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Copyright © 2011 by Harish Vadada
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As a technologist in the wireless industry for over a decade I have been flummoxed multiple times at the financial terms and metrics that get mentioned. Hence, I decided to create this eBook to address all the wireless financial terms and more to demystify the wireless metrics for a layman, having seen the business in motion as an insider. The metrics described here are used as a standard to compare the profitability and health of a network operator. My goal is to de‐mystify the business processes and aura surrounding the buzzwords that are used in the wireless business. I attribute this drive of mine to all the professors and teachers that I have associated with in my life. They had made learning fun and in the process embedding in me the bug of lifelong association of learning, teaching and mentoring. I come from a family of teachers – my grandfather was a teacher, my dad’s first job was a teacher and he became a teacher after he retired from the corporate world. I attribute this passion for sharing knowledge for being in my ‘genes’. And I fuel this passion of sharing my knowledge online through my blog – www.telecom‐cloud.net as well as through a Social Training network – www.gyanfinder.com of which I am a co‐founder. I believe in Keeping it – Simple, honest and free! Please send me suggestions and improvements and let me know if I can help you in your endeavor.
To my parents who made me; and my wife and kids who sustain me.
ACSI – (American Customer Satisfaction Index) Created by the National Quality Research Center at the University of Michigan. ACSI reports scores on a 0‐100 scale at the national level and produces indexes for 10 economic sectors, 47 industries (including e‐commerce and e‐business), more than 225 companies, and over 200 federal or local government services. In addition to the company‐level satisfaction scores, ACSI produces scores for the causes and consequences of customer satisfaction and their relationships. The measured companies, industries, and sectors are broadly representative of the U.S. economy serving American households. ACSI releases results on a monthly basis to bring stakeholders in‐depth coverage of various sectors of the economy throughout the entire calendar year. The national index is updated quarterly, factoring in ACSI scores from more than 225 companies in 47 industries; 2 local government services; and over 200 programs, services, and websites offered by 130 federal agencies.(URL: www.theacsi.org/) _____________________________________________________________________________________ AAL – (Add‐a‐Line) Add another phone service line to an existing account. _____________________________________________________________________________________ Advantages of Proposition – Unique Selling Proposition (USP), competitive advantage for the seller to stand apart from competition. It is a marketing concept that was first proposed as a theory to explain a pattern among successful advertising campaigns of the early 1940s. It states that such campaigns made unique propositions to the customer and that this convinced them to switch brands. The term was invented by Rosser Reeves of Ted Bates & Company. Today the term is used in other fields or just casually to refer to any aspect of an object that differentiates it from similar objects. Pinpointing USP requires some hard soul‐searching and creativity. One way to start is to analyze how other companies use their USPs to their advantage. This requires careful analysis of other companies' ads and marketing messages. A careful analysis of what they say they sell, not just their product or service characteristics, we can learn a great deal about how companies distinguish themselves from competitors e.g. Neiman Marcus sells luxury, while Wal‐Mart sells bargains. _____________________________________________________________________________________ Amortization – depreciation of intangible assets. When used in the context of a home purchase, amortization is the process by which the loan principal decreases over the life of the loan. With each mortgage payment that is made, a portion of the payment is applied towards reduction of the principal and another portion of the payment is applied towards paying the interest on the loan. While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets. The amortization calculator formula is:
Where: P is the principal amount borrowed, A is the periodic payment, r is the periodic interest rate divided by 100 (annual interest rate also divided by 12 in case of monthly installments), and n is the total number of payments (for a 30‐year loan with monthly payments n = 30 × 12 = 360). Negative amortization (also called deferred interest) occurs if the payments made do not cover the interest due. The remaining interest owed is added to the outstanding loan balance, making it larger than the original loan amount. _____________________________________________________________________________________ AMPU – (Average Margin per user) AMPU stands for Average Margin per User and is the difference between the cost of serving a user and the revenue that the user generates. AMPU can be positive or negative. Higher the AMPU, the greater the profit. AMPU = ARPU – Average Cost per User Or AMPU = Total Margin/ Number of Subscribers AMPU takes into consideration both Revenue and Cost. Types of revenue factors. Non Recurring Revenue: These are the revenue sources that are one time charge for the customer and are to be recovered as soon as the customer enters the network. Activation Charges Security Deposit Recurring Revenue: These are recovered as and when the customer makes a usage or avail off certain Rental services. _____________________________________________________________________________________ ARPU – (Average Revenue per User) Service Revenue divided by number of subscribers. ARPU is commonly calculated by dividing the aggregate amount of revenue by the total number of users who provide that revenue. Other measurements are tracked as well, including the revenue generated by new customers as compared with the revenue generated by existing customers and the revenue generated by new services as compared with the revenue generated by existing services. ARPU is not the best indicator of carrier’s health. Average Margin Per User (AMPU) or Average Profit Per User (APPU) per month or over the life of the subscriber are better measures of carrier’s strategy and execution, however, since such details are not public knowledge, ARPU trending over time provides a
good glimpse into how things are progressing with a carrier or within a given market. Higher wireless data ARPU is directly correlated to a company's success in selling additional services to individual customers using creative business models that empower the entire ecosystem, device customization that enhances user experience and brand loyalty, and applications and services that benefit the customers. Growth in ARPU is likely to be more profitable than increasing the number of customers; the increases in costs are likely to be less than those incurred by raising the number of customers. Blended ARPU: weighted average ARPU of all customers (eg. Post‐paid and Pre‐paid customers or Voice and Data customers) _____________________________________________________________________________________ Asset Turnover – Sales divided by Average Total Assets. This measures the efficiency of a company’s use of its assets in generating sales revenue. There are a few variations on this, depending on what measure of assets is used. The most obvious is total assets, i.e., fixed assets + current assets. This measures how many dollars in sales is generated for each dollar invested in assets.
Revenue obviously comes from the income statement Net assets = total assets less total liabilities The resulting figure is expressed as a “number of times per year” From an investor's point of view, it can be argued that current liabilities should be deducted from the amount of assets used. Investors are concerned with returns on their investment; therefore the funding of current assets from current liabilities can be ignored. Taking this further what investors care about is the sales generated by their investment, i.e. equity + debt. This leaves us using the same denominator as ROCE (return on capital employed). Using this definition thereby gives us a nice decomposition: ROCE = EBIT margin ×asset turnover _____________________________________________________________________________________ Bad Debt ‐ portion of receivables that can no longer be collected. Bad debt in accounting is considered an expense. This usually occurs when the debtor has declared bankruptcy or the cost of pursuing further action in an attempt to collect the debt exceeds the debt itself. When debts are classified as bad, they are charged as a cost on the profit and loss account. Because a certain level of bad debt is expected, it is common practice for companies to make a provision for the amount of debt that is expected to become bad.
_____________________________________________________________________________________ Basis Points (bps) – A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. In most cases, it refers to changes in interest rates and bond yields. For example, if the Federal Reserve Board raises interest rates by 25 basis points, it means that rates have risen by 0.25% percentage points. If rates were at 2.50%, and the Fed raised them by 0.25%, or 25 basis points, the new interest rate would be 2.75%. In the bond market, a basis point is used to refer to the yield that a bond pays to the investor. For example, if a bond yield moves from 7.45% to 7.65%, it is said to have raised 20 basis points. The usage of the basis point measure is primarily used in respect to yields and interest rates, but it may also be used to refer to the percentage change in the value of an asset such as a stock. It may be heard that a stock index moved up 134 basis points in the day's trading. This represents a 1.34% increase in the value of the index. 1 basis point = 1 permyriad = one one-hundredth percent 1 bp = 1/100% = 0.01% = 0.1‰ = 10−4 = 1⁄10000 = 0.0001 It is frequently, but not exclusively, used to express differences in interest rates of less than 1% per year. For example, a difference of 0.10% is equivalent to a change of 10 basis points (e.g. a 4.67% rate increases by 10 basis points to 4.77%). Like percentage points, basis points avoid the ambiguity between relative and absolute discussions about interest rates by dealing only with the absolute change in numeric value of a rate. For example, if a report says there has been a "1% increase" from a 10% interest rate, this could refer to an increase either from 10% to 10.1% (relative, 1% of 10%), or from 10% to 11% (absolute, 1% plus 10%). If, however, the report says there has been a "10 basis point increase" from a 10% interest rate, then we know that the interest rate of 10% has increased by 0.10% (the absolute change) to a 10.1% rate. It is common practice in the financial industry to use basis points to denote a rate change in a financial instrument, or the difference (spread) between two interest rates, including the yields of fixed‐income securities. _____________________________________________________________________________________ Below the Line – expenses such as depreciation that are not directly controllable by a business owner, therefore excluded from certain P&Ls. Accounting: Used to characterize items in an account that are excluded from the account total, such as appropriations and extraordinary items that have no effect on the profit or loss in the current accounting period.
Advertising: Used to characterize promotional methods (such as catalog marketing, direct marketing, and trade fair marketing) those are under the direct control of the marketer (client) and earn no commissions for the advertising agency. _____________________________________________________________________________________ Benchmarking – process of comparing one’s business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time, and cost. Improvements from learning mean doing things better, faster, and cheaper. Benchmarking involves looking outward (outside a particular business, organization, industry, region or country) to examine how others achieve their performance levels and to understand the processes they use. In this way benchmarking helps explain the processes behind excellent performance. When the lessons learnt from a benchmarking exercise are applied appropriately, they facilitate improved performance in critical functions within an organization or in key areas of the business environment. Application of benchmarking involves four key steps: Understand in detail existing business processes Analyze the business processes of others Compare own business performance with that of others analyzed Implement the steps necessary to close the performance gap Benchmarking should not be considered a one‐off exercise. To be effective, it must become an ongoing, integral part of an ongoing improvement process with the goal of keeping abreast of ever‐improving best practice. Strategic Benchmarking: Where businesses need to improve overall performance by examining the long‐ term strategies and general approaches that have enabled high‐performers to succeed. It involves considering high level aspects such as core competencies, developing new products and services and improving capabilities for dealing with changes in the external environment. Performance or Competitive Benchmarking: Businesses consider their position in relation to performance characteristics of key products and services. Benchmarking partners are drawn from the same sector. This type of analysis is often undertaken through trade associations or third parties to protect confidentiality. Process Benchmarking: Focuses on improving specific critical processes and operations. Benchmarking partners are sought from best practice organizations that perform similar work or deliver similar services. Functional Benchmarking: Businesses look to benchmark with partners drawn from different business sectors or areas of activity to find ways of improving similar functions or work processes. This sort of benchmarking can lead to innovation and dramatic improvements. Improving activities or services for which counterparts do not exist.
