value insights

Financial and Competitive Success Interrelationships- Valutrics

It is generally recognized that there are at least two fundamental types of  commercial
success standards that may be used to set  goals and objectives: financial and competitive.
However, two other strategic success criteria may be an acceptable level of risk and long-term growth
For example, a severely indebted firm—perhaps one emerging from bankruptcy—may view success
from the perspective of risk reduction and financial solvency rather than profit margins or market shares.
On the other hand, a successful firm in a mature industry—such as automotive, basic metals,
or chemicals—may be more concerned about the industry life cycle and achieving competitive competence
in emerging markets to support long-term growth.

Financial Success Standards
the firm’s financial performance trends should be contrasted to those of competitors and the industry
as a whole. Of course, industry performance norms regarding profit margins, rates of return, and sales
growth are not themselves acceptable as objectives, but they do provide useful frames of reference.
Certainly, the firm that does not seek strategically to exceed normal industry performance levels has
no right to anticipate competitive success (or even survival), in the long term.
Although the most frequently employed financial success standard is a firm’s rate of return on invested capital,
that is not necessarily the most useful standard available. Substantial attention has been directed in
recent years to the concept of shareholder value as a means of defining the firm’s financial success more
effectively than simpler accounting measures such as ROI. According to the shareholder value concept,
economic returns on capital should be based on discounted free cash flows and residual values during
a projection period long enough to represent the accomplishment of strategy. The economic value of such
cash flows is what is left after cash flows have been discounted at a rate of return reflecting blended costs
of debt and equity funding. (Several software packages are available commercially to perform the actual
computations.) The discount “hurdle” should reflect rates of return that investors can realize in
the same industry at comparable rates of risk. When a firm elects to define goals in terms of economic
value added by strategy to shareholders’ wealth, the planning manager of course must assemble sufficient
data to monitor rates of return on invested capital and shareholders’ equity obtained by comparable firms
in the same industry, as well as relevant costs of debt financing.

Competitive Success Standards
Defining competitive success standards is more difficult than defining financial success standards.
That is partly because, unlike financial measurements, competitive measures cannot be assembled by following
“generally accepted principles.” Moreover, relevant data regarding the market’s size and competitors’ sales
may be very difficult, or impossible, to obtain. Nevertheless, some principles regarding competitive success
standards have begun to emerge. At the most basic level, surveys,  have demonstrated that firms’ competitive
goals typically include measures of market share.
Porter  broadened the idea of competitive success with his notion of sustainable competitive advantage.
Although the specific concept of a competitive goal as the endpoint of strategy never does appear in Porter’s
writings, it is implied that his guidelines for strategy are focused on holding a high share of market segments
that management deems to be desirable.
Hamel and Prahalad  have gone the furthest in defining the nature of competitive success by challenging management
to determine, well ahead of time, exactly what future competitive success will be like. After all, in present
industry and market settings, rivals already have probably staked out their preferred positions of competitive
advantage; and it would be difficult to alter the current structure. According to these theorists, competitive
goals are statements of strong positions in emerging industries and markets that will be attractive in the future.
Thus, goal setting requires management to predict future business conditions, and strategy formulation requires
a prescription of core competences that will be needed to achieve future competitive advantages.

Interrelationships of Competitive and Financial Success
It is interesting to observe that financial and competitive successes can be closely related, although there may
be several intervening variables to complicate the interpretation of this principle. Other factors being equal,
competitive success tends to be accompanied by financial success. Early in an industry’s life cycle, companies
that accumulate significantly more experience in producing a line of products or delivering a line of services
eventually may expect to do so at a lower cost than less experienced competitors as long as production technology
remains relatively unchanged. Presumably, firms with competitive cost advantages are more likely than others in the
same industry to achieve high market shares. Moreover, it has been demonstrated that firms with disproportionately
large market shares typically enjoy higher rates of return on invested capital than their less experienced
competitors, at least in the growth stage of an industry’s life cycle.

The general approach to be taken in developing financial and competitive objectives of strategy typically entails
contrasting goals to “baseline” projections of the firm’s likely performance—that is, if no changes in internal
capabilities or competitive strategy are made. The resulting “gaps” between baseline projections and goals enable
management to measure the amount of improvement required of strategy for goals’ achievement. The value of such a gap
is a strategic objective. For instance, if management intends to capture 25 percent of a billiondollar market ($250 million)
and its “baseline” projection suggests that present momentum will achieve only $200 million, then the objective of
that firm’s marketing strategy is $50 million of revenue from sources that presently do not exist unless management
improves, or adjusts, its competitive strategy. A firm typically has strategic objectives for most functions—marketing,
operations, administration, finance—and often for combinations of functions, for ning acquisitions and divestments or
launching new lines of business.

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