test 2 Flashcards
3 traditional framework to assess firm performance
accounting profitability, shareholder value creation, economic value creation
What is the firm’s accounting profitability
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
Accounting profitability example
apple had a distinct competitive advantage over BlackBerry because apple’s ROIC was much higher than blackberrys
limitations of accounting profitability
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
positive of accounting profitability
measures relative profitability, which is useful when comparing firms of different size over time
to measure competitive advantage, we must
- assess firm performance 2. benchmark to the industry average/other competitors
Shareholder value creation
how much shareholder value does the firm create?
shareholders
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
risk capital
the money provided by shareholders in exchange for an equity share in a company, cannot be recovered if the firm goes bankrupt
Total return to shareholders
return on risk capital, including stock price appreciation plus dividends received over a specific period, this is what investors are interested in
total return to shareholders is an ______, unlike accounting data
external performance measure
efficient market hypothesis
all available information about a firm’s past, current state, and expected future performance is embedded in the firm’s stock price
limitations of shareholder value creation
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
economic value creation
how much economic value does the firm generate, the foundation upon which to formulate a firm’s competitive strategy of cost leadership or differentiation
a firm has competitive advantage when it creates more _____ than rival firms
economic value
economic value creation formula
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
amount of total perceived consumer benefits need to equal _____
maximum willingness to pay
Value (V)
consumer’s willingness to pay maximum price, sometimes called the reservation price
Cost (C)
cost to produce the good/service directly impacts the profit margin
Profit (P)
Difference between the price (P) charges and the cost (C) to produce or (P-C)
from an economic context, strategy is about:
- creating economic value 2. capturing as much of it as possible
a large difference between v and c gives the firm two distinct pricing options
- charge higher prices to reflect the higher product value and increase profitability 2. charge the same price as rivals and gain market share
opportunity costs
the value of the best forgone alternative use of the resources employed
what strategy considers opportunity costs
economic value creation
limitations of economic value creation
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
What provides the bases for a sustainable strategy
the triple bottom line, the simultaneous pursuit of performance along social, economic, and ecological dimensions
the triple bottom line from the stakeholder perspective
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
extended producer responsibility
in anticipation of government regulation- proactively addressing social or ecological issues
business model
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
business model innovation
may be more important in achieving superior performance than product of process innovation
competitive advantage and firm performance
no one best strategy, goal of strategic managment, quantitative and qualitative, business model
no one best strategy
only better strategies, relative to competitors or industry average, must interpret any performance metric relative to those of competitors
goal of strategic management
integrate and align each business function and activity to obtain overall superior performance
quantitative and qualitative
holistic perspective is required for performance assessment measuring different dimensions over different times
accounting profitability ratios
percent operating margin, percent profit margin
percent operating margin
operating income/revenue
percent profit margin
net profit/net sales
liquidity ratios
current ratio and quick ratio
current ratio
total current assets/ total current liabilities
quick ratio
(total current assets - inventory)/total current liabilities
shareholder value ratios
percent return on assets and percent return on equity
percent return on assets
net profits/total assets
percent return on equity
net profits/owners equity
competitive advantage is always measured ____
in relation to other firms
example of a business model
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
razor-razor blade business model
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
subscription based business models
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
pay as you go business model
user pays for only the services he or she consumes. ex: utilities such as power and water
freemium business model
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
Business level strategy
the goal directed actions managers take in their quest for competitive advantage when competing in a single product market
who, what, why, and how of busienss level strategy
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
how to compete for advantage
differentiation, cost leadership, and integration
differentiation
create higher value by delivering products/services with unique features
cost leadership
create similar value by delivering products/services at a lower cost and lower prices than competitors
integration
combination of differentiation and cost leadership strategies
strategic position
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
generic business strategies
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.
