what is a firm? - ceworkshops-com.3dcartstores.com · a portfolio of assets 3 admin p1 p2 p3 p4 ......
TRANSCRIPT
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Integrating Business Valuation and Strategy –Afternoon Session
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Prepared and Presented by:William A. Kline, Ph.D., CFA
What is a firm?
Learning Outcomes
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Assets
Tangible
PP&E Hardware Cash
Intangible
Brand Trademarks Customer Relationships
A Portfolio of Assets
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Admin
P1
P2
P3
P4
A Portfolio of Projects
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What is the goal of the management team?
Learning Outcomes
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The Management Team’s Goal Is…
• To create value for its stakeholders who are:• Shareholders• Employees• Suppliers• Buyers• Consumers• Government• The local municipality, people, environment• Those in need of…
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What is value appropriation?
Learning Outcomes
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Corporate ProfitRevenue-COGS= Gross Profit-SGA= Operating Profit (EBIT)-Interest Expense= Earnings Before Tax (EBT)-Taxes= Net Income (Profit)
Inputs/Base Suppliers Manufacturers Wholesalers Retailers Consumers
Industry Value Chain, Corporate Profit, and Value Appropriation
TMT/Employees
Shareholders/Community/Stakeholders
Buyer power, substitutes, consumer needs, etc.Focal Firm Merck
Customers/Consumers (Price/Quality)
Bondholders
Government
Suppliers
Industry profitability drives firm profitability and influences the overall value available to be distributed to firm stakeholders.
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How does the TMT create value?
• The best managers make decisions that add value to the firm by:• Increasing revenue• Minimizing expenses• Managing risk
Learning Outcomes
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What are 3 main categories in the management process? Describe the main components in each.
Learning Outcomes
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Strategy Formulation (Tradeoffs,
Strategic Fit)
ImplementationPerformance
Feedback/ControlTMT/Board
Vision
Strengths/WeaknessesAssetsResources
Capabilities
Competencies
Opportunities/Threats
Porter’s Analysis
Competitor Analysis
Macroeconomic Analysis/Consumer Preferences
Stock Return
ROA/ROE
Org. Structure
Control Mechanisms
Culture/Motivation/Teams
Internal Analysis
External Analysis
NPVBiases
Governance
Industry Practices
Communication
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What are the basic assumptions about decision-making?
Learning Outcomes
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Behavioral FinanceTraditional finance assumes that investors exhibit or practice:
1. Risk Aversion – Investors minimize risk for a given level of return or maximize return for a given level of risk.
2. Rational Expectations – Investors’ forecasts properly reflect all relevant information pertaining to security valuation.
3. Asset Integration – Investors take a portfolio perspective when evaluating an individual asset’s risk / return characteristics.
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How are the basic investor decision-making assumptions violated?
Learning Outcomes
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Behavioral FinanceBehavioral finance assumes investors exhibit three psychological characteristics:
1. Loss Aversion – Investors prefer larger uncertain losses to smaller certain losses.
2. Biased Expectations – Investors have too much confidence in their ability to forecast the future.
3. Asset Segregation – Ignore the concept of the portfolio perspective.
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• Dr. Kahneman argues that we have two systems in our brains:• System 1 (Fast) – operates automatically and quickly, with little or no effort
and no sense of voluntary control. Examples:• Orient to the source of a sudden sound• Answer 2 + 2 = ?• Read words on large billboards• Drive a car on an empty road
• System 2 (Slow) – allocates attention to the effortful mental activities like complex calculations. This is associated with choice and concentration. Examples:• Count the occurrences of the letter A on a page of text• Park in a narrow space or parallel park• Check the validity of a complex logical argument (think the SAT exam)
Thinking, Fast and Slow (Daniel Kahneman: Noble Prize Winner
Thinking, Fast and Slow. Danial Kahneman, ISBN: 978-0-374-53355-7
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• Your first task is go down both columns, calling out whether each word is printed in lowercase or in uppercase. When you are done with the first task, go down both columns again, saying whether each word is printed to the left or to the right of center by saying “left” or “right”.
The Conflict
LEFT upperleft lower
right LOWERRIGHT upper
RIGHT UPPERleft lower
LEFT LOWERright upper
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An IllusionWhich line is longer?
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• System 2 controls our System 1 impulses
• We must use System 2 to learn to overcome illusions
• Our brain can only handle so much: when stressed or overwhelmed System 2 begins to break down and we lose control or emotional responses.
