Strategy Flashcards
What is Strategy?
- A plan to achieve a competetive advantage
What are Porters five forces?
- Threat of new entrants
- Buyer bargainaing power
- Supplier bargaining power
- Threat of substitute
- Rivlary amongst competitors
What is Accounting based performance measuring?
- Return on Capital Employed (ROCE)
What is the problem with accounting based performance measuring?
Highly dependend on accounting system used
What is the Stakeholder Theory?
- Companies should include all stakeholders when making decisions, not only shareholders
What is the Shareholder Theory?
- Companies should only include Shareholder needs when making decisions
What is the Entrepreneurial Process?
- Opportunity through environmental shift (Technological, political, Demographic)
- Discovery (New Information, insights, imperfections)
- Exploitation (Education, Location, motivation)
- Excecution (Recourcse assembly, Organisational design, strategy)
How to entrepreneurial firms compete?
- Differentiation since cost of diversification is often tuff
What differentiation opportunities are there?
- External: changing customer demand, prices, or technology
- Internal: technology push (greater creative innovation capabilities)
What is moral hazard?
- Entrepreneur might not act in the investors best interest
Why is there a need for external capital?
- Profitability (cost might lower later due to scale)
- Asset intensity (lag of cash to assets and assets to sales, Net working capitaland fixed assets)
- Pace of growth (Timing, need for fast growth, ambitions)
What are the benefits of Bootstrapping?
- Prevents dilution of ownership
- Instills financial discipline
- Maintains Reasonable growth pace
What are the benefits of raising capital?
- Promotes Growth and rate of market penetration
- Hinders/intimidates competition
- Increases bargaining power in supply chain
- Pushes product sophistication
What are the pros of VC?
- Work with a partner with similar incentives
- Draw from experience and knowledge and network
- Risk sharing
- Create discipline
- Signal quality
What are the cons of VC?
- Might have dissimilar incentives
- Capital may be costly
- Dilute ownership
- Reduce autonomy
- Reduce ability to see through vision
What investment fits family and friends?
moderate risk return endeavors
What investment fits angels?
less sophisticated, pre step to VC
What investment fits VC?
high risk high reward
What investment fits CVC?
may not pursue as aggressive financial returns
What are the benefits of debt?
- Fixed repaiment scheduele
- Ceiling and floor clearly specified
- Capital provider incentive is only on collection of payment + interest
What are the benefits of equity investments?
- Shared ownership and risk
- Clear floor specification
- Theoretical incentive alignment
What are the benefits of convertible loans
- Best of both worlds for capital providers
- Incentives can shift
- Loan or preffered stock
What is the Information Economics Theory?
- Information imbalance between “seller” and “Buyer”
- Adverse selection (“buyer” cant tell the quality of the product)
- Signaling (Informed party signals their value (Diploma)
What is the agency theory?
- Principal (Investor) and Agent (Entrepreneur)
- Challenges arise due to differing goals, risk preferences and information levels
- moral hazard: Agent might act reclessly after investment due to reduced risk
- Informationa asymetry: Agent might withold information in order to get investment
what is Transaction cost economics (TCE)?
- Investment might be better or cheaper rather than buying the product
- Therefore CVC´s or Strategic partners might invest in start-ups
- Created dependency and less risk with entrepreneur to go somewhere else
what is priced and unpriced security?
- Priced for x amount of € Y amount fo Shares are bought different post money
- Unpriced ownership percentage not clarified and postponed to next round financier often gets discount
Why do convertible loans make sense?
- Less costs due to valuation and lawyers
- Lower skillset required
- Faster ability to raise money
- Increase valuation later as it is unpriced less dilution
what is the point of Caps in convertaqble notes?
- Angels might not be rewarded for risk taken if valuation gets to high (less shares per €)
- Cap is put on maximum valuation at which the angel will buy
- Minimizes max possible dilution
Why is there Geographic concentration in vc?
- Entrepreneurs go where the money is
- Better network
- Faster ways
- More talent
What are factors taken into regard concern gin cvc?
