Strategic Management Exam #1

How do Coke and Pepsi not destroy each other? A. Don't compete on price B. Don't attack each other C. Acquired bottlers, lowering costs D. Invested heavily in branding

A

Optimizing the value and cost trade-off gets you to ___________ A. Productivity frontier B. Red ocean C. Economic moat D. Blue ocean

A

(NI - preferred dividends) / outstanding shares A. Current ratio B. EPS C. P/E D. Total float

B

Forgone alternatives A. Sunk costs B. Productivity frontier C. Opportunity costs D. FOMO

C

Price elasticity of demand

Demand elasticity = % change in quantity / % change in price I.e. old price = $9; new price = $10; old quantity = $150; new quantity = 110 ((New Q - Old Q) / Old Q) / ((New P - Old P) / Old P))

Price elasticity of supply

Depends heavily on the flexibility of production High price elasticity of supply is represented by a flat supply curve; a small increase in price drives a lot of new output - Facilities where production can easily be switched over - I.e. house rentals during August National Golf tournament Like demand curves, they are more elastic over the long-term - Capacity can be added - New suppliers may enter the market

2 ways a firm can add value and achieve a competitive advantage

Differentiation (raise willingness to pay, WTP) Lower cost (slightly reducing WTP, dramatically lowering costs)

Simultaneous game move

Each player acts independently, unaware of the other actions action All decide what to do at the same time I.e. prisoner's dilemma

Dynamic game

Game with multiple interactions over time Most of business is a dynamic game, which gives you the opportunity to learn over time

How is the beverage industry broken up?

Into soft drinks and alcoholic drinks

Honda B (management portion of strategic management)

Judgement Flexibility Experimentation Intuition Bottom-up Opportunistic Learning Recognition Adaptation Updating Luck

Concentrate

Low COGS, but high SGA (branding, advertising); selling the product costs a lot

What Is Strategy? (reading)

Positioning (once the heart of strategy) is rejected as too static for today's dynamic markets and changing technologies, as it is thought rivals can quickly copy any market position, and competitive advantage is, at best, temporary In many industries, however, what some call hypercompetition is a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition Bit by bit, almost imperceptibly, management tools (i.e. benchmarking, outsourcing, reengineering, partnering) have taken the place of strategy Differences in operational effectiveness were at the heart of the Japanese challenge to Western companies in the 1980s - The Japanese were so far ahead of rivals in operational effectiveness that they could offer lower cost and superior quality at the same time Productivity frontier: maximum value that a company delivering a particular product or service can create at a given cost, using the best available technologies, skills, management techniques, and purchased inputs - Can apply to individual activities, to groups of linked activities such as order processing and manufacturing, and to an entire company's activities - When a company improves its operational effectiveness, it moves toward the frontier - Doing so may require capital investment, different personnel, or simply new ways of managing For at least the past decade, managers have been preoccupied with improving operational effectiveness (i.e. programs such as TQM, time-based competition, and benchmarking; embraced continuous improvement, empowerment, change management, and the so-called learning organization) Managers have let operational effectiveness supplant strategy -> zero-sum competition, static or declining prices, and pressures on costs that compromise companies' ability to invest in the business for the long term Competitive strategy is about being different and deliberately choosing a different set of activities to deliver a unique mix of value Strategic competition: the process of perceiving new positions that woo customers from established positions or draw new customers into the market New positions often open up because of change, and, unlike incumbents, newcomers can be more flexible because they face no trade-offs with their existing activities Whatever the basis—variety, needs, access, or some combination of the three—positioning requires a tailored set of activities because it is always a function of differences on the supply (not demand) side; that is, of differences in activities Trade-offs arise for three reasons: - Inconsistencies in image or reputation: a company known for delivering one kind of value may lack credibility and confuse customers—or even undermine its reputation—if it delivers another kind of value or attempts to deliver two inconsistent things at the same time - Trade-offs arise from activities themselves: different positions require different product configurations, different equipment, different skills, etc. - Trade-offs arise from limits on internal coordination and control: companies that try to be all things to all customers risk confusion in the trenches as employees attempt to make day-to-day operating decisions without a clear framework Types of fit: first-order when simple consistency between each activity (function) and the overall strategy, second-order fit occurs when activities are reinforcing, third-order fit goes beyond activity reinforcement to optimization of effort Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage: positions built on systems of activities are far more sustainable than those built on individual activities The more a company's positioning rests on activity systems with second- and third-order fit, the more sustainable its advantage will be Fit among a company's activities creates pressures and incentives to improve operational effectiveness, which makes imitation even harder The most viable positions are those whose activity systems are incompatible because of tradeoffs

There's a shifting focus to ____________ drinks; ______________________ outsold carbonated soft drinks starting 2016

Shifting focus to healthier drinks; bottled water outsold carbonated soft drinks starting 2016 Bottled water volumes rose 4.5% CAGR from 2007-2017 CSD volumes declined 1.8% over the same period

Rule of 72

Simple way to determine how long an investment will take to double given a fixed annual rate of interest 72 / interest rate (compound)

Cirque du Soleil (background info)

Started in 1984 Grew from one show to 19 shows Now in 40 countries, 271 cities Revenue estimated at $800M+ In Vegas, 9,000 viewers a night (5% of total Las Vegas visitors)

Nash equilibrium (reading)

The Nash equilibrium, named after John Nash, describes a stable outcome that results from people or institutions making rational choices based on what they think others will do In a Nash equilibrium, no one is able to improve their own situation by changing strategy: each person is doing as well as they possibly can, even if that does not mean the optimal outcome for society Every "game" with a finite number of players, each with a finite number of options to choose from, would have at least one such equilibrium Provides a way to make real-world predictions based on information about each person's incentives (works in most markets except perfectly competitive) One example in particular has come to symbolize the equilibrium: the prisoner's dilemma If they both confess to a bloody murder, they each face ten years in jail If one stays quiet while the other snitches, then the snitch will get a reward, while the other will face a lifetime in jail If both hold their tongue, then they each face a minor charge, and only a year in the clink There is only one Nash-equilibrium solution to the prisoner's dilemma: both confess Each is a best response to the other's strategy; since the other might have spilled the beans, snitching avoids a lifetime in jail The Nash equilibrium helped economists to understand how self-improving individuals could lead to self-harming crowds Better still, it helped them to tackle the problem: they just had to make sure that every individual faced the best incentives possible It makes sense for each firm to set production levels based on the strategy of its competitor; consumers, however, end up with less stuff and higher prices than if full-blooded competition had prevailed In two-person, zero-sum games, there would always be an equilibrium I.e. American hospital system in the 1940s Each individual hospital wanted to snag the brightest medical students, but with such students particularly scarce because of the war, hospitals were forced into a race whereby they sent out offers to promising candidates earlier and earlier What was best for the individual hospital was terrible for the collective: hospitals had to hire before students had passed all of their exams; students hated it, too, as they had no chance to consider competing offers Today, students submit their preferences and are assigned to hospitals based on an algorithm that ensures no student can change their stated preferences and be sent to a more desirable hospital that would also be happy to take them, and no hospital can go outside the system and nab a better employee The system harnesses the Nash equilibrium to be self-reinforcing: everyone is doing the best they can based on what everyone else is doing Nash's insights also help to explain why adding a road to a transport network can make journey times longer on average Self-interested drivers opting for the quickest route do not take into account their effect of lengthening others' journey times, and so can gum up a new shortcut There have been recent refinements: In plenty of situations, there is more than one possible Nash equilibrium Should account for non-credible threats With complicated games, or ones where they do not have a chance to learn from mistakes, his insights may not work as well

Strategy (basics)

The creation of a unique or valuable position, involving a different set of activities Performing different activities, or performing similar activities differently than rivals (positioning) Strategy involves a whole system of activities (fit), which reinforces a strategic position If there were only one ideal position, there would be no need for strategy (companies would face a simple imperative—win the race to discover and preempt it) Too many organizations and companies think they have a strategy, but they are just bench-marking the competition Without making trade-offs and finding unique ways to add value to customers, the competition will just copy-cat your advantage way. Build a big economic moat, the bigger the better Creating fit among a company's activities

Different types of prisoner's dilemma

Traditional, oligopoly, and complement

Traditional prisoner's dilemma

Two suspects are accused of a crime Punishments vary Best individual outcome (I betray, they do not) Worst outcome (both betray) Cooperation: not confessing

Total value created

Willingness to pay - cost (SG&A and COGS)

In the long-run, fixed costs are _______________

avoidable, so they are critical factors when entering/exiting a market

Industry structure is evidenced in the ____________________

financial statements

Companies have different strategic ____________ within same industries

positions

A sustainable strategy will be a set of ___________

reinforcing activities

An increase in demand shifts the curve to the ____________, __________the price

right; increasing

RBV (pros)

Acknowledges you want rare/valuable assets and capabilities -> lets you find new aspects to effectively compete

Individual: getting in your competitor's head

As a person Think like your competitor, on multiple levels: - Owners (PE firm, family-owner) - Key stakeholders (government) - Top management - Managers I.e. someone owning GM's Latin America division (person could be new hire or in place for 20 years)

Coca-Cola (concentrate producer) is largely a B2B company because A. Sell to bottlers B. Emphasize PR more than advertising C. Advertise during NFL playoffs D. Higher margin than bottlers

A

What's an in-class example of an increase in supply?

Reliance Jio came to the Indian market and brought 35 billion in capacity An increase in supply shifts the curve to the right, dropping the price It's not a change in quantity supplied by price

One person's price is another person's

cost

Strategy is all of the following except A. Goal-oriented B. Same activities better than competition C. Creates competitive advantage D. Different activities

B

_____________ strategy = earns player a larger payoff, regardless of what the other party does A. Necessary B. Dominant C. Simultaneous D. Prisoner's dilemma

B

An example of price discrimination might be: A. Lower prices during matinee B. Student discount C. Free popcorn with ticket sale D. Group (volume) discount

B.

Blackstone Snaps Up Colony Capital Warehouses for $5.9 billion (in-class reading)

Blackstone Group buying portfolio of US industrial warehouses for $5.9 billion, furthering its bet on the continued growth of e-commerce Blackstone's second major purchase of a warehouse network this year Investing in warehouses that help online retailers with the movement of goods from a transportation hub to their final destination Blackstone owns 1,000+ warehouses

Blue Ocean Strategy (reading)

Blue oceans will remain the engine of growth, as prospects in most established market spaces (red oceans) are shrinking steadily In more and more industries, supply is overtaking demand and brands are becoming more similar; however, most companies seem becalmed in their red oceans Red oceans tend to be favored, as corporate strategy is heavily influenced by its roots in military strategy (meaning strategy is all about red ocean competition driving an opponent off a battlefield of limited territory) Focusing on the red ocean means accepting the key constraining factors of war (limited terrain and the need to beat an enemy to succeed) and denying the distinctive strength of the business world (the capacity to create new market space that is uncontested) Blue ocean strategy is about doing business where there is no competitor Creating new land, not dividing up existing land By focusing on competition, scholars, companies, and consultants have ignored two very important (and far more lucrative) aspects of strategy: One is to find and develop markets where there is little or no competition (blue oceans) and the other is to exploit and protect blue oceans These challenges are very different from those to which strategists have devoted most of their attention Company and industry are the wrong units of analysis The traditional units of strategic analysis (company and industry) have little explanatory power when it comes to analyzing how/why blue oceans are created There is no consistently excellent company; the same company can be brilliant at one time and wrongheaded at another Likewise, there is no perpetually excellent industry; relative attractiveness is driven largely by the creation of blue oceans from within them The most appropriate unit of analysis for explaining the creation of blue oceans is the strategic move—the set of managerial actions and decisions involved in making a major market creating business offering Creating blue oceans builds brands So powerful is blue ocean strategy that a blue ocean strategic move can create brand equity that lasts for decades Large R&D budgets are not the key to creating new market space; the key is making the right strategic moves Companies that understand what drives a good strategic move will be well placed to create multiple blue oceans over time, thereby continuing to deliver high growth and profits over a sustained period The creation of blue oceans is a product of strategy and as such is very much a product of managerial action Common characteristics across strategic moves that create blue oceans The creators of blue oceans never use the competition as a benchmark; instead they make it irrelevant by creating a leap in value for both buyers and the company itself Perhaps the most important feature of blue ocean strategy is that it rejects the fundamental tenet of conventional strategy: that a tradeoff exists between value and cost Red ocean strategy: compete in existing market space, beat the competition, exploit existing demand, make the value/cost trade-off, align the whole system of a company's activities with its strategic choice of differentiation or low cost Blue ocean strategy: create uncontested market space, make the competition irrelevant, create and capture new demand, break the value/cost trade-off, align the whole system of a company's activities in pursuit of differentiation and low cost A blue ocean is created in the region where a company's actions favorably affect both its cost structure and its value proposition to buyers Cost savings are made from eliminating and reducing the factors an industry competes on; buyer value is lifted by raising and creating elements the industry has never offered Over time, costs are reduced further as scale economies kick in, due to the high sales volumes that superior value generates A rejection of the trade-off between low cost and differentiation implies a fundamental change in strategic mind-set Blue ocean strategy is achieved only when the whole system of a company's utility, price, and cost activities is properly aligned The red ocean assumption that industry structural conditions are a given and firms are forced to compete within them is based on an intellectual worldview that academics call the structuralist view, or environmental determinism According to this view, companies and managers are largely at the mercy of economic forces greater than themselves Blue ocean strategies, by contrast, are based on a worldview in which market boundaries and industries can be reconstructed by the actions and beliefs of industry players: the reconstructionist view Companies that create blue oceans usually reap the benefits without credible challenges for ten to 15 years, because blue ocean strategy creates considerable economic and cognitive barriers to imitation Because blue ocean creators immediately attract customers in large volumes, they are able to generate scale economies very rapidly, putting would-be imitators at an immediate and continuing cost disadvantage When imitation requires companies to make changes to their whole system of activities, organizational politics may impede a would-be competitor's ability to switch to the divergent business model of a blue ocean strategy When a company offers a leap in value, it rapidly earns brand buzz and a loyal following in the marketplace Attempts to imitate a blue ocean creator may conflict with the imitator's existing brand image I.e. Unveiled in 1908, the Model T was the first mass-produced car, priced so that many Americans could afford it; new entrant, value pioneering(mostly existing technologies), and entered a rather unattractive industry at the time I.e. AMC multiplex: in the 1960s, the number of multiplexes in America's suburban shopping malls mushroomed; the multiplex gave viewers greater choice while reducing owners' costs; incumbent, value pioneering (mostly existing technologies), and entered a rather unattractive industry at the time

Framework for blue oceans

Buyer utility: is there exceptional buyer utility? What's in it for the customer? Start here Price: is you price easily accessible to most buyers? Will this reach scale? Start with price, not cost Cost: can you attain your cost target to profit at your strategic price? Adoption: what are the adoption hurdles? Are you addressing them upfront?

How can buyers limit consumer (WTP - price) surplus? (Porters 5 Forces)

By lowering prices or demanding more Powerful buyers typically demand lower prices but sometimes higher quality and/or greater service too

Porter's 5 Forces is useful for analyzing __________ A. Company profitability B. Impact of technology C. Industry profitability D. Level of differentiation

C

In the long-run, greater elasticity of supply because A. Suppliers increase capacity B. New entrants join the market C. Both A and B

C.

