IT

1. Chapter 1: IT Business Value Proposition

1.1. How do Firms Make IT Investment Related Decisions?

1.1.1. Cost-Benefit Analysis

1.1.1.1. Lacks: Estimate Benefits How long it'll take pplz to use Chance of not finishing the project

1.1.2. Focus: Management factors contributing to maximize pay-offs of IT investments for firms

1.2. Information Technology (IT) vs. Information Systems (IS)

1.2.1. IT: development, maintenance, use of computer systems, software, networks to process and distribute data

1.2.2. IS: Combines technical components and human activities within the organization. Information systems refer to the management of organizational function in charge of planning, designing, developing, implementing and operating systems and providing services

1.2.2.1. Good IS = Users take it for granted

1.3. Patterns in IT spending over time and across Industires

1.3.1. IT is one of the largest capital spending items, and sizeable of overall budget

1.3.1.1. Includes everything, from salaries to software

1.3.2. Firms in USA with sales over 250 million yearly range between $300-$500 million per year (2-4% of revenue)

1.3.3. If too much $$ = slacking menz If too little $$ = constrain from new service requests and leverage installed technology

1.3.4. IT Spending Trends

1.3.4.1. 3% average of revenue

1.3.4.2. Highest IT Spending: Banking, Media & Entertainment, Consulting and Business Services

1.3.4.3. Lowest IT Spending: Metals & Natural Resources, Construction, Automotive

1.3.4.4. IT spending in IT companies is relatively high

1.3.4.5. IT budgets slashed during recessions (dollar value)

1.3.4.5.1. Since 2001 big changes, b/c more experienced firms with IT and in 2009 they'll have new goals

1.3.4.6. Certain years IT spending is unusually high

1.3.4.6.1. Dot com boom = IT spending in Telecommunications was 17% (very high)

1.3.5. New Technology adoption

1.3.5.1. Average N.A firms spend $50-90 million on new IT products

1.3.5.1.1. Recently Business Analytics: large data sets and statistical analysis (select customers, prices) Increase business intelligence

1.3.5.1.2. Cloud Computing: Store documents on external servers (85% of firms investing in it)

1.3.5.1.3. Web 2.0: Wikis, blogs, social networking, interacting with customers and see emerging trends

1.3.5.1.4. GPS-Enabled, location-aware Web Apps: can recommend events etc

1.3.5.1.5. Radio-Frequency Identification (RFID): used by Wal-Mart to track specific items

1.3.5.2. IT spending (new shit and opportunites) vs. capital expenditures (operational IT spending supports status quo)

1.4. The IT business Value Proposition

1.4.1. Value Activities (the value company creates that people are willing to pay for)

1.4.1.1. Gain competitive advantage by: 1. Perform at cost equal or below competitors 2. Or create more value in performing activities (Customers pay premium) 3. Or Both

1.4.1.1.1. IE. BestBuy invest in sentiment analytics that searches blogs etc. to see what people are saying about best buy

1.4.2. Higher IT spending

1.4.2.1. Process

1.4.2.1.1. Higher Revenue and/or Lower Costs

1.4.3. Communicating IT's Value

1.4.3.1. Strategic Alignment: understand near and medium-term priorities

1.4.3.2. Speak with constituencies about capabilities (costs, risks)

1.4.3.3. Quarterly value discussion if we're doing what we said.

1.4.3.4. As an IT organization, need to take stock of general progress towards bringing value to business partnerships - and that strategy is bringing benefits

1.4.3.5. Use annual budget planning and to show high-level value of IT as a methodology for continuing to invest in technology

1.5. IT Productivity Paradox

1.5.1. The Beautiful hypothesis

1.5.1.1. Higher IT Spending

1.5.1.1.1. Process (the black box)

1.5.2. Strassmann (1990,1997) finds no association between IT expenditures and profitability and hasn't changed for 20 years

1.6. The Input-Process-Output Model

1.7. IT implementation, IT Capability, IT Infrastructure, Human IT resources

1.7.1. Effective Implementation

1.7.1.1. High percentage fail implementation or objectives

1.7.1.1.1. 31.1% projects canceled, 52.7% cost 189% more than original estimates (KPMG calls them runaway projects)

