1 Sustainability of a Competitive Advantage Sustainability of a competitive advantage is a function...

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Sustainability of a Competitive Advantage

• Sustainability of a competitive advantage is a function of:– the rate of core-competence obsolescence

due to environmental changes, e.g., technological shifts

– the availability of substitutes for the core competence

– the imitability of the core competence, e.g., diffusion of an innovation

– whether the firm is properly organized to capture value

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External and Internal Analyses

General

Environment

General

Environment

General

Environm

ent

Sociocultural

Global

Technological

Polit

ical

/Leg

al

Dem

ogra

phic Econom

ic

IndustryEnvironment

CompetitorEnvironment

By studying the external environment, firms identify what they might choose to do(Structure>Conduct>Performance)

Opportunities and threats

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External and Internal Analyses

By studying the firm’s (internal) capabilities & resources, firms identify what they can do (over time)

Unique resources, capabilities, and competencies

(sustainable competitive advantage)

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Internal Analysis (Resources, Capabilities)

• How do we effectively manage current core competencies while simultaneously developing new ones? (exploit/explore)

• How do we assemble bundles of resources, capabilities and core competencies to create value for customers?

• How do we learn to change rapidly?

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What affects decisions about Resources, Capabilities, and Core

Competencies

• Uncertainty regarding current/future characteristics of the general and industry environments

• Complexity - the interrelationship among factors that shape a firm’s environment(s), and top management perceptions of these environments

• Intraorganizational Conflicts among people making and affected by resource allocation decisions

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Components of Internal Analysis

Identifying CoreIdentifying CoreCompetenciesCompetencies

ResourcesResources• TangibleTangible• IntangibleIntangible

CapabilitiesCapabilities

CoreCoreCompetenciesCompetencies

Identify Identify sustainable sustainable competitivecompetitiveadvantagesadvantages

StrategicStrategicCompetitivenessCompetitiveness

Four CriteriaFour Criteriaof Sustainableof Sustainable

AdvantageAdvantage

• ValuableValuable• RareRare• Imitation/Substitutes = costlyImitation/Substitutes = costly• Organized properlyOrganized properly

ValueValueChainChain

AnalysisAnalysis

• In/OutsourceIn/Outsource• decisionsdecisions

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Discovering CoreDiscovering CoreCompetenciesCompetencies

Resources•Tangible•Intangible

Resources are what a firm draws upon to create value -- its assets– and valuable resources are embedded and difficult to trade in markets

Resources are inputs into a firm’s production process... IP, capital equipment, skills, brands, organizational routines, access to financial capital, talented managers, etc.

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Resources•Tangible•Intangible

Tangible • Financial• Physical• Labor

Intangible• Technological• Innovation• Reputation• Organizational activity systems• Knowledge

markets for resources are often imperfect

resources are not intrinsically valuable

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Capabilities

Capabilities describe the firm’s ability to create, deploy, modify, reconfigure, and leverage resources. Valuable capabilities permit resources to be combined in unique ways to create core competencies

markets for capabilities are imperfect

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CoreCoreCompetenciesCompetencies

are resources and capabilities that are a source of competitive advantage over rivals

make a firm distinctive

McKinsey and Co. recommends isolating 3-4 competencies when framing strategic actions

Consider Amazon (culture, transaction scale economies, bundling, virtualization)

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AdvantageAdvantage

•ValuableValuable•RareRare• Imitation/Substitution = CostlyImitation/Substitution = Costly•OrganizedOrganized


Valuable: Capabilities that help a firm neutralize threats or exploit opportunities

Rare: Capabilities that are not possessed by many others

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AdvantageAdvantage



Costly to imitate: capabilities that other firms cannot develop easily, usually due to

• Unique historical conditions - e.g., founder, culture• Causal ambiguity - capabilities hidden• Social complexity - capabilities distributed• Time diseconomies

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AdvantageAdvantage



Nonsubstitutable: capabilities that do not have strategic equivalents

• Invisible to competitors• Firm-specific knowledge • Trust-based working relationships between

managers and nonmanagerial personnel

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Core Competence as a Strategic Capability

Resources• Inputs to a firm’s

production process

Capability• Capability that is not strategic

Core Competence• Capability that is strategic

Affected by

Does it satisfy the criteria of sustainable competitive advantage?

