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Chapter 5
Competitive Advantage
| Question | Answer |
|---|---|
| Define Accounting Profitability | - Using financial data and ratios from publicly available accounting data to assess competitive advantage --> Assess firm performance --> Compare and benchmark to other competitors or industry average |
| Accounting Profitability Ratios | Return on Invested Capital (ROIC) Return on Revenue (ROR) Return on Equity (ROE) Return on Assets |
| Breakdown of ROIC | ==> Net Profits / Invested Capital Measures how effectively a company uses its invest capital --> Shareholders equity (selling shares) --> Interest-bearing debt (borrowings) Two Components - Return on Revenue (ROR) - Working Capital Turnover |
| Return on Revenue (ROR) | How much of the firm’s sales is converted into profits COGS/Revenue → production efficiency R&D/Revenue → % of sales $ invested in R&D SG&A/Revenue → % of sales $ invested in SGA |
| Working Capital Turnover | - Measure of how effectively capital is being used to generate revenue - Amt of money a company can deploy in the short-term (current assets - current liabilities) Working Capital / Revenue PPE / Revenue LT Assets / Revenue |
| Limitations of Accounting Profitability | Historical and backward looking Does not consider off-balance sheet items Focuses on tangible assets, no longer the most important |
| Define Shareholder Value | External Performance Metric How the market views all publicly available info about a firm's past, current state, and expected future performance |
| Metrics for Shareholder Value | - Total Return to Shareholders - Return on (Risk) Capital - Market Capitalization |
| Limitations of Shareholder Value | - Stock prices can be volatile, difficult to assess firm performance in the short-term - Heavily affected by macroeconomic factors - Usually reflect the psychological mood of investors, highly irrational |
| Define Economic Value | Difference between buyer’s willingness to pay for a product or service and the firm’s total cost to produce it ==>Customer Value - Production Cost CONSIDERS OPPORTUNITY AND HISTORICAL COST |
| Limitations of Economic Value | - Difficult to value goods from consumer perspective - Consumer values change based on income, preference, time, etc. - For measuring firm-level advantage, must estimate the economic value created for all products and services offered by the firm |
| Balance Scorecard | A framework to help managers achieve their strategic objectives more effectively 4 questions to evaluate competitive advantage How do Customers view us? How do we create value? What core competences do we need? How do shareholders view us? |
| Balance Scorecard Advantages | Link the strategic vision to responsible parties Translate vision in measurable operational goals Design & plan business processes Implement feedback & organizational learning to modify/adapt strategic goals when needed Accommodates ST/LT goals |
| Balance Scorecard Disadvantages | Meant for implementation, not formation, of strategy Only as good as the user making it |
| What is a Business Model | How the firm conducts it business with its buyers, suppliers, and partners in order to make money |
| Business Model Examples | Razor-razorblade Subscription Pay as you go Freemium Ultra Low Cost Wholesale Agency Bundling |
| Razor - razor blade | Initial product is sold at a loss to drive demand for complementary Ex. Initial: Kindle Complementary: Books |
| Subscription | Pay a monthly price to have access to a good or service during subscription term Ex. Magazines |
| Pay-as-you-go | Users pay for only the services they consume Ex. utilities |
| Freemium | Free to use good/service for basic features Premium to use advanced features/addons |
| Ultra-low cost | Like a freemium but its cheap instead of free |
| Wholesale | Suppliers sells to retailers at fixed price Retailers sell to make profit (sale - fixed price) |
| Agency | Relies on agent or retailer to sell product for predetermine percentage commission Real Estate, Brokers |
| Bundling | Selling under-demanded products as a group at a discount |
Created by:
opon12
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