Chapter 1 Understanding Strategy

Strategy is an action that managers take to attain one or more of the organization’s goals.

- can also be defined as “A general direction set for the company and its various components to achieve
a desired state in the future. Strategy results from the detailed strategic planning process”.

THE DIFFERENT VIEWS/APPROACHES OF STRATEGY

1. Classical Administrator
2. Design Planner
3. Role Player
4. Competitive Positioner
5. Visionary Transformer
6. Self-Organizer
7. Turnaround Strategist

CHOOSING THE RIGHT APPROACH

Choosing the right approach involves:

 Gathering the right information;
 Developing market awareness;
 Deciding what action needs to be taken;
 Assessing risk;
 Thinking critically; 

Chapter 2: THE NATURE OF STRATEGIC MANAGEMENT

Strategic management is both an art and science of formulating, implementing, and evaluating, cross-
functional decisions that facilitate an organization to accomplish its objectives.
- Is the ongoing planning, monitoring, analysis and assessment of all necessities an organization needs
to meet its goals and objectives.

Competitive Advantage - Anything that a firm does especially well compared to rival firms.

Achieving Goals - Helps keep goals achievable by using a clear and dynamic process for formulating
steps and implementation.

Sustainable Growth - Lead to more efficient organizational performance, which leads to manageable
growth.

Cohesive Organization - Necessitates communication and goal implementation company-wide

Increased Managerial Awareness -Strategic management means looking toward the company’s future.
Mission Statement A mission statement identifies the scope of a firm’s operations in product and market
terms

Vision Statement Answers the question “what do we want to become” - Where it wants to be in the future

Values Process - that will guide its action

-requires a commitment to strategic planning

Strategic Planning -includes the planning of strategic decisions, activities and resource allocation needed to
achieve those goals

Strategic Management can be:

Prescriptive Strategic Management - means developing strategies in advance of an organizational issue.

Descriptive Strategic Management -means putting strategies into practice when needed

Types of Strategic Management

SWOT ANALYSIS A SWOT analysis is a comprehensive evaluation of all the strengths, weaknesses,
opportunities, and threats of the strategy you compose.

Balanced Scorecard The Balanced Scorecard is a strategic management system that translate the vision and
strategy of an organization into operational objectives and measures

THE FOUR PERSPECTIVES AND PERFORMANCE MEASURES

The Financial Perspectives

● Establishes long and short-term financial performance objectives

● Concerned with the global financial consequences
● Has three strategic themes:
-revenue growth
- cost reduction
- asset utilization

Customer Perspectives
● Source of the revenue component for the financial objectives
● Defines and selects the customers and market segment in which the company chooses to compete

Process Perspectives
● Entails the identification of the processes needed to achieve the customer and financial objectives.

Learning and Growth (infrastructure) Perspectives

● The source of the capabilities that enable the accomplishment of the other three perspectives.
● It has three major objectives:
- increase employee capabilities
-increase motivation
-empowerment and alignment
-increase information systems capabilities
Quiz. 2
Individuals who are most responsible for the success or failure of an organization.
- Strategists

A statement representing what the organization wants to become and where it wants to be in the future.
-Vision statement

Often considered to be the most difficult stage in strategic management.

-Strategy Implementation

These are the means by which long-term objectives will be achieved.

-Strategies

Managers need to know which strategies not working well; primary means for obtaining this information.
-Strategy Evaluation

"What is our business?"

-Mission statement

Refer to strategy formulation, implementation, and evaluation.

-Strategic Management

Economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and
competitive trends and events that could significantly benefit or harm an organization in the future.
-External Opportunities and threats

Anything that a firm does especially well compared to rival firms.

- Competitive Advantage

Specific results that an organization seeks to achieve in pursuing its basic mission.
-Objectives

Communication is a key to successful strategic management.

-true

Short-term milestones that organizations must achieve to reach longterm objectives.

- Annual Objectives

Requires a firm to establish annual objectives, devise policies, motivate employees, & allocate resources so
that formed strategies can be executed.
-Strategy Implementation

External strengths and weaknesses are organization's controllable activities that are performed especially well
or poorly.
-false

Mission statement is an enduring statements of purpose that distinguish one business from other similar firms.
-true

A company’s game plan.

