Strategic Management and
Firm Performance
Chapter Two
© 2006 by Nelson, a division of Thomson Canada Limited.
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Accounting Measures
& Firm Performance
$$$
Accounting Measures are Popular in Analysis
+ Easily available for publicly traded firms
+ Stock exchanges stress quality accounting data
.
as a tool for investor decisions
Broad support for use as a performance measure
+
+ May provide insights into economic rates of return
However, they
- May have a built in short-term bias
- Are subject to manipulation by managers
- Undervalue intangible assets
© 2006 by Nelson, a division of Thomson Canada Limited.
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+s
Market - Based Measures
& Firm Performance
+ Strategy researchers have increasingly relied on
market-based measures of firm performance.
This increased use may partially be a response to the
criticisms of accounting-based measures.
+ These measures may more accurately reflect econ.
performance than accounting based measures.
.
.
.
Useful for assessing econ. value of a given strategy or
choosing between strategies that could be implemented.
+ Market-based measures focus on the present
value of future streams of income, (e.g., expected
value of future cash flows) not past performance.
© 2006 by Nelson, a division of Thomson Canada Limited.
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Market - Based Measures
& Firm Performance
! Although the four measures have limitations, they
provide insight into the ability of a firm to achieve
above-average returns, average returns or belowaverage returns.
! Correlations between the accounting measures &
market measures are only 0.15 to 0.30.
This suggests that market measures tell us something different
about performance than accounting measures.
© 2006 by Nelson, a division of Thomson Canada Limited.
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The Balanced Scorecard
• Brings financial measures of previous
performance together with measures of
the drivers of future performance.
• The Balanced Scorecard translates a
business units mission into tangible
objectives and measures.
© 2006 by Nelson, a division of Thomson Canada Limited.
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The Balanced Scorecard
© 2006 by Nelson, a division of Thomson Canada Limited.
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