© Ram Mudambi, Temple University, 2007 Lecture 3 Internal Analysis: Resources, Capabilities, Competencies, and Competitive Advantage BA 951 Policy Formulation and Administration

© Ram Mudambi, Temple University, Learning Outcomes  A systematic look inside the firm – why are some firms more successful than others?  The basis of competitive advantage  The boundaries of the firm  ‘Make or buy’  Inter-firm cooperation

© Ram Mudambi, Temple University, Lecture Outline  The nature and sources of competitive advantage  Generic strategies  The resource-based view of the firm  From resources to core competencies  From core competencies to value creation

© Ram Mudambi, Temple University, Competitive Advantage: Value Creation, Low Cost, and Differentiation  Competitive advantage is a firm’s ability to outperform its competitors (earn higher profits).  Sustained competitive advantage (SCA) comes from maintaining higher profits than competitors over long periods of time.  The source of competitive advantage is value creation for customers.

© Ram Mudambi, Temple University, Value Creation per Unit Sometimes called producer surplus U

© Ram Mudambi, Temple University, Comparing Toyota and General Motors Superior value creation requires that the gap between perceived utility (U) and costs of production (C) be greater than that obtained by competitors.

© Ram Mudambi, Temple University, Definitions of basic accounting terms

© Ram Mudambi, Temple University, Drivers of Profitability (ROIC)

© Ram Mudambi, Temple University, Comparing Wal-Mart to Target

© Ram Mudambi, Temple University, Generic Building Blocks of Competitive Advantage

© Ram Mudambi, Temple University, Porter’s generic strategies

© Ram Mudambi, Temple University, Efficiency, quality, innovation, and customer responsiveness

© Ram Mudambi, Temple University, The resource-based view of the firm  Associated with Edith Penrose and more recently with Birger Wernerfelt  The question is “what do we have?” rather than “who do we serve?”  The external environment is in a constant state of flux and largely out of the firm’s control  The internal environment is more stable and more in the firm’s control

© Ram Mudambi, Temple University, What are the firm’s resources? Tangible resources  Financial resources  Physical resources Intangible resources  Reputation  Brand equity Human resources  Human capital – knowledge, skills, etc.  Relationships – effectiveness of teams

© Ram Mudambi, Temple University, From resources to capabilities  From ‘what to we have?’ to ‘what can we do?’  Relative rather than absolute measurements

© Ram Mudambi, Temple University, What are the firm’s capabilities?  Capability = competence  Competencies are identified by disaggregation  Functional disaggregation  Value chain disaggregation  Competencies are relative  Importance of benchmarking  Core competencies are those which  make a disproportionate contribution to ultimate customer value or to the efficiency of its delivery  are a basis for entering new markets

© Ram Mudambi, Temple University, Value Chain Disaggregation

© Ram Mudambi, Temple University, Core competencies  A competence becomes a core competence when the well-performed activity is central to the company’s strategy, competitiveness, and profitability  Often, a core competence results from collaboration among different parts of an organization  Typically, core competencies reside in a company’s people, not in its physical assets  A core competence gives a company a potentially valuable competitive and collaborative advantage

© Ram Mudambi, Temple University, Competencies Competencies Core Competencies Distinctive competencies Uniqueness - Selznick, Ansoff Importance - Hamel and Prahalad

© Ram Mudambi, Temple University, Examples of core competencies Skills in manufacturing a high quality product Skills in manufacturing a high quality product System to fill customer orders accurately and swiftly System to fill customer orders accurately and swiftly Fast development of new products Fast development of new products Better after-sale service capability Better after-sale service capability Superior know-how in selecting good retail locations Superior know-how in selecting good retail locations Innovativeness in developing popular product features Innovativeness in developing popular product features Merchandising and product display skills Merchandising and product display skills Expertise in an important technology Expertise in an important technology Expertise in integrating multiple technologies to create whole families of new products Expertise in integrating multiple technologies to create whole families of new products

© Ram Mudambi, Temple University, Examples: Core competencies Sharp Corporation  Expertise in flat-panel display technology Toyota, Honda, Nissan  Low-cost, high-quality manufacturing capability and short design-to-market cycles Intel  Ability to design and manufacture ever more powerful microprocessors for PCs Motorola  Defect-free manufacture (six-sigma quality) of cell phones

© Ram Mudambi, Temple University, Profit potential of a competency

© Ram Mudambi, Temple University, The Sustainability of Competitive Advantage Barriers to imitation  Speed of imitation by competitors in reducing advantage  Imitation by acquiring similar resources  Imitation of capabilities (more difficult) Limits on competitors  Prior strategic commitments  Absorptive capacity for change Industry dynamism  The rapid innovation shortens product life cycles.

© Ram Mudambi, Temple University, Overview of resource/capability analysis Resources Capabilities Profit potential Strategy Sources of strength and weakness What can the firm do relative to its competitors? Best exploits the firm’s capabilities relative to its external environment Identify resource gaps Invest in resource base

© Ram Mudambi, Temple University, Distinctive Competencies, Resources, and Capabilities The roots of competitive advantage:

© Ram Mudambi, Temple University, Why Do Companies Fail? What went wrong?  Inertia  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

© Ram Mudambi, Temple University, The Icarus Paradox A company becomes so specialized and inner directed based on past success that it loses sight of market realities A company becomes so specialized and inner directed based on past success that it loses sight of market realities Craftsmen – Texas Instruments, DEC – engineering for engineering’s sake Craftsmen – Texas Instruments, DEC – engineering for engineering’s sake Builders – diversification – ITT, Gulf + Western Builders – diversification – ITT, Gulf + Western Pioneers – Innovation – Wang Labs Pioneers – Innovation – Wang Labs Salesmen – Sell anything – P&G, Chrysler Salesmen – Sell anything – P&G, Chrysler Failure to see the link between competence and value creation Failure to see the link between competence and value creation

© Ram Mudambi, Temple University, Avoiding failure and sustaining competitive advantage  Focus on the building blocks of competitive advantage.  Institute continuous improvement and learning.  Track best industrial practice and use benchmarking.  Overcome inertia.

© Ram Mudambi, Temple University, Summary  The building blocks of competitive advantage  Generic strategies  The resource based view of the firm  From resources to competencies  From competencies to value creation  Sources of failures in this linkage