Strategy: Industry Structure, Moats and Returns Above WACC
Strategy
Strategy questions test whether you can connect an industry's structure to a company's economics. The core frameworks: Porter's five forces (supplier power, buyer power, threat of new entrants, threat of substitutes, rivalry) explain industry profitability; the value chain shows where in the activity set a firm creates or loses margin; SWOT summarises internal strengths and weaknesses against external opportunities and threats, but is a summary tool rather than an analytical framework - confusing it with Porter is a classic distractor.
The economic test of any strategy is whether returns exceed the cost of capital. ROIC = NOPAT / invested capital, where NOPAT = EBIT x (1 - tax rate) and invested capital = net working capital + net PP&E + acquired intangibles. A firm earning ROIC above WACC creates value; growth only creates value while that spread is positive - growth in a business earning below WACC destroys value.
Sources of advantage: cost leadership, differentiation and focus (Porter's generic strategies), underpinned by scale economies, switching costs, network effects, intangibles such as brands and patents, and efficient scale. Market sizing uses TAM/SAM/SOM and should be triangulated - top-down (market size x share) and bottom-up (units x price x reach).
Worked example: EBIT of 150, a 25% tax rate and invested capital of 800 give NOPAT of 112.5 and ROIC of 14.1%. With a WACC of 9%, the 5.1-point spread on 800 of capital is roughly 41 of annual value creation. A question showing revenue growth alongside ROIC falling below WACC is testing whether you know growth can destroy value.