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Title: Lecture%201%20


1
Lecture 1 Navigating the Business Environment
  • Steve Montgomery

2
Introduction To The Business Environment
  • What to do when someones not telling you what to
    do
  • High level topics covered
  • Course introduction, Overview of corporate
    structure (1 session)
  • Business strategy (2 sessions)
  • Introduction to Marketing (2 sessions)
  • Basics of Accounting and Finance (2 sessions)
  • Project Valuation and ROI (2 sessions)
  • Putting it all together (A Review) (1 session)

3
Steve Montgomery - Bio
  • Education
  • BS, Mechanical Engineering, U. of Illinois, 1994
  • MS, ME, Purdue, 1996 Vacuum Drying
  • Ph.D., ME, Purdue, 2000 Nanoscale Surface
    Particulate Adhesion
  • M.BA (Technology Management), U. Washington, 2008
  • Accepted a position _at_ Intel 9/2000 in RD
  • Individual contributor roles Heat sink fouling,
    Heat pipes, thermosyphons, data center cooling,
    liquid cooling of CPUs, thermal interface
    materials, Nanotechnology
  • 20 patents awarded or pending
  • Refereed journal publications invited reviewer
    of prospective articles
  • Member and Invited speaker, ASME International
    Congress and Exposition
  • Business and Management path
  • Started off as a team lead, mentoring 2 MEs.
    Added lab management responsibilities
    contractors, interns
  • Promoted to co-department head, 2005
  • Program manager/silicon design manager,
    Integrated Silicon Voltage Regulation technology

4
Course Module Overview
5
Lecture 1 Course Intro
  • Course introduction syllabus
  • Introduction to business
  • Goals of corporation
  • The mindset change, with an example
  • Corporate structure
  • Overview of profitability
  • Intro to SWOT, Strength, Weaknesses,
    Opportunities, Threats (Time permitting)

6
Strategy
  • Overview of competitive strategy What are the
    high level goals of any company?
  • Differentiation and pricing power
  • Survival and profitability
  • Porters Five Forces Model
  • How to assess the landscape of your market
  • Blue Ocean Strategy
  • A toolkit to identify areas to explore creating
    a competition-free zone to reach the above
    objectives

End goal Understanding your business allows you
to pick smart projects
Kim, W.C. and Mauborgne, R., 2005, Blue Ocean
Strategy How To Create Uncontested Market Space
and Make the Competition Irrelevant, HBS Press.
(Well also be using their HBR articles for
brevity)
7
Lecture 2 SWOT Porters Five Forces Model
  • Business strategy overview
  • Strengths, weaknesses, opportunities threats
    (SWOT)
  • Porters five forces model
  • Class discussion Microsofts market position and
    future options/opportunities (freeform SWOT
    analysis application of Porters)

8
Lecture 3 Blue Ocean Strategy
  • The Blue Ocean Strategy model framework
  • Overview
  • Competitive mapping tools and frameworks
  • Application examples Southwest Airlines, Toyota
    RAV4

9
Marketing
  • Purpose of Marketing
  • Create, communicate and deliver unique value to
    customers so that the organization can capture a
    portion back D.J. Turner, UW Assoc. Dean
  • Why you should care
  • Good marketing people buy what you have to sell
  • Bad marketing people dont buy what you have to
    sell
  • An effective market strategy is synergistic with
    your companys global strategy - and a way to
    create a lasting mental link
  • Marketing is the design of a psychological
    construct
  • You are creating positive associations in buyers
    minds. How do you do that?

End goal Understanding your business and how
you reach customers allows you to pick smart
projects and sell them to management
10
Lecture 4 Marketing 1
  • Marketing 101
  • The purpose Marketing as a design exercise
  • How do you identify the unique niche your
    product/project occupies?
  • The 5 Cs Context, customers, collaborators,
    competitors, company
  • The 4 Ps Product, price, place, promotion

11
Lecture 5 Marketing II
  • Heath and Heath, Made to Stick Why Some Ideas
    Die and Why Others Survive
  • What gets a persons attention? Why do people
    respond to certain stimuli in a certain way?
  • And how can this be used to your advantage?
  • The SUCCES approach to communicating with an
    audience
  • Simple, Unexpected, Concrete, Credible,
    Emotional, Stories