1.7.2. IT Infrastructure: physical assets

1.7.3. IT Capability

1.7.3.1. IT infrastructure, Human IT resources, intangible IT enables resources such as knowledge, synergy, customer orientation, combination with other resources = IT Capable firm (posses an organizational IT capability)

1.7.4. Human IT resources

1.7.4.1. Technical IT skills (programming systems analysis and design) and managerial IT skills (effective management of IS functions, coordinating with user community)

1.8. Approaches for evaluating payoffs from IT Investments

1.8.1. Successful users of IT vs. Companies without recognition

1.8.1.1. Profitability Measures

1.8.1.1.1. Return on Assets (ROA)

1.8.1.1.2. Return on Sales (ROS)

1.8.1.1.3. Operating income to assets

1.8.1.1.4. Operating income to sales

1.8.1.2. Cost Measures

1.8.1.2.1. Operating expenses to sales

1.8.1.2.2. Cost of goods sold to sales

1.8.1.2.3. Selling and general administrative expenses to sales

1.8.1.3. Generally higher profits and lower costs in IT capable firms

1.8.2. Another study - ComputerWorld 100 companies vs top industry companies

1.8.2.1. IT competitive firms = higher ROA due to profitability and efficiency where's non competitive IT firms due to profitability only

1.8.2.1.1. higher Asset Turnover in IT capable firms

1.8.3. Enterprise Resource Planning (ERP) systems were big around Y2k (Anderson, Banker, Ravindran)

1.8.3.1. SEC required companies to disclose IT Spending for Y2K

1.8.3.1.1. Found for every $60 of firm value associated with $1 of Y2K spending

1.8.4. IT Budget

1.8.4.1. Are IT budgets affected by firm's external environment, competition & Technological circumstances, internal environment e.g. firm's strategy? (Kobelsky, Richardson, Smith, Zmud)

1.8.4.2. Does budgeted IT spending consistent with contextual factors, generate higher profits?

1.8.4.2.1. More likely to achieve higher performance levels

1.9. DuPont analysis of expected payoffs from IT Investments

1.9.1. ROA = Net Income / Sales x Sales / Total Assets = Profit Margin x Asset Turnover

1.9.1.1. Expense control (profit per dollar) and asset utilization (sales per dollar of assts)

1.9.1.1.1. If IT investment is capital expenditure - effect on total assets (capitalized and depreciated) (impact asset turnover)

1.9.1.1.2. Operating expenses traced by using both ratios and financial statements

1.9.1.1.3. Inventory turnover = COGS / Average Inventory

2. Chapter 3: IT Strategy

2.1. Managerial perceptions regarding strategic role of IT over time

2.1.1. Value of investing in new IT have fluctuated over the years

2.1.2. 1985 Positive

2.1.2.1. large retail chains use computers (competitive adv)

