1. 3 CHARLES W. L. HILL / GARETH R. JONES
Strategic Management An Integrated Approach 10th ed.
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
Student Version
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Prepared by C. Douglas Cloud , Professor Emeritus of Accounting, Pepperdine University

2. REBUILDING COMPETITIVE ADVANTAGE AT STARBUCKS
When Howard Shultz became the CEO of the company in January, 2008, he closed all Starbucks stores for one day and retrained the baristas in the art of making coffee.
The company redesigned many of its stores to give them a contemporary feel.
It stopped selling breakfast sandwiches because Shultz thought the smell detracted from the coffeehouse experience.
(continued)
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3. Six hundred underperforming U.S. stores were closed.
He gave store managers more freedom in deciding the type of artwork that would be displayed in the stores.
Starbucks began purchasing coffee beans from growers who adhered to environmentally-friendly policies, and it promoted this to customers.
Six hundred underperforming U.S. stores were closed.
The results have been impressive, with ROIC reaching 24.19% in 2010.
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4. The company’s goal was to do both as efficiently as possible.
OVERVIEW
Starbucks took actions (1) to improve its brand and (2) to improve the quality of the Starbucks experience for customers.
The company’s goal was to do both as efficiently as possible.
This chapter focuses on internal analysis, which is concerned with identifying the strengths and weaknesses of the company.
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5. THE ROOTS OF COMPETITIVE ADVANTAGE
Learning Objective: After reading this chapter you should be able to discuss the source of competitive advantage.
THE ROOTS OF COMPETITIVE ADVANTAGE
A company has a competitive advantage over its rivals when its profitability is greater than the average profitability of all companies in its industry.
When it maintains this competitive advantage over a number of years, it has a sustained competitive advantage.
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6. THE ROOTS OF COMPETITIVE ADVANTAGE
Distinctive competencies are firm-specific strengths that allow a company to differentiate its products from those offered by rivals, and/or achieve lower cost.
Resources refer to the assets of a company.
Tangible resources are physical entities, such as land, buildings, and inventory.
Intangible resources are nonphysical entities that are created by managers and other employees, such as patents, copyrights, and trademarks.
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7. THE ROOTS OF COMPETITIVE ADVANTAGE
Capabilities refer to a company’s resources coordinating skills and productive use.
These skills reside in the style or manner through which it makes decisions and manages its internal processes to achieve organizational objectives.
Capabilities are intangible.
Capabilities are valuable if they enable a company to create strong demand for its products, and/or lower its costs.
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8. THE ROOTS OF COMPETITIVE ADVANTAGE
For a company to possess a distinctive competency, it must—at a minimum—have either:
a firm-specific and valuable resource, and the skills necessary to take advantage of that resource, or
a firm-specific capability to manage resources.
Distinctive competency is strongest when a company possesses both (1) and (2).
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9. COMPETITIVE ADVANTAGE, VALUE CREATION, AND PROFITABILITY
Learning Objective: After reading this chapter you should be able to identify and explore the role of efficiency, quality, innovation, and customer responsiveness in building and maintaining a competitive advantage.
COMPETITIVE ADVANTAGE, VALUE CREATION, AND PROFITABILITY
At the most basic level, a company’s profitability depends on three factors:
The value (utility) customers place on the company’s product.
The price a company charges for its product.
The costs of creating those products.
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10. COMPETITIVE ADVANTAGE, VALUE CREATION, AND PROFITABILITY
The price chosen by a company is typically less than the utility value placed on the good or service by the customer.
The customer captures some of that utility in the form of consumer surplus.
The point-of-sale price tends to be less than the utility value placed on the product by many customers.
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11. COMPETITIVE ADVANTAGE, VALUE CREATION, AND PROFITABILITY
Managers must understand:
the dynamic relationships and costs in order to make decisions that will maximize competitive advantage and profitability;
how value creation and pricing decisions affect demand; and
how unit costs change with increases in volume.
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12. Learning Objective: After reading this chapter you should be able to explain the concept of the value chain.
THE VALUE CHAIN
The term value chain refers to the idea that a company is a chain of activities.
