MGT test 2

markets-and-technology framework

A conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions.

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.

innovation ecosystem

A firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic decision making.

Industry Analysis

A method to (1) identify an industry's profit potential and (2) derive implications for a firm's strategic position within an industry.

platform business

An enterprise that creates value by matching external producers and consumers in a way that creates value for all participants, and that depends on the infrastructure or platform that the enterprise manages.

radical innovation

An innovation that draws on novel methods or materials, is derived either from an entirely different knowledge base or from a recombination of the existing knowledge bases with a new stream of knowledge.

disruptive innovation

An innovation that leverages new technologies to attack existing markets from the bottom up.

incremental innovation

An innovation that squarely builds on an established knowledge base and steadily improves an existing product or service.

Blue-ocean strategy

Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs.

EVC

CA=

Strategic trade-offs

Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost.

economies of scale

Decreases in cost per unit as output increases.

Discuss the significance of Economies of Scale in this case.

During this case it can be seen that Space X took advantage of economies of scale. Because they used a low-cost strategy, they saved money during the production process. This allows Space X to produce more rockets more frequently. This is an example of a virtuous cycle. Their strategy also forces rivals to decrease their cost and price which increased the overall accessibility to space. Space X placed a large emphasis on democratizing space access. They needed people to catch up with their company so that the idea of space access was more tangible. This would allow them to keep making more rockets and continue the virtuous cycle.

(v-c) -(v-p) + (P-C)

EVC=

Differentiation Strategy

Generic business strategy that seeks to create higher value for customers than the value that competitors create, while containing costs.

Cost-leadership Strategy

Generic business strategy that seeks to create the same or similar value for customers at a lower cost.

strategy canvas

Graphical depiction of a company's relative performance vis-à-vis its competitors across the industry's key success factors.

1. Charge higher prices, thus increasing profits 2. To charge the same prices as your competitors (avg. price), thus increasing market share (instead of profits) -Give away surplus to capture more value in the future

Greater EVC gives the Firm 2 strategic options

Value Curve

Horizontal connection of the points of each value on the strategy canvas that helps strategic leaders diagnose and determine courses of action.

diseconomies of scale

Increases in cost per unit when output increases.

growth own IP coordinate value chain activities increase switching costs reinforce network effects reduce BP of suppliers neutralize hold-up problem

Logic behind backward vertical integration

winner-take-all markets

Markets where the market leader captures almost all of the market share and is able to extract a significant amount of the value created.

minimum efficient scale (MES)

Output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.

Focused cost-leadership strategy

Same as the cost-leadership strategy except with a narrow focus on a niche market.

Focused differentiation strategy

Same as the differentiation strategy except with a narrow focus on a niche market.

economies of scope

Savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology.

Business Level strategy

The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market.

Value Innovation

The simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy.

Scope of Competition

The size—narrow or broad—of the market in which a firm chooses to compete.

From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.

What is shareholders value creation

strategic position

a firm's strategic profile based on the difference between value creation and cost (V-C)

Fiver Forces Model

a framework that identifies five forces that determine the profit potential of an industry and shape a firm's competitive strategy

industry

a group of incumbent companies that face more or less the same set of suppliers and buyers

(V-P)

consumer surplus=

co-opetition

cooperation by competitors to achieve a strategic objective

firms total costs (VC+FC) of bringing a product/service to market

cost=

-Brand Loyalty -Repeat Purchase Intentions -Positive Word of Mouth -Referrals -Switching costs -Simple-consistency

evidence of consumer surplus

strategic commitments

firm actions that are costly, long-term oriented, and difficult to reverse

Firm Effects

firm performance attributed to the actions managers take

Industry effects

firm performance attributed to the structure of the industry in which the firm competes

shareholders

individuals or organizations that own one or more shares of stock in a public company

Netflix business model

more Netflix subscribers-> more content-> value of Netflix subscription->demand for Netflix services

entry barriers

obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential

exit barriers

obstacles that determine how easily a firm can leave an industry

price the consumer pays/ price charged by the firm

price=

(P-C) -profit

producer surplus=

total return to shareholders

return on risk capital that includes stock price appreciation plus dividends received over a specific period

platform ecosystem

the market environment in which all players participate relative to the platform

Threat of Entry definition

the risk that potential competitors will enter an industry

network effects

the value of a product or service for an individual user increases with the number of total users

opportunity costs

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

consumer's max WTP -perceived benefits

value=

1. stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short term 2. Overall macroeconomic factors such as economic growth or contraction, the unemployment rate, and interest and exchange rates all have a direct bearing on stock prices 3. Stock prices frequently reflect the psychological mood of investors, which can at times be irrational.

what are the limitations of shareholder value creation

V

what is the value creation

architectural innovation

A new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets.

sustainable strategy

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

5. Describe and analyze the evolution of the Netflix content acquisition strategy:

A: Apply the primary concepts of the "make versus buy" decision to this case. The make versus buy decision in this case was primarily because just buying 3rd party content became unsustainable for Netflix. It also came because all firms began to create "Walled Gardens" which was exclusive content only on their platforms. Content costs and their long-term debt was rising. What was the strategic logic behind the choice to start producing original content with House of Cards in 2013? Include all relevant considerations and details. The strategic logic behind this was vertical backward integration. One piece of it was growth which included wanting to get new subscribers while retaining the existing ones all while growing internationally. Another piece was to own and control intellectual property, so they had no contracts. It also allows them to coordinate value chain activities and increase switching costs. Lastly, it reinforces network effects, reduces bargaining power of suppliers and neutralizes the hold-up problem. What were (are) the potential risks/disadvantages of moving into original content? Netflix is the only one in the industry that has to stand as a streaming service alone, a lot of others have corporate support and can take a loss on streaming to feed other services How did their strategy address the growing Bargaining Power of Suppliers? Netflix had to create a strategy that addressed the growing Bargaining Power of Suppliers if they wanted to profit. While maintaining their deals with shows such as Friends or The Office was preferred, companies who created these shows had the option of removing them from Netflix if they weren't paid their preferred amount and could strictly solicit them on their own personal platforms. Netflix combated this with backwards vertical integration. By creating their own original content they were able to have multiple avenues to interest the audience and increase value. Describe how this is an example of tapered vertical integration. They "make" some content in-house and they also "buy" some content from 3rd parties using licensing contracts on the open market.

1. Describe the strategy scenario facing Netflix at the beginning/end of the case. How would you address the questions about pricing strategy at the end of the case?

A: In the beginning, Netflix was a DVD rental service that disrupted Blockbuster. They then transformed into a streaming service only as a distribution platform. They eventually transitioned into what they are today which is a mix of 3rd party content and original content. Netflix has had several pricing increases since 2013 and this can be justified because they had added value with their Netflix originals. Increasing costs helps offset increasing content cost and decreasing their long-term debt.

7. Describe the landscape of competition in the streaming video industry. Who are the primary competitors? How have the recent new entrants shaken up the landscape? 1. BP of suppliers 2. threat of substitutes 3. Opportunites of complements 4.BP of buyers

A: The primary competitors include the early movers including Hulu, Amazon Prime Video, and Youtube. Later entrants such as Disney+ and HBOmax have shaken up the landscape because they are established companies with unique backgrounds that are willing to throw a lot of resources at their streaming services without expectation to profit. 1. Bargaining Power of Suppliers 1. The bargaining power of suppliers was high for two reasons: Cloud computing & content. Cloud computing has high switching costs because going between cloud services is a limited and cumbersome process. Content prices were also rising which was an early warning as to why we couldn't rely on 3rd party content. 2. Threat of Substitutes 1. The threat of substitutes is high which is having a downward pressure on price for the firms. Substitutes include live-streaming TV, Cable, Movie theaters, streaming music, video games and social media. 3. Opportunity of Complements? Or Threat of Complements in this case? 1. In this case there are many complements that can seem to be a threat because they capture a lot of the value created. This is because streaming services can't exist without them. This is things such as wifi, 4G, Iphones and smart TVs. 4. Bargaining Power of Buyers Buyers do have price sensitivity, but firms are giving away so much surplus that even with price increases they still subscribe. There are no switching costs, but platforms have exclusive content so if they want to see another episode they have to stay subscribed. The fact that firms are differentiated and produce exclusive content gives the buyers less power. Lastly, buyers can't backward vertically integrate because there is no middleman

reverse innovation

An innovation that was developed for emerging economies before being introduced in developed economies. Sometimes also called frugal innovation.

competitive industry structure

Elements and features common to all industries, including the number and size of competitors, the firms' degree of pricing power, the type of product or service offered, and the height of entry barriers.

reservation price

the maximum price a consumer is willing to pay for a product or service based on the total perceived consumer benefits -ALSO KNOWN AS VALUE

6. Analyze the evolution of Pricing strategy at Netflix over time. What was the strategic logic behind the various decisions to raise prices throughout the timeline? How was Netflix able to raise prices without destroying much demand? What does this case tell us about both (a) creating and (b) capturing value?

Netflix's pricing strategy is to charge higher prices, thus increasing profits. The strategic logic was that there were increasing content costs, so they had to increase their prices. Netflix was able to do this without destroying demand because they were an early mover in the industry, and they had 11% of the market share. Netflix shows value creation in its content because customers are willing to pay more for a streaming service if they are showing exclusive content that they can't get anywhere else. The value capture comes in when firms are giving away surplus at one point to create network effects that allow value to be captured at a later point.

Describe and analyze the Low-Cost strategy at Space X. What are the primary strategic objectives? Identify the unique elements of the strategy. Describe the strategy using the language of "economic value creation" from Chapter 5.

Space X uses a Low-Cost strategy in order to maintain success. This strategy involved three unique objectives. Reusability is the first element of their strategy. Elon Musk felt that space programs were throwing away multi-millions of dollars after each of their flights. This made no more sense than throwing away a 747 after each commercial flight. By reducing waste and increasing resource efficiency they could save money. One of the reasons there is a low demand for space flight is because it is so expensive. Next they utilized reliability without over-engineering. Launch vehicles tended to be over engineered because reliability was a greater priority than cost. Musk believed that reliability did not tie to cost. Just because a car costs more does not mean it will not break down. He used the example of Honda Civic being a very reliable car compared to a Ferrari. He then built their shuttles with simple, basic designs with no frills. Lastly, the element of vertical integration was vital in their low-cost strategy. Companies such as ULA have subcontractors that have facilities spread out all over the country. ULA's latest shuttle also used three different types of engines for their rocket. Musk realized that he could save a lot of money by creating his own engine in house and creating a rocket that only used one type of engine. The economic value creation logic was to create the lowest possible cost in the industry at value parity. The two components of economic value creation are consumer surplus and producer surplus. By lowering prices and taking more market share it created consumer surplus. By reducing its cost in a low-cost strategy it was able to create producer surplus. This also forced all rivals to decrease cost and price which increased the overall accessibility to space.

Analyze the Corporate-Level tactics in this case: a. Diversification (Starlink) i. What do you think about the Starlink business? ii. Is Starlink a good business opportunity? Or an opportunity cost?

While Space X's core business was commercial launch, they began to grow and diversify. They began on a new venture called Starlink which is a WIFI business. Space X used this venture as volume and demand for their company. The idea of diversification and growing new ventures is a great idea for Space X, but Starlink may not be the best idea. There are already many solidified WIFI and service providers. Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. By putting time and money in to Starlink they are losing focus on core business, and their core business is commercial launch.

complementor

a company that provides a good or service that leads customers to value your firm's offering more when the two are combined

complement

a product, service, or competency that adds value to the original product offering when the two are used in tandem

How should Space X think about Growth, going forward? a. What is the best strategy for growing revenues and profits? b. What are your thoughts on the company's ambition to go to Mars? c. How will the landscape of competition change over the next 10 years? d. Analyze the final quote at the end of the case (page 13).

a. The best strategy for growing revenues and profits is to keep producing their product using a low-cost strategy. This strategy allows them to gain more market share. They can also create new ventures by continuing their space tourism or their ambition to go to Mars. It is predicted that space tourism could be worth $30 billion by the year 2030. b. The ambition to go to Mars is backed by the idea that humans should be spacefaring individuals who are looking to the future. c. The landscape of competition in the next 10 years is unknown. Many are worried about if there is enough demand in the world for all the capacity that is coming online. Investment marketers are worried and funding is being slowed, but it is hard to ignore the new ventures that are coming to the forefront. Many of these ventures could be very profitable. d. The last quote of the case seems as if Musk wants us to believe that our future won't be exciting without space exploration. It is an overall drive to increase the demand to go into space so his company will grow.

risk capital

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

producer surplus

what is value capture