3 Chapter 3 Internal Analysis Distinctive Competencies Competitive
- Slides: 27
3 Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability BA 469 Spring Term, 2007 Prof. Dowling
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) 2
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 3
Profitability in the U. S. Retailing Industry, 1996 -2001 4
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 5
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 6
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 7
Strategy, Resources, Capabilities, and Competencies 8
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 9
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 10
Value Creation per Unit 11
Value Creation and Pricing Options 12
Comparing Toyota and General Motors 13
Differentiation and Cost Structure: Roots of Competitive Advantage 14
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 15
The Value Chain: Primary and Support Activities 16
The Generic Building Blocks of Competitive Advantage 17
Efficiency • The quantity of inputs it takes to produce a given output • Productivity leads to greater efficiency and lower costs – Employee productivity – Capital productivity 18
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 19
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 20
A Quality Map for Automobiles 21
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 22
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 23
Responsiveness to Customers (cont’d) • Sources of enhanced customer responsiveness – Customer response time, design, service, aftersales service and support • Differentiates a company/its products; leads to brand loyalty and premium pricing 24
The Durability of Competitive Advantage • Barriers to Imitation – Imitating Resources – Imitating Capabilities • Capability of Competitors – Strategic commitment – Absorptive capacity • Industry Dynamism 25
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 26
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 27
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