Strategy and Performance
Chapter 2
Strategic Management:Value Creation, Sustainability, and Performance, 3e, 2014
Learning Objectives
1.
2.
3.
4.
5.
The value of both financial and nonfinancial performance dimensions.
Relationship between financial
performance and competitive advantage.
Use financial analysis to examine strategy.
Economic logic of industries and
companies.
Interaction between strategy formulation
and financial analysis.
The Goal of Strategy

"Superior performance"
or

"Substantial positive return"
or

"Above average profitability"
or

"Above average return on equity"
Key Strategy Performance Dimensions

Summary performance – the whole firm

Relative to competition

Over the long run
Emerging Performance Considerations

Stockholders versus stakeholders
 Value creation can take many forms:
economic, social, cultural, knowledge, etc.

Triple Bottom Line
 Economic
 Social
 Ecological or environmental
Whole Foods 2014

Stockholder performance
 ROE
 Revenue

Company
15.1%
+ 9.9%
Industry
8.4%
+ 1.5%
Stakeholder performance
 Creates larger market for organics farmers
 Wider shopping choices for consumers
 Seminars on nutrition and healthy eating
 GMO transparency
Stakeholder Performance
Financial Performance

Customary measures
 Return on equity (ROE)
 Revenue growth
 Common stock returns (dividends + stock
price gains)
 Market capitalization
Calculating ROE – "Dupont Analysis"
Detailed Financial Analysis

Current financial statements
 Reveals patterns of investments and strategic
behaviors
 Common-sized statements facilitate
comparison of different size competitors

Trend analysis – statements over years
 Changing levels of investments
 Changing expenses and margins
Strategy and Financial Statements
Strategic plan and direction
Decisions on resource allocations
Inter-related sets of activities
Patterns of asset allocations
Economic Logic

"Recipe" for a type of company
 Club store: "Pile it high, mark it down."
 Luxury retailer: "Merchandise beautifully,
pamper the customer."

"Recipe" for an industry
 Game consoles: "Installed base"
 Banks: "Net interest margin"
Common Industry Operating Metrics

Retailing
 "Same store sales change vs. last year"

Airline
 "RPM" – revenue passenger miles
 "Load factor" – percentage of seats filled

Cable TV
 Net subscriber additions
 "Churn" – % subscribers dropping quickly