BCOR 460 Exam 1 (CH. 5, 6, & GLO-BUS)

The difference between the cost of producing a product and the price consumers are willing to pay for that product is know as...

economic value created

The balanced scorecard approach helps managers balance _________ goals.

financial and strategic

Experience Curve Effects

~When technology is changed while output is constant ~Examples: -A new production process -Implementing lean manufacturing

Which of the following determine a firm's competitive advantage?

~cost position relative to competitors ~value position relative to competitors

Which of the following dimensions make up the triple bottom line?

~economic ~social ~ecological

Advantages of the Balanced Scorecard

Managers can: •Link the strategic vision to responsible parties •Translate the vision into measurable goals •Design and plan business processes •Implement feedback and organizational learning -Modify and adapt strategic goals

When a trade occurs, the consumer and the producer both capture ________.

some of the economic value

Goal-directed actions managers take:

~To achieve competitive advantage ~In a single product market

Four Cost Drivers That Help Keep Costs Low

1. Cost of input factors 2. Economies of scale 3. Learning-curve effects 4. Experience-curve effects

The firm's accounting profitability, ability to create shareholders value, and ability to generate economic value tend to be ________.

Correlated

To understand how effectively a firm uses its total invested capital, one can use the ratio _____________.

ROIC (net profit/invested capital)

The money a shareholder spends for an equity share in a company is known as...

Risk capital

Public company's are required by law to release detailed accounting data in order to enable _______.

comparative analysis of firms

The Balanced Scorecard

~Helps managers achieve their strategic objectives more effectively ~Uses internal and external performance metrics ~Balances both financial and strategic goals

To measure and assess firm performance:

~Accounting profitability ~Shareholder value creation ~Economic value creation

Differentiation Strategies

~Add value to products and services ~Are responsive to customer preferences ~Can increase costs -Additional R&D is needed -Innovation is needed -But customers are willing to pay a premium

Cost Leadership Strategies

~Appeal to the bargain-conscious buyer ~Offer lower prices than competitors ~Attract an increased volume of sales ~Can be profitable over a long period of time

Business Models Evolve Dynamically

~Business models can be combined. ~Business models can evolve. ~Business models can be disrupted. ~Businesses must respond to disruption & adapt. ~Legal conflicts can arise.

Strategic Trade-Offs

~Choices between a cost or value position ~There is tension between: -Value creation and -Pressure to keep cost in check ~Purpose of trade offs are to maximize the firm's: -Economic value creation -Profit margin

What Is a Business Model?

~Details the competitive tactics and initiatives ~Explains how the firm intends to make money ~Stipulates how the firm conducts its business -Buyers, suppliers, and partners

Limitations of Economic Value Creation

~Determining value for consumers is not simple. ~The value of a good in the eyes of consumers changes. -Based on income, preferences, time, and other factors •~To measure firm‐level competitive advantage, we must estimate the economic value created for all products and services offered by the firm.

Generic Business Strategies

~Differentiation ~Cost Leadership

Market Capitalization

~Dollar value of total shares outstanding ~Number of outstanding shares x share price

Focused Business Strategies

~Focus on a narrower competitive scope ~Types: -Focused Differentiation +Ex: Mont Blanc: exquisite pens at several hundred dollars -Focused Cost Leadership +Ex: BIC: disposable pens and lighters at low cost ~Scope of competition: -The size (narrow or broad) of the market in which a firm chooses to compete

Disadvantages of the Balanced Scorecard

~Focused on strategy implementation -Not formulation ~Limited guidance about which metrics to use ~Only as useful as the managers apply it ~Strategy must be translated into measurable objectives ~Not much guidance on how to get back on track if setbacks occur

The Freemium Model

~Free + premium business model ~Provides the basic features free of charge ~Users pay for premium services -Such as advanced features or add‐ons ~Examples: -Software trials with an option to buy

Cost Leadership Strategy

~Goal: -Reduce the firm's cost below its competitors -Offer adequate value ~Resources are focused on: -Reducing cost +To manufacture a product +To offer a service -Reducing prices for customers -Optimizing the value chain to achieve low-cost

