3 Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability BA 469 Spring Term, 2007 Prof. Dowling

3 - 2 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)

3 - 3 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

3 - 4 Profitability in the U.S. Retailing Industry,

3 - 5 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

3 - 6 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

3 - 7 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

3 - 8 Strategy, Resources, Capabilities, and Competencies

3 - 9 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