Fundamentals of Strategic Management - SBUX

Today we hit Q2 running and had a new class, Fundamentals of Strategic Management with Anita McGahan. Her reputation certainly proceeds her, as she has been described as a protegé of Micheal Porter. You can tell with in minutes of meeting her that she's intense. Many students are intimidated by her, but in our class she was absolutely brilliant. Even some students who weren't considering consulting before are certainly considering it now.

She dived right into describing ROA and benchmarking companies versus the industries they were in versus the economy at large.She showed how a company might "out perform" the general economy, but still be "under performing" their industry. This is an idea which I had recently discussed as an extension of Nick Kerhoulas' idea for CEO compensation, but using derivatives (long / short positions) to mathematically come to the same result for bonuses (compensate CEOs and other top managers based on alpha less beta).

Also, I've previously mentioned that DuPont Analysis is one of my favourite financial frameworks because it is intuitive and Anita cut into it in more detail, specifying (as I had previously) that:

ROE = ROA x FLA

But she emphasized that FLA is a financial strategy whereas ROA is an operational strategy (I got called on this question when I was describing it in my post, but obviously Prof. McGahan described it much better. I made the mistake of saying that Total Asset Turnover, TAT, was "how much you could sell". Anita described it better as "Operational Strategy"). She even confirmed my hunch that FLA = 1 + D/E.

Also, her description of Porter's Five Force's was brilliantly (no surprise) insightful as she explained how three of the forces:

1. Buyer Power
2. Supplier Power
3. Threat of Substitution

were all measures of Value Creation (what value can be yielded by this industry - directly related to Industry Structure in the previous graphic and more specifically by the graphic below).(Also note the graphic immediately above can be recursively applied to describe an entire Value Added chain)

However, the last two of Porter's Five Forces:

1. Rivalry
2. Threat of Entry

were directly related to Value Capture (or more generically, Competitive Position as described in the first graphic above).

When it came to applying the material to the Starbucks case, she used the framework to describe where the most interesting stories were in the case, used math to describe the costs of achieving SBUX's growth goals and showed that against the balance sheet that additional fund raising was necessary to fuel growth. She dipped briefly into finance to describe EPS dilution caused by the payback periods required to cover store openings.

Even in building a potential solution, she lead the class in a discussion which critiqued possibilities such as franchising: why firms in the industry, the majority framed as operating as a sole proprietorship, would under report earnings and be disinterested in becoming a franchise.

Besides being a very technical and framework heavy course, it was certainly enjoyable. I know it sounds weird, but she kept our class in absolute stitches with her jokes about strategy and doing business (as I type this, I am aware of how awkward this appears).

To put it lightly, this promises to be an interesting class. This felt exactly like a case interview for consulting.