LSE mg205: competitive strategy and game theory
Lecture 12
Competitive Advantage
Competitive Strategy and Game Theory
Economic Value Added (or
Economic Profit)
• Net operating income less a charge for the cost of capital that is employed to produce the income. • EVA = NOPAT − WACC × Capital
(1)
where NOPAT is net operating profit after tax, and WACC is the weighted average cost of capital to the firm, an implicit market price that reflects the risk to the supplier of finance.
Competitive Strategy and Game Theory
Economic Value Added (or
Economic Profit)
• EVA = (RONA −WACC) × Capital (2) where RONA is return on net assets i.e. capital
(i.e., NOPAT/Capital).
• The return spread (RONA − WACC) measures the ability of the firm to create value per dollar of capital used.
• EVA/Capital = RONA − WACC
(3)
Competitive Strategy and Game Theory
Economic Value Added (or
Economic Profit)
• How to maximize EVA?
• EVA = (RONA −WACC) × Capital
• Increase the “spread” (RONA – WACC)
– RONA= NOPAT/Capital = (NOPAT/Sales)*(Sales/Capital)
– Higher margins
– More asset turnover
• Identify and divest negative spread activities.
• Invest in positive spread projects.
• Sustain the spread (competitive advantage) over a longer time.
• Reduce WACC by optimizing capital structure.
Competitive Strategy and Game Theory
Competitive Advantage
• Economic profits are determined in part by, industry attractiveness; profitability varies widely across industries.
• But we will focus more on competitive advantage defined as the ability of a firm to earn a rate of return above the industry norm.
• Firm profitability varies widely within industries.
Competitive Strategy and Game Theory
Competitive Advantage
• Economic profits are determined in part by, industry attractiveness; profitability varies widely across industries.
• But we will focus more on competitive advantage defined as the ability of a firm to earn a rate of return above the industry norm.
• Firm
Competitive Advantage
Competitive Strategy and Game Theory
Economic Value Added (or
Economic Profit)
• Net operating income less a charge for the cost of capital that is employed to produce the income. • EVA = NOPAT − WACC × Capital
(1)
where NOPAT is net operating profit after tax, and WACC is the weighted average cost of capital to the firm, an implicit market price that reflects the risk to the supplier of finance.
Competitive Strategy and Game Theory
Economic Value Added (or
Economic Profit)
• EVA = (RONA −WACC) × Capital (2) where RONA is return on net assets i.e. capital
(i.e., NOPAT/Capital).
• The return spread (RONA − WACC) measures the ability of the firm to create value per dollar of capital used.
• EVA/Capital = RONA − WACC
(3)
Competitive Strategy and Game Theory
Economic Value Added (or
Economic Profit)
• How to maximize EVA?
• EVA = (RONA −WACC) × Capital
• Increase the “spread” (RONA – WACC)
– RONA= NOPAT/Capital = (NOPAT/Sales)*(Sales/Capital)
– Higher margins
– More asset turnover
• Identify and divest negative spread activities.
• Invest in positive spread projects.
• Sustain the spread (competitive advantage) over a longer time.
• Reduce WACC by optimizing capital structure.
Competitive Strategy and Game Theory
Competitive Advantage
• Economic profits are determined in part by, industry attractiveness; profitability varies widely across industries.
• But we will focus more on competitive advantage defined as the ability of a firm to earn a rate of return above the industry norm.
• Firm profitability varies widely within industries.
Competitive Strategy and Game Theory
Competitive Advantage
• Economic profits are determined in part by, industry attractiveness; profitability varies widely across industries.
• But we will focus more on competitive advantage defined as the ability of a firm to earn a rate of return above the industry norm.
• Firm