Summary Management - With Case Study (First and Second Partial), Schemi e mappe concettuali di Economia Manageriale

Scarica Summary Management - With Case Study (First and Second Partial) e più Schemi e mappe concettuali in PDF di Economia Manageriale solo su Docsity! Management We define management as: A range of decisions associated with the acquisition, allocation, and integration of resources (human, physical, financial, etc.) required to perform a certain economic activity. Acquisition: goods, human resources etc. Allocation: Placing goods, people and money. Integration: Working together like a team. Economic activity: Actions that involve the production, distribution and consumption of goods and services within a society. Example: I have to decide whether hiring 6 people and using elementary tools that do the job in 5 days (cheaper option) or hiring 3 people and advanced tools (more expensive option). As a manager I will take into account my priorities. Why do people perform economic activities? People have needs that they satisfy with goods and services in exchange of money (economic activity). Needs, goals and values differ across cultures and socio-economic conditions. They also evolve over time. · Needs: dissatisfaction due to the lack of something; · Goals: what people aim to achieve; · Values: what is important to the life of people. Maslow’s hierarchy of needs In 1943, Abraham Maslow developed “a theory of psychological health predicated on fulfilling innate human needs in priority”. Maslow observed that needs spans from the tangible, such as food and water, to the intangible, such as self- esteem and creativity. There are also different types of needs:  Natural needs (product of human biology)  Social needs (product of self and social interaction with other) ~ Radical (fundamental to society e.g., justice of freedom) ~ Non-radical (belonging, friendship, etc.)  Essential/Primary Needs (natural + certain social needs)  Non-essential/secondary needs (social needs that are influences by imitation, fashion, expectations from other) !! In poor countries the bottom ones are lacking, so you cannot offer the top ones. For you employees you have to make sure that the top needs are satisfied.  Primary good: satisfy essential needs  Non-essential goods: satisfy non-essential needs A decent society provides essential needs for everyone (and possibly free).  Complementary goods: you need both to satisfy need (car + fuel)  Substitutes goods: you need one to satisfy need (car or motorbike) If a company sells both the complementary good, they try in every way to sell you both of them. For example, a company will try to sell you both the printer and the ink, maybe lowering the price of the printer and putting pressure to buy always the same brand (the same applies to Lavazza coffee machines). (Economic of scope: share the cost because you make similar things but basically make double the profit)  Differentiable goods: producers can add differentiating features to the good. These are more profitable since consumers buy an item for different reason e.g., brand, quality, fidelity etc.  Commodities: there are no differentiating features, so consumer will buy a certain brand just because it has a lower price. This leads to a lot a competition and makes the field less profitable.  Consumer goods: for final use or consumption. This is B-> C (Business To Consumer) because it’s the B that sells and the C who buys it.  Industrial goods: used to produce other goods. This is B -> B (Business To Business) because it’s the B that sells and the B who buys it. Final costumer and industries are completely different especially for the strategy of marketing: usually for industries in order to sell something a representative of the company will show up to the other business. (exception: Yvres Roches, Drugs, Folletto). On the other hand, company are rational about their purchases, whereas people may be influenced in theirs.  Disposable goods: used once.  Durable goods: used many times. The consumers may already have them and since they are more expensive, they postpone a new purchase during a recession (lipstick effect is the contrary).  Good for individual: use or consumption by single individuals.  Collective consumption: use or consumption by many individuals at the same time. In this type of goods is important to differentiate the type of people that have access to it in order to provide a certain quality of people (Examples: clubs, guides, entertainment, transportation)  Public goods: ~ The goods produced by the State or its branches (rather than firms, families or non-profits) [Example: national security, highways). ~ The goods that are both non-excludable* and non-rivalrous* in consumption.  Private goods. Excludable: it is possible to prevent people from accessing a good. Rivalrous: consumption by a consumer prevents consumption by others. What does economic activity involve?  Technical transformation: physical, spatial, logical.  Transactions: to buy input and to sell output (in good markets this creates value), transactions link organizations to other organizations and individuals.  Complementary (support) activities: institutional structure and design, organizational and human resources management, accounting and information management The circular flow model Money moves through society in 2 ways: flowing from producers to workers as wages, and back to producers as payment for products. partnership rather than a corporation – also money is often provided by banks and investors). Owners do not generally manage the company. Stakeholders: Persons and group that affect or are affected by and organization’s decisions, policies, and operations. (Stake=interest or claim on a business enterprise). Shareholders: Also called stockholders, are individuals or organizations that own shares of a company’s stock. Shareholder theory of the firm Friedman Stakeholder theory of the firm Freeman Firm is seen as property of its owners Corporation creates value for society Purpose is to make profits Purpose is to satisfy a need in the society: corporations must create many other kinds of value in addition to profit Managers and board of directors are agents of shareholders and have no obligations to others Accountability is towards key stakeholders (But it’s not like stakeholders own the company!!) Owner’s interests take precedence over the interests of other All stakeholders’ interests must be taken into account The core arguments of the Stakeholder Theory are:  Descriptive: Managers direct their energies toward all stakeholders, not just owners  Instrumental: Good relationship are a source of value for the firm  Normative: Any individual, who makes a contribution, or takes a risk, has a moral right to some claim on the corporation’s rewards There are different kind of kinds of stakeholders:  Market Stakeholders: engage in economic transactions with the company as it carries out its purpose of providing society with goods and services. Shareholders, Creditors loan, Employees, Suppliers, Customers.  Non-market Stakeholders: people and groups are nonetheless affected by or can affect its actions. Community, governments, competitors and the general public.  Internal Stakeholders: employed by the firm, such as managers and employees. They contribute their effort and skill, usually at company worksite.  External Stakeholders: are not directly employed by the firm, although they may have important transactions. How to answer them? 1. A stakeholder map can be used to identify the most important stakeholders in a situation and define the connections among them. No liability = no responsabilities 1. Who are the relevant stakeholders? 2. What are the interests of each stakeholder? 3. How are coalitions likely to form? 4. What is the power of each stakeholder? 2. 3. Coalitions are dangerous for a company because they lead to multi-stakeholder action: single stakeholders that are not individually powerful can collectively exert a stronger pressure. Coalitions tend to form among stakeholders that have similar interests in a certain situation. Coalitions are not static and can change due to change in interests or in the characteristic of the situation. 4. There are different type of power that a stakeholder can have:  Voting power: The right to cast a vote (shareholders)  Economic power: How dependent is the company on the decisions of the stakeholder (e.g., suppliers and customers)  Political power: the power of the government or the influence on the actions of the government  Legal power: the right to sue a company for damages (e.g., employees, customers, environmentalists)  Informational power: access to valuable data, facts, and details that can be revealed to the public (customers, activists and others) MARKET STAKEHOLDERS NON-MARKET STAKEHOLDERS The case of VALEANT Pharmaceuticals International It is a multinational specialty pharmaceutical company based in Canada which had a precise strategy: acquisition of existing companies (and their drugs), cost cutting, and price hikes. Valeant spent only 3% of sales on R&D, against 15-20% of big pharma companies. After buying companies, Valeant laid off employees to achieve savings:  2012: Medicis had 790 employees; Valeant fired 750  2013: Bausch & Lomb had 4,100 employees; Valeant fired 3,000  2015: Salix had 1,000 employees; Valeant fired 400 Were the drug prices increases justified? ~ Patients are shielded from price increases by insurance and virtually no one is denied a drug they need; ~ Mr. Pearson (CEO) stated that “Our duty is to our shareholders and to maximize value” and if products are “sort of mispriced and there’s an opportunity, we will act appropriately in terms of doing what I assume our shareholders would like us to do”. Patagonia - Case Study Patagonia is a privately owned company which produce outwear apparel. They position themselves as a premium, high quality and environmentally friendly products. Their first shop was created in 1966, under the name of Chouinard Equipment, as they sold just climbing equipment. In 1972 they launched their first apparel line and just 7 years after, they were a corporation expanded worldwide. Their mission statement is "build best products, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis". All their employees act as "dirt bag" and represent the brand very well. Off-site in mountains or beach are very much common and both paternity and maternity leaves are provided. Due to this organizational culture, they have a really low turn-over. The founder, Yvon Chouinard believes in management by absence. Patagonia spend only 1% of their revenue in marketing campaign, since the press is very interested in them. They choose their representatives to be as close as possible to the brand mindset. They choose their retail shops to be not only a way to sell their product, but also as a way to promote their mission. Since 1996, they showed a proactive attitude, aiming to manufacture all their product with organic cotton, even if at the time was much more expensive and complex in terms of searching for new suppliers. They invest 3 million a year for searching more durable fabrics, threads and zippers, less damaging dye and new fabrics. They aim to producing high quality items cheaply with high gross-profit margin. Mini-case: Responsibility at Uber Uber Technologies Inc. (UBER) is a technology platform, whose smartphone apps connect driver-partners and riders. It mainly provides ride hailing services, developing applications for road transportation, navigation, ride sharing, and payment processing solutions. Uber Technologies serves customers worldwide through its ride-sharing application. It went public on May 9, 2019 and its 2019 revenue was $14.1 B. Epilogue: After