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Business Strategy

Business Strategy. Walt Disney Company. 1984 Profits: $242 Million. Theme Park Operations: 77 percent of profits. Consumer Products: 22 percent of profits. Filmed Entertainment: 1 percent of profits. Walt Disney Company. Hired Michael Eisner - 1984.

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Business Strategy

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  1. Business Strategy BMG 547 M2

  2. Walt Disney Company 1984 Profits: $242 Million Theme Park Operations: 77 percent of profits Consumer Products: 22 percent of profits Filmed Entertainment: 1 percent of profits BMG 547 M2

  3. Walt Disney Company Hired Michael Eisner - 1984 1. Increased admission prices at theme parks 1984 - $186 m 1989 - $787 m 2. Focused on movie studios (character development) 1984 - $2.42 m 1994 - $845 m • Diversified into television (ABC), hotels, retail stores, • sport team, cruise line, publishing, consumer • products, licensing, etc. (Huey & McGowan, 1995) Market Cap: 1984 = $2 billion 1994 = $28 billion BMG 547 M2

  4. What is Strategy? • A Game Plan • A firms’ theory about how to gain Competitive Advantage BMG 547 M2

  5. Definition of Strategy Strategy is the directionand scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations. (Johnson et al, 2005) BMG 547 M2

  6. The Strategic Management Process External Analysis Strategic Choice Strategy Implementation Competitive Advantage Mission Objectives Internal Analysis BMG 547 M2

  7. Competitive Advantage The Ability to Create More Economic Value Than Competitors • there must be something different about a firm’s offering vis-à-vis competitors’ offerings • if all firms’ strategies were the same, no firm would have a competitive advantage • competitive advantage is the result of doing something different and/or better than competitors BMG 547 M2

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  10. Competitive Advantage Competitive Advantage Economic Returns Advantage Above Normal • exceeding expectations Parity Normal • meeting expectations Disadvantage Below Normal • failing expectations BMG 547 M2

  11. Competitive Advantage Measuring Competitive Advantage Two Classes of Measures: 1) Accounting Measures • ROA, ROS, ROE, etc. that exceed industry averages 2) Economic Measures • earning a return in excess of the cost of capital BMG 547 M2

  12. Accounting Ratios • Profitability • Liquidity • Performance • Gearing BMG 547 M2

  13. Ratios • Advantages • Limitations BMG 547 M2

  14. Economic Measures • The Cost of Capital • rate of return that companies pay to suppliers of capital inn order to induce them to invest • Debt and Equity • WACC BMG 547 M2

  15. Cost of Equity • CAPM (Capital Asset Pricing Model) • Exp. = (Rf) + beta(Rerp) • Rf= risk free- eg Gov bond • Rerp= Risk premium(Exp-Rf) • Beta= risk of investment compared to overall market risk BMG 547 M2

  16. Cost of Equity • Example • McDonalds- • Rerp= 3% • Beta= .97 • Rf= 5% • Exp= 5% +.97(3%) = 7.91% BMG 547 M2

  17. Why Study Strategy? • Organisations that engage in strategic management generally perform better than those that don’t (Bain & Co.) • Clearer sense of strategic vision for the firm • Sharper focus on what is strategically important • Improved understanding of a rapidly changing environment(Wheelen & Hunger (2004) BMG 547 M2

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