COMPETITIVE ADVANTAGE.pptx

CHAPTER 5...

CHAPTER 5 Competitive Advantage, Firm Performance, and Business Models ©ISerg/iStock/Getty Images RF ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  The AFI Strategy Framework Exhibit 1.3 Jump to Appendix 1 long image description ©McGraw-Hill Education.  Learning Objectives LO 5-1 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage. LO 5-2 Apply shareholder value creation to assess and evaluate competitive advantage. LO 5-3 Explain economic value creation and different sources of competitive advantage. LO 5-4 Apply a balanced scorecard to assess and evaluate competitive advantage. LO 5-5 Apply a triple bottom line to assess and evaluate competitive advantage. LO 5-6 Use the why, what, who, and how of business models framework to put strategy into action. ©McGraw-Hill Education.  An Overview of Frameworks Discussed To measure and assess firm performance: Accounting profitability Shareholder value creation Economic value creation Integrative frameworks, combining quantitative data with qualitative assessments: The balanced scorecard The triple bottom line ©McGraw-Hill Education.  Three Standard Performance Dimensions What is the firm’s accounting profitability? How much shareholder value does the firm create? How much economic value does the firm generate? ©McGraw-Hill Education.  Accounting Profitability Accurately assesses firm performance Compares firm performance to competitors / industry average Available through: Standardized accounting metrics (GAAP, FASB) Form 10-K statements Profitability ratios Return on invested capital (ROIC), return on equity (ROE), return on assets (ROA), and ©McGraw-Hill Education. return on revenue (ROR)  Comparing Apple and Microsoft: Drivers of Firm Performance Exhibit 5.1 Source: Analysis of publicly available data Jump to Appendix 2 long image description ©McGraw-Hill Education.  Elements of ROIC Explained Return on revenue How much of the firm’s sales is converted into profits Working capital turnover How effectively capital is being used to generate revenue ©McGraw-Hill Education.  Return on Revenue Elements Cost of goods sold (COGS) / Revenue How efficiently a company can produce a good Research & development expense / Revenue How much of each dollar earned is invested in R&D Selling, general, & administrative expense / Revenue How much of each dollar earned is invested in SG&A ©McGraw-Hill Education.  Working Capital Turnover Elements Working capital / Revenue How much working capital the firm has tied up in its operations PPE / Revenue How much of a firm’s revenues are dedicated to cover plant, property, and equipment Critical assets and difficult to get rid of Intangibles / Revenue Intangibles include patents, copyrights, and ©McGraw-Hill Education. trademarks, goodwill, and brand value  Limitations of Accounting Data Historical and backward-looking Does not consider off–balance sheet items: Pension obligations Leasing obligations Focuses mainly on tangible assets May not be the most important Consider: innovation, quality, customer experience ©McGraw-Hill Education.  The Declining Importance of Book Value in a Firm’s Stock Market Valuation Exhibit 5.2 Source: Analysis and depiction of data from Compustat, 1980–2015 Jump to Appendix 3 long image description ©McGraw-Hill Education.  Shareholder Value Creation - Definitions Shareholders Own shares of stock, are legal owners Risk Capital Money provided for an equity share Total Return to Shareholders Stock price appreciation + dividends Market Capitalization Dollar value of total shares outstanding Number of outstanding shares x share price ©McGraw-Hill Education.  Stock Market Valuations of Apple and Microsoft, 1990–2017 Exhibit 5.3 Source: Depiction of publicly available data Jump to Appendix 4 long image description ©McGraw-Hill Education.  Limitations of Shareholder Value Creation Stock prices can be volatile Difficult to assess firm performance Macroeconomic factors affect stock prices Economic growth or contraction Unemployment, interest and exchange rates Stock prices can reflect the mood of investors Investors can be irrational ©McGraw-Hill Education.  Economic Value Creation The difference between: A buyer’s willingness to pay for a product / service And the firm’s total cost to produce it The difference between value (V) and cost (C) ©McGraw-Hill Education.  Firm B’s Competitive Advantage Same cost as firm A but firm B creates more economic value. Firm B’s advantage is based on superior differentiation. ©McGraw-Hill Education. Jump to Appendix 5 long image description Exhibit 5.4  Firm C’s Competitive Advantage Same total perceived consumer benefits as firm D, but firm C creates more economic value. ©McGraw-Hill Education. Jump to Appendix 6 long image description Exhibit 5.5  Producer & Consumer Surplus Producer surplus (also called profit) Price charged minus cost to produce Consumer surplus What you were willing to pay minus what you paid Both parties capture some of the value created. ©McGraw-Hill Education.  Competitive Advantage and Economic Value Created Exhibit 5.7 Jump to Appendix 7 long image description ©McGraw-Hill Education.  Opportunity Costs and Limitations of Economic Value Creation Opportunity costs The value of the best forgone alternative Limitations of Economic Value Creation Valuing a consumer good isn’t easy The value of a good changes in the eyes of consumers Income, preferences, time, etc. ©McGraw-Hill Education.  The Balanced Scorecard Helps managers achieve their strategic objectives Uses internal and external performance metrics Balances both financial and strategic goals ©McGraw-Hill Education.  The Balanced Scorecard Approach ©McGraw-Hill Education. Jump to Appendix 8 long image description Exhibit 5.8  Examples of Metrics for Each Balanced Scorecard Section Customers Revenue, profit, customer satisfaction Value Creation Competitiveness, innovation, organizational learning Core Competencies Key business processes Shareholders Cash flow, operating income, ROIC, ROE, ©McGraw-Hill Education. total returns to shareholders  Advantages of the Balanced Scorecard Links strategic vision to responsible parties Translates vision into measurable goals Designs and plans business processes Implements feedback and organizational learning Alerts to needed strategic goal adaptation ©McGraw-Hill Education.  Disadvantages of the Balanced Scorecard Focused on implementation Not formulation Managers must identify the right metrics to track Lacks guidance: Which metrics to use? How to address setbacks? ©McGraw-Hill Education.  The Triple Bottom Line Focus: economic, social and ecological performance Three dimensions: Economic Dimension: Profits Businesses must be profitable to survive Social Dimension: People Ecological Dimension: Planet Considers the natural environment ©McGraw-Hill Education.  Sustainable Strategy ©McGraw-Hill Education. Jump to Appendix 9 long image description Exhibit 5.9  What Is a Business Model? Details competitive tactics and initiatives Explains how the firm: Intends to make money Conducts its business With buyers, suppliers, and partners ©McGraw-Hill Education.  Why, What, Who, and How of Business Models (1 of 2) Details competitive tactics and initiatives Explains how the firm: Intends to make money Conducts its business With buyers, suppliers, and partners ©McGraw-Hill Education.  Why, What, Who, and How of Business Models (2 of 2) Exhibit 5.10 Source: Adapted from R. Amit and C. Zott (2012), “Creating value through business model innovation,” MIT Sloan Management Review: 41–49. Jump to Appendix 10 long image description ©McGraw-Hill Education.  Popular Business Models Razor-razorblade: pay for replacements Subscription: pay for access Pay as you go: pay for what you consume Freemium: pay for extra features / add-ons Wholesale: products sold at a discount Agency: products sold on commission Bundling: more than one product sold at a discount ©McGraw-Hill Education.  Dynamic Nature of Business Models Business Models: Can be combined Can evolve Can be disrupted Businesses must respond to disruption & adapt Legal conflicts can arise ©McGraw-Hill Education.