Mor 562: Strategic Choice and Valuation

8

Marshall School of Business

University of Southern California

MOR 562: STRATEGIC CHOICE AND VALUATION

Fall, 2013

Professor: Carl W. Voigt, Ph.D.

Office: Bridge Hall 303-F

Phones: USC Office: (213) 740-0764

Mobile: (213) 446-1753

Fax: (213) 740-3822

Email:

Office Hours: Monday & Wednesdays, 12:30-1:50 pm, and by appointment.

Prerequisites: Recommended completion of GSBA 540 & 515 or GSBA 519a&b or GSBA 529

COURSE DESCRIPTION

Strategic Choice and Valuation is an advanced strategy elective designed for MBA students interested in the strategic management of businesses and corporations. The central purpose of the course is to develop frameworks for evaluating opportunities to achieve superior financial performance, and to provide students with a strong grounding in the analytical skills involved in real-world strategic business planning. Mastering the frameworks and analytical skills covered in this course is essential for any student intending to follow a career in consulting, business planning, or upper echelon management. These skills are also invaluable for students intending to work for startup firms. Because presentation plays such a critical role in the strategic planning process, the course will emphasize mastery of both content and of appropriate and effective presentation skills.

This course is intended for those with an interest in strategy who want to get “below the surface” of business and corporate strategy analysis. This elective will revisit the basic topics covered in a “first principles of strategy” course (such as industry analysis, competitor analysis, strategy formulation, positioning and sustainability analysis, value chain analysis, cost and differentiation-advantage analysis, corporate diversification and vertical integration analysis, etc.) but will do so with an emphasis on depth, detail, and quantitative precision.

The course will emphasize two recurring themes: scenario analysis and strategic valuation. By definition, strategic investment decisions are made in the presence of irreducible uncertainty. An ability to think well about uncertainty gives a strategist a real advantage. Recognizing the type of uncertainty faced, and distinguishing risk from uncertainty are important analytical steps that must be mastered. The course will make much out of scenario planning as a way to deal with irreducible uncertainty. The second theme is strategic valuation. A substantial portion of the course will be devoted to mastering the skills of strategic valuation; including the application of net present value techniques to strategic analysis.

In a very real way, this is a skills course. As an advanced elective our goal will be to drive deeper into the microeconomic reasoning behind strategic value creation. This will necessarily force us to use microeconomic models, frameworks, and theories to analyze the sources of rents at the firm level in both static and dynamic frameworks. We will apply these models to strategic decisions such as market entry, expansion strategy, investing in capabilities, and firm configuration. Additionally, good strategy analysis requires thoughtful analyses of the payoffs to these strategic decisions. To do this we must master and apply valuation methods to our strategic decisions. We will use NPV analysis in strategic valuation, and valuation under uncertainty using scenario analysis.

COURSE PEDAGOGY

This class will use a combination of readings, exercises, lectures and case discussions. We will make strong use of business cases. Cases provide a natural “test-bed” for theory and provide vivid examples that aid the memory of important concepts. While nothing can surpass first hand personal industry and managerial experience as a basis for analysis and decision-making, case analysis is an indispensable proxy for the kind of knowledge that can only be gained through years of experience and research. Lectures will be given to elaborate on key theoretical concepts and frameworks. Students will also be required to conduct their own library research for some topics.

The learning experiences in this course are sequenced as “expanding concentric circles.” That is, we will cover topics multiple times, but each time with increased depth and expanded detail.

COURSE EXPECTATIONS

I have very specific expectations as to what constitutes a good learning environment: a) thorough preparation, b) active participation, and c) attendance. My expectations are as follows:

Preparation. Because this course relies heavily on advanced conceptual articles and case materials, extensive before class preparation and in class participation are required to ensure the class' success. What you get from this course will depend on what you put in – not just in terms of your reading and analysis of the articles and cases, but your willingness to question and to seek alternate perspectives, to be clear about your own position, and your being prepared to defend it. Unless you have thought about the readings and cases, it is very hard to learn for others’ questions and contributions to class.

