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test 2 Flashcards

1
Q

3 traditional framework to assess firm performance

A

accounting profitability, shareholder value creation, economic value creation

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2
Q

What is the firm’s accounting profitability

A

use financial data and ratios derived from publicly available accounting data such as income statements and balance sheets. examine ROIC, constituent parts are ror and working capital turnover

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3
Q

Accounting profitability example

A

apple had a distinct competitive advantage over BlackBerry because apple’s ROIC was much higher than blackberrys

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4
Q

limitations of accounting profitability

A

all accounting data are historical and backward looking, data do not consider off balance sheet items, accounting data focus mainly on tangible assets which are no longer most important

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5
Q

positive of accounting profitability

A

measures relative profitability, which is useful when comparing firms of different size over time

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6
Q

to measure competitive advantage, we must

A
  1. assess firm performance 2. benchmark to the industry average/other competitors
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7
Q

Shareholder value creation

A

how much shareholder value does the firm create?

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8
Q

shareholders

A

individuals or organizations who own one or more shares of stock in a public company and are the legal owners or public companies, effective strategies to grow the business can increase a firm’s profitability and its stock price

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9
Q

risk capital

A

the money provided by shareholders in exchange for an equity share in a company, cannot be recovered if the firm goes bankrupt

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10
Q

Total return to shareholders

A

return on risk capital, including stock price appreciation plus dividends received over a specific period, this is what investors are interested in

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11
Q

total return to shareholders is an ______, unlike accounting data

A

external performance measure

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12
Q

efficient market hypothesis

A

all available information about a firm’s past, current state, and expected future performance is embedded in the firm’s stock price

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13
Q

limitations of shareholder value creation

A

stock prices can be volatile, making it difficult to assess firm performance, especially in the short term; overall macroeconomic factors such as unemployment and economic growth/contraction and interest and exchange rates all have a direct bearing on stock prices; stock prices frequently reflect psychological mood of investors which can be irrational at times

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14
Q

economic value creation

A

how much economic value does the firm generate, the foundation upon which to formulate a firm’s competitive strategy of cost leadership or differentiation

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15
Q

a firm has competitive advantage when it creates more _____ than rival firms

A

economic value

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16
Q

economic value creation formula

A

difference between buyer’s willingness to pay for a product/service and the firm’s total cost to product it: V-C, also called economic contribution

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17
Q

amount of total perceived consumer benefits need to equal _____

A

maximum willingness to pay

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18
Q

Value (V)

A

consumer’s willingness to pay maximum price, sometimes called the reservation price

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19
Q

Cost (C)

A

cost to produce the good/service directly impacts the profit margin

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20
Q

Profit (P)

A

Difference between the price (P) charges and the cost (C) to produce or (P-C)

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21
Q

from an economic context, strategy is about:

A
  1. creating economic value 2. capturing as much of it as possible
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22
Q

a large difference between v and c gives the firm two distinct pricing options

A
  1. charge higher prices to reflect the higher product value and increase profitability 2. charge the same price as rivals and gain market share
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23
Q

opportunity costs

A

the value of the best forgone alternative use of the resources employed

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24
Q

what strategy considers opportunity costs

A

economic value creation

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25
Q

limitations of economic value creation

A

determining the value of a good in the eyes of the consumer is not a simple task; the value of a good in the eyes of consumers changes based on income, preferences, time’ to measure firm level competitive advantage the economic value created must be assessed for all products/services the firm offers

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26
Q

What provides the bases for a sustainable strategy

A

the triple bottom line, the simultaneous pursuit of performance along social, economic, and ecological dimensions

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27
Q

the triple bottom line from the stakeholder perspective

A

economic, social, and ecological dimensions make up the triple bottom line, noneconomic factors can have a significant impact on a firm’s financial performance, as well as its reputation a goodwill

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28
Q

extended producer responsibility

A

in anticipation of government regulation- proactively addressing social or ecological issues

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29
Q

business model

A

plan that details the firm’s competitive tactics and initiatives, a business model explains how the firm intends to make money and how the firm conducts its business with buyers, suppliers, and partners

