© ram mudambi, temple university, 2007 lecture 3 internal analysis: resources, capabilities,...

© Ram Mudambi, Temple University, 2007

Lecture 3Lecture 3

Internal Analysis: Resources, Internal Analysis: Resources, Capabilities, Competencies, and Capabilities, Competencies, and Competitive AdvantageCompetitive Advantage

BA 951BA 951Policy Formulation and Policy Formulation and

AdministrationAdministration

© Ram Mudambi, Temple University, 2007 3-2

Learning OutcomesLearning Outcomes

A systematic look inside the firm – why are A systematic look inside the firm – why are some firms more successful than others?some firms more successful than others?

The basis of competitive advantageThe basis of competitive advantageThe boundaries of the firmThe boundaries of the firm

‘‘Make or buy’Make or buy’ Inter-firm cooperationInter-firm cooperation


Lecture OutlineLecture Outline

The nature and sources of competitive The nature and sources of competitive advantageadvantageGeneric strategiesGeneric strategiesThe resource-based view of the firmThe resource-based view of the firmFrom resources to core competenciesFrom resources to core competenciesFrom core competencies to value creationFrom core competencies to value creation


Competitive Advantage: Value Competitive Advantage: Value Creation, Low Cost, and Creation, Low Cost, and DifferentiationDifferentiationCompetitive advantageCompetitive advantage is a firm’s ability to is a firm’s ability to

outperform its competitors (earn higher outperform its competitors (earn higher profits).profits).Sustained competitive advantageSustained competitive advantage (SCA)(SCA) comes from maintaining higher profits than comes from maintaining higher profits than competitors over long periods of time.competitors over long periods of time.The source of competitive advantage is The source of competitive advantage is value creationvalue creation for customers. for customers.


Value Creation per UnitValue Creation per Unit

Sometimes called producer surplus

U


Comparing Toyota and General Comparing Toyota and General MotorsMotors

Superior value creation requires that the gap between perceived utility (U) and costs of production (C)

be greater than that obtained by competitors.


Definitions of basic accounting Definitions of basic accounting termsterms


Drivers of Profitability (ROIC)Drivers of Profitability (ROIC)


Comparing Wal-Mart to TargetComparing Wal-Mart to Target


Generic Building Blocks of Generic Building Blocks of Competitive AdvantageCompetitive Advantage

3-11© Ram Mudambi, Temple University, 2007

Porter’s generic strategiesPorter’s generic strategies

Competitive DimensionCost Differentiation

Competitive Broad Cost leadership Differentiation leadership

Scope Narrow Cost focus Differentiation focus


Efficiency, quality, innovation, Efficiency, quality, innovation, and customer responsivenessand customer responsiveness


The resource-based view of the The resource-based view of the firmfirmAssociated with Edith Penrose and more Associated with Edith Penrose and more recently with Birger Wernerfeltrecently with Birger WernerfeltThe question is The question is “what do we have?”“what do we have?” rather rather than than “who do we serve?”“who do we serve?”The external environment is in a constant The external environment is in a constant state of flux and largely out of the firm’s state of flux and largely out of the firm’s controlcontrolThe internal environment is more stable and The internal environment is more stable and more in the firm’s controlmore in the firm’s control


What are the firm’s resources?What are the firm’s resources?

Tangible resourcesTangible resources Financial resourcesFinancial resources Physical resourcesPhysical resources

Intangible resourcesIntangible resources ReputationReputation Brand equityBrand equity

Human resourcesHuman resources Human capital – knowledge, skills, etc.Human capital – knowledge, skills, etc. Relationships – effectiveness of teamsRelationships – effectiveness of teams


From resources to capabilitiesFrom resources to capabilities

From From ‘what to we have?’‘what to we have?’ to to ‘what ‘what can we do?’can we do?’Relative rather than absolute Relative rather than absolute measurementsmeasurements


What are the firm’s capabilities?What are the firm’s capabilities?Capability = competenceCapability = competenceCompetencies are identified by Competencies are identified by

disaggregationdisaggregation Functional disaggregationFunctional disaggregation Value chain disaggregationValue chain disaggregation

Competencies are relativeCompetencies are relative Importance of benchmarkingImportance of benchmarking

Core competencies are those whichCore competencies are those which make a disproportionate contribution to ultimate make a disproportionate contribution to ultimate

customer value or to the efficiency of its deliverycustomer value or to the efficiency of its delivery are a basis for entering new marketsare a basis for entering new markets


Value Chain DisaggregationValue Chain Disaggregation


Core competencies Core competencies A A competencecompetence becomes a becomes a core competencecore competence when the when the well-performed activity is well-performed activity is centralcentral to the company’s to the company’s strategy, competitiveness, and profitabilitystrategy, competitiveness, and profitability Often, aOften, a core competence results from core competence results from

collaboration collaboration among different parts among different parts

of an organizationof an organization TypicallyTypically,, core competencies reside in a core competencies reside in a

company’s company’s peoplepeople, not in its physical assets, not in its physical assets A A core competencecore competence gives a company a potentially gives a company a potentially valuable valuable competitive competitive andand collaborative advantage collaborative advantage