strenuously opposing Bonilla’s bill, Uber backed off, apparently recognizing that the company did not have the political strength to defeat it. The company entered negotiations over the specific terms of the legislation to reduce somewhat the amount of insurance required. Once these changes had been made, Uber (and its allies) dropped their opposition to the bill, and it easily passed the legislature. Bonilla’s office issued a statement saying, “This measure symbolizes business flexibility, consumer affordability, political compromise, and most importantly, what public policy should be a collective process for all stakeholders to contribute.” In the following months, laws designed to close the app-on gap went into effect in more than a dozen other states, requiring Lyft and other similar application providers to guarantee primary liability insurance as soon as a driver signaled availability, even if they had not yet collected a passenger. fulfil a task which implies a power to take decisions in name of the principal. So, the primary function of boards is to keep an eye on managers. Conflict of interests: if both principal and agent are utility- maximizers, the agent will probably act in her interest rather than in the interest of the principal. Safeguard mechanisms: the principal must introduce safeguard mechanisms (contracts, controls, incentives, guarantees, …) which are often costly. Aligning owner-manager interests through pay-for-performance compensation (bonuses, stock grants, stock options). This is called MBO (Management by objectives or management by planning MBP). An important part of MBO is the measurement and comparison of an employee's actual performance with the standards set. Ideally, when employees themselves have been involved with the goal-setting and choosing the course of action to be followed by them, they are more likely to fulfill their responsibilities. But there can be some problems such as compensation can be too high, CEOs may have an influence on compensation committees, executives could use unethical practices to create the appearance of performance, executives could focus too much on short-term performance to increase stock prices quickly, there is no convincing evidence that pay-for- performance drives future company performance. Who protects shareholders rights?  Government agencies, such as the Securities and Exchange Commission (SEC) in the US, monitor financial markets and companies. By law, shareholders have a right to know about the affairs of the corporation in which they holder ownership shares.  Financial disclosure in company annual reports is mandatory for listed companies  Insider trading of listed companies (when access to confidential company information is used to buy/sell stock) is illegal  Shareholder activism (i.e., aggressive voting and campaigning)  Stock screening (i.e., social investment screens companies with bad environmental, social, and governance performance – ESG)  Shareholder lawsuits (i.e., shareholders who sue the company or the managers for damages) Managers make decisions about the use of the organization’s resources and are concerned with planning, organizing, directing, and controlling the organization’s activities to reach its objectives. They engage in a series of activities to harmonize the use of resources, so that the business can develop, produce, and sell products.  Planning activities to achieve the organization’s objectives. Crisis management or contingency planning, which deals with potential disasters such as product tampering, oil spills, fire, earthquake, or even a reputation crisis.  Organizing resources and activities to achieve the organization’s objectives  Directing employees’ activity toward achievement of objectives  Controlling the organization’s activities to keep it on course. Controlling and planning are closely linked: by monitoring performance and comparing it with standards, managers can determine whether performance is on target. 1. Top managers (President, CEO, CFO, COO, Executive VPs): spend most of their time planning. Make the organization’s strategic decisions. The Chief Executive Officer managers the overall strategic direction of the company and represents the company to stakeholders. The Chief Financial Officer manages the financial operations of the company and reports to the CEO. The Chief Operating Officer is responsible for daily operations of the company and reports to the CEO. 2. Middle Management (Plant managers, Division managers, Department managers): responsible for tactical and operational planning to implement the general guidelines established by Top management 3. First-line management (Foremen, Supervisors, Office managers): Supervise workers and the daily operations of the organization. Managers skills: · Technical expertise: specialized knowledge and training required to perform jobs, most needed by first-line managers. · Conceptual skills: the ability to think in abstract terms and to think creatively. · Analytical skills: the ability to identify relevant issues and recognize their importance. · Human relation skills: the ability to deal with people, inside and outside the organization. Management is about people. Economic activity takes place in human societies and is based on human work. So, it is important to have assumptions about people. Two views:  Homo oeconomicus: perfectly rational, clear objectives, able to compare alternatives, all information available for free. Individual preferences described by utility functions (isolation), maximation of income/wealth and no room for reciprocity, trust, and other emotions (opportunism). But perfectly rationality and the other assumptions are often violated in practice, and this is important for organizations.  Human beings: have limits on information and cognitive ability (bounded rationality) , they are members of groups, which shape their preferences and behaviour, they persue well-being, emotions and propensity to cooperative behaviour. The framing effect is a cognitive bias where people decide on options based on whether the options are presented with positive or negative connotations. People tend to avoid risk when a risk when a positive frame is presented but seek risks when a negative frame is presented. What else might influence the decisions of people? · Income · Time available · Memory · Analytical abilities · Opportunities · Emotions · Cost of information · Social expectations · And many other biases (status quo bias, loss aversion, sunk cost bias, …) · Organizational decision making usually require to divide problems situations in step, in which different people may be involved. Enron – Case Study Formed in 1985 for a merger of Houston Natural Gas and Internorth, Enron Corp. was the first nationwide natural gas pipeline network. In the 1989 they created artificial shortages of energy so that the price went up and then started selling shares and make money. This could be possible thank to the energy policy act of 1992 that allowed companies like Enron the right to buy, sell or trade and transport gas. They relied directly on buyers and sellers, and demand quick access to credit market. However. as Enron rarely had liquidity, it was obligated to turn to the banks. They became one of the largest companies in North America in terms of sales in 2000, but behind the facade, its debt was also soaring. In 1997, Enron began to explore new markets, as it believed that the solution to its debt was to invest abroad. However, many of these investments did not live up to their expectations. Enron was one of Andersen biggest clients and Andersen auditors and consultants occupied permanent offices at Enron. Basically, Andersen was at the same time Enron's independent auditor and internal auditor, and also provided consulting services. CFO, Skilling, since 1987 used SPE/SPV to hide the large amount of debt and toxic asset from Enron activities. These are legal entities that can be used to relocate the risk of a venture and in particular to isolate the financial risk in the event of bankruptcy. Bethany Mclean, journalist for the Future, saw something shady in the company, and after an interview, published the article "Is Enron overpriced?". After this, Enron was pushed by their shareholders to publish their complete income statement. In October 2001 the company publish data that showed more than 590 million of debts (later on they will turn out to be 60 billion). In 2001 Enron shuts down and later on, in August 2002, Anderson shuts down. The Sarbanes-Oxley act is a law that hopefully will help corporate governance reduce conflicts of interests. - Theranos – Case Study It was established in 2003 in Silicon Valley by Elizabeth Holmes. During her first year at Stanford in 2003, she developed the idea of creating a patch that would test microscopic blood samples for infectious diseases. She even filled the necessary paperwork to acquire a patent. Theranos promised blood tests to be easier, faster and cheaper. Her first advocates were Stanford professor Channing Robertson. At the end of 2004, Theranos already had more than 6 million investments. At this point, Holmes abandoned the idea of a patch and replaced with a machine, Edison. The strength on Enron was her founder. She was very charismatic and touched emotional part of her audience: when interviewer asked details about the working of the machine, she was always very vague. Even when investors made meetings, she distracted them and an assistant would take the blood sample into a normal laboratory to analyse it. In 2013, Enron signed with the famous supermarket Walgreen and blood tests began to be done there. After just one year and after many wrong responses, it was necessary to start doing them in the traditional way, with needles. No one was capable of understanding what was going on: stakeholders were not medical expertise, even if they were famous figure such as Tim Droper and the Walton family. A large number of people in the board of directors were ex secretary of state and ex secretary of defence. They actually helped the hype around Enron. Laboratory technicians that realized something was wrong, were immediately fired. All the employees had to sign a discretion agreement. Just on single scientist, Ian Gibbons but he died right before he could say anything about it. In January 2015, John Carreyrou published a Wall Street article where Enron was exposed. This was thanks to Tyler Schultz, ex-employees and son of one the most important investors in Enron. In just one year the evaluation of the firm fell from 9 million to 0. In 2018, Enron went bankruptcy. In the trial against Holmes, it was discovered that she was in relationship with some of the board members, Shultz and Henry Kissinger. She was accused guilty in January 2022. or continent), customer (around the needs of various types of customers). Most firms use more than one type of departmentalization. Delegation of authority - Giving tasks to employees empower them. Delegation involves: the responsibility of employees to carry out tasks satisfactorily with certain freedom for the proper execution and the accountability of employees to the boss for obtaining the desired outcomes. The degree of centralization is the degree to which authority is delegated throughout an organization. The number of subordinates that report to a particular manager. It is related to the number of organizational layers (the levels of management in an organization). This could be: - Narrow span: a manager directly supervises only a few subordinates. It is better when superiors and subordinates are not in close proximity, managers have multiple responsibilities and the interaction between superiors and superiors are frequent. - Wide span: a manager directly supervises a