1.
What is Strategy?
Professor Sonia Marciano
April 2018

2.
2
Industry
Attractiveness
"Positional"
Value
"Idiosyncratic"
Value
Corporate
Scope
Organizational
and Management
Quality
Marketing
Effectiveness
Operations
Financial
Structure
Can Think of the Value of the Firm in Eight
Components…Organizationalandmanagement,marketing,operations,and
financialstructurearefunctionalorexecutioncomponents

3.
A Common and Comprehensive Measure of
Profitability
3
RETURN ON INVESTED CAPITAL (ROIC) =
Net Operating Profit After Tax
Invested Capital
 Profitable means the firm’s ROIC is higher than the firm’s
cost of capital.
 In the US, the median ROIC is about 12%.
 The least profitable firms have negative ROICs.
 “Really high” might be an ROIC of 40% or more.

4.
Industries Usually Contain Outperformers
Most Data from Capital IQ, drawn from years ranging between 2014-16
Averages of 2014 – 2016 ROIC
Auto = 6% ? > 23%
Auto Parts = 14% AutoZone = 31%
Casual Apparel = 16% The Buckle = 49%
Fast/Fast Casual Restaurants = 11% Dominos = 70%
Restaurants = 7% Cracker Barrel = 17%
Hotels = 13% Marriott = 47%
Online Travel Agents = 14% Priceline = 40%
Aircraft Manufacturing = 11% Boeing = 33%
Fashion & Athletic Apparel = 21% Lululemon = 36%
Footwear Industry = 9% Nike = 19%
Off-Price Retailers = 19% TJX = 29%
Home Improvement Industry = 11% Home Depot = 43%
Industry (US Average ≈ 12%)
Examples of Firm Who Earn
Economic Profits
Sustained profits requires that the firm is outstanding at pleasing its customers or producing efficiently.

5.
The Five Forces Identifies Scarcity and Scalability
Along an Industry Vertical Chain…
Rivalry: Firms seek to avoid rivalry by serving a
segment better than other firms do—but
economies of scale can make growth “cheap” in
the short run but expensive in the long run as
“scarcity” and price premiums are eliminated.
Substitutes are products
that “sandwich” in the
industry. Substitutes are
either cheaper but
“worse” or better but
more expensive.
Substitutes are
threatening when they
to reduce the industry’s
scarcity. Entrants threaten to directly reduce the
scarcity of a firm. Generally, big fixed
and sunk costs limit entry…that is, the
more scalable the incumbents are, the
less attractive entry is.
Suppliers add value
to the product, but
the more the
supplier’s input
matters to the end
user, the higher the
risk of supplier power
if there are few
alternatives to the
supplier’s input. In
other words,
sometimes it’s the
supplier who enjoys
more scarcity than
the industry. 5
Buyers value the good more than it costs to
produce, but if you sell buyers a HIGH share
of their costs, they will get informed or
might backward integrate—either move
limits the industry’s bargaining position
because the buyer may find a satisfactory
alternative.

6.
Global Beer ROICs
International
3yr Average
(2013-2015)
AB-InBev 12.70
SAB Miller 8.75
Heineken 7.78
Carlsberg 2.32
China Resources Enterprise -1.62
Why is earning ROIC>WACC generally challenging?

7.
But even in markets where owning distribution is
allowed, most brewers don’t self-distribute. Why?
Distribution of Alcohol in the US

8.
FRITO LAY’S COMPETITIVE
LANDSCAPE IS MORE
FAVORABLE
Frito Lay

9.
PEPSI AND COKE SPEND AT
LEAST 5X MORE ON
ADVERTISING THAN LAY’S
$355 million in
2016
$192 million in
2016
$35.92 million in 2014
Source: Statista
12% of
Revenue
4% of Revenue11% of
Revenue

10.
To Reduce Rivalry:
• Consolidate
• Move capacity to underserved markets--
Dominate a segment
• Differentiate
• Improve production efficiency (most efficient
producer gets more share)

11.
To Tame Buyer Power….
• Need a “win-win”
• AB wants the best distribution
partner – AB needs the distributor to
feel the same way about AB that AB
feels about the distributor.

