MGMT 481-03 Business Policy & Strategy CH 5

reservation price

The maximum price a consumer is willing to pay for a product or service based on the total perceived consumer benefits.

risk capital

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

opportunity costs

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

list the three standard performance dimensions

1. accounting profitability 2. shareholder value 3. Economic Value

what is a business model

Stipulates how the firm conducts its business with its buyers, suppliers, and partners in order to make money. the model explains how the firm intends to make money

market capitalization

A firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time.

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.

producer surplus

Another term for profit, the difference between price charged (P) and the cost to produce (C), or (P - C)

explain exhibits 5.4 in terms of value price cost competitive advantage & economic value creation

Assuming that both firms produce their respective models at the same total unit cost ($400), and the market at large has preferences similar to that of our consumer, then Firm B will have a competitive advantage. Why? As Exhibit 5.4 depicts, even though the total unit costs for both firms is the same, Firm B's laptop is perceived as providing more utility than Firm A's laptop, which implies that Firm B creates more economic value ($1,200 - $400 = $800) than Firm A ($1,000 - $400 = $600). Thus, Firm B has a competitive advantage over Firm A because Firm B's total perceived consumer benefits are greater than Firm A's, while the firms have the same cost. The amount of total perceived consumer benefits equals the maximum willingness to pay, or the reservation price. In short, Firm B's advantage is based on superior differentiation leading to higher perceived value. Further, the competitive advantage can be quantified: It is $200 (or $1,200 - $1,000) per laptop sold for Firm B over Firm A (see Exhibit 5.4). Exhibit 5.4 shows that Firm B's competitive advantage is based on greater economic value creation because of superior product differentiation. In addition, a firm can achieve competitive advantage through a second avenue. In particular, competitive advantage can also result from a relative cost advantage over rivals, assuming both firms can create the same total perceived consumer benefits.

What is the triple bottom line?

Combination of economic, social, and ecological concerns—or profits, people, and planet—that can lead to a sustainable strategy. 1) Profits. The economic dimension captures the necessity of businesses to be profitable to survive. 2) People. The social dimension emphasizes the people aspect (such as PepsiCo's initiative of the whole person at work). 3) Planet. The ecological dimension emphasizes the relationship between business and the natural environment.

profit

Difference between price charged (P) and the cost to produce (C), or (P - C); also called producer surplus.

consumer surplus

Difference between the value a consumer attaches to a good or service (V) and what he or she paid for it (P), or (V - P).

balanced scorecard

Strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals.

value

The dollar amount (V) a consumer attaches to a good or service; the consumer's maximum willingness to pay; also called reservation price.

explain exhibit 5.6 in terms of value price cost competitive advantage & economic value creation

Exhibit 5.6, if the price charged is $1,000, the profit is P - C = $1,000 - $400 = $600. The firm captures this amount as profit per unit sold. The consumer captures the difference between what she would have been willing to pay (V) and what she actually paid (P), called consumer surplus. In our example, the consumer surplus is V - P = $1,200 - $1,000, or $200. Economic value creation therefore equals consumer surplus plus firm profit, or (V - C) = (V - P) + (P - C). The relationship between consumer and producer surplus is the reason trade happens: Both transacting parties capture some of the overall value created. Note, though, that the distribution of the value created between parties need not be equal to make trade worthwhile. In the example illustrated in Exhibit 5.6, the consumer surplus is $200, while profit per unit sold is $600.

shareholder value

From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital,16 which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt. Return on risk capital that includes stock price appreciation plus dividends received over a specific period. (shareholders care about this alot)

shareholders

Individuals or organizations that own one or more shares of stock in a public company.

economic value

It provides the foundation upon which to formulate a firm's competitive strategy for cost leadership or differentiation. Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it. Difference between value (V) and cost (C), or (V - C).

explain exhibit 5.5 in terms of value price cost competitive advantage & economic value creation

Now let's introduce two new firms to our hypothetical laptop market. Exhibit 5.5 shows how Firm C and Firm D each offer a model that has the same perceived consumer benefits ($1,200). Firm C, however, creates greater economic value ($900, or $1,200 - $300) than does Firm D ($600, or $1,200 - $600). Why? Because Firm C's total unit cost ($300) is lower than Firm D's ($600). Firm C has a relative cost advantage over Firm D, even though both products provide the same total perceived consumer benefits ($1,200). Furthermore, Firm C has a competitive advantage over Firm D in the amount of $300 for each laptop sold. Here, the source of Firm C's competitive advantage is a relative cost advantage over its rival, Firm D, while perceived consumer benefits are the same. So far we have looked at situations in which products are priced at the maximum that a consumer might be willing to pay. But markets generally don't work like that. More often, the economic value created is shared between the producer and the consumer. That is, most of the time consumers are able to purchase the product at a price point below the maximum they are willing to spend. Both the seller and the buyer benefit.

total return to shareholders

Return on risk capital that includes stock price appreciation plus dividends received over a specific period.

Accounting Profitability

Using accounting data to assess competitive advantage and firm performance is standard managerial practice. When assessing competitive advantage by measuring accounting profitability, we use financial data and ratios derived from publicly available accounting data such as income statements and balance sheets. 1. Assess the performance of their firm accurately. 2. Compare and benchmark their firm's performance to other competitors in the same industry or against the industry average.

list all business models mentioned in chapter 5

microsoft's- mobile first, cloud first model perpetual license model razor - razor blades model subscription model pay as you go model freemium model ultra low cost model wholesale model agency model bundling model

explain why business models must be dynamic in the 21st century

technology is always changing and businesses need to adapt to new environments if they want to survive their competition, Return on risk capital that includes stock price appreciation plus dividends received over a specific period.