Chapter 5

Balanced Scorecard

A strategy implementation tool that harnesses multiple internal and external performance metrics to balance financial and strategic goals.

The balanced scorecard framework enables managers to 

implement feedback and organizational learning

translate the strategic vision into operational goals

communicate and link the strategic vision

Consumer Surplus

The difference between the value a consumer attaches to a good or service and what he or she paid for it.

Value-Price Paid

Economic Value Created

The difference between value (V) and cost (C), or (V – C), also known as the sum of consumer and producer surplus.

Public companies are required by law to release detailed accounting data, which enables economic value creation comparative analysis of firms

Efficient-Market Hypothesis

The idea that all available information about a firm’s past, current state, and expected future performance is embedded in the market price of the firm’s stock.

Environmental, Social, and Governance (ESG) Criteria

A set of standards that evaluate companies beyond mere financial results.

Market Capitalization

The total dollar market value of a company’s outstanding shares at any given time, calculated as the

(# of shares outstanding * by the share price)

Opportunity Costs

The worth of the most favorable sacrificed alternative due to the resources utilized.

Producer Surplus

Another term for profit, the difference between price charged (P) and the cost to produce (C), or (P – C). also called profit

Profit

The difference between price charged (P) and the cost to produce (C), also known as producer surplus. (P-C)

Reservation Price

The maximum price a consumer is willing to pay for a product or service based on total perceived benefits.

Risk Capital

The money provided by shareholders in exchange for an equity share in a company, which cannot be recovered if the firm goes bankrupt.

Shareholder Capitalism

The perspective that shareholders have the most legitimate claim on the profits of public companies.

Sustainable Strategy

A strategy along economic, social, and ecological dimensions that can be pursued over time without causing harm to people or the planet.

Total Return to Shareholders

Return on risk capital that includes stock price appreciation plus dividends received over a specific period.

Triple Bottom Line

A framework considering economic, social, and ecological concerns; often summarized as profits, people, and planet.

Tragedy of the Commons

A problem arising when individuals or entities pursue their own self-interest without regard for society or global well-being.

Value

The dollar amount a consumer attaches to a good or service, also referred to as the consumer’s maximum willingness to pay.

Competitive Advantage

Superior performance relative to other competitors in the same industry or against the industry average

Consumers’ Willingness to Pay−Cost to Produce

Accounting Metrics

Financial measures used to assess a firm's performance through detailed accounting data.

Externalities

Social consequences of business activities, such as pollution and energy loss.

Shared Value Creation Framework

Framework proposing that strategic leaders maintain a dual focus on shareholder value creation and value creation for society(social and economic).

Says that: Stock prices are influenced by the psychological mood of investors.

Overall macroeconomic factors have a direct bearing on stock prices.

Stock prices can be highly volatile.

Legal Personality

The recognition of a for-profit firm as a legal entity with rights and obligations, separate from its founders.

These are the key questions for understanding the balanced scorecard?

• How do we create value?

• How do customers view us?

• What core competencies do we need?

The public stock company has four characteristics that make it an attractive corporate form

1. Limited liability for investors

   means that the shareholders who provide the risk capital are liable only for the capital specifically invested, and not for other investments they may have made or for their personal wealth.  While they can earn money on their investment, they cannot lose an amount that is larger than that investment. encourages investments by the wider public and entrepreneurial risk-taking.

2. Transferability of investor ownership through the trading of shares of stock on exchanges such as the New York Stock Exchange (NYSE), Each share represents only a minute fraction of ownership in a company, thus easing transferability.

3. Legal personality. The law regards a non-living entity such as a for-profit firm as similar to a person, with legal rights and obligations. Legal personality allows a firm’s continuation beyond its founders’ lifetime or involvement in the company.

4. Separation of legal ownership and management control.¹³ In publicly traded companies, the stockholders (the principals, represented by the board of directors) are the legal owners of the company, and they delegate decision-making authority to professional managers (the agents).

Legal owner

Own at least one share

a multidimensional perspective

mance dimensions:³⁷

1. Accounting metrics

2. Shareholder value

3. Economic value

a firm’s strategic leaders must be able to accomplish two critical tasks:

1. Assess their firm’s performance accurately.

2. Compare and benchmark their firm’s performance to other competitors in the same industry or against the industry average

 three defining problems faced by capitalism today according to strategy scholar Rebecca Henderson 

are climate change, economic inequality, and the short-term focus of corporate governance(beleaguered institutions).

firm's purpose has shifted over time.  The are the views of the firm's purpose in historical order, with the most recent view at the top.

creating shared value 

pursuing corporate social responsibility 

maximizing profits 

examples of the competition metrics most commonly used in strategic management to conduct direct performance comparisons between different companies

Return on invested capital, return on assets, and return on revenue

e information used for comparing the performance of public companies based on accounting profitability

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• The relative performance is evaluated using standardized financial metrics.

• The information is derived from such data as income statements and balance sheets.

accounting profitability perspective

Accounting data are historical and therefore backward-looking. Accounting data focus primarily on tangible assets.

most commonly used metrics for comparing the performance of different companies

return on revenue
return on equity
return on assets

These statements about stock market valuations are true

• Viewed over the long term, stock market valuation is a useful metric for assessing competitive advantage.

• Stock market valuation is equal to the number of outstanding shares multiplied by the share price.

Because external factors create volatility in stock prices, a better measure of a firm's performance over the long term is

the total return to shareholders

a successful  product differentiation strategy

, its product will have a higher perceived value and the firm will have a competitive advantage over a competitor that creates a product at equal cost but with a lower reservation price.