STRAT FINAL STUDY GUIDE da8fe1961a9b4e83b5da0a8d26e78e13.pdf

🚨 STRAT FINAL STUDY GUIDE Created @November 9, 2023 9:06 PM Class STR 390 Type Study Materials Strategy 390 Final Study Guide.pdf Reviewed Link to Midterm Study Guide 🌆 MidTerm 1 Study Guide Final Study Plan Outline Schumpeterian Rents (Lec.) Intro. to Schumpeterian Rents Markets are:...

🚨 STRAT FINAL STUDY GUIDE Created @November 9, 2023 9:06 PM Class STR 390 Type Study Materials Strategy 390 Final Study Guide.pdf Reviewed Link to Midterm Study Guide 🌆 MidTerm 1 Study Guide Final Study Plan Outline Schumpeterian Rents (Lec.) Intro. to Schumpeterian Rents Markets are: Dynamic Markets are subject to: Change What is difficult in changing markets? Sustaining a competitive advantage What does Schumpeter define as an essential fact about capitalism? Creative Destruction definition: a process of industrial mutation… that incessantly revolutionizes the economic structure from within, destroying the old one and creating a new one What are the two components of Equilibrium that contribute to Economic Profits (rents) 1. Environmental Determinants a. (Porter’s 5 Forces) 2. Firm Specific Determinants a. Resources, Capabilities STRAT FINAL STUDY GUIDE 1 b. Value Proposition c. Scope of the firm What leads to Disequilibrium? Change (Schumpeterian Rents) Schumpeterian rents can take the form of what? Technological change Preference change Regulation change List some examples of Schumpeterian Rents Horse & buggy to Cars Taxis to Ubers Blockbuster to Netflix Animal-based food to Plant-based food Combustion engine cars to electric vehicles What is the crux of the Schumpeterian Perspective markets are dynamic; NOT static What does the Schumpeterian perspective argue? it argues that economic rents come from changes, which lead to opportunities In the Schumpeterian perspective, what is crucial to competition? timing & adaptation Schumpeterian Rents in Class Cases 1. Ebony a. Schumpeterian Rent: i. Invention of the Internet b. Environmental Determinant: i. Increased threat of substitutes ii. Lowered barriers to entry iii. Increased rivalry c. Firm-Specific Determinant: i. Decreased competitive advantage ii. Eroded value proposition 2. Ryanair STRAT FINAL STUDY GUIDE 2 a. Schumpeterian Rent: i. Deregulation of European airline industry b. Environmental Determinant: i. Lowered barriers to entry ii. Increased Rivalry iii. Gave Ryanair an opportunity c. Firm-Specific Determinant: i. Decreased competitive advantage of incumbents ii. Forced incumbents to retreat from low-fare position 3. Disney a. Schumpeterian Rent: i. Invention/Adoption of high-speed internet b. Environmental Determinant: i. Decreased buyer power ii. Increased barriers to entry c. Firm-Specific Determinant: i. Caused Disney to forward vertically integrate through Disney+ Competitive Lifecycles & S Curves (Lec.) Competitive Lifecycles Competition life cycle follows what: S-curve: details cumulative revenues Describe the competitive life cycle graph: STRAT FINAL STUDY GUIDE 3 Competitive Life Cycle Profit Margins What is Emergent Phase characterized by: uncertainty regarding consumer preferences & demand product innovation & differentiation are focused on find the right product features (differentiation) revenues are low as only early adopters are willing to buy few firms as most are small and new (entrepreneurial) profit margins can be high or low potentially high WTP and Price high early-adopter WTP high differentiation potentially high costs: innovation = costly educating new consumers can be costly economies of scale is difficult if MES is high What is Process Innovation? implementation of a new or significantly improved production or delivery method What is Product Innovation? introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses What is Annealing Also referred to as “Dominant Design” Point at which the dominant design, or standard, is established Uncertainty is dramatically reduced STRAT FINAL STUDY GUIDE 4 Early entrants that did not pioneer dominant design often fail What is the Growth Phase characterized by: Uncertainty reduced by emergence of dominant design process innovation begins to increase as firms attempt to make dominant design more efficient some product innovation remains Revenues rapidly increase as demand increases attributable to mainstream consumers willing to buy Number of firms grows to fill demand entrants are more likely to be incumbents from related industries Margins: increase early due to: (1) growing demand reduces competition and (2) firms begin to realize economies of scale decline later because growth slows (excess capacity increases competition) What is the Shakeout characterized as a weeding stage where as revenues plateau or decline, firms start to fail only the best/most-efficient firms remain afterward What is the Mature Phase characterized by: very little uncertainty nearly all innovation is process-oriented many fewer firms remain mostly large, efficient firms number dependent on