- Look for financial return bot also look for benefit to parent company
- Open innovation model different to R&D
- Some will have investment fund and other will allocate capital when an opportunity arises
- Report to corporate level and follow corporate mission
- Less atttactive to other investors (competition signaling)
- Performance my be less important
- Combination of strategic and financial goals
What are the advantages of going public?
- Imidieate capital input
- Cashout option
- Better than taking on debt
- Public markets tend to value companies higher
- Take debt at cheaper costs
- Diversification benefits for founders
- Credibility and legitimacy
- Makes acquisition easier
What are the disadvantages of going public?
- Information disclosure
- Constant pressure
- Less manegerial flexibility
- Cycle dependent
- Dilution of control and ownership
- Cost of IPO
- Cost of being Public (reportings)
- Cost of failing to go public)
What is the importance of the lead underwriter?
- Bank undergoing the IPO
- Reputation of bank is important signaling
Q: What are the key traits of an entrepreneurial firm?
A: Innovation
- risk-taking
- seizing new opportunities
- focus on growth
- flexibility
- market disruption
How does a non-entrepreneurial firm differ from an entrepreneurial firm?
A non-entrepreneurial firm focuses on:
avoiding risks
sticking to established processes in existing markets.
How is the definition of an entrepreneurial firm subjective, and why might it vary depending on who you ask?
The definition can change based on perspective.
Founders might see the firm as entrepreneurial if it focuses on innovation and growth.
Investors or outsiders might judge the firm by its market disruption or risk-taking.
Different stakeholders may have different views based on their expectations and experiences.
Q: Do entrepreneurship and strategy belong together? Why?
A: Yes, they belong together because:
provides direction and helps focus efforts
ensures efficient resource allocation
helps long-term growth and competitive advantage.
enables adaptation to changes
What is strategy?
Strategy is the plan or roadmap that guides decision making, to achieve competitive advantage.
Why does an entrepreneurial firm need strategy?
Direction and Focus
Resource Allocation
Competitive advantage
Adapting to Change
When does a moral hazard occur?
When one party takes risks knowing that the consequences will be borne by another party, leading to misaligned incentives.
How does moral hazard lead to risky decisions by entrepreneurs?
Entrepreneurs might make risky decisions because they don’t fully bear the cost of failure, which can result in suboptimal outcomes for investors.
What is the misalignment of incentives between entrepreneurs and capital providers?
- Entrepreneurs focus on growth and control
- investors focus on monetization and returns
How does information asymmetry contribute to moral hazard in entrepreneurship?
Entrepreneurs have more information about the business, allowing them to potentially overstate progress or delay bad news, which can hurt investors.
How does moral hazard play out between investors and entrepreneurs?
- increased risky decisions by entrepreneur
- Misalignment of incentives
- Abuse of information asymmetry
How does information asymmetry contribute to moral hazard in entrepreneurship?
Entrepreneurs have more information about the business, allowing them to potentially overstate progress or delay bad news, which can hurt investors.
Why are most worthwhile entrepreneurial opportunities capital intensive?
Few entrepreneurial opportunities are not capital intensive.
they often require significant upfront investment in:
- innovation
- growth
- market entry.
How does the potential for creative disruption relate to risk?
greater the potential for creative disruption, the greater the risk
How do traditional capital providers view creative disruption
usually unwilling or unequipped to support disruptive entrepreneurship.
What is the relationship between risk and return in entrepreneurship?
positive relationship between risk and return
hy is equity the preferred form of capital for entrepreneurial ventures?
Equity is the only form of capital at the risk/return frontier, where investors accept greater risk for the potential of greater returns.
to what extend can we understand investors objectives, timing and incentives?
to the extent that we understand what they require
What is the common objective of capital providers?
Monetization
Why might monetization not be the objective for entrepreneurs?
focus more on growth or innovation
What happens once monetization is realized or clearly unattainable?
equity providers will often exit the business.
What happens when monetization opportunities are scarce?
When monetization opportunities are scarce, capital providers are also scarce
hat factors influence the objectives of different classes of capital providers?
timing, scale, and motivation