System 1 and 2 Implications
Dan Ariely asks, Are we in control of our decisions?
https://www.youtube.com/watch?v=9X68dm92HVI
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Daniel Kahneman: Thinking, Fast and Slow
https://www.youtube.com/watch?v=mWaIE6u3wvw
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List 3 behavioral biases and explain how each could lead to poor executive decisions.
Learning Outcomes
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Precision
Overestimating the precision and importance of information
- Information is rarely complete or precise
- Additional information does not enhance predictive power
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OverconfidenceOverconfident investors think the information they have is better than average and that they are able to read and interpret information better than the average investor
Overconfidence induces frequent trading and leads to poor diversification
Estimating too narrow of a range of probabilities can lead managers to make incorrect decisions. What project should we accept????
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Fear of Regret/Seeking PrideFear of regret – refers to the pain one feels after making a bad decision.
- Causes investors to hold onto losers too long.
- Investing good money after bad
- Lend more money to borrowers
Seeking of pride – joy felt from making a wise decision.
- Causes investors to sell winners to soon
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Anchoring
Investors evaluate alternatives, not in terms of final outcomes, but rather in terms of gains and losses defined relative to a reference point.
The reference point is used by investors to determine if the position is trading at a “loss” or at a “profit” in their minds.
Investors face a behavioral tendency to re-compute profits as the difference between the current stock price and the reference point.
This may be a problem when making company projections as it gives too much weight to the past.
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The Disposition Effect
There is little evidence of fear of regret and seeking of pride when news about the overall economy is released.
However, feelings of regret and pride are strong during periods of company specific new releases.
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Gambling Biases
House money – When investors treat winnings as house money, not their own money. Take very large risks with their winnings.
Snake bite – Refers to the reluctance to take risks after experiencing losses.
Trying to break even – Refers to the desire by investors to recoup large losses in one quick long-shot.
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Refers to the tendency by people to place higher value on what they own than on identical items that they do not own.
The Endowment Effect
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The Confirming Evidence TrapWhen we seek out information that supports our views.
Ask enough people and someone with agree with you…
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Mental AccountingRefers to the brain’s tendency to classify activities into separate categories or accounts. The investor treats the accounts as if they were independent.
When investors ignore interrelationships or correlations across assets, they violate the basic tenets of MPT.
Mental accounting may cause the investor to create poorly diversified portfolios.
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RepresentativenessRefers to the behavioral tendency to simplify decisions by treating particular events or characteristics as representative of future success or failure.
Examples – viewing a “good company” as a “good stock” and chasing mutual fund performance.
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FamiliarityRefers to the behavioral bias to buy stocks of companies with which investors are most familiar, using their familiarity as a shortcut to investing.
Behavioral investors might tilt their portfolios toward small companies that are located close to their homes because they feel they know and understand local companies.
Familiarity may lead to poor diversification, too much investment in large domestic stocks, too little investment in international stocks, and too much investment in local companies.
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Strategy Formulation
Module 5: BA 462
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Strategy Formulation (Tradeoffs,
Strategic Fit)
ImplementationPerformance
Feedback/Control
TMT/BoardVision
Strengths/WeaknessesAssetsResources
Capabilities
Competencies
Opportunities/Threats
Porter’s Analysis
Competitor Analysis
Macroeconomic Analysis
Stock Return
ROA/ROE
Org. Structure
Control Mechanisms
Culture
Internal Analysis
External Analysis
NPVBiases
Governance
Industry Practices
Communication
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Learning Outcome Statements• Define resources and capabilities and explain how capabilities are the foundation for a
competitive advantage. Provide an example.
• Discuss RBV and KBV and how they are related to competitive advantage.
• Explain the concepts of strategic fit, as well as tradeoffs and provide an example of each.
• What is the difference between things that are codified and things that are tacit?
• Discuss why firms rely on real-options logic. How is real-options logic related to KBV and innovation?
• Describe support activities and primary activities in a firm’s value chain. How do firms use the value chain to make outsourcing decisions? Provide an example.
• Compare/contrast differentiation and low-cost strategies. Also, compare/contrast broad and focused strategies. (Hint: draw the 2x2 chart discussed in class to guide your explanation)
• Describe the concepts of differentiation parity and low-cost parity.
• Explain how scholars/practitioners should go about performing segmentation analysis. Provide an example.
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What is Strategy?