MES Margins are generally lower than growth phase this depends on the structure of the industry (some industries may have higher stabilizing profit margins) Technology S-Curve: STRAT FINAL STUDY GUIDE 5 Beginning and end of curves: disruptive innovations eventually supplant incumbent technologies disruptive innovations initially perform poorer than incumbent technologies firms that cannot adapt to new technology are “disrupted” or diven from the market Each disruptive innovation starts a new competitive lifecycle STRAT FINAL STUDY GUIDE 6 Examples of technology S-curves Hunting → Farming → Science/Plant-based foods VCS → DVD → Streaming Sustaining vs. Disruptive Innovation: Sustaining Innovation: improve products/services along dimensions of performance that mainstream customers care about Example: 5th blade on razor, clearer TV picture, better cell reception Example: fuel injection in a car’s carburetor Disruptive Innovation: initially inferior on historic performance but offer a novel mix of attributes that appeal to fringe customers may be smaller cheaper, more accessible, or more convenient Example: Electric vehicle with respect to gas-powered vehicle Why do incumbents often fail to make jump from old technology to new technology? underestimate the value/success of the innovation existing resources/capabilities rendered valueless by new technology tradeoff between short-term and long-term (e.g. cannibalization by adopting new technology, firms may accelerate the demise of old technology (example: Kodak) How do we visualize sustaining innovations vs. disruptive innovations? sustaining move us UP the curve disruptive create a NEW curve When do incumbent firms succeed? Innovation requires large amounts of capital or expertise Example: Nuclear technology → high costs Customers desire assurance of established firms Example: Universities & their reputations Incumbent firms have complementary resources or capabilities that transfer to new technology Example: Emerson, General Electric & CAT scanners When should a firm enter if a new competitive life cycle is beginning? First-Mover Advantage strong (positive) network effects steep learning curves STRAT FINAL STUDY GUIDE 7 high switching costs brand/customer loyalty ability to set industry standard excludable complements & complementary resources Second-Mover Advantage high demand uncertainty/risk high consumer education costs free rider opportunities What are Network effects? exist when the WTP for a product depends on the number of other users of the same product What are Standards? norms or requirements for a product/process What are Complements? definition: goods whose prevalence enhances the value of another characterized by negative cross price elasticity Quick Quiz: Question 1: High Demand uncertainty is likely to lead to a: A. First-mover-advantage B. Second-mover advantage: Answer: Second-mover advantage STRAT FINAL STUDY GUIDE 8 Question 2: Which of the following graphs best represents the cross price elasticity between Tesla Cars and EV chargers? A. Graph 1 B. Graph 2 C. Graph 3 D. Graph 4 Answer: Graph 4 Platform Fundamentals (Lec.) Platforms What is a platform? definition: technology, product, or service that creates value by enabling interactions between users with the potential for network effects interactions = transactions, communications, meetings, exchanges, etc. Examples: eBary, Tinder, Playstation Platforms are not just digital. Examples of physical platforms include: Financial services: credit cards Transportation: package delivery Transaction: classified ads What is an Intermediary an entity that buys from suppliers and resells to buyers i.e. wholesaling Why is an intermediary not a platform no interaction between intermediary’s buyers and suppliers control product quality, pricing, etc. What is the key difference between platforms and intermediaries? platforms disintermediate by enabling interactions between suppliers and buyers STRAT FINAL STUDY GUIDE 9 platforms give control over product quality, pricing, features, etc. to platform participants Examples: farmer’s market, flea markets, auctions Example of Intermediary vs. Platform Intermediary = Grocery Store Platform = Farmer’s market What are One-Sided Platforms? def → enable interactions amongst a single group Example: email, all members do the same thing: send and receive emails What are Multi-Sided Platforms? enable interactions between distinct groups or “sides” Example: Recruiting platforms: job-seekers and recruiters Example: Credit card platforms: card holders & merchants What is the key differentiator between one-sided and multi-sided? In one-sided platforms, there is only one group and it does the same function, whereas multi-sided has groups that perform distinct functions What is a better way of understanding sides in platforms? Think of sides as “Players” Example: YouTube is a 3-sided platform side 1: users side 2: advertisers side 3: content creators When do network effects exist? network effects exist