This chain of activities transforms inputs into outputs that customers value.
The transformation process involves both primary activities and supplies activities that add value to the product.
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13. THE VALUE CHAIN
The support activities of the value chain provide inputs that allow the primary activities to take place.
The materials-management (logistics) function controls the transmission of physical materials through the value chain.
The human-resources function ensures that the company has the right combination of skilled people to perform its value creation activities effectively.
(continued)
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14. THE VALUE CHAIN
3) Information systems are, primarily, the electronic systems for managing inventory, tracking sales, pricing products, selling products, and so on.
4) Company infrastructure is the companywide context within which all the other value creation activities take place:
Organizational structure
Control system
Company culture
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15. THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE
Learning Objective: After reading this chapter you should be able to understand the link between competitive advantage and profitability.
THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE
Four factors help a company build and sustain a competitive advantage.
Superior efficiency
Superior quality
Innovation
Superior customer responsiveness
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16. THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE
Superior Efficiency
The more efficient a company is, the fewer inputs are required to produce a particular output.
The most common measure of efficiency for many companies is employee efficiency.
Employee productivity refers to the output produced per employee.
Employee productivity helps a company attain a competitive advantage through a lower cost structure.
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17. Superior Quality
A product is said to have superior quality when customers perceive that its attributes provide them with higher utility than the attributes of products sold by rivals.
When customers evaluate the quality of a product, they commonly measure two attributes.
Quality as excellence: Product design and styling, aesthetic appeal, features, and so on.
Quality as reliability: The product consistently performs, its function well, and rarely, if ever, breaks down.
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18. Innovation
Innovation refers to the act of creating new products or processes. There are two main types of innovation:
Product innovation is the development of products that are new to the world or have superior attribute to existing products (Apple developed the iPod, iPhone, and iPad in the 2000s).
Process innovation is the development of a new process for producing products and delivering them to customers (Toyota’s lean production system helped to boost employee productivity).
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19. Superior Customer Responsiveness
To achieve superior customer responsiveness, a company must be able to do a better job of identifying and satisfying its customers’ needs.
A company needs to customize goods and services to the unique demands of individual customers or customer groups.
Customer response time is the time it takes for the good to be delivered or a service to be performed.
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20. RETURN ON INVESTED CAPITAL (ROIC)
Many authorities on the measurement of profitability argue that ROIC is the best measure because “it focuses on the true operating performance of the company.”
A company’s ROIC an be determined using the formula the following formula:
ROIC = net profits/invested capital = net profits/revenues x revenues
invested capital
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21. THE DURABILITY OF COMPETITIVE ADVANTAGE
Learning Objective: After reading this chapter you should be able to explain what impacts the durability of a company’s competitive advantage.
THE DURABILITY OF COMPETITIVE ADVANTAGE
How quickly rivals will imitate a company’s distinctive competencies has an important impact on a company’s competitive advantage durability.
In general, the easiest distinctive competencies to imitate are buildings, manufacturing plants, and equipment since they can often be purchased on the open market.
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22. THE DURABILITY OF COMPETITIVE ADVANTAGE
Intangible resources (brand names, marketing and technological know-how, and patents) can be more difficult to imitate.
Patents give the inventor of a new product a 20-year exclusive production agreement.
One study found 60% of patented innovations were successfully invented in 4 years.
Absorptive capacity refers to the ability of an enterprise to identify, value, assimilate, and use new knowledge.
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23. AVOIDING FAILURE AND SUSTAINING COMPETITIVE ADVANTAGE
Why Companies Fail
Inertia
Companies find it difficult to change their strategies and structures in order to adapt to changing competitive conditions.
Changing the established capabilities of an organization means changing its existing distribution of power and influence—and this triggers turf battles.
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24. AVOIDING FAILURE AND SUSTAINING COMPETITIVE ADVANTAGE
Prior Strategy Commitments
A company’s prior strategy commitments not only limit its ability to imitate rivals but may also cause competitive disadvantage.
The Icarus Paradox
Many companies become so dazzled by their early success that they believe more of the same type of effort is the way to future success. They eventually lose sight of market realities and fail (like Icarus, of ancient mythology).
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