2.1.2.2. British CEOs neglect IT

2.1.3. 1987, 1990 negative

2.1.3.1. self-doubt of IT investments

2.1.3.2. Computers not productive

2.1.3.3. Opinions = IT paradox clear

2.1.4. 1994, 1995, 1997 positive

2.1.4.1. helping truckers

2.1.4.2. Banks leading the way

2.1.4.3. 13th to 4th slot for innovation

2.1.5. 2000, 2003 negative

2.1.5.1. discontent in corporate boardrooms

2.1.5.2. Harvard Business: IT doesn't matter

2.1.6. 2005 Positive

2.1.6.1. 90% of managers could create competitive advantage

2.1.7. Positive and negative subsequently

2.2. Factors driving managerial perceptions

2.2.1. IT is shared vision between top team management (TMT)

2.2.1.1. Is IT a strategic resource?

2.2.1.1.1. Can IT change the basis of competition?

2.2.1.1.2. Can IT build barriers to entry?

2.2.1.1.3. Can IT change the balance of power in supplier relationships?

2.2.1.1.4. Can IT generate new products?

2.2.2. Firms can use IT to grow firms without hiring or replacing employees

2.2.3. Circa 1970 used big data to distribute magazines

2.2.4. Google Drive beat MS Office by doing what they do for free

2.3. Sentiment analytics and how to use them

2.4. IT strategy

2.4.1. Factors Driving IT Strategy

2.4.1.1. IT and barriers to entry

2.4.1.1.1. Economies of Scale (lower cost)

2.4.1.1.2. Network Effect

2.4.1.1.3. Customer Switching costs

2.4.1.1.4. Capital Requirements

2.4.1.1.5. Incumbent Advantage

2.4.1.1.6. Access distribution channels

2.4.1.1.7. Government policy may limit entry

2.4.1.2. D'Aveni: Hyper-competition (environment acting like there is no barrier to entry)

2.4.1.2.1. Four forces fuelling hyper-competition

2.4.1.2.2. Need to disrupt the market to take leadership in market by taking calculated risks

2.5. Perceived role of IT on the firm's competitive environment

2.5.1. Existing View

2.5.1.1. Automate existing processes

2.5.1.1.1. May discourage employees or turn off customers

2.5.1.1.2. Provide Information up or down ladder

2.5.1.2. Channel for information flow within the firm

2.5.1.2.1. Informate Up

2.5.1.2.2. Informate Down

2.5.1.3. force that can transform an industry

2.5.1.3.1. Change relationships with suppliers, customers, product, markets, organizational structure

2.5.2. Firm's Disposition towards IT

2.5.2.1. Innovative versus Conservative

2.5.2.1.1. Innovators

2.5.2.1.2. Conservatives

2.5.2.1.3. Innovators have higher levels of payoffs but also higher risk

2.5.2.2. Offensive versus Defensive approach to IT

2.5.2.2.1. Defensive

2.5.2.2.2. Offensive

2.6. Effect on IT on Porter's five forces

2.7. General Views regarding role of IT

2.8. Mcfarlan's strategic grid

2.8.1. successful business model aligns organization with environment

2.8.2. Measures Impact of IT on business operations

2.8.3. Measures Impact of IT on strategy

2.8.3.1. Enhance value proposition

2.8.4. Grid Breakdown

2.8.4.1. Support mode or Support Quadrant (Low on operations, low on strategy) No Focus

2.8.4.1.1. simply supports employee's activities (agriculture or hand-crafted products)

2.8.4.1.2. competitive disadvantage

2.8.4.1.3. IT goals: none (doesn't align with supportive) not viable and doesn't want to compete on IT

2.8.4.2. Factor Mode or Factory Quadrant (High, Low) Operational Focus

2.8.4.2.1. Important in operations (short term)

2.8.4.2.2. If there's a problem causes significant loss of revenue

2.8.4.2.3. ATMs, websites, production

2.8.4.2.4. Achieve temoporary competitive advantage or parity

2.8.4.2.5. IT goals: goal is operational effectiveness. Reduce operating costs and enhance effectiveness of business operations

2.8.4.2.6. Senior executives who invest in this: "We will be better able to respond to environmental uncertainty and new competitors if we can gain control over internal processes

2.8.4.3. Turnaround Mode or Turnaround Quadrant (low, high) Strategic Positioning Focus

2.8.4.3.1. Building new IS but relies on old system for day to day

2.8.4.3.2. build competitive advantage

2.8.4.3.3. IT goals: enhance value proposition to customers

2.8.4.4. Strategic Mode or Strategic Quadrant (high, high) Dual Focus

2.8.4.4.1. IT innovation to perform day to day operations and to sustain/gain competitive advantage high impact on strategy

2.8.4.4.2. Sustainable strategic advantage

2.8.4.4.3. IT goals: similar dual goal (revenue growth and efficiency)

2.8.5. Benefits

2.8.5.1. Assess alignment of IT projects with business operations and strategy

2.8.5.2. Evaluate IT portfolio of IT projects with operational and strategic priorities

2.8.5.3. Benchmark firm's portfolio of IT with other firms in the industry

2.8.5.4. Framework for developing IT governance at board level

2.8.6. Bottomline

2.8.6.1. Role IT plays in firm, role of IT within firm should be aligned with business strategy

2.9. Use of McFarlan's strategic grid & strategic alignment

2.9.1. Variety-based positioning, produce using distinctive sets of activities

2.9.2. Needs-based positioning, target specific group of customers and has set of unique set of activities that meet these needs

