that included customer satisfaction, quality, and fi nancial results. “If you’re not in line with this vision,” she told the group, “you don’t need to be here.” Th e question of how GM will deploy the roughly $39 billion in cash and cash equivalents on its balance sheet to achieve her goals and make it the most valued auto company will require that change and leadership come from within GM at all levels. It requires that Ms. Barra’s drive to boost profi tability will depend on whether she and her top lieutenants change behavior deep in the company’s bureaucracy. She noted that GM should be a company where employees go home enthused about a “really cool project” instead of complaining, “I had to go climb Mt. Stupid today to try and get the right thing done.”7 • It requires constant monitoring, adjusting, and vigilance to get it right. It took Gary Hirshberg and Samuel Kay- men (cofounders of Stonyfi eld Farms, Inc.’s yogurt) and their families nine painful years before the company reached profi tability. Meg Hirshberg, Gary’s wife, commenting on Stonyfi eld’s road to profi tability, wrote:

We endured countless disasters, mishaps, and near-death experiences. Th at meant there were countless times we could have rid ourselves of the misery we called a business. Gary and Samuel were overworked and exhausted but determined to persevere. I never had a voice in the decision to carry on, but there were many moments when I was forced to answer the question: Was I in or was I out (in helping the business succeed)?8

6 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS Thinking WHAT IS A STRATEGIC DECISION? Critically Exercise a. McDonalds’s announced in April 2015 that it plans to raise wages by more than a dollar per hour and off er employees personal time off for all its US company-owned restaurants. Th e increase would raise wages for more than ninety thousand US employees. Is this a strategic decision or just a salary adjustment? If you consider it a strategic decision, what makes it strategic? b. General Electric, in April 2015, announced that it will be selling or spinning off the bulk of its $500 billion GE Capital business. GE Capital accounted for around half of the company’s profi ts, but was under pressure from nervous investors who worried about the value of GE’s stock. Is this a strategic decision? If so, based on what criteria? How might this decision change GE? How might this decision change the competitive dynamics in the banking and fi nancial services industry? (See http://www.nytimes.com/2015/04/11/business/dealbook/general-electric-to-sell- bulk-of-its-fi nance-unit.html.) c. Identify a company that is currently engaged in a major strategic decision or initiative. Identify and explain the characteristics of this strategic decision—that is, what makes it a strategic decision? What’s at risk if this decision does not pan out? What’s the potential upside to this decision if things do pan out?

3. WHAT IS STRATEGY?

Th e word strategy and its derivatives (e.g., strategic, strategically, strategists) conjure up a lot of diff erent notions, interpretations, and meanings; each of us has our own. A strategic action is distinct from an operational or routine action in that, if a strategic action is not achieved, the overall well-being and health of the organization is threatened. If a strategic action is achieved, it provides the organization with the means for improving fi rm performance. Th e word strategy is derived from the Greek noun strategos (literally interpreted as “the art of the general.” Th e Greek verb stratego means “to plan the destruction of one’s enemies through the eff ective use of resources.”9 Th ese two terms capture the essence of strategy and its enduring value as a key management concept. As a noun, the “art of the general” highlights who is responsible for setting and executing strategy. Th e general is responsible for clearly articulating and carrying out the strategy. As the verb stratego, strategy implies action and forward thinking. “To plan the destruction of one’s enemies” lays out the terrain and sets in motion the challenges ahead for the general. Strategy is about the future—to plan and set a direction for an army or an organization. Whether it is to gain political, military, or economic advantage, the essence of good strategy is good management, good leadership, and good execution. In his book, Strategy: A History, Lawrence Freedman carefully, and in great detail, provided an in-depth study detailing the evolution and development of strategy. Freedman defi ned strategy as a continuous process for improving organizational performance, with no endpoint.10 In his study, Freedman concluded that strategy is about employing whatever resources are available to achieve the best outcome in situations that are both dynamic and contested. It is about getting more out of a situation than the starting balance of power would suggest. It is the art of creating power.11

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 7 Thinking Critically FREEDMAN’S THREE BROAD STRATEGY APPROACHES Exercise In Freedman’s book, Strategy: A History,i he identifi ed three broad approaches to strategy that emerged over time. He observed that each strategy approach evolved to help political, military, industrial and other leaders achieve the best outcome in situations that are dynamic and contested. Th e approaches he described are: Strategy as Superior Force versus Strategy as Guile or Craft iness: As seen through the study of Greek Classics, confrontations between parties were fought or addressed through strategy as the application of superior force (personifi ed by the heroic Achilles) or guile, the use of seduction (personifi ed by the craft y Odysseus, who came up with the idea of the Trojan horse). Freedman observed that while guile was more seductive because it off ers the possibility of cleverness in defeating brute power, he thought that guile alone was overrated, particularly against enemies that were clever as well as strong. Strategy as Cunning and Fineness. In Chinese general Sun Tzu’s masterful book, Th e Art of War, the general celebrates cunning by arguing that the way to win is by always doing the opposite of what your op- ponent expects and that strategic goals could oft en best be achieved by avoiding the destructive uncertainty of pitched battle. He is quoted as saying:

