1. INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES, SUSTAINABLE COMP. ADV. & PROFITABILITY SPRING 2010 CHAPTER 3, BUS 189 DR. MARK FRUIN

2. 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 –GENERIC COMPETITIVE STRATEGIES SUCCESS BASED ON INDUSTRY STRUCTURE & POSITION INTERNAL ANALYSIS = ORG ANALYSIS FROM RESOURCE BASED POINT OF VIEW –FIRM AS A COLLECTION OF RESOURCES –FIRM THAT BEST COMBINES, MOBILIZES & MANAGES RESOURCES WINS –RBV = R-C-C-DC (A LONG TERM ORG PROCESS MODEL)

3. 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 NEARLY AS WELL

4. 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

5. 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 BUT LATELY, DELL HAS NOT BEEN WINNING WHAT’S WRONG? –MAYBE A LITTLE BIT OF PORTER WOULD HELP?

6. DISTINCTIVE COMPETENCIES INVOLVE MANAGERIAL CHOICE & DISCRETION INVOLVE CREATING SUPERIOR ORGANIZATIONAL PROCESSES –WHICH TAKE RESOURCES, TIME & EFFORT –WHICH RARELY OCCUR RIGHT AWAY & EASILY –WHICH INVOLVE AN INFINITE NUMBER OF FEEDBACK LOOPS & MORE CHOICE AND DISCRETION NECESSARILY INVOLVE A MAJORITY OF ORGANIZATIONAL MEMBERS –STRATEGIC INTENT –STRETCH GOALS

7. RESOURCES TANGIBLE INTANGIBLE CREATE LITTLE VALUE UNLESS THEY ARE USED, SO USE RESOURCES USING THEM, CONVERTS THEM INTO CAPABILITIES –CAPABILITIES ARE PRODUCTS OF FIRM STRUCTURE, PROCESSES & CONTROL SYSTEMS OR SO THE BOOK SAYS; ACTUALLY, IT’S THE REVERSE IN MY OPINION –RESIDE NOT IN INDIVIDUALS, BUT ARE EMBODIED IN ORGANIZATIONS

8. WHAT MAKES RESOURCES VALUABLE? BOOKS SAYS, “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”/ ENABLING-ABILITY

9. 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 WRONG CHOICES MADE, HARD TO GO BACK –PATH DEPENDENCY; ESCALATING COMMITMENT –AS SOON AS YOU DRIVE OFF THE LOT, YOUR NEW CAR IS WORTH 20% LESS

10. DYNAMIC CAPABILITIES AS BUSINESS ENVIRONMENT CHANGES, CAPABILITIES & COMPETENCIES HAVE TO CHANGE TOO, 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 & HARD CHARGING FAST FOLLOWERS/LATE COMERS

11. 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

12. CONSUMER SURPLUS PRICE CHARGED IS TYPICALLY LESS THAN UTILITY VALUE TO CUSTOMERS “EXTRA” UTILITY FROM CUSTOMER PT OF VIEW = CONSUMER SURPLUS THE MORE UTILITY THAT CONSUMERS GET FROM FIRM OFFERINGS, THE MORE PRICING OPTIONS FIRM HAS

13. 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!!

14. GENERIC COMPETITIVE STRATEGIES COST LEADERSHIP OR LOWER COST STRUCTURES GIVES FIRMS MORE PRICING OPTIONS DIFFERENTIATION CREATES MORE UTILITY/VALUE AND ALLOWS MORE PRICING CHOICES

15. 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

16. 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

17. 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

18. 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

19. 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

20. TEXTBOOK CONFUSED CIRCULAR ARGUMENT IN TEXTBOOK; 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

21. COMPETITIVE ADVANTAGE AND PROFITABILITY LEARN & ANALYZE DUPONT FORMULA –SLIGHTLY DIFFERENT FROM APPENDIX, CHPT 1 & HOW TO DO CASE ANALYSIS CHAPTER –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

22. 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) BEGIN WITH DIFFERENT RESOURCES USE THEM IN DIFFERENT WAYS DEVELOP THEM DIFFERENTLY –IMITATING CAPABILITIES IS EVEN HARDER TO DO STRATEGIC COMMITMENTS (PATHWAYS) HARD TO IMITATE –A SEQUENCE OF CHOICES ALMOST IMPOSSIBLE TO IMITATE ABILITY TO IMITATE MAY DEPEND ON ABSORPTIVE CAPACITY

23. WHY COMPANIES FAIL INERTIA PRIOR STRATEGIC COMMITMENTS –TOO COMMITED TO PRIOR INVESTMENTS/DECISIONS –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)

24. 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 here; what is it?) –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)