Saudi Electronic University Managing Dynamic Environment Discussion

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Business Finance

Description

for this discussion, you will explore the relationship between financial analysis and strategic analysis in a review of the case study Case 9: Starbucks Corporation, p.462 (from your textbook)

A case study is a puzzle to be solved, so before reading and answering the specific questions, develop your proposed solution by following these five steps:

  1. Read the case study to identify the key issues and underlying issues. These issues are the principles and concepts of the course modules which apply to the situation described in the case study.
  2. Record the facts from the case study which are relevant to the principles and concepts of the course modules. The case may have extraneous information not relevant to the current module. Your ability to differentiate between relevant and irrelevant information is an important aspect of case analysis, as it will inform the focus of your answers.
  3. Describe in detail the actions that would address or correct the situation.
  4. Consider how you would support your solution with examples from experience or current real-life examples or cases from textbooks.
  5. Complete this initial analysis and then read the discussion questions. Typically, you will already have the answers to the questions, but with a broader consideration. At this point, you can add the details and/or analytical tools required to solve the case.

In an original post, present a well-written answer and diagnosis for the following case study questions:

  1. Examine the reasons why Starbucks’ strategy has been so successful.
  2. Examine the threats to Starbucks’ success in the future.
  3. How does Starbucks link organizational goals to measures of value?
  4. How does Starbucks link organizational goals to measures of performance?

Embed course material concepts, principles, and theories (which require supporting citations) in your initial response along with at least one scholarly, peer-reviewed journal article. Keep in mind that these scholarly references can be found in the Saudi Digital Library by conducting an advanced search specific to scholarly references. Use Saudi Electronic University academic writing standards and APA style guidelines.

You are required to reply to at least two peer discussion question post answers to this weekly discussion question and/or your instructor’s response to your posting. These post replies need to be substantial and constructive in nature. They should add to the content of the post and evaluate/analyze that post’s answer. Normal course dialogue doesn’t fulfill these two peer replies but is expected throughout the course. Answering all course questions is also required.