All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolvedii

Tzu wrote that it was preferable to use “stratagem and fi nesse” to defeat an enemy, such as starving one’s foe through famine, than to expose oneself to risk of battle and “the chance of arms”. Sun Tzu’s teachings are still used in business schools and military academies today. He forewarned that military should always avoid the destructive uncertainty of pitched battle, since a winning or superior outcome could be achieved by depriving or preventing the enemy from using a superior strength or competency in battle. Strategy as Political Negotiation, Bargaining, Military Might and Science. In the late 18th century, mainly as a result of the military and political thinking of the Napoleonic wars, strategy began to be viewed as a way to merge the scientifi c and operational art and precision of military strategy with the craft iness and skill of a seasoned politician. Th is concept of strategy is usually understood to be the main application of business strategy today. As such, strategy was seen as a way of uniting operational art in the military sphere with political objectives. Carl von Clausewitz, the great Prussian General and strategist, described it this way: “War is not merely an act of policy but a true political instrument, a continuation of political intercourse carried on with others.”iii Freedman concludes in his historical study that strategy is about trying to work out in a sensible way to get from one stage (of performance) to the next. With each stage a new set of problems has to be negotiated before you move beyond it. He concludes in his masterful book that, there is no endpoint when it comes to strategy; strategy is not simply a grander name for a plan. As Mike Tyson painfully found out: “Everyone has a plan ’til they get punched in the mouth.”iv

Sources: What is Strategy: Adapted from: Lawrence Freedman, Strategy: A History, Oxford University Press, 2013; Th e Economist, “Why Strategy is not a plan.” Book Review, Freedman, Lawrence. Strategy: A History. New York: Oxford University Press, 2013; Sun Tzu, Th e Art of War. Downloaded at: http://www.history.com/topics/sun-tzu

i Freedman, Lawrence. Strategy: A History. New York: Oxford University Press, 2013, ii Sun Tzu, Brainy Quotes. Downloaded at: http://www.brainyquote.com/quotes/authors/s/sun_tzu.html iii Wikiquote: https://en.wikiquote.org/wiki/Carl_von_Clausewitz iv Freedman, Lawrence. Strategy: A History. New York: Oxford University Press, 2013, ix

8 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS Critical FREEDMAN’S THREE BROAD STRATEGY APPROACHES Thinking Questions a. Freedman in his book identifi ed three broad approaches to strategy. How does Freedman defi ne or view each strategy approach? Find one business example for each strategy approach? How was the approach used to help improve performance organizational performance? From a business perspective is there one approach that is better than another? If so which one? If not, why not? b. Find one sports example for each strategy approach? From a sports perspective is there one approach that is better than another? If so, which one? If not, why not? c. Find one political or military example for each strategy approach? From this perspective, is there one approach that is better than another? If so, which one? If not, why not?

3.1 WHAT IS GLOBAL STRATEGY?

Strategy is about having a theory of what actions and activities will improve future performance.12 Strategic managers are constantly testing their theory of strategy and ascertaining its eff ectiveness across varying business models, products, services, processes and markets—that is, does a company’s strategy work across diff erent formats? A fi rm’s theory of strategy is working if it can create and sustain a competitive advantage over its rivals.13 For instance, Walmart’s success at improving company performance in the US with its ev- eryday low prices, convenience, and variety of products has not proved so successful in foreign markets, especially in China and Germany. Why? What is diff erent about its theory of strategy in the US versus other nations? Th e principles of strategy making and execution are the same whether the fi rm is facing domestic or global competition. Th e context is diff erent in that global competition adds extra layers of complexity because of the diversity of cultures and institutional dimensions. International strategy involves off ering a fi rm’s products and services in more than one nation. For example, Lululemon Athletica, Inc., a Canadian company, sells it athletic sportswear in its home country as well as in the United States and Australia. In determining its strategy, goals, objectives, and opportunities for growth, it is considering expanding to other countries. Lululemon’s growth path has taken it from selling domestically to globally by expanding its pres- ence in other nations. Global strategy is determining what you want to achieve globally and achieving it—it is about having a theory as to how to globally improve a fi rm’s performance.14 Global strategy is when a fi rm sells in many, if not all, of the countries that have, or potentially have, representative markets for a fi rm’s products and services. Porter identifi ed two forms of international industries: multidomestic industries and global industries.15 Multidomestic industries are represented by competition in which one country’s industry and institutional environment is independent of another country’s industries or cultural institutions. For example, in 1998, Microsoft acquired a very successful South Korean soft ware company that specialized in offi ce soft ware and adapted it for its Microsoft Offi ce platform in Korea.16 Microsoft ’s entry into this market was a disaster: not only did the company fail in meeting its ambitious goal of capturing 100 percent of market share through the combined companies; it also nearly caused a national revolution. Th ousands of Koreans took to the street to protest Microsoft ’s acquisition of the Korean company. Microsoft ’s changes to the specialized Korean soft ware incited Koreans, who recalled the Japanese colonial occupation of Korea in the early 1900s. During the occupation, Japan forbade

