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By:

Ashley Daniels
Kate Daisher
Tim Lothamer

Chapter 5
Competitive Advantage, Firm Performance,
and Business Models
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Chapter Case 5
STANCA SANDA/Alamy

Assessing
Competitive
Advantage:
Apple
vs.
BlackBerry
Assessing Competitive Advantage: Apple vs. BlackBerry

2012 AAcomparison
comparisonofofApple
Applevs.
vs.BlackBerry
BlackBerry
2012
Apples ROIC was 35.0%.
Apples ROIC was 35.0%.
BlackBerrys ROIC was 14.1%.
BlackBerrys
ROIC was 14.1%.

Applewas
was2.5
2.5times
timesmore
moreefficient
efficientthan
thanBlackBerry
BlackBerryatat
Apple
generatinga areturn
returnon
oninvested
investedcapital,
capital,sosoApple
Applehad
had
generating
clearcompetitive
competitiveadvantage
advantageover
overBlackBerry.
BlackBerry.
a aclear

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Exhibit 5.1 Comparing Apple and


BlackBerry: Drivers of Firm Profitability
Higher Profits

Lower Production Cost


Lower Research Cost
**WHY?**
**What is SG&A**
Higher Revenue To
Fixed Assets
Faster Turnover

Working Capital =
current assets/current liabilities

Quicker return on credit


sales
Higher Working Capital
Turnover

Quicker payoff to
suppliers
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SG&A / Revenue
Selling, General and Administrative Expenses

www.investopedia.com/terms/s/sga.asp

SGA/Revenue
Apple: 6.4%
BlackBerry: 14.1%

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Company Stock Value


Blackberry: > 2003 Incline < 2008
Appx $230 Max Share Value

Apple: > 2010 Incline


Appx $132 Max Share Value

Source: Google Finance


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The Fatal Mistake That Doomed


Blackberry
Sam Gustin Time Magazine

BlackBerrys failure to keep up with Apple and Google


was a consequence of errors in its strategy and vision
What are some reasons Blackberry failed?

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The Fatal Mistake That Doomed


Blackberry
Sam Gustin Time Magazine

BlackBerrys failure to keep up with Apple and Google


was a consequence of errors in its strategy and vision
Consumer Market > Business Market
Apps
Smartphone usage beyond talk/text/emails
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When You Lose Your Competitive


Advantage

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THREETRADITIONAL
TRADITIONALFRAMEWORKS
FRAMEWORKSTO
TOASSESS
ASSESS
THREE
FIRMPERFORMANCE
PERFORMANCE
FIRM

ACCOUNTINGPROFITABILITY
PROFITABILITY
ACCOUNTING
Whatisisthe
thefirms
firmsaccounting
accountingprofitability?
profitability?
What

SHAREHOLDERVALUE
VALUECREATION
CREATION
SHAREHOLDER
Howmuch
muchshareholder
shareholdervalue
valuedoes
doesthe
thefirm
firmcreate?
create?
How

ECONOMICVALUE
VALUECREATION
CREATION
ECONOMIC
Howmuch
mucheconomic
economicvalue
valuedoes
doesthe
thefirm
firmgenerate?
generate?
How
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5.1 Competitive Advantage and


Firm Performance
To measure competitive advantage, we must:
1. Assess firm performance
A. Accounting Profitability
B. Shareholder Value
C. Economic Value

2. Benchmark to the industry average / other competitors

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Accounting Profitability
Return on revenue (ROR)
Every $100 in revenue:
Apple $26.70 profit
Blackberry $6.30 profit

R&D Costs (per $ of revenue)


Apple 2.2%
Blackberry 8.4%
Innovation has nothing to do with how many R&D dollars you have. When
Apple came up with the Mac, ISM was spending at least 100 times more on
R&D. Its not about money. Its about the people you have, how youre led, and
how much you get it. Steve Jobs
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Accounting Profitability
LIMITATIONS

All accounting data are historical data and thus


backward-looking.
What does their future look like?

Accounting data do not consider offbalance sheet


items.
What obligations do they have like lease agreements?

Accounting data focus mainly on tangible assets,


which are no longer the most important.
What is the current innovation, quality, customer experiences?

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Shareholder Value Creation


Shareholders
Individuals or organizations who own one or more shares
of stock in a public company
The legal owners of public companies
Effective strategies to grow the business can increase a
firms profitability and its stock price.

Risk capital
The money provided by shareholders in exchange for an
equity share in a company.
Cannot be recovered if the firm goes bankrupt
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Exhibit 5.4 Apples Market Cap


(December 2011- April 2013)

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Shareholder Value Creation


LIMITATIONS
Stock prices can be highly volatile, making it difficult to
assess firm performance, particularly in the short term.
Overall macroeconomic factors such as the unemployment
rate, economic growth or contraction, and interest and
exchange rates all have a direct bearing on stock prices.
Stock prices frequently reflect the psychological mood of
investors, which can at times be irrational.

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Economic Value Creation


A firm has a competitive advantage when it creates
more economic value than rival firms.
Economic value creation is the difference between a
buyers willingness to pay for a product/service and
the firms total cost to produce it:
(V C), where (V) = Value and (C) = Cost, also called
economic contribution

The amount of total perceived consumer benefits


equals the maximum willingness to pay.

