Management Strategic

PERTEMUAN KE 5
The AFI Strategy Framework

Exhibit 1.3 Jump to Appendix 1 long image description

Learning Objectives

LO 5-1 Conduct a firm profitability analysis using accounting data to assess and evaluate
competitive advantage.
LO 5-2 Apply shareholder value creation to assess and evaluate competitive advantage.
LO 5-3 Explain economic value creation and different sources of competitive advantage.
LO 5-4 Apply a balanced scorecard to assess and evaluate competitive advantage.
LO 5-5 Apply a triple bottom line to assess and evaluate competitive advantage.
LO 5-6 Use the why, what, who, and how of business models framework to put strategy into
action.
An Overview of Frameworks Discussed

To measure and assess firm performance:

• Accounting profitability
• Shareholder value creation
• Economic value creation
Integrative frameworks, combining quantitative data with qualitative
assessments:
• The balanced scorecard
• The triple bottom line
 Three Standard Performance Dimensions

What is the firm’s accounting profitability?

How much shareholder value does the firm create?
How much economic value does the firm generate?
Accounting Profitability

Accurately assesses firm performance

Compares firm performance to competitors / industry
average
Available through:
• Standardized accounting metrics (GAAP, FASB)
• Form 10-K statements
• Profitability ratios
• Return on invested capital (ROIC), return on equity
(ROE), return on assets (ROA), and return on revenue
(ROR)
Comparing Apple and Microsoft:
Drivers of Firm Performance

Exhibit 5.1
Source: Analysis of publicly available data
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Elements of ROIC Explained

Return on revenue
• How much of the firm’s sales is converted into profits
Working capital turnover
• How effectively capital is being used to generate
revenue
Return on Revenue Elements

Cost of goods sold (COGS) / Revenue

• How efficiently a company can produce a good
Research & development expense / Revenue
• How much of each dollar earned is invested in R&D
Selling, general, & administrative expense / Revenue
• How much of each dollar earned is invested in SG&A
Working Capital Turnover Elements

Working capital / Revenue

• How much working capital the firm has tied up in its
operations
PPE / Revenue
• How much of a firm’s revenues are dedicated to cover
plant, property, and equipment
• Critical assets and difficult to get rid of

Intangibles / Revenue
• Intangibles include patents, copyrights, and
trademarks, goodwill, and brand value
Limitations of Accounting Data

Historical and backward-looking

Does not consider off–balance sheet items:
• Pension obligations
• Leasing obligations
Focuses mainly on tangible assets
• May not be the most important
• Consider: innovation, quality, customer experience
The Declining Importance of Book Value in a Firm’s Stock Market Valuation

Exhibit 5.2
Source: Analysis and depiction of data from Compustat, 1980–2015

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Shareholder Value Creation - Definitions

Shareholders
• Own shares of stock, are legal owners
Risk Capital
• Money provided for an equity share
Total Return to Shareholders
• Stock price appreciation + dividends
Market Capitalization
• Dollar value of total shares outstanding
• Number of outstanding shares x share price
Stock Market Valuations of Apple and Microsoft, 1990–2017

Exhibit 5.3
Source: Depiction of publicly available data

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Limitations of Shareholder Value Creation

Stock prices can be volatile

• Difficult to assess firm performance
Macroeconomic factors affect stock prices
• Economic growth or contraction
• Unemployment, interest and exchange rates
Stock prices can reflect the mood of investors
• Investors can be irrational
Economic Value Creation

The difference between:

• A buyer’s willingness to pay for a product / service
• And the firm’s total cost to produce it
• The difference between value (V) and cost (C)
Firm B’s Competitive Advantage

Same cost as firm A but firm B creates more economic value.

Firm B’s advantage is based on superior differentiation.

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Exhibit 5.4
Firm C’s Competitive Advantage

Same total perceived consumer benefits as firm D, but firm C creates more
economic value.

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Exhibit 5.5
Producer & Consumer Surplus

Producer surplus (also called profit)

• Price charged minus cost to produce
Consumer surplus
• What you were willing to pay minus what you paid
Both parties capture some of the value created.
Competitive Advantage and
Economic Value Created

Exhibit 5.7
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 Opportunity Costs and Limitations of
Economic Value Creation

Opportunity costs
• The value of the best forgone alternative

Limitations of Economic Value Creation

• Valuing a consumer good isn’t easy
• The value of a good changes in the eyes of consumers
• Income, preferences, time, etc.
The Balanced Scorecard

Helps managers achieve their strategic objectives

Uses internal and external performance metrics
Balances both financial and strategic goals
The Balanced Scorecard Approach

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Exhibit 5.8
 Examples of Metrics for Each
Balanced Scorecard Section

Customers
• Revenue, profit, customer satisfaction
Value Creation
• Competitiveness, innovation, organizational learning
Core Competencies
• Key business processes
Shareholders
• Cash flow, operating income, ROIC, ROE, total returns to shareholders
Advantages of the Balanced Scorecard

Links strategic vision to responsible parties

Translates vision into measurable goals
Designs and plans business processes
Implements feedback and organizational learning
Alerts to needed strategic goal adaptation
Disadvantages of the Balanced Scorecard

Focused on implementation
• Not formulation
Managers must identify the right metrics to track
Lacks guidance:
• Which metrics to use?
• How to address setbacks?
The Triple Bottom Line

Focus: economic, social and ecological performance

Three dimensions:
• Economic Dimension: Profits
• Businesses must be profitable to survive
• Social Dimension: People
• Ecological Dimension: Planet
• Considers the natural environment
Sustainable Strategy

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Exhibit 5.9
What Is a Business Model?

Details competitive tactics and initiatives

Explains how the firm:
• Intends to make money
• Conducts its business
• With buyers, suppliers, and partners
 Why, What, Who, and How of Business Models (1 of 2)

Details competitive tactics and initiatives

Explains how the firm:
• Intends to make money
• Conducts its business
• With buyers, suppliers, and partners
Why, What, Who, and How of Business Models (2 of 2)

Exhibit 5.10

Source: Adapted from R. Amit and C. Zott (2012), “Creating value through business model innovation,” MIT Sloan Management Review: 41–49.

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Popular Business Models

Razor-razorblade: pay for replacements

Subscription: pay for access
Pay as you go: pay for what you consume
Freemium: pay for extra features / add-ons
Wholesale: products sold at a discount
Agency: products sold on commission
Bundling: more than one product sold at a discount
Dynamic Nature of Business Models

Business Models:
• Can be combined
• Can evolve
• Can be disrupted
Businesses must respond to disruption & adapt
Legal conflicts can arise