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What is the difference between operational efficiencies and strategic positioning?
Learning Outcomes
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Strategy Versus Operational Efficiencies
• OE means performing activities better than your competitors• Cheaper inputs• Better technology• Motivated employees
• Strategic positioning refers to doing things differently than your competitors
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Productivity Frontier• State of best practice – the best techniques, technology,
methods, inputs, etc. at a given time
• This frontier is always shifting• Technology• Outsourcing (is outsourcing good?)• Communication
• Does being very efficient lead to a sustainable advantage? NO….• Best practices get imitated
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OE (Continued)
• Over time, industry returns fall
• Consumers and other stakeholders generally benefit from lower prices
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What then is Strategy?
• Porter argues it is about being different…• Southwest• Ikea
• What about trade-offs?• Firms must consider the pros and cons of all options• Example: Continental Lite, Neutrogena
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Strategic Fit
• Operations need to fit with the overall strategy
• The organizational focus must be clear
• Often called “core competencies” or “key success factors”…make the things you’re good at your key focus
• If everything works together in a system, you’re operations will be harder to copy
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Key Definitions• Resources – tangible and intangible assets
• Capabilities – the integration of resources
• Core competencies – what the firm emphasizes while carrying out the firm vision
• Distinctive competencies – those competencies which provide a competitive advantage
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RBV and I/O Frameworks
• RBV is internal
• I/O has a more external view
• You need both….These perspectives form SWOT analysis
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The Resource-based View• What is the resource-based view?
• This view perceives the firm as a portfolio of assets where the development of idiosyncratic resources and capabilities is the primary task of management. Managers aim to maximize value through the optimal deployment of existing resources and capabilities, while developing the firm’s resource base for the future. (Grant, 1996)
• It is a theory about why some firms have a competitive advantage
• Internal resources are what make some competitors better than others.
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The Firm As A Portfolio Of Assets
Assets
Tangible
PP&E Hardware Cash
Intangible
Brand Trademarks Customer Relationships
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Resource-based View
• Control of rare commodities would be a simple example of a resource that could drive a competitive advantage. However, it is more likely that a knowledge-based asset or a set of capabilities will drive advantage.
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Resource-based View – 4 Factors1. Valuable – Does a resource create value? A resource must enable a firm to
employ a value-creating strategy, by either outperforming its competitors or reduce its own weaknesses (Barney, 1991, p99; Amit and Shoemaker, 1993, p36).
2. Inimitable – Can someone copy the resource? An important underlying factor of inimitability is causal ambiguity, which occurs if the source from which a firm’s competitive advantage stems is unknown (Peteraf, 1993, p182; Lippman and Rumelt, 1982, p420). If the resource in question is knowledge-based or socially complex, causal ambiguity is more likely to occur as these types of resources are more likely to be idiosyncratic to the firm in which it resides (Peteraf, 1993, p183; Mahoney and Pandian, 1992, p365; Barney, 1991, p110).
3. Nonsubstitutable – Can a competitor use another resource in place of yours?
4. Rare – Is it a scarce resource?
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Resource-based view• A subsequent distinction made by Amit & Schoemaker
(1993, p35) is that the encompassing construct previously called resources can be split up into resources and capabilities. In this respect resources are tradable and non-specific to the firm, while capabilities are firm-specific and used to utilize the resources within the firm, such as implicit processes to transfer knowledge within the firm (Makadok, 2001, p388-389; Hoopes, Madsen and Walker, 2003, p890). This distinction has been widely adopted throughout the resource-based view literature (Conner and Prahalad, 1996, p477; Makadok, 2001, p338; Barney, Wright and Ketchen, 2001, p630-31).
http://en.wikipedia.org/wiki/Resource-based_view 49
Resource Exercise – Goal: Technical Workforce
Training Hiring
SoftwareWorkforce
Customization
Better Trained/More Productive Workforce
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Between the Lines• The specifics of the training program and hiring
procedures are what make a difference.• Customized, firm-specific training is more
valuable than general conference training.• Customized software cannot be copied easily.• More developed hiring systems may yield better
employee/firm fit.• Combine all three activities and you have a
dynamic capability that is hard to copy.
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What is the difference between things that are codified and things that are tacit?
Learning Outcomes
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Knowledge-based view
• As presented earlier, knowledge-based resources may be the driver of value. Scholars have since developed a knowledge-based view of the firm. Basically, firms are created in order to integrate the specialist knowledge of its employees.
