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global mind-set
ability to analyze, understand, and manage an internal organization in ways that are not dependent on the assumptions of a single country, culture, or context
define value
VOLUNTARY EXCHANGE
measured by a product’s performance characteristics and by its attributes for which customers are willing to pay
only exists if a voluntary transaction occurs (everything else is an estimate)
if no one is voluntarily willing to buy/sell a given product/service, then it has no price to be attached to it
if no one wants to buy: lower value expectations, search for buyers, stop selling it
define intangible resources
-assets that are rooted deeply in the firm’s history, accumulate over time, and are relatively difficult for competitors to analyze and imitate
-usually tied to people and take longer time to develop
-EX: corporate culture, relationships with stakeholders, brand reputation, capabilities, trust
valuable capabilities
capabilities that allow the firm to exploit opportunities or neutralize threats in its external environment
rare capabilities
capabilities that few, if any, competitors possess
costly-to-imitate capabilities
capabilities that other firms cannot easily develop
nonsubstitutable capabilities
capabilities that do not have strategic equivalents
value chain activities
activities or tasks the firm completes in order to produce products and then sell, distribute, and service those products in ways that create value for customers
support function
activities or tasks the firm completes in order to support the work being done to produce, sell, distribute, and service the products the firm is producing
outsourcing
purchase of a value-creating activity or a support function activity from an external supplier
market segmentation
process of dividing customers into groups based on their needs
business model
describes what a firm does to create, deliver, and capture value for its stakeholders
cost leadership strategy
integrated set of actions taken to produce products with features that are acceptable to customers at the lowest cost, relative to that of competitors
differentiation strategy
integrated set of actions taken to produce products (at an acceptable cost) that customers perceive as being different in ways that are important to them
focus strategy
integrated set of actions taken to produce products that serve the needs of a particular segment of customers
total quality management (TQM)
involves the implementation of appropriate tools/techniques to provide products and services to customers with best quality
sequence of resources to advantage model:
resources
capabilities
competencies
competitive disadvantage
competitive parity
competitive advantage
sustainable competitive advantage
resources (from model)
-first step
-primary building blocks of an organization
-include tangible & intangible
-”raw materials”
-EX: machinery, people, culture, processes, capital, locations, relationships
capabilities (from model)
-second step
-the ABILITY to transform resources (raw materials) into usable skills, tools, and processes (something valuable to the organization)
-EX: taking sticks, feathers, rocks, and having the ability to make it into a bow
competencies (from model)
-third step
-having the necessary knowledge/skill to do something successfully (proven SKILL to reach a certain level of ACCOMPLISHMENT)
-does NOT speak to how good you are
define VRIS
V - Valuable
R - Rare
I - Imitability
S - Substitutable
define value (VRIS framework)
-improves economic competitiveness
-provides economic value above the investors’ risk-adjusted average return expectations
-NOT valuable = rapid failure or competitive disadvantage
-YES valuable = see if rare
define rare (VRIS framework)
-better than all competitors
-NOT rare = competitive parity
-YES rare = competitive advantage, see if able to imitate
define imitate (VRIS framework)
-very difficult or costly for competitors to imitate
-NOT difficult for competitors to imitate = short-term competitive advantage
-YES difficult for competitors to imitate = see if substitutable
define substitutable (VRIS framework)
-if there is a strategically equivalent competency that a competitor has that can negate your advantage
-NO substitutes = sustainable competitive advantage
-YES substitutes = short-term competitive advantage
-EX: Vegas is a substitute for a cruise
who wrote the VRIS model?
Jay Barney (adds the concept of economic value and the attributes of what’s necessary for competitive advantage to be sustained over a long period of time)
define tangible resources
assets that can be observed (touched) and/or quantified
-EX: people, equipment, facilities, cash and office building leases (quantifiable)
four basic types of competencies:
incompetencies
deficiencies
core competencies
distinctive competencies
define incompetencies
-not very good at something so the organization is harmed quickly
-performance outcome: rapid failure (immediate threat to survival)
-EX: not able to repay debt so you become bankrupt
define deficiencies
-you’re good at something but at least one competitor is noticeably better than you
-performance outcome: competitive disadvantage (slower threat to survival)
-EX: will eventually die because not in top position
define core competencies
-good at something and have no competitors that are any better than you
-performance outcome: competitive parity
define distinctive competencies
-good at something and better than all your competitors at what you do
-performance outcome: competitive advantage
which scholar created the value chain concept?
