SDM: All Objectives (Fall '21, Final)

Describe the following w.r.t. organizational politics: · Coalition · Political skill

Coalition: Group pursuing common interest throguh legitimizing concern and/or pressuring target group. Tactics · Rational persuasion · Consultation - Gaining participation of target in achieving group's goal · Personal appeal · Ingratiation: Flattering/helping target · Inspirational appeal (i.e., values & ideals) · Quid pro quo Political skill: Effectively understand others at work & use this knowledge to enhance one's own objectives. Have the following qualities · Understand others' positions/views · Understand situations & determine best response · Develop large networks · Gain cooperation/buy-in · Make others feel at ease (OB12)

Describe how to reduce human error from biases in capital decision-making.

Cognitive biases lead to excessive capital usage, difficult maintaining steady / above-avg. returns, etc. Recommendations: 1) Broaden portfolio of submissions for capital; 2) Use consistent metrics to level playing field for proposals. (SDM189)

Describe bounded rationality and how we manage our decisions because of it.

Cognitive limitations due to our limited attention, limited time, complexity of problems, emotions, perceptions, etc. Managed through, · Heuristics, habits, rules of thumb · Attention mgmt. · Setting goals · Breaking down problems & decentralizing decisions. (BD15)

Describe some potential pitfalls of using groups for decision-making

Common Information Bias: Emphasizing information held by majority & ignoring/neglecting information from minority. Diversity-Based Infighting: Unproductive, negative conflict over differing views Risky Shift: More risk-taking as group than individual would alone. Leads to shifting blame to group & taking less responsibility. Groupthink: Consensus at expense of discussing honestly. Doesn't guarantee poor decision, but increases chances of it. Occurs when, · Group incongruence: Members don't get along / don't want to criticize. · Members more passive: Yield more easily, derive satisfaction from membership, try to prevent division. · Image at stake: Group w/pos. image under threat, i.e. competition, adverse engagement. · Symptoms: Self-censorship, pressure on dissonant members, unanimity, complex rationalization, perception of member invulnerability (ignore dangers from optimism), mindguards - shielding members from factors, morality of group & immorality of opposition, stereotypying others (OB10)

Describe business level cooperative strategy, and the types.

Complementary strategic alliances: Share complementary resources for comp. adv. · Vertical alliances: Good for environmental changes, likely to succeed. · Horizontal alliances - New product development. Difficult to maintain since firms compete against each other · Competition Response Strategy: Responding to rivals attack. More temporary so less advantageous, and usually strategic than tactical so difficult to reverse. · Uncertainty Reducing Strategy: Hedge risk, especially in fast cycle or new markets. · Competition reducing strategy: Least likely to create competitive advantage. E.g., Collusion: Agree to produce certain amount or set prices at certain amount. Explicit collusion: Agree on price / production amounts. Illegal. Tacit collusion: Several firms observe each other & indirectly set price / production amount, indirectly coordinate with each other --> present in industries with high concentration, e.g. Airline , cereal (SM9)

Describe the two components of a supply chain, and the three features pervasive in supply chains.

Components of Supply chains: (1) Structure of stocks & flows for acquisitions of inputs into process, and (2) mgmt. policies governing the flows. Three features pervasive in supply chains: 1) Oscillation: Due to time delays & decisions failing to account for delays. 2) Amplification: Height of a period. 3) Phase: Cycle/period length. Phase lag refers to lag of peaks/valleys of cycle of one thing behind another (i.e., material production behind consumer goods production).

Describe the following: · Types of conflict escalation, · Conflict outcomes · Responses to conflict.

Conflict Escalation: Conflict grows worse over time. Types of conflict escalation: · Cultural/identity/status differences, · History of antagonism, · Insecurity, · Goal of escalating conflict Conflict Outcomes · Lose-Lose · Win-Lose or Lose-Win · Compromise · Win-Win Responses to Conflict · Competing/forcing/dominating: Winning at other's expense · Accommodating: Forging own concerns so other party's concerns are met · Avoiding: Neglects his and other's concerns · Compromising: Partially meeting own and other's concerns · Collaborating: Working to meet both concerns (OB12)

Describe some consequences of illiquidity on a firm.

Consequences of illiquidity · Public or private firm: Tradeoffs of control vs. illiquidity. · IPOs: Hot/cold periods. Clustering in certain sectors where illiquidity discount is high. · Portfolio mgmt.: Consider time horizon when considering liquidity for portfolio (long vs. short). Returns should be the same for liquid vs. illiquid, once considering for transaction costs. (DoV14)

Describe considerations when adjusting the discount rate for illiquidity.

Considerations for discount rate adjustment: 1) Firm characteristics: Size, liquidity of assets, health, CFs, control, etc. 2) Market: Economic conditions, time horizon, transaction costs, bid-ask spread. Discount Rate Adjustment: · Compare to returns you could otherwise earn (e.g., venture capital return vs. traded stocks) · Compare against liquidity premiums observed in the market. · Use firm-specific premiums (difficult) Quantitative Marketability Discount Model (QMDM): 1) Calculate unadjusted firm value (e.g., CFs in perpetuity). 2) Discount proportional CFs and firm value (adjusted for growth to end of horizon) by discount rate adjusted for illiquidity. 3) Sum and compare to initial unadjusted firm value to get illiquidity discount. Failures of QMDM: · If assuming a portion of CFs are paid out, then initial firm value should be based on this. · Model adjusts for both control & illiquidity, but one can exist without the other · Unclear on how to adjust the discount rate. (DoV14)

Describe the following relative valuation test: · Definitional tests of multiples

Consistently defined: Consistency in numerator & denominator (e.g. equity measure vs. firm measure) · Inconsistent ratios (e.g. price/EBITDA) may lead to not accounting for debt or other differences among firms. Uniformly defined: E.g. accounting standards differences, differences in calendar year for earnings, Analysts may use different values or adjust, so important to know how variables & multiples are defined. (DoV7)

Characterize what nonverbal communication in interpersonal communication.

Conveys attitudes / emotional mental state information. Vary based on culture, but basic emotions the same for all: Fear, disgust, surprise, happiness, anger · Expressions/gesturing: Facial expressions, tone, personal appearance, body language, paralanguage (how something is said - voice tone, pitch, silence), gestures (sign to convey a meaning). Easier to control. · Leaky behaviors: Behaviors we can't control - more likely to express true feelings through nonverbal means than verbal means. (OB9)

Describe Corporate Level Cooperative strategy, and the types

Corporate Level Cooperative strategy: Collaborating w/1+ firms to expand operations. Broader in scope and more complex, so more challenging & costly. 1) Diversifying alliances: Share resources / capabilities for product and/or geographic diversification 2) Synergistic alliances: Share resources / capabilities for to create economies & synergies across firms. 3) Franchising: Contract to control sharing of resources / capabilities w/franchisees - Good to use in fragmented industries, e.g. hotels, retail, motels, commercial printing (SM9)

Describe some differences between liquid and illiquid firms w.r.t. corporate finance.

Corporate finance considerations Higher illiquidity, higher CoC Illiquid firms: Harder investing in LT projects w/ negative CF in early years since won't be able to fund those CFs. Liquid firms, · Greater dividends, · Easier ability to raise/borrow capital w/lower transaction costs. · Liquid mgmt. compensation (stock, options) in liquid firm. (DoV14)

List the three principles of developing formulations that capture the decision-making process used by managers.

(1) Based on information available to mgmt., (2) robust under extreme conditions, (3) consistent w/actual decision-making. (BD17)

Describe aging chains and their stock & flow diagram.

(BD12)

Describe coflows and their CLD / stock & flow diagram.

(BD12)

Describe what the following modes of behavior look like: · Exponential growth · Goal-seeking · S-shaped growth · Growth with overshoot · Overshoot & collapse · Oscillation

(BD4)

Describe the Richards and Weibull models for S-Shaped Growth.

(BD9)

State the following: · Covariance · Correlation · Var(aX+aY) · Baye Theorem

(DMD1)

State the formulas for the following: · Standard deviation for a portfolio · Distance of a circle

(DMD8)

State the following determinant formulas: · Reinvestment rate · Expected growth from reinvestments · Growth w.r.t. existing assets

(DoV13)

Describe the determinant that yields the price/sales ratio.

(DoV7)

List some ways intensity of competition (rivalry intensity) can be present.

- Few competitors - Slow growth - High storage/fixed costs - Lack of differentiation - Low switching costs - High strategic stakes (need to perform well, e.g. location, market) - High exit barriers (specialized assets, exit costs, dependent relationships w/other companies, emotional barriers, government/social restrictions) (SM2)

List some ways suppliers and customers have power.

- Few suppliers/customers - Concentrated industry - Lack of substitutes - Critical buyer/supplier need - High switching costs - Forward/backward integration - Supplier/customer is significant materials/revenue source (SM2)

Describe the causes of (dysfunctional) conflict within a firm.

1) Communication (talking vs. listening) 2) Cognitive Factors: Differences in expectations of profession/career, goals, agendas, etc. 3) Structural Factors · Specialization of BUs/departments · Interdependency of resources, tasks & coordination · Authority Centralization/Decentralization: Conflict from having more/less control over work · Physical Layout, i.e., working too close (physically) or too far (virtual). 4) Individual Characteristics · Personalities: Type A (competitive, aggressive, impatient), dispositional trust (i.e. less trust less likely to concede), other differences in personality · More/less organized · How conflict is perceived (opportunity or hinderance) · Conflicting goals 5) History: · Poor past performance · Past conflicts · Distrust from prior interactions (OB12)

Describe some ways of increasing firm value.

1) Efficiency of operating assets: · Redeploy / divest assets · Improve efficiency of existing assets · Reduce taxes or capital for maintenance or working capital 2) Efficiency of non-operating assets: · Cash / marketable securities (i.e. invest it or pay out dividends) · Spin off / divest other holdings · Optimize / reduce pension fund obligations 3) Growth: · Increase amount of expected growth · Lengthen period of high growth, e.g. prevent new entrants and/or create competitive advantages 4) Reduce costs: · Adjust the mix or cost of debt/equity, · Improve ALM · Make products less discretionary to customers (DoV13)

Describe the outcomes of interfirm rivalry based on quality & firm size.

1) Firm size: · Smaller firms: Nimble, variety of competitive actions / responses, less slack. · Larger firms: Variety of strategic possibilities, but slower competitive actions/responses, greater slack. 2) Quality: Meets/exceeds customer expectations. · Product: Performance, features, flexibility, durability, serviceability, aesthetics, perceived quality · Service: Timeliness, courtesy, consistency, convenience, completeness, accuracy (SM5)

Describe the individual barriers to effective communication.

1) Individual perceptions/frames of reference 2) Semantic Differences: Meanings in words, gestures, jargon, symbols 3) Status differences: Hinder upward communication, & source credibility 4) Consideration of self-interest: Information provided that is biased toward their own self-interest 5) Poor Listening Skills of receivers 6) Personal Space: Paying attention may vary w/perception of personal space (OB9)

Describe the following steps of the five prong problem solving approach. · Design the solution: Levers/Ways to Trigger System 2 Thinking

1) Joint evaluation of alternatives (avoids biases). 2) Force opportunities for reflection, e.g. employees to reflect on improving training, taking notes, etc. 3) Use planning prompts to encourage action (flu-shot mailers, team writes out goals in detail when/how) 4) Inspire broader thinking: Using 'could' instead of 'should' - Less focus on a single solution. 5) Increase accountability to eliminate bias from decision-making. 6) Encourage consideration of disconfirming evidence to avoid confirmation bias, escalation of commitment / sunk-costs. Encourage counterfactual thinking (what if we had taken a different approach) and tough questions. 7) Use reminders: Avoid biases from relying on system 1 too much, highlight goals & increase motivation. 8) Bypass both systems: Setup systems to skirt system 1 & 2 · Set the default, e.g. automatically enrolling · Build in automatic adjustments to account for poor system 1 & 2 thinking · Planning fallacy: Add buffer time to the projects (SDM184)

Describe the five prong approach in using choice architecture to improve decision-making.

1) Understand how decisions are made: System 1/2 thinking, cognitive biases. 2) Define the problem: Behavioral economics work best when human behavior at core of problem, people note acting in own best interests, & problem can be narrowly defined / broken down. 3) Diagnose the underlying cause: Due to lack of motivation (failure to take action) or due to cognitive bias (way in which action is taken). 4) Design the solution: Planning prompts, reflection opportunities, joint evaluation, or bypassing decision-making with automation. 5) Test the solution: ID target that is specific & measurable, ID a range of solutions, implement in some parts of firm and not others (test/control groups) (SDM184)

Describe how a pyramid structure speeds up the process of discovering ideas.

1) Vertical relationships set up deductive relationships between points & subpoints so wants to keep reading. · Continue until assume no more questions from reader. · Don't ask until ready to answer, don't answer before the question. 2) Horizontal relationships show groupings & likeness between subpoints 3) Narrative flow of introduction sets up the question by, · Tying ideas/questions together to show relevance to audience, · Describes the question's history, and · States what is known or expected to be known. (PP2)

Describe the steps of the modeling process

1. State the problem 2. Form dynamic hypothesis 3. Form simulation model 4. Test 5. Design policy & evaluate State the problem: Problem theme, variables, time horizon, reference modes. Form dynamic hypothesis: Working theory of problem, impact of feedback; endogenous factors, mapping variables. Form simulation model: Structure, parameters, tests for consistency. Test: Consistency among variables, replicating behaviors, sensitivity testing, robust under extremes. Design policy & evaluate: Specify future scenarios, develop rules/strategies/real world structure, changing decision rules, what-if analysis on policies, sensitivity analysis, interactions/synergies of policies (if any). Test changes in parameters/structure/assumptions in model & under wide range of scenarios. (BD3)

Rule of thumb for decisions

3 futures, 3 objectives, 3 options for each decision scenario Helps avoid overwhelmingness of endless possibilities & anticipate our biases in judgements & choices (SDM185)

Describe activity based costing & its pros/cons.

