3 Internal Analysis Distinctive Competencies Competitive Advantage and

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

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) Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 3

Profitability in the U. S. Retailing Industry, 1996 -2001 Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 7

Strategy, Resources, Capabilities, and Competencies Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 10

Value Creation per Unit Copyright © Houghton Mifflin Company. All rights reserved. 11

Value Creation and Pricing Options Copyright © Houghton Mifflin Company. All rights reserved. 12

Comparing Toyota and General Motors Copyright © Houghton Mifflin Company. All rights reserved. 13

Differentiation and Cost Structure: Roots of Competitive Advantage Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 15

The Value Chain: Primary and Support Activities Copyright © Houghton Mifflin Company. All rights reserved. 16

The Generic Building Blocks of Competitive Advantage Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 20

A Quality Map for Automobiles Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved. 24

Analyzing Competitive Advantage and Profitability • Benchmarking company performance against that of competitors and the company’s own historic performance • Return on invested capital • Net profit = Total revenues – Total costs Copyright © Houghton Mifflin Company. All rights reserved. 25

Definitions of Basic Accounting Terms Copyright © Houghton Mifflin Company. All rights reserved. 26

Drivers of Profitability (ROIC) Copyright © Houghton Mifflin Company. All rights reserved. 27

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 Copyright © Houghton Mifflin Company. All rights reserved. 28

The Durability of Competitive Advantage • Barriers to Imitation – Imitating Resources – Imitating Capabilities • Capability of Competitors – Strategic commitment – Absorptive capacity • Industry Dynamism Copyright © Houghton Mifflin Company. All rights reserved. 29

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 Copyright © Houghton Mifflin Company. All rights reserved. 30

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 Copyright © Houghton Mifflin Company. All rights reserved. 31