What accounting and financial metrics allow us to measure firm success?
1. Accounting or book measures
- Revenues = prices multiplied by quantities
- Cost of goods sold = price for input products multiplied by quantities
- Gross margin = Gross Profit divided by revenue
- Operating expenses = other costs in running the business
- Operating income = Gross profit less operating expenses
- Operating margin = operating income divided by revenues
- Cash flow = net cash a firm receives in a given period of time
- Present discounted sum of future cash flows = value that owners have a claim on
- ROA = Operating profits / Value of assets
- ROE = Net Income / (Assets – liabilities)
2. Market-based measures
- Stock price = market capitalization divided by number of outstanding shares = assessment of value-generating potential of the firm’s strategy
- Tobin’s Q = Market Value / Book value of Assets
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What is economic value?
= Value created in the value chain: each link chain in the chain adds some value to its inputs
= Value generated by the activities undertaken at a point in time by the incumbent firms
= Willingness to pay for a firm’s product less the opportunity costs of the supplier
What are the three groups that share PIE? = Value division
- Suppliers
- Customers
- Incumbent firms
What are the four elements of a firm’s strategy?
1. Long-term goals: What we want to achieve
2. Scope of the firm: What we do
3. Competitive advantage: How we do it
4. Logic: Why it will work
What are possible sources of sustainable competitive advantage?
1. Demand Side
• Brand
• Patent
• Design
• Location
= sources of monopoly power
2. Cost Side
• Access to cheap resources
• Process patent
• Superior technology (unique and valuable)
• Economics of scale
• Organizational skills
Zero Added Value means no competitive advantage.
If the company enters the game and increases the size of the PIE, then it has