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Internal Analysis

Competitive Advantage
A firm has Competitive Advantage if its
profitability is greater than the average
profitability of all the firms in the industry
If it is able to maintain for longer period then
it is called Sustainable Competitive Advantage
Given the external environment, a firm has to
find out what internal resources will give
Sustainable Competitive Advantage

External Environment
What the Firm Might Do

Sustainable
Competitive
Advantage
Internal Environment
What the Firm Can Do

Creating Value
By exploiting their competencies firms create
value.
Value is measured by:
Product performance characteristics
Product attributes for which customers are willing to
pay

Firms create value by innovatively bundling and


leveraging their resources and capabilities.
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Competitive Advantage, Value


Creation, and Profitability

How profitable a company becomes


depends on three basic factors:

1. VALUE or UTILITY the customer gets from owning


the product
2. PRICE that a company charges for its products
3. COSTS of creating those products
Consumer surplus is the excess utility a
consumer captures beyond the price paid.
Basic Principle: the more utility that consumers
get from a companys products or services, the
more pricing options the company has.

Value Creation per Unit

SWOT Analysis
an analysis of an organizations strengths and
weaknesses alongside the opportunities and
threats present in the external environment

Limitations of SWOT Analysis


Strengths may not lead to an advantage
SWOT does not prioritize factors
SWOTs focus on the external environment is
too narrow
SWOT gives a one-shot view of a moving
target

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Resource-Based View (RBV)


RBV is a method of analyzing and identifying a
firms strategic advantages based on examining its
distinct combination of assets, skills, capabilities,
and intangibles
The RBVs underlying premise is that firms differ
in fundamental ways because each firm possesses
a unique bundle of resources
Each firm develops competencies from these
resources, and these become the source of the
firms competitive advantages

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Three Basic Resources


1. Tangible assets are the easiest resources to identify
and/or quantify - are often found on a firms balance
sheet
2. Intangible assets are resources such as brand
names, company reputation, organizational morale,
technical knowledge, patents and trademarks
3. Organizational capabilities are not specific inputs.
They are the skills that a company uses to transform
inputs into outputs

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When will the organizations resources will


provide sustainable competitive advantage?

The VRIO Framework


If a firm has resources that are:
valuable,
rare, and
costly to imitate, and
the firm is organized to exploit these resources,

then the firm can expect to enjoy a sustained


competitive advantage.

The VRIO Framework


Applying the Tool
a resource or bundle of resources is subjected to
each question (VRIO) to determine the competitive
and economic implications of the resource
each question is considered in a competitive
context
may also be applied to strategic initiatives
(new products, new markets, new strategy, etc.)

Applying the VRIO Framework


The Question of Value
in theory: Does the resource enable the firm
to exploit an external opportunity or neutralize
an external threat?
the practice: Does the resource result in an
increase in revenues (change demand curve),
a decrease in costs (change cost curve), or
some combination of the two?

Applying the VRIO Framework


The Question of Rarity
if a resource is not rare, then perfect competition
dynamics are likely to be observed (i.e., no
competitive advantage, no above normal profits)
a resource must be rare enough that perfect
competition has not set in
thus, there may be other firms that possess the
resource, but still few enough that there is scarcity

Applying the VRIO Framework


The Question of Imitability
if there are high costs of imitation, then the firm
may enjoy a period of sustained competitive
advantage
a sustained competitive advantage will last
only until a duplicate emerges
if a firm has a competitive advantage, others
will attempt to imitate it

Applying the VRIO Framework


The Question of Imitability
Costs of Imitation
Unique Historical Conditions
first mover advantages
path dependence

Applying the VRIO Framework


The Question of Imitability
Costs of Imitation
Causal Ambiguity
causal links between resources and
competitive advantage may not be
understood
bundles of resources fog these causal
links

Applying the VRIO Framework


The Question of Imitability
Costs of Imitation
Social Complexity
the social relationships entailed in
resources may be so complex that
managers cannot really manage them
nor replicate them

Applying the VRIO Framework


The Question of Imitability
Costs of Imitation
Patents
patents may be a two-edged sword
offer a period of protection if the firm is
able to defend its patent rights
required disclosure may actually decrease
the cost of imitation, and the timing

Applying the VRIO Framework


The Question of Organization
a firms structure and control mechanisms
must be aligned so as to give people ability
and incentive to exploit the firms resources
examples: formal and informal reporting structures,
management controls, compensation policies,
relationships, etc.
these structure and control mechanisms complement
other firm resourcestaken together, they can help a
firm achieve sustained competitive advantage

When Resources Provide Competitive


Advantage?
Irrelevant
Source of
Competitive Parity

No

Add-Value?

No
Yes

Rare?

Source of Temporary
Competitive Advantage
No

Yes

Hard to
Imitate?

