INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES OR SUSTAINABLE COMP. ADV. SPRING 2007 CHAPTER 3, BUS 189 DR. MARK FRUIN

PORTER VS. RESOURCE BASED VIEW OF THE FIRM EXTERNAL ANALYSIS = INDUSTRY ANALYSIS –5 FORCES MODEL = INDUSTRY “DYNAMICS” (DESCRIPTIVE, NOT ANALYTICAL –SUPERIOR POSITION (IN INDUSTRY) = COMPETITIVE SUCCESS INTERNAL ANALYSIS = ORG ANALYSIS FROM RESOURCE BASED POINT OF VIEW –FIRM AS A COLLECTION OF RESOURCES –FIRM THAT BEST COMBINES, MOBILIZES & MANAGES RESOURCES WINS

DELL COMPUTER FROM RBV, WHAT COMPETITIVE ADVANTAGES DOES DELL HAVE? RESOURCES = WHAT YOU “HAVE” CAPABILITIES = WHAT YOU “DO” WITH WHAT YOU HAVE COMPETENCIES = WHAT YOU DO WELL DISTINCTIVE COMPETENCIES = WHAT YOU DO WELL AND OTHERS DON’T DO AS WELL

DELL COMPUTER II WHAT DISTINCTIVE COMPETENCIES DOES DELL HAVE –DIRECT SALES MODEL –EASILY NAVIGABLE WEBSITE 85% OF SALES MADE VIA INTERNET –HIGH RETURN ON INVESTED CAPITAL –SUPPLY CHAIN SUCCESS MANAGE SUPPLIER RELATIONS, MORE THAN MANAGE SUPPLY CHAIN –LOW INVENTORY COSTS –CUSTOMER LOYALTY - HIGH RESALES

DELL COMPUTER III ARE THESE DISTINCTIVE COMPETENCIES? –P. 77 FIRM-SPECIFIC STRENGTHS THAT ALLOW A COMPANY TO DIFFERENTIATE ITS PRODUCTS AND/OR ACHIEVE SUBSTANTIALLY LOWER COSTS THAN ITS RIVALS IF SO, WHERE DO THEY COME FROM? –ALL DISTINCTIVE COMPETENCIES STARTED AS COMPETENCIES –ALL COMPETENCIES STARTED AS CAPABILITIES –ALL CAPABILITIES STARTED AS RESOURCES

BUILDING BLOCKS OF COMPETITIVE ADVANTAGE BOOK ON P. 76 SAYS FOUR MAIN BUILDING BLOCKS OF COMPETITIVE ADVANTAGE ARE: –EFFICIENCY –QUALITY –CUSTOMER RESPONSIVENESS –INNOVATION CONFUSING BECAUSE IN NEXT CHPT ON FUNCTIONAL LEVEL STRATEGIES, THE SAME FOUR ARE MENTIONED

BEGGING THE QUESTION IF DISTINCTIVE COMPETENCIES COME FROM FOUR BUILDING BLOCKS OF COMPETITIVE ADVANTAGE WHERE DO THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE COME FROM? –DISTINCTIVE COMPETENCIES COME FROM COMPETENCIES –COMPETENCIES COME FROM CAPABILITIES –CAPABILITIES COME FROM RESOURCES

DISTINCTIVE COMPETENCIES INVOLVE MANAGERIAL CHOICE & DISCRETION INVOLVE CREATING SUPERIOR ORGANIZATIONAL PROCESSES NECESSARILY INVOLVE A MAJORITY OF ORGANIZATIONAL MEMBERS –STRATEGIC INTENT –STRETCH GOALS

RESOURCES TANGIBLE INTANGIBLE CREATE LITTLE VALUE UNLESS THEY ARE USED USING THEM, CONVERTS THEM INTO CAPABILITIES –BOOK SAYS, P. 78 –CAPABILITIES ARE PRODUCT OF FIRM STRUCTURE, PROCESSES & CONTROL SYSTEMS –RESIDE NOT IN INDIVIDUALS, BUT ARE EMBODIED IN ORGANIZATION