Accounting Profitability

~Helps assess competitive advantage -accurately assess firm performance. -compare firm performance to competitors / the industry average. ~Standardized accounting metrics ~Form 10‐K statements ~Profitability ratios -Return of invest capital -ROE -ROA -Return on revenue

Examples of Metrics for Each of the Four Balanced Scorecard Questions

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

The Success of Business Strategy Relies On

~How well the strategy: -Leverages the firm's internal strengths -Mitigates its weaknesses ~How well it helps the firm: -Exploit external opportunities -Avoid external threats

Complements

~Increases perceived value ~Consumed in tandem ~Example: AT&T U-verse -Bundles Internet access, phone, and TV services ~Example: DVR -Enables pause & recording of TV shows

Customer Service

~Increases perceived value ~Example: Zappo's -Offers free shipping both ways -They do not outsource customer service -Don't use pre-determined scripts for service ~Example: Trader Joe's: -Stores stock local products as requested by the community

Product Features

~Increases perceived value ~Turns commodity products into differentiated products ~Strong R&D capabilities are often needed

The Razor-Razorblade Mode

~Initial product is often: -Sold at a loss or -Given away for free ~Helps drive demand for complementary goods ~Money made primarily on replacement parts ~Example: HP -Charges little for its laser printers -Imposes high prices for replacement toner cartridges

Cost of Input Factors

~Input factors such as: -Raw materials -Capital -Labor -IT services ~Example: the airline industry -Access to cheaper fuel -Interest-free government loans -Access to nighttime takeoffs and landings

Learning Curve Effects

~Learning drives down costs. -It takes less time to produce the same output. -We learn how to be more efficient. ~People learn from cumulative experience: -Writing computer code -Developing new medicines -Building submarines ~First noted during WWII: -When production doubled, per-unit cost dropped 20%.

Only a Handful of Strategic Options Are Available

~Low cost or differentiation ~Broad or narrow ~So managers must... -Understand firm and industry effects -Fine-tune strategy formulation and execution

Risk Capital

~Money provided for an equity share in a company ~Cannot be recovered if the firm goes bankrupt

Managerial Implications

~No best strategy exists - only better ones ~Competitive advantage is best measured by: -Criteria that reflect overall business unit performance -NOT the performance of specific departments ~Both quantitative and qualitative performance dimensions matter. ~A firm's business model is critical to achieving a competitive advantage.

Shareholders

~Own one or more shares of stock in a company ~The legal owners of public companies

The Agency Model

~Producer relies on an agent or retailer to sell the product. -At a predetermined percentage commission ~Producer may also control the retail price. ~Example: -Entertainment industry •Agents place artists or artistic properties. •They then receive a commission.

Three Drivers That Can Increase Value

~Product features ~Customer service ~Complements

The Bundling Model

~Products or services for which demand is negatively correlated at a discount ~Example: -The Microsoft Office Suite •Instead of selling Word and Excel $120 each, •Microsoft bundles them at a discount, say $180

How Do We Measure and Assess Competitive Advantage?

~Relative to a benchmark -Either using competitors or the industry average ~It is a multi‐faceted concept ~By measuring accounting profit, shareholder value, or economic value ~The balanced scorecard approach ~The triple bottom line

Differentiation

~Seeks to create higher value than competitors ~Offers products or services with unique features ~Keeps the firm's cost structure as low as possible ~Charges higher prices

Cost Leadership

~Seeks to create similar value than competitors ~Products or services delivered at lower cost ~Charges lower prices

Economies of Scale Allows Firms To:

~Spread fixed costs over a larger output -Ex: Microsoft spent $25 billion on R&D for Windows 7 before a single copy was sold ~Employ specialized systems and equipment -Ex: Demand for Tesla's Model S sedan allowed it to employ cutting-edge robotics ~Take advantage of certain physical properties -Ex: Big box stores can stock more merchandise and handle inventory efficiently

Total Return to Shareholders

~Stock price appreciation plus dividends

Limitations of Shareholder Value Creation

~Stock prices can be highly volatile. -Makes it difficult to assess firm performance ~Macroeconomic factors affect stock prices. -Economic growth or contraction -Unemployment, interest and exchange rates ~Stock prices can reflect the mood of investors. -Can be irrational