very large numbers of employees. It is better when subordinates are highly competent and a set of specific operating procedures governs the activities of managers and their subordinates. Formalization is degree to which the firm standardizes work through rules, procedure, training, etc. Increase as firms get older and larger. The main problems are a less organizational flexibility, discourages organizational learning and creativity, increases job dissatisfaction and work stress (high turnover), rules/producers become focus of attention. The leader in this element is McDonald’s which implemented a really strong formalization into their products which provides the firm to a standard in every restaurant even in two completely different continents. Departmentalization can use functions, products, regions, and customers in different ways to achieve optimal coordination. Various structures can be adopted: - Line Structures: the simplest organizational structure, with direct lines of authority extend from top management to employees at the lowest levels. It is common in small business (but not only). It has a clear chain of command (so it is easy to understand who is the boss) and it enables managers to make decisions quickly. On the other hand it requires that managers posses a wide range of knowledge and skills, as they are responsible for a variety of activities (discussions about stuff are made in a very small group of people). - Line-and-Staff structure: traditional line relationship between superiors and subordinates, specialized managers – also called staff managers (for example legal counsel, who is very close to the CEO especially because decisions need to be taken quickly as they could have huge repercussions on the company) or HR, which provide advice and support on specialized matters – assist line managers who can focus on the area of expertise in the operation of the business. Staff managers do not have authority over line managers but over subordinates in their own departments. This can cause ambiguous lines of communication (even if HR and finance are on the same level, finance could need to ask permission to hire someone). In addition, staff managers may become frustrated because they lack the authority to carry out certain decisions; line managers may become frustrated that they do not have authority over staff managers. - Multidivisional Structure: it organizes departments into larger group called divisions (or business units). The first-level of units are grouped by outputs (products, clients or geographical regions). Divisions are “mini-firm”, accountable for their profits. Corporate headquarters set the vision for the whole group, and provide planning, finance, budgeting, and other services. It allows delegation of decision-making authority and inevitably creates work duplication. The departments need to have the same “mindset” (you cannot make pasta luxury and bread cheap, because the philosophy of the brand will became ambiguous). Competition between divisions could be a thing and this could leads to higher profitability (giving assets to encourage growth). Delegation of decision-making authority allows divisional and department managers to specialize. Since decision are made quickly, innovation are quite fast too. Each division is more likely to provide products that meet the needs of its customer. On the other hand it creates work duplication, which makes it more difficult to obtain the economies of scale that result from grouping functions together. Isolation of divisions, possible internal competition and conflict. One of the biggest example is LVMH. - Matrix Structure: It sets up teams from different departments, it creates two or more intersecting lines of authority (meaning an individual works for multiple “bosses”). The matrix superimpose output-based departments on the more traditional function-based departments. It is useful when competencies of people can be deployed in many areas. NASA was one of the first to implement it because it needed to coordinate different projects at the same time. Other examples are universities and McKinsey. It provides flexibility, enhanced cooperation, creativity. It allows people to develop their expertise. It enables the company to react quickly to changes in the environment by giving special attention to specific projects/problems. On the other hand it is generally expensive and quite complex (a lot of meetings to solve problems and time is wasted) and employees may be confused as to whose authority has priority. Freshii – Case Study Freshii is a restaurant franchise that focuses on fast and healthy food options. With more than 395 location in 18 countries, the company has a variety of customizable food offerings from burritos and salads to frozen yogurt and smoothies. Surprisingly, Freshii has no stove, ovens, fryers or freezer. On 31 January 2017 Freshii goes public on Toronto Stock Exchange. In term of span of control Freshii has a wide span of control with an unconventional flat structure. They are decentralized, collaborative and open. People own significant part of the business. Every employee is considered a partner and a shareholder. They can be assimilated with Google in terms of organizational culture: monthly fitness challenges, great scope of responsibilities, growth and opportunities. The flat organizational structure has its pros and it cons. On one hand it is great for creativity, empowerment, productivity, motivation, growth opportunities. On the other hand, it has its drawbacks: some processes need to be standardized, longer decision marking, mix of ideas but what is the overall view of what needs to be done, Financial statements - Income statement/profit and loss account (costs and revenues): measures the gains or losses from both normal and extraordinary operations in a period of time. It purpose is for comparison, for transparency with shareholders and develop a knowledgeable decision-making process (this includes also buying another company). - Balance sheet: (assets and funds) a snapshot of the assets used by the company and the funds that are related to these assets at an instant in time. - Cash-flow statement: (inflows and outflows) a report of the inflows and outflows of cash. It links the most significant elements of Balance sheet and income statement. Profitability is an indicator of a firm’s ability to cover negative components (including loan and equity capital) with positive components of income at market conditions without being systematically supported by third parties. [income statement and balance sheet] Solvency is the firm’s ability to pay their expenses and make their investments at the right time. [Balance sheet and cash-flow statement] Profitability ratios: they measure the ability of a firm to achieve adequate return. The fundamental idea behind these ratios is to link some measure of income with some measure of investment size. You compare your profitability to competitors and yourself in previous periods. GOOD BAD NORMAL ROTA (Return on total assets) = EBIT / Total Assets Higher than industry average. Decent: 8-12% How well management uses all the assets to generate a surplus. It reflects both success of products mong customers (volumes and prices) and internal efficiency of the firm. Key tool in directing management’s day-to-day activities. It provides a benchmark against which all operations can be measured. It doesn’t tell you about the contribution of different elements and it may depend heavily on assets valuations in the Balance Sheet. ROS (Return on sales/Profit margin) = EBIT / Total sales >10% However, companies mostly focus on the evolution of Profit margin over time; decreasing (or “deteriorating”) margins indicate reduced appeal of products or decline in market power) Asset turnover = total sales / total assets Acceptable: 1<x<1.5 Evolution of Asset turnover is important, because declining values of this indicator imply that firms are incurring inefficiencies or are not able to use resources at their full capacity. - High ROS and slow turnover: telecommunications, luxury brand - Low ROS and fast turnover: fast-fashion, supermarkets. ROE (Return on equity) = net income/ owner’s funds Adequate: 10-15% It is the rate of the return on the investment made by shareholders (both initial common stock and subsequent reserves left in the company). A good ROE also makes it easy to attract new funds and enables the company to glow. If it is low shareholders go away and the company might not be ready when new capital is needed. Riskier companies should earn higher ROE to convince shareholders to invest. ROE is usually higher than ROTA (example: 3M is very safe, so ROE is not high, but it is for sure safe) Liquidity: is the short-term solvency, which is the capacity of the firm to pay current liabilities. Short-term liabilities are important to fund a firm’s operations. Lack of liquidity leads to bankruptcy, hostile takeovers, financial restructuring, or difficulties in contracting with banks or suppliers. It is possible to be profitable and have liquidity problem at the same time (not all the payments are made immediately [deferred payments], not all inflows and outflows of cash are costs and revenue [new debt and debt reimbursement], some costs are spread over many year [depreciation]). Cash flows in and out during the operating cycle (purchase of material and its transformation and production) and clash flows from non-operating sources (debt, dividends, new shares) Current ratio = current assets /current liabilities The threshold may differ depending on industry, lifecycle of the firm >1 Quick ratio = current assets – inventories / current liabilities >0.8 is unecessar y <0.8 0.8 This ratio excludes inventory because it may be difficult to turn it quickly into clash. It is widely used by lending institutions to assess companies’ liquidity levels. Working capital to sales ratio = Current assets – Current liabilities / sales *100 Solid: 10<x<20 It measures the ability of the firm to finance Sales growth. The modern trend is to reduce this ratio to the lowest acceptable levels, by introducing efficiencies and paying suppliers as late as possible. Debtor days = account receivable / revenue * 365 The shorter the better or even negative How many days on average it takes to get paid by customers Inventory days = inventories / revenue *365 The shorter the better How many days on average an item stays in the inventory Creditor days = account payable / revenue *365 The longer the better How many days on average it takes to pay suppliers Funding requirement (cash conversion cycle) = inventory days + accounts receivable days – account payable days The shorter the better [Amazon secret is that it is negative!!] Short: effective management of inventory and payment terms; positive balance on bank accounts. Long: it takes time to make products, to sell them, to receive payment from costumers, while suppliers force the firm to pay quickly; negative balance in bank account and interest to pay. Financial strength: it is the firm’s ability to meet interest and principal payments in the long run. This is a very important are of corporate finance, because financial strength has a huge impact on the riskiness of firm and the profitability of the firm for shareholders. Interest coverage ratio = EBIT /interests The higher the better Lower than 1.5 (>1 is loss) It indicates how many times operating income exceeds interest expenses. Capital structure: composition of debt and equity. The problem with debt is that payments are certain, while firm’s cash flows are uncertain. So, the lower the debt, the safer the firm. Risk means a likelihood for the firm of going out of business, because it is unable to meet debt payment (default). Firm use debt because they are cheaper than equity: banks and other lenders accept interest rates that are lower than expected return for equity (because lenders don’t lose anything), interest is deducted from taxable income, while dividends or capital gains for shareholders are not. Debt to equity ratio = current + long term liabilities /owner’s funds 1<x<2 >1 over- capitalized <2 under- capitalize d Financial leverage (gearing) = total assets/ equity The ratio between the total funds available to a firm and its equity. An increase in financial leverage has two effect: it increases ROE, it increases corporate risk. It pays off to increase ROE through financial leverage in good times, but it is counterproductive and risky in bad times. It is useful when ROTA in steadily higher than the interest rate. However, for very high Debt-to-equity ratios, even a single year of low or negative ROTA could be financially disruptive. Financial leverage could be particularly risky in times of high uncertainty. Cost of debt = interest paid / debt ROE = ROTA + (ROTA – cost of debt) + debt / equity 1. Comment on Profitability ROTA and ROE: if they are different, usually financial leverage is involved. ROTA is explained by ROS and Asset Turnover. 