12
Accounting/Finance
  • Accounting Two types
  • Bookkeeping and managerial
  • Bookkeeping Your companys overall financial
    health
  • Balance sheets income statements and how to read
    them
  • Managerial Measurable metrics that drive
    decision making
  • What incentives are you creating, and can you
    measure the right things?
  • Finance The art and science of cash management
  • Cash is King
  • Treat it like its yours
  • Time money

End goal Understanding your business, how you
reach customers, and your firms business
condition allow you to pick smart projects and
sell them to management
13
Lecture 6 Accounting Basics
  • Balance Sheets
  • Income Statements
  • Analysis formulae
  • Examples
  • Healthy companies
  • Intangible asset driven (Microsoft)
  • Tangible asset driven (Boeing)
  • Unhealthy company (GM, pre-bailout)
  • How can we infer managements thinking by looking
    at the financials?

14
Lecture 7 Managerial Accounting
  • Perfect decisions result from having perfect
    information, but in reality
  • Assumptions are made, clouding the picture
  • How do we create the right incentives?
  • How do we measure the right things in a company?

15
Project Valuation and ROI
  • The project decision Is this project a good use
    of company resources?
  • How can we tell? What should we measure?
  • What are we not doing by starting this project?
  • Techniques for estimating Return on Investment

End goal Understanding your business, how you
reach customers, your firms business condition
and the potential impact your of your work allow
you to pick smart projects and sell them to
management
16
Lecture 8 Project Valuation and ROI I
  • Introduction to discounted cash flow (DCF)
    analysis
  • Weighted average cost of capital (burden rate)
  • Opportunity cost What is lost by taking one
    action over another

17
Lecture 9 Project Valuation and ROI II
  • Application of DCF analysis
  • What kind of project do I have?
  • Cost reduction?
  • Market segment share increase?
  • Premium offering?

TBD
18
Lecture 10
  • Course wrap-up and summary
  • How to identify whom to influence
  • Who is liable to support your project?
  • Who is liable to oppose your project?
  • How to identify stakeholders, and how does my
    idea affect other teams?

19
Point of this course?
  • As future technical leaders, you will need
  • An ability to evangelize your ideas and rally
    support/resources
  • An understanding/grasp of business topics and
    strategy
  • An ability to communicate your ideas to senior
    management
  • The ability to pick projects that maximize your
    business, promote your career, and promote the
    careers of those on your team
  • All the tools here are applicable on a number of
    levels
  • Your firm
  • Your business group
  • Your own career
  • By way of necessity, well stay at the firm level
    (since the details of everyones particular
    company is often confidential)

20
Homework And Grading
  • Homework after each module
  • Mix of problems and cases
  • Cases read the case and answer some questions.
    No right or wrong answers
  • Problems Out of textbooks
  • Thinking process, not final answer, is the
    important thing
  • No exams
  • Your final will be more along the lines of a
    project (TBD)
  • Will integrate all aspects of the class
  • Rough breakdown of grading
  • Class participation 10
  • Homework 40 (some are weighted more than
    others)
  • Final 50

21
Textbook
  • There is a course pack/textbook for this course,
    130 at the bookstore
  • Contains excerpts from texts, journal articles,
    and cases.

22
Making The Transition
  • As students, youre making 2 transitions
  • From not in school to back in school
  • From engineering education to business, e.g. from
    hard sciences to softer subjects
  • Keep disciplined, and dont get frustrated
  • There are few F ma formulas in business
  • Softer topics require you to think differently!
  • An example Firm-wide financial calculations

23
ROIC Rate of Return On Invested Capital
  • ROIC Metric of how well a firm uses its
    invested capital
  • Usually calculated before taxes (Because firms
    pay taxes at different rates. Removing the tax
    variable allows for apples/apples comparison
    across firms)
  • Where do we find this information?
  • Note Careful! There are several different
    philosophies on calculating the above!!
  • First and foremost tax treatment
  • Also If you were a CEO and you wanted to
    increase this number

24
ROIC, cont.
25
ROIC, cont.
Revenue and cost of revenue
RD, SGA and total operating expenses (Well use
the total number)
26
ROIC, cont.
Long term debt Loans provided to the company
(Ebay has zero long term debt)
Shareholders equity What the invested capital
is worth as of the date of the Bal sheet
Under key statistics, you can find of
outstanding shares and dividends/share.
27
A Discussion Point
  • Consider these companies
  • EBAY (EBay)
  • MSFT (Microsoft)
  • INTC (Intel)
  • CAT (Caterpillar)
  • Which of these companies would you expect to do
    well on ROIC?
  • Software/.com based company?
  • Or heavy industry/manufacturing?