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 9 the use of Hangul, Korea’s offi cial language, and declared Japanese as the only offi cial language in 1938. By 1940, Koreans were forced to change their family names and only use Japanese sur- names. When Korean independence was restored at the end of World War II, the preservation of Hangul became a priority. Microsoft , a multibillion-dollar global company, apparently was viewed as a return to colonial rule. Microsoft ’s dream of dominating the Korean soft ware market was destroyed, and its multimillion-dollar investment in the Korean company was a failure. Microsoft learned a hard lesson: that not all soft ware industries and institutional cultures are the same across nations. Microsoft ’s entry in Korea called for a multidomestic market strategy, not a global market strategy. A global market is one where a fi rm’s products and services are sold across several markets, with little or no change to the product or service. For example, Ford’s concept of a global car, the sale of Boeing aircraft in all nations with domestic carriers, and Apple’s iPhone’s dominance in numerous countries are just some examples of global markets. Another example of a global market is Uber’s innovative ride-sharing app, which faced stiff er obstacles and barriers in Europe than it did in the US because of diff erent government regula- tions and stronger cabbie unions. Global strategy is driven by globalization. More and more strategic managers are fi nding that their fi rm’s products are not only competing with domestic rivals, but with global rivals as well. Globalization is the cross integration and interdependence of global industries and markets. Globalization is being driven by global economics (i.e., the interdependence of national economies through foreign direct investment [FDI], trade agreements, or other mechanisms); global industries (e.g., air transport, computers, smartphones); global institutions (e.g., Th e World Trade Association, NGOs [nongovernmental organizations such as the Red Cross or Greenpeace]); and accelerated growth in the number of fi rms adopting global strategies (i.e., fi rms competing across nations). Chapter 2 will look at some of the drivers of globalization and the implication of globalization on fi rms’ strategies.

Thinking Critically WHAT COUNTRIES HAVE YOU EXPERIENCED? Exercise a. Write fi ve things that come quickly to mind when you hear the term globalization. What are fi ve things that come to mind when you think of China? India? Th e USA? Italy? b. Quickly jot down the number of countries in which you spent at least one day or more experienc- ing the country and its culture. What did you learn from your international experience(s)? What are some of the professional and personal benefi ts of visiting another country?

3.2 WHAT CONSTITUTES A GOOD STRATEGY?

Porter defi ned strategy as what determines corporate performance. He wrote:

As a multisport athlete, I was always fascinated with competition and how to win. At Harvard Business School and later at the Harvard Department of Economics, I was drawn to the fi eld of competition and strategy because it tackles perhaps the most basic question in both business management and industrial economics: What determines corporate performance?17

10 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS Some of the most common observations of what constitutes a good strategy are:

• Alternative(s) chosen to make a desired future happen, such as achievement of a goal or solution to a problem • Art and science of planning and marshaling resources for their most effi cient and eff ective use18 • A particular set of activities and how they fi t together • A pattern in a stream of decisions19 • Creating and sustaining a fi rm’s competitive advantage • Making choices about what industries to participate in, what products and services to off er, and how to allocate resources20 • Positioning an organization for sustainable competitive advantage21 • Making choices, trade-off s; it’s about deliberately choosing to be diff erent22 • An approach for fi rst creating value for customers (value creation) and in turn creating value for the fi rm (value capture)23

3.3 WHAT IS THE PURPOSE OF STRATEGY?

We can further understand strategy by how we defi ne it, its purpose, and the reasons why so many hours and resources are devoted to getting it right. Good strategy and good execution of strategy drive wealth creation. Th is is why it’s so important to get strategy right and understand its purpose. Th e primary purpose of strategy is to help strategic managers make informed judgments in anticipation of future success. It is about the decisions, competitive actions, and activities the strategic manager needs to make in the face of uncertain, unpredictable competitive markets. As such, the purpose of strategy is not to eliminate risks in taking strategic actions, but to:

• Identify, assess and understand the nature of risk • Increase the odds of a favorable outcome • Help the general manager gain greater control over the fi rm’s external environment than the external environment has over the fi rm • Improve organizational performance

Thinking YOUR FAVORITE COMPANY’S STRATEGY Critically Exercise Do you have a favorite company that you admire for its continued strategic successes? What is the company? Describe the company’s strategy in fi ft y words or less. Explain what it is that you admire about this company.

