4 October 2001

Americas / United States

Investment Strategy
Equity Research

Competitive Advantage
Period (CAP)
At the Intersection of Finance and
Competitive Strategy

Volume 1 Updated

U.S. Investment Strategy

Michael J. Mauboussin
212/325/3108
michael.mauboussin@csfb.com

Alexander Schay
212/325/4466
alexander.schay@csfb.com

Patrick McCarthy
212/325/2657
patrick.mccarthy@csfb.com

Competitive advantage periodCAPprovides an essential link between

finance and competitive strategy analysis.

The idea of CAP has a long intellectual history.

CAP is based on theory that is supported by empirical evidence.

We consider CAP in a world of heightened innovation.

Competitive Advantage Period (CAP)

4 October 2001

Executive Summary
The key to investing is not assessing how much an industry is going to affect society, or
how much it will grow, but rather determining the competitive advantage of any
company and, above all, the durability of that advantage. The products or services that
have wide, sustainable moats around them are the ones that deliver rewards to
investors.
Warren E. Buffett, Fortune, November 22, 1999 (Emphasis added)
Thoughtful investors and corporate managers recognize that sustainable competitive
advantage is vital to understanding the value of business. Yet most investors do not
have a sound and direct way to measure competitive advantage. Competitive
advantage periodCAPis an economically sound way to explicitly consider a
businesses sustainable competitive advantage. CAP, then, bridges a vital gap between
finance and competitive strategy.
The key points of this report are as follows:

CAP is an indicator of how long the market expects a company to create

shareholder value. A company creates shareholder value when its incremental
investments generate returns that exceed the cost of capital. Even though most
finance and investment texts recommend an explicit forecast horizon no longer than
ten years, our market-based experience shows that CAPs often exceed ten years,
and can reach or exceed twenty years.

We trace the historical development of the idea of CAP. Financial theorists and
practitioners have understood CAPs importance for decades. Notwithstanding this,
CAP has yet to find its ways into most valuation discussions.

We provide empirical evidence for the theory that underpins CAP, tapping four
separate studies (including our own). These studies show that overall returns
including return on invested capital and return on equitymean-revert. However,
the returns of certain companies and industries show persistence. This suggests
that CAPs vary for companies with different economic characteristics.

We outline how to estimate a market-implied CAP. In effect, we can solve for CAP
by estimating the markets expectations for future cash flows and the cost of capital.
Importantly, we find that CAPs cluster for companies with similar economic
characteristics. As a result, investors should focus on anticipating revisions in cash
flow expectations.

Companies that face rapid innovation tend to have shorter CAPs. However, the
market often imbues these same companies with real option value. We show how
investors can segregate real option value.

Stable CAPs over time for value-creating companies is tantamount to a positive

revision in expectations. However, the record shows that even the best companies
ultimately succumb to competitive forces that drive their economic returns to the
cost of capital.

Competitive Advantage Period (CAP)

4 October 2001

Why CAP Matters

Take a good look at the curriculum of any top business school. Finance courses teach
students all about discounted cash flow, cost of capital, and options pricing theory. The
students then walk down the hall and study competitive strategy, including analysis of
industry structure, value chains and game theory. Yet the studies of finance and
competitive strategy are never really completely wed. Sure, the finance professors
acknowledge the importance of competitive advantage and the strategy professors note
the significance of value creation. But neither group fully addresses how finance and
competitive strategy mix in the real world.
We believe the concept of competitive advantage periodor CAPplays a major role in
bridging the gap between finance and strategy. CAP indicates how long the market
expects a company to create shareholder value. Equivalently, investors can express
CAP is the number of years the market expects a company to generate excess
1
returnsreturns above the cost of capitalon new investments. Economic theory,
borne out daily in the markets, predicts that high return businesses will attract
investment from competitors, inevitably driving their returns lower. The inverse is true for
low return businesses.
As a result, we can represent CAP as a discrete, finite period of excess returns on new
investments that investors can measure in years. See Exhibit 1. Beyond the CAP, we
assume that companies will earn exactly the cost of capital on incremental investments,
which means that the companies will longer create shareholder value. Use of a
perpetuity-with-inflation, or a simple perpetuity, as a residual value (i.e., the value
beyond CAP) reflects this assumption. Note that these residual value estimates do not
say that a company will not grow beyond CAP, rather they say that the company will not
create additional value.