Internal Benchmarking: Involves benchmarking businesses or operations from within the same organization (e.g. business units in different countries). The main advantage of internal benchmarking is that access to sensitive data and information is easier; standardized data is often readily available; and, usually less time and resources are needed. External Benchmarking: Involves analyzing outside organizations that are known to be best in class. External benchmarking provides opportunities of learning from those who are at the "leading edge". This type of benchmarking can take up significant time and resource to ensure the comparability of data and information, the credibility of the findings and the development of sound recommendations. International Benchmarking: Best practitioners are identified and analyzed elsewhere in the world, perhaps because there are too few benchmarking partners within the same country to produce valid results. Globalization and advances in information technology are increasing opportunities for international projects. However, these can take more time and resources to set up and implement and the results may need careful analysis due to national differences. _____________________________________________________________________________________ Blue Ocean Strategy – high growth and profit can be generated by creating new demand in an uncontested market space of industries and/or markets not in existence today, a “Blue Ocean,” instead of competing head to head for known customers in an existing industry, a “Red Ocean.” Blue oceans, in contrast, denote all the industries not in existence today—the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. Blue Ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. Cirque du Soleil ‐ an example of creating a new market space, by blending opera and ballet with the circus format while eliminating star performer and animals. (URL: http://www.blueoceanstrategy.com/) _____________________________________________________________________________________ Business Model – describes the rationale of how an organization creates, delivers, and captures value. The process of business model construction is part of business strategy. A business model is used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies. Hence, it gives a complete picture of an organization from a high‐ level perspective. Whenever a business is established, it either explicitly or implicitly employs a particular business model that describes the architecture of the value creation, delivery, and capture mechanisms employed by the business enterprise. The essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit: it thus reflects management’s hypothesis about what customers want, how they
want it, and how an enterprise can organize to best meet those needs, get paid for doing so, and make a profit. A business model draws on several business processes including economics, entrepreneurship, finance, marketing, operations and strategy. Some of the main components addressed by a business model are, Value Proposition: A description of a customer problem and how the product looks to mitigate this. Market Segment: A group of customers that is targeted by the ensuing product. Value Chain Structure: The company's position and activities in the value chain and how the firm looks to capture this value chain. Revenue generation and margins: How revenue for the company is generated ‐ sales, subscriptions, support and the cost structure associated as well as the targeted profit. Competitive Analysis and Strategy: Identify existing competitors and how the company will address to develop a sustainable advantage over competitors. _____________________________________________________________________________________ Buyer’s Remorse – Customer cancels service without incurring ETF within the remorse period & has returned the device. It may stem from fear of making the wrong choice, guilt over extravagance, or a suspicion of having been overly influenced by the seller. The anxiety may be rooted in various factors, such as: the person's concern they purchased the wrong product, purchased it for too high a price, purchased a current model now rather than waiting for a newer model, purchased in an ethically unsound way, purchased on credit that will be difficult to repay, or purchased something that would not be acceptable to others. A prospective buyer often feels positive emotions associated with a purchase (desire, a sense of heightened possibilities, and an anticipation of the enjoyment that will accompany using the product, for example); afterwards, having made the purchase, they are more fully able to experience the negative aspects: all the opportunity costs of the purchase, and a reduction in purchasing power. Also, before the purchase, the buyer has a full array of options, including not purchasing; afterwards, their options have been reduced to: Continuing with the purchase, surrendering all alternatives Renouncing the purchase Buyer's remorse can also be caused or increased by worrying that other people may later question the purchase or claim to know better alternatives. _____________________________________________________________________________________ CAGR – (Compound Annual Growth Rate) annualized gain of an investment over a given time period. CAGR is often used to describe the growth over a period of time of some element of the business, for example revenue, units delivered, registered users, etc.
CAGR is the best formula for evaluating how different investments have performed over time. Investors can compare the CAGR in order to evaluate how well one stock performed against other stocks in a peer group or against a market index. The CAGR can also be used to compare the historical returns of stocks to bonds or a savings account. When using the CAGR, it is important to remember two things: the CAGR does not reflect investment risk, and the same time periods must be used. Investment returns are volatile, meaning they can vary significantly from one year to another, and CAGR does not reflect volatility. CAGR is a pro forma number that provides a "smoothed" annual yield, so it can give the illusion that there is a steady growth rate even when the value of the underlying investment can vary significantly. This volatility, or investment risk, is important to consider when making investment decisions. _____________________________________________________________________________________ Cannibalization – reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer. If a company is practicing market cannibalization, it is eating its own market. For example, say Pepsi puts out a new product called Pepsi chill, and customers buy Pepsi chill instead of regular Pepsi. Although sales may be up for the new product, these sales may be eating into Pepsi's original market, in which case the overall company sales would not be increasing. Because of the possibility of market cannibalization, investors should always dig deeper, analyzing the source and impact of the success of a company's new but similar product. Identification of cannibalization is by no means clear‐cut and needs to take into account of the dynamics of the market. This needs examination by three methods. Gains loss analysis Duplication of purchase Deviations from expected share movements _____________________________________________________________________________________ Capacity Charge – cost of sustaining and expanding a wireless carrier’s infrastructure, can be assigned to users based on bandwidth usage or other methodology. The capacity charge, sometimes called Demand Charge, is assessed on the amount of capacity being purchased. _____________________________________________________________________________________ Capacity Utilization – extent to which an enterprise actually uses its productive capacity. It refers to the relationship between actual output that 'is' produced with the installed equipment and the potential output which 'could' be produced with it, if capacity was fully used.
_____________________________________________________________________________________ CAPEX/Capex (Capital Expenditure) – investment to create future benefits. A capital expenditure is incurred when a business spends money either to buy assets or to add to the value of an existing asset with a useful life that extends beyond the taxable year. Also referred to as Capital Investments, for tax purposes, CAPEX is a cost which cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question. Included in capital expenditures are amounts spent on: Acquiring fixed, and in some cases, intangible assets Repairing an existing asset so as to improve its useful life Upgrading an existing asset if its results in a superior fixture Preparing an asset to be used in business Restoring property or adapting it to a new or different use Starting or acquiring a new business _____________________________________________________________________________________ Cap-and-trade – A market mechanism designed to reduce the cost of cutting pollution. The regulator caps pollution at a level below business‐as‐usual and allocates allowances to industry up to but not exceeding the cap. Covered entities must have their emissions independently verified and must surrender allowances to match their annual emissions each year, normally with penalties for non‐ compliance. Since the overall cap is below actual emissions, this cuts the overall level of pollution and creates a scarcity of allowances, and therefore a monetary value. Those with a surplus may sell them to those with a shortfall, creating a tradable market for allowances. _____________________________________________________________________________________ Capital Efficiency – ratio of output divided by CAPEX. The larger the ratio, the better the capital efficiency. The basic formula for calculating capital efficiency involves dividing the average value of output by the rate of expenditure for the same period of time. Output divided by expenditure will help to make it clear if a venture is currently generating a modest profit, is approaching a point where profitability will be realized once expenditures are decreased, or if there is no real value in continuing to fund the venture. While the latter situation is one to avoid at all costs, the two former possible states are not situations that should be considered negative. Because many business ventures begin with a higher level of capital expenditures, a project rarely realizes a profit in the first stages of the operation. The expectation is that after the initial launch, some expenses will be settled and not be recurring. As the rate of expenditure decreases and the output or production increases, the opportunity for profit expands. For this reason, periodic calculation of the capital efficiency of a project can help investors know that the project is heading in the right direction.
_____________________________________________________________________________________ Capital Intensity – A business process or an industry that requires large amounts of money and other financial resources to produce a good or service. A business is considered capital intensive based on the ratio of the capital required to the amount of labor that is required. Some industries commonly thought of as capital intensive include oil production and refining, telecommunications and transports such as railways and airlines. Another example is the auto industry which is capital‐intensive because, in order to make cars, it requires a lot of workers and expensive equipment that must be properly maintained. Another, smaller scale example is a dentist office, which requires expensive equipment and materials. In order to stay afloat, capital intensive companies need either consistently large profits or inexpensive credit. _____________________________________________________________________________________ Capital Injection – An investment of capital generally in the form of cash or equity ‐ and rarely, assets ‐ into a company or institution. The word "injection" connotes that the company or institution into which capital is being invested may be floundering or in some distress, although it is not uncommon for the term to also refer to investments made in a start‐up or new company. Capital injections in the private sector are usually made in exchange for an equity stake in the company into which capital is being injected. However, governments may make capital injections into struggling sectors to assist in their stabilization in the larger public interest; in such cases, a government may or may not negotiate an equity stake in recipient companies or institutions. _____________________________________________________________________________________ Cash Cost Per User (CCPU) – Measure of the monthly cost to serve a customer, derived by dividing total operating costs by average number of users. It is a measure of the monthly costs to operate the business on a per subscriber basis consisting of costs of service and operations, and general and administrative expenses of consolidated statement of operations, plus handset subsidies on equipment sold to existing subscribers, less stock‐based compensation expense. _____________________________________________________________________________________ Churn – average number of customers discontinuing service during a period. The broad definition of churn is the action that a customer’s telecommunications service is canceled. This includes both service‐ provider initiated churn and customer initiated churn. An example of service‐provider initiated churn is a customer’s account being closed because of payment default. Customer initiated churn is more complicated and the reasons behind vary. Examples of reason codes are: unacceptable call quality, more favorable competitor’s pricing plan, misinformation given by sales, customer expectation not met, billing problem, moving, and change in business, and so on. Churn can be shown as follows:
Monthly Churn = (C0 + A1 - C1) / C0 Where: C0 = Number of customers at the start of the month C1 = Number of customers at the end of the month A1 = Gross new customers during the month As an example, suppose a carrier has 100 customers at the start of the month, acquires 20 new customers during the month, and has 110 customers at the end of the month. It must have lost 10 customers during the month, 10 percent of the customers it had at the start of the month. According to the formula: Monthly Churn = (100 + 20 - 110) / 100 = 10% In an intensely competitive environment, customers receive numerous incentives to switch and encounter numerous disincentives to stay. Price: Particularly in the wireless and long‐distance markets, carriers often offer pricing promotions, such as relatively low monthly fees, high‐volume offerings (fixed number of minutes at a reasonable fee per month), and low rates per‐minute. Service quality: Lack of connection capabilities or quality in places where the customer requires service can cause customers to abandon their current carrier in favor of one with broader reach or a more robust network. Fraud: Customers may attempt to “game the system” by generating high usage volumes and avoiding payment by constantly churning to the next competitor. Lack of carrier responsiveness: Slow or no response to customer complaints is a sure path to a customer relations disaster. Broken promises, long hold times when the customer reports problems, and multiple complaints related to the same issue are sure to lead to customer churn. Lack of features: Customers may switch carriers for features not provided by their current carrier. This might include the inability of a particular carrier to be the “one‐stop shop” for the entire customer’s Communications needs. New technology or product introduced by competitors: New technologies such as high‐speed data or bundled high‐value phone offerings like iPhone —create significant opportunities for carriers to entice competitors’ customers to switch. Billing or service disputes: Billing errors, incorrectly applied payments, and disputes about service disruptions can cause customers to switch carriers. Depending on the situations, such churn may be avoidable. _____________________________________________________________________________________ COGS – (Cost of Goods Sold) direct costs attributable to the production of products or services sold by a company. It includes cost of materials and labor used in creation, as well as indirect expenses such as distribution costs and sales force costs. For example, the COGS for a PC maker would include the
material costs for the parts that go into making the PC along with the labor costs used to put the computer together. The cost of sending the computer to sellers like Bestbuy and the cost of the labor used to sell them would be excluded. The exact costs included in the COGS calculation will differ from one type of business to another. The cost of goods attributed to a company’s products is expensed as the company sells these goods. There are several ways to calculate COGS but one of the more basic ways is to start with the beginning inventory for the period and add the total amount of purchases made during the period then deducting the ending inventory. This calculation gives the total amount of inventory or, more specifically, the cost of this inventory, sold by the company during the period. _____________________________________________________________________________________ Competitive Advantage – A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. In other words it is a position of a company in a competitive landscape that allows them to earn return on investments higher than the cost of investments. Differentiation Strategy: This strategy involves selecting one or more criteria used by buyers in a market ‐ and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product ‐ often to reflect the higher production costs and extra value‐added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products. eg. Porsche Cost Leadership Strategy: With this strategy, the objective is to become the lowest‐cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimizing costs. If the achieved selling price can at least equal (or near) the average for the market, then the lowest‐cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large‐scale businesses offering "standard" products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low‐cost leader will also discount its product to maximize sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. eg. Wal‐Mart, Dell Computers Differentiation Focus Strategy: In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants ‐ in other words that there is a valid basis for differentiation ‐ and that existing competitor products are not meeting those needs and wants. eg. Perfumania, All things remembered Cost Focus Strategy: Here a business seeks a lower‐cost advantage in just one or a small number of market segments. The product will be basic ‐ perhaps a similar product to the higher‐priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me‐ too's". eg. Many smaller retailers featuring own‐label or discounted label products.