Criticisms of RBV

Circular logic: rare and valuable = competitive advantage? Resource value is rarely constant (not permanently valuable - context/condition can change) Minimal research on how RBV applies to the real world Vague definitions (i.e. tacit knowledge) are hard to measure Bit of a black box (what are the inputs, and outputs)

Marginal costs

Expenses that vary in direct proportion to the quantity of production - Raw materials - Packaging - Manufacturing related labor - Utilities - Maintenance repair - Incremental machinery Include cash costs and opportunity costs (non-cash) Marginal cost curve = short-run supply curve of individual firm As volume increases, costs stay the same or increaes

Warby Parker

For every pair purchased, a pair is distributed to someone in need

Honda (B) Case (reading notes)

Honda Motor Co. was founded by Soichiro Honda, an inventive genius with a legendary ego, in 1948 Postwar Japan was in desperate need of transportation; Soichiro viewed technology as the vehicle through which Japanese society could be restored and the world made a better place in which to live - Established the Honda Technical Research Institute in 1946 - Tinkered with engines and raised money for development First engine hardly sold and had numerous defects and Soichiro relied on his friends for helping to fund his next Even after accepting a partner (Takeo Fujisawa) in 1949, the firm continued to falter In 1951 Soichiro unexpectedly unveiled a breakthrough design that doubled horsepower over competitive 4-stroke engines -> becoming a full-scale motorcycle manufacturer Pushed by Takeo to develop a commercial motorcycle, in 1958 the Honda 50cc Supercub was introduced—with an automatic clutch, 3-speed transmission, automatic starter, and the safe, friendly look of a bicycle (without the stigma of the outmoded mopeds) Supercub's innovative design and affordable price -> high demand and need for more capital (explosive sales in Japan) Takeo utilized the Supercub to restructure Honda's channels of distribution, selling the Supercub directly to retailers—and primarily through bicycle shops From the Japanese vantage point, the American market was vast, untapped, and affluent; at the time, everyone in the United States drove an automobile, making it doubtful that motorcycles could ever do very well in the market Experiments with local Southeast Asian markets had little success and the European market, while larger, was heavily dominated by its own name-brand manufacturers In truth, we had no strategy other than the idea of seeing if we could sell something in the US: it was a new frontier, a new challenge, and it fit the "success against all odds" culture that Mr. Honda had cultivated Entirely in the dark the first year: unaware that the motorcycle business in the US occurs during a seasonable April-to-August window and that timing coincided with the end of the 1959 season By the first week of April 1960, reports were coming in that Honda machines were leaking oil and encountering clutch failure Throughout the first eight months in the U.S.., Honda had not attempted to move the 50cc Supercubs; while they were a smash success in Japan (and manufacturing couldn't keep up with demand there), they seemed wholly unsuitable for the U.S. market where everything was bigger and more luxurious The Honda 50s were used to run errands, and they attracted a lot of attention; forced to sell Supercub after larger bikes kept breaking; the retailers who wanted to sell them weren't motorcycle dealers... they were sporting goods stores In 1963, Honda adopted a strategy (The Nicest People Campaign) that directly identified and targeted that large, untapped segment of the marketplace that was to become inseparable from the Honda legend Automobiles were introduced into the product line in 1963, shifting resources and management attention heavily in that direction in the ensuing years

What's the most destructive basis for competitions for industry profitability and why?

Price reductions Price reductions transfer profits directly from an industry to its customers, and they are usually easy for competitors to see and match, making successive rounds of retaliatory cuts more likely

Characteristics of perfect competition

Products are identical Many, small (price-taking) participants Full information of buyers and suppliers Identical sellers Free entry Free exit .. Zero profits and the industry supply curve is horizontal

How does the beverage industry have high barriers to entry?

R&D investment, supply chain / distribution, economies of scale in manufacturing and marketing, incumbent aggression

How to know which ratios to use?

Think: what question am I answering? Refer to S&P (industry analysis) industry surveys for key metrics to track (in the back) Listen to investor relations webcasts (earning conference calls): - C-suite will mention key financial ratios and operational metrics - If they don't the analysts will Use investopedia.com for key definitions Use Finviz, Yahoo Finance, and Morningstar (financial ratios) to find and compare ratios Ratios are not really proprietary, they're common knowledge

What are Porters 5 Forces?

Threat of new entrants Bargaining power of suppliers Bargaining power of buyers Rivalry among existing competitors Threat of substitute products and services

Average cost includes

both fixed and marginal costs

Strong _________________ provides manufacturers with considerable pricing power

brand power Pricing increases in the low-single digits covered commodity costs increases

When a firm breaks-even...

it earns exactly its cost of capital

Learning curve effects are ________________, while experience curve effects are from ________________ or _________________

learning by doing; process innovation or technology

Industry structure influences and shapes _____________

long-term profitability

The unit of analysis for blue ocean is not an industry or a company, but a __________________

strategic move: a set of managerial actions and decisions to create a market The most appropriate unit of analysis is not an industry or company, but the managerial actions and decisions to create a market

Great strategy creates a _____________ of activities

system Reinforces a strategic position Difficult to replicate "Straddlers" often fail; they are unwilling/unable to make tradeoffs

Game theory is

the science of strategy; a branch of social science that examines strategic decision making Anticipating how others may respond to your actions You can influence what other people are doing not programmed Way to model/quantify some behaviors of yourself and others

Blue ocean is a business model, meaning it's only achieved when the system of the company's _________________, ______________________, and ______________ are properly aligned

utility, price, and cost

In supply chain, one person's price is another person's ______ A. Burden B. Profit C. WTP D. Cost

D

Competing on Resources (reading)

As recently as 10 years ago, we thought we knew most of what we needed to know about strategy, yet the armies of planners have all but disappeared, swept away by the turbulence of the past decade On multiple fronts, strategy has come under fire: the pace of global competition and technological change has left managers struggling to keep up; managers complain that strategic planning is too static and too slow; strategy has also become deeply problematic at the corporate level (i.e. destroying value by owning the very divisions that had seemed to fit in their growth/share matrices The resource-based view of the firm (RBV) combines the internal analysis of phenomena within companies (a preoccupation of many management gurus since the mid-1980s) with the external analysis of the industry and the competitive environment (the central focus of earlier strategy approaches) RBV builds on, but does not replace, the two previous broad approaches to strategy by combining internal and external perspectives It derives its strength from its ability to explain in clear managerial terms why some competitors are more profitable than others, how to put the idea of core competence into practice, and how to develop diversification strategies that make sense RBV will be as powerful and as important to strategy in the 1990s as industry analysis was in the 1980s Acknowledges the importance of company-specific resources and competencies, yet it does so in the context of the competitive environment Relies on economic reasoning Sees capabilities and resources as the heart of a company's competitive position, subject to the interplay of three fundamental market forces: demand (does it meet customers' needs, and is it competitively superior?), scarcity (is it imitable or substitutable, and is it durable?), and appropriability (who owns the profits?) Competitive advantage, whatever its source, ultimately can be attributed to the ownership of a valuable resource that enables the company to perform activities better or more cheaply than competitors The RBV inextricably links a company's internal capabilities (what it does well) and its external industry environment (what the market demands and what competitors offer) The best of resources are often intangible, not physical, hence the emphasis in recent approaches on the softer aspects of corporate assets—the culture, the technology, and the transformational leader Inimitability is at the heart of value creation because it limits competition Inimitability doesn't last forever (competitors eventually will find ways to copy most valuable resources), but managers can forestall them - and sustain profits for a while Core competence has too often become a "feel good" exercise that no one fails; every company can identify one activity that it does relatively better than other activities and claim that as its core competence Unfortunately, core competence should not be an internal assessment of which activity, of all its activities, the company performs best; it should be a harsh external assessment of what it does better than competitors, for which the term distinctive competence is more appropriate The way to avoid the vacuousness of generic statements of core competence is to disaggregate the corporation's resources What makes a resource valuable? Value creation zone: scarcity, appropriability, demand Managers must therefore continually invest in and upgrade their resources, however good those resources are today, and leverage them with effective strategies into attractive industries in which they can contribute to a competitive advantage nvesting in resources: because all resources depreciate, an effective corporate strategy requires continual investment in order to maintain and build valuable resources The great contribution of the core competence notion is its recognition that, in corporations with a traditional divisional structure, investment in the corporation's resources often takes a backseat to optimizing current divisional profitability At the same time, investing in core competencies without examining the competitive dynamics that determine industry attractiveness is dangerous If a company has no unusually valuable resources, companies must continually upgrade the number and quality of their resources and associated competitive positions in order to hold off the almost inevitable decay in their value (can add new resources, upgrade to alternative resources that are threatening the company's current capabilities, or upgrade its resources in order to move into a structurally more attractive industry) Add new competencies sequentially, and learn to exploit the virtuous circle of "seeds and needs" Corporate strategies must strive to leverage resources into all the markets in which those resources contribute to competitive advantage or to compete in new markets that improve the corporate resources Good corporate strategy, then, requires continual reassessment of the company's scope; the question strategists must ask is, How far can the company's valuable resource be extended across markets The RBV helps us understand why the track record of corporate diversification has been so poor and identifies three common and costly strategic errors companies make when they try to grow by leveraging resources: First, managers tend to overestimate the transferability of specific assets and capabilities Second, managers overestimate their ability to compete in highly profitable industries The third common diversification mistake is to assume that leveraging generic resources, such as lean manufacturing, will be a major source of competitive advantage in a new market—regardless of the specific competitive dynamics of that market Whether a company is building a strategy based on core competencies, is developing a learning organization, or is in the middle of a transformation process, those concepts can all be interpreted as a mandate to build a unique set of resources and capabilities However, this must be done with a sharp eye on the dynamic industry context and competitive situation, rigorously applying market tests to those resources Strategy that blends 2 powerful sets of insights about capabilities & competition represents an enduring logic that transcends management fads

Industry structure is quite _________ over time; tells us a great deal about the business environment A. Complex B. Changing C. Stable D. Competitive

C

Streaming War Spurs Classic TV Arms Race (in-class reading)

Entertainment heavyweights have spent more than $2 billion on classic television shows in recent weeks Streaming-video consumers are willing to pay for a handful of services that cost a total of about $38 (bundling) a month for about 6 streaming services Very high FC, little marginal (easy to supply for one more person)

T/F strategy is about choosing what to do

False, strategy is about choosing what NOT to do

Michael Porter

Michael Porter (Harvard Business School) Simplified the concepts of competitive advantage and created frameworks on how to achieve it Advised countries on how to create competitive advantage - leading to theories on clustering of specialized skills and industries Founded the Monitor Consulting, which was acquired by Deloitte More recently writes on healthcare and corporate social responsibility

Price-to-earnings (PE) ratio

Share price / earnings per share In general, a high P/E suggests that investors are expecting higher earnings growth in the future Tech companies tend to have higher P/E ratios since they are viewed as high growth Measure a company's current share price relative to its per-share earnings Netflix's P/E is 200+, meaning investors pay $200 for every $1 of earnings -> anticipating fast growth; Google's is 30 Type of valuation ratio

Making Game Theory Work (reading)

There can be more than 1 equilibrium; treat game theory as a model which continually is refined with more information Managers suspect that game theory is too theoretical - Only works if inputs are detailed enough to be practical - Often misused; provides a single, overly precise answer to complex problems New approach - Generates a set of strategic options which can be modified - Calculate equilibrium for a sequence of decisions - Find the "best robust option:" considering upside and downside There can be more than 1 future scenario

Honda SuperCub and Honda's North America new market entry (class discussion)

Unforeseen success (Supercubs much smaller than everything else on the market) Honda A (website): made all the right decisions Honda B (article): scrappy with some luck US has a lot of money and is relatively untapped Sporting goods stores adopted Just one thing does not lead to success Have to be logical, thoughtful, use data, eliminate bad ideas, DCF analysis... but also have to be a leader, scrappy, frugal, treat as start up Supercub created demand (possible blue ocean) The decision to enter the US market was bold, since motorcycles were not so popular there at the time

Economics informs the relationship between what 3 things?

Willingness to pay, price, and costs

A company can outperform rivals only if it can establish a __________ that it can _____________

difference that it can sustain

In the long-run, price elasticity of supply is ______________ because

higher because new suppliers and capacity enters the market In the short-run, higher demand typically is shown in higher prices In the long-run, higher demand typically is shown in greater supply

Strategy (definition)

A set of self-reinforcing actions a firm takes to create and sustain a competitive advantage - Performing different activities - Same activities differently - Goal-oriented; creates trade-offs - Economic moat that protects profits; difficult to imitate

To Develop a Winning Strategy, Know Who You Are Fighting (reading)

Business strategy is all about using uncertain information to make unalterable choices that best create and capture economic surplus A successful strategist must find and exploit opportunities that establish and protect a sustainable advantage; otherwise, the economic surplus will be snatched up by other industry players such as competitors, suppliers, channel drivers, and customers You must be better at something so that you can offer the best value to a defined set of potential customers It used to be quite clear who the chief rivals are in most industries, but companies now have an increasing variety of unique competitors, making the playing field harder to define Management is inwardly focused, and the effort to study and anticipate competitors' moves is remarkably superficial Competitor reactions are one of the most overlooked aspects of business unit strategy formation Managers are much more likely to focus on their own organizations' strengths and weaknesses, on trends and economic drivers and on risks and uncertainties, than on their competitors' 5 practices that can improve your competitive readiness and your organizational culture and agility: Understand your rivals' economics - One of the hardest and most important things to understand - Test yourself and your team with an important product or service you sell: would you and a competitor earn the same profit for the same price? - I.e. Costco's large package sizes attract bigger baskets, require less replenishing time and allow faster checkout, which drive significant efficiency and help sales per square meter, making more of fixed costs Look forward, not backward - While you consider an attack on their best profit pool, think whether they are likely to attack yours and ask how strong of a defence you can mount - Research shows that future competitor reactions are widely ignored even in the two areas you'd want them to be best studied: product and price decision Put yourselves in their head - It is just as common to see companies overestimate the risk and speed of competitive responses as it is to see them ignore the risk - Synthesize into threats and opportunities - Such synthesis should be an input for all major strategic decisions Be willing to act more boldly - Even in fairly extreme cases - when a competitor may have a massive setback like a product-safety scandal, product fraud, massive service failures or loss of customer data - the response tends to be timid By applying the combined practices, understanding the impact on their economics and anticipating their ability to respond could mean now may be the time to go after prized key accounts or channel partners, launch an aggressive marketing campaign. or offer a bold service guarantee

Which of the following creates a HIGH barrier to entry? A. Low switching costs B. No economies of scale C. Equal access to distribution D. High learning curve

D

Market equilibrium

Determined by overlaying demand and supply curves Real markets rarely rest precisely at equilibrium; continually adjusting to new demand and supply Market "clears" at this price and quantity Three scenarios: excess demand, equilibrium, and excess supply

Types of distribution in the beverage industry

Direct delivery: transport, stock shelves, order product (Coke truck delivers straight to Kroger) Warehouse: 3rd party transports from warehouse to store (for smaller companies without economies of scale)

Fixed costs

Expenses that must be paid if in business, unrelated to quantity of production Building depreciation, insurance, rent, salaries (full-time like CEO, but could be marginal), technology, interest expense, property tax (or rent/mortgage) "Sunk:" expenses are paid and irrespective of production Include both out-of-pocket expenditures and opportunity cost of capital As volume increases, cost decreases

Game theory and rationality

Game theory assumes (incorrectly) that humans are always rational The predictive power of the Nash equilibrium relies on rational behavior; yet humans often fall short of this ideal In experiments replicating the set-up of the prisoner's dilemma, only around half of people chose to confess; for the economists who had been busy embedding rationality (and Nash) into their models, this was problematic What is the use of setting up good incentives, if people do not follow their own best interests? All was not lost; the experiments also showed that experience made players wise; by the tenth round only 10% of players were refusing to confess That taught economists to be more cautious about applying Nash's equilibrium (people aren't machines and can learn) With complicated games, or ones where they do not have a chance to learn from mistakes, his insights may not work as well

Static game

Game with only 1 move or decisions; once and done Usually simultaneous move I.e. prisoner's dilemma

5 characteristics of strategically valuable resources

Hard to copy (test of inimitability) Depreciates slowly (test of durability) Value is controlled by the company (test of profitability) Not easily substituted (test of substitutability) Better than competitors' similar resources (test of competitive superiority)

Learning curve

Increased labor productivity with increased production First documented with WW2 production of aircraft - Every time production doubled, costs fell at a predictable rate Driven by cumulative output within existing technology over time "Learning by doing" The more you do something the better you get at it; labor productivity improves with repetition Learning curve effect is the labor productivity solely from the increase in production A 90% learning curve is a 10% decrease in per-unit cost for every doubling of production I.e. might take a long time to produce first ever SuperCub in Japan but improve over time Lower per unit cost because of labor productivity from increased production

Strategic implications of RBV

Invest in your most valuable resources: continually invest in building and maintaining your strategically valuable resources I.e. Eisner revived Disney's commitment to animation, a capability at which it excelled; he invested $50 million in Who Framed Roger Rabbit to create the company's first animated feature-film hit in many years; Disney then quadrupled its output of animated feature films, bringing out successive hits, including The Lion King Upgrade your resources: to stave off the inevitable decay in your resources' value, move beyond what your company is already good at I.e. Diversified manufacturer Cooper Industries realized it lacked global management capabilities; it addressed the problem by acquiring Champion Spark Plug; Champion had numerous overseas plants and could provide the skills Cooper needed to manage international manufacturing Can also leverage resources

History of game theory

Morgenstern and von Neumann were the pioneers, originally focused on zero-sum games Eleven "game theorists" have won the Nobel Prize in Economics Also applied to Biology and other sciences Way to model/quantify some behaviors of yourself and others

What better drives profit, line extensions or new products?

Most companies are focused on line extensions, even though new products services drive profits In a study of business launches of 108 companies: 86% of new ventures were line extensions Only 14% were targeting new markets or industries

Two Years Ago, India Lacked Fast, Cheap Internet - One Billionaire Changed All That

Mukesh Ambani, head of Reliance Industries (large Indian conglomerate) is spending $35 billion of the company's money to get South Asia on 4-G network Started in 2010, Ambani bought a company that had just acquired a pan-India 4G license Some rivals began rolling out 4G services in some cities, but Mr. Ambani wanted to build a network that would also cover more than 18,000 cities and towns and 200,000 villages, touching some places that didn't have electricity yet That required more than 200,000 cell towers and 150,0000 miles of high-tech fiber-optic cable, enough to encircle the Earth 6x; the construction is essentially complete Free calls and data for a penny - 1.3 billion people in market Lots of FC ($35 billion)... will you ever get paid back? What's the MC and WTP? Reliance Jio is Ambani's telecom company, which is providing unlimited 4G data for $2.10 a month Jio has signed up 200+ million subscribers Price war cutting industrywide revenue per user at around $1.53 monthly Competitive advantage: long-term, ambition, access to capital Price per GB decreasing, so, naturally, usage is increasing

Considering the beverage industry, name an important tool to differentiate products

New product development Research and development (R&D) spending at an average annual rate of nearly 20% over the past 5 years

In reality, are markets perfect?

No While no market is "perfect," need to evaluate each of the variable to see how "perfect/imperfect" competition is Imperfect reality: - Difference between products - Few participants; oligopolies - Costly or sparse information - Difference between sellers - Barriers to entry - Barriers to exit

If there are low barriers to entry, what are the threats to industry profits?

No economies of scale: unit costs vary little with volume No learning curve: unit costs vary little with experience No switching costs (FC buyers face when changing suppliers): easy to try new entrants' product/service No network effects: WTP is not a function of others' purchases - Network effects: value of network increases as the number of people use it No customer loyalty: customer willing to try new entrants' offering Minimal start-up costs: initial investment recouped quickly Equal access to distribution: sales channels widely available No history of incumbent aggression: no reason to expect retaliation Limited government restrictions: no licenses or approval necessary

Insights from the industry analysis in-class graphs

Not all industries are profitable (wide range of successes) Operating profits vary (consumer staples is relatively flat while IT is cyclical) Each sector is made up of many sub-industries; for example, technology has 30+ industries

Between short-term profitability and sales volume, which was the primary objective of the Supercub?

Sales volume

John Nash (and Nash Equilibrium)

"A mathematical genius" At the age of 19, only 14 month into graduate school, wrote a paper which eventually led to the Nobel Prize, Economics In a Nash equilibrium, no one is able to improve their own situation by changing strategy: each person is doing as well as they possibly can, even if that does not mean the optimal outcome for society I.e. hospitals seeking medical students, roads and traffic Everyone stuck and doing what's best for them even if it hurts the whole ... Crowds can make collectively bad decisions (i.e. traffic, pollution)

DuPont formula

(NI / sales) x (Sales/ assets) x (Assets / equity) Profit margin (profitability) x total asset turnover (efficiency) x leverage factor (leverage) Super powerful way to quickly see how a company generates returns

Honda A (strategic portion of strategic management)

Analysis Planning Discipline Logic Top-down Targeted Forecasting Prediction Execution Modeling Skill

Origins of strategic positions

1. (Lack of) variety-based 2. Needs- based 3. Access-based Not mutually exclusive, often overlap (Carmike does not show NC-17) Meaning positions only occur when the set of activities also differs

Describe the shape of the marginal cost curve

A firm's marginal cost curve typically slopes upward since it becomes increasingly costly to squeeze incremental output out of busy production lines and over-stretched personnel as the firm produces more As a firm reaches 100% capacity utilization, the marginal cost curve becomes a nearly vertical line; this can happen for a variety of reasons (i.e. run out of capacity, intern taps out after 80 hour work week so you need to hire another, worker is less efficient) Marginal cost curve = short-run supply curve of an individual firm

Organization: getting in your competitor's head

As entire company If they are similar to you, they will think like you; if they are different (asymmetrical), they will not think like you Companies should protect, leverage, build, acquire or extend valuable, rare, easily exploited and inimitable resources and capabilities I.e. GM/Latin America

Why do real markets rarely rest at equilibrium?

Because supply and demand curves do not stay perfectly still for long and prices and quantities take some time to adjust, there is usually some excess supply or excess demand at any point in time

Atlas Sand is Built to Last (in-class reading)

Atlas controls the largest, highest quality open-dune frac sand reserves in west Texas Their competitive strengths include efficient plant designs, flexible balance sheet with modest financial leverage, and efficient delivery New suppliers frequently entering over time (supply capacity increasing yet demand is lower) Publicly-traded sand competitors have rather poor stock performance Much lower G&A interest per ton than that of competitors Series of logistics, people process, and sand that Atlas Sand believes creates a virtuous cycle of activities that gives it a competitive advantage: - People and process: skillset (experience, 24/7 operational staffing), execution (total cost management, early warnings(, paperwork - Sand: supply reliability (finished capacity), quality (crush strength, turbidity), load times - Logistics: trucking, coordination, last mile equipment

CDS SoundBite: Why is having the right strategy more important than ever? (in class video)

Big questions of strategy: Who are we going to be, and what few things are we going to do better than everyone else? Value destruction is mainly caused by bad strategy decisions Competitors -> need to differentiate A majority of top executives have no confidence in their strategy Need to consider fundamental questions: who are we going to be, what makes us great today, and how will we bring those advantages to the market Need to consider your capabilities (what you do better than anything else or how you differentiate yourself) Considering what you can do better can foster growth

How does blue ocean reject the productivity trade-off

Blue oceans mean increasing value and reducing costs Cost savings are made by eliminating and reducing the factors an industry competes on Buyer value is lifted by raising and creating elements the industry has never offered

Basis of competition varies by industry

Branding critically important in consumer goods (pricing) New products development is increasingly outsourced/purchased

What are some ways to manipulate EPS?

Buy back own shares Accelerate revenue Alter timing of discretionary expenses (delay) Can fail to recognize certain expenses by citing them as "unusual" Could consider a one-time gain on a sale of machinery as opearting income

How can suppliers limit total economic surplus (WTP - cost)? (Porter 5 Forces)

By raising prices or limiting quality Suppliers can exert bargaining power by raising prices, shifting costs downstream to industry participants, or limiting the quality of the goods and services they provide Powerful suppliers can thereby squeeze profitability out of an industry that is unable to pass on cost increases in its own prices

Operational effectiveness is performing ______________ better than the competition A. Different activities B. Operational activities C. Similar activities D. Financial activities

C

Southwest Airlines: Herb Kelleher (podcast)

Co-founded Southwest Airlines in 1967; Rollin King brought up idea Airline industry originally didn't have great returns, but the allure and curiosity of doing something different took over; took 4.5 years to get up and running Kelleher recognized untapped flying market in that most thought flying was too costly Texas flights with inhospitable competitors (i.e. Transtexas, Texas International tried suing) who were monopolists regulated by CAB Fares as low as $10-$20; about 45% lower than other carriers; enormous productivity made up for this (10 minute turns at gate; flew 4 airplane schedule with 3 plane) Set up first profit sharing plan after first slim profit; unionized employees "If you paid the higher fare, we'll give you a bottle of whiskey" In 1978, Congress deregulates the airline industry; in 1981, Kelleher gives up his law practice Haven't had a loss for a full year since 1972 Focused on profitability instead of market share; now valued around $20 billion

Notable difference between Coca-Cola and PepsiCo

Coca-Cola is a pure-play beverage company, while Pepsi is diversified into food and snacks In Q1 2019, Coca-Cola reported a 5.0% increase in net revenues to $8 billion, partially due to bottler inventory increase in preparation for Brexit (2%+); Coca-Cola reported increased volume for: juice, dairy, and plant-based beverages (with 3% growth), tea and coffee (2%), enhanced water, and sports drinks (1%) For PepsiCo, food and snacks volume had net revenue growth of 2.2% in the Q2 2019, while beverages increased 2.0% In 2016, PepsiCo and Coca-Cola invested in craft soda brands - Coca-Cola acquired Monster Beverages - Coca-Cola also relaunched two craft sodas, Blue Sky and Hansen's - PepsiCo launched the 1893 Original Cola and Ginger Cola lines - PepsiCo released a craft carbonated beverage brand called Stubborn

How do managers, consultants, and strategists use financial ratio analysis?

Compare performance of companies across on industries Benchmark companies against industry averages and competitors to identify areas of strength and weakness Analyze trends in companies and industries Quantitatively reflect strategic choices and changes Great starting point for analysis; diagnosis the industry, situation

Three Challenges General Motors Will Face in 2019

Competition has toughened in China (GM's largest vehicle market) as Chinese automakers become more popular; premium market still doing well, as Cadillac was up 20%; more profitable cars like SUVs, Buick, etc.; still maintain profits there but declining -> trying to fix by product mix; local competition and declining profits -> profits South America amid economic/political instability; leaning on unions; betting on big returns when conditions return because typically does well there US: focus on SUV and truck sales GM's dominant strategy varies by geography Heavy research and development; Honda and GM working together on autonomous vehicles to learn and grow together Humans aren't always rational, so need to recognize unions in Latin America might not cooperate, management can oversight, etc.

What's one of the most overlooked aspects to BU (business unit) strategy formulation?

Competitor reactions We don't spend enough time thinking about competitors as we should

Competitive intelligence tips

Competitors share information all the time... to customers, suppliers, future employees/employers, Wall Street, industry/trade shows, US Patent Office, local newspapers, etc. Download their 10k and investor relations presentations Research hometown newspaper Who are they hiring? Indeed.com LinkedIn resumes (people say all kinds of things) Glassdoor.com: employees are more than eager to tell you what they think of their current (and former) company Search for presentation at Slideshare Read forums What patents are they filing? What are the competitor's suppliers and customers saying? Conduct a survey Interview experts Scour trade shows Talk to your own sales people Refine an excel model: your understanding of competitors improves over time; revenues, COGS, SG&A; test your assumptions Win-loss analysis by deal, by competitor Look at the disruptors; are you spending too much time looking at the predictable competitors? Compare prices and features Search with keywords Create a safe and structured way to get information Protect yourself: all these tips to find out more about your competitors are the exact same tactics they are using on you; teach your people to value information and explain how it can potentially harm the place they work

Sales/figures of SuperCub

Created a 4 stroke engine with 2x the power and no additional weight Developed enough manufacturing expertise to be a fully-integrated producer of engine, frame, chains, sprockets, etc. After initial success in Japan (3K unit/month); then aggressively invested in a 30K unit/month capacity (lead capacity - opposite of lag); lead capacity Sold for $250 per bike vs. $1,000 for Sears, Roebuck version "Step through frame" easier for new market - female riders Heavy commitment to R&D and manufacturing; new products could be brought to market quickly; from design -> production in 18 months Primary objective was sales volume not short-term profitability US sales of $500K in 1960 to $77M in 1965

What are some types of competitors that are often not recognized?

Customers, suppliers, potential entrants, and substitute products are all competitors in the fight for profits

Honda had a mass-production, mass-market ______ approach for success with motorcycles in the US A. Customized B. High-priced C. Experience curve D. Low-cost

D

Which is not an essential component of a breakeven analysis when solving for unit price? A. Volume of units B. Total FC C. Variable cost / unit D. % market share

D

Explain how the price elasticity of demand is a function of the time period under consideration

Demand may be inelastic in the short-run until alternatives are developed Over time, however, substitutes can often be found and used, so the demand curve is flatter or more elastic in the long run

Substitutes (basics for Porters 5 Forces)

Easy to overlook because they may look very different from industry's product Nearly always exist - I.e. one substitute is to "do without the product" - Another example is to do it yourself (i.e. grocery check-out) Threat come from outside the existing industry in the form of a product/service, not a firm A substitute is a thing (product/service), while a new entrant is a company

Why do companies fail to choose or stick with a strategy?

Failure to choose: "when companies operate far from the productivity frontier, trade-offs appear unnecessary; it can seem that a well-run company should be able to beat its ineffective rivals on all dimensions simultaneously" The growth trap: "eventually, pressures to grow or apparent saturation of the target market lead managers to broaden the position by extending product lines, adding new features, imitating competitors' popular services, matching processes, and even making acquisitions" Role of leadership: "there will be constant pressure to compromise, relax trade-offs, and emulate rivals; one of the leader's job is to teach others in the organization about strategy - and to say no" Also profitable growth

Red ocean

Existing industries (known market space) Compete in existing market space (existing industries) Beat the competition Exploit existing demand (win-lose) Make the value-cost trade-off Align the whole system of a firm's activities for differentiation OR low cost

Solvency ratios

Flexibility of a company to pay long term obligations and their level of debt How much debt (leverage) is in capital structure (what it measures; long-term as opposed to liquidity short) Determines company's risk; influences ability to take out more debt (why company cares) Capital intensive industries (car, oil, steel, telecommunications, transport) often have more leverage (how it affects an industry) I.e. leverage ratio

Liquidity ratios

Flexibility of a company to pay their short term obligations Ability to meet short-term obligations as they come due (what it measures) Determines financial flexibility and likelihood of short-term distress (why company cares) Certain industries may require more financial flexibility (how it affects an industry) I.e. current ratio

For value-analysis, _______________ all the firm's activities (i.e. design, sourcing, manufacturing, marketing, etc.) and see where the _______ is being added; that's the business you want to be in

For value-analysis, BREAK DOWN all the firm's activities (i.e. design, sourcing, manufacturing, marketing, etc.) and see where the VALUE is being added; that's the business you want to be in

Sequential game move

Game where the players take turns, and additional information/insight is gained as time progresses 1 person decides after the other (back and forth) Players who move later in the game have additional information about the actions of other players or states of the world Players who move first can often influence the game

Representative bias

Generalizing about a situation based on only a few observations of similar situations in the past Tom reads the WJS, parks at Fishburne, must be in the B school

Assuming these financial ratios are like "vital signs" for a company, how can you use them?