A Guide to Case Analysis. Preparation for a case discussion should:

1. Begin with a rapid reading of the assigned case and other materials.

2. Then, it is worthwhile to review the discussion questions provided for clues as to what issues require special attention.

3. The next step is normally to re-read the case carefully, taking notes that sort information, facts, and observations under a number of relevant headings. You should try to formulate theories or hypotheses about what is going on as you read ("the company loses money on small orders"), modifying or rejecting them as new information surfaces ("Table 2 shows that shipping costs per unit are higher for small orders, but only for long-distance shipments"). Push yourself to reach definitive conclusions before you come to class.

4. All students should perform quantitative analyses, “crunching” whatever numbers are available. It is also very important to provide quantitative support wherever possible, particularly when exploring various hypotheses as to the nature and importance of certain phenomena. (If the requisite data are not available in the case, a precise description of what data are missing often triggers ideas for making creative use of the information that is available.) It is usually worthwhile to identify trends in the firm or industry, preferably with a quantitative measurement. Some of these trends, often very important ones, will not be flagged in the text of the case.

5. Finally, preparation will include notes that can be used to guide your interventions in class discussions.

Guide to Article Analysis. The following set of questions is provided to guide your analysis of the readings assigned in this course.

1. What is the purpose of this article? What problem or issue does it address? Just what is the author trying to do?

2. What are the basic assumptions/assertions/values that underlie this piece? (View of human nature; purpose of organization--e.g. economic efficiency vs. human satisfaction; degree to which planning is possible; etc.) Are these assumptions explicit or implicit?

3. What is the basic argument/thesis? What are the major findings and conclusions?

4. What is the nature of the evidence presented in support of the argument/ thesis? (Impressionistic, theoretical, empirical, etc.) Are the conclusions well supported?

5. What problems or concerns are you left with? How does the article relate to other articles you have read and to your own knowledge and experience? How does it contribute to your overall understanding of business strategy?

Students will probably want to, and are strongly encouraged to, form study groups that will meet regularly to share insights and ideas about the assigned readings and cases. While this is, of course, voluntary, past experience has shown that a good grade depends on it.

COURSE EVALUATION

The grading scheme for this class will be as follows:

Class Contribution, Participation, Short Assignments, Case Notes 20%

Four Tests (Short & Long) 50

Group Project & Presentation (Short Presentation 5%) 30

100%

In order to successfully pass this course, a passing grade (> 50%) must be achieved in each individual course component. Final grades will be assigned on (approximately) the following basis: A's - 91 and above, B's 81 - 90, C's 71 - 80, D's 50 - 70, and F's below 50. Plus and minus shades will be assigned to those immediately above or below grade cutoff points. The distribution of grades will closely follow the guidelines of the Marshall School of Business (an average class GPA of 3.5). (Faculty Handbook, 1994: 30).

ATTENDANCE POLICY

Class attendance is absolutely essential. All missed classes will be noted. The policy on missed classes is to allow each student two (2) absences, no questions asked, no penalty. (Note that since class sessions are double sessions, missing two classes is the as missing four regular class sessions.) All further absences over this limit will reduce the student's participation grade and final course grade, no questions asked, no excuses of any kind accepted. Students with an excessive number of absences are at risk of failing the course. Only Official University engagements, such as scheduled officially USC Marshall sponsored case competition, sports events, will be accepted as exceptions to this policy. Job interviews, etc., are not excused, so choose your absences carefully. Habitual lateness, leaving class early, and/or exiting and re-entering during class sessions, for whatever reason, will be noted as evidence of low course commitment and penalized.

