Chapter 5

Balanced scorecard (p. 192)

Strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals.

These are the key questions for understanding the balanced scorecard? How do shareholders view us?

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• How do we create value?

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• How do customers view us?

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• What core competencies do we need?

The balanced scorecard framework enables managers to 

implement feedback and organizational learning

• translate the strategic vision into operational goals

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• communicate and link the strategic vision

Consumer surplus (p. 188)

Difference between the value a consumer attaches to a good or service (V) and what he or she paid for it

Economic value created (p. 186)

Difference between value (V) and cost (C), or (V – C), or the sum of consumer and producer surplus

Efficient-market hypothesis (p. 184)

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 (p. 171)

A set of standards beyond mere financial results on which companies are evaluated.

Market capitalization (p. 184)

A firm performance metric that captures the total dollar market value of a company’s total outstanding shares at any given point in time.) (Number of Shared Outstanding* Share Price

Opportunity costs (p. 191)

The value of the best forgone alternative uslder cae of the resources employed.

Producer surplus (p. 188)

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

Profit (p. 188)

Difference between price charged (P) and the cost to produce (C), or (P – C); also called producer surplus.

Reservation price (p. 186)

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

Risk capital (p. 183)

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

Shareholders (p. 183)

Individuals or organizations that own one or more shares of stock in a public company.

Shared value creation framework (p. 177)

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.

Shareholder capitalism (p. 172)

Shareholders—the providers of the necessary risk capital and the legal owners of public companies—have the most legitimate claim on profits.

Sustainable strategy (p. 197)

A strategy along the economic, social, and ecological dimensions that can be pursued over time without detrimental effects on people or the planet.

Total return to shareholders (p. 184)

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

Triple bottom line (p. 197)

Combination of economic, social, and ecological concerns—or profits, people, and planet—that can lead to a sustainable strategy.

Tragedy of the commons (p. 176)

A problem that arises when individuals, companies, or nations pursue their own self-interest without considering the well-being of society or the global community.

Value (p. 188)

The dollar amount (V) a consumer attaches to a good or service; the consumer’s maximum willingness to pay; also called reservation price.

Competitive advantage (p. 188)

• consumers' willingness to pay

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• the cost to produce the good or service

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The public stock company has four characteristics that make it an attractive corporate form:¹¹

1. Limited liability for investors. This characteristic 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. Limited liability 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), NASDAQ,¹² or exchanges in other countries. 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

To address these key questions, we will develop a multidimensional perspective for assessing competitive advantage. We begin by focusing on the three standard performance dimensions:³⁷

1. Accounting metrics

2. Shareholder value

3. Economic value

Because competitive advantage is defined as superior performance relative to other competitors in the same industry or to the industry average, 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.

Many strategy scholars argue that the value of public stock companies is too narrowly defined in terms of financial performance, leading to scandals and economic crises.

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

• beleaguered institutions

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• climate change

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• economic inequality

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The price determines in part the stock's market valuation.

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

Social consequences of business activities, including pollution, energy loss, and dangerous accidents, are known as externalities 

Our understanding of the 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 valeu 

pursuing corporate social responsibility 

maximizing procits 

Return on invested capital, return on assets, and return on revenue are examples of the 

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

The firm's accounting metrics, ability to create shareholder value, and ability to generate economic value tend to be correlated

the following correctly describes the information used for comparing the performance of public companies based on accounting profitability?

• The information is filed in a 10-K report.

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• The relative performance is evaluated using standardized financial metrics.

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

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

-Return on invested capital, return on assets, and return on revenue are examples of the  profitability ratios most commonly used in strategic management to conduct direct performance comparisons between different companies.

When a firm goes bankrupt, shareholders  cannot recover their risk capital

the following are among the most commonly used metrics for comparing the performance of different companies?

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• return on assets

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• return on equity

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• return on revenue

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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

If a firm has 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.

Companies are required to provide  benchmarks to shareholders, which are used in determining a firm's competitive advantage.

When a trade occurs, the consumer and producer both capture some of the economic value

To determine the value of a good in the eyes of consumers, a firm can examine consumers' purchasing habits for their revealed preferences