Business Performance Measurement Frameworks

Learning Objectives

• Assess firm profitability using accounting data to evaluate competitive advantage.
• Analyze shareholder value creation as a metric for competitive assessment.
• Understand economic value creation and sources of competitive advantage.
• Implement a balanced scorecard for a comprehensive evaluation of competitive advantage.
• Leverage a triple bottom line approach to gauge overall business performance.
• Utilize a business model framework to translate strategy into actionable items.

Performance Measurement Frameworks

• Key dimensions: accounting profitability, shareholder value creation, economic value creation.
• Integrative frameworks combine quantitative metrics and qualitative assessments:
  • Balanced scorecard: tracks performance against strategic goals.
  • Triple bottom line: evaluates sustainability in economic, social, and environmental metrics.

Accounting Profitability Metrics

• Accurate assessment of firm performance against competitors and industry standards.
• Utilizes standardized accounting metrics and financial reports (e.g., Form 10-K).
• Major ratios:
  • Return on Invested Capital (ROIC)
  • Return on Equity (ROE)
  • Return on Assets (ROA)
  • Return on Revenue (ROR)

Key Components of ROIC

• Return on Revenue (profit from sales).
• Working Capital Turnover (efficiency of capital use).
• Cost of Goods Sold (COGS) relative to Revenue (operational efficiency).
• R&D Expense relative to Revenue (innovation investment).
• Selling, General & Administrative (SG&A) Expense relative to Revenue (administrative efficiency).

Limitations of Accounting Data

• Historical perspective may not reflect current performance.
• Excludes off-balance sheet items such as pensions and leases.
• Primarily focuses on tangible assets, neglecting innovation, quality, and customer experience.

Shareholder Value Creation Insights

• Shareholders own stock and provide risk capital for the company.
• Total return to shareholders includes stock appreciation and dividends.
• Market capitalization is calculated as total shares outstanding multiplied by share price.

Challenges with Shareholder Value Measurement

• Stock prices exhibit volatility, complicating firm performance assessment.
• Economic factors (e.g., growth, unemployment, interest rates) influence stock valuations.
• Investor sentiment can lead to irrational market behaviors.

Economic Value Creation

• Defined as the difference between consumer willingness to pay and the firm’s production cost.
• Firms can gain competitive advantage by enhancing differentiation or managing costs effectively.

Producer and Consumer Surplus

• Producer surplus represents profit, calculated as the price charged minus production costs.
• Consumer surplus is the difference between what consumers are willing to pay and the actual purchase price, highlighting value captured by consumers.

Opportunity Costs and Economic Value Limitations

• Opportunity costs represent the value of the next best alternative foregone.
• Gauging consumer value can be complex due to variable consumer preferences and external factors.

The Balanced Scorecard Framework

• Supports managers in achieving strategic objectives.
• Incorporates both internal and external performance metrics.
• Balances financial outcomes with long-term strategic goals.

Metrics in the Balanced Scorecard

• Customer metrics: revenue, profit, customer satisfaction levels.
• Value creation metrics: competitiveness, innovation progress, organizational learning.
• Core competencies: assessment of key business processes.
• Shareholder metrics: cash flow, operating income, ROIC, ROE.