_____________________________________________________________________________________ Contra Account – account on a financial statement (balance sheet and P&L) that offsets the activity of a related and corresponding account. When it comes to an example of how one account offsets another account, perhaps the easiest illustration would be to take an account that records accumulated amortization into account. In order to balance the debit position associated with the amortization, an opposite or contra account with the balance sheet structure will represent a credit that essentially offsets the amortized figure. This helps to maintain a balance between debits and credits in the bookkeeping process. However, it must be understood that the concept of the contra account does not always involve a credit offsetting a debit. The basic function of a contra account is simply to be an opposite of another account. This means that an account showing a debit would be a type of contra account usually known as a contra‐liability account. By the same token, an account with a credit would be balanced by a contra‐ asset account. _____________________________________________________________________________________ Core – accounts and services for customers with good credit who are billed after services are received. _____________________________________________________________________________________ Cost-Benefit Analysis – economic tool that weighs the total expected costs against the total expected benefits of one or more actions in order to choose the best or most profitable option. Cost Benefit Analysis is an economic tool to aid decision‐making, and is typically used by organizations to evaluate the desirability of a given intervention in markets. Cost‐benefit analysis is mostly, but not exclusively, used to assess the value for money of very large private and public sector projects. This is because such projects tend to include costs and benefits that are less amenable to being expressed in financial or monetary terms (e.g. environmental damage), as well as those that can be expressed in monetary terms. Private sector organizations tend to make much more use of other project appraisal techniques, such as rate of return, where feasible. The practice of cost‐benefit analysis differs between countries and between sectors (e.g. transport, health) within countries. Some of the main differences include the types of impacts that are included as costs and benefits within appraisals, the extent to which impacts are expressed in monetary terms and differences in discount rate between countries. _____________________________________________________________________________________ Covered POP - Population covered by a wireless network’s coverage footprint. _____________________________________________________________________________________ CPGA - Cost Per Gross Add. A ratio used to quantify the costs of acquiring one new customer to a business. Often, the CPGA ratio is used by companies that offer subscription services to clients, such as
wireless companies and satellite radio companies.
_____________________________________________________________________________________ Customer Lifetime Value (CLV) – a financial concept that represents how much each customer is worth in dollar terms, and therefore exactly how much a company should spend to acquire and keep each customer. CLV is calculated using a model and inputting various estimates and simplifying assumptions. In reality, there are several variations of CLV available due to the complexity and uncertainty of customer behavior.
In wireless, CLV can also be: CLV = ((ARPU – Variable CCPU) x Tenure) – (SAC + Capacity Charge) CLV in wireless:
CLV (customer lifetime value) calculation process consists of four steps: Forecasting of remaining customer lifetime in years Forecasting of future revenues year-by-year, based on estimation about future products purchased and price paid Estimation of costs for delivering those products Calculation of the net present value of these future amounts Forecasting accuracy and difficulty in tracking customers over time may affect CLV calculation process _____________________________________________________________________________________ DARPU – Data Average Revenue per User. Total Data Revenue divided by number of subscribers. _____________________________________________________________________________________
DCF (Discounted Cash Flow) - method of valuing a project, company, or asset using Time Value of Money. All future cash flows are estimated and discounted to give their Present Values (PVs). The sum of all future cash flows, both incoming and outgoing, is the Net Present Value (NPV), which is taken as the value of the cash flows. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one. Calculated as:
Also known as the Discounted Cash Flows Model. The purpose of DCF analysis is just to estimate the money to be received from an investment and to adjust for the time value of money. _____________________________________________________________________________________ Depreciation – accounting method to attribute the cost of an asset over the asset’s useful life. Amortization is the term usually used for depreciation of intangible assets. Depreciation is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn. For example, if a company buys a piece of equipment for $10 million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year, the company will expense $1000, 000 (assuming straight‐line depreciation), which will be matched with the money that the equipment helps to make each year. _____________________________________________________________________________________ Discount Rate – used in financial calculations to bring the value of anticipated future cash flows to the present. Often it is chosen to be equal to the cost of capital. Some adjustment may be made to the discount rate to take account the risks associated with uncertain cash flows. _____________________________________________________________________________________ Disruptive App – An app which takes away potential revenue from its carrier. For example, Skype may lower a carrier’s airtime and/or long distance revenue even though its bandwidth costs the carrier more in capacity charges/opportunity costs. _____________________________________________________________________________________
Disruptive Technology – innovations that improve a product or service in ways that the market does not 3expect, typically by lowering price or designing for a different set of consumers. Example WiMAX which accelerated the development of 3GPP‐LTE. _____________________________________________________________________________________ Earnings Per Share (EPS) – Earnings returned on an initial investment amount. The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. Calculated as:
When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number. _____________________________________________________________________________________ EBITDA ‐ Earnings before interest, taxes, depreciation and amortization. A metric that can be used to evaluate a company's profitability. EBIT or DA independently can denote those components. Externally reported as OIBDA (Operating Income before Depreciation and Amortization) with minor definitional differences. EBITDA is calculated by taking net income and adding interest, taxes, depreciation and amortization expenses back to it. EBITDA is used to analyze a company's operating profitability before non‐operating expenses (such as interest and "other" non‐core expenses) and non‐cash charges (depreciation and amortization). Factoring out interest, taxes, depreciation and amortization can make even completely unprofitable firms appear to be fiscally healthy. A look back at the dotcoms provides countless examples of firms that had no hope, no future and certainly no earnings, but became the darlings of the investment world. The use of EBITDA as measure of financial health made these firms look attractive. EBITDA numbers are easy to manipulate. If fraudulent accounting techniques are used to inflate revenues and interest, taxes, depreciation and amortization are factored out of the equation, almost any company will look great. EBITDA is a financial calculation that is NOT regulated by GAAP (Generally Accepted Accounting Principles) and therefore can be manipulated to a company's own ends. _____________________________________________________________________________________ EBITDA Margin – EBITDA divided by Total Revenue. Conceptually, EBITDA Margin represents what percentage is retained from the overall amount received. A measurement of a company's operating
profitability. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue. Because EBITDA excludes depreciation and amortization, EBITDA margin can provide an investor with a cleaner view of a company's core profitability. _____________________________________________________________________________________ Economics of Strategy – economics book by Besanko, Dranove, and Shanley that applies modern economic principles to firms’ strategic positions. _____________________________________________________________________________________ Economies of Density – increase in output resulting in a less than proportional increase in total costs. _____________________________________________________________________________________ Economies of Scale – cost advantages a business obtains due to growth. Factors that cause a producer’s average cost per unit to fall as scale is increased. The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. There are two types of economies of scale: External economies - the cost per unit depends on the size of the industry, not the firm. Internal economies - the cost per unit depends on size of the individual firm. _____________________________________________________________________________________ Economies of Scope – conceptually similar to Economies of Scale. Whereas economies of scale refer to efficiencies associated with supply side changes, Economies of Scope refer to efficiencies associated with demand side changes. Examples include increasing or decreasing the scope of marketing and distribution of different types of products. Economies of Scope are the main reason for strategies such as product bundling, product lining, and family branding. The average total cost of production decreases as a result of increasing the number of different goods produced. _____________________________________________________________________________________ Elasticity – ratio of the percentage change in one variable to another variable. An elasticity of 1 means that a 1% change in something causes a 1% change in something else. It is a tool for measuring the responsiveness of a function to changes in parameters in a unit less way. Frequently used elasticities include price elasticity of demand, price elasticity of supply, income elasticity of demand, elasticity of substitution between factors of production and elasticity of intertemporal substitution. Elasticity is one of the most important concepts in neoclassical economic theory. It is useful in understanding the incidence of indirect taxation, marginal concepts as they relate to the theory of the firm and distribution of wealth and different types of goods as they relate to the theory of consumer
choice. Elasticity is also crucially important in any discussion of welfare distribution, in particular consumer surplus, producer surplus, or government surplus. _____________________________________________________________________________________ EOY –End of Year. Sometimes referred to as EY. _____________________________________________________________________________________ Equipment Installment Plan (EIP) – Mobile Operator financing in lieu of subsidizing handsets. An iPhone offered by an operator costs much less than buying from Apple without a data service. _____________________________________________________________________________________ Family Branding – marketing strategy that involves selling several related products under one brand name. A family brand name is used for all products. By building customer trust and loyalty to the family brand name, all products that use the brand can benefit. Some good examples include brands in the food industry, including Kellogg’s, Heinz and Del Monte. Of course, the use of a family brand can also create problems if one of the products gets bad publicity or is a failure in a market. This can damage the reputation of a whole range of brands. _____________________________________________________________________________________ Financial Accounting Standards Board (FASB) – It is a private, not‐for‐profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public's interest. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. It was created in 1973, replacing the Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB) of the American Institute of Certified Public Accountants (AICPA). The FASB is not a governmental body and its mission is "to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information." To achieve this, FASB has five goals: Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability, and on the qualities of comparability and consistency. Keep standards current to reflect changes in methods of doing business and in the economy. Consider promptly any significant areas of deficiency in financial reporting that might be improved through standard setting. Promote international convergence of accounting standards concurrent with improving the quality of financial reporting. Improve common understanding of the nature and purposes of information in financial reports. _____________________________________________________________________________________
Fixed Cost – business expense that is not dependent on the activities of the business. They tend to be time‐related, such as salaries or rents. An example of a fixed cost would be a company's lease on a building. If a company has to pay $12,000 each month to cover the cost of the lease but does not manufacture anything during the month, the lease payment is still due in full. _____________________________________________________________________________________ Flywheel – additive effect of many small initiatives. The Flywheel concept is from Jim Collins’ “Good to Great.” It is a concept that is based on concept to apply immense force to rotate the ‘Flywheel’ and it doesn't move but perseverance to move it inch by an inch still persists. While efforts continue to apply force to it and finally the efforts pay off by making it complete a turn. Nobody notices but the person who is turning the wheel knows what they are up to. They continue applying force in the same direction until it attains a speed which people stop to notice. They believe that a massive restructuring program must have gone under to bring it to such speed. _____________________________________________________________________________________ Forecast (FC) ‐ detailed estimate of the expected financial position and results of operations and cash flows based on expected conditions. Forecasts are made for all GL accounts in conjunction with the budget, and updated monthly. _____________________________________________________________________________________ “Friends & Family” – Mobile Network Operators plan that gives customer’s unlimited calling to a select group of numbers. They are popularly known as ‘my circle’ or ‘myfaves’ as branded by different operators. _____________________________________________________________________________________ FTE – Full‐Time Equivalent is a way to measure a worker's involvement in a project. An FTE of 1.0 means that the person is equivalent to a full‐time worker at 40 hours per week, while an FTE of 0.5 signals that the worker is only half‐time at 20 hours per week. _____________________________________________________________________________________ Future Value (FV) – future sum of money that a given amount of money is worth at a specified time in the future, assuming a certain interest rate or ROI. FV=PV (1+i) n Where, FV – Future value PV – Present Value i – Annual interest rate There are two ways to calculate FV:
For an asset with simple annual interest: = Original Investment x (1+(interest rate*number of years)) For an asset with interest compounded annually: = Original Investment x ((1+interest rate)^number of years) _____________________________________________________________________________________ GAAP – Generally Accepted Accounting Principles. The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. GAAP derives, in order of importance, from: Issuances from an authoritative body designated by the American Institute of Certified Public Accountants(AICPA) Council (for example, the Financial Accounting Standards Board Statements, AICPA Accounting Principles Board Opinions, and AICPA Accounting Research Bulletins); AICPA issuances such as AICPA Industry Guides Industry practice Para-accounting literature in the form of books and articles. _____________________________________________________________________________________ General Ledger (GL) ‐ Main accounting record of a business. It includes accounts for current assets, fixed assets, liabilities, revenue and expense items, gains and losses. The general ledger is a summary of all of the transactions that occur in the company. It is built up by posting transactions recorded in the general journal. The two primary financial documents of any company are their balance sheet and the profit and loss statement, and both of these are drawn directly from the company’s general ledger. The order of how the numerical balances appear is determined by the chart of accounts, but all entries that are entered will appear. The general ledger accrues the balances that make up the line items on these reports, and the changes are reflected in the profit and loss statement as well. _____________________________________________________________________________________ Gross Adds (GA) – new subscribers with a unique log‐in ID and account combination or SIM card, a "gross add" is the industry measure for acquiring a new customer by purchase of a plan and a phone. The number of new subscribers, or gross adds, minus the number of customers that drop service or churn. Gross Adds = Beginning customers – Churn + Net Adds _____________________________________________________________________________________ Gross Margin – difference between revenue and production costs, including overhead. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, essentially).
