1. © 2006 by Nelson, a division of Thomson Canada Limited.2-1 Strategic Management and Firm Performance Chapter Two

2. © 2006 by Nelson, a division of Thomson Canada Limited.2-2 Accounting Measures & Firm Performance + Easily available for publicly traded firms + Stock exchanges stress quality accounting data. as a tool for investor decisions + Broad support for use as a performance measure + May provide insights into economic rates of return However, they - May have a built in short ‑ term bias - Are subject to manipulation by managers - Undervalue intangible assets $ $ $ Accounting Measures are Popular in Analysis

3. © 2006 by Nelson, a division of Thomson Canada Limited.2-3 Market - Based Measures & Firm Performance + These measures may more accurately reflect econ. performance than accounting based measures... Useful for assessing econ. value of a given strategy or. choosing between strategies that could be implemented. Strategy researchers have increasingly relied on market-based measures of firm performance. This increased use may partially be a response to the criticisms of accounting-based measures. + +s+s + Market-based measures focus on the present value of future streams of income, (e.g., expected value of future cash flows) not past performance.

4. © 2006 by Nelson, a division of Thomson Canada Limited.2-4 Market - Based Measures & Firm Performance Although the four measures have limitations, they provide insight into the ability of a firm to achieve above-average returns, average returns or below- average returns. ! Correlations between the accounting measures & market measures are only 0.15 to 0.30. ! This suggests that market measures tell us something different about performance than accounting measures.

5. © 2006 by Nelson, a division of Thomson Canada Limited.2-5 The Balanced Scorecard Brings financial measures of previous performance together with measures of the drivers of future performance. The Balanced Scorecard translates a business units mission into tangible objectives and measures.

6. © 2006 by Nelson, a division of Thomson Canada Limited.2-6 The Balanced Scorecard