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Chapter Outline
5.1 Competitive Advantage and Firm Performance Accounting Profitability
Shareholder Value Creation Economic Value Creation The Balanced Scorecard The Triple Bottom Line
5.2 Business Models: Putting Strategy into Action Popular Business Models
Dynamic Nature of Business Models 5.3 Implications for the Strategist
Learning Objectives
LO 5-1 Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.
LO 5-2 Apply shareholder value creation to assess and evaluate competitive advantage.
LO 5-3 Explain economic value creation and different sources of competitive advantage.
LO 5-4 Apply a balanced scorecard to assess and evaluate competitive advantage.
LO 5-5 Apply a triple bottom line to assess and evaluate competitive advantage.
LO 5-6 Outline how business models put strategy into action.
Competitive Advantage,
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The Quest for Competitive Advantage: Apple vs. Microsoft*
Apple and Microsoft have been fierce rivals since their arrival in the mid-1970s. Although Apple has been dominating more recently, in the early decades of the PC revolution, Microsoft was the undisputed leader. With its Windows operating system, Microsoft set the standard in the world of personal computers. Some 90 percent of all PCs run Windows. Once users are locked into a Microsoft operating system, which
generally comes preloaded with the computer they purchased, they then want to buy applications that run seamlessly with the oper- ating system. The obvious choice for users is Microsoft’s Office Suite (containing Word, Excel, PowerPoint, OneNote, Outlook, Pub- lisher, and Access), but they need to shell out sev- eral hundred dollars for the latest version. Micro- soft’s business model was to create a large installed
base of users for its PC operating system and then make money from selling application software such as its ubiq- uitous Office Suite.
Microsoft then went on to replicate with its corporate customers this hugely successful business model of setting the standard in operating systems combined with bundling discounted application suites. Once servers became ubiq- uitous in corporations, Microsoft offered IT departments e-mail systems, databases, and other business applications that were tightly integrated with Windows. As a conse- quence, some 80 percent of Microsoft’s revenues were either tied directly or indirectly to its Windows franchise.
Microsoft’s strategy of focusing on setting the indus- try standard allowed it to create a favorable (monopoly) market position and thus to extract high profits for many years. For example, its bundling strategy with Microsoft
Office, combining different application services that run seamlessly in one discounted product offering, allowed Microsoft to overtake IBM, once the most valuable tech company. By 2000, Microsoft was the most valu- able company globally with some $510 billion in market capitalization.
In contrast, at roughly the same time, Apple was strug- gling to survive with less than 5 percent market share in the PC market. Near bankruptcy in 1997, Apple’s revi- talization took off in the fall of 2001 when it introduced the iPod, a portable digital music player. Eighteen months later, the Cupertino, California, company soared even higher when it opened the online store iTunes, quickly followed by its first retail stores.
Apple’s stores earn the highest sales per square foot of any retail outlets, including luxury stores such as jeweler Tiffany & Co.
or LVMH, purveyor of fine handbags and other luxury goods.
Apple didn’t stop there. In 2007, the company revolutionized the smart- phone market with the introduction of the iPhone. Just three years later, Apple created the tablet computer industry by introducing the iPad, thus beginning to reshape the publishing and media industries. Further, for each of its iPod, iPhone, and iPad lines of businesses, Apple followed up with incremental product innovations extending each product category. By the fall of 2012, Apple had become the most valuable company in the world with some $620 billion market capitalization.
Two years later, in the fall of 2014, Apple introduced the hugely popular iPhone 6 and the iPhone 6 Plus, offering larger screens with higher resolution. In the spring of 2015, the high-tech company introduced Apple Watch, a watch that is fully integrated with the iOS Apple operating system, thus running basically all the apps available for the
CHAPTERCASE 5
Steve Jobs and Bill Gates at All Things Digital 5 in 2007.
© Reprinted by permission of WSJ, Copyright July 8, 2007 Dow Jones &
Company, Inc. All rights reserved worldwide.
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iPhone. Apple Watch also incorporates new fitness track- ing and other health-oriented capabilities. At the same time, Apple’s market capitalization had further risen to almost
$740 billion.
The comparison of Microsoft and Apple over time shows that competitive advantage is clearly transitory. Given the rough-and-tumble competition combined with relentless
technological progress and innovation, it is hard to gain a competitive advantage in the first place, and it is even harder to sustain it.
You will learn more about Microsoft and Apple by reading the chapter; related questions appear on page 167.1
* A strategic financial analysis exercise related to this ChapterCase is available in Connect.
GAINING AND SUSTAINING competitive advantage is the defining goal of strategic management. Competitive advantage leads to superior firm performance. To explain differences in firm performance and to derive strategic implications—including new strategic initiatives—we must understand how to measure and assess competitive advantage. We devote this chapter to studying how to measure and assess firm performance. In particular, we introduce three frameworks to capture the multifaceted nature of competitive advan- tage. The three traditional frameworks to measure and assess firm performance are
■ Accounting profitability.
■ Shareholder value creation.
■ Economic value creation.
We then will introduce two integrative frameworks, combining quantitative data with qualitative assessments:
■ The balanced scorecard.
■ The triple bottom line.
Next, we take a closer look at business models to understand more deeply how firms put their strategy into action in order to make money. We conclude the chapter with practical
“Implications for the Strategist.”
5.1 Competitive Advantage and Firm Performance
It is easy to compare two firms and identify the better performer as having competitive advantage. But simple comparisons have their limitations. How can we understand how and why a firm has competitive advantage? How can we measure it? How can we under- stand that advantage within the bigger picture of an entire industry and the ever-changing external environment? And what strategic implications for managerial actions do we derive from our assessments? These apparently simple questions do not have simple answers.
Strategic management researchers have debated them intensely for at least 30 years.2 To address these key questions, we will develop a multidimensional perspective for assessing competitive advantage. Let’s begin by focusing on the three standard performance dimensions:3
1. What is the firm’s accounting profitability?
2. How much shareholder value does the firm create?
3. How much economic value does the firm generate?
These three performance dimensions tend to be correlated, particularly over time.
Accounting profitability and economic value creation tend to be reflected in the firm’s stock price, which in turn determines in part the stock’s market valuation.
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