INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES, SUSTAINABLE COMPETIVE ADVANTAGES & PROFITABILITY

1. INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES, SUSTAINABLE COMPETIVE ADVANTAGES & PROFITABILITY Bus 189, Feb 10-12, 2014 CHAPTER 3, HILL & JONES DR. MARK FRUIN

2. PORTER VS. RESOURCE BASED VIEW OF THE FIRM • EXTERNAL ANALYSIS = INDUSTRY ANALYSIS • 5 FORCES MODEL = DESCRIBES, DOES NOT ANALYZE, INDUSTRY “DYNAMICS” • SUPERIOR INDUSTRY POSITION => COMPETITIVE SUCCESS • GENERIC COMPETITIVE STRATEGIES SUCCESS BASED ON INDUSTRY STRUCTURE & POSITION • INTERNAL ANALYSIS = ORG ANALYSIS FROM RESOURCE BASED POINT (RBV) OF VIEW • FIRM AS A COLLECTION OF RESOURCES • FIRM THAT BEST COMBINES, MOBILIZES & MANAGES RESOURCES WINS • RBV = R-C-C-DC (LONG TERM ORG PROCESS & CHANGE)

3. DISTINCTIVE COMPETENCIES • INVOLVE MANAGERIAL CHOICE & DISCRETION • NO RISK, NO REWARD • EXECUTION (CARRY THROUGH) IS ALL IMPORTANT • INVOLVE CREATING SUPERIOR ORG PROCESSES • WHICH TAKE RESOURCES, TIME & EFFORT • WHICH RARELY OCCUR RIGHT AWAY & EASILY • WHICH INVOLVE AN INFINITE NUMBER OF FEEDBACK LOOPS, MORE CHOICES AND CONTINUOUS DISCRETION • NECESSARILY INVOLVE A MAJORITY OF ORG MEMBERS • STRATEGIC INTENT • STRETCH GOALS

4. RESOURCES • TANGIBLE • INTANGIBLE • CREATE LITTLE VALUE UNLESS THEY ARE USED, SO USE RESOURCES • USING THEM, CONVERTS THEM INTO CAPABILITIES • CAPABILITIES ARE PRODUCTS OF FIRM STRUCTURE, PROCESSES & CONTROL SYSTEMS OR SO THE BOOK SAYS; ACTUALLY, IT’S THE REVERSE • THAT IS, DEDICATED RESOURCES (CAPABILITIES) CREATE STRUCTURES, PROCESSES & SYSTEMS • CAPABILITIES RESIDE NOT IN INDIVIDUALS, BUT ARE EMBODIED IN ORGANIZATIONS

5. WHAT MAKES RESOURCES VALUABLE? • BOOKS SAYS, “RESOURCES ARE VALUABLE WHEN THEY ARE FIRM-SPECIFIC AND DIFFICULT TO IMITATE” • CONFUSING BECAUSE RESOURCES HAVE LITTLE VALUE ON THEIR OWN • WHEN RESOURCES ARE CONVERTED TO CAPABILITIES AND USED EFFECTIVELY = VALUE IS CREATED • OLYMPIC RING MODEL OF RESOURCE VALUE = SCARCITY, DEMAND, APPROPRIABILITY, NON- SUBSTITUTABILITY AND “ADHESABILITY”/ “ENABLING-ABILITY”

6. GOOD NEWS & BAD NEWS • THE GOOD NEWS IS THAT RESOURCES BECOME VALUABLE TO THE EXTENT THEY ARE SPECIALIZED & DEDICATED • ASSET SPECIFICITY (GOOD ECONOMIST WORD) • THE BAD NEWS IS THAT RESOURCES ARE VALUABLE TO THE EXTENT THAT THEY ARE SPECIALIZED & DEDICATED • IF WRONG CHOICES MADE, HARD TO GO BACK • PATH DEPENDENCY; ESCALATING COMMITMENT • AS SOON AS YOU DRIVE OFF THE LOT, YOUR NEW CAR IS WORTH 20% LESS