Excess Returns

Exhibit 1: Competitive Advantage Period

CAP

Time
This idea, which has a fairly long tradition, comes with a variety of names including T
(Miller and Modigliani, 1961), value growth duration (Rappaport, 1986), fade rate
(Madden, 1999), and market-implied forecast period (Rappaport and Mauboussin,

Competitive Advantage Period (CAP)

4 October 2001

2001). Notwithstanding this tradition, most investors and corporate managers have a
poor understanding of the significance of CAP in understanding stock prices.
This report is an update a piece we wrote a number of years ago (Mauboussin and
Johnson, 1997) and tries to provide a more complete history of the idea, empirical
evidence of CAPs validity, and guidelines for placing CAP in the context of the
investment decision process.
For investors that question the significance of CAP, or are simply unaware of its
importance, we suggest a reading (and rereading) of the above Warren Buffett
quotation. Buffett, arguably the last half-centurys greatest investor, has never wavered
on the significance of understanding competitive advantage in successful investing. We
saw Buffett present at Columbia Business School a few years back. A student asked
him a great question: Mr. Buffett, if you could only look at one thing to evaluate the
merit of an investment, what would it be? Sustainable competitive advantage shot
back Buffett, without a hint of hesitation.
Is it possible that the one issue Buffett thinks is most important to understand is among
the issues that investors discuss, and quantify, the least? The apparent answer is yes.
We note two potential reasons. The first is while some measure of competitive
advantage is embedded in the ubiquitous price/earnings (P/E) ratio, very few investors
know how to extract it. Second, many investors who use a discounted cash flow model
impose improper constraints on itarbitrary explicit forecast horizons and terminal
values are but two examplesobscuring CAPs relevance.
Before proceeding too far, we should take a moment to define competitive advantage.
For a company to have a competitive advantage, it must satisfy two conditions. First, it
must generate a return on investment that exceeds its cost of capital. Second, it must
create more value than its average competitor (Besanko, Dranove and Shanley, 2000).
By this strict definition, the term CAP is somewhat of a misnomer. That said, the
operational goal of CAP is to capture value creationthe first part of this definition.
The definition of competitive advantage requires some additional comments. The most
important point is that a company cannot claim to have a competitive advantage unless
it earns, or promises to earn, a return that exceeds the cost of capital. Often, corporate
managers claim a competitive advantage without any economic validity.
Also important (and perhaps in apparent contrast to Buffetts claim) shareholders do not
necessarily benefit from a company with a sustainable competitive advantage. The key
to successful investing is to anticipate revisions in expectations. If the stock market
completely reflects a companys competitive strength, investors should expect to earn
only a market appropriate rate of return. Fortunately, we will explain later that even a
stable market-implied CAP over time represents a positive revision in expectations for
value-creating companies, and hence the opportunity for superior shareholder returns.

Competitive Advantage Period (CAP)

4 October 2001

The History of CAP

The place to start to understand CAP is Miller and Modiglianis (M&M) seminal paper on
valuation (1961). In that paper, M&M address a question that had dogged financial
economists and market practitioners for years: what does the stock market value? They
show, in effect, that the value of a company rests on the present value of the cash flow it
can generate for its claimholders over its life. Forty years later, M&Ms conclusions
remain both good theory and practice.
M&M also provide some wonderful ways to look at corporate value, and one of those
ways is a consistent approach in all discussions of CAP. Specifically, they show that an
investor can express the value of a company in two parts:

Value = Steady state value + future value creation

Steady state value simply takes the companys current earnings (normalized) and
capitalizes them at an appropriate discount rate. Accordingly, steady state represents
the value of the company assuming there are no opportunities to make value-creating
investments. Future value creation is a function of three drivers: the magnitude of new
investments, the return on new investment and how long a company can find new
2
value-creating investments. CAP answers the how long question.
While M&M paved the theoretical road, Fruhan (1979) provides a more practical
demonstration of CAPs importance. Using return on equity as a proxy for economic
return on investment, Fruhan cites the number of years during which exceptional
returnswill continue to be available before these returns are forced to the level of the
firms cost of common equity by competitive forces as a key source of value creation.
(Original emphasis.) Fruhan also shows the value consequences of various CAP
assumptions.
Rappaport not only demonstrated CAPs significancehe called the concept value
growth durationbut he was also was the first to forcefully demonstrate the power of
reading CAP from stock prices. Rappaport showed that CAPs length is not just an
interesting theoretical point of debate among investors and managers. Indeed, investors
can observe market-implied CAPs, even if with some difficulty. This market signals
approach shifted the debate from what individual market participants think to what the
market, a collection of individuals, thinks.
Leibowitz and Kogelman (1994) provide a strong and economically sound link between
the widely used P/E multiple and the concept of CAP. Their work, well rooted in M&M,
breaks a companys P/E multiple into two components: a base P/E (the appropriate P/E
for the steady state) and the franchise factor (FF), the P/E multiple attributable to future
value creation. FF, of course, is a function of the magnitude of investment, return on
investment and how long excess-return investment opportunities are available.
While all of the researchers we cited provided quantitative, if theoretical, perspectives
on CAP, Warren Buffett is probably the ideas greatest (and wealthiest) champion.
Buffett has talked frequently about his desire to buy business that have economic moats
around themmoats that are wide, and deep, and that have lots of alligators in them to
fend off the competition. But his comments dont end there. Buffett also adds that
economic moats are rarely stable: theyre either getting a little bit wider, or a little bit

Competitive Advantage Period (CAP)

4 October 2001

narrower, day-by-day. He views his task as finding those companies and managers that
will expand the moat over time. Take Buffetts concept of moat and insert CAP and you
see that they are interchangeable terms.

Competitive Advantage Period (CAP)

4 October 2001

Empirical Evidence
Earlier, we noted that is the key concept that underlies CAP is that competitive forces
assure that economic returns on new investment revert to the cost of capital over time.
The idea is that businesses earning returns in excess of the cost of capital will attract
competitors willing to accept lower returns. Indeed, the theory goes, capital will flow into
the industry until returns reach the cost of capital. Companies that are able to fend off
their competition and are able to earn high returns for a prolonged period have a
sustainable competitive advantage.
Reversion to the economic mean also suggests that low return businesses should see
capital flee, allowing for returns to rise to the cost of capital.
Determining whether or not reversion to the cost of capital occurs would seem to be a
straightforward empirical question. Claiming a clear-cut answer, however, requires a
sound way to measure economic returns, which is difficult. This point notwithstanding,
four studies provide a basis for the view that companies generate excess returns for a
finite time. The major flaw in all of these studies, unfortunately, is that they rely on
accounting-based measures. Yet they all suggest that reversion to the mean is a
powerful force.
Palepu, Healy and Bernard (2000) show that U.S. firms for 1979-1998 that had above

average or below average return on equity (ROE) tended to revert over time to a
normal level within no more than ten years. See Exhibit 2. Despite this broad meanreverting behavior, the authors add that some firms indeed remain above or below
normal levels for long periods of time.
Exhibit 2: Behavior of ROE over Time for US Companies (1979-1998)
40.00%

30.00%

20.00%

Average ROE

10.00%

QI
QII

0.00%

QIII
QIV
QV

-10.00%

-20.00%

-30.00%

-40.00%
Year

Source: Palepu, Healy, and Bernard, Business Analysis and Valuation: Using Financial Statements
(Cincinnati: Southwestern College Publishing, 2000), p. 10-6.

Ghemawat (1991) observes a similar mean reverting pattern for the return on

investment of nearly 700 business units in the Profit Impact of Market Share (PIMS)
database over the 1971-1980 period. See Exhibit 3. Ghemawat, too, remarks that

Competitive Advantage Period (CAP)

4 October 2001

some companies persist in their ability to generate sustainable excess returns, hence
defying (at least for some time) the collapse of excess returns.
Exhibit 3: Behavior of ROI over Time (1971-1980)

Source: Pankaj Ghemawat, Commitment: The Dynamic of Strategy, (New York: The Free Press 1991), p. 82.

