Strategic Management: Chapter 5 – Flashcards
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To measure and assess firm performance, use (3)
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Accounting profitability, Shareholder value creation, Economic value creation
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Integrative frameworks, combining quantitative data with qualitative assessments (2)
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The balanced scorecard The triple bottom line
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Helps assess competitive advantage: Accurately assess firm performance. Compare firm performance to competitors / the industry average. Standardized accounting metrics Form 10-K statements Profitability ratios Return on invested capital (ROIC), return on equity (ROE), return on assets (ROA), and return on revenue (ROR)
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Accounting profitability
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One of the most commonly used metrics in assessing firm financial performance is....
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return on invested capital (ROIC)
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ROIC formula
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ROIC = (Net profits/Invested capital)
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ROIC is a popular metric because it is a good proxy for firm _____. In particular, the ratio measures how effectively a company uses its _____, which consists of two components: (1) shareholders' equity through the selling of shares to the public, and (2) interest-bearing debt through borrowing from financial institutions and bond holders.
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profitability, total invested capital
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total invested capital consists of two components
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(1) shareholders' equity through the selling of shares to the public, and (2) interest-bearing debt through borrowing from financial institutions and bond holders.
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Profitability ratios used in measuring accounting profitability (4)
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ROIC, ROE, ROA, ROR
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The _____ is a form that companies are required by law to release and its the primary source of companies accounting data. (thanks to sarbannes oaxley act)
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10-K
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As a rule of thumb, If a firm's ROIC is ____ than its cost of capital, it generates value.
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greater
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ROIC is broken into what two constituents
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ROR, working capital turnover
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ratio that indicates how much of the firm's sales is converted into profit
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ROR
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a measure of how effectively capital is being used to generate revenue.
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working capital turnover
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Return on revenue can be broken into three additional ratios
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1) COGS/revenue, 2) R&D expense/revenue 3) Selling, general &admin expense/revenue
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ROR formula
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net profits/revenue
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ratio that indicates how efficiently a company can produce a good
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COGS/revenue
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ratio that indicates how much of each dollar that the firm earns in sales is invested to conduct research and development
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R&D/revenue
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ratio that indicates how much of each dollar that the firm earns in sales is invested in sales, general, and administrative (SG&A) expenses
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SG&A/revenue
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Working capital turnover can be broken down into what other ratios? (4)
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fixed asset turnover, inventory turnover, receivables turnover, payables turnover
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fixed asset turnover formula
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revenue/FA
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ratio that measures how well a company leverages its fixed assets, particular property, plant and equipment
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fixed asset turnover
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inventory turnover formula
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COGS/inventory
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ratio that indicates how much of a firm's capital is tied up in its inventory
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inventory turnover
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receivables turnover formula
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revenue/accounts receivable
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ratio that concerns the effectiveness of a company's receivables and payables. These are a part of a company's cash flow management and they indicate the company's efficiency in extending credit, as well as collecting debts.
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receivables turnover
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____ ratios of receivables turnover imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers
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higher
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payables turnover formula
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revenue/account payable
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ratio that indicates how fast the firm is paying its creditors and how much it benefits from interest-free loans extended by its suppliers
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payables turnover
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Limitations of Accounting Data (3)
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1) All accounting data are historical and thus backward-looking. 2) Accounting data do not consider off-balance sheet items, such as pension obligations and leasing obligations 3) Accounting data focus mainly on tangible assets, which are no longer the most important. (Innovation, quality, customer experience are important.)
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Own one or more shares of stock in a company The legal owners of public companies
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Shareholders
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Money provided for an equity share in a company Cannot be recovered if the firm goes bankrupt
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risk capital
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Stock price appreciation plus dividends
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total return to shareholders
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total return to shareholders
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Stock price appreciation plus dividends
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the value of a company that is traded on the stock market (Dollar value of total shares outstanding) Number of outstanding shares x share price
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market capitalization
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market capitalization calculation
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Dollar value of total shares outstanding Number of outstanding shares x share price
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a second traditional way to measure and assess competitive advantage, attempting to overcome the short-comings of a backward-looking internal focus on mostly tangible assets inherent in accounting profitability
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shareholder value creation
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Limitations of Shareholder Value Creation (3)
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1) Stock prices can be highly volatile. Makes it difficult to assess firm performance 2) Macroeconomic factors affect stock prices. (Economic growth or contraction Unemployment, interest and exchange rates) 3) Stock prices can reflect the mood of investors. Can be irrational
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The difference between value and cost (V-C)
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Economic Value Creation
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In Economic Value Creation, competitive advantage can be based on what two things
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superior product differentiation, a relative cost advantage over rivals
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In Economic Value Creation, in order to calculate CA, the three components needed are....
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value, price, cost
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aka profit in economic value creation
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producer surplus
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The difference between the price charged (P) and the cost to produce (C)
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Producer surplus (also called profit)
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The difference between what you would have been willing to pay (V) and what you paid (P)
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consumer surplus
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Economic value creation is ____ + ____
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consumer surplus, firm profit
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Economic value creation formula using letter variables
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V-C = (V-P) + (P-C)
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What three different things does the variable V denote?
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total perceived consumer benefits, consumer's maximum willingness to pay, reservation price
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The value of the best forgone alternative use of the resources employed
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opportunity cost
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Rather than merely relying on historical costs, as done when taking the perspective of accounting profitability, in economic value creation perspective all costs, including _____ costs, must be considered
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opportunity
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Limitations of Economic Value Creation (3)
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1) Determining value for consumers is not simple. 2) The value of a good in the eyes of consumers changes. Based on income, preferences, time, and other factors 3) To measure firm-level competitive advantage, we must estimate the economic value created for all products and services offered by the firm.
