Identify Two Approaches to Estimating a Firm's Competitive Advantages and Discuss

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The Answer is The two general approaches to estimating a firm's competitive advantage are measuring accounting performance and measuring economic performance. A firm's accounting performance is a measure of its competitive advantage calculated using information from a firm's published profit and loss and balance sheets. A firm's accounting performance is determined by comparing a firm's accounting ratios with other firms in the industry. The greatest advantage of accounting measures of competitive advantage is that they are relatively easy to compute. The most significant drawback to accounting measures is that they do not consider a firm's cost of capital. Additionally, accounting measures can be difficult to compare across countries.
Economic measures of competitive advantage compare a firm's level of return to its cost of capital instead of to the average level of return in the industry. The primary benefit of economic measures is that if a firm earns at least its cost of capital, it is satisfying two of its important stakeholders, debt holders and equity holders. Disadvantages of economic measures include that it can be difficult to calculate a firm's cost of capital, especially for privately held firms, and economic measures may overstate the importance of debt and equity holders.

Identify Two Approaches to Estimating a Firm's Competitive Advantages and Discuss

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Identify Two Approaches to Estimating a Firm's Competitive Advantages and Discuss

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