Kim mgmt 493 test 2
Elements of ROR
- COGS / revenue - R&D / revenue - selling, general, admin exp / revenue
Questions When Formulating Business Strategy
- How should we compete? - Which segments? - What customer needs will we satisfy? - Why do we want to satisfy them? - How will we satisfy our customers' needs?
Profitability ratios used in accounting profitability
- ROIC - ROE - ROA - ROR
Experience-Curve Effects
improvements to technology and production processes
Product Features
increase the perceived value of the product or service offering
Organizational Inertia
incumbent firms have formalized processes and structures
Economic Incentives
incumbent firms must defend their position
Innovation Ecosystem
incumbent firms rely on certain suppliers, buyers, complementers
Economies of Scale Definition
the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time
Cost
the firm's total cost to produce a product
Red Oceans
the known market space of existing industries
Multidimensional Perspective for Assessing Competitive Advantage asks
- What is the firm's accounting profitability - How much shareholder value does the firm create? - How much economic value does the firm generate?
Business-Level Strategy
- about positioning a company in its competitive environment - goal-directed actions to achieve competitive advantage in a single product market - require a choice: strategic trade-offs
Accounting Profitability helps assess competitive advantage by:
- accurately assessing firm performance - comparing firm performance to competitors/industry average
Complements
- add value to a product or service when they are consumed in tandem - marketing/promotions - newness/exclusiveness
Aspects of Introduction Stage
- barriers to entry are high - strategic objective: market acceptance and future growth
Market Scope
- broad market (broad scope) - narrow market (focused scope)
Incremental Innovation
- builds on established knowledge - results from steady improvement - existing technologies - existing markets
How to respond to disruptive innovation
- continue to innovate - guard against disruptive innovation - disrupt yourself (start your own DI, reverse innovation)
What are the underlying concepts that guide the 3 dimensions of corporate strategy?
- core competencies - economies of scale - economies of scope - transaction costs
Drivers that Keep Costs Low
- cost of input factors - economies of scale - learning-curve effects - experience-curve effects
Aspects of Decline Stage
- demand falls rapidly - innovation efforts cease - if a breakthrough emerges, it leads to a new industry or resets the life cycle - strong pressure on prices
Aspects of Growth Stage
- demand increases rapidly - product/service standards emerge
Market Capitalization
- dollar value of total shares outstanding - number of outstanding shares x share price
Why do incumbent firms tend to focus on incremental innovation?
- economic incentives - organizational inertia - innovation ecosystem
Platform Business
- enables interaction between producers and consumers - enables matches among users - provides infrastructure and sets governance conditions
Radical Innovation
- entirely new knowledge base or recombination of existing knowledge - new technologies - new markets
Four Strategic Options to Pursue in the Decline Stage
- exit (bankruptcy/liquidation) - harvest (reduce further investments) - maintain (support at a given level) - consolidate (buy rivals)
Limitations of Accounting Data
- historical and backward looking - does not consider off-balance sheet items (ex: pension obligations, operating leases) - focuses mainly on tangible assets (which may not be most important)
Types of Innovation
- incremental - radical - architectural - disruptive
Pipeline Business
- linear transformation through the value chain - R&D, then design, then manufacture, then sell
Risk Capital
- money provided for an equity share - cannot be recovered if a firm goes bankrupt
Architectural Innovation
- new markets - existing technologies
Disruptive Innovation
- new technologies - existing markets
Aspects of Maturity Stage
- only a few large firms remain - economies of scale - process innovation has reached a maximum - demand is driven by replacement or repeat purchases - market has reached maximum size - industry growth is zero or negative
Players in a Platform Ecosystem
- owner - providers - producers - consumers
3 Drivers that Increase Perceived Value
- product features - customer service - complements
Choose a business strategy that:
- provides a strong position that attempts to maximize economic value creation - is effectively implemented
Blue Ocean: Increase Perceived Consumer Benefits
- raise: which of the factors should be raised - create: which factors should be created
Aspects of Shakeout Stage
- rate of growth declines - firms begin to intensely compete - price is an important competitive weapon
Goals of Cost Leadership Strategy
- reduce cost below competitors - offer adequate value - reduce prices for customers - optimize the value chain for low cost
Advantages of the Platform Business Model
- scale more efficiently by eliminating gatekeepers - they unlock new sources of value creation and supply - benefit from community feedback
Strategic Position
- source of competitive advantage: differentiation or low cost leadership
Tools used in accounting profitability
- standardized accounting metrics - form 10k statements - profitability ratios
Limitations of Shareholder Value Creation
- stock prices can be volatile - macroeconomic factors affect stock prices - stock prices can reflect the mood of investors
Generic Business Strategies have 2 important dimensions
- strategic position - market scope
The Industry Life Cycle; Over Time:
- the number and size of competitors change - different types of consumers enter the market - supply and demand of the market change - different competencies are needed for the firm to perform well
Opportunity Cost
- the value of the best forgone alternative use of the resources - the sum of the best forgone values of each resources
Differentiation Strategy
- unique features that increase value of goods and services - adding value to products and services can increase costs - competitive advantage achieved when: value - cost > competitors
Blue Oceans represent
- untapped market space - creation of additional demand - opportunities for highly profitable growth
Limitations of Economic Value Creation
- valuing a consumer good isn't easy - the value of a good changes depending on the consumer and time period - to measure firm-level competitive advantage, we must estimate economic value created for all products and services offered by the firm
Boundaries of the Firm/Three Dimensions of Corporate Strategy
- vertical integration - diversification - geographic scope
Corporate Strategy
- what industry - what product/service - what geographic location
Blue Ocean: lower costs
- which factors should be eliminated - which factors should be reduced
Working Capital Turnover Elements
- working capital / revenue - PPE / revenue - long term assets / revenue
Study diagram for market scope
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How does economic value creation link to competitive advantage?
