To illustrate what is meant by strategy principles, six of the most important linkages between strategy and performance are summarized:
- The most important single factor affecting a business unit's performance is the quality of the products and services, relative to its competitors. This is done in two ways. In the short run, superior quality yields increased profits via premium prices. In the long run, superior and/or improving relative quality is the most effective way for a business to grow, leading to both market expansion and gains in market share.
- Market share and profitability are strongly related. Business units with over 50 percent of their served markets experience ROIs more than three times greater than SBUs with under 10 percent of their markets. Apart from the connection with relative quality is the fact that large-share businesses benefit from economies of scale, which result in lower peer-unit costs than their smaller competitors.
- High investment intensity acts as a powerful drag on profitability. Businesses that employ a great deal of fixed assets or working capital per dollar of sale, per dollar of value added, or per employee usually have lower rates of return. The average rate of return for the most capital-intensive businesses is less than half that earned by the low-capital-intensive ones.
- Many so-called "dog" and "question mark" businesses generate cash, while many "cash cows" are dry. Although market growth and relative share are linked to cash flows, many other factors also influence this dimension of performance. In fact, more than half of the "question marks" (businesses with positive market growth rates and that occupied follower positions in terms of market share) and six out of ten "dogs" (businesses with negative market growth rates, and that were followers in terms of market share) were net cash generators (net cash flow equaled after tax income, plus depreciation, plus or minus the net change in a unit's investment base). Conversely, more than one in four "stars" (those with top ranking market share in a growing market) and almost as high a proportion of "cash cows" (those with top-ranking market share but negative market growth rates) were net cash users.
- Vertical integration is a profitable strategy for some kinds of businesses but not for others. For small-share businesses, ROI is highest when the degree of vertical integration is low. For businesses with average or above-average relative market share, ROI was highest when vertical integration was either low or high, and lowest in the middle.
- Most of the strategic factors that boost ROI also contribute to long-term value. Although there were some trade-off between current profitability and long-term value enhancement, businesses with strong initial competitive positions generally scored well on long-term value as did businesses with high employee productivity, superior relative quality, and cost advantage relative to competitors.
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