Y

N

Capability• integration of resources

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Performance Implications

Valuab

le?

Rare?

Imita

te/Sub

st. C

ostly

?

Organ

ized?

CompetitiveConsequences

PerformanceImplications

No No No NoCompetitiveDisadvantage

Below AverageReturns

Yes No NoYes/No

CompetitiveParity Average Returns

Yes Yes NoYes/No

Temporary Com-petitive Advantage

Above Average to Average Returns

Yes Yes Yes YesSustainable Com-petitive Advantage

Above Average Returns

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Value creation

• Profit determined by :– The amount of value customers place on

firm’s goods or services (V)– Firm’s cost of production (C)

• Consumer surplus occurs when price charged by a firm on a good or service is less than value placed on it by a customer

• Value creation = V-C

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Value creation

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Porter’s Value Chain

Firm InfrastructureHuman Resource Management

Technology Development

Procurement

SupportActivities

Inbound Logistics

PrimaryActivities Operatio

ns

Outbound

Logistics

Marketing

and Sales

Service

Upstream value activities Downstream value activities

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Value Chain activities in Bio/Pharm Value Chain activities in Bio/Pharm

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Source MIT Sloan School – “Architectures and roadmaps for communications and media”

Value Chain in Communications Technology Industry

Value Chain in Communications Technology Industry

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Global Value Chain Management

Assembling, Manufacturing and Sales

Assembling, Manufacturing and Sales

Distribution Center

Country Market

A

Country Market

B

Supplier ASupplier BSupplier N

Supplier XSupplier YSupplier Z

Where will you design, assemble, inventory, market, and manage?

Where will you design, assemble, inventory, market, and manage?

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OutsourcingOutsourcing is the purchase of some or all of a value-creating activity from an external supplier

Usually this is because the specialty supplier can provide these functions more efficiently

Margin

Margin

Prim

ary A

ctivities

Support Activities

Se

rvice

Ma

rketin

g & S

ales

Ou

tbou

nd L

ogistics

Op

era

tions

Inbo

und

Log

istics

Firm Infrastructure

Human Resource Mgmt.

Technological Development

Procurement

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Strategic Rationales for Outsourcing

• Improve Business Focus– lets company focus on broader business

issues by having outside experts handle various operational details

• Provide Access to World-Class Capabilities– the specialized resources of outsourcing

providers makes world-class capabilities available to firms in a wide range of applications

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• Accelerate Business Re-Engineering Benefits– achieves re-engineering benefits more

quickly by having outsiders--who have already achieved world-class standards--take over process

• Share Risks– reduces investment requirements and

makes firm more flexible, dynamic and better able to adapt to changing opportunities

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• Free Resources for Other Purposes– permits firm to redirect efforts from non-

core activities toward those that serve customers more effectively

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Outsourcing Issues• Greatest Value

– outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced

• Evaluating Resources and Capabilities– don’t outsource activities in which the firm itself can

create and capture value

• Environmental Threats and Ongoing Tasks– do not outsource primary and support activities that

are used to neutralize environmental threats or complete necessary ongoing organizational tasks

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Outsourcing Issues• Nonstrategic Team of Resources

– do not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantage

• Firm’s Knowledge Base– do not outsource activities that stimulate the

development of new capabilities and competencies

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Core Competencies: Cautions and Reminders

• Never take for granted that core competencies will continue to provide a source of competitive advantage

• All core competencies have the potential to become core rigidities

• Core rigidities are former core competencies that now generate inertia and stifle innovation

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