Activity based costing (ABC): Breaks costs down into costs by activities: Per unit, batch (e.g. purchase orders), product line/level, capacity sustaining (e.g., security for factory) TC = VC * Q + BC * B + PC * L + OC VC / BC / PC / OC = unit / batch / product / capacity FC = BC * B + PC * L + OC FC = fixed costs Benefits: · Better understanding from analyzing drivers · Trace costs directly to activity · Potential for greater cost control & accuracy · More focused incentives for managers Cons: · Costly & complex: Assign decision rights, analysis & bookkeeping costs, indirect costs of managing ABC · Opportunism: Managers can manipulate drivers, putting them outside of monitoring · Doesn't allocate opportunity cost - only historical costs. · Evaluates costs, but doesn't consider benefits of systems, e.g. can't allocate joint benefits (ADMC11)

Define/describe the following terms: - Agency costs - Free rider problem - Horizon problem - Adverse selection - Moral hazard

Agency costs: Agent maximizes own utility at cost to principle. Results from information asymmetry. Two sources: · Cost of agents actions · Costs to control behavior (e.g. incentive scheme) Free rider problem: Output greater from a team, but spread out across members - Incentive to shirk, and worsens with more team members. Horizon problem: Short-term focus/actions of agent if he expects to leave before principal. Adverse selection: insureds know more about own circumstances than insurer Moral hazard: Engaging in risky behavior when insulated from consequences of own actions (ADMC4)

Describe the Model of Competitive Rivalry

All of the following provides feedback to the firm and its competitors- 1) Competitive analysis: Market commonality, Resource similarity 2) Drivers of competitive behavior: Awareness, Motivation, Ability 3) Interfirm rivalry: · Likelihood of attack: First-mover incentives, firm size, quality · Likelihood of response: Type of competitive action, reputation, market dependence 4) Outcomes: Market position, Financial performance (SM5)

Describe when allocating costs equals, exceeds or falls short of marginal costs.

Allocating costs & marginal costs: · Cost allocation usually average cost · If cost rate = total cost / base < Marginal Cost, underallocating costs (used when rising average cost overallocating; slope of R lower than M) · If R >M (slope of R greater than M), overallocating costs. Can discourage managers & disincentivize investing/profiting · If R = M, cost allocations are exactly equal to marginal costs (requires special studies to understand (ADMC7)

Describe how ABC compares to absorption costing.

Analyzing ABC · Generally, differences between ABC vs. absorption costing not material · Absorption cost accounting can overcost high volume units and undercost low volume units. · ABC can overcost less complex products and undercost more complex, more resource-consuming products. (ADMC11)

Describe the different approaches to associates' involvement in managerial decisions, and the Vroom Yetten method.

Approaches - Low to High level of associate involvement: · AI: Manager solves alone, use information available · AII: Associates provide information, but not informed of problem or engaged for alternatives/evaluation. · CI: Manager explains problem one by one to associates, requests their input individually (not as a group), manager makes decision alone. · CII: Manager explains to associates as a group, obtains ideas/suggestions in group setting, makes decision alone. Input may or may not be reflected in manager's decision · GII: Manager explains to group. Work together to generate & evaluate alternatives & agree on solution. Manager acts as facilitator. Does not force group to accept his solution & will accept alternative from group. Manager must decide how much agreement should exist within group. Majority is speedier w/less risk of impasse than unanimity. Vroom-Yetton: Manager diagnoses problem & then associate involvement determined. Optimal involvement depends on quality of decision, acceptance or commitment subordinates have when implementing, amount of time making decision (OB10)

Describe the following steps of the five prong problem solving approach. · Design the solution: Levers/Ways to Trigger System 1 Thinking

Arouse emotions: Empowerment, e.g. how to use your strengths in your new job. Leverage biases: Loss aversion & vividness bias (pay more attention to flashy data) highlight downside of failing to take action. E.g. "Pay your taxes or lose your car" Simplify/Vest the process: Easier to maintain information if shared, simplified. (SDM184)

Describe the following Negotiation Strategy & its Tactics · Attitudinal bargaining

Attitudinal structuring: Influencing attitudes & relationships of negotiating parties Tactics: Use language similar to other party's ; Dissociate oneself from others not liked by opponent; Associate with others' likes; Reward opponent's behavior; Express appreciation (OB12)

List some barriers to entry

Barriers: - Economies: Efficiency as firm grows from declining cost/scale. - Differentiation: Uniqueness, & subsequent brand loyalty. - Capital requirements: Resources to invest. - Switching/fixed/storage costs - Distribution channels - cost disadvantages: Proprietary tech, raw materials, location, subsidies) - Legal / political / gov. policy - Retaliation (SM2)

Describe the following group decision-making techniques: · Brainstorming · Delphi Technique

Brainstorming: Encourage large number of ideas & imagination. Combating problems of group brainstorming: 1) Brain writing: Everyone stops during meeting & writes down all of their ideas. Introduces anonymity, less talking/distraction 2) Electronic brainstorming: Ideas entered into database & ideas put on large screen. Anonymity, less distraction/talking Delphi Technique · Members solicited for judgements remotely, i.e. through questionnaire. · Results fed back to group, & members can respond & change their judgements. · Good when members geographically dispersed, can constrain input, (i.e., using questionnaire) (OB10)

Describe buyer value as it relates to differentiation.

Buyer value and differentiation: Uniqueness only valuable if it raises value to buyer (i.e., buyer value chain) · Buyer value: Value for buyer from lower cost, and/or raising product performance or buyer's performance. Can come from time savings, prestige/status, quality, etc. · Value chain & buyer value: Value generated from links between firm's value chain & buyer's value chain. E.g. trucks: Branding, spare parts (reducing wait time), credit policies, etc. (CA2 / CA3 / CA4)

Define the following: · CLDs · Stocks · Flows · Delays

Causal Loop Diagrams (CLD): Feedback models describing change w.r.t. to what effect otherwise would have been. Positive/negative leads to increase/decrease in effect. Reality may differ given system complexity & changes in stocks & flows. Stocks: Tangible/intangible accumulations describing system state. Flows: Rates of increase/decrease in stocks Delays: Differences between inflows and outflows, usually the inflow rate exceeding the outflow rate (BD5, BD6)

Describe communication networks in Organizational Communication.

Characterized in terms of density: Sparse: Few connections; Dense: many connections Centralization: Central points for better control - Better for dense networks: · Wheel (i.e., w/spokes, no outside), · Y-network (communicate w/multiple, while others communicate w/only one - speed/efficiency) Decentralization: No single member of network dominates information exchanges. · Circle · Well-connected (wheel w/tire) (OB9)

Describe the following cost drivers for cost advantage: · Economies or diseconomies of scale · Learning · Pattern of capacity utilization · Linkages · Interrelationships · Integration · Timing · Location · Institutional factors · Discretionary policies independent of other drivers

Cost Drivers: Economies of scale: Efficiency w/ larger volume/cost amortization. Also consider effects of economies' sensitivity, organization, scale, & management. Learning: Learning lowers cost. Creates comp. adv. if proprietary. Spillover reduces industry cost. Capacity utilization: Cost from underutilization. Consider impact on strategy from time period w.r.t. seasonality, cycle, discontinuity Linkages: Links one activity/VCA to another. Two types: Within the VC (indirect, quality assurance, activity coordination, etc.), vertical (supplier, channels - i.e., warehouses, logistics, etc.) Interrelationships: Sharing activities, knowledge - especially if sensitive to economies - between sister unit and between activities. Integration: E.g. vertical integration reduces costs, bargaining power of suppliers/buyers, & avoids transaction costs. But may create inflexibility or exit barriers. Timing: First mover advantage, late mover advantages (e.g., learning from competitors), business cycle, market conditions, sustainable advantages Location: Impacts labor, mgmt. raw materials, energy, distance to suppliers, Institutional factors: Gov. regulation, taxes, unions, politics Discretionary policies independent of other drivers: E.g., how firm conducts business (e.g., no meals onboard for airlines). I.e., Product configuration, performance, features; mix of products offered; level of service provided; spending on marketing/tech.; buyers served; delivery time; etc. What firm wants to offered & cost of what is offered (CA2 / CA3 / CA4)

Describe how to fight motivated bias.

Counterattacks: Blinding: Eliminate influence from stereotypes, associations & irrelevant factors. (audition behind curtain) Checklists: Reduce forgetfulness, memory distortions; focus on relevance. (criteria for pitches, structured interviews w/standard rating for responses). Algorithms: Consistency w/focus on how much emphasis each piece of information gets. (credit scores, hiring algorithms). Trip wires (announce deadline/consequence in advance to avoid "present bias" - tendency to focus on immediate preferences & ignore LT consequences. Sunk costs ignored). Decision points (if trip wire is too binding, take break & reassess objectives/options, e.g. bidding). (SDM185)

Compare & contrast how newer firms create value through strategic entrepreneurship as compared to larger firms.

Creating Value through Strategic Entrepreneurship · Newer firms ID entrep. opportunities due to flexibility & willingness to take risks · Larger firms leverage more resources/capabilities Both need to achieve/sustain comp. adv.: · Entrep. mindset among managers/employees, · Knowledge to ID/exploit opportunities, · Strong human capital. · Social capital helps ID compl. partners w/resources · Develop capabilities for firm's core competencies & comp. adv. to take exploit entrep. opportunities (SM13)

Describe how relative valuation compares to the DCF method.

DCF: · Value of asset based on CF, risk & growth · Estimate intrinsic value based on future CFs · Assumptions explicit & stated Relative Valuation · Value an asset based on comparable assets observed/priced in the market · Assumptions are implicit & not stated (DoV7)

Describe some debiasing techniques.

Debiasing Techniques: · Mindfulness of biases: Awareness in self & others · Practice debiasing as a group to remove emotion. · Teach bias as something that's there, not as a defect. · Assign obligation to dissent (may need to be pushed): Designated devil's advocate w/ factual dissent - project team (why case should be made for the project) and devil's advocate w/risk-reward analysis. · Premortem: We're here five years later. What went wrong? · Red team vs. blue team: Internal team vs. independent external team. Written materials read beforehand, avoids emotion, easier discussion · Start in small ways, start at the top, take it seriously, be open to it. · Other ideas: Controlled risk-taking, more agile, rapid proto-typing (SDM186)

Describe the following: - Decision rights - Influence costs - Decision management - Decision control - Controllability principle.

Decision rights: Delegating decisions - Consideration given between delegating to those w/knowledge (since costly to transfer) or retaining decision right (if difficult to monitor behavior of delegate). Influence costs: Costs / resources consumed in lobbying decision-maker. By not assigning decision rights, these may be lower (no one to lobby), but some decisions may still required evidence (e.g. promotions) Decision management: Aspects related to initiating / implementing decisions. Decision control: Aspects related to ratifying/monitoring decisions. · Example: FT hire (initiate) --> authorized by mgmt. (ratify) --> hire candidate (implement) --> evaluate (monitor) Controllability principle: Only holding mgmt. accountable for controllable actions/events. However, may, · Disincentivize risk mitigation · Ignore benchmarks/comparisons available. · Create opportunism. (ADMC4 / ADMC5)

Describe decision-making steps, and contrast optimal vs. satisfactory decisions

Decision-Making Steps · Define problem & desired state · ID criteria & information for solution & decisions · Evaluate alternatives, gather feedback, follow up, monitor results, repeat. Optimal vs. Satisfactory Decisions: Limited to satisfying decisions due to lack of 100% complete information / alternatives, & tend to choose 1st alternative since we're busy & conserving resources. Satisfying: Timely, acceptable, satisfy criteria Optimal: All information & alternatives. (OB10)

Describe the following predisposition in decision-making: Decision-Making Styles

Decision-Making Styles: Relating to how individuals gather information & evaluate alternatives. How individuals gather information: · Sensing: Relies on senses w/focus on experience, rules, steps, & fact-checking to support decisions. Practical, realistic, enjoy gathering information, creativity difficult. · Intuition: Dislike details & time-sorting, information seen in chunks, holistic, integrated abstractions. Imaginative, creative. Adjusts to rapid changes/crises. Useful where facts/direction/time ambiguous or different alternatives exist. How individuals evaluate alternatives: · Thinking: Rational, impersonal. Objective, analytical, logical, firm. Easy to critique others, difficult dealing w/people's feelings. Standards, policies, discipline, detached, impersonal, organized. Improves performance. · Feeling: Emotion-based, personal, subjective. Emphasize harmony, influenced by their/others' likes/dislikes, sympathetic, appreciative. Improves morale of those around us. (OB10)

Contrast deductive and inductive reasoning: · How each works · When they should be used

Deductive Reasoning: · Points derive from each other · Paragraphs connect via inductive reasoning; deductive used within paragraphs. Inductive reasoning: · Infer based on likeness or grouping · One word describes all things (PP5)

Describe the following predisposition in decision-making: Degree of Acceptable Risk

Degree of Acceptable Risk: · Amount of risk depends on individual · Lower risk-taking, more information. · Reference points to evaluate current state, goal, min. level, and the average (OB10)

Describe informational delays.

Delays in adjusting beliefs (the stock). Information not conserved. Change in perception = (X - X-bar) / D, where X is the belief, X-bar is the adjusted belief, and D is the units of delay time (BD11)

Describe how to determine loop polarity in CLDs.