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30
Q

business model innovation

A

may be more important in achieving superior performance than product of process innovation

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31
Q

competitive advantage and firm performance

A

no one best strategy, goal of strategic managment, quantitative and qualitative, business model

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32
Q

no one best strategy

A

only better strategies, relative to competitors or industry average, must interpret any performance metric relative to those of competitors

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33
Q

goal of strategic management

A

integrate and align each business function and activity to obtain overall superior performance

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34
Q

quantitative and qualitative

A

holistic perspective is required for performance assessment measuring different dimensions over different times

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35
Q

accounting profitability ratios

A

percent operating margin, percent profit margin

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36
Q

percent operating margin

A

operating income/revenue

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37
Q

percent profit margin

A

net profit/net sales

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38
Q

liquidity ratios

A

current ratio and quick ratio

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39
Q

current ratio

A

total current assets/ total current liabilities

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40
Q

quick ratio

A

(total current assets - inventory)/total current liabilities

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41
Q

shareholder value ratios

A

percent return on assets and percent return on equity

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42
Q

percent return on assets

A

net profits/total assets

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43
Q

percent return on equity

A

net profits/owners equity

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44
Q

competitive advantage is always measured ____

A

in relation to other firms

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45
Q

example of a business model

A

zipcar allows its members to rent a vehicle online that is already in their vicinity for a few hours or a day. users are charged for duration of use and gas and insurance are included in rental fees. appeals to urban dwellers and millenials, downside is it take a lot of up front investment to build a rental fleet, unable to obatin the capital necessary to scale its operations to be profitable

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46
Q

razor-razor blade business model

A

initial product is often sold at a loss or given away for free to drive demand for complimentary goods, make money off of replacement parts needed. ex: gillette gives away razorr base but you must buy expensive replacement blades

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47
Q

subscription based business models

A

users pay for aceess to a product or service whether they use the product or service during the payment term or not. ex: cable television cell phone serviceproviders

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48
Q

pay as you go business model

A

user pays for only the services he or she consumes. ex: utilities such as power and water

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49
Q

freemium business model

A

basic features of a product or service are provided free of charge but the user must pay for premium services such as advanced features or add ons. ex; software trials

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50
Q

Business level strategy

A

the goal directed actions managers take in their quest for competitive advantage when competing in a single product market

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51
Q

who, what, why, and how of busienss level strategy

A

who-which customer segements-will be serve
what customer needs, wishes, and desires will we satisfy
why do we want to satisfy them
how will we satisfy our customers’ needs

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52
Q

how to compete for advantage

A

differentiation, cost leadership, and integration

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53
Q

differentiation

A

create higher value by delivering products/services with unique features

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54
Q

cost leadership

A

create similar value by delivering products/services at a lower cost and lower prices than competitors

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55
Q

integration

A

combination of differentiation and cost leadership strategies

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56
Q

strategic position

A

the greater the economic value created, the greater the firm’s competitive advantage, a firm’s business level strategy determines its strategic position, a business strategy is more likely to lead to a competitive advantage if it allows firms to either perform similar activities differently or perform different activities than their rivals

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57
Q

generic business strategies

A

independent of industry, can be used by any organization, manufacturing or service, large or small, public or private, us or non us, in the quest for competitive advantage.

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58
Q

value creation and cost in generic business strategies

A

tend to be positively correlated. there exist important trade offs between value creation and low cost

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59
Q

value drivers

A

product features, customer service, complements

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60
Q

product features

A

most important and clearest drivers, unique features»higher price. ex: BMW M3

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61
Q

customer service

A

ID umet customer needs and satisfy them. ex: ritz-Carlton, Zappos online retailer

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62
Q

complements

A

add value when consumed as a bundle ex: AT&T u verse with a DVR add on

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63
Q

Whole Foods

A

lost its competitive advantage due to failure to control costs effectively, a clearly formulated business strategy enables them to increase differentiation value gap (healthy choices while educating customers) and command premium prices while keeping cost structure in check (offer more products)

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64
Q

A cost leadership strategy with adequate value

A

managers can manipulate cost drivers to keep their costs low

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65
Q

cost drivers

A

cost of input factors, economies of scale, learning curve effects, experience curve effects

