Test One Flashcards
Strategy
A firm’s theory about how to gain competitive advantages
Define Mission
Long-term purpose of a firm
Define Strategic Management Process
Sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy that generates competitive advantages
Visionary Firm
Firms whose central mission is central to all they do and they earn higher returns
Objectives
Specific measurable targets a firm uses to evaluate the extent to which it is realizing its mission
External Analysis
The firm identifies the critical threats and opportunities in its environment
Internal Analysis
Helps a firm identify its organizational strengths and weaknesses and helps the firm identify which of its resources and capabilities are likely to be sources of competitive advantage.
Business-Level Strategies
Actions taken by the firm to gain competitive advantage in a single market or industry.
Corporate-Level Strategies
Actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously.
Competitive Advantage
Creation of more economic value than rival firms
Economic Value
The difference between the perceived benefits gain by a customer that purchases a firm’s products or services and the full economic cost of these products or services.
Competitive Parity
Firms that create the same economic value as their rivals
Competitive Disadvantage
Firms that generate less economic value than their rivals
Accounting Performance
Measure of competitive advantage calculated by using information from a firm’s published profit and loss and balance sheet statements.
Accounting Ratios
Numbers taken from a firm’s financial statements that are manipulated in ways that describe various aspects of a firm’s performance.
Profitability Ratios
Measure of profit in the numerator and some measure of firm size or assets in the denominator
Liquidity Ratios
Focus on the ability of a firm to meet its short-term financial obligations
Leverage Ratios
Focus on the level of a firm’s financial flexibility
Activity Ratios
Focus on the level of activity in a firm’s business
Cost of Capital
Rate of return that a firm promises to pay its suppliers of capital to induce them to invest in the firm
Economic Measurements of Competitive Advantage
Compare a firm’s level of return to its cost of capital instead of to the average level of return in the industry.
Cost of Debt
Interest firm must pay its debt holders
Cost of Equity
Rate of return a firm promises its equity holders in order to induce these individuals and institutions to invest in the firm.
Weighted Average Cost of Capital
% of the firm’s total capital