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Strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals
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The balanced scorecard
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balanced scorecard approach
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Four key questions in the balanced-scorecard framework
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how do customers view us? how do we create value? what core competencies do we need? How do shareholders view us?
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By relying on both an internal and external view of the firm, the balanced-scorecard approach combines the strengths provided by what individual approaches to assessing competitive advantage discussed earlier? (3)
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accounting profitability, shareholder value creation, economic value creation
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Examples of Metrics for the following Balanced Scorecard Question: how do customers view us? (3)
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revenue, profit, customer satisfaction
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Examples of Metrics for the following Balanced Scorecard Question: how do we create value? (3)
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Competitiveness, innovation, organizational learning
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Examples of Metrics for the following Balanced Scorecard Question: what core competencies do we need? (2)
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Core competencies, supporting business processes
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Examples of Metrics for the following Balanced Scorecard Question: how do shareholders view us?
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Cash flow, operating income, ROIC, ROE, total returns to shareholders
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Advantages of the Balanced Scorecard (4)
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Managers can: 1) Link the strategic vision to responsible parties 2) Translate the vision into measureable goals 3) Design and plan business processes 4) Implement feedback and organizational learning (Modify and adapt strategic goals)
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Disadvantages of the Balanced Scorecard (5)
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1) Focused on strategy implementation. Not formulation 2) Limited guidance about which metrics to use 3) Only as useful as the managers apply it 4) Strategy must be translated into measurable objectives 5) Not much guidance on how to get back on track if setbacks occur
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Combination of economic, social, and ecological concerns (or profits people and planet) that can lead to a sustainable strategy
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The Triple Bottom Line
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According to the Triple Bottom Line, Three dimensions fundamental to sustainable strategy are...
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profits, people, planet
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The economic dimension in the Triple Bottom Line (the business must be profitable to survive)
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profits
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The social dimension in the Triple Bottom Line
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People
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The ecological dimension in the Triple Bottom Line (Emphasizes the relationship between business and the natural environment)
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Planet
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According to the triple bottom line, when profits, people and planet align, you have....
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sustainable strategy
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According to the Strategy Highlight "Interface: The World's First Sustainable Company" what makes this company unique?
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Interface, the world's largest manufacturer of modular carpet This industry typically has heavy reliance on fossil fuels and chemicals. In 1994, they set a goal for 2020: No petroleum-based raw materials No oil-related energy Between 1996 and 2008 Saved over $400 million due to its energy efficiency and use of recycled materials Strategic intent is to be the world's first fully sustainable company
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a _____ details the competitive tactics and initiatives Explains how the firm intends to make money Stipulates how the firm conducts its business
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Business Model
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Business Model does what three things?
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1) Details the competitive tactics and initiatives 2) Explains how the firm intends to make money 3) Stipulates how the firm conducts its business (buyers, suppliers and partners)
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Talk about "Airbnb: Tapping the Value of Unused Space" business strategy
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2 San Francisco friends Rented out space on the mattresses Served guests breakfast First mover in the peer-to-peer rental industry Unique accommodation offerings Spring 2015: valued at $20 billion
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Popular Business Models (7)
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Razor-razorblades, Subscription, Pay as you go, Freemium, Wholesale, Agency, Bundling
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Business model where: Initial product is often: Sold at a loss or Given away for free Helps drive demand for complementary goods Money made primarily on replacement parts Example: HP Charges little for its laser printers Imposes high prices for replacement toner cartridges
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Razor-razorblades
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Who invented the Razor-razorblades model?
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As you might guess, this was invented by Gillette, which gave away its razors and sold the replacement cartridges for relatively high prices.
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Business model where: Traditionally used for (print) magazines and newspapers Users pay for access to a product or service Examples: Cable television Satellite radio Health clubs
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Subscription
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Business model where: Users pay for only the services they consume Examples: Utilities providing power and water Cell phone service plans
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Pay as you go
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Business model where: Free + premium business model Provides the basic features free of charge Users pay for premium services Such as advanced features or add-ons Examples: Software trials with an option to buy
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Freemium
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Business model where: The traditional model in retail Products sold at a fixed price to retailers Retailers mark up the prices to make a profit Example: Books are originally purchased from a publisher Re-sold at 50% markup from a retailer
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Wholesale
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Business model where: Producer relies on an agent or retailer to sell the product. At a predetermined percentage commission Producer may also control the retail price. Example: Entertainment industry Agents place artists or artistic properties. They then receive a commission.
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Agency
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Business model where: Products or services for which demand is negatively correlated at a discount Example: The Microsoft Office Suite Instead of selling Word and Excel $120 each, Microsoft bundles them at a discount, say $180
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Bundling
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Ways that Business Models Evolve Dynamically (5)
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Business models can be combined. Business models can evolve. Business models can be disrupted. Businesses must respond to disruption ; adapt. Legal conflicts can arise.
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Give an example of how Amazon disrupted a business model
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Amazon disrupted wholesale models of publishers
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How Do We Measure and Assess Competitive Advantage?(5)
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1) Relative to a benchmark Either using competitors or the industry average 2) It is a multi-faceted concept 3) By measuring accounting profit, shareholder value, or economic value 4) The balanced scorecard approach 5) The triple bottom line
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Managerial Implications of business strategy (4)
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1) No best strategy exists - only better ones 2) Competitive advantage is best measured by: -Criteria that reflect overall business unit performance -NOT the performance of specific departments 3) Both quantitative and qualitative performance dimensions matter. 4) A firm's business model is critical to achieving a competitive advantage.
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How has microsoft shifted its focus?
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Prior focus: windows-only business model New focus: "mobile-first, cloud-first" Main changes: Office suite now available on Apple iOS / Android Office 365 available as a subscription service Software can be accessed on any device.
