909513

research-article2020
MTRXXX10.1177/2379298120909513Management Teaching ReviewCarter

Experiential Exercises

Management Teaching Review

Tackling Weaknesses in
2023, Vol. 8(1) 57­–67
© The Author(s) 2020
Article reuse guidelines:
Students’ Financial Analysis sagepub.com/journals-permissions
DOI: 10.1177/2379298120909513
https://doi.org/10.1177/2379298120909513
Capabilities: A Value-Based journals.sagepub.com/home/mtr

Exercise for Strategic

Management Courses

William R. Carter1

Abstract
Appraising firm performance is an important aspect of the strategic management
process. Unfortunately, many students in strategic management courses do not have
adequate financial analysis skills to do this task. This deficiency affects their ability to
learn and perform the full scope of the strategic management process. This article
presents an exercise designed to address this challenge. The exercise emphasizes
the central objective of strategic management, that is, the achievement of superior
levels of creating and capturing value. The brief lesson and exercise enable students
to use simple accounting metrics to appraise the quality of a firm’s current strategy,
execution capabilities, and resulting competitive position. Primarily for undergraduate
courses in which numerous students are challenged by quantitative analysis tasks, this
exercise alleviates the need for instructors to invest an inordinate amount of time
reteaching financial analysis.

Keywords
strategic analysis, performance appraisal, strategic management, value creation, value
capture, financial analysis

The aim of strategic management (SM) is to achieve and prolong a superior level of
firm performance, an outcome referred to as sustained competitive advantage (Barney,
2001; Porter, 1980; Rothaermel, 2013). Critical phases of strategic analysis focus on

1
University of Baltimore, Baltimore, MD, USA

Corresponding Author:
William R. Carter, University of Baltimore, 1420 North Charles Street, Baltimore, MD 21201, USA.
Email: wcarter@ubalt.edu
58 Management Teaching Review 8(1)

identifying a firm’s sources of sustainable competitive advantage. The resource-based

view, for example, is a leading theory for explaining sustainable competitive advan-
tage (Barney, 2001). Regardless of the source of advantage, improving performance
requires an understanding of current performance. A critical task in the SM process
therefore involves characterizing the focal firm’s current performance in terms of sus-
tained superiority (Grant & Baden-Fuller, 2018; Rothaermel, 2013). Appraising a
firm’s performance does not explain how it achieved that performance, but it is never-
theless a critical step in strategic analysis and one that students in a capstone SM
course must perform competently.
Many undergraduate students, however, have inadequate financial analysis skills.
Students’ inability to properly appraise performance in capstone cases impedes learn-
ing and can cause anxiety (Sizoo et al., 2008). Because instructors have limited time
to cover topics beyond the core concepts, theories, and skills unique to SM (Greiner
et al., 2003; Wren et al., 2007), building adequate student competence in even basic
firm performance appraisal may be a challenge (Aupperle & Sarhan, 1995).
This article addresses this challenge by presenting an exercise designed for use
early in the undergraduate capstone SM course when students are learning to analyze
the current status of a focal firm. The purpose of the exercise is to provide students
with a simple framework that uses only a few revenue and profitability measures for
appraising a firm’s current performance status. For simplicity and relevance, the exer-
cise emphasizes two core dimensions of performance: value creation and value cap-
ture. When examined over time and compared with industry benchmarks, these
value-based concepts provide a straightforward and accessible means of appraising
firm performance. The exercise does not address deeper diagnostic and recommenda-
tion issues.
The exercise was designed for a face-to-face class and takes about 90 minutes to
complete (variations are described in Appendix A). The class session progresses from
a lesson on concepts and methods to activities for experiential learning and reflection
(Kolb & Kolb, 2005; Ryan & Ryan, 2013). The following section introduces the back-
ground concepts and validates their applicability for this use. The class lesson and
exercise descriptions follow, with additional details contained in appendices and sup-
plemental materials.

Performance Appraisal in Strategic Management

Improving long-term organizational performance is the main objective of SM.
Formulating strategies to pursue those ends requires analyzing economic perfor-
mance to appraise a firm’s strategic position (David & David, 2017; Grant & Baden-
Fuller, 2018; Wheelen et al., 2015). Performance, however, is a complex construct,
and there are many methods for measuring it. The content of SM textbooks on these
topics, therefore, varies (see Table 1 for representative examples) with analysis of a
set of financial ratios being the most common approach presented.
For many undergraduate students, however, even basic ratio analysis can be
daunting due to its multidimensional complexity. Calculating a set of basic ratios
Carter 59

Table 1. Representative Textbook Content Related to Performance Appraisal.

