Profit Stream Research Articles

How to escape a declining market: Capacity investment or Exit?

This paper considers a firm that faces a declining profit stream for its established product. The firm has the option to invest in a new technology with which it can produce an innovative product while having the option to exit at any point in time. In the presence of an exit option, earlier work determined the optimal timing to invest, where it was shown that higher uncertainty might accelerate investment timing. In the present paper the firm also decides on capacity. This extension leads to monotonicity, i.e. higher uncertainty delays investment timing. We also find that higher potential profitability of the innovative product market increases the incentive to invest earlier, where, however, we get the counterintuitive result that the firm invests in smaller capacity. Finally, if quantity has a smaller negative effect on price, the firm wants to acquire a larger capacity at a lower investment threshold.

THE GOOD EGG

“Now what?” Ken pondered as he stared out the window on his flight back from Phoenix having just closed on the acquisition of a 20-unit restaurant company: The Good Egg. Ken Pendery, the CEO of the First Watch restaurant chain for the last 30 years, had just recently grown the company by 20% in one fell swoop. But what was he to do with these Arizona restaurants located more than 1,000 miles from the nearest company-owned First Watch…convert them to First Watch, leave them be, institute the First Watch menu but leave The Good Egg flag…? Ken understood that the decision regarding what to do with The Good Egg brand would have far-reaching consequences. The purchase and conversion to First Watch of two J. Christopher’s restaurants in Atlanta 18 months earlier had not gone as planned. Part of the predecessor’s loyal customer base defected, sales fell by nearly 20%, and the company struggled for the next year to restore sales and profits to pre-conversion levels. If The Good Egg were to have the same fate upon conversion, the results would be devastating for the company and the management team. Recognizing that The Good Egg was the most highly-penetrated breakfast, brunch, and lunch brand with 15 locations in Phoenix and 5 in Tucson as well as a 30-year operating history made the decision even more precarious. The reasons for conversion were clear in Ken’s mind. First Watch had 10% higher average unit sales volumes than The Good Egg. Additionally, having 20 newly-converted First Watch restaurants would provide a foothold in the West, further expanding the brand’s presence. Finally, upon the inevitable sale of First Watch by its private equity group, the valuation of First Watch would be enhanced if those 20 restaurants were converted to First Watch as opposed to selling two disparate brands. Allowing The Good Egg to simply continue to operate independently would provide a predictable, stable revenue and profit stream, and remove the possibility of conversion loss as was realized in Atlanta. Straying from this strategy posed the possibility of considerable upside potential, but also significant downside risk. This would be one of the most pivotal decisions Ken would have to make as CEO and the decision consumed him for the remainder of his 5-hour flight back to Sarasota.

Investing in Durable Assets to Achieve Superior Performance: Restoring Tiger Balm's Roar

Investing in durable assets—assets whose value lasts well beyond the current period—strengthens profit streams, creates barriers to imitation, and contributes to superior performance in the long term. The experiences of such companies as Singapore Airlines, Canon, and Coca‐Cola highlight the three types of investments that can be used to build durable assets and the importance of doing so. A detailed analysis of the case of Tiger Balm, a venerable Singapore‐based brand that is thriving despite 20 years of neglect between 1971 and 1991, identifies some of the factors that can lead to under‐investment in durable assets. It also underscores the value of emphasizing the long‐lasting contributors to organizational success, particularly in marketing‐intensive industries. © 2015 Wiley Periodicals, Inc.

Worker Problem-Solving and the Nature of the Firm: New Theory, New Evidence

This paper proposes a different theory of the firm and demonstrates how it can be employed to yield hypotheses about differences in innovation and human resource strategy according to the shareholder/stakeholder and liberal/coordinated market dichotomies. The theory assumes that feasible production and demand sets are nonconvex due to interaction among activities; thus firms exist to permit the identification and exploitation of profit opportunities through coordinated action. This implies that firms face a nonconvex profit landscape comparable to the fitness landscapes invoked in evolutionary biology. Given the complexity of these landscapes and the uncertainty of the location of profit hills, there is a tradeoff between exploiting existing or adjacent hills and prospecting for more distant ones: the first minimizes risk, the second maximizes potential profit. A further assumption is then introduced, that shareholder firms seek to maximizes the present value of expected future profit streams, while stakeholder firms maximize the likelihood of achieving profitability over a given time horizon. Combining these theoretical priors, we characterize the likely innovation, organizational and human resource characteristics of the two types of firms and the effects exerted by their external environment, as described in the Varieties of Capitalism literature. These theoretical predictions are confirmed in a set of case studies of a stakeholder firm in liberal and coordinated environments and a shareholder firm in a coordinated environment. This is seen through differences in the role of worker problem-solving, which brings together innovation and learning, organizational structure and human resource strategy.