Gross margin = (Revenue - Cost of goods sold) / Revenue Cost of sales (also known as cost of goods sold or COGS) includes variable costs and fixed costs directly linked to the sale, such as material costs, labor, supplier profit, shipping‐in costs (cost of getting the product to the point of sale, as opposed to shipping‐out costs which are not included in COGS), etc. It does not include indirect fixed costs like office expenses, rent, administrative costs, etc. _____________________________________________________________________________________ Halo Effect – the first traits recognized influence interpretation and perception of later traits because of expectation. The halo effect is very common among physically attractive individuals. Physically attractive individuals are assumed to possess more socially desirable traits, live happier lives, and become more successful than unattractive people. Edward Thorndike was the first to support the halo effect with empirical research. Thorndike’s main contribution to psychology was the creation of many theories to educational psychology. _____________________________________________________________________________________ Handset Seeding – giveaways of handsets to developers with the expectation that they will develop apps. For example concerned many of its developers aren't up to speed with Android 2.0, Google had emailed studios informed them they could receive a free Motorola Droid or Nexus One handset presently as part of the firm's Device Seeding Program. Mobile operators do the same by seeding the market in expectation of launching a new technology, another example was seeding data capable phones before data services were launched during GSM days. _____________________________________________________________________________________ Hedgehog Concept – a Venn diagram of three intersecting circles can be drawn for “good‐to‐great” companies that represent: 1. What they are deeply passionate about, 2. What they can be the best in the world at 3. What best drives the economic engine.
Under this concept, good‐to‐great companies turn down opportunities that fail the Hedgehog test. The Hedgehog concept is from Jim Collins’ “Good to Great.” Consistency is key in a business. Although it is okay to change directions if the current plan is not working, this shouldn't be a common occurrence. The
hedgehog concept shows many benefits for leaders who plan first, and then act. Consider how any changes, no matter how small, might affect the company five or ten years from now; don't only concentrate on the immediate benefits. Companies that have leaders following the hedgehog concept will have a better chance of becoming great companies in the long run. _____________________________________________________________________________________ Herfindahl–Hirschman Index – Herfindahl Hirschman Index determines if a monopoly exists. The calculation gives higher weight to larger firms but also allows firms outside of the top four largest to factor into the equation. A similar index is the Four‐Firm Concentration Ratio, which only factors in the four largest firms. The lower the Herfindahl Hirschman Index, the more spread out the market share with many large firms. The higher the Herfindahl Hirschman, the more concentrated the market shares with only a couple of large firms. Formula: HHI = Σ Xi, i from 1 to n Xi is the percent market share of firm i x 100 n is the number of firms (or 50 if more than that) Herfindahl‐Hirschman Index will vary with changes in market share among bigger business firms. A market characterized by monopoly will have higher HHI. For example, if a single company dominates (100 percent market share) then index will equal 10,000‐exhibiting a monopoly. In a competitive market, with thousands of business firms competing for customers, HHI would be near zero‐indicating perfect competition. Governments worldwide use Herfindahl‐Hirschman Index for assessing mergers. A competitive marketplace is considered to be one with HHI lower than 1,000. On other hand, a market with HHI of 1,800 or more is considered as highly concentrated. A market at this level has potent anti‐ trust concerns. Anti‐trust concerns are also raised when a transaction may increase market HHI by more than 100 points. _____________________________________________________________________________________ Horizontal Market – market which meets a given need of a wide variety of industries, rather than a specific one. The audience for horizontal markets shares characteristics across industries. Based on the scope of horizontal markets, the marketing efforts that support them must reach this spectrum of buyers and prospective buyers. An Internet service provider (ISP), for example, may launch a horizontal marketing effort to support the sale of Internet services to homeowners. This is a broad umbrella consisting of all homeowners in a specific region. This category of homeowners represents a horizontal market. _____________________________________________________________________________________
IFRS – International Financial Reporting Standards (comparable to GAAP). IFRS are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments and adopted by the International Accounting Standards Board (IASB). International Financial Reporting Standards comprise: International Financial Reporting Standards (IFRS)—standards issued after 2001 International Accounting Standards (IAS)—standards issued before 2001 Standing Interpretations Committee (SIC)—issued before 2001 Conceptual Framework for the Preparation and Presentation of Financial Statements (2010) _____________________________________________________________________________________ Incollects – invoices sent to a carrier for calls by their subscribers that originated outside of the carrier’s service area. Incollects ‐ sometimes called out‐roamers, are billing records that are received from other systems for services provided to their customers that have used the services of other networks. _____________________________________________________________________________________ Indirect Channels – dealers and national retailers that sell any network operator’s products and services. Indirect Channels are also known as Indirect Sales Channels or Retail Sales Partners. The indirect channel is used by companies who do not sell their goods directly to consumers. Suppliers and manufacturers typically use indirect channels because they exist early in the supply chain. Depending on the industry and product, direct distribution channels have become more prevalent because of the Internet. Distributors, wholesalers and retailers are the primary indirect channels a company may use when selling its products in the marketplace. Companies choose the indirect channel best suited for their product to obtain the best market share; it also allows them to focus on producing their goods. _____________________________________________________________________________________ Income Statement/Income Summary or Profit and Loss Statement (P&L) ‐ A financial statement for companies that indicates how revenue is transformed into net income (the result after all revenues and expenses have been accounted for). P&Ls can also be used to report on departments or business lines within a company. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The format of the income statement or the profit and loss statement will vary according to the complexity of the business activities. However, most companies will have the following elements in their income statements: Revenues and Gains Revenues from primary activities Revenues or income from secondary activities Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)
Expenses and Losses Expenses involved in primary activities Expenses from secondary activities Losses (e.g., loss on the sale of long-term assets, loss on lawsuits) _____________________________________________________________________________________ Innovator’s Dilemma – management book by Clayton Christensen that describes how established companies often overlook disruptive technologies. The book explains how established companies are focused on improving a product/service for their most sophisticated customers, although this innovation outpaces what most customers can absorb over time. Christensen describes two types of technologies: sustaining technologies and disruptive technologies. Sustaining technologies are technologies that improve product performance. These are technologies that most large companies are familiar with; technologies that involve improving a product that has an established role in the market. Most large companies are adept at turning sustaining technology challenges into achievements. Christensen claims that large companies have problems dealing with disruptive technologies. Disruptive technologies are "innovations that result in worse product performance, at least in the near term." They are generally "cheaper, simpler, smaller, and, frequently, more convenient to use." Disruptive technologies occur less frequently, but when they do, they can cause the failure of highly successful companies who are only prepared for sustaining technologies.
Above graph shows, disruptive technologies cause problems because they do not initially satisfy the demands of even the high end of the market. Because of that, large companies choose to overlook disruptive technologies until they become more attractive profit‐wise. Disruptive technologies, however, eventually surpass sustaining technologies in satisfying market demand with lower costs. When this happens, large companies who did not invest in the disruptive technology sooner are left behind. This, according to Christensen, is the "Innovator's Dilemma." Solving the Innovator's dilemma lies in firms being able to identify, develop and successfully market emerging, potentially disruptive technologies before they overtake the traditional sustaining technology.
However, as described by the Innovator’s Dilemma, the value networks and organization structures of these firms make it an arduous process to complete. _____________________________________________________________________________________ Involuntary Churn – percentage of customers whose service is terminated by the carrier for reasons such as nonpayment of bill. _____________________________________________________________________________________ JD Power Awards – J.D. Power and Associates is a global marketing information services firm founded in 1968 by James David Power III. The firm conducts surveys of customer satisfaction, product quality, and buyer behavior for industries ranging from cars to marketing and advertising firms. The firm is best known for its customer satisfaction research on new‐car quality and long‐term dependability. Its service offerings include industry‐wide syndicated studies, proprietary research, consulting, training, and automotive forecasting. J.D. Power and Associates' marketing research consists primarily of consumer surveys. The company bears the cost of developing and administering specific surveys with sample sizes of between several hundred and over 100,000.J.D. Power ratings are based on the survey responses of randomly selected and/or specifically targeted consumers. J.D. Power relies on consumer reporting for study results as well as in‐house vehicle testing for opinion based reviews in Blogs. Although publicly known for the endorsement value of its product awards, J.D. Power obtains the majority of its revenue from corporations that seek the data collected from J.D. Power surveys for internal use. Companies which have used J.D. Power surveys range from automotive, cellphone, and computer manufacturers to home builders and utility companies. To be able to use the J.D. Power logo and to quote the survey results in advertising, companies must pay a licensing fee to J.D. Power. These advertisement licensing fees, however, form a small part of J.D. Power's revenues. _____________________________________________________________________________________ Journal Entry (JE) – used in accounting to document a business transaction that increases funds in one account and decreases them in another account without cash being received or a check being processed. _____________________________________________________________________________________ Key Performance Indicators (KPIs) – Metrics (usually non‐financial) to measure performance and help an organization define and evaluate how successful it is, typically in terms of making progress towards its long‐term organizational goals. Key performance indicators define a set of values used to measure against. These raw sets of values, which are fed to systems in charge of summarizing the information, are called indicators. Quantitative indicators which can be presented as a number. Practical indicators that interface with existing company processes. Directional indicators specifying whether an organization is getting better or not.