WHAT MAKES RESOURCES VALUABLE? BOOKS SAY, P , RESOURCES ARE VALUABLE WHEN THEY ARE FIRM-SPECIFIC AND DIFFICULT TO IMITATE CONFUSING BECAUSE RESOURCES HAVE LITTLE VALUE ON THEIR OWN WHEN RESOURCES ARE CONVERTED TO CAPABILITIES AND USED EFFECTIVELY = VALUE IS CREATED OLYMPIC RING MODEL OF RESOURCE VALUE = SCARCITY, DEMAND, APPROPRIABILITY, NON- SUBSTITUTABILITY, AND “ADHESABILITY”

GOOD NEWS & BAD NEWS THE GOOD NEWS IS THAT RESOURCES BECOME VALUABLE TO THE EXTENT THEY ARE SPECIALIZED & DEDICATED –ASSET SPECIFICITY (GOOD ECONOMIST WORD) THE BAD NEWS IS THAT RESOURCES ARE VALUABLE TO THE EXTENT THAT THEY ARE SPECIALIZED & DEDICATED –IF MAKE WRONG CHOICES, HARD TO GO BACK –PATH DEPENDENCY; ESCALATING COMMITMENT

DYNAMIC CAPABILITIES AS BUSINESS ENVIRONMENT CHANGES, WE DON’T WANT ANY OLD CAPABILITIES, BUT DYNAMIC CAPABILITIES –CAPABILITIES THAT CAN BE ADAPTED TO CHANGING CONDITIONS –FLEXIBILITY, ADAPTABILITY –BUT ORGANIZATIONAL INERTIA MAKES FLEXIBILITY/ADAPTABILITY HARD TO REALIZE, ESPECIALLY IN LIGHT OF INDUSTRY LIFE CYCLE CHANGES

RBV AND VALUE CREATION PROFITABILITY BASED ON THREE FACTORS: -THE VALUE CUSTOMERS PLACE ON PRODUCT/SERVICE OFFERINGS -THE PRICE COMPANIES CHANGE FOR PRODUCTS -THE COSTS OF CREATING/MAKING/ DELIVERING THOSE PRODUCTS

CONSUMER SURPLUS PRICE CHARGED IS TYPICALLY LESS THAN UTILITY VALUE TO CUSTOMERS “EXTRA” UTILITY FROM CUSTOMER PT OF VIEW = CONSUMER SURPLUS P. 80, THE MORE UTILITY THAT CONSUMERS GET FROM FIRM OFFERINGS, THE MORE PRICING OPTIONS FIRM HAS

TOYOTA EXAMPLE TOYOTA CREATES MORE UTILITY VALUE FOR CONSUMERS FOUND IN HIGHER QUALITY, GREATER SATISFACTION & MORE INNOVATION TOYOTA CAN CHARGE HIGHER PRICES THAN ITS RIVALS IN SPITE OF THE FACT THAT ITS COSTS ARE LOWER!!

GENERIC COMPETITIVE STRATEGIES COST LEADERSHIP OR LOWER COST STRUCTURES GIVES FIRMS MORE PRICING OPTIONS DIFFERENTIATION CREATES MORE UTILITY/VALUE AND ALLOWS MORE PRICING CHOICES

VALUE CHAIN HOW ONE COMPANY’S INPUTS ARE CONVERTED INTO OUTPUTS INTERCONNECTED CHAINS/SETS OF ACTIVITIES –FROM UPSTREAM TO DOWNSTREAM –PRIMARY VERSUS SECONDARY ACTIVITIES R&D PRODUCTION MARKETING & SALES CUSTOMER SERVICE

VALUE CHAIN II SUPPORT ACTIVITIES –LOGISTICS –HUMAN RESOURCES –INFORMATION SYSTEMS –COMPANY INFRASTRUCTURE ORG STRUCTURE CONTROL SYSTEMS COMPANY CULTURE

VALUE CHAIN III WHAT BOOK DOESN’T SAY LINKAGE & FEEDBACK BETWEEN STEPS IN VALUE CHAIN JUST AS IMPORTANT AS WHAT HAPPENS WITHIN STEPS –FIRST ORDER FIT –SECOND ORDER FIT –THIRD ORDER FIT IN COMPLEX FIRMS, COMPLEX VALUE CHAINS –IN M-FORM FIRMS, FOR EXAMPLE, LITTLE DISTINCTION BETWN PRIMARY & SUPPORT

