topic 2

What is value creation

Value created for the customer minus the cost for the firm. It implies creation of competitive advantage.

What is the value stick framework?

A model with three components: Cost (bottom), price (middle what the firm controls), and Willingness to Pay (top-customer’s maximum) Formula V-C

What is Willingness to Pay (V)?

The highest price a customer is willing to pay for your product/service. Charging above this risks customers not purchasing.

What is Price (P) in the Value Stick?

The final price a company charges. It’s the point firms have most control over. Can be set between Cost and Willingness to Pay.

What is Cost (C) in the value stick?

Total money spent producing a product and service, including physical costs (materials) and non physical costs (utilities and rent)

Formula for value creation

V-C (willingness to pay - costs)

What are the three types of value creation indicators?

1. Accounting data (profits, ratios)

2. Market indicators (firm value in market)

3. Mixed indicator (market value, book value)

What are advantages of accounting data indicators

Can be manipulated may not include activity risks

What are disadvantages of market indicators?

Only work for publicly traded companies

Who are stakeholders

Various groups participating in the firm with different objectives (owners, employees, customers, suppliers, etc)

What is the shared objective for all stakeholders

Value creation

What is strategic analysis

Serves to understand the attractiveness of the sector and the compettive advantage of a company in that sector

What are the two types of external analysis

Macroenvironment analysis (PESTEL)

Microenvironment analysis (PORTERS five forces)

What is macro-environment?

Factors that have similar influence on ALL organizations operating at a given time in each economic area

What is sectoral/micro-environment?

Part of environment closest to organization's main activity. Variables affecting specific companies or groups in delimited ways.

What does SWOT stand for?

Strengths (internal), Weaknesses (internal), Opportunities (external), Threats (external)

Which SWOT elements are internal?

Strengths and Weaknesses

Which SWOT elements are external?

Opportunities and Threats

What is Porter's Five Forces Model? Framework for analyzing competition:

1. Rivalry among competitors, 2. Threat of new entrants, 3. Threat of substitutes, 4. Bargaining power of suppliers, 5. Bargaining power of buyers

What does the Rivalry force analyze?

How intense is the fight between current companies in the market? Factors: concentration, company size/number, differentiation, switching costs, fixed costs, sector growth, exit barriers

What does Threat of New Entrants analyze?

How easy is it for new companies to enter and compete? Barriers: economies of scale, capital requirements, control of inputs, product differentiation, distribution access, legal barriers

What does Threat of Substitutes analyze?

Can customers easily switch to a different type of product solving the same problem? Consider: degree of substitution, elasticity of demand, relative prices, price/performance ratio

What does Bargaining Power of Suppliers analyze? How much control do suppliers have over your costs and terms?

Factors: number of suppliers, importance of input, standardization, threat of backward integration

What are the steps for Porter's Five Forces analysis?

1. Identify core sector, 2. Identify competitors/suppliers/customers/substitutes/entrants, 3. Analyze degree of threat/opportunity for each force, 4. Conclude on sector profitability

What is the Resource-Based View (RBV)?

Each organization is a unique combination of resources and capabilities. Differences in resource endowments explain differences in achievements.

What are the three steps for internal analysis?

1. Identify key resources/capabilities, 2. Analyze potential for competitive advantage (VRIO model), 3. Draw conclusions/recommendations

What are the three types of tangible resources?

1. Physical assets (land, buildings, machinery), 2. Financial resources (bank accounts, internal funds, borrowing capacity), 3. Raw materials

What are the three types of intangible resources?

1. Technological (patents, know-how), 2. Relational (brands, reputation, client portfolio), 3. Human (employee qualification, motivation, flexibility)

What are capabilities?

What the company knows how to do through interaction of resources. Organizational skills (not individual). Based on routines - regular, predictable activity patterns.

What is Apple's core capability example?

Industrial design skills + hardware/software integration → innovative mobile devices (Mac, iPad, iPhone, iWatch)

What does VRIO stand for?

Valuable, Rare, Inimitable (hard to imitate), Organized (firm organized to exploit resource)

What is competitive strategy?

How an organization competes in a given activity with respect to competition. How it achieves competitive advantages from strategic resources.

What are the two generic competitive strategies?

1. Cost Leadership (be most efficient), 2. Differentiation (create unique value customers pay premium for)

What is Differentiation strategy?

Creating something unique valued by buyers beyond low price. Key: CREATE VALUE FOR CLIENTS who are willing to pay higher price

What are three sources of differentiation?

1. Product features (design, performance, packaging), 2. Customer characteristics (payment methods, delivery, emotional considerations), 3. Complementary products (platforms, consoles + games)

What are three requirements for successful differentiation?

1. Must be perceived by customers, 2. Must be sustainable over time, 3. Must offer competitive advantage to buyer

What are advantages of differentiation strategy?

High margins, defense against competition, reduces power of customers/suppliers

Can cost leadership and differentiation be pursued together?

Generally difficult - firms usually must choose one primary strategy. Some exceptional firms achieve both (Toyota, IKEA). Risk of being "stuck in the middle."

What are the 6 steps from business idea to business model?

1. Getting from idea to model, 2. Visualizing (Canvas), 3. Prototyping, 4. Navigating environment, 5. Proving it, 6. Telling your story

How is value split?

Consumer Surplus = V - P, Firm's Profit = P - C

What does VRIO stand for?

Valuable, Rare, Inimitable, Organized