Textbook authors Primary concepts and methods described

David & David (2017)
Dess et al. (2016)
Dyer et al. (2016)
Gamble et al. (2019)
Grant (2016)
Rothaermel (2013)
Wheelen et al. (2015)
Financial ratios, breakeven analysis, capital structure
decisions, forecasting, corporate valuation methods
Financial ratios, balanced scorecard
Appendix on key financial ratios
Appendix on key financial ratios, balanced scorecard,
triple bottom line
Economic value added, enterprise value, stock market
valuation, ratio analysis, Du Pont disaggregation of
return on capital employed, balanced scorecard,
corporate social responsibility, real options
Economic value creation, profitability, financial ratios,
shareholder value (return on equity and return on
assets), balanced scorecard, triple bottom line
Financial ratios, earnings per share, economic value added,
market value added, balanced scorecard, benchmarking

can create challenges for synthesis and interpretation and induce fine-grained func-
tional and tactical thinking (e.g., attention to capital structure decisions, pricing
assumptions, inventory management, and advertising budget changes). In my expe-
rience, detailed ratio analysis causes some students to attempt to diagnose strategic
issues and prescribe corrective action before performing a thorough and comprehen-
sive strategic analysis.
Performance analysis can play two roles in strategic analysis and decision mak-
ing (Grant, 2016; Grant & Baden-Fuller, 2018). A fundamental role of performance
analysis is for appraising the quality of a firm’s current competitive performance
(Gamble et al., 2019). The objective of performance appraisal is to draw conclusions
about the quality of the firm’s SM, that is, the degree to which they have competitive
advantage. A more detailed level of performance analysis, what can be described as
diagnostics, helps identify specific financial and operational issues (David & David,
2017). The objective of this exercise is solely related to appraising a firm’s overall
current performance as a gauge of their strategic effectiveness; it does not address
diagnostics.

Value Creation and Value Capture

Economic profit is not the only measure of a commercial firm’s success. Profit is,
however, a necessary outcome for survival. As such, even enlightened stakeholder
theory and the business case for social responsibility emphasize that investments
toward noneconomic ends contribute to economic performance (Carroll & Shabana,
2010; Jensen, 2010). Thus, a central objective of a business enterprise is a quest for
value (Grant, 2016). Grant (2016) states, “We can generalize by saying that the
60 Management Teaching Review 8(1)

Table 2. Framework of a Value-Based Approach to Assessing Firm Performance.

Performance Relative to Year-to-year trend over Basic, minimum

dimension industry average the past 3-5 years metrics
Creating value Above or below? Getting better or worse? Revenue growth
Capturing value Above or below? Getting better or worse? Operating margin,
return on assets

purpose of business is, first, to create value for customers and, second, to appropri-
ate some of that customer value in the form of profit—thereby creating value for
the firm” (p. 37). These notions of creating and capturing value are well rooted in
the academic literature (e.g., Bowman & Ambrosini, 2000; Lepak et al., 2007;
Pitelis & Teece, 2009).
Value creation is assessed with measures of customers’ value and preference for a
firm’s offerings (e.g., top-line metrics such as revenue growth, same-store sales
growth, successful new product introductions, etc.). Value capture refers to profitabil-
ity and can be assessed through gross, operating, and net profit margins. The overall
efficiency of a firm’s system to create and capture value can be assessed by return on
assets or return on capital.
There are also two important comparative aspects of a firm’s performance, superi-
ority versus rivals and improvement over time. Comparing performance with rivals
(i.e., industry average) is necessary to assess the degree to which superior performance
has been achieved (Aupperle & Sarhan, 1995; Dess et al., 2016; Rothaermel, 2013).
Analyzing performance over time is critical to understand the emergence and persis-
tence of a firm’s performance superiority and thus the quality of ongoing SM (Gamble
et al., 2019; Richard et al., 2009). Bringing these simple dimensions together forms the
framework shown in Table 2.

The Exercise
Learning Objectives
The overall objective of the exercise is for students to be able to apply a basic appraisal
method for characterizing the nature and direction of a firm’s economic performance.
At the conclusion of this exercise, students will be able to

•• Distinguish between and articulate the concepts of value creation and value
capture
•• Assess the trend and relative nature of a firm’s ability to create and capture
value
•• Summarize their analysis into an overall appraisal of the firm’s performance
status and trajectory
Carter 61

Preparation
The steps to prepare for this exercise are as follows:

