Lessons and Logic Learned from Competitive Strategy Work

These are some of the broad lessons that I have learned and codified for the sake of better understanding competitive strategy. Lessons are in bold.

1. For a company that sells defence equipment (e.g. bullet proof vest), quality of product is important. Anchor to the key driver and then vertically explore it. Quality of product important, therefore can’t compromise on raw materials and testing, hence supplier testing and availability is priority. Quality hence R&D important (think what R&D should optimize). Threat of liability.
2. Hummus restaurant in NY selling in high-end grocery stores and specialty food retailers, experiencing slowdown. 3 potential growth strategies. Eventually this involves “Expanding Scope” within strategic options. But before this, understand why there is a slowdown. Understand current market: NY market size, trends, market share, time series of P&L pool. Where does your restaurant sit. Then eventually go through the expanding scope options (e.g. M&A, JV, new geo, new product line, new channel).

3. For a biz or project to break-even in 5 years. Understand unit revenue and cost structure (fixed and variable to gauge operating leverage), capex (maintenance and growth), working capital needs. With this you can calc break-even.
4. With numbers.. Your initial investment is $1.5 million and $100,000 of capex/year over the next five years. Each tub of hummus costs $2.75 to produce and will be sold for $4.75. You think you can sell 200,000 plates per year.
1. Treat all capex as fixed cost. Calculate profit per unit from unit price and cost, then multiply by unit volume. $400k profit, $2m fixed costs, 5Y breakeven.
5. Say you have a phone book business. If you increase your price by 10 percent but lose 10 percent of your advertisers, what’s your revenue change?
1. If price increases by 10% but volume decreases 10%.
2. That’s 1.1 x 0.9 = 0.99. Effect is 1% drop in revenue.
3. Can do 1.1 x 0.9 mentally by doing 1 x 0.9 (0.9) then 0.1 x 0.9 (0.09) and add them up
6. City 1 has 10,000 businesses, 50,000 people and $5,000 cost per ad. City 2 has 2,000 businesses, 4,000 people and $600 cost per ad. Which city do you want to advertise in?
1. Normalize cost per ad, make it same, and see which City is better. Multiple City 2 metrics by 8. City 1 is better.
7. If sales drop by $20m and GP drops by $12m, assuming all costs are fixed, that will flow directly through EBITDA so EBITDA will also drop by $12m (so not keeping the same margin %, but direct drop-through in GP to EBITDA).
1. The obvious reaction is to reduce fixed costs so EBITDA doesn't drop by the full GP loss
2. Implication of this is inability to return to previous sales levels if selling off important equipment
3. Lesson: if cost structure is fixed, then a % drop in revenue correlates to absolute $ drop in EBITDA
8. Assuming cost structure is fully fixed. If a company has $100 in revenue, $20 in EBITDA and management decreases prices by 10%, what increase in volume would be necessary to make the change in price EBITDA neutral?
1. 10% price drop translates to -$10 EBITDA
2. To offset price drop, need 11.1% increase in volume to get back to $100 in revenue
3. Fixed cost structure means that 11.1% volume increase flows directly through to EBITDA to get right absolute EBITDA amount
4. Remember to differentiate between absolute EBITDA amount and % EBITDA margin
9. You have a company with $100 million in sales. Which makes the biggest impact? A) Volume increases by 20 percent B) price increases by 20 percent C) expenses decrease by $15 million
1. C means -$15 EBITDA, lowest impact. Volume 20% means 120m sales, but if there are variable costs, won’t be a full drop-through to EBITDA. 20% price increase is regardless of variable cost, it makes biggest impact.
10. If a company's revenue grows by 10 percent, would its EBITDA grow by more than, less than or the same percent?
Muti - Rough Variable vs Fixed Cost Impact on Operating Leverage.xlsx9.5KB
1. Depends if growth was price or volume driven, and fixed vs variable cost structure
1. If structure is full variable cost, then EBITDA growth is same as revenue growth. If there are fixed costs in the business, there is a greater yoy % growth in EBITDA. EBITDA should grow more assuming standard structure (e.g. 60/40 variable to fixed costs).