Does the firm offer returns in excess of the total cost of a capital, as suggested by the economic value added (EVA) model? EVA is the spread between a firm’s return on invested capital minus its weighted average cost of capital, multiplied by the amount of capital invested. In other words, EVA is what is left over after a firm has covered all its factors of production (operating expenses, overheads, interest, taxes, plus fair return to shareholders). To succeed financially how should we appear to our shareholders? Is the question to be answered here?
1) The customer’s perspective: Does the firm provide the customer with superior value in terms of product differentiation low cost and quick response?
2) The operations Perspectives: How effectively and efficiently do the core processes that produce customer value perform? Which are the most important sources of customer value which need improving to offer greater customer value?
3) The organizational perspective: Can this firm adapt to changes in its environment? Is its workforce committed to shared goals? Does the organization learn from past mistakes? When confronted with a problem, does it work on root causes or does it only scratch the surface?
A properly constructed scorecard helps a firm strike a fine balance between short and long term financial measures; financial and non-financial measures internal and external performance perspectives. A firm’s long term strategy should take all the above perspectives into account while trying to match a firm’s internal resources and capabilities with external opportunities.
Corporate success, ultimately depends on how well a firm is able to extend its competitive advantage to new areas over a long period of time. As mentioned previously competitive advantage comes from a firm’s ability to perform activities (using its unique, durable, specialized, had to imitate resources and skills etc. while serving the needs of customers) more effectively than rivals.
Grand Strategies (GS):
GS is the general plan of major action by which a firm intends to achieve its long term goals. It provides basic direction for the strategic actions of a firm. Most firms begin their operations as single business units. Some firms continue to thrive due to their specialized operations and exclusive focus on a limited business arena. McDonald’s for instance has been able to develop a steadily improved product line and keep its costs low by focusing on the fast food business alone. Likewise, Inofsys Technologies had exploited the low cost advantage of software services initially in India and after consolidating its position is now seeking to extend its business by developing competencies in new and emerging technologies. Wal-Mart too, has benefited primarily from the retailing industry. However, operating primarily in one industry may make the firm vulnerable to business cycle. Should the industry attractiveness decline (Software, Telecom, businesses in late 90s) through a permanent decrease in consumer demand for the firm’s products or intensified competition from existing or new competitors, then the firm’s performance is likely to suffer. These limitations can be overcome by operating in different fields through diversification. The firm could diversify into related (to exploit its core strengths) or unrelated businesses (to tap profit opportunities in other area). Of course unrelated diversifications may result in uncertainties associated with losing touch with the fundamentals of each business and the difficulty of analysing the numerous disaggregate external opportunities and threats inherent in unrelated industries. Managers have to be extremely cautious in choosing the various strategic alternatives aimed at improving customer value.
Grand Strategies fall in four general categories: Growth / expansion, stability, retrenchment and combination.
Source: Strategic Management