AFM241 Chapter Notes - Chapter 2: Asset Turnover, Perfect Competition, Profit Margin
17 May 2018
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Chapter 2
News Based Context and Perspective
• Firms want to sustain their competitive edge and focus on making one thing great that other
companies cannot imitate easily.
• Fo a elatie pefoae stadpoit to opetitos, a fi’s opetitie positio a e
classified as being in competitive advantage, competitive parity, or competitive disadvantage.
• Sustained versus temporary competitive advantage
• Specific actions that firms take to neutralize threats or exploit opportunities by leveraging their
resources and capacities in order to gain a competitive advantage within a particular market are
known as business strategies.
• Fi’s atios to gai opetitie adatage aross several markets are known as corporate
strategies.
• Ho to alig a fi’s IT iitiaties ith its usiess stateg?
2.2 Relative Firm Performance
• Relative firm performance is the driving force and goal of business strategy. Sets apart from
competitors.
• Normal level of profits (zero economic profits) represents the minimum level of profits that
a business owner would consider necessary in order to make it worthwhile to run the
usiess. E.g. a fi that’s i opetitie pait; aot hage pie due to many
competitors; this firm competes in a perfectly competitive market
• Economic (positive) profit means that the firm generates revenues above the opportunity
ost of the fi’s iputs. E.g. fi ith a opetitie adatage; fis opeate i a
monopolistic or oligopolistic markets
• Aside fo eooi pofit ot a good easueet, use aoutig easueet hih does’t
assume we can measure the opportunity cost of a firm.
• Two limitations are they provide a measure of past performance, and they don’t aout fo
risk.
• Accounting measure of performance are divided into three groups
• Efficiency
• Asset and inventory turnover, sales per employee
• Cost
• COGS, and operating expenses
• Profitability
• ROA, ROE, and variations of profit margins.
• The poide a ie i tes of the fi’s ailit to leeage its assets effiie ad otai its
cost in order to achieve a desired level of profitability.
• How to bridge the gap between economic measures and accounting measures
• Hybrid measures:
• Economic value added (EVA), Market value added, return on invested capital, and
Toi’s
• Toi’s speifies the fi’s aket alue as a ultiple of the eplaeet ost of its assets.
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• E.g. a firm with asset worth $100,000 and the market value of the firm is $500,000, this
means that the firm has been able to generate value from its assets and achieve above
normal performance.
• A alue of Toi’s aoe . idiates positie eooi pofits; has competitive edge
2.3 Business Models
• Outlines how to deliver value to customer and turn payments into profits
• Business models make assumptions on revenue and cost
• Based on the assumptions, the management will decide:
• The mechanisms and manner by which value is to be captured
• Which technologies and features are to be embedded in the product and service
• The way in which technologies are to be assembled
• The identity of market segments to be targeted
• How the revenue and cost structure of a business is to be designed to meet customer needs
• Skype and Linked have thrived usig the feeiu odel. Get a lage use ased ith fee shit ad
introduce paid options.
• Success of business model focuses on
• Understand your potential customers and their needs
• Analyze your operations and make sure that you can deliver what the customers want
(effectiveness) and when they want it (timeliness) at a reasonable cost (efficiency)
• A business model defines how an enterprise interacts with its environment to define a unique
strategy, attract the resources and build the capacities to execute it, and in the process, create value
for all stakeholders
• A successful business model aligns an organization with its environment
• Wal-Mart uses the discount-retailing business model (idea of applying supermarket logic)
• How did Sam Walton the founder of Walmart made it unique?
• Chose to target a different group of customers (small towns). Customers would then shop
locally instead of going to the retailers in metropolitan areas
• Everyday low prices
• Made efficiency and cost reduction through innovation in purchasing, logistics, and
information management.
2.4 Role of Economic and Industry Wide Forces
.. Pote’s Fie Foes Faeok
• Used to perform industry analysis and for business strategy development
• The following five forces determine the competitive intensity and therefore attractiveness of a
market:
• Threat of new entry
• Rivalry among existing competitors
• Bargaining power of buyers
• Bargaining power of suppliers
• Substitute products
• An industry is unattractive if the combination of the forces drives down overall profitability
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find more resources at oneclass.com
• Perfect competition is unattractive while monopoly is attractive for example no substitutes in a
monopoly.
Threat of New Entry
• New entries force profitability in the industry down. higher threat of entry = lower attractiveness of
industry
• 7 sources of entry barriers that work in favor of incumbent (holding a position) firms
• Economies of scale: spread fixed costs over a large volume of output. Afte a poit, it’ll go
into dis-economies of scale. E.g. the administrative cost of managing a very large firm may
start rising faster than the drop in cost per unit of product due to larger factories. A new
et o’t ahiee a high olue of sales.
• demand side benefits of scale (network effect): value of product that you consume
ieases ith the size of the etok of uses. E.g. I o’t use a podut if o oe else uses
it. Skype and LinkedIn has used freemium model to generate the mass network
• customer switching costs: cost for customers to switch to another provider.
• Capital requirements: new entries must invest in PPE, R&D, and capital expenditures.
• Incumbent advantage independent of size: a patented technology has the potential to
provide a firm with a monopolistic power.
• Access to distribution channels: incumbent firms control existing distribution channels
• Government policy: incumbent firms may be supported by subsidies and preferential
treatment in government contracts.
• Another barrier may be the retaliation of incumbents to the new entry
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
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