Yes
Source of Sustained
Competitive Advantage

Variations to VIRO
There must be no strategically equivalent
valuable resources that are themselves not rare
or inimitable
Substitutability may take at least two forms
Competitor may be able to substitute a similar resource
that enables it to develop and implement the same
strategy
Very different firm resources can become strategic
substitutes

Core Competence
Set of integrated and harmonized resources
and capabilities that serve as a source of
competitive advantage over rivals.
Core competencies distinguish a company
competitively and make it distinctive
McKinsey recommends using three to four
competencies when framing strategic actions

Core Competencies
Competencies typically combine multiple
kinds of Resources/Capabilities.
Several core competencies may underlie a
business unit.
Several business units may draw from same
competency

Risks of ignoring core competencies


Opportunities for growth will be needlessly turned down.
May desensitize a company to its growing dependence on
outside suppliers of core products.
A company that fails to understand the core competence basis
for competition in its industry may be surprised by new entrants
who rely on competencies developed in other end markets.
May unwittingly relinquish valuable skills when they divest an
under-performing business
A company focused only on end products may fail to invest
adequately in new core competencies that can propel growth in
the future.
As a company divides and fractures into smaller business units,
competencies may become fragmented and weakened

Beware the risk of Core Rigidities


Competencies can lead to Rigidities
Over commitment to a core competency can
lead to rigidity
Incentives and culture may reward current
competencies while thwarting development of
new competencies.
Technological change can cause strengths due
to prior coherence to become weaknesses

Value Chain Analysis


Value Chain analysis was first suggested by
Michael Porter (1995) as a way of
presenting the construction of value as
related to end customer.

Value Chain
The term value chain describes a way of looking
at a business as a chain of activities that
transform inputs into outputs that customers
value

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Value Chain Analysis (VCA)


Value chain analysis (VCA) attempts to
understand how a business creates customer
value by examining the contributions of
different activities within the business to that
value
It also helps us to understand on how to
improve the value by
- Performing these activities better (or)
- At a lower cost than the competitors

VCA takes a process point of view

Value Chain Analysis


The value chain identifies the separate activities and
business processes performed to design, produce,
market, deliver, and support a product/service and
how well they create customer value.
Consists of two types of activities
Primary activities
Support activities

Primary Activities
Contribute to the physical creation of the
product or service, its sale and transfer to the
buyer, and its service after the sale.
inbound logistics, operations, outbound
logistics, marketing and sales, and service

Support Activities
Activities of the value chain that add value
through important relationships with both
primary activities and other support activities
procurement, technology development,
human resource management, and general
administration.

SUPPORT

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
MARGIN

ACTIVITIES

TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND
LOGISTICS

OPERATIONS

OUTBOUND
LOGISTICS

MARKET-ING

SERVICE

& SALES
MARGIN

PRIMARY ACTIVITIES

THE GENERIC VALUE CHAIN

Primary Activities
Inbound logistics
Activities used to transport, receive, store, and disseminate
inputs to a product (materials handling, warehousing,
inventory control, etc.)

Operations
Activities necessary to convert the inputs provided by
inbound logistics into final product form (machining,
packaging, assembly, etc.)

Outbound logistics
Activities involved with collecting, storing, and physically
distributing the product to customers (finished goods
warehousing, order processing, etc.)

Primary Activities (contd)


Marketing and sales
Activities completed to provide means through
which customers can purchase products and to
induce them to do so (advertising, promotion,
distribution channels, etc.)

Service
Activities designed to enhance or maintain a
products value (repair, training, adjustment,
etc.)

Support Activities
Procurement
Activities completed to purchase the inputs needed to produce a firms
products

Technological Development
Activities completed to improve a firms product and the processes used
to manufacture it (process equipment, basic research, product design, etc)

Human Resource Management


Activities involved with recruiting, hiring, training, developing, and
compensating all personnel

Firm infrastructure

Activities that support the work of the entire value chain (general
management, planning, finance, accounting, legal, government relations,
etc.)

Conducting a VCA
1. Identify activities
2. Allocate costs- using activity based costing
3. Analyze the activities

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Activity Based Costing in VCA


Activity-Based VCA approach would provide a
more meaningful analysis of the procurement
functions costs and consequent value added
than the traditional cost accounting approach
Existing financial management and accounting
systems in many firms are not set up to easily
provide activity-based cost breakdowns

Analyzing Activities
Each activity should be examined relative to
competitors abilities and rated as superior,
equivalent or inferior
Focus on activities that differentiates the
company from other competitors - Lower cost or
unique value
Keep in mind- the Industry, Position of firm in
industry value chain and objective of the firm
Identify the activities where the firms
competitive strength is high as well as low

Assessing Organizations Competitive


Strength
What does a high competitive strength rating relative to
rivals mean?
Strong competitive position & possession of competitive
advantages
Opportunity for company to improve its long-term market
position

Good strategy entails


Looking for opportunities to leverage company strengths into
competitive advantage
Using company strengths to attack the competitive
weaknesses of rivals

Why Do a Competitive Strength


Assessment?
Reveals strength of firms competitive position
Shows how firm stacks up against rivals, measureby-measure -- pinpoints the companys competitive
strengths and competitive weaknesses
Indicates whether firm is at a competitive advantage
/ disadvantage against each rival
Identifies possible offensive attacks (pit company
strengths against rivals weaknesses)
Identifies possible defensive actions (a need to
correct competitive weaknesses)

Limitations of VCA
Why does the successful firm not buy the
unsuccessful and teach it how to minimise costs or
additional features?
Why does the successful firm not sell its expertise
in cost reducing to less successful firms?
Why does the unsuccessful firm not bid for the
executive(s) in charge of cost drivers from the
successful firm?
They do happen but not always why not always?