2.9.3. Access based positioning, unique set of activities that can leverage to serve the needs of geographically distinct group of customers

2.9.4. Most business strategies and IT strategies are isolated from each other = sub-optimal

2.10. Porter

2.10.1. Operational Effectiveness: performing similar activities better than rivals

2.10.2. Strategic positioning means performing different activities from rivals' or performing similar activities in different ways

2.11. Business value: Accounting/Finance Angle

2.11.1. Study of Dehning, Richardson, Zmud (2003)

2.11.1.1. IT investment announcement: investors explore the investment and predict impact on profitability

2.11.1.2. Some IT investments are made just to stay competitive and sustainable

2.11.1.3. If IT investment to change competitive environment, signal benefits and risks to investors

2.11.1.3.1. Business models that disrupt industr y

2.11.2. IT is an afterthought (2002)

3. Chapter 4: Competing with Analytics

3.1. Oil Problems

3.1.1. Hard to Find

3.1.2. Expensive

3.1.3. Environmental Harm

3.1.4. Questions:

3.1.4.1. Where is there more Oil?

3.1.4.2. How can we do it substantially and safetly

3.2. Extensible Business Reporting Language (XBRL) - business and financial data language around the world (driven by SEC)

3.2.1. Prevedre converts Big Data to Right Data for organization by analyzing 40,000 data series with millions of records

3.3. Association between business analytics and business Strategy

3.3.1. Demand & supply for business analytics has grown. Results:

3.3.1.1. Democratization of business intelligence tools, smaller firms can buy

3.3.1.2. Unanticipated competitiors

3.4. Association between business analytics and IT Strategy (IT investments)

3.5. Key success factors for competing with analytics

3.6. Specific objectives related to case of Harrah's

3.6.1. What type of IT investment did Harrah's focus on?

3.6.1.1. databases to learn about its customers

3.6.1.2. Customer Service

3.6.1.3. Main goal: importance of databases to compete with analytics

3.6.2. What is the IT capability of Harrah's and how this capability evolved overtime?

3.6.2.1. Innovations

3.6.2.1.1. Website to use cash in rewards to book rooms

3.6.2.1.2. Connecting systems using middleware

3.6.2.1.3. Personalization to prepare prioritized list of contacts, online access to customers' casino, background and contact information

3.6.2.1.4. Automate blackjack and table game by inserting radio frequency transmitters into gaming chips

3.6.2.1.5. Optimize casino floor configuration - running software to connect slot machine performance with customer behaviors

3.6.2.1.6. Print coupons

3.6.2.1.7. server based and video based systems to change depending on day etc.

3.6.2.1.8. Touch Screens

3.6.2.1.9. Point Program

3.6.2.2. 2009: 700 technology staffers, 40 casinos

3.6.3. What is the firm's IT strategy? Does this strategy change over time?

3.6.3.1. Contained Costs

3.6.3.1.1. Innovation (IT infrastructure)

3.6.3.1.2. Outsource (cheaper prices

3.6.3.2. Innovation

3.6.3.2.1. 10 employees, mock casino floor, tested new IT

3.6.3.2.2. 6 categories of Innovation

3.6.3.3. Investments

3.6.3.3.1. 2% of annual revenue (double of competitors)

3.6.3.3.2. $100 million yearly to analyze customer data

3.6.3.3.3. $130 million data center in New Jersey

3.6.3.3.4. CIO - conserve cash in business

3.6.4. What has been the role of IT on the firm's business strategy? Did this role change over time?

3.6.4.1. Harrah's Analyzing Practices

3.6.4.1.1. CIOs worked close with CEOs

3.6.4.2. Practices on IT Projects

3.6.4.2.1. Only take on project if IT and business management agree outcomes outweigh total costs

3.6.4.2.2. IT Projects measured using financial metrics

3.6.4.3. IT capabilities

3.6.4.3.1. IT team divided into 4 groups

3.6.5. What were the risks and expected payoffs associated with the IT initiatives at Harrah's?

3.6.5.1. 20% improvement in profits per room when it used homegrown, patented modeling tools in 2001

3.6.5.1.1. Predict lifetime yield based on demographic, betting pattern, cardholder data

3.6.5.2. Benefits

3.6.5.2.1. Talk time for salespeople reduced by 12 seconds per phone call

3.6.5.2.2. Saved more than $20 mill in costs

3.6.5.2.3. icnreased 72% customers played at different locations

3.6.5.2.4. Cross-market revenues increased from 113 to 250 million

3.6.5.2.5. Increased share of customers' gaming budgets from 36% to 50% by 2004

3.6.5.2.6. Revenue from gaming industry at 80% and industry average was 45%

3.6.6. If you were to evaluate the IT contribution on the Harrah's relative performance which financial performance measures would you consider and why?

