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Timing Your Business Case with the Technology Valuation Lifecycle - page 6 / 8

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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

Profit Margin

(a)

Competitive

(b)

Constraint

Capacity

Constraint

(c)

ROA= 8% ROA= 4%

Asset Turnover

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.

Commodity-like industries

(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.

(b)

have

a

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

significant wars.

price

competition.

And

combating

price

pressure

with

well

positioned

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.

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