1. 1 Competing On Capabilities Shantanu Dutta –Understanding Company Capabilities –P&G –My research and findings on capabilities and firm performance in the semiconductor industry

2. 2 Sustainable Competitive Advantage and Company Capabilities n Firms within the same industry vary significantly in their performance. n This occurs because firms differ in their ability to maintain sustainable competitive advantage. n A key component which enables firms to maintain sustainable competitive advantage is their organizational capabilities. n We will explore the notion of capabilities

3. 3 Role of Capabilities and Resources In Profitability Firm A Superior Resources Superior Capabilities Firm B Firm C … Firm N Competing Firms Competitive Advantage Imperfect Imitability Imperfect Mobility Competitive Dynamics Erodes Advantages Firm’s Profitability

4. 4 Identifying Company Capabilities n In a dynamic business environment marketing strategy has to become more dynamic n Essence of successful strategy : Identify and develop hard- to- imitate organizational capabilities that distinguish a company from its competitors in the eyes of customers n Three core features of such capabilities : –they make a significant contribution to the perceived benefits of the customer who consumes the end product –they provide potential access to a wide variety of markets –they are difficult for competitors to imitate

5. 5 P&G’s Organizational Capabilities n Managing and organizing the marketing process –P&G’s extraordinary depth of staff resources dedicated to understanding consumers and other market research was considered a key competitive advantage –The major strength of P&G’s consumer research was the quality of interviewing and consistent methodology among projects. This provided large data bases of comparable research over several years from which P&G could establish norms and accurately track changing consumer perceptions and habits. n Fortune 1998: P&G manages every element of its business with a painstaking precision that most organizations fail to approach.

6. 6 P&G: Results of Organizational Capabilities n Thorough organization of the marketing activities ensure that consumers perceive the benefits in the manner that P&G would like them to perceive. n Brand equity for P&G

7. CONCEPTUALIZING & MEASURING FIRM’S CAPABILITIES Shantanu Dutta Marshall School of Business, University of Southern California Presentation To: Marketing Science Institute Board of Trustees Meeting November 4, 1999

8. 8 Resources and Capabilities: Key Concepts r Resources: are assets that are ‰ Externally available and not firm specific ‰ Owned or controlled by the firm ‰ Convertible to achieve the firm’s goals/objectives r Capabilities: are organizational processes used to deploy resources and are ‰ Information-based and firm-specific (and hence display imperfect mobility) ‰ Developed through complex interactions among the firm’s resources (and hence display imperfect imitability) ‰ Form the basis for the firm’s competitive advantage

9. Resources and Capabilities: The Case of R&D R&D Expenditure Technological Base R&D Capability Innovative Output

10. 10 Conceptualizing Firm’s Capabilities Capabilities refers to a firm’s “[ability to] deploy resources to effect a desired end” êA firm exhibits superior capability if it is able to deploy its resources more efficiently than other competing firms êA firm with a higher capability should be able to achieve a higher level of objectives/goals for the same set of resources

11. 11  Secondary data on 92 firms, one SIC code (3674) from 1984-1994.  Some firms in the sample: Intel, Cirrus, AMD  Business-to-business setting: Buyers are firms like Compaq and Dell  Financial, Operations, Marketing data for sample firms from Compustat  Patent data for firms from the USPTO Description of Data

12. Application To Semiconductor Industry

13. Findings: Role of Marketing In Technological Innovation  Marketing capability has a significant impact on a firm’s ability to come up with technological innovations  The impact of marketing capability on innovativeness is greatest for firms which already have a good technological base  A firm’s prior technological base has a significant impact on its marketing capability

14. 14  Key Result:  The most significant determinant of profitability is the combination of R&D and marketing capabilities Impact of Firm’s Functional Capabilities on Profitability

15. Distribution of Marketing Inefficiency

16. Distribution of R&D Inefficiency

17. 17 Distribution of Capabilities: Implications n Average marketing capability lower than average R&D capability Implication: Lots of room for improvement in marketing capability n More variance in marketing capability than in R&D capability across firms Implication: Greater bang for buck in improvement in marketing capability

18. 18 Logistics/Product Design/Manufacturing -Ability to reduce manufacturing costs -Ability to protect/exploit patents -Ability to customize products -Relationship with key suppliers -Flexible and adaptive manufacturing -Strong track record of innovative R&D Marketing -Ability to manage collaborators /channels -Ability to develop creative market communications -Ability to develop strong/loyal customers and relationships -Ability to offer high quality service (technical support, repair, returns, etc.) -Ability to introduce stream of innovative products quickly to market -Ability to develop products that embody ease of use’ -Ability to develop customized products Some Examples of Organizational Capabilities