2. Comment on Liquidity Current ratio and quick ratio: if they are different, inventory is to blame. Amount of cash Working capital to sales: anomalies such as long inventory days or very short creditor days 3. Comment of Financial strength Debt-to-equity: lower the debt, higher the safety Interest coverage Compare cost of debt to ROTA Cost of debt > ROTA Cost of debt < ROTA High debt-to-equity REDUCE DEBT Too risky? Low debt-to-equity ROTA is low You should have more debt 4. Overall comment: - How would you solve them? If you want to improve ROS, with new investment in PPE, you are probability going to need more debt. - What kind of strategy? High ROS, slow turnover: luxury brand Low ROS, fast turnover: fast-fashion, supermarkets - Ways of improving: 1. Profitability: ROS, asset turnover, new debt 2. Liquidity: days ratio, new debt, selling assets 3. Financial strength: reduce debt MANAGEMENT What is strategy? As explained by Michael Porter, professor at Harvard Business School considered one of the most influential thought leaders in strategic management, strategy is mainly based on the needs of the customer and issues that will satisfy the needs of the customer. Competition is not equal to be the best in your field (it is not like in sports where the fastest wins), but in business there is no best way: there is no way to be the best bank, to be the best car-maker etc. Your job is actually to meet customer’s needs, to create something different in which it has something to offer (you need to find your place in the market). We define strategy as: The set of goal-directed actions a firm taken to gain and sustain superior performance relative to competitors. How to think about competition? 1. Competing to be the best: run the same race 2. Competing to be unique: run a different race Strategic management is the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage. Good strategy It enables a firm to achieve superior performance and sustainable competitive advantage relative to its competitors and consists of 3 elements:  Diagnosis: identify competitive challenge. By analysis of firm’s external and internal environment. (Part 1 of AFI framework)  Guiding policy: address the competitive challenge. By formulation of firm’s corporate, business and functional strategies. (Part 2 of AFI framework)  Coherent actions: implement firm’s guiding policy trough strategy implementation. (Part 3 of AFI framework) But also, it creates value for shareholders. We define value creation when companies with a good strategy are able to provide products or services to consumers at a price point that they can afford while keeping their costs in check, thus making profit at the same time. Both parties benefit from this trade as each captures a part of the value created. Tesla’s secret strategy In 2006, Elon Musk, co-founder of Tesla, explained the start-up's master plan Step 1: Build sports car Step 2: Use that money to build an affordable car Step 3: Use that money to build an even more affordable car Step 4: While doing above, also provide zero-emission electric power Step 5: Don’t tell anyone We define competitive advantage as: Superior performance relative to other competitors in the same industry or the industry average. Sustainable competitive advantage is outperforming competitors or the industry average over a prolonged period of time. Competitive disadvantage is underperforming to other competitors in the same industry of the industry average. Competitive parity is when the performance of two or more firms at the same level. Firms gain competitive advantage by combining value and cost through strategic positioning by:  Differentiation: delivering superior value while containing the cot to create it. (Walmart)  Cost leadership: offering similar value at lower cost. (Nordstrom) Southwest Airline – Case Study How was Southwest different from the other US airline companies (the worst market competition)? On their 2005 commercial, they targeted competitors: “They can try to copy our low fares, they can try to copy our comfy leather seats, they can try to copy our award-winning website but good luck copying these guys (Southwest’s airlines). The official airline of positively outrageous customer service.”  Joint probability [and] P(X, Y)= P(X|Y)*P(Y) is the probability that two events take place together at the same time. On the other hand, rolling the dice are independent of each other, so we simply multiply the two probabilities to get joint probability.  The Conditional Expectation E(X|Y) is the expected value of a random variable, given that another event has already taken place. ∑ 𝑥 ∗ 𝑝 (𝑥 |𝑌) Prediction of events A theory is a series of logical steps linking antecedents to consequences. X  Y: x leads to y. Note that there is a clear direction of causality in a theory. Why it is relevant for management? Theories tell you what data / factors to examine. The factors that affect your outcome improve your ability to make an accurate prediction of what will happen. The data that you collect provide signals for your conditional probabilities, i.e. for improving your predictions. - Predict events. An event is associated to the outcome of an action. You want to decide whether or not to take that action. Step 1: What’s your theory? - Based on your theory, you envision a probability, called prior probability. Step 2: Elicit signals – Now that you have a prior probability you decide whether to stay with this probability or to elicit signals. Gathering signals is costly. A signal is a piece of information that enables you to make your chosen probability more precise. Posterior probability takes into account the signal, but also the prior probability, such as the posterior is not exactly equal to the signal. There could be also a series of priors, signals, posteriors, in which each posterior becomes the prior before the next signal. - Decide actions. Step 3: If worth it, proceed collecting signals, otherwise make a decision.  APPROACH 1: Think of a threshold probability: it is important that decision-makers select the threshold before they estimate their probabilities or see the data. This is important because doing it aften often generates confirmatory biases leading to bad decisions.  APPROACH 2: Assign values to profit and loss. 1. Estimate monetary values. 2. You attribute utilities that represent how much you enjoy a positive outcome or how much you suffer a loss. The utility model or the (monetary) value model are equivalent. The only difference is that you set the former based on a wide-ranging set of considerations you may have, which of course may include an estimate of the profit you can make. For sure the first one is closer to financial planning, the second one is closer to a rigorous way of sense-making in managerial decision. The utility model is similar to setting a threshold probability off the top of your head. By setting such a threshold probability you are de facto setting utilities. For instance, if your threshold P* for entering a business is very high, you will probably set a high negative value for the «utility» of a loss. In the monetary value model, you make calculations about tangible values. Correlation is not causation! You need to have a logical theory and you need to pay to the data we collect (representative, large sample). - Correlation measures the extent to which two or more variables are related – when one moves, so does the other, either in the same or opposite direction. - Causation indicates that one event is the result of the occurrence of the other event. External analysis Pestel Framework is a framework that categorizes and analyses an important set of external factors (Political, Economic, Socio-cultural, Technological, Ecological, and Legal) that might impinge upon a firm. These factors can create both opportunities and threats for the firm. A firm’s external environment consists of all factors outside the firm that can affect its potential to gain and sustain a competitive advantage. By analysing the factors in the firm’s external environment, strategic leaders can mitigate threats and leverage opportunities. ► Political factors: result from processes and actions for government bodies that influence firm decisions and behaviour. ► Economic factors: includes macroeconomic factors such as growth rates, employment rates, interest rates, price stability and currency exchange rates. ► Socio-cultural factors: capture society’s evolving cultures, norms, and values. Strategic leaders need to closely monitor such trends and consider the implications for firm strategy. Demographic trends also also important sociocultural factors. ► Technological factors: capture the application of knowledge to create new processes and products. ► Ecological (Environmental) factors: involve broad environmental issues such as resource constraints, climate change and ecological crises. These factors can present both threats and opportunities for organizations. ► Legal factors: include official outcomes of political processes as manifested in laws, mandates, regulations and court decisions. Regulatory changes tend to affect entire industries at once. Closely related to political factors. AirBnb – Case Study New entrant in the global hotel industry (2008), Airbnb is a platform that connect individuals who want to rent out their residences (the hosts) as lodgings for travellers (the guests). Not the first mover in the peer-to-peer rental space. In 2019: 5 million listing in over 81,000 cities in more than 190 countries. Offer more accommodation than the three biggest hotel chains combined (Marriot, Hilton and Intercontinental). Airbnb makes money charging a commission for the service to both the hosts and to the guests. Asset light approach to circumvent traditional entry barriers in the hotel industry (no need to use millions to acquire and manage physical assets or employees). Marriott has almost 250,000 employees; Airbnb around 2,500. Sophisticated pricing and reservation system, website design and perfect timing (hosts in need to pay rent or mortgages to keep their homes & users in need to seek low-cost accommodations). Airbnb can react much faster to changes in demand and supply. Factor Analysis - Airbnb Political - Unregulated housing laws and guidelines. - Hotel chains and resort owners have challenged Airbnb in courts and lobbied local governments, some of which passed regulations to limit or prohibit short-term rentals. - Local residents in New York, San Francisco, Berlin, Paris, and many other cities are also