MGMT 790 UMUC Incumbent versus New Entrants Research Paper



MGMT 790

University of Maryland Global Campus


Question Description

In the Anheuser Busch case, you will come across phrases such as “’average steady moderate performer,” “average sustained high performer,” and “average chronic underperformer’”. The attached article about steady moderate and sustained high performers explains these terms. It also gives some good examples of each.

Examples of steady moderate performers (p. 88):
Federal Express
British Petroleum (BP)

Examples of sustained high performers (p. 86):
Home Depot


If possible, give an example related to barriers to entry and explain how permanent the barrier was or has been. If you cannot think of an example easily, just look around you and think of the places you have been to during the last one month and you will be able to think of several examples.

What would be your strategy if you were an incumbent? What would be your strategy if you were an entrant or a potential entrant and the incumbents were well entrenched?

What reasons are common to Amazon, Southwestern, Toyota, and Wal Mart that others cannot copy their capabilities

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Competition, Strategy, and Business Performance Anita M. McGahan etween 1981 and 1997, the financial-market premium on publicly traded U.S. corporations rose dramatically. At the same time, accounting profitability dropped steadily. Figures 1 and 2 show the trends. In Figure 1, the financial-market premium is the ratio of the value of all financial claims on a firm (including stocks and bonds) to the replacement value of the firm’s assets.1 In Figure 2, accounting profitability is the ratio of after-tax income to the book value of assets. B Figures 1 and 2 are surprising because financial-market premiums and accounting profitability do not move together. If the two performance measures followed similar trends, then the figures would suggest an alignment between investor expectations and actual returns. Although the divergence in the trends is surprising, there are several possible explanations. One is that the average financial-market premium rose even as profitability fell because investors had more money to invest. As the aggregate supply of funds increased, the financialmarket values of firms (relative to their asset bases) increased as well. In this environment, the added supply of financial capital also may have encouraged corporations to expand into markets with lower returns, and thus average accounting profitability declined. A different potential explanation attributes the increased financial-market premium to fundamental improvements in investor expectations, perhaps because of breakthroughs in underlying technology. As Special thanks to Michael E. Porter for discussions and for co-authorship of many of the articles in this research stream. I am grateful to Carliss Baldwin, Barbara Feinberg, Benson P. Shapiro, the editor, two anonymous referees, and seminar participants at the Harvard Business School for comments and suggestions.Thanks to Rebecca Evans for research support.The Division of Research at the Harvard Business School provided generous financial support for this project. 74 CALIFORNIA MANAGEMENT REVIEW VOL. 41, NO. 3 SPRING 1999 Competition, Strategy, and Business Performance U.S. Corporations 25 20 15 10 5 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Ratio of Market Value FIGURE 2. Accounting Probability of U.S. Corporations 14 12 10 8 6 4 2 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Ironically, many executives feel more pressure to improve operating results even as financialmarket premiums increase. The pressure may occur with increased threat of takeover, more active boards of directors, or increased competitive threats. Can strategies be improved constantly? Management consultants, business academics, investment analysts, and the business press have all offered executives a range of theories on this question. Companies spend hundreds of thousands and sometimes millions of dollars to get current advice from experts on the newest approaches to improving rates of return. They often advise integrating core capabilities, subcontracting unessential activities, divesting unrelated businesses, and consolidating through merger with rivals. FIGURE 1. Financial-Market Premium of Value of Returns companies pursued the new projects, their accounting profitability was temporarily depressed. Yet despite all the advice, Sources: Developed from data in the Compustat Basic File screened for anomalies and for matching with the Compustat Business-Segment Reports. executives with operating responsiThe screening approach is described in Anita M. McGahan,“The bilities have not had much inforPerformance of U.S. Corporations: 1981-1994,” Harvard Business School mation that can help them set goals Working Paper, July 1998. and frame strategic problems. Little data is available for identifying how the performance history of a business compares with trends in the economy. As a consequence, it is difficult to know when a problem requires a radical solution. When is a small operating problem an indication of deeper strategic issues, and when is it temporary? How often should strategy be reformulated? How common are turnarounds? How long should a high performer expect to sustain its profitability? Is it unusual for a company to show low profitability for a long time? Operating executives often must