Madden also documents that competition causes cash flow return on investment

(CFROI) to fade toward the average. Even though Madden only looked at CFROI over
four years, mean reversion was pronouncedespecially for high growth, high return
businesses.
We have done what we believe is the most thorough and current analysis of mean-

reverting economic returns. Using over 550 companies from the CSFBEdge database
for 1991-2000, we see very clear evidence that high excess returns diminish over time
and that substandard returns rise. See Exhibits 4 and 5.
Exhibit 4: Behavior of Median Return on Invested Capital (1991-2000)
25.00%

Median ROIC

20.00%
QI
15.00%

QII
QIII
QIV

10.00%

QV
5.00%

0.00%
1991

1992

1993

1994

1995

1996
Year

Source: Company data, CSFBEdge estimates.

1997

1998

1999

2000

Competitive Advantage Period (CAP)

4 October 2001

Exhibit 5: Change in Median Returns on Invested Capital (1991-2000)

Quintile
First
Second
Third
Fourth
Fifth

Change
-8%
-2%
1%
2%
7%

Source: Company data, CSFBEdge estimates.

While each studies all use different measures of economic returns and time frames, the
empirical results suggest that the economic theory underlying CAP is valid. Further, the
evidence shows two other important points. The first is that that some firms, and
industries, sustain returns above or below the cost of capital for extended time periods.
This suggests that various industries and companies have different CAPs. One size
does not fit all.
Second, the most important determinant of the rate of reversion appears to be industry
innovation. Said more directly, industry rate of change predicts the longevity of CAP:
fast-changing industries have short CAPs and slow-changing industries have longer
3
CAPs. Having provided the theory and evidence for CAP, we now turn to how to use
CAP in the investment decision process.

Competitive Advantage Period (CAP)

4 October 2001

Estimating Market-Implied CAP

CAP rests on the idea that risk adverse investors will only assume a finite number of
years of assumed value creation for a company. Naturally, this observation begs an
important question: who determines CAP?
Most investment and finance texts gloss over the issue, and those with
recommendations generally suggest imposing quasi-arbitrary 5- or 10-year horizons into
the discounted cash flow model. Gray, Cusatis, and Woolridge (1999), for example,
offer the 1-5-7-10 Ruleone year for boring companies, five years for decent
companies, seven years for good companies, and ten years for great companies.
Such a recommendation is as unsound as it is vague because it accommodates no
input from the stock market itself. You can be assured that the 1-5-7-10 Rule is no
match for the markets wisdom. It certainly doesnt pass the practitioners test.
Copeland et al. (2000), in a disingenuous stroke, downplay the importance of the explicit
forecast period altogether. In their words, While the length of the explicit forecast period
you chose is important, it does not affect the value of the company. (One does have to
wonder why something that does not affect the value of the company is important.)
That the forecast period does not affect value is only valid when investors allocate value
creation to the residual value. While there are admittedly myriad ways to value a
business, one of CAPs important attributes is that it clearly demarcates the period
during which a company earns excess returns (i.e., value creation) from the residual
value period, which assumes no additional value creation. Here we evoke the wonderful
John Maynard Keynes quote Id rather be vaguely right than precisely wrong.
Our experience suggests that you are better off assuming all value creation during CAP
(which allow you to understand the assumptions) than to spread value creation between
the explicit forecast period and the residual value or, in the worst-case scenario,
lumping all value creation into the residual value (thereby obscuring all value creation
assumptions).
We think the best place to seek the answer to CAPs length is the market itself. The
stock market, which represents the collective expectations of buyers and sellers,
determines the CAP. We believe the vital task of investors is to quantify the marketimplied CAP. How do we go about estimating the market-implied CAP?
First principles suggest that the value of any financial asset, including stocks, boils down
to a cash flow stream, an appropriate discount rate, and a forecast period. Given that
the stock price is known, investors must read expectations for cash flows and the cost of
capital. Investors can read consensus expectations for these drivers from independent
research sources (e.g., Value Line, First Call, I/B/E/S). With the stock price, as well as
market expectations for cash flows and cost of capital in hand, the investor is ready to
estimate the market-implied CAP. Mechanically, investors simply stretch the forecast
horizon out as far as possible to solve for the current stock price. This period, measured
in years, is the market-implied CAP.
Importantly, our experience suggests that CAPs tend to be clustered for companies with
similar economic characteristics (often companies within the same industry). This is
critical, because investors who have a sense for a peer groups CAP can focus their