1. Advise students beforehand to bring a calculating device for this lesson. It may
also be useful to suggest that students review financial statement analysis
through their prior textbooks or websites such as www.accountingtools.com/
financial-statement-analysis.
2. A brief lesson is needed to situate performance appraisal in the SM process, to
introduce the variety of analytical methods including the concepts of creating
and capturing value, and to review basic income statement structure and math
(see the Supplemental Materials for sample presentation slides and related
instructor notes).
3. A simple multiyear income statement with revenue growth and profitability
measures calculated (e.g., operating margin and return on assets, at a mini-
mum) is also needed. The statements should provide at least 3 years of data so
that multiyear trends can be examined.
4. A second version of the income statement with calculated fields left blank
serves as the worksheet that students use when calculating growth and profit-
ability metrics (see Appendix B for a sample income statement and corre-
sponding worksheet).
5. The blank and completed income statements should be embedded individually
in the presentation slides. To avoid students finding these answers on the inter-
net, instructors should customize their own data.

Introducing and Conducting the Exercise

The time required for this lesson and exercise is 90 minutes (see Table 3 for a step-by-
step suggested schedule). The introductory lesson (see Supplemental Materials) cov-
ers the rationale for appraising performance, describes the pros and cons of alternative
methods, and introduces the concepts of creating and capturing value. Following the
lesson and introductory discussion is the exercise and debriefing. Conducting the exer-
cise involves the following steps:

1. Display the blank version of the income statement and distribute the printed
worksheet to the class. Instruct students to individually calculate and fill in the
blanks. This task takes 10 to 15 minutes.
2. Ask students to think about what their calculations tell them about this firm’s
ability to create value and capture value. This question is designed to help them
connect their calculations back to the concepts just covered in the introductory
lesson. If time allows, pair-share or small group discussions can add value.
3. Reveal the calculated fields individually or via the full-income statement, iden-
tify and address any student errors or misunderstandings, and provide neces-
sary corrective instruction.
62 Management Teaching Review 8(1)

Table 3. Schedule/Timeline.

Exercise step Suggested timing

1. Conduct introductory lesson 30-40 minutes
2. Provide materials and instructions for the exercise 2-3 minutes
3. Allow time for students to do the work 15 minutes
4. Present and review the calculations and interpretations 10-15 minutes
5. Conduct debriefing and general discussion 10-20 minutes

Debrief, Reflection, and Observations

The debriefing focuses on assessing students’ abilities to calculate and understand the
appraisal analysis and their ability to interpret meaning about a firm’s ability to create
and capture value. To conclude the exercise, students reflect on what they learned (the
supplemental Instructor Notes provide suggested reflection questions). For example, I
have them consider (a) the benefits and limitations of this exercise’s method compared
with more detailed financial analysis, (b) how the two performance dimensions help
them understand a firm’s current performance situation, and (c) what the appraisal
suggests about the quality of a firm’s SM. The exercise concludes with an open discus-
sion of these issues.
Some students may struggle with the most basic business math (i.e., calculating
trends, calculating margins). Some will not have a clear understanding of the interpre-
tation of gross, operating, and net margins. A review of such issues related to income
statement structure, calculations, and content typically concludes the exercise.

Conclusion
This exercise helps develop student skills necessary for basic appraisal and under-
standing of a firm’s performance situation. It meets instructors’ needs for a relatively
quick and direct lesson that minimally sacrifices time needed for core course con-
tent. Although it does not delve into diagnosing performance issues, it lays the
essential groundwork for the later-phase diagnostic analysis and prioritization of
alternative actions that are required of students in case analysis assignments occur-
ring later in the course.
I have used this exercise in over a dozen class sections, and many students have
enthusiastically expressed that the appraisal method is easily understood and is more
straightforward than what they recall from prior financial analysis courses. This enthu-
siasm, I believe, indicates greater confidence and lowered anxiety some students expe-
rience about this task. Even students with well-developed financial analysis skills have
expressed appreciation about how this approach provides a valuable new perspective
on the character of a firm’s current performance. Most important, evidence of student
learning is encouraging. The performance appraisal analyses within students’ major
case analyses are consistently more valid and meaningful in course sections using this
Carter 63

exercise compared with my prior sections in which the approach to performance

appraisal was more ambiguous and based on more generalized ratio analysis.

Appendix A
Variations and Alternatives
This value-based exercise was designed for a face-to-face undergraduate capstone class
with a 90-minute class period in which a significant number of students are known or
believed to be challenged in performing basic financial statement analysis. This appen-
dix suggests alterations that may be of value for different sizes of classes, different
lengths of class period, different student levels, and different delivery formats.

Class Size. The size of the class is a relatively minor issue in that the exercise is
designed for individual rather than group activity. However, in conjunction with lon-
ger class periods, it has been effective to follow the individual tasks with a brief pair-
share or small group discussion.

Class Time. For classes of shorter length, or when additional session content takes up
a portion of an available class period, this exercise can be divided into the lesson por-
tion and the exercise/debriefing portion. If time is further constrained, the student
time for calculating and working to make sense of the analysis can be given as home-
work, and in-class time can focus on the debriefing and reflection. When more time
is available for covering firm performance appraisal, a discussion (with examples) of
slightly more detailed income statements can be valuable. Sample issues that can be
uncovered with more time include types of businesses that don’t really have cost of
goods sold/gross margins (e.g., accounting firms), how to handle firms with more
complex revenue streams (e.g., franchise fast food chains), and statements that pro-
vide more detail but do not clearly subtotal statement lines such as operating expenses
and profit. If time allows and students are more advanced (see below), more refined
metrics such as average customer purchase, same-store sales, new-product introduc-
tion success, and return on equity can be discussed and integrated or identified as
outside the scope of what is needed for this portion of the analysis process.

Student Levels. When relatively few students have adequate knowledge and skill in
basic income statement structure, calculation, and analysis, more time may be required
to review these elementary concepts. Constructing and deconstructing an income
statement can be useful to help students understand the standard layout of an income
statement and how calculated elements are defined and determined. Alternatively, if
all or nearly all students have adequate knowledge and skills for this basic level of
analysis, the exercise can be enhanced by integrating more detailed and nuanced met-
rics as described above. Discussion, for example, could focus on how the value cre-
ation and value capture framework complements analyses such as the DuPont method,
economic value added, and stock market metrics.
64 Management Teaching Review 8(1)

Delivery Format. The exercise presented is for a face-to-face format. Due to the novel
conceptual content of the value creation and capture approach, online formats may
require the development of a video lesson or a written supplement. The exercise can
be structured such that the blank worksheet is provided electronically with time
allowed for students to complete it and submit it online. After the submission deadline,
the answers can be posted with an explanatory video and/or documents. Discussion
boards are useful for debriefing and reflection, particularly when done in groups of
students with mixed skills in financial analysis. It may be useful as well to provide
links to internet sources for basic instruction on income statement structure and
analysis.

Appendix B
Worksheet and Answer Key
Any simple income statement such as the one below can be used for this exercise as the
firm/industry is irrelevant. However, simplicity, as exhibited in this sample, should be
stressed in the selection or development of these sheets. The numbers used in the actual
exercise should be changed to avoid the possibility that students share or find answers
from this article or prior students’ work on the internet. The “blanked” income statement
first shown to students is below. Copies of the blanked sheet should be printed and dis-
tributed to students as a worksheet on which they can calculate and fill in the boxes. The
slides provided as supplemental materials provide the worksheet and complete income
statement including animations that can be used for revealing answers. To make it easy
for users to create their own versions, the supplemental files also include an Excel
spreadsheet with both portions of the following sample worksheet.
Carter 65

The answer key below can be shown and explained in full or on a cell-by-cell or
line-by-line basis after all students have completed their work. Again, the presented
data are meant only as an example, and actual figures should be customized and fre-
quently altered. Be aware that this exercise can, unfortunately, still move too fast for
some students to fully grasp the method. Therefore, it is useful to electronically post
or transmit the answer key as a spreadsheet file (e.g., Excel). Doing so provides the
students with a reference to the formulas in the event they have difficulty retaining the
in-class lesson.

($ millions)
Industry
2018 2017 2016 Average
Revenue 1,360 1,317 1,264
Growth rate 3.3% 4.2% 5.8%
Cost of goods sold 975 918 844
Gross profit 385 399 420
Gross margin 28.3% 30.3% 33.2% 35.1%
Operating expenses 343 332 322
Operating profit 42 67 98
Operating margin 3.1% 5.1% 7.8% 12.3%
Net profit 24 33 51
Total assets 518 518 518
Return on assets 4.6% 6.4% 9.8% 10.4%

In this example (a retail clothing firm), the firm has very poor current performance.
Based on analysis of their revenue growth metric, the trend is negative, and the growth
rate is lower than industry average. Thus, their ability to create value is both declining
and inferior to their peers. An examination of the trend and relative level of their gross
margin, operating margin, and return on assets demonstrates that their ability to cap-
ture value is also inferior and declining. Overall, this firm can be described as in a
crisis state. The firm appears mostly to suffer from a lack of creating value. That is, the
firm appears to have focused on constraining investments and expenses in the face of
revenue declines. Furthermore, the declining gross margin (which was once near
industry average) may indicate a declining pricing power position (e.g., poor brand
position) and/or poor inventory management (buying, closeouts, etc.), resulting in
excessive discounting. The cuts to investments and expenses may be exacerbating the
weakening position.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship,
and/or publication of this article.
66 Management Teaching Review 8(1)

Funding
The author received no financial support for the research, authorship, and/or publication of this
article.

ORCID iD
William R. Carter https://orcid.org/0000-0002-7691-8040

Supplemental Material
Supplemental material is available at http://journals.sagepub.com/doi/suppl/10.1177/2379298
119909513

References
Aupperle, K. E., & Sarhan, M. H. (1995). Assessing financial performance in the capstone stra-
tegic management course: A proposed template. Journal of Education for Business, 71(2),
72-77. https://doi.org/10.1080/08832323.1995.10116762
Barney, J. B. (2001). Resource-based theories of competitive advantage: A ten-year retrospec-
tive on the resource-based view. Journal of Management, 27(6), 643-650. https://doi.
org/10.1177/014920630102700602
Bowman, C., & Ambrosini, V. (2000). Value creation versus value capture: Towards a coher-
ent definition of value in strategy. British Journal of Management, 11(1), 1-15. https://doi.
org/10.1111/1467-8551.00147
Carroll, A. B., & Shabana, K. M. (2010). The business case for corporate social responsibil-
ity: A review of concepts, research and practice. International Journal of Management
Reviews, 12(1), 85-105. https://doi.org/10.1111/j.1468-2370.2009.00275.x
David, F. R., & David, F. R. (2017). Strategic management: Concepts and cases (16th ed.).
Pearson.
Dess, G. G., McNamara, G., & Eisner, A. B. (2016). Strategic management: Creating competi-
tive advantages (8th ed.). McGraw-Hill.
Dyer, J., Godfrey, P., Jensen, R., & Bryce, D. (2016). Strategic management: Concepts and
tools for creating real world strategy. Wiley.
Gamble, J. E., Peteraf, M. A., & Thompson, A. A. (2019). Essentials of strategic management:
The quest for competitive advantage (6th ed). McGraw-Hill.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases (9th ed.). Wiley.
Grant, R. M., & Baden-Fuller, C. (2018). How to develop strategic management competency:
Reconsidering the learning goals and knowledge requirements of the core strategy course.
Academy of Management Learning & Education, 17(3), 322-338. https://doi.org/10.5465/
amle.2017.0126
Greiner, L. E., Bhambri, A., & Cummings, T. G. (2003). Searching for a strategy to teach
strategy. Academy of Management Learning & Education, 2(4), 402-420. https://doi.
org/10.5465/amle.2003.11902092
Jensen, M. C. (2010). Value maximization, stakeholder theory, and the corporate objective func-
tion. Journal of Applied Corporate Finance, 22(1), 32-42. https://doi.org/10.1111/j.1745-
6622.2010.00259.x
Kolb, A. Y., & Kolb, D. A. (2005). Learning styles and learning spaces: Enhancing experien-
tial learning in higher education. Academy of Management Learning & Education, 4(2),
193-212. https://doi.org/10.5465/amle.2005.17268566
Carter 67

Lepak, D. P., Smith, K. G., & Taylor, M. S. (2007). Value creation and value capture: A
multilevel perspective. Academy of Management Review, 32(1), 180-194. https://doi.
org/10.5465/amr.2007.23464011
Pitelis, C. N, & Teece, D. J. (2009). The (new) nature and essence of the firm. European
Management Review, (6), 5-15. https://doi.org/10.1057/emr.2009.1
Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competi-
tors. Free Press.
Richard, P. J., Devinney, T. M., Yip, G. S., & Johnson, G. (2009). Measuring organizational
performance: Towards methodological best practice. Journal of Management, 35(3), 718-
804. https://doi.org/10.1177/0149206308330560
Rothaermel, F. T. (2013). Strategic management: Concepts and cases. McGraw-Hill.
Ryan, M., & Ryan, M. (2013). Theorising a model for teaching and assessing reflective learning
in higher education. Higher Education Research & Development, 32(2), 244-257. https://
doi.org/10.1080/07294360.2012.661704
Sizoo, S., Jozkowskia, R., Malhotra, N., & Shapero, M. (2008). The effects of anxiety and self-
efficacy on finance students. Journal of Instructional Psychology, 35(4), 347-356.
Wheelen, T. L., Hunger, J. D., Hoffman, A. N., & Bamford, C. E. (2015). Concepts in strategic
management and business policy. Pearson.
Wren, D. A., Halbesleben, J. R., & Buckley, M. R. (2007). The theory–application balance
in management pedagogy: A longitudinal update. Academy of Management Learning &
Education, 6(4), 484-492. https://doi.org/10.5465/amle.2007.27694948