Actionable indicators are sufficiently in an organization's control to effect change. Financial indicators used in performance measurement and when looking at an operating index. _____________________________________________________________________________________ Keynesian perspective – Keynesian principles is a school of macroeconomic thought based on the ideas of 20th‐century English economist John Maynard Keynes. Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936. The interpretations of Keynes are contentious and several schools of thought claim his legacy. According to Keynesian theory, some individually‐rational microeconomic‐level actions — if taken collectively by a large proportion of individuals and firms — can lead to inefficient aggregate macroeconomic outcomes, wherein the economy operates below its potential output and growth rate. Such a situation had previously been referred to by classical economists as a general glut. There was disagreement among classical economists on whether a general glut was possible. Keynes contended that a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers. In such a situation, government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Keynesian macroeconomics destroys the classical dichotomy by abandoning the assumption that wages and prices adjust instantly to clear markets. This approach is motivated by the observation that many nominal wages are fixed by long‐term labor contracts and many product prices remain unchanged for long periods of time. Once the inflexibility of wages and prices is admitted into a macroeconomic model, the classical dichotomy and the irrelevance of money quickly disappear. _____________________________________________________________________________________ Kondratiev cycles – Kondratiev waves (also called supercycles, great surges, long waves, K‐waves or the long economic cycle) are described as sinusoidal‐like cycles in the modern capitalist world economy. Averaging fifty and ranging from approximately forty to sixty years in length, the cycles consist of alternating periods between high sectoral growth and periods of relatively slow growth. Unlike the short‐term business cycle, the long wave of this theory is not accepted by current mainstream economics.
Kondratiev identified four distinct phases the economy goes through. They are a period of inflationary growth, followed by stagflation, then deflationary growth and finally depression. Some characteristics are as follows: Inflationary Growth (expansion): ‐ stable to slow rising prices, low commodity prices, low and stable interest rates, rising stock prices. The period might also be characterized by strong and growing corporate profits and technological innovations. Stagflation (recession): ‐ rising prices, rising commodity prices, rising interest rates, stagnant to falling stock prices. Stagnant profits, rising debt. This period usually sees a major war that contributes to the commodity and price inflation, and to the rising debt and misdirects business resources. Deflationary Growth (plateau): ‐ stable to falling prices, falling commodity prices, falling interest rates, sharply rising stock prices, profit growth but probably not as good as in the inflationary growth phase. Sharply rising debt. Possible period of considerable technological innovation. Excess debt contributes to speculative bubbles. Depression (depression): ‐ falling prices, rising commodity prices (particularly gold), stable interest rates, falling stock prices, falling profits, debt collapse. As the stock market collapses numerous scandals will emerge. A major war occurs that helps contribute to end of the depression phase and the start of the new expansion period. _____________________________________________________________________________________ Lag and accelerator models – The accelerator effect in economics refers to a positive effect on private fixed investment of the growth of the market economy (measured e.g. by a change in Gross National Product). Rising GNP (an economic boom or prosperity) implies that businesses in general see rising profits, increased sales and cash flow, and greater use of existing capacity. This usually implies that profit expectations and business confidence rise, encouraging businesses to build more factories and other buildings and to install more machinery. (This expenditure is called fixed investment.) This may lead to further growth of the economy through the stimulation of consumer incomes and purchases, i.e., via the multiplier effect. The accelerator effect also goes the other way: falling GNP (a recession) hurts business profits, sales, cash flow, use of capacity and expectations. This in turn discourages fixed investment, worsening a
recession by the multiplier effect. The accelerator effect is shown in the simple accelerator model. This model assumes that the stock of capital goods (K) is proportional to the level of production (Y):
K = k×Y
This implies that if k (the capital‐output ratio) is constant, an increase in Y requires an increase in K. That is, net investment, In equals:
In = k×∆Y
Suppose that k = 2 (usually, k is assumed to be in (0,1)). This equation implies that if Y rises by 10, then net investment will equal 10×2 = 20, as suggested by the accelerator effect. If Y then rises by only 5, the equation implies that the level of investment will be 5×2 = 10. This means that the simple accelerator model implies that fixed investment will fall if the growth of production slows. An actual fall in production is not needed to cause investment to fall. However, such a fall in output will result if slowing growth of production causes investment to fall, since that reduces aggregate demand. Thus, the simple accelerator model implies an endogenous explanation of the business‐cycle downturn, the transition to a recession. In statistics and econometrics, a distributed lag model is a model for time series data in which a regression equation is used to predict current values of a dependent variable based on both the current values of an explanatory variable and the lagged (past period) values of this explanatory variable. The starting point for a distributed lag model is an assumed structure of the form yt = a + w0xt + w1xt − 1 + w2xt − 2 + ... + error term or the form yt = a + w0xt + w1xt − 1 + w2xt − 2 + ... + wnxt − n + error term, Where yt is the value at time period t of the dependent variable y, a is the intercept term to be estimated, and wi is called the lag weight (also to be estimated) placed on the value i periods previously of the explanatory variable x. In the first equation, the dependent variable is assumed to be affected by values of the independent variable arbitrarily far in the past, so the number of lag weights is infinite and the model is called an infinite distributed lag model. In the alternative, second, equation, there are only a finite number of lag weights, indicating an assumption that there is a maximum lag beyond which values of the independent variable do not affect the dependent variable; a model based on this assumption is called a finite distributed lag model. In an infinite distributed lag model, an infinite number of lag weights need to be estimated; clearly this can be done only if some structure is assumed for the relation between the various lag weights, with the entire infinitude of them expressible in terms of a finite number of assumed underlying parameters. In a finite distributed lag model, the parameters could be directly estimated by ordinary least squares (assuming the number of data points sufficiently exceeds the number of lag weights); nevertheless, such estimation may give very imprecise results due to extreme multicollinearity among the various lagged
values of the independent variable, so again it may be necessary to assume some structure for the relation between the various lag weights. The concept of distributed lag models easily generalizes to the context of more than one right‐side explanatory variable. _____________________________________________________________________________________ Lean Enterprise – production practice that seeks to eliminate any action determined to be “non value add.” Lean Enterprise is often known simply as “Lean,” _____________________________________________________________________________________ Long Tail – Small volumes of hard‐to‐find items can be sold to many customers. The Long Tail phenomenon was less common before Internet sales became common. The Long Tail or long tail refers to the statistical property that a larger share of population rests within the tail of a probability distribution than observed under a 'normal' or Gaussian distribution. A long tail distortion will arise with the inclusion of some unusually high (or low) values which increase (decrease) the mean, skewing the distribution to the right (or left). The term Long Tail has gained popularity in recent times as describing the retailing strategy of selling a large number of unique items with relatively small quantities sold of each – usually in addition to selling fewer popular items in large quantities. The Long Tail was popularized by Chris Anderson in an October 2004 Wired magazine article, in which he mentioned Amazon.com and Netflix as examples of businesses applying this strategy. Anderson elaborated the concept in his book The Long Tail: Why the Future of Business Is Selling Less of More.
_____________________________________________________________________________________ Margin – difference between the selling price of a product or service and the cost of producing it. _____________________________________________________________________________________
Net Adds – Gross Adds minus deactivations. Incremental change in customer base over a period. NetAdds = New Subscribers - Churn _____________________________________________________________________________________ Net Income (NI) – remaining income after adding revenue and gains and subtracting all expenses and losses. If negative, Net Income is referred to as Net Loss. Net Income = Net Revenue - Total Overall Expenses _____________________________________________________________________________________ Net Income Margin (NI Margin/NIM) – Net Income divided by Revenue. Net Income Margin = Net Income/Revenue _____________________________________________________________________________________ Net Present Value (NPV) – The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. Formula:
NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. _____________________________________________________________________________________ Net Promoter Score (NPS) – Net Promoter is a customer loyalty metric developed by (and a registered trademark of) Fred Reichheld, Bain & Company, and Satmetrix. It is a market research tool that uses a single question: “How likely is it that you would recommend your current provider to a friend or colleague?” Customers respond on a 0‐to‐10 point rating scale and are categorized as follows: Promoters (score 9-10) are loyal enthusiasts who will keep buying and refer others, fueling growth. Passives (score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings. Detractors (score 0-6) are unhappy customers who can damage the brand and impede growth through negative word-of-mouth.
To calculate a company's Net Promoter Score (NPS), take the percentage of customers who are Promoters and subtract the percentage who are Detractors. NPS = % of Promoters (9, 10) - % of Detractors (0-6) _____________________________________________________________________________________ Network perception – Perception management are actions to convey or deny selected information and indicators to people in order to influence their emotions, motives, and objective reasoning, so as to be favorable to the originators objectives. Everyone is influenced by perceptions, but only a few know how to actually manage these perceptions to increase their success potential. Every operator is influenced by certain perceptions due to their marketing campaigns, Industry studies, Industry awards and customer behavior. A great example is the Verizon – “can you hear me now?” campaign which set in the minds of people of ubiquitous coverage. When a person has had a poor experience with a company, or has even heard bad things without having experienced them themselves, it’s going to take something pretty special to tip the perceptions on their head – first impressions are the ones that stick, and a bad reputation has seen the downfall of many a promising companies. _____________________________________________________________________________________ Nielsen ratings – Nielsen ratings are the audience measurement systems developed by Nielsen Media Research, in an effort to determine the audience size and composition of television programming in the United States. Nielsen Media Research was founded by Arthur Nielsen, who was a market analyst, whose career had begun in the 1920s with brand advertising analysis and expanded into radio market analysis during the 1930s, culminating in Nielsen ratings of radio programming, which was meant to provide statistics as to the markets of radio shows. Nielsen metrics for mobile devices (including “connected” devices like iPads, Kindles and tablets) are used to study the market share, consumer satisfaction, device share, service quality, revenue share, advertising effectiveness, audience reach and other key indicators in the mobile marketplace. Nielsen uses a broad range of measurement tools to help companies make the most of their investments in mobile, including: Monitoring network signaling in 86 U.S. markets to count mobile subscribers and determine marketshare Analyzing the cellphone bills of more than 65,000 mobile subscribers in the U.S. Conducting extensive drive tests to measure quality of service in North America Deploying On-Device Meters to measure Smartphone activity Analyzing carrier server logs to understand feature phone usage behavior Surveying mobile consumers via telephone, in-person and online surveys. _____________________________________________________________________________________
Network satisfaction – A survey conducted by consumerreports.org which takes several factors into consideration while coming up with the results. This report and Ratings will be useful regardless of how a person picks an approach for choosing a carrier and phone plan, and may be interesting. The report outlines key findings about the best and worst carriers, according to readers. It also offers news about the rise of more no‐contract plans, faster 4G service, and the prevalence of bills that are higher than readers expected. This helps guide consumers to plans and phones that may suit them, whether the person is a minimal phone user, a heavy talker and texter, an ardent e‐mailer, or someone who does all that plus heavily surfs the Web. Our overall Ratings rank service, with and without a contract, based on the survey conducted by the Consumer Reports National Research Center covering 23 metro areas. _____________________________________________________________________________________ OEM (Original Equipment Manufacturer) – manufacturer of products or components that are purchased by another company and retailed under the purchasing company’s brand name. _____________________________________________________________________________________ Oligopoly – market dominated by a small number of sellers. The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι (oligoi) "few" + πόλειν (pólein) "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants. As a quantitative description of oligopoly, the four‐firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. For example, as of this year Verizon, AT&T, Sprint, and T‐Mobile together control 89% of the US cellular phone market. _____________________________________________________________________________________ Operating Cash flow – The cash generated from the operations of a company, generally defined as revenues less all operating expenses, but calculated through a series of adjustments to net income. The OCF can be found on the statement of cash flows. It is arguably a better measure of a business's profits than earnings because a company can show positive net earnings (on the income statement) and still not be able to pay its debts. It's cash flow that pays the bills for any company. OCF is also used as a check on the quality of a company's earnings. If a firm reports record earnings but negative cash, it may be using aggressive accounting techniques. Operating Cash Flow = EBITA + Depreciation - Taxes Also known as "cash flow provided by operations" or "cash flow from operating activities". _____________________________________________________________________________________ Operating Margin – ratio of operating income divided by net sales, usually expressed in percent. Operating margin is a measurement of what proportion of a company's revenue is left over after paying
for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.