rely on their experience rather than hard data to make judgments about the magnitude and scope of strategic problems. This article seeks to remedy this problem by providing broad information on the characteristics of businesses with different kinds of performance histories. It CALIFORNIA MANAGEMENT REVIEW VOL. 41, NO. 3 SPRING 1999 75 Competition, Strategy, and Business Performance offers benchmarks to help executives form judgments about strategic challenges and opportunities. This study relies on recently collected data on the profitability of publicly traded U.S. firms within specific businesses. The data has been compiled since about 1980 by Compustat, when a new reporting requirement for businessspecific operating profit, sales, and assets went into effect. The dataset has several limitations. First, private companies are missing. Second, international companies are excluded if they are not represented on U.S. exchanges. Third, the industry definitions, given by the U.S. Standard Industry Classification (SIC) System, are broad in some sectors and narrow in others. Fourth, the reported information on a company’s businesses may not conform to its strategic business units. Companies are required to report on businesses that constitute at least 10% of sales. Many firms often group together several similar operating units for reporting. On average, each business reported by Compustat probably represents two or three different operating units.2 For this reason, the reporting entities are called “business segments” instead of “business units.” Although the dataset suffers these problems, it has the substantial advantage of representing the first source of comprehensive information on the profitability by industry of both diversified and single-business public corporations. Over the past few years, Professor Michael E. Porter and I have used the data in several research studies to identify fundamental facts about business performance over time in a broad range of economic sectors. The studies were motivated by a sense that the new data provided unprecedented opportunities to understand the relevance of industry, corporate-parent, and business-specific influences on performance.3 Patterns in Business Performance Strategic goals for performance are expressed in multiple ways: market share, revenue growth, earnings per share, dividend growth, and operating returns are all common measures. Is there a single correct measure of performance? Surely not. Despite the diverse possibilities, this study relies on a single measure, the ratio of operating income to assets (i.e., “accounting profitability”). This measure represents a return on invested capital and has the advantage of capturing the broad operating qualities of a business. Revenue growth and market share are important drivers of operating income. The requirements to compensate equity and debt claimants are reflected in assets. The ratio of operating income to assets is also one of the only available measures of performance at the business level. This study uses the financial-market premium as a supplementary measure of performance.4 It reflects investor expectations about a company’s prospects for generating value in the future. The financial-market premium is greater than one when investors expect the company to generate more value from its booked assets than if the assets were sold off. Whereas accounting 76 CALIFORNIA MANAGEMENT REVIEW VOL. 41, NO. 3 SPRING 1999 Competition, Strategy, and Business Performance profitability reflects historic and current management influence, the financialmarket premium reflects investor expectations about future operating returns. However, the financial-market premium has several disadvantages as a measure of operating performance. First, it is only available at the corporate level and not at the business level. Second, it can fluctuate with shifts in investor expectations that are not fundamentally related to the operations of the business. For these reasons, the classification scheme in this study relies on accounting profitability rather than the financial-market premium. The Compustat Business-Segment Reports, the primary source of information, were screened to eliminate records associated with missing or meaningless industry identifiers. Records were eliminated when assets or sales are less than $10 million because they often do not represent operating businesses. Single-year appearances were excluded for the same reason. For the financial-market analyses, companies with less than $50 million in assets were eliminated because their financial paper may not be traded frequently. Both of these screens conform to precedents in the literature.5 Financial institutions were also screened out of the dataset because their operating characteristics are quite different than those of other types of businesses. Because business units are aggregated in the reports submitted by firms, the dataset is not well suited for analysis of entry and exit from the economy. The screened dataset covers about 60% of the non-financial corporate assets reported to the Internal Revenue Service over the 1981-1997 period. It includes 13,547 business segments in 8,018 corporations and in 664 industries. The average profitability across all businesses over the 1981-1997 period is 9.21%.6 About half of the observations are associated with diversified firms. (Here, the term “diversified” is used to describe corporations that participate in more than one business in