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CONTEMPORARY STRATEGY ANALYSIS tenth edition Robert M. Grant John Wiley & Sons Ltd., 2019 Chapter 1 The Concept of Strategy 1 The Concept of Strategy OUTLINE • The role of strategy in success • A framework for strategy analysis • The evolution of strategic management • What is strategy? How do we describe it? • How is strategy made? • Strategy and not-for-profit organizations Copyright © 2019 John Wiley & Sons, Inc. THE ROLE OF STRATEGY IN SUCCESS Ingredients of Success QUEEN ELIZABETH & THE HOUSE OF WINDSOR LADY GAGA & THE HOUSE OF GAGA GOALS Life-long dedication to role of monarch and head of state UNDERSTANDING THE ENVIRONMENT Alert to the changing political and Awareness of: social environment . • new economics of the music business Sensitive to the mood and needs • marketing potential of social of the British people networking • needs of Generation Y RESOURCE APPRAISAL Recognized lack of formal authority and need to exploit traditional loyalties and informal influence Exploited her innate theatricality, eccentricity, design capability, and musical skills IMPLEMENTATION Resolute commitment; strong self-discipline; building an effective family team supported by loyal professionals Devotion to living the Lady Gaga character; engagement in continually creating new images for herself Copyright © 2019 John Wiley & Sons, Inc. Single-minded quest for stardom through her Lady Gaga persona THE ROLE OF STRATEGY IN SUCCESS What Makes a Successful Strategy? Successful strategy EFFECTIVE IMPLEMENTATION Long-term, simple and agreed objectives Copyright © 2019 John Wiley & Sons, Inc. Profound understanding of the competitive environment Objective appraisal of resources THE BASIC FRAMEWORK FOR STRATEGY ANALYSIS Strategy as the Link between the Firm and its Environment THE FIRM THE INDUSTRY ENVIRONMENT • Goals & Values • Resources & Capabilities • Structure & Systems Copyright © 2019 John Wiley & Sons, Inc. STRATEGY STRATEGY • Competitors • Customers • Suppliers THE BASIC FRAMEWORK FOR STRATEGY ANALYSIS Ryanair’s activity system Low operating costs High aircraft utilization Boeing 737s only 25-min. turnaround Point-to-point routes Secondary airports Copyright © 2019 John Wiley & Sons, Inc. No-frills product offering Low prices; Charges for all additional services High labor productivity Single class, no reserved seating No baggage transfer Job flexibility Direct sales only Internet-only check-in A BRIEF HISTORY OF BUSINESS STRATEGY 1950s: Financial budgeting • Operational budgeting • DCF capital budgeting 1960s & early 1970s: Corporate planning • Corporate plans based on medium-term economic forecasts The Evolution of Late 1970 & 1980s: Strategic 3 key changes: Emergence of Strategic Management 1. Changing concept of strategy Management • Strategy as a quest for profit 2. Changing processes of strategy formulation • Industry analysis and competitive positioning New tools of strategy analysis 21st3. century: Adapting to Turbulence • • • • Adapting to and exploiting digital The quest for flexibility & strategic innovation Strategic alliances Social and environmental responsibility Copyright © 2019 John Wiley & Sons, Inc. 1990s: The Quest for Competitive Advantage • • • Emphasis on resources & capabilities Shareholder value maximization Refocusing, outsourcing, delayering, cost cutting STRATEGY TODAY What is Strategy? • Distinguishing strategy from tactics: – Strategy is the overall plan for deploying resources to establish a favorable position. – Tactic is a scheme for a specific maneuver • Characteristics of strategic decisions: – Important. – Involve a significant commitment of resources. – Not easily reversible © 2017 Robert M. Grant, www.contemporarystrategyanalysis.com STRATEGY TODAY Definitions of Strategy Strategy: a plan, method, or series of actions designed to achieve a specific goal or effect. — Wordsmyth Dictionary (http://www.wordsmyth.net) The determination of the long-run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. Strategy: “a cohesive response to an important challenge.” ——Richard Rumelt, Good Strategy / Bad Strategy (Crown Business, 2011) — Alfred Chandler, Strategy and Structure (MIT Press, 1962) Lost Boy: John Darling: Lost Boy: John Darling: “Injuns! Let ’s go get ‘em!” “Hold on a minute. First we must have a strategy.” “Uhh? What’s a strategy?” “It’s, er … it’s a plan of attack.” — Walt Disney’s Peter Pan Copyright © 2019 John Wiley & Sons, Inc. STRATEGY TODAY Why Do Firms Need Strategy? Strategy as Decision Support Improves