Charles W. L. Hill / Gareth R. Jones

CHARLES W. L. HILL / GARETH R.
JONES
Strategic
StrategicManagement
Management An
AnIntegrated
IntegratedApproach
Approach10th
10thed.
ed.
Internal
InternalAnalysis:
Analysis:
Chapter
Distinctive
Distinctive Competencies,
Competencies,
3 Competitive
CompetitiveAdvantage,
Profitability
Profitability
Advantage, and
and
Student Version
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Prepared
Prepared by
by C.
C. Douglas
Douglas Cloud
Cloud ,, Professor
Professor Emeritus
Emeritus of
of Accounting,
Accounting, Pepperdine
Pepperdine University
University
REBUILDING
REBUILDING COMPETITIVE
COMPETITIVE
ADVANTAGE
ADVANTAGE AT
AT STARBUCKS
STARBUCKS
 When Howard Shultz became the CEO of
the company in January, 2008, he closed all
Starbucks stores for one day and retrained
the baristas in the art of making coffee.
 The company redesigned many of its stores
to give them a contemporary feel.
 It stopped selling breakfast sandwiches
because Shultz thought the smell detracted
from the coffeehouse experience.
(continued)
 He gave store managers more freedom in
deciding the type of artwork that would be
displayed in the stores.
 Starbucks began purchasing coffee beans
from growers who adhered to
environmentally-friendly policies, and it
promoted this to customers.
 Six hundred underperforming U.S. stores
were closed.
 The results have been impressive, with
ROIC reaching 24.19% in 2010.
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3-3
OVERVIEW
OVERVIEW
 Starbucks took actions (1) to improve its

brand and (2) to improve the quality of the
Starbucks experience for customers.
 The company’s goal was to do both as
efficiently as possible.
 This chapter focuses on internal analysis,
which is concerned with identifying the
strengths and weaknesses of the company.
Learning
Learning Objective:
Objective: After
After reading
reading this
this chapter
chapter you
you
should
should be
be able
able to
to discuss
discuss the
the source
source ofof
competitive
competitive advantage.
advantage.
THE
THE ROOTS
ROOTS OF
OF COMPETITIVE
COMPETITIVE ADVANTAGE
ADVANTAGE
 A company has a competitive advantage
over its rivals when its profitability is greater
than the average profitability of all
companies in its industry.
 When it maintains this competitive
advantage over a number of years, it has a
sustained competitive advantage.
THE
THE ROOTS
ROOTS OF
OF COMPETITIVE
ADVANTAGE
 Distinctive competencies are firm-specific
strengths that allow a company to differentiate
its products from those offered by rivals, and/or
achieve lower cost.
 Resources refer to the assets of a company.
 Tangible resources are physical entities,
such as land, buildings, and inventory.
 Intangible resources are nonphysical
entities that are created by managers and
other employees, such as patents,
copyrights, and trademarks.
THE
THE ROOTS
ROOTS OF
OF COMPETITIVE
ADVANTAGE
 Capabilities refer to a company’s resources
coordinating skills and productive use.
 These skills reside in the style or manner
through which it makes decisions and manages
its internal processes to achieve organizational
objectives.
 Capabilities are intangible.
 Capabilities are valuable if they enable a
company to create strong demand for its
products, and/or lower its costs.
THE
THE ROOTS
ROOTS OF
OF COMPETITIVE
ADVANTAGE
 For a company to possess a distinctive
competency, it must—at a minimum—have
either:
1) a firm-specific and valuable resource, and
the skills necessary to take advantage of
that resource, or
2) a firm-specific capability to manage
resources.
 Distinctive competency is strongest when a
company possesses both (1) and (2).
Learning
Learning Objective:
Objective: After
After reading
reading this
this chapter
chapter
you
you should
should bebe able
able to
to identify
identify and
and explore
explore the
the
role
role of
of efficiency,
efficiency, quality,
quality, innovation,
innovation, and
and
customer
customer responsiveness
responsiveness in in building
building and
and
maintaining
maintaining aa competitive
advantage.
COMPETITIVE
COMPETITIVE ADVANTAGE,
ADVANTAGE, VALUE
VALUE
CREATION,
CREATION, AND
AND PROFITABILITY
PROFITABILITY
 At the most basic level, a company’s
profitability depends on three factors:
1) The value (utility) customers place on the
company’s product.
2) The price a company charges for its product.
3) The costs of creating those products.
COMPETITIVE
ADVANTAGE, VALUE
VALUE
CREATION,
CREATION, AND
AND PROFITABILITY
PROFITABILITY
 The price chosen by a company is typically less
than the utility value placed on the good or
service by the customer.
 The customer captures some of that utility in
the form of consumer surplus.
 The point-of-sale price tends to be less than
the utility value placed on the product by many
customers.
COMPETITIVE
ADVANTAGE, VALUE
VALUE
CREATION,
CREATION, AND
AND PROFITABILITY
PROFITABILITY
 Managers must understand:
 the dynamic relationships and costs in
order to make decisions that will maximize
competitive advantage and profitability;
 how value creation and pricing decisions
affect demand; and
 how unit costs change with increases in
volume.
Learning
Learning Objective:
Objective: After
After reading
reading this
this chapter
chapter
you
you should
should be
be able
able to
to explain
explain the
the concept
concept ofof
the
the value
value chain.
chain.
THE
THE VALUE
VALUE CHAIN
CHAIN
 The term value chain refers to the idea that a
company is a chain of activities.
 This chain of activities transforms inputs into
outputs that customers value.
 The transformation process involves both
primary activities and supplies activities that add
value to the product.
THE
THE VALUE
VALUE CHAIN
CHAIN
 The support activities of the value chain

