Foundations of Corporate Success: How Business Strategies Add Value

By John A. Kay | Go to book overview

CHAPTER 13
The Value of Competitive Advantage

In this chapter I explain how competitive advantage is quantified, how it is turned into added value, and how added value is reflected in conventional measures of financial performance, such as cash flow, profits, and returns to shareholders.

Competitive advantage is, necessarily, relative--a competitive advantage is something that one firm has over another. When I talk of competitive advantage without making a specific comparison, the implicit comparison is with a normal or representative firm--perhaps the weakest competitor, or a hypothetical entrant to the market in which the firm concerned holds its competitive advantage. The expected costs and revenues of that representative firm provide a benchmark against which the competitive advantages of other firms in the same market can be measured. In a contestable market, where it is easy for firms to enter or leave, the added value created by each firm will be exactly equal to the size of its competitive advantage. But if entry is costly, firms with little competitive advantage may nevertheless succeed in adding value, and if there is excess capacity in an industry there may be no added value even for firms which have competitive advantages. These relationships between the competitive advantages of different firms and the ability of any or all to add value are the subject of the first part of the chapter.

In the second part of the chapter, I explain how added value underpins all the principal measures of corporate performance, including cash generation, accounting profitability, and shareholder value. I demonstrate the fundamental equivalence between all these measures in the long run and show how each offers a valid but distinct perspective on corporate success.

The success of corporate strategy is generally measured by financial measures of corporate performance. There are many alternative financial measures. Some commentators emphasize profitability and earnings per share, others cash flow and returns to shareholders.

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Foundations of Corporate Success: How Business Strategies Add Value
Table of contents

Table of contents

  • Title Page i
  • Foreword iii
  • Preface vi
  • Contents xi
  • List of Figures xiii
  • List of Tables xiv
  • List of Tables xv
  • I - Corporate Success 1
  • Chapter 1 - The Structure of Strategy 3
  • Chapter 2 - Adding Value 19
  • II - Business Relationships 31
  • Chapter 3 - Co-Operation and Co-Ordination 33
  • Chapter 4 - Relationships and Contracts 50
  • III - Distinctive Capabilities 63
  • Chapter 5 - Architecture 66
  • Chapter 6 - Reputation 87
  • Chapter 7 - Innovation 101
  • Chapter 8 - Strategic Assets 113
  • IV - From Distinctive Capabilities to Competitive Advantage 125
  • Chapter 9 - Markets 127
  • Chapter 10 - Mergers 144
  • Chapter 11 - Sustainability 160
  • Chapter 12 - Appropriability 181
  • Chapter 13 - The Value of Competitive Advantage 192
  • Added Value Statements 211
  • V - Competitive Strategies 219
  • Chapter 14 - Pricing and Positioning, 1 221
  • Chapter 15 - Pricing and Positioning, 2 235
  • Chapter 16 - Advertising and Branding 251
  • Chapter 17 - Vertical Relationships 267
  • VI - The Strategic Audit 283
  • Chapter 18 - The Industry 285
  • Chapter 19 - The Firm 302
  • Chapter 20 - The Nation 320
  • VII - The Future of Strategy 335
  • Chapter 21 - A Brief History of Business Strategy 337
  • Chapter 22 - Conclusion 364
  • Value of the Ecu 369
  • Glossary 371
  • Bibliography 377
  • Index of Companies 395
  • General Index 399
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