INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES, SUSTAINABLE COMP. ADV. & PROFITABILITY FALL 2009 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? –FIRM-SPECIFIC STRENGTHS THAT ALLOW FIRM 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

DISTINCTIVE COMPETENCIES INVOLVE MANAGERIAL CHOICE & DISCRETION INVOLVE CREATING SUPERIOR ORGANIZATIONAL PROCESSES –WHICH TAKE RESOURCES, TIME & EFFORT –WHICH RARELY OCCUR RIGHT AWAY & EASILY 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, AS IT DOES, WE DON’T WANT ANY OLD CAPABILITIES, BUT DYNAMIC CAPABILITIES –CAPABILITIES THAT CAN BE ADAPTED TO CHANGING CONDITIONS –FLEXIBILITY, ADAPTABILITY, RESILIENCY –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 , 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 (OFTEN SHOWN AS A SECONDARY VALUE CHAIN) IN MANY CASES, IT’S HARD TO DISTINGUISH PRIMARY AND SECONDARY ACTIVITIES; OLD IDEA ASSOCIATED WITH MFG FIRMS) –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 ACTIVITIES; SAME FOR SERVICE INDUSTRIES

BUILDING BLOCKS OF COMPETITIVE ADVANTAGE = FUNCTIONAL LEVEL STRATEGIES –DON’T BE CONFUSED; SEE CHAPTER 4 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 –KAIZEN OR CONTINUOUS IMPROVEMENT

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, ACCUMULATED PROGRESS-->HARD TO REPLICATE COMPT. ADV. –TENDENCY TO OVERLOOK INCREMENTAL INNO IN FAVOR OF RADICAL & DISRUPTIVE INNOVATION RADICAL INNOVATION DISRUPTIVE (DISCONTINUOUS) INNOVATION

FIGURE 3.8, p. 92 CIRCULAR ARGUMENT, NOT TO BE CONFUSED WITH VALUE CREATION CYCLE DISTINCTIVE COMPETENCIES DO NOT ALLOW FIRMS TO ACHIEVE SUPERIOR EFFICIENCY, QUALITY, INNO & CUST RESPONSIVENESS SUPERIOR E, Q, I & C.R. MAY ALLOW FIRMS TO DEVELOP DISTINCTIVE COMPETENCIES DISTINCTIVE COMPETENCIES ARE REALIZED ONLY AFTER CHOICE, INVESTMENT, EFFORT & ORGANIZATIONAL LEARNING –NOT OTHER WAY AROUND

COMPETITIVE ADVANTAGE AND PROFITABILITY LEARN & ANALYZE FIGURE 3.9: DUPONT FORMULA –SLIGHTLY DIFFERENT FROM APPENDIX TO CHPT 1 –WHERE ROIC = NOPLAN/IC (depreciation + adjusted taxes) 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

KEY POINTS IN ANALYIS & DISCUSSION TABLE 3.1 FIGURES 3.9 & 3.10 WHY DOES DELL HAVE A MUCH BETTER ROIC THAN HP? WHY IS DELL’S ROIC SLIPPING RELATIVE TO HP IN RECENT YEARS?

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

WHY COMPANIES FAIL INERTIA PRIOR STRATEGIC COMMITMENTS –TOO COMMITED TO PRIOR INVESTMENTS –TOO INVESTED TO PULL OUT –TOO MYOPIC ICARUS PARADOX (DANNY MILLER) –CRAFTSMEN (TOO ENGINEERING FOCUSED) –BUILDERS (TOO ENAMORED OF BUILDING) –PIONEERS (TOO FIXED ON BEING CREATIVE) –SALESMEN (TOO FOCUSED ON SELLING)

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 BENCHMARKS (There may be a contradiction.) –NOTION OF COMPETITIVE ADVANTAGES BASED ON DISTINCTIVE COMPETENCIES UNUSUAL RESOURCES UNUSUAL CAPABILTIES & COMPETENCIES ESSENTIALLY, INIMITABLE; THUS, BEST PRACTICES MAY NOT BE REPLICABLE OVERCOME INERTIA BE LUCKY (RIGHT TIME, RIGHT PLACE)