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Accounting Profitability

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Helps assess competitive advantage - ROIC, ROE, ROA, ROR - use income statements and balance sheets. - 10K's are primary source of companies' accounting data - uses standard, publicly available metric - historical/backward looking - focuses on tangible assets - does not consider off-balance sheet items

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Risk Capital

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

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Total Return to Shareholders

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- Stock price appreciation plus dividends

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Market Capitalization

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

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Limitations of Shareholder Value Creation

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- Stock prices can be highly volatile, thus making 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 (irrationality)

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Economic Value Creation

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- the difference between a buyer's willingess to pay for a product/service and the firm's total cost to produce it - V-C - can create competitive advantage because of superior product differentiation or create a relative cost advantage over rivals

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Producer surplus (Profit)

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P-C

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Consumer Surplus

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- difference between what you would be willing to pay and what you paid - V-P

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Opportunity Costs

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value of the best forgone alternative use of the resources employed

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Limitations of Economic Value Creation

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- determining value for consumers is not simple - value in the eyes of consumer changes based on income, preferences, time, and other factors - to measure firm-level competitive advantage, you must estimate the economic value created for all products/services offered by the firm

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Integrative Frameworks

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- combining quantitative data with qualitative assessements (the balanced scorecard and the triple bottom line)

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Balanced Scorecard

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- helps managers achieve strategic objectives more effectively - uses internal and external performance metrics - balances both financial and strategic goals

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Examples of Metrics for Each of Four Balanced Scorecard Questions

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- 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)

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Advantages of Balanced Scorecard

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managers can: - link the strategic vision to responsible parties - translate the vision into measurable goals - design/plan business processes - implement feedback and organizational learning to modify and adapt strategic goals

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Disadvantages of Balanced Scorecard

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-focused on strategy implentation (NOT formulation) - limited guidance about which metrics to use - only as useful as managers apply it - strategy must be translated into measurable objectives - not much guidance on how to get back on track if setbacks occur

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Triple Bottom Line

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- Profits: economic dimension - People: social dimension - Planet: ecologival dimension

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Business Model

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- details competitive tactics and initiatives - explains how firm intends to make money - stipulates how the firm conducts its business (buyers. suppliers, and partners)

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2 steps of Effective Business Model

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1. Formulate - managers transform strategy of how to compete into a blueprint of actions and initiatives that support overarching goals 2. Implement - managers implement blueprint through structures, processes, culture, and procedures

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Popular Business Models

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- razor- razorblades - subscription - pay as you go - freemium - wholesale - agency - bundling

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Dynamic Evolution of Business Models

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- business models can evolve, be combined, and/or be disrupted. - businesses must respond to disruption and adapt - legal conflicts can arise

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Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage

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- to measure competitive advantage, you must be able to accurately assess firm performance, and compare/benchmark the focal firm's performance to other competitors in the same industry/industry avg - to measure accounting profitability, you use standard metrics derived from publicly available accounting data - ROA, ROE, ROIC, ROR - all accounting data are historical and backward looking; focus only on tangible assets; doesn't consider intangibles (innovation competency)

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Apply shareholder value creation to asses and evaluate competitive advantage

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- investors primarily interested in total return to shareholders - total return to shareholders is an external performance metric; indicates how market views publicly available indo about firm's past, current, and future performance - applying shareholders' perspective: measure and assess RORC and market capitalization - highly volatile stock prices and macroeconomic factors - stock prices reflect psychological mood of investors - shareholder value creation is a better measure of competitive advantage over long term

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Explain economic value creation and different sources of competitive advantage

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- The relationship between economic value creation and competitive advantage provides the foundation upon which to formulate a firm's competitive strategy of cost leadership or differentiation. - value (V), price (P), and cost (C) are needed to evaluate good/service - A firm has a competitive advantage when it is able to create more economic value than its rivals.

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ROIC

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- Net profits / Invested capital - SE through selling of shares to the public - interest bearing debt through borrowing from financial institutions and bondholders - if a firm's ROIC > C of capital = value generation - if a firm's ROIC < C of capital = value degeneration - must compare to competitors - ROR and Working capital turnover

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ROR

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- how much firm's sales turn into profit - COGS / Revenue - R&D expense / Revenue - Selling, general, & admin (SG&A) expense / Revenue

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Working capital turnover

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- Revenue / Working Capital - Fixed Asset Turnover (PPE): Revenue / Fixed Assets - Inventory Turnover: COGS / Inventory - Receivables Turnover: Revenue / Accounts Receivable - Payables Turnover: Revenue / Account Payable

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Apply a balanced scorecard to assess and evaluate competitive advantage

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- Its goal is to harness multiple internal and external performance dimensions to balance financial and strategic goals. - How do customers view us? - How do we create value? - What core competencies do we need? - How do shareholders view us?

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Apply a triple bottom line to assess and evaluate competitive advantage.

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- economic, social, and ecological, also known as profits, people, and planet - Achieving positive results in all three areas can lead to a sustainable strategy - managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities in as serious a way as they track its financial performance. - is related to stakeholder theory, an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return.

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Outline how business models put strategy into action.

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- The translation of a firm's strategy (where and how to compete for competitive advantage) into action takes place in the firm's business model (how to make money). - details how the firm conducts its business with its buyers, suppliers, and partners.

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Business Level Strategy

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- goal directed actions managers take to achieve competitive advantage in a single product market - 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?

