3 Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability.

3Internal Analysis:

Distinctive Competencies, Competitive

Advantage, and Profitability

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Internal Analysis

• Identifying the strengths and weaknesses of the company

• Managers must understand– The role of resources, capabilities, and distinctive

competencies in the process by which companies create value and profit

– The importance of superior efficiency, innovation, quality, and responsiveness to customers

– The sources of their company’s competitive advantage (strengths and weaknesses)


Competitive Advantage

• Competitive advantage– A firm’s profitability is greater than the average

profitability for all firms in its industry

• Sustained competitive advantage– A firm maintains competitive advantage for a

number of years


Profitability in the U.S. Retailing Industry, 1996-2001


Distinctive Competences and Competitive Advantage

• Distinctive competencies– Firm-specific strengths that allow a company to

gain competitive advantage by differentiating its products and/or achieving lower costs than its rivals

– Arise from resources and capabilities


The Role of Resources

• Resources– Capital or financial, physical, social or human,

technological, and organizational factor endowments

• Tangible and intangible

• A firm-specific and difficult to imitate resource is likely to lead to distinctive competency

• A valuable resource that creates strong demand for a firm’s products may lead to distinctive competency


The Role of Capabilities

• Capabilities– A company’s skills at coordinating and using its

resources

• Capabilities are the product of organizational structure, processes, and control systems


Strategy, Resources, Capabilities, and Competencies


A Critical Distinction

• If a firm has firm-specific and valuable resources it must also have the capability to use them effectively to create distinctive competency

• A firm can create distinctive competency without firm-specific and valuable resources if it has unique capabilities


Competitive Advantage, Value Creation, and Profitability

• Profitability factors– Amount of value customers place on the

company’s products– Price charged– Costs of creating the value


Value Creation per Unit


Value Creation and Pricing Options


Comparing Toyota and General Motors


Differentiation and Cost Structure: Roots of Competitive Advantage


The Value Chain

• A company is a chain of activities for transforming inputs into outputs that customers value

• The transformation process is composed of primary and support activities that add value to the product


The Value Chain: Primary and Support Activities


The Generic Building Blocks of Competitive Advantage


Efficiency

• The quantity of inputs it takes to produce a given output

• Productivity leads to greater efficiency and lower costs– Employee productivity– Capital productivity


Quality

• Superior quality = customer perception of greater value in a specific product’s attributes– Form, features, performance, durability, reliability,

style, design

• Quality products = goods and services that are reliable and that are differentiated by attributes that customers perceive to have higher value


Quality (cont’d)

• The impact of quality on competitive advantage– High-quality products increase the value of

(differentiate) the products in customers’ eyes– Greater efficiency and lower unit costs are

associated with reliable products


A Quality Map for Automobiles


Innovation

• The act of creating new products or processes– Product innovation

• Creates products that customers perceive as more valuable, increasing the company’s pricing options

– Process innovation• Creates value by lowering production costs

• Perhaps the most important building block of competitive advantage


Responsiveness to Customers

• Doing a better job than competitors of identifying and satisfying customers’ needs– Superior quality and innovation are integral to

superior responsiveness to customers– Customizing goods and services to the unique

demands of individual customers or customer groups


Responsiveness to Customers (cont’d)

• Sources of enhanced customer responsiveness– Customer response time, design, service, after-

sales service and support

• Differentiates a company/its products; leads to brand loyalty and premium pricing


The Durability of Competitive Advantage

• Barriers to Imitation– Imitating Resources– Imitating Capabilities

• Capability of Competitors– Strategic commitment– Absorptive capacity

• Industry Dynamism


Why Companies Fail

• Inertia– Companies find it difficult to change their strategies and

structures

• Prior strategic commitments– Limit a company’s ability to imitate and cause competitive

disadvantage

• The Icarus paradox– A company can become so specialized based on past

success that it loses sight of market realities

– Craftsmen, builders, pioneers, salesmen


Avoiding Failure and Sustaining Competitive Advantage

• Focus on the building blocks of competitive advantage

• Institute continuous improvement in learning

• Track best industrial practice in use benchmarking

• Overcome inertia

• Luck


Analyzing Competitive Advantage and Profitability

• Benchmarking company performance against that of competitors and the company’s own historic performance

• Return on invested capital

capital InvestedprofitNet ROIC

• Net profit = Total revenues – Total costs


Definitions of Basic Accounting Terms


Drivers of Profitability (ROIC)


Ways to Increase ROIC

• Increase the company’s return on sales– Reduce cost of goods sold– Reduce spending on sales force, marketing,

general, and administrative expenses– Reduce R&D spending– Increase sales revenue more than costs

• Increase sales revenues from invested capital– Reduce the amount of working capital– Reduce amount of fixed capital

3 Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability.

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