-Strategic Plan

The process of conducting research and gathering and assimilating external information.
-Environmental Scanning and Industry analysis
Strategies are the means by which annual objectives will be achieved.
-False

Strategy evaluation is needed because success today is no guarantee of success tomorrow

-True

It answers the questions, “What do we want to become

-Vision Statement

chapter 3 THE STRATEGIC MANAGEMENT PROCESS

Strategic Management Process - describes its methods by which managers conceived of and implement a
strategy that can lead to a sustainable competitive advantage.

Managers ask the following questions:

● What do we want to accomplish ultimately? What is our vision?

● What are we about? What is our mission?
● How do we accomplish our goals? What are our values?

VISION - A vision statement provides the direction and describes what the founder wants the organization to
achieve in the future; it’s more about the “what” of a business. It is different from a mission statement,
which describes the purpose of an organization and more about the “how” of a business.

A vision statement should answer the basic question, “What do we want to become?”

MISSION STATEMENT- Distinguishes one firm from another

● Declares the firm’s reason for being

● Reveal what an organization wants to be and whom it wants to serve
● Essential for effectively establishing objectives and formulating strategies

Mission Statement Components

● Customers: Who are the firm’s customers?

● Products or services: What are the firm’s major products or services?
● Markets: Geographically, where does the firm compete?
● Technology: Is the firm technologically current?
● Concern for survival, growth, and profitability: Is the firm committed to growth and financial soundness?
● Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
● Self-concept: What is the firm’s distinctive competence or major competitive advantage?
● Concern for public image: Is the firm responsive to social, community, and environmental concerns?
● Concern for employees: Are employees a valuable asset of the firm?
What is strategy formulation?

● includes developing a vision and mission

● identifying an organization's external opportunities and threats,
● determining internal strengths and weaknesses,
● establishing long-term objectives,
● creating alternative strategies, and
● choosing particular strategies to pursue.

Strategy Implementation

● requires a firm to establish annual objectives,

● devise policies,
● motivate employees, and
● allocate resources so that formulated strategies can be implemented
● developing a strategy-supportive culture,
● creating an effective organizational structure,
● redirecting marketing efforts,
● preparing budgets,
● developing and utilizing information systems, and
● relating employee reward to organizational performance.

Strategy Evaluation
Three fundamental strategy-evaluation activities are:
1) Reviewing external and internal factors that are the bases for current strategies
2) Measuring performance
3) Taking corrective actions

Levels of Strategies
❑ Corporate Strategy
❑ Business Strategy
❑ Functional strategy
❑ Operational Strategy

External Opportunities and Threats - are factors which could harm or benefit the organization in the future
Internal Strengths and Weaknesses - Controllable activities that are performed especially well or poorly.
Long-term Objectives - essential for organizational success
Strategies - are the means by which long term objectives will be achieved.
Annual Objectives - are short term milestones that organizations must achieve to reach long term objectives.
Policies - are the means by which annual objectives will be achieved.

Benefits of Strategic Management

➢ Nonfinancial Benefits
● Enhanced awareness of threats
● Improved understanding of competitors’ strategies
● Increased employee productivity
● Reduced resistance to change
● Clearer understanding of performance-reward relationship
● Enhanced problem-prevention capabilities

WHY SOME FIRMS DO NO STRATEGIC PLANNING

Lack of knowledge of strategic planning
Poor reward structures
Fire fighting
Waste of time
These decisions involve managing the level of raw Usually, external opportunities and threats are:
materials, work-in- process, and finished goods,
especially considering what to order, when to uncontrollable by a single organization.
order, how much to order, and materials handling.
Which management function includes breaking
-inventory tasks into jobs, combining jobs to form
departments and delegating authority?

Proponents of the resource-based view argue that organizing

external factors are more important than internal
factors for a firm in achieving and sustaining
competitive advantage. This involves setting out your top-level objectives
and working out the vision, mission, objectives,
False values, techniques and goals of the organization.

A limitation of financial ratios is the fact that they

are based on accounting data. Where do you want to take it?

True According to Porter, what is usually the most

powerful of the five competitive forces?

A firm's strengths that cannot be easily matched or

imitated by competitors are called: Rivalry among competing firms

distinctive competencies.
There are seven basic functions of marketing:
customer analysis, selling, product and service
What types of skills are especially critical for planning, pricing, distribution, marketing research
successful strategy implementation? and opportunity analysis.

