Question

Chapter 4 (2). Identify and discuss real examples of companies with a competitive advantage based on customer lock-in as opposed to product innovation. Which do you expect to sustain a high ROIC for a longer time?

Chapter 5 (1). Discuss the three generic sources of a company’s growth, their relative importance for its growth, and what this means for a company’s strategy.

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Answer 1

Answer 4(2)

Firms having competitive advantage

Firms that have a competitive edge over their rivals thrive in the marketplace and can exist for a very long time. Public companies that fall into this category can produce substantial returns for investors as they are able to capitalize on their competitive advantage. If one or more competitors can copy their ideas or make better products, then the company that had the competitive edge loses that advantage quickly.

For example, in the cell phone manufacturing industry, U.S.-based Apple Inc. (NASDAQ:AAPL) was on top of the world last year due to the explosive popularity of its iPhones and other products. Investors couldn't get enough of Apple's stock, pushing it well over $700 per share late last year. However, mesmerized by the media and hyped by Wall Street, investors failed to realize that Apple's competitive advantage is not permanent. Indeed Apple's main advantage was not in the making of the iPhone (hardware) but the software that went into it that made operating the device incredibly easy for a kid, grandma or an adult. Other players in the industry were not going to sit around and let Apple dominate the industry for too long. Companies such as South Korea's Samsung Electronics (OTC:SSNLF) went on the offensive by offering cheaper and even better versions of mobile phones, taking a sizable chunk of Apple's market share in a short period of time. Accordingly, Apple's stock price has returned to earth and closed at $449.73 Friday.

Which do you expect to sustain a high ROIC for a longer time

Answer

Return on invested capital (ROIC) is often just as important—and occasionally even more so—as a measure of value creation and can be easier to sustain at a high level.

When a company's ROIC is already high, growth typically generates additional value. But if a company's ROIC is low, executives can create more value by boosting ROIC than by pursuing growth.A close look at companies with high price-to-earnings multiples shows that many have extraordinary returns on capital but limited growth. This scrutiny suggests that, contrary to conventional wisdom, investors recognize (and will pay more for) the anticipated returns of companies with a strong ROIC, despite their limited growth prospects. This observation doesn't mean that growth is undesirable; unless companies keep up with their industries, they will likely destroy value. But they shouldn't pursue growth heroically at the expense of improvements in ROIC.

Answer 5(1)

Sources of companies growth

three generic sources of company’s growth are the portfolio momentum, market share performance and merger and acquisitions. Portfolio momentum is an organic growth when a company benefits from an overall expansion in the market portfolio. Market share performance is the company gaining or losing share in a market and it is also an organic growth. Merge and acquisition is an inorganic growth when a company buys or sells revenue via acquisitions. Studies have shown that companies’ growth is mainly coming from portfolio momentum and merge and acquisitions. One of the strategies toincrease growth would be to develop a new product so innovative that it will give the company a competitive advantage. Another strategy would be to persuade customers to buy more of the existing product or to attract new customers