This copyrighted document is intended solely for use in Jared Harris and Michael Lenoxs Business Strategy

Specialization on Coursera. Any other use is prohibited. To order The Strategists Toolkit, please contact Darden
Business Publishing at permissions@dardenbusinesspublishing.com.

StrategyAnalytics

MeasuresofIndustryDemandandStructure
Item Equation
CompoundAnnual CAGR=(EndingValue/Beginning
GrowthRate(CAGR) Value)^(1/#years)1
ElasticityofDemand ED=(%ChangeinSales)/(%Changein
Price)
CrossPriceElasticity CPE=(%ChangeinSalesifGoodA)/(%
ChangeinPriceofGoodB)
ConcentrationRatio CR4=MarketShareofthefour
4Firm(CR4) largestfirmsinanindustry
HerfindahlHirschman HHI=(MarketShare)^2
Index
CommonUses
Useful forsummarizingtheeffectof
fluctuatinggrowthratesoverseveralyearsfor
itemssuchasrevenues
Usefulforassessingtheeffectofpricechanges
ondemandwhensettingpricesandpredicting
sales
Usefulforassessingthedegreetowhich
consumersarewillingtosubstituteone
productforanother
Asimplemetrictoevaluatetheextentto
whichanindustryisdominatedbyafewkey
firms
Thesumofthesquaredmarketsharesofall
firmsinanindustry.Thisisamore
comprehensivemetrictoevaluatetheextent
ofconcentrationinanindustry.Inamonopoly,
theHHIwillbe1(100%)2andinahighly
fragmented(andpresumablyhighly
competitive)industry,theHHIwillapproach
zero.

MeasuresofFinancialPerformance
Item Equation CommonUses
ReturnonAssets(ROA) ROA=NetIncome/TotalFirmAssets Ameasureoffirmperformancethatmakesfor
clearercomparisonofperformanceamong
firmsthathavedifferentamountsofleverage
(differentratiosofdebttoequity)
ReturnonEquity(ROE) ROE=NetIncome/Shareholders Ameasureoffirmperformancethatlooksonly
Equity atwhatshareholdersarereceivinginreturn
forkeepingmoneytiedupinthefirm
ReturnonSales(ROS) ROS=NetIncome/SalesRevenue Ameasureoffirmperformancethatmakesfor
clearercomparisonofperformanceamong
firmsthatoperateindifferentways(e.g.,
amongfirmswheresomeowntheassetsthey
useandotherscontractfortheseassets)
PriceEarningsRatio PE=PriceperShareofStock/Earnings Usefulforcomparingstockpricesamong
perShareofStock largelysimilarfirms
FreeCashFlow FCF=netincomeaftertaxesless Thecashafirmbringsinduringayearthatis
investmentsinequipmentandworking notneededtosupportthefirmitself
capitalplusdepreciationandanyother
noncashcharges(e.g.,amortizationof
goodwill)

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This copyrighted document is intended solely for use in Jared Harris and Michael Lenoxs Business Strategy
Specialization on Coursera. Any other use is prohibited. To order The Strategists Toolkit, please contact Darden
Business Publishing at permissions@dardenbusinesspublishing.com.

DiscountedCashFlow DCF=(FreeCashFlow)/(1)t Netpresentvalue(NPV)offuturenetcash

(DCF) flows.Usefulforassessingtheassumptions
requiredforeconomicviabilityofspecific
strategicactions.(isthediscountratetobe
appliedtotheproject,tistheamountoftime
untileachcashamountisreceived.)
MarkettoBookRatio MB=(StockPriceTotalShares Usedasawaytojudgeifthestockmarket
Outstanding)/AccountingValueofthe believesthefirmwillcreatemorevalueby
FirmsAssetsNetofDebt operatingthanitcouldbysellingoffitsassets
TobinsQ Q=(StockPriceTotalShares Usedasanalternativewaytojudgeifthestock
Outstanding+OutstandingDebt)/ marketbelievesthefirmwillcreatemore
ReplacementValueofFirmsAssets valuebyoperatingthanitcouldbysellingoff
itsassets(attemptingtocorrectfor
accounting)

ToolsforInferenceandDecisionMakingUnderUncertainty
Item Equation CommonUses
BreakEvenAnalysis B=FixedCosts/(Price VariableCosts) Identifythevolumeneededtomakeaproject
viableatagivenpriceor(lessoften)theprice
neededtomakeaprojectviableatagiven
volume.
DecisionTrees SeeExcelTreePlan Identifythebestchoicetodaygivena
sequenceofuncertainoutcomesandcostlyor
irreversiblealternativechoices,oridentifythe
valueofinformationthatreducesthe
uncertaintyordelaysthechoices.
SensitivityAnalysis SeeExcelCrystalBall Evaluatetherangeoflikelyoutcomesgiven
(TornadoChartsand thatmultiple(largelyindependent)
MonteCarloAnalysis) uncertaintiescancanceleachotheroutor
amplifytheeffectofoneanotherandidentify
keyuncertaintiestobeconcernedaboutor
areaswherechangescanhavelargebeneficial
effects.
Optimization SeeExcelSolver Determinehowtoallocateresourcesgivena
variedsetofresourcesandalargenumberof
waystousethoseresources.
RegressionAnalysis SeeExcel Determinehowvariousfactorsarerelated
fromajumbleofhistoricaldata.(Howgreat
arethescaleeconomies?)

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