GLO-BUS- BCOR 460 Exam 1 -CH. 5, 6 Graded A+

CH. 5 - Slides - ANSWER To measure and assess firm performance: - ANSWER ~Accounting profitability ~Shareholder value creation ~Economic value creation Integrative frameworks, combining quantitative data with qu ...

CH. 5 - Slides - ANSWER To measure and assess firm performance: - ANSWER ~Accounting profitability ~Shareholder value creation ~Economic value creation Integrative frameworks, combining quantitative data with qualitative assessments: - ANSWER ~The balanced scorecard ~The triple bottom line Accounting Profitability - ANSWER ~Helps assess competitive advantage -accurately assess firm performance. -compare firm performance to competitors / the industry average. ~Standardized accounting metrics ~Form 10‐K statements ~Profitability ratios -Return of invest capital -ROE -ROA -Return on revenue Limitations of Accounting Data - ANSWER ~all accounting data are historical and thus backward‐looking. ~accounting data do not consider off-balance sheet items, such as: -pension obligations -leasing obligations ~accounting data focus mainly on tangible assets, which are no longer the most important. -innovation, quality, customer experience are important. Shareholder Value Creation - ANSWER ~shareholders ~risk capital ~total return to shareholders ~market capitalization Shareholders - ANSWER ~Own one or more shares of stock in a company ~The legal owners of public companies Risk Capital - ANSWER ~Money provided for an equity share in a company ~Cannot be recovered if the firm goes bankrupt Total Return to Shareholders - ANSWER ~Stock price appreciation plus dividends Market Capitalization - ANSWER ~Dollar value of total shares outstanding ~Number of outstanding shares x share price Limitations of Shareholder Value Creation - ANSWER ~Stock prices can be highly volatile. -Makes it difficult to assess firm performance ~Macroeconomic factors affect stock prices. -Economic growth or contraction -Unemployment, interest and exchange rates ~Stock prices can reflect the mood of investors. -Can be irrational Economic Value Creation - ANSWER ~The difference between: -A buyer's willingness to pay for a product / service -And the firm's total cost to produce it -The difference between value (V) and cost (C) ~Competitive advantage can be based on: -Economic value creation because of superior product differentiation -A relative cost advantage over rivals Producer surplus (also called profit) - ANSWER ~The difference between the price charged (P) and the cost to produce (C) Consumer surplus - ANSWER ~The difference between what you would have been willing to pay (V) and what you paid (P) Opportunity Costs - ANSWER ~The value of the best forgone alternative use of the resources employed ~Example: Opportunity Costs of an Entrepreneur (1) forgone wages if employed elsewhere (2) the cost of capital invested in the business •vs. the stock market •vs. U.S. Treasury bonds Limitations of Economic Value Creation - ANSWER ~Determining value for consumers is not simple. ~The value of a good in the eyes of consumers changes. -Based on income, preferences, time, and other factors •~To measure firm‐level competitive advantage, we must estimate the economic value created for all products and services offered by the firm. The Balanced Scorecard - ANSWER ~Helps managers achieve their strategic objectives more effectively ~Uses internal and external performance metrics ~Balances both financial and strategic goals Examples of Metrics for Each of the Four Balanced Scorecard Questions - ANSWER ~How do customers view us? -Revenue, profit, customer satisfaction ~How do we create value? -Competitiveness, innovation, organizational learning ~What core competencies do we need? -Core competencies, supporting business processes ~How do shareholders view us? -Cash flow, operating income, ROIC, ROE, total returns to shareholders Advantages of the Balanced Scorecard - ANSWER Managers can: •Link the strategic vision to responsible parties •Translate the vision into measurable goals •Design and plan business processes •Implement feedback and organizational learning -Modify and adapt strategic goals Disadvantages of the Balanced Scorecard - ANSWER ~Focused on strategy implementation -Not formulation ~Limited guidance about which metrics to use ~Only as useful as the managers apply it ~Strategy must be translated into measurable objectives ~Not much guidance on how to get back on track if setbacks occur The Triple Bottom Line - ANSWER ~three dimensions fundamental to sustainable strategy 1. Profits: economic dimension 2. People: social dimension 3. Planet: ecological dimension What Is a Business Model? - ANSWER ~Details the competitive tactics and initiatives ~Explains how the firm intends to make money ~Stipulates how the firm conducts its business -Buyers, suppliers, and partners Popular Business Models - ANSWER • Razor‐razorblades • Subscription • Pay as you go • Freemium • Wholesale • Agency • Bundling The Razor-Razorblade Mode - ANSWER ~Initial product is often: -Sold at a loss or -Given away for free ~Helps drive demand for complementary goods ~Money made primarily on replacement parts ~Example: HP -Charges little for its laser printers -Imposes high prices for replacement toner cartridges The Subscription Model - ANSWER ~Traditionally used for (print) magazines and newspapers ~Users pay for access to a product or service ~Examples: -Cable television -Satellite radio -Health clubs The Pay‐as‐You‐Go Model - ANSWER ~Users pay for only the services they consume ~Examples: -Utilities providing power and water -Cell phone service plans The Freemium Model - ANSWER ~Free + premium business model ~Provides the basic features free of charge ~Users pay for premium services -Such as advanced features or add‐ons ~Examples: -Software trials with an option to buy The Wholesale Model - ANSWER ~The traditional model in retail ~Products sold at a fixed price to retailers ~Retailers mark up the prices to make a profit ~Example: -Books are originally purchased from a publisher -Re‐sold at 50% markup from a retailer The Agency Model - ANSWER ~Producer relies on an agent or retailer to sell the