Chapter 3 INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES, COMPETITIVE ADVANTAGE, AND PROFITABILITY

Learning Objectives Discuss the source of competitive advantage Identify/explore the role of efficiency, quality, innovation, and customer responsiveness in building and maintaining a competitive advantage Explain the concept of value chain Understand the link between competitive advantage and profitability Explain what impacts the durability of a company’s competitive advantage 2010 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.

“In preparing for battle I have always found that plans are useless, but planning is indispensable.” - Dwight D. Eisenhower 2010 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.

Internal Analysis Firm’s resources & capabilities “…pinpoints the strengths and weaknesses of the organization. It includes assessments of: Firm’s resources & capabilities Distinctive competencies Building/sustaining a competitive advantage requires a company to achieve superior: Efficiency Quality Innovations Responsiveness to customers 2010 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.

Internal Analysis: Strengths and Weaknesses “…gives managers the information to choose the strategies and business model to attain a sustained competitive advantage. Strengths Assets that boost profitability Weaknesses Liabilities that depress profitability 2010 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.

Competitive Advantage Competitive Advantage- firm’s profitability is greater than the average profitability for all firms in its industry. Sustained Competitive Advantage- firm maintains above average and superior profitability and profit growth over a number of years. 2010 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.

Distinctive Competencies “…firm-specific strengths that allow a company to differentiate its products from those offered by rivals, and/or achieve substantially lower costs….” 1-7 2010 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.

Resources “…assets of a company.” Tangible (physical entities)- land, buildings, equipment, inventory, & money Intangible (nonphysical entities created by managers & other employees)- brand names, company reputation, employee knowledge & experience, intellectual property 2010 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.

Capabilities “…a company’s skills at coordinating its resources and putting them to productive use.” 2010 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.

Strategy, Resources, Capabilities, and Competencies Figure 3.1 2010 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.

Competitive Advantage, Value Creation, and Profitability How profitable a company becomes depends on three basic factors: Value/utility customers place on products Price company charges for products Consumer surplus = “excess” utility consumer captures beyond price paid Costs of creating product Basic Principle More utility consumers get from company’s products or services, the more pricing options company has. 2010 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.

Value Creation per Unit Figure 3.2 2010 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.

Value Creation and Pricing Options There is a dynamic relationship among utility, pricing, demand, and costs. Figure 3.3 2010 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.

Comparing Toyota and General Motors Figure 3.4 Superior value creation requires the gap between perceived utility (U) and costs of production (C) be greater than attained by competitors. 2010 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.

Value Chain Activities Primary Activities R & D = design and production Production = creation of good/service Marketing = brand positioning & advertising Customer Service = after-sales service & support Support Activities Materials Mgmt. = transmission of materials HR = ensures right mix of skilled people I. S. = managing, tracking Infrastructure = context in which all other activities take place 2010 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.

The Value Chain “…company is a chain of activities for transforming inputs into outputs customers value – including primary & support activities. Figure 3.5 2010 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.

Building Blocks of Competitive Advantage Efficiency – fewer inputs to produce given output Efficiency = Outputs / Inputs Quality – customers perceive product’s attributes provide higher utility in excellence & reliability Innovation Product Process Customer Responsiveness – customers attribute more utility by creating differentiation with competitive advantage 2010 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.

Building Blocks of Competitive Advantage Figure 3.6 2010 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.

Quality Map for Automobiles Attributes of Quality: 1. Excellence 2. Reliability Figure 3.7 2010 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.

Competitive Advantage & Value Creation Cycle 1-20 2010 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.

Analyzing Competitive Advantage and Profitability Competitive Advantage- Profitability greater than average of all companies in same industry Benchmarking- Comparing performance against competitors & historic performance Measures of Profitability Return On Invested Capital (ROIC) Net profit Net income after tax Capital invested Equity + Debt to creditors Net Profit = Total Revenues – Total Costs = 2010 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.

Definitions of Basic Accounting Terms Table 3.1 2010 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.

Drivers of Profitability (ROIC) Figure 3.9 2010 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.

Ways to Increase ROIC       Increase Company’s Return on Sales Increase sales revenue more than costs Reduce cost of goods sold Reduce spending on SG&A Reduce R&D expenses Increase Capital Turnover Reduce the amount of working capital Reduce the amount of fixed capital       2010 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.

Durability of Competitive Advantage Depends on: Barriers to Imitation- difficulty to copy distinctive competencies Resources Capabilities Capability of Competitors Strategic commitment Absorptive capacity Industry Dynamism- ability to change rapidly Competitors also seeking distinctive competencies that give them a competitive edge. 2010 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.

• Craftsmen • Builders • Pioneers •Salespeople Why Companies Fail Inertia- difficult to adapt strategies & structures to changing conditions Prior Strategic Commitments- limit ability to imitate & cause competitive disadvantage Icarus Paradox- so specialized/inner-directed by past success lose sight of market realities Rising/Falling industries: • Craftsmen • Builders • Pioneers •Salespeople When company loses competitive advantage, profitability falls below the industry.  Loses ability to attract/generate resources.  Profit margins invested capital shrink rapidly. 2010 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.

Avoiding Failure: Sustaining Competitive Advantage Focus on Building Blocks  Efficiency  Quality  Innovation  Responsiveness to Customers Institute Continuous Improvement & Learning Track Best Practice/Use Benchmarking Overcome Inertia Luck may play a role in success, so always exploit a lucky break - but remember: “The harder I work, the luckier I seem to get.” J P Morgan 2010 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.

“Developing a sound and healthy organization requires understanding the environment as much as understanding the organization.” - Gary Hamel 2010 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.