Competitive advantage period: The neglected value driver

Although the notion of competitive advantage has been of unassailable importance in valuation, it is a subject that has not been explicitly addressed in finance textbooks in a way commensurate with its importance. Further, many analysts and strategic planners that adhere to a discounted-cash-flow framework reduce the model's validity by using explicit forecast periods that do not properly reflect competitive advantage. Competitive advantage period (CAP)-the number of years a company is expected to generate excess returns on incremental investments-is critical as it weds competitive advantage (strategy) to valuation (finance). We believe that CAP plays an important role in linking valuation theory and practice.