Strategic Management: Value Creation, Sustainability, and Performance, 3e, 2014 Strategy and Performance Chapter 2

1. The value of both financial and non- financial performance dimensions. 2. Relationship between financial performance and competitive advantage. 3. Use financial analysis to examine strategy. 4. Economic logic of industries and companies. 5. Interaction between strategy formulation and financial analysis. Learning Objectives

"Superior performance" or "Substantial positive return" or "Above average profitability" or "Above average return on equity" The Goal of Strategy

Summary performance – the whole firm Relative to competition Over the long run Key Strategy Performance Dimensions

Stockholders versus stakeholders  Value creation can take many forms: economic, social, cultural, knowledge, etc. Triple Bottom Line  Economic  Social  Ecological or environmental Emerging Performance Considerations

Whole Foods 2014 Stockholder performance CompanyIndustry  ROE15.1%8.4%  Revenue+ 9.9%+ 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

Customary measures  Return on equity (ROE)  Revenue growth  Common stock returns (dividends + stock price gains)  Market capitalization Financial Performance

Calculating ROE – "Dupont 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 Detailed Financial Analysis

Strategy and Financial Statements Strategic plan and directionInter-related sets of activities Decisions on resource allocationsPatterns of asset allocations

"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" Economic Logic

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 Common Industry Operating Metrics