Ch.5: Competitive Advantage, Firm Performance, and Business Models

(Just Understand) The importance of a balanced scorecard is a communication of strategy to all employees -Strategy is no good good if it doesn't get communicated

(Just Understand) The importance of a balanced scorecard is a communication of strategy to all employees -Strategy is no good good if it doesn't get communicated

(Just understand) 1.) Business models can be COMBINED 2. Can EVOLVE 3. can be DISRUPTED 4. must RESPOND to disruption and adaptation 5. LEGAL CONFLICT can arise

(Just understand) 1.) Business models can be COMBINED 2. Can EVOLVE 3. can be DISRUPTED 4. must RESPOND to disruption and adaptation 5. LEGAL CONFLICT can arise

(Just understand) A firm's stock price increases only if the firm's rate of growth exceeds consumer expectations -Investors discount to PV by whatever growth rate they expect ex.) If expected to grow 2%, but actually grow 4%, stock price increases

(Just understand) A firm's stock price increases only if the firm's rate of growth exceeds consumer expectations -Investors discount to PV by whatever growth rate they expect ex.) If expected to grow 2%, but actually grow 4%, stock price increases

(Understand) A firm has a competitive advantage when it creates more ECONOMIC VALUE than rival firms (V-C)!!!!!!!!!

(Understand) A firm has a competitive advantage when it creates more ECONOMIC VALUE than rival firms (V-C)!!!!!!!!!

(Understand) Competitive advantage goes to the company with MOST VALUE CREATED (V-C) -Because you can get 2 distinct cost advantages: 1. Can charge higher price to reflect higher value 2. Can price same as competitors to get more market share

(Understand) Competitive advantage goes to the company with MOST VALUE CREATED (V-C)

(Understand) It can be difficult to find consumer willingness to pay (How much they value a product), but there are strategies: 1. Look at consumer's buying behavior to reveal preferences 2. Do surveys to reveal preferences ex.) ask: how much is too high to pay? What price do you think this would be a bargain? What price do you think would be a perfect price to pay?

(Understand) It can be difficult to find consumer willingness to pay (How much they value a product), but there are strategies: 1. Look at consumer's buying behavior to reveal preferences 2. Do surveys to reveal preferences ex.) ask: how much is too high to pay? What price do you think this would be a bargain? What price do you think would be a perfect price to pay?

(Understand) The triple bottom line framework is related to stakeholder theory= an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect returns

(Understand) The triple bottom line framework is related to stakeholder theory= an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect returns

(Understand) Total Return to Shareholders is.. A FORWARD LOOKING AND EXTERNAL PERFORMANCE METRIC, unlike accounting ratios

(Understand) Total Return to Shareholders is.. A FORWARD LOOKING AND EXTERNAL PERFORMANCE METRIC, unlike accounting ratios

(Understand) Transactions occur because both parties (firms and customers) capture some of the value created -Producer surplus= (P-C) -Consumer Surplus= (V-P)

(Understand) Transactions occur because both parties (firms and customers) capture some of the value created -Producer surplus= (P-C) -Consumer Surplus= (V-P)

Efficient-market hypothesis (know pretty well)

Efficient market hypothesis= The idea that all available information about a firm's part, current state, and expected future performance are embedded in the stock market -Stock price is a forward-looking metric

What are the 3 standards that businesses use to measure and assess firm performance?

1. Accounting Profitability= Financial statement ratios 2. Shareholder value creation= Stock Price 3. Economic value creation= (V-C)

To measure competitive, what 2 critical tasks must managers be able to accomplish?

1. Accurately assess performance of own firm 2. Compare and benchmark their firm's performance to other competitors in the same industry (Competitive advantage is relative)

What are the 2 cost advantages that a company can get from having the most economic value created? (V-C)

1. Can charge higher price to reflect higher value 2. Can price same as competitors to get more market share

What are the 3 limitations of the Economic Value Creation method to assess competitive advantage?

1. DETERMINING VALUE FOR CONSUMERS NOT SIMPLE 2. The VALUE of a good IN THE EYES OF CONSUMER CHANGES= Based on income, preferences, and other factors ex.) If high income, want higher class products 3. To assess competitive advantage must ESTIMATE THE ECONOMIC VALUE CREATED FOR ALL PRODUCTS AND SERVICES offered by the firm= Can be hard for firms with a lot of products

What are the 5 disadvantages of a balanced scorecard? (May not need to concentrate on)

1. FOCUSED ON STRATEGY IMPLEMENTATION= Says nothing about formulation -Managers still need to formulate an effective strategy 2. Limited guidance on what metrics to use 3. Only as useful as the managers that apply it 4. Strategy must be translated into measurable objectives 5. Not much guidance on how to get back on track if setbacks occur (But even though disadvantages, still useful because most companies fail on the implementation phase)

What are the 3 limitations of using accounting data to assess competitive advantage?

1. Historical and BACKWARD LOOKING= Only tells outcomes of past decisions, and past is no indicator for future performance. 2. DO NOT CONSIDER OFF-BALANCE SHEET items (pensions and operating leases)= Can be significant ex.) If company leases all stores, its ROA will be artificially higher 3. FOCUS MAINLY ON TANGIBLE ASSETS, which are no longer most important ex.) Goodwill and brand equity, innovation, etc. can't be counted

What are the 4 questions a firm must ask to assess internal and external performance in a balanced scorecard?

