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

2. 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

3. 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

4. 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

5. Evaluation of Resources
Strength or Weakness

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

7. 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

8. 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 -

9. Factors that Limit Imitation
Physical Uniqueness –
Path Dependency –
Causal Ambiguity –
Social Complexity –
Absorptive Capacity –

10. 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

11. Value Creation per Unit

12. Comparing Toyota and General Motors

13. Porter’s Value Chain
Views the organization as a series (chain) of activities, which may or may not create value

14. 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

15. …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…..

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

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

18. 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...

19. 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

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

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

22. The Generic Building Blocks of Competitive Advantage

23. Analyzing Competitive Advantage and Profitability
Benchmarking return on invested capital
against competitors
again historic performance
Net profit = Total revenues – Total costs

24. Drivers of Profitability (ROIC)

25. 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%

26. Definitions of Basic Accounting Terms

27. 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

28. 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?