COURSE CONTRIBUTION AND CLASS PARTICIPATION

Your overall commitment and attitude toward this course, and your daily active verbal participation in class discussions, will be closely monitored. In grading class participation, I will look at both the quantity and quality of your class contributions/interventions. Class participation is obviously a function of preparation, skills, attitude, and a willingness to actively commit yourself in front of me and your colleagues. In relative terms, a classroom is a cost-free environment for experimenting and learning to "play the game." Make use of it. Shyness is no excuse.

With regard to quality, the dimensions that we look for include:

Relevance -- does the comment bear on the subject at hand? Comments that do not link up with what the discussion is focusing on can actually detract from the learning experience.

Causal Linkage -- are the logical antecedents or consequences of a particular argument traced out? Comments that push the implications of a fact or idea as far as possible are generally superior.

Responsiveness -- does the comment react in an important way to what someone else has said?

Analysis -- is the reasoning employed consistent and logical?

Evidence -- have data from the case, from personal experience, from general knowledge been employed to support the assertions made?

Importance -- does the contribution further our understanding of the issues at hand? Is a connection made with other cases we have analyzed?

Clarity -- is the comment succinct and understandable? Does it stick to the subject or does it wander?

It is expected that you will make brief notes or outlines before coming to class whether they are specifically asked for or not in the Daily Outline. You should rely on these notes when contributing to the class discussion.

All students will be formally called on, at random, to take the lead in various aspects of class discussions at least once or twice during the semester. If the student called upon is not present, is late, or is not sufficiently prepared to make a substantial contribution to the class discussion, he/she will lose points for class contribution. If the student makes helpful comments, he/she will accumulate points for class contribution. Since it is unlikely that there will be enough opportunities to call on each student more than once or twice, be warned that failure to be thoroughly prepared, on all occasions, can be devastating to your overall grade.

Each student will receive a score for participation at the end of each class session. The simple recitation of facts from the readings or case will receive some credit toward the student’s class contribution score. Comments that do more than simply recite facts, however, will receive substantially more credit. For instance, comments that provide synthesis or raise counterintuitive points, will add much more to a student’s class contribution score. Students who make no contributions will receive no credit. Comments that contain factual misstatements, demonstrate lack of adequate preparation, or are distracting because they come too late in the discussion, will be penalized. Attempts to dominate class discussion rarely result in consistent and significant contributions.

Participation Card: At the end of each class discussion, students who actively participated in the discussion should turn in a Participation Card. These cards should list your name, the date, the case or topic discussed that day, and a synopsis of your contributions during that day’s discussion. The Participation Cards will be used in combination with the instructor’s own daily evaluations to determine your participation grade for the day. For this purpose, please purchase a package of 3x5 index cards and bring them to each class.

Unannounced Quizzes: Students should expect regular “pop/practice” quizzes. These quizzes will be given to assist you in checking your mastery of the course concepts and tools. Multiple choice and short answer questions may be given at the beginning of classes. No make-up opportunities will be given to students who are absent or late. Student performance on these pop-quizzes will be used to determine a student’s participation grade.

Assigned Exercises: Throughout the course several exercises have been assigned. Some will be individual and some will be group assignments. Please consult the course discussion outline that complements the syllabus for this course. There is an expectation that you will complete all these homework assignments and turn them in class. Homework assignments will consist 10 percent of the course grade. If you submit them all, with a satisfactory quality, you will earn the full 10 percent. Poor quality assignments, or assignments that are late, will be penalized. If you plan to be absent, submit your work early (by email). If you miss assignments, for whatever reason, you can earn “extra credit” by completing the assignments, late, and creating a similar new exercise with a solution. There is an element of gamesmanship in completing the assignments. While I want you to complete all the assignments – there are something like 35 short assignments – I realize that you probably will not have the time to do them all. So you need to pick and choose; but you need to do a sufficient number to get as close to full credit as possible. The person or persons completing the mst will set the top mark for this part of participation. Group efforts count; but only 50 percent for each person. You need to do some assignments yourself; you cannot simply turn in group assignments.