Michael Porter
define value chain
-representation of the SEQUENTIAL steps involved in producing goods (and services), starting with raw materials and ending with the delivered product
-some value chains interconnect
-a tool that helps you understand a company/industry from a sequential process perspective
-EX: start with iron and end with a ring sold at Walmart, all the resources (wood, rubber, etc.) to create a pencil
support activities for value chain examples
company-level: finance, HR, leasing/real estate, information systems
industry-level: risk management, contract management, G&A services
what is upstream (in value chain)?
if your company sits in a certain place along the value chain and you look back towards activities that happened in the supply chain(s) leading to you
-looking BACK towards the beginning of the value chain
what is downstream (value chain)?
If you are evaluating or looking at activities towards your consumers
-Looking TOWARDS/FORWARD consumers
competitive positions & their level of economic returns:
-competitive disadvantage = below avg. economic return
-competitive parity = avg. economic return
-competitive advantage = above avg. economic return
define business-level strategy
an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
-strategy for ONE business line
-includes commitments and actions to:
eliminate competitive disadvantages
leverage distinctive competencies
five generic business-level strategies:
cost leadership (low cost, broad target)
differentiation (unique, broad target)
focused cost leadership (low cost, narrow target)
focused differentiation (unique, narrow target)
integrated cost/differentiation (stuck in the middle)
define cost leadership
(low cost, broad target)
attempt to provide the lowest cost products in their markets to attract a very broadly defined set of customers
EX: Walmart, McDonald’s
define differentiation
(unique, broad target)
provides a wide array of designer merchandise and exceptional service at higher-than-normal prices. has something definitive that separates you from your competitors
EX: Harley-Davidson, Nordstrom
define focused cost leadership
(low cost, narrow target)
limited selection of consumer goods, but still focused on very low prices
EX: dollar general, Spirit Airlines
define focused differentiation
(unique, narrow target)
limited selection, selling better merchandise with better service than its competitors. has something definitive that separates you from your competitors
EX: Bugatti, Anthropologie
define integrated cost leadership/differentiation
(stuck in the middle)
finds a firm engaging simultaneously in primary value-chain activities and support functions to achieve a low-cost position with some product differentiation
seen as being middle ground; not cheap but not expensive; not highest quality but not low quality
EX: Kohl’s, Sephora
cost leadership competitive risks
obsolete: processes used to produce and distribute goods/services may become obsolete due to competitors’ innovations
EX: 3-D printing (better way of doing things)
poor quality: too much focus on cost reductions may occur at expense of customers’ perceptions of you providing an acceptable level of quality/service (perception of failing below can acceptable level)
EX: Dollar General, items fall apart
imitability: competitors using their own core competencies, may successfully imitate the cost leader’s strategy
focus strategies competitive risks
competitor is better at reaching customers: a focusing firm may be “out-focused” by its competitors; the competitor has more specialized appeal (better at serving niche market)
big competitor is better at reaching the market: large competitor may set its sights on a firm’s niche market; overwhelmed (EX: original pizza place beat by Pizza Hut)
trend changed: customer preferences in a niche market may change to closely resemble those of broader market (being a specialist can be tricky)
differentiation competitive risks
too high of price: price differential between the differentiator’s product and the cost leader’s product becomes too large; too expensive (too high with prices)
your item isn’t seen as “better”: differentiation ceases to provide incremental value for which customers are willing to pay; basically all the same (your products are not much better at all)
your items aren’t unique anymore: counterfeit goods replicate the differentiated features of the firm’s products; counterfeits (EX: fake Rolex)
define reach
-firm’s access and connection to customers
-number of customers
-EX: Facebook has 2.06 B users
define richness
-depth and detail of two-way flow of information between the firm and the customer (enhance customer service)
-somewhat controversial, privacy concerns
define affiliation
-facilitation of useful interactions with customers
-knowing information on another, finding ways to help better
-EX: pop-up ads, “would you be interested in…?”
