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

------

How does economic value creation link to competitive advantage?

-------

Fundamental Difference Between Accounting Performance and Shareholder Value Assessments

---------

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