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Accounting & Financial Management
AFM 241
Theophanis Stratopoulos

Week 6 (June 10-14) Lecture 1 Agenda Capability lifecycle (Hypercompetition) IT capability lifecycle Harrah’s Business strategy IT investments - IT capability IT strategy Relative Performance Capability Lifecycle “The capability lifecycle includes several stages. The lifecycle of a new capability in a new-to-the world organization begins with the founding stage, which lays the basis for subsequent development of the capability. A development stage follows this initial stage, marked by gradual building of the capability. Eventually, capability building ceases and the capability reaches the maturity stage. Once the capability reaches the maturity stage, or even before then, a variety of events may influence the future evolution of the capability. The capability then may branch into one of at least six additional stages of the capability lifecycle: retirement (death), retrenchment, renewal, replication, redeployment, and recombination. These six stages may follow one another in a variety of possible patterns over time. Some of these branching stages also may take place simultaneously. Importantly, in each branch of the capability lifecycle, historical antecedents in the form of capability evolution prior to branching influence the subsequent evolution of the capability.” H&P 2003 ● foundation- development-maturity- ● players - vision - plan - execution - exploitation - retirement ● Three different scenarios ○ one shot ○ two consecutive ○ sequential and incremental Harrah’s ● Which of the above scenarios describes Harrah’s and why? ○ Waves 1988-1993, 1993-1998, 1998-2006 ○ Main investment in each wave ○ Strategic priorities in each wave Business and IT strategy ● How will you define Harrah’s business strategy? ○ Has this changed over time? ● Where will you position them in terms of Porter’s OE vs. Positioning? ● Where will you position them in terms of McFarlan’s Strategic Grid? ● How will you consider the alignment between business and IT strategy? Why? Financial Performance Operating Profit Margin Kobelsky et al. 2008: ● … equals operating earnings before depreciation divided by sales revenue … We adopt operating measures of performance because we expect IT to affect operations and not non-operating items included in net income e.g., interest income and expense, taxes, discontinued operations, unusual write-offs and extraordinary items. ○ Compustat: OIBDP/ SALE Henderson and Singhal 2008: ● … we focus on operating income, which is sales less the cost of goods sold (CGS), and selling, general, and administrative expenses (SGA). We use operating income over other income measures (for example, net income or earnings per share) because it is a cleaner measure of performance that is not obscured by special items, tax considerations, or interest expenses. We are interested in measuring the productivity of operating assets in place. Accordingly, we divide operating income by the average of beginning and ending period book value of assets to get ROA. ○ Compustat: (SALE - COGS - XAGT)/ SALE Tobin’s q Chung and Pruit 1994: … approximate q is simply defined as follows: Approximate q = (ΜVΕ + PS + DEBT)/TA where ΜVΕ is the product of a firm's share price and the number of common stock shares outstandin
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