'A Practical Application of Event Studies in Merger Assessment: Successes and Failures'

The stock market’s reaction to news can be a particularly valuable source of information that may lead to inferences about the nature of a merger or a take-over. The idea underlying event studies is that the reaction of share prices - which reflect expectations about a firm’s stream of future profits - will allow alternative hypotheses as to the consequences of a merger to be tested. By examining who gains and loses when mergers or merger are announced, different hypotheses can be tested regarding expectations about market power or efficiency resulting from the merger. The aim of this article is two-fold. First, this article aims at using event studies as an ex ante method to assess the anticompetitive impact of a merger. The movement of the share prices of the merged firms and their competitors on the announcement day indicates whether customers expected these mergers to be profitable for the firms. An assumption is made that firms increase profitability mainly by increasing prices (reducing output) in the market, thus adopting conducts having an adverse impact on competition. Similarly, the movement of the share prices of the merged firms and their competitors on the announcement day indicates whether customers expected these mergers to be profitable for the firms.

Do tying, bundling, and other purchase restraints increase product quality?

Tying, bundling, minimum purchase requirements, loyalty discounts, exclusive dealing, and other purchase restraints can create stronger incentives for firms to invest in product quality. In our first example, the firm sells a durable experience good and a complementary non-durable good to a representative consumer. Tying shifts profits from the durable to the non-durable good, making profits more sensitive to the consumer's experience. In our second example, the firm sells a single experience good to consumers with heterogeneous demands. Minimum purchase requirements screen out the low-volume consumers who would otherwise free ride on the superior monitoring of the high-volume consumers. The examples illustrate that purchase restraints can increase both firm profits and consumer surplus by making firm profits more sensitive to consumer experience, either directly by giving the consumer more control over the stream of profits or indirectly by constraining consumers to monitor more intensively.

Do Tying, Bundling, and Other Purchase Restraints Increase Product Quality?

Tying, bundling, minimum purchase requirements, loyalty discounts, exclusive dealing, and other purchase restraints can create stronger incentives for firms to invest in product quality. In our first example, the firm sells a durable experience good and a complementary non-durable good to a representative consumer. Tying shifts profits from the durable to the non-durable good, making profits more sensitive to the consumer's experience. In our second example, the firm sells a single experience good to consumers with heterogeneous demands. Minimum purchase requirements screen out the low-volume consumers who would otherwise free ride on the superior monitoring of the high-volume consumers. The examples illustrate that purchase restraints can increase both firm profits and consumer surplus by making firm profits more sensitive to consumer experience, either directly by giving the consumer more control over the stream of profits or indirectly by constraining consumers to monitor more intensively.

Ambiguous Jump-Diffusions and Optimal Stopping

An ambiguity averse decision-maker contemplates investment of a fixed size capital into a project with a stochastic profit stream under the Knightian uncertainty. Multiple priors are modeled as a "cloud" of diffusion processes with embedded compound Poisson jumps. The "cloud" contains the Brownian motion (BM) as a process with zero density of jumps. The decision-maker has recursive multiple priors utility as in Epstein and Schneider (2003) and chooses the optimal investment timing. We demonstrate that if the expected present value (EPV) of the project is the same for each jump-diffusion prior at the moment of investment, then the BM is the worst prior in the waiting region. The same conclusion holds for some parameter values even when the BM gives the highest EPV of the project. For other parameter values, it is possible that the local dynamics of the worst case prior is given by a jump-diffusion in a vicinity of the investment threshold and by the BM in a vicinity of negative infinity. Explicit formulas for the value functions and investment thresholds are derived.

Will social media kill branding?

