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Freemium

(Free + premium) basic features free of charge but charges for premium services such as add-ons

Inventory Turnover

= (Cost of goods sold / inventory) Captures the firm's production cost of merchandise it has sold. Inventory is the cost of the firm's merchandise to be sold. This ratio indicates how much of the firm's capital is tied up in its inventory. [component of Working capital Turnover]

Receivables Turnover

= (revenue / accounts receivable ) higher ratios imply more efficient management in collecting accounts receivable and shorter durations of interest free loans to cusomters. [component of Working capital Turnover] Concerns the effectiveness of a company's receivables and payables. Part of a company's cash flow management. Indicate the company's efficiency in extending credit as well as collecting credit.

Producer Surplus

Another term for profit; difference between price charged (P) and cost to produce (C), so (P - C).

Disruption

Apple and book publishing caused this to Amazon

Dynamic Nature of Business Models

Combination Evolution Disruption Response to Disruption Legal Conflicts

Triple Bottom LIne

Combination of economic social and ecological concerns or profits people and planet that can lead to sustainable strategy. Profits - economic dimension captures the necessity of businesses to be profitable and survive People - social dimension emphasizes the people aspect whole person at work Planet - ecological dimension relationship between business and natural environment. The three areas lead to: sustainable strategy - a strategy that can be pursued over time without detrimental effects on people or the planet. Achieving work life balance and human stability To ensure a firm is implementing the approach successfully, managers must audit the company's results in fulfilling its social and ecological obligatons

Combination

Combine two models i.e razor-razorblade and subscription model like Verizon or AT&T

Response to Disruption

Give leverage

Consumer Surplus

Difference between value of consumer attaches to a good or service (V) and what they paid for it (P), so (V - P)

Economic Value Creations

Economic Value Created - difference between value and cost (V - C) Reservation price Total perceived consumer benefits and economic value created Producer surplus Consumer Surplus The relationship between consumer and producer surplus is the reason trade happens, both transacting parties capture some of the overall value created. Opportunity Costs

Evolution

Freemium can be seen as so.

Intangibles and the value of firms

Intangible assets not captured in accounting data have become more important in firm's stock market valuations over the last decades. Key financial ratios based on accounting data give us an important tool with which to assess competitive advantage. They help us measure relative profitability which is useful when comparing firms of different sizes over time.

Risk Capital

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

Return on invested capital (ROIC)

ROIC = Net profits / invested capital Firm profitability, measures how effectively a company uses its total invested capital 1) Shareholders' equity through selling shares to the public 2) Interest-bearing debt through borrowing from financial institutions and bondholders. If a firm's ROIC is greater than its cost of capital it generates value. Break down ROIC into constituents: return on revenue (ROR) working capital turnover (WCT)

Legal conflicts

Rapid development of business models can lead to breach existing rules of commerce.

Total Return to Stakeholders

Return on risk capital that includes stock price appreciation plus dividends received over a specific period. External and forward looking metric. Indicates how the stock market views all available public information about a firm's past, current state, and expected future performance with most weight on growth expectations.

Bundling

Sells products or services for which demand is negatively correlated at a discount.

Shareholder value creation

Shareholders - individuals or organizations that own one or more shares of stock in a public company. Legal owners of public companies Shareholder's perspective, the measure of competitive advantage that matters most is return on risk capital. Risk capital Total return to stakeholders Efficient market hypothesis Market capitalization All public companies are required to report total return to shareholders annually in the statements they file with SEC. Effective strategies to grow the business can increase a firm's profitability and thus its stock price.

Balanced Scorecard

Strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals Four Key Questions: 1) How do customers view us? 2) How do we create value? 3) What core competencies do we need? 4) How do shareholders view us?

Disadvantages of the balanced scorecard

Tool for strategy implementation not formulation. It is up to the firm to formulate a strategy ONly gives limited guidance about which metrics to choose. Different situations call for different metrics. Accounting profitability, shareholder value creation, and economic value creation. A failure to achieve competitive advantage is not so much a reflection of a poor framework but of a strategic failure.

Wholesale

Traditional model in retail

Subscription

Traditionally used for magazines and newspaper. Pay for access whether they use the service or product during a payment term or not.

Opportunity Costs

Value of the best forgone alternative use of the resources employed

Three standard performance dimensions

What is the firm's accounting profitability? How much shareholder value does the firm create? How much economic value does the firm generate? Tend to be correlated, particularly over time. Accounting profitability and economic value creation tend to be reflected in the firm's stock price which in turn determines in part the stock's market valuation

Fixed Asset Turnover

[component of Working capital Turnover] = (Revenue / Fixed Assets) measures how well a company leverages its fixed assets, property, plant and equipment (PPE). This ratio indicates how much a firm's capital is tied up in its fixed assets. Higher fixed assets often go along with lower firm valuations

Market Capitalization

a firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time. (Market cap = number of outstanding shares * share price)

Business model

firm's plan that details how it intends to make money 1) Transform their strategy of how to compete into a blueprint of actions and initiatives that support the overarching goals 2) Mangers implement this blueprint through structures processes culture and procedures. If the company fails to translate a strategy into a profitable business model the firm will run into trouble.

Razor-razorblades

initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.

Efficient Market Hypothesis

market price of the firm's stock. A firm's share price provides an objective performance indicator. When assessing and evaluating competitive advantage, a comparison of rival firms shape price development or market capitalization provides a helpful yardstick when used over the long term.

Pay as you go

only pay the services they consume.

Cost of Capital

represents a firm's cost of financing operations from both equity through issuing stock and debt through issuing bonds. Managers must compare their ROIC to other competitors.

Limitations of accounting data

1) All accounting data are historical and thus backward looking. Past decisions and no guarantee of future performance. 2) Accounting data do not consider off balance sheet items. 3) Accounting data focus mainly on tangible assets which are no longer the most important. Not everything can be counted counts. Not everything that counts can be counted. There are some intangible assets such as intellectual property (patents, trademarks) customer goodwill. But many key intangible assets are not captured. Most competitively important assets are not captured. Most competitively important assets tend to be intangibles such as innovation, quality, and customer experience which are not included in a balance sheet.

Advantages of a Balanced Scorecard

1) Communicate and link the strategic vision to responsible parties within the organization 2) Translate the vision into measurable operational goals 3) Design and plan business process 4) Implement feedback and organizational learning to modify and adapt strategic goals when indicated. can accommodate both short and long term performance metrics.

The economic value creation framework shows:

1) Creating economic value 2) Capturing as much of it as possible

Limitations of Economic Value Creation

1) Determine the value of a good in the eyes of consumers is not a simple task. To tackle this, look at consumer purchasing habits to see preferences. 2) The value of a good in the eyes of consumers changes based on income, preferences, time and other factors. If your income is high you are likely to place a higher value on some goods. 3) To measure firm-level competitive advantage we must estimate economic value created for all products and services offered by the firm. Estimation may be a relatively easy task if the firm offers only a few products and services.

Return on Revenue (ROR)

Component of ROIC Indicates how much of the firm's sales is converted into profits. Three additional financial ratios: 1) (Cost of goods sold / revenue) indicates how efficiently a company can produce a good. 2) (R&D expense / revenue) indicates how much of each dollar that the firm earns in sales is invested in conduct research and development. A higher percentage is generally an indicator of stronger focus on innovation to improve current product and services to come up with new ones. 3) (Selling general & administrative expense / revenue) how much of each dollar that the fir earns in sales is invested in SG&A expenses. Is an indicator of the firm's focus on marketing and sales to promote its products and services.

