MAN 4720 Chapter 5
LO 5-1 Describe and evaluate economic value creation when measuring competitive advantage.
- 3 components are critical to evaluating any good or service: value (V), price (P), and cost (C). In economics, cost includes opportunity cost. - Economic value created is the difference between a buyer's willingness to pay for a good or service and the firm's cost to produce it (V- C). - A firm has a competitive advantage when it is able to create more economic value that its rivals. - To measure firm-level competitive advantage, we estimate the economic value created for all products and services offered by the firm.
LO 5-6 Compare and contrast different approaches to measuring competitive advantage, and derive managerial implications.
- Both quantitative and qualitative criteria matter when assessing the effectiveness of a firm's strategy. - Competitive advantage is best measured by criteria that reflect performance of the company overall' the goal of strategic management is to integrate and align each functional-level activity to obtain superior performance at the company level. - Any performance metric must be interpreted relative to competitors and the industry average.
LO 5-4 Describe and evaluate the balanced-scorecard approach for assessing competitive advantage.
- The balanced-scorecard approach provides a more integrative view of competitive advantage. - Its goal is to harness multiple internal and external performance dimensions to balance financial and strategic goals. - Managers develop strategic objectives for the balanced scorecard by answering 4 key questions: 1. How do customers view us? 2. How do we create value? 3. What core competencies do we need? 4. How do shareholders view us?
LO 5-3 Describe and evaluate shareholder value creation when measuring competitive advantage.
- The measure of competitive advantage that matters from the shareholders' perspective is the return on (risk) capital. - Investors are primarily interested in total return to shareholders, which includes stock price appreciation plus dividends received over a specific period. - Total return to shareholders is an external performance metric; it indicates how the market view all available information about a firm's past, current state, and expected future performance. - Stock prices can be highly volatile, which makes it difficult to assess firm performance. Overall macroeconomic factors have a direct bearing on stock prices. Also, stock prices frequently reflect the psychological mood of the investors, which can at times be irrational.
LO 5-2 Describe and evaluate accounting profitability when measuring competitive advantage.
- To measure accounting profitability, 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). - All accounting data are historical and thus backward-looking. They do not consider off-balance sheet items such as an innovation competency. They focus mainly on tangible assets, which are no longer the most important.
Risk Capital
Capital provided by shareholders in exchange for an equity share in a company; it cannot be recovered if the firm goes bankrupt.
Triple bottom line
Combination of economic, social, and ecological concerns that can lead to a sustainable strategy.
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).
Economic Value Created
Difference between value (V) and cost (C), or (V-C); sometimes also called economic distribution.
Profit (producer surplus)
Differentiate between the price charged (P) and the cost to produce (C), or (P-C).
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.
LO 5-5 Describe and evaluate the triple-bottom-line framework when assessing competitive advantage.
Sustainable strategy refers to a firm's ability to maintain its performance in the economic, social, and ecological context-called the triple bottom line.
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 Cost
The value of the best forgone alternative use of the resources employed.