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66
Q

economies of scale

A

output up, cost per unit down. spread fixed costs over large output, specialized systems, physical properties

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67
Q

spread fixed costs over large outputs

A

microsoft upront R&D for windows upgrade

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68
Q

specialized systems

A

ERP software or robots

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69
Q

physical properties

A

cube square rule for big box stores

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70
Q

minimum efficient scale

A

lowest cost position constant returns to scale

71
Q

diseconomies of scale

A

complexity of management or physical limits (gore associates and aircraft aeronautics)

72
Q

learning curves

A

steeper curve=more learning ex: aircraft manufacturing, cardiac surgeons

73
Q

experience curves

A

combine economy of scale and learning curves, scale comes down a given learning curve, technology allows movement to steeper curve, combination can leapfrog in competitive advantage

74
Q

ex of experience curves

A

walmart high volumes and technology leadership

75
Q

benefit and risk of cost leadership

A

benefit: protected from competitors if price war
risk: new entrant arrives and new capabilities needed

76
Q

benefit and risk of differentiation

A

benefit: reduced rivalry and high cost of imitation
risk: might overshoot features needed and vulnerable to price sensitive customers

77
Q

combining cost leadership and differentiation

A

firms skilled in both lowering costs and uniqueness, difficult because firm manages internal value chain activities that are fundamentally different from one another. can work if investments are complements, not subsitutes

78
Q

value and cost drivers of integration strategy

A

quality, economies of scope, customization, innovation, structure, culture and routines

79
Q

The dynamics of competitive positioning

A

strategic positions need to change over time, productivity frontier

80
Q

strategic positions need to change over time

A

PC assemblers need to move tablets or smartphones

81
Q

productivity frontier

A

value cost realtionship; relationship that captures the result of performing best practices at any given time, the function is concave (bulging outward) to capture the trade-off between value creation and production cost

82
Q

well formulated and implemented strategies =

A

enhanced chances of superior performane

83
Q

integration strategies only successful if

A

an innovation that reconciles the trade offs, such as toyota lean manufacturing in the 80s and 90s

84
Q

gale of creative destruction-Joseph Schumpter

A

continuous waves of market leadership changes in the encyclopedia business. innovation is a competitive weapon that can create and destroy value

85
Q

move from typewriters to computers

A

Wang Labs, cimputer comp, helped to kill the typewriter industry, IBM and compaq defeated wang labs for the computer market, lenovo bought remains of ibm personal computer market, hp bought compaq and is inder threat from mobile device

86
Q

tv viewing options

A

big 3 networks struggle against cable and satellite providers, customized online content now rising

87
Q

Innovation process: discovery and development of new knowledge captured by the 4 is

A

idea, invention, innovation, imitation

88
Q

Idea

A

may be presented in terms of abstract concepts or as findings derived from basic research

89
Q

invention

A

transformation of an idea into a new product, process, or the modification and recombination of existing ones

90
Q

innovation

A

concerns the commercialiation of an invention by entrepreneurs

91
Q

imitation

A

copying a successful innovation

92
Q

Innovation

A

a novel and usful idea that is successfully implemented

93
Q

who are the change agents for creative destruction

A

entrepreneurs

94
Q

Jeff Bezos

A

Amazon, saw growth of internet in 1994, now the world’s largest online retailer, created new opportunity and exploited it

95
Q

Oprah

A

Harpo Productions, rose from abuse and poverty to over $2 billion net worth, ended talk show to devote time to OWN TV channel, created new opportunity and exploited it

96
Q

Elon Musk

A

Tesla Motors, Solar City, SpaceX, Paypal, an engineer and serial entrepreneur, deep passion to solve environmental, social, and economic challenges

97
Q

example of combining entrepreneurial with strategic actions

A

samsungs innovation in mobile devices

98
Q

five different stages of the industry life cycle

A

introduction, growth, shakeout, maturity, and decline

99
Q

New industries created by innovation

A

express delivery, internet retailing and advertsiign, nantotechology growing in medical and aircraft industries

