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MGMT 471 > Ch. 5 > Flashcards

Ch. 5 Flashcards

1
Q

What is the goal of strategic management?

A

Gaining and sustaining a competitive advantage

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2
Q

What are the three traditional frameworks to measure and assess firm performance?

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

What are two frameworks to assess firm performance that integrate quantitative and qualitative data?

A
  1. The Balanced Scorecard

2. The Triple Bottom Line

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4
Q

Def: Strategy

A

A set of goal directed actions a firm takes in order to gain and sustain a competitive advantage

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5
Q

Def: Competitive Advantage

A

Superior performance relative to other competitors in the same industry or the industry average

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6
Q

Standardized metrics help you to accomplish what two tasks?

A
  1. accurately assess the performance of a firm

2. Compare and benchmark a firm’s performance against competitors or the industry average

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7
Q

Profitability ratios used in strategic management: (4)

A

ROIC - Return on Invested Capital
ROR - Return on Revenue
ROE - Return on Equity
ROA - Return on Assets

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8
Q

ROIC: What is it? What are the important parts?

A

ROI = Net Profit / Invested Capital

  • Notes a firm’s profitability
  • How a firm uses its total invested capital (Shareholder’s equity through selling shares and interest bearing debt it borrows)
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9
Q

If a firm’s ROIC is greater than it’s cost of capital, it __________ ________.

A

If a firm’s ROIC is greater than it’s cost of capital, it generates value.

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10
Q

What are the two aspects that drive a company’s ROIC?

A
  1. Return on revenue

2. Working capital turnover

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11
Q

ROR: What is it?

A

Return on Revenue = Net Profits / Revenue

- how much a firm’s sales are is converted into profits

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12
Q

Three additional financial ratios that are derived from ROR

A

Cost of Goods Sold / Revenue
R&D Expense / Revenue
Selling General & Admin. Expense / Revenue

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13
Q

COGS / Revenue shows

A

how efficiently a company can produce a good

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14
Q

R&D Expense / revenue shows

A

how much each dollar that the firm earns in sales is invested to conduct R&D

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15
Q

Selling General & Admin. Expense / Revenue shows

A

how much of each dollar a firm earns in sales is invested into sales, general, and administrative expenses
- how much a company focuses on marketing and sales to promote it’s products and services

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16
Q

What are the 4 parts of working capital turnover (rev/WC)?

A

Fixed Asset Turnover
Inventory Turnover
Receivables Turnover
Payables Turnover

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17
Q

Fixed Asset Turnover =

A

Revenue / Fixed assets

- measures how well a company leverages it’s fixed assets

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18
Q

Inventory Turnover =

A

COGS / Inventory

-how much of a firm’s capital is tied up in it’s inventory

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19
Q

Receivables Turnover =

A

revenue / accounts rec.

- managing accounts receivables

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20
Q

Payables Turnover =

A

revenue / accts. pay.
- how fast a firm is paying its creditors and how much it benefits from from interest free loans extended by it’s suppliers

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21
Q

The three limitations to accounting data:

A
  1. Acctg. data is historic so its back-ward looking
  2. Acctg. data doesn’t consider off-balance-sheet items
  3. Acctg. data only focuses on tangible assets, and intangible are more important
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22
Q

Book value vs. Not captured

A

Book value - firms cost of assets minus depreciation

Not captured - future expectations for a firm’s growth potential and performance

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23
Q

Using accounting data is a ________ ______ to assess competitive advantage

A

Using accounting data is a starting point to assess competitive advantage.
- market value is different than book value, changed over time so there’s a lot of valuation not shown by acctg. data alone.

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24
Q

Def: Shareholder

A

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

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25
Q

Def: Risk Capital

A

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

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26
Q

Def: Total Return to Shareholders

A

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

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27
Q

Def: Market Capitalization

A

A firm performance metric that captures the total dollar market value of a company’s total outstanding shares at any given point in time

28
Q

Market Capitalization =

same as stock market valuation

A

of outstanding shares * share price

29
Q

Why is a competitive advantage transitory?

A

Difficult to gain and sustain a competitive advantage

30
Q

What are the three limitations of shareholder value creation?

A
  1. stock prices can be volatile, making it difficult to assess firm performance in the short term
  2. Macroeconomic factors all have a direct impact on stock price
  3. Stock prices reflect the mood of investors which can be irrational
31
Q

The three parts to calculate a competitive advantage:

A 
Value 
Price 
Cost 
(VPC)
-perceived consumer benefit and economic value
32
Q

Def: Value

A

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

33
Q

Value is the same as _________ ______.

A

Value is the same as reservation price

34
Q

Def: Profit (Pi)

A

Difference between the price (P) charged and the cost (C) to produce
P - C = Profit

35
Q

Profit is also called ______ _______.

A

Profit is also called Producer surplus

36
Q

Def: Consumer Surplus

A

Difference between the value a consumer attaches to a good or service (V) and what they paid for it (P)
V - P = Consumer Surplus

37
Q

The economic value creation framework shows a strategic that has two components:

A
  1. creating economic value

2. capturing as much economic value as possible

38
Q

Competitive advantage goes to the company that created the largest ______ ______.

A

Competitive advantage goes to the company that created the largest economic value.

39
Q

Profit = _______ - ______

A

Profit = total rev. - total costs

- where total rev. = price * quantity sold

40
Q

Economic value creation also accounts for __________ costs.

A

Economic value creation also accounts for opportunity costs.

41
Q

Def: opportunity costs

A

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

42
Q

The three limits of economic value creation:

A
  1. determining the value of a good in the eyes of the consumer is not an easy task
  2. the value of a good in the eyes of the consumer 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
43
Q

Def: Balanced Scorecard

A

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

44
Q

The 4 key questions to the balanced scorecard framework:

A
  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?
    - all work together but focus on the middle, competitive advantage!
45
Q

The balanced scorecard allows managers to: (4 things)

A
  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
46
Q

The balanced scorecard can be used for what kind of goals?

A

Both - ST and LT

47
Q

The 4 disadvantages of the balanced scorecard:

A
  1. Tool for strategy implementation NOT formulation
  2. Only limited guidance on which metrics to use
  3. Failure may be due to a strategic failure aka don’t blame the framework
  4. Doesn’t give guidance on how to set metrics back on track once they’ve deviated
48
Q

A good manager must do these two things when using the balanced scorecard:

A
  1. devise a strategy that enhances the odds at gaining a competitive advantage
  2. accurately translate that strategy into objectives that they can measure and manage within the BSC approach
49
Q

Def: Triple Bottom Line

A

Combination of economic, social, and ecological concerns that can lead to a sustainable strategy
Profits
People
Planet

50
Q

Def (TBL): Profits

A

the economic dimension captures the necessity of a business to be profitable to survive

51
Q

Def (TBL): People

A

the social dimension emphasizes the people aspect of a firm’s success

52
Q

Def (TBL): Planet

A

the ecological dimension emphasizes the relationship between the firm and the natural environment

53
Q

Def: Sustainable Strategy

A

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

54
Q

Def: Business Model

A

a firm’s plan that details how it intends to make money

55
Q

Popular Business Models: razor-razorblades

A

Initial product sold for less or given away for free in order to drive demand for a complimentary good
(replacement parts)

56
Q

Popular Business Models: Subscription

A

Users pay access to a product or service whether or not they actually use that product/service during the payment term

57
Q

Popular Business Models: Pay as you go

A

consumers only pay for the services they consume ex. water bill

58
Q

Popular Business Models: Freemium

A

(free+premium) provides basic features of a product or service for free but then charges for add-ons or advanced features ex. brainscape

59
Q

Popular Business Models: Wholesale

A

Sell to retailers who mark up the product and retailers get to keep whatever the difference in buying and their selling price is

60
Q

Popular Business Models: Agency

A

producer relies on an agent or retailer to sell the product, at a predetermined percentage commission; sometimes the producer will also control the retail price

61
Q

Popular Business Models: Bundling

A

Selling products or services together for which demand is negatively correlated at a discount ex. word > excel, buy each for $120 or both for $180

62
Q

Business models can change and evolve due to disruptions in the market. What are 5 ways they can change?

A
  1. combination - combine 2 models
  2. evolution - tweak an existing model
  3. disruption - create a new way to do the same thing ex. books v. ebooks
  4. response to disruption - confine to new way of doing things ex. app store offerings
  5. Legal conflicts - conforming to new rules and regulations
63
Q

No best strategy exists, only _____ ones.

A

No best strategy exists, only better ones

64
Q

Competitive advantage is best measured by criteria that reflect ______ business unit performance rather than _______ business unit performance.

A

Competitive advantage is best measured by criteria that reflect OVERALL business unit performance rather than INDIVIDUAL business unit performance.

65
Q

_______ and _______ performance dimensions matter in judging the effectiveness of a firm’s strategy.

A

Qualitative and quantitative performance dimensions matter in judging the effectiveness of a firm’s strategy.

66
Q

A firm’s ______ ______ is critical to achieving a competitive advantage

A

A firm’s business model is critical to achieving a competitive advantage

67
Q

Chapter 5: what part of AFI did we discuss?

A

Strategy analysis! :D

MGMT 471 (7 decks)

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