chapter three internal analysis: distinctive competencies, competitive advantage, and profitability
TRANSCRIPT
Chapter ThreeInternal
Analysis: Distinctive
Competencies, Competitive
Advantage, and
Profitability
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“In preparing for battle I have always found that plans are
useless, but planning is indispensable.”
- Dwight D. Eisenhower
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Internal Analysis includes an assessment of: Quantity and quality of a company’s
resources and capabilities Ways of building unique skills
and company-specific or distinctive competencies
Internal Analysis
The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organization.
Strengths lead to superior performance. Weaknesses lead to inferior performance.
Building and sustaining a competitive advantage requires a company to achieve superior:
• Efficiency• Quality
• Innovations• Responsiveness to customers
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Internal Analysis: Strengths and Weaknesses
Internal analysis - along with the external analysis of the company’s environment - gives managers the
information to choose the strategies and business model to attain a sustained competitive advantage.
StrengthsOf the enterprise are assets that
boost profitability
Weaknesses Of the enterprise are liabilities that
lead to lower profitability
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Internal Analysis: A Three-Step Process
1. Understand the process by which companies create value for customers and profit for themselves. Resources Capabilities Distinctive competencies
2. Understand the importance of superiority in creating value and generating high profitability. Efficiency Quality
3. Analyze the sources of the company’s competitive advantage. Strengths – that are driving profitability Weaknesses – opportunities for improvement
Innovation Responsiveness to Customers
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Competitive Advantage
Competitive Advantage• A firm’s profitability is greater than the average
profitability for all firms in its industry. Sustained Competitive Advantage
• A firm maintains above average and superior profitability and profit growth for a number of years.
The Primary Objective of Strategyis to achieve a Sustained Competitive Advantagewhich in turn results in Superior Profit and Profit Growth.
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Profitability in the Computer Industry, 1998-2003
Dell has achieved a sustained competitive advantage over its rivals.
Data Source: Value Line Investment Survey
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Strategy, Resources, Capabilities, and Competencies
Figure 3.1
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Distinctive Competencies and Role of Resources and Capabilities
Resources• Tangible (physical) and intangible (non-physical)• Allow a company to create value for its customers• Must have skills to take advantage of the resources• Firm-specific and difficult-to-imitate resources as well as valuable resources that create strong demand for a company’s products lead to distinctive competencies
Capabilities • Coordinating resources & putting to productive use• Skills reside in the organization’s rules, routines and procedures• Product of its organization, processes & controls• Firm-specific capabilities to manage its resources lead to distinctive competencies
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Distinctive Competencies to Gain Competitive Advantage
Distinctive Competencies Firm-specific strengths allow a company to differentiate its products and/or achieve substantially lower costs than its rivals in order to gain a competitive advantage.
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Competitive Advantage, Value Creation, and Profitability
1. VALUE or UTILITY the customer gets from owning the product
2. PRICE that a company charges for its products
3. COSTS of creating those products Consumer surplus is the “excess” utility a
consumer captures beyond the price paid.Basic Principle: the more utility that consumers
get from a company’s products or services, the more pricing options the company has.
How profitable a company becomes depends on three basic factors:
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Value Creation per UnitFigure 3.2
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Value Creation and Pricing Options
There is a dynamic relationship among utility,
pricing, demand, and costs.
Figure 3.3
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Comparing Toyota and General Motors
Superior value creation requires that the gap between perceived utility (U) and costs of production (C)
be greater than that obtained by competitors.
Figure 3.4
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The Value Chain
A company is a chain of activities for transforming inputs into outputs that customers value –
including the primary and support activities.
Figure 3.5
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Building Blocks of Competitive Advantage
The Generic Distinctive Competencies
Allow a company to:• Differentiate product offering• Offer more utility to customer• Lower the cost structure regardless of the industry, its products, or its services
Figure 3.6
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Efficiency
Measured by the quantity of inputs it takes to produce a given output:
Efficiency = Outputs / Inputs Productivity leads to greater efficiency
and lower costs:• Employee productivity• Capital productivity
Superior efficiency helps a company attain a competitive advantage
through a lower cost structure.
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Quality
• Reliable and • Differentiated by attributes that customers
perceive to have higher value
The impact of quality on competitive advantage:
• High-quality products differentiate and increase the value of the products in customers’ eyes.
• Greater efficiency and lower unit costs are associated with reliable products.
Superior quality = customer perception of greater value in a product’s attributesForm, features, performance, durability, reliability, style, design
Quality products are goods and services that are:
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A Quality Map for Automobiles
When customers evaluate the quality of a product, they commonly measure it against two kinds of attributes:1. Quality as Excellence2. Quality as Reliability
Figure 3.7
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Innovation
Innovation is the act of creating new products or new processes• Product innovation
» Creates products that customers perceive as more valuable and
» Increases the company’s pricing options• Process innovation
» Creates value by lowering production costs
Successful innovation can be a major source of competitive advantage – by giving a company something unique,
something its competitors lack.
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Responsiveness to Customers
Superior quality and innovation are integral to superior responsiveness to customers.
Customizing goods and services to the unique demands of individual customers or customer groups.
Enhanced customer responsiveness Customer response time, design,
service, after-sales service and supportSuperior responsiveness to customers
differentiates a company’s products and services and leads to brand loyalty and premium pricing.
Identifying and satisfying customers’ needs – better than the competitors
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Competitive Advantage: The Value Creation Cycle
Figure 3.8
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Analyzing Competitive Advantage and Profitability
Competitive Advantage• When a companies profitability is greater than the average of all
other companies in the same industry that compete for the same customers
Benchmarking• Comparing company performance against that of competitors and
the company’s historic performance
Measures of Profitability
• Return On Invested Capital (ROIC)• Net profit Net income after tax
Capital invested Equity + Debt to creditors
• Net Profit
Net Profit = Total revenues – Total costs
= ROIC =
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Definitions of Basic Accounting Terms
Table 3.1
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Drivers of Profitability (ROIC)
Figure 3.9
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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 Sales, Marketing, General & Administrative Expenses