SFM Assignment Q: Define the term strategy as used in business decision making.

Discuss the ways in which the investment and financing decisions can support the corporate strategy. What are some of the factors that create the potential for competitive advantage? (7 marks) A: Business organizations make decisions every day, most likely using decision making strategies. In a business, the board of directors or president usually makes strategic decisions regarding the future of the company, but decision-making takes place at every level. Decisions involve a high degree of uncertainty and risk, but a good strategy can help reduce that risk.

A strategy is the formulation and implementation of a companys key decisions. A welldesigned strategy should include a statement of the companys goals, some criteria to decide which activities a company should and should not do, and a view on how the company should be organized internally and how it should deal with the external environment. Furthermore, a strategy must also contain an explanation for its logic, that is, an explanation for why the goals will be achieved by adhering to the strategy.
Without such strategies, no action can take place and naturally the resources would remain idle and unproductive. They make managerial decisions correct to the maximum extent possible through a scientific approach. With strategies for making business decisions, there is a mechanism to warrant the quality of such decisions. More importantly, it gives a common language and set of mental models that makes conversations about decisions more efficient and effective. This common understanding of decision processes, criteria, and roles avoids many of the common organizational decision traps, allowing people in organizations to spend their conversational energies on creating better alternatives and validating assumptions and ultimately warranting their decisions. Effective decision makers create strategy by:

Building collective intuition that enhances the ability of a top-management team to see threats and opportunities sooner and more accurately. Stimulating quick conflict to improve the quality of strategic thinking without sacrificing significant time. Maintaining a disciplined pace that drives the decision process to a timely conclusion. Defusing political behaviour that creates unproductive conflict and wastes time.

Corporate strategy studies the relevant strategic issues concerning the corporation as a whole, rather than a specic business unit. Effect of Investment Decisions With few exceptions, the empirical literature on corporate investment and performance has evolved independently from most of the theoretical work in corporate strategy. Many investments have direct strategic consequences such as investments in capacity, R&D, and acquisitions. Even the more mundane projects can be more easily valued if their relation with the strategy of the company is explicitly spelled out. If we look at any organisation today, most of what we see is the outcome of past strategic investment decisions. The firms assets, tangible or intangible, can all be traced back to investment decisions made in the past. More important is the fact that strategic investment decisions often involve a very substantial outlay of resources, the success or failure of which can have long term consequences for the firm. Specifically, adopting a given strategic investment strategy may result in a major departure from the firms previous operations, significantly affecting its future financial performance and altering its risk profile as well. Strategic investments are responsible for turning the firms strategic positioning into business performance and ultimately into shareholder value. Indeed, it is through strategic investments that shareholder value is created and augmented. Although such decisions are made relatively infrequently, they are the backbone of strategy formulation and implementation. As such, investment decision-making is part and parcel of a firms strategy and is of vital importance to the future success of the firm. Effect of financing Decisions In the past, financial theorists suggested that, in perfect and efficient market, financing decisions may be irrelevant for firms strategy (Modigliani and Millet 1958); however, in the real world such choices may differentially affect firm value, explicitly because there are several imperfections (Myers and Majluf 1984). Several strategy scholars have argued that financial decisions have strategic importance (Barton and Gordon 1987, Bromiley 1990, Kochhar 1996), especially in affecting corporate governance (Jensen 1986).

Oviatt (1984) suggested that a theoretical integration between the two disciplines is indeed possible, and that according to the way managers, firms financial stakeholders and firms non-financial stakeholders interrelate, transaction cost economics and agency theory provide possible avenues. Barton and Gordon (1987) pointed out that corporate strategies complement traditional finance paradigms and enrich the understanding of a firms capital-structure decisions. In addition to tax reasons, the value of a firm can be affected by financing decisions in the moment that information asymmetries between the firms management and its stakeholders are noted, or when real decisions differ from financing decisions, because of agency problems, for example, or whether costs of financial distress are generated due to debt. Factors that Create the Potential for Competitive Advantage One of the best known concepts in strategy is that of competitive advantage (Porter, 1980). Competitive advantage is a firms attribute that may allow the firm to generate economic profits. The term may generate profits is used because the logic of the strategy must first be tested. If misused, a potential competitive advantage may not deliver superior performance. Assumptions for this discussion: economic profit refers to the (risk-adjusted) present value

of revenue minus all costs, including the opportunity cost of capital; shareholder value is equivalent to economic profit abstracting from capital market imperfections and other frictions.
The attribute that gives the firm a competitive advantage in a specific market can be a number of things: It could be an asset that the firm owns, including tangible assets (e.g., plants, machines, land, mines, and oil reserves), proprietary intangible assets (e.g., patents, intellectual property, and trademarks), or non-tradable intangible assets (e.g., reputation, know-how, culture, and management practices). A competitive advantage could also arise from the companys position in the industry, which generates barriers to entry due to government protection, firstmover advantages (e.g., brand name and reputation), control of distribution channels, market size, or technology (e.g., network effects, platforms, and standards compatibility). A sustainable competitive advantage might arise from something unique. A unique asset or position is something that is very difficult for others to imitate or

reproduce. It may be prohibitively costly for most, but a few could buy or create such assets or positions. o Example: Consider the example of Apple Inc., which is a company that has successfully delivered shareholder gains over extended periods of time (although not necessarily at every moment in its history). Some believe that one of Apples main competitive advantages is its excellence in product design. By producing computers and other consumer electronic products with innovative designs, Apple can target a niche of consumers who value design. But excellence per se is not enough. What prevents other competitors from imitating Apple? Apple must be better at producing welldesigned gadgets than other firms. In other words, Apple needs to have a unique capability in design. Another important factor in continuation of the previous attribute is that a unique capability must be able to create value in order to be called a competitive advantage. Value creation must imply a wedge between what customers are willing to pay for a product and the suppliers opportunity cost of producing it. This wedge is the total value created by a (buying and selling) transaction. Thus, a positive added value is a

necessary condition for a sustainable competitive advantage.