Terms Flashcards
4 Ps
Product, Placement, Price, Promotion
Accounting Equation
Assets = Liability + Owner’s Equity
Ansoff’s Matrix
2x2 for future growth. x-axis is existing vs new products. y-axis is existing vs new markets.
Backward Integration
Merging with a business that is further back in the process. Provides greater control of costs, quality and delivery times of material. It’s often expensive and hard to reverse.
Complementary Good
Technically “negative cross elasticity of demand” - in other words, if demand of one good increases, so will the demand of the other.
Contribution Margin Formula
Revenue/Unit - Variable Cost/Unit
Contribution Profit
Portion of sales not consumed by variable costs that can be used for fixed costs.
Cost Control
The practice of identifying opportunities for cost reduction and minimizing them to increase profits.
Cost of Goods Sold Formula
Beginning inventory value + Purchases of inventory – Ending inventory value
Cost of Revenue
Total cost of manufacturing and delivering a product. Designed to represent the direct costs.
Current Assets Formula
Cash + Accounts Receivable + Inventory + Prepaid Expenses
Differentiable Good
The opposite of a commodity. Can charge higher prices because product is unique in the marketplace.
Direct Competitor
Competitors that essentially create the same product.
Direct Costs
Costs that are easily directly attributable to a given product. Assigned on a cause and effect relationship.
Diversification
(Part of Ansoff’s matrix) New products in new markets.
Divestiture
The process of a full disposal of a business unit through sale, exchange, closure or bankruptcy. Usually because business unit is not part of core competency of business. May also be due to redundancy after an acquisition. Can also be done for need of cash.
Experience Curve
Y-axis: direct costs per unit X-axis: Cumulative volume of production. The more experience a firm has making something (or market share), the cheaper it will be able to make it. Don’t give up market leadership position and grab it when you can. Seems to impact high-volume items more than low-volume (semiconductors vs nuclear reactors).
Fixed Costs
Costs that are not dependent on the level of goods/services produced.
Fixed Costs (examples)
Monthly rent, phone line, salaries that aren’t based on production.
Gross Margin
Gross Profit divided by Revenue - A measure of how well a company produces revenue from the cost of products and services.
Gross Profit Formula
Net Sales - COGS
Horizontal Merger
Buying a competitor to gain market
Income From Operations Formula
Gross Margin – Operating Expenses
Indirect Competitor
Competitors that solve the same customer problem (horse, car, train)
Indirect Costs
Costs that are due to a product, but are difficult to directly attribute.
Market Development
A growth strategy that develops new market segments for current products. (Part of Ansoff’s matrix)
Market Penetration
A measure of the amount of sales or adoption of a product compared to total theoretical market. Can also be growing with existing product to existing markets.
Market Share
Companies sales over sales of the industry
Net Income Formula
Income – Expenses
Net Sales Formula
Gross Sales - Returns and allowances
Operating Expenses
The money the business spends in order to turn inventory into throughput but not directly associated to production.
Operating Expenses Formula
Sales and Marketing + Research and Development + General and Administrative
Operating Income
Another word for EBIT (revenue - operating expenses)
Operating Margin Formula
Operating Earnings / Revenue
Overhead
Another word for fixed costs
Population Pyramid
Age distribution of gender and age with youngest at the bottom.
Porter’s Five Forces
- Industry Rivalry
- Bargaining Power of Suppliers
- Threat of New Entrants
- Threat of Substitutes
- Bargaining Power of Buyers
Product Development
(Part of Ansoff’s matrix) New products to existing markets.
Profit Margin Formula
Net Income / Revenue
Profitability vs Profit
Profitability is a relative number (a percentage), profit is the absolute number (revenue minus expenses).
Segmentation
Slicing a market into segments. Based on demographics, beliefs or occasion of use. Goal is to understand most attractive parts of existing or potential customer base by comparing size, growth and profitability. Allows more effective targeting of advertising. “Actionable segmentation” is rare.
Unit Contribution Margins
The price of a good minus its variable cost. This portion can be used to cover the fixed costs.
Value Chain
The set of activities that a firm takes to deliver a valuable product or service to the market.
Variable Costs
Costs that change in proportion to the good or service that a business produces. Also the sum of all marginal costs of units produced.
Variable Costs (examples)
Cloth for clothes, Labor for clothes, employee salary that changes with production, extra electricity for busy times (not taxation, not necessarily COGS)
Vertical Integration
Merging of two businesses that are at different stages of production.
CAPEX
Funds used to acquire, upgrade and maintain property, industrial buildings or equipment.
Examples of capital-intensive industries
Oil exploration and production, telecommunications, manufacturing and utilities.
Hurdle rate
The minimum acceptable rate of return on a project or investment required by a manager or investor.
HHI
Herfindahl-Hirschman Index. A common measure of market concentration. The sum of the square of all competing firms. Used by the justice dept.
Inventory Turnover
The rate at which inventory is turned over in a given period. COGS / Average Inventory. Sometimes Net Sales is used
Du Pont Equation (ROE)
ROE = Profit Margin * Asset Turnover * Financial Leverage
Asset Turnover
The amount of sales that can be generated per asset. Total Sales divided by Assets.
Financial Leverage
Total Assets/Average Shareholder Equity
Cannibalization
A reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer.
Opportunity cost
The loss of potential gain from other alternatives when one alternative is chosen.
Economies of scope
A proportionate saving gained by producing two or more distinct goods, when the cost of doing so is less than that of producing each separately.
Economies of scale
The cost advantages that enterprises obtain due to their scale of operation (typically measured by amount of output produced), with cost per unit of output decreasing with increasing scale.
Non-market Strategy
Non-market strategy helps groups gain soft power and influence and use them to their competitive advantage. It is developed towards government, press and influential groups. Tools for non-market strategies are: events, demonstrations, networking, sponsoring, research, publications, but also the consequences of law suits.
Consolidation
In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. Can provide new technologies, clients, geographies, cheaper financing, supplier/customer bargaining power.
Competitive Response
Anticipate what firms will do in response to a changing strategy of their competitors.
Same store sales
The difference in revenue generated by a retail chain’s existing outlets over a certain period.
5Cs
Customer, Company, Competitors, Collaborators, Climate.
