Strategic Management: Chapter 5
Accounting Profitability vs Economic Value Creation
Accounting Profitability - relies on histrocial costs Economic Value Creation - all costs are considered, including opportunity costs
All available information vs partially available information? - Efficient-market hypothesis
All!!!! past, current, and expected future
Razor-Razor-Blade
Developed by Gillette - the initial product is often sold at "a loss" or "given away for free" in order to drive demand for complementary goods
Subscription-Based
uses pay for access to a product/service during the payment term - ex) cable tv, cellular service providers, satellite radio, internat service prividers......
(V-C) vs (P-C) vs (V-P)
v- c = economic value creation p -c = profit V-p = consumer surplus
Advantage of the balanced scorecard (4)
- communicate and link the strategic vision to responsible parties within the organization - Translate the vision into "measurable operational goals"' - Design and plan business process - Implement feedback and organizational learning in order to modify and adapt strategic goals when indicated
Corporate Social Responsibility
- historically, economic performance has been the focus of firm performance - more recently society and investors require companies to also address social and ecological concerns - Millennials - born between 1980 and 1991 - expect firms to be socially responsible and have a strong interest in working for companies that match their values - research studies - CSR and firm performance relationship
What are limitations of Accounting Profitability?
1. All accounting data are historical data and thus "backward-looking" 2. Accounting data do not consider "off-balance sheet items" 3. focus mainly on tangible assets, which are no longer the most important 4. they do measure "relative" profitability, which is useful when comparing firms of different size over time
what are two distinct pricing options for the firm has a large difference between V and C?
1. Charge higher prices to reflect the higher product value and increase profitability, or 2. charge the same price as rivals and gain marker share
the four key questions (The balanced Scorecard) - key words
1. Customers 2. Value 3. Core competencies 4. Shareholders
the triple bottom line
1. Economic 2. Social 3. Ecological Combination of economic, social, and ecological concerns that can lead to a sustainable strategy Non-economic factors can have a significant impact on a firm's financial performance, as well as reputation and goodwill
Effective Business Model - Two steps
1. Formulate : managers transform their strategy of how to compete into a blueprint of actions and initiatives that support the overarching goals 2. Implement : Managers implements this blueprint through structures, processes, culture, and procedures
shareholder value creation - limitations in three words
1. Highly volatile 2. macroeconomic factors 3. psychological mood - irrational
the four key questions (The balanced Scorecard)
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?
Disadvantage of the Balanced Scorecard (4)
1. not for " Strategy formulation" but it is a tool for "strategy implementation" 2. it provides only limited guidance about which metrics to choose- different situations call for different metrics 3. failure to achieve competitive advantage is not indicative of a poor framework but of strategic failure, i.e Managers much have crafted a strategy that builds competitive advantage 4. Managers must accurately translate their strategy into objectives that can be measured within this model
shareholder value creation - limitations
1. stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short term 2. overall macroeconomic factors such as the unemployment rate, economic growth or contraction, and interest and exchange rates all have a direct bearing on stock prices 3. stock prices frequently reflect the psychological mood of investors, which can at times be irrational
Business Models
: Putting strategy into Action :Plan that details the firm's competitive tactics and initiatives
P, Profit
= Difference between the price P charged, and the cost (C) to produce or (P-C)
Reservation price
= V = consumer's willingness to pay maximum price; sometimes called the reservation price
V = Total perceived consumer benefits =
= maximum willingness to pay
Limitations - Economic Value Creation
Determining the value of a good in the eyes of consumers is not a simple task the value of a good in the eyes of consumers changes based on income, preferences, time, etc to measure firm-level competitive advantage, the economic value created for all products/services offered by the firm must be assessed
Extended Producer Responsibility
In anticipation of government regulation - proactively addressing social or ecological issues
what should I need to check for examining accounting profitability?
ROIC, coonstituent parts are 1. return on revenue 2. working capital turnover
which is more important to achieve superior performance or product or process innovation? - Business Model Innovation
Superior performance!! is more important to achieve -
Freemium = Free + Premium
The basic features of a product/service are provided "free" of charge, but the user must pay for premium services such as advanced freatures or add-ons (LINKEDIN!!!!!)
Opportunity Cost
The value of the best forgone(미리 예측된) alternative use of the resources employed
Does economic value creation include opportunity costs?
Yes! Economic Value Creation - all costs are considered, including opportunity costs
Efficient-market hypothesis - related to shareholder value creation.
all available information about a firm's past, current state, and expected future performance is embedded in the firm's stock price
the purpose of the balanced scorecard ? - balance what ?
balance financial and strategic goals -> Competitive Advantage
Total return to shareholder - external performance vs internal performance?
external performance unlike accounting data
what does business model explain?
how the firm intends to make money - How the firm conducts its business with buyers, suppliers, and partners
Business Models - 2 key words
includes.. 1. Firm's competitive tactics 전술, 작전행동 2. Initiatives (특정 문제 해결-목적 달성을 위한 새로운) 계획
shareholders
individuals or organizations who own one or more shares of stock in a public company they are the "legal owners" of public companies "effective strategies to grow the business" can increase a firm's profitability and its stock price - good CEO makes the value of stock to be greater!!
the importance of book value in firm's stock market valuation... how is the trend?
not capture in book value is increasing - more than 70 - 80% of firm's value nowadays
Total return to shareholders -- related to shareholder value creation.
return on risk capital, including stock price appreciation plus dividends received over a specific period (capital gains + dividend gains) this is what investors are interested in it is an "external performance metric", unlike accounting data
The balanced Scorecard
strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals
Economic Value Creation
the difference between a buyer's willingness to pay for a product/service and the firm's total cost to produce it V-C: V = VALUE, C = COST
Disadvantage of the Balanced Scorecard - opinion
the failure in the balanced scorecard can be a failure from strategic, but not from the metrics. So, it is important to translate strategies into objectives that can be measure within this model.
Risk Capital- related to shareholder value creation.
the money provided by shareholders in exchange for an equity share in a company cannot be recovered if the firm goes bankrupt
the purpose of the triple bottom line
the simultaneous pursuit of performance along social, economic, and ecological dimensions provides a basis for a sustainable strategy
Pay-As-You-Go
the user pays from only the services he or she consumes
what is the strategic objective?
to maximize (V-C), which is the economic value created