100
Q

competitors and the industry life cycle

A

the number and size of competitors change with each stage

101
Q

consumers and the industry life cycle

A

different types of consumers enter the market at each stage. both the supply and demand sides of the market change as the industry ages

102
Q

early adopters

A

excited by the possibilities of the product rather than the cool technology of technology enthusiasts

103
Q

many innovators fail to get from _____ when crossing the chasm

A

early adopters to majority (15-50% of market)

104
Q

the critical early majority base purchasing decisions on _____

A

practicality, can generate a herding effect

105
Q

Introduction life cycle stage

A

R&D, product innovation at maximum, process innovation at minimum, slow growth and small size, want to differentiate and achieve market acceptance. usually bought by tech enthusiasts

106
Q

Growth life cycle stage

A

R&D, some manufacturing and marketing. decrease product innovation and increase process innovation, high growth and moderate size. want to stake out strong strategic position, usually bought by early adopters

107
Q

shakeout life cycle stage

A

manufacture, engineer, more increase in process innovation and decrease in product innovation, moderate/slowing growth and large size, survive by drawing on deep pockets, bought by early majority

108
Q

maturity life cycle stage

A

manufacture, engineer, market. low product innovation, high process innovation, none to mderate growth and largest size, maintain strong strategic position, bought by late majority

109
Q

decline life cycle stage

A

manufacture, process engineer, market, aservice, product inn at min, process inn at max, negative market growth, want to exit, harvest, maintain, or consolidate, bought by laggards

110
Q

incremental innovation

A

steady improvement of a product or service, often from incumbent firms (econ incentives, organizational inertia, innovation ecosystem)

111
Q

examples of incremental innovation

A

gillette now 6 bladed razors, intel 386 to 486 processprs

112
Q

radical innovation

A

novel methods or materials serving new markets, often from new firms

113
Q

examples of radical innovation

A

mass production (Ford), genetic engineering, airplanes predictable pattern of innovation

114
Q

architectural innovation

A

reconfigure known components to create new markets

115
Q

examples of architectural innovation

A

canon user friendly copiers, GPS to handheld consumer devices

116
Q

disruptive innovation

A

novel technologies serving existing markets from bottom up, stealth attack (

117
Q

examples of disruptive innovation

A

japanese autos, digital photography, data storage media

118
Q

The internet as disruptive force: the long tail

A

80% of sales in a given category of boos or movies are hot hits (Pareto principle), technology allows easier acces to the tail, less of more, online firms can gain a large share from selling a small number og nearly unlimitied choices

119
Q

what is the short head

A

the blockbuster that are available at brick and mortar stores, significant inventory costs

120
Q

innovation in the 20th century

A

mostly closed, internal shift from closed to open in 21st

121
Q

open innovation

A

mobility of skilled workers, exponential growth of venture capital, wider marketplace of ideas options, better capabilities in external sppliers

122
Q

open innovation leverage

A

leverages both internal ideas and inventions and external ones; 2 way sharing

123
Q

closed innovation principles

A

smart people in field work for us, must discover, develop, and ship ourselves to profit from R&D, if we discover ourselves we will get it to the market first, creating the most/best ideas in industry=win, should control IP so competitors dont profit from it

124
Q

open innovation principles

A

not all smart people work for us, external r and d can create value, internal r and d needed to claim portion of value, dont have to originate research to profit, better business model is more important that getting to market first, should profit from others use of our IP, and buy others IP when it advances our business model

125
Q

most innovative companies in 2013

A

nike, amazon, square ,uber, pinterest, target, all use continuous innovation

126
Q

corporate strategy determines the firm’s boundaries along three dimensions

A
  1. industry value chain, 2. range of products and services 3. where to compete: geography
127
Q

key strategic management concepts in corporate level strategy

A

core competencies, economies of scale, economies of scope, transaction costs

128
Q

core competencies

A

unique strenghts

129
Q

economies of scale

A

average cost per unit decreases

130
Q

economies of scope

A

savings producing two or more outputs

131
Q

transaction costs

A

all internal and external costs associated with an economic exchange

132
Q

transaction cost economies

A

explains and predicts the scope of the firm (Market vs firm have differential costs),

