Strategic Management Exam 2 (v.2)

Traditional frameworks to measure firm performance

- accounting profitability

- shareholder value creation

- economic value creation

Integrative frameworks to measure firm performance

- balanced scorecard

- triple bottom line

Accounting Profitability

compares and benchmarks firm performance to competitors / industry average

- through GAAP, 10-K statements, ROIC, ROE, ROA, ROR

Accounting Profitability Limitations

- historical and backward-looking

- doesn’t consider off balance sheet items (operating leases, pension)

- focus on tangible assets

Shareholder value creation

- reduced focus on tangible assets

- shareholders own stock (stock price appreciation + dividends = return)

Risk capital

money provided for an equity share

Market Capitalization

dollar value of total shares outstanding; outstanding shares * share price

Shareholder value creation limitations

- stock prices can be volatile

- macroeconomic factors effect stock prices (interest rates, unemployment)

- stock prices can reflect mood of investors

Economic Value Creation

difference between a buyer’s willingness to pay for a product/service and the firm’s total cost to produce it

Reservation price

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

Economic Value Creation limitations

- valuing a consumer good is not easy

- value changes on the eyes of consumer’s income, preferences, time

- must estimate EVC for products/services offered by the firm

Balanced Scorecard

- helps managers achieve their strategic objectives

- internal and external performance metrics

- balances both financial and strategic goals

Balanced Scorecard Metrics

customers —> revenue, profit, customer satisfaction

value creation —> competitiveness, innovation

core competencies —> key business processes

shareholders —> cash flow, operating income, ROIC, ROE, return to SH

Balanced Scorecard limitations

- focus on implementation, not formulation

- if deviations occur, how to get back on track?

- lacks guidance of what metrics to use and how to address setbacks

Triple Bottom Line

1.) Profit —> economic dimension

2.) People —> social dimension

3.) Planet —> ecological dimension