Lec 08 Flashcards
Evaluating a firms performance
Financial ratio analysis:
- market value
- revenue
- profit
Satisfaction of stakeholders
- customers
- employees
- suppliers
- owners
- …
Financial ratio analysis
- Short-term solvency/liquidity ratios
- long-term solvency/liquidity ratios
- asset utilization/turnover ratio
- profitability and market value ratios
Historical data has to e considered also comparing of the figures with those of competitors
Historical comparison
Financial figures should always be looked in conjunction with their historical development, as absolute figures do not say anything about a firm’s development.
Comparison with industry norm
Many financial ratios depend strongly on the industry the firm is part of. Also, return ratios and margins are heavily industry dependent.
Other factors affecting margins are the amount of value added by a firm, the level of competition in that market and differentiation of a firm’s offerings. Therefore, high-tech companies achieve higher margins than resellers for example.
Comparison with key competitors
Within a certain industry, there can be different strategic groups of firms aiming at different areas of the market spectrum. For example, a number of firms may focus on the low-cost segment whereas others aim their offerings at the premium submarket. Competition is mainly concentrated within these groups. Thus, it makes sense to identify the key competitors in the strategic group a firm belongs to and draw comparisons with them.
Balances scoreboard
Just looking at financial ratios can give a wrong impression. Investments in R&D and the development of employees are expenses that diminish a firm’s performance. Managers often don’t want to make long term investments because of that. The balanced scoreboard tries to eliminate this by looking at these 4 points:
- Customer
- internal
- Innovation & learning
- financial
Customer perspective
The customer perspective has the aim to ensure that the way the company operates is geared to their customer’s demand. For this, it is required that the specific measures to meet customer needs are defined. Four key categories of customer concerns can be identified:
- time
- quality
- performance and service
- cost
Internal business perspective
In this perspective, the internal processes and principles needed to achieve high customer satisfaction as an output are of concern. Factors belonging to the internal business category are usually those that have an effect on either:
- cycle time
- quality
- employee skills
- productivity
Innovation and learning perspective
This perspective focuses on factors related to change and future development of the company. It includes changes to the product and service portfolio of a company, but also the (predominantly intangible) assets needed to successfully do so, such as:
- human capital (skills, talent, knowledge)
- information capital (information systems, networks)
- organizational capital (culture and leadership)
Financial Perspective
The financial perspective serves as a control measure to determine whether the goals set as part of the other perspectives result in the ultimate goal to achieve sound financial performance. Measures typically include profitability, growth and shareholder value. The idea is that well-defined goals and strategies related to the other perspectives result in good financial outcomes, rather than requiring trade-offs between them and financial performance.
Limitations and potential downsides of the balances scoreboard
While balanced scorecards enable a compact and comprehensive overview, it cannot be seen as a measure that can quickly be implemented. Rather, it requires long-term commitment. It also requires that the measures part of the balanced scorecards are in alignment with the objectives of the individuals that are part of the firm. This is important for the reason that employees need to see the motivation in pursuing the goals defined in the balanced scorecards rather than thinking of them as something that is not in accordance with their own interests.
Organizational Ethics
Corporate misconduct most of the time is not the result of an individual’s misbehavior. Typically, it requires cooperation of others and therefore should be seen in the context of the organization’s operating culture.
Leaders face an exemplary role when it comes to ethical conduct.
It can be made out that strong ethics also drive strong organizational culture and factors such as employee effort and commitment.
Integrity based vs. compliance based approaches to organizational ethics
Compliance-based ethics programs are often reactively implemented when a firm fears legal action being taken against them.
Integrity-based ethics programs are more thorough and aim to ensure integrity among managers and employees.
Critical elements for an organization to become highly ethical can be identified as role models, corporate credos and codes of conduct, reward and evaluation systems, policies and procedures.
Role models
The behavior and actions of a top executive serve as an example to the managers and employees in a company.
Often leaders also have to take responsibility for unethical behavior in the company, even if they are not directly involved in it. The reason behind this is that it is seen as the executive’s job to ensure that the company’s values and behavioral principles are communicated clearly throughout the organization.
Corporate credos and codes of conduct
Mechanisms that fall into this category serve as guidelines for decision making and offer orientation in terms of norms and beliefs that a company enacts. Additionally, they lay the foundation for employees to refuse to act unethically. It is important that employees are aware of these guidelines and their purpose.
