CHAPTER THREE
WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF CONDUCTING A FINANCIAL RATIO ANALYSIS OF A FIRM?
*ADVANTAGES* - financial ratios enable a firm to obtain a quick assessment of its overall performance - three comparisons lend themselves to financial ratio analysis... *[1]* historical comparisons --> the trend in various financial ratios over time *[2]* comparison with industry norms --> enables a firm to determine whether or not it looks competitive within the industry *[3]* comparison with competitors --> provides a set of benchmarks that track the firm's competitiveness *DISADVANTAGES/LIMITATIONS* - the quality of the accounting data on which the ratios are calculated - the ratios do not provide any direction as to how managers should invest resources to generate future sustainable competitive advantages
FOUR PROBLEMS OF SWOT ANALYSIS
*[1]* SWOT may identify strengths, but these do not always translate into competitive advantages. to generate competitive advantages, firms have to understand the source of their strengths and focus resources on developing them. *[2]* SWOT has a too narrow focus on the external environment. often, a firm's future growth comes from peripheral or emerging parts of the market. *[3]* SWOT is static. over time, all aspects of a firm's environment may change, and SWOT does not offer insights into the processes that cause the change, or how a firm needs to adapt to a dynamic environment. *[4]* SWOT may overemphasize single strategic dimension. this overemphasis may lead to neglect of other important factors that affect a firm's performance.
SWOT ANALYSIS IS A TECHNIQUE TO ANALYZE THE INTERNAL AND EXTERNAL ENVIRONMENTS OF A FIRM. WHAT ARE THE ADVANTAGES OF A SWOT ANALYSIS?
a SWOT analysis is a technique to analyze the internal and external environments of a firm. SWOT provides a useful starting point for improving firms and better positioning them for success.
CAUSAL AMBIGUITY
a characteristic of a firm's resources that is costly to imitate because a competitor cannot determine what the resource is and/or how it can be re-created
SOCIAL COMPLEXITY
a characteristic of a firm's resources that is costly to imitate because the social engineering required is beyond the capability of competitors, including interpersonal relations among managers, organizational culture, and reputation with suppliers and customers
PATH DEPENDENCY
a characteristic of resources that is developed and/or accumulated through a unique series of events
DESCRIBE THE PRIMARY AND SUPPORT ACTIVITIES IN A FIRM'S VALUE CHAIN.
a firm's value chain consists of a firm's value-creating activities *PRIMARY ACTIVITIES* are sequential activities that pertain to the physical creation of the product or service, its sale and transfer to the buyer, and its service after sale; including inbound logistics, operations, outbound logistics, marketing and sales, and service. *SUPPORT ACTIVITIES* either add value by themselves or add value through important relationships with both primary activities and other support activities; including procurement, technology development, human resource management, and general administration
FINANCIAL RATIO ANALYSIS
a method of evaluating a company's performance and financial well-being through ratios of accounting values, including short-term solvency, long-term solvency, asset utilization, profitability, and market value ratios.
BALANCED SCORECARD
a method of evaluating a firm's performance using performance measures from the customers' perspectives, as well as internal, innovation and learning, and financial perspectives
VALUE-CHAIN ANALYSIS
a strategic analysis of an organization that uses value-creating activities
SERVICE
actions associated with providing service to enhance or maintain the value of the product
MARKETING AND SALES
activities associated with purchases of products and services by end users and the inducements used to get them to make purchases
TECHNOLOGY DEVELOPMENT
activities associated with the development of new knowledge that is applied to the firm's operations
HUMAN RESOURCE MANAGEMENT
activities involved in the recruiting, hiring, training, development and compensation of all types of personnel
SUPPORT ACTIVITIES
activities of the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities; including procurement, technology development, human resource management, and general administration
OPERATIONS
all activities associated with transforming inputs into the final product form
INTERRELATIONSHIPS
collaborative and strategic exchange relationships between value-chain activities either *[a]* within firms or *[b]* between firms. strategic exchange relationships involve exchange of resources such as information, people, technology, or money that contribute to the success of the firm.
OUTBOUND LOGISTICS
collecting, storing, and distributing the product or service to buyers
UNDER WHAT CONDITIONS ARE EMPLOYEES AND MANAGERS ABLE TO APPROPRIATE SOME OF THE VALUE CREATED BY THEIR FIRM?
employees and managers sometimes have the capability to consume a firm's earnings in the form of salary perks. four conditions that determine their ability to do so are... *[1]* employee bargaining power, due to their unique skills and abilities *[2]* employee replacement cost, due to the rareness of employee skills *[3]* employee exit cost, which is the ability of the employee to find alternative employment, and associates with lower ability to appropriate earnings *[4]* manager bargaining power, due to managers' information about the integrated understanding of the firm's total operations
GENERAL ADMINISTRATION
general management, planning, finance, accounting, legal and government affairs, quality management, and information systems; activities that support the entire value chain and not individual activities
INTERNAL BUSINESS PERSPECTIVE
measures of firm performance that indicate how well a firm's internal processes, decisions, and actions are contributing to customer satisfaction
INNOVATION AND LEARNING PERSPECTIVE
measures of firm performance that indicate how well firms are changing their product and service offerings to adapt to changes in the internal and external environments
CUSTOMER PERSPECTIVE
measures of firm performance that indicate how well firms are satisfying customers' expectations
FINANCIAL PERSPECTIVE
measures of firms financial performance that indicate how well strategy, implementation and execution are contributing to bottom-line improvement
INTANGIBLE RESOURCES
organizational assets that are difficult to identify and account for, and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources
TANGIBLE RESOURCES
organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources
RESOURCE-BASED VIEW [RBV] OF THE FIRM
perspective that firms' competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute
INBOUND LOGISTICS
receiving, storing, and distributing inputs of a product
HOW CAN MANAGERS CREATE VALUE BY ESTABLISHING IMPORTANT RELATIONSHIPS AMONG THE VALUE-CHAIN ACTIVITIES BOTH WITHIN THEIR FIRM AND BETWEEN THE FIRM AND ITS CUSTOMERS AND SUPPLIERS?
relationships among value chain activities can improve firm operations, leading to better quality products or lower costs. for example, the human resource management practice of encouraging transfer of employees across divisions can improve employee morale, transfer of information and ideas across divisions, and thereby improve operations. a relationship between inbound logistics and suppliers can lead to implementation of just-in-time management, which can reduce inventory cost and improve product quality.
PRIMARY ACTIVITIES
sequential activities of the value chain that refer to the physical creation of the product or service, its sale and transfer to the buyer, and its service after sale, including inbound logistics, operations, outbound logistics, marketing and sales, and service
EXPLAIN THE FOUR CRITERIA FOR SUSTAINABILITY OF COMPETITIVE ADVANTAGES.
strategic resources that lead to firms' sustainable competitive advantage must be... [1] *valuable* --> in order to give the firms competitive advantages [2] *rare* --> or else competitors will be able to obtain the advantages too [3] *costly to imitate* --> or else competitors will be able to replicate the competitive advantages; four factors that limit resource imitation are physical uniqueness, path dependency, causal ambiguity, social complexity [4] *costly to substitute* --> or else competitors will be able to create a similar competitive advantage that serves the same function
WHAT ARE THE MAIN ADVANTAGES OF THE BALANCED SCORECARD?
the advantages of the balanced scorecard are that it incorporates more information about firm operations than financial ratio analysis about firm's basis for sustainable competitive advantage. therefore, it should be a better indicator of future organizational success.
SUMMARIZE THE CONCEPT OF THE BALANCED SCORECARD.
the balanced scorecard is a method of evaluating a firm's performance using performance measures from the customers', internal, innovation and learning, and financial perspectives. these measures include the financial perspective from financial ratio analysis, but also include measures of other firm processes that should pertain to developing sustainable competitive advantage. the customers' perspective includes measures of customers satisfaction. the internal perspective includes the ability of the firm's organization to efficiently and effectively create products and services that satisfy customers' needs. the innovation perspective includes measures of the firm's ability to change operations in order to keep up with the dynamic business environment.
ORGANIZATIONAL CAPABILITIES
the competencies and skills that a firm employs to transform inputs into outputs
PROCUREMENT
the function of purchasing inputs used in the firm's value chain, including raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings
