1. 3
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

2. 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 company’s competitive advantage (strengths and weaknesses)
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3. Competitive Advantage
A firm’s 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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4. Profitability in the U.S. Retailing Industry, 1996-2001
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5. 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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6. 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 firm’s products may lead to distinctive competency
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7. The Role of Capabilities
A company’s skills at coordinating and using its resources
Capabilities are the product of organizational structure, processes, and control systems
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8. Strategy, Resources, Capabilities, and Competencies
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9. 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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10. Competitive Advantage, Value Creation, and Profitability
Profitability factors
Amount of value customers place on the company’s products
Price charged
Costs of creating the value
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11. Value Creation per Unit
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12. Value Creation and Pricing Options
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13. Comparing Toyota and General Motors
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14. Differentiation and Cost Structure: Roots of Competitive Advantage
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15. 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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16. The Value Chain: Primary and Support Activities
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17. The Generic Building Blocks of Competitive Advantage
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18. 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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19. Quality
Superior quality = customer perception of greater value in a specific product’s 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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20. Quality (cont’d) 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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21. A Quality Map for Automobiles
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22. Innovation The act of creating new products or processes
Product innovation
Creates products that customers perceive as more valuable, increasing the company’s pricing options
Process innovation
Creates value by lowering production costs
Perhaps the most important building block of competitive advantage
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23. 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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24. Responsiveness to Customers (cont’d)
Sources of enhanced customer responsiveness
Customer response time, design, service, after-sales service and support
Differentiates a company/its products; leads to brand loyalty and premium pricing
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25. 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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26. Why Companies Fail Inertia Prior strategic commitments
Companies find it difficult to change their strategies and structures
Prior strategic commitments
Limit a company’s 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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27. 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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28. Analyzing Competitive Advantage and Profitability
Benchmarking company performance against that of competitors and the company’s own historic performance
Return on invested capital
Net profit = Total revenues – Total costs
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29. Definitions of Basic Accounting Terms
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30. Drivers of Profitability (ROIC)
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31. Ways to Increase ROIC Increase the company’s 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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