Determine Loop Polarity: · If odd number of neg. links, loop is negative; else, positive. · Or if tracing effect of change around loop opposes original change, then negative. · Trouble assigning polarity may mean more than one pathway can be assigned (BD5)

Describe the following variances: · Direct labor variance · Direct materials variances

Direct labor variance Total labor variance = actual cost of labor - std. cost of labor = (actual wage x actual hours) - (std. wage x std. hours) = (Actual wage - std. wage) x actual hours + (actual hours - std. hours) x std. wage = wage variance + efficiency variance Direct materials variances: Same as labor, with additional piece for raw materials inventory Total materials variance: = (actual quantity bought - actual quantity used in production) * standard raw materials cost (ADMC12)

Reasons for vertical disintegration

Disintegration reasons: · VI had been done for spurious reasons · Firm is over-integrated · Globalization increases number of buyers, increases advantages & reduces risks of trading (so avoids VMF) · Specialist suppliers & mgmt. experience : Quality assurance, firm can't ensure excellence in all areas. Managers more experienced in quasi integration · Foreign competition forces cost-effectiveness · Technology/communication reduces bilateral trading costs (SDM138)

Describe the following relative valuation test: · Descriptional tests of multiples

Distribution comparison of multiples across entire market (not just within sector). Use median/percentiles in place of avg./std. dev. to avoid bias & predisposition. Outliers/averages: If outliers over threshold thrown out, comparisons of sectors/markets won't necessarily line up. Biases where estimates drop out (e.g. from negative multiples). Addressed by adjusting analysis for dropouts, computing aggregate multiples, or multiples that can be computed for group. Time variations: Multiples change over time, so relative valuations have short shelf lives. (DoV7)

Describe the following Negotiation Strategy & its Tactics · Distributed bargaining

Distributive bargaining: Approach w/competing & win-lose. Used when goals of one in conflict w/another. Tactics: "Breaking negotiation would be costly to you"; Preventing other from committing to their target; convincing other to commit to your target; Convince other that your target is fair (OB12)

Characterize the three directions of organization communication.

Downward Communication: Top-down. Often deficient & can lead to organizational problems. Upward Communication: Bottom-up. Difficult to do and fear of retaliation. Helped by open-door policies, surveys, decision participation, encouragement of honesty Horizontal Communication: · Between people at same level - overlooked in design of firms. · Important for setting boundaries, recognizing dependencies, etc. · 360 degree evaluations can lead to political ratings of superiors or peers, or managers may retaliate for poor feedback. (OB9)

Describe the drivers of competitive behavior.

Drivers of competitive behavior · Awareness: Recognize competitors, interdependence, market commonality, resource similarity · Motivation: Incentive to take action or respond to competitor · Ability: Resources / flexibility to take action / respond · Resource dissimilarity: More dissimilar resources, greater delay in response. (SM5)

Describe some characteristics and drivers of a competitive landscape

Drivers of the competitive landscape: · Globalization: Interdependence of countries. Information/people/goods move freely, competing, diversification. · Technology: Diffusion (speed/availability) from innovation/disruption, information age, knowledge intensity Leads to the following results: Scarcity of capital, volatile markets, speed/innovation, flexibility to respond to environment. (SM1)

Describe the following drivers for differentiation: · Policy choices · Linkages · Timing · Location · Interrelationships · Learning & spillovers · Integration · Scale · Institutional factors

Drivers of uniqueness (ordered most important to least) Policy choices: Product features & performance, Services provided (credit, delivery, repair, etc.), Intensity of activity adopted (e.g., rate of advertising), Content of activity, Technology employed, Quality of inputs procured for activity, Procedures governing actions of personnel, Skill & experience of personnel, Information to control activity Linkages: Three types: 1. Those within the value chain (Meeting buyer needs, coordination of sales & service, optimization in meeting needs, higher investment in indirect activities), 2. Supplier linkages (coordinating w/suppliers (e.g., development time)), 3. Channel linkages (Training channels in selling & other business practices), Joint selling w/channels, Subsidizing channel investments in personnel, facilities, & performance of additional activities Timing: First to adopt image or perform activity, or intentional late moving Location: E.g., most convenient branch Interrelationships: Sharing value activities with sister units Learning & spillovers: Learning how to perform activity better Integration: Coordinating activities, in-house servicing, Scale: Larger scale perform activity can't do at smaller scale. Some activities' costs heavily fixed no matter the scale (e.g., national advertising). Institutional factors: Good relationships with unions, unique job definitions (CA2 / CA3 / CA4)

Contrast dysfunctional conflict and functional conflict.

Dysfunctional Conflict · Creates doubt in s/h mind about firm's performance · Power/political conflict/behavior to win at all costs · Negative effects on interpersonal relationships · Consumes time, resources & emotional energy Functional conflict · Encourages innovation, communication & change · Stimulates creativity, problem-solving, & decision-making · Enhanced morale & cohesion within a group (OB12)

List the five EV multiples.

EV / EBITDA EV / EBIT EV / EBIT(1-t) EV / Capital invested (i.e., Value / Book Capital) EV / Sales

List and describe the elements of communication.

Encoding: Translating information into message or signal Decoding: How message is interpreted Medium / channel: Means by which message sent Receipt & Feedback: Process message is received and response sent back (OB9)

Describe how organizations can overcome communication barriers.

Encourage Proactive Individual Actions: · Consider medium & how message will be received, · Regulate information, · Encourage/reward/cultivate feedback, active listening. Conduct communication audits: Current communication capabilities, meetings/interviews w/mgmt. & associates, collect/analyze surveys & quality Improve Communication Climates: Develop trust by understanding perceptions of communication quality (OB9)

Define the following: - Endogenous variables - Exogenous variables

Endogenous: Dynamics explained by variables, structures & interactions within model. Exogeneous: Assumptions / behavior you've assumed, not modeled. Small number - Too many leads to inexplicable or favorable results not reflected by reality. (BD3)

Describe the following cognitive biases and practical considerations of them relative to financial incentives · Expectancy disconfirmation · Loss aversion

Expectancy disconfirmation model: Dissatisfaction arises when reward is removed. Loss aversion: Loss of reward more painful than gain of reward. Practical Considerations: · Sustainability of rewards w.r.t. type, amount, & timing. · Long-term resource requirements and customer participation rates · Be conservative when launching a rewards program. (SDM190)

Compare expected volume to normal volume.

Expected volume: Projected volume over upcoming year. Pros: · Improves decision control. · Downstream mgmt. will monitor upstream mgmt. more intensely when OH increases as volume falls Cons: · Suggests increasing prices if avg. cost increases from decrease in volume (prices should be lowered to increase demand) · Given two cost centers, can cause death spiral by allocating higher OH when one is experiencing lower volume (e.g. two factories w/one closing). Normal volume: Long-run average volume. Pros: · Stabilizes earnings · Improves decision management around pricing Cons: · Managers have less incentive to control over/under-absorbed OH if it's not passed to product costs. · Unclear how long to base normal volume on. (ADMC9)

Describe the following bias and how to address / mitigate it: · Expert bias

Expert bias: Relying on a single decision, or "chasing" a person's or group's past performance How to address it: • Review recommendations from a diverse set of qualified individuals (usually better than one decision-maker) • Do not chase past performance (SDM189)

Describe the following fundamental mode of behavior: · Exponential growth · Goal-seeking · Oscillation

Exponential Growth: Positive self-reinforcing feedback. Doesn't always need to generate growth (e.g., falling of stocks). Goal Seeking: Dominant negative feedback. Time to double or halve for any amount is the same for exp. growth and goal-seeking. Oscillation: Goal-seeking - corrective action but w/time delays causing over/undershoot, i.e. time to perceive state, initiate corrective actions, etc. (BD4)

Describe the different communication styles in interpersonal communication.

Expressiveness: Vivid, verbose, conversational dominance, humor, unpretentiousness Preciseness: Thoughtful, careful, structured Verbal aggressiveness: How opinions are advocated - authoritarian, angry, unsupportive Questioning orientation: Degree of curiosity - inquisitive, argumentative, philosophical Emotionality: Reflection of emotion - worry, tense, defensive Impression management: Calculated, guarded, dominating, charm, concealment (OB9)

Define flexible budgets for overhead.

Flexible budgets: OH = [Fixed costs + variable costs * volume] / allocation base (e.g. machine hours) OH rate is slope of line through origin & point (BV, BOH) (ADMC9)

Describe the components of a formal negotiation process.

Formal Negotiation Process Preparation: Parties outline goals & best alternative negotiated agreement (BATNA). Understand own and opponent's position. Ask questions like, Other party's position & power? Must they confer with others to make concessions? What do they consider a win? What is history of their negotiating style? Do they focus on distributive strategy or on integrative strategy? Determining the negotiation process: Timeline, place, structure of negotiation, sharing of information, how agreements will be approved Negotiating the agreement: Actual negotiation Closing the deal: Clear about conclusion, final agreement (OB12)

Describe some ways to control for differences in value multiples when making forward revenue comparisons.

Forward Revenues Comparisons · Firm is young, but higher CFs expected in future. · Firm is distressed currently, but revenues in future better reflect potential. · Easier to estimate multiples of revenues after growth rates have leveled off & risk profile is stable Methods: · PV(Multiple * Value): Use multiples of today against expected future revenues, then discount to present. · Current Value to Future Revenues: Forecast revenue in five years & divide current firm value by these forecasted revenues. · Regression w/Comparable Firms: Regress multiples of comparable firms, derive coefficients, and derive firm-specific expected multiples. Apply these to future revenues & discount back. · Exit Multiples: Estimating earnings in future year then applying exit multiple to reflect sale or public offering. Pitfalls of forward revenues methods: · Using best-case estimates instead of expected values: Need to account that some firms may not last. · Double-counting growth: Inflating multiples & justifying it as potential - But revenues already reflect growth. · Not PV'ing to Time 0 (DoV9)

List the four tests for doing relative valuation.

Four tests (steps) to using multiples · Definitional tests: Define the multiple consistently · Descriptional tests: Awareness of cross-sectional distribution of the multiple. · Analytical Tests: Drivers/behaviors of the multiple under different changes. · Application tests: Finding the right firms and controlling for differences. (DoV7)

Describe how analysts' perceptions of a company can change given changes in the following variables of EV multiples: · Growth · Risk · Effects from quality of investments · Tax rates

Growth: · Growth drives EV multiples, so lower growth firms appear cheaper and high growth appear overvalued. Risk: · Risk (higher CoC) significantly lowers EV. · Implications w.r.t. emerging vs. mature companies, differences in leverage, predictable CFs. Effects from Quality of Investments: · As ROC decreases, higher reinvestment rate needed to support growth rate. · If ROC < CoC, firm will trade below book capital. · Differences in margins change EV multiples (e.g., EV/Sales) consistently. Tax rates: · Pre-tax multiples decrease disproportionately more than after-tax multiples with higher tax rates · Therefore, high-tax rate firms look cheap compared to those with low tax rates. (DoV9)

Describe some guidelines on using linear optimization models

Guidelines on using linear optimization model · Think through issues & don't rely only on the model · Good data is essential for a good model & decisions · Study data in problem, qualify/supplement with your own judgement · Use optimization model wisely, and use sensitivity / what-if runs frequently (DMD3)

Describe the following w.r.t. MCEV: · Hedgable risks · Non-hedgable risks

Hedgable risks: Included in PVFP & TVOG. NH'able risk: · Risks are illiquid & asymmetrical, assumptions not based on credible data (mortality, etc.), no markets exist for replication. · For EC charge, discount NH'able risk at CoC at 99.5% confidence over 1 year. · Diversification allowed over projection, but other div. benefits not allowed. (SDM172)

List the ways a pyramid structure helps the reader move through writing.

Higher levels of abstraction suggest levels under them, so paragraphs thought of as one holistic idea. Aids reader in recall and helps avoid re-reading. Ideas, 1) ...summarize those that fall below them 2) ...are of the same kind (i.e., can you group ideas as a plural noun?); 3) ...are logically ordered Logic acts as a bridge and helps reader connect items to groupings and see your message. Ordering sets of ideas: · Deductively (major premise, minor premise, conclusion), · Chronologically (first, second, third), · Structurally (boston, NY, Washington), · Comparatively (first most important, second most, etc.) (PP1)

Describe how to value control premiums in acquisitions, and the ways they may differ among acquisitions.

How to value control premiums in acquisitions: 1) Calculate the status quo valuation 2) Calculate the valuation w/restructuring changes & value of control premium (restructure less status quo) 3) Determine what premium should be paid for the acquisition. The greater the premium, the greater the value of control paid to the target. No rules of thumb on control premiums exist since they'll vary based on, · Firm performance and the reasons for it · Firm characteristics (e.g., smaller vs. larger, industry, etc.) · Ease of changing mgmt. in the firm (DoV13)

Describe how the value of control can impact a stock's price.

If analysts build in expected value of control, the following implications apply: 1) Paying a premium for control can result in overpayment 2) Stock affected by changes in perception of likelihood of mgmt. change 3) Poor corp. governance leads to lower stock prices - If governance is effective, value of control will be high (easier to change mgmt.); if ineffective, value of control will be lower

Describe the modeling of the desired acquisition rate and expected losses when accounting for the supply line. · Indicated order rate (IO) · Adjustment to the supply line (ASL) · Desired / expected supply line (SL*, SL) · Expected acquisition lag (EAL) · Desired acquisition rate (DAR) · Time to perceive the acquisition lag (TPAL) · Expected loss rate (EL)

Indicated order rate is the sum of the desired acq. rate plus an adjustment to the supply line: IO = DAR + ASL The adjustment to the supply line (or stock level) is the A/E difference per units of delay time supply line ASL = SL* - SL / SLAT Adjustment could be immediate using desired acq. rate, or based on long-run requirements w/expected loss rate (EL) SL* = EAL*DAR or SL* = EAL * EL Expected acq. lag is a function of acq. lag and time to perceive the lag EAL = L(AL, TPAL) To ensure DAR is non-neative when there is a large surplus of inventory, DAR = Max(0, EL + AS)

Describe organizational barriers to effective communication.