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Fundamental Difference Between Accounting Performance and Shareholder Value Assessments
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Stages of the Industry Life Cycle
1. introduction 2. growth 3. shakeout 4. maturity 5. decline
T or F: it is difficult to succeed at value innovation
TRUE
Value
a buyer's willingness to pay for a product/service
Crossing the Chasm
a gap between early adopters and early majority who take a "wait and see" approach
Blue Ocean Strategy
a strategy that combines both differentiation and cost-leadership activities (ex: Trader Joe's)
ROIC
after-tax income / total assets
Competitive Advantage Achieved
as long as economic value created is greater than competitors (value - cost > competitors)
Innovation can _______ and _______ value
create, destroy
Cost Leadership Strategy
creating a low-cost position relative to a firm's peers
Working Capital
current assets - current liabilities
The importance of book value in a firm's stock market valuation has ...
decreased
Economies of Scale
decreases in cost per unit as output increases
Economic Value Creation
difference between value and cost
Many firms dominate in the ___________ of innovation, and are challenged by ____________.
early wave, next wave
Laggards
enter the market during the decline stage - 16% - generally don't want new technology - demand is small, early and late majority are moving on to different products and services
Early Adopters
enter the market during the growth stage (13.5% of market potential) - demand is driven by imagination and creativity - to capture these customers: directly communicate the product's potential
Technology Enthusiasts
enter the market during the introduction stage - smallest market segment (2.5%) - enjoy using beta versions
Late Majority
enter the market during the shakeout and maturity stage (34%) - not confident in their ability to master the technology - wait until standards have emerged - represent majority of the market - buy from well-established firms with a strong brand
Early Majority
enter the market during the shakeout stage (34% of the total market potential) - practical "what can this do for me?" - this group is key to catching the growth wave
Initial Innovations
foundational for other rapid innovation
Working Capital Turnover
how effectively capital is being used to generate revenue
COGS / Revenue
how efficiently a company produces a good
PPE /Revenue
how much of a firm's revenues are dedicated to cove PPE (these are critical assets and difficult to get rid of)
Long Term Assets / Revenue
how much of a firm's revenues are tied up in long-term assets (intangibles like intellectual property, goodwill, brand value)
R&D / Revenue
how much of each dollar earned is invested in R&D
Selling, General, and Admin Expense / Revenue
how much of each dollar earned is invested in SG&A
Return on Revenue
how much of the firm's sales is converted into profits
Working Capital /Revenue
how much working capital the firm has tied up in its operations
Learning-Curve Effects
less time to produce output with experience
Shareholder Value Creation
management uses the equity capital contributed by the shareholders to make and implement decisions that will increase the wealth of shareholders in excess of what they have contributed
ROR
net income / sales
ROA
net income / total assets
ROE
net income / total equity
Working Capital Turnover
net sales / average working capital
Process Innovation in Growth Stage
new ways to produce a product
Product Innovation in Growth Stage
new/recombined aspects of a product
Shareholders
own shares of stock, are legal owners of public companies
Cost of Input Factors
raw materials, capital, labor, and IT services
Introduction Stage Core Competency
research and development - necessary to create a product category that will attract customers - can be very capital-intensive (high costs)
Total Return to Shareholders
stock price appreciation + dividends
Blue Ocean Strategy uses
value innovation to reconcile trade-offs
Reverse Innovation
when companies initially develop products for niche or underdeveloped markets, and then expand them into their original or home markets - direction of technology innovation has changed to developing to advanced - ex: more affordable ultrasound machine