Quiz 1: Competitive Advantage, Firm Performance & Business Models

Competitive Advanatge

• Superior performance relative to competitors or industry avg.

• Assess at the firm or SBU level using quantitative and/or qualitative measures

Assessing Performance: Basic Approaches

• accounting profitability

• shareholder value creation

• economic value creation

Assessing Performance: Integrative Approaches

• balanced scorecard

• triple bottom line

• shared value creation.

Business Model

A way of describing how a firm makes money and how it creates and delivers value.

• Narrow: How a firm makes money

• Design: What?, Why?, Who?, How?

Business Model Implementation

Common business models may be combined; narrowly, the business model is part of strategy implementation.

Razor–Razor Blades Model

A product is often sold at a loss or given away to increase demand for a complementary good.

Subscription Model

Users pay a recurring fee for access to a product or service, whether they use it or not.

Pay-as-you-go Model

Users pay only for the goods or services they consume

Freemium Model

Basic features are free, while users pay for premium services or features.

Wholesale Model

A traditional model in retail, where products are bought directly from producer/manufacturer

Agency Model

producer relies on an agent/retailer to sell good

Bundling Model

combines less popular products with more popular products and sells the package

Economic Value Creation

Value minus cost; the firm creating the most economic value has a competitive advantage.

Value

The 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

Cost

The dollar amount to make the good or service including opportunity costs

Economic Value Creation Limitations

Difficult to operationalize, measure value, compare firms’ offerings, aggregate many goods, and account for shifting value.

Accounting Profitability

Uses standardized ratios such as ROIC, ROA, and ROE to compare firm performance.

Accounting Profitability Limitations

Can be manipulated, is backward-looking and delayed, and may miss intangibles and off-balance-sheet items.

Shareholder Value Creation

Assesses firm performance using shareholder returns.

Shareholders

Owners of a firm’s stock.

Total Return to Shareholders

Return on risk capital + dividends.

Shareholder Value Creation Limitations

Affected by volatility, macroeconomic factors, and investors’ psychological state.

Balanced Scorecard

• Integrative performance approach that considers multiple perspectives rather than a single measure.

• Components:

  • Customer perspective

  • Create future value

  • Necessary core competencies

  • Shareholder perspective

Triple Bottom Line

integrative performance approach that considers economic, social, and ecological/environmental performance.