Information overload: · From uncertainty & requiring more information. · Complex tasks · Tech developments increasing available information Information Distortion: · Moving through technology, · Competition withholding information, network breakdown (traveling through mult. people) · Specialty jargon, impairing communication · Time-pressure · Cross-cultural barriers, (OB9)

Describe the following considerations w.r.t. innovation: · Implementation & integration · Acquisitions · Alliances

Innovation Considerations: Implementing / integrating: · Facilitated through shared values/knowledge, strategic leadership & communication (e.g. allocating resources). · Appeal cross-functionally (horizontal vs. vertical) · Barriers from politics or frames of reference Acquisitions: · Careful selection of firms with complementary capabilities/assets to extend product/revenue lines. · Key risk from substituting acquisition for innovation. Alliances: · Alliances can help ID/exploit opportunities for innovation, but firms can use info for own benefit - careful consideration of partners for compatible skills/assets/goals. (SM13)

Describe how adoption of a new innovation/invention can be modeled similar to an infection.

Innovation diffusion as infection: · Word of mouth can spread like infection: Potential adopters (P) + adopters (A) = N (population). · Once potentials have been depleted, adoption (infection) rate falls to zero. · A/N is probability adopter is in contact (but can occur over phone call, email, etc.) (BD9)

Define the following: - Inside view - Power curve of market

Inside view: · People focus only on case at hand, & then try to predict based on own experience, even if never done something before. · Execs model this & tell favorable stories about how products stand out. They sandbag, asking for more than what they know they'll get. Power Curve of Market: · Power law in the tails: Middle of graph almost no economic profit. · Economic profit = profit - economic CoC (SDM179)

Contrast insulation & non-insulating methods of cost allocations.

Insulation method: Costs based on share of allocation base and not on other BUs' performance. Non-insulating: · Costs depend on other BUs' performance. · Diversifies by allocating more to higher performance. · May incentivize BUs to monitor each other & cooperate to improve performance · Can distort performance measure. (ADMC7)

Describe the following Negotiation Strategy & its Tactics · Integrative bargaining

Integrative bargaining: Collaborative win-win approach. Used when problem permits attractive solution for both. Tactics: Concerns are aligned/important; show how your target too important to compromise; show win-win is possible; show you're flexible to solutions; insist fair criteria for deciding among solutions (OB12)

Describe intended rationality and how to test for it in a decision model.

Intended rationality: · Decision rule produces reasonable result as if as if there were no delays, side effects, feedback, nonlinearities - i.e., system as simple as presumed to be. Partial model tests for intended rationality: · Test a single decision point or variable for reasonability & consistency w/mental model. (BD15)

Contrast internal innovation & internal corporate venturing.

Internal Innovation: · Incremental: Existing knowledge/tech · Radical: Significant breakthroughs, high potential for profits. Rare, difficult to achieve, risky, requires creativity. Internal corporate venturing: · Autonomous Strategic Behavior: Bottom-up - Product champions pursue new ideas. Push through political process to commercialize new good/service until success in the marketplace. · Induced Strategic Behavior: Top-down - Managers determine & foster type/amount of innovation desired. 1) Open innovation - Create industry standards; 2) Closed innovation - Generate returns disallowing others to use it. (SM13)

Challenges of Internal Analysis

Internal analysis challenges: · Managing assets: ID/develop/deploy/protect resources, capabilities, CC. · Mistaking CC for capabilities (vice versa) · Conditions: Environment/customer uncertainty, changes/trends, use of judgement, relationship complexity, intrafirm conflicts/decisions (e.g. managers) · Differentiate between CC & capabilities. (SM3)

Describe the following w.r.t. MCEV · Economic projection assumptions

Internally consistent, actively monitored/set, consistent w/prices of similar CFs. With regard to Investment Returns & Discount Rates: · Certainty equivalent valuation: Adjust CFs, not discount rate. Can use reference rate for investment return & discount rate · Risk-neutral valuation (risk-adjusted CFs) & State-price deflators (scenario-specific discount factors): Use when model is market consistent (SDM172)

Describe International Cooperative strategy

International cooperative strategy · Cross border strategic alliance: Combine resources/capabilities for comp. adv. Dif. countries. · Why: Limited domestic growth, overcome liabilities moving into foreign country (cultural knowledge/politics) · More complex than domestic alliances, but int'l alliances outperform domestic à importance of intl' diversifying (SM9)

Describe the two types of interpersonal communication.

Interpersonal Communication: Direct verbal/nonverbal Formal Communication: Formal structure, sanctioned information. Weaknesses: Slow, loss of morale/ dissatisfaction in company, difficult to overcome. Informal Communication: Spontaneous interaction. Strengths: Solidarity, easier to share & reach multiple people. Weaknesses: Rumors (unsubstantiated), gossip (presumed factual, communicated privately). (OB9)

Describe the types/bases of individual power.

Legitimate Power: Power from position, aka formal authority. Reward Power: Power from ability to provide others with desired outcomes. Coercive Power: Power from ability to punish others Expert Power: Power from special expertise or technical knowledge. Diminished when others gain knowledge. Referent Power: Power from others' desire to be associated with them Strategic Contingencies Model of Power: Power gained from addressing major problems faced by the firm (or reducing uncertainty) and developing contingencies. (OB12)

Describe levers & moves that matter to beat the market.

Levers · Endowment - what you start with (30% move on curve) · Revenue (size) · Debt level (leverage) · Past investment in R&D (innovation) · Trends that push you along · Industry trend · Exposure to growth geographies Moves that matter · Programmatic M&A: Steady stream of M&A deals (no more than <30% market cap in one year, >30% of market cap over 10 years) · Dynamic reallocation of resources: Moving resources when things failing or new opportunities arise (moving people around). · Strong capital expenditure: Spend >1.7x capital spending / sales vs. industry median. · Strength of productivity program: Improve productivity to put you at least in top 30% in your industry (fewer expenses). · Improvements in differentiation: Gross margin needs to reach top 30% in industry. E.g. selling products/services for equity in small business (SDM179)

Describe how to use linear optimization models under uncertainty.

Linear optimization under uncertainty Stage one & stage two: Today's current stage is stage one, and next quarter / scenario is stage two, which show all states of the world & their probabilities. Two's decisions don't have to be made until next quarter. Formulation of problem as Linear optimization model: Expected value of all objective functions with constraints specific to each scenario, and solve for optimal values Flexibility of two stage linear optimization modeling paradigm · Allows for flexibility modeling different probabilities for future states of the world · Allows for flexibility in modeling different numbers of states of the world (e.g., multiple scenarios to evaluate) · Allows for flexibility in modeling different numbers of stages (i.e. next quarter & the subsequent quarter) Summary of method for constructing two stage linear optimization model under uncertainty · Determine decisions in stage one (today) and stage two (next period) · Evaluate what will happen in next period, data in next period, and probability of those states in next period. · Create decision variables in each stage for each state of the world · Set up constraints · Account for today's decisions & expected value of next period's states (DMD3)

State Little's Law for First Order Material Delays.

Little's law: For a first-order delay with Input (I): If Output (O) = Stock (S) / Average Delay (D), then equilibrium (S) always occurs at DI (i.e., S = DI), regardless of probability distribution of outflow. Also means that Delay = S / O = S / I (BD11)

Describe ways to structure an analysis of the problem in writing.

Logic Trees · Financial Structure: Components & mutually exclusive exhaustive components at each branch. · Task structure: Divide each component into discrete task and analyze numbers in lower levels. · Activity Structure: Trace / decompose activities producing an undesirable effect · Choice Structure: Effectively decision tree until reach level with knowledge of likely causes. · Sequential structure: Move top-down through elements to ensure correct choice/activity is performed. (PP8)

Describe the logistic model for S-shaped growth, its formulas and benefits.

Logistic Model: Growth rate is downward sloping function of population. Benefits: · Provides reasonable approximation for S-shaped growth processes, · Can be solved analytically w/integration, · Can be transformed into linear equation & use least squares to estimate parameters. · (BD9)

Describe the following w.r.t. MCEV from the CFO forum: · Goals of the CFO forum · Free surplus · Required capital · Value of inforce · Frictional Costs of Capital

MCEV = free surplus + req. capital + VIF where VIF = PVFP - TVOG - FrCoC · Free surplus: Held at MV, no FrCoC - doesn't support liabilities. · Required capital: Financial strength, establish credit rating, meet internal risk-capital goals · VIF: Arbitrage free (no TV of money), provides for profit, TVOG, and frictional costs · FrCoC: Taxes, agency costs, financial distress. Goals: Robust guidance that ensures market valuation of CFs with specifics around, · Investment returns & discount rates, · Movement analysis · VoNB, · NH'able risks · Sensitivity analysis for firm comparability · Process implementation · Reflect mgmt. views, but aligned w/market. (SDM172)

Describe methods & analyses for use in EV.

MCEV Methods & Analysis Method used: Distributable earnings, MV BS method Movement analysis for comparability via standard template. Adjustments for capital & dividend flows, FX, acquired/divested business, model errors/improvements/changes, judgement, assumption changes, changes in experience during reporting period (restatement) Rate determination for expected earnings on free surplus and req. capital, and expected change in VIF Expected contribution broken into two components: · Investment return is BOP ref. rate, · Expected excess investment return over BOP period ref. rate (real world basis to reflect mgmt. expectation of business). · Underlying assumptions for investment return should be disclosed. Rate could be negative. · Don't' need to disclose economic assumptions/variances · Std. template may not work if firms perform analysis in different order with second order impacts · Timing of line items may differ among companies (BOP, MOP, EOP) (SDM172)

Describe the premiums on voting shares w.r.t. the value of control.

MV = status quo + (optimal - status quo)*Pr(Mgmt. Change) · If no chance of changing mgmt., no difference between voting/nonvoting shares. · Higher premium on voting shares, 1) ...at badly managed firms 2) ...where fewer voting shares 3) ...greater percentage of voting shares available for trading by general public (DoV13)

Describe the purpose of mapping a system structure, and tools for doing so.

Map system structure communicates boundary of model & causal structure. Tools to do so include the following: · Model boundary chart: I.e., list of endogenous/exogenous/excluded variables - Summarizes scope of variables, limitations. · Subsystem diagram: Summarize overall architecture of model - not too detailed, but can show hierarchy. · Causal loop diagrams · Stock and flow diagrams · Policy structure diagrams: Show information inputs into decisions & decision rules. (BD3)

Define the following market variances: · Price variance · Quantity variance · Mix variance · Sales variance

Marketing variances: Price & quantity variances Price variance = (actual price - std price) * actual quantity Quantity variance = (actual quantity - std qty) * std price Mix variance = (actual mix % - std mix %)*actual units of products sold * std price Sales variance = (actual units of all products sold - std units of products)*std mix% * std price · Mix & sales variances helpful when company sells multiple products that tend to be substitutes (ADMC13)

Describe material delays.

Material delays: Delay usually assumed not to be constrained (e.g. by capacity). Two components: 1) Average length/residence in delay 2) Distribution of output around the average time of delay: The way units enter a delay may affect how they're processed in delivery i.e., one-by-one, pulse input (quantity of units injected into delay at single instant). Affects distribution of delay & rate of outflow. Processing may be based on, · Decision rule / service discipline: Decision of which enter/exit, i.e. FIFO, LIFO), · Delay / travel time (may not the same for all units, e.g. letters) · Presence of mixing: Perfect mixing destroys information about first/last input & outflow. Proportional to stock of material in transit. · First order material delay: Outflow = Material in transit (S) / Average Delay Time (D) This forms a negative feedback loop since outflow rate is directly proportional to changes in stock - So outflow rate will exceed inflow rate & lower stock, then lowering the outflow rate. (BD11)

Describe the following w.r.t. the probability of changing management in a firm: · Mechanisms for changing mgmt. · Drivers of mgmt. change

Mechanisms for changing mgmt.: · Activist investors, · Proxy contests, · Forced CEO turnover, · Hostile acquisitions 1 - need to be target for acquisition, 2 - reasonable chance of success, 3 - acquirer has to change mgmt. & policies Drivers of mgmt. change: · Institutional constraints: Corporate governance rules, capital, regulatory/political, passive, or interest-conflicting · Firm-specific constraints, i.e., corporate antitakeover amendments in charter, limited voting rights in shares, complex corporate holding structures (e.g., pyramids, or large stock held by s/h or managers) · Activist investors · CEO making poor acquisitions or paying too much · Small board composed of outsiders · Competitive industry structure · Publicizing hostile takeover or ousting of CEO (DoV13)

State the determinant formulas for value and value-to-book multiples.

