THREE SIGMA, INC.
Helping Executives Create and Sustain Superior Performance

                    

 


Evaluate Your Competitive Strategy

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Systems Theory Bibliography

                                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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How effective is your competitive strategy?

The purpose of a competitive strategy is to achieve a sustainable competitive advantage for the business.

A competitive advantage enables a business withstand competitive forces better than its rivals.  A sustained competitive advantage is indicated by the following:

1.  Long term profits that exceed the business' cost of capital, provide a reserve for future uncertainty, and enable accomplishment of the business' goals.
2.  Sustained growth in sales volume and/or sales revenue.

A strong competitive advantage is evidence of a sound competitive strategy.

Complete the following matrix to evaluate your competitive advantage.
5 to 7 years of data enables a good evaluation.  3 years of data is a minimum time period to get meaningful results. 
NOTE: All cells must have an entry in them.  Enter a zero (0) in any cell that does not contain data.
 

Enter your fiscal  year, beginning with the most recent year in the extreme right column.

Past Year 6 Past Year 5 Past Year 4 Past Year 3 Past Year 2 Past Year 1 Current Year

Year

             

Net sales revenue (dollars)

 

           

Sales volume       (units)*

             

Operating profit (dollars)

             

After tax net income (dollars)

             

Interest paid on long term debt (dollars)

             

Average owners/stockholders equity (dollars)

             

Owners/stockholders after tax rate of return on equity expectations (percent).  See chart below.

             

Average income tax rate (percent)

             

* If sales volume is not available, enter a zero (0) in these cells.

Determining Owners/Stockholders After Tax Rate of Return Expectations

To preserve and maintain the wealth-producing assets of the business, its return on equity must be competitive with other investment options available to stockholders and investors.  Unless there are emotional or indirect financial incentives, this expected rate of return is based on the investors perceived risk associated with the investment opportunity.  The range of investment options and their associated risks are shown in the following table.

Investment options

Rate of return

Risk

30-year U. S.     government bonds

   3-5 %

Low

 Stocks and mutual funds

   8-13 %

Moderate

 Venture capital

25-30 % or higher

High

Investors and stockholders perceived risk associated with your business activity will determine their rate of return expectations.  Failure to meet these expectations will dry up future financing capability and produce unhappy stockholders or investors. 

Your competitive advantage score                                               

       Profitability component                                     0

       Growth component                                             0

Evaluating your competitive strategy 

Score

Minus 9 to 0

  • You have no competitive advantage. 

  • Your competitive strategy is ineffective.

1 to 5
  • You have a marginal competitive advantage.   
  • Your competitive strategy needs to be reexamined.

6 to 9

  • You have a strong competitive advantage.  
  • Your competitive strategy appears sound for now.
  Evaluating your profitability
Owners/ stockholders earnings expectations during this period (dollars)

$0

Actual earnings during this period (dollars)

$0

Owners/ stockholders actual return on equity during this period (percent)
0%

Contact us to help interpret your results. 

Copyright 2002 Three Sigma, Inc.