the screened dataset.) The average business segment posts $883 million in assets. On average, diversified corporations post $2,688 million in assets, and single-business firms post $791 in assets. (Thus, singlebusiness firms have smaller business segments on average than diversified corporations.) The first step in the analysis is the classification of businesses by their performance over the 1981 to 1997 period.7 It would be too cumbersome to represent all possible paths of profitability among businesses over 17 years, especially since the average business is represented in the dataset for 10.5 years. These complications are handled by classifying businesses based on their profitability ranking during the first four and last four years in which they are represented in the dataset. This approach has the virtue of simplicity. A comparison with more complex classification methods suggests that the biases in the simple classification scheme are not severe, and the relationships across categories in profitability, size, relative growth, financial-market premiums, and financialmarket values are consistent.8 Figure 3 shows the categories. The left-hand-side of the matrix represents average accounting profitability among businesses in the first four years that CALIFORNIA MANAGEMENT REVIEW VOL. 41, NO. 3 SPRING 1999 77 Competition, Strategy, and Business Performance High (25%) Ending Performance Medium (50%) Low (25%) High (25%) Sustained High Performers Declining High Performers Fallen High Performers Medium (50%) Rising Moderate Performers Steady Moderate Performers Declining Moderate Performers Turnarounds Rising Underperformers Chronic Underperformers 15.95% 3.89% Low (25%) 14.80% 2.88% they appear in the dataset.9 The top of the figure represents average accounting profitability among businesses in the last four years in which they appear.10 The lines show the cutoff thresholds.11 The thresholds were selected so that the top 25% of businesses by rank in profitability would qualify as “high” performers, the bottom 25% would qualify as “low” performers, with the rest qualifying as “medium” performers. Each label in each box describes the trend in the relevant range. For example, the upper left box, labeled “Sustained High Performers,” represents businesses that both began and ended with high profitability. Figure 4 shows that the number of businesses was not evenly distributed by category. Only 74 (or 0.5%) of the 13,547 businesses are “Turnarounds,” FIGURE 4. Number of Businesses by Category Ending Performance Beginning Performance Beginning Performance FIGURE 3. Performance Categories 78 Sustained High Performers 2,628 (19.4%) Declining High Performers 599 (4.4%) Fallen High Performers 160 (1.2%) Rising Moderate Performers 685 (5.1%) Steady Moderate Performers 5,517 (40.7%) Declining Moderate Performers 572 (4.2%) Turnarounds 74 (0.5%) Rising Underperformers 658 (4.9%) Chronic Underperformers 2,654 (19.6%) CALIFORNIA MANAGEMENT REVIEW VOL. 41, NO. 3 SPRING 1999 Competition, Strategy, and Business Performance TABLE 1. Sustainability Beginning Performance Ending Performance % with same rank % with higher rank % with lower rank High 77.6% N/A 22.4% Moderate 81.4% 10.2% 8.4% Low 78.4% 21.6% N/A beginning with low performance and ending with high performance.12 “Fallen High Performers,” businesses that dropped from high to low profitability, are also relatively rare and account for just 1.2% of the total.13 The “Steady Moderate Performer” category is the most populated with 40.7% of the businesses.14 Implicit in Figure 4 is information about the sustainability of high, medium, and low profitability. Of the 25% of businesses that started with high performance (top row), the figure shows that most of them (19.4%) sustained their high performance over the period. Table 1, which is derived from Figure 4, makes this explicit. It shows that 77.6% of the businesses that began with high performance also ended with high performance. The rest ended with a lower rank in profitability. Moderate performance was sustained at an even higher rate of 81.4%. Indeed, all types of performance—high, medium, and low—were quite persistent. Surprisingly, low profitability was slightly more persistent than high performance. Moderate performance was more persistent than any other type.15 A question arises regarding the rate of entry and exit from the various categories. Were businesses that began with low performance more likely to exit than those that began with high or medium performance? As indicated earlier, the dataset is not well suited for analyzing questions of economic entry and exit.16 Exit from the dataset occurs with bankruptcy, merger, privatization, and a change in industry identifier. Entry into the dataset occurs with an initial public offering, de novo entry by an established firm, and with a change in industry identifier. During the 1980s and 1990s, corporate reorganization frequently led to changes in identifiers. As a result, the average business segment posted 10.5 years of data between 1981 and 1997. How much lower is the profitability of Chronic Underperformers than of those in other categories? Table 2 shows an average ratio of operating income to assets of –7 .2%.17 Of course, Sustained High Performers, with a 25.9% average, CALIFORNIA MANAGEMENT REVIEW VOL. 41, NO. 3 SPRING 1999 79 Competition, Strategy, and Business Performance TABLE 2. Average Profitability by Category Beginning Performance Category Sustained High Performers