define corporate-level strategy
across MULTIPLE businesses
define valuation
the analytical process of estimating the current (or projected) worth of an asset or a company
there is no value until a transaction takes place
Fundamental Analysis & Discounted Cash Flows
-important for project valuation
-best approach if data is available
-most accurate for economic value
-EX: how much a specific cruise ship is worth (not the whole fleet or company)
define economics
the study of HUMAN BEHAVIOR as it relates to the allocation of scarce resources
NOT about money
driven by the laws of human nature and highlights differences between what people say they value or believe from how they act when no one is watching
define total utility
the total satisfaction received from consuming a good or service
define utility
the satisfaction or usefulness of a good or service to meet the needs of a given customer
define economic value
MAXIMUM amount of money/resources an economic agent will pay for a good or service in a voluntary transaction (focus with cash)
define weighted average cost of capital (WACC)
-the average cost of all types of money (capital) that the company received from its investors (cost of money from company’s perspective)
-minimum return needed at the company level to avoid eventual bankruptcy (lowest level of economic return) across all of its investments to remain viable over the long run
-COMPANY-LEVEL
define hurdle rate
the minimum level of risk-adjusted return investors require for a specific investment or project
SPECIFIC PROJECT
define net present value (NPV)
the difference between the present value of future net cash inflows over a period of time minus the initial outlay of investment capital
most important variable is discount rate
define internal rate of return (IRR)
the discount rate that makes the net present value (NPV) of all cash flows from a particular project investment equal to zero
solving for what the discount rate is when NPV is 0
using WACC as the discount rate and NPV is greater than 0, should you invest? (WACC: NPV>0)
Yes!
using WACC as the discount rate and NPV is less than 0, should you invest? (WACC: NPV<0)
No! You will lose economic value (bankruptcy risk)
using hurdle rate as the discount rate and NPV is greater than or equal to 0, should you invest? (NPV ≥ 0)
Yes!
using hurdle rate as the discount rate and NPV is negative, should you invest? (NPV = -#)
It depends! The executive team should determine if there are special reasons to justify investing.
Not an automatic no, but requires justification
if IRR > company’s WACC, then…
the company shouldn’t lose economic value which is good!
if IRR > hurdle rate, then…
project investors should be happy which is good!
why is economic value preferable to accounting when evaluating data?
with accounting value - (book value) revenues, costs, and profits are more vulnerable to being manipulated
with economic value - (cash) cash flows are less susceptible to near-term manipulation and usually more correlated to the emotional feeling of “need” that a given consumer (or company) attributes to a good or service (better approximates an individual’s “utility” for one good or service in comparison to an alternative good or service)
define accounting
the cumulative set of rules and processes for recording, analyzing, retrieving, and reporting financial transactions of a firm (legalistic; potential manipulation)
why do we prefer to use cash flows if possible when measuring economic value?
cash flows are less susceptible to near-term manipulation and usually more correlated to the emotional feeling of “need” that a given consumer (or company) attributes to a good or service (better approximates an individual’s “utility” for one good or service in comparison to an alternative good or service)
how do we measure economic value?
by using cash flows instead of accounting metrics
define law of diminishing marginal utility
all else equal, as consumption of a good or service increases, the marginal utility derived from each additional unit declines
EX: when craving a Snickers the first bar will have high satisfaction but the tenth bar will have less (value goes down the more you consume)
what are the conditions of free market enterprise?
voluntary transactions
private property
competitive pricing mechanisms (monopolies are illegal, regulatory monopolies minimized) - competitive environment
laws against fraud and theft (lying, cheating, stealing)
*show true “value” of something
define capitalism
the cumulative aggregation of all the individual, voluntary, competitive transactions in a free enterprise system
define free market enterprise
voluntary transactions of private property using competitive pricing
*any intervention by third parties (ex. government, regulators) reduce balance between supply and demand…AKA lowers total utility
**Government acts as a referee in free enterprise
WACC formula
WACC = (cost of debt)*(% of debt) + (cost of equity)*(% of equity)
If IRR>WACC but IRR<hurdle rate, do you invest?
No! Would only do the deal if IRR is > both WACC and hurdle rate
What method provides the best estimate in terms of true economic value?
The fundamental analysis and discounted cash flows provide a better estimate in terms of true economic value, due to being most accurate since comparables are more difficult when only buying a specific part of a company (such as how much a specific cruise ship is worth vs the entire fleet)
*the problem is you often don't have access to the data that you need to run a discounted cash flow, so you go with a variety of other techniques as well
assuming free market/enterprise conditions… prices are set by _______ and ________.
supply = availability of a given good/service within a set (usually short) period of time
demand = cumulative level of interest in procuring a good/service
the larger the discount rate, the lower the present value of stream of future cash flow of an investment (TRUE/FALSE) aka larger discount rate = lower cash flow
True
discount rate is used to account for _________.
relative risk
cost of debt is the _________.
interest rate on a loan
primary activities for value chain examples
company-level: inbound logistics, operations, outbound logistics, marketing & sales, customer service
industry-level: mining/harvesting, gathering and processing, transport for further processing, manufacture final version, sell and deliver
Adjusting for relative risk - pick the best option:
invest $1 in a government-backed investment and receive a 10% return
invest $1 in a risky investment and receive a 10% return
Option 1: no point in investing in riskier investments if the return % is the same
Note 
Flashcard (21)