How does a physician use vital signs? Historical: - Diagnose: quickly diagnose a company's situation (strengths, weaknesses); find issues - Benchmark: compare the company against its peers - Investigate: develop hypotheses on what is wrong and look for further confirmation Future: - Identify leading indicators: anticipate changes in the trend - Analyze trends: gauge the company's progress over time (can't just be one blip)

Efficiency ratios

How efficiently a company's day to day operations are managing inventory, selling and producing products, or using assets to generate revenue How well a company uses its assets to generate sales (what it measures) Helps evaluate specific processes a company can improve (why company cares) Measures how capital intensive industry is (how it affects an industry) I.e. inventory turnover

Test of durability

How quickly does the resource depreciate? How long does the asset last? (How much life is left?) I.e. patents usually last 14-20 years, Coca-Cola's formula has lasted, Disney's brand name survived post-Walt Disney's death, Shell's oil deposits are long-lasting

Advantages of Porters 5 Forces analysis

Identifies main industry-level determinants of profitability A framework for interpreting industry developments A "checklist" helps avoid careless oversights ... Understanding the forces that shape competition in an industry is the starting point for developing strategy It reveals the most salient aspects of the competitive environment and the crucial constraints to overall profitability It highlights the industry changes that pose the greatest threats and opportunities Industry structure also provides a baseline for sizing up a company's strengths and weaknesses An understanding of industry structure guides managers toward possibilities for strategic action, including (1) positioning the company vs. the current competitive forces; (2) anticipating shifts in the forces and exploiting them; and (3) shaping the balance of forces to create a new more favorable structure or one that favors the company Industry structure reveals insights for positioning

Causal ambiguity

Impossible to disentangle what the valuable resource is or how to recreate it (hard to figure out) Not exactly sure what is the main driver of value I.e. Other airlines don't know what it is but Southwest has great culture: can mimic Southwest's successful low-cost strategy, but not their culture of fun, family, frugality, and focus I.e. Coca-Cola has invested in 100+ years and their formula, supply chain, and brand are hard to imitate I.e. Honda's SuperCub

Weaknesses of Porter's 5 Forces analysis

Industry structure is the starting point to develop strategy, but not the final word Assumes a fairly static industry environment; understates disruptive effects of technology Industries are often not discrete, but often overlap Firms often participate in multiple industries (i.e. Amazon) How do you explain profitability variance(!) among companies? ... Hard to know how to classify some industries (i.e. Amazon is logistics, retail, etc.) Preferences change Consumers and buyers work together (doesn't factor in collaboration) Focuses too much on current state (not future) Doesn't include technology, government, complements, etc. Nothing to do with inside of the company (like employees); only talks about outside Basis for competition changing

How do Coke and Pepsi compete without destroying each other?

Industry structures are quite stable; this one is 100+ years old Coke and Pepsi: duopoly; competing without destroying each other - Compete on non-price terms - Competition fosters innovation - Advertising polarizes choice Stay aware of macro-trends (tend toward healthy drinks) Strategic planning for both organic (inorganic by acquisition) growth Coke remains the dominant brand with 3.9B gallons vs. #2 Pepsi at 1.7B gallons Coke is flat (0.4% positive) vs. Pepsi (-3.4% negative)

Investors use ________________ metrics in addition to traditional financial ratios

Industry-specific Airline: revenue-passenger mile, available seat miles Oil/gas: price-to-cash flow ratio, reserve life index (duration of reserves at a given production rate with no additions), reserve-replacement ratio (amount of proved reserves added to a company's reserve base relative to amount produced) Insurance: net investment yield (pretax net investment income over average invested assets), net premium written to surplus (net written premiums over policyholders surplus) Entertainment/media: average revenue per user, net subscriber additions (indicates success of cable of satellite provider's marketing), churn (stability of a customer base)

Head to head strategy

Industry: focus on rivals within its industry Strategic group: focus on competitive position within the strategic group Buyer group: focus on serving the buyer group Scope of product/service: focus on maximizing the value of product/services within industry Functional/emotional orientation: focus on improving the price performance with functional/emotional orientation of the industry Time: focus on adapting to external trends as they occur

Creation strategy

Industry: look across alternative industries Strategic group: looks across strategic groups within industry Buyer group: redefines the industry buyer group Scope of product/service: looks across to complementary product/services Functional/emotional orientation: rethinks the functional/emotional orientation of its industry Time: participates in shaping external trends over time

Rivalry (basics for Porters 5 Forces)

Most visible competitive force (price reductions, new products/services) High rivalry pressures prices down and/or costs up

Examples of blue ocean creations from 30 years ago

Mutual funds Cellular phones Discount retailing Express delivery Snowboards Coffee bars Home videos 20 sectors and 20,000 industries (SAIC has had to expand over time)

Return on equity (ROE)

Net income / equity The higher the ROE percentage, the more efficient management is in utilizing its equity base and the better investor returns How much the company earns per dollar of common equity I.e. Disney's ROE in 2018 was 25.8%, increasing steadily since 2009 = Improving its profitability - Massive stock repurchases ($25B at an average price of $58) Type of profitability ratio

Net profit margin

Net income / revenue Are you making money? How much of a company's revenues are kept as net income I.e. Disney's net margin ranged from 9.15% in 2009 to 16.88% in 2016 Tends to fluctuate as a result of non-recurring charges, such as interest expenses and operating leverage Consumer electronics (can charge high and doesn't cost much to make) PM > airline > grocery (perishable, lots of choices; new entrants, supplier bargaining power, and rivalry all high threats) Type of profitability ratio

How does blue ocean feel about using competition for benchmarking?

Never use competition as the benchmark

In the context of Porters 5 Forces, are complements, the government, technology, and complements good and/or bad for profitability?

Not necessarily; it's important to look at specific impact it has on competitive force Complements are increasingly important as products/services are intertwined and have extensive network effects Strategists use complements to boost demand, improve overall industry structure or advance their firm's strategic position

Example of Honda's good virtuous cycle

One good thing leads to another (order doesn't matter); creates self-reinforcing strategy (1) Demand (built a great, cheap product so there's a lot of demand) (2) Factory utilization (can fully run the factory because of high demand) (3) Technology (if your factory runs fully, your technology can help speed up the manufacturing process) (4) Volume (able to produce more since technology aids manufacturing) (5) Cost (per unit decreases since high volume) (6) Price (can sell for lower since low cost per unit)

A Note on Microeconomics for Strategists (reading)

One of the fundamental units of analysis for the strategist is the industry or market in which a firm competes Economists' models of markets are simplified to allow rigorous analysis and only roughly approximate real markets; yet microeconomic models incorporate concepts that are invaluable to the business strategist, and they provide a foundation on which to build structured analyses of real markets

Endowment effect

Overvaluing something because you own it I.e. hanging onto a poor-performing stock, my IKEA table is worth $400

Assumptions and variables of game theory

People are not always rational There are many assumptions in any model The first time you make a model it will definitely be wrong-ish How can you balance a model so that it is simple enough to be useful, but detailed enough to be informative? Fixating too much on competitors is looking at best practices (not real strategic differentiation); red ocean

Biases

People are people: there are multiple potential biases which may affect decision making Representative bias, overconfidence, confirmation bias, endowment effect

Strategic positioning

Performing different activities from rivals' or performing similar activities in different ways Choosing a unique position is not enough to guarantee a sustainable advantage Also where you can do well in

Operational effectiveness

Performing similar activities better than rivals perform them Includes but is not limited to efficiency Refers to any number of practices that allow a company to better utilize its inputs by, for example, reducing defects in products or developing better products faster

Henry Mintzberg

Professor at McGill for 40+ years A iconoclast; "consistency contrarian Canadian" Effective strategies often emerge from opportunistic, skillful, and disciplined response to opportunities... not planning alone Studies the broad practice of managing: - "Strategic planning" is an oxymoron (strategies don't come out of a formally planned process... most emerge) - "Management is a practice" - Managers are often distracted "jumping from topic to topic" - Managers are trained incorrectly (wrote "Managers, not MBAs" which stresses MBAs don't know management until learning through experience) ... Strategy often "emerges" from discovery, not tops-down analysis Emergent strategy (as you get feedback from customer; from opportunistic, skillful, and disciplined response to opportunities; not just from planning alone) Management isn't just about planning, organizing, coordinating controlling; it's about getting interrupted a lot and trying to keep your head above water Management is a practice (not a science or profession) The content of what you're dealing with changes, the practice doesn't I.e. IKEA's strategy originated after managers couldn't fit their table in their car/truck

Customers are particularly price sensitive when:

Purchase is a large percent of total income (i.e. mortgage) Unprofitable, or strapped for cash Input has little influence/impact on end product (quality of the buyers' products isn't affected by the industry's product) Buyer's overall costs is not affected by the industry (can't pay for itself many times over)

ROA (video)

ROA = Net income / total assets Profitability ratio ROA is a measure of how profitable a company is relative to its total assets or the resources it owns or controls Allows investors to judge how efficient management is at using the company's assets to generate earnings Different industries will have different ROAs -> best to compare ROAs within the same industry - I.e. manufacturing companies require many assets while service companies like an accounting firm will require very few Gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings ROA is best used when comparing similar companies or comparing a company to its previous performance. ROA takes into account a company's debt, unlike other metrics, such as ROE Higher ROA indicates more asset efficiency Tells you what earnings were generated from invested capital (assets) The ROA figure gives investors an idea of how effective the company is in converting the money it invests into net income ROA for public companies can vary substantially and will be highly dependent on the industry - When using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or against a similar company's ROA The ROA figure gives investors an idea of how effective the company is in converting the money it invests into net income ROA is most useful for comparing companies in the same industry, as different industries use assets differently The higher the ROA number, the better, because the company is earning more money on less investment The biggest issue with return on assets (ROA) is that it can't be used across industries; because companies in one industry, such as the technology industry, and another industry like oil drillers will have different asset bases Some analysts also feel that the basic ROA formula is limited in its applications, being most suitable for banks

RBV needs to be more empirical

RBV is a "view" or "perspective," but not a theory that can be adequately tested The lesson for managers is that conclusions about critical resources should be based on objective data from the market; in our experience, managers often treat core competence as an exercise in intuition and skip the thorough research and detailed analysis needed to get the right answers

3 scenarios for exit decisions

Reinvest to stay in business (price exceeds min. of average cost) Stay in business but do not reinvest (min. of average cost exceeds price, but price still covers marginal costs at least in short-run) Shut down immediately (min. of marginal cost curve > price)

Value

Relative, context, and time-dependent

What were the outputs of Honda's success in North America? In other words, what dud success look like?

Revenues and market share Profitability Brand, longevity of company

What role did management play in Honda's success entering the NA market for motorcycles? (Case B)

See (new) opportunities Be willing to adapt Willingness to take risks Scrappy

Price discrimination

Sellers try to claim more economic value by charging different prices to different buyers for same product: price discrimination Based on WTP I.e. can charge differently for hard vs. paperback books; drop iPhone price after a year; on airlines, charging more the week before than months before

Access-based positioning

Serving broad needs of many customers in a narrow market Based on access to customers (geography, scale) I.e. Carmike Cinemas operates movie theaters exclusively in cities and towns with populations under 200,000 through a lean cost structure (standardized, low-cost theater complexes requiring fewer screens and less sophisticated projection technology than big-city theaters) ... Although their needs are similar to those of other customers, the best configuration of activities to reach them is different Access can be a function of customer geography or customer scale, or of anything that requires a different set of activities to reach customers in the best way

Variety-based positioning

Serving few needs of many customers Based on product/service varieties rather than customer segments Usually a lack of variety but for wide array I.e. Jiffy Lube International specializes in automotive lubricants and does not offer other car repair or maintenance services -> value chain produces faster service at a lower cost than broader line repair shops; a combination so attractive that many customers subdivide purchases, buying oil changes from the focused competitor, Jiffy Lube, and going to rivals for other services I.e. The Vanguard Group, a leader in the mutual fund industry, provides an array of common stock, bond, and money market funds that offer predictable performance and rock-bottom expenses; investment approach sacrifices the possibility of extraordinary performance in any one year for good relative performance in every year ... People respond to a superior value chain for a particular type of service; can serve a wide array of customers, but for most it will meet only a subset of their needs Makes economic sense when a company can best produce particular products or services using distinctive sets of activities

_______________ often try to imitate success without making necessary trade-offs, and fail; why do trade-offs develop for them?

Straddlers Inconsistency to reputation and image Inability to match service levels No reduction in fixed costs Culture, bureaucracy, and confusion ... A strategic position is not sustainable unless there are trade-offs with other positions I.e. Continental Airlines saw how well Southwest was doing and decided to straddle; while maintaining its position as a full-service airline, Continental also set out to match Southwest on a number of point-to-point routes (Continental Lite eliminated meals and first class service, increased departure frequency, lowered fares, and shortened turnaround time at the gate) Because Continental remained a full-service airline on other routes, it continued to use travel agents and its mixed fleet of planes and to provide baggage checking and seat assignments An airline can choose to serve meals—adding cost and slowing turnaround time at the gate— or it can choose not to, but it cannot do both without bearing major inefficiencies Continental's planes were delayed leaving congested hub cities or slowed at the gate by baggage transfers; late flights and cancellations generated a thousand complaints a day; could not afford to compete on price and still pay standard travel-agent commissions, but neither could it do without agents for its full-service business; compromised by cutting commissions for all Continental flights across the board and by lowering the rewards of Continental's entire frequent-flier program -> angry travel agents and full-service customer Neutrogena advertises in medical journals, sends direct mail to doctors, attends medical conferences, and performs research at its own Skincare Institute; originally focused its distribution on drugstores and avoided price promotions (gave up the large-volume potential of selling through supermarkets and using price promotions for desired attributes)

Productivity frontier

Sum of all existing best practices at any given time (maximum value that a company can create at a given cost, using the best available technologies, skills, etc.) - Product features, service features - Enabling technology - Low-cost production Edge is operational efficiency, where you can't derive any more value without charging more (have to make trade-off between cost and value) ... Constantly shifting outward as new technologies and management approaches are developed and as new inputs become available X-axis (high to low: relative cost position) and Y-axis (non-price buyer value delivered: high to low) At the frontier, where companies have achieved current best practice, the trade-off between cost and differentiation is very real

Channels to get product in the beverage industry

Supermarket, mass-merchant, vending machines, convenience stores, fountain accounts (restaurants), drugstores, schools, etc.

