Glossary of terms

Asset-based valuation Valuing the firm based solely on its balance sheet, focusing on the fair-market value of total assets minus total liabilities.

BATNA Best alternative to a negotiated agreement, or your walk-away position in a negotiation.

Beta A measure of how volatile a stock’s value has been, relative to the market as a whole; one of the indicators of how ‘risky’ a particular stock is.

Blue ocean An uncontested market space, distinct from a red ocean in which many other firms are competing.

Business strategy The choices a firm makes in how one business unit competes in a particular market.

Capabilities How a firm deploys its resources; ‘distinctive’ capabilities are those that the firm does better than others.

Capital asset pricing model (CAPM) Helps to estimate an expected return for a firm’s equity holders.

Capital budgeting A technique to evaluate the potential profitability of various (and large) capital investments.

Channel The way a firm reaches its customers. For example, a bank will have a retail branch network, and also a telephone service and an internet- or mobile-based service; these are the bank’s different channels to market.

Cognitive bias The not-entirely rational and sometimes inaccurate way someone looks at the world, perhaps because of prior experiences or the availability of information.

Comparable transaction valuation Valuing the firm by comparing it to its peer group.

Competitive advantage A position in a given market that gives a firm a superior return to that of its competitors.

Competitive position A chosen position in a given market – for example, low-cost, high-quality or focus.

Core competence A bundle of capabilities and resources that a firm can use across a number of different businesses or markets.

Corporate strategy The choices made by the firm about how it competes across multiple businesses, especially in terms of how it achieves synergies across them.

Cost of debt Expectation of returns from debt-holders willing to lend to the firm.

Cost of equity Expectation of returns from shareholders willing to invest in the firm.

Crowdsourcing Making use of large numbers of people to come up with or evaluate ideas; increasingly used in innovation processes in companies.

Culture The collective beliefs of people in an organisation; the unwritten rules about ‘how we do things around here’.

Discount rate When referred to in valuation, the discount rate used is the weighted average cost of capital.

Discounted cash flow Computing a value for an asset or firm given a stream of future cash flows and a cost of capital.

Diversification A shift into adjacent markets, countries or business areas.

Dividend discount model Valuing a firm by using the dividend stream it intends to return to investors.

Dynamic pricing Rapid changes in the price you charge in response to demand.

Economies of scale The reduction in costs of a product achieved by making it in large volumes.

Emergent strategy The pattern of actions that takes shape over time, often not exactly the same as the intended strategy of the firm.

EQ or Emotional Intelligence The ability to monitor your own and other people’s emotions.

Five forces analysis Invented by Michael Porter, this is a way of defining how profitable an industry is likely to be by looking at its overall structure – the internal rivalry, threat of new entrants, potential substitutes, supplier bargaining power and customer bargaining power.

Generic strategies The three basic positions you can have in a market – low-cost, focus and differentiation – as defined by Michael Porter.

Groupthink The notion that people working closely in a team end up sharing similar views and agreeing with each other too readily.

Innovator’s dilemma When faced with a disruptive technology (qv), established firms have to decide whether and when to adopt the new technology, with the risk that doing so means cannibalising existing sales.

Internal rate of return The rate of return, as a percentage, that gives a project a net present value of zero.

Motivation The underlying driver of individual effort in an organisational setting, often separated into intrinsic (from within) and extrinsic (from someone else).

Net present value The net value of all future cash flows associated with the project, discounted to the present day.

Open innovationn An umbrella term to describe how firms can make use of sources of insight and funding from people outside their boundaries in order to innovate more effectively.

Parenting advantage The ability of the corporate centre or ‘parent’ to add more value to a business unit than any other potential parent.

Performance appraisal The formalised way individuals receive feedback on how they are doing in an organisation.

Personalised marketing The notion that a product or service can be tailored to the specific needs of one individual.

Portfolio The set of businesses or markets that exists in a multi-business company.

Ratio analysis A methodology for analysing and making sense of a company’s financial statements.

Resource-based view A way of looking at strategy that starts with an analysis of the firm’s distinctive resources and capabilities.

Resources A firm’s productive assets – for example, human, physical, financial or technological; they can be tangible or intangible in nature.

Risk-free rate The return an investor might expect from a risk-free investment; one example is a risk-free bond issued by a reliable government.

Scenario A coherent point of view about one possible way the future will transpire.

Segment A coherent subset of potential customers that might be targeted by a company.

Stage/gate process A formalised set of reviews that firms put in place to decide which innovation ideas to invest in and develop further.

Strategy The choices a firm makes about how and where it competes.

Vision A firm’s ‘vision statement’ describes the ‘intended future state’ – for example, leadership in a particular industry. Sometimes the word ‘purpose’ is used instead of vision. ‘Mission’ is another close synonym, but it is usually used to mean a timeless raison d’etre for the firm – a statement of why it exists.

Weighted average cost of capital A financial metric used to measure the cost of capital to a firm. It is a weighted average of the firm’s cost of debt and its cost of equity.