BUILDING BLOCKS = FUNCTIONAL LEVEL STRATEGIES EFFICIENCY = OUTPUT/INPUT EFFICIENCY NOT JUST IN PRODUCTION, BUT IN R&D, HR, LOGISTICS, SALES, ETC. QUALITY AS EXCELLENCE & QUALITY AS RELIABILITY SOURCES OF QUALITY AS COMPETITIVE ADVANTAGE = POSTWAR JAPAN & TQM

INNOVATION PRODUCT INNOVATION –iPOD, INTEL PENTIUM CHIP PROCESS INNOVATION –LEAN PRODUCTION OR TPS –WALMART’S IT SYSTEM FOR INVENTORY CONTROL & LOGISTICS INCREMENTAL INNOVATION –KAIZEN –KAIZEN X TIME = CONSIDERABLE PROGRESS RADICAL INNOVATION DISRUPTIVE INNOVATION

FIGURE 3.8, p. 93 CIRCULAR ARGUMENT, NOT TO BE CONFUSED WITH VALUE CREATION CYCLE DISTINCTIVE COMPETENCIES DO NOT ALLOW FIRMS TO ACHIEVE SUPERIOR EFFICIENCY, QUALITY, INNO & CUST SAT SUPERIOR E, Q, I & C.S. MAY ALLOW FIRMS TO DEVELOP DISTINCTIVE COMPETENCIES DISTINCTIVE COMPETENCIES ONLY REALIZED AFTER CHOICE, ORG LRNING & EFFORT –NOT OTHER WAY AROUND

COMPETITIVE ADVANTAGE AND PROFITABILITY LEARN & ANALYZE FIGURE 3.9: DUPONT FORMULA ROIC (RETURN ON INVESTED CAPITAL) DECOMPOSED INTO TWO MAJOR COMPONENTS: –RETURN ON SALES (NET PROFIT/SALES) –COGS/SALES –SG&A/SALES –R&D/SALES –CAPITAL TURNOVER (SALES/INVESTED CAPITAL) –WORKING CAPITAL/SALES –PPE/SALES

DUPONT FORMULA WORKS TO LOWER COSTS OR INCREASE VALUE THROUGH DIFFERENTIATION PP DISCUSS WAL-MART VS. TARGET WITH RESPECT TO PROFITABILITY & WHY –WHICH HAS LOWER COSTS HOW MUCH LOWER? –WHICH CREATES MORE VALUE HOW MUCH MORE VALUE

DURABILITY OF COMPETITIVE ADVANTAGE OR SUSTAINABLE COMPETITIVE ADVANTAGE = DURABILITY BARRIERS TO IMITATION –INDUSTRY DYNAMISM A BIG FACTOR –IMITATING/DUPLICATING RESOURCES (RESOURCE ENDOWMENTS) –IMITATING CAPABILITIES STRATEGIC COMMITMENTS (PATHWAY) HARD TO IMITATE ABILITY TO IMITATE MAY DEPEND ON ABSORPTIVE CAPACITY

WHY COMPANIES FAIL INERTIA PRIOR STRATEGIC COMMITMENTS ICARUS PARADOX (DANNY MILLER) –CRAFTSMEN –BUILDERS –PIONEERS –SALESMEN

STEPS TO AVOID FAILURE FOCUS ON THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE (FUNCTIONAL LEVEL STRATEGIES) INSTITUTE CONTINUOUS IMPROVEMENT AND LEARNING PRACTICES TRACK INDUSTRY BEST PRACTICES AND BENCHMARK (There may be a contradiction.) OVERCOME INERTIA BE LUCKY (RIGHT TIME, RIGHT PLACE)

GOOGLE SIDEBAR PP DISCUSSES GOOGLE’S SUCCESS USING THE CONCEPTS FROM THIS CHAPTER, HOW WOULD YOU ACCOUNT FOR GOOGLE’S SUCCESS?