Business Strategy

I. Firm Performance and Competitive Advantage A. The ultimate objective of the strategic management process is to enable a firm to choose and implement a strategy that generates a competitive advantage. B. Competitive Advantage – when a firm is able to create more economic value than rival firms. 1. Whenever a firm has a performance advantage over its competition, it is said to enjoy a competitive advantage. This can be by higher perceived value by the customer or by lowering costs. C. Economic Value – simply the difference between the perceived benefits gained by a customer who purchases a firm’s products or services and the full economic cost of these products or services. 1. The size of a firm’s competitive advantage is the difference between the economic value a firm is able to create and the economic value its rivals are able to create. D. Temporary Competitive Advantage – a competitive advantage that last for a short period of time. E. Sustained Competitive Advantage – last much longer. F. Competitive Parity – Firms that create the same economic value as their rivals. G. Competitive Disadvantage – firms that create less economic value than their rivals. H. Factors That Can Contribute to Why Competitive Advantage Seem to Persist Longer in Some Industries. 1. Informationally Complex 2. Require customers to know a great deal in order to use an industry’s products 3. Require a great deal of research and development 4. Have Significant Economies of Scale are more like to have sustained competitive advantages compare to firms that operate in industries without these attributes. II. Measuring Competitive Advantage A. Simple Accounting Measures of Competitive Advantage 1. Most popular way of measuring a firm’s performance. 2. Regression analysis – z = .012(working capital/total asset) + .14 (retained earnings/Total Assets) + .033(EBIT/total assets) + .0006(market value of equity/bookvalue of