CHAPTER 5 Competitive Advantage and Firm Performance Instructor

CHAPTER 5 Competitive Advantage and Firm Performance Instructor: Dr. Gehan Shanmuganathan Mc. Graw-Hill/Irwin Copyright © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

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

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

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

Economic Value Creation • 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 • Pizza! • Value = $12 • Price = $10 • Cost = $7 SOLD! • Consumer Surplus Ø $12 - $10 = $2 • Cost: The dollar amount to make the good or service • Producer Surplus Ø $10 - $7 = $3 • Economic Value Ø $12 - $7 = $5 5 -5

EXHIBIT 5. 2 Competitive Advantage & Economic Value COMPETITIVE HIGHEST ADVANTAGE = VALUE – COST 5 -6

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

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

Shareholder Value Creation • Shareholders – legal owners of public firms Ø Total return to shareholders v Return on risk capital + dividends Ø External performance metric Ø Efficient-market hypothesis v 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 Ø Nucor (steel) slow growth Ø Dell (computer) faster growth 5 -9

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

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

THE TRIPLE BOTTOM LINE • Financial, Social, & Ecological Considerations EXHIBIT 5. 11 Ø Also known as "People, Planet, & Profits" Ø BP oil spill had many major effects Ø BMW changed car designs to enhance recycling Ø Integrative approach for sustainable strategy The Triple Bottom Line 5 -12

STRATEGY HIGHLIGHT 5. 1 Interface: The World’s First Sustainable Company • Interface is a global leader in modular carpet tiles Ø Business to business so not a consumer name Ø In 1994, founder & CEO set a BHAG v Highly industrial, petroleum-intensive business to go “off oil”! Ø By 2008, estimates savings at $400 million v Energy efficiency v Recycled raw materials instead of virgin material Ø Sustainability as a market differentiator v Employee motivation 1– 13 5 -13

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

CHAPTERCASE 5/ Consider This… • Google & Microsoft are now competitors in a number of business areas. • Smartphone operating systems may be next… Ø Microsoft’s “Phone 7” operating system sold 2 M units in the first 10 weeks on the market (launched Nov. 2010). 1. If Microsoft is successful in gaining a major share of the smartphone market, will economic, accounting, or shareholder perspective be affected first? 2. How would you rate Google and Microsoft on qualitative elements? 5 -15