12.
What Does this Do for the Distributor’s
Economics, Rivalry and Substitutes?
12
A portfolio of over 400 beer brands including:
Budweiser, Bud Light, Corona, Stella Artois, Beck’s, Castle, Castle Lite, Hoegaarden, Leffe,
Aguila, Antarctica, Brahma, Cass, Chernigivske, Cristal, Harbin, Jupiler, Klinskoye, Michelob
Ultra, Modelo Especial, Quilmes, Victoria, Sedrin, Sibirskaya Korona and Skol.

13.
Sam Adams…
Gross Margin: 39%
Operating Margin: 10%
Sam Adams does better than the typical craft brewer.13
Retailer $0.20
Distributor
$0.24
Operating
Profit $0.06
Operating
Expense $0.16 COGS $0.34Craft Brewer
$0.56

14.
Doesn’t Get Much Better Than This:
AB-InBev
Gross Margin: 60%
Operating Margin: 30% 14
Retailer
$0.20
Distributor
$0.16
Operating
Profit $0.19
Operating
Expense $0.19
COGS $0.26
Brewer
$0.64

15.
To Reduce Threat From Substitutes…
• More effective marketing – 4 P’s as good as
any mnemonic…
– Product
– Place (get the channels on board)
– Promotion (communicate and resonate ala
Subaru)
– Price – more than just level, but innovative
revenue model.

16.
16
Industry
Attractiveness
"Positional"
Value
"Idiosyncratic"
Value
Corporate
Scope
Organizational
and Management
Quality
Marketing
Effectiveness
Operations
Financial
Structure
Can Think of the Value of the Firm in Eight
Components…
Organizationalandmanagement,marketing,operations,and
financialstructurearefunctionalorexecutioncomponents

17.
Strategy is Helpful in Nonmarket
Contexts, Too

18.
I Dealt with Two Storms in the
Fall of 2009
• One knocked power out in much of my town
(Scarsdale).
• The second was my daughter, then a high school
freshman, who decided to use brute force to earn
straight A’s – for all the wrong reasons, but that is
another story.

19.
At About 10pm One Evening in
Late October…
• Samantha: “We gotta find a place to get
green or blue glitter…”
• Me: (Apparently confused)
• Samantha: “MOM…SERIOUSLY? LET’S GO!”
• You may know that complying with a
teenager is generally less exhausting than
reasoning with her.

20.
Why Do You Need Glitter??

21.
Parents Night!
B+A
Let’s just say, it’s
got A LOT of glitter
A-

22.
Information Students are Given…
• Participation: 15%
• Group work: 20%
• Puppet: 15%
• Midterm: 25%
• Final Exam: 25%
Assume there is a grade curve (so, say, up to
20% of students can receive an A).
What information is missing?
22

23.
0
0.1
0.2
0.3
0.4
0.5
70 80 90 100 110
Score
Low Variance
Mean: 90,…
0
0.005
0.01
0.015
0.02
5 55 105 155
Score
High Variance
Mean: 80,…
0
0.02
0.04
0.06
0.08
0.1
50 60 70 80 90 100 110 120
Score
Medium Variance
Mean: 85,…
How much variance was
there among the grades
given on the puppets?
- Is the puppet an important
component of the final
grade?
- Yes…its necessary, but
- Puppet can’t pull you above
the mean.
- Sock puppet the heck out of
something that is high weight
but low variance.