7. DYNAMIC CAPABILITIES • AS BUSINESS ENVIRONMENT CHANGES, CAPABILITIES & COMPETENCIES HAVE TO CHANGE TOO, • WE DON’T WANT ANY OLD CAPABILITIES, BUT DYNAMIC CAPABILITIES • CAPABILITIES THAT CAN BE ADAPTED TO CHANGING CONDITIONS • FLEXIBILITY, ADAPTABILITY, RESILIENCY • BUT ORGANIZATIONAL INERTIA MAKES FLEXIBILITY/ ADAPTABILITY HARD TO REALIZE, ESPECIALLY IN LIGHT OF INDUSTRY LIFE CYCLE CHANGES & HARD CHARGING FAST FOLLOWERS/LATE COMERS

8. RBV AND VALUE CREATION PROFITABILITY BASED ON THREE FACTORS: -THE VALUE CUSTOMERS PLACE ON PRODUCT/SERVICE OFFERINGS -THE PRICE COMPANIES CHANGE FOR PRODUCTS -THE COSTS OF CREATING/MAKING/ DELIVERING THOSE PRODUCTS

9. CONSUMER SURPLUS • PRICE CHARGED IS TYPICALLY LESS THAN UTILITY VALUE TO CUSTOMERS • “EXTRA” UTILITY FROM CUSTOMER PT OF VIEW = CONSUMER SURPLUS • THE MORE UTILITY THAT CONSUMERS GET FROM FIRM OFFERINGS, THE MORE PRICING OPTIONS FIRM HAS

10. TOYOTA EXAMPLE • TOYOTA CREATES MORE UTILITY VALUE FOR CONSUMERS • FOUND IN HIGHER QUALITY, GREATER SATISFACTION & MORE INNOVATION • TOYOTA CAN CHARGE HIGHER PRICES THAN ITS RIVALS IN SPITE OF THE FACT THAT ITS COSTS ARE LOWER!! • FROM PORTER GENERIC COMPETITIVE STRATIES POINT OF VIEW, IS THIS COST LEADERSHIP OR DIFFERENTIATION?

11. GENERIC COMPETITIVE STRATEGIES • COST LEADERSHIP OR LOWER COST STRUCTURES GIVES FIRMS MORE PRICING OPTIONS • DIFFERENTIATION CREATES MORE UTILITY/VALUE AND ALLOWS MORE PRICING CHOICES

12. VALUE CHAIN • HOW ONE COMPANY’S INPUTS ARE CONVERTED INTO OUTPUTS • INTERCONNECTED CHAINS/SETS OF ACTIVITIES • FROM UPSTREAM TO DOWNSTREAM • PRIMARY VERSUS SECONDARY ACTIVITIES • R&D • PRODUCTION • MARKETING & SALES • CUSTOMER SERVICE

13. VALUE CHAIN II • SUPPORT ACTIVITIES (OFTEN SHOWN AS A SECONDARY VALUE CHAIN) • IN MANY CASES, IT’S HARD TO DISTINGUISH PRIMARY AND SECONDARY ACTIVITIES; OLD IDEA ASSOCIATED WITH MFG FIRMS • IN KNOWLEDGE BASED FIRMS, WHAT’S PRIMARY AND SECONDARY? • LOGISTICS • HUMAN RESOURCES • INFORMATION SYSTEMS • COMPANY INFRASTRUCTURE • ORG STRUCTURE • CONTROL SYSTEMS • COMPANY CULTURE

14. VALUE CHAIN III • WHAT BOOK DOESN’T SAY • LINKAGE & FEEDBACK BETWEEN STEPS IN VALUE CHAIN JUST AS IMPORTANT AS WHAT HAPPENS WITHIN STEPS • FIRST ORDER FIT • SECOND ORDER FIT • THIRD ORDER FIT • IN COMPLEX FIRMS, COMPLEX VALUE CHAINS • IN M-FORM FIRMS, FOR EXAMPLE, LITTLE DISTINCTION BETWN PRIMARY & SUPPORT ACTIVITIES; SAME FOR SERVICE INDUSTRIES