1. How do customers view us? -Revenue, profit, customer satisfaction -Higher reservation price= higher economic value 2. How do we create value? -Competitiveness, innovation, organizational learning -Focus on business processes and structures that allow a firm to create economic value 3. What core competencies do we need? -Core competencies, supporting business processes (How to achieve core competencies) 4. How do shareholders view us? -Cash flow, operating income, ROIC, ROE, and total return to shareholders -Lead to a more more future oriented valuation

What are the 4 advantages of the Balanced Scorecard? (May not need to concentrate on)

1. Link the strategic vision to responsible parties 2. Translate the vision into measurable goals 3. Design and plan business processes= Needed to achieve core competencies 4. Implement feedback and organizational learning

What 2 things can a competitive advantage created from economic value creation be based on?

1. Product Differentiation= Higher V 2. A relative cost advantage over rivals= Less C (V-C)

What are the 3 concerns that are concentrated on in the triple bottom line?

1. Profits (economic)= Necessity of business to be profitable to survive 2. People (social)= Making people feel like work is worth something, "make them feel whole at work" 3. Planet (ecological)= Relationship between business and the natural environment

What are the 3 limitations to shareholder value creation? (Know well)

1. Stock price can be HIGHLY VOLATILE= Makes it difficult to assess firm performance, especially in short-term 2. OVERALL MACROECONOMIC FACTORS all have bearings on stock price= Companies can't control these, so hard to tell if fall in stock price is from this or failure in strategy 3. Stock prices reflect PSYCHOLOGICAL MOOD OF INVESTORS, which can be irrational

What are the 2 things that public shareholders have to report to the Security Exchange commission (SEC)? (May not need to know)

1. Total return to shareholders 2. Benchmarks

Agency Model (know well)

Agency Model= Producer relies on an agent or retailer to sell the product at a predetermined % COMMISSION -Producer may also control retail price ex.) Entertainment industry: Agents place artists, they then receive a commission

Balanced scorecard (know well)

Balanced Scorecard= A framework to help managers achieve their strategic objectives more efficiently -Uses both INTERNAL and EXTERNAL performance metrics to balance both financial and strategic goals

Bundling Model (know well)

Bundling Model= Products or services for which demand is negatively correlation are bundling together at a discount -Allows to sell more product ex.) Microsoft office suite: Instead of offering office and excel for $120 each, Microsoft bundles at discount for $180

Business Model

Business Model= Translation of a firm's strategy into action -Explains how a firm intends to make money -Details competitive tactics and initiatives (Stipulates how the firm conducts its business: buyers, suppliers, and partners)

Consumer Surplus

Consumer Surplus= The bargain the customer gets -The difference between what they would have been willing to pay (V) and the price they actually paid (P) (V-P)

Economic Value Creation

Economic Value Creation= The difference between a buyer's willingness to pay for product, and the firm's total cost to produce it (V-C)

Freemium Model (know well)

Freemium Model= Provides basic features free of charge, but users have to pay for premium serives (advanced features and add-ons) -Free+Premium business model ex.) GW2

What is the goal of a balanced scorecard?

Goal= To harness multiple internal and external performance dimensions to balance financial and strategic goals

What 2 things does accounting profitability and the study of financial ratios help us accomplish? (know well)

Helps us assess competitive advantage!! 1. Accurately assess firm performance 2. Compare firm performance to competitors/ the industry

Market Capitalization (know well)

Market capitalization= Dollar value of shares outstanding (# shares outstanding x stock price) -Tells how much money is invested in a company at any given point in time ex.) If company loses 30% of value and market cap was $1,000, then market cap now $700

Opportunity Costs

Opportunity Costs= The value of the best forgone alternative use of the resources employed ex.) Opportunity costs of an entrepreneur: a.) Forgone wages b.) Cost of capital invested in business= compared to in stock market or treasury bonds

Pay-as-you-go model (know well)

Pay-as-you-go model= Users pay for only the services they consume ex.) Utilities of power and water, and cell phone service plans

Producer Surplus

Producer Surplus= Profit -The difference between the price charged (P) and the cost to produce (C) (P-C)

Razor-Razor-blade model (know well)

Razor-Razor-blade model= Initial product is often sold at a loss or given away for free (Drives the demand for complementary goods) -Money made primarily on replacement parts ex.) HP charges little for laser printers, but a lot on ink

Risk capital

Risk capital= The money shareholders provide in return for an equity share -CAN'T RECOVER IF GO BANKRUPT

Is stock price or shareholder value creation a better measure of competitive advantage over the long-term? (Know well)

Shareholder value creation= Better measure of competitive adv. over long-term -Due to the "noise" introduced by market volatility, external factors, and investor sentiments

Shareholders

Shareholders= Individuals or organizations that own one or more stock in a public company -LEGAL OWNERS OF THE COMPANY -Interested mostly in company's total return to shareholders (Return on risk capital)

Study financial ratios on notecards!!!!

Study financial ratios on notecards!!!!

Subscription Model (know well)

Subscription Model= Users pay for access to a product or service, not matter if they use it or not ex.) Netflix, newspapers, cable, etc.

Sustainable strategy (know well)

Sustainable strategy= A strategy along the economic, social, and ecological dimensions that can be pursued over time without detrimental effects on people or the planet

Total return to shareholders (know well)

Total return to shareholders= Return on risk capital (stock appreciation + Dividends) - A FORWARD LOOKING AND EXTERNAL PERFORMANCE METRIC, unlike accounting ratios -Indicates how the stock market views all available public information about firm's, current, past, and future performance

Triple Bottom Line

Triple Bottom Line= A combination of economic, social, and ecological concerns (profits, people, and planet) lead to a SUSTAINABLE STRATEGY

Wholesale model

Wholesale Model= Products sold at a fixed price to retailers, retailers mark up prices to make profit -Traditional model in retail