Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

1. 3 Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability BA 469 Spring Term, 2007 Prof. Dowling

2. Internal Analysis • Identifying the strengths and weaknesses of the company • Managers must understand • The role of resources, capabilities, and distinctive competencies in the process by which companies create value and profit • The importance of superior efficiency, innovation, quality, and responsiveness to customers • The sources of their company’s competitive advantage (strengths and weaknesses)

3. Competitive Advantage • Competitive advantage • A firm’s profitability is greater than the average profitability for all firms in its industry • Sustained competitive advantage • A firm maintains competitive advantage for a number of years

4. Profitability in the U.S. Retailing Industry, 1996-2001

5. Distinctive Competences and Competitive Advantage • Distinctive competencies • Firm-specific strengths that allow a company to gain competitive advantage by differentiating its products and/or achieving lower costs than its rivals • Arise from resources and capabilities

6. The Role of Resources • Resources • Capital or financial, physical, social or human, technological, and organizational factor endowments • Tangible and intangible • A firm-specific and difficult to imitate resource is likely to lead to distinctive competency • A valuable resource that creates strong demand for a firm’s products may lead to distinctive competency

7. The Role of Capabilities • Capabilities • A company’s skills at coordinating and using its resources • Capabilities are the product of organizational structure, processes, and control systems

8. Strategy, Resources, Capabilities, and Competencies

9. A Critical Distinction • If a firm has firm-specific and valuable resources it must also have the capability to use them effectively to create distinctive competency • A firm can create distinctive competency without firm-specific and valuable resources if it has unique capabilities

10. Competitive Advantage, Value Creation, and Profitability • Profitability factors • Amount of value customers place on the company’s products • Price charged • Costs of creating the value

11. Value Creation per Unit

12. Value Creation and Pricing Options

13. Comparing Toyota and General Motors

14. Differentiation and Cost Structure: Roots of Competitive Advantage

15. The Value Chain • A company is a chain of activities for transforming inputs into outputs that customers value • The transformation process is composed of primary and support activities that add value to the product

16. The Value Chain: Primary and Support Activities

17. The Generic Building Blocks of Competitive Advantage

18. Efficiency • The quantity of inputs it takes to produce a given output • Productivity leads to greater efficiency and lower costs • Employee productivity • Capital productivity

19. Quality • Superior quality = customer perception of greater value in a specific product’s attributes • Form, features, performance, durability, reliability, style, design • Quality products = goods and services that are reliable and that are differentiated by attributes that customers perceive to have higher value

20. Quality (cont’d) • The impact of quality on competitive advantage • High-quality products increase the value of (differentiate) the products in customers’ eyes • Greater efficiency and lower unit costs are associated with reliable products

21. A Quality Map for Automobiles

22. Innovation • The act of creating new products or processes • Product innovation • Creates products that customers perceive as more valuable, increasing the company’s pricing options • Process innovation • Creates value by lowering production costs • Perhaps the most important building block of competitive advantage

23. Responsiveness to Customers • Doing a better job than competitors of identifying and satisfying customers’ needs • Superior quality and innovation are integral to superior responsiveness to customers • Customizing goods and services to the unique demands of individual customers or customer groups

24. Responsiveness to Customers (cont’d) • Sources of enhanced customer responsiveness • Customer response time, design, service, after-sales service and support • Differentiates a company/its products; leads to brand loyalty and premium pricing

25. The Durability of Competitive Advantage • Barriers to Imitation • Imitating Resources • Imitating Capabilities • Capability of Competitors • Strategic commitment • Absorptive capacity • Industry Dynamism

26. Why Companies Fail • Inertia • Companies find it difficult to change their strategies and structures • Prior strategic commitments • Limit a company’s ability to imitate and cause competitive disadvantage • The Icarus paradox • A company can become so specialized based on past success that it loses sight of market realities • Craftsmen, builders, pioneers, salesmen

27. Avoiding Failure and Sustaining Competitive Advantage • Focus on the building blocks of competitive advantage • Institute continuous improvement in learning • Track best industrial practice in use benchmarking • Overcome inertia • Luck