Interpersonal True

Tick the 3 Methods/ Approaches to Internal

Analysis. Refers to the process whereby a firm determines
the costs associated with organizational activities
Value Chain Analysis from purchasing raw materials to manufacturing
Functional Approach product(s) to marketing those products.
Resource-based View
Value chain analysis
Receives raw material from both the external and
internal evaluation of an organization.
____________ and __________ refer to
management information system economic, social, cultural, demographic,
environmental, political, legal, governmental,
These decisions involve managing the skilled, technological, and competitive trends and events
unskilled, clerical, and managerial employees by that could significantly benefit or harm an
caring for job design, work measurement, job organization in the future.
enrichment, work standards, and motivation External opportunities; external threats
techniques.
Consists of all those activities that transform
Workforce inputs into goods and services.
Production/operations management deals with
Which of the following is the process of inputs, transformations, and outputs that vary
influencing people to accomplish specific across industries and markets.
objectives?
production/operations function
Motivating

In China, business behaviors revolve around

What are the 3 aspects of Internal Analysis?
guanxi, or personal relations.
Resources, capabilities, & core competencies
True
 Among the primary benefits derived from strategic
It is a concept that focuses on integrating various planning are the following except:
departments within a company to accomplish its
strategic goals. Provides the detailed route map that will take the
business in the desired direction
Strategic planning
Which ratio would be considered an activity ratio?
The development and execution of strategic
planning are viewed as consistency of being average collection period
performed in these steps except

Resourcing What category of ratios measures a firm’s ability

to meet maturing short-term obligations?

What category of ratios measures how effectively Liquidity

a firm can maintain its economic position in the
growth of the economy and industry? A firm’s strengths that cannot be easily matched or
imitated by competitors are called

Growth distinctive or core competencies.

These decisions include choice of technology, The process of performing an internal audit,
facility layout, process flow analysis, facility compared to the external audit, provides more
location, line balancing, process control, and opportunity for participants to understand how
transportation analysis. Distances from raw their jobs, departments and divisions fit into the
materials to production sites to customers are a whole organization.
major consideration.
True
Process
All of the following are key questions that can
What category of ratios includes return on total reveal internal strengths and weaknesses in the
assets and return on stockholders’ equity? management department EXCEPT

Profitability Are the organization's products positioned well

against competing products?
During what stage of strategic management are a
firm’s specific internal strengths and weaknesses
determined?

Formulation

______is an analytical tool used to determine

whether a firm’s value chain analysis is
competitive compared to those of rivals and thus
conducive to winning in the marketplace.

Benchmarking

Internal __________ are activities in an

organization that are performed especially well.

strengths

Strategic planning as a broad concept consists of

strategy formulation and implementation

In China, to show that you enjoyed your meal, you

should completely finish your food.

False
Chapter 4-5 The external assessment

An external audit reveals key opportunities and ECONOMIC FORCES

threats confronting an organization so that Five macroeconomic factors
managers can formulate strategies to take
➢Growth rates
advantage of the opportunities and avoid or reduce
the impact of threat ➢ Interest rates
➢ Levels of employment
NATURE OF EXTERNAL AUDITS ➢ Price stability (inflation and deflation)
❑The purpose of an external audit is to develop a ➢ Currency exchange rates
finite list of opportunities that could benefit a firm
and threats that should be avoided.
An economic variable of significant importance in
❑As the term finite suggests, the external audit is
strategic planning is Gross Domestic Product
not aimed at developing an exhaustive list of every
(GDP), especially across countries.
possible factor that could influence the business
SOCIAL, CULTURAL, DEMOGRAPHIC,
❑ It is aimed at identifying key variables that offer
actionable responses. AND NATURAL ENVIRONMENT FORCES
Social, cultural, demographic, and environmental
❑ Firms should be able to respond to the factors
by formulating strategies that take advantage of changes have a major impact on virtually all
external opportunities or that minimize the impact products, services, markets, and customers. Small
of potential threats. Small, large, for-profit, and non-profit
organizations in all industries are being staggered
KEY EXTERNAL FORCES and challenged by the opportunities and threats
- ECONOMIC FORCES arising from changes in social, cultural,
- SOCIAL, CULTURAL, DEMOGRAPHIC, demographic, and environmental variables.
AND NATURAL ENVIRONMENT
FORCES ✓Number of marriages
- POLITICAL, GOVERNMENTAL, AND
✓Number of divorces
LEGAL FORCE
- TECHNOLOGICAL FORCES ✓Number of births
- COMPETITIVE FORCES
POLITICAL, GOVERNMENTAL, AND
The PESTEL model LEGAL FORCES

Political (p) The political environment dscribes the Federal, state, local, and foreign governments are
processes and actions of government bodies that major regulators, deregulators, subsidizers,
can influence the decision and behavior of firms. employers, and customers of organizations.