pressuring governments to enact more aggressive rule banning short-term trentals because they argue that companies such as Airbnb contribute to a shortage of affordable housing by turning entire apartment complexes into hotels or transforming quiet family neighbourhoods into all- night, every-night party hot spot. Economic - Benefiting hosts and cities trough shared economy Social - Hosts share new experiences. Technological - Book rooms trough app and website. Environmental - Healthier and lower energy usage than hotels Legal - Trough terms and conditions. Factor Analysis – How do PESTEL factors affect hotel apartments? Political - Increased regulation of home sharing; it could reduce the benefits of home sharing for hosts, while apartment hotels are already licensed as hotels. Economic - Reduced business travelling due to Covid19; it could impact both home sharing and apartment hotels negatively. Social - Increased concerns for hygiene; apartment hotels can be seen as safer Is Sonder a new competitor? Sonder is a hospitality start-up that operates furnished apartment buildings in 36 cities globally. Sonder leases and manages its own buildings, which are licensed as hotels. The model includes contactless check-in, concierge service by phone and text (as well as in person on demand) and apartments with kitchens and laundry appliances — targeting travellers seeking more isolation and privacy. Other start-ups like Blueground, Lyric, and Roost combine elements of hotels and apartment rentals. Based on our analysis, Airbnb should introduce hotel apartments if it believes that there is a greater probability than 42.8% that the hotel apartment market will experience a big growth. So, Airbnb needs a theory of how customers will evolve in the post-pandemic world, to collect insight from experts, to collect data and to run experiments with hotel apartments. “While you were still using Airbnb to spend a weekend in a stranger's home, the company was quietly expanding into boutique hotels and entire Airbnb-branded buildings – Airbnb has been quietly opening branded apartment buildings and condo- hotel towers in cities like Miami, Austin, Orlando, and Nashville. In Miami, the company is partnering with a developer to open a 48-story, Airbnb-branded tower called Natiivo that will offer 412 condos and 192 hotel rooms — all of which can be rented out via Airbnb, Christopher Cameron reported for The New York Post. Airbnb is also opening branded apartment buildings in cities like Orlando and Nashville, where studio apartments start at $2,392 per month. In the past couple of years, Airbnb has also added more and more boutique hotels to its platform and acquired hotel-booking app HotelTonight. These moves signal that Airbnb is expanding from its vacation rental roots and moving toward real-estate and hotels.” – Article of December 9, 2019 – Katie Warren, Insider. Five forces model Micheal Porter developed the highly five forces model to help strategic leaders understand the profit potential of different industries and how they can position their respective firms to gain and sustain competitive advantage. Porter’s Five Forces is a business analysis model that helps to explain why various industries are able to sustain different levels of profitability. The model identifies an industry’s profit potential and understand how firms can be positioned within an industry to gain and sustain competitive advantage. An industry is a group of incumbent companies that face more or less the same set of suppliers and buyers. Firm performance is determined primarily by two factors: industry and firm effects. Industry effects: attribute firm performance to economic structure of the industry in which the firm operates. They attribute firm performance to the industry in which the firm competes. The structure of an industry is determined by - Increased interest in privacy (e.g., working from hotel rooms); apartment hotels offer more isolation Technological - Home automation (electronic locks, smart home devices) - it could be easier to implement in apartment hotels Environmental - Solar panels, energy efficiency; it could be easier to achieve in managed apartment buildings due to economies of scale Legal - Increased litigation with residents in the building for typical rented apartments while hotel apartments operate in a more favourable environment Strategic groups model explains differences in firm performance within the same industry by clustering firms into groups based on a few key dimensions. It is done by graphing the firms on two chosen dimensions that form x- and y-axes. Implies that differences in firm performance not based just on industry but also on strategic group membership. Mobility barriers (costly and not easily reversable strategic actions) restrict inter-group movement. Even within the same industry, firm performances differ depending on strategic group membership. Some strategic groups tend to be more profitable than others. This difference implies that firm performance is determined not only by the industry to which the firms belong, but also by its strategic group membership. Intra-group rivalry exceeds inter- group rivalry. What is inside the firm? - From external to internal analysis Core competencies, resources, and capabilities are key to competitive advantage’s creation and sustainability. Core competencies are unique strengths embedded deep within a firm. They enable a firm to gain and sustain competitive advantage by differencing its products & services from rivals, creating higher value for the customer, and offering products at lower costs. Core competencies find their expression in the structure, processes, and routines that strategic leaders put in place. The important point here is that competitive advantage is frequently the result of a firm’s core competencies. Example: Five Guys, an American fast casual restaurant chain focused on hamburgers, hot dogs and French fires. Core competency: a superior ability to deliver fresh, customized hamburgers using only the highest quality ingredients. They do not deliver (until the pandemic), no marketing expenditures (they rely on word of mouth), no full menu, very limited menu with great ingredients and attention to quality + high prices). These multiple and varied activities, when combined, reinforce Five Guys’ core competency, which enables the hamburger joint to differentiate its product offerings, to create higher perceived value for its customers, and to command premium prices for it products. Company Core competencies Application Examples Amazon - Superior IT and AI capabilities - Superior customer service - Diversification across different industries - Online retailing: largest selection of items online - Full vertical integration in retail, from warehouse to delivery - Cloud computing: largest provider through Amazon Web Services Apple - Superior industrial design in integration of hardware and software - Superior marketing and retailing experience - Establish and maintaining and ecosystem that reinforce one another in a virtuous fashion - Creation of innovative and category-defining mobile devices and software that take the user’s experience to a new level Five Guys - Superior ability to deliver fish, customized hamburgers as well as hand- cut fries using the highest quality ingredients - Hamburgers and fries. Because core competencies are critical to gaining and sustaining competitive advantage, it is important to understand howe they are created. Companies develop core competencies through the interplay of resources and capabilities. Core competencies must be constantly nourished, or they will eventually lose their ability to yield a competitive advantage. There may be an invisible part of core competencies (i.e., intangible resources). Resources are any assets that a firm can draw on when formulating or implementing a strategy. (Tangible & Intangible) Capabilities are organizational and managerial skills necessary to deploy a diverse set of resources. (Intangible) Activities are distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services. To gain a deeper understanding of how the interplay between resources and capabilities creates core competencies that drive firm activities leading to competitive advantage, we turn to the resource-based view of the firm. This is a model that sees certain types of resources as key to superior firm performances. Internal resources are key to achieve and sustain competitive advantage. Resource heterogeneity is the assumption in the resource-based view that a firm is a bundle of resources, capabilities and competencies differ across firms. Resource immobility is the assumption in the resource-based view that a firm has resources do not move easily from firm to firm. · Physical resources - property, plant and equipment - are typically acquired by firms at market prices. Firm location, geographic access to key inputs are heterogeneously distributed. · Human Resources are recruiting skills (i.e., Patagonia), employee’s specific knowledge, skill, experience. · Intellectual Property such as patents, trademarks, copyright and trade secrets. Organizational/Intangible resources: corporate cultures idiosyncratic to firms and very hard to imitate (i.e., organizational culture at Zappos) such as brand loyalty and reputation. Example - Zappos: quirky culture corporation. It is an online shopping shoe. After selling the company, culture comes first. Embrace change, weirdness. With Tutu-Tuesday. Build a positive and family team. Great service costumers, 14$/h - if an employee spends 10 hours to the phone with a costumer bonding, it's not a waste of time but it is a way to have repeated costumer (which helps very much with sales). Holocracy: no level of hierarchy FROM THE WEBSITE OF ZAPPOS: Zappos is not an average company. Our service is not average, and we don't want our people to be average. For all our emphasis on customer service, our #1 priority is company culture. It’s what makes us successful. And in our culture, we celebrate and embrace our diversity and each person’s individuality. We believe that if we get the culture right, then most of the other stuff — like delivering great customer service or building a long-term enduring brand or business — will be a natural by product. Our culture would not be what it is today without Zapponians past and present. We are all protectors and cultivators of the Zappos culture; it's what makes it unique and something that grows every day. The VRIO Framework One important tool for evaluating a firm’s resource endowments is a framework that answer the question, what resource attributes underpin competitive advantage? The VRIO Framework is a theoretical framework that explains and predicts firm-level competitive advantage - Valuable resources enable a firm to increase its economic value creation, exploiting an external opportunity or offset an external threat. [Google use data based HCM to hire and retain innovative and productive employees] - Rare: the firms that possess it is less than the number of firms it would require to reach a state of perfect competition - Imitate (costly): if firms that do not possess the resources are unable to develop or buy the resources at a reasonable price (direct imitation or substitution). - Organized to capture value: having in place an effective organizational structure, processes, and systems to fully exploit the competitive potential of the firm’s resources, capabilities, and competencies. The story of XEROX Parc and Apple: the manager told them to show all their technology to a competitor. How to sustain a Competitive Advantage? Several conditions allow firms to protect their resources, competencies and capabilities. 