The traditional branding paradigm involved heavy upfront investment and tightly managing the image via controlled communications in hopes of creating dominant brands that could be leveraged to cultivate loyalty and a long-term, steady stream of profits. However, social media can drastically alter consumers’ behavior and their brand preferences. This rapidly evolving landscape has left managers at a loss, and what they are experiencing is likely the beginning of a tectonic shift in the way brands are managed. In this article, we take a close look at the building blocks of branding and also examine the core of social media. After careful analysis of the two, we discuss the likely impact social media will have on the practice of brand management. We conclude that it will extend beyond the narrow confines of the use of social media as a message platform, to the core of how markets are targeted and products are delivered. We make recommendations regarding how companies can manage various facets of branding in this new marketplace.

Value of strategic alliances: Evidence from the bond market

The objective of this study is to examine the relationship between strategic alliances and the cost of debt, proxied by the at-issue yield spread of bond offerings. We hypothesize that the participation of strategic alliances lowers a firm’s cost of debt because it improves the level and stability of future profit streams and reduces information asymmetry among investors. Based on 2150 bond-issuing firms during the period 1985–2009, we find evidence consistent with this argument. Furthermore, we find that the mitigating effect of strategic alliances on the debt cost is much more pronounced for firms with higher product market competition, more severe financial constraints, and greater R&D investments. Taken together, this is the first paper to examine the importance of strategic alliances in the bond market and our results highlight that corporate alliance activity is valued outside the equity market and creates additional benefits that result in lower cost of debt financing.

Customer Acquisition and Customer Retention in a Monopolistically Competitive Industry

The concept of Customer Lifetime Value (CLV) that is, the present value of the stream of profits accruing to a firm over the whole period of its relationship with a customer, has gained wide acceptance as a concept in marketing science and business practice. Closely related to CLV are the concepts of Customer Acquisition (attracting new customers to a firm’s service) and Customer Retention (preventing existing customers from leaving for competitive suppliers of the service). A general feature of the literature on CLV has been the independence of a firm’s CLV strategies from aspects the market environment, such as the size of the market, number of firms in the industry, and rivals’ actions. In this paper we develop a dynamic model of a firm in a monopolistically competitive industry to examine how aspects of the market environment affect Customer-Acquisition and Customer- Retention optimal decisions.

The ties that bind: Bank relationships and small business lending

Abstract The importance of bank relationships for small firms’ ability to raise external finance is well-documented, yet the mechanism through which relationships improve access to capital markets has received little empirical attention. This paper uses hand-collected, proprietary data from a mid-sized bank in the United States to identify the channels that strengthen the relationship between a small business and its bank. In contrast to earlier work that focuses on the role of relationships in alleviating information and incentive problems in lending, I find that the source of value in relationship banking is not limited to enhanced monitoring. Exploiting a unique feature of this dataset, I examine two channels of relationship strength that directly measure the stream of non-lending profits generated from (1) the non-credit services cross-sold to the borrower, and (2) the additional bank clients referred by the borrower. I document that non-lending profitability empirically determines the risk-adjusted terms of lending. In models of loan price that already include both the bank’s proprietary risk rating and traditional risk proxies, non-lending profits significantly improve explanatory power and account for up to half of the total explained variation. Conditional on risk profile, a one-standard deviation increase in aggregate non-lending profits lowers the loan interest rate by 32 basis points and increases access to credit by 26%.

Dynamic pricing for new and remanufactured products in a closed-loop supply chain

This study deals with managing two differentiated versions of the same product by developing analytical models using Lagrangean relaxation and dynamic programming schemes. We assume market demand is price-dependent and partially substitutable between the new and remanufactured goods, and supply of the returned cores is constrainted, i.e., the remanufacturable quantity in the present period is subject to the availability of end-of-use products in the previous period. The primary objective behind analytic formulation is to investigate the pricing behavior over time under a variety of parameter settings including market property, return rate, and substitutability. Analytical and numerical results reveal that the pricing strategy depends critically on the types of markets (e.g., different phases of product lifecycle), cost-savings of remanufactured products, and the substitutable coefficient. Furthermore, we show that the proposed pricing strategy is an effective mechanism in rendering a greater profit stream during the product lifecycle.