Economic (e) The economic factor in the external Political, governmental, and legal factors,
environment are largely macroeconomic, affecting therefore, can represent key opportunities and
economywide phenomena.
threats for both small and large organizations.
Sociocultural (s) Sociocultural factors capture a
society’s cultures, norms, and values. For industries and firms that depend heavily on
Demographic trends are also important government contracts or subsidies, political
sociocultural forces. forecasts can be the most important part of an
external audit.
technological Technological factors capture the
application of knowedge to creatre new processes Changes in patents, laws, antitrust legislation, tax
and product rates, and lobbying activities can affect firms
significantly
Ecological factors (e) Ecological factors concern
broad environmental issues such as the natural The increasing global interdependence among
environment, global warming, and sustainable economies, markets, governments, and
economic growth Three diemsions- economic,
organizations makes it imperative that firms
social, and ecological- make up the triple bottom
line. Using triple bottom line approach, managers consider the possible impact of political variables
audit their company’s fulfillment of its social and on the formulation and implementation of
ecological obligations to stakeholders. competitive strategies
➢ This trend reflects the growing importance of COMPETITIVE FORCES and firm’s strategy:
information technology (IT) in strategic the five forces model
management
➢ These individuals are responsible for ❖Collecting and evaluating information on
developing, maintaining, and updating a competitors is essential for successful strategy
company's information database. formulation.
➢ A CIO and CTO work together to ensure that ❖Identifying major competitors is not always easy
information needed to formulate, implement, and because many firms have divisions that compete in
evaluate strategies is available where and when it different industries.
is needed ❖Many mulyidivisional firms do not provide sales
and profit information on a divisional basis for
Technological forces competitive reasons.
➢Revolutionary technological changes and
discoveries are having a dramatic impact on Nature
organizations. ❖Competitiveness is closely linked with customer
focus.
➢ The Internet has changed the nature of ❖A business must be competitive because this
opportunities and threats by altering the life cycles enables it to undrtake activities central to its
of products, increasing the speed of distribution, strategy.
creating new products and services
They include
➢ To effectively capitalize on e-commerce, a ➢Developing customer loyalty
number of organizations are establishing two new ➢Increasing sales to existing customers
positions in their firms: Chief Information Officer ➢Enhancing the strength and value of its brand
(CIO) and Chief Technology Officer (CTO) ➢Developing new product and product extensions
➢Increasing market effectiveness
Ex.
1. Airlines – Many airlines now offer wireless
Chapter 5
technology in flight.
2. Automotive – Vehicles are becoming wireless. ❑ Poster’s Five Forces model
3. Banking – Visa sends text message alerts after ❑ External Factor Evaluation (EFE) Matrix
unusual transactions. ❑ Competitve Profile Matrix (CPM)
4. Education – Many secondary ( and even
college) students may use smart phones for math 1 Threat of entry
because research shows this to be greatly helpful. 2 Power of suppliers
5. Health Care – Patients use mobile devices to 3 Power of buyers
monitor their own health, such as calories 4 Threat of Substitutes
consumed. 5 Rivalry among existing competitors
6. Politics – President Obama won the election
partly by mobilizing Facebook and Myspace users,
revolutionizing political campaigns. Obama
announced his vice presidential selection of Joe
Biden by a text message.
7. Publishing – e-books are increasingly available
▪ Developed by Michael Porter Rivalry among existing competitors
▪ Poster’s model aims to enable managers not only
The rivalry among existing competitors is HIGH
to understand their industry environment but also
when:
to shape their firm’s strategy.
- There are many competitors in the industry.
▪ As a rule of thumb, the stronger the five forces,
- The competitors are roughly of equal size.
the lower the industry’s potential-making the
- Industry growth is slow, zero, or even negative.
industry less attractive to competitors.
- Exit barriers are high.
▪ The weaker the five forces, the greater the
- Products and services are direct substitutes.
industry’s profit potentialmaking the industry
more attractive
The strategic role of components: Adding a sixth
force
Threat of Entry
o Entry barriers are obstacles that determine how ❑ A complement is a product, service or
easily a firm can enter an industry. competency that adds value to the original product
o Threats of entry is High when: offering when the two are used in tandem.
