Principles of Strategic Management: Strategy Evaluation and Corporate Governance - Measuring Strategic Performance ROI, ROE,, Economic Value Added (EVA), Market Value Added (MVA)

What This Is

Measuring strategic performance is crucial for evaluating a company's success and making informed decisions. It involves assessing the financial and non-financial outcomes of a company's strategy. For instance, Apple's focus on innovation and customer experience has led to significant returns on equity (ROE) and economic value added (EVA), making it a benchmark for strategic performance.

Key Frameworks & Tools

• Return on Investment (ROI): A financial metric that calculates the return on investment in a project or initiative, typically expressed as a percentage.
• Return on Equity (ROE): A financial metric that measures a company's profitability by calculating net income as a percentage of shareholder equity.
• Economic Value Added (EVA): A financial metric that calculates a company's economic profit by subtracting its cost of capital from its net operating profit after taxes (NOPAT).
• Market Value Added (MVA): A financial metric that measures a company's market value minus its book value, indicating its market value creation.
• DuPont Analysis: A framework that breaks down ROE into three components: profit margin, asset turnover, and financial leverage.
• Balanced Scorecard (BSC): A strategic management framework that evaluates a company's performance from four perspectives: financial, customer, internal processes, and learning and growth.
• BCG Matrix: A strategic management tool that categorizes a company's products or business units into four quadrants based on their market growth rate and relative market share.
• Ansoff Matrix: A strategic management tool that categorizes a company's growth strategies into four quadrants based on market and product development.
• Value Chain Analysis: A framework that identifies the key activities that create value for a company's customers and products.
• SWOT Analysis: A framework that identifies a company's strengths, weaknesses, opportunities, and threats.

Step-by-Step Application

1. Conduct a DuPont Analysis:
   • Calculate profit margin by dividing net income by revenue.
   • Calculate asset turnover by dividing revenue by total assets.
   • Calculate financial leverage by dividing total assets by shareholder equity.
   • Multiply the three components to get the ROE.
2. Build a Balanced Scorecard:
   • Identify the company's strategic objectives and initiatives.
   • Develop metrics and targets for each objective.
   • Assign responsibility and accountability for each metric.
   • Regularly review and update the scorecard.
3. Use the BCG Matrix:
   • Plot each product or business unit on a grid based on market growth rate and relative market share.
   • Identify the four quadrants: stars, cash cows, question marks, and dogs.
   • Develop strategies for each quadrant, such as investing in stars, harvesting cash cows, and divesting dogs.
4. Apply the Ansoff Matrix:
   • Identify the company's current market and product offerings.
   • Determine the company's growth objectives and strategies.
   • Plot each strategy on the matrix based on market and product development.
   • Develop plans for each quadrant, such as market penetration, product development, market development, and diversification.

Common Mistakes

1. Mistake: Confusing industry attractiveness with competitive position.
   • Correction: Industry attractiveness refers to the overall attractiveness of the industry, while competitive position refers to the company's relative position within the industry.
2. Mistake: Using the wrong level of strategy.
   • Correction: Use the right level of strategy, such as corporate, business unit, or functional, depending on the context.
3. Mistake: Failing to consider non-financial metrics.
   • Correction: Use a balanced approach that includes both financial and non-financial metrics, such as customer satisfaction and employee engagement.

Case Interview / Exam Tips

1. Common question patterns: Be prepared to analyze a company's financial performance and strategic position.
2. Tricky distinctions: Be able to distinguish between different strategic concepts, such as differentiation and low cost, or blue ocean and red ocean.
3. Framing answers: Use a clear and concise framework to structure your answers, such as the DuPont Analysis or the BCG Matrix.

Quick Practice Scenario

A company has low market share in a high-growth industry – where does it sit on the BCG matrix?

Answer: Question mark Explanation: The company has low market share, but the industry is growing, making it a question mark.

Last-Minute Cram Sheet

1. ROI = Net Income / Investment
2. ROE = Net Income / Shareholder Equity
3. EVA = NOPAT - Cost of Capital
4. MVA = Market Value - Book Value
5. DuPont Analysis: ROE = Profit Margin x Asset Turnover x Financial Leverage
6. BCG Matrix: Stars, Cash Cows, Question Marks, Dogs
7. Ansoff Matrix: Market Penetration, Product Development, Market Development, Diversification
8. Value Chain Analysis: Identify key activities that create value for customers and products
9. SWOT Analysis: Identify strengths, weaknesses, opportunities, and threats
10. "Stuck in the middle" means trying to do both cost leadership and differentiation without achieving either – not a valid hybrid strategy unless operational excellence is present.