Working Capital Turnover

Component of ROIC Measure of how effectively capital is being used to generate revenue. Dig deeper to find the underlying drivers in working capital turnover which enables managers to uncover which levers to pull in order to improve firm financial performance. Managers break down working capital turnover into other ratios included: Fixed asset turnover Inventory turnover Receivables turnover Payables turnover

Popular Business Models

Razor-razorblades Subscription Pay as you go Freemium Wholesale Building

LS

To determine the value of a good in the eyes of consumers a firm can examine a consumer's purchasing habits for their revealed preferences. Achieving competitive advantage means maximizing the difference between cost to produce the good/service and consumers willingness to pay. When a firm creates more economic value than competing firms it has competitive advantage When a firm tries to meet the prices of its competitors it sacrifices profitability per unit. Book value: calculated as costs of assets minus accumulated depreciation, its importance has decline over time, it captures the historical cost of a firm's assets A firm pursing a successful differentiation strategy will have a competitive advantage over a competitor that creates a product at equal cost but with lower reservation price When comparing different firms of different sizes over a period of time it is most useful to look at relative profitability BHAG = big hairy audacious goal The importance of the firm's book value has decreased as part of a firm's total stock market valuation Stock price = firm's current stated, future performance, and past Total return to shareholders in the long term external factors create volatility in stock prices Since 2000 assets not captured in firms' accounting data have become much more important to a firm's competitive advantage To determine economic value creation one must look at the sum of consumer and producer surplus. Pay as you go model is gaining momentum A balanced scorecard offers both common financial metrics and a variety of operational measures on customer satisfaction, internal processes, and the company's innovation and improvement activities A stock price increases if it grows faster than expected

Reservation Price

maximum price a consumer is willing to pay for a product or service based on the total perceived consumer benefits. The amount of total perceived consumer benefits equals maximum willing to pay or reservation price. This is then split into economic value creation and the firm's total unit cost.

Implications for the Strategist

1) No best strategy exists - only better ones. True performance can be judged only in comparison to other contenders in the field or industry average, not absolute basis. 2) The goal of strategic management is to integrate and align each business function and activity to obtain superior performance at the business unit and corporate levels. 3) Both quantitative and qualitative performance dimensions matter in judging the effectiveness of a firm's strategy. 4) A firm's business model is critical to achieving a competitive advantage. How a firm does business is as important as what it does.

Limitations of shareholder value

1) Stock prices can be highly volatile making it difficult to assess firm performance, in the short term. Total return to shareholders is a better measure of firm performance and competitive advantage over the long term because of "noise" introduced by market volatility, external factors and investor sentiment 2) Overall macroeconomic factors such as economic growth or contraction, unemployment rate, and interest and exchange rates all have a direct bearing on stock prices. It can be difficult to ascertain the extent to which a stock price is influenced more by external macroeconomic factors than by firm's strategy.

Total perceived consumer benefits and economic value created:

1) Value (V) - dollar amount a consumer attaches to a good or service 2) Price (P) 3) Cost (C) - the cost to produce means little to the consumer but is a great deal to the producer (supplier) of the good or service since it has a direct bearing on the profit margin.

Payables Turnover

= (revenues / accounts payable) indicates how fast the firm is paying its creditors by its suppliers Lower ratio indicates more efficient in paying creditors and generating interest-free loans from suppliers. [component of Working capital Turnover] Concerns the effectiveness of a company's receivables and payables. Part of a company's cash flow management. Indicate the company's efficiency in extending credit as well as collecting credit.

Accounting Profitability

Using accounting data to assess competitive advantage and firm performance is standard managerial practice. When assessing competitive advantage by measuring accounting profitability we use financial data and ratios derived from publicly available accounting data such as income statements and balance sheets. 1) Accurately assess the performance of their firm 2) Compare and benchmark their firm's performance to other competitors in the same industry or against the industry average. Standardized financial metrics derive from income statements and balance sheets. Public companies are required by law to release these data in compliance with GAAP set by the FASB and audited by CPAs. Publically traded firms are required to file Form 10k annually. Sarbanes Oxley Act made to comply with stringent requirement and in turn enhances the data's usefulness for comparative analysis. Accounting data enables us to conduct direct performance comparisons between companies ROIC, ROE, ROA, and return on revenue.