CompetenciesCompetencies

Competencies

CoreCompetencies

Distinctivecompetencies

Uniqueness- Selznick, Ansoff

Importance- Hamel and Prahalad


Examples of core competenciesExamples of core competenciesSkills in manufacturing a high quality productSkills in manufacturing a high quality productSystem to fill customer orders accurately and swiftlySystem to fill customer orders accurately and swiftlyFast development of new productsFast development of new productsBetter after-sale service capabilityBetter after-sale service capabilitySuperior know-how in selecting good retail locationsSuperior know-how in selecting good retail locationsInnovativeness in developing popular product featuresInnovativeness in developing popular product featuresMerchandising and product display skillsMerchandising and product display skillsExpertise in an important technologyExpertise in an important technologyExpertise in integrating multiple technologies to create Expertise in integrating multiple technologies to create whole families of new productswhole families of new products


Examples: Core competencies Examples: Core competencies Sharp CorporationSharp Corporation

Expertise in flat-panel display technology Expertise in flat-panel display technology

Toyota, Honda, NissanToyota, Honda, Nissan Low-cost, high-quality manufacturing capability and Low-cost, high-quality manufacturing capability and

short design-to-market cycles short design-to-market cycles

IntelIntel Ability to design and manufacture ever more powerful Ability to design and manufacture ever more powerful

microprocessors for PCsmicroprocessors for PCs

MotorolaMotorola Defect-free manufacture (six-sigma quality) of cell Defect-free manufacture (six-sigma quality) of cell

phonesphones


Profit potential of a competencyProfit potential of a competency

EXTENT SUSTAINABILITY APPROPRIABILITY

Scarcity Durability Property rights

Relevance Mobility Relative bargaining power

Replicability Embeddedness of resources


The Sustainability of Competitive The Sustainability of Competitive AdvantageAdvantage

Barriers to imitationBarriers to imitation Speed of imitation by competitors in reducing advantageSpeed of imitation by competitors in reducing advantage Imitation by acquiring similar resourcesImitation by acquiring similar resources Imitation of capabilities (more difficult)Imitation of capabilities (more difficult)

Limits on competitorsLimits on competitors Prior strategic commitmentsPrior strategic commitments Absorptive capacity for changeAbsorptive capacity for change

Industry dynamismIndustry dynamism The rapid innovation The rapid innovation

shortens product life cycles.shortens product life cycles.


Overview of resource/capability Overview of resource/capability analysisanalysis

Resources

Capabilities

Profit potential

Strategy

Sources of strength and weakness

What can the firmdo relative to

its competitors?

Best exploits the firm’s capabilities relative

to its externalenvironment

Identify resource gapsInvest in resource base


Distinctive Competencies, Distinctive Competencies, Resources, and CapabilitiesResources, and Capabilities

The roots of competitive advantage:The roots of competitive advantage:


Why Do Companies Fail?Why Do Companies Fail?

What went wrong?What went wrong? InertiaInertia

Companies find it difficult to change their Companies find it difficult to change their strategies and structures strategies and structures

Prior strategic commitmentsPrior strategic commitments Limit a company’s ability to imitate and Limit a company’s ability to imitate and

cause competitive disadvantage cause competitive disadvantage

The Icarus paradoxThe Icarus paradox


The Icarus ParadoxThe Icarus Paradox

• A company becomes so specialized and A company becomes so specialized and inner directed based on past success that it inner directed based on past success that it loses sight of market realities loses sight of market realities

• Craftsmen – Texas Instruments, DEC – engineering Craftsmen – Texas Instruments, DEC – engineering for engineering’s sakefor engineering’s sake

• Builders – diversification – ITT, Gulf + WesternBuilders – diversification – ITT, Gulf + Western• Pioneers – Innovation – Wang LabsPioneers – Innovation – Wang Labs• Salesmen – Sell anything – P&G, ChryslerSalesmen – Sell anything – P&G, Chrysler

• Failure to see the link between competence Failure to see the link between competence and value creationand value creation


Avoiding failure and sustaining Avoiding failure and sustaining competitive advantagecompetitive advantage

Focus on the building blocks of competitive Focus on the building blocks of competitive advantage.advantage.

Institute continuous improvement and Institute continuous improvement and learning.learning.

Track best industrial practice and use Track best industrial practice and use benchmarking.benchmarking.

Overcome inertia.Overcome inertia.


SummarySummary

The building blocks of competitive The building blocks of competitive advantageadvantage

Generic strategiesGeneric strategiesThe resource based view of the firmThe resource based view of the firmFrom resources to competenciesFrom resources to competenciesFrom competencies to value creationFrom competencies to value creation

Sources of failures in this linkageSources of failures in this linkage

© ram mudambi, temple university, 2007 lecture 3 internal analysis: resources, capabilities,...

Documents

firms resources

competitive advantage

competitive advantageba

core competence results

firms capabilities

firms controlwhat

firms ability

ultimate customer value