Chapter 5 competitive advantage

accounting data

All accounting data are historical data and thus backward- looking.Accounting data do not consider off- balance sheet itemsAccounting data focus mainly on tangible assets, which are no longer the most important.

profit (producer surplus)

Difference between price charged ( P ) and the cost to produce ( C ), or ( P -C ).

consumer surplus

Difference between the value a consumer attaches to a good or service ( V ) and what he or she paid for it ( P ), or ( V - P ).

crowdsourcing

A process in which a group of people voluntarily performs tasks that were traditionally completed by a firm's employees.

business model

Organizational plan that details the firm's competitive tactics and initiatives; in short, how the firm intends to make money.

total return to shareholders

Return on risk capital that includes stock price appreciation plus dividends received over a specific period.

balanced scorecard

Strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals.

value

The dollar amount ( V ) a consumer would attach to a good or service; the consumer's maximum willingness to pay; sometimes also called reservation price.

opportunity costs

The value of the best forgone alternative use of the resources employed.

competitive advantage

measure competitive advantage, we must be able to ( 1) accurately assess firm performance, and ( 2) compare and benchmark the focal firm's performance to other competitors in the same industry or the industry average.

freemium (=free+premium)

model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add- ons.

pay-as-you-go

user pays for only the services he or she consumes. The pay- as- you- go model is most widely used by utilities, cell phone plans

market capitalization

A firm performance metric that captures the total dollar market value of all of a company's outstanding shares at any given point in time ( Market cap = Number of outstanding shares x Share price). Stock prices can be highly volatile, making it difficult to assess firm performance, par-ticularly in the short term. Overall macroeconomic factors such as the unemployment rate, economic growth or contraction, and interest and exchange rates all have a direct bearing on stock prices.Stock prices frequently reflect the psychological mood of investors, which can at times be irrational.

triple bottom line

Combination of economic, social, and ecological concerns that can lead to a sustainable strategy.

advantages of balanced scorecard

Communicate and link the strategic vision to responsible parties within the organization. ¦ Translate the vision into measureable operational goals. ¦ Design and plan business processes. ¦ Implement feedback and organizational learning in order to modify and adapt strategic goals when indicated. Both short and long term.

economic value created

Difference between value ( V ) and cost ( C ), or ( V = C ); sometimes also called economic contribution.Determining the value of a good in the eyes of consumers is not a simple task.The value of a good in the eyes of consumers changes based on income, preferences, time, and other factors.To measure firm- level competitive advantage, we must estimate the economic value created for all products and services offered by the firm.

shareholder

Individuals or organizations that own one or more shares of stock in a public company. They are the legal owners of public companies.

razor-razor blade model

The initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.

risk capital

The money provided by shareholders in exchange for an equity share in a company; it cannot be recovered if the firm goes bankrupt.

subscription based

Users pay for access to a product or service whether they use the product or service during the payment term or not. Industries that use this model presently are cable television, cellular service providers, satellite radio, Internet service providers, and health clubs.

disadvantages of balanced scorecard

balanced scorecard is a tool for strategy implementation, not for strategy formulation

profitability metrics

we use standard metrics derived from publicly available accounting data. ¦ Commonly used profitability metrics in strategic management are return on assets ( ROA), return on equity ( ROE), return on invested capital ( ROIC), and return on revenue ( ROR).