Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

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

2. Internal Analysis: Identifying Strengths and Weaknesses 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. 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 unique application of resources and acquisition of capabilities

4. 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

5. 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 • We must add people, particularly leadership in building the structure, etc.

6. Strategy, Resources, Capabilities, and Competencies

7. 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

8. 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

9. Value Creation per Unit

10. Value Creation and Pricing Options

11. Comparing Toyota and General Motors

12. Differentiation and Cost Structure: Roots of Competitive Advantage

13. 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

14. The Value Chain: Primary and Support Activities

15. The Generic Building Blocks of Competitive Advantage

16. Exercise • Strategy in Action 3.2: Southwest Airlines • What portions of the value chain does Southwest Airlines work on to create value for its customers? • Why these portions rather than the more significant costs like fuel?

17. Drivers of Profitability (ROIC)

18. Ways to Increase ROIC • Increase the company’s return on sales • Reduce cost of goods sold • Reduce spending on sales force, marketing, general, and administrative expenses • Reduce R&D spending • Increase sales revenue more than costs • Increase sales revenues from invested capital • Reduce the amount of working capital • Reduce amount of fixed capital

19. 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