28
ROIC, cont.
  • Mindset change 1 What does this tell you about
    blanket comparisons between industries?
  • What happens if INTC cancelled their dividend? Or
    if MSFT increased theirs to match CAT and BA?

29
INTC, No Dividend, MSFT to 1.68
  • Now the picture looks somewhat different!
  • What if stock analysts graded firms on ROIC
    alone?
  • Mindset change 1 Variables are subject to human
    behavior and decision making
  • People respond to incentives!
  • How come Boeings ROIC is so high?

30
Negative Shareholder Equity?
  • A negative number for shareholder equity??
  • Looking at YOY changes, BA has been active in
    asset management look at the Other
    Liabilities line!

31
What If We Had Gone to AOL Finance?
  • Remember Many formulas are calculated
    differently!
  • Always use as many metrics as makes sense to
    measure performance, and be wary of incentive
    creation!

32
Strategic Thinking
  • As future leaders, you need to keep the following
    ideas in mind
  • What incentives do the programs that I observe
    create?
  • What behaviors do these incentives drive?
  • Are these behaviors good or bad? Why?
  • What metrics best reflect value creation?
  • And how do you use them to your benefit?
  • Everybody else plays checkers. You should play
    chess.

33
Corporate Structure, Goals Profitability
34
Corporate Goals
  • Any corporation in business today (for profit,
    obviously) has the following goals
  • Survival
  • Profitability
  • Survival can mean many things
  • Staying in business
  • Returning value to shareholders
  • Pushing the state of the art
  • Pursuing a mission and a set of values

35
Survival
  • To survive, companies seek to minimize
    inefficiencies and streamline processes
  • Organizations are grouped to streamline tasks,
    allocate resources, and unify functions
  • Analyzing an org chart can tell you a lot about
    what a company values
  • and is a gateway to understanding the overall
    strategy and business model

36
Intel Corporation Operational Model
Source theofficialboard.com
37
Intel Corporation As of 3 Weeks Ago
Source theofficialboard.com
38
Apples Organization
39
General Electric Conglomerate Model
Source http//www.ge.com/investors/personal_inves
ting/ge_organization_chart-1_2.pdf
40
Sun Hydraulics
41
Organization Types
  • Several different types of models in use
  • Operational Model Focused mainly on
    centralizing core functions and distributing
    businesses
  • Conglomerate Model Manages vastly divergent
    businesses. Company-within-a-company model
  • Sun Hydraulics model No structure at all!

42
Mission of Corporations
  • Maximizing shareholder value is the ultimate
    goal of profit-making companies
  • Shareholders provide the risk capital
  • If company fails, risk capital gone
  • Shareholders own the company!
  • Shareholder value stock price, dividends, or
    both
  • Stock price Market value of a firms common
    shares
  • Dividends Cash payments doled out by the firm
    on a regular basis as a direct return to
    shareholders

Ref Hill, Chapter 1.
43
Profitability
  • There are several metrics that can used to
    measure the health of a company
  • ROA (Return on assets)
  • WACC (Weighted average cost of capital)
  • Used in financial calculations
  • Others (See Hills Appendix)
  • ROIC Return on Invested Capital (from earlier)
  • Profitability is the bottom line make profits
    and stay alive
  • Well study these metrics in a later lecture

44
Profitability, cont.
  • Profitability can be had 2 ways
  • Top line growth
  • Bottom line discipline
  • The best firms do both
  • Grow revenues (top line) while holding the line
    on costs and expenses (bottom line)
  • Whats the single biggest predictor of
    profitability? Product differentiation

45
What Is Differentiation?
  • Differentiation is achieving the ability to
    deliver a product or service that customers
    perceive to be unique or distinct in some
    important way
  • Differentiation doesnt need to be tangible -
    Examples
  • Nordstroms known for customer service above
    all else, even on similar merchandise to rivals
  • Mercedes, BMW Perceived status of owning a
    Bimmer or a Benz vs. an equivalent car
  • Brand image plays a huge role in determining
    perceived value
  • Can be based on cost as well

