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Competitive Advantage and Firm Performance

Competitive Advantage and Firm Performance. Instructor: Dr.Gehan Shanmuganathan. LO 5-1 Describe and evaluate economic value creation when measuring competitive advantage. LO 5-2 Describe and evaluate accounting profitability when measuring competitive advantage.

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Competitive Advantage and Firm Performance

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  1. Competitive Advantageand Firm Performance Instructor: Dr.Gehan Shanmuganathan

  2. LO 5-1 Describe and evaluate economic value creation when measuring competitive advantage. LO 5-2Describe and evaluate accounting profitability when measuring competitive advantage. LO 5-3Describe and evaluate shareholder value creation when measuring competitive advantage. LO 5-4Describe and evaluate the balanced-scorecard approach for assessing competitive advantage. LO 5-5Describe and evaluate the triple-bottom-line approach when assessing competitive advantage. LO 5-6Compare and contrast different approaches to measuring competitive advantage, and derive managerial implications. 5-2

  3. Google vs. Microsoft ChapterCase5 • Google & Microsoft in multipoint competition • How to measure success of this competition? • Revenues & net income? • Performance per employee? • There are several ways to measure firm performance. Which is best? 5-3

  4. MEASURING COMPETITIVE ADVANTAGE • Always measured relative to other firms • Three standards are typical by asking: • 1. How much economic value does the firm generate? • 2. What is the firm’s accounting profitability? • 3. How much shareholder value does the firm create? 5-4

  5. Economic Value Creation • Pizza! • Value = $12 • Price = $10 • Cost = $7 • Consumer Surplus • $12 - $10 = $2 • Producer Surplus • $10 - $7= $3 • Economic Value • $12 - $7= $5 • Value: A dollar amount a consumer is willing to pay for a good or service • Price: The dollar amount a good or service is offered for sale • Cost: The dollar amount to make the good or service SOLD! 5-5

  6. EXHIBIT 5.2 Competitive Advantage & Economic Value HIGHEST VALUE – COST COMPETITIVE ADVANTAGE = 5-6

  7. Accounting Profitability • Uses standard, publicly available metrics • Regulated by • Accounting principles (GAAP) • U.S. Securities & Exchange Commission (SEC) • Sarbanes-Oxley Act (2002) • Permits direct firm performance comparisons • Using standard ratios • See Table 1 of text for typical strategic financial ratios 5-7

  8. Profits vs. Return on Revenue (ROR) Ranking changes markedly with the use of different metrics 2010 Profits in $M 2010 ROR % 5-8

  9. Shareholder Value Creation • Shareholders – legal owners of public firms • Total return to shareholders • Return on risk capital + dividends • External performance metric • Efficient-market hypothesis • All available information is embedded in the stock price • SEC requires all public firms to submit shareholder returns • Stock price based on expectations of performance • Nucor (steel) slow growth • Dell (computer) faster growth 5-9

  10. Google vs. Microsoft, Continued • Accounting perspective shows Microsoft with an advantage over Google. • But both firms have large intangible assets. • BUT shareholder value favors Google over Microsoft! • Microsoft stock is flat while Google is up 200%. 5-10

  11. THE BALANCED SCORECARD • Multiple internal & external metrics • Considers both financial & strategic • Customer perspective • Linked to revenues & profits • Future processes to create value • 3M 30% revenues from products less than 4 years old • Internal core competencies • Honda engine design and manufacture • Shareholder perspective • A variety of financial measures 5-11

  12. THE TRIPLE BOTTOM LINE EXHIBIT 5.11 The Triple Bottom Line • Financial, Social, & Ecological Considerations • Also known as "People, Planet, & Profits" • BP oil spill had many major effects • BMW changed car designs to enhance recycling • Integrative approach for sustainable strategy 5-12

  13. STRATEGY HIGHLIGHT 5.1 Interface: The World’s First Sustainable Company • Interface is a global leader in modular carpet tiles • Business to business so not a consumer name • In 1994, founder & CEO set a BHAG • Highly industrial, petroleum-intensive business to go “off oil”! • By 2008, estimates savings at $400 million • Energy efficiency • Recycled raw materials instead of virgin material • Sustainability as a market differentiator • Employee motivation 5-13

  14. Implications for the Strategist • Both quantitative AND qualitative performance dimensions matter. • Managers need to have a holistic view • Competitive advantage is best by criteria, reflecting overall company performance • Metrics aggregate upward, useful to gauge firm's strategy • Only better strategy is our goal. • No best strategy exists • Strategic performance metrics must be relative 5-14

  15. CHAPTERCASE 5/ Consider This… • Google & Microsoft are now competitors in a number of business areas. • Smartphone operating systems may be next… • Microsoft’s “Phone 7” operating system sold 2 M units in the first 10 weeks on the market (launched Nov. 2010). • If Microsoft is successful in gaining a major share of the smartphone market, will economic, accounting, or shareholder perspective be affected first? • How would you rate Google and Microsoft on qualitative elements? 5-15

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