discountedcashflowmodelshouldprovideenoughflexibility
intermsofcapturingchangesintheunderlyingcharacteristics
ofthefirm.Athree-stageorn-stagemodelmaybeneededto
capture the longer transitions to stable growth that are
inherent in high-growth firms.
Source of Growth (Barriers to Entry)
Thehigherexpectedgrowthforafirmcancomefromeither
generalcompetitiveadvantagesacquiredovertimesuchasa
brandnameorreducedcostsofproduction(fromeconomies
ofscale) orspecific advantagesthat aretheresultoflegal
barriers to entry, suchas licenses or product patents. The
formerarelikelytoerodeovertimeasnewcompetitorsenter
themarketplace,whilethelatteraremorelikelytodisappear
abruptlywhenthelegal barrierstoentryareremoved.The
expectedgrowthrateforafirmthathasspecificsourcesof
growthislikelytofollowthetwo-stageprocesswheregrowth
ishigh foracertainperiod(forinstance, theperiodofthe
patent) and dropsabruptly to a stable rate after that. The
expectedgrowthratefora firmthathasgeneral sourcesof
growthismorelikelytodeclinegraduallyovertimeasnew
competitorscomein.Thespeedwithwhichthiscompetitive
advantage is expected is a function of several factors,
including:
- The nature of the competitive advantage. Some
competitive advantages, such as brand name in
consumer products, seem to be more difficult to
overcome and consequently are likely to generate
growth for longer periods. Other competitive
advantages,suchasafirst-moveradvantage,seemto
erode much faster.