Internal Analysis:

Distinctive Competencies,
Competitive Advantage, And
Profitability
• “In preparing for battle I have always found
that plans are useless, but planning is
indispensable.”
– Dwight D. Eisenhower
(34th President of the United States from 1953 until
1961. He was a five-star general in the United States
Army during World War II and served as Supreme
Commander of the Allied Forces in Europe)
 Need for Internal Analysis
• Within a given industry, why some companies
do better than others

• Internal Analysis helps to explore the basis of

competitive advantage at the level of the
individual company
 Internal Analysis
“…pinpoints the strengths and weaknesses of the
organization. It includes assessments of:

• Firm’s resources & capabilities

• Distinctive competencies

• Building/sustaining a competitive advantage requires a

company to achieve superior performance in:
• Efficiency
• Quality
• Innovations
• Responsiveness to customers
 Strengths and Weaknesses
• “…gives managers the information to choose
the strategies and business model to attain a
sustained competitive advantage.

• Strengths: Assets that boost profitability

• Weaknesses: Liabilities that depress

profitability
 Competitive Advantage
Competitive Advantage- firm’s profitability is
greater than the average profitability for all
firms in its industry.

Sustained Competitive Advantage- firm

maintains above average and superior
profitability and profit growth over a number of
years.
 Distinctive Competencies

• “…firm-specific strengths that allow a company

to differentiate its products from those offered
by rivals, and/or achieve substantially lower
costs….”
 Resources
“…assets of a company.” - refer to the financial, physical,
human, technological, and organizational resources of the
company.

Tangible (physical entities)

Ex: land, buildings, equipment, inventory, & money

Intangible (nonphysical entities created by managers & other

employees)
Ex: brand names, company reputation, employee
knowledge & experience, intellectual property
 Resources …
• Resources that are firm specific and difficult to imitate
(barriers to imitation) are unique. Resources that
create a strong demand for the firm’s products are
valuable.

• Unique and valuable resources lead to a distinctive

competency.
 Capabilities
• “…a company’s skills at coordinating its resources
and putting them to productive use.”

– These skills reside in the way a company makes decisions

and manages its internal processes e.g. rules, routines,
and procedures.

– Capabilities are, by definition, intangible. They reside not

so much in individuals as in the way individuals interact,
cooperate, and make decisions within the context of an
organization.
Strategy, Resources, Capabilities, and
Competencies
 Competitive Advantage, Value
Creation, and Profitability
How profitable a company becomes depends on
three basic factors:
1. Value/utility customers place on products
2. Price company charges for products
 Consumer surplus = “excess” utility consumer captures
beyond price paid

3. Costs of creating product

Basic Principle
“More utility consumers get from company’s products or
services, the more pricing options company has.”
Value Creation per Unit
Value Creation and Pricing Options
 Value Creation and Pricing Options
• Under Option 1, a company can make the product more attractive,
raising costs (C) but also raising utility (U). Customers are then willing
to pay a higher price (P increases). (Product differentiation)

• Under Option 2, a company can lower its price (P), creating a higher
utility (U), more demand, and increased volume of sales. (Low cost)
– Economies of scale realized because of the increased volume

• Low cost and differentiation are two basic strategies for creating value
and attaining a competitive advantage in an industry.

• Competitive advantage (and higher profits) goes to those companies

that can create superior value

• To create superior value is to drive down the cost structure of the

business and/or differentiate the product in some way so that
consumers value it more and are prepared to pay a premium price.
 The Value Chain
• It is a sequence of interrelated activities for
transforming inputs into outputs that
customers value.

• The process consists of a number of primary

activities and support activities, each of which
can add value to the product
 The Value Chain Activities
Primary Activities
• R & D = design and production
• Production = creation of good/service
• Marketing = brand positioning & advertising
• Customer Service = after-sales service & support

Support Activities
• Materials Mgmt. = transmission of materials
• HR = ensures right mix of skilled people
• I. S. = managing, tracking
• Infrastructure = context in which all other
activities take place
 Building Blocks
of Competitive Advantage
• Efficiency – fewer inputs to produce given output
Efficiency = Outputs / Inputs

• Quality – customers perceive product’s attributes provide higher utility

in excellence & reliability

• Innovation (Successful innovation gives a company something unique

that its competitors lack )
• Product
• Process

• Customer Responsiveness – customers attribute more utility by

creating differentiation with competitive advantage
 More on customer responsiveness
• A company give its customers exactly what they want when they want
it. It involves doing everything possible to identify customer needs and
to satisfy those needs.

1. improve the efficiency of production processes and the quality of

products.

2. develop new products that have features currently not incorporated

in existing products.

3. customize goods and services to the unique demands of individual

customers.

4. reduce customer response time, or the amount of time it takes for a

good to be delivered or a service to be performed.
Building Blocks of Competitive
Advantage
Competitive Advantage
& Value Creation Cycle
 Analyzing Competitive
Advantage and Profitability
Competitive Advantage- Profitability greater than
average of all companies in same industry

Benchmarking- Comparing performance against

competitors & historic performance

Measures of Profitability: Return on Invested Capital;

Profit margin
Net Profit = Total Revenues – Total Costs
 Drivers of Profitability (ROIC)
SG&A- Selling, General & Administrative
PPE – property, plant & equipment
 Ways to Increase ROIC
• Increase Company’s Return on Sales
– Increase sales revenue more than costs
– Reduce cost of goods sold
– Reduce spending on SG&A
– Reduce R&D expenses

• Increase Capital Turnover

– Reduce the amount of working capital
– Reduce the amount of fixed capital
Durability of Competitive Advantage

1. Barriers to Imitation- difficulty to copy distinctive

competencies
• Resources – tangible and intangible
• Capabilities

2. Capability of Competitors
• Strategic commitment
• Absorptive capacity

3. Industry Dynamism- ability to change rapidly

Competitors also seeking distinctive competencies

that give them a competitive edge
 Why Companies Fail
• Inertia- difficult to adapt strategies & structures to
changing conditions
• Prior Strategic Commitments- limit ability to imitate &
cause competitive disadvantage
• Icarus Paradox- so specialized/inner-directed by past
success lose sight of market realities
• Rising/Falling industries:
• Craftsmen • Builders • Pioneers •Salespeople
• When company loses competitive advantage, profitability
falls below the industry.
– Loses ability to attract/generate resources.
– Profit margins invested capital shrink rapidly.
 Avoiding Failure:
Sustaining Competitive Advantage
1.Focus on Building Blocks
• Efficiency
• Quality
• Innovation
• Responsiveness to Customers

2.Institute Continuous Improvement & Learning

3.Track Best Practice/Use Benchmarking
4.Overcome Inertia