COMPETENCIES AND PROFITABILITY ANALYZING INTERNAL

RESOURCESCHAPTER 3

Decena | Dy | Gastanes | Lim | Requejo | Santos | Tan

Opening Case

• Standout performers in the US airline industry - ROIC 5.8%• Famous for low fares 30% beneath rivals

Opening Case

• Competitive Advantage– Only one type of plane – High employee-to-

passenger ratio 1 to 2,400– No meals, no movies and

no baggage transfer– Flies from point-to-point– Gives a percentage of

profit in terms of shares to its employees

The Roots of Competitive Advantage

DISTINCTIVE COMPETENCIES• Firms-specific strengths that allow a company to

differentiate its product from those offered by rivals, and/or achieve substantially lower costs than its rivals.

The Roots of Competitive Advantage

DISTINCTIVE COMPETENCIES: Resources

• Assets of a company- Tangible: Physical entities

such as land, buildings, equipment, inventory and money

- Intangible: Nonphysical entities such as brand names, reputation of company, and intellectual property

The Roots of Competitive Advantage

• Skills at coordinating its resources and putting them to productive use- Southwest

Airlines: Select, motivate, and manage workforce

DISTINCTIVE COMPETENCIES: Capabilities

The Roots of Competitive Advantage

DISTINCTIVE COMPETENCIES: Resources, Capabilities and Competencies

• Use those resources effectively• Establish a distinctive competitive

advantage• Both firm-specific and valuable

resources and firm-specific capabilities to manage those resources

The Roots of Competitive Advantage

DISTINCTIVE COMPETENCIES: The Role of Strategy

Competitive Advantage, Value Creation and Profitability

• How profitable a company becomes depends of three factors:- The value customers place on

the products- The price that a company

charges for its products- The costs of creating those

products

Competitive Advantage, Value Creation and Profitability

• Utility vs. Price: Utility is something that the customers get from the product.

• Consumer surplus: The price a company is typically less than the utility value

• Customer’s reservation price: The price that reflects that individual’s unique assessment of the utility

Competitive Advantage, Value Creation and Profitability

VALUE CREATION PER UNIT

Competitive Advantage, Value Creation and Profitability

VALUE CREATION AND PRICING OPTIONS

Competitive Advantage, Value Creation and Profitability

COMPARING TOYOTA AND GENERAL MOTORS

The Value Chain

• Idea that a company is a chain of activities for transforming inputs into outputs that customers value.

The Value Chain

Research and Development•Design

of products and production processes

Production• Creation of good or

service

Marketing and Sales• Increase the value that

customers perceive

Customer Service•Provid

e after sales service and supportPrimary

Activities

The Value Chain

Materials management (Logistics)•Control

s the transmission of physical materials through the value chain

Human Resources• Ensures that the company

has the right mix of skilled people

Information Systems• Largely electronic systems

Company Infrastructure•Compa

nywide context within which all other value creation activities take place

Support Activities

The Building Blocks of Competitive Advantage

Efficiency

Quality

Innovation

Customer Responsiveness

The Building Blocks of Competitive Advantage

Generic competencies allow a company to:• Differentiate its product

= provide more utility• Lower cost structure

Efficiency, quality, innovation and customer responsiveness are all INTERRELATED.

The Building Blocks of Competitive Advantage

EFFICIENCY• Quantity of inputs to produce a

given output• A company is more efficient with

few inputs and high outputs

Employee Productivity

Output produced per employee

Capital Productivity

Sales produced per dollar of capital

The Building Blocks of Competitive Advantage

QUALITY• A product has superior quality when customers perceive that its attributes provide them with higher utility than products sold by rivals

Quality as Excellence

Quality as Reliability

The Building Blocks of Competitive Advantage

INNOVATION• Act of creating new products and processes• Give the company something unique

Product Innovation

Process Innovation

The Building Blocks of Competitive Advantage

CUSTOMER RESPONSIVENESS• Achieving superior quality and

innovation• Customize goods and services• Customer response time: time it

takes for a good to be delivered or a service to be performed

Competitive Advantage and the Value Creation Cycle

Competitive Advantage and Superior Profitability

Business Model

StrategiesDistinctive Competencies

Analyzing Competitive Advantage and Profitability

• The key measure of company’s financial performance is its profitability.

• Return on Invested Capital – best measure of profitability because of “it’s focus on true operating performance of the company.”

Analyzing Competitive Advantage and Profitability

DU PONT FORMULA• Decomposition of ROIC was first developed by

managers at DuPont Company (1900s) as a method for identifying drivers of profitability.

ROIC

Return on Sales

COGS/Sales

SG&A/Sales

R&D/Sales

Capital Turnover

Working Capital/Sales

PPE/Sales

The Durability of Competitive Advantage

BARRIERS TO IMITATION• Primary determinant of

the speed of imitation• The greater the barriers

to imitation, the more sustainable is a company’s competitive advantage

The Durability of Competitive Advantage

IMITATING RESOURCES• Firm-specific and

valuable tangible resources – Buildings, plant and

equipment

• Intangible resources– Brand names, marketing

strategies, patent system

The Durability of Competitive Advantage

IMITATING CAPABILITIES• Based on the way in which decisions are made and

processes managed deep within a company

• Product of how numerous individuals interact within a unique organizational setting

The Durability of Competitive Advantage

IMITATING CAPABILITIES: Capability of Competitors

• Commitment to a particular way of doing business

• Absorptive capacity: ability of an enterprise to identify, value, assimilate, and use new knowledge

The Durability of Competitive Advantage

IMITATING CAPABILITIES: Industry Dynamism• Most dynamic industry: very high rate of product

innovation

Avoiding Failure and Sustaining Competitive Advantage

WHY COMPANIES FAIL

• Profitability is substantially lower

• Lost the ability to attract and generate resources

Avoiding Failure and Sustaining Competitive Advantage

WHY COMPANIES FAIL: Inertia• Argument: Difficult to

change their strategies and structures in order to adapt to changing competitive conditions

• Organizational capabilities• Distribution of power and

influence (power struggle and political resistance)

Avoiding Failure and Sustaining Competitive Advantage

WHY COMPANIES FAIL: Prior Strategic Commitments• Stuck with significant resources specialized for that

particular business

Avoiding Failure and Sustaining Competitive Advantage

WHY COMPANIES FAIL: The Icarus Paradox

• Icarus in Greek mythology• Miller: The greatest asset

caused demise• Four major categories:

craftsmen, builders, pioneers, and salesmen

Avoiding Failure and Sustaining Competitive Advantage

STEPS TO AVOID FAILURE

Focus on the Building Blocks of

Competitive Advantage

Institute Continuous

Improvements and Learning

Track Best Industrial

Practice and Use

Benchmarking

Overcome Inertia

Avoiding Failure and Sustaining Competitive Advantage

THE ROLE OF LUCK• In the face of uncertainty,

some companies just happen to pick the correct strategy

• “The harder I work, the luckier I seem to get”