The Social Cost of Environmental Solutions

This article assesses the social consequences of efforts by multinational corporations to capture business value through recycling, reusing materials and reducing waste. Synthesising evidence from the global environmental justice and feminist and international political economy (IPE) literatures, it analyses the changing social property relations of global recycling chains. The authors argue that, although recycling more would seem to make good ecological sense, corporate programmes can rely on and further ingrain social patterns of harm and exploitation, particularly for the burgeoning labour force that depends on recyclables for subsistence living. Turning the waste stream into a profit stream also relies on prison labour in some places, such as in the United States where the federal government operates one of the country's largest electronics recycling programmes. The ongoing corporatisation of recycling, the authors argue further, is devaluing already marginalised populations within the global economy. Highlighting the need to account for the dynamism between social and environmental change within IPE scholarship, the article concludes by underlining the ways in which ‘green commerce’ programmes can shift capital's contradictions from nature onto labour.

Revenue and Profit Implications of Industrial Service Strategies

In many business markets, manufacturers seek service-led growth to secure their existing positions and continue to grow in increasingly competitive environments. Using longitudinal data from 513 German mechanical engineering companies and latent growth curve modeling, this study offers a fine-grained view of the financial performance implications of industrial service strategies. By disentangling the revenue and profit implications of industrial service strategies, findings reveal that such strategies increase both the level and the growth of manufacturing firms’ revenue streams. In contrast, they reduce the level but improve the growth of manufacturers’ profits. Results further suggest that services supporting the clients’ actions (SSC) and services supporting the supplier’s product (SSP) affect performance outcomes in different ways. SSCs directly affect revenue and profit streams. In turn, SSPs display only indirect effects on financial performance mediated through SSCs. A moderator analysis identifies two organizational contingencies that facilitate service business success: Only companies with decentralized decision-making processes and a high share of loyal customers can expect favorable financial results from industrial service strategies. In summary, this research provides significant insights and managerial guidance for turning service strategies into financial successes.

Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?

Real assets are usually valued by computing the stream of profits they can bring to a price-taking firm in a liquid market. This method ignores market fundamentals by assuming that all the relevant information is included in the spot price. Our article analyses the bias resulting from such an approach when the market is imperfectly competitive. We propose a stylised two-period model of the natural gas market with no uncertainty, focusing on strategic interactions between two types of oligopolistic players—pure traders and suppliers with downstream customers—who have access to storage. We show that the true value of storage capacity is not the same for traders and for suppliers. Comparing the latter value with the traditional price-taking valuation reveals a systematic bias that tends to induce underinvestment.

Scholarly Communication: a Lament and a Call for Change

Scholarly Communication:a Lament and a Call for Change Charles B. Lowry, Ph.D. (bio) We are all familiar with the current scholarly communication landscape, but dramatizing the implicit contradictions will point to a "path forward" and point to some remedies. I cannot help but oversimplify this complex landscape. Were it possible for the academy to design a scholarly communication system from scratch, it would not resemble the one we have today, except for two features—it would employ a scheme of vetting for quality, and it would emphasize the value of openness in support of the exchange of scholarly information. The present publishing system is suffering from entropy and is badly endangered. Even ten years ago, this discussion would have been considerably different than today, when we are entering the final stages of a revolution in how we transmit the results of research scholarship and how we look at the full life cycle of scholarly output. The main shift is format transition, illustrated by Reed-Elsevier data. In 2000, 64 percent of its income was derived from print formats, and 22 percent from electronic. That, by 2011, had reversed.1 In simplest terms, there are three separate systems that interact with, but are independent of, one another. They are badly out of sync internally and in the ways they interact. This essay reviews key issues in all three areas—copyright, publishing, and research universities—and outlines potential steps toward achieving a new system. [End Page 237] Intellectual Property—Law and Practice It is within the legal and legislative intellectual property landscape that we find one of the cornerstones of the current conflicts in the scholarly communication system. Research institutions devote minimal resources to either managing the ownership of their copyright intellectual property or to fully exercising their right to educational fair use. By contrast, efforts to maximize the value of copyrights transferred to publishers by researchers is tenacious and relentless and backed by large resources. In particular, we find that actors interested in this side of the equation use several strategies to increase profits. Some come readily to mind: • Lobbying aimed at legislation to increase the profitability of copyrights at the expense of use; • The threat of legal action to dampen legal uses and stimulate alternative methods of access that create new profit streams; and • Lawsuits aimed at minimizing legitimate and legal practices of educational fair use with the full range of legal imagination to find innovative ways to create infringement where there is none. How do these strategies manifest themselves? Trying to recount the history is not possible here. But some examples are worth considering as a prelude to suggesting how these strategies differ from the values of research scholars and the academy, in general, and my view that it is past time for us to reclaim control of the intellectual property created by academic research. First, the system of intellectual property law has evolved through legislation and practice to comprehend fundamentally different and, really, contradictory purposes. I am going to ignore patents and trademarks and confine myself to U. S. copyright, for which the original term fixed by Congress in 1790 was 14 years, after which these works passed into the public domain. There have been four extensions of the copyright term in the last two centuries, and not one was the result of the efforts on the consumer side. To appreciate the imbalance in the way legislation and legal decisions have evolved, it is very important to keep in mind the original wording of Article I of the U.S. Constitution, which established federal authority over copyrights. It reads, "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."2 It seems pretty clear that the purpose of granting limited copyrights was not to ensure profits but to ensure the advancement of knowledge, in other words, the "common good." At least that is what James Madison and other founders explicitly had in mind. The "Copyright Clause is the only clause granting power to Congress for which the means to accomplish its stated purpose are specifically provided. The exact limitations...