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Strategic Trade-Offs

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- Choices between cost or value position - tensions between value creation and pressure to keep C in check - purpose is to maximize firm's economic value creation and profit margin

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Differentiation

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generic business strategy that seeks to create higher value for customers than the value that competitors create - offers products/services with unique features - keeps firm's C structure as low as possible - charges higher prices - add V to products/services - responseive to customer preferences - can increase C when additional R&D and innovation are needed or when it relies on customers who are willing to pay a premium focus of competition - service - new product launches - marketing and promo competitive advantage achieved when - V-C > competitors

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Cost Leadership

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generic business strategy that seeks to create the same or similar value for customers at lower cost - products/services delivered at lower cost goal is to reduce firm's C below its competitors and offer adequate value resources focused on - reducing C to manufacture product or offer a service - reduce prices for customers - optimizing value chain to achieve low C - appeal to bargain-conscious buyer - offer lower prices than competitors - attract increased volume of sales - can be profitable over long period of time

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scope of competition

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the size (narrow or broad) of the market in which a firm chooses to compete

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Focused cost leadership

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same as cost leadership except with a narrow focus on a niche market

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focused differentiation

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same as differentiation except with a narrow focus on a niche market

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Cost of Input Factors

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- Raw materials - Capital - Labor - IT services

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Economies of Scale

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allow a firm to - Spread fixed costs over a larger output - Employ specialized systems and equipment - Take advantage of certain physical properties - decreases in per unit costs as output increases

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Economies of Scope

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savings that come from producing (2+) outputs at less C than producing each ouput individually, despite usng the same resources and technology

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Value Drivers

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- product features - customer service - complements

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Cost Drivers

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

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Learning Curve Effects

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learning drives down C - takes less time to produce same output - learn how to be more efficient people learn from cumulative experience - writing computer code - developing new medicines - building submarines first noted during WWII

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Minimum efficient scale (MES)

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

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experience curve

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change the underlying technology while holding cumulative output constant effects based on process innovation allow a firm to leapfrog to a steeper learning curve - driving down per unit C

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Success of Business Strategy Relies On

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- how well the strategy leverages firm's internal strengths and mitigates its weaknesses - how well it helps the firm exploit external opportunities and avoid external threats

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Blue Ocean Strategy

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- successfully combines differentiation and cost leadership activities using value innovation to reconcile the inherent trade offs - untapped market space creation of additional demand - opportunity for highly profitable growth

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Value Innovation

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- simultaneous pursuit of differentiation and low C in a way that creates a leap in value for both the firm and the consumers; considered cornerstone of blue ocean strategy - changes competitive landscape - opens up new areas of competition Must answer the following questions: - Which of the factors that the industry takes for granted should be eliminated? - Which of the factors should be reduced well below the industry's standard? - Which of the factors should be raised well above the industry's standard? - Which factors should be created that the industry has never offered? To be successful it requires the firm to: - reconcile trade offs to increase V and lower production C - pursue both business strategies simultaneously

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Red Ocean

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- market space of existing industries - rivalry among existing firms is cut throat because the market space is crowded and competition is zero-sum game - products become commodities - competition focused mainly on price - any market share comes at expense of other competitors in the same industry

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Value Curve

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- horizontal connection of the points of each value on the strategy canvas that helps strategists diagnose and determine courses of action

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Strategy Canvas

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- graphical depiction of a company's relative performance vis-avis its competitors across the industry's key success factors

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Define business-level strategy and describe how it determines a firm's strategic position

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- Business-level strategy determines a firm's strategic position in its quest for competitive advantage when competing in a single industry or product market. - Strategic positioning requires that managers address strategic trade-offs that arise between value and cost, because higher value tends to go along with higher cost. - Differentiation and cost leadership are distinct strategic positions - managers must also define the scope of competition—whether to pursue a specific market niche or go after the broader market.

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Examine the relationship between value drivers and differentiation strategy

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- The goal of a differentiation strategy is to increase the perceived value of goods and services so that customers will pay a higher price for additional features. - the focus of competition is on value-enhancing attributes and features, while controlling costs. - the unique value drivers managers can manipulate are product features, customer service, customization, and complements. - Value drivers contribute to competitive advantage only if their increase in value creation (?V) exceeds the increase in costs, that is: V > C

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Examine the relationship between cost drivers and the cost-leadership strategy

answer

- The goal of a cost-leadership strategy is to reduce the firm's cost below that of its competitors. - the focus of competition is achieving the lowest possible cost position, which allows the firm to offer a lower price than competitors while maintaining acceptable value - the unique cost drivers that managers can manipulate are the cost of input factors, economies of scale, and learning- and experience-curve effects. - No matter how low the price, if there is no acceptable value proposition, the product or service will not sell

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Assess the benefits and risks of differentiation and cost-leadership business strategies vis-à-vis the five forces that shape competition

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- The five forces model helps managers use generic business strategies to protect themselves against the industry forces that drive down profitability - Differentiation and cost-leadership strategies allow firms to carve out strong strategic positions, not only to protect themselves against the five forces, but also to benefit from them in their quest for competitive advantage. - Exhibit 6.7

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Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy

answer

- To address the trade-offs between differentiation and cost leadership at the business level, managers must employ value innovation, a process that will lead them to align the proposed business strategy with total perceived consumer benefits, price and cost. - Lowering a firm's costs is primarily achieved by eliminating and reducing the taken-for-granted factors on which the firm's industry rivals compete - Increasing perceived buyer value is primarily achieved by raising existing key success factors and by creating new elements that the industry has not yet offered - Managers will track their opportunities and risks for lowering a firm's costs and increasing perceived value vis-à-vis their competitors by use of a strategy canvas, which plots industry factors among competitors (see Exhibit 6.10

question

Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value innovation

answer

- A successful blue ocean strategy requires that trade-offs between differentiation and low cost be reconciled. - It is often difficult because the two distinct strategic positions require internal value chain activities that are fundamentally different from one another. - When firms fail to resolve strategic trade-offs between differentiation and cost, they end up being "stuck in the middle." They then succeed at neither business strategy, leading to a competitive disadvantage

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