Hill7e Basic Ch03
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Transcript of Hill7e Basic Ch03
Chapter ThreeInternal
Analysis: Distinctive
Competencies, Competitive
Advantage, and
Profitability
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Internal Analysis includes an assessment of: Quantity and quality of a company’s
resources and capabilities Ways of building unique skills
and company-specific or distinctive competencies
Internal Analysis
The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organization.
Strengths lead to superior performance. Weaknesses lead to inferior performance.
Building and sustaining a competitive advantage requires a company to achieve superior:
• Efficiency• Quality
• Innovations• Responsiveness to customers
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Internal Analysis: Strengths and Weaknesses
Internal analysis - along with the external analysis of the company’s environment - gives managers the
information to choose the strategies and business model to attain a sustained competitive advantage.
StrengthsOf the enterprise are assets that
boost profitability
Weaknesses Of the enterprise are liabilities that
lead to lower profitability
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Internal Analysis: A Three-Step Process
1. Understand the process by which companies create value for customers and profit for themselves. Resources Capabilities Distinctive competencies
2. Understand the importance of superiority in creating value and generating high profitability. Efficiency Quality
3. Analyze the sources of the company’s competitive advantage. Strengths – that are driving profitability Weaknesses – opportunities for improvement
Innovation Responsiveness to Customers
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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 above average and superior profitability and profit growth for a number of years.
The Primary Objective of Strategyis to achieve a Sustained Competitive Advantagewhich in turn results in Superior Profit and Profit Growth.
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Strategy, Resources, Capabilities, and Competencies
Figure 3.1
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Competitive Advantage, Value Creation, and Profitability
1. VALUE or UTILITY the customer gets from owning the product
2. PRICE that a company charges for its products
3. COSTS of creating those products Consumer surplus is the “excess” utility a
consumer captures beyond the price paid.Basic Principle: the more utility that consumers
get from a company’s products or services, the more pricing options the company has.
How profitable a company becomes depends on three basic factors:
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Value Creation per UnitFigure 3.2
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Value Creation and Pricing Options
There is a dynamic relationship among utility,
pricing, demand, and costs.
Figure 3.3
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Comparing Toyota and General Motors
Superior value creation requires that the gap between perceived utility (U) and costs of production (C)
be greater than that obtained by competitors.
Figure 3.4
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The Value Chain
A company is a chain of activities for transforming inputs into outputs that customers value –
including the primary and support activities.
Figure 3.5
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Building Blocks of Competitive Advantage
The Generic Distinctive Competencies
Allow a company to:• Differentiate product offering• Offer more utility to customer• Lower the cost structure regardless of the industry, its products, or its services
Figure 3.6
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Efficiency
Measured by the quantity of inputs it takes to produce a given output:
Efficiency = Outputs / Inputs Productivity leads to greater efficiency
and lower costs:• Employee productivity• Capital productivity
Superior efficiency helps a company attain a competitive advantage
through a lower cost structure.
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Quality
• Reliable and • Differentiated by attributes that customers
perceive to have higher value
The impact of quality on competitive advantage:
• High-quality products differentiate and increase the value of the products in customers’ eyes.
• Greater efficiency and lower unit costs are associated with reliable products.
Superior quality = customer perception of greater value in a product’s attributesForm, features, performance, durability, reliability, style, design
Quality products are goods and services that are:
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Innovation
Innovation is the act of creating new products or new processes• Product innovation
» Creates products that customers perceive as more valuable and
» Increases the company’s pricing options• Process innovation
» Creates value by lowering production costs
Successful innovation can be a major source of competitive advantage – by giving a company something unique,
something its competitors lack.
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Responsiveness to Customers
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.
Enhanced customer responsiveness Customer response time, design,
service, after-sales service and supportSuperior responsiveness to customers
differentiates a company’s products and services and leads to brand loyalty and premium pricing.
Identifying and satisfying customers’ needs – better than the competitors
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Analyzing Competitive Advantage and Profitability
Competitive Advantage• When a companies profitability is greater than the average of all
other companies in the same industry that compete for the same customers
Benchmarking• Comparing company performance against that of competitors and
the company’s historic performance
Measures of Profitability
• Return On Invested Capital (ROIC)• Net profit Net income after tax
Capital invested Equity + Debt to creditors
• Net Profit
Net Profit = Total revenues – Total costs
= ROIC =
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Definitions of Basic Accounting Terms
Table 3.1
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Drivers of Profitability (ROIC)
Figure 3.9
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Comparing Wal-Mart to Target
Figure 3.10