Business Policy (Exam 2) Guide

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

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

-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

capabilities that allow the firm to exploit opportunities or neutralize threats in its external environment

capabilities that few, if any, competitors possess

capabilities that other firms cannot easily develop

capabilities that do not have strategic equivalents

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

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

purchase of a value-creating activity or a support function activity from an external supplier

process of dividing customers into groups based on their needs

describes what a firm does to create, deliver, and capture value for its stakeholders

integrated set of actions taken to produce products with features that are acceptable to customers at the lowest cost, relative to that of competitors

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

integrated set of actions taken to produce products that serve the needs of a particular segment of customers

involves the implementation of appropriate tools/techniques to provide products and services to customers with best quality

1. resources

2. capabilities

3. competencies

4. competitive disadvantage

5. competitive parity

6. competitive advantage

7. sustainable competitive advantage

-first step

-primary building blocks of an organization

-include tangible & intangible

-”raw materials”

-EX: machinery, people, culture, processes, capital, locations, relationships

-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

-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

V - Valuable

R - Rare

I - Imitability

S - Substitutable

-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

-better than all competitors

-NOT rare = competitive parity

-YES rare = competitive advantage, see if able to imitate

-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

-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

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)

assets that can be observed (touched) and/or quantified

-EX: people, equipment, facilities, cash and office building leases (quantifiable)

1. incompetencies

2. deficiencies

3. core competencies

4. distinctive competencies

-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

-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

-good at something and have no competitors that are any better than you

-performance outcome: competitive parity

-good at something and better than all your competitors at what you do

-performance outcome: competitive advantage

Michael Porter

-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

company-level: finance, HR, leasing/real estate, information systems

industry-level: risk management, contract management, G&A services

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

If you are evaluating or looking at activities towards your consumers

-Looking TOWARDS/FORWARD consumers

-competitive disadvantage = below avg. economic return

-competitive parity = avg. economic return

-competitive advantage = above avg. economic return

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:

1. eliminate competitive disadvantages

2. leverage distinctive competencies

1. cost leadership (low cost, broad target)

2. differentiation (unique, broad target)

3. focused cost leadership (low cost, narrow target)

4. focused differentiation (unique, narrow target)

5. integrated cost/differentiation (stuck in the middle)

(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

(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

(low cost, narrow target)

limited selection of consumer goods, but still focused on very low prices

EX: dollar general, Spirit Airlines

(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

(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

1. 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)

2. 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

3. imitability: competitors using their own core competencies, may successfully imitate the cost leader’s strategy

1. 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)

2. 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)

3. trend changed: customer preferences in a niche market may change to closely resemble those of broader market (being a specialist can be tricky)

1. 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)

2. 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)

3. your items aren’t unique anymore: counterfeit goods replicate the differentiated features of the firm’s products; counterfeits (EX: fake Rolex)

-firm’s access and connection to customers

-number of customers

-EX: Facebook has 2.06 B users

-depth and detail of two-way flow of information between the firm and the customer (enhance customer service)

-somewhat controversial, privacy concerns

-facilitation of useful interactions with customers

-knowing information on another, finding ways to help better

-EX: pop-up ads, “would you be interested in…?”

across MULTIPLE businesses

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

-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)

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

the total satisfaction received from consuming a good or service

the satisfaction or usefulness of a good or service to meet the needs of a given customer

MAXIMUM amount of money/resources an economic agent will pay for a good or service in a voluntary transaction (focus with cash)

-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

the minimum level of risk-adjusted return investors require for a specific investment or project

SPECIFIC PROJECT

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

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

Yes!

No! You will lose economic value (bankruptcy risk)

Yes!

It depends! The executive team should determine if there are special reasons to justify investing.

Not an automatic no, but requires justification

the company shouldn’t lose economic value which is good!

project investors should be happy which is good!

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)

the cumulative set of rules and processes for recording, analyzing, retrieving, and reporting financial transactions of a firm (legalistic; potential manipulation)

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)

by using cash flows instead of accounting metrics

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)

1. voluntary transactions

2. private property

3. competitive pricing mechanisms (monopolies are illegal, regulatory monopolies minimized) - competitive environment

4. laws against fraud and theft (lying, cheating, stealing)

*show true “value” of something

the cumulative aggregation of all the individual, voluntary, competitive transactions in a free enterprise system

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 = (cost of debt)*(% of debt) + (cost of equity)*(% of equity)

No! Would only do the deal if IRR is > both WACC and hurdle rate

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

1. supply = availability of a given good/service within a set (usually short) period of time

2. demand = cumulative level of interest in procuring a good/service

True

relative risk

interest rate on a loan

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

Option 1: no point in investing in riskier investments if the return % is the same