1. Better expectations of future: if better expectations can be systematically repeated over time, a firm develop a Sustainable Competitive Advantage. 2. Intellectual property protection (IP): a critical intangible resource that can provide a strong isolating mechanism and thus help to sustain a competitive advantage [patents: bio/pharmaceutical firms, design, copyrights (singers, writers), trademarks, trade secrets (Coca-Cola, Ferrero)]. 3. Social complexity: different social and business systems interact and are combined. At Zappos, one must consider together the organizational culture, social relationships and the industry. 4. Causal ambiguity: cause and effect of the phenomenon are not apparent. It is very difficult to pinpoint the sources of Apple success (Steve Jobs? Tim Cook? Timing? Rare skills? A combination of them?) 5. Path dependence: decisions made in the past limit the options one faces. Time compression diseconomies make difficult for rivals to replicate a resource quickly. The Value Chain are the internal activities a firm engages in when transforming inputs into outputs. Each activity adds incremental value and incremental costs. Strategic activity systems is the conceptualization of a firm as a network of interconnected activities that can be the foundation of its competitive advantage. Hard to imitate, evolve over time if a firm is to sustain its competitive advantage. In response to changing environments, firms need to upgrade value creating activities and adapt their activity systems. SWOT Analysis Swot Analysis is a framework that allows managers to synthesize insights obtained from an internal analysis of the company’s Strengths and Weaknesses with those from an analysis of external Opportunities and Threats to derive strategic implications. 1. Focus on the Strengths-Opportunities: to derive «offensive» alternatives by using an internal strength to exploit an external opportunity. How can the firm use internal strengths to take advantage of external opportunities? 2. Focus on the Strengths-Threats: to use an internal strength to minimize the effect of an external threat. How can the firm use internal strengths to reduce the likelihood and impact of external threats?  Quality: in a classroom example, as the size increases, the quality of teaching may decrease (more difficult interactions etc.  Range of variation: Remember: some costs do not vary in a certain range of volumes and then increase for other ranges (increasing classroom size from 150 to 200 may not increase cost a lot, but increasing to 400 does).  Fixed-Costs Absorption: dividing fixed costs across larger number of units of output produced (given a production capacity). These economies are higher if fixed costs represent a larger fraction of total costs (e.g., industrial production as opposed to trade and intermediaries).  Learning-curve effects the technology remains constant, cumulative output increases, cost per unit decreases (“learning by doing”). Learning economies are incremental and predictable decrease in unit costs of output as the cumulative production volume increases. The steeper the learning curve, the more learning has occurred. Some processes and products have greater potential for improvement over time than others. Greatest leverage at early stages of product lifecycle.  Enhanced Human Skills: the ability of people to learn to improve their work habits and perform assigned tasks more quickly and better. This applies to all employees and managers, not just to those directly involved in production.  Simplification of products and processes: when people gain experience regarding a certain product or production process, they can also grasp possible pathways to simplification, leading to greater efficiency at lower costs.  Better selection of materials: understanding which production resources are most appropriate for carrying out a given activity.  Higher coordination: people must interact and utilize different kinds of plants and equipment as they carry out the activities. With experience, individuals get to know one another and learn to work in teams and coordinate different processes.  Higher programmability of activities: events become more predictable and response time to non- standard circumstances is quicker and more effective. This makes it possible to plan processes more effectively by timing each operation, optimizing the mix of different production capacities, coordinating resources etc.  Experience curve: the technology changes, cumulative output remains constant, cost per unit decreases (process innovation) ~ Production capacity (PC): maximum units of output that can be procuded in a given period (time-frame), using current resources. ~ Current production capacity (CPC) units of output produced in a given time-frame. ~ Degree of utilization of production capacity: the ratio of current production capacity to production capacity.  Economies of scope describe the savings that come from producing two (different) outputs at lower cost than producing each output individually, despite using the same resources and technology.  Complementarities in the production and in the distribution of products/services (i.e., shared inputs)  Deployment of unique assets and capabilities across several products (e.g., brand reputation) such as customer service [Zappos]  Use same advertising campaigns for multiple products  Amortizing expenses related to generic R&D, increasing the perceived value of the product or service offering  Creation of exit barriers and lock-in effects for consumers (e.g., Apple’s product ecosystem) An example is Armani. They sell a broad array of products from clothes to shoes, watches, jewelry, cosmetics and home interior. Products marketed under several specialized labels. Sources of scope economies relate to intangible assets (brand advantage, corporate image, know - how). Competitive scope (scope of competition) is the size (narrow or broad) of the market in which a firm chooses to compete. Being “stuck in the middle” means being everything to everyone, like Jet Blue. Blue ocean strategy successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs. Jet Blue: The story JetBlue was founded by David Neeleman in 2000. In its early years, JetBlue used value innovation to drive up perceived customer value even while lowering operating costs. Between 2007 and 2015, JetBlue faced several emergency landings, erratic pilot, and bad crew behaviours. In 2007, JetBlue was forced to cancel about 1,600 flights, and David Barger became CEO. In 2015, JetBlue was lagging the Dow Jones Index, and Robin Hayes was appointed CEO. In 2017, JetBlue ranked dead last in the annual WSJ survey of U.S. airlines. In 2019, JetBlue became the 6th largest Airline company in the U.S., offering approximately 1,000 flights daily, employing 22,000 crew members, and servicing 42 million customers annually. Since the beginning, JetBlue pursued a Blue Ocean Strategy combining - Differentiation strategy: perceived customer value in service offerings: functional website with all travel related services, hired work-from-home live agents, high-end flight with multiple amenities (mint class), additional free services - Cost-leadership strategy: low operating costs: 1 type of airplane (airbus a-320), lowering training and maintenance costs, point-to-point model by directing connecting fewer but highly trafficked city pairs: flying longer distance and transporting more passengers, lower-cost per available seat-mile in the U.S. Gillette – Case Study The historical leader of cartridge razors in the US market. Bought by Procter & Gamble (P&G) in 2007 for$57 billion it is one of the most profitable P&G brands. It had always pursued a differentiation advantage, with devotion to quality (“The Best a Man Can Get”), constant introduction of better performing models, and premium prices. However, Gillette’s share of US shaving market had fallen from 70% in 2010 to 54% in 2016. Gillette was losing market share to private label brands and two new competitors: Dollar Shave Club and Harry’s. - Dollar Shave Club (DSC): an online subscription service. It offered subscriptions for 2, 4, and 6-blade cartridges at prices ranging from $3 to $9 each. The razor was included for free with the first shipment. Basic but functional products made by Korean giant Dorco. DSC became famous in 2012 after it ran an edgy advertisement on YouTube (they are clearly targeting Gillette). It was subsequently bought by Unilever for $1 billion in 2016. It has low price, direct-to-consumer channel, irreverent and anti-establishment brand attitude, convenience of auto-replenishment. - Harry’s: Another subscription service, launched in 2013. It sold two types of razor handles at $10 and $25 and offered replacement cartridges for about $2 each. “Quality” blades made in Germany, and nice packaging (very good German suppliers -> to avoid high prices they instead bought the company). It integrated manufacturing and bought the blade factory in Germany. Minimalistic “vintage” and hipster aesthetic. It started selling its products in Target stores in 2016. It has convenience of auto-replenishment, affordable price (but not so low), direct-to-consumer channel + availability in supermarkets, premium image. Should Gillette have cut prices? Gillette in 2017 - The market for men’s shaving was declining, because men shaved less often and spent more money on toiletries and perfumes. Gillette launched Gillette Shave Club in 2015, trying to replicate DSC and Harry’s model, but without reducing prices. This club had very limited success. Equity analysts were complaining that Gillette was not listening to customers and that “super-premium innovation” was not the only way to win in this product category. According to estimates, the price elasticity of demand for Gillette’s shaving products ranged between -0.50 and -1.10 (10% decrease in price - 5% to 11% increase in demand). The theory needed to address the reasons why customers were leaving. If prices were the only reason, Gillette could find a price point at which customers would prefer to stay with Gillette (superior quality) than to adopt inferior brands. But maybe they were not. An equity analyst said: “The upstarts have become a real threat. Some of them are becoming very very big. It isn’t just a price point conversation: it has evolved into something about brand affinity. People want to be doing things their own way, there is a distrust of big brands. People are being smarter now, using a smarter, hipper brand.” In 2017, Gillette reduced prices by about 12% on average and up to 20% on certain products. It didn’t change anything. In addition, they could acquire any company, due to the Federal Trade Commission as they thought it could have helped create monopoly (hence higher prices). In 2019, they tried to renew brand image and they receive mixed response. When the Pandemic hit, Gillette started selling beard oil and balms (a major shift). Apple Inc. in 2020 – Case Study 274 Bn $ in sales 57 Bn $ of net income 2,000 Bn $ of market capitalization (2021) About 250,00 products sold (2019) The History of Apple (1976-2016) April 1976 – Apple was founded by Ronal Wayne found, Steve Jobs and Steve Wozniak who both had a vision of changing the way people viewed computers. The first logo was the Isaac Newton apple, then the rainbow apple. Apple I – Circuit Board only, which did not come with a keyboard. Ron Wayne left the company after 12 months. 