provide inputs that allow the primary activities to
take place.
1) The materials-management (logistics)
function controls the transmission of physical
materials through the value chain.
2) The human-resources function ensures that
the company has the right combination of
skilled people to perform its value creation
activities effectively.
(continued)
THE
THE VALUE
VALUE CHAIN
CHAIN
3) Information systems are, primarily, the
electronic systems for managing
inventory, tracking sales, pricing
products, selling products, and so on.
4) Company infrastructure is the
companywide context within which all the
other value creation activities take place:
a) Organizational structure
b) Control system
c) Company culture
Learning
Learning Objective:
Objective: After
After reading
reading this
this chapter
chapter
you
you should
should be
be able
able to
to understand
understand thethe link
link
between
between competitive
competitive advantage
advantage and
and
profitability.
profitability.
THE
THE BUILDING
BUILDING BLOCKS
BLOCKS OF
OF
COMPETITIVE
ADVANTAGE
 Four factors help a company build and sustain a
1) Superior efficiency
2) Superior quality
3) Innovation
4) Superior customer responsiveness
THE
THE BUILDING
BUILDING BLOCKS
BLOCKS OF
OF
COMPETITIVE
ADVANTAGE
Superior
Superior Efficiency
Efficiency
 The more efficient a company is, the fewer inputs
are required to produce a particular output.
 The most common measure of efficiency for many
companies is employee efficiency.
 Employee productivity refers to the output
produced per employee.
 Employee productivity helps a company attain a
competitive advantage through a lower cost
structure.
Superior
Superior Quality
Quality
 A product is said to have superior quality when
customers perceive that its attributes provide
them with higher utility than the attributes of
products sold by rivals.
 When customers evaluate the quality of a
product, they commonly measure two attributes.
 Quality as excellence: Product design and styling,
aesthetic appeal, features, and so on.
 Quality as reliability: The product consistently
performs, its function well, and rarely, if ever, breaks
down.
Innovation
Innovation
 Innovation refers to the act of creating new
products or processes. There are two main types
of innovation:
 Product innovation is the development of products
that are new to the world or have superior attribute
to existing products (Apple developed the iPod,
iPhone, and iPad in the 2000s).
 Process innovation is the development of a new
process for producing products and delivering them
to customers (Toyota’s lean production system
helped to boost employee productivity).
Superior
Superior Customer
Customer
Responsiveness
Responsiveness
 To achieve superior customer responsiveness, a
company must be able to do a better job of
identifying and satisfying its customers’ needs.
 A company needs to customize goods and
services to the unique demands of individual
customers or customer groups.
 Customer response time is the time it takes for
the good to be delivered or a service to be
performed.
RETURN
RETURN ON
ON INVESTED
INVESTED CAPITAL
CAPITAL (ROIC)
(ROIC)
 Many authorities on the measurement of
profitability argue that ROIC is the best measure
because “it focuses on the true operating
performance of the company.”
 A company’s ROIC an be determined using the
formula the following formula:
ROIC = net profits/invested capital
= net profits/revenues x revenues
invested capital
Learning
Learning Objective:
Objective: After
After reading
reading this
this chapter
chapter you
you
should
should be
be able
able toto explain
explain what
what impacts
impacts thethe
durability
durability of
of aa company’s
company’s competitive
advantage.
THE
THE DURABILITY
DURABILITY OF
OF COMPETITIVE
ADVANTAGE
 How quickly rivals will imitate a company’s

distinctive competencies has an important impact
on a company’s competitive advantage durability.
 In general, the easiest distinctive competencies to
imitate are buildings, manufacturing plants, and
equipment since they can often be purchased on
the open market.
THE
THE DURABILITY
DURABILITY OF
OF COMPETITIVE
ADVANTAGE
 Intangible resources (brand names, marketing and
technological know-how, and patents) can be
more difficult to imitate.
 Patents give the inventor of a new product a
20-year exclusive production agreement.
 One study found 60% of patented innovations
were successfully invented in 4 years.
 Absorptive capacity refers to the ability of an
enterprise to identify, value, assimilate, and use
new knowledge.
AVOIDING
AVOIDING FAILURE
FAILURE AND
AND SUSTAINING
SUSTAINING
COMPETITIVE
ADVANTAGE
Why
Why Companies
Companies Fail
Fail
 Inertia
 Companies find it difficult to change their
strategies and structures in order to adapt to
changing competitive conditions.
 Changing the established capabilities of an
organization means changing its existing
distribution of power and influence—and this
triggers turf battles.
AVOIDING
AVOIDING FAILURE
FAILURE AND
AND SUSTAINING
SUSTAINING
COMPETITIVE
ADVANTAGE
Prior
Prior Strategy
Strategy Commitments
Commitments
 A company’s prior strategy commitments not
only limit its ability to imitate rivals but may also
cause competitive disadvantage.
The
The Icarus
Icarus Paradox
Paradox
 Many companies become so dazzled by their
early success that they believe more of the
same type of effort is the way to future success.
They eventually lose sight of market realities
and fail (like Icarus, of ancient mythology).

Charles W. L. Hill / Gareth R. Jones

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Charles W. L. Hill / Gareth R. Jones

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CHARLES W. L. HILL / GARETH R.

 Starbucks took actions (1) to improve its

 The support activities of the value chain

 How quickly rivals will imitate a company’s

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