- Customer switching costs are low ❑ A compny is a complementor to your company
- Capital requirements are low if customers value your product orservice offering
-Incumbents do not possess: Proprietary more when they are able to combine it with the
technology and established brand equity other company’s product or service.
o New entrants expect that incumbent will not or
cannot retaliate. External Factor Evaluation (EFE) Matrix is a
strategy tool used to examine company’s external
The power of suppliers environment and to identify the available
o Powerful suppliers can raise the cost of opportunities and threats.
production by demanding higher prices or
delivering lower-quality products. 1. Key External Factors When using the EFE
o Supplier power is enhanced when the supplied matrix we identify the key external opportunities
product is unique and differentiated. and threats that are affecting or might affect a
company. By analyzing the external environment
The power of buyers with the tools like PESTLE analysis, Porter’s Five
o The bargaining power of buyers concerns the Forces or Profile Matrix, the key external factors
pressure buyers can put on the margins of can be identified. The general rule is to identify as
producers in the industry. many key external and internal factors as possible.
o Backward integration occurs when a buyer
moves upstream in the industry value chain, into 2. Weights Each key factor should be assigned a
the seller’s business. weight ranging from 0.0 (low importance) to 1.0
o Power of buyers is HIGH when: (high importance). The number indicates how
- There are a few large buyers. important the factor is if a company wants to
- Each buyer purchases large quantities succeed in an industry. If there were no weights
relative to the size of a single seller. assigned, all the factors would be equally
- The industry’s products are standardized important, which is an impossible scenario in the
or undifferentiated commodities. real world. The sum of all the weights must equal
- Buyer’s face little or no switching costs. 1.0. Separate factors should not be given too much
- Buyer’s can credibly threaten to emphasis (assigning a weight of 0.30 or more)
backward-integrate into the industry because the success in an industry is rarely
determined by one or few factors.
Threat of SUBSTITUTES
o The threat of substitutes is the data that products
or services available from outside the given
industry will come close to meeting the needs of
current customers.
o Threat of substitute is hugh WHEN:
- The substitute offers an attractive price-
performance trade-off.
- The buyer’s cost of switching to the
substitute is low.
3. Ratings The ratings in external matrix refer to CHAPTER 6-7: THE INTERNAL
how effectively company’s current strategy ASSESSMENT
responds to the opportunities and threats. The
NATURE OF AN INTERNAL AUDIT
numbers range from 4 to 1, where 4 means a
superior response, 3 – above average response, 2 – Basis for objectives and strategies
average response and 1 – poor response. Ratings, ◼ Internal strengths/weaknesses
as well as weights, are assigned subjectively to ◼ External opportunities/threats
each factor. In our example, we can see that the ◼ Clear statement of mission
company’s response to the opportunities is rather
poor, because only one opportunity has received a ASSESSMENT OF THE FIRMS RESOURCES
rating of 3, while the rest have received the rating
of 1. The company is better prepared to meet the Resources – are assets such as cash, buildings, or
threats, especially the first threat. intellectual property that a company can draw on
when crafting and executing a strategy.
4. Weighted Score The score is the result of weight
multiplied by rating. Each key factor must receive Resources can either be:
a score. Total weighted score is simply the sum of Tangible Resources
all individual weighted scores. The firm can Intangible Resources
receive the same total score from 1 to 4 in both
matrices. The total score of 2.5 is an average Capabilities – are the organizational and
score. In external evaluation a low total score managerial skills necessary to orchestrate a diverse
indicates that company’s strategies aren’t well set of resources and to deploy them strategically.
designed to meet the opportunities and defend
against threats. In internal evaluation a low score Activities – enable firms to add value by
indicates that the company is weak against its transforming inputs into goods or services.
competitors.
Core Competencies – are unique strengths,
Competitive profile matrix is an essential embedded deep within a firm, that allow a firm to
strategic management tool to compare the firm differentiate its products and sources from those of
with the major players of the industry. Competitive its rivals, creating a higher value for the customer
profile matrix show the clear picture to the firm or offering products and services of comparable
about their strong points and weak points relative value at lower cost.
to their competitors.