the quality of decision making Strategy as Coordination and Communication Creates consistency and unity Strategy as Target Copyright © 2019 John Wiley & Sons, Inc. Improves performance by setting high aspirations STRATEGY TODAY Sources of Superior Profitability INDUSTRY ATTRACTIVENESS RATE OF PROFIT ABOVE THE COST OF CAPITAL How do we make money? Which businesses should we be in? COMPETITIVE ADVANTAGE How should we compete? Copyright © 2019 John Wiley & Sons, Inc. CORPORATE STRATEGY BUSINESS STRATEGY STRATEGY TODAY Describing Strategy: Current Positioning, Future Direction • STRATEGY AS POSITIONING STRATEGY AS DIRECTION Where are we competing? - Product market scope - Geographical scope - Vertical scope What do we want to become? - Vision statement How are we competing? - What is the basis of our competitive advantage?) COMPETING FOR THE PRESENT Copyright © 2019 John Wiley & Sons, Inc. • What do we want to achieve? - Mission statement - Performance goals • How will we get there? - Guidelines for development - Priorities for capital expenditure, R&D - Growth modes: organic growth, M&A, alliances PREPARING FOR THE FUTURE HOW IS STRATEGY MADE? THE STRATEGY PROCESS Strategic Making: Design or Process? Strategy as Design Strategy as Process Planning and rational choice Many decision makers responding to multitude of external and internal forces INTENDED STRATEGY REALIZED STRATEGY EMERGENT STRATEGY Mintzberg’s Critique of Formal Strategic Planning: •The fallacy of prediction—the future is unknown •The fallacy of detachment—impossible to divorce formulation from implementation •The fallacy of formalization—inhibits flexibility, spontaneity, intuition and learning. Copyright © 2019 John Wiley & Sons, Inc. HOW IS STRATEGY MADE? THE STRATEGY PROCESS Applying Strategy Analysis Setting the strategic agenda Analyzing the situation Formulating strategy Implementing strategy Formulate strategy Implement strategy Industry analysis Identify the current strategy Appraise performance Diagnose performance Analysis of resources & capabilities Copyright © 2019 John Wiley & Sons, Inc. STRATEGIC MANAGEMENT OF NOT-FOR-PROFIT ORGANIZATIONS Applying Strategy Analysis to Not-For-Profits Examples Organizations in competitive environments that charge users Royal Opera House Organizations in competitive environments that provide free services Salvation Army Organizations sheltered from competition European Central Bank Guggenheim Museum Habitat for Humanity New York Police Dept. Stanford University World Health Organization Linux Analysis of goals and performance Identifying mission, goals, and performance indicators and ensuring consistency among them is a key area of strategy analysis for all non-profits Analysis of the competitive environment Main tools of Main arena for competitive analysis competition and are the same as for competitive strategy is for-profit firms the market for funding Identifying and exploiting distinctive resources and capabilities critical to design strategies that create competitive advantage Analysis of resources and capabilities Strategy implementation Not important. However, agencies compete for public funding. Analysis of resources and capabilities essential in determining priorities and designing strategies The basic principles of organizational design, performance management, and leadership are common to all organizational types Copyright © 2019 John Wiley & Sons, Inc. Summary ❑ The role of strategy in success ▪ Strategy important to the success of individuals and organizations ▪ Successful strategies embody clear goals; insight into the external environment; appraisal of internal resources; sound implementation ❑ The framework for strategy analysis ▪ Links the firm to its external environment ❑ The evolution of strategic management ▪ Strategy was concerned with detailed planning; now its is about direction, identity, and exploiting the sources of superior profitability ❑ What is strategy? How do we describe it? ▪ Strategy describes where a firm is competing, how it is competing, and the direction in which it is developing ❑ How is strategy made? ▪ Through combining purposeful planning (rational design) and flexible responses to changing circumstances (emergence). ❑ Strategic management of not-for-profit organizations ▪ Most of the tools of strategy analysis are applicable • Copyright © 2019 John Wiley & Sons, Inc. 16 CONTEMPORARY STRATEGY ANALYSIS tenth edition Robert M. Grant John Wiley & Sons Ltd., 2019 Chapter 2 Goals, Values, and Performance 1 Goals, Values, and Performance OUTLINE • Strategy as a quest for value • Putting performance analysis into practice • Beyond profit: values and corporate social responsibility • Beyond profit: strategy and real options Copyright © 2019 John Wiley & Sons, Inc. STRATEGY AS A QUEST FOR VALUE What is Business For? ▪ Every business has a unique purpose—typically this reflects the motives of the entrepreneurs who created these businesses E.g. Henry Ford (Ford Motor Company), Steve Jobs (Apple), Jack Ma (Alibaba) were each motivated by a distinct vision. ▪ Common to every business enterprise: the desire/need to create value ▪ Value is the monetary worth of a product. Hence, the purpose of business is 1) to create value for customers 2) to appropriate some of that value in the form of profit—in order to ensure the survival of the firm Copyright © 2019 John Wiley & Sons, Inc. STRATEGY AS A QUEST FOR VALUE Value for Whom? Shareholders vs Stakeholders The shareholder approach The stakeholder approach The firm exists to maximize the wealth of its owners The firm is a coalition of interest groups —it must create value for them all For the purposes of strategy analysis we assume that the primary goal of the firm is maximizing profit over its lifetime Rationale: 1) Competition: To survive a firm must earn return on capital > cost of capital. This is difficult when competition is strong. 2) Acquisition: Firms that do not maximize profits are vulnerable to acquisition. 3) Convergence of interests: long run profitability requires satisfied customers, motivated employees, and good relations with governments and communities. Hence: Strategy analysis is concerned with identifying and accessing the sources of profit available to the firm Copyright © 2019 John Wiley & Sons, Inc. STRATEGY AS A QUEST FOR VALUE Value Creation A. Value created: total customer value less real cost of production B. Value created: consumer surplus plus producer surplus PROFIT, CASH FLOW, AND ENTERPRISE VALUE What is Profit? Different Measures Give Different Rankings (data for 2017) Company Market capitalization Net income ($ billion) ($ billion) ROS (%) ROE (%) ROA (%) Return to shareholders (%) Apple 824 48.4 26.9 39.0 16.3 +46.8 Amazon 689 3.0 2.3 9.6 3.1 +27.4 Alibaba 480 6.2 29.8 21.9 9.1 +94.1 JPMorgan Chase 397 24.4 50.2 9.5 1.4 +24.6 ExxonMobil 358 19.7 5.2 11.8 5.7 –5.8 Wal-Mart Stores, Inc. 310 13.6 4.1 14.9 11.9 +45.2 Toyota 204 15.8 7.6 13.2 4.1 +5.8 Copyright © 2019 John Wiley & Sons, Inc. PROFIT, CASH FLOW, AND ENTERPRISE VALUE Linking Profit to Enterprise Value Profit maximization an ambiguous goal: – Total profit vs. Rate of profit – Over what time period? – What measure of profit? – Accounting profit versus economic profit Estimating the value of the enterprise: Net present value of free cash flows: Where: V Ct WACC Copyright © 2019 John Wiley & Sons, Inc. V= Σt Ct (1 + WACC)t market value of the firm. free cash flow in time t weighted average cost of capital PROFIT, CASH FLOW, AND ENTERPRISE VALUE Value Maximization and Strategy Choice In principle, DCF approach to enterprise value maximization is the correct approach to choosing a strategy: ▪ Identify strategy alternatives ▪ Estimate cash flows and cost of capital for each strategy ▪ Select the strategy which generates the highest NPV. But in practice: ▪ Difficult to estimate cash flows more than 2 or 3 years ahead ▪ Hence, value maximization may encourage short-termism. Implications for strategy analysis: ▪ Simple guidelines can approximate value maximization, e.g. a) On existing assets—seek to maximize rate of return b) On new investment—seek rate of return > cost of capital ▪ Use qualitative strategy analysis to evaluate future profit potential. Copyright © 2019 John Wiley & Sons, Inc. PROFIT, CASH FLOW, AND ENTERPRISE VALUE Profitability Ratios Ratio Formula Return on Capital Employed (ROCE) Operating profit, before interest, after tax, Equity + Debt Return on Equity (ROE) Return on Assets (ROA) Gross margin Operating margin Net margin Notes The return on the capital invested in a business. ROCE is also known as return on invested capital. The numerator can be is operating profit or earnings (EBIT). Net income Measures the firm's success in using shareholders’ capital to generate profits that Shareholders’ equity are available to remunerate investors. Operating profit The numerator should be the return on all the company’s assets—e.g. operating profit, Total assets EBITDA (earnings before interest, tax, depreciation, and amortization), or EBIT (earnings before interest and tax). Sales – cost of material