3.6.6.1. Looking at the numbers only doesn't mean its good. Lost opportunity in Macau (bought golf course instead)

4. Chapter 5: Database Theory

4.1. Business Process

4.1.1. Purchasing inventory, making payments, selling products, collecting payments, hiring employees

4.2. Order-to-Cash and Purchase-to-Pay

4.2.1. Order-to-Cash process (customer)

4.2.1.1. Generate and record sales order

4.2.1.2. Ship content of orders to customers

4.2.1.3. Send invoice for products to customers and record amount to be received

4.2.1.4. Receive and record payments

4.2.2. Purchase-to-Pay (Supplier

4.2.2.1. Prepare and record purchase order

4.2.2.2. REceive goods and record the receipt of inventory

4.2.2.3. Receive invoice from vendor and record amount to be paid

4.2.2.4. Submit and record payment

4.3. Data vs. Information

4.3.1. Data

4.3.1.1. Minimum data to be collected should capture:

4.3.1.1.1. Individuals or organizations involved in each activity (name of salesperson etc.)

4.3.1.1.2. Assets exchanged as a result of this activity

4.3.1.1.3. Locations where activity took place and parties invovled

4.3.1.1.4. Time periods related to completion of activiy

4.3.1.2. Facts about things

4.3.2. Information

4.3.2.1. what you get when you process data into usefulness

4.4. Database and database management systems (DBMS)

4.4.1. capturing, accessing and managing data

4.5. Relational database

4.5.1. Prodution

4.5.1.1. track data about frequent and complex transactions (reading to writing to database)

4.5.2. Decision Support System (DSS)

4.5.2.1. Datawarehouses (process data to information)

4.5.2.1.1. Updated infrequently (significant when occuring)

4.5.2.2. Data about data is stored (metadata) and kept in a data dictionary (compilation of components of data, names, characteristics and facts about relations between the data sets

4.5.2.2.1. A Database Management System (DBMS) manages all of this data

4.5.2.3. 4 Database Models

4.5.2.3.1. Hierarchical

4.5.2.3.2. NEtwork

4.5.2.3.3. Relational

4.5.2.3.4. Object-oriented

4.6. Production versus Decision Support System database and data warehouse

4.7. Entity, attribute, occurrence, associations

4.7.1. Databases store data about entities and their attributes.

4.7.1.1. Entity (table or file or relation) users want to track (person, event etc.)

4.7.1.1.1. Written as tProduct or tCustomer

4.7.2. Attributes are characteristics (fields or columns) of entities

4.7.2.1. Selecting Attributes

4.7.2.1.1. Simple (atomic attribute) can be stated in a single component (e.g. postal code)

4.7.2.1.2. Composite attribute (employee name, subdivided into first and last name) Avoid these

4.7.2.1.3. Single-valued Attributes: only one value (first name)

4.7.2.1.4. Multivalued attributes: more than one (eg. degrees in school)

4.7.3. Entity Occurrence (record or row) refers to individual instance of an entity

4.7.4. Association

4.7.4.1. there's one association from a set A to set B if only one item in B can be associated with an item in A (mothers and kids)

4.7.4.1.1. Many association from A to B

4.7.4.1.2. Known as functional dependancy, A determines B

4.7.4.2. There is a many association from A to B if more than one item in B can be associated with a given item in A (professors and students)

4.7.4.3. Associations among attributes of an entity

4.7.4.3.1. Classified as one or many

4.8. Associations among atrributes & associations among entities

4.8.1. Association between occurrences between different entities = relations. Relation between 2 entities = pair of associations