1977 - Apple gained just enough sales to start building Apple II – Built-in Case with built-in-keyboard and case along with floppy disk drives, but war began with IBM… 1980 – Apple introduced their own PC. Apple went to Xerox PARC and used their GUI for future products. Apple then released to Apple Three and Lisa. It went public (IPO). A considerable growth of IBM compatible computer, that set a new standard for the industry. The relatively open system stimulated the development of complements. January 24th, 1984 – Steve Jobs unveiled the Macintosh to a huge audience which responded with thunderous applaud which lasted for over a minute. It had 128kb RAM, compact design, comes with a keyboard + mouse, easy to use, industrial design, technical elegance. It sold well at the time. The famous commercial aired on television only once – during the 3rd quarter of the 1984 Super Bowl football game. Based on George Orwell's novel, Nineteen Eighty-Four (authored in 1949) the spot provided the allegory of the new Apple Macintosh computer providing an inspirational creative spark that would free individuals from the overbearing control of "Big Brother" - presumably, IBM's Personal computer.  Dominant business: derives between 70 and 95 of its revenues from a single business  Related diversification: derives less than 70 percent of its revenue from a single business activity and obtains revenues from other lines of business linked to the primary business activity.  Unrelated diversification less 70 percent of its revenues comes from a single business and there are few, if any, linkages among its business. Leaders must ask whether the individual businesses are worth more under the company’s management than if each were managed individually. Firms that pursue unrelated diversification are often unable to create additional value and experience a diversification discount. Firms that pursue related diversification are more likely to improve their performance 3. Where should the company compete geographically? Geographic scope in terms of regional, national, or global markets Concepts that guide corporate strategic decisions: core competencies, economies of scale, economies of scope and transaction costs. We define transaction costs as all internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets. Internal costs pertain to organizing economic exchange within the firm such as costs of recruiting and retaining employees. External costs are costs of searching, negotiating, and enforcing contracts with firms or individuals in the open markets. The transaction costs determine and predict firm boundaries in 2 ways: make (should firm activities be pursued in- house? – vertically integrate) or buy (should goods and services be obtained externally? – contract with market players). BCG Matrix: Short-term contracts: describes contracts to be awarded with a short duration, generally less than one year. When engaging in short-term contracting, a firm sends out requests for proposals to several companies, which initiates M arket G row th Relative market share Question Mark Earnings: Low, unstable, or growing Cash flow: negative Strategy: Increase market share or harvest/divest (They may have potential, but the future is uncertain) Star Earnings: High, stable, or growing Cash flow: Neutral Strategy: Hold or invest for growth Dog Earnings: Low, unstable Cash flow: Neutral or negative Strategy: Harvest/divest (Products that have failed or are in the deadline phase of their product lifecycle not worth invest in) Cash Cows Earnings: High, stable Cash flow: High, stable Strategy: Hold (Great source of cash, reinvest to squish cash to defend market share, reduce investment in order to maximize cash flows and profits) competitive bidding for contracts. This allows a somewhat longer planning period than individual market transactions and the buying firm can often demand lower prices due to the competitive bidding process. Strategic alliances are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services. These could be long-term contracts (longer than a year and helps facilitate transaction-specific investments), equity alliances (partnership in which at least one partner takes partial ownership in the other partner) and joint ventures (two or more partners crate and jointly own a new organization). For example, Amazon took all three of these corporate strategic decisions. Machine learning and Artificial intelligence capabilities are a core competency and source of sustainable competitive advantage. Amazon’s AI capabilities provide product enhancement and improved customer experience, thereby making the company a desirable platform for customers. This condition strengthens the company’s strategic position as a major technology business and influencer in the global market. Amazon’s key source of scale has come from its ability to amortize its massive investment in the Web shopping engine across multiple categories and service contracts. The cost of building and maintaining a user-friendly online shopping interface has proved to be beyond the means of many Amazon competitors. Investments in AWS and physical storage capacity enables driving unit costs down within and across product categories. Amazon's distribution network ranks among the largest networks for fulfilling direct customer orders (rather than moving full cases and pallets as a traditional retailer does). Amazon Fulfillment Centers store products for packing and shipping. Shipping a range of products is more efficient than shipping a single product and Amazon sells an extremely broad range of products. As a result, it can negotiate favourable deals with freight companies. Through one-click purchasing (patented in 1999) and Prime subscription, Amazon reduces the cost of finding what you want, the time it takes to get it into your hands, the effort it would take to return it, the added cost of shipping (Prime), the payments process (One-Click) and many other subtleties that are all part of how their extremely efficient e- commerce market works. These innovations dramatically lower consumers' cost of engaging with their markets and thereby lowers transaction costs. Determinants of operating income - How is profitability affected by different operational choices? Structural determinants: - Production capacity: concept of maximum capacity - Economies of scale - Economies of learning - Economies of scope: McDonald’s produces both hamburgers and French fries at a lower average expense than what it would cost two separate firms to produce the goods separately - Industry - Vertical integration: Ikea purchasing forests in Romania to supply its own raw material - Horizontal Integration: Marriott acquired Sheraton - Price levels: purchasing prices are price of inputs bought from suppliers and selling prices are price of outputs sold to consumers. Purchasing prices and Selling prices depend on internal factors (e.g., power of the firm in negotiating with suppliers or setting selling prices) and external factors (e.g., industry trends, competition levels) - Volumes: different volumes influence operating profits by changing both total costs (via variable costs) and revenue. Break-even analysis illustrates and models the relationship between volumes produced and sold by a firm, and its operating income. Variable costs are costs that have a strong and direct link with production and sales volume. Fixed costs are costs that have NO strong and direct link with production and sales volume. If labour can be easily increased/decreased or reallocated across business units, then labour is a variable cost. However, in practice, there may exist regulations and labour laws that create hiring/firing costs. In that case, labour costs would entail a fixed cost component. For our purposes, we will assume labour as a variable cost. Operating break-even point is the amount of sales that allows the firm to cover its operating costs. Contribution per Unit is the net cash flow from a single transaction: it is the cash gained from an extra sale unit. At BEP firms start to make an operating profit. Higher the BEG, the higher the risk. The operating elasticity is the relationship between total variable costs and fixed costs at the BEP (the higher the elasticity, the lower the risk). OE = VCBEP/FC = (VCU * QBEP)/FC Total contribution is the net cash flow from a single transaction multiplied by total quantity of units: it is equivalent to combining fixed cost and profit. QBEP = FC / CPU CPU = R – VC CM% = CPU / R Operating risks are linked to two components of the organization’s economic structure: BEP and degree of operating leverage. Operating leverage is the size of the wedge (gap) between revenues and total costs above and below the break- even point. For a firm with a very rigid cost structure (i.e. high ratio of fixed costs to total costs), the firm will react badly to drops in volumes (less room to distribute fixed costs over units of output) but it will respond positively to increases in volumes. For a firm with a flexible cost structure (i.e. low ratio of fixed costs to total costs), if volumes drop, the firm can easily reduce costs (fire people) but if the volumes increase, the firm experiences cost increases but sees less benefit in terms of revenues relative to rigid structure. Operating risk is not necessarily a bad thing: it amplifies losses, but it amplifies profits. The choice of two plant with the same BEP but different operating risk depends on our estimate of how much volumes sold would exceed the BEP, and on the manager’s degree of risk aversion. PATAGONIA Patagonia is a private owned company which produce outwear apparel. Their corporate culture is unique: since the early days they are focused in creating a business to inspire and implement solutions to the environmental crisis, as their mission statement declares. They are pursuing this in various ways. First and foremost, their employees act as "dirt bag" and represent the brand very well. Patagonia has a slow turnover since the organizational culture includes off site in mountains or beach and both paternity and maternity leaves are provided. In addition, since 1996, they have shown a proactive attitude, aiming for the manufacturing of all their product with organic cotton, even if at the time was much expensive and complex in terms of searching for new suppliers. The family of the Chouinard are the only stakeholders of the company. This enabled the firm to benefit both its financial and environmental goals. Since the company is not publicly listed, it is less constrained by shareholders demand and their decision can be more long-term goals rather than being focused on raising revenue in the short term. In September 2022, the company donated all the shares to non-profit entities: 98% went to Holdfast Collective and 2% of shares with voting powers to Patagonia Purpose Treat. In spring 2010 they launched a new project "Product lifecycle" which encouraged their costumer to reduce, repair, reuse and recycle their clothing. Basically, it consisted in a process of giving a new life to the Patagonia product by repairing them, to avoid waste. This project could be a disaster in terms of revenue, but it was a ripe for the internet. Patagonia also committed to design simpler product to facilitate repairing and created a partnership with eBay to make the shipping easier. ENRON Enron was formed by the merger of Houston Natural Gas and Internorth Enron Corp. was the first nationwide natural gas pipeline network. In the 1989 they created artificial shortages of energy so that the price went up and then started selling shares and make money. This could be possible thank to the energy policy act of 1992 that allowed companies like Enron the right to buy, sell or trade and transport gas. However, Enron rarely had liquidity and it was obligated to turn to the banks. They became the largest companies in North America in terms of sales in 2000, but behind the facade, its debt was also soaring. Using so-called mark-to-market accounting, they booked profits on trades and other transaction based on assumption about the