Economic System MASTER CLASS

Question 1

What are the big companies with different strategy?

Answer 1

Apple & Walmart (successful) GM & Swiss air (bankruptcy protection and total bankruptcy)

Question 2

What strategy did SWISS air follow?

Answer 2

GM Part of structure in the us 2007: Hunter strategy; they followed a strategy that put the company at risk from a liquidity standpoint.This was due to internationalization strategy.

Question 3

What is hunter strategy?

Answer 3

It’s a grand strategy. Essentially it was a concept that you must grow fast, to continue to survive in a industry that wasn’t doing well.So they went after hunter strategy by acquiring bunch of companies: sabena Belgium lot, polishWhen you acquire companies u use your cash, your equity or leverage,Swiss air leveraged too much and faced liquidity problems. Essentially it took them to the grounding day. Now it’s owned by Lufthansa.

Question 4

Why SWISS air failed?

Answer 4

Tried to grow and expand too fast. Their ability to grow on a sustainable basis generating value or creating value was not there. If you don’t have an ability to grow on a sustainable basis you o bankrupt.

Question 5

What is the most important matter on business?

Answer 5

Economic Value.You must create value and it’s a matter of economic system. Company must generate a return greater than the cost of capital they employ; generating a profit is not sufficient. Profit must be enough to cover the cost of capital.

Question 6

What two factors drive the notion of economic value in a company?

Answer 6

1) Cash flow related : it’s driven by two things.-Ability to generate ROI of capital- revenue growth- Swiss air had revenue growth but not rerun on invested capital ROI, must generate sufficient revenue growth that would diversify its value creation base 2) Cost of capitalAbility to compensate investors for the risk they take and inflation (2 elements)You can change the risk element but difficult)Asset management

Question 7

Cash flow is driven by what?

Answer 7

Cash flow is driven by the Ability to generate a return on invested capital and Revenue Growth;

Question 8

What two things drive the Return on Invested capital?

Answer 8

1- ability to generate margin from operation:Sales minus operating cost; you generate EBITDA margin which is about operation efficiency.2- Capital TurnoverThe ability to sell more with fewer capital stock into somethingEx; Low cost airline using same aircraft more frequently per day. They rotate the capital investment more frequently which is about asset management.

Question 9

What drives the Revenue Growth?

Answer 9

Market share; competition for more market shares in a established existing market or New market development Price Premium (can be related to EBITDA margin) (These are parts of business development)/>(Branding innovation)

Question 10

What are the challenges of any company?

Answer 10

Maintain price premium and increase market shares become the biggest challenge for any company; Starbucks story with everywhere in Huston USA.They overtime fell the price pressure ( couldn’t charge a price Premium because the product is commoditised) due to too many stores.GROW INTERNATIONALLYLocation of the value chain; all of the activities that company internally control. You can localised your value chain (sourcing, purchasing etc) or go to cheaper country)

Question 11

What do you mean by EBITDA margin and Capital turnover?

Answer 11

EBITDA margin is about operational efficiency Capital turnover is about asset management These two have key role for internationalisation; they have boundaries.

Question 12

What was the challenge for Starbucks?

Answer 12

To maintain their price premium and yet increase market shares was a challenge domestically. Huston, sB became almost a commodity. They grew their market share to the point where they were present everywhere.The problem was that they lost the ability to charge a price premium. So they had price pressure. People had too much Starbucks. They went international.

Question 13

On what basis do you decide to participate in a market? International strategy?

Answer 13

Opportunistically enter new market if I could have a dominant position. Location of value chain; localise outsource. These are generic?

Question 14

What are the notion of driving value in terms of market or product?

Answer 14

ROI, Revenue growth —–These are the two Drivers of value chain.

Question 15

How can you create more value in terms of growing?

Answer 15

Further penetrate into existing market; you could consolidate your cost and gain from scale, thus increase ROI, but there’s also a competition & may not be able to charge a price Premium.
Go after New markets Internationalisation Grow sales, but incur more cost: in these new markets you have less scale, and thus you will benefit less from economy of scale, therefore you may see your ROI capital decreasing.
Or diversify in existing market or new markets both products and markets (complicated) I.e. Starbuck with coffee machines) launch new products which is complicated, you may not be able to focus on core business
Or you diversify your products and markets ( Starbucks with coffee bean and machines) more complicated At maturity you can significantly slowdown in the domestic markets. Demand stops then diversifications or internationalisation like Starbucks.

Question 16

Shake UP face?

Answer 16

Where supply grows faster than the demand growth; bigger rivalry; emerging giants dominant. At maturity beginning of the decline; demand growth stops and then diversification tend to be the solution (internationalisation like Starbucks)

Question 17

What we can you learn from Starbucks?

Answer 17

Foreign sales; engine of growth from foreign sales as opposed to domestic- compensate lack of domestic growth with international growth

Question 18

What are the three stages in Internationalisation?

Answer 18

Phase, rhythm and scope; Phase how many stores in an average? Rhythm steady or more hectic (one one one or opportunistic) Scope narrow with a few markets or wide scope with many markets. You want to be at the fast phase because u need growth, but if you go at fast phase you may not have a steady rhythm & if you want steady rhythm that you can control easily then you slowdown your phase & if you want to increase your phase then you probably need to go after more opportunistically. Then you have more hectic which makes it harder for you to control and manage.The notion of hectic rhythm may penalise you in EBITDA margin and potentially on return on invested capital but Yiu may Gail from a stronger phase.If you go with the strong the pace and the wider scope then you will also have a lower return on invested capital and a lower EBITDA margin because you will not be able to gain from the scale, thus if you want to improve your EBITDA margin and have a higher return on invested capital and then you may want to consider go at a narrower scope but then tough to maintain the space.This is why CEOs are paid well; I.e. Tough space.