Conduct a firm profitability analysis using accounting data to assess and evaluate competitive advantage.
■ To measure competitive advantage, we must be able to (1) accurately assess firm performance, and (2) compare and benchmark the focal firm’s performance to other competitors in the same industry or the industry average.
■ To measure accounting profitability, we use standard metrics derived from publicly available accounting data.
■ Commonly used profitability metrics in strategic management are return on assets (ROA), return on equity (ROE), return on invested capital (ROIC), and return on revenue (ROR). See the key financial ratios in five tables in the “How to Conduct a Case Analysis” guide.
■ All accounting data are historical and thus backward-looking. They focus mainly on tangible assets and do not consider intangibles that are hard or impossible to measure and quantify, such as an innovation competency.