Introductory Finance

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Competitive Advantage

Porter’s Five Forces Model is an important tool that many businesses utilize to create effective decisions and strategies when entering a business industry with a new or different business concept. The model can be used to find out the profitability or the attractiveness of a company or firm, and the five forces in this model include such things as; buyer power, threat that results from substitute products or services, the kind of threat that s an outcome of new entrants or competitors, supplier power, and competition or rivalry among existing businesses (Porter, 1979).

There are a number of things that can make an organization or a business unsuccessful or unproductive. Some of these things might include; declining or decreasing sales, outdated systems of running businesses, or a business or company using procedures and systems of business that are not up to date, and doing or operating a business through manual means (Porter, 1979). If a business has nit computerized its systems then it is likely to waste a lot of time and make errors that can cost the company a lot of money (Baltzan & Phillips, 2009). Prices also have to be reviewed from time to time, if a business does not want to operate loses. In addition to this, a company or firm has to establish a rewards program for its customers so as to attract them to their business. This can have numerous benefits for a business in that it can increase the number of customers frequenting the business, and as a result increase the sales, productivity, and profitability of the business (Baltzan & Phillips, 2009).

To sustain competitive advantage, the following formula can be followed (O’Sullivan & Sheffrin, 2010);

CAP = (value X WACC- NOPAT) (1+ WACC)/ 1 (R- WACC)

NOPAT is net operating profit after tax

WACCC is weighted average cost of capital

CAP is competitive advantage period

R is rate of return on capital that has been invested on

I is annualized new investment in both fixed and working capital (O’Sullivan & Sheffrin, 2010)

Conclusion

These are things that a company or a firm has to improve on in order for it to be more profitable and productive.

References

Baltzan, P. & Phillips, A. (2009). Business driven information systems. USA: McGraw Hill Companies Inc.

O’Sullivan, A. & Sheffrin, M. (2010). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall

Porter, M.E. (1979). How Competitive Forces Shape Strategy. Harvard business Review.