4. WHAT IS A BUSINESS MODEL?

Th e process of business-model construction is part of business strategy. A business model is an abstract representation of a product, process, function, organization, market, network, or other business activity. For example, architects build tangible or physical scale models as representation of a structure to study aspects of an architectural design or to communicate design ideas

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 11 to clients, committees, and the general public. Afuah describes a business model as “a set of activities which a fi rm performs, how it performs them, and when it performs them so as to off er its customers benefi ts they want and to earn a profi t.”24 Th e process of business-model construction is part of business strategy. At their core, all business models address one basic question: how will the organization create, deliver, and sustain value to its customers?25 Baden-Fuller and Morgan “defi ne the business model as a system that solves the problem of identifying who is (or are) the customer(s), engaging with their needs, delivering satisfaction, and monetizing the value.”26 Th ey identifi ed three main purposes for constructing business models. First, they can describe diff erent kinds and types of businesses. Baden-Fuller and Morgan note that this is critical in trying to analytically study organizations. Second, business models can be shorthand descriptions of how fi rms operate. In this role, business models are used to ensure that there is strategic fi t across activities. Th ird, business models can be used to depict or describe how the organization will function.27

4.1 BUSINESS MODELS AND VALUE CREATION

A fi rm’s business model defi nes and identifi es how it will generate revenues and profi ts.28 Th e business model provides the economic justifi cation that drives a fi rm’s value proposition. A fi rm’s value proposition is the mix of goods and services, price and payment terms, and other amenities off ered by the fi rm to its customers. A fi rm’s customers determine if its products, services, prices, and other amenities have value or not. According to Drucker, the main purpose of a business is to “… provide value to the customer—to provide something that an independent and knowledgeable outsider who can choose whether or not to buy is willing to get in exchange for his or her purchasing power.”29 As such, a fi rm’s business model details the economics of the fi rm. Business economics in its broadest sense defi nes how an organization procures, manages, and allocates its resources and capabilities to create a competitive advantage. It includes the value added by the organization and how it chooses to compete in its choice of strategy. Th e business model identifi es a fi rm’s cost of doing business or its transaction costs within its value chain. Transaction costs cover a wide range of actions and activities in the fi rm’s value chain. A value chain is defi ned as the interlinked value-adding activities that convert inputs into outputs, which in turn add to the fi rm’s top line (revenues) and bottom line (profi tability). A value chain shows where and how a fi rm can create customer value and capture it.

Thinking Critically YOUR BUSINESS MODEL Exercise Do you have a personal business model? If so, what is it? How do you create and track value for yourself and others?

4.2 HOW DO YOU KNOW IF A COMPANY’S BUSINESS MODEL IS WORKING?

Th e obvious answer is to look at the fi rm’s profi tability and fi nancial health, both at a single moment in time and over a longer period.30 Is the fi rm’s fi nancial performance and health below, equal to, or above the performance and health of its rivals? If the fi rm’s fi nancial health is

12 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS superior, then there is strong evidence that the fi rm’s customer value proposition is working and it has a superior competitive advantage over its rivals. Competitive advantage is when a fi rm can provide the same value as its competitors but at a lower price, or can charge higher prices by providing greater value through diff erentiation. Firms employ diff erent business models compared to rivals in order to win over customers by providing superior customer value. For example, Internet advertising revenues make up the majority of Google’s revenues and profi ts. Google’s business model and value proposition in the Internet advertising e-commerce industry diff ers from those of Facebook, Amazon, Yahoo!, Apple, and others (see Chapter 3’s Opening Case: Sizing Up Players in Mobile Advertising).

Thinking IS YAHOO!’S BUSINESS MODEL WORKING? Critically Exercise Yahoo! was started at Stanford University in January 1994 by two electrical engineering graduate students, Jerry Yang and David Filo, when they created a website named “Jerry and David’s Guide to the World Wide Web.” Th e guide was a directory of other websites. In April 1994, Jerry and David’s guide was renamed Yahoo! Yahoo! grew rapidly throughout the 1990s and diversifi ed into a web portal (web portals bring information together from diverse sources in a uniform way), followed by numerous high-profi le acquisitions (Maven Networks, RockMelt [a social web browser], Flickr, Tumblr, and others). Maven provided Yahoo! with its Internet video players and video advertising tools. Th e company’s stock price rose to $118.75 in 2000. Aft er the dot-com bubble burst in 2001, it fell to $8.11. In 2008, Yahoo!’s board rejected an acquisition bid from the Microsoft Corporation to buy Yahoo! for $44.6 billion in cash and stock. Yahoo! web products, services, and other off ering include: Yahoo! Search, Yahoo! Mail, Yahoo! Messenger, Yahoo.com (Yahoo!’s homepage), Yahoo! Games, and Yahoo! Music. Th e Yahoo! homepage provides users with a preview of their mailbox, weather, stock quotes, sports scores, and comics. On July 16, 2012, former Google executive and Walmart corporate director Marissa Mayer became Yahoo!’s CEO and president—the youngest CEO of a Fortune 500 company—at the age of 37. Mayer was tasked with turning Yahoo! around aft er several years of declining sales, major management missteps, and a revolving door of Yahoo! CEOs. Key elements of Mayer’s transformation strategy included a focus on mobile products and mobile advertising formats, as well as increasing revenue from mobile devices, a platform where Yahoo! was historically weak (see Chapter 3 Opening Case: Sizing Up the Players in Mobile Advertising). In its 10-K report to the US Securities and Exchange Commission on 12/31/14, Yahoo! reported that “If we are unable to develop products for mobile devices that users fi nd engaging and that help us grow our mobile revenue, our competitive position, our fi nancial condition, and operating results could be harmed” (see Yahoo! Summary Income Statement—2007–2014). “In addition, a number of competitors off er products, services, and apps that directly compete for users with our off erings, including e-mail, search, video, social, sports, news, fi nance, micro-blogging, and messaging.” On September 29, 2015, the Wall Street Journal reported that Yahoo! intends to sell more than $20 billion worth of stock that it holds in Alibaba (China’s biggest online commerce company). Th e WSJ stated that Mayer “needs to complete the Alibaba spin-off to quell investors, who are growing impatient with her lack of progress turning around the company’s struggling online-ad business in more than three years at the helm.”i

