SM_L1 Flashcards
(30 cards)
What is strategy?
Strategy is about:
- Uniqueness in offering
- Making trade-offs
- Creating fit across activities
What are two common competitive strategies?
-
Cost leadership:
– Lower costs than competitors
– Standardised products -
Product differentiation:
– Unique product features
– Higher perceived customer value
What drives cost leadership?
- Economies of scale
- Learning curve (costs drop as production doubles)
- Low-cost access to factors of production
- Efficient policy choices
- Tech. advantage independent of scale (R&D investments)
Explain learning curve effects
- Costs decline by ~20–30% whenever cumulative production doubles
- Efficiency improves with experience
What is product differentiation?
A strategy where a firm provides unique attributes:
- Product features
- Timing (first-mover)
- Location
- Strong reputation
- Linkage between function and complexity (sales+after sales)
- Product mix
- Links with other firms
- Reputation
Give an example of reputation as a differentiator
Reputation can:
- Encourage brand loyalty
- Justify premium prices
- Deter short-term ‘quality reduction’ (reputation cheating)
What is competitive advantage?
Achieved when a firm:
- Implements a value-creating strategy
- Which rivals cannot easily duplicate
- Results in above-normal performance
Name two key profitability ratios
- ROA (Return on Assets): profitafter tax ÷ total assets
- ROE (Return on Equity): profitafter tax ÷ shareholders’ equity
What is the price-earnings ratio (P/E)?
P/E = current market price per share ÷ after-tax earnings per share
- Reflects investors’ expectations
Why is value creation and capture important?
It shows how firms:
- Create value for customers
- Capture enough value for profitability
- Manage resources, customers, and competition
What is meant by ‘business model innovation’?
- Shifts from selling just products to selling solutions
- Changes value proposition, profit formula, and key processes
Why do managers need strategy?
Managers use strategy to:
- Position the firm vs. competitors
- Exploit opportunities and counter threats
- Leverage strengths and address weaknesses
Return on total assets (ROA)
Formula: profit after tax / total assets
Description: Return on total investment in a firm
Return on equity (ROE)
Formula: profit after tax / total stockholder equity
Description: Return on total equity investment in a firm
Gross profit margin
Formula: (sales - cost of goods sold) / sales
Description: Sales available to cover operating expenses and still generate profit
Earnings per share (EPS)
Formula: (profits after tax - preferred stock dividends) / number of shares of common stock outstanding
Description: Profit available to owners of a common stock
Price-earning ratio
Formula: current market price per share / after-tax earnings per share
Description: Anticipated firm performance
Cash flow per share
Formula: (after-tax profits + depreciation) / number of common shares outstanding
Description: Funds available to fund activities above current levels of costs
Current ratio l.
Formula: current assets / current liabilities
Description: Ability to cover short-term liabilities with short-term assets
Quick ratio l.
Formula: (current assets - inventory) / current liabilities
Description: Ability to meet short-term obligations without selling current inventory
Debt to asset l.
Formula: total debt / total assets
Description: The extent to which debt has been used to finance a firm‘s business
Debt to equity l.
Formula: total debt / total equity
Description: The use of debt versus equity to finance business activities
Times interest earned l.
Formula: profit before interest and tax / total interest charged
Description: How much a firm‘s profit can decline and still meet its obligations
Inventory turnover (activity ratio)
Formula: sales / inventory
Description: Speed with which a firm‘s inventory is turning over
