1. Chapter 3
INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES, COMPETITIVE ADVANTAGE, AND PROFITABILITY

2. Learning Objectives Discuss the source of competitive advantage
Identify/explore the role of efficiency, quality, innovation, and customer responsiveness in building and maintaining a competitive advantage
Explain the concept of value chain
Understand the link between competitive advantage and profitability
Explain what impacts the durability of a company’s competitive advantage
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3. “In preparing for battle I have always found that plans are useless, but planning is indispensable.”
- Dwight D. Eisenhower
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4. Internal Analysis Firm’s resources & capabilities
“…pinpoints the strengths and weaknesses of the organization. It includes assessments of:
Firm’s resources & capabilities
Distinctive competencies
Building/sustaining a competitive advantage requires a company to achieve superior:
Efficiency
Quality
Innovations
Responsiveness to customers
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5. Internal Analysis: Strengths and Weaknesses
“…gives managers the information to choose the strategies and business model to attain a sustained competitive advantage.
Strengths
Assets that boost profitability
Weaknesses
Liabilities that depress profitability
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6. Competitive Advantage
Competitive Advantage- firm’s profitability is greater than the average profitability for all firms in its industry.
Sustained Competitive Advantage- firm maintains above average and superior profitability and profit growth over a number of years.
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7. Distinctive Competencies
“…firm-specific strengths that allow a company to differentiate its products from those offered by rivals, and/or achieve substantially lower costs….”
1-7
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8. Resources “…assets of a company.”
Tangible (physical entities)- land, buildings, equipment, inventory, & money
Intangible (nonphysical entities created by managers & other employees)- brand names, company reputation, employee knowledge & experience, intellectual property
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9. Capabilities
“…a company’s skills at coordinating its resources and putting them to productive use.”
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10. Strategy, Resources, Capabilities, and Competencies
Figure 3.1
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11. Competitive Advantage, Value Creation, and Profitability
How profitable a company becomes depends on three basic factors:
Value/utility customers place on products
Price company charges for products
Consumer surplus = “excess” utility consumer captures beyond price paid
Costs of creating product
Basic Principle
More utility consumers get from company’s products or services, the more pricing options company has.
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12. Value Creation per Unit
Figure 3.2
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13. Value Creation and Pricing Options
There is a dynamic relationship among utility, pricing, demand, and costs.
Figure 3.3
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14. Comparing Toyota and General Motors
Figure 3.4
Superior value creation requires the gap between perceived utility (U) and costs of production (C) be greater than attained by competitors.
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. Value Chain Activities
Primary Activities
R & D = design and production
Production = creation of good/service
Marketing = brand positioning & advertising
Customer Service = after-sales service & support
Support Activities
Materials Mgmt. = transmission of materials
HR = ensures right mix of skilled people
I. S. = managing, tracking
Infrastructure = context in which all other activities take place
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. The Value Chain
“…company is a chain of activities for transforming inputs into outputs customers value – including primary & support activities.
Figure 3.5
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. Building Blocks of Competitive Advantage
Efficiency – fewer inputs to produce given output
Efficiency = Outputs / Inputs
Quality – customers perceive product’s attributes provide higher utility in excellence & reliability
Innovation
Product
Process
Customer Responsiveness – customers attribute more utility by creating differentiation with competitive advantage
2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Building Blocks of Competitive Advantage
Figure 3.6
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19. Quality Map for Automobiles
Attributes of Quality:
1. Excellence
2. Reliability
Figure 3.7
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20. Competitive Advantage & Value Creation Cycle
1-20
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21. Analyzing Competitive Advantage and Profitability
Competitive Advantage- Profitability greater than average of all companies in same industry
Benchmarking- Comparing performance against competitors & historic performance
Measures of Profitability
Return On Invested Capital (ROIC) Net profit Net income after tax Capital invested Equity + Debt to creditors
Net Profit = Total Revenues – Total Costs =
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22. Definitions of Basic Accounting Terms
Table 3.1
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23. Drivers of Profitability (ROIC)
Figure 3.9
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24. Ways to Increase ROIC       Increase Company’s Return on Sales
Increase sales revenue more than costs
Reduce cost of goods sold
Reduce spending on SG&A
Reduce R&D expenses
Increase Capital Turnover
Reduce the amount of working capital
Reduce the amount of fixed capital      
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25. Durability of Competitive Advantage
Depends on:
Barriers to Imitation- difficulty to copy distinctive competencies
Resources
Capabilities
Capability of Competitors
Strategic commitment
Absorptive capacity
Industry Dynamism- ability to change rapidly
Competitors also seeking distinctive competencies that give them a competitive edge.
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26. • Craftsmen • Builders • Pioneers •Salespeople
Why Companies Fail
Inertia- difficult to adapt strategies & structures to changing conditions
Prior Strategic Commitments- limit ability to imitate & cause competitive disadvantage
Icarus Paradox- so specialized/inner-directed by past success lose sight of market realities
Rising/Falling industries:
• Craftsmen • Builders • Pioneers •Salespeople
When company loses competitive advantage, profitability falls below the industry  Loses ability to attract/generate resources  Profit margins invested capital shrink rapidly.
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27. Avoiding Failure: Sustaining Competitive Advantage
Focus on Building Blocks
 Efficiency  Quality
 Innovation  Responsiveness to Customers
Institute Continuous Improvement & Learning
Track Best Practice/Use Benchmarking
Overcome Inertia
Luck may play a role in success, so always exploit a lucky break - but remember:
“The harder I work, the luckier I seem to get.”
J P Morgan
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28. “Developing a sound and healthy organization requires understanding the environment as much as understanding the organization.”
- Gary Hamel
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