Sources: http://info.yahoo.com/: https://investor.yahoo.net/sec.cfm: http://fi les.shareholder.com/downloads/YHOO/ 789709555x0x826745/b7e0b2eb-68d3–4612–9307–03478b206a37/YahooInc2014AnnualReport.pdf;http://www.mergentonline. com.libproxy.unh.edu/companydetail.php?compnumber=87948&pagetype=synopsis; https://investor.yahoo.net/annuals.cfm

i Douglas MacMillan, “Yahoo! Presses Ahead With Alibaba Spinoff,” Wall Street Journal, September 29, 2015: B1.

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 13 Exhibit A (Th ousands) Yahoo! Year 2014 2013 2012 2011 2010 2009 2008 2007 Summary of Revenues 4618133 4680380 4986566 4984199 6324651 7208502 6969274 5257668 Income Statement: Cost of revenues 1298314 1349380 1620566 1502650 2627545 3023362 2838758 2096201 12/31/2007– Gross profi t 3319819 3331000 3366000 3481549 3697106 4185140 4130516 3161467 12/31/2014 Total operating expenses 4475191 4090454 4420198 2681208 2924582 4172177 3435103 2053742 Income (loss) from operations 142942 589926 566368 800341 772524 12963 695413 1107725 Gain from sale of Alibaba Group Shares — — 4603322 — — — — — Gain on sale of Alibaba Group ADSs 10319437 — — — — — — — Provision (benefi t) for income taxes 4038102 153392 1940043 241767 221523 262717 337263 767816 Net income (loss) 7532142 1376566 3950602 1062669 1244628 424298 660000 1896230 Net income attributable to Yahoo! Inc. 7521731 1366281 3945479 1048827 1231663 — — — Net income (loss) per share—basic 7.61 1.3 3.31 0.82 0.91 0.31 0.49 1.35 Net income (loss) per share—diluted 7.45 1.26 3.28 0.82 0.9 0.29 0.47 1.28 Number of full time employees 12500 12200 11700 14100 13600 13600 14300 9800

Sources: http://www.mergentonline.com.libproxy.unh.edu/companydetail.php?compnumber=87948&pagetype=synopsis; https://investor.yahoo.net/annuals.cfm

Critical Thinking YAHOO! Questions a. Describe Yahoo!’s business model. Based on the fi nancial information found in Exhibit A (Yahoo! Summary of Income Statement), does Yahoo! have a competitive advantage? Is its business model working? How do you know if it’s working or not? b. Mayer is planning to spin off Yahoo!’s holdings in Alibaba. Th e spin-off is projected to provide Yahoo! with pre-tax capital gains of $20 billion. What should it do with the proceeds? What portion of the proceeds should she allocate to the turnaround strategy, and how much should be returned to shareholders through dividends? c. Go to your college or university online databases (or a business publication that reports fi nancial information). Click on a business and economics database link, such as Mergent online or a similar service. Find the latest fi nancial information for Google, Facebook, and Yahoo! Peruse each company’s fi nancial statements (income statements and balance sheets or fi nancial highlights) for the last three years. Which company has the superior business model, based on its overall fi nancial performance during this three-year period? Now what do you think of Yahoo!’s business model and its overall eff ectiveness?

14 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS 4.3 FIRST STEP IN EVALUATING BUSINESS MODEL EFFECTIVENESS—FINANCIAL ANALYSIS

Strategic managers do not need to be CPAs, but as leaders of their organization, they need to have a fi rm understanding of their company’s fi nancial performance. Th ey need to know how to read fi nancial statements and to be able to assess and interpret the fi nancial health of the organization. Th e numbers and data collected by the organization are put into reports and fi nancial statements. Th e fi nancial statements provide the information for understanding the cost, quality, and price relationships associated with doing business. Th is information is turned into knowledge used to make informed decisions. At a minimum, the general manager responsible for the profi t and loss of an organizational entity needs to:

• Know the fi nancial statements and what goes into them (e.g., income statement, balance sheet, cash fl ow). • Conduct a fi nancial ratio analysis and know the various kinds of ratios: liquidity; turnover or activity; leverage; profi tability; and stock market (see Table 1.1: Financial Ratios) • Compare and analyze ratios by comparing performance against some standard company or industry performance metrics (e.g., past fi nancial performance, future expectations or goals, best in class for a particular industry or company). Th is is particularly important for understanding which rivals are winning (earning above-average profi ts) and losing (with losses or below-average profi ts) in the markets in which they compete. If one company is extracting all the industry profi ts at a single point in time and/or over a longer period, then one can conclude that this company has a competitive advantage over its rivals. • Conduct a vertical analysis—these are common size statements in which all the numbers are reported as a percentage (of total sales for the income statement and of total assets for the balance sheet). For example, the vertical analysis of the balance sheet means every amount on the balance sheet is restated as a percentage of total assets. If inventory is $100,000 and total assets are $400,000, then inventory is presented as 25 percent ($100,000 divided by $400,000). • Conduct a horizontal analysis or trend analysis—look at fi nancial performance (expressed as an absolute number or on a percentage basis) over a set time period, using several ratios and fi nancial indicators. For example, what was the compounded average annual sales growth, gross margin growth, and net profi t growth for the company over the last fi ve years?

Th e strategic manager needs to be able to answer the following questions:

• Is the company’s business model working? • Does the company have a competitive advantage? • Is the company’s competitive advantage sustainable? • Can the company weather fi nancial adversity?

In conducting a fi nancial analysis and audit, the general manager needs to be good at interpreting, understanding, and using fi nancial information to inform decisions and take strategic actions. At a minimum, the strategic manager should have a good understanding of the following types of ratios (See Table 1.1 Financial Ratios): Liquidity Ratios: Liquidity ratios measure a fi rm’s short-term solvency—does the fi rm have adequate short-term cash fl ow to meet its current and maturing fi nancial obligations and needs? As such, liquidity ratios usually focus on the current or short-term accounts found in the company’s balance sheet (e.g., current assets and current liabilities). Activity or Turnover Ratios: Activity ratios refl ect how well a fi rm utilizes it resources—is the fi rm eff ec- tively utilizing its assets? For example, if inventory is not sold at a reasonable rate, then a fi rm could have cash needlessly tied up in stagnant or obsolete inventory. Activity ratios refl ect movement and are usually calculated

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 15 by dividing net sales or cost of goods sold by an asset account (e.g., inventory, accounts receivable, property, plants and equipment). Leverage Ratios: Leverage ratios measure a fi rm’s long-term solvency or ability to meet lenders and investors’ fi nancial requirements—who is fi nancing the fi rm’s assets? Are funds being provided by short-term creditors, long-term creditors (referred to as debt fi nancing), or owners? Leverage ratios keep track of owners’ versus nonowners’ claims on the assets of the business. Profi tability Ratios: Profi tability ratios measure how well a business is performing—its fi nancial health and ability to meet investors’ fi nancial expectations. How much income is the business generating relative to total sales, assets utilized, and owners’ and nonowners’ claims on assets? Also, are returns on sales, assets, and owners’ equity at a level that will attract investors and fi nance long-term fi rm growth? Stock Market Ratios: Stock market ratios measure how investors in publicly traded companies perceive a company’s past, present, and future fi nancial performance, as well as the company’s overall attractiveness to current and prospective investors. Among the better-known stock market performance indicators investors will track are: earnings per share (EPS) (net income/ number of “common” shares outstanding); price earnings ratio (PE), (stock price/EPS); dividend yield (dividend declared/stock price); and market capitalization (common shares outstanding multiplied by stock price).

Table 1.1. Financial Key Financial Ratios (Ratios are based on an analysis of the Accounting Equation) Ratios Accounting Equation:

• Assets = Claims on Assets • Assets = Liabilities + Owners’ Equity • Assets = Non Owners’ Claims (Creditors) + Owners’ (Stockholders) Claims on Assets • Current Assets + Non Current Assets = Current Liabilities + Non Current Liabilities + Owners’ Equity • Owners’ Equity = Owners’ (Sole proprietors, partners, or stockholders) contributions + Retained Earnings • Retained Earnings = Revenues—Expenses = Net Income—Dividends paid to common stockholders • Assets—Liabilities = Owners’ Equity • Assets—Liabilities = Net Worth • Th erefore Net Worth = Owners’ Equity • Change in Assets = Change in Liabilities + Changes in Owners’ Equity (Statement of Cash Flows or Funds Flows)

As a fi rst step fi nancial audit, at a minimum the following ratios should be considered:

A. LIQUIDITY RATIOS: Can the organization meet its current and maturing fi nancial obligations? Liquidity ratios usually focus on the current or short-term accounts on the balance sheet (e.g., current assets and current liabilities).

RATIO CALCULATION STATEMENT REPORTED

Current Assets 1. Current Ratio = ------Balance Sheet Percentage (%) Current Liabilities

16 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS Meaning: Compares total dollars in current assets with total dollars in current liabilities. Rule of Th umb: (For a manufacturing concern) 2:1; that is, lenders would prefer to see $2 in current assets for every $1 in current liabilities. For high technology companies and companies that are eff ective at supply change management a current ratio of less than 2:1 is not unusual.