_____________________________________________________________________________________ Operating expense (OPEX) – OPEX is the ongoing cost for running a product, business, or system. It is a category of expenditure that a business incurs as a result running a product, business, or system. Its counterpart, a capital expenditure (CAPEX), is the cost of developing or providing non‐consumable parts for the product or system. For example, the purchase of a photocopier involves CAPEX, and the annual paper, toner, power and maintenance costs represent OPEX. Operating expenses include: Accounting expenses License fees Maintenance and repairs, such as snow removal, trash removal, janitorial service, pest control, and lawn care Advertising Office expenses Supplies Attorney fees and legal fees Utilities, such as telephone Insurance Property management, including a resident manager Property taxes Travel and vehicle expenses One of the typical responsibilities that management must contend with is determining how low operating expenses can be reduced without significantly affecting the firm's ability to compete with its competitors. _____________________________________________________________________________________ Opportunity Cost – next best choice available when choosing between several mutually exclusive choices. The opportunity cost is also the cost of the foregone products after making a choice. Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice”. The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output foregone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs. _____________________________________________________________________________________
Organic Growth – Organic growth is the process of businesses expansion due to increasing overall customer base, increased output per customer or representative, new sales, or any combination of the above, as opposed to mergers and acquisitions that are examples of inorganic growth. Typically, the organic growth rate also excludes the impact of foreign exchange. Growth including foreign exchange, but excluding divestitures and acquisitions is often referred to as core growth. Organic growth is growth that comes from a company's existing businesses, as opposed to expansion by acquisition of an external company. It may be negative. _____________________________________________________________________________________ P&L – Profit and Loss Statement or Income Statement. A financial statement for companies that indicates how revenue is transformed into income (the result after all revenues and expenses have been accounted for). P&Ls can also be used to report on departments or business lines within a company. The statement of profit and loss follows a general form as seen in this example. It begins with an entry for revenue and subtracts from revenue the costs of running the business, including cost of goods sold, operating expenses, tax expense and interest expense. The bottom line (literally and figuratively) is net income (profit). The balance sheet, income statement and statement of cash flows are the most important financial statements produced by a company. While each is important in its own right, they are meant to be analyzed together. _____________________________________________________________________________________ Pareto Chart – A Pareto chart, named after Vilfredo Pareto, is a type of chart that contains both bars and a line graph, where individual values are represented in descending order by bars, and the cumulative total is represented by the line. In quality control, the Pareto chart often represents the most common sources of defects, the highest occurring type of defect, or the most frequent reasons for customer complaints, etc. The benefits of using a Pareto Charts lie in economic terms. A Pareto Chart breaks a big problem down into smaller pieces, identifies the most significant factors, shows where to focus efforts, and allows better use of limited resources. They can separate the few major problems from the many possible problems so that focus can be put on improvement efforts, arrange data according to priority or importance, and determine which problems are most important using data, not perception. A Pareto Chart can answer the following questions: What are the largest issues facing our team or business? What 20% of sources are causing 80% of the problems? Where should we focus our efforts to achieve the greatest improvements? A Pareto Chart is a good tool to use when the process that is being investigated produces data that are broken down into categories and the number of times each category occurs can be counted. A Pareto diagram puts data in a hierarchical order, which allows the most significant problems to be corrected
first. The Pareto analysis technique is used primarily to identify and evaluate nonconformities, although it can summarize all types of data. It is the perhaps the diagram most often used in management presentations. _____________________________________________________________________________________ Post-Mortem – analysis completed subsequent to a project or campaign to determine if expectations were achieved. A detailed post‐mortem can be used to inform future decisions. _____________________________________________________________________________________ Postpaid/Postpay – accounts and services for customers who are billed after services are received. Also known as Core. _____________________________________________________________________________________ Prepaid/Prepay ‐ accounts and services for customers who pay up front, before the services are received. _____________________________________________________________________________________ Present Value (PV) – value on a given date of a future payment or series of future payments, discounted to reflect the Time Value of Money and other factors such as investment risk. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations. Also referred to as "discounted value". The basis is that receiving $1,000 now is worth more than $1,000 five years from now, because if we get the money now, we could invest it and receive an additional return over the five years. The calculation of discounted or present value is extremely important in many financial calculations. For example, net present value, bond yields, spot rates, and pension obligations all rely on the principle of discounted or present value. _____________________________________________________________________________________ Price-Cost Margin – Price margin (also called gross margin) is the part of a product or service's price in excess of cost, expressed in dollars or as a percentage of the price. Businesses normally use markup formulas to add predetermined percentages to an item's cost to arrive at a price. Not all products in a business's inventory carry the same markup or price margin. Savvy businesspeople calculate price margins to provide information for analyzing the relative profitability of different products, whether the margin is generating a net profit over expenses, how much to discount prices for sales and much more. _____________________________________________________________________________________ Price per MHz POP ($/MHz-POP) – The wireless industry commonly uses a dollar per megahertz per person covered, or $/MHz‐POP metric to value spectrum. This method may place a high value on densely populated areas, which for consumer‐based wireless telephone carriers may correlate well with
their business model. However, an electric utility may want to wirelessly monitor many transmission lines with little to no population around them. These transmission lines may contribute valuable service to the utility and the immediate response to an outage may translate to substantial savings or revenue. However, a $/MHz‐POP valuation methodology would not have demonstrated a meaningful return on investment for the utility.
_____________________________________________________________________________________ Product Bundling – Product bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business (for example: bundle a word processor, a spreadsheet, and a database into a single office suite), in the cable television industry (for example, basic cable in the United States generally offers many channels at one price), and in the fast food industry in which multiple items are combined into a complete meal. A bundle of products is sometimes referred to as a package deal or a compilation or an anthology. Bundling is most successful when: There are economies of scale in production, There are economies of scope in distribution, Marginal costs of bundling are low. Production set-up costs are high, Customer acquisition costs are high. Consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product. Consumers have heterogeneous demands and such demands for different parts of the bundle product are inversely correlated. Product bundling is most suitable for high volume and high margin (i.e., low marginal cost) products. In oligopolistic and monopolistic industries, product bundling can be seen as an unfair use of market power because it limits the choices available to the consumer. In these cases it is typically called product tying. _____________________________________________________________________________________ Product Lining – a marketing strategy of selling several related products. Product lining is the marketing strategy of offering for sale several related products. Unlike product bundling, where several products are combined into one, lining involves offering several related products individually. A line can comprise related products of various sizes, types, colors, qualities, or prices. Line depth refers to the number of product variants in a line. Line consistency refers to how closely related the products that make up the line are. Line vulnerability refers to the percentage of sales or profits that are derived from only a few products in the line. _____________________________________________________________________________________
QOS – (Quality of Service) The quality of service (QoS) refers to several related aspects of telephony and computer networks that allow the transport of traffic with special requirements. In particular, much technology has been developed to allow computer networks to become as useful as telephone networks for audio conversations, as well as supporting new applications with even more strict service demands. QoS (quality of service) refers to the mechanisms in the network software that make the actual determination of which packets have priority (see packet scheduler). CoS (class of service) refers to feature sets, or groups of services, that are assigned to users based on company policy. If a feature set includes priority transmission, then CoS winds up being implemented in QoS functions within the routers and switches in the network. _____________________________________________________________________________________ RAZR Effect – Motorola relied too long on the RAZR, and when the RAZR’s appeal declined, Motorola slashed prices to gain market share, and suffered heavy losses. The RAZR used great technology, it had a bold and expressive aesthetic, and it succeeded in the marketplace. When it entered the mass market in 2005, Motorola CEO Edward J. Zander proudly announced in his Q3 2005 conference call that the RAZR “just knocked the cover off the ball in unit sales, operating earnings and market shares and every area that we measured.” And with good reason. The “RAZR boom”, as it was referred to, not only raised sales and brand awareness, but also brought Motorola a stock boost of nearly $10 per share. However the “worst” is that everything that made the RAZR a success is being lost by the company, just a few years later. Nowadays, even Motorola does not seem to be able to follow its own example of innovation with its new product lines. _____________________________________________________________________________________ Revenue (Rev) – income a company receives from normal business activities. Profits or net income is revenue minus expenses. Revenue is the amount of money that is brought into a company by its business activities. In the case of government, revenue is the money received from taxation, fees, fines, inter‐governmental grants or transfers, securities sales, mineral rights and resource rights, as well as any sales that are made. Revenue for a company is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold. _____________________________________________________________________________________ Revenue Lifetime Value (RLV) – Present Value of expected future revenue streams. _____________________________________________________________________________________ Roaming – use of a cell phone that is outside the coverage footprint of the carrier. The term "roaming" originates from the GSM (Global System for Mobile Communications) sphere; the term "roaming" can also be applied to the CDMA technology. _____________________________________________________________________________________
ROCE (return on capital employed) – It is the rate of return a business is making on the total capital employed in the business. Capital will include all sources of funding (shareholders funds + debt). To be consistent with this the return should be taken prior to interest (the return to lenders) and tax. It is therefore: EBIT ÷ (shareholders funds + debt) RoE is a similar measure which looks only at the returns to shareholders. return on equity (RoE) is normally higher than ROCE and is affected by the level of debt. Return on operating capital employed is a variant of ROCE that looks at the operations of the business only, ignoring the effects of cash holdings and provisions. It is therefore a better measure of how efficiently the actual business is run and is more comparable across companies. Comparisons across companies using any measure of return on capital require that numbers for both profit and capital are comparable. This means looking closely at a range of accounting policies and adjusting where necessary. For example, differences in depreciation or revaluation policies that change the amount of capital employed. _____________________________________________________________________________________ Roaming Overbuild – construction of additional network where network previously existed to ameliorate coverage gaps. _____________________________________________________________________________________ ROI (Return on Investment) – ratio of money gained or lost on an investment relative to the amount of money invested. Also referred to as Rate of Return, it is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. Formula:
_____________________________________________________________________________________ ROIC (Return on Invested Capital) – financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as Net Operating Profit less adjusted taxes, also known as "return on capital". Return on invested capital (ROIC) is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as net operating profit less adjusted taxes divided by invested capital and is usually expressed as a percentage. In this calculation, capital invested includes all monetary capital invested: long‐term debt, common and preferred shares.