15. BUILDING BLOCKS OF COMPETITIVE ADVANTAGE • = FUNCTIONAL LEVEL STRATEGIES • DON’T BE CONFUSED; SEE CHAPTER 4, NEXT CHPT • EFFICIENCY = OUTPUT/INPUT • EFFICIENCY NOT JUST IN PRODUCTION, BUT IN R&D, HR, LOGISTICS, SALES, ETC. • QUALITY AS EXCELLENCE & RELIABILITY • THERE’S A DIFFERENCE! • SOURCES OF QUALITY AS COMPETITIVE ADVANTAGE = POSTWAR JAPAN & TQM • KAIZEN OR CONTINUOUS IMPROVEMENT

16. INNOVATION • PRODUCT INNOVATION • iPOD, INTEL PENTIUM CHIP • PROCESS INNOVATION • LEAN PRODUCTION OR TPS • WALMART’S IT-SYSTEM FOR INVENTORY CONTROL & LOGISTICS • INCREMENTAL INNOVATION • KAIZEN • KAIZEN X TIME = CONSIDERABLE, ACCUMULATED PROGRESS-->HARD TO REPLICATE COMPT. ADV. • TENDENCY TO OVERLOOK INCREMENTAL INNO IN FAVOR OF RADICAL & DISRUPTIVE INNOVATION • RADICAL INNOVATION • DISRUPTIVE (DISCONTINUOUS) INNOVATION

17. COMPETITIVE ADVANTAGE AND PROFITABILITY • LEARN & ANALYZE DUPONT FORMULA • SLIGHTLY DIFFERENT BETWEEN APPENDIX, CHPT 1 & HOW TO DO CASE ANALYSIS CHAPTER • WHERE ROIC = NOPLAN/IC (depreciation + adjusted taxes) • ROIC (RETURN ON INVESTED CAPITAL) DECOMPOSED INTO TWO MAJOR COMPONENTS: • RETURN ON SALES • (NET PROFIT/SALES) • COGS/SALES • SG&A/SALES • R&D/SALES • CAPITAL TURNOVER • (SALES/INVESTED CAPITAL) • WORKING CAPITAL/SALES • PPE/SALES

18. DURABILITY OF COMPETITIVE ADVANTAGE • OR SUSTAINABLE COMPETITIVE ADVANTAGE = DURABILITY or LONGEVITY • BARRIERS TO IMITATION • INDUSTRY DYNAMISM A BIG FACTOR • IMITATING/DUPLICATING RESOURCES IS HARD TO DO (RESOURCE ENDOWMENTS) • BEGIN WITH DIFFERENT RESOURCES • USE THEM IN DIFFERENT WAYS • DEVELOP THEM DIFFERENTLY • IMITATING CAPABILITIES IS EVEN HARDER TO DO • STRATEGIC COMMITMENTS (PATHWAYS) HARD TO IMITATE • A SEQUENCE OF CHOICES ALMOST IMPOSSIBLE TO IMITATE • ABILITY TO IMITATE MAY DEPEND ON ABSORPTIVE CAPACITY

19. WHY COMPANIES FAIL • INERTIA • PRIOR STRATEGIC COMMITMENTS • TOO COMMITED TO PRIOR INVESTMENTS/DECISIONS • TOO INVESTED TO PULL OUT • TOO MYOPIC • ICARUS PARADOX (DANNY MILLER) • CRAFTSMEN (TOO ENGINEERING FOCUSED) • BUILDERS (TOO ENAMORED OF BUILDING) • PIONEERS (TOO FIXED ON BEING CREATIVE) • SALESMEN (TOO FOCUSED ON SELLING)

20. STEPS TO AVOID FAILURE • FOCUS ON THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE (FUNCTIONAL LEVEL STRATEGIES) • INSTITUTE CONTINUOUS IMPROVEMENT AND LEARNING PRACTICES • TRACK INDUSTRY BEST PRACTICES & BENCH-MARKS (There may be a contradiction here; what is it?) • NOTION OF COMPETITIVE ADVANTAGES BASED ON DISTINCTIVE COMPETENCIES • UNUSUAL RESOURCES • UNUSUAL CAPABILTIES & COMPETENCIES • ESSENTIALLY, INIMITABLE; THUS, BEST PRACTICES MAY NOT BE REPLICABLE. NONETHELESS, BENCHMARKS R GOOD • OVERCOME INERTIA • BE LUCKY (RIGHT TIME, RIGHT PLACE)