Chapter 5: Competitive Advantage, Firm Performance, and Business

Mo els
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1. Accounting profitability
Three performance dimensions 2. Shareholder value
3. Economic value
Examines return on invested capital (ROIC) which breaks down into
Accounting profitability two parts; return on revenue (ROR) and working capital turnover
Individuals or organizations who own one or more shares of stock in a
public company. Legal owners
Shareholders
Money provided by shareholders in exchange for an equity share in a
company
Risk capital
Return on risk capital, including stock price appreciation plus
dividends received over a specific period
Total return to shareholders Economic
Difference between a buyer's willingness to pay (WTC) and the
firm's total cost to produce the product/service
value - (V-C) where (V)= Value (C)= Cost
Difference between the value a consumer attaches to a good (V) and
what they actually paid for it (P)
Consumer Surplus - (V-P)
Difference between the price charged (P) and the cost to make the
product (C)
Firm's Profit - (P-C)
The value of the best forgone alternative use of the resource
employed
- Accounting profitability: relies on historical costs
Opportunity Costs - Economic value creation: all costs considered
Tool that harnesses multiple internal and external performance
metrics in order to balance financial and strategic goals
Balanced Scorecard
1. How do customers view us
2. How do we create value
3. What core competencies do we need
Four questions of balanced scorecard 4. How do shareholders view us
- Communicate and link strategic vision to responsible parties
- Translate vision into measurable operational goals
- Design and plan business processes
Advantages of balanced scorecard - Implement feedback and learning
- Tool for implementation, not formulation
- Limited guidance on what metrics to choose
- Failure to achieve competitive advantage is based off strategic
Disadvantages of balanced scorecard failure
- Strategy must be accurately translated into objectives
Combination of economic, social, and ecological concerns that can
lead to a sustainable strategy
Triple bottom line
In anticipation of government regulations, proactively addressing
social or ecological issues
Extended producer responsibility
Plan that details the firm's competitive tactics and initiatives to make
money
Business Model
Process in which a group of people voluntarily perform tasks that were
traditionally completed by a firm's employees
Crowdsourcing
Initial product is often sold at a loss or given away for free in order to
drive demand for complementary goods
Razor-Razor-Blade Model
Users pay for access to a product/service during the payment term The
Subscription-Based Model user pays for only the services they consume
Pay-As-You-Go Model
Freemium Model

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 Chapter 5: Competitive Advantage, Firm Performance, and Business
Mo els
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Basic features of a product/service are provided free, but user must pay for premium services

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