24.
The Teacher is the Customer and
Classmates are Competitors
• Customers (or a customer segment) grade you
on a set of attributes
• We need a lot of information to be strategic

25.
Strong Analogy to Business Strategy
• If demand is high relative to supply – firms don’t
compete directly with each other.
– Firms focus on learning what are customer
expectations and
– How these expectations can be produced
efficiently
– Firms who execute better outperform in this
environment.
• If supply exceeds demand, firms must outperform
their competitors
– Firms who outperform must be perceived as “high
tail” by their customers
– And execution still matters

26.
What We Need to Know—IN THE MINDS
OF CUSTOMERS
• In which components, historically, did the
instructor discern most carefully—that is, which
components generally exhibited the most
VARIANCE among students?
• In components with low variance—what level of
work constituted “meeting the bar” in the mind
of the instructor?
• In components with high variance—what
attributes or criteria were used to distinguish
scores?
• Which attributes does the customer consider
most carefully—that is, which attributes have
high weight?
• In attributes with low (perceived) variance—
what level of the attribute constitutes
“meeting the bar”?
• In attributes with high (perceived) variance—
what criteria do customers use to distinguish
firm offerings?

27.
HTC EVO Vs. iPhone
27

28.
What Might EVO Have Done Wrong?
–Over-invested in product attributes that
had LOW WEIGHT
–Over-invested in product attributes that
exhibited LOW PERCEIVED VARIANCE
–Underinvested in attribute that exhibited
HIGH WEIGHT
–Underinvested in attribute that exhibited
HIGH PERCEIVED VARIANCE

29.
ROICs of Auto Firms Who Comprise
the Majority of US Sales
23.58
17.64
10.80
8.40
7.54 6.68 6.34 5.75 5.62 5.34 5.01 4.92 4.63 4.00 3.27 2.99
-10.32
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
AVERAGE ROIC JULY 2014 - AUGUST 2017ROIC (%)

30.
ROIC Has 3 Components
• Income = Margin * Volume
• The Denominator is Invested Capital
1 = Firm Earns a High
Premium Over Cost
2 = For a Large Enough
Number of Customers
3 = And the Amount Invested Is
Low Relative To The Income
Earned.

31.
Subaru Global Platform vs. the
Competition
31
~22
Platforms
~30
Platforms
One Global Platform

32.
Reviews
• From Car and Driver (2017): The Outback may
not inspire many thrills, but that’s not its
mission. What it will do is get you, your
passengers, and your cargo wherever you
want to go, comfortably and quietly, across
whatever the terrain may be.
• “Practical”, ”Sensible”, “Functional”

33.
Make a Table of Key Automobile Attributes and a Set of
Potential Competitors for the Subaru Forester…
Competitors
Price
Level
Attribute
(1)
Attribute
(2)
Attribute
(3)
Attribute
(4)

34.
Make/Model MSRP
Perceived
safety
5 year cost
Fuel
Mileage
Horse
Power
Subaru Forester $22,820
Subaru XV Crosstrek $22,820
Nissan JUKE $23,030
Mitsubishi Outlander
Sport
$22,920
Jeep Wrangler $23,590
Hyundai Tucson $22,325
Jeep Patriot $22,185
Kia Sportage $22,495
Dodge Journey $22,490
Strongly Recommend
Mediocre
Not Recommended
Firms Who Sustain High ROIC Over Time Can
Be Framed as Outstanding, Unique, or a “Monopoly”
34
Higher variance Lower variance
SOURCE: Kelley Blue Book; Insurance Institute for Highway Safety (IIHS)

35.
Crossover Challenge
35

36.
If You Can’t Trust a Canadian…

37.
Is Subaru Really Safe?
• Turns out that this is a very complicated question:
– What kind of crash – point of impact and with what?
– Involving precisely what type of road conditions?
• From Forbes 12/2/09 The Best Cars in a Crash:
– Aim of article was to answer the question – what car best
protects people in front, side, rear and rollover crashes?
– Conclusion: Japanese automaker Subaru earned four out of 10
spots on our list of the best cars in a crash. It also reported sales
last month more than 24% higher than November 2008, and up
almost 14% for the year to date. The company says that 2009
will likely be Subaru's highest-selling year ever.
– Why? The cars' three-ring construction, which reinforces body
pillars from front to rear -- car is “over built” in this respect.

