The Marketing Book 5th Edition

RETURN

RISK

The Optimal

Value Adding

Strategic

Direction

Reduce Risk more

than Return Start point

Increase Return

more than Risk

Shareholders’

Risk/Return line

Any strategy which moves the company to a point below the

Shareholders’ Risk/Return line reduces shareholder value

K 0

β 0

Controlling marketing and the measurement of marketing effectiveness 509

value-creating gap between expected and
required rates of return can be substantial. Not
surprisingly, because it is the attractive strategic
direction to take, it is also the most difficult to
achieve. In order to generate increased future
rates of return with reduced levels of risk, the
business must have developed a strong ‘sus-
tainable competitive advantage’, which is, of
course, the main objective of modern corporate
and competitive strategies. A strong sustain-
able competitive advantage should enable a
company to increase its future rates of return to
levels well above both its required rate of
return and the rates of return of its
competitors.
However, its sustainable competitive
advantage could also mean that, even in the
event of a downturn in the market, its rates of
return are less volatile in the future than those
of its competitors. If this is the case, the
company’s risk profile will be lower than its
competition, which could result in a lower
required rate of return.

This introduces the key concept, which

will be utilized through the chapter, of a ‘super

profit’, which is the excess return achieved by a

business due to the development and main-

tenance of a sustainablecompetitive advantage.

The ‘excess’ return represents the surplus

expected or actual return over the rate of return

required by investors.

A sustainable competitive advantage

A key aspect of a competitive advantage in

terms of its ability to create shareholder value is

its sustainability. If competitors can match the

competitive advantage immediately, or even

relatively quickly, the company will be unable

to exploit it to achieve a super profit. This

actually highlights an important but simple

way of considering any sustainable competitive

advantage; it should act as an effective entry

Figure 20.2 Economic value-adding strategies – utilizing a strong sustainable competitive advantage