133
Q

external transaction costs

A

costs associated with economic exchanges (negotiating and enforcing contracts)

134
Q

internal transaction costs

A

costs pertaining to organizing an exchange within a firm (recruiting and training employees)

135
Q

if cost of in house < than cost of market

A

vertically integrate (make), google hires programmers to write code in house instead of contracting out

136
Q

disadvantage or make in house

A

principal agent problem (owner = principal, manager = agent)

137
Q

disadvantage of bur from markets

A

search cost, opportunism, information asymmetries

138
Q

deciding whether to make in house or buy from markets determines the firms ___

A

boundaries

139
Q

Alternatives to the make or buy continuum

A

short term contracts, strategic alliances, parent subsidiary relationship

140
Q

short term contracts

A

competitive bidding process, less than one year term, lower prices - cost advantages

141
Q

strategic alliances

A

facilitate investment without admin costs

142
Q

examples of strategic alliances

A

long term contracts, equity alliances, joint ventures

143
Q

parent subsidiary relationship

A

most integrated alternative, parent companies have command and control

144
Q

example of parent subsidiary realtionship

A

GM owns Opel and Vauxhall in Europe

145
Q

Make or buy continuum from less integrated to more integrated

A

buy > strategic alliances > make

146
Q

vertical integration

A

ownership of its inputs, production, and outputs in the value chain, vertical value chain, industry level integration from upstream to downstream

147
Q

ex of industry level integration from upstream to downstream

A

cell phone industry value chain has many different industries and firms

148
Q

ex of full vertical integration

A

wyerhauser owns forests, mills, and distribution to retailers

149
Q

ex of backwards vertical integration

A

HTC’s backward integration into design of phones

150
Q

ex of forward vertical integration

A

HTCs forward integration into sales and branding

151
Q

not all industry value chain stages are equally profitable

A

apple designs in house software and hardware but partners for manufacturing

152
Q

benefits of vertical integration

A

securing critical supplies, lowering costs and improving quality, lowering costs and improving quality, facilitating investments in specialized assets

153
Q

risks of vertical integration

A

increasing costs and reducing quality, reducing flexibility, increasing the potential for legal repercussions

154
Q

alternatives to vertical integration

A

taper integration and strategic outsourcing

155
Q

taper integration

A

backward integrated but also relies on outside market firms for supplies OR forward integration but also relies on outside market firms for some of its distribution

156
Q

strategic outsourcing

A

moving value chain activities outside the firm’s boundaries

157
Q

ex of strategic outsourcing

A

peoplesoft, eds, and perot systems provide hr services to many firms that chose to outsource it

158
Q

degrees of diversification

A

range of products and services a firm should offer. pepsi owns lays and quaker oat but sold KFC

159
Q

diversification strategies

A

product diversification, geographic diversification, product market diversification

160
Q

product diversification

A

active in several different product categories

161
Q

geographic diversification

A

active in several different countries

162
Q

product market diversification

A

active in a range of both products and countries

163
Q

single business form

A

derives > 95% from one business- google revenue from online research

164
Q

dominant business firm

A

derives 70-95% from one business- harley yields 10% from clothing

165
Q

related diversification strategy

A

< 70% from one business

166
Q

related constrained diversification strategy

A

leverage current competencies, exxon strategic move into natural gas

167
Q

related linked diversification strategy

A

share only limited links to current business, amazon moves to cloud computing, kindle tables, video streaming

168
Q

unrelated diversification

A

< 70% and few if any links amon businesses, GE, LG, Tata

169
Q

core competence

A

unique skills and strengths, allows firms to increase the value of product/service, lowers the cost

170
Q

ex of core competencies

A

walmart-globally distributed supply chain at low cost

171
Q

the core competence market matrix

A

provides guidance to executives on how to diversify in order to achieve continued growth

172
Q

does corporate diversification lead to superior performance

A

are the individual businesses worth more under the company’s management than if each were managed in seperate firms

173
Q

ex of corporate strategy being dynamic over time

A

adidas founded in 1924 with focus on shoes, globalization led to less integration and wider sports apparel, nike started in 1978 as a vertically disinegrated firm

Advanced Topics (3 decks)

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