Supply/value chain (inputs to outputs) for CSD industry

Suppliers to concentrate -> concentrate producers -> bottlers -> retail channels A sequence of industries stacked up; one industry's supplier is another industry's buyer

(RBV): Companies are a collection of physical/intangible ________________ and __________________

The RBV sees companies as very different collections of physical (i.e. freehold locations) and intangible (i.e. brand reputation, employee loyalty) assets and capabilities (i.e. supplier chain, managerial judgement; embedded in a company's routines, processes, and culture) No two companies are alike because no two companies have had the same set of experiences, acquired the same assets and skills, or built the same organizational cultures Value is created by the combination of assets and capabilities Companies are like people: all have different origin stories and no two are situated the exact same (i.e. Coca-Cola is from ATL, PepsiCo from NY) ... A company will be positioned to succeed if it has the best and most appropriate stocks of resources for its business and strategy

Understanding Industry Structure (reading)

The arena in which competition takes place is the industry in which a company and its rivals vie for business Each industry has a distinctive structure that shapes the nature of competitive interaction that unfolds there Understanding the underlying structure of a company's industry, now and in the future, is a core discipline in strategy formation Industries register sharply different levels of average profitability in the long run

Blue ocean strategy (summary)

The best way to drive profitable growth is to stop competing in overcrowded industries - In those red oceans, companies try to outperform rivals to grab bigger slices of existing demand - As the space gets increasingly crowded, profit and growth prospects shrink, products become commoditized, and ever-more-intense competition turns the water bloody. Create blue oceans (uncontested market spaces where the competition is irrelevant) to avoid the fray - In blue oceans, you invent and capture new demand, and you offer customers a leap in value while also streamlining your costs Leads to handsome profits, speedy growth, and brand equity that lasts for decades while rivals scramble to catch up I.e. Cirque du Soleil invented a new industry that combined elements from traditional circus with elements drawn from sophisticated theater Logic behind blue ocean strategy: It's not about technology innovation: often, the underlying technology already exists, and blue ocean creators link it to what buyers value - Even Ford's revolutionary assembly line can be traced to the meatpacking industry in America You don't have to venture into distant waters to create blue oceans: most blue oceans are created from within, not beyond, the red oceans of existing industries - Incumbents often create blue oceans within their core businesses (i.e. AMC introduced megaplexes, providing moviegoers spectacular viewing experiences at lower costs to theater owners Incumbents are not at a disadvantage in creating new market spaces, and blue oceans made by incumbents are usually within their core businesses To apply blue ocean strategy motives: Never use the competition as a benchmark: instead, make the competition irrelevant by creating a leap in value for both yourself and your customers - Ford did this with the Model T; Ford could have tried besting the fashionable, customized cars that wealthy people bought for weekend jaunts in the countryside; instead, it offered a car for everyday use that was far more affordable, durable, and easy to use and fix than rivals' offerings; Model T sales boomed, and Ford's market share surged from 9% in 1908 to 61% in 1921 Reduce your costs while also offering customers more value - Cirque created uncontested market space that made the competition irrelevant and pulled in a whole new group of customers (i.e. adults and corporate clients) In breaking through the boundary traditionally separating circus and theater, Cirque made a new and profitable blue ocean from within the red ocean of the circus industry At the time of its debut, circuses focused on benchmarking one another and maximizing their shares of shrinking demand by tweaking traditional circus acts It redefined the problem itself by offering people the fun and thrill of the circus and the intellectual sophistication and artistic richness of the theater The company found was that many of the elements considered essential to the fun and thrill of the circus were unnecessary and in many cases costly (i.e. animal acts) -> the lasting allure of the traditional circus came down to just three factors: the clowns, the tent, and the classic acrobatic acts So Cirque kept the clowns (while shifting their humor away from slapstick to a more enchanting, sophisticated style), glamorized the tent, and added artistic flair

Profitability ratios

The ability of a company to generate profits and revenue How much profit a company generates per dollar in sales (what it measures) Helps evaluate a company's cost structure relative to competitors (why company cares) Can measure industry attractiveness (how it affects an industry) I.e. profit margin, ROE

Market demand (curve)

The sum of the demand of individual buyers or businesses at each price (reports the aggregate quantity demanded at any given price) Buyers willingness-to-pay varies Arrays individuals in order of their WTP (buyers who have an ample income or a high need for the good constitute the upper left end of the curve; buyers with tighter budgets or less interest in the good comprise the lower end of the curve) Relation with price discrimination

Market supply curve

The sum of the quantity supplied by all firms at a given price At the lowest prices, only the most efficient producers continue to operate, and the quantity supplied is low As prices rise, incumbents produce more and new firms join: the less efficient firms are at the top right of the supply curve - The less efficient firms are at the top right of the supply curve Arrays individual firms or plants from the most efficient to the least efficient

Flood of Sand Points to Shakeout for Shale Suppliers (in-class reading)

There's a strong demand from shale fracking companies; however, new supply is rushing in (too) quickly Sand is an input for fracking There's a trade-off between quality and location (Wisconsin is higher in quality than Texas but location makes it more expensive to transport)

Describe the shape of the average cost curve

Usually "U" shaped curve At the bottom of the U, the firm is producing most efficiently The average fixed cost per unit declines with production since fixed costs are spread over more and more units (not making a lot -> high FC -> high average cost curve) Eventually, as a firm expands and its facilities and personnel are stretched thin, marginal costs rise so high that average total costs begin to rise again Fixed costs & diminishing

Example of willingness to pay (Apple Watch in-class example)

WTP is highly sensitive to context, tastes, preferences, availability of substitutes Do people really want to buy this (is there demand), or is it just a substitute for your iPhone?

Supercell (basics)

Valued at 10 billion with only 300 employees The best teams make the best games "What if you put together a games company the way you'd put together a professional sports team?" In that type of model, the sole mission of the founders and management would be to acquire the best talent for every single position, create the best possible environment for them, and then get out of the way It would be an environment with zero bureaucracy; a place where the best people could make the biggest possible impact and nothing would stand in their way; everything else, including financial goals, would be secondary; over the years, we realized that even more important than having the best people is having the best teams - just as in sports, where World Cups and Championships are won by teams, not individuals Supercell: small and independent cells We've found that the best quality work comes from small teams in which every member is passionate about what they do Often times when teams become bigger, processes, bureaucracy and even politics emerge, and the work just isn't fun anymore; that's why we wanted to create an organizational model made up of very small teams, or "cells" as we call them Supercell is a collection of these cells; each game comes from a cell, and they operate extremely independently and have complete control over their own roadmap; our organizational model is optimized for speed and passion, not for control Supercell: games that people will play for years (mission) Many of us had been big fans of games like World of Warcraft, which most people play for years, not just weeks or months; our dream was to create game services with longevity like that Willing to make trade-off of killing games; formerly pc and other platforms but now only mobile SuperCell: failures and learnings That's why we have a tradition of celebrating (failure) these lessons by drinking champagne every time we screw up; for us, it's clear that releasing hit games means having to take big risks; and by definition, taking those risks means that you'll fail more often than you'll succeed So whenever we realize that we haven't failed in a while, it's a sign that we haven't taken enough risks; and that is truly the biggest possible risk for a creative company like ours

Imagine you're advising a company on a potential acquisition where their main competitor is interested in acquiring the same target company. You need to determine how much to bid while assessing competitor's likely actions and the target's response. What are some key questions to ask?

What synergies can we realize compared to our competitor? Is this acquisition more beneficial for us or them? What is our capacity to pay compared to our competitor? - How much debt can we incur? - Is our competitor likely to pay in cash or stock? - Which would the target prefer? What other factors might play into the decision by the target company's management on which to accept? - Job retention? Cultural fit? Acquirer's long-term vision for target? What will play a bigger role in the target's decision, the financial aspects of behavior or the behavioral/cultural ones?

Test of competitive superiority

Whose resource is really better? I.e. it's not clear which of the Big 4 has the superior workforce ... A maker of medical-diagnostics test equipment bested rivals at designing an easy interface between its machines and people who use them; armed with this capability, it expanded into doctors' offices, a fast-growing segment of its market, where its equipment could be operated by office personnel (not just technicians): competitive superiority in designing the interface between its machines and the people who use them (rather than just being instrumentation) Disaggregation helps derive actionable implications

A strategy is a set of

activities

Game theory applies to both _____________ and ________________ outcomes

competitive (zero-sum) and collaborative (Win-win) outcomes

Strategy evolves over _________

decades Changes in customer preferences can be sudden, need flexibility Need both engine #1 (existing business), engine #2 (new business)

Reinvestment, exit decisions depend on the ___________ and __________

market price and costs (average, marginal) Average cost is initially high due to high FC; it eventually increases again due to high MC

In the short-run, firms should produce as long as the ________ meets or exceeds the ________

price; marginal cost

Porters 5 Forces helps strategists better _________ their firms, exploit ____________ and __________ the industry

position; change; shape Position firm: building defenses against competitive forces; finding a position where the forces are weakest (highest sustainable profits) Exploit change: anticipate shifts in the forces; identify opportunities (investment, diversification, alliances) Shape industry: shape the balance of forces to create a new favorable structure; neutralize supplier and customer power

Strategy is less about right and wrong than it is about structuring the __________, careful __________, and thoughtful ________________

problem; analysis; recommendations Strategy/class shows you many resources that you can use to continually hone your business acumen, expand your professional network / build your career, create value for your customers, your firm, and yourself

Superior resources are great, but do not guarantee success because you need to match resources with _________________________

the external environment (product market fit) Just because it meets the 5 criteria does not necessarily mean the market needs it or is ready for it

British motorcycles' bad viscous downward cycle

(1) Design (poor design) (2) Quality (poor quality due to poor design) (3) Worker satisfaction (poor quality means have to work more) (4) Pricing (need to price higher to compensate) (5) Distribution (not going to want to sell high priced products)

Earnings per share (EPS)

(NI - preferred dividends) / average outstanding shares Shows the amount of a firm's net income available for payment to its common stockholders or in other words how profitable the firm is on a shareholder basis Type of valuation ratio

Data/graphs from carbonated soft drink (CSD) industry

1975 - 1990s: average revenue growth of 10% in the US (high); rule of 72 2000s - today: US CSD consumption peaked in 2000 (53 gallons per capita, 29% Debt increasing so interest rates presumably treat (debt-to-capital ratio increasing so borrowing more money) Interest coverage (how many times you can pay off your interest burden) slightly decreasing but not big deal Gross and EBITDA margins increasing Forward price-to-earnings ratio increasing so positive outlook (investors willing to pay more) After packaged foods and meats, soft drinks have the (second) largest share of revenue in the food and beverage industry; they have high profits as well Water is still a fast-growing segment Coca-Cola mainly experiencing growth while PepsiCo products decline

What does economics have to do with strategy? (from reading)

A thorough grasp of the demand curve aids in the understanding of how a price change or a shift in a related market affects aggregate output; also helps the strategist see how such changes alter the mix of buyers who are actively purchasing a product (analysis of the segments that make up the demand curve can be helpful in understanding how to expand the market) In economists' models, demand curves are generated by forces beyond the control of firms; in real markets, firms take actions to influence the size of demand and the shape of the demand curve An analysis of supply is useful to the strategist: allows a set of managers to predict how individual firms and the market as a whole will react to shifts in input costs and technology A grasp of the elasticity of the industry supply curve allows one to anticipate how responsive the quantities supplied will be to prices and how quickly prices will rise or fall in response to changes in demand Also valuable is an understanding of the marginal cost curves of individual firms (firms with high marginal cost curves will typically be the ones squeezed out of a market when the market falls into a slump, especially in commodity market) With a basic understanding of market adjustment, a strategist can not only predict the consequences of changes in supply or demand, but can also make better sense of changes in prices or output

Luxottica

A vertically-integrated, global manufacturer of eyewear: 9.2B Euro revenues Geographic breadth: - 150 countries, 50 commercial subsidiaries - Global, but 57% of revenues come from North America Vertical integration: - Manufacturing: 12 production facilities, 89 million glasses/yr - Licensing: Ray-Ban, Oakley, Versace, Armani, Prada, Chanel Distribution network: - LensCrafter, PearleVision, Target Optical, Sunglass Hut - 9,000 retail locations; 90% proprietary or licensed brands Market position: holds 77% Luxury eyewear market, 29% if spectacles market

Two generic approaches to gaining competitive advantage A. Low cost, differentiation B. Low cost, high value C. Operational efficiency, high value D. Operational efficiency, differentiation

A.

Session 1 takeaways

Adopt the perspective of an executive; not an entry-level employee - Consider the context, ask insightful questions, think ahead - Develop a point-of-view and use facts to back up your assertions - Listen to others; don't just talk Accept some ambiguity - Use frameworks and concepts to structure the problem - Strategy is less about right or wrong than it is about structuring the problem, careful analysis, and thoughtful recommendations

Strategy requires both an ___________________ and ______________ perspective

An external (outside-in) and internal (inside-out) perspective RBV: shouldn't only focus on external... internal things that create competitive advantage Great opportunity if you have the resources for sustainable competitive advantage Relation between cost and value are not mutually exclusive Being among the best at multiple things is better than being the top dog at one thing Is it really better than others?

Economic moat

Another way to describe barriers to entry A structural competitive advantage that allows a firm to earn above-average returns on capital over a long period of time Holds competitors at bay Need to be defensible Warren Buffet

Excess supply

At P1, orange growers supply more fruit than buyers will purchase Growers find they cannot sell all of their oranges and inventories pile up Prices fall as growers try to rid themselves of excess supply before the inventory goes bad They reduce their plans for future harvests, and perhaps some growers leave the market As prices fall, buyers are willing to buy more and more oranges The adjustment continues until supply and demand are again in balance at the equilibrium price and quantity

Excess demand

At P3, supermarkets, orange juice makers, and other buyers are eager to purchase Q demanded (D), but orange growers are willing to provide only Q supplied (E); thus excess demand Buyers scramble to purchase the few oranges that are available, and prices get bid up Over time, growers add to their crop, new growers enter the market, and buyers turn to substitutes such as tangerines Eventually, the market comes to P2 and Q2, at which supply and demand are in balance (market equilibrium)

Why did British firms not just copy Honda's strategy?

At one plant, 80% of the NVT machines were 15+ years old No genuinely new NVT model since 1968 New Japanese bikes incorporated features, which British makers struggled to add to existing models British bikes were known for their mechanical failures, especially oil leaks Warranty claims were resisted by the dealers, spare parts were hard to come by New Japanese bikes regularly topped British bikes in performance tests By 1975, NVT had 408 dealers of which 7% sold Triumphs exclusively NVT labor restrictions were strained and morale was low Estimated that the average Honda employee could assemble 2.3 bikes in the time an NVT assembler could make one

RBV includes all of the following except A. Depreciates slowly B. Makes competition obsolete C. Hard to copy D. Better than competition

B

Warren Buffet describes barriers to entry as an economic ______ A. Wall B. Moat C. Portfolio D. Shield

B

Where are the majority of profits in the CSD industry? A. Bottlers B. Concentrate producers C. Retail outlets D. Private equity

B

__________ is the most visible competitive force A. Supplier power B. Competitive rivalry C. Buying power D. Technology innovation

B

_________________ means you aren't exactly sure why the competition is performing better A. Murky thinking B. Causal ambiguity C. Super straddling D. Competitive intelligence

B

How does Coca-Cola maintain its profitability?

Barriers to new entrants - economic moat Brand equity allows Coke to claim a higher portion of value Contractual relationships with bottlers and retail outlets makes it hard for others to get in In 2009, for example, Coke contributed $540M in marketing, support payments to its top, bottler

Why is technology not one of the 5 Industry Competitive forces?