Memorizing identities and be able to substitute derive as needed. (DoV9)

Describe the following predisposition in decision-making: Moods vs. Emotions

Moods vs. Emotions Moods: States of being w.r.t. pos/neg. feelings. Moods are generic in nature. Disconnected from any particular event. May lead to more creativity, risk-taking, less consistent, etc. Emotions: States of being w.r.t. people & events. Emotions are discrete (e.g. fear, anger). May face regret & react by avoiding choice again in future, or engaging in self-management: · Protecting ego by trying to reverse decision, · Run from responsibility, · Hindsight 20/20, · Ignore/suppress outcome, · Self-justification, anger. (OB10)

Describe the following types multiples: · Multiples of earnings · BV or replacement value multiples · Revenue multiples · Sector-specific

Multiples of Earnings: E.g., EPS, P/E, four quarter avg. (trailing P/E), expected EPS over next year (forward P/E) BV or replacement value multiples: Since accounting can distort values, may look at · EV / BV · Tobin's Q: MV / replacement cost of assets (avoids using BV). Revenue multiples: · Price / sales or EV / sales. · Revenues multiples make it easier to compare firms in different markets Sector-specific: Not recommended, would depend on the sector, not easily comparable, over/undervaluations persistent. (DoV7)

Describe the following bias and how to address / mitigate it: · Narrow framing

Narrow framing: Focusing on a single attribute / problem in isolation for decision - even when interdependent and/or expected outcomes are the same or comparable. How to address it: • Consistent evaluation metrics aligned w/firm's goals • Capital decisions made in aggregate rather than individually or one at a time. (SDM189)

Describe the following types of accounting measures used in controlling behavior · Net income · Return on investment · Residual income · Economic Value Added (EVA)

Net income: Pros: · Considers debt financing Cons: · Doesn't consider equity financing. · May incentivize overinvestment if it produces positive net income. Return on investment: Net Income / Total Assets (ROA), or Net Income NI / Total Assets Invested Pros: · Compare to market yields · Recognizes gain/loss Cons: · Ignores appreciation & intangibles; · could lead to overinvestment (ROI lower than capital charge) or underinvestment (ROI higher than capital charge, but lower than usual ROI) Residual income: Profits - opp. CoC (weighted avg.) Pros: Single number Cons: Difficult when comparing small & large divisions. EVA: Adjusted earnings - CoC. · CoC based on total division / firm assets. · Example of adj earnings: Add back in R&D costs since LT focus Pros: · Can be tied to manager compensation to maximize firm performance. Cons: · Difficult to implement system evaluating both firm performance and employee compensation - Need employees to understand. (ADMC5)

Describe network cooperative strategy, and the types.

Network cooperative strategy: · Partnerships among several firms w/shared objectives. · Effective for geographically clustered firms. · Shared knowledge from multiple sources leads to innovation. Types include 1) Alliance network: Partnerships firms develop when using network cooperative strategy 2) Stable alliance: Networks in mature industries w/predictable demand for economies of scale/scope 3) Dynamic alliance: Industries w/frequent product innovations and short life cycles. (SM9)

Describe the following w.r.t. MCEV · New business and renewals

New Business and Renewals: · Analyze A/E renewals - Assumptions consistent between inforce & NB (but not necessarily the same). · NB margins defined as ratio of VofNB / PVNBP. Should reflect additional s/h value from NB. · Do not need to restate if assumptions change, but should disclose if they do. (SDM172)

Describe the following group decision-making techniques: · Nominal Group Technique · Constructive conflict approaches

Nominal Group Technique: Structured discussion, but final decision decided by silent vote: · Ideas written down silently · First round - One member one idea. Repeat until all ideas presented. No discussion until finished. · Ideas recorded & discussed. Clarify & evaluate. · Conclude with silent & independent vote / ranking of alternatives. Decision determined by summing or pooling votes. Constructive conflict approaches: May lead to lower satisfaction than other approaches due to conflict, still effective. · Dialectical inquiry: Two points of view / recommendations developed by subgroups, then debated. Helps ensure thorough review. · Devil's advocacy: Member/subgroup argues against others' recommendation. Only generates one set of assumptions/recommendations. (OB10)

Describe the following cognitive biases and practical considerations of them relative to financial incentives · Reciprocity theory · Crowding out effect

Norm of reciprocity: Rewards reinforce behavior and set expectations for future rewards if behavior is repeated. Crowding Out Effect: If you lead with money, money will likely always be a factor in the relationship Practical Considerations: · Rewards set expectations for fair exchanges · Financial incentives may detract from product value (SDM190)

Describe the origin of oscillations and the order rate when the supply line is fully accounted for.

Oscillations: · Time delay must be partially ignored. · Continued corrective actions for perceived gap in desired/actual state. · If WSL = 1, more stable response of system to shocks. · If WSL=0, managers ignore supply line altogether. (BD17)

Define the following: · Power · Organizational politics

Power: Ability to achieve desired outcomes. Organizational Politics: Behavior to further self-interest w/o concern for others (OB12)

Describe how to calculate the minority discount / control premium when buying a private firm.

Private company valuations / Minority discounts & control premiums · If buying 51% of firm, pay 51% of optimal value of firm. · If 49% or less, pay 49% of status quo valuation. · Difference between the two is the minority discount. The following implications apply for minority discounts & control premiums: · Minority discount should vary inversely with mgmt. quality · Control may not always require 51%. · Value of an equity stake will depend on if it provides owner with a say in the way a firm is run (DoV13)

Describe why problem-solving arises and the routine for problem-solving.

Problem solving arises from undesirable/unexplainable results. · Define the problem: ID the gap in actual/desired and source of the problem (requires understanding the system and its data/inputs/outputs) · Reason for the problem: Underlying behaviors/processes in the system. · Potential Solutions: Feasibility, likelihood of success · Best possible solution, and changes needed: Costs/benefits/risks (PP8)

Describe the pros/cons of using regression when controlling for differences across companies using relative valuation.

Pros: · Inform about strength of variable relationships · Can be adjusted for nonlinearity · Can be extended to multiple regression & cross effects. Cons: · Using regression requires careful definition of market or sector (too few/many samples) · Narrowing our choice of fundamentals used for explanatory (independent) variables. (DoV7)

Describe the pros and cons of using accounting / financial measures for controlling behavior.

Pros: · Useful for monitoring as part of performance evaluation. · Useful for decision control · Decisions not related to ratifying or monitoring can be made with aggregate accounting data. Cons: · Must ensure financial measures not under control of those being monitored · Non-financial measures better for decision management control and operations mgmt. since more timely & more frequently available · Decisions made with aggregate data - no ratifying or monitoring individual decisions (ADMC4)

Describe the following w.r.t. MCEV · Reference (swap) rates

Proxy for risk-free rate that can be used if liabilities are liquid. Advantages of swap rates · More liquid than gov. bonds and don't need liquidity premium · Widely adopted · Consistent with implied volatilities · Synthetic instruments that don't suffer from systematic distortions Disadvantages of swap rates · Contain small margin for credit risk · Not available in all markets or in all durations (SDM172)

Describe the reasons for including an adjustment for expected losses to the supply line, and the intended goals of the adjustment.

Reasons for including an adjustment for expected losses (outflows) to the supply line: (1) Leaving expected losses out leads to a steady state error where stock differs from desired value for long-term equilibrium (2) In reality, decisions often account for losses when managing stocks, so wouldn't be sensible to exclude them. The adjustment corrects for two things: (1) Avoids over-ordering by accounting for correction in stock shortfall that would cause overshoot. (2) Compensates for changes in acquisition lag. (BD17)

Describe the following: · Reasons for allocating costs · Cost allocation steps · Considerations for disaggregating costs, · Considerations w.r.t. cost analysis / allocation

Reasons to Allocate Costs · External reporting & taxes · Cost-based reimbursement · Decision making & control · Cost allocation can act as a tax on profit center & alter how managers invest · Externalities: Indirect costs/benefits from marginal addition of production/people (e.g. add'l cost to HR to admin one more new hire beyond just the salary). Positive could be pollution, negative could be well-educated citizens. Cost allocation steps · Define cost objects · ID/accumulate common costs · Choose method for allocating using allocation base Disaggregate based on · Materiality/growth · Cost/activity behavior & interdependencies · Competitors Considerations in cost analysis / allocation: · Grouping smaller costs together · Cost drivers: Splitting activities w.r.t. BU, shared, links, competitors. · Assigning assets by activity · Time period: Seasonality, cycle, discontinuity. (CA2 / CA3 / CA4 / ADMC7)

List some reasons why it's important to study cost variances.

Reasons to study variances: · A/Es, judge performance, · Contract bidding, evaluating alternatives, · Transfer prices within firm, · Benchmarks for decision. · Assessing random variation: The sum of the aggregate variance should be near-zero - Otherwise, it indicates that the variance is not random fluctuation. · Variances might indicate that standards are unrealistic or unreasonable, or that system is out of control. (ADMC12)

Describe some strategies to beat market odds & better strategize.

Recommendations: · Change strategy from annual to continuous · Change base case to momentum cases · Make strong bets on a few breakout cases than spreading resources across divisions (SDM179)

Processes to elicit information from the client

Reference modes: Graphs & descriptive data showing development of problem over time. Time horizon: Emergence of problem & effects on policies/decisions. Choice of time frame changes perception of problem. Set time frame >longest delay in system. (BD3)

Describe relative valuation and its strengths & weaknesses

Relative valuation composed of three steps: 1) Finding comparable assets. 2) Scaling variable to generate standardized prices 3) Adjusting for differences across variables for comparability Strengths: · Widely used/accepted · Less time/resource intensive than DCF · Easier to sell/defend to investors · Reflect current mood of market Weaknesses · Potential for inconsistent estimates · Market may systemically under/overvalues · Can be subject to analyst bias/manipulation · Multiples can have short shelf lives since change over time. (DoV7)

Describe some considerations of illiquidity on relative valuation.

Relative valuation with illiquid assets: Difficult to do, need the following: · Sufficient comparable firms (growth, risk, CF), · Sufficient number of transactions for these firms/assets and information around these transactions, · Control for accounting differences Relative valuation with illiquidity discount: Adjust discount rate in consistent way as adjusting firms' data/multiples. (DoV14)

Describe the following steps of the five prong problem solving approach. · Define the problem

Rewiring the brain is difficult. Instead consider the following: · Guide people to reconsidering how they perceive or respond to a situation. · When people act against own best interests, gently guide to different choices more aligned w/their best interests. · Try to break problem down into smaller, more manageable pieces. (SDM184)

Characterize communication media in interpersonal communication

Richness: How much info medium conveys. Depends on 1) potential for immediate feedback, 2) multiple cues, 3) use of natural language (vs. numbers) 4) extent communication has personal focus Order of richness · Face to face: Richest - cues, tone, semantics, facial expressions, body language. · Video conferencing, phone / radio · Email / text · Personal written text · Formal written text · Formal numerical text (graphs, stats, printouts) Tradeoff: Richness has a tradeoff of cost/benefit · Emotionally stable: Richer media requiring social skill · Emotionally unstable: Leaner media independent of situation · Deceiving use richer media · May depend on firm norms/requirements (OB9)

Describe the determinants of firm value.

Risk: Stems from cost of capital (debt/equity) Cashflow: Cash after taxes & reinvestment to maintain assets, but before debt pmts. Growth · ST growth from inforce assets, but limited efficiency. · LT growth from new assets if firm reinvests at RoC. · Length of growth period based on sustainable competitive advantage, RoC, and CoC. Other: Cash, cross holdings, nonoperating assets (DoV13)

Describe the following mode of behavior: · S-shaped growth · S-shaped with overshoot · S-shaped overshoot & collapse

S-shaped growth: Exp. growth approaches carrying capacity (E.g., new organisms in ecosystem). Two conditions need to be met for S-shaped growth: 1) Negative loops include no significant time delays; 2) Carrying capacity must be fixed. S-shaped growth with overshoot: Overshoots carrying capacity & oscillates from delays. S-shaped overshoot & collapse: Never reaches equilibrium. Resources continue to be consumed & carrying capacity falls if it is nonrenewable (e.g. normal distribution). If carrying capacity can regenerate, a nonzero equilibrium can be maintained. (BD4)

Describe what shadow prices are in linear optimization.

Sensitivity Analysis & Shadow Prices on Constraints Shadow price (marginal price, dual price, marginal cost): The change in the optimal value if decision variables are increased by one unit, all else fixed. (e.g. how much more the party should be willing to pay for additional x of something). Economic information in shadow price, e.g. incremental value per change in unit General principles governing shadow prices · Shadow price of zero when constraint is non-binding at optimal solution. · One shadow price for each constraint: Unit of shadow price is unit of objective function per unit of constraint (e.g. $ / lbs) · · The derivative of the objective function w.r.t. constraint is the shadow price (change in optimal objective function value / RHS of constraint) · If constraint is binding, then shdow price is same as lagrange multipler. But strict inequalities don't exist in lagrange multiplers. · Shadow price is acceptable within a range, e.g. from spreadsheet model in text $60/1000lbs is acceptable for a 1.5 increase or 2.25 decrease in the constraint; after that we don't know what the shadow price is (DMD3)

Segments of general environment.

Shortcut: PESTELI-GD · Demographic, economic, political/legal, sociocultural, technology, global, physical (SM2)

Describe stock behavior when including sudden expected losses.

Significant amplification: · Acquisition rate (AR) increases more than when the desired stock increases. · Ex.p.672: Increase in 20% of desired stock leads to 19.2 units / 12.5 units = +53% increase in acquisition rate. Amplification ratio of 53%/20% = 2.65, so a 1% increase in desired capacity will increase new capital by 2.65%. Amplification is temporary and overshoots equilibrium, since it's only way for to compensate stock is for AR to exceed LR (ex.p.672) (BD17)

Describe the types of markets within competitive dynamics.

Slow-cycle markets: · Imitation is costly and shields competitive advantage. Fast-cycle markets: · Imitation frequent, rapid & inexpensive, and comes from reverse engineering. · Innovation key source of competitive advantage, but is difficult to maintain. Standard cycle markets: · Blend of slow & fast cycle markets. · Competitive advantage is partially sustainable. (SM5)

Describe negative consequences of using standard costs and variances, and how performance evaluation can assist in mitigation.