_____________________________________________________________________________________ Real business cycles theory – Real Business Cycles (RBC) theory views cycles as arising in frictionless perfectly competitive economies with generally complete markets subject to real shocks (random changes in technology or productivity), it makes the argument that cycles are consistent with competitive general equilibrium environments in which all agents are rational maximizes. Contrary to what Keynesian, Monetarist, and new classical economists believed, RBC theorists, starting with Nelson and Plosser in 1982, found that the hypothesis that GDP growth follows a random walk cannot be rejected. They argued that most of the changes in GDP were permanent, and that output growth would not revert to an underlying trend following a shock. "In this case, the observed fluctuations in GNP are fluctuations in the natural (trend) rate of output, not deviations of output from a smooth determinist trend." (Snowdon) Typically RBC models have the following features: They use a representative agent framework, thereby avoiding aggregation problems. Firms and households have explicit objective (utility) functions that they maximize subject to budget and technology constraints. Cycles are created by exogenous productivity shocks (impulse mechanism), which are amplified by propagation mechanisms such as intertemporal substitution, consumption smoothing, investment lag, or inventory building. Kydland and Prescott’s time-to-build model, for example, assumes that it takes 4 quarters to build capital. They furthermore employ a fatigue effect, which incorporates into the model that more labor in t = 1 will lead to higher preference for leisure in t = 2. Their basic assumptions are rational expectations, perfect (competitive) markets, and perfect information. RBC models were generally successful in accounting for persistence and comovement, but less successful in offering convincing explanations for fluctuations in employment. _____________________________________________________________________________________ S.A. – (Sustainable Advantage) Sustainable competitive advantage is the focal point of corporate strategy. It allows the maintenance and improvement of any enterprise's competitive position in the market. It is an advantage that enables business to survive against its competition over a long period of time. _____________________________________________________________________________________
Sales Lift – incremental increase in sales attributable to an event or campaign and can be online or offline. _____________________________________________________________________________________ Seasonal Adjustment – statistical method for removing the seasonal component of a time series used when analyzing non‐seasonal trends. Seasonal adjustment is a statistical method for removing the seasonal component of a time series that is used when analyzing non‐seasonal trends. It is normal to report seasonally adjusted data for unemployment rates to reveal the underlying trends in labor markets. The investigation of many economic time series becomes problematic due to seasonal fluctuations. Series are made up of four components: St: The seasonal component Tt: The trend component Ct: The cyclical component It: The error, or irregular component. Unlike the trend and cyclical components, seasonal components, theoretically, happen with similar magnitude during the same time period each year. The seasonal component of a series is often considered to be uninteresting in their own right and to cause the interpretation of a series to be ambiguous. By removing the seasonal component, it is easier to focus on other components. A good example is the decrease of Voice traffic in Cell sites close to universities during holidays. _____________________________________________________________________________________ Sensitivity Analysis – study of how the variation in the output of an analysis (e.g. a cost‐benefit analysis) changes when various inputs are change. In any budgeting process there are always variables that are uncertain. Future tax rates, interest rates, inflation rates, headcount, operating expenses and other variables may not be known with great precision. Sensitivity analysis answers the question, "if these variables deviate from expectations, what will the effect be (on the business, model, system, or whatever is being analyzed)?" In more general terms uncertainty and sensitivity analysis investigate the robustness of a study when the study includes some form of statistical modeling. Sensitivity analysis can be useful to computer modelers for a range of purposes, including: Support decision making or the development of recommendations for decision makers (e.g. testing the robustness of a result); Enhancing communication from modelers to decision makers (e.g. by making recommendations more credible, understandable, compelling or persuasive); Increased understanding or quantification of the system (e.g. understanding relationships between input and output variables); and Model development (e.g. searching for errors in the model).
_____________________________________________________________________________________ SG&A – (Selling General and Administrative Expenses) Reported on the income statement, it is the sum of all direct and indirect selling expenses and all general and administrative expenses of a company. Direct selling expenses are expenses that can be directly linked to the sale of a specific unit such as credit, warranty and advertising expenses. Indirect selling expenses are expenses which cannot be directly linked to the sale of a specific unit, but which are proportionally allocated to all units sold during a certain period, such as telephone, interest and postal charges. General and administrative expenses include salaries of non‐sales personnel, rent, heat and lights. SGA expenses consist of the combined costs of operating the company, which breaks down to: Selling: Cost of Sales, which includes salaries, advertising expenses, cost of manufacturing, rent, and all expenses and taxes directly related to producing and selling product General: General operating expenses and taxes that are directly related to the general operation of the company, but don't relate to the other two categories. Administration: Executive salaries and general support and all associated taxes related to the overall administration of the company _____________________________________________________________________________________ Simple Free Cash Flow (Simple FCF) ‐ EBITDA minus tax, interest, and capex. A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. Free Cash Flow = Cash Flow from Operations (Operating Cash) - Capital Expenditure _____________________________________________________________________________________ Six Sigma (6σ) – business management strategy that seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. Six Sigma is a business management strategy originally developed by Motorola, USA in 1986. Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization ("Black Belts", "Green Belts", etc.) who are experts in these methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified financial targets (cost reduction and/or profit increase). The term Six Sigma originated from terminology associated with manufacturing, specifically terms associated with statistical modeling of manufacturing processes. The maturity of a manufacturing
process can be described by a sigma rating indicating its yield, or the percentage of defect‐free products it creates. A six sigma process is one in which 99.99966% of the products manufactured are statistically expected to be free of defects (3.4 defects per million). Motorola set a goal of "six sigma" for all of its manufacturing operations, and this goal became a byword for the management and engineering practices used to achieve it. _____________________________________________________________________________________ SOC – Service Order Charge, for example a Blackberry device e‐mail plan in which subscribers can choose to add an e‐mail plan, for a certain charge per month. _____________________________________________________________________________________ Spiff – immediate bonus for a sale of a specified product. "Spiffs" are paid, either by a manufacturer or employer, directly to a salesperson for selling a specific product. The use of the spiff, while widely accepted in some industries, is of questionable ethical nature. A spiff can sometimes encourage salespeople to push a less satisfactory product upon a customer, or allow manufacturers to circumvent the instructions or intentions of managers and owners by paying the salespeople directly. While commission‐centric sales tactics are often transparent, based on the price of the product being pushed by a salesperson, spiff‐centric sales tactics are less noticeable, and may be perceived as dishonest salesmanship by consumers who are pushed towards a product when there is no evidence that the salesperson might be biased or influenced by monetary gain. It should be noted, however, that not all commissions are transparent based on ticket price. Many retailers pay employees different percentages on different products, based on the gross profit margin of the item. _____________________________________________________________________________________ Stickiness – economic situation in which a variable is resistant to change. For example, wages are said to be sticky in the short run. _____________________________________________________________________________________ Subscriber Acquisition Costs (SAC) – Average variable cost of acquiring a new customer. The customer acquisition cost of mobile companies is complicated by the number of costs involved. Mobile telecoms companies frequently pay incentives to retailers who bring in customers for their networks. They also usually subsidize the costs of mobile phones (heavily so in the case of contract customers). The SAC of contract connections is usually far higher than that of prepay connections because of the greater incentives and subsidies. This is more than outweighed by the greater value to the networks of contract customers who are committed to minimum expenditure levels. _____________________________________________________________________________________ Supply Chain – system of organizations, people, technology, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities transform
natural resources, raw materials and components into a finished product that is delivered to the end customer. In sophisticated supply chain systems, used products may re‐enter the supply chain at any point where residual value is recyclable. Supply chains link value chains. _____________________________________________________________________________________ SWOT Analysis - strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or a business venture. It involves specifying the objective and identifying the internal and external factors that are favorable and unfavorable to achieve that objective. Setting the objective should be done after the SWOT analysis has been performed. This would allow achievable goals or objectives to be set for the organization. Strengths: characteristics of the business, or project team that give it an advantage over others Weaknesses (or Limitations): are characteristics that place the team at a disadvantage relative to others Opportunities: external chances to improve performance (e.g. make greater profits) in the environment Threats: external elements in the environment that could cause trouble for the business or project Identification of SWOTs is essential because subsequent steps in the process of planning for achievement of the selected objective may be derived from the SWOTs. First, the decision makers have to determine whether the objective is attainable, given the SWOTs. If the objective is NOT attainable a different objective must be selected and the process repeated. The SWOT analysis is often used in academia to highlight and identify strengths, weaknesses, opportunities and threats. _____________________________________________________________________________________ Sunk Costs – Costs that have already been incurred and cannot be recovered. In economics and business decision‐making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be either fixed (that is, they are not dependent on the volume of economic activity, however measured) or variable (dependent on volume). In traditional microeconomic theory, only prospective (future) costs are relevant to an investment decision. Traditional economics proposes that an economic actor not let sunk costs influence one's decisions, because doing so would not be rationally assessing a decision exclusively on its own merits. The decision‐maker may make rational decisions according to their own incentives; these incentives may dictate different decisions than would be dictated by efficiency or profitability, and this is considered an incentive problem and distinct from a sunk cost problem. Evidence from behavioral economics suggests this theory fails to predict real‐world behavior. Sunk costs greatly affect actors' decisions, because many humans are loss‐averse and thus normally act irrationally when making economic decisions.
