ROA – The Competitive/Capacity Advantage
Technologies that maximize the asset base of a company do so by reducing both competitive and capacity constraints. Competitive constraints impact the profit margin of the company. Capacity constraints impact the total asset turnover (net sales divided by average total net assets). ROA is a measure of profit margin and total asset turnover.
The Competitive/Capacity Advantage
ROA= 8% ROA= 4%
H o w e v e r , t h e p a r t i c u l a r management strategy. 4
combination of profit margin and asset turnover differs by industry and Capital-intensive industries (e.g. steel, auto, heavy manufacturing) by
nature have a low asset turnover and must seek higher profit margins.
(e.g. retail food, paper, industrial chemicals) face greater the basis of a higher asset turnover. Companies in the seek technologies that improve the efficiency of their
price competition and must compete on lower right section of the graph (c) will asset base (e.g. factory planning and
execution graph (a)
software that reduces capacity constraints). Companies will seek technologies that improve profitability (e.g.
in the upper left section of the enterprise profit optimization
software that reduces competitive constraints). Companies in the middle segment more balanced position for which technologies will impact their Return on Assets.
The objective for any technology company selling to the Late Majority is to improve the ROA of their customers by removing competitive and/or capacity constraints. They do so by developing
and positioning technology with superior ROA itself. competitive or capacity advantage that impact ROA is Understanding these advantages is even more essential
Understanding the relative benefits of essential for building a business case. to technology companies because they
themselves face value wins price
Metric of Focus
Choosing a metric of focus for a technology has significant implications:
Buyers need to align their valuation metric with shareholder expectations and operations. For example, if a discrete manufacturer plans an investment in an optimization system for their production floor to maximize their asset base, full accounting for indirect costs and communication of value in terms of ROA. Buyers are also more prone to institutionalize
4 Tomas Selling and Clyde P. Stickney, “The Effects of Business Environment and Strategy on a Firm’s Rate of Return on Assets,” Financial Analysts Journal 45, no. 1 (January-February 1989): 43-52. Provides a firm-level analysis of the use of ROA, adapted for technology procurement for this article.