Copyright © 2001 Houghton Mifflin Company. All rights reserved. Chapter 4 Internal Analysis: Resources, Capabilities, Competencies, and Competitive Advantage Strategic Charles W. L. Hill Management Gareth R. Jones Fifth Edition PowerPoint Presentation by Charlie Cook An Integrated Approach

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-2 Chapter 3 External Environment What the Firm Might Do Chapter 4 Internal Environment What the Firm Can Do Sustainable Competitive Advantage

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-3 Competitive Advantage: Value Creation, Low Cost, and Differentiation Competitive advantage is a firm’s ability to outperform its competitors (earn higher profits). The source of competitive advantage is value creation for customers. Sustained competitive advantage comes from maintaining higher profits than competitors over long periods of time.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-4 FIGURE 4.3 Generic Building Blocks of Competitive Advantage

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-5 Generic Building Blocks of Competitive Advantage In other words, firms can build a sustainable competitive advantage by having capabilities in at least one of the following areas:  Superior Quality  Superior Efficiency  Superior Service (customer responsiveness  Superior Innovation

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-6 Business-Level Strategies We will talk in further detail about business-level strategies after Exam I. However, your generic choices are to offer products/services that are different/unique from your competitors or less expensive than those of your competitors. To achieve differentiation you will need superior innovation, superior quality, and/or superior service. To achieve low-cost you will need superior efficiency, superior quality, and/or superior process innovation.

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-7 FIGURE 4.6 The Value Chain – The means through which firms create value to either differentiate or provide lower cost products/services

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-8 What a firm has to work with: its assets, including its people and the value of its brand name What a firm Has... Resources Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-9 Strategic Resources and Capabilities – which can be found in every link along the value chain Tangible  Human Resources  Financial  Physical  Land  Buildings  Plant  Equipment  Organizational Intangible  Brand names  Reputation  Patents  Technological or marketing know-how

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-10 What a firm Does... Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-11 Valuable Rare Capabilities that are not possessed by many others Capabilities that help a firm neutralize threats or exploit opportunities Core Competencies What a firm Does... that is Strategically Valuable

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-12 Rare Core Competencies What a firm Does... that is Strategically Valuable Valuable Capabilities that are not possessed by many others Capabilities that help a firm neutralize threats or exploit opportunities

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-13 Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Core Competencies What a firm Does... that is Strategically Valuable Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-14 Resources Leading to Sustainable Competitive Advantage Organizational Resources and Capabilities Financial Physical Human Organizational VALUABLE? RARE? Competitive Advantage DIFFICULT OR COSTLY TO IMITATE? NONSUBSTITUTABLE Sustainable Competitive Advantage APPLIED TO MULTIPLE BUSINESSES? Core Competency or Capability

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-15 What Criteria Make Core Competencies Costly to Imitate? What Criteria Make Core Competencies Costly to Imitate? Unique Historical Conditions Causal Ambiguity This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage Example: Disney created Mickey Mouse at a time when animated motion pictures were new An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-16 What Criteria Make Core Competencies Costly to Imitate? What Criteria Make Core Competencies Costly to Imitate? Social Complexity Occurs when the firm’s capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firm’s reputation with suppliers and customers

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-17 ValuableRare Costly to Imitate Nonsub- stitutable Competitive Consequences Performance Implications NO Competitive Disadvantage Below Average Returns YESNO YES/NO Competitive Parity Average Returns YESNOYES/NOYES Temporary Competitive Advantage Aver./Above Average Returns Above Average Returns Above Average Returns YE S Sustainable Competitive Advantage Sustainable Competitive Advantage Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-18 FIGURE 4.7 Distinctive Competencies, Resources, and Capabilities The roots of competitive advantage:

Copyright © 2001 Houghton Mifflin Company. All rights reserved.4-19 Why Do Companies Fail? What went wrong?  Inertia  Prior strategic commitments  The Icarus paradox Avoiding failure and sustaining competitive advantage:  Focus on the building blocks of competitive advantage.  Institute continuous improvement and learning.  Track best industrial practice and use benchmarking.  Overcome inertia.