ch 5 book notes Honors Strategic Management
ch 5 book notes Honors Strategic Management MGMT 3013H
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This 5 page Class Notes was uploaded by ajtovar on Sunday October 2, 2016. The Class Notes belongs to MGMT 3013H at University of Arkansas taught by Vikas Anand in Fall 2016. Since its upload, it has received 3 views. For similar materials see Honors Strategic Management in Management at University of Arkansas.
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Date Created: 10/02/16
Apple vs. Microsoft -micros strat of focusing on setting the industry standard allowed it to create a favorable (monopoly) mkt position and thus extracted high profits for many years -apple ipod, itunes, retail stores -comp adv is transitory aka hard to get and hard to sustain it 3 frameworks to measure and asses firm performance: accounting profitability, shareholder value creation, economic value creation Two integrative framework (combining quantitative data with qualitative assessments: balanced scorecard, triple bottom line -business models to understand more deeply how firms put their strat into action in order to make money 1) Comp adv and firm performance a) Multidimensional perspective for addressing comp adv i) accounting profitability ii) shareholder value creation iii) economic value creation iv) these three tend to be correlated over time. v) Accounting and economic tend to be reflected I the firms stock price, which in turn determines in part the stocks market valuation b) Accounting profitability (1) Accurately assess the performance of their firm (2) Compare and benchmark their firms performance to other competitors in the same industry or against the industry avg ii) Standardized financial metrics (income statement and balance sheet) fulfill these conditions iii) ROIC return on invested capital (ROIC=Net profits/ invested capital) (1) Good proxy for firm profitability (2) How effectively a co. uses its total invested capital (3) Shareholders equity through the selling of shares to the public, interest bearing debt through borrowing from financial institutions and bondholders (4) If ROIC is greater than its cost of capital, it generates value (5) Cost of capital: represents a firms cost of financial operations from both equity through issuing stock and debt through issuing bonds (6) ROIC: return on revenue and working capital turnover (7) ROR return: how much of the firms sales is converted into profits (a) COGS/rev: indicates how efficiently a co. can produce a good (b) R&D/rev: how much of each dollar that the firm earns in sales is invested to conduct R&D (c) SG&A/rev: how much each dollar that the firm earns in sales is invested in sales, general, and admin expenses (i) Indicator of the firms focus on marketing and sales to promote its products and services (8)Working capital turnover: measure of how effectively capital is being used to generate rev (a) Fixed asset turnover (Rev/Fixed assets): how well a co. leverages its fixed assets, particularly property, plant, and equipment (PPE) (i) Indicates how much of a firms capital is tied up in its fixed assets (b) Inventory turnover (COGS/inv) (i) COGS: production cost of merchandise sold (ii) Inv: cost of merchandise to be sold (c) Receivables and payables: indicate co.s efficiency in extending credit and collecting debts (i) Receivables turnover (rev/accounts receivable): higher ratios imply more efficient management in collecting accounts receivable and shorter durations of interest free loans to customers (ii) Payables turnover (rev/accounts payable): how fast the firm is paying its creditors and how much it benefits from interest free loans extended by its suppliers iv) Limitations of accounting data (1) historical and thus backward looking (a) Time delay (2) Don’t consider off-balance sheet items (a) Pension obligations, operating leases (b) Strategists address this shortcoming by adjusting accounting data to obtain an equivalent economic capital base, so that they can compare companies w/ diff capital structures (3) Focus mainly on tangible assets, which are less important than intangible (a) Intangibles: innovation, quality, and customer experience c) Shareholder value creation i) Shareholder: individuals/ orgs that own one or more shares of stock in a comp ii) Risk capital: money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt iii) Total return to stockholders: return on risk capital, including stock price appreciation plus dividends received over a specific period iv) External and forward looking metric v) Efficient market hypothesis: all available info about a firms past, present, and future performance is embedded in the market price of the firms stock vi) Market capitalization (market cap): captures total dollar market value of a company’s total outstanding shares at any given point in time (1) Mkt cap = #of outstanding shares x share price (2) Effective strats to grow the business can increase a firms profitability and thus its stock price (3) Firms stock price generally increases only if the firms rate of growth exceeds investors expectations (4) Investors adjust their expectations over time vii)Stock market valuation = share price x #of outstanding shares viii) Limitations of shareholder value creation (1) Stock prices can be highly volatile, making it difficult to access firm performance, particularly in short term (a) Total return to shareholders is better measure over the long term (2) Overall macroeconomic factors such as economic growth or contraction, the unemployment rate, and interest and exchange rates all have a distinct bearing on stock prices (3) Stock prices frequently reflect the psychological mood of investors, which