10

Competitive Advantage Period (CAP)

4 October 2001

analytical energy on revisions in cash flow expectationsthe most likely source for
expectations revisions.
Our analysis also shows that CAPs in many instances substantially exceed 10 years,
and can approach or surpass 20 years in some cases. CAPs are set on the margin by
self-interested, motivated, and informed investors. So if a companys implied CAP is too
short or too long, astute investors will buy or sell the shares in an attempt to generate
excess returns. Further, we find that with a sufficiently long CAP, the residual value
tends to account for two-thirds or less of corporate value.
A practical debate that is worth noting is whether or not investors should model cash
flows so that economic returns on investment fade, or decay, to the cost of capital
versus assuming an abrupt transition from value creation to no value creation. In our
experience, this debate is not very illuminating since CAPs (and fade rates) are similar
for businesses with like economic characteristics. Accordingly, an investors analytical
energy must shift to anticipating revisions in cash flows. Investors that engage in
additional modeling complexity by assuming fade rates rarely gain useful insights about
revisions in cash flows.

11

Competitive Advantage Period (CAP)

4 October 2001

CAP and the Investment Process

We can now specify more directly how CAP plays into the investment decision process.
Investors must first acknowledge that stock price changes largely reflect revisions in
expectations. But before anticipating an expectation revision, an investor must clearly
understand the expectations implied by the current stock price.
As the markets perception of a companys competitive position is central in dictating
CAP, investors have not only have a way to gauge perceived competitive strength but
also get a much clearer understanding of the value-creating cash flows necessary to
justify the current price (or a different one). So an appreciation of CAP is a necessary,
but not sufficient, part of the investment process.

12

Competitive Advantage Period (CAP)

4 October 2001

CAP and Innovation

We believe that rate of innovation in the business world is both rapid and accelerating.
Further, multiple models of innovation suggest it will continue its torrid pace for the
foreseeable future (Mauboussin and Schay, 2000). Does the accelerating of innovation
mean anything for CAP? We think so.
Historically, businesses have generated relatively moderate economic returns but were
able to do it for a long time. Said differently, the magnitude of annual value creation was
not large, but these companies could sustain value creation for a long time (long CAPs).
More-and-more, innovation assures that the pattern is of very high excess returns but
for shorter periods of time (short CAPs). See Exhibit 6.

Excess Returns

Excess Returns

Exhibit 6: Innovation and CAP

High Excess Returns

Short CAPs

Low Excess Returns

Long CAPs

Time

Time

Take as an example the contrast between Coca-Cola and Microsoft. As we write this in
early September 2001, these companies have the exact same price/earnings (P/E)
multiple28.3Xbased on First Call consensus earnings per share for calendar 2002.
Yet Microsofts returns on capital exceed Coca-Colas, its expected growth rate is more
rapid, and market share in its core market is higher. What we can say, however, is that if
Microsoft is to be successful over the next twenty years, it will likely be with products
and services that are very different than todays offerings. Said differently, Microsoft will
have to innovate heavily to sustain its position. This is one of the characteristics of a
short-CAP business.
In contrast, we can be reasonably assured that Coca-Colas basic business model will
be recognizable twenty years hence. While globalization and technology will certainly
touch the company, its market position will likely remain strong. This is a prime
characteristic of a long-CAP business.
That the P/Es Microsoft and Coca-Cola are identical notwithstanding very different
CAPs underscores just one of the crippling shortcomings of P/E multiple analysis.
Investors must go beyond the multiple to understand the composition of value creation.
Thoughtful investors that do so invariably run into the concept of CAP.
We now turn to what is perhaps the most challenging dimension of implementing CAP:
real option value. Uncertainty often accompanies innovation. And uncertainty is
potentially very valuable for companies that can capture it in the form of option value.