• Codified vs. Tacit
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KBV Exercise• Step 1 – http://www.kalvan.net/howtojug/howtojug.htm
• Step 2 - http://www.wikihow.com/Juggle
• Step 3 -http://www.youtube.com/watch?v=kCt1bmSASCI
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Company Valuation ratio
Country Company Valuation ratio
Country
Yahoo! Japan 72.0 Japan Coca-Cola 7.8 US
Colgate-Palmolive 20.8 US Diageo 7.4 UK
Glaxo Smith Kline 13.4 UK 3M 7.3 US
Anheuser-Busch 12.6 US Nokia 6.7 Finland
eBay 11.2 US Sanofi-Aventis 6.3 France
SAP 10.8 Germany AstraZeneca 5.9 UK
Yahoo! 10.7 US Johnson & Johnson 5.7 US
Dell Computer 10.0 US Boeing 5.7 US
Sumitomo Mitsui Financial 8.8 Japan Eli Lily 5.6 US
Procter & Gamble 8.4 US Cisco Systems 5.5 US
Qualcomm 8.3 US Roche Holding 5.5 Switz.
Schlumberger 8.2 US L’Oreal 5.3 France
Unilever 8.1 Neth/UK Altria 5.2 US
PepsiCo 8.0 US Novartis 5.1 Switz.
Firms with the Highest Ratios of Market value to Book Value(December 2006)
© 2010 Robert M. Grantwww.contemporarystrategyanalysis.com
Source: Interbrand
Rank Brand Brand valuein 2008, $ bill.
Changefrom 2007
Countryof origin
1 Coca-Cola 66.7 -1% USA2 IBM 59.0 +11% USA 3 Microsoft 59.0 -2% USA4 GE 53.1 +14% USA5 Nokia 35.9 +35% Finland 6 Toyota 34.1 +37% Japan 7 Intel 31.3 6% USA8 McDonald’s 31.0 0% USA9 Disney 29.3 +11% USA
10 Google 25.6 +96% USA11 Mercedes Benz 25.6 +28% Germany12 Hewlett-Packard 23.9 +26% USA 13 BMW 23.3 +36% Germany14 Gillette 22.1 +5% USA15 American Express 21.9 +18% USA16 Louis Vuitton 21.6 +34%. France17 Cisco 21.3 +22% USA18 Marlboro 21.3 0% USA 19 Citi 20.2 +1% USA 20 Honda 19.1 +21% Japan
The World’s Most Valuable Brands, 2008
© 2010 Robert M. Grantwww.contemporarystrategyanalysis.com
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Key Success Factors•How do customers choose?•What do we need to survive competition?
What resources & capabilitiesdo we need to deliver theseKSFs?
Starting from the insideStarting from the inside Starting from the outsideStarting from the outside
Two Approaches to Identifying an Organization’s Resources and Capabilities
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND OPERATIONSOUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
PRIMARY ACTIVITIES
SUPPORT ACTIVITIES
57© 2010 Robert M. Grantwww.contemporarystrategyanalysis.com
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Describe support activities and primary activities in a firm’s value chain. How do firms use the value chain to make outsourcing decisions? Provide an example.
Learning Outcomes
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The Value Chain“The value chain groups a firm’s activities into several categories, distinguishing between those directly involved in producing, marketing, delivering and supporting a product or service; those that create, source, and improve inputs and technology; and those performingoverarching functions such as raising capital, or overall decision making”
Michael Porter59
Upstream, Support, and Downstream Activities and Competitive Advantage
Firm Infrastructure(e.g., financing, planning, investor relations)
Human Resource Management(e.g., recruiting, training, compensation system)
Procurement(e.g., components, machinery, advertising, services)
Inbound Logistics
Operations Outbound Logistics
Marketing and Sales
After-Sales Service
Support Activities
Primary Activities
Value
What buyers are willing to pay?
Technology Development(e.g., product design, testing, process design, R&D
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Value Chain• Outsourcing decisions: How does a TMT make these decisions?
What factors should be analyzed?
• Firm value creation examples and the value chain
• Connect the value chain concept with core competency concept…
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Value Chain Exercise
• In groups, draw a value chain for each company below. Also, identify mission critical activities for each. Be prepared to discuss.• Disney (Group 1), GM (Group 2), McDonalds (Group 3), Starbucks
(Group 4), Apple (Group 5)
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What is an Industry Value Chain?• Draw an industry value chain and prepare to discuss.
