Chapter04 exhibits

Chapter04 exhibits - • How long can firm keep profits...

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Drivers of Return on Invested Capital Recall that: ROIC = NOPLAT (1 – t) / Invested Capital Similarly: ROIC = (1 - t) (Price per unit – Cost per unit) / Invested capital per unit Sources of competitive advantage? Price premium Cost efficiencies Capital efficiencies
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Competitive Advantage Structure-Conduct-Performance Literature Developed by Edward Mason in the 1930s Michael Porter, Competitive Strategy , 1980 Michael Porter, Competitive Advantage , 1985 Businesses should follow strategies that result in the creation of competitive advantages Figure out how to do better than the next guy
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Porter’s Five Forces http://www.quickmba.com/strategy/porter.shtml
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Different industries have different profitability. Competitiveness of industry structure matters.
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Sustainability of ROIC How sustainable is high ROIC? Length of Product Life-Cycle Cheerios vs new gadget Persistence of Competitive Advantage Potential Competition
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Unformatted text preview: • How long can firm keep profits from innovation? – Potential for Product Renewal • Use brand to launch new products – J&J, P&G Empirical Analysis of ROIC • McKinsey & Co. studied more than 5000 US non-financial companies since 1963 – Median ROIC relatively constant around 10% – ROICs differ by industry but not by company size – Large variations in ROIC between and within industries – Rates of ROIC tend to remain fairly stable Goodwill on balance sheet generally reflects value of acquisitions. In general, paid to target shareholders. Summary • ROIC is driven by competitive advantages that enable companies to realize price premiums, cost or capital efficiencies • Industry structure is an important but not exclusive determinant of ROIC • Companies that have figured out how to earn an attractive ROIC have a good chance of seeing that sustained over time. And v.v....
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This note was uploaded on 06/06/2011 for the course FINA 4210 taught by Professor Staff during the Spring '08 term at UGA.

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Chapter04 exhibits - • How long can firm keep profits...

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