2. Quick or Current Assets less Current Balance Sheet Percentage (%) Acid Test Ratio = Assets that are not easily Converted into cash (usually Inventory) ------Current Liabilities

Meaning: Compares those current assets that are cash or near cash (readily converted into cash) with current liabilities. Rule of Th umb: 1:1; that is, for every $1 in cash or near cash lenders would like to see current liabilities of a $1 or less. For high technology companies and companies that are eff ective at supply change management a quick ratio of less than less than 1:1 is not unusual.

3. Working Capital = Current Assets Minus Balance Sheet Dollars Current Liabilities

Meaning: Provides a measure of how much greater current assets are (in dollars) current liabilities. Usually the larger the working capital in dollars the more liquid or solvent is the company.

B. TURNOVER OR ACTIVITY RATIOS: Is the organization suffi ciently utilizing its assets? Activity refl ects how well an organization employs or utilizes its resources. For example, is merchandise being moved out of inventory at a reasonable rate or do we have funds needlessly invested in stagnant or slow moving inventory? Activity ratios refl ect movement and are usually calculated by dividing total net sales, credit sales or cost of goods sold by an asset account (either short-term or long-term).

4. Inventory Sales (or cost of goods sold) Income Statement and Times Turnover = ------= Balance Sheet Average (*) Inventory

(*) To calculate an average take beginning inventory plus ending inventory and divide by 2. Remember ending inventory in one year is the beginning inventory for the next year. If only one year’s balance sheet is given, then an average cannot be calculated (use total year end inventory).

Meaning: Th is ratio calculates how many times total inventory, usually fi nished goods, was replaced during the year. For example, if the inventory rate is 9x (nine times) it means that 9 times during the year fi nished goods inventory was replaced (restocked). Rule of Th umb: Big-ticket items (cars, airplanes, machinery) have low turnover rates while small ticket items (screws, pens, hamburgers) have high inventory turns. Generally, the quicker inventory is moved out of stock (high inventory rates) the quicker sales can be generated accelerating the company’s earning cycle.

Days (365 days) --- Days

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 17 5. Days inventory = ------on hand Inventory Turnover

Meaning: Calculates how many days on average inventory were held during the year. For example, if fi nished goods inventory turnover is 9x (9 times) then on average inventory was in stock 40 days (fi nished goods inventory was replaced every forty days on average).

6. Accounts Receivable Credit Sales (or Net Total Sales) Income Statement Times (AR) Turnover = ------and Average Accounts Balance Sheet Receivable

7. Collection Period Days (365 days) --- Days ------AR Turnover

Meaning: Th e longer the collection period the longer it takes to collect accounts receivable. Long collection periods signal customer problems and/or poor credit management or poor credit management or both.

8. Fixed Asset Net Sales Income Statement Times Turnover = ------and Net Fixed Assets Balance Sheet (Usually defi ned as long-term total assets less depreciation)

Meaning: Are we generating suffi cient sales to warrant an investment in long-term fi xed assets, such as plant and equipment? Th e higher the turnover, the more effi cient the fi rm is in employing fi xed assets. For example, if the fi xed asset turnover is 9x (nine times) then the company would be generating $9 in revenues for every $1 in fi xed assets annually. Higher rates are generally associated with more effi cient utilization of fi xed assets and higher returns on fi xed assets.

C. LEVERAGE RATIOS: Who is fi nancing the business or organization? Is it short-term creditors, long-term creditors (referred to as debt fi nancing) or owners (referred to as equity investors)? Leverage compares owner’s fi nancial contributions or investment (either direct through capital infu- sion, or purchase of stock or through income retained in the business) in the assets of the business with the non-owners (debt holders) investment in the assets of the business. Th us, leverage ratios keep track of owners’ versus non-owners’ claims on the assets of the business.

Total Debt (total current Balance Sheet Percentage % and non-current liabilities) 9. Debt Ratio = ------Total Assets

Meaning: If the balance sheet reports claims on assets then the debt ratio calculates the portion of assets fi nanced by non-owners (debt holders) compared to the percentage of assets fi nanced by owners. For

18 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS example, a debt ratio of .40 would indicate that for every $1 owners and non-owners have in claims on assets, creditors have claims of $.40 and owners have claims of $.60. Rule of Th umb: 50%/50% or 1:1. Generally creditors usually do not want to own more than fi ft y percent of the total claims on assets.

10. Times Interest Net Income before taxes Earned plus interest expense Income Statement Times ------Interest Expense

Meaning: Indicates the number of times interest expense can be covered by earnings. For example, if times interest earned were 5x (5 times), then the company could actually cover fi ve times the interest expense. Creditors like to see high interest expense coverage, usually around a minimum of 2 times.

11. Long-term Debt Long-Term Liabilities to Total Assets = ------Balance Sheet Percentage Total Assets

Meaning: Of all creditors’ claims on assets what percent is being claimed by long-term creditors?

12. Net Worth = Total Assets minus Balance Sheet Dollars Total Liabilities

Meaning: Net worth is synonymous with owners or stockholders’ equity. Owner or stocker equity represents non-creditors’ claims on assets. Th e higher the net worth, the more confi dent creditors, as well as current or prospective owners have in current and future company fi nancial performance.

