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Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

Internal Analysis
Identifying the strengths and weaknesses of the company Managers must understand
The role of resources, capabilities, and distinctive competencies in the process by which companies create value and profit The importance of superior efficiency, innovation, quality, and responsiveness to customers The sources of their companys competitive advantage (strengths and weaknesses)
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Competitive Advantage
Competitive advantage
A firms profitability is greater than the average profitability for all firms in its industry

Sustained competitive advantage

A firm maintains competitive advantage for a number of years

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Profitability in the U.S. Retailing Industry, 1996-2001

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Distinctive Competences and Competitive Advantage

Distinctive competencies
Firm-specific strengths that allow a company to gain competitive advantage by differentiating its products and/or achieving lower costs than its rivals Arise from resources and capabilities

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The Role of Resources

Resources
Capital or financial, physical, social or human, technological, and organizational factor endowments Tangible and intangible

A firm-specific and difficult to imitate resource is likely to lead to distinctive competency A valuable resource that creates strong demand for a firms products may lead to distinctive competency

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The Role of Capabilities

Capabilities
A companys skills at coordinating and using its resources

Capabilities are the product of organizational structure, processes, and control systems

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Strategy, Resources, Capabilities, and Competencies

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A Critical Distinction
If a firm has firm-specific and valuable resources it must also have the capability to use them effectively to create distinctive competency A firm can create distinctive competency without firm-specific and valuable resources if it has unique capabilities

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Competitive Advantage, Value Creation, and Profitability

Profitability factors
Amount of value customers place on the companys products Price charged Costs of creating the value

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Value Creation per Unit

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Value Creation and Pricing Options

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Comparing Toyota and General Motors

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Differentiation and Cost Structure: Roots of Competitive Advantage

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The Value Chain

A company is a chain of activities for transforming inputs into outputs that customers value The transformation process is composed of primary and support activities that add value to the product

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The Value Chain: Primary and Support Activities

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The Generic Building Blocks of Competitive Advantage

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Efficiency
The quantity of inputs it takes to produce a given output Productivity leads to greater efficiency and lower costs
Employee productivity Capital productivity

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Quality
Superior quality = customer perception of greater value in a specific products attributes
Form, features, performance, durability, reliability, style, design

Quality products = goods and services that are reliable and that are differentiated by attributes that customers perceive to have higher value

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Quality (contd)
The impact of quality on competitive advantage
High-quality products increase the value of (differentiate) the products in customers eyes Greater efficiency and lower unit costs are associated with reliable products

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A Quality Map for Automobiles

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Innovation
The act of creating new products or processes
Product innovation
Creates products that customers perceive as more valuable, increasing the companys pricing options

Process innovation
Creates value by lowering production costs

Perhaps the most important building block of competitive advantage

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Responsiveness to Customers
Doing a better job than competitors of identifying and satisfying customers needs
Superior quality and innovation are integral to superior responsiveness to customers Customizing goods and services to the unique demands of individual customers or customer groups

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Responsiveness to Customers (contd)

Sources of enhanced customer responsiveness
Customer response time, design, service, aftersales service and support

Differentiates a company/its products; leads to brand loyalty and premium pricing

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Analyzing Competitive Advantage and Profitability

Benchmarking company performance against that of competitors and the companys own historic performance Return on invested capital

ROIC =

Net profit Invested capital

Net profit = Total revenues Total costs

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Definitions of Basic Accounting Terms

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Drivers of Profitability (ROIC)

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Ways to Increase ROIC

Increase the companys return on sales
Reduce cost of goods sold Reduce spending on sales force, marketing, general, and administrative expenses Reduce R&D spending Increase sales revenue more than costs

Increase sales revenues from invested capital

Reduce the amount of working capital Reduce amount of fixed capital

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The Durability of Competitive Advantage

Barriers to Imitation
Imitating Resources Imitating Capabilities

Capability of Competitors
Strategic commitment Absorptive capacity

Industry Dynamism

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Why Companies Fail

Inertia
Companies find it difficult to change their strategies and structures

Prior strategic commitments

Limit a companys ability to imitate and cause competitive disadvantage

The Icarus paradox

A company can become so specialized based on past success that it loses sight of market realities Craftsmen, builders, pioneers, salesmen

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Avoiding Failure and Sustaining Competitive Advantage

Focus on the building blocks of competitive advantage Institute continuous improvement in learning Track best industrial practice in use benchmarking Overcome inertia Luck

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