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

The Role of Resources and Capabilities in the Creation of Profit A product of the Resource Based View Resources Build Shape Core Competencies Distinctive Competencies Competitive Advantages Strategies Build Capabilities Competitiveness & Profit

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

Evaluation of Resources Strength or Weakness

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

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

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

Low Cost - Support Activity examples…... Fewer layers of management Policies to reduce turnover IBM Printer - 150 to 62 parts, 3.5 minutes Margin Monitor supplier performance Service Marketing & Sales Inbound Logistics Operations Outbound Logistics Margin

Low cost - Primary Activity examples…. Inbound - Operations - Outbound - Marketing/Sales - Customer Service -

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

Differentiation - Support Activity examples…... Commitment to quality Compensation rewarding innovation Package tracking systems Margin Purchasing high-quality components Service Marketing & Sales Inbound Logistics Operations Outbound Logistics Margin

Differentiation - Primary Activity examples…... Inbound - Operations - Outbound - Market/Sales - Customer Service -

Your Firm Buyers Suppliers Your Rivals Opportunities for Adding Value Opportunities for Adding Value Opportunities for Advantage Buyers Suppliers Your Rivals

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 - 2000 Dell Compaq ROIC 38.1% 13.3% ROS 7.0% 1.4% COGS/Sales 80% 76% SG&A/Sales 10% 14% R&D/Sales 1.5% 3.5% Capital Turnover 5.20 3.17 Working Capital/Sales 9.2% 10.1% PPE/Sales 3% 8.1%

Definitions of Basic Accounting Terms

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

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?