Key Definitions Flashcards
What comprises SG&A?
Selling: Salesforce Salaries and Commissions, Phone and Travel Costs, Shipping and Delivery Costs, Marketing and Advertising
Overhead: Rent/Mortgage, Insurance, Utilities, Salaries of Mgmt, HR, Legal, Accting, Office Supplies
What is a business value chain?
Value chain is the activities of a business. Each step adds value to the product by transforming resources, and this value-add justifies the profit margins made.
Primary activities: major contributors to value creation. Example: inbound logistics, production and operations, outbound logistics, marketing and sales, Service
Supporting activities: aka overhead - HR, Technology, R&D, Strategy
The above is for classic manufacturing, but can be adapted for industries or to show an entire industry
How can value chain analysis be used?
Company analysis - discover root cause of problem in structured way – a search pattern.
Potential biz situations: 1. Problems with rising costs or quality issues. Examine each of the primary and supporting activities to determine root cause. 2. Assessing a business model - use value chain analysis to understand processes of company that result in highest value and margin. Define company’s core competencies vs secondary activities and look at strengths/weaknesses 3. if facing logistical issues, use to analyze supply chain 4. if conducting a business model redesign, conduct value chain analysis to determine which steps can be outsourced
Market Analysis - value chain analysis allows you to understand relevant players and power of each participant. also, helps one better understand a product and its unique characteristics. Use to structure profit pool analysis.
What is a profit pool analysis?
Analysis of an industry’s profit structure - identify steps in value chain that contribute relatively small or large shares of profit in overall industry.
helps identify high-profit activities, and unveils competitive and economic forces in industry
Arrange in succession by value chain activity - total profits of each activity
A-B-C Analysis
A Goods - Often Scarce, High Value per Unit - focus on these first because highest impact with minimal effort
C Goods - Not Scarce, Low Value per Unit - focus on these last because lowest impact with most effort
Examples of use - How to reduce cost of working capital. First cluster inventory by stock volume and value
What is working capital?
=current assets-current liabilities
current assets»_space; inventory (tie up capital and if demand shifts, can backlog) look at inventory turnover ratio, cash, accounts receivable
current liabilities»_space; short term debt, accounts payable
**working capital is an indicator of company’s operational efficiency.
What is a break even analysis? how to conduct?
B/E analysis helps determine number of products needed to be sold in order for revenue to equal costs.
Need to know: fixed cost, variable cost/product, price per product
1. calculate profit per product. = Rev - variable cost
Ex. 100-50= $50
2. multiply profit per product * “X” # of units = fixed costs
$50 * x = $500 of fixed cost
3. Breakeven
x = 500/50
x= 10 units
Check feasibility of selling X units, and make recommendation on next steps.
implications of high break even aka high fixed cost businesses
For industries that are “asset heavy” with high fixed costs, companies must sell a lot of units to be profitable. Economies of scale plays a major role in the success of these businesses. Economies of scale also leads to a experience/learning curve, which leads to less variable costs and more control over pricing. High fixed cost businesses also pose a higher barrier to entry for new competitors
what is a core competency
A core competency is the skill or a capability of a company that delivers the highest value for thecustomercompared to its other activities. The concept is related to thePorter’s value chain, as core competencies are a sub-category of the primary activities, depicting the most crucial processes
Helps with:
• Where to focus in terms of introducing and developing new products, one dimension of theAnsoff Matrix
• What processes to outsource
• How to build a competitive edge in terms of cost or quality
How to createnew marketsor enter emerging high growth markets
what are potential company strengths?
Resources and capabilities, for example: • Image/ Goodwill • Financial resources • Technology • Know how • Patents • Customers Access to networks, natural resources
what are potential company weaknesses
• Poor reputation • Highcost structure • Lack of customer/ employee loyalty • Lack of innovative R&D Lack of access to key distribution channels/ resources/ trade associations
4 stages of the product lifecycle?
(1) Introduction:In the first phase, the product is introduced. Normally at this stage there are a few competitors andcustomers. Therefore, sales and profit are low and the risk that the product will not succeed is high. In order to boost sales the focus lies heavily onpromotionactivities
(2) Growth:Products that succeed in addressing customer’s needs will lead to an increase in sales. Advertisement is still a key component to promote further growth
(3) Maturity:At this stage the product can be seen as well established and widely accepted within the targeted customer group. Profits are high and risks are low. Typically in this phase,competitionincreases. To keep the market position and expand this phase, companies often employ strategies such as introduction of complementary or updated products or simply invest in marketing activities
(4) Decline:At this point, the product may not fulfill the current needs of the customers and sales start to decline. The important decision at this stage is deciding when to take the product off market such that the client optimizes financial gains and minimizes losses due to time and investment.
economies of scope
While economies of scale for a firm primarily refer to reduction in the average cost per unit, economies of scope refer to lowering the average cost for a firm in producing two or more products that could share resource
implications of low break even aka low fixed cost businesses
low fixed costscomes with low risk of volatile consumer demand but also comes with limitedgrowth opportunitiesand a risk of significant cost increases with sudden increase in demand. Additionally, lower fixed costs are an incentive for competitiors toenter the marketmore easily (low barriers to entry).
CAGR
CAGR shows the yearly growth of an indicator if it had grown at a steady rate y-o-y.
• CAGR is a theoreticalsteady growth rateover a specific amount of time • CAGR isnottheaverageof theY-o-Ygrowth rates • It doesn’t reflect highs and lows and couldmask sub trendswithin the period You probably will encounter CAGR in graphs that the interviewer will hand out to you but you will likely not have to calculate CAGR yourself