Because it doesn't affect everyone in the industry the same way or equally (same is true with government); competition goes well beyond the established industry rivals Customers, suppliers, potential entrants, and substitute products are all competitors in the fight for profits, competitors whose influence may be more or less important depending on the industry

Why are margins expected to expand?

Because of pricing power and cost reduction In spite of 1) rising commodity costs (i.e. packaging, PET, sugar) and the 2) large mix of lower-margin products

The test of substitutability

Can a unique resource be trumped by a different resource? I.e. the steel industry has lost a major market in beer cans to aluminum makers in the past 20 years because of easy substitution

Trends in beverage industry

Carbonated soft drinks (CSD) were the main beverage business for a long time, but people are opting for more drinks they perceive to be healthier; caffeinated drinks are also doing well It's a concentrated industry with a few large players who own many of the individual drink brands; economies of scale matter There is no such thing as average: the two brands of bottled water from the sames company had different growth rates.

Blue Ocean (videos)

Blue Ocean Strategy: 3.5 million copies sold, bestseller among 5 continents, 43 languages Competition is no longer at the center of strategic thinking; industry structures can be reshaped; creativity can be unlocked systematically; execution can be built into strategy All with a step-by-step process that's repeatable and can be institutionalized with analytic tools and frameworks Answers questions like: "What keeps you trapped in red ocean thinking?" "What do you do if your blue ocean becomes red?" "How can you create a sustainable blue ocean?" Crunching numbers, fighting for market share, and striving to beat competitors in your industry is a zero-sum game: when one wins, another loses As your competition becomes crowded and competition intensifies, your ocean becomes red: can try to compete harder, or think different (i.e. Apple creating new market space, Uber, etc.) Competition is wrong, you/you business and industry just need to know how to do it Blue ocean strategy teaches you how to think different (i.e. make competition irrelevant, create instead of compete), look at your industry from new perspective, break conventional boundaries and challenge the status quo ... Renée Mauborgne on lessons from Facebook, Uber and Amazon Gap between competing and creating; need tools for creating Steps to implementing blue ocean strategy: Road map: expand people's horizons and guide them Tools: market-creating with guidance on how to do it Humanness: inspire and build people's confidence Facebook's humanness being questioned as privacy under fire Uber's sexual harassment claims need to be addressed Amazon puts future of brick and mortars in question Amazon has tried to imitate companies who have created their blue oceans (i.e. Zappos, Google) Bought online shoe retailer Zappos, couldn't compete Its own search has many issues with keywords "Fire phone" faced a major challenge against iPhone Disruption is not the strategy for every firm Nondisruptive creation creates new market without displacing anyone by solving new problems or seizing new opportunity

What does fit drive?

Both competitive advantage and sustainability Virtuous cycle: consistency, reinforcement, optimization of activities with each other; "well-oiled machine" Locks out imitators: when activities complement one another, rivals will get little benefit from imitation unless they successfully match the whole system; difficult to replicate Fit has to do with the ways a company's activities interact and reinforce one another ... Fit locks out imitators by creating a chain that is as strong as its strongest link (When when activities mutually reinforce each other, competitors can't easily imitate them) Competitive advantage arises from fit across activities

Branding vs. private label

Brand loyalty is the "holy grail" - Significant advertising $ - Raise willingness-to-pay Threat from private label (13% of market) and growing

The British Motorcycle Industry at a Crossroads (reading)

By 1975, the collapse of the British motorcycle makers was nearly complete due to competition from Honda and other Japanese rivals, and a single British company, NVT, remained in operation The dominant dynamic in the global motorcycle industry during the 1960s and early 1970s was the rise of Japanese competitors, led by Honda British motorcycles had been popular around the world at least since the 1954 motorcycle-gang film The Wild One; however, by 1975, new Japanese machines such as the Kawasaki Z-1 easily topped the British bikes in performance tests, and technological changes had improved their handling characteristics British motorcycles were also known for their mechanical failures, particularly oil leaks At Honda, marketing personnel performed a commercial evaluation of any new product or feature and production engineers assessed its costs before design of the product or feature began (design) At NTV, the staff tended to focus on "pure" design considerations and would use non-standard parts and unusual fittings if necessary to improve performance, handling, or styling; projects were controlled informally, with virtually no paperwork (design) Honda carried out its global production of nearly 2 million bikes per year in four very modern, specialized plants in Japan with highly specialized machine tools (production of engine and frame parts) NVT produced its motorcycles in three factories which used general purpose, labor intensive machines were used to manufacture engine and frame parts (production of engine and frame parts) Assembly of finished product was the least automated and most labor-intensive stage of Honda's production process (assembly) It was estimated that the average Honda assembler could put together 2.3 motorcycles in the time it took the average NVT assembler to make one, in part since Honda made many simple, small-displacement motorcycles with few parts (assembly) Honda worked closely with its suppliers to reduce working capital and to colocate production, in some cases even allowing suppliers to set up operations within Honda plants (procurement of other components) NVT suppliers tended to use production techniques comparable to those of NVT itself, not the latest, high-volume production techniques (procurement of other components) In the United States in 1975, Honda and NVT had consumer advertising and promotion budgets of $10 million and $800,000, respectively Dealers: in 1975, Honda sold its motorcycles in the United States through 1,974 dealers, while NVT eventually had 400

How can the threat of new entrants limit industry profit potential?

By putting a pre-emptive cap on prices, limiting industry profit potential Profitable industry naturally attracts new entrants - eager to bring new capacity and win market share When the threat is high, profits cannot rise too high without attracting new competitors

How can you increase profitability?

By raising prices or lowering costs

___________ often try to imitate success without making necessary trade-offs, and fail A. Incumbents B. New entrants C. Straddlers D. Business robots

C

____________ ratios measure how well a company uses its assets to generate sales A. Profitability B. Solvency C. Efficiency D. Valuation

C

Inventory turnover

COGS / average inventory Higher inventory turnover ratios indicate that a company is more efficient at managing its inventory Inventory turnover varies dramatically by industry Grocers typically have higher ratios than specialty furniture or jewelry Grocery > consumer electronics Type of efficiency ratio

What factors do you believe are important when analyzing a beverage company?

Cash flow statements, distribution network, relationships with distributors, co-marketing/licensing agreements, impact of fuel prices, patents, trade secrets, IS/BS, product portfolio, category management, marketing position in category, WTP and price point, channel mix (retail, consumer, government, hospitality), SKU count, drink formats, management experience, unit sales YoY growth, SG&A costs, new product innovation, union vs. non-union workforce, manufacturing locations

The Coca-Cola Company to acquire Costa (August 2018; in-class article)

Coca Cola's acquisition of Costa coffee $5.1B and 4,000 retail stores Shifting portfolios toward faster-growing categories Leveraging their global distribution systems I.e. speciality coffee Keurig Green Mountain, Inc. agreed to acquire Dr. Pepper Snapple in January 2018 Synergy beyond just retail; helps diversify as Coke's main business remains flat ... Costa has nearly 4,000 retail outlets and is a leading coffee company in the UK Reasons for the acquisition: coffee expertise (can complement existing capabilities), diversifying into a new and fast-growing segment; China opportunity; new revenue sources for Costa; synergy possibilities Coke also has new alcoholic beverage in Japan

Compare Coca-Cola and Coca-Cola FEMSA (bottler) using the DuPont method

Coca-Cola (KO): - Profit margin: 20.2% (secret formula) - Asset efficiency: 0.37 - Leverage: 4.9 (more debt since they can probably borrow cheap and get great interest rate) - ROE: 37.7% (can fluctuate due to structural change like buying bottler) Bottler: - Profit margin: 7.6% (trucks, aluminum, expensive cost structure) - Asset efficiency: 0.66 (moves product faster) - Leverage: 2.1 - ROE: 11.2%

Data Center Market Powers Up to Meet Cloud Demand (in-class reading)

Companies are outsourcing data centers to third party providers (i.e. Amazon, Microsoft) instead of owning them themselves Companies are increasingly relying on data-center operators, such as Equinix Inc. and Digital Reality Trust Inc., who typically charge commercial customers for the power they use This story is about real estate companies that "house" data-center equipment for cloud companies and the 3 groups of data centers - Owned by non-technology companies (Home Depot, Disney, etc. how are becoming customers), which is becoming less common - Owned by outsourced real estate companies (Equinix, Digital Realty Trust), who let Cloud companies rent space - Owned by Amazon, Microsoft, IBM, other Cloud service providers (Evernote, Box, Dropbox, Google, Canvas) who are building their own facilities Companies like Amazon wants to expand before they build their own data centers, so they temporarily "rent" space from Equinix and Digital Realty Trust The industry measures capacity and growth by power usage (not sq ft of real estate, number of buildings, servers or other metrics) Equinix and Digital Realty Trust's power stems from "availability of power, network capacity and time to add space" Economies of scale might be very important (having the resources to build new facilities, spreading fixed costs over more units)

Why is ROE a popular measure?

Comparison across industries It allows for comparison of performance of dramatically different companies Comparison vs. investment alternatives

Porters 5 Forces applied to food and beverage industry

Competitive rivalry among existing firms: High - Beverage firms are constantly competing against each other to attain a larger market share; the industry's low growth rate also means that one firm's gain in market share would equal another firm's loss Customer bargaining power: Moderate - Large buyers (i.e. large retailers and restaurant chains) have the highest bargaining power due to their ability to purchase in bulk; smaller buyers do not have such bargaining power but may opt for cheaper substitutes Supplier bargaining power: Low - The bargaining power of suppliers is generally not effective as it is easy for firms to switch; however, suppliers with rare ingredients may be able to extract higher prices Threat of substitution: High - The low switching cost and large array of beverage choices poses a threat to beverage makers; increased awareness towards a healthier lifestyle had also deterred consumption of unhealthy beverages Threat of new entry: Low - Large investments in marketing and production lines are required to bring a new product to market; even so, it will not guarantee brand recognition such as those of big beverage firms

Complement prisoner's dilemma

Complementer: someone who makes your good and services more valuable Microsoft and Intel Cooperation: lowering prices

What are some supplier threats to industry profitability? (Porters 5 Forces)

Concentrated group of suppliers limits price comparisons High switching costs; difficult to "play" suppliers against one another Suppliers offer differentiated inputs, few substitutes (i.e. pharmaceutical makers) Suppliers not heavily dependent on industry for revenues Customers are smaller, diversified, unable to negotiate Suppliers can integrate forward (buyers backward) and compete directly

Holistically, how is profitability affected by Porters 5 Forces?

Constrained by substitutes and new entrants Bargained away by customers and buyers Competed away by rivals

Current ratio

Current assets / current liabilities Shows a firm's ability to pay off is current liabilities using its current assets Current ratio must be looked at vs. industry's norms to determine "high" or "low" ratio Facebook' current ratio more than doubled from 2011 to 2012 from 5.1 to 10.7, more than 3 times the industry average - The initial public offer added cash to the balance sheet - Shows that FB is well positioned to pay off its current liabilities Consumer electronics > grocery > airline Type of liquidity ratio

Which framework defined as: increase in labor productivity from an increase in production? A. Experience curve B. Productivity frontier C. Economies of scale D. Learning curve effect

D.

Willingness to pay

Determines the demand of units (Q) for every given price (P) Price where the buyer is indifferent on buying or not buying or not buying it Not necessarily what the buyer wants to pay or "fair" price Depends on multiple factors: income, tastes, substitutes, complements, context, preferences Highest price at which the buyer would choose to purchase the unit of the good

Warby Parker: Dave Gilboa & Neil Blumenthal (podcast)

Disrupted eyeglass industry in America that grew into billion dollar company Noticed iPhones were selling for ¼ the price of glasses in 2008; realized there was really only one glasses distributor Selling via online channels wasn't that popular at the time; built own ecommerce site Home try-on program: sent frames to people's homes... if they liked them would put prescription in and ship back Initially wanted to sell glasses for $45 for a $500 pair of glasses Skeptics thought price was indicator of quality After launching business, went 15 months before raising first round of funding PR, website, and initial inventory were only things at first -> GQ and Vogue interviews -> tens of thousands of frames being sold without adequate inventory

Blue ocean

Doing business where there is no competitor (all the industries not in existence today—the unknown market space) Create unknown market space; uncontested (doing business where there is no competitor) Make the competition irrelevant Create and capture new demand Break the value-cost trade-off Align the whole system of a firm's activities in pursuit of differentiation AND low cost

Compare concentrate producers with bottlers

Dramatically different operating margin of the concentrate producers (32%) and bottlers (8%) Coca-Cola is a concentrate producer (not bottler) Concentrate producers have higher operating (gross) margin, low COGS, high SG&A Bottlers have higher COGS, low SG&A, and lower operating (gross) margin

Experience curve

Drop in per-unit direct costs from process innovation (same output) First coined by Bruce Henderson, founder of BCG Process innovation, technology allows firms to "jump" to a new learning curve and lower per-unit cost at the same production level Includes all direct costs (i.e. labor, capital, distribution) "Experience-curve effects based on process innovation allow a firm to leapfrog to a steeper learning curve, thereby driving down per-unit costs" More productive because adding process, innovation, something different Lower per unit cost because of introduction of technology, innovation, process etc

Earnings growth and dividend % in the consumer staples sector

Earnings growth and dividend % will likely lag the consumer staples sector; merger and acquisition will continue EPS growth for beverages industry will likely lag the consumer staples sector Total debt-to-capitalization ratio increased significantly fund Despite current high levels, expected above-average margin expansion should support earnings per share (EPS) growth and free cash flow generation, helping mitigate investors' exposure to credit risk Beverages industry pay dividend yield 2.5% vs. 2.9% of wider sector

Why study economics?

Economic frameworks inform us of the relationships among key strategy variables: - Willingness to pay (demand elasticity) - Price (market equilibrium) - Cost (firm supply and expenses) Enables more informed strategic decisions: - Markets and market segments to target - Bases for competitive advantage - Internal organization - Firm boundaries If you know your company's economics, there is a better spot in knowing what you are good at and what you can do

Crafting blue-ocean strategies (actions)

Eliminate factors that industry has long competed on Raise factors well above the industry standard Reduce factors well below the industry standard Create factors that the industry has never offered

Bottlers

Extensive fixed (PPE) costs on balance sheet and COGS on income statement, high making costs

T/F There's no need to understand the break-points of the strategy

False... you should understand the break-points of the strategy; what is the turning point?

Where do financial ratios come from?

Financial statements (income statement, balance sheet) and financial market information (i.e. stock price from NASDAQ, London Stock Exchange, NYSE)

Enter/exit decisions (econ)

Firm will enter a market only when it expects the average market price to be higher than the minimum average cost Once in business, the firm should expand output until the marginal cost of an incremental unit rises to the market price

Soft drink trends

Focus on growing non-carbonated product lines Maintain soft drink volumes by introducing smaller-size cans Improve consumer perception of soft drinks by switching to natural sweeteners

Elastic and inelastic demand

For some goods, the curve is flat (elastic): the quantity that buyers want is highly sensitive to the price charged, and a small dip in price sparks a large surge in the quantity demanded; typical of goods such as butter that have close substitutes (e.g., margarine) An inelastic demand curve is steeper, indicating that consumers buy nearly the same amount of the good even if its price rises or falls significantly; necessities with few substitutes such as water tend to have inelastic demand curves

Opportunity cost

Forgone alternatives (what you didn't do) Benefit not received because the alternative choice was not taken

Oligopoly prisoner's dilemma

I.e. Coke and Pepsi don't consume on price; instead sweepstakes, bottle size, etc. Boeing and Airbus; Apple IOS/Android; Visa, Mastercard; DC, Marvel Comics; Intel, AMD Cooperation: raising prices As soon as one drops prices, other does too, so best to work together

Prisoner's dilemma

Idea that incentives work, drive behavior and can lead to being worse off If they both confess to a bloody murder, they each face ten years in jail If one stays quiet while the other snitches, then the snitch will get a reward, while the other will face a lifetime in jail If both hold their tongue, then they each face a minor charge, and only a year in jail There is only one Nash-equilibrium solution to the prisoner's dilemma: both confess

Is price of elasticity of demand a perfect measure?

