Chapter 3 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 –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

Types of Resources Tangible Resources 1.PP&E 2.Buildings 3.Materials/Inventory 4.Money Intangible Resources 1.Relational Resources Relationships Reputation 2.Non-relational Knowledge Patents, copyrights and trademarks Attitudes

Evaluation of Resources Strength or Weakness – – –

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

Core Competencies –central to the firm’s competitiveness –rewarded in market place –combination of skills & knowledge, not products or functions –flexible, long term platforms –embedded in the organization’s systems –distinctive competencies are those the firm performs better than rivals –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? Technology? Reputation? Fixed Assets? –Imitability - how quickly can it be copied? Transparent - Transferable - Replicable -

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 –differences in technology, plant, equipment –efficiencies, learning, experience, wages, productivity –marketing, sales, promotion, warehousing, distribution, administration costs –distribution –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 –Operations –Outbound logistics –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

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

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 Information Systems Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin ….tries to pull the arrow forward...

Commitment to quality Compensation rewarding innovation Package tracking systems 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 Opportunities for Advantage Opportunities for Adding Value Opportunities for Adding Value

The Generic Building Blocks of Competitive Advantage

Analyzing Competitive Advantage and Profitability Benchmarking return on invested capital –against competitors –again historic performance Net profit = Total revenues – Total costs

Drivers of Profitability (ROIC)

Dell vs. Compaq DellCompaq ROIC38.1%13.3% ROS7.0%1.4% COGS/Sales80%76% SG&A/Sales10%14% R&D/Sales1.5%3.5% Capital Turnover Working Capital/Sales 9.2%10.1% PPE/Sales3%8.1%

Dell vs. Compaq DellCompaq ROIC38.1%13.3% ROS7.0%1.4% COGS/Sales80%76% SG&A/Sales10%14% R&D/Sales1.5%3.5% Capital Turnover Working Capital/Sales 9.2%10.1% PPE/Sales3%8.1%

Dell vs. Compaq DellCompaq ROIC38.1%13.3% ROS7.0%1.4% COGS/Sales80%76% SG&A/Sales10%14% R&D/Sales1.5%3.5% Capital Turnover Working Capital/Sales 9.2%10.1% PPE/Sales3%8.1% Compaq’s higher sales force costs Compaq’s effort to differentiate their PCs

Dell vs. Compaq DellCompaq ROIC38.1%13.3% ROS7.0%1.4% COGS/Sales80%76% SG&A/Sales10%14% R&D/Sales1.5%3.5% Capital Turnover Working Capital/Sales 9.2%10.1% PPE/Sales3%8.1% Compaq’s addition costs to finance inventory Dell’s strategy of outsourcing manufacturing to suppliers

Definitions of Basic Accounting Terms

Ways to Increase ROIC 1.Increase the company’s return on sales a)Reduce cost of goods sold b)Reduce spending on sales force, marketing, general, and administrative expenses c)Reduce R&D spending d)Increase sales revenue more than costs 2.Increase sales revenues from invested capital a)Reduce the amount of working capital b)Reduce amount of fixed capital

Balanced Scorecard Comprehensive view of the firm from the customer, internal, financial and innovation/learning perspectives –1) How do customers see us? Time, quality, service & performance, costs –2) What must we excel at? –3) How do we look to shareholders? –4) Can we continue to improve and create value?