Strategic Management Firm Core Competencies (Resources & Capabilities) and Firm Performance

Professor Jeff Dyer BYU, Marriott School Sources of Superior Profitability Superior Profitability Attractive Industry Firm Resources & Capabilities

Professor Jeff Dyer BYU, Marriott School Performance Differentials in the Steel Industry ( ) $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 LTVArmcoBethlehemInlandUSXNucor $0.07 $0.26 $0.76 $1.29 $1.38 $4.50 Average = $ Value of $1 Invested in 1981 Source: R.P. Rumelt (1995)

Professor Jeff Dyer BYU, Marriott School GENERIC FIRM-LEVEL STRATEGIES FOR COMPETITIVE ADVANTAGE Low cost (Efficiency) –Producing similar product at lower cost Differentiation (Premium value) –Producing unique product with attributes buyers will pay for Costs MarginsIndustry Average Price Low Cost Product Differentiation Sources of AdvantageGeneric Strategies

Professor Jeff Dyer BYU, Marriott School Barriers to Entry vs Barriers to Imitation n Barriers to entry shared by all industry competitors; barriers to imitation are firm-specific n Barriers to imitation are created by firms through developing specialized and unique resources and capabilities n Barriers to imitation are primarily of two types: – Barriers to cost imitation (e.g., access to inputs, scale, experience) – Barriers to product imitation and accessing customers (e.g., patents, brands, customer learning) D A BC Industry A 8% B 5% C 15% Industry

Professor Jeff Dyer BYU, Marriott School FIRM-LEVEL MODEL OF SUSTAINABLE COMPETITIVE ADVANTAGE Cost Barriers (To Imitation) High Low HighLow Differentiation (Customer Access) Barriers (To Imitation) COST ADVANTAGE (Similar product at equal or lower price) MULTIPLE SOURCES OF SUSTAINABLE ADVANTAGE (Causal Ambiguity) Iowa Beef (Steaks) Merck (Pharmaceuticals) IBM (70s-80s Computers) Microsoft NO ADVANTAGE (Avg. or poor profits) Alcoa (Aluminum) Purdue (Chickens) DIFFERENTIATION ADVANTAGE (Differentiated products/ features; Niche Player) Polaroid (Instant Photography)

Professor Jeff Dyer BYU, Marriott School Barriers to Cost Imitation n Superior/favored access to inputs; location advantages n Scale, experience, cost management know-how n Proprietary process technology, specialized production assets n Value chain configuration n Government support (regulations, tariffs, subsidies) Example(s) n Alcoa (bauxite), DeBeers (diamonds) n Boeing, Wal-Mart, Giant Food n Toyota n Toyota, Amazon.com, IKEA n Airbus (Europe); Auto and semiconductor industries (Korea) Cost-based Advantages

Professor Jeff Dyer BYU, Marriott School Barriers to Product Imitation (Customer Access) Differentiation Advantages n Unique/proprietary product offerings – patents, deeds, copyrights – breadth of offering, complementary products n Reputation/brand capital – quality reputation n Relationships – exchange part of reciprocal relationships n Favored access to distribution n Network or learning effects; Installed base – multiple customer locations, customer learning Examples n Disney, Polaroid, Xerox, Pharmaceutical companies n Sony, Mercedes, Disney, Jell-O, Kleenex, Marriott n Japanese keiretsu groups, supplier networks partnerships n Coke & Pepsi; P&G diapers (hospitals), Japanese car makers n Nintendo, Matsushita (VHS standard), software

Professor Jeff Dyer BYU, Marriott School Drivers of Competitive Advantage and High Returns n Barriers to entry n Threats of substitutes n Relative bargaining power n Degree of rivalry n Firm Resources – preferred access to key assets, locations, inputs; brand names, installed base, financial resources, etc. n Firm Capabilities – firm know-how and processes to create new products and resources Industry Factors Firm Factors

Professor Jeff Dyer BYU, Marriott School The Components of Profitability: Firm Resources Outweigh Industry Attractiveness 37% 1% 7% 9% 47% Stable Industry Industry-Year Firm/Business Unit Firm/Corporate Other (not attributable) Source: R.P. Rumelt (1991)

Professor Jeff Dyer BYU, Marriott School SUMMARY Sources of Competitive Advantage n The industry: developing an attractive industry structure which minimizes buyer/supplier power, avoids excessive rivalry, and raises barriers to entry. n The firm: identifying, developing, and leveraging key resources and capabilities to create create cost-based advantages or product differentiation advantages which cannot be easily imitated. n Competitive reaction: developing response strategies to competitor behavior which effectively anticipate and neutralize competitor actions. Competitive Advantage depends upon: