Chapter 13 Flashcards
What is a Gap analysis?
Compares actual or projected performance with desired performance
Two catagories to measure an organisations performance?
Economic measures and Effectivness measures
What is Economic performance?
Direct measures of sucess in terms of economic outcomes
Three ways to measure ecomomic performance?
- Performance in product markets: Sales growth or market share.
- Accounting measures of profitability: Profit margins, Return of capital employed.
- Financial market measures: Movment in share price
What is the Du pont model?
The model dissects a companys return of capital employed (ROCE) in order to work out the components that add value to, or subtract from the whole.
What is Effectiveness measures?
Broad set of performance criteria than just economic. Example, measures reflecting internal operational efficiency.
What is the Balanced scorecards and what five perspective does it consider?
The balanced scorecards considers five perspectives on performance simultaneously in order to prevent the dominance of a single perspective.
1. The financial perspective
2. The customer perspective
3. The internal business perspective
4. The innovation and learning perspective
5. The sustainability perspective
What is the triple bottom line and how does it measure performance?
The triple bottom line pays explicit attention to corporate social responsibility and the environment.
It measures performance on three dimensions.
1. Economic measures of performance - Sales, profit and share price
2. Social measures - Employee training, health and saftey.
3. Environmental measures - Pollution and recycling.
What are the three main performance comparisons to consider when measuring performance?
When measuring performance it is important to be clear what you are measuring against.
1. Orgasational targets - Managements own targets.
2. Trends over time - Whether performance is increasing or declining over time. Increasing = May suggest good strategy.
Declining = May suggest poor strategy.
3. Comparable organisations - Comparison to other similar organisations (benchmarking)
What is SAFE and what does it stand for?
SAFE is a method to identify perferred strategic options
S - Suitability
A - Acceptability
F - Feasibility
E - Evaluation
Describe Suitability
Suitability is concerned with assessing which proposed strategies address the key opportunities and threats an organisation faces - It is therefore concerned with the overall rationale of a strategy.
Assessing the extent to wich a proposed strategy
- Exploits the opportunities in the environment and avoids the threats
- Capatalises on the organisations strenghts and avoids or remedies the weaknesses
What is ranking and screening?
Possible strategies are assessed against key factors relating to the strategic position of the organisation and a score established for each option
One advantage is that managers can see which strategy is most suitable in different environments.
What is decision trees?
Decision trees can also be used to assess strategic options against a list of key factors. In decision trees options are eliminated and preferred options emerge by progressively introducing requirements that must be met (Growth & investments). In the end of the decision tree a number of developed opportunities exist.
However there is a risk, each choice at the bransches on the tree can tend to be simplistic.
What is Acceptability within the SAFE framework?
Acceptability is concerned with whether the expected performance outcomes of proposed strategy meet the expectations of stakeholders. These can be of three types; the 3 Rs - Return, Risk and stakeholder reaction
What is Return (R)
Measures of financial profitability and effectivess of a strategy
Private sector - Investor expect a return of investment
Public sector - Governments typically measure value for many for the service provided
What are the four common approches to financial return?
Return on capital employed - Calculates profitability in relation to capital
The payback period - The lenght of time it takes before the cumulative cash flows for a strategic option become positive.
Discounted cash flow - Forcasting techniques (Earnings are discounted the further into the future they are)
Share holder value analysis (SVA) - Focus on the creation of value for shareholders
Name three problems of financial analysis
The problem of uncertainty - Predicitions can be uncertain
The problem of specificity - Tend to focus on tangible cost and benefits rather than the strategy more broadly
Assumptions - Is only as good as the assumptions that are built into the analysis
What is Risk (R)
Risk concerns the extent to which strategic outcomes are unpredictable, especially with regard to possible negative outcomes.
Explain sensitivity analysis!
“What if” analysis.
Question and challange each of the important assumptions underlaying a particular strategy
The analysis test how sensitive the predicted performance outcome is to each of these assuptions.
What is financial risk?
Financial risk refers to the possibility that the organisation may not be able to meet the key financial obligations necessary for survival.
Debt relation to equty is important (gearing)
Liquidity - Liquid assets, often cash that are available to pay bills
What is a cost benefit analysis?
CBA - It is often used to determine the strenght and weknesses of different strategic alternatives and may also be the basis for comparing courses of action.
A money value should be put on all the costs and benifits of a strategy
What is Reaction to stakeholders? (R)
Stakeholders mapping can be used to consider the likely reactions of stakeholders to new strategies –> Evaluationg the acceptability of a strategy
How they may evaluate strategy differently
- Owners - Shareholders, private individuals - Will have financial expectation to be met so that proposed strategy thaht might reduce profitability is likely to be unacceptable
- Bankers (Intrest bearing loans) - Concerned about the risk attatched to the loans
Government - Price or geographic expansion
Employees - Reject strategy that makes them jobless
Customer - New business model –> online –> might be rejected
What is Feasibility
Feasibility is concerned with whether a strategy could work in practise –> If the organisation has the capacity to deliver a strategy
What is Evaluation?
Evaluation is the process of identifying strategies that pass all the criteria of suitability, acceptability and feasibility
What are the four qualifications that need to be made about the evaluation process?
Management judgement - SAFE is useful in strategic options but does not replace for management judgment
Consistency - Does the components work togheter like a package
The implementation and development of strategies - evaluation might come up att the development och implementation stage –> can show issues that might make the organisation change strategy
Strategy development in practice
