Chapter 7

Chapter 7 & 8 Strategic Management Model Competitive Methods S2 P2 P3 S3 P1 S1

Aggregated Cash Flow of Synthesizing Coalignment Theory with the Realities of the Firms Need to Produce Cash Flow The Value Adding Model Products/Services Competitive Method P1 Outsource Restaurant Asset Productivity Environmental Events Expert Systems Assets and Capital S1 Service Training Revenue Maximization Resource Allocation Strategic Alliances Adding Value Worksheet Aggregated Cash Flow of each Product and Service Cash Flow per Share The Reality

The Pillars of the Investment Decision in Competitive Methods Determining cost of capital Estimating cash flows Determining risk The investment Factors to be evaluated in every investment decision

Strategic Financial Management – the Cost of Capital k kE =Rf + Risk Premium Required return = return of capital + return on capital to offset inflation + return on capital to offset perceived risk

Demand possibilities (a) Probability of sales (c) Expected value analysis of possible demand for a new competitive method Demand possibilities (a) Actual units sold (b) Probability of sales (c) Expected value (b)*(c) Excellent 10,000 .10 1,000 Good 8,000 .30 2,400 Favorable 6,000 1,800 Encouraging 4,000 .20 800 Marginal 2,000 200 Total expected unit sales resulting from new competitive method 6,200

Operating Leverage and Risk

The Net Present Value Formula Length of Project Cost of Capital Cash Flows Investment