Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

Chapter 3

Internal Analysis: Identifying Strengths and Weaknesses

anagers m!st !nderstand
" #he role of reso!rces, capabilities, and distinctive competencies in the process by $hich companies create val!e and profit " #he importance of s!perior efficiency, innovation, %!ality, and responsiveness to c!stomers " #he so!rces of their company&s competitive advantage 'strengths and $eaknesses(

Distinctive Competences and Competitive Advantage

) Distinctive competencies
" *irm+specific strengths that allo$ a company to gain competitive advantage by differentiating its prod!cts and,or achieving lo$er costs than its rivals " Arise from !ni%!e application of reso!rces and ac%!isition of capabilities

#he -ole of -eso!rces

) -eso!rces
" Capital or financial, physical, social or h!man, technological, and organi.ational factor endo$ments ) #angible and intangible

) A firm+specific and diffic!lt to imitate reso!rce is likely to lead to distinctive competency ) A val!able reso!rce that creates strong demand for a firm&s prod!cts may lead to distinctive competency

#he -ole of Capabilities

) Capabilities
" A company&s skills at coordinating and !sing its reso!rces

) Capabilities are the prod!ct of organi.ational str!ct!re, processes, and control systems ) We m!st add people, partic!larly leadership in b!ilding the str!ct!re, etc/

Strategy, -eso!rces, Capabilities, and Competencies

A Critical Distinction
) If a firm has firm+specific and val!able reso!rces, it m!st also have the capability to !se them effectively to create distinctive competency ) A firm can create distinctive competency $itho!t firm+specific and val!able reso!rces if it has !ni%!e capabilities

Competitive Advantage, 0al!e Creation, and Profitability

) Profitability factors
" Amo!nt of val!e c!stomers place on the company&s prod!cts " Price charged " Costs of creating the val!e

0al!e Creation and Pricing 1ptions

Comparing #oyota and 2eneral otors

Differentiation and Cost Str!ct!re: -oots of Competitive Advantage

#he 0al!e Chain

) A company is a chain of activities for transforming inp!ts into o!tp!ts that c!stomers val!e ) #he transformation process is composed of primary and s!pport activities that add val!e to the prod!ct

#he 0al!e Chain: Primary and S!pport Activities

#he 2eneric 3!ilding 3locks of Competitive Advantage

45ercise
) Strategy in Action 3/6: So!th$est Airlines ) What portions of the val!e chain does So!th$est Airlines $ork on to create val!e for its c!stomers7 ) Why these portions rather than the more significant costs like f!el7

4fficiency
) #he %!antity of inp!ts it takes to prod!ce a given o!tp!t/ 8s!ally meas!red as o!tp!ts over inp!ts9 e5amples of latter
" :o/ of employees " Capital investment

) Prod!ctivity leads to greater efficiency and lo$er costs

" 4mployee prod!ctivity " Capital prod!ctivity

;!ality
) S!perior %!ality < c!stomer perception of greater val!e in a specific prod!ct&s attrib!tes
" *orm, feat!res, performance, d!rability, reliability, style, design

) ;!ality prod!cts < goods and services that are reliable and that are differentiated by attrib!tes that c!stomers perceive to have higher val!e

;!ality 'cont&d(
) #he impact of %!ality on competitive advantage
" =igh+%!ality prod!cts increase the val!e of 'differentiate( the prod!cts in c!stomers& eyes " 2reater efficiency and lo$er !nit costs are associated $ith reliable prod!cts

A ;!ality

ap for A!tomobiles

Innovation
) #he act of creating ne$, commercially viable prod!cts or processes
" Prod!ct innovation
) Creates prod!cts that c!stomers perceive as more val!able, increasing the company&s pricing options

" Process innovation

) Creates val!e by lo$ering prod!ction costs

) Perhaps the most important b!ilding block of competitive advantage

-esponsiveness to C!stomers
) Doing a better >ob than competitors of identifying and satisfying c!stomers& needs
" S!perior %!ality and innovation are integral to s!perior responsiveness to c!stomers " C!stomi.ing goods and services to the !ni%!e demands of individ!al c!stomers or c!stomer gro!ps

-esponsiveness to C!stomers 'cont&d(

) So!rces of enhanced c!stomer responsiveness
" C!stomer response time, design, service, after+sales service and s!pport

) Differentiates a company&s prod!cts9 leads to brand loyalty and premi!m pricing

0al!e Creation per 8nit

Analy.ing Competitive Advantage and Profitability

) 3enchmarking company performance against that of competitors and the company&s o$n historic performance ) -et!rn on invested capital ROIC = Net profit Invested capital

Net profit = Total revenues Total costs

Definitions of 3asic Acco!nting #erms

Drivers of Profitability '-1IC(

Ways to Increase -1IC

) Increase the company&s ret!rn on sales
" -ed!ce cost of goods sold " -ed!ce spending on sales force, marketing, general, and administrative e5penses " -ed!ce -?D spending " Increase sales reven!e more than costs

) Increase sales reven!es from invested capital

" -ed!ce the amo!nt of $orking capital " -ed!ce amo!nt of fi5ed capital

#he D!rability of Competitive Advantage

) 3arriers to Imitation
" Imitating -eso!rces " Imitating Capabilities

) Capability of Competitors
" Strategic commitment " Absorptive capacity

) Ind!stry Dynamism

Why Companies *ail

) Inertia
" Companies find it diffic!lt to change their strategies and str!ct!res

) Prior strategic commitments

" @imit a company&s ability to imitate and ca!se competitive disadvantage

) #he Icar!s parado5

" A company can become so speciali.ed based on past s!ccess that it loses sight of market realities " Craftsmen, b!ilders, pioneers, salesmen