Standard costs & variances help control costs & undesirable incentives when used with performance evaluation: 1) Incentives for higher inventories: Higher inventories spreads out cost and improves earnings & favorable cost variances. Opportunity CoC w/raw materials in inventory. Mitigation: Charging managers for inventory holding costs mitigates, but would have to be backed in accounting. 2) Negative Externalities: Buying substandard materials to impose additional work on downstream production. Mitigation: Standards & specs around purchasing, and tying purchasing manager to variances around rework and/or raw materials quantity 3) Cooperation can be discouraged: If individuals are evaluated based on variances, can encourage shirking in or among teams. Mitigation: · Variances for team or department, and evaluating individual & group accomplishments. · Mutual monitoring of managers (e.g. purchasing & production managers monitor each other) Satisficing: Rewarding managers for the standard disincentivizes managers to go further. Mitigation: Compensation schemes should incentivize better performance. (ADMC12)

Describe the following w.r.t. Standard Costs: · Standards · Target costing · Risk reduction

Standards: · Bottom-up set at BOY and used as benchmarks. · Tighter standards, more decision control (vice versa) · Those w/control over variance thresholds usually have ratification rights over standards. Target costing Target cost = target price - target profit · Top-down w/focus on setting correct costs at product development/planning by reducing costs by subcomponent. · Once product is designed, opportunity to reduce cost is gone. Risk reduction: · Use of standard costs & booking to variance accounts removes uncontrollable factors from downstream users --> Salaries are less for not having to bear this risk. (ADMC12)

Describe the following other modes of behavior: · Stasis or equilibrium · Randomness · Chaos (and what is not chaos)

Stasis or equilibrium: Neg. feedback so nearly constant, or imperceptible change. Randomness: Our imperfect understanding about a system's variations. Noise causes deviations. Chaos · Chaotic oscillations: Period/oscillation that never repeats itself exactly. Sensitive dependence - divergence until each provides no information about other. What is not Chaos Dampened oscillations - · Local stability: Jolts cause systems to change, but natural tendency to equilibrium (e.g., swings) · Locally unstable: Small jolts knock some systems out of equilibrium quite a bit or altogether - i.e., ball on a hill · Limit cycles: Nonlinear limits constraining oscillations or amplitudes. · Global stability: Doesn't diverge into infinity. Limit cycles keep oscillations constrained. (BD4)

Describe the vertical restructuring framework.

Steps in applying vertical restructuring framework: ID/disaggregate stages of chain. ID participants at each stage: · Market size · Participants · Pre/post investment phases · Types of transactions · Subtle ownership connections Static analysis: · Asset specificity, · Bilateral monopoly / oligopoly, · Transaction frequency · Economic surplus available · Market power asymmetry. Dynamic analysis: Predict changes: · Asset specificity · Number of buyers/sellers · Transaction frequency · Behavior of buyers & sellers · Power asymmetry · Industry structure Develop VI Strategy · Develop/assess criteria for optimal vertical strategy looks like · Evaluate if changes in structure are needed to support · Beware of "gut" or "feel" of decision-makers and attack faulty logic Vertical restructuring framework (see graph/chart) · Is the adjacent stage in an attractive industry or possess a skills match? · If the stage is subject to VMF and quasi integration won't work, remain partially integrated. · If the stage is subject to VMF & can't defend/exploit market power, exit the stage. · If the stage is subject to VMF but can defend/exploit market power, remain integrated (SDM138)

Describe the solution of a linear optimization model.

Steps: · Graph non-negativity conditions · Graph each of constraints (e.g. 1.5W+P=27) · Shade in feasible region that satisfies constraints · Determine the objective function isoquants · Determine optimal solution - one of the corner points of the polygon · Multiple optimal solutions if isoquant touches feasible region boundaries · Unbounded linear optimization model if arbitrarily large values for maximization, or vice versa · Infeasible if no plan satisfies all constraints · Limitations: Graphing only works for two variables - beyond this needs computer algorithms. Unbounded solutions may make optimization infeasible. (DMD3)

Describe strategic alliances, the reasons for them, & the types.

Strategic alliance: Cooperate w/resources & capabilities for comp. advantage. · Joint venture: Indep. LID created for comp. adv. w/shared resources. Good during uncertainty. · Equity Strategic Alliance: Each owns % of LID, combine some resources/capabilities · Non-equity Strategic Alliance: No new LID/equity. Informal sharing resources / capabilities. Not good for complex projects Reasons for Strategic Alliances · Create value can't create alone, enter new markets · Lack resources / capabilities for objectives, e.g. small businesses · Unique competitive conditions for different types of markets (SM9)

Describe key concerns of business-level strategy.

Strategy Focus for LT Performance: · Exploiting core competencies for above average returns, · Vision/mission, · Environments · Competitiveness, · Allocate resources, · Understand customers' needs & how to satisfy. (SM4)

Describe Competitor Analysis

Studying competitors actions & strategies, and understanding where market and resource commonality may exist. (SM5)

Describe SI and SIR models for epidemics, and the tipping point when an infection becomes an epidemic.

Susceptible Infectious (SI) Model: · Logistic model assuming no recovery or reversing a transition in a susceptible population (S) given a contact rate (c) · S*c encounters · Likelihood of I/N of those encounters are infected · Total population of S + I = N · Infectivity rate of i, · Infection rate = (Sc*i)*(I/N) Susceptible Infectious Recovery (SIR): · Includes recovery from healing, quarantine, immunization, etc. · Average duration of infectivity (recovery rate) = I/d · Tipping point for epidemic when infection rate exceeds recovery rate: Sc*i*(I / N) > I / d, or cid(S/N) > 1 (BD9)

Contrast System 1 and System 2 Thinking.

System 1 thinking: · Automatic, mental shortcuts, intuition, emotional · Potential for poor decisions, biases, or lack of follow-through on LT plans if unchecked System 2 thinking: · Slow, logical & deliberate. · Challenges our intuition and corrects snap judgments · Requires cognitive effort - Can't govern all decisions since energy is scarce. (SDM184)

Explain why the interactions of different policies must be considered.

Systems are highly non-linear - Policies may interfere with each other or create synergies, but they are not the sum of their impacts alone. (BD3)

Describe the following w.r.t. MCEV: · Financial options & guarantees

TVFOG = Stochastic PVFP - Deterministic PVFP · Assets projected at reference rate. · Credited rates locked in at beginning & excess distributed to p/h, so no stochastic CIR needed. · P/h floors or bonuses at other end of contract need stochastic projection · Consistent w/markets, but may consider historical experience, current economic environment, and future behaviors & costs (SDM172)

Describe temporary vs. permanent write-offs w.r.t. expenses.

Temporary changes in costs (due to demand) can be offset with one-time write-off Permanent changes can be offset with changes to plant, property, equipment, etc. (e.g. reducing depreciation schedule). Mgmt. reluctant to permanent write-offs since may signal to competitors about their sales & capacity, or may signal that they overinvested in capacity (hurts their careers) (ADMC9)

Compare the Industry Organizational Model and the Resource Based Model of Above Average Returns

The Industry Organization (I/O) Model: Industry source of competitive advantage & determine where to compete. Firms have similar resources, and differences are short-lived. Above-average returns from cost-leadership & differentiation. · Study environment · Locate industry · ID strategy · Develop/acquire assets/skills · Leverage strengths to implement Resource-Based Model: Competitive advantage comes from strategy using uniqueness of resources & capabilities, which can evolve over time. · ID firm's resources, study strengths/weaknesses vs. competitors · Determine what/how capabilities lead to comp. advantage. · ID industry/strategy to exploit resources/capabilities (SM1)

Describe the impact of cost drivers on differentiation.

The cost of differentiation: Reflects cost drivers of value activities. Relationship between uniqueness & cost drivers: (1) Uniqueness drivers impacts cost drivers (2) Cost drivers can affect cost of being unique If making activity unique lowers costs, then (1) firm hasn't exploited all opportunities to lower costs, (2) uniqueness formerly judged undesirable, or (3) significant innovation occurred that competitors haven't exploited yet (CA2 / CA3 / CA4)

Describe cost leadership as a Business Level Strategy in terms of the following: · Theme · Porter's five forces · Competitive risks

Theme - Acceptable: · Broad market, low cost, acceptable quality, · Innovation for standardization & efficiency · Complementary products/services, · Economies of scale Competition/Rivalries: Consider w.r.t. their size/number/location/resources Bargaining Power of Buyers: Excessive pressure forces firm to leave market, so customer has to pay higher price Bargaining Power of Suppliers: Higher margins and large product offerings help absorb cost increases from supplier. Threat of new entrants (barriers): Efficiency Substitutes: Less concern since lower cost detracts from substitutes' value Competitive risks: Innovation, understanding cust. needs, imitation by competitors. (SM4)

Describe differentiation as a Business Level Strategy in terms of the following: · Theme · Porter's five forces · Competitive risks

Theme - Distinct: · Broad market, products distinctive in many ways to create value & insulate against rivals. · Thorough customer understanding & how to demand premium · Consistent upgrade in features without significant cost increases Rivalries: Insulated using brand loyalty to create price insensitivity Bargaining power of buyers: Insulated using brand loyalty to create price insensitivity Bargaining power of suppliers: High margins help absorb price changes in high quality components Potential entrants: Overcome customer loyalty Product substitutes: Overcome customer loyalty Competitive risks: · Competition price differential too large, · Customer reconsiders their needs & narrows their perception of value, · Differentiation becomes less valuable, · Counterfeits from competitors (SM4)

Describe Integrated Cost Leadership / Differentiation as a Business Level Strategy in terms of the following: · Theme · Focuses · Competitive risks

Theme: Low cost and differentiation. Flexible manufacturing systems: Flexibility in human, physical, & information resources to differentiate products at low cost Information networks: Linking companies w/suppliers, distributors, & customers to ease flexibility & satisfy customer expectations. Total quality: Focus on customer satisfaction & cost Competitive risks: · Reduce costs while differentiating, · Maintaining primary/support functions in value chain, · Can't attract customers - cost not low enough & can't differentiate - neither cost / differentiation leadership (SM4)

Describe the following steps of the five prong problem solving approach. · Testing the solution

Three key elements: 1) ID desired outcome: Specific & measurable 2) ID possible solutions & focus on one. Multiple things makes effecting change too complex for the desired outcome. 3) Introduce the change in some areas of the firm ("treatment group") and not others ("control group"): e.g., break into groups/teams, change the environment to get around biases / motivation issues. (SDM184)

Define the following terms: - Three types of innovation firms engage in. - Entrepreneur - Entrepreneurial Opportunities - Entrepreneurial Mindset - International Entrepreneurs

Three types firms engage in: - Invention: new product/process. Measured in technical ways. - Innovation: Bring something to use. Measured in commercial ways/metrics - Imitation: Adoption of similar innovation from different firm Entrepreneurs: Exploit market imperfections for comp. advantage. Individuals, teams, organizations. Highly motivated, passionate, self-confident, optimistic, emotional about product, strong social skills, planners Entrepreneurial Opportunities: Chance to develop new product or sell existing product in new market. Exploit conditions to satisfy need in market. "Creative destruction" of existing goods/services. Entrepreneurial mindset: ID opportunities w/potential for innovation leading to competitive advantage. Requires absorptive capacity to learn & link old info to new. International Entrepreneurs: Opportunities outside domestic. Internationalization leads to increased performance. How entrepreneurs differ in countries (culture, amt. invested, experience, gained/sustained comp. adv.) (SM13)

Describe three types of OH cost pools that can be used in absorption cost systems.

Three ways to allocate costs under absorption cost systems (depends on firm) · Plantwide: Good if using homogenous process (e.g. one product). Not if produces heterogenous products · Individual cost accounts for individual cost items: Good for understanding cost drivers · OH rates by department: Increased bookkeeping costs if large firm (ADMC9)

Describe the three-legged stool analogy w.r.t. to a firm.

Three-legged stool (org. architecture structure): Firm incurs costs to do what market already does more efficiently: · Measure performance · Reward/punish performance · Partition decision rights to highest valued use One leg falls, they all fall (e.g., using objective vs. subjective measures, or financial vs. nonfinancial measures) (ADMC4)

Describe how the mere-reaction effect ties into the role of timing & frequency of incentives & rewards on customer behavior.

Timing, consistency, & frequency of thank-you's · Fast acknowledgement/reward of a behavior is more important than the frequency of rewarding the behavior, even if the response is minor. Mere-reaction effect: People like to repeat behaviors generating any kind of reaction, even if reactions are negative or not useful. Offers people the illusion of control if they can generate reactions (not necessarily the content). (SDM190)

Contrast the top-down approach with the bottom-up approach when building a pyramid in writing, and caveats for beginners

Top down approach/method · Decide the question for the reader and write the answer if known. · ID the situation the reader will agree with as true or verifiable · Answer the question "What problem arose?" · Check - The complication should raise the question you wrote. Bottom up approach: If can't decide what the subject or question is, · List all the points you think you want to make · Connect relationships between them · Draw conclusions, determine subject, question, answer, situation, complication & key lines. Caveats for beginners · Try top down first · Situation helps think through the introduction · Don't skip thinking through the introduction · Historical chronology in the introduction: Needed for cause-effect relationships (indicates analysis) · Limit the introduction to what the reader will agree is true or what they know · All key line points supported with deductive or inductive reasoning, & answered each question raised. (PP3)

Describe total OH variance and its three disaggregated variances.

Total OH variance: Over/under-absorbed OH. = actual OH incurred - OH absorbed = AOH - (OH rate * SV) Made up of three variances: Efficiency Variance: Difference in flexible budget under actual volume vs. under standard volume. Implies a difference in the measure of unit volume (e.g., some units were poor quality & were scrapped). FOH + VOH*AV - FOH + VOH*SV Spending Variance: Difference in actual overhead vs. flexible budget under actual volume. Implies a difference in fixed (i.e., property taxes) or variable costs (e.g., materials for unit production). Actual OH - flexible budget at actual volume Volume Variance: Difference in flexible budget under standard volume vs. under budgeted volume scaled for SV / BV. Implies a difference in actual vs. expected units produced (underused or overused capacity). FOH + VOH*SV - OHR*SV= FOH + VOH*SV - (FOH + VOH*BV) * SV / BV (ADMC13)

Describe the trivialization effect of customer rewards, and practical considerations of it.

