02/10/2013

Week 1 – Lecture Slides

FIN 6446
Professor Manuel Lasaga
FIU

Prof. Manuel Lasaga Department of Finance, FIU

What is Strategy?

Michael Porter:
What is Strategy

Prof. Manuel Lasaga Department of Finance, FIU

What is Strategy?

• What is Professor Porter’s view of Strategy?

– What is Operational Effectiveness

– What is positioning?

• “According to the new dogma, rivals can quickly copy any market position,
and competitive advantage is at best temporary.” – Prof. M. Porter

Prof. Manuel Lasaga Department of Finance, FIU

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 02/10/2013

What is Operational effectiveness?

– OE is performing similar activities better than rivals perform them.

• Efficiency (production process)

– OE includes improving customer satisfaction & achieve best practice.

• Demand analysis
• Industry analysis

Prof. Manuel Lasaga Department of Finance, FIU

What is Strategy?

• Strategy is the creation of a unique and valuable position, involving a

different set of activities. It is about being different.

• Strategy is creating fit among a company’s activities. The success of a

strategy depends on doing many things well.

• Making trade-offs in competing, choosing what not to do. You cannot

be everything to everybody.

Prof. Manuel Lasaga Department of Finance, FIU

SouthWest Airlines
• Strategic Goal: Meet customers’ short-haul travel needs at
fares competitive with automobile travel

• Deliver low-cost convenient service

• Fast turnarounds at the gate (keep planes flying longer

hours)

• Does not offer meals, assigned seats

• Automated ticketing at the gate

• Standardized fleet of 737s

Prof. Manuel Lasaga Department of Finance, FIU

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What is Strategic Positioning?

• Positioning is the strategy to make differentiation sustainable

• Positioning deep moat such as a unique business model

• Strategic positioning is a long-term process

Prof. Manuel Lasaga Department of Finance, FIU

Fin 6446 – Competitive Strategy

Week 1: Economic &

Business Models
Chapter 1

Prof. Manuel Lasaga Department of Finance, FIU

Economic and Business Models

Prof. Manuel Lasaga Department of Finance, FIU

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Economic Analysis Relies on Models

Economic models
– Abstract representation of reality.

– Models focus on key relationships: cause and effect

– Models can be analytical, conceptual and mathematical

– Design of a model begins with assumptions

• Simplifying assumptions
• Critical assumptions

– In evaluating a business plan/strategy take apart the underlying

business model and test all its assumptions and coherence of its
thought process.

Prof. Manuel Lasaga Department of Finance, FIU

Business Models
• A business model is a simplified representation of how the operations of a
business achieve its strategic goals
– How the pieces fit
– How business utilizes resources to achieve a competitive advantage
– How business decisions are made
– How the business is governed

Prof. Manuel Lasaga Department of Finance, FIU

What do Business Models and activities

have in common?

• A business model is how a company uses resources to maximize

shareholder value

• Understanding your business model:

– Key assumptions

– Critical components of the model

– How are management decisions incorporated into the model?

– Is the model an accurate description of how a business achieves

profitability?

Prof. Manuel Lasaga Department of Finance, FIU

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What Worked, What Didn’t & What Changed

• Walmart: put good-sized stores in small & mid-sized towns ignored by
competition

• International lending: countries will not go bankrupt

• Hilti: power tool maker switched from selling to renting tools in

response to low-end entrants

• Disney Europe: Europeans graze all day at park’s restaurants like

Americans

• Healthcare: capitation

• Real estate lending: lend on basis of collateral

Prof. Manuel Lasaga Department of Finance, FIU

What do Business Models and activities

have in common?

• A business model is how a company uses resources to maximize

shareholder value

• Understanding your business model:

– Key assumptions

– Critical components of the model

– How are management decisions incorporated into the model?

– Is the model an accurate description of how a business achieves

profitability?

Prof. Manuel Lasaga Department of Finance, FIU

Business Models
• A business model is a simplified representation of how the operations of a
business achieve its strategic goals
– How the pieces fit
– How business utilizes resources to achieve a competitive advantage
– How business decisions are made
– How the business is governed

Prof. Manuel Lasaga Department of Finance, FIU

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 02/10/2013

Economic Analysis Relies on Models

Economic models
– Abstract representation of reality.

– Models focus on key relationships: cause and effect

– Models can be analytical, conceptual and mathematical

– Design of a model begins with assumptions

• Simplifying assumptions
• Critical assumptions

– In evaluating a business plan/strategy take apart the underlying

business model and test all its assumptions and coherence of its
thought process.

Prof. Manuel Lasaga Department of Finance, FIU

Business Models
• A business model is a simplified representation of how the operations of a
business achieve its strategic goals
– How the pieces fit
– How business utilizes resources to achieve a competitive advantage
– How business decisions are made
– How the business is governed

Prof. Manuel Lasaga Department of Finance, FIU

Economic Resources

Prof. Manuel Lasaga FIU / FIN 6446 18

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The Goal of a Business is to

Optimize the Use of Limited Resources

Types of resources:

1. Labor: (skilled and unskilled, managerial, professional)

2. Capital (physical and human)

3. Natural Resources: Land, minerals, timber, water and other natural

resources (renewable and non-renewable)

4. Entrepreneurship / Management: Vision, Leadership, Strategic

Focus, & Decisiveness

Prof. Manuel Lasaga FIU / FIN 6446 19

The Concept of Opportunity Cost

• Opportunity cost:
– What is given up when taking an action or making a choice
– The best alternative choice

• The opportunity cost of college

– Explicit costs
• Tuition, fees, books, supplies
– Implicit costs
• Forgone income

Prof. Manuel Lasaga FIU / FIN 6446 20

Components of Opportunity Cost

• Explicit cost
– Actual dollars spent, accounting costs.

• Implicit cost
– Opportunity costs of resources based on their best alternative use

Economic Costs = Explicit Costs + Implicit Costs

Prof. Manuel Lasaga FIU / FIN 6446 21