Chapter 5: Competitive Advantage, Firm Performance & Business Models

Triple-bottom line

Profits: —The economic dimension captures the necessity of businesses to be profitable to survive. People: —The social dimension emphasizes the people aspect, such as PepsiCo's initiative of the whole person at work. Planet: —The ecological dimension emphasizes the relationship between business and the natural environment.

Freemium: (free + premium)

Provides the basic features of a product or service free of charge, but charges the user for premium services such as advanced features or add-ons.

Performance Ratios (ROIC, ROE, ROA, ROR)

ROIC: Return on Invested Capital ROE: Return on Equity ROA: Return on Assets ROR**: Return on Revenue (Profit margin)

Accounting Profitability

Since competitive advantage is defined as superior performance relative to other competitors in the same industry or industry average, a firm's managers must be able to accomplish two critical tasks: —Accurately assess the performance of the firm. —Compare and benchmark the firm's performance to other competitors in the same industry or against the industry average.

Integrative Frameworks

The Balanced Scorecard & The Triple Bottom Line

Bundling

The bundling business model sells products or services for which demand is negatively correlated at a discount. Demand for two products is negatively correlated if a user values one product more than another.

Subscription

The subscription model has been traditionally used for print magazines and newspapers.

Popular business models

-Razor-razor-blades -Subscription -Pay-as-you-go -Freemium: (free + premium) -Wholesale -Agency -Bundling

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? —These three performance dimensions tend to be correlated, particularly over time. Tend to also be reflected in a firm's stock price, which in turn determines in part the stock's market valuation.

Economic Value Creation (V - C)

The relationship between economic value creation and competitive advantage is fundamental in strategic management. It provides the foundation upon which to formulate a firm's competitive strategy when it creates more economic value than rival firms. Is the difference b/w a buyer's willingness to pay for a product or service and the firm's total cost to produce it. —Creating economic value —Capturing as much of it as possible For ease in calculating competitive advantage, three components are needed: Total perceived consumer benefits and economic value created: —Value (V): Denotes the dollar amount (V) a consumer attached to a good or service. —Price (P): What price is a customer willing to pay for goods/services → how much above cost are they willing to pay. —Cost ©: Difference between the two is the profit or producer surplus.

Opportunity Cost

What is the most attractive/profitable alternative that we have now foregone. —When you are making trade offs, a lot of choices preclude other choices.

Shareholder Value Creation

If you are a shareholder, you are looking for 1) stock price appreciation and 2) dividends. —Shareholders — individuals or organizations that own one or more shares of stock in a public company — are the legal owners of public companies. —From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital: -Which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.

Pay-as-you-go

In the pay-as-you-go business model, users pay for only the services they consume.

Agency

In this model the producer relies on an agent or retailer to sell the product, at a predetermined percentage commission. Sometimes the producer will also control the retail price.

Razor-razor-blades

Initial products are often sold at a loss or given away for free to drive demand for complementary goods.

Balanced scorecard

Is a framework to help managers achieve their strategic objectives more effectively. This approach harnesses multiple internal and external performance metrics in order to balance both financial and strategic goals. —The four key questions: -How do customers view us? -How do we create value? -What core competencies do we need? -How do shareholders view us?

Wholesale

The traditional model in retail is called a wholesale model. Under the wholesale model, book publishers would sell books to retailers at a fixed price.