Trivialization effect: Market norms have conditioned us to compare rewards received against the behavior/effort exerted. The greater the perceived disconnect, the greater the dissatisfaction. Sometimes a simple thanks leads to greater satisfaction. Practical Considerations: · Leave financial rewards out. · Positive or Negative: Setting a standard, comparing to competitors, etc. may lead to customers anchoring their future expectations. · If you can hone in on incentive reference points, may be able to capitalize on them. (SDM190)

List and describe the three types of conflict.

Types of Conflict · Personal conflict: Personal differences. · Substantive conflict: Work content, tasks & goals. Can be turned positive if managed correctly · Procedural conflict: How work should be completed (OB12)

Describe some discrete optimization problems.

Types of discrete optimization problems · Integer optimization model: Decision variables need to be integers · Binary optimization model: Decisions are binary - zero or one · Mixed integer optimization model: Some are integer or binary, others are regular decision variables (DMD9)

Describe some applications of management science models (e.g., optimization models).

Uses of management science models in the airline industry · Hub & spoke system: Cities are spokes that airport serves. Models used to determine where to place airports to optimally take advantage of markets (binary optimization) · Demand forecasting (linear regression) · Flight schedule: how many flights to book (mixed integer optimization model) · Fleet assignment: Which flight to assign to which plane based on fuel, capacity, etc. (binary optimization model) · Crew pairing/assignment (binary optimization) · Overbooking from no-shows or cancelled reservations (decision trees) · Revenue management (linear optimization model) Mgmt. science models in the investment mgmt. industry · Analysis of financial data · Forecasting future performance of assets · Construction & mgmt. of efficient portfolios · Determining trading strategies to minimize trading costs · Evaluation of financial assets, e.g. options & other derivatives (DMD10)

Describe some valid and invalid reasons to vertically integrate.

Valid reasons to integrate · Vertical market failure: Few buyers/sellers, haggling / manipulation, +costs/risks. · Frequent transaction costs: Negotiating, exploiting monopoly status, opportunism, bounded rationality · Exploit market power in adjacent stage: Develop/enter new markets or backfill for firms exiting, leverage price insensitive markets. · Asset specificity: Something specific to success / comp. adv. Site specificity (assets kept close by, e.g. mines), technical specificity (tech w/low alt. value, only used by one/both parties), human capital specificity (skills specific to customer relationship) · Increased switching costs: Asset specificity, capital intensity, asset durability. · Economic surplus in adjacent & fragmented markets Common (invalid) reasons for excessive integration 1) Spurious reasons: · Smooth earnings volatility: (1) Returns in industry often positively correlated, so will not smooth, (2) s/h can diversify to reduce unsystematic risk · Assuring supply or outlets: In efficient markets, not a concern - even if price seems unfair relative to costs. · Capturing more value by moving into value-added stages of chain (e.g. moving closer to customers) - Weak correlation. Economic surplus drives superior returns. 2) Failure to consider quasi integration strategies. (SDM138)

Describe the generic value chain.

Value Chain: Source of capabilities/CC leading to competitive advantage. - Primary activities: Physical creation, sale & transfer of product. In/outbound logistics, operations, marketing/sales, service. - Support activities: Support all VCA. HR, technology development, procurement, finance, etc. (CA2 / CA3 / CA4/SM3)

Describe the value of control.

Value of control: Value of firm from current mgmt. (status quo), and the value under optimal mgmt. Calculated as the product of, (Optimal firm value - status quo value) * (Probability of changing mgmt.) (DoV13)

Define: · Value · Value added · Margin · Differentiation · Industry segmentation · Merger · Acquisition · Takeover · Synergy · Private synergy

Value: Performance/differentiation w.r.t. cost. Willing to pay. Value added: Price less raw materials. Ignores other inputs, cost behavior, sources of cost reduction / differentiation. Margin: Value less cost Differentiation: Premium price, loyalty, ability to sell more. Sourced from VCA, quality, breadth of activities/scope, and downstream channels. Industry segmentation: Subunits via boundaries, customers, their needs/behavior, & products. Determine segment's attractiveness, competitive scope (where/when/how to compete), strategy sustainability w.r.t. comp. adv. Merger: Integrate, coequal basis Acquisition: Controlling share Takeover: Unsolicited Synergy: Value together > value apart Private synergy: Capabilities/CC only w/target (CA2 / CA3 / CA4 / SM7)

Describe variable costing, the incentive to overproduce from it, & other problems of variable costing.

Variable (direct) costing: · Ax+B, where B are fixed costs and A are variable costs per unit · In variable costing, fixed costs are written off in the period they occur, whereas under absorption costing they're spread over units produced. Problems / Incentives from variable costing: 1) Incentive to overproduce: · If actual costs differ from expected at EOY, mgmt. can classify as fixed or variable according to their own discretion: If fixed cost but classified as variable, difference gets averaged over units produced and some gets inventoried. 2) Who decides which is fixed & which is variable? Puts them outside of scope of monitoring and allows them to persuade / manipulate if they know more. 3) Doesn't account for opportunity cost of capacity. 4) Unit Costs: If constraints on costs, then neither variable or fixed costs will account for costs beyond those constraints (since they're based on historical data) (ADMC10)

Describe variable delay times.

Variable delay times: · Delays depend on both exogeneous / endogeneous factors. If waiting for an ATM, waiting time only depends on people already in line (endogeneous). · Modeling nonlinear delays can use time constant based on state of system (piecewise function). (BD11)

Describe some reasons as to why we ignore the supply line and time delays in complex systems.

Why do we ignore the supply line (1) Not accounting for time delays; (2) Learning time often exceeds experience/tenure of decision-makers (3) Ignoring delays sometimes rational (e.g., in annual, quarterly or monthly performance reviews) Why don't markets weed out people with suboptimal decision rules? · Investors/firms only consider themselves · Rest of the market taken as exogeneous. · "Others should've seen it coming" - groupthink and herd mentality (BD17)

Describe the likelihood of responses in interfirm rivalry.

· Action: Dependent if competitor action was strategic vs. tactical - Will dictate time, resources and commitment to respond. · Reputation: More responses to market leader actions. Fewer responses to unpredictable competitors. · Market dependence: Greater market dependence leads to greater chance of responding. (SM5)

Describe the advantages & disadvantages of using groups for decision-making.

· Advantages: · Accumulate more knowledge for better alternatives · Often superior judgement evaluating alternatives (espec. when complex), · Higher level acceptance & satisfaction, · Personal growth for group · Disadvantages: · More time for decisions, · Challenging gathering, · Costlier, · Possible premature compromise & not considering all alternatives, · Subject to groupthink/bias, · Can be dominated by "decision leaders" reducing quality/satisfaction/acceptance, · Managers may rely too much on group & lose own decision/implementing skills. (OB10)

Define the following terms: - Allocation base - Absorption Cost System - Over (under) absorbed - Cost pool - Budgeted volume - Standard volume - Actual volume

· Allocation base: Measure of activity w/common costs & cost objects. Greatest association w/OH and imposes most externalities to "tax". Absorption Cost System: Costs traced directly to products (difficult to do) Over (under) absorbed: Expected exceeds (falls short of) actual Cost pool: Accumulation of cost accounts. Budgeted volume (aka denominator volume): Forecasted expected or normal volume at BOY. Standard (earned or allowed) volume: Volume calculated EOY based on standard units of volume with actual units produced. Actual volume: Actual incurred volume reviewed EOY. (ADMC7, ADMC9, ADMC13)

Describe the following steps of the five prong problem solving approach. · Design the solution

· Architecture & nudges to encourage certain decisions / actions without taking away freedom (e.g., smaller plates, auto-enrolling in retirement plan, etc.) · Using levers that bypass decision-making (e.g. one-size fits all, auto-renew, simply thanking for work is enough of System 1 to improve performance). (SDM184)

Describe the following: · Availability heuristic · Conservatism bias

· Availability heuristic: Rely on information available · Conservatism bias: Favor prior evidence over new evidence. Slow to accept new information. (SDM187)

Define the following: · Blind-spot bias · Choice supportive bias

· Blind-spot bias: Failing to recognize your own cognitive bias - notice much more in other people · Choice supportive bias: You feel positive about choices you make, even if they have flaws (e.g. your dog). (SDM187)

List the types of group decision-making techniques.

· Brainstorming · Nominal Group Technique · Delphi Technique · Constructive conflict approaches (OB10)

Ways to think/evaluate your objectives.

· Broaden objectives: Reflect/generate many objectives, bring together, align/sort later. · Seek advice, but outline own first so not anchored by advice. Don't share own obj. beforehand. · Cycle through objectives one at a time, leads to alternatives vs. one solution checking all objectives. (SDM185)

Definitions: · Business-level strategy · Focused Cost Leadership · Focused Differentiated Strategy · Competitive risks of focused strategy

· Business-Level Strategy (BLS): Actions/responses to competitors' activities, creating value, CC, & comp. adv.., five forces. · Focused Cost Leadership: Narrow market, lowest cost. · Focused Differentiated Strategy: Narrow market, distinctiveness. Narrower competitive scope than market. · Competitive risks of focused strategy: Too narrow segment, new entrants, customers' needs become less focused & more similar to rest of industry (SM4)

Describe the following: · Clustering illusion · information bias

· Clustering illusion: Seeing patterns in random events (generating gambling fallacies) · Information bias: Seeking information even when it does not affect action. More information not always better and less information sometimes makes better predictions (SDM187)

Describe why market comparisons might be used over sector comparisons when controlling for differences in value multiples.

· Comparisons within a sector don't answer if a company is over/undervalued (especially if entire sector is misvalued). Market regression of multiples is less restrictive w.r.t. comparable companies with similar risk (beta), growth, & CF (payout) and provides meaningful comparisons market-wide including if our firm is over/undervalued relative to other firms in market (DoV7, DoV9)

Define the following biases related to perceiving/judging alternatives: · Confirmation bias · Anchoring bias · Bandwagon/groupthink effect · Egocentrism

· Confirmation bias: Listen to what confirms our beliefs (e.g. sides of climate change) · Anchoring bias: Rely on initial value, e.g. first person to establish salary estimate in negotiation loses · Bandwagon/groupthink effect: One impacts whole group's belief. Strive for consensus. · Egocentrism: Focus on own perspective & can't imagine how others affected by policy / strategy - everyone has same information access. (SDM184)

Describe considerations when using/scaling value multiples.

· Consistency between the numerator & denominator · Including / excluding (non-wasting) cash · Including proportionate debt & cash of majority (>55%) & minority holdings when consolidating. (DoV9)

Describe the weaknesses of using standard costs.

· Costly to implement/operate · Rapid changes in tech & process improvement causes standards to become obsolete · Costly for managers time to investigate cost variances (only do so if material) · Can create specialized knowledge · Must be implemented carefully or will create dysfunctional behavior (e.g. too much emphasis on labor variances (ADMC12)

List the four predispositions of Carl Jung that impact decision-making.

· Decision-Making Styles · Degree of Acceptable Risk · Cognitive Biases · Moods vs. Emotions (OB10)

Describe the following relative valuation step: · Analytical tests of multiples

· Determinants: Formulas for variables should be analyzed in terms of risk, growth & CF generating potential to understand what drives their values. · Relationships: How multiples change as fundamentals change. Multiples assume linear relationship between one variable and the next (e.g. PEG ratio, (Price/Earnings) / Growth) · Companion variable: Variable that dominates the multiple (not the same for each multiple) (DoV7)

List the three ways to allocate excess from over/under-absorbed OH or standard cost variances.

· Direct Write-off: Credit/debit CoGS entirely · Pro-rata: Allocate pro-rata to work in progress (WIP), finished goods, and cost of goods sold (p.402) · Recalculation method: Recalculate costs each job using actuals to revise EOY OH rate or standard costs. Costly, but used if affects investment decisions or if required for reporting under contract. (Pro-rating sends signal that prices should be increased) (ADMC9, ADMC12)

List the three types of negotiation strategies

· Distributive bargaining · Integrative bargaining · Attitudinal structuring (OB12)

Describe the likelihood of attacks in interfirm rivalry in terms of the following: · First/second/late mover advantages · Benefits · Risks

· First mover advantage: Important in fast-moving markets, requires resource allocation/slack & investment (R&D, innovation, products) & flexibility. · Second movers imitate and have more time to observe and improve on first-mover's actions/technology w/feedback from market - but too long and it costs them market share & loyalty · Benefits: Customer loyalty from first move, gaining / holding mkt share · Risks: Dif. to estimate returns, cost, reducing slack for innovation (SM5)

Describe some general considerations in modeling illiquidity.

· Illiquidity reflects inability to trade during liquid period or credit/default risk · Varies based on firm size, horizon length, sector/industry, markets, etc. · Observed in restrictions on trade/sales of assets (options, futures, control shares, IPO shares), discount rates, transaction costs, security price differences, etc. (DoV14)

Describe the criticisms of absorption costing & how to reduce it.

· Inaccurate product costs: Absorption costing seeks to tie costs directly to products, but fails to account for every activity associated with a product's development · Incentives to overproduce: Spreading the cost over more units produced distorts profits if some units are inventoried. Reducing incentive to overproduce · Charging managers for inventory holding costs via residual income. But would have to be backed out in reporting · Having a policy against building inventory, but cumbersome & generates influence costs · Just in time production (JIT), but difficult to manage & time (ADMC10, ADMC11)

Challenges/Problems of M&A's

· Integration difficulties (culture, mgmt. administrative) · Poor target due diligence (strategic fit, financial audit, premium paid), · Too much debt (esp. premium) · Synergies never realized · Over-diversified (info processing, focus on financial controls - not strategic, lack of innovation), · Time lost: Mgmt. thrill w/acquisitions (searching/due diligence/negotiations/managing integration) · Too large (rigidity, unflexible) (SM7)

Describe the types of quasi integration strategies available in lieu of vertical integration.

