Management - Appunti Esame generale

1.0 DETERMINANTS OF OPERATING INCOME

How is profitability affected by different operational choices?

STRUCTURAL DETERMINANTS

Production capacity=concept of maximum capacity

• Economies of scale= a proportionate saving in costs gained by an increased level of production; mergers may lead to an economy 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=i.e. Ikea purchasing forests in Romania to supply its own raw material
• Horizontal integration=i.e. Marriott acquired Sheraton
• Price levels=purchasing prices: price of inputs bought from suppliers; selling prices: price of outputs sold to consumers
• Volumes=different volumes influence operating profits by changing both total costs (via variable costs) and revenues

PURCHASING AND SELLING PRICES depend on internal factors (e.g., power of the

1.0 INTRODUCTION

In business, it is important to understand the factors that influence a firm's profitability. These factors can be both internal (such as the firm's negotiating with suppliers or setting selling prices) and external (such as industry trends and competition levels).

2.1 BREAK-EVEN ANALYSIS

Break-even analysis (BEA) is a tool that illustrates and models the relationship between the volumes produced and sold by a firm, and its operating income.

What is the relationship between volumes sold and profit?

What is the effect of fixed costs absorption?

If sales volumes increase, how will this affect earnings?

What is the minimum volume that needs to be sold to cover all costs?

What effect do decisions to internalize/outsource have on cost structure, earnings, etc.?

3.0 FIXED AND VARIABLE COSTS

Variable costs are costs that are directly linked to production and sales volume. These costs can include sales commission, raw materials, and external production processes.

*We will assume that labor is easily adjusted, meaning it is a variable cost.

It could also mean that as the volume increases, the marginal costs diminish (e.g., commission cap). We will be assuming it will be.

FIXED COSTS: Costs that have a direct link with production and sales volume (e.g., rent, depreciation, legal and administrative consulting).

Structural fixed costs: Development fixed costs (those that support current activities and future development – R&D, Advertising).

Total cost (TC) = VC + FC

4.0 BREAK-EVEN POINT

OPERATIVE BREAK-EVEN POINT (BEP): Amount of sales that allows the firm to cover its operating costs. At BEP, firms start to make an operating profit.

CONTRIBUTION PER UNIT (CPU): The net cash flow from a single transaction: it is the cash gained from an extra sale unit = Revenue – Variable Costs.

TOTAL CONTRIBUTION: The net cash flow from a single transaction multiplied by the total quantity of units: it is equivalent to combining fixed costs and profit. Total Contribution = Quantity × CPU.

OPERATIVE BEP IN QUANTITY (Q): BEP production volume. Operative BEP, in quantity (Q), is the quantity for which total revenues are equal to total costs (TC). FC = Q × BEP CPU.

CONTRIBUTION MARGIN: 42% of

revenuescontribution as a (called CM%, or Cm ratio, or ContributionPercentage of Sales, or Profit to Volume)

CPUCM %= R uBREAK-EVEN POINT IN REVENUESpercentage contribution margincalculated with theFC=R BEP CM %

5.1 OPERATING RISKS

OPERATING RISKSOperating risks are linked to two components ofthe organization’s economic structure: BEP anddegree of the operating leverage

OPERATING LEVERAGEOperating leverage is the size of the wedge(gap) between revenues and total costsabove and below the break-even point

OPERATING RISKSSuppose that there are exogenous changes in volumeFor a firm with a very rigid cost structurei.e. high ratio of FC to TC- the firm will react badly to drops in volumes (less room to dispute FC overunits of output)- the firm will respond positively to increase in volumesFor a firm with a flexible cost structurei.e. low ratio of FC to TC- if volumes drop, the firm an easily reduce costs- if volume increases, the firm experiences cost increases but sees less

ELEMENTS of operating risks

The level of BEP the higher the BEP, the higher the risk

The operating elasticitythe relationship between total VC and FC at the BEP; the higher the elasticity, the lower the risk

1. Operating risk is not necessarily a bad thing: it amplifies losses (as we move in the area left to the BEP), but it amplifies profits (as we move in the area right to the BEP)
2. The choice of, e.g., two plants 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

6.1 OPERATING ELASTICITY

OPERATING ELASTICITY

Operating elasticity can be measured by calculating the ratio between total variable costs (VC) and fixed costs (FC) at the BEP (quantity of breakeven).

