Notes 02 - Strategy and Performance

Strategy and Performance
Strategy Notes
Measuring strategic performance
Summary measures of overall company performance
Reflecting long run investments and results
Allowing for comparisons to competitors
Good financial examples
Better - Return on equity (ROE)
o Revenue growth (but careful, growth can be "bought")
o Common stock returns
o Market capitalization
Emerging performance dimensions
 Value created for non-financial stakeholder measures – external and internal
 "Triple bottom line" – economic, social, and ecological performance simultaneously
Break down ROE into component ratios
Asset productivity
Financial leverage
Each ratios may be further examined for possible sources of improvement.
© 2014 Page West
Detailed financial statement analysis
Reveals patterns of strategic investment
Helps identify differences among competitors
Current financial statement comparisons
Common-sized financial statement comparisons
Operating ratio comparisons
Trend analysis – one company over time
Understand differences between types of margins and how competitors fare on each
Gross margin
Operating income
Net income
Consider economic logic & operating characteristics for companies & industries
Kodak followed the "razor blade" model – sell cameras at breakeven, sell film at hefty
gross margins. Once a camera is bought, the consumer must buy the film – lockin.
Microsoft & Sony follow similar approach with their video game consoles.
Saks Fifth Avenue – sells small quantities of expensive merchandise, with large markups
on every item.
Large retail "box" stores – "stack it high, move it out" – put money in the bank by selling
vast quantities with smaller markups on each item. These companies earn ROE by
combining profitability and asset productivity (moving vast quantities of inventory
efficiently thru warehouses and stores).