13

Competitive Advantage Period (CAP)

4 October 2001

Innovation-heavy companies are often options-laden companies, and disaggregating

the CAP of the base business and the real option value in a challenge. Rappaport and
Mauboussin offer a concrete process to evaluate option value in the investment decision
process.
The investors first task is to judge whether or not there is potential real options value.
The earmarks of potential real options value include astute management, product
market leadership, and inherent industry uncertainty.
The investors second task is to determine whether or not there is imputed real options
value, the difference between the current stock price and the consensus-driven
discounted-cash flow value of the existing businesses. Measuring market-imputed real
options value is a straightforward extension of the expectations investing approach.
Basically, investors estimate the embedded expectations for the existing business with
one significant alteration: instead of solving for CAP, the investor must assume a CAP.
Heres why. Solving for the market-implied CAP uses the stock price (which may include
real option value) to read expectations that reflect only the existing businesses.
Therefore, the market-implied CAP will always overstate the correct CAP for an
options-laden companyand sometimes by a significant number of years.
Lets recast this discussion in the context of our Coca-Cola and Microsoft P/E multiple
comparison. The combination of Microsofts high return, short CAP existing business
plus its real option value (it fits the potential description to a tee) equate to a 28.3X P/E.
Coca-Colas relatively lower return, long CAP business support a 28.3X P/E with little or
no option value.
The bottom line message is that investors that buy Microsoft versus those that buy
Coca-Cola are making very different bets, in spite of the similarity that the P/E suggests.

14

Competitive Advantage Period (CAP)

4 October 2001

Rolling CAPs
Heres our final point. If the CAP for a value-creating company remains constant over
time, an investor can expect to generate excess returns (provided that expectations for
the other value drivers are unchanged). Note that while a constant CAP counters
economic theory, certain companies have been able to achieve it as the result of
outstanding management. To illustrate this point, refer to Exhibit 7. Imagine going from
year 0 to year 1. As the length of CAP is unchanged, we add a year of expected value
creation, and lop off the past year of value creation. As the investor purchased the
shares expecting above-cost-of-capital returns for the implied period, the additional year
represents a bonus, or excess returns.
It appears that this principle lies at the heart of Warren Buffetts investment process.
Buffett buys businesses with high returns on capital that have deep and wide moats and
holds them forever, hoping that CAPs stay constant. Although this technique seems
fairly straightforward, finding businesses with enduring CAPs is not simple (Shapiro,
1991). This approach is especially difficult in a work of heightened innovation and
shrinking CAPs.

Excess Returns

Exhibit 7: Rolling CAPs are Tantamount to Positive Revision

shaded area = value creation

15

Time

 

Competitive Advantage Period (CAP)

4 October 2001

Conclusion
The notion of competitive advantage period is theoretically, empirically and practically
important to the investment process. Yet it remains a relatively obscure part of the dayto-day discussion of valuation. We believe that CAP represents a vital link between
strategy and finance, and that the misuse of explicit forecast periods can lead to
potentially misguided decisions.

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Competitive Advantage Period (CAP)

4 October 2001

References
Besanko, David, David Dranove and Mark Shanley, Economics of Strategy (New York:
John Wiley & Sons, 2000).
Copeland, Tom, Tim Koller and Jack Murrin, Valuation: Measuring and Managing the
Value of Companies 3rd Ed. (New York: John Wiley & Sons, 2000).
Fruhan, William E. Jr., Financial Strategy (Homewood, Il.: Richard D. Irwin, Inc., 1979).
Ghemawat, Pankaj, Commitment: The Dynamic of Strategy (New York: Free Press,
1991).
Gray, Gary, Patrick J. Cusatis and J. Randall Woolridge, Valuing a Stock (New York:
McGraw-Hill, 1999).
Leibowitz, Martin L., and Stanley Kogelman, Franchise Value and the Price/Earnings
Ratio The Research Foundation of the Association for Investment
Management and Research, 1994.
Madden, Bartley J., CFROI Valuation (Oxford: Butterworth-Heinemann, 1999).
Mauboussin, Michael J., and Paul Johnson, Competitive Advantage Period CAP: The
Neglected Value Driver Credit Suisse First Boston Equity Research, January
14, 1997.
Mauboussin, Michael J., and Alexander Schay, Innovation and Markets Credit Suisse
First Boston Equity Research, December 10, 2000.
Miller, Merton H., and Franco Modigliani, Dividend Policy, Growth, and the Valuation of
Shares The Journal of Business, 34 (October 1961).
Palepu, Krishna G., Paul M. Healy and Victor L. Bernard, Business Analysis & Valuation
(Cincinnati: South-Western College Publishing, 2000).
Rappaport, Alfred, Creating Shareholder Value: The New Standard for Business
Performance (New York: Free Press, 1986).
Rappaport, Alfred, and Michael J. Mauboussin, Expectations Investing: Reading Stock
Prices for Better Returns (Boston: Harvard Business School Press, 2001).
Shapiro, Alan, Corporate Strategy and the Capital Budgeting Decision The New
Corporate Finance: Where Theory Meets Practice, Donald H. Chew, Jr., Ed,
(New York: McGraw Hill, 1993), pp. 75-89.