4.8.1.1. One-to-ONe (1:1)

4.8.1.1.1. Can start from either A or B

4.8.1.2. One-to-Many (1:M)

4.8.1.2.1. one customer can place many orders (occurrences to order traced back to one customer)

4.8.1.3. Many-to-Many (M:N)

4.8.1.3.1. many entities on both sides are related

4.8.2. Cardinality refers to maximum and minimum number of occurrences that must be included in a relation

4.8.2.1. Direction of association matters

4.8.2.1.1. Establish cardinality: start at customer and trace back to salesperson

4.8.2.1.2. Start from salesperson to customer

4.8.3. Relationships can be classified as

4.8.3.1. Optional

4.8.3.1.1. an entity on ne side of a relation can be represented with a corresponding occurrence (but not required to) (product can relate to order line table)

4.8.3.2. Mandatory

4.8.3.2.1. Occurrences on both side of the relation must occur (tOrder and borderline)

4.8.3.3. Entities associated with them can be classified as

4.8.3.3.1. Strong

4.8.3.3.2. Weak

4.8.3.4. Recursive relation occurs when entity is related to itself (organizational structure)

4.9. PRimary and Foreign Key

4.9.1. Primary Key: value of attribute used to uniquely identify an entity occurrence, that attribute can serve as the primary key of this entity

4.9.1.1. Student Number

4.9.1.2. Combined or concatenated primary key: combine 2 attributes to identify one entity

4.9.1.3. Candidate key: remaining potenital keys not slected

4.9.2. Secondary key: use combination of first and last name when you don't have employee number

4.9.3. Foreign Key

4.9.3.1. Tables linked through one-to-many relation the primary key on the one side is repeated on the table on the many side of the relation

4.10. Entity-relationship Diagram (ERD) or entity-relationship (-R) model

4.10.1. Data model designed to provide description of a database in visual form

4.10.1.1. Rectangles = entities

4.10.1.1.1. always nouns

4.10.1.2. Elliptical = attributes

4.10.1.3. Diamonds = relations between entities

4.10.1.3.1. passive verbs (generates)

4.10.1.4. Relation read from the 1 side to the M side

4.10.1.5. A circle adjacent to any entity is an optional relation

4.10.1.6. Single character written next to entity to indicate relation type

4.10.1.7. Labeled with maximum and minimum cardinalities

4.10.1.7.1. (0,N) none to many

4.10.2. Relational Schema (uses ERD entity's relations by connecting foreign keys with respective primary keys

4.11. Product Order Module

4.11.1. All products are ordered from vendors - listed in vendor table

4.11.2. Company (customer) create product order and sends to vendor

4.11.3. New entity created called ORDEr

4.11.3.1. Optional to vendor

4.11.3.1.1. order_line table created to act as a bridge

4.12. Back-Order Module

4.12.1. Order but no product in stock (customer waits)

4.12.1.1. IF quantity not enough

4.12.1.2. Produces new optional entity Back_Order

4.12.2. In back order until supplier resupplies

5. Chp 14: Capital Structure in a Perfect Market

5.1. MM Proposition I: In a perfect capital market, the total value of a firm is equal to the market value of the total cash flows generated by its assets and is not affected by its choice of capital structure.

5.2. Homemade Leverage

5.2.1. Create leverage: Investor can buy on margin and cash flows of the unlevered equity are collateral to the margin loan then it is a risk free (assuming they borrow at the same rate as corporations) investment.

5.2.2. Create unlevered: Investors can buy both the debt and the equity of a firm. Combining the cash flows produces cash flows identical to the unlevered equity.

5.3. Market Value Balance Sheet: Includes all assets and liabilities depicted in market values.

5.4. MM Proposition II: The cost of capital of levered equity increases with the firm's market value debt-equity ratio

5.4.1. rwacc = E/(E+D)re + D/(E+D)rd

5.5. Leveraged Recapitalization: Use debt to repurchase shares. This decreases the market value of the equity but the share price remains the same