46
Differentiation, cont.
47
Differentiation, cont.
  • Differentiation is often the result of strategic
    choices
  • Make a choice to do something particularly well,
    then go execute
  • Does this happen through more RD? (Innovation)
  • Achieving better brand image? (Marketing)
  • Improving your customer service? (Responsiveness
    to customers)
  • Or do you cut costs and differentiate on price?
    (Cost controls)
  • In any of the above, youre making choices to
    invest (often limited) resources choose well!
  • Some firms are able to do a number of things well
    at the same time

48
Differentiation, cont.
  • Sometimes firms choose to differentiate via
    market segmentation
  • Artificially create a bunch of market niches,
    which you conveniently have a product for
  • Allows you to deliver a product with incremental
    (if that) differences from your other
    offeringsand your opponents have to responds
  • Some firms pick 1-2 segments and focus effort
    there
  • Often means focusing on one customer type
  • Example Porsche only builds sports cars and
    luxury SUVs
  • Examples
  • Truck market Compact, crew cab, full size, dual
    axles, etc.
  • Microprocessors and system on chips (SOCs)
  • Television sets
  • Some firms are able to fill several markets with
    good products
  • Examples Toyota, Intel
  • Reason is the ability to leverage a flexible
    manufacturing capability low costs

49
Differentiation Summary
  • Firms make choices on which factors to promote or
    ignore (well explore this more in Lecture 3)
  • When you achieve differentiation, either hard
    (features you have the competition doesnt) or
    soft (brand perception), you can charge a higher
    price
  • Key is delivering perceived value to customers
  • Intangibles can be harder to imitate
  • Me-too products can be reverse engineered
  • Intangibles often reflect execution, which is
    harder to match
  • BUT, intangibles often are a function of consumer
    trust. If thats ever lost, may be difficult to
    get back (GM?)

50
Implication To Strategy
  • Choosing the right strategy means your strengths
    are maximized and your weaknesses minimized.
    Also means you can exploit some weakness in your
    competition.
  • End result You end up with products your
    customers want to buy.
  • What if you make a mistake and focus on the wrong
    thing?
  • IBM thought that hardware was the main buying
    decision for PCs in the late 80s (and gave away
    DOS to MSFT)
  • BUT, were able to refocus on services and recover
  • MSFT today is re-orienting towards online
    services to counter Google (as well see in the
    case for next time)

51
Introduction To SWOT (Strengths, Weaknesses,
Opportunities, Threats)
52
SWOT Analysis Thinking Strategically
  • Strengths
  • What aspects of a firm are its strengths?
  • Can be structural, market based, IP, etc.
  • What gives a firm its competitive advantages?
  • Weaknesses
  • What aspects of a firm are weak?
  • Can be structural, legal, market based, etc.
  • What hinders a firm from competing well?
  • Opportunities
  • What areas/markets are there that a firm can grow
    into?
  • Do the above strengths contribute, or do new
    capabilities need to be created?
  • Threats
  • What will stop a firm from growing into new
    spaces?
  • What out there threatens a firms existing market
    share and prodcut line?
  • What is the nature of this threat?
  • Competition?
  • Political environment? Something else?

53
SWOT Scorecard
Strengths Threats
Weaknesses Opportunities
54
For Next Time
  • More on SWOT
  • Porters Five Forces Model
  • Microsoft SWOT analysis Class discussion
  • Reading
  • Hill, Chs. 1-2 (skim)
  • Porter, Five Competitive Forces that shape
    strategy
  • Microsoft Search Case

55
Next Time, cont.
  • Using the reading and the SWOT definitions (the
    reading and a few slides ago), prepare a simple
    SWOT analysis for MSFT and Google
  • Questions to ponder for the MSFT case
  • Whats MSFTs motivation in pursuing search?
  • What are MSFTs strengths/weaknesses in this area
    and in general? Googles?
  • Has Marc Andressons vision come true? How does
    this relate to Googles overall strategy (you may
    need to Google Googles strategy if youre not
    familiar already.)? Have Gates fears come true?
  • How has MSFT fared historically in its strategic
    moves?
  • What key insight about the search market did
    Yahoo! overlook and Google exploit?
  • Did Google rest on its search accomplishments, or
    did it branch out?
  • Can you see a pattern in the functions Google
    created?
  • In light of your answer above, does MSFTs moves
    make sense? Why or why not?
  • In the search market, outline Porters five
    forces for discussion. Use MSFT as your
    reference point
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