Стейкхолдерский подход к управлению, ориентированному на приращение стоимости компании

Автор: Ирина Васильевна Ивашковская НИУ ВШЭ iivashkovskaja@hse.ru
 В статье обоснована оригинальная модель интегрированного управления стоимостью компании, отвечающая принципам создания стоимости для стратегических финансовых и нефинансовых стейкхолдеров компании. Обосновано, что для приращения стоимости для стейкхолдеров необходимо следовать принципу потока положительной экономической прибыли для нефинансовых стейкхолдеров компании. Показано, что интегрированный подход требует на уровне менеджмента внедрениямодели управления на основе стоимости для стейкхолдеров компании(stakeholder value based management,STVM),на уровне совета директоров –моделикорпоративного управления на основе стоимости для стейкхолдеров(stakeholder’s value based corporate governance, STVG). Для мониторинга процесса создания стоимости для стейкхолдеров необходима третья составляющая – стратегические отчеты о стоимости компании.

Derivatives in the wake of disintermediation: a simultaneous equations model of commercial and industrial lending and the use of derivatives by US banks

Before the financial crisis of 2007–2009, the search for new revenue and profit streams by US banks contributed to a long-term trend towards disintermediation. Trading in derivatives might offer an alternative to traditional deposit-taking and lending business as a source of revenue and profit; or it might enable banks to increase their lending more rapidly, through improved risk management. A simultaneous equations model is developed for the growth in commercial and industrial lending, and the use of derivatives. Lending by derivatives users grew more slowly on average, and the likelihood of using derivatives was inversely related to the growth of lending. This suggests the use of derivatives was a substitute for traditional lending business. Dealing in derivatives creates new forms of systemic risk through complex and opaque patterns of exposure. The empirical results suggest a continuing need for careful regulatory oversight, and more transparent disclosure of banks’ derivatives exposures.

Validation of the IS Impact Model for Measuringthe Impact of e-Learning Systems in KSA Universities StudentPerspective

The IS-Impact Measurement Model, developed by Gable, Sedera and Chan in 2008, represents the to-date and expected stream of net profits from a given information system (IS), as perceived by all major user classes. Although this model has been stringently validated in previous studies, its generalisability and verified effectiveness are enhanced through this new application in e-learning. This paper focuses on the re-validation of the findings of the IS-Impact Model in two universities in the Kingdom of Saudi Arabia (KSA). Among the users of 2 universities e-learning systems, 528 students were recruited. A formative validation measurement with SmartPLS, a graphical structural equation modelling tool was used to analyse the collected data. On the basis of the SmartPLS results, as well as with the aid of data-supported IS impact measurements and dimensions, we confirmed the validity of the IS-Impact Model for assessing the effect of e-learning systems in KSA universities. The newly constructed model is more understandable, its use was proved as robust and applicable to various circumstances.