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Competitive Advantage Period (CAP)

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Books that Reference CAP

Black, Andrew, Philip Wright and John E. Bachman, In Search of Shareholder Value:
Managing the Drivers of Performance (London: FT Pitman Publishing, 1998).
Mills, Roger W., The Dynamics of Shareholder Value: The Principles and Practice of
Strategic Value Analysis (Lechlade: Mars Business Associates, Ltd., 1998).
Moore, Geoffrey A., Paul Johnson and Tom Kippola, Gorilla Game: An Investors Guide
to Picking Winners in High Technology (New York: HarperBusiness, 1998).
Moore, Geoffrey A., Living on the Fault Line: Managing for Shareholder Value in the
Age of the Internet (New York: HarperBusiness, 2000).
Young, S. David and Stephen F. OByrne, EVA and Value-Based Management (New
York: McGraw-Hill, 2000).

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Competitive Advantage Period (CAP)

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________________________
1

To be more technically correct, CAP is a proxy for how long the market expects a company to
generate excess returns.
2
M&M explain value this way The current value of the firm is given by the value of the earning
power of the currently held assets plus the market value of the special earning opportunity
multiplied by the number of years for which it is expected to last. (Emphasis added.)
3
As Bill Gates notes: I think the multiples of technology stocks should be quite a bit lower than
multiples of stocks like Coke and Gilette, because we are subject to complete changes in the
rules. I know very well that in the next ten years, if Microsoft is still a leader, we will have had to
weather at least three crises. From Brent Schlender, The Bill and Warren Show, Fortune, July
20, 1998.
N.B.: CREDIT SUISSE FIRST BOSTON CORPORATION may have, within the last three years, served as a manager or co-manager
of a public offering of securities for or makes a primary market in issues of any or all of the companies mentioned.
Closing price is as of October 3, 2001.
Microsoft Corporation (MSFT, $ 53.05, Buy)
Coca-Cola, (KO, $46.17, Hold)

19

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KUALA LUMPUR........ 603 2143 0366

LONDON .................. 44 20 7888 8888
MADRID .................... 34 91 423 16 00
MELBOURNE............. 61 3 9280 1888
MEXICO CITY ............. 52 5 283 89 00
MILAN ............................ 39 02 7702 1
MOSCOW................... 7 501 967 8200
MUMBAI ..................... 91 22 230 6333
NEW YORK ................ 1 212 325 2000
PALO ALTO ............... 1 650 614 5000
PARIS....................... 33 1 53 75 85 00
PASADENA................ 1 626 395 5100
PHILADELPHIA ......... 1 215 851 1000
PRAGUE .................. 420 2 210 83111

SAN FRANCISCO.......1 415 836 7600

SO PAULO .............55 11 3841 6000
SEOUL ........................82 2 3707 3700
SHANGHAI................86 21 6881 8418
SINGAPORE ....................65 212 2000
SYDNEY......................61 2 8205 4433
TAIPEI .......................886 2 2715 6388
TOKYO........................81 3 5404 9000
TORONTO...................1 416 352 4500
WARSAW....................48 22 695 0050
WASHINGTON............1 202 354 2600
WELLINGTON...............64 4 474 4400
ZURICH ........................41 1 333 55 55

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