· Joint ventures / strategic alliances: Avoids antitrust. · Asset ownership: Owning assets, but contracting out the assets in other stages. E.g. Owning molds, but contracting them out to factories · Franchises: Avoids large investment & mgmt. resources. Ability to cancel franchise if standards aren't met. · Licenses: Ideal for buying/selling tech, since usually requires complementary assets. (SDM138)

Describe the following biases related to the framing of alternatives: · Loss aversion · Sunk-cost fallacy · Escalation of commitment · Controllability bias

· Loss aversion: Feel losses more acutely than gains of same amount à more risk-averse than rational · Sunk-cost fallacy: Pay attention to historical unrecoverable costs when considering future actions · Escalation of commitment: Invest add'l resources in losing proposition because of sunk costs already (time, effort, money invested already) · Controllability bias: We can control outcomes more than so, so we misjudge riskiness of action (SDM184)

Reasons/benefits of M&A's

· Market Power: Can sell at higher prices or costs are lower than competitors (firm size, resource quality, market share). · Economies scale/scope: Horizontal/vertical/related acquisitions. (synergies, distrib/supp, integr. capabilities) · Entry Barriers · New product development: Lower cost/risk, increased speed to market · Diversification · Reshape Competitive Scope: Less dependence on own product · Learning / Developing New Core Competencies & Capabilities (SM7)

Describe why using a pyramid structure in writing is beneficial/useful.

· Mind automatically sorts for comprehension; · Pyramid clearly communicates message. · Pyramid makes for easier reader comprehension and avoids fatigue · Make use of magic #7+-2: ST memory can hold about 7 ideas. Higher level categories suggest subsequent ideas, so easier to remember. (PP1)

Describe the shortfalls of fitting data to a fractional growth rate model.

· Multiple model fitting: Different models may all fit data well - Which do you believe? · Timing: Data used for parameter estimation may become obsolete quickly. · Feedback: Fitting doesn't account for feedback system & dynamics (e.g. early in history where growth is higher), so actual growth may vary significantly from expected · Weaponizing: Fitting may be used to gain buy-in that model is correct. (BD9)

Describe some guidelines in constructing CLDs.

· Name loops · Curved lines / paths, no crossed lines · Shapes only for stocks/flows · Iterate w/smaller diagrams & consolidate, not too much detail · Indicate delays, polarity (R as reinforcing +; or B as balancing, -). · Nouns / noun phrases for variable names w/clear sense of direction (E.g., "feedback from boss" vs. "praise from boss"). Variables' names normal sense of direction s/b positive (BD5)

Define the following terms: · Objective function · LHS/RHS · Linear optimization model · Isoquant · Binding · Non-binding · Simplex algorithm

· Objective function: Expresses objective in terms of decision variables · LHS/RHS: Left-hand side, right-hand side; inequality sign is the 'relationship' · Linear optimization model if all constraint functions & objective functions are satisfied · Isoquant: Locus of points wose objective function value equals a constant. · Binding or active: If inequality is satisfied at equality at optimal solution; · Non-binding or inactive: If inequality is satisfied with strict inequality at optimal solution · Simplex algorithm: Method for solving most linear optimization models. Number of times it must solve m systems of equations in m unknowns is related to number of n constraints (DMD3)

Define the following: · Ostrich effect · Outcome bias · Placebo effect

· Ostrich effect: Ignoring dangerous or negative information (e.g. investors check holdings less during recessions) · Outcome bias: judging decision based on outcome rather than how decision was made (e.g. gambling doesn't make it a smart decision even if you win) · Placebo effect: Simply believing something has an effect causes it to have an effect (SDM187)

Describe how strategic alliances can help in slow, fast and standard cycle markets.

· Overcome entry barriers · Accelerate product development / market entry · Learning · Economies · Pooling or complementing resources · Share risk & expenses · Set new standards · Competitive responses · Maintain market stability or power (SM9)

Define the following biases: · Overconfidence · Over-Optimism · Champion · Sunflower · Recall bias

· Overconfidence: Overestimate our abilities affecting future outcomes, take credit for past outcomes, ignore chance. (Experts more prone to this bias since more convinced they are right.) · Over-Optimism: Overestimate likelihood of positive events/outcomes/plans & underestimate negative ones. · Champion: The tendency to evaluate a plan or proposal based on the track record of the person presenting it, more than on the facts supporting it · Sunflower bias: Following the leader, rare push-back, rare contributions of original thought, don't speak out til leader has. · Recall bias: Rely on info easily recalled for decision (SDM186, OB10)

Define the following: · Pro-innovation bias · Recency · Salience · Selective perception

· Pro-innovation bias: Overvalue innovation usefulness, undervalue its limitations · Recency: Weighing latest information more heavily (e.g., investors think market always look they way it does today, leads to unwise decisions) · Salience: Focus on recognizable features (e.g. thinking about dying by lion than what's more likely) · Selective perception: Expectations influence how we perceive the world (e.g. other team commits more infractions) (SDM187)

Describe the dimensions of customer relationships.

· Reaching/accessing customers, · Richness (2-way flow, learning about customer), · Affiliation (interaction, viewing their perspective). Consider who/what/how (which customers, what needs, how to satisfy w/CC), cost elasticity, CC use/upgrading, innovation (SM4)

Describe successful / effective acquisitions.

· Right target & premium (due diligence) · Effective/rapid integration. · Complementary assets/resources, · Friendly acq., · Financial slack (cash/debt) · Low resulting debt · Sustained R&D/innovation · Remains flexible/adaptable. (SM7)

External Environmental Analysis

· Scanning: Changes/trends · Monitoring: Meaning/emerging trends · Forecasting: How cycles/trends evolve. · Assessing: Timing/impact of changes on strategy (SM2)

Describe criteria for vertical integration.

· Setup costs: Capital, systems, training · Transaction costs: Information collection/processing · Risk: Potential price changes, supply/outlet foreclosure, insulation from market · Coordination effectiveness: Inventory levels, capacity utilization, delivery, quality (SDM138)

Describe the following w.r.t. stocks & flows: · Snapshot test · Conservation · Model boundaries

· Snapshot test: A stock can be counted at a point in time. Expected's can be stocks, but actuals are rates. Stocks change only through their rates (flows). · Conservation: If there is a compensating inflow for an outflow, the stock is conserved (though information about it is not) · Model boundaries ("clouds") should continue to be questioned if no other stocks/flows/activities should be included/excluded from CLD. (BD6)

Define the following stability biases: · Status quo bias · Present bias

· Status quo bias: prefer status quo in absence of pressure to change it · Present bias: value immediate rewards very highly & undervalue long-term gains (SDM187)

Define the following: · Stereotyping · Survivorship bias · Zero risk bias

· Stereotyping: Expecting X to have certain qualities without real information. · Survivorship bias: Focus on surviving cases, leads to misjudging situation (e.g. being an entrepreneur is easy because we haven't heard of those failing) · Zero risk bias: Eliminating risk, focusing solely on ensuring certainty (can be counterproductive) (SDM187)

Characterize interfirm rivalry.

· Strategic / tactical actions: LT/ST market-based moves & adjustments, use of resources, ability to reverse course · Competitive actions/response: Build/defend positions or counter competitive actions (SM5)

Definitions: · Strategic Leaders & Mgmt. · Profit Pool · Global-focusing · Competitor analysis · Strategic groups

· Strategic leaders / mgmt.: Focus on Int/Ext. environment, vision, mission, culture, strategy dev/implementation. · Profit pool: Profit available. Four steps: Boundaries, pool size, VCA size, reconcile calcs. · Global-focusing: Global focus on niche markets, competencies, and resources while limiting risks (guanxi - personal relationships / good connections in China; wa - group harmony & cohesion in japan) · Competitor analysis: How firm competes. competitors' objectives, strategies, assumptions, capabilities (strengths/weaknesses). · Strategic groups: Firms w/similar strategies (greater similarity, greater rivalry - greater for intra vs. inter). Formed/limited by mobility, rivalry, resources. Stable membership over time. (SM1, SM2)

Describe some ways to control for differences when comparing value multiples within a sector.

· Subjective judgments: Pausing to consider variables affecting multiples. · Matrix approach: Plotting multiples against companion variables, E.g. see image. Difficult for +2 variables. · Regressions: Allow for many variables, nonlinear relationships among multiples & fundamentals. (DoV9)

Describe responsibility accounting & types of responsibility centers.

· Subunits of division w/decision rights & responsibility, and unique specific performance measurement / reward. · Good when costly to transfer knowledge. Cost center: · Performance Measurement: Efficiency, output, & quality. · Knowledge: Specific to optimal input mix · Decision rights: Maximize output given budget, or minimize cost given required output. Profit center: Collection of cost centers · Performance Measurement: A/E profits · Knowledge: Transfer pricing & OH allocation. · Decision rights: Input, product & selling Investment centers: Collection of profit centers · Performance Measurement: Net income, ROI & residual income · Knowledge: Constraints w.r.t. product quality & market rules. · Decision rights: Specific around ROI. (ADMC5)

Definitions: · Sustainable competitive advantage · Tangibles · Intangibles · Social Capital · Outsorcing

· Sustainable competitive adv: Valuable (neutralize/exploit threats/opportunities), rare, costly imitate (historical, ambiguous, social compelxity), non-substitutable (can't replicate w/resources) · Tangibles: Observed/quantified, dif. to leverage beyond quantified value (e.g. borrowing, raising capital, firm resources, physical, copyrights/patents, etc.). · Intangibles: Dif. quantify/assess, greater source for capabilities & CC, can't duplicate/imitate (e.g. knowledge, reputation, HR, ideas, R&D capacity) · Social capital: Positive relationships with customers · Outsourcing: VCA from external party. Can create job loss & uncertainty around innovation/tech (SM3)

Definitions: · System 1 · System 2 · Functional fixedness · Cognitive rigidity · Joint evaluation · Vanishing options test · Planning fallacy · Motivated bias

· System 1 (automatic/intuition), · System 2 (reasoning). · Functional fixedness: Focus on only one solution, · Cognitive rigidity: Focus w.r.t. yes-no framing, one solution. Pressure, time, negativity, exhaustion, stressors; avoid loss. · Joint evaluation: Separate options. Focus on what's missing if a choice is made (opportunity cost) · Vanishing options test: If options weren't available, what else would you do with __? · Planning fallacy: narrative of success & managing for it, even if odds are against you · Motivated bias: Cognitive biases arising from psychological needs. Difficult to move on. Results from overconfident (1 - too much weight to information we have, and 2 - when we can't see, trouble imagining other ways to frame problem). (SDM185)

Porter's Five Forces Model

· Threat of new entrants · BP of suppliers: · BP of buyers: · Substitute products/services · Intensity of competition (SM2)

Ways to avoid one future/objective/option.

· Three estimates/obj/options: Low/med/high. Wider ranges, more realistic middle & extreme estimates. · Think twice: Project once, ignore, project again. Justify why 1st is wrong. Average the two. · Use premortems: Imagine future failure, explain cause ("prospective hindsight"). Results: Tempers optimism, realistic risks, backup plans, factors success/failure, more control/preparation. Take outside view: Your project w/the best plan for success! Outside view: Someone else, similar project - After considering similar ventures, what advice would you give them? What if odds are against them? Helps avoid planning fallacy. (SDM185)

Describe the three pillars of thanking customers.

· Type and amount (the "how") · Timing & frequency (the "when") · Sustainability ("the how long") (SDM190)

Describe how disclosures and EV are useful to investors.

· Understand mgmt. views and impacts w.r.t. decisions, judgement, drivers, risks & sensitivities · Set expectations for future performance · Reconciliation of financials · Convey credibility through sign-off by mgmt. and/or third party audit · Compare to other firms (SDM172)

Describe the following w.r.t. MCEV · Stochastic models

· Use implied volatilities, martingales, market data, correlations (where observable). If not available, may use historic market, but need to disclose. · Consider moneyness, maturity, duration, options & guarantees (SDM172)

Describe the following w.r.t. MCEV · Non-economic projection assumptions

· Use past experience, trending, margins. Actively review assumptions. · Experience not needed to be constantly updated, but LT assumptions should be updated/consistent w/experience. (SDM172)

Describe the following relative valuation step: · Application tests of multiples

· When controlling for differences in comparable firms, focus on similar cashflow, risk & growth potential and control w/additional criteria. · Differences will remain between firm being valued & comparables - Remain aware of differences & control via, 1) Subjective adjustments: May be subjective, inconsistent & biased. 2) Modified multiples: May assume linearity in variables. 3) Statistical techniques via regression on sectors and markets. (DoV7)

Describe how to model an illiquidity adjustment for an asset as an option value.

· With perfect market timing, option value with horizon set equal to optimal sale point. · Trading restricted during this horizon. · Sets an upper bound of marketability during a period of illiquidity. · Cost of illiquidity increases with greater volatility & length of horizon where trading is restricted. Weaknesses: 1) Liquidity gives right to sell at prevailing market price - not a strike price, and 2) Pricing models based on continuous price movements and arbitrage-free pricing - not clear how would hold in illiquidity. (DoV14)

Describe how to address / mitigate the following bias: · Optimism / Overconfidence

• Survey past performance: Are estimates optimistic w.r.t. reality? • Track predictions against reality - Focus on narratives & not data. • Remove anecdotal "proof points" from the decision-making process (SDM189)