can at times be irrational d) Economic value creation: diff b/w a buyers willingness to pay for a product or service and the firms total cost to produce it i) A firm has a comp adv when it creates more economic value than rival firms ii) Reservation price: absolute maximum youd be willing to pay for product iii) The amount of total perceived consumer benefits equals the maximum willingness to pay, or the reservation price iv) Comp adv can also result from a relative cost advantage over rivals, assuming both frms can create the same total perceived consumer benefits v) Value: dollar amount (V) a consumer attaches to a good or service (1) Captures a consumers willingness to pay and is determined by the perceived benefits a good or service provides to the buyer (2) Cost (C) (3) Price (P) vi) Profit/ producer surplus: diff b/w price charged and cost to produce (p-c) vii)Consumer surplus: diff b/w value a consumer attaches to a good or service and what he paid for it (V-P) viii) Economic value creation is about: (1) Creating economic value (2) Capturing as much of it as possible ix) Comp adv goes to the firm that achieves the largest economic value created (1) Need to maximize (V-C) x) Profit = TR-TC where TR = price x quantity sold (1) Fixed costs: independent of consumer demand (2) Variable costs: change w/ level of consumer demand xi) Opportunity costs: capture the value of the best forgone alternative use of the resources employed xii)Limitations: (1) Determining the value of a good in the eyes of consumers is not a simple task (2) Value of a good in eyes of consumer changes based on income, preferences, time, and other factors (3) To measure firm level comp adv, we must estimate the economic value created or all products and services offered by the firm 2) Balanced scorecard: framework to help managers achieve their strat objectives more efficiently a) Harnesses multiple internal and external performance metrics in order to balance both financial and strat goals b) How customers view us i) Customers perspective concerning the companys products and services links directly to its revenues and profits c) How do we create value i) Challenges managers to develop strat objectives that ensure future competitiveness, innovation, and organizational learning d) What core competencies do we need i) Focusses mangers internally to identify the core competencies needed to achieve their objectives and the accompanying business processes that support, hone, and leverage those competencies e) How do shareholders view us i) Understanding the shareholders view of value creation leads managers to a more future oriented evaluation f) Advantages of balanced scorecard i) Communicate and link the strat vision to responsible parties w/in the org ii) Translate the vision into measurable operational goals iii) Design and plan business processes iv) Implement feedback and org learning to modify and adapt strat goals when indicated v) Can accommodate both short and long term performance metrics g) Disadvantages: i) Tool for strat implementation not strat formulation ii) Only as good as the skills of managers who use it (1) They must first devise a strat that enhances the odds of achieving comp dv. Second they must accurately translate the strat into objectives that they can measure and manage w/in the balanced scorecard approach iii) Doesn’t provide much insight into how metrics that deviate from the set goals can be put back on track 3) Triple bottom line: combo of economic, social, and ecological concerns (profit, people, planet) that can lead to sustainable strat a) Sustainable strat: can be pursued over time w/o detrimental effects on people or planet i) Interface: worlds first sustainable company ii) Carpet iii) BHAG big hairy audacious goal: powerful mechanism to stimulate progress b) Business model: plan that details how it intends to make money i) How firm conducts its business w/ buyers, suppliers, and partners ii) For business model to be successful, it might need to consider reinforcing activities ex. Netflix and OITNB iii) Firms managers transform their strat of how to compete into a blueprint of actions and initiatives that support the over-arching goals. Second step they implement blueprint through structures, processes, culture, and procedures iv) Airbnb: tapping the value of unused spaice c) Popular business models i) Razor-razorblades: product sold at loss or given away and company makes $ off replacement parts ii) Subscription iii) Pay as you go: ex. Zipcar iv) Freemium: ex. Hootsuite v) Wholesale: ex. books vi) Agency: producer relies on an agent/ retailer to sell the product at a predetermined percentage commission vii)Bundling: sells products or services for which demand us negatively correlated at a discount (1) Demand for 2 products is negatively correlated if a user values one product more than another (2) ex. Microsoft office d) Dynamic nature of business models i) Combination: AT&T razor-razorblade and subscription ii) Evolution: freemium came from razor-razorblade model iii) Disruption: amazon and books iv) Response to disruption: apple v) Legal conflicts: apple lol 4) Implications for strategist a) No best strat exists-only better ones (in comparison w/ others) i) Interpret any performance metric relative to those of competitors and the industry avg ii) Comp adv is best measured by criteria that reflect overall business unit performance rather than the performance of specific departments iii) Both quant and qual performance dimensions matter in judging the effectiveness of a firms strat iv) Firms business model is critical to achieving comp adv. How a firm does business is as important as what it does
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