No, it's potentially imperfect measure because: - Super hard to measure on people - Slope varies at different points of curve (not a straight line) - The % change from 10 to 15 and 15 to 10 (both 5 units) is quite different on a percentage basis

Barry Nalebuff videos

Game theory is the science of strategy Anticipating how others will respond to what you're doing and realize that you can actually change what they're doing (and how they react) Traces back to Oskar Morgenstern and John von Neuman (1940s) Originated with zero-sum games (the notion that I'll destroy you before you destroy me) John Nash then created cooperative games (they don't just have to be zero-sum) Nash equilibrium as a resting point of the game (what I'm doing is best given what I think you're doing and vice versa) General strategies can provide happy endpoint (but not always good for society) ... Prisoner's Dilemma We are often focused on competitive strategy should also focus on complementors (someone who makes your goods and services more valuable rather than less) We normally imagine companies are worried about their rivals undercutting them and stealing market share, but the problem with Intel and Microsoft is each of them is charging too high a price The collusive outcome in the case of compliments is actually lower prices, more sales, higher profits, and happier customers Strategies and game theory apply just as much to creating cooperative outcomes as it does to thinking about ways to beat other parties When working on a cooperative outcome, you also care about how much you are going to capture "People cooperate to create a pie then compete to divide it" How can I work together to do something that will benefit both of us (but particularly benefit me) ... Game Theory and Poker Matched all in after realizing opponent was betting on his dejection and not his cards Strategic dominance occurs when one strategy is better than another strategy for one player, no matter how that player's opponents may play

Which has greater profitability variation: industry-level effects vs. within-industry level efffects

Greater profitability variation within-industry effects (30-45%) vs. industry-level effects (10-20%); individual performance matters There's more variability within an industry itself than between different ones I.e. pharmaceutical companies may have higher profit margins than grocers, but pharmaceuticals can have dogs and grocers can have great profit margins

Gross margins in beverage industry

Gross margins are holding at 55%+ from pricing power, and cost reductions Gross profit margin of 55.8% in the fourth quarter of 2017 - Slightly down from last year - Strong pricing power, cost cutting, despite rising raw material costs Growth in international markets supports gross margin expansion - Revenues-per-unit sold are generally lower in emerging markets - Beverage experience a favorable shift in product mix, wider margin carbonated soft drinks

What is strategy? (definition)

Having a sustainable competitive advantage by doing your thing really well, creating an economic moat, and making trade-offs (you do you); value

Honda's economy of scale

Honda used a mass-production, mass-market, low-cost approach for early success with motorcycles in the US Start making more of same thing, and average cost decreases as a result

Business unit (BU) strategy

How to compete, usually talking only about 1 business unit I.e. Pepsi has 2 (snack, beverage)

Why would Tesla build a gigafactory that has $5 billion in fixed costs?

If demand for electric cars continues to increase, the average fixed cost per unit decreases -> economies of scale

If net income were to stay the same, what are some factors that could affect the total ROE?

Increase financial leverage (debt), asset turnover

Porters Five Forces is useful in analyzing what type of profitability?

Industry NOT firm profitability (individual companies), which depends on competitive positioning Systematically identify opportunities and threats Anticipate changes in industry; leverage to firm's benefit

Should a start up focus on the inputs or the outputs of success?

Inputs -- need to know what causes success I.e. number of proposals, pitches, initial clients

Test of inimitability

Is the resource hard to copy? Physically unique: mineral rights, patents, wonderful real estate location Path dependent: takes time (unique and scarce because of all that has happened along the path taken in their accumulation -> competitors cannot go out and buy these resources instantaneously, but must build them over time; brand loyalty) Causal ambiguity: hard to figure out ... Economic deterrence, occurs when a company preempts a competitor by making a sizable investment in an asset (competitor could replicate the resource but, because of limited market potential, chooses not to) Some resources are hard for rivals to copy because they're physically unique (i.e. a desirable real estate location) others must be built over time, such as Gerber's brand name for baby food

How should you track industry structures, and how have they changed? (Porters 5 Forces)

It is important to pay attention to industry conditions over the long-term (business cycle), not a single year While industry structures do not change dramatically, they are continually evolving Examples of industry shifts include: - Industry consolidations through mergers and acquisitions - More extensive global supply chains; extensive outsourcing - Billion $ IT investment, locking out smaller firms - Expiring patents, creating a flood of generic competitors - Technology creating new substitutes - Industries overlapping (telecom, technology, media)

Leading and lagging indicators

Leading indicators tend to be operational or marketing metrics (i.e. clicks per view, net new consumers, revenue per user of new products) Lagging look in past vs. leading indicators try to coordinate with future I.e. number of applications for a school is a leading indicator of a school Financial ratios are just the beginning, as they are often lagging indicators If you want to glimpse into the future potential performance, need to look at leading indicators (operational, marketing, customer, employee etc). Executive decision makers often look at lagging indicators, possibly because they lack real-time data or a reliable way to make that data useful

Threats to industry profitability from customer bargaining power (Porters 5 Forces)

Limited number of buyers leading to volume discounts (group is concentrated or purchases in volumes that are large relative to the size of a single vendor) Undifferentiated products generate no customer preference (if buyers believe they can always find equivalent suppliers, they tend to play one vendor against another) No switching costs: easy for customers to try new entrants' offering Suppliers can integrate forward and compete directly

Southwest's business model

Limited service, frequent and reliable departures, lean and highly productive ground and gate crews, high aircraft utilization, low ticket prices, short-haul (point-to-point, mid-sized cities, secondary airports) Everything originates from only having one kind of plane -> more efficiency, consistency, faster turn-around, etc.

Why would a restaurant stay open an extra 2 hours if it's only 1/3 full

Lots of FC (rent, chef salary) which are "sunk" As long as revenue > MC (food, drinks) should stay open

Honda created a virtuous cycle of activities which helped them to consistently

Lower costs, offer low prices, and gain market share

Hats of writing

Madman (brainstorm): "We need more ideas" Architect (structure): Logical, flows, not repetitive "Let's group the ideas" "Which ideas are most important" Carpenter (write): "Let's draft the argument; put words on paper" "Can we be more persuasive" Judge

How did Honda compete differently from traditional motorcycle companies? (i.e. Harley Davidson, British motorcycles)

Marketing: targeting the leisure market (i.e. outdoor stores) Quality: offering higher reliability; established dealer network Prices: offering lower prices because of economies of scale

Slope of the demand curve

Measures how responsive buyers are to the change in prices, and is crucial to the way markets adjust

M&A (merger and acquisition) in the consumer staples sector

Merger and acquisition (M&A) activity likely to continue Shifting portfolios toward faster-growing categories Leveraging their global distribution system I.e. specialty coffee Keurig Green Mountain, Inc. agreed to acquire Dr. Pepper Snapple Group in January 2018

Is operational effectiveness enough to achieve superior profitability?

No, it's necessary but not sufficient Competitors can quickly imitate management techniques and new technologies using best practices (imitation -> benchmarking becomes the norm) The more benchmarking companies do, the more they look alike - The more that rivals outsource activities to efficient third parties, often the same ones, the more generic those activities become - Operational effectiveness initiatives unwittingly draw companies toward imitation and homogeneity - With consolidation the competitors left standing are often those that outslated others, not companies with real advantage

Does increasing ROE indicate an increase in profitability?

Not necessary... could be high in debt

Southwest (basics)

Only 1 kind of plane; all pilots can fly all planes all parts, manual same, does 1 thing and is really good at it Focus on profitability over growth; have been profitable ever since and have maintained employee wages Standardization (no first class, customers are treated the same) Never cut wages or had layoffs Dropped costs by 50% Quick turnaround times Mid-sized cities Smaller airport charges less Capital structure dictates strategic position and how yoiu make money Competed against cars (able to sell itself as affordable) ... Offers short-haul, low-cost, point-to-point service between midsize cities and secondary airports in large cities Avoids large airports and does not fly great distances Frequent departures and low fares attract price-sensitive customers Fast turnarounds at the gate of only 15 minutes keeps planes flying longer hours than rivals and provides frequent departures with fewer aircrafts Does not offer meals, assigned seats, interline baggage checking, or premium classes of service Automated ticketing at the gate encourages customers to bypass travel agents, allowing Southwest to avoid their commissions A standardized fleet of 737 aircraft boosts the efficiency of maintenance A full-service airline could never be as convenient or as low cost

Is operational effectiveness the same as strategy? Explain why or why not.

Operational effectiveness is NOT strategy Operational effectiveness means performing similar activities better than rivals perform them Strategic positioning means performing different activities from rivals' or performing similar activities in different ways A sustainable strategy will be a set of reinforcing activities A company can outperform rivals only if it can establish a difference that it can sustain; strategic positions should have the horizon of a decade or more, not a single planning cycle

How is operational efficiency related to the productivity frontier?

Operational efficiency can incrementally optimize value and cost, but eventually there will be trade-offs - Productivity gain can move to the edge of the frontier - Japanese firms gained enormous market share in the 1980s - 1990s from US leaders, largely through operational efficiency (practices such as total quality management and continuous improvement) ... OE competition shifts the productivity frontier outward, effectively raising the bar for everyone, but it leads to relative improvement for no one

You can get in your competitor's head by evaluating a competitor's strategy on what two levels?

Organizational and individual Who is the decision maker and what are their incentives? War games, red team: role play "as if" you were the competitor

Overconfidence

Overestimating own capacities and likelihood of success, while underestimating others I.e. yeah, but I will be able to pull it off; WeWork values 47 billion but actually ⅓

What were the inputs which led to Honda's success in North America? In other words, what caused success?

Product Process/productivity Sales and distribution Promotion (nicest people) Leadership

ROE (video)

ROE is a measure of financial performance that tells you how efficient a company is at generating profits Better ROE = more efficient A good return on equity is attractive to investors Equity is the amount of cash received from the original investors in exchange for shares ROE is considered a measure of how effectively management is using a company's assets to create profits A good or bad ROE will depend on what's normal for the industry or company peers A good rule of thumb is to target an ROE that is equal to or just above the average for the peer group As a shortcut, investors can consider a return on equity near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor A high return on equity might not always be positive An outsized ROE can be indicative of a number of issues—such as inconsistent profits or excessive debt As well, a negative ROE, due to the company having a net loss or negative shareholders' equity, cannot be used to analyze the company; nor can it be used to compare against companies with a positive ROE Sometimes an extremely high ROE is a good thing if net income is extremely large compared to equity because a company's performance is so strong However, more often an extremely high ROE is due to a small equity account compared to net income, which indicates risk Could be due to inconsistent profits, excess debt (since equity is assets - debt), and negative net income (and negative shareholder equity) Because shareholders' equity is equal to a company's assets minus its debt, ROE could be thought of as the return on net assets

Ratio analysis (video)

Ratio analysis is the quantitative analysis of financial information from a company's financial statements or share price Ratios are key to financial analysis, as they provide input for evaluating and comparing a company to its peers, or to an industry benchmark Ratios provide the vital signs used to measure corporate health, allowing investors to drill down to specific aspects of the company's operational status I.e., the company may be profitable, but certain ratios could indicate that it doesn't manage inventory well, or that it has cash flow issues

Pitfalls of financial ratios

Ratios can be manipulated (i.e. increase in leverage can boost ROE; delay expenses; buy back shares to increase EPS) Ratios can be heavily influenced by short-term, one-time (historical/past) events - I.e. if EPS is abnormally low, P/E ratio will be abnormally high because it is based on expectations of future earnings - I.e. lawsuits, layoffs, and other uncommon events can skew ratios; to address this analysts may calculate and "adjusted" ratio Different industries have different norms for ratios (need to compare with industry) - I.e. utilities will be much more levered than technology companies Different industries emphasize different ratios - Leverage is used differently in banking than other industries - Some industry-specific ratios like sales per square foot (retail) or revenue per user (social media) Careful when comparing companies - needs to be apples-to-apples, similar industry, similar customer/product mix, similar scale and scope Look at trends over time. Just because a company had a great quarter, does not mean they are consistently profitable

Competitive advantage

Relative to competition, wide wedge between customers' willingness to pay and cost of product (profit) - Must be unique and valuable; no one else can replicate it - From all activities in company working in harmony - Comes from insight (Honda A) and trial-and-error (Honda B)

Value captured by the firm

Revenue or price - cost (SG&A and COGS) (Profit)

SG&A expenses

SG&A costs as a percentage of sales declined in 2016 and reminded fairly unchanged throughout 2017 - Increases due to the consolidation of bottling companies at both PepsiCo (in February 2010) and Coca-Cola (in October 2010) = Decreasing because of multi-year productivity improvement programs helped expenses: targeting global supply chain optimization, marketing effectiveness, expense leverage, data and information technology system standardization, and bottling integration synergies Multiple factors can work together - or in conflict; beware of the mono-causal explanation

Supply curve (from reading)

Supply curve: how much of a good a supplier will choose to provide at each price A firm's supply decision really consists of two decisions: whether to compete in the market at all (the long run is any time horizon long enough to permit entry and exit decisions) and of how much to produce in light of current market conditions, given that the firm is in the market A firm's decision about how much to supply in the short run starts with its costs Where the price elasticity of supply is high, the supply curve is nearly flat and a small increase in price evokes a lot of new output (i.e. the supply of team t-shirts is far more elastic than the supply of hotel rooms) A supply curve can be more elastic in one region than in another (i.e. becomes inelastic or steeper as firms in the industry run into capacity constraints)

Creative destruction

Schumpeter describes wave of innovation and "creative destruction;" nothing lasts forever Economist Joseph A. Schumpter first recognized this phenomenon in the 1930s; he described waves of innovation that allow early movers to dominate the market and earn substantial profits; however, their valuable resources are soon imitated or surpassed by the next great innovation, and their superior profits turn out to be transitory Schumpeter's description of major companies and whole industries blown away in a gale of "creative destruction" captures the pressure many managers feel today Banking on the durability of most core competencies is risky... most resources have a limited life and will earn only temporary profits

Confirmation bias

Seeking information which confirms what a decision-maker already believes I.e. see, the talk show host just proved my point

Needs-based positioning

Serving broad needs of few customers Based on most or all of the needs of a particular group (offers a lot of services to 1 type of customer) Same customer can have different needs based on occasion I.e. Ikea targets young furniture buyers who want style at low cost: uses a self-service model based on clear, in-store displays: designs its own low-cost, modular, ready-to-assemble furniture, offers in-store child care and extended hours I.e. Bessemer Trust Company targets families with a minimum of $5 million in invest able assets who want capital preservation combined with wealth accumulation; assign sophisticated account officer for every 14 families -> configure its activities for personalized service (i.e. investment management and estate administration, oversight of oil and gas investments, and accounting for racehorses and aircrafts, hold meetings on yacht/estate); Citi, on the other hand, mainly issues loans ... Arises when there are groups of customers with differing needs, and when a tailored set of activities can serve those needs best A variant arises when the same customer has different needs on different occasions or for different types of transactions Differences in needs will not translate into meaningful positions unless the best set of activities to satisfy them also differs

Demand curve

Shows how many (Q) would be purchased at a price (P) Summarizes the buyer's WTP for various quantities of a good (& specifies the Q of a good that the individual would purchase at each P) I.e. at $1, buying 5 Slopes downward since buyers are normally willing to pay less and less for additional units of a good as they buy more and more

Supercell's business model

Small company: small teams, avoids bureaucracy, fewer processes, independence and control Core pillars (game play and social): wide customer brace, millions of tasks forces People first: best people, bigger impact; finances second; selective in releasing games Global games company: universal popularity, wide customer base Virtuous cycle of small teams, mindset, long-lasting company, etc.

