Chapter 4 Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

Why Internal Analysis?  Early strategy theory rooted in industry structural analysis - external focus  This approach has lost its appeal because: internationalization & deregulation has all but removed safe havens internationalization & deregulation has all but removed safe havens technology and changes in demand have blurred industry lines technology and changes in demand have blurred industry lines

A product of the Resource Based View Resources Capabilities Core Competencies Strategies Competitiveness & Profit The Role of Resources and Capabilities in the Creation of Profit Distinctive Competencies Competitive Advantages Build Shape

Strength Skill, specialized expertise, or important capability Skill, specialized expertise, or important capability Physical asset Physical asset Human assets or intellectual capital Human assets or intellectual capital Organizational asset Organizational asset Intangible assets Intangible assets Competitive achievement Competitive achievement Alliance or cooperative venture Alliance or cooperative venture

Evaluation of Resources Strength or Weakness relative to competitors relative to competitors basic business requirements basic business requirements key vulnerabilities key vulnerabilities

Other Threats Emergence of cheaper/better technologies Emergence of cheaper/better technologies Introduction of better products by rivals Introduction of better products by rivals Entry of lower-cost foreign competitors Entry of lower-cost foreign competitors Onerous regulations Onerous regulations Rise in interest rates Rise in interest rates Potential of a hostile takeover Potential of a hostile takeover Unfavorable demographic shifts Unfavorable demographic shifts Adverse shifts in foreign exchange rates Adverse shifts in foreign exchange rates Political upheaval in a country Political upheaval in a country

Tangible Resources Intangible Resources Org. Capabilities Examples….. Customer Service Product Development Employee Productivity Inputs into Outputs

Core Competencies central to the firm’s competitiveness central to the firm’s competitiveness rewarded in market place rewarded in market place combination of skills & knowledge, not products or functions combination of skills & knowledge, not products or functions flexible, long term platforms flexible, long term platforms embedded in the organization’s systems embedded in the organization’s systems distinctive competencies are those the firm performs better than rivals distinctive competencies are those the firm performs better than rivals All core competencies have the potential to become core rigidities All core competencies have the potential to become core rigidities

Sustainable Competitive Advantage Must be valuable, rare, inimitable, and non- substitutable Sustainability is a function of Durability - how long will it last? Durability - how long will it last? Technology? Reputation? Fixed Assets? Technology? Reputation? Fixed Assets? Imitability - how quickly can it be copied? Imitability - how quickly can it be copied? 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 Imitation  Physical Uniqueness –  Path Dependency –  Causal Ambiguity –  Social Complexity –  Absorptive Capacity –

Relative costs and prices Where do cost/price differences come from? raw materials and components raw materials and components differences in technology, plant, equipment differences in technology, plant, equipment efficiencies, learning, experience, wages, productivity efficiencies, learning, experience, wages, productivity marketing, sales, promotion, warehousing, distribution, administration costs marketing, sales, promotion, warehousing, distribution, administration costs distribution distribution inflation, exchange and tax rates inflation, exchange and tax rates

Value Creation per Unit

Comparing Toyota and General Motors

Porter’s Value Chain Views the organization as a series (chain) of activities, which may or may not create value

Porter’s Value Chain (cont.)  Primary Activities – Inbound logistics – Supply Chain Management – Operations – Outbound logistics - Distribution – Marketing and sales – Customer service – Contribute to the physical creation of the product/service, its sale and transfer to the buyer, and its service after the sale

Porter’s Value Chain (cont)  Support Activities Company infrastructure – General Admin Company infrastructure – General Admin Human resource management Human resource management R&D, Technology and Systems Development R&D, Technology and Systems Development Procurement Procurement

Company Infrastructure HRM R&D, Technology & Systems Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin The Value Chain SupportSupport Primary

A low cost strategy….. Company Infrastructure HRM Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin …tries to pull the arrow back….. R&D, Technology & Systems Development

Fewer layers of management Policies to reduce turnover IBM Printer to 62 parts, 3.5 minutes Monitor supplier performance Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin Low Cost - Support Activity examples…...

Low cost - Primary Activity examples….  Inbound -  Operations -  Outbound -  Marketing/Sales -  Customer Service -

A differentiation strategy….. Company Infrastructure HRM Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin ….tries to pull the arrow forward... R&D, Technology & Systems Development

Commitment to quality Compensation rewarding innovation Amazon Recommendations Purchasing high-quality components Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin Differentiation - Support Activity examples…...

 Inbound -  Operations -  Outbound -  Market/Sales -  Customer Service - Differentiation - Primary Activity examples…...

Suppliers Buyers Your Firm Your Rivals

Suppliers Buyers Your Firm Your Rivals Opportunities for Advantage

Suppliers Buyers Your Firm Your Rivals Opportunities for Adding Value Opportunities for Adding Value