when the WTP for a product depends on the number of other users of the same product for platforms, the user’s WTP or WTA (willingness to affiliate) depends on the number of other platform participants How are Network Effects demand-side economies of scale? Network effects are demand-side economies of scale because they increase the WTP or WTA, thus increasing value creation STRAT FINAL STUDY GUIDE 10 How does supply-side economies of scale work? supply-side economies of scale work by increasing unit margins as a result of increased production, the fixed cost gets spread over more output than before. It reduces per-unit variable costs. This occurs as the expanded scale of production increases the efficiency of the production process True or False: Network effects can only be positive False: Network effects can be positive or negative How do Positive Network effects work? Increase WTP as the number of users increases Examples: social media users How do Negative Network effects work? Decrease WTp as the number of users increase Examples: Congestion effects (parties), advertisers, & trolls (on social media) What are Direct (Same-Side) Network Effects? exist when the WTP/WTA depends on the number of other users on one’s own side True or False: One-sided Platforms can only have direct network effects True STRAT FINAL STUDY GUIDE 11 What are Indirect (Cross-Side) Network Effects? exists when the WTP/WTA depends on the number of users on another side of the platform True or False: Network effects increase linearly False: at some point there are “diminishing returns” An x-sided platform has how many potential network effects x^2 for direct → each side for indirect → in each direction between the two sides indirect potential = x*2 Each effect can be positive or negative two sides are complementors if they have positive indirect Transaction platforms vs. innovation platforms What is a Transaction platform? def: platforms that create value by enabling direct exchange or transactions captures value through transaction fees, subscriptions, and/or advertising What is an Innovation platform? def: platform that has technological foundations upon which others develop complementary products/innovations creates value by facilitating the development of complementary products (usually without contracts) captures value by selling/renting/licensing platform products and/or advertising Transaction platforms vs. innovation platforms Visa = two-sided transaction platform STRAT FINAL STUDY GUIDE 12 Kroger = intermediary Amazon = two-sided transaction platform Playstation = two-sided innovation platform Advanced Platform Strat (Lec.) *remember: network effects & value propositions” Fact: for platforms, WTP is a function of scale there are diminishing returns as # of customers/affiliators increases When will platform industry be more concentrated? when Minimum Efficient Scale is high relative to (mature) market size other barriers to entry are high OR network effects are positive and strong, AND consumer preferences are homogenous or platform can offer features to users who are willing to pay, AND multi-homing costs are high What are heterogenous consumer preferences? consumers want different things What are the four quadrants of customer preferences? Open vs. Curated and Category Specific vs. Broad What is multi-homing? the practice of simultaneously affiliating with multiple platforms multi-homing can weaken network effects What is mono-homing? the practice of only affiliating with a single platform at a time True or False: Each side of the market homes similarly? False: each “side” of the market may home differently What are multi-homing costs? costs/investments incurred by user due to platform affiliation If multi-homing costs are high, users are more likely to mono-home If multi-homing costs are low, users are more likely to multi-home What are the components of Platform Affiliation? Setup, Ongoing, and Termination STRAT FINAL STUDY GUIDE 13 Component costs of platform affiliation What costs mater the most in multi-homing? ongoing costs What costs matter the most in switching? setup and termination costs matter the most 💡 Costs can be broken down by low, medium, and high What is the Chicken and the Egg problem? If both sides depend on one another, how do you get a platform started when you have neither side yet? What are the solutions to the chicken and Egg Problem 1. Subsidize: give away or discount affiliation on one side → Examples: Yellow pages free to residents eBay, Facebook giving away products to users AirBnB providing professional photographers to (early adopter) homeowners 2. Exclusivity: pay high-value, marque users to only affiliate with your platform → Example: Joe Rogan & Spotify 3. Develop or buy complements Apple started app store with its own “remote” app This is referred to as “seeding” 4. Provide cheap/free tools to ease complement development STRAT FINAL STUDY GUIDE 14 Apple provides software development kits to ease app development 