Sunk costs should not affect the rational decision‐makers best choice. However, until a decision‐maker irreversibly commits resources, the prospective cost is an avoidable future cost and is properly included in any decision‐making processes. For example, if one is considering preordering movie tickets, but has not actually purchased them yet, the cost remains avoidable. If the price of the tickets rises to an amount that requires him to pay more than the value he places on them, he should figure the change in prospective cost into the decision‐making and re‐evaluate his decision. _____________________________________________________________________________________ Take rate – The amount of people taking up on a given offer or promotion campaign. Take rate is used to measure micro‐conversions. These can include: Newsletter subscriptions Downloadable materials such as eBooks Case studies White papers RSS subscriptions “Add to Friend” links for social networking sites Up-sell and cross-sell offers added to shopping cart _____________________________________________________________________________________ Tenure Factor – (in the CLV equation) a “Tenure Factor” reflects voluntary and involuntary churn. For example, in the first month the tenure factor is 1.0 since 100% of the customer base is still active. In the second month it will be less. _____________________________________________________________________________________ Time Value of Money (TVM) – value of money figuring in a given amount of interest earned over a given amount of time. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. FV = PV (1+r), where FV – Future Value PV – Present Value r – Rate of return It is also referred to as present discounted value. _____________________________________________________________________________________ Theories of cyclicality – Telecommunication industry like most businesses today is in crisis in the United States, Europe, and other regions. The present downturn is only temporary and the industry will recover, though not at the hyper level of the bubble years. That, however, is not the real problem for the industry. It is not a one‐time recovery from a one‐time boom and bust. The main problem is that the telecom industry is entering a pattern of volatility, with boom‐bust patterns becoming a common
occurrence rather than an aberration. A pattern of ups and downs may be emerging, a cycle. While business cycles are not new to many industries, in telecom they are a new phenomenon. In the past, the network industry progressed in only one direction: up. Telecom has always been less volatile than the economy as a whole. It grew steadily, with long planning horizons hardly ruffled by the business cycle. There are many competing explanations for economic cyclicality, from sunspots to the alignment of the planets, and to the political election cycle. Many distinguished economists have contributed their views towards the economics that govern these cycles. The Monetarist View: According to that theory, associated especially with Friedrich von Hayek (1933, 1950) and Milton Friedman (1982), cycles are caused by flawed monetary policy that causes instability. For example, if a central bank changes interest rates incorrectly, consumers and businesses get wrong signals and their expectations lead to reactions that set off instabilities. The Keynesian Perspective: Aggregate demand is affected by the mood swings of market participants that often become self‐fulfilling, (Keynes 1936, Hicks 1950, Tobin 1975). The key trigger is psychological and on the demand side. Keynes called it the "animal spirits" of entrepreneurs. More recently Allan Greenspan described it as an "irrational exuberance" (Shiller, 2001).The demand orientation of the Keynesian approach leads Wall Street analysts to look closely at data for consumer spending as leading indicators. Real Business Cycles Theory (RBC): This theory is a supply side story, going back to Prescott (1983) and others. For RBC advocates, cycles are caused by random shocks and their impact on total factor productivity. The internet was a positive shock. September 11 was a negative shock. Random positive shocks lead to higher productivity, higher output, higher real wages, consumption, etc. For RBC advocates, causality does not run from consumption to output but the other way around.(Espinosa‐Vega and Guo, 2001). The theory therefore rejects explanations based on consumer psychology such as "exuberant irrationality." RBC proponents believe that there is really nothing that governments can do about a cycle since it is based on random shocks. Lag and Accelerator Models: These models go back to Samuelson (1939). Small changes in desired capacity levels lead to large differences in capacity expansion, which drives investment. Where there is a delivery lag, unanticipated shifts in desired capacity can generate cycles of investment spending. The key here is the adjustment lag. These lags induce oscillation in the same way that a slowly reacting bathroom shower induces cycles of hot and cold water. The famous "cobweb" cycle is a model of such overshooting. The "Austrian" Theory: This view is associated with Mises (1928), Hayek (1933, 1990), Haberler (1937), BohmBawerk (1895), Wicksell (1936), and Schumpeter (1939). It is focused on overcapacity. Such overcapacity has been created for some reason‐whether due to exuberance, excessive bank lending, monetary policy, or other factors. After an adjustment lag there is eventually a downturn. The pattern is one of boom, overcapacity, price war, bust, and shakeout. A young industry tends to start off with small firms, and once their product fetches a high price it attracts entry, which expands output and lowers price. This goes on for a while. Industry growth rate slows below that of individual firms, and a shakeout occurs. Externalities: The RBC theory discussed earlier assumes constant returns to scale. That is, if one increases the capital and labor inputs of the firms proportionately, their outputs would grow by the same proportion. But for network industries this ignores the network effects, also known as positive network externalities (Farmer and Guo, 1994) or the‐Metcalfe effect. An increase in usage leads to
greater utility of the product and to increased demand. This increases productivity and real wages and enables further consumption. Growth of other network participants is factored in as part of the value of the product, and leads to still further growth. At some point, however, the expectations of further growth decline, for example as saturation occurs. _____________________________________________________________________________________ Tornado Diagram – used to compare the importance of relative variables in Sensitivity Analyses. The sensitive variable is modeled as an uncertain value while all other variables are held at baseline values. A tornado diagram is a type of bar chart in which the data is displayed with vertical bars, with the largest at the top and the smallest at the bottom, giving the appearance of a tornado. _____________________________________________________________________________________ Total Quality Management (TQM) – business management concept that focuses on reducing errors during manufacturing or service processes, increasing customer satisfaction, and streamlining the supply chain. TQM capitalizes on the involvement of management, workforce, suppliers, and even customers, in order to meet or exceed customer expectations. Considering the practices of TQM as discussed in six empirical studies, Cua, McKone, and Schroeder (2001) identified the nine common TQM practices as cross‐functional product design, process management, supplier quality management, customer involvement, information and feedback, committed leadership, strategic planning, cross‐functional training, and employee involvement. _____________________________________________________________________________________ Total Shareholder Return (TSR) – combination of share price and dividends to show the total return to the shareholder. It is used to compare the performance of different companies’ stocks and shares over time. It is a concept used to compare the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder. The absolute size of the TSR will vary with stock markets, but the relative position reflects the market perception of overall performance relative to a reference group. With Pricebegin = share price at beginning of period, Priceend = share price at end of period, Dividends = dividends paid and TSR = Total Shareholder Return, TSR is computed as TSR = (Priceend − Pricebegin + Dividends) / Pricebegin _____________________________________________________________________________________ Unsupported App – app where the creator lacks the infrastructure or commitment to resolve issues. These apps could be broken by an OS update. In wireless, unsupported apps could also lead to additional customer service expense or negative publicity for the carrier or device‐ maker. _____________________________________________________________________________________ USP – Unique Selling Point, Unique Selling Proposition. Competitive advantage. Pinpointing the USP requires some hard soul‐searching and creativity. To start the company needs to analyze how other
companies use their USPs to their advantage. This requires careful analysis of other companies' ads and marketing messages. An analysis of what the competition sells, not just their product or service characteristics, but they need to get a great deal about how companies distinguish themselves from competitors. To uncover a company’s USP and use it to power sales, here are some steps that might need to be done. Analyzing customers’ needs: Too often, entrepreneurs fall in love with their product or service and forget that it is the customer's needs, not their own, that they must satisfy. Step back from the daily operations and carefully scrutinize what customers really want. Know what motivates customers' behavior and buying decisions. Effective marketing requires a person to be an amateur psychologist. They need to know what drives and motivates customers. This goes beyond the traditional customer demographics, such as age, gender, race, income and geographic location that most businesses collect to analyze their sales trends. Uncover the real reasons customers buy your product instead of a competitor's. As business grows, the best source of information for the company is the customers themselves. So reaching out to customers for feedback would be a great strategy to the company. _____________________________________________________________________________________ Value Added Service (VAS) – all services in telecommunications beyond standard voice and text transmissions. In the telecommunication industry, on a conceptual level, value‐added services add value to the standard service offering, spurring the subscriber to use their phone more and allowing the operator to drive up their ARPU. For mobile phones, while technologies like SMS, MMS and GPRS are usually considered value‐added services, a distinction may also be made between standard (peer‐to‐ peer) content and premium‐charged content. These are called mobile value‐added services (MVAS) which are often simply referred as VAS. _____________________________________________________________________________________ Value Chain – series of activities for a firm operating in a specific industry. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. The Value Chain concept was first described by Michael Porter in 1985. Primary Activities in a Value chain are: Inbound Logistics: Here goods are received from a company's suppliers. They are stored until they are needed on the production/assembly line. Goods are moved around the organisation. Operations: This is where goods are manufactured or assembled. Individual operations could include room service in a hotel, packing of books/videos/games by an online retailer, or the final tune for a new car's engine. Outbound Logistics: The goods are now finished, and they need to be sent along the supply chain to wholesalers, retailers or the final consumer.
Marketing and Sales: In true customer orientated fashion, at this stage the organisation prepares the offering to meet the needs of targeted customers. This area focuses strongly upon marketing communications and the promotions mix. Service: This includes all areas of service such as installation, after-sales service, complaints handling, training and so on. _____________________________________________________________________________________ Value Driver – an activity or organizational focus which enhances the perceived value of a product or service in the perception of the consumer and which therefore creates value for the producer. Advanced technology, reliability, or reputation for customer service can all be value drivers. _____________________________________________________________________________________ Variable Cost – expenses that change in proportion to the activity of the business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost. Direct Costs, however, are costs that can easily be associated with a particular cost object. However, not all variable costs are direct costs. For example, variable manufacturing overhead costs are variable costs that are indirect costs, not direct costs. Variable costs are sometimes called unit‐level costs as they vary with the number of units produced. Direct labor and overhead are often called conversion cost, while direct material and direct labor are often referred to as prime cost. _____________________________________________________________________________________ Vertical Chain/Vertical Integration – A style of management control where companies in a supply chain are united through a common owner. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or (market‐specific) service, and the products combine to satisfy a common need. It is contrasted with horizontal integration. Vertical integration is one method of avoiding the hold‐up problem. A monopoly produced through vertical integration is called a vertical monopoly. _____________________________________________________________________________________ Vertical Market – group of similar businesses and customers that engage in trade based on specific and specialized needs. A vertical market (often referred to simply as a "vertical") is a group of similar businesses and customers that engage in trade based on specific and specialized needs. Often, participants in a vertical market are very limited to a subset of a larger industry (a niche market). An example of this sort of market is the market for point‐of‐sale terminals, which are often designed specifically for similar customers and are not available for purchase to the general public. Vertical marketing can be witnessed at trade shows.
_____________________________________________________________________________________ Visitor Roaming – use of a cell phone on a carrier’s network by a non‐customer, payment for which is arranged between the carrier and the user’s wireless service provider. _____________________________________________________________________________________ Voluntary Churn – percentage of customers who choose to deactivate their service. _____________________________________________________________________________________ Waterfall Chart – form of data visualization which helps in determining the cumulative effect of sequentially introduced positive or negative values. A waterfall chart is a form of data visualization that helps in determining the cumulative effect of sequentially introduced positive or negative values. The waterfall chart is also known as a flying bricks chart or Mario chart due to the apparent suspension of columns (bricks) in mid‐air. Often in finance, it will be referred to as a bridge. Waterfall charts were popularized by the strategic consulting firm McKinsey & Company in its presentations to clients. _____________________________________________________________________________________ What is Strategy – management book by Michael Porter. The book explains how the strategic model of the 1980s was based on productivity, increasing market share, and lowering costs, all of which led to philosophies like Total Quality Management (TQM), benchmarking, outsourcing, re‐engineering, Six Sigma, Lean Enterprise, and so on. Continuing incremental improvement, however, brings different players to the same level. Porter states that a company’s strategy should focus on customer needs, customer accessibility, or the variety of a company’s products and services. In the value chain, one link can be imitated, but the chain is difficult to imitate. The tradeoff is that for a company to excel at some things, it must make a conscious decision not to do other things. _____________________________________________________________________________________ Yield – rate of income generated. _____________________________________________________________________________________ YOY – Year over Year. _____________________________________________________________________________________
About the Author Harish Vadada is a Wireless engineer and web 2.0 enthusiast and has spent more than a decade helping large companies build and develop networks. He has designed and built networks on 4G/3G/2G technologies and helped make strategic decisions evaluating emerging technologies and architectures and launch new products and services for various operators and vendors in the US. He is also a co‐founder and Chief Strategy Officer of software product startup Gyanfinder – a social training network for the eLearning industry. He is also an avid technology blogger and writer having contributed to various telecom magazines as a writer. He has a Master’s of Science in Electrical Engineering from Lamar University, Texas and lives with his wife and two kids in Martinez, California. Please reach out to him on – harish.vadada@telecom‐cloud.net for questions/suggestions. LinkedIn ‐ http://www.linkedin.com/in/harishvadada Twitter ‐ @ TelecomCloud_4G
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