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Exhibit 5.7 Competitive Advantage


and Economic Value Created:
The Role of Value, Cost, and Price

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OPPORTUNITY COST

Opportunity costs The value of the best forgone


alternative use of the resources employed
Accounting profitability Relies on historical costs
Economic value creation All costs are considered,
including opportunity costs

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Economic Value Creation


LIMITATIONS

Determining the value of a good in the eyes of


consumers is not a simple task.
The value of a good in the eyes of consumers changes
based on income, preferences, time, etc.
To measure firm-level competitive advantage, the
economic value created for all products/services
offered by the firm must be assessed.
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The Balanced Scorecard


HOLISTIC PERSPECTIVE OF FIRM PERFORMANCE

Balanced scorecard Strategy implementation tool


that harnesses multiple internal and external
performance metrics in order to balance financial and
strategic goals
The four key questions are:
1.
2.
3.
4.

How do customers view us?


How do we create value?
What core competencies do we need?
How do shareholders view us?
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ADVANTAGES OF THE BALANCED SCORECARD

Communicate and link the strategic vision to


responsible parties within the organization
Translate the vision into measureable operational
goals
Design and plan business processes
Implement feedback and organizational learning in
order to modify and adapt strategic goals when
indicated

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DISADVANTAGES OF THE BALANCED SCORECARD

It is a tool for strategy implementation, not for strategy


formulation.
It provides only limited guidance about which metrics to
choosedifferent situations call for different metrics.
Failure to achieve competitive advantage is not indicative
of a poor framework but of strategic failure i.e.,
managers must have crafted a strategy that builds
competitive advantage.
Managers must accurately translate their strategy into
objectives that can be measured within this model.
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The Triple Bottom Line

3 Ps
Economic Profit
Social People
Ecological - Planet

Noneconomic factors can have a significant impact


on a firms financial performance, as well as its
reputation and goodwill.
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TBL Cont
Sustainable strategy
Stakeholder theory an approach to understanding a
firm as embedded in a network of internal and
external constituencies that each make contributions
and expect consideration in return.
TBL the term was coined in 1994 by John
Elkington 3 bottom lines and not just the finances

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Food for Thought


TBL
TBL
Whatisisimportant
importanttotoyou
youasasyou
youlook
lookfor
foryour
yourultimate
ultimate
What
career?
career?
Companiesthat
thatfollow
followthe
theTBL
TBLmodel?
model?
Companies
Whatisisyour
yourstance
stanceononPeople,
People,Planet,
Planet,Profit?
Profit?
What

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CORPORATE SOCIAL RESPONSIBILITY

Historically, economic performance has been the focus of firm


performance.
More recently, society and investors require companies to also
address social and ecological concerns.
Millennials born between 1980 and 1991 expect firms to
be socially responsible and have a strong interest in working
for companies that match their values.
Research studies CSR and firm performance relationship:
Some find CSR improves financial performance.
Others conclude superior financial performance makes CSR possible.
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5.2 Business Models:


Putting Strategy into Action
Business model Plan that details the firms
competitive tactics and initiatives
A business model explains how the firm intends to
make money, and how the firm conducts its business
with buyers, suppliers, and partners.
Business model innovation may be more important
in achieving superior performance than product or
process innovation.
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Strategy Highlight 5.2


Threadless:
Leveraging
Crowdsourcing
to
Design
Threadless: Leveraging Crowdsourcing to Design
CoolT-Shirts
T-Shirts
Cool
2000 Founded
FoundedbybyJake
JakeNickell
Nickell&&Jacob
JacobDeHart,
DeHart,their
their
2000
businessmodel
modelleverages
leveragesprosumers,
prosumers,a ahybrid
hybridbetween
between
business
producers
and
consumers.
producers and consumers.
ThroughInternet-enabled
Internet-enabledtechnology,
technology,crowdsourcing
crowdsourcing
Through
usinga agroup
groupofofpeople
peoplewho
whovoluntarily
voluntarilyperform
performtasks
tasks
using
traditionallycompleted
completedbybyfirm
firmemployeestranslates
employeestranslates
traditionally
real-timemarket
marketresearch
researchand
anddesign
designcontests
contestsinto
into
real-time
actualsales.
sales.
actual
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Effective Business Model Two Steps


1. Formulate
Managers transform their strategy of how to compete into a blueprint of
actions and initiatives that support the overarching goals.

2. Implement
Managers implement this blueprint through structures, processes,
culture, and procedures.

If translation into a profitable business model fails, the


firm will most likely fail.
SHU example
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5.3 Implications for the Strategist


COMPETITIVE ADVANTAGE AND FIRM PERFORMANCE

No
One
Best
Strategy
No One Best Strategy

Only better strategies Relative to competitors or industry average


Only
better strategies Relative to competitors or industry average

GoalofofStrategic
StrategicManagement
Management
Goal

Integrate and align each business function and activity to obtain


Integrate
and align each business function and activity to obtain
overall superior performance.
overall superior performance.

Quantitativeand
andQualitative
Qualitative
Quantitative

Holistic perspective is required for performance assessment,


Holistic
perspective is required for performance assessment,
measuring different dimensions over different times.
measuring different dimensions over different times.

BusinessModel
Model
Business

How a firm does business is more critical to its competitive advantage


How
a firm does business is more critical to its competitive advantage
than what it does.
than what it does.
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ts
What to Remember

Competitive advantage Blackberry is not relevant


due to losing its competitive advantage compared to
Apple
TBL - way of measuring an organization's impact on
people and the environment as well as its finances.

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Resources:
Google Finance Apple Inc. (2016, March 22). Retrieved from http://www.google.com/finance?
q=NASDAQ:APPL
Google Finance BlackBerry Ltd. (2016, March 22). Retrieved from http://www.google.com/finance?
q=NASDAQ:BBRY
Gustin, S. (2013, Sept. 24). The fatal mistake that doomed Blackberry. Time Magazine. Retrieved from
http://business.time.com/2013/09/24/the-fatal-mistake-that-doomed-blackberry/

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