Competitive Advantages And Firm Performance
Chapter 5 Competitive Advantage and Firm Performance
Three ways of measuring competitive advantage (benefits and limitations of each)
Competitive advantage is always relative- measured in relation with other firms-. 1) How much economic value does the firm generate? 2) What is the firm’s accounting profitability? 3) How much Stakeholder value does the firm create?
Economic Value Creation
Value the $ amount that a consumer would attach to a good or service. Value captures a consumer´s willingness to pay.
Economic Value Created is the difference between a buyer’s willingness to pay for a product and the firm´s cost to produce it.
A firm has a competitive advantage when it is able to create more economic value than it’s rivals.
Reason: a large difference between value and Cost gives the firm 2 distinct pricing options
a) It can Charge higher prices to reflect the higher product value and thus increase its profitability b) It can charge the same price as competitors and thus gain market share.
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Is conceptually quite powerful and lies at the center of many strategic management frameworks. However, it falls short when managers are called upon to operationalize competitive advantage.
Uses standard metrics derived from publicly available accounting data. Accounting data enable us to conduct direct performance comparisons between different companies (ROA; ROIC; ROE; ROR…)
Altough accounting data tend to be readily available and we can easily transform them to asses competitive performance, they also exhibit some important limitations:
* All accounting data are historical data and thus backward-looking. * Accounting data do not consider off-balance sheet items * A.D. Focus mainly on tangible assets, which are no longer the most important.
Key financial ratios based on A.D. give us one more tool with which to assess competitive advantage. They help us measure relative profitability, which is useful when comparing firms of different size over time. While not perfect, they are an important starting point.
Shareholder Value Creation
Shareholders are the legal owners of public