5.6. Unlevered Beta: Measures market risk of the firm's underlying assets, assess the cost for comparable investments

5.6.1. Levered Beta: Levered beta changes the Equity Beta with changes in capital structure

5.6.1.1. Equity Beta increases with leverage

5.6.2. Bu = E/(E+D)Be + D/(E+D)Bd

5.7. Net debt = Debt - Holdings of cash or short term investments

5.8. Fallacy I: Leverage and Earnings Per Share

5.8.1. With more debt = higher EPS if earnings are above a certain value. Stock price doesn't increase because with higher EPS investors are being rewarded for the extra risk and the stock price doesn't automatically increase

5.9. Fallacy II: Equity Issuance and Dilution

5.9.1. Untrue because issuing shares increases assets for the company. If sold at a fair price NPV should be 0.

6. Chapter 2: Business Strategy

6.1. Firm Performance (Absolute vs. Relative)

6.1.1. Sustainable advantage can't be imitated or replicated

6.1.2. Temporary Competitive advantage sooner is imitated or replicated by competitors

6.1.3. Companies measure performance relatively Competitive Advantage Competitive Parity Competitive Disadvantage

6.1.4. Business strategies: exploit opportunities and neutralize threats within an market

6.1.4.1. Corporate Strategies: same thing but across several markets

6.2. Firm performance measures (economic vs accounting)

6.2.1. Normal Profit: zero economic profit, perfectly competitive market, no option on price

6.2.2. Economic Profit: generate revenues above opportunity cost of firm's inputs (competitive advantage) charge a higher price or lower costs

6.2.2.1. Oligopoly or monopoly

6.2.3. Accounting

6.2.3.1. Accounting Profit we don't include Opportunity cost. Accounting ratios use past data and don't account for risk but are readily available (efficiency - leverage assets, contain its costs, desired profitability

6.2.3.2. Profitability measures: Return on Assets (ROA) = NI/TA (net profits generated per dollar of total assets, after expenses) Return on Equity (ROE) = NI/Equity (Net profit for every unit of shareholder's equity) Return on Sales (ROS) = Operating Income / Sales (profit per dollar of sales aka Operating Profit Margin) Gross Profit Margin = Sales - COGS / COGS (gross profit as percent of COGS) Sales Growth = Sales t=2 - Sales t=1 / Sales t=1

6.2.3.3. Efficiency Measures Fixed Assets Turnover = Sales / FA (Measures volume of sales generated per dollar of fixed assets) Total Asset Turnover = Sales / TA (Volume of sales per dollar of assets) Sales per Employee = Sales / Number of Employees (Volume of sales per employee)

6.2.3.4. Common Cost Measures COGS to Sales = COGS / Sales (How well a company can widen its gross margins) SG&A Expenses to Sales = SG&A / Sales (Control overhead expenses) Operating Expenses to Sales = Operating Expenses / Sales (Evaluate efficiency of cost structure, total overhead employed per dollar of revenue)

6.2.4. Economics

6.2.4.1. Hybrid Measures Tobin's q = Firm Market Value / Book Value of Total Assets (How much total value from its assets - if above 1 than generating above normal profits)

6.3. Business Strategy vs. corporate strategy

6.4. Forces that shape business strategy

6.5. Business Models

6.5.1. To chose best strategy is contingent on organizational resources (and capabilities)

6.5.2. Makes assumptions on behaviours of revenues, costs, customer and competitor behaviour

6.5.2.1. Makes decisions for

6.5.2.1.1. Which technologies to embed in the product and service

6.5.2.1.2. How revenue and cost structure should be designed to meet customer needs

6.5.2.1.3. The way in which technologies are to be assembled

6.5.2.1.4. IDentity of market segments to be targeted

6.5.2.1.5. Mechanisms and manner by which value is to be captured

6.5.3. Communicate value proposition (architecture of business)

6.5.4. Successful Business Model 1. Understand your potential customers and their needs 2. Analyze operations and make sure they can deliver what customers want (effectiveness) and when (timeliness) at a reasonable cost (efficiency)

6.5.5. "A business model defines how an enterprise interacts with its environment to define a unique strategy, attract the resources and build the capabilities to execute it, and, in the process, create value for all stakeholders. A successful business model aligns an organization with its environment."