Aver- Average Ending age Size in Perfor- ProfitaAssets mance bility ($ mil.) Median Average Average Size in Financial- FinancialAssets Market Market ($ mil.) Premium Value High High 25.9 459 92 1.64 974 High Med. 15.2 853 143 1.31 1,303 Fallen High Performers High Low 7.9 223 73 1.27 318 Rising Moderate Performers Med. High 15.1 677 142 1.39 1,028 Steady Moderate Performers Med. Med. 9.2 967 162 1.14 1,223 Declining Moderate Performers Med. Low 2.3 364 75 1.01 427 Turnarounds Low High 10.7 253 77 1.32 474 Rising Underperformers Low Med. 3.6 867 126 1.11 1,046 Chronic Underperformers Low Low -7.2 419 62 1.28 485 Declining High Performers show the highest average profitability. The statistics in Table 2 are developed from means taken over the entire period in which businesses are represented. Thus, Declining High Performers and Rising Moderate Performers also show relatively high average profitability. Declining Moderate Performers are secondlowest in rank. Table 2 also shows the averages sizes in assets of businesses by category. Categories with high average sizes are highlighted. Steady Moderate Performers are over twice as large as both Sustained High Performers and Chronic Underperformers. The next column of Table 2 shows median size in assets. (The median is defined so that half of observations fall below and half fall above the value.) For all categories, the median size is significantly less than the average, although the relationships between categories are similar. This means that the distribution of businesses by size is strongly skewed. In all categories there are a lot of small businesses and relatively few very large businesses. The very large businesses draw up the averages. In the discussion of core examples, this issue is raised again. Overall, the information on size by category suggests that high performers become moderate performers by growing large, perhaps compromising their original operating strategies. It also suggests that low performance occurs if a high or moderate performer does not grow enough to achieve a minimum efficient scale. 80 CALIFORNIA MANAGEMENT REVIEW VOL. 41, NO. 3 SPRING 1999 Competition, Strategy, and Business Performance FIGURE 5. Average Growth Rates by Category Beginning Performance Ending Performance Sustained High Performers 15.3% (10.0%) Declining High Performers 13.7% (8.5%) Fallen High Performers 10.4% (4.5%) Rising Moderate Performers 14.7% (11.4%) Steady Moderate Performers 15.1% (8.9%) Declining Moderate Performers 8.5% (2.4%) Turnarounds 15.5% (9.9%) Rising Underperformers 16.3% (19.6%) Chronic Underperformers 16.9% (22.4%) Note: Simple averages with weighted averages in parentheses.The weights are the inverses of the variances of the estimates. The last two columns of Table 2 show the average financial-market premium and financial-market value of businesses in each category.18 The financialmarket value represents the total amount of investors’ claims on a business in absolute terms.19 The financial-market value is lower for Sustained High Performers than for Steady Moderate Performers. This occurs because Steady Moderate Performers are so large on average. Their size overwhelms the influence of the higher financial-market premium on Sustained High Performers. The regularity carries an important implication for strategy: Steady Moderate Performance may be a worthy objective in its own right if it creates more financialmarket value than Sustained High Performance. Although a detailed analysis of the financial-market premium goes beyond the scope of the study, several of the estimates are striking. The average financial-market premium is greatest for Sustained High Performers, with Rising Moderate Performers and Turnarounds distant followers. In general, improving performers had a higher financial-market premium than declining performers, which suggests that investor expectations about the future were related to the trajectory of accounting profitability. Chronic Underperformers had a relatively high financial-market premium despite their low accounting profitability. (Recall that over 19% of the businesses in the dataset qualify for the category.) This result means that, on average, investors expected better performance from Chronic Underperformers than from Declining Moderate Performers. Perhaps investors ...
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Final Answer



Market Entry strategies: Incumbent Versus New entrants
Institutional Affiliation




Market Entry strategies: Incumbent Versus New entrants
Strategic planning is pivotal to the success of any organization. In the united states, most
strategic planners create much value by cutting costs, deterring new entry into the market, and
focusing on how to improve domestic markets and simultaneously develop new international
markets in countries such as China. It is crucial to understand the performance ability of the
business organization to make strategic decisions that suitable for that organization. Based on the
capability, the business entities can be categories as ’average steady moderate performer,”
“average sustained high performer,” and “average chronic underperformer.’” The regular,
moderate performers are higher on average than average sustained top performers as well as
chronic underperformers. Therefore, a useful analysis of these markets provides an insight...

Ghgbe_Obbgu (18222)
Rice University

Great study resource, helped me a lot.

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