5. Offer standalone value to one side start as “normal” merchant/vendor, then become a platform later Example: OpenTable What is the problem with solutions to chicken and egg problems Both subsidizing and exclusivity can be expensive!!! How many sides to bring on board? Pros and Cons of More Sides Pros of More Sides Cons of More Sides potentially stronger network effects increased complexity access to more sources of creativity, value, and conflicts of interest revenue less control & integration How should platforms price each side? Platforms should profit from the side that: with the more inelastic demand or higher WTP that adds least value (or diminishes value) for others Platforms should subsidize (or give away) to side that: creates the most value for (most positive network effects) other users STRAT FINAL STUDY GUIDE 15 Sidecar vs. Uber: What did Uber do differently? 1. Lowered switching costs offered cash bonuses to drivers who switched from other platforms ($500-$1000) 2. Prioritized growth/network effects gave bonuses (subsidies) to riders who referred other riders kept prices and profits low/negative Question: When starting a platform, firms should always begin with as many sides as possible to maximize the network effects. Answer: False Cases Netflix eHarmony Wii Encore? STRAT FINAL STUDY GUIDE 16 ________________________________________________________________________________________ Lecture 14: Schumpeterian Rents Intro Fortune 500 Turnover More than half have fell off Hard to get to the top harder to stay at the top Markets are Dynamic slow changers: ex. transportation, hairdressing, insurance Fast changers: ex. phones, computer, software Creative Destruction “A process of industrial mutation… that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Schumpeter coined the term creative destruction essential part of capitalism → kill off old firms and create new/better ones Examples: Netflix, Uber, Airbnb, iPhone STRAT FINAL STUDY GUIDE 17 Schumpeterian Perspective AKA Disequilibrium premise that markets are dynamic not static many changes come from technology can also come from changes in regulation, changing preferences, ex. trends: phenomenal camera companies but post people prefer great cameras within phones, thus preferring apple or Samsung argues that economic rents come from changes, which lead to opportunities timing and adaptation are critical to competition Where have we already seen Schumpeterian rents at work? Ebony Invention of the Internet lead to increased threat of substitutes, lowered barriers to entry, decreased competitive advantage, and eroded value proposition Ryan Air Deregulation of European airline industry led to… lowered barriers to entry, increased rivalry, gave Ryanair an opportunity Decreased competitive advantage of incumbents, forced incumbents to retreat from lowfare position Disney Invention/Adoption of high-speed internet led to… decreased buyer power, increased barriers to entry caused Disney to forward vertically integrate (Disney+) Lecture 15: Competitive Lifecycles, Technology S-Curves, First and Second Mover Advantage Competitive Lifecycles: STRAT FINAL STUDY GUIDE 18 First Phase: Emergent Phase people will recognize what the product is going to be dominant deign (think of cars how we went from electric in the beginning to realizing we are going to go with combustion engine) Uncertainty: regarding consumer preferences and demand product innovation and differentiation: focused on finding the right product features hard to know what consumers want and need to find out what “sticks” in terms of consumer preferences STRAT FINAL STUDY GUIDE 19 take VR headsets for example, at the beginning only a few bought them until it took off them more firms came into the industry making them revolves around product innovation Second Phase: Growth Phase we see growth and adoption too much entry leads to a shakeout where firms die off Third Phase: Mature Phase you end up with a lower amount of firms Profit Margin Curve most variable/uncertain uncertain early because there are early adopters in the emergent phase and have a high willingness to pay there is a lot of R&D and costs that go into it → leads to demand to outgrow supply Process Innovation a process innovation is the implementation of a new or significantly improved production or delivery method lowers cost and is not visible to the consumer consumers do not care if it was made in an assembly line, they care about the features it has Product Innovation the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses STRAT FINAL STUDY GUIDE 20 occurs heavily in the mature phase Annealing point at which the dominant design, or standard is established uncertainty is dramatically reduced early entrances that did not pioneer the dominant design often fail firms can also die in the annealing phase because they adopted the losing standard ex. those who chose to continue to make EVs in the 1900s when combustion engines were dominant STRAT FINAL STUDY GUIDE 21