6.6. INdustry STructure view

6.6.1. Porter's Five Forces Framework

6.6.1.1. Used to perform industry analysis and business strategy development

6.6.1.1.1. Determines attractiveness of industry and competitive intensity

6.6.1.1.2. Threat of New Entry The higher the threat of new entry, lower attractiveness

6.6.1.1.3. Power of New Suppliers Can raise prices or lower quality of inputs

6.6.1.1.4. Power of Buyers if power suppliers is high, power of buyers is low and vice versa

6.6.1.1.5. Threats of Substitutes

6.6.1.1.6. Rivalry Among Existing Competitors (advertising, price discounts, new products etc.)

6.6.2. Implications of Five Forces Framework

6.6.2.1. Management should exploit or neutralize threats

6.6.2.1.1. Unattractive: price wars, heavy advertising, diverse product alternatives, added services

6.6.2.2. Weaknesses

6.6.2.2.1. Views market structure as exogenous but its actually endogenous (result of innovation and learning).

6.6.2.2.2. underplays technological opportunities, path dependencies, appropriability conditions, supporting institutions, learning, switching costs, regulations

6.6.2.2.3. Teece says

6.7. Resource based view (RBV)

6.7.1. Resources are physical, human capital, organizational owned or controlled by firm that implements strategies

6.7.2. Capabilities is how companies combine resources (improve productivity)

6.7.3. If having advantage 1) Number of firm that can access this resource 2) How long before competitor acquires similar resource

6.7.3.1. If small = competitive advantage

6.7.3.2. IS resource value added

6.7.3.2.1. Yes

6.7.3.2.2. no

6.7.4. Isolating mechanisms: Raising barriers to imitation

6.7.4.1. Causal Ambiguity: how inputs (cause) and outputs (effect is understood (is it easy to do?)

6.7.4.2. Path Dependence: need to make same decisions as competitor (more ambiguity = harder)

6.7.4.3. Acquiring resources and capabilities: position at a time in history or geographical location

6.7.4.4. Time compression diseconomies: too expensive to replicate

6.8. Value Chain

6.8.1. How attracts resources and builds capabilities to execute its business strategy, process and create value

6.8.2. Chain of technologically and economically distinct activities

6.8.2.1. Measured by How much buyers willing to pay for it (value is price - cost)

6.8.2.1.1. If perform lower costs or differentiator = more value

6.8.2.2. Primary Activities: physical creation of firm's product, marketing, delivery and support

6.8.2.2.1. inbound logistics operations outbound logistics marketing&sales After Sales Service & Support

6.8.2.3. Support Activities: provide inputs and infrastructure allow value activities to take place (human resource management, firms infrastructure, IT, R&D, procurement

6.8.2.3.1. Human Resources Accounting Information Technology Research and Development Procurements

6.9. Porters archetypes of business strategies

6.9.1. Cost Leadership

6.9.1.1. Reducing cost below competitors (enjoy economic profit while everyone has zero or negative economic profits

6.9.1.1.1. Do this with economies of scale

6.9.1.1.2. Dealing with threats

6.9.1.1.3. Has more bargaining power with suppliers and negotiating with customers

6.9.2. Product Differentiation

6.9.2.1. Real or perceived features

6.9.2.1.1. Use R&D or superior customer service

6.9.2.1.2. can charge premium, high customer loyalty (even during recession)

6.9.2.2. Ways to Differentiate

6.9.2.2.1. Changing the properties or features of product or service

6.9.2.2.2. Linkages between functions within the firm provide the firm with unique advantage

6.9.2.2.3. Introducing product at the right time

6.9.2.2.4. Physical location of firm (vacation)

6.9.2.2.5. Mix of Products (Nike+)

6.9.2.2.6. Explicit links between products or services with another firm

6.9.2.2.7. Reputation of firm (Ferrari)

6.9.3. Focused Product Differentiator or Cost Leadership

6.9.3.1. Focus on a geographic or segment of the market

6.10. Accounting and Financial performance measures related to market structure and business strategy

6.10.1. Product Differentiator

6.10.1.1. Higher margins on sales = higher gross or operating profit margins

6.10.1.2. ROA driven relatively more by higher profit margins

6.10.2. Cost Leaders

6.10.2.1. Quantifiable measures such as cost or time reduction (lean) and technologies to get lowest average cost per unit

6.10.2.2. Extract value much better out of assets: ROA driven relatively more by asset turnover (efficiency) than profit margins