Chapter 4Chapter 4

Internal Analysis: Distinctive Internal Analysis: Distinctive Competencies, Competitive Competencies, Competitive Advantage, and ProfitabilityAdvantage, and Profitability

Why Internal Analysis?Why Internal Analysis?

Early strategy theory rooted in Early strategy theory rooted in industry structural analysis - industry structural analysis - external focusexternal focus

This approach has lost its appeal This approach has lost its appeal because:because: internationalization & deregulation has internationalization & deregulation has

all but removed safe havensall but removed safe havens technology and changes in demand technology and changes in demand

have blurred industry lines have blurred industry lines

A product of the Resource Based ViewA product of the Resource Based View

Resources

Capabilities

Core Competencies

Strategies

Competitiveness & Profit

The Role of Resources and Capabilities in The Role of Resources and Capabilities in the Creation of Profitthe Creation of Profit

DistinctiveCompetencies

Competitive Advantages

Build

Build

Shape

StrengthStrength

Skill, specialized expertise, or Skill, specialized expertise, or important capabilityimportant capability

Physical assetPhysical asset Human assets or intellectual capitalHuman assets or intellectual capital Organizational assetOrganizational asset Intangible assetsIntangible assets Competitive achievementCompetitive achievement Alliance or cooperative ventureAlliance or cooperative venture

Evaluation of ResourcesEvaluation of Resources

Strength or WeaknessStrength or Weakness relative to competitorsrelative to competitors basic business requirementsbasic business requirements key vulnerabilitieskey vulnerabilities

Other ThreatsOther Threats Emergence of cheaper/better technologiesEmergence of cheaper/better technologies Introduction of better products by rivalsIntroduction of better products by rivals Entry of lower-cost foreign competitorsEntry of lower-cost foreign competitors Onerous regulationsOnerous regulations Rise in interest ratesRise in interest rates Potential of a hostile takeoverPotential of a hostile takeover Unfavorable demographic shiftsUnfavorable demographic shifts Adverse shifts in foreign exchange ratesAdverse shifts in foreign exchange rates Political upheaval in a countryPolitical upheaval in a country

Tangible

Resources

Intangible

Resources

Org.

Capabilities

Examples…..•Customer Service•Product Development•Employee Productivity

Inputs into Outputs

Core CompetenciesCore Competencies central to the firm’s competitiveness central to the firm’s competitiveness rewarded in market placerewarded in market place combination of skills & knowledge, not combination of skills & knowledge, not

products or functionsproducts or functions flexible, long term platformsflexible, long term platforms embedded in the organization’s embedded in the organization’s

systemssystems distinctive competencies are those the distinctive competencies are those the

firm performs better than rivalsfirm performs better than rivals All core competencies have the All core competencies have the

potential to become potential to become core rigiditiescore rigidities

Sustainable Competitive Sustainable Competitive AdvantageAdvantage

Must be valuable, rare, inimitable, and non-Must be valuable, rare, inimitable, and non-substitutablesubstitutable

Sustainability is a function ofSustainability is a function of Durability - how Durability - how longlong will it last? will it last?

Technology? Reputation? Fixed Assets?Technology? Reputation? Fixed Assets? Imitability - how quickly can it be Imitability - how quickly can it be copiedcopied??

Transparent - easy to see?Transparent - easy to see? Transferable - can it be done elsewhere?Transferable - can it be done elsewhere? Replicable - can we do it here?Replicable - can we do it here?

Factors that Limit Factors that Limit ImitationImitation

Physical Uniqueness –Physical Uniqueness – Path Dependency –Path Dependency – Causal Ambiguity – Causal Ambiguity – Social Complexity – Social Complexity –

Absorptive Capacity – Absorptive Capacity –

Relative costs and prices Relative costs and prices

Where do cost/price differences come Where do cost/price differences come from?from? raw materials and componentsraw materials and components differences in technology, plant, equipmentdifferences in technology, plant, equipment efficiencies, learning, experience, wages, efficiencies, learning, experience, wages,

productivityproductivity marketing, sales, promotion, warehousing, marketing, sales, promotion, warehousing,

distribution, administration costsdistribution, administration costs distributiondistribution inflation, exchange and tax ratesinflation, exchange and tax rates

Value Creation per UnitValue Creation per Unit

Comparing Toyota and Comparing Toyota and General MotorsGeneral Motors

Porter’s Value ChainPorter’s Value Chain

Views the organization as a series Views the organization as a series (chain) of activities, which may or (chain) of activities, which may or may not create valuemay not create value

Porter’s Value Chain Porter’s Value Chain (cont.)(cont.)

Primary ActivitiesPrimary Activities– Inbound logistics – Supply Chain Inbound logistics – Supply Chain

ManagementManagement– OperationsOperations– Outbound logistics - DistributionOutbound logistics - Distribution– Marketing and salesMarketing and sales– Customer serviceCustomer service

– Contribute to the physical creation of the Contribute to the physical creation of the product/service, its sale and transfer to product/service, its sale and transfer to the buyer, and its service after the salethe buyer, and its service after the sale

Porter’s Value Chain Porter’s Value Chain (cont)(cont)

Support ActivitiesSupport Activities Company infrastructure – General Company infrastructure – General

AdminAdmin Human resource managementHuman resource management R&D, Technology and Systems R&D, Technology and Systems

DevelopmentDevelopment ProcurementProcurement

Company Infrastructure

HRM

R&D, Technology & Systems Development

Procurement

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The Value Chain

Support

Primary

A low cost strategy…..

Company Infrastructure

HRM

Procurement

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…tries to pull the arrow back…..

R&D, Technology & Systems Development

Fewer layers of management

Policies to reduce turnover

IBM Printer - 150 to 62 parts, 3.5 minutes

Monitor supplier performance

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Low Cost - Support Activity examples…...

Low cost - Primary Activity Low cost - Primary Activity examples….examples….

Inbound - Inbound - Operations - Operations - Outbound - Outbound - Marketing/Sales - Marketing/Sales - Customer Service - Customer Service -

A differentiation strategy…..

Company Infrastructure

HRM

Procurement

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….tries to pull the arrow forward...

R&D, Technology & Systems Development

Commitment to quality

Compensation rewarding innovation

Amazon Recommendations

Purchasing high-quality components

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Differentiation - Support Activity examples…...

Inbound - Inbound - Operations - Operations - Outbound - Outbound - Market/Sales - Market/Sales - Customer Service - Customer Service -

Differentiation - Primary Activity Differentiation - Primary Activity examples…...examples…...

Suppliers Buyers

Your Firm

Your Rivals

Suppliers Buyers

Your Firm

Your Rivals

Opportunities forAdvantage

Suppliers Buyers

Your Firm

Your Rivals

Opportunities forAdding Value

Opportunities forAdding Value