Chapter 7 Chapter 7 8 Strategic Management Model

Chapter 7

Chapter 7 & 8 Strategic Management Model Competitive Methods P 1 S 1 P 2 S 2 P 3 S 3

Synthesizing Coalignment Theory with the Realities of the Firms Need to Produce Cash Flow The Value Adding Model Products/Services P 1 Environmental Events Assets and Capital Competitive Method Outsource Restaurant Asset Productivity Expert Systems S 1 Service Training Revenue Maximization Resource Allocation Strategic Alliances Adding Value Worksheet Aggregated Cash Flow of each Product and Service The Reality Cash Flow per Share

t tmen inve s The risk ing rmin Dete cos ing rmin Dete Esti mat ing c ash f t of lows cap ital The Pillars of the Investment Decision in Competitive Methods Factors to be evaluated in every investment decision

Strategic Financial Management – the Cost of Capital k Required return = return of capital + return on capital to offset inflation + return on capital to offset perceived risk k. E =Rf + Risk Premium

Expected value analysis of possible demand for a new competitive method Demand possibilities (a) Actual units sold (b) Probability of sales (c) Expected value (b)*(c) Excellent 10, 000 . 10 1, 000 Good 8, 000 . 30 2, 400 Favorable 6, 000 . 30 1, 800 Encouraging 4, 000 . 20 800 Marginal 2, 000 . 10 200 Total expected unit sales resulting from new competitive method 6, 200

Operating Leverage and Risk

The Net Present Value Formula Cash Flows Investment Cost of Capital Length of Project