Strategic Management in Global Environments

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Firm performance & Competitive advantage

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But first, some management lingo:

Key Performance Indicators (KPI) • a quantifiable measure used to evaluate the success of an

organization, employee, etc. in meeting objectives for performance. • Or: measurable value that reports progress against a result • Inspires action (progress towards objective) • Measurement must be well defined • Action to be taken • Responsibility • Timeframe

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Typical KPIs for marketing

• Sales revenue • Organic traffic • Social media traffic

(engagement, responses, followers) • Impressions, click-thru rate • Online mktg ROI • Cost/lead

• Number of new customers acquired. • Customer lifetime value. • Cost per customer/acquisition. • Return on Investment for ad-

spend. • Customer attrition rates. • Social media/brand awareness

rates.

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Typical KPIs for HR

• Training costs • Turnover rate (retention) • Conversion rate (finding talent) • Absentee rate • Employee engagement • Overtime hours • Job satisfaction

• Revenue per Employee. • Cost per Hire. • Employee Turnover. • Overtime Percentage. • Absenteeism. • Length of Service. • Job Satisfaction Rate. • Profit per Employee.

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Typical KPIs for Finance

• ROI • D/E • Co credit rating • Working capital • Cash flows: Net Present Value • Profit margins • Inventory turnover

• Stock price • Net present value • Etc…

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Typical KPIs for Accounting

• EBIT • Net cash flow • Gross profit • Quick ratio • P/L • Sales by region • COGS • Days of sales outstanding • Expenses / budget • Debt to equity • Sales revenue

• All the ratios J

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Typical KPIs for Management

• Employee turnover • Employee Satisfaction • Time management • Order fulfillment time • % product defects • Planned vs actual hours worked • % cancelled projects • Goal-meeting

• Balanced Scorecard • Triple Bottom Line • Corporate Social Responsibility

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Typical KPIs for Supply Chain Management

• Perfect order measurement • Cash to cash cycle time • Customer order cycle time • Fill rate • Supply chain cycle time • Inventory day of supply • Freight bill accuracy • Freight cost per unit • Inventory turnover

• Days of sale outstanding • Average pmt period for

production materials • On time shipping rate • Inventory turnover ratio • Turn-era index • GM ROI • Days of supply • Inventory velocity

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Apple vs Microsoft

• What are examples of performance measurements used in the mini case in the chapter posted on CC?

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How to measure firm performance?

Traditional frameworks • Accounting profitability • Shareholders value creation • Economic value creation

Integrative frameworks • The balanced scorecard • The triple bottom line

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Accounting profitability

PROS

• Data easily available and dependable, due to GAAP & FASB standards and legal reporting requirements

• Easy to determine competitive advantage by comparing public firms on key ratios

CONS

• All data are historical, i.e., backward looking

• Off-balance sheet items not considered (e.g., pension obligations)

• Focus mainly on tangible assets

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Intangibles and value

• Intangibles not already captured in accounting data à important to firms’ stock market valuation • Book value = historical cost of firm’s

assets • Market valuation = future

expectations of a firm’s growth potential and performance

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Price-to-book value

• P/B is the ratio of the market value of a company’s shares (share price) over its book value of equity (value of assets on the balance sheet) • P/B is an important metric used by investors to gauge if a stock is

valued properly. • Low P/B ratio (below 1) could signal that a stock may be undervalued • Low P/B could also mean that co is earning poor ROA • Value investors look for opportunities where they believe the market

has inaccurately priced a stock • A good indicator, but not to be used alone!

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Shareholder value creation

Shareholders: individuals or organizations that own one or more shares of stock in a public company. They are the legal owners of public companies.

Most important measure of competitive adv. to shareholders: return on risk capital (money they provide in return for an equity share, which can’t be recovered in bankruptcy)

Total return to shareholders – stock price appreciation + dividends received over a specific period.

Forward looking performance metric

Indicates how the stock market views all available public information about a firm

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Shareholder value creation & competitive advantage

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MVC by market cap?

• What are the most valuable companies by market capitalization (2022)?

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Shareholder Value creation - limitations

• Stock prices can be highly volatile • Overall macroeconomic factors, such as

economic growth, unemployment, interest and exchange rates, all have a direct bearing on the stock prices • Psychological mood of investors is

frequently reflected in stock prices, which can be irrational

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Economic value creation

• Difference between a buyer’s willingness to pay for a product or service, and the firm’s total cost to produce • Reservation price = maximum price a consumer is willing to pay for a

product/service based on the total perceived consumer benefits

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2 ways to obtain economic value advantage?

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A few important terms

• Value = dollar amount a consumer attaches to a good or service; the consumer’s maximum willingness to pay (i.e., reservation price) • Profit = difference between price charged and the cost to produce

(i.e., producer surplus) • Consumer surplus = difference between the value a consumer

attaches to a good or service and what he or she paid for it

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Economic value creation

PROS • Fundamental in formulating cost

vs differentiation strategies • Conceptually powerful measure

of competitive advantage • Considers all costs, including

opportunity costs

CONS • Not easy to determine the value

of a good in the eyes of consumers • Value of a good changes based

on demographics, sociocultural elements • Difficult to measure competitive

advantage at firm level (must measure ec. v. for all products and services

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Balanced scorecard

• Relies on multiple internal and external performance metrics in order to balance both financial and strategic goals

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Balanced scorecard

PROS

• Communicate and link strategic vision to responsible parties in org

• Translate vision into measurable operational goals

• Design and plan business processes

• Implement feedback and org learning

CONS

• A tool for strategy implementation not formulation

• Failure to achieve competitive advantage is a reflection of a strategic failure, not a bad framework

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The triple bottom line

Mark Carney (governor of Bank of England):

“Companies and industries that are not moving towards zero- carbon emissions will be punished by investors and go bankrupt.”

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