value creation and cost in generic business strategies
tend to be positively correlated. there exist important trade offs between value creation and low cost
value drivers
product features, customer service, complements
product features
most important and clearest drivers, unique features»higher price. ex: BMW M3
customer service
ID umet customer needs and satisfy them. ex: ritz-Carlton, Zappos online retailer
complements
add value when consumed as a bundle ex: AT&T u verse with a DVR add on
Whole Foods
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)
A cost leadership strategy with adequate value
managers can manipulate cost drivers to keep their costs low
cost drivers
cost of input factors, economies of scale, learning curve effects, experience curve effects
economies of scale
output up, cost per unit down. spread fixed costs over large output, specialized systems, physical properties
spread fixed costs over large outputs
microsoft upront R&D for windows upgrade
specialized systems
ERP software or robots
physical properties
cube square rule for big box stores
minimum efficient scale
lowest cost position constant returns to scale
diseconomies of scale
complexity of management or physical limits (gore associates and aircraft aeronautics)
learning curves
steeper curve=more learning ex: aircraft manufacturing, cardiac surgeons
experience curves
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
ex of experience curves
walmart high volumes and technology leadership
benefit and risk of cost leadership
benefit: protected from competitors if price war
risk: new entrant arrives and new capabilities needed
benefit and risk of differentiation
benefit: reduced rivalry and high cost of imitation
risk: might overshoot features needed and vulnerable to price sensitive customers
combining cost leadership and differentiation
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
value and cost drivers of integration strategy
quality, economies of scope, customization, innovation, structure, culture and routines
The dynamics of competitive positioning
strategic positions need to change over time, productivity frontier
strategic positions need to change over time
PC assemblers need to move tablets or smartphones
productivity frontier
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
well formulated and implemented strategies =
enhanced chances of superior performane
integration strategies only successful if
an innovation that reconciles the trade offs, such as toyota lean manufacturing in the 80s and 90s
gale of creative destruction-Joseph Schumpter
continuous waves of market leadership changes in the encyclopedia business. innovation is a competitive weapon that can create and destroy value
move from typewriters to computers
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
tv viewing options
big 3 networks struggle against cable and satellite providers, customized online content now rising
Innovation process: discovery and development of new knowledge captured by the 4 is
idea, invention, innovation, imitation
Idea
may be presented in terms of abstract concepts or as findings derived from basic research
invention
transformation of an idea into a new product, process, or the modification and recombination of existing ones
innovation
concerns the commercialiation of an invention by entrepreneurs
imitation
copying a successful innovation
Innovation
a novel and usful idea that is successfully implemented
who are the change agents for creative destruction
entrepreneurs
Jeff Bezos
Amazon, saw growth of internet in 1994, now the world’s largest online retailer, created new opportunity and exploited it
Oprah
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
Elon Musk
Tesla Motors, Solar City, SpaceX, Paypal, an engineer and serial entrepreneur, deep passion to solve environmental, social, and economic challenges
example of combining entrepreneurial with strategic actions
samsungs innovation in mobile devices
five different stages of the industry life cycle
introduction, growth, shakeout, maturity, and decline
New industries created by innovation
express delivery, internet retailing and advertsiign, nantotechology growing in medical and aircraft industries
competitors and the industry life cycle
the number and size of competitors change with each stage
consumers and the industry life cycle
different types of consumers enter the market at each stage. both the supply and demand sides of the market change as the industry ages
early adopters
excited by the possibilities of the product rather than the cool technology of technology enthusiasts
many innovators fail to get from _____ when crossing the chasm
early adopters to majority (15-50% of market)
the critical early majority base purchasing decisions on _____
practicality, can generate a herding effect
Introduction life cycle stage
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
Growth life cycle stage
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
shakeout life cycle stage
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
maturity life cycle stage
manufacture, engineer, market. low product innovation, high process innovation, none to mderate growth and largest size, maintain strong strategic position, bought by late majority
decline life cycle stage
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
incremental innovation
steady improvement of a product or service, often from incumbent firms (econ incentives, organizational inertia, innovation ecosystem)
examples of incremental innovation
gillette now 6 bladed razors, intel 386 to 486 processprs
radical innovation
novel methods or materials serving new markets, often from new firms
examples of radical innovation
mass production (Ford), genetic engineering, airplanes predictable pattern of innovation
architectural innovation
reconfigure known components to create new markets
examples of architectural innovation
canon user friendly copiers, GPS to handheld consumer devices
disruptive innovation
novel technologies serving existing markets from bottom up, stealth attack (
examples of disruptive innovation
japanese autos, digital photography, data storage media
The internet as disruptive force: the long tail
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
what is the short head
the blockbuster that are available at brick and mortar stores, significant inventory costs
innovation in the 20th century
mostly closed, internal shift from closed to open in 21st
open innovation
mobility of skilled workers, exponential growth of venture capital, wider marketplace of ideas options, better capabilities in external sppliers
open innovation leverage
leverages both internal ideas and inventions and external ones; 2 way sharing
closed innovation principles
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
open innovation principles
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
most innovative companies in 2013
nike, amazon, square ,uber, pinterest, target, all use continuous innovation
corporate strategy determines the firm’s boundaries along three dimensions
- industry value chain, 2. range of products and services 3. where to compete: geography
key strategic management concepts in corporate level strategy
core competencies, economies of scale, economies of scope, transaction costs
core competencies
unique strenghts
economies of scale
average cost per unit decreases
economies of scope
savings producing two or more outputs
transaction costs
all internal and external costs associated with an economic exchange
transaction cost economies
explains and predicts the scope of the firm (Market vs firm have differential costs),
external transaction costs
costs associated with economic exchanges (negotiating and enforcing contracts)
internal transaction costs
costs pertaining to organizing an exchange within a firm (recruiting and training employees)
if cost of in house < than cost of market
vertically integrate (make), google hires programmers to write code in house instead of contracting out
disadvantage or make in house
principal agent problem (owner = principal, manager = agent)
disadvantage of bur from markets
search cost, opportunism, information asymmetries
deciding whether to make in house or buy from markets determines the firms ___
boundaries
Alternatives to the make or buy continuum
short term contracts, strategic alliances, parent subsidiary relationship
short term contracts
competitive bidding process, less than one year term, lower prices - cost advantages
strategic alliances
facilitate investment without admin costs
examples of strategic alliances
long term contracts, equity alliances, joint ventures
parent subsidiary relationship
most integrated alternative, parent companies have command and control
example of parent subsidiary realtionship
GM owns Opel and Vauxhall in Europe
Make or buy continuum from less integrated to more integrated
buy > strategic alliances > make
vertical integration
ownership of its inputs, production, and outputs in the value chain, vertical value chain, industry level integration from upstream to downstream
ex of industry level integration from upstream to downstream
cell phone industry value chain has many different industries and firms
ex of full vertical integration
wyerhauser owns forests, mills, and distribution to retailers
ex of backwards vertical integration
HTC’s backward integration into design of phones
ex of forward vertical integration
HTCs forward integration into sales and branding
not all industry value chain stages are equally profitable
apple designs in house software and hardware but partners for manufacturing
benefits of vertical integration
securing critical supplies, lowering costs and improving quality, lowering costs and improving quality, facilitating investments in specialized assets
risks of vertical integration
increasing costs and reducing quality, reducing flexibility, increasing the potential for legal repercussions
alternatives to vertical integration
taper integration and strategic outsourcing
taper integration
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
strategic outsourcing
moving value chain activities outside the firm’s boundaries
ex of strategic outsourcing
peoplesoft, eds, and perot systems provide hr services to many firms that chose to outsource it
degrees of diversification
range of products and services a firm should offer. pepsi owns lays and quaker oat but sold KFC
diversification strategies
product diversification, geographic diversification, product market diversification
product diversification
active in several different product categories
geographic diversification
active in several different countries
product market diversification
active in a range of both products and countries
single business form
derives > 95% from one business- google revenue from online research
dominant business firm
derives 70-95% from one business- harley yields 10% from clothing
related diversification strategy
< 70% from one business
related constrained diversification strategy
leverage current competencies, exxon strategic move into natural gas
related linked diversification strategy
share only limited links to current business, amazon moves to cloud computing, kindle tables, video streaming
unrelated diversification
< 70% and few if any links amon businesses, GE, LG, Tata
core competence
unique skills and strengths, allows firms to increase the value of product/service, lowers the cost
ex of core competencies
walmart-globally distributed supply chain at low cost
the core competence market matrix
provides guidance to executives on how to diversify in order to achieve continued growth
does corporate diversification lead to superior performance
are the individual businesses worth more under the company’s management than if each were managed in seperate firms
ex of corporate strategy being dynamic over time
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