inputs Gross margin measures how much value a firm adds value to the goods and services it buys in. Sales Operating profit / Sales Net income / Sales Copyright © 2019 John Wiley & Sons, Inc. Operating margin and net margin measure a firm's ability to extract profit from its sales, but influenced by differences in capital intensity between different types of business. PROFIT, CASH FLOW, AND ENTERPRISE VALUE Enterprise Value and Shareholder Value Enterprise value = Market capitalization of equity + Market value of debt Reasons for preferring maximization of enterprise value over maximization of shareholder value: • Not always easy to distinguish debt from equity • Shareholder value maximization has become discredited by its misapplication by managers (e.g. in emphasizing short-term profits and in seeking to manipulate reported earnings). Copyright © 2019 John Wiley & Sons, Inc. PUTTING PERFORMANCE ANALYSIS INTO PRACTICE Profitability Ratios Ratio Formula Return on Capital Employed (ROCE) Operating profit, before interest, after tax, Equity + Debt Return on Equity (ROE) Return on Assets (ROA) Gross margin Operating margin Net margin Notes The return on the capital invested in a business. ROCE is also known as return on invested capital. The numerator can be is operating profit or earnings (EBIT). Net income Measures the firm's success in using shareholders’ capital to generate profits that Shareholders’ equity are available to remunerate investors. Operating profit The numerator should be the return on all the company’s assets—e.g. operating profit, Total assets EBITDA (earnings before interest, tax, depreciation, and amortization), or EBIT (earnings before interest and tax). Sales – cost of material inputs Gross margin measures how much value a firm adds value to the goods and services it buys in. Sales Operating profit / Sales Net income / Sales Copyright © 2019 John Wiley & Sons, Inc. Operating margin and net margin measure a firm's ability to extract profit from its sales, but influenced by differences in capital intensity between different types of business. PUTTING PERFORMANCE ANALYSIS INTO PRACTICE Performance Diagnosis: Disaggregating ROA COGS/Sales Sales Margin Depreciation/Sales SGA expense/Sales ROA Fixed asset turnover (Sales/PPE) Inventory Turnover (Sales/Inventories) Sales/Assets Creditor Turnover (Sales/Receivables) Turnover of other items of working capital Copyright © 2019 John Wiley & Sons, Inc. PUTTING PERFORMANCE ANALYSIS INTO PRACTICE Disaggregating ROA for UPS (U) and Fedex (F) Labor costs/Sales U: 54.8% F: 36.3% Fuel costs/Sales U: 7.5% F: 5.8% Operating Margin U: 11.2% F: 6.3% Maintenance/Sales U: 2.3% F: 4.2% Depreciation/Sales U: 3.4% F: 5.2% ROA Other costs/Sales U: 16.7% F: 7.6% U: 21.4% F: 42.5% PPE turnover Sales/Assets U: 1.49 F: 1.21 U: 3.02 F: 2.03 Receivables turnover U: 10.23 F: 6.80 Cash turnover U: 9.51 F: 15.50 Copyright © 2019 John Wiley & Sons, Inc. PUTTING PERFORMANCE ANALYSIS INTO PRACTICE Linking Value Drivers to Performance Targets Margin Shareholder value creation Economic Profit CEO Sales Targets cogs/ sales Development Cost/Sales ROCE Inventory Turnover Capital Turnover Corporate/Divisions Capacity Utilization Order Size Customer Mix Sales/Account Customer Churn Rate Deficit Rates Cost per Delivery Maintenance cost New product development time Indirect/Direct Labor Customer Complaints Downtime Accounts Payable Time Cash Turnover Accounts Receivable Time Functions Depts. & Teams PUTTING PERFORMANCE ANALYSIS INTO PRACTICE Balanced Scorecard for a Regional Airline Simplified Strategy Map Financial Increase Profitability Lower Cost Performance Measures Targets Initiatives • Market Value • Seat Revenue • Plane Lease Cost • 25% per year • 20% per year • 5% per year • Optimize routes • Standardize planes • FAA on-time arrival rating • Customer ranking • No. customers • First in industry • 98% satisfaction • % change • Quality management • Customer loyalty program • On Ground Time • On-Time Departure •
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Explanation & Answer

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Case 9: Starbucks Corporation-Outline
I. Reasons Why Starbucks' Strategy Has Been Successful
A. A company strategy describes where an organization is competing, how it is
competing, and the direction it is taking toward its future
B. Starbucks' strategy...


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I was having a hard time with this subject, and this was a great help.

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