MGT Chapter 5

BM: The traditional model in retail; products sold at a fixed price to retailers; retailers mark up the prices to make a profit

"Wholesale" Business Model

Limitations of Shareholder Value Creation

- Stock prices can be highly volatile. - Macroeconomic factors affect stock prices. - Stock prices can reflect the mood of investors.

The limitations of accounting data

- historical and thus backward-looking. - do not consider off-balance sheet items - focus mainly on tangible assets, which are no longer the most important.

Formula for return on invested capital (ROIC)

Net operating profit after taxes / (total stockholders equity + total debt - value of preferred stock)

Best strategy for competitive advantage?

No best strategy exists - only better ones

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

Opportunity Costs

The difference between the price charged (P) and the cost to produce (C); also called profit

Producer surplus

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

Reservation price

Metrics for question: How do customers view us?

Revenue, profit, customer satisfaction

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

Risk Capital

Individuals in organizations that own one or more shares of stock in a public company; the legal owners of public companies

Shareholders

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

Sustainable Strategy

The ______________________ approach attempts to provide a more integrative view of competitive advantage

The balanced-scorecard approach

Goal of the balanced-scorecard approach?

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

Return on risk capital that includes stock price appreciation plus dividends received over a period of time

Total Return to Shareholders

Total perceived consumer benefits; consumer's maximum willingness to pay; reservation price

V

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

Value

where and how to compete for competitive advantage

a firm's strategy

A firm's ______ is critical to achieving a competitive advantage

business model

The translation of a firm's strategy into action takes place in the firm's _________________

business model (or how to make money)

Overall macroeconomic factors have a ________ bearing on stock prices.

direct

Business models evolve _______________ Business models can be ______________ Business models can be ______________ Businesses must respond to disruption & ________ _______ conflicts can arise.

dynamically; combined; disrupted; adapt; legal

A firm has a competitive advantage when it is able to create more _____________ than its rivals.

economic value

The source of competitive advantage can stem from higher perceived value creation (assuming _______) or lower cost (assuming _____________).

equal cost; equal value creation

Formula for return on equity (ROE)

Net income / total stockholder's equity

BM: producer relies on an agent or retailer to sell the product at a predetermined percentage commission; producer may also control the retail price

"Agency" Business Model

BM: Products or services for which demand is negatively correlated at a discount

"Bundling" Business Model

BM: Free + premium business model; provides the basic features free of charge and users pay for premium services such as advanced features or add-ons

"Freemium" Business Model

BM: Users pay for only the services they consume

"Pay as you go" Business Model

BM: Initial product is often sold at a loss or given away for free; helps drive demand for complementary goods; money made primarily on replacement parts

"Razor-razorblades" Business Model

BM: Traditionally used for (print) magazines and newspapers; users pay for access to a product or service

"Subscription" Business Model

3 Limitations of Economic Value Creation?

1) Determining value for consumers is not simple. 2) The value of a good in the eyes of consumers changes. 3) To measure firm-level competitive advantage, we must estimate the economic value created for all products and services offered by the firm

The macroeconomic factors affect stock prices

1) Economic growth or contraction 2) Unemployment, interest and exchange rates

Competitive advantage can be based on what 2 things?

1) Economic value creation because of superior product differentiation 2) A relative cost advantage over rivals

4 Disadvantages of the Balanced Scorecard

1) Focused on strategy implementation (not formulation) 2) Limited guidance about which metrics to use 3) Only as useful as the managers apply it 4) Strategy must be translated into measurable objectives 5) Not much guidance on how to get back on track if setbacks occur

The 4 Balanced Scorecard Questions

1) How do customers view us? Revenue, profit, customer satisfaction 2) How do we create value? Competitiveness, innovation, organizational learning 3) What core competencies do we need? Core competencies, supporting business processes 4) How do shareholders view us? Cash flow, operating income, ROIC, ROE, total returns to shareholders

Triple bottom line dimensions 1) The business must be profitable to survive. 2) Emphasizes the people aspect 3) the relationship between business and the natural environment

1) Profits: The economic dimension 2) People: The social dimension 3) Planet: The ecological dimension

4 ways to measure and assess competitive advantage?