38.
In 2014, Subaru was the 9th largest player in the US
Large Enough Segment for Subaru to Serve Profitably
38SOURCE: Edmunds.com; US auto sales by manufacturer, as of June 2014
2.9%
0%
5%
10%
15%
20%
As of June 2014

39.
But Unrelenting Internal and External Pressure
on Management of Subaru to GROW
What would you do?

40.
60%
$$ $88,000
68%
40% chose Subaru over other brands
Customers under 35
48%
Begin by Learning: Who Buys Subarus?
College Educated
Gender
Pet Owner
LGBT
Household Income
87% 38% (Industry avg.)
55% (industry avg.)
$78,000
68% 45% (industry avg.)
SOURCE: JD Power; Team Subaru; Bureau of Labor Statistics
Demographic
Category
40

41.
Subaru Says This…

42.
June 22nd, 2016
Carmichael Lynch took home eight
American Advertising Awards including
the “People’s Choice: Best of Show” for
Subaru’s “Bucket List.”

43.
This One…

44.
SUBARU
UNIT SALES 2000-2016
800,000
600,000
400,000
200,000
UNITSALES
“…with the industry about to ring up the lowest
annual sales per capita since World War II,
Subaru was set to break annual sales of 200,000
for only the second time in its history, and the
first time since 2006”
Forbes, December 29th, 2016

45.
Branding is Not an Attribute…It’s an Association of a
Product with an Attribute

46.
Strategy vs. Marketing
Strategy
• Figure out your target
market’s highly weighted
attributes
• Determine which attributes
are “table stakes”
• And in which attributes your
target perceives variance
• Determine most efficient
means to produce the highly
weighted attributes
• Identify the moats
Branding
• Develop an emotional and
authentic relationship with
your target
• Don’t list the attributes –
promote the product so
the target market believes
you ARE the attributes

47.
Still, Not Everyone Wants a Subaru
47
SOURCE: Edmunds.com; US auto sales by manufacturer, as of June 2017
As of Summer 2017
0
2
4
6
8
10
12
14
16
18
Sales(%)
US Auto Sales by Manufacturer
3.7 %

48.
Moats Protect a “Monopoly” Replication
• Moats exist when competitors are better
off NOT copying the firm’s unique product
attributes.
• Which means if competitors DO copy the
firm…
• Their profits are LOWER than if they DIDN’T
• Moats are the things that make the firm too
expensive to copy.
• If competitors ARE better off copying the
firm…then the firm has provoked…
• RIVALRY! And this is REALLY BAD.

49.
Examples of “Moats” or Impediments to Replication or
Imitation of A Firm’s Market Advantages…
Legal Barriers
One-of-a-Kind
Strategic Assets
Information Gaps
and Complexity
Economies of Scale,
Market Size, and
Sunk Cost
Increasing Returns
Advantages
• Patents
• Copyrights
• Trademarks
• Operating Licenses
• Superior Locations
• Human Talent
• Trade secrets
• Intellectual property
• Brand names
• “Black magic”
• Social complexity
• Path dependence
• Need to imitate on
numerous
dimensions
• Cumulative experience
along a learning curve
• Product performance
track records and
reputation
• Installed base in a
network market
• Market big enough
to support just one
efficient-scale firm
MostpowerfulLeastpowerful
What do you do when they expire?
Worth more to other firms?
Risk of Obsolescence?
Gateways to profitable growth?
Often most enduring ... but will they prevent
us from replicating our success
formula as we grow?
Will advantage be
undermined as market grows?
Will advantage be
undermined by shifts in technology or
customer priorities?
49
The extreme of an increasing return situation is a “winner take all” market. Network effects, high
multi-housing costs and low demand for differentiation are the conditions that generally underlie
winner take all markets.