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Differentiate between corporate-level strategies, business-level strategies and function-level strategies.
Learning Outcomes
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Levels and Types of Strategy• Corporate-Level Strategy
• A plan that indicates in which industries and national markets an organization intends to compete.
• Business-Level Strategy• Outlines the specific methods a division, business unit, or organization will
use to compete effectively against its rivals in an industry
• Functional-level strategy • A plan of action to improve the ability of each of an organization’s functions
to perform its task-specific activities in ways that add value to an organization’s goods and services.
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Compare/contrast differentiation and low-cost strategies. Also, compare/contrast broad and focused strategies. (Hint: draw the 2x2 chart discussed in class to guide your explanation)
Describe the concepts of differentiation parity and low-cost parity.
Learning Outcomes
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Generic Strategies• Low-cost providers (Example: McDonalds)
• Efficient facilities• Being selective with new customers (profiling)• Minimizing costs in areas like R&D, service, sales force, advertising, etc.• Cheaper sources of inputs (vertical integration?)• Must have differentiation parity
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Generic Strategies
• Differentiation (Example: Mercedes, Apple)• Design or brand image• Features• Customer service• Dealer network• Extensive research and development
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Generic Strategies
• Broad or Focus? Focused would be:• One buyer group• One segment of a product line• Geographic market
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Explain how scholars/practitioners should go about performing segmentation analysis. Provide an example.
Learning Outcomes
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Customer Segmentation• Age
• Gender
• Location
• Types of users
• Income
• Behavior
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Customer Segmentation• Who are they?• How sensitive are they to price?• How can they be reached?• How are they using a product or service?• Which of their needs are served/unserved?• Are customers loyal?• Do they seek an arm’s-length transaction or a
long-term relationship?
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External Analysis
Strategy Formulation (Tradeoffs,
Strategic Fit)
ImplementationPerformance
Feedback/ControlTMT/Board
Vision
Strengths/WeaknessesAssetsResources
Capabilities
Competencies
Opportunities/Threats
Porter’s Analysis
Competitor Analysis
Macroeconomic Analysis/Consumer Preferences
Stock Return
ROA/ROE
Org. Structure
Control Mechanisms
Culture/Motivation/Teams
Internal Analysis
External Analysis
NPVBiases
Governance
Industry Practices
Communication
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List and describe key macroeconomic factors for firms to examine as part of their external analysis. Explain how macroeconomic factors influence firm operations.
Learning Outcomes
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1. GDP
2. PCE
3. Durable goods
4. ISM (leading)
5. Interest rates
6. Stock market
Key Indicators1. Unemployment (by sector)
2. Housing
3. ISM (leading)
4. CPI
5. Commodities
6. Etc…
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Defining the Industry
When Will Industry Structure Change Dramatically?
• New technology or new inventions (cell phones?)
• Deregulation/regulation
• Depressions/Expansions
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Industry Analysis: Classification by Industry Life Cycle
• Pioneer - high risk and many failures.
• Growth - growth accelerates.
• Mature - mirrors overall economy.
• Decline - demand steadily decreases.
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Industry Analysis: Classification by Business Cycle Reaction
Business Cycle Reaction
Growth Defensive Cyclical
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Industry Analysis: Evaluation of External Factors
Technology
Government
SocialDemographics
Foreign Influences
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Industry Structure
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Calculate CR4, CR8, and the HHI index and explain what each means.
Compare/contrast pure competition, oligopolies, and monopolies.