KEY INTERNAL FORCES
The benefits to using Competitive Profile Matrix ➢ For different types of organizations such as
(CPM) for rivals analysis are: hospitals, universities, and government agencies,
➢ The same factors are used to compare the firms. the functional business areas differ.
This makes the comparison more accurate ➢ The ➢ Functional areas of a university can include
analysis displays the information on a matrix, athletic programs, placement services, fundraising,
which makes it easy to compare the companies academic research, counseling and intramural
visually programs.
➢ The results of the matrix facilitate decision-
making. Companies can easily decide which areas DISTINCTIVE COMPETENCIES
they should strengthen, protect or what strategies ➢ A firm’s strengths that cannot be easily matched
they should pursue. or imitated by competitors.
➢ Building competitive advantages involves
taking advantage of distinctive competencies
➢ Strategies are designed to improve on a firm’s
weaknesses, turning them into strengths---- and
maybe even into distinctive competencies
THE PROCESS OF PERFORMING AN
INTERNAL AUDIT
➢ Closely parallels the process of performing an
external audit
•Information from:
•Management
•Marketing
•Finance/accounting
•Production/operations
•Research & Development
•Management Information Systems
Communication maybe the most
important word in management Marketing
Customer Needs/Wants for Products/Services
Resource Based View (RBV) 1. Defining
➢ Approach to Competitive Advantage 2. Anticipating
➢ Internal resources are more important than 3. Creating
external factors in achieving and sustaining 4. Fulfilling
competitive advantage
✓ Three All Encompassing Categories Marketing Functions
1. Physical resources –include all plant & 1. Customer analysis
equipment, location, technology, raw materials, 2. Selling products/services
machines 3. Product & service planning
2. Human resources - include all employees, 4. Pricing
training, experience, intelligence, skills, 5. Distribution
knowledge, abilities 6. Marketing research
3. Organizational resources - include firm 7. Opportunity analysis
structures, planning processes, information
system, patents, trademark, copyrights, databases, CUSTOMER ANALYSIS – the examination and
etc. evaluation of consumer needs, desires and wants
—involves administering surveys, analyzing
consumer information, evaluating market
➢ Empirical Indicators – three characteristics of
positioning strategies, developing customer
resources enable a firm to implement strategies
profiles and determining optimal market
that improve its efficiency and effectiveness and
segmentation strategies.
lead to sustainable competitive advantage
▪ Rare
SELLING- includes many marketing strategies
▪ Hard to imitate
such as advertising, sales promotion, publicity,
▪ Not easily substitutable
personal selling, sales force management,
customer relations and dealer relations.
The more a resources(s) is rare, non-imitable, and
non-substitutable, the stronger a firm’s
PRODUCT AND SERVICE PLANNING –
competitive advantage will be and the longer will activities such as test marketing; product and
it last. brand positioning; devising warranties; packaging,
determining product options, product features,
DOMESTIC VERSUS FOREIGN CULTURES product styles and product quality, deleting old
products; and providing for customer service.
In Japan – business relations operate within the
context of “Wa”, which stresses social harmony PRICING – Five major stakeholders affect pricing
and group cohesion. decisions: consumers, governments, suppliers,
distributors, and competitors.
In China – business behavior revolves around
“guanxi”-or personal relations. DISTRIBUTION – includes warehousing,
distribution channels, distribution coverage, retail
In Korea – “inhwa” – or harmony based on respect site locations, sales territories, inventory levels
of hierarchical relationships, including obedience and locations, transportation carriers,
to authority. wholesaling, and retailing.
MARKETING RESEARCH – is the systematic
gathering, recording, and analyzing of data about
problems relating to the marketing of goods and
services.

OPPORTUNITY ANALYSIS – involves assessing

the costs, benefits, and risks associated with
marketing decisions.

THREE STEPS IN COST/BENEFIT ANALYSIS:

1. Compute the total costs associated with a

decision
2. Estimate the total benefits from the decision
3. Compare the total costs with the total benefits

Five Types of Financial Ratios:

1. Liquidity Ratios – measures a firm’s ability to
meet maturing short-term obligations.
2. Leverage ratios – measure the extent to which a
firm has been financed by debt.
3. Activity Ratios –measure how effectively a firm
is using its resources.
4. Profitability ratios – measure management’s
overall effectiveness as shown by returns
generated on sales and investments.
5. Growth ratios – measures the firm’s ability to
maintain its economic position in the growth of the
economy and industry.