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

5-2 LO 5-1Describe and evaluate economic value creation when measuring competitive advantage. LO 5-2Describe and evaluate accounting profitability when measuring competitive advantage. LO 5-3Describe and evaluate shareholder value creation when measuring competitive advantage. LO 5-4Describe and evaluate the balanced-scorecard approach for assessing competitive advantage. LO 5-5Describe and evaluate the triple-bottom-line approach when assessing competitive advantage. LO 5-6Compare and contrast different approaches to measuring competitive advantage, and derive managerial implications.

ChapterCase 5 Google vs. Microsoft Google & Microsoft in multipoint competitionGoogle & Microsoft in multipoint competition  How to measure success of this competition?  Revenues & net income?  Performance per employee? There are several ways to measure firm performance. Which is best?There are several ways to measure firm performance. Which is best? 5-3

MEASURING COMPETITIVE ADVANTAGE Always measured relative to other firmsAlways measured relative to other firms Three standards are typical by asking:Three standards are typical by asking:  1. How much economic value does the firm generate?  2. What is the firm’s accounting profitability?  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 serviceValue: 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 salePrice: The dollar amount a good or service is offered for sale Cost: The dollar amount to make the good or serviceCost: The dollar amount to make the good or service Pizza!Pizza! Value = $12Value = $12 Price = $10Price = $10 Cost = $7Cost = $7 Consumer SurplusConsumer Surplus  $12 - $10 = $2 Producer SurplusProducer Surplus  $10 - $7 = $3 Economic ValueEconomic Value  $12 - $7 = $5 SOLD! 5-5

EXHIBIT 5.2 Competitive Advantage & Economic Value COMPETITIVE ADVANTAGE = ADVANTAGE = HIGHESTVALUE –COSTHIGHESTVALUE –COST 5-6

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

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

Shareholder Value Creation Shareholders – legal owners of public firmsShareholders – legal owners of public firms  Total return to shareholders  Return on risk capital + dividends  External performance metric  Efficient-market hypothesis  All available information is embedded in the stock price SEC requires all public firms to submit shareholder returnsSEC requires all public firms to submit shareholder returns Stock price based on expectations of performanceStock price based on expectations of performance  Nucor (steel) slow growth  Dell (computer) faster growth 5-9

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

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

THE TRIPLE BOTTOM LINE Financial, Social, & Ecological ConsiderationsFinancial, Social, & Ecological Considerations  Also known as "People, Planet, & Profits"  BP oil spill had many major effects  BMW changed car designs to enhance recycling  Integrative approach for sustainable strategy EXHIBIT 5.11 The Triple Bottom Line 5-12

1–13 STRATEGY HIGHLIGHT 5.1 Interface: The World’s First Sustainable Company Interface is a global leader in modular carpet tilesInterface is a global leader in modular carpet tiles  Business to business so not a consumer name  In 1994, founder & CEO set a BHAG  Highly industrial, petroleum-intensive business to go “off oil”!  By 2008, estimates savings at $400 million  Energy efficiency  Recycled raw materials instead of virgin material  Sustainability as a market differentiator  Employee motivation 5-13

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

CHAPTERCASE 5/ Consider This… Google & Microsoft are now competitors in a number of business areas.Google & Microsoft are now competitors in a number of business areas. Smartphone operating systems may be next…Smartphone operating systems may be next…  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