Learning Outcomes
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Industry Structure• As a basis, in order to understand Industry Structure, we must
understand Industry Concentration levels
• Concentration Measures
* CR4
* CR8
* HHI
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The Basics
• Economists study the factors that constrain competition
• Business strategists seek to erect barriers to competition so that they can profit…
Industry Structure--DOJ The Department of Justice is the delegated authority with respect to
anti-trust regulation
Generally, if an industry has an HHI near 1,800 or if a merger adds over 100 points to the HHI, the DOJ will open an investigation
http://www.justice.gov/atr/
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Industry Structure—Perfect Competition
Characterized by:1. Low Entry and Exit Barriers2. Many small sellers3. Costless Transactions4. Perfect Information5. Product Market Homogeneity6. No Firm has any Significant Power
In reality, there are no perfectly competitive markets The closes markets to Perfect Competition are commodities markets
Industry Structure—Perfect Competition
• Products are Substitutes
1. Sellers are Homogeneous
2. Products are Homogeneous
3. All Sellers are Price Takers
• Since this is Cost Leadership at its best (or worst), the price of goods are priced at Marginal Cost = Marginal Revenue
• In the long run, there are zero profits
1. There can be short term profits but not long term profits
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Industry Structure--Monopoly Monopolies occur when there is one firm which controls the entire
market for a product Monopolies are often geographical. For example, PECO has a
monopoly on gas supply in Bucks County while PGW has a monopoly on gas supply in Philadelphia County
Monopolies can be 1) Regulated Monopolies or 2) Natural Monopolies A firm has Monopoly Power when it has the basic power of a true
monopoly in a geographic or product market. For example, a patent can give a firm monopoly power with respect to a technology
Industry Structure--Monopoly Characterized by:
1. One Seller2. High Regulation (Electric Supply)3. High Barriers to Entry (Fixed Costs)4. Control of Natural Resources (Diamonds)5. Government can often Monopolize
Examples of Monopolies1. SEPTA/NJ Transit2. PECO3. Patented Drug
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Industry Structure--Oligopoly• Characterized by:
1. A Few Firms (3-8)
2. High Brand Value for Oligopolistic Firms
3. Some Regulation
4. High Barriers to Entry (Fixed Costs)
Industry Structure--Oligopoly• Examples of Oligopoly
1. U.S. Cellular Industry (Verizon, ATT, TMobile, Sprint)
2. Search Engine Industry (Google, Yahoo)
3. Operating Systems (Windows, Apple, Unix)
4. Tire Manufacturers (Michelin, Goodyear, Pirelli)
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Industry Structure--Oligopoly• Oligopolies are dangerous because of collusion
1. Collusion is a federal crime in the United States
2. Tacit Collusion is not a crime in the United States
• An oligopoly which has the legal right to collude is called a Cartel
• Oligopolies can be highly competitive (Cellular) or highly anti-competitive
Concentration of the Search Engine Industry
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Concentration of the Search Engine Industry
CR4 = 65.6 (Google) + 16.8 (Yahoo) + 11.5 (Bing) + 3.7 (Ask) = 97.6
CR8 = CR4 + 2.5 (AOL) = 100
HHI = 65.62 + 16.82 + 11.52 + 3.72 = 4,303 + 282 + 132 + 8 = 4,725
Therefore, the Search Engine Industry is highly concentrated and Oligopolistic
Describe why we use the Porter’s framework. Explain the key components in each of the 5 forces.
Learning Outcomes
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Average Return on Invested Capital in U.S. Industries, 1992–2006
CORE CURRICULUM
Profitability of Selected U.S. Industries
CORE CURRICULUM
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Industry analysis: Porter’s five forces1. Threat of new entrants
2. Threat of substitute products or services
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Rivalry amongst existing firms
Source: Competitive Advantage: Creating & Sustaining Superior Performance. Michael E. Porter. The Free Press. 1998.
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Porter’s Five Forces
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Threat of Entry What influences the likelihood of a new competitor entering the market?
1. Economies of scale (supply side)2. Network effects (demand side)3. Switching costs4. Capital requirements5. Incumbent advantages6. Distribution networks7. Protectionist policies
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Power of Suppliers1. What is the industry’s supplier concentration?
2. How easy is it to switch to other suppliers? (Microsoft operating systems..)
3. Is the product or service standardized or customized?
4. Any substitutes available?
5. Can suppliers enter the market and compete? (forward integration)
6. At the industry level, do suppliers have customer concentration (is there mutual dependence or do the suppliers sell to many industries)?
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The Power of Customers1. What is the customer concentration? (i.e., what % of sales come from
the industry’s largest customer?)
2. How standardized is the product or service being supplied to the customer?
3. Can the customer easily find a new vendors?
4. What is the probability of backward integration?
5. How important is the component that the customer buys?
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The Threat of Substitutes1. Is it easy to find a substitute (closeness in function) for this
industry’s product or service?
2. Can I do things in my firm instead?
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Rivalry Among Existing Competitors
1. Can firms effectively differentiate?
2. Again, what are the switching costs?
3. Does the industry have high fixed costs?
4. How is industry capacity expanded? (In large chucks or in small amounts?)
5. Are product or services perishable?
6. What is the industry growth rate?
7. Are there high exit barriers?
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