Sustain Competitive Advantage - Widen Moat, Spot Disruptive Innovations

JWI 531 Advanced Financial Mananagement, week1 summary, 4/13/13

1. Competitive advantage
************************
It is the firm's identity in the market - the firm's ability to create value that is unique and difficult to imitate. In a dynamic market, competitive advantage is temporary and the leadership must constantly look out for emerging opportunities. Where possible the firm must develop unique resources to create disruptive change. Relentless innovation is critical to sustain competitive advantage.

2. Economic Moat = Competitive Advantage
*****************************************
(i) Value of a firm
********************
is the future cash that can be taken out of the business that can be discounted back to the present.

(ii) Establish firm's fair value correctly
*******************************************
- Accurately determine the magnitude and timing of the future cash flows
- Check how sustainable and protected are the profits

(iii) Study the firm's competitive positioning
***********************************************
what is the role of the firm in the industry's competitive landscape ?
Assess the firm's sources of competitive advantage and their durability
Use Porter's 5 forces, SWOT, Moat, Critical dimensions, benchmarking, perceived value, strategy testing, value curve
Wide and sustainable moats deliver enduring rewards to investors

(iv) Seller's model - 4 key Moat Metrics (Boyd & Quinn, 2006)
******************************************
Economies of scale - ability to exert low cost pressure
High switching costs - customer stickiness
Intangible assets -  patents
Network economics - gain a wide user base

Actively strengthen such metrics to widen and deepen the moat
A firm that ignores the importance of a moat or takes its focus off of moat-metrics will face a higher chance of going out of business.

(v) Constantly scan the landscape for disruptive innovations
*************************************************************
they can make any conventional moat obsolete overnight (ClaytonChristensen.com)
stage 1 - they begin by meeting customer needs in insignificant/emerging markets at low margins
stage 2 - they get a break when performance of a sustaining technology exceeds high end of customer threshold
stage 3 - they change the game by shifting basis of competition from performance towards speed to market and delivery flexibility
when performance becomes less important for the customer, business models based on delivery efficiency begin to rule
eg. Dell in PC market; online education

Dr DP