128  Return on Invested Capital
Webvan was an online grocery-delivery business based in California. In 
contrast to eBay, it had a capital-intensive business model involving substan-
tial warehouses, trucks, and inventory. In addition, Webvan was competing 
with local grocery stores in selling products at very thin margins. The com-
plexity and costs of making physical deliveries to customers within precise 
time frames more than offset Webvan’s savings from not having physical 
stores. Finally, Webvan’s business did not enjoy increasing returns to scale; as 
demand increased, it needed more food pickers, trucks, and drivers to serve 
customers.
From the outset, it was clear that eBay’s business model had a sound and 
sustainable competitive advantage that permitted high returns. Webvan had 
no such advantage over its grocery store competitors. Whereas eBay’s strategy 
was primed for success, Webvan’s foreshadowed doom. In general, success 
in the online grocery business has since proven to be far more elusive than in 
other forms of online retail. For example, Amazon Fresh has faced challenges 
expanding beyond the most densely populated metropolitan areas. Amazon’s 
2017 acquisition of Whole Foods was one signal that in grocery, competition 
from traditional stores is hard to overcome.
The importance of ROIC is universal: it applies to companies as well as to 
businesses within companies. For example, within its retail business model, 
Amazon creates substantial revenues from third-party sellers using its online 
platform. Platform sales by third parties generate increasing returns to scale, 
more so than Amazon’s direct sales. Platform sales require little invested capi-
tal, and Amazon’s marginal cost of additional transactions is minimal. As a 
result, platform sales have become an important driver of Amazon’s overall 
value creation.
This chapter explores how rates of return on invested capital depend on 
competitive advantage. We examine how strategy drives competitive advan-
tage, which when properly fitted to industry structure and competitive be-
havior can produce and sustain a superior ROIC. This explains why some 
companies earn only a 10 percent ROIC while others earn 50 percent. The final 
part of the chapter presents 55 years of ROIC data by industry over time. This 
analysis shows how ROIC varies by industry and how rates of ROIC fluctuate 
or remain stable over time.
What Drives ROIC?
To understand how strategy, competitive advantage, and return on invested 
capital are linked, consider the following representation of ROIC:
ROIC
TaxRate PriceperUnit
Cost perUnit
InvestedCapitalper
=
−
−
(
)
1
Unit