Beverages Industry Survey (reading)

Soft drink giants are likely to keep shifting portfolios toward higher growth categories The three fastest-growing beverage categories in the U.S. (in order) were value-added water, ready-to -drink coffee, and energy drinks in 2018 Shifting consumer tastes in favor of lower calorie, less sugary, uncarbonated, and natural ingredients continue to drive beverage consumption growth trends The pivot toward healthier libations has come largely at the expense of carbonated soft drinks and fruit beverages, the two categories to post the largest declines in U.S. sales volume in 2018 Beverage makers will likely continue to pursue merger & acquisition opportunities in order to shift their portfolios toward faster-growing categories CFRA also expects beverage producers to offset carbonated soft drink volume declines by introducing smaller-size bottles and cans, while slowly improving consumer perception of soft drinks by switching to natural sweeteners and offering a wider variety of diet and zero calorie product We see improved demand for natural foods and non-carbonated beverages as key sales drivers as consumers continue to seek healthier products Soft drink sales continue to fall - Younger consumers continue to lower calorie and sugar intake, as evidenced by the fact that two of the three fastest-growing drink categories are value-added water and bottled water, while carbonated soft drinks, sports drinks and fruit beverages are among the slowest growing In the near term, we think manufacturers will look to address concerns surrounding artificial sweeteners in the U.S., which have led to declines in diet soda volumes over the past few years To support growth, we see manufacturers increasing offerings of smaller package sizes, which produce greater profitability per unit volume Domestic non-alcoholic unit sales volume growth will improve on increased advertising and promotional spending and new product launches Longer term, we think volume trends will benefit from increased penetration into non-traditional markets and growing consumer demand for non-alcoholic products, which should continue to raise non-alcoholic beverage per-capita consumption levels The two largest revenue contributors within the food and beverage industry are Packaged Foods & Meats at 53.2% and Soft Drinks at 24.0% Despite its relatively miniscule revenue contribution, distillers/vintners had the highest operating profit, followed by those of soft drink companies at 21.2% Competitive rivalry among existing firms: High - Beverage firms are constantly competing against each other to attain a larger market share; the industry's low growth rate also means that one firm's gain in market share would equal another firm's loss Customer bargaining power: Moderate - Large buyers (i.e. large retailers and restaurant chains) have the highest bargaining power due to their ability to purchase in bulk; smaller buyers do not have such bargaining power but may opt for cheaper substitutes Supplier bargaining power: Low - The bargaining power of suppliers is generally not effective as it is easy for firms to switch; however, suppliers with rare ingredients may be able to extract higher prices Threat of substitution: High - The low switching cost and large array of beverage choices poses a threat to beverage makers; increased awareness towards a healthier lifestyle had also deterred consumption of unhealthy beverages Threat of new entry: Low - Large investments in marketing and production lines are required to bring a new product to market; Even so, it will not guarantee brand recognition such as those of big beverage firms The U.S. bottled water market showed strong growth in terms of volume and revenues in the past three years Some cities had successfully implemented soda taxes, despite heavy opposition from soda makers The U.S. beverage industry is generally divided into franchise or syrup companies and bottlers Some segments of the beverages industry are quite concentrated, largely due to strong brand names, successful product development, and acquisition activity Brand owners, such as Coca-Cola and PepsiCo, generally own both the beverage trademarks and the secret formulas for their concentrates Bottlers are generally tasked on manufacturing, selling, and distributing products under brand names licensed from brand owners in an exclusive territory As with food product companies, beverage companies enhance pricing power by fostering customer loyalty through brand awareness Also similar to food product companies, beverage companies distribute their products through the use of direct-delivery systems and warehouse system The primary retail distribution channels for beverages are supermarkets, mass merchandisers, vending machines, convenience stores, fountain accounts (such as restaurants or cafeterias), and other outlets, which include small groceries, drugstores, and educational institutions Just like the food product industry, barriers to entry are relatively low into the U.S. beverage industry while very high on a larger, international scale

Strategy setting is not a one-time event, it's a process combining

Strategic leadership (setting direction through vision, mission) Strategic planning (tops down analysis and planning) Scenario planning by asking "what if" questions Adapting strategy to emerging trends, information, technology Blending foresight with judgement

Honda's success has elements of both

Strategy and management

Strategy vs. tactics

Strategy is long-term, spanning 1-2 business cycles or 7-15 years Tactics are short-term

Threat to industry profits from substitutes (Porters 5 Forces)

Substitute offers attractive price-performance trade-off (either better performance and/or better price) Low switching cost makes it easy for customers to abandon incumbent

How would you describe the changes in Coca-Cola's supply chain?

Supply chain; one person's price is another person's cost If strategy is over the long-term (1-2 business cycles); business models should be flexible not static Determine how much vertical integration you want, and why - Flexibility to forward/backward integrate to capture more value - Ability to apply leverage to bottlers There are a range of ownership structures; opportunity to weigh relative returns/risks (i.e. Coke may pursue an asset-light approach) - Owning (all or parts) your supply chain is not necessarily beneficial; depends on the need to control responsiveness, risk, etc. As market growth slows, expect consolidation (cost reduction)

Prerequisites for blue ocean strategy

Technology is not a prerequisite Blue oceans often come from existing industries (often from incumbents) Never use competition as a benchmark Focus on differentiating and lowering cost The new category creates scale Incumbents are often not able to respond - Not as flexible - Incumbent brand is anchored in red ocean

What does strategy factor into?

The external environment Internal routines and activities Competitive position The scope and span of the firm

What Is Strategy? (reading summary)

The myriad activities that go into creating, producing, selling, and delivering a product or service are the basic units of competitive advantage Operational effectiveness means performing these activities better (faster, or with fewer inputs and defects) than rivals Companies can reap enormous advantages from operational effectiveness, as Japanese firms demonstrated in the 1970s and 1980s with such practices as total quality management and continuous improvement From a competitive standpoint, the problem with operational effectiveness is that best practices are easily emulated As all competitors in an industry adopt best practices, the productivity frontier (the maximum value a company can deliver at a given cost, given the best available technology, skills, and management techniques; can apply to individual, group, or company activities) shifts outward, lowering costs and improving value at the same time Such competition produces absolute improvement in operational effectiveness, but relative improvement for no one The more benchmarking that companies do, the more competitive convergence you have: that is, the more indistinguishable companies are from one another Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company; performing different activities from rivals, or performing similar activities in different ways Sustainable competitive advantage: need a lot of things working together Three key principles underlie strategic positioning: Strategy is the creation of a unique and valuable position, involving a different set of activities; strategic position emerges from three distinct sources: - Serving few needs of many customers (Jiffy Lube provides only auto lubricants) - Serving broad needs of few customers (Bessemer Trust targets only very wealthy clients) - Serving broad needs of many customers in a narrow market (Carmike Cinemas operates only in cities with a population under 200,000) Strategy requires you to make trade-offs in competing - to choose what not to do - Some competitive activities are incompatible; thus, gains in one area can be achieved only at the expense of another area - For example, Neutrogena soap is positioned more as a medicinal product than as a cleansing agent; the company says "no" to sales based on deodorizing, gives up large volume, and sacrifices manufacturing efficiencies - By contrast, Maytag's choice to extend its product line and acquire other brands represented a failure to make difficult trade-offs: the boost in revenues came at the expense of return on sales Strategy involves creating "fit" among a company's activities - Fit has to do with the ways a company's activities interact and reinforce one another - For example, Vanguard Group aligns all of its activities with a low-cost strategy; it distributes funds directly to consumers and minimizes portfolio turnover - Fit drives both competitive advantage and sustainability: when activities mutually reinforce each other, competitors can't easily imitate them - Continental Lite tried to match a few of Southwest Airlines' activities, but not the whole interlocking system, leading to disastrous results Employees need guidance about how to deepen a strategic position rather than broaden or compromise it; about how to extend the company's uniqueness while strengthening the fit among its activities; this work of deciding which target group of customers and needs to serve requires discipline, the ability to set limits, and forthright communication; clearly, strategy and leadership are inextricably linked

Dominant strategy

The strategy which earns the player a larger payoff than any other, regardless of what the other party does I.e. GM's dominant strategy varies by geography (China as expensive Cadillac/Buick, US trucks)

The stronger the Porters 5 forces, the _______________ the industry's _______________

The stronger the Porters 5 forces, the lower the industry's profit potential

Considerations of game theory

Too often, managers gets a calcified view of their industry and positioning "that's the way we always do it" Managers get married to our own ideas (think: heuristics) - without testing assumptions Remember. your competitor, suppliers, and customers have a vote. Need to think "what if" Framing out the relevant variables is an important process step in thinking through the problem This is a way to do scenario planning - understanding the breadth of potential outcomes - so you are not surprised Understand your competitor's (and supplier's, and customer's) economics. Looking at their financial ratios - what does it tell you? What are their strengths and weaknesses? In B2B (business-to-business), it's pretty common for you to know your competitors by name. The deals are larger, less frequent, and quite involved. For example, Philips, Siemens, GE people who sell MR/CT scanners to hospitals all know each other.

Financial leverage ratio

Total assets / total equity Critical ratio for analyzing companies which take on debt to make large, long-term investments If the ratio is too high, the company could become insolvent before paying back the debt Shows the long-term solvency of a company, taking into account long-term debt and equity investments Grocery > airline (American has a lot) > consumer electronics Type of solvency ratio

How does Coke implement its strategy globally?

Treat each market differently The overarching strategy may have differences in implementation by geography (i.e. approach to Spain vs. North America bottlers) Industry structure of markets vary (i.e. # of bottlers)

T/F You should be suspicious of single, overly precise answers to complex problems

True

What role did management play in Honda's success entering the North America market for motorcycles? (Case A and British Motors)

Understand business environment and landscape (built lead capacity and on experience from Japan) - Undeserved segment - Productivity gains -- Learning curve and business model

Practices to improve your competitive readiness

Understand your rivals' economics - Willingness to pay, price, costs Look forward, not backward - What will the competitor do next? Seek supporting evidence Put yourself in their head - Sometimes we can overestimate the competition's readiness, speed, ambition, efficiently to react Synthesize threats and opportunities - Data is collected haphazardly; needs combination and action Be willing to act more boldly - I.e. Apple's "switch campaign"

Threat to industry profits from rivals (Porters 5 Forces)

Undifferentiated products serve as perfect substitutes Low switching costs incentivize buyers to shop through prices Perishable products with short shelf-life encourage discounting Excess industry capacity adjusts easily to increased demand Many, similarly powerful competitors with no dominant leader High fixed-to-variable cost ratio incentivizes market share gains Low industry growth rates focus competitors on market share High barriers to exit so firms tolerate low profitability

Valuation ratios

Used to value a company's equity, and are often used by analysts to determine if a company is a buy, sell or hold Provide relative measure of a company's value (what it measures) Shareholders' primary concern is a company's market value (why company cares) May indicate future growth prospects of an industry (how it affects an industry) I.e. EPS, P/E

Are companies more likely to have competitively valuable resources or a mixed bag of resources?

Usually it's a mixed bag of resources: need to combine them in unique and value-add ways More likely, they have a mixed bag of resources: some good, some mediocre, and some outright liabilities, such as IBM's monolithic mainframe culture Valuable resources must still be joined with other resources and embedded in a set of functional policies and activities that distinguish the company's position in the market - afterall, competitors can have core competencies too

Name and classify the frameworks

Value (and value system): value creation (WTP, price, cost) and capture, value (supply) chain analysis Supply and demand: economic principles, industry structure analysis (forces) Internal view: experience and learning curve, ratio analysis, virtuous cycle or business model, RBV (strategic resources), core competencies Cost analysis (revenues, COGS, GP, SGA, operating income) Game theory

Competing on Resources (summary)

What gives your company a competitive edge? Your strategically valuable resources: the ones enabling your enterprise to perform activities better or more cheaply than rivals These can be physical assets (a prime location), intangible assets (a strong brand), or capabilities (a brilliant manufacturing process) I.e. Japanese auto companies have consistently excelled through their capabilities in lean manufacturing Strategically valuable resources have five characteristics, say Collis and Montgomery: 1) They're difficult for rivals to copy 2) They depreciate slowly 3) Your company—not employees, suppliers, or customers— controls their value 4) They can't be easily substituted for 5)They're superior to similar resources your competitors own To keep your edge sharp, build your strategies on resources that pass these five tests Regularly invest in those resources and acquire new ones as needed, as Intel did by adding a brand name—Intel Inside—to its technological resource base

Corporate strategy

Where to compete

While operational effectiveness is about achieving excellence in ______________ activities or functions, strategy is about ______________ activities

While operational effectiveness is about achieving excellence in individual activities or functions, strategy is about combining activities Fit: the whole matters more than any individual part, and competitive advantage grows out of the entire system of activities

Test of appropriability

Who captures the value that resource creates? A "rainmaker" or star salesperson is not a very secure resource If your strategically valuable resource is three people, you're vulnerable ... Resource value is controlled by your company Your firm (not individual employees, suppliers, distributors, or customers) keeps the lion's share of profits generated by the resource Your company does not lose a critical resource when a key employee leaves

Consumer surplus

Willingness to pay - revenune/price

Did Honda create more value?

Yes Willingness to pay might have increased Mass production -> cost per unit decreased -> lowering of prices and increase in quantity (or just a larger profit section)

Is industry structure fairly stable?

Yes, and it tells a great deal about the business environment (suppliers, competitors, buyers, etc.)

Strategically valuable resources are "valuable" relative to competition, in _________________________

a specific context Resources cannot be evaluated in isolation, because their value is determined in the interplay with market forces A resource that is valuable in a particular industry or at a particular time might fail to have the same value in a different industry or chronological context

Creating a new market provides immediate ____________ to imitation

barriers Able to generate scale economies very rapidly, imitation may require companies to make changes to their whole system of activities, cognitive barriers (when a company offers a leap in value, it rapidly earns brand buzz and a loyal following in the marketplace)

The essence of the job of the strategist is to cope with ___________

competition Managers tend to view competition too narrowly (competition goes well beyond the established industry rivals

Willingness to pay determines the ___________ for every ________________

demand of units (Q) for every price (P)

Many important resources are (physical/intangible/capabilities)

intangible (i.e. brand, culture)

Each industry has a distinctive structure that shapes ___________ and ___________________________

interactions and long-term profitability

In the short-run, firms decide how much to supply based on their

marginal costs Many capital-intensive firms have lost market share and profits because they set price to "cover fixed costs" during industry downturns

For each step in the supply chain, one company's buyer is another company's

supplier--each one trying to maximize their profit Firms can forward (concentrate buys bottler) / backward (bottler buys concentrate producer) integrate to capture more value Supply chains are typically global, complex, and overlapping

Changes in price and volume need to be interpreted ____________

together