The higher the operating elasticity, the lower the risk.

VC BEP

OE= FC

To calculate the OE, you need to first calculate the quantity to q at which the firm breaks

evenPROFIT POINT

1. Profit point=sales volume that covers all costs (operations + financial charges and fiscal costs) and provides an acceptable net income
2. Add the target "operating income" to fixed costs
3. The "income" that covers costs of non-core operations and builds up a desired net profit

Summary

Understand the structural determinants of the operating income:

• FC vs VC
• The link between operating risks and BEP
• Economic meaning and computation of operating elasticity
• Computing the profit point
• EXTERNAL ANALYSIS: INDUSTRY STRUCTURE, COMPETITIVE FORCES, AND STRATEGIC GROUPS

PESTEL 1.0 FRAMEWORK: ANALYZING FIRMS' EXTERNAL ENVIRONMENT

We define PESTEL FRAMEWORK as a framework that categorizes and analyzes a set of external factors (Political, Economic, Socio-cultural, Technological, Ecological, and Legal) that might impinge upon a firm. These factors can create both threats and opportunities for the firm.

1. POLITICAL factors: Result from and influence firm decisions and behavior of government bodies. Examples include the US-China trade war, which has direct implications for several businesses like Chinese electronics companies.
2. ECONOMIC factors: Include macroeconomic factors such as growth rates, employment rates, interest rates, price stability, and currency exchange rates. The Covid-19 pandemic, for example, has the global economy reeling.
3. SOCIO-CULTURAL factors: Capture society's evolving cultures, norms, and values. Examples include English-language broadcasters pouring money into Spanish-language networks to reach the 18% of the US population that is Hispanic.
4. TECHNOLOGICAL factors: Capture the application of knowledge to create new processes and products. Advances in AI and Machine Learning, for example, have brought drastic changes in how we work and live.
5. ECOLOGICAL factors: Involve environmental issues such as broad resource constraints, climate change, ecological crises, and threats. These factors present both challenges and opportunities.

present both and for organizations

Tesla building zero-emission

Ex: is addressing environmental concerns by

battery-powered vehicles

L EGAL factors

official laws,

Include outcome of political processes as manifested in

mandates, regulations court decisions

and

Closely related to political factors

EU implemented General Data protection regulation

Ex: in 2018, (GDPR) to

apply legal pressure on US tech companies concerning data privacy

How can we apply the PESTEL framework to identify threats and opportunities

in Airbnb's external environment?

New entrant in the global hotel industry (2008)

45 Platform that connects individuals who want to rent out their residences

(the hosts) as lodgings for travelers (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

Disrupting the hotel industry

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 250,00 employees; Airbnb around 2,500

Sophisticated pricing and reservation system

Website design

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

PESTEL analysis

Political - unregulated housing laws and guidelines

Economic - benefiting hosts and cities through shared economy

Socio-cultural - hosts share new "experiences"

Technological - book rooms through app and website

Environmental - healthier and lower energy usage than hotels

Legal - thorough terms and conditions

What will happen after COVID?

competitors

New !hospitality start-up furnished

Sonder is a company that operates in 36 cities globally and leases and manages its own apartment buildings. These buildings are licensed as hotels and offer contactless check-in and concierge service. The model includes communication by phone and text, as well as in-person assistance on demand. The apartments are equipped with kitchens and laundry facilities, providing more isolation and privacy. Sonder targets travelers seeking the convenience of hotels combined with the comforts of home. Other start-ups like Blueground, Lyric, and Roost also combine elements of hotels and apartment rentals.

PESTEL Analysis:

How do factors affect hotel apartments?

Factor Analysis:

Political - Increased regulation of home sharing could reduce the benefits for hosts, while apartment hotels are already licensed as businesses, making them more suitable for business travelers.

Economic - The reduced travel due to Covid-19 could negatively impact both home sharing and apartment hotels.

Social - There is an increased concern for hygiene, making hotel apartments appear safer. There is also an increased interest in privacy, such as working from hotel rooms, which hotel apartments can offer.

Technologic - Home automation