Stability of ROIC

What determines an organization’s value?
Value = (Price – Cost) / Invested Capital

Edward Mason’s Structure-Conduct-Performance model (which is based on Michael Porter’s frameworks) suggests that an organization’s created value is dependent on the structure of the industry and the conduct of organizations within that industry.

Structure is defined by Michael Porter’s well-known “5 forces” framework, while conduct reflects the interdependent decisions of competitors.

Studies (see diagram) confirm that ROIC is stable across industries. As shown, industry structure and existing business models within them (cyclical nature, operational leverage, capital intensity, etc.) define the parameters within which an organization can create value.

Studies also confirm the existence of high-profit organizations in low-profit industries and vice versa…

Source:

Value: The Four Cornerstones of Corporate Finance
by McKinsey & Company Inc.,Tim Koller, Richard Dobbs, Bill Huyett