The Value Curve and the Strategy Canvas

~The Value Curve -Horizontal connection points -Located on the strategy canvas -Helps strategists determine courses of action ~The Strategy Canvas -Graphical depiction of a company's performance -Relative to its competitors -Viewed across the industry's key success factors

Integrative frameworks, combining quantitative data with qualitative assessments:

~The balanced scorecard ~The triple bottom line

Producer surplus (also called profit)

~The difference between the price charged (P) and the cost to produce (C)

Consumer surplus

~The difference between what you would have been willing to pay (V) and what you paid (P)

Economic Value Creation

~The difference between: -A buyer's willingness to pay for a product / service -And the firm's total cost to produce it -The difference between value (V) and cost (C) ~Competitive advantage can be based on: -Economic value creation because of superior product differentiation -A relative cost advantage over rivals

The Wholesale Model

~The traditional model in retail ~Products sold at a fixed price to retailers ~Retailers mark up the prices to make a profit ~Example: -Books are originally purchased from a publisher -Re‐sold at 50% markup from a retailer

Opportunity Costs

~The value of the best forgone alternative use of the resources employed ~Example: Opportunity Costs of an Entrepreneur (1) forgone wages if employed elsewhere (2) the cost of capital invested in the business •vs. the stock market •vs. U.S. Treasury bonds

The Subscription Model

~Traditionally used for (print) magazines and newspapers ~Users pay for access to a product or service ~Examples: -Cable television -Satellite radio -Health clubs

Differentiation Strategy

~Unique features that increase value of goods and services ~Consumers are willing to pay a higher price. ~The focus of competition: -Unique product features -Service -New product launches -Marketing and promotion ~Competitive advantage achieved when: -Value - Cost > competitors

The Pay‐as‐You‐Go Model

~Users pay for only the services they consume ~Examples: -Utilities providing power and water -Cell phone service plans

"How will we compete to gain & sustain competitive advantage?"

~Who: which customer segments will we serve? ~What: customer needs, wishes, and desires will we satisfy? ~Why: do we want to satisfy them? ~How: will we satisfy our customers' needs?

Limitations of Accounting Data

~all accounting data are historical and thus backward‐looking. ~accounting data do not consider off-balance sheet items, such as: -pension obligations -leasing obligations ~accounting data focus mainly on tangible assets, which are no longer the most important. -innovation, quality, customer experience are important.

Which of the following are significant threats to a firm pursuing a cost-leadership strategy?

~competitors adopting similar business strategies ~replacement by innovative substitutes ~value falling below the acceptable threshold

The most important cost drivers are ______.

~experience curve effects ~cost of input factors ~learning curve effects ~economies of scale

Managers must make strategic trade-offs involving choices between cost and value because _________.

~higher value tends to require higher costs

A firm's competitive advantage is determined jointly by ____________.

~industry effects ~firm effects

In order for a firm to successfully implement a business-level strategy, it must limit the impact of ______________.

~its own internal weakness ~external threats

In a focused cost leadership strategy, a firm provides _________.

~low-cost products to a niche market

Which of the following are considered off-balance sheet items?

~pension obligations ~operating leases

Which of the following ratios are used for evaluating the difference in working capital turnover for two competitors?

~receivables turnover ~fixed asset turnover ~inventory turnover

Shareholder Value Creation

~shareholders ~risk capital ~total return to shareholders ~market capitalization

A ______________ is a situation that requires choosing between a cost of value position.

~strategic trade-off

The Triple Bottom Line

~three dimensions fundamental to sustainable strategy 1. Profits: economic dimension 2. People: social dimension 3. Planet: ecological dimension

Which of the following frameworks provide a relatively holistic perspective on firm performance?

~triple bottom line ~balanced scorecard

To formulate an appropriate business-level strategy, managers must answer the ______ questions of competition.

~who ~what ~why ~how

Popular Business Models

• Razor‐razorblades • Subscription • Pay as you go • Freemium • Wholesale • Agency • Bundling