13. Current Liabilities Current Liabilities to Net Worth = ------Balance Sheet Percentage Net Worth

Meaning: Since net worth refl ects owners’ claims on assets, then current liabilities to net worth compares short-term non-owner claims on assets with owners’ claims on assets. For instance, if current liabilities to net worth is .25, it would indicate that for every $1 owners and non owners have in claims on total assets, short-term creditors have $.25 in claims on assets and owners have $.75 in claims. Rule of thumb is usually $.35 maximum or no more than 35 cents in claims by short-term creditors.

D. PROFITABILITY RATIOS: How much income is the organization generating relative to total sales or total assets employed? Is the income suffi cient to warrant an investment in this organization? Profi tability ratios measure how well the company is performing.

14. Return on Net Income Sales (ROS) = ------Income Statement Percentage Net Sales

Meaning: Return on sales is a measure of operating effi ciency. Th is ratio reports the percent of net income earned for every dollar in sales generated. For example, a ROS of .07 means that for every dollar in sales

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 19 $.07 was reported as net income. Conversely, for every dollar in sales, $.93 was reported as expense. Rule of thumb for a manufacture is usually $.05 aft er tax; consumer goods company around 10 cents on the dollar and 20 to 25 cents on the dollar for established high technology companies.

15. Return on Net Income before Taxes Income Statement Percentage Assets or = ------and Investment (ROI) Total Assets Balance Sheet

Meaning: Th is ratio provides an indication of how much income was generated for each dollar invested in assets. For example, a 15 % ROI means that 15 cents is being return for every dollar in assets. Rule of Th umb: A minimum of 15% ROI. Higher returns are required for higher risk businesses and new ventures. For example, it is not unusual for venture capital investors and investment bankers to expect returns of 40% or higher per year for riskier high technology ventures.

16. Gross Margin (GM) $ = Net Sales minus Cost of Goods Sold Income Statement Dollars

Meaning: Gross margin dollars provides an indication of operating effi ciency or performance. Since cost of goods sold is composed of inventory expense, direct labor expense and overhead expense then operating margin (total dollars available aft er paying for cost of good sold expenses) must be adequate enough to cover general and administrative expenses, research and development expenses, marketing and sales expense and interest expense. Any dollars remaining aft er cost of goods sold expenses, operating expenses, and interest expense are covered goes to net income.

17. Gross Margin Income Statement Percentage Gross Margin (GM) % = ------Net Sales

Rule of thumb: Manufacturing 20–25% gross margins; Consumer goods companies gross margins of 30–35%; High technology companies 50% GM or higher.

18. Return on Net Income—Preferred Income Statement Percentage Equity = Dividends and (ROE) ------Balance Sheet Average Common Shareholder’s Equity

Meaning: Th is ratio reports the rate of return common stockholders are receiving on their claims in the assets of the business.

19. Retained Earnings Net Income minus Income Statement Dollars Dividends or owner’s withdrawals

Meaning: Retained earnings refl ects owners’ claims on the assets of the business that were generated from the operations of the business at a moment in time. Note: retained earnings are claims on assets, not dollars or cash retained in the business (although a portion of retained earnings claims could be in cash).

20 ACTING STRATEGICALLY, THINKING CRITICALLY: A CASEBOOK FOR BUSINESS STUDENTS E. STOCK MARKET RATIOS

20. Earnings Per Net Income—Preferred Share (EPS) Stock Dividends Income Statement Dollars = ------and Average Number of Balance Sheet Common Stockholders Shares Outstanding

Meaning: Th is ratio measures the number of dollars earned in net income for every common share of stock outstanding.

21. Price Earnings (PE) Ratio Common Stock Price Times ------Earnings Per Share

For example, if a company’s stock is trading at $60 a share and its earnings over the last 12 months were $3 per share the company’s P/E ratio for the stock is 20 or trading at 20 times earnings.

22. Market Capitalization = Total number of common shares outstanding Dollars Multiplied by current market price of common shares.

For example if a company’s stock is trading on the NYSE at $100 per share and are 10 million shares outstanding then the company’s market capitalization is $10 billion dollars.

Thinking FINANCIAL SNAPSHOTS Critically Exercise a. Go to your college or university online databases (or a business publication that reports fi nancial information). Click on a business and economics database link, such as Mergent online or a similar service. Find the latest fi nancial information for Starbucks and Dunkin’ Brands. Peruse each company’s fi nancial statements (income statement and balance sheet or fi nancial highlights) for the last three years. Which company has the superior business model, based on its overall fi nancial performance during this three-year time period? b. Assume that you received a $10,000 inheritance from a rich uncle. Th e will specifi es that your uncle wants you to buy stock in all three of the following companies: Apple, Inc., Google, Inc., and Yahoo! Conduct a brief fi nancial audit for each company. Based on this fi nancial audit, how many shares of each company’s stock would you buy, and why? Th e only restriction in the will is that you need to invest at least 50 percent of the money ($5,000) in one company’s shares, and you cannot sell these shares for at least three years.

STRATEGY CONCEPTS AND STRATEGIC MANAGEMENT 21