future, accelerating its own earnings. This technique was allowed by SEC, but only for short periods of time. They had huge problems with the board of director such as lack of monitoring, inappropriate conflict of interest, lack of independence and excessive compensation. The lack of independence was due to Anderson's internal auditors and consulting services while serving as Enron external auditors. The main reasons for the collapse were conflict of interest, risk taking, remuneration system, inadequate board oversight, corporate culture, lack of transparency and greed. CFO, Skilling, since 1987 use SPEs/SPVs to hide large amount of debt and make the financial statement look better. A journalist of the Wall-Street Journal, Bethany McLean, saw something shady in the company and published the article "Is Enron overpriced?". After this, Enron was pushed by their shareholders to publish their complete income statement. In 2001 Enron shuts down and later on, Anderson was out of business. Since 2002, the Sarbanes-Oxley Act require the audit committee to be composed entirely of outside auditor and oversees the integrity of internal financial controls. THERANOS The board of director is the group in charge of pursuing the interest of the company and of shareholders. They need to establish corporate objectives, develop strategy and broad policies, select top-level personnel to carry out these objectives, protect stakeholder interests, monitor managers, and report on financial performance and take care of investor relations. To be effective it should select outside directors to fill most positions, the outside members should be truly independent, and split roles between CEO and board chairperson. OK THERANOS NON FACEVA NULLA DI TUTTO CIÒ. Theranos was established in 2003, by Elizabeth Holmes, a freshman in Stanford who had the idea of creating a patch that would test microscopic blood samples for infectious disease. She even filled the necessary paperwork to acquire a patent. Theranos promised blood tests to be easier, faster, and cheaper. Her first advocates were Stanford professor Channing Robertson. Due to the Silicon Valley culture, investors encouraged start-up founders to think big and to "fake it till you make it". Indeed, the strength of Theranos was for sure its founder: she was very charismatic and always very vague. At the end of 2004, Enron had already more than 6 million investments. At this point, Holmes abandoned the idea of the patch for a machine, Edison. In 2013, Theranos even signed with the famous supermarket Walgreen and blood tests began to be done there. After just one year, and after many wrong responses, it was necessary to start doing them in the traditional way. Theranos' board of directors was not capable of understanding what was actually going on due to the lack of diversity: six out of ten directors were retired government official with no medical expertise and none of them had audit or legal expertise. In addition, they were not truly independent - later on will be discovered that Holmes were in relationships with two of them, Shultz and Kissinger. In January 2015, the Wall Street Journal published an article where Enron was exposed. In just one year, the evaluation of the firm fell form 9 million to 0. In 2018, Enron went bankruptcy. Elizabeth Holmes was accused guilty in January 2022. ASML It is a Dutch tech company in the semiconductor industry specialized in the development and manufacturing of photolithography systems. Despite it is not the only maker of this technology, it has specialized in the Extreme Ultraviolet light technology to etch integrated circuits onto silicon wafers. Due to such specialization, its revenues and profits have steadily grown. With outstanding market shares, it has gained a dominant position in the industry. China has an interest in such technology, lagging with its own. However, under American pressure Dutch government has not allowed the company to licence its technology. Applying the VRIO framework to the EUV technology, we notice that: 1. It is valuable, as it allows the etching of smaller components than previous technology. 2. It is rare, as it has the majority of its market share of this technology. 3. It is costly to imitate, due to path dependence and time compression diseconomies due to the amount of R&D behind it, as well as better expectations about the progress of the technology and trade secrets. 4. It is organized to capture value, as it manufactures employing its own technology and receives funding from customers to develop further research. AIRBNB Airbnb is a platform that connect individuals who wants to rent out their apartments for short period of time for travellers. In 2019 their offered 5 million listing in over 81.000 cities in more than 190 countries. Airbnb offer more accommodation that the 3 biggest hotel chains combined. They made huge success as a new entrant in the global hotel industry by circumventing traditional entry barriers and providing accommodation without owning or renting any real-estate. Airbnb has done this by connecting hosts with travellers and charging them both a commission using their user friendly, easy to use website and app. The company also used favourable external factors such as low regulation, benefits of shared economy, new social experiences for travellers and hosts etc. One of the company’s main advantages is its superb ability to react to changes in customer demand. Recently, Airbnb fired a quarter of its workforce, indicating a financial strain. Henry Harteveldt, a lodging industry analyst, predicted that, after Covid-19, hotels will have a near-term advantage, thanks to better forms of hygiene and social- distancing policies. The wave of cancellations that followed Covid made travellers aware of the wide range of terms in bookings, from no- penalty cancellations to full liability. Most hotels have generous policies that allow clients to make changes 24 to 48 hours before arrival. When travel is widely permitted, every place offering overnight accommodations must win back the confidence of travellers to step outside their control zone. Hotels have budget for industrial cleaning products and professional housekeeping staff, as well as marketing capacity to promote this. Many hotel companies are coming out with new cleaning standards inspired by the Centres for Disease Control and Prevention. There is no out-standing winner for hygiene: hotels have better cleaning methods, but home-share property may be better for many in order to avoid shared spaces like elevators and lobbies. Their new competitors could be Sonder, a start-up that offers apartment building with concierge service via phone for people seeking isolation and privacy due to covid. AirBnB themselves started building their own hotel-style buildings that can be rented through the AirBnB app and website. This is a response to the increase regulation of the home sharing market. This shows that Airbnb is responding to changes in the external environment and preparing to exploit business opportunities of the post covid-19 world. Factor Analysis – How do PESTEL factors affect hotel apartments? Political - Increased regulation of home sharing could reduce the benefits of home sharing for hosts, while apartment hotels are already licensed as hotels. Economic - Reduced business travelling due to Covid-19 could impact both home sharing and apartment hotels negatively. Social - Increased concerns for hygiene; apartment hotels can be seen as safer - Increased interest in privacy (e.g., working from hotel rooms); apartment hotels offer more isolation Technological - Home automation (electronic locks, smart home devices) - it could be easier to implement in apartment hotels Environmental - Solar panels, energy efficiency; it could be easier to achieve in managed apartment buildings due to economies of scale Legal - Increased litigation with residents in the building for typical rented apartments while hotel apartments operate in a more favourable environment Factor Analysis - Airbnb Political - Unregulated housing laws and guidelines. - Hotel chains and resort owners have challenged Airbnb in courts and lobbied local governments, some of which passed regulations to limit or prohibit short-term rentals. - Local residents in New York, San Francisco, Berlin, Paris, and many other cities are also pressuring governments to enact more aggressive rule banning short-term trentals because they argue that companies such as Airbnb contribute to a shortage of affordable housing by turning entire apartment complexes into hotels or transforming quiet family neighbourhoods into all-night, every-night party hot spot. Economic - Benefiting hosts and cities trough shared economy Social - Hosts share new experiences. Technological - Book rooms trough app and website. Environmental - Healthier and lower energy usage than hotels Legal - Trough terms and conditions. Pestel Framework is a framework that categorizes and analyses an important set of external factors (Political, Economic, Socio- cultural, Technological, Ecological, and Legal) that might impinge upon a firm. These factors can create both opportunities and threats for the firm. A firm’s external environment consists of all factors outside the firm that can affect its potential to gain and sustain a competitive advantage. By analysing the factors in the firm’s external environment, strategic leaders can mitigate threats and leverage opportunities. STARBUCKS Starbucks is a multinational chain coffeehouse and roastery traded at Nasdaq stock market. SWOT analysis is a framework that managers can use to analyse internal strength and weaknesses in correlation to external opportunities and threats. It combines RBV, PESTEL and five forces. The famous coffee-chain was doubting about opening stores in Italy. In the Starbucks’ SWOT Analysis, the main points are: Opportunities Threats Strengths · Very profitable organization · Premium brand, strong brand recognition · Worldwide presence (in all continents) · Great supply chain · Atmosphere in Starbucks locations (comfy and ur- ban) Its business model can be easily replicated to access new countries BUT… Weaknesses · Products not customized to local tastes (coffees are the same in every country) · Too expensive for many customers (on average costs 3 euro) · Exposure to rises in the costs of coffee and dairy products · Trend towards healthier lifestyle (reducing fat drinks and sweets) · The US market is saturated, where almost 15,000 of Starbucks locations are located In Italy there is a strong coffee culture, with rituals and sophisticated habits. Customer are used to pay 1€ for coffee, which is usually consumer standing and quickly, opposed to the Starbucks experience. Also, the “bars” in Italy are everywhere and customer are loyal to their favourite one – waiter know the names of each habitual costumer whereas Starbucks is known for getting names wrong written on their cups. Starbucks worked on the probability of success by putting in a very high level of effort. They opened a big Starbucks Reserve Roastery in Milan, at the time the third in the world after Seattle and Shanghai. Even if Starbucks Italian restaurants were unprofitable, it would have been a global advertising and it could survive even if the other restaurants failed. They combined their resources with an Italian retail partner – Percassi Group – that had a long experience as a franchise of big brands (Victoria’s Secret) and with its own brand (Kiko). Percassi, which manages all Starbucks restaurants in Italy apart from the Roastery, had the knowledge of the Italian market and retail sector that Starbucks lacked. Percassi also provided expert insight and had run its own “experiments” in the past with international brands.