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Internal Analysis: Distinctive
Competencies, CompetitiveAdvantage, and Profitability
Chapter 3
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Internal Analysis: Identifying
Strengths and WeaknessesManagers must understand
The role of resources, capabilities, anddistinctive competencies in the process by
which companies create value and profit The importance of superior efficiency,
innovation, quality, and responsiveness tocustomers
The sources of their companys competitiveadvantage (strengths and weaknesses)
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Distinctive Competences and
Competitive Advantage Distinctive competencies
Firm-specific strengths that allow a company
to gain competitive advantage by
differentiating its products and/or achieving
lower costs than its rivals
Arise from unique application of resources
and acquisition of capabilities
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The Role of Resources
Resources
Capital or financial, physical, social or human,
technological, and organizational factor endowments
Tangible and intangible A firm-specific and difficult to imitate resource is
likely to lead to distinctive competency
A valuable resource that creates strong demand
for a firms products may lead to distinctive
competency
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The Role of Capabilities
Capabilities
A companys skills at coordinating and using
its resources
Capabilities are the product of
organizational structure, processes, and
control systems
We must add people, particularly
leadership in building the structure, etc.
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Strategy, Resources,
Capabilities, and Competencies
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A Critical Distinction
If a firm has firm-specific and valuable
resources, it must also have the capability
to use them effectively to create distinctivecompetency
A firm can create distinctive competency
without firm-specific and valuable
resources if it has unique capabilities
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Competitive Advantage, Value
Creation, and Profitability Profitability factors
Amount of value customers place on the
companys products
Price charged
Costs of creating the value
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Value Creation and Pricing
Options
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Comparing Toyota and General
Motors
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erent at on an ost
Structure: Roots of Competitive
Advantage
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The Value Chain
A company is a chain of activities for
transforming inputs into outputs that
customers value
The transformation process is composed
of primary and support activities that add
value to the product
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The Value Chain: Primary and
Support Activities
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The Generic Building Blocks of
Competitive Advantage
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Exercise
Strategy in Action 3.2: Southwest Airlines
What portions of the value chain does
Southwest Airlines work on to create valuefor its customers?
Why these portions rather than the more
significant costs like fuel?
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Efficiency
The quantity of inputs it takes to produce agiven output. Usually measured as outputsover inputs; examples of latter
No. of employees
Capital investment
Productivity leads to greater efficiency and
lower costs Employee productivity
Capital productivity
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Quality
Superior quality = customer perception of
greater value in a specific products
attributes
Form, features, performance, durability,
reliability, style, design
Quality products = goods and services that
are reliable and that are differentiated byattributes that customers perceive to have
higher value
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Quality (contd)
The impact of quality on competitive
advantage
High-quality products increase the value of(differentiate) the products in customers eyes
Greater efficiency and lower unit costs are
associated with reliable products
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A Quality Map for Automobiles
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Innovation
The act of creating new, commercially
viable products or processes
Product innovation
Creates products that customers perceive as more
valuable, increasing the companys pricing options
Process innovation
Creates value by lowering production costs Perhaps the most important building block
of competitive advantage
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Responsiveness to Customers
Doing a better job than competitors of
identifying and satisfying customers
needs
Superior quality and innovation are integral to
superior responsiveness to customers
Customizing goods and services to the unique
demands of individual customers or customergroups
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Responsiveness to Customers
(contd) Sources of enhanced customerresponsiveness
Customer response time, design, service,
after-sales service and support
Differentiates a companys products; leads
to brand loyalty and premium pricing
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Value Creation per Unit
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Analyzing Competitive
Advantage and Profitability Benchmarking company performanceagainst that of competitors and the
companys own historic performance
Return on invested capital
capitalInvestedprofitNetROIC!
Net pro it = Total revenues Total costs
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Definitions of Basic Accounting
Terms
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Drivers of Profitability (ROIC)
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Ways to Increase ROIC
Increase the companys 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 investedcapital
Reduce the amount of working capital
Reduce amount of fixed capital
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The Durability of Competitive
Advantage Barriers to Imitation Imitating Resources
Imitating Capabilities Capability of Competitors
Strategic commitment
Absorptive capacity
Industry Dynamism
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Why Companies Fail
Inertia
Companies find it difficult to change their strategies
and structures
Prior strategic commitments Limit a companys ability to imitate and cause
competitive disadvantage
The Icarus paradox
A company can become so specialized based on past
success that it loses sight of market realities
Craftsmen, builders, pioneers, salesmen
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