50.
2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
McD 59 62 61 64 62 63 64 69 70 67 72 73 73 71 67 69
Burger King 67 65 68 68 71 70 69 71 69 74 75 75 76 76 72 76
50
55
60
65
70
75
80
85
90
AmericanConsumerSatisfaction
Index
Burger King is Nicer…

51.
2012 2013 2014 2015 2016 2017
McD 18.7 18.0 17.2 15.6 17.8 19.1
Burger King 7.6 8.3 3.7 5.3 6.8 6.5
-
5.0
10.0
15.0
20.0
25.0
ROIC We Take this as Evidence that
McDonald’s is Prioritizing Better
Revenues about $1.2
billion

52.
0
0.002
0.004
0.006
0.008
0.01
0.012
0.014
0.016
0.018
0.02
5 25 45 65 85 105 125 145 165
Score
High Variance
Mean: 80, StDev: 30
Being “high tail” means:
• Pay attention to attributes with high weight
• Focus resources on attributes in which consumers perceive
variance rather than on…
• Attributes that you can “sock puppet”…
• AND competitors understand that the cost of copying you is high
relative to the benefit, so…
• You face relatively little competition

53.
HERSHEY MARS
ROIC 25% 12% Unknown
(private company)
No. countries
sold
70 191 70
Brands
(chocolate only)
18
(685 SKUs)
8 21
US Market
Share(chocolate only)
44.6% 4.6% 29.2%
Chocolate Competitors
Source: IBISWORLD, Hershey 10K, Nestle 10K

54.
Hershey Distribution Channels (US
Market)
Source: Hershey’s Fact Book Source: IBISWORLD
...and how the retail dollar is split

55.
Who are Hershey’s Customers and What do
they Want?

56.
Positional Value
Source: Hershey’s Fact Book

57.
Data Driven Marketing
➔ Doubled cash flows to $1.07 billion
➔ Optimize store layout
➔ SWAS concept to increase sales by 25%
➔ VideoMining capturing purchase
decisions

58.
“Buy a commodity, sell a Brand.” -
Warren Buffett
$7.5 Billion
$4.2 Billion
Source: Capital IQ

59.
Takeaways
• What product/service attributes have weight
and which have weight and variance?
• Goal: Firm’s output is judged as “high tail” by
the firm’s target market
– Income is high relative to Invested capital
– Competitors are WORSE OFF if they IMITATE
• Don’t make choices that provoke competition

60.
Strategy Framework
Industry attractiveness?
• Five Forces and market structure:
– Is industry ’s output scarce relative to demand? (low rivalry).
– Is what the supplier sells scarce relative to what the industry sells?
– Can buyers do without what the industry sells?
– Do entrants or substitutes threaten scarcity?
– Nature of demand and MES?
What is the “hand dealt”? Need clear idea of opportunities/constraints inherent in the firm’s
context.
Potential for firm level advantages?
• Advantages fall into one or a combination of 3 buckets:
– Preemption: first mover advantage (being first to give the market what it wants usually
matters!)
– Core competencies: capabilities entrenched in firm’s infrastructure and operating
practices which generate a WTP or C advantage (or both).
– Employed Resources: Un-owned but especially productive inputs (i.e., unique talent (S.
Spielberg)
Firm plan to develop defendable, scalable and scopable assets/capabilities that produce attributes
consumers view as unique (scarce). Plan to drive a wedge between WTP & C.
Sustainability?
• Industry dynamics (Changes in taste, technology, regulations, globalization, capital markets, etc.)
• Execution:
– Organizational design: How management balances “redundancy” and “flexibility”
– Capital budgeting: How the management chooses how to invest and finance its
investments
– People: How management drives engagement and retention.
How much risk of obsolescence does the firm face and is it skilled at managing these
external and internal risks?
Whereisthescarcity
intheindustry’s
ecosystem?
Canthefirm
engineeravaluable
“monopoly”?
Canthefirmcontend
forcesthatmakeits
outputorproduction
processlessoptimal?