1) Relative to a benchmark (either using competitors or the industry average) 2) By measuring accounting profit, shareholder value, or economic value 3) The balanced scorecard approach 4) The triple bottom line

Integrative frameworks, combining quantitative data with qualitative assessments:

1) The balanced scorecard 2) The triple bottom line

2 Opportunity Costs of an Entrepreneur?

1) forgone wages if employed elsewhere 2) the cost of capital invested in the business (vs. the stock market, vs. U.S. Treasury bonds)

The balanced scorecard: 1) Uses what type of performance metrics? 2) Balances what 2 types of goals? 3) Helps managers achieve what more effectively?

1) internal and external 2) financial and strategic 3) strategic objectives

Applying a shareholders' perspective, key metrics to measure and assess competitive advantage are?

1) the return on (risk) capital 2) market capitalization

The three traditional frameworks used to measure and assess firm performance:

Accounting profitability Shareholder value creation Economic value creation

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

Balanced Scorecard

A firm's plan that details how much it intends to make money

Business Model

Details the competitive tactics and initiatives, how the firm intends to make money and how the firm conducts its business (buyers, suppliers, and partners)

Business Model

What is meant by "Stock prices can reflect the mood of investors"

Can be irrational

Metrics for question: How do shareholders view us?

Cash flow, operating income, ROIC, ROE, total returns to shareholders

Metrics for question: How do we create value?

Competitiveness, innovation, organizational learning

The difference between the value a consumer attaches to a good or service (V) and what he or she paid for it (P); (V-P)

Consumer surplus

Metrics for question: What core competencies do we need?

Core competencies, supporting business processes

Competitive advantage is best measured by?

Criteria that reflect overall business unit performance (NOT the performance of specific departments)

The difference between a buyer's willingness to pay for a product / service & the firm's total cost to produce it; the difference between value (V) and cost (C)

Economic Value Creation

Noneconomic factors can have a significant impact on a firm's....

Financial performance, reputation and customer goodwill

______companies do business is as important to gaining and sustaining competitive advantage as ______ they do.

How; what

What things are more important than tangible assets?

Innovation, quality, customer experience

Result of highly volatile stock prices?

Makes it difficult to assess firm performance

4 Advantages of the Balanced Scorecard

Managers can: 1) Link the strategic vision to responsible parties 2) Translate the vision into measureable goals 3) Design and plan business processes 4) Implement feedback and organizational learning (modify and adapt strategic goals)

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

Market Capitalization

Formula for return on revenue (ROR)

Net Profits / Revenue

Formula for return on assets (ROA)

Net income / Total assets

Total return to shareholders is a(n) __________ performance metric; it indicates how the market views all publicly available information about a firm's past, current state, and expected future performance.

external

The value of a good in the eyes of consumers changes based on ....?

income, preferences, time, and other factors

Competitive Advantage is a ________ concept

multi-faceted

Pension obligations and leasing obligations are what type of items?

off-balance sheet items

Both ____________ and ____________ capture some of the value created

producers; consumers

Both ___________ and ____________ performance dimensions matter when it comes to competitive advantage

quantitative; qualitative

Managers are frequently asked to maintain and improve not only the firm's economic performance but also its _______ and ___________ performance.

social; ecological

The triple-bottom-line framework is related to what theory?

stakeholder theory

an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return.

stakeholder theory

To measure accounting profitability, we use what kind of metrics derived from where?

standard metrics derived from publicly available accounting data.

Looking at the triple bottom line approach, a ___________________ produces not only positive financial results, but also positive results along the social and ecological dimensions.

sustainable strategy

Achieving positive results in all three dimensions (economic, social, and ecological) of the triple bottom line can lead to a?

sustainable strategy (a strategy that can endure over time)

Shareholder value creation is a better measure of competitive advantage over the long term due to...?

the "noise" introduced by market volatility, external factors, and investor sentiment

Investors are primarily interested in _________________________ which includes stock price appreciation plus dividends received over a specific period.

total return to shareholders

Combination of economic, social, and ecological concerns - or profits, people, and planet - than can lead to a sustainable strategy

triple bottom line

Using a _____________________ approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities in as serious a way as they track its financial performance.

triple bottom line

Three components that are critical to evaluating any good or service?

value (V), price (P), and cost (C)