[BUS 345] Chapter 5: Competitive Advantage and Firm Performance [Quiz 1]

(Shareholder Value Creation) *Risk Capital*:

*Money provided by shareholders in exchange for an equity share in a company.* **cannot be recovered if a firm goes bankrupt.

(Shareholder Value Creation) *Total Return to Shareholders*:

*Return on risk capital, including stock price appreciations & dividends received over a specific period.* **External performance metric

Value (V):

*The dollar amount consumers would attach to a product.* ("Reservation Price") **max. willingness to pay

Accounting Profitability: LIMITATIONS

- All accounting data are *historical data* and thus backward-looking. - Accounting data *do not consider off-balance sheet items*. - Accounting data *focus mainly on tangible assets* (no longer most important). - Measure *relative profitability*.

Accounting Profitability examines...

- Return on Invested Capital (ROIC) - Return on Revenue (ROR) - Working Capital Turnover **Internal performance metric

3 Traditional Performance Frameworks:

1. Accounting Profitability 2. Shareholder Value Creation 3. Economic Value Creation

To measure competitive advantage, we must:

1. Assess firm performance 2. Benchmark to the industry average/other competitors

A large difference between (V) and (C) gives the firm two distinct pricing options:

1. Charge higher prices to reflect higher product value. 2. Charge the same price as competitors to gain market share.

4 Things the Balanced Scorecard Allows Managers to Do:

1. Communicate and link the strategic vision to responsible parties within the organization. 2. Translate the vision into measurable operational goals. 3. Design and plan business processes. 4. Implement feedback and organizational learning to modify and adapt strategic goals when indicated.

Strategy is about...

1. Creating economic value 2. Capturing as much of it as possible

Economic Value Creation: 3 LIMITATIONS

1. Difficult to determine the value of a good in the eyes of consumers. 2. Consumer perceived value 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.

Shareholder Value Creation: 3 LIMITATIONS

1. High volatility of stock prices ((short-term)). 2. Overall macroeconomic factors have a direct bearing on stock prices. 3. Stock prices often reflect the psychological mood of investors.

4 Balanced Scorecard Questions:

1. how do customers view us? 2. how do we create value? 3. what core competencies do we need? 4. how do shareholders view us?

Balanced Score Card:

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

Efficient-Market Hypothesis:

All available information about a firm's past, current state, and expected future performance is embedded in the firm's stock price.

Triple Bottom Line:

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

Total Return to Shareholders indicates:

How the stock market views all available information about a firm's past

"Reservation Price"

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

Opportunity Costs:

The value of the best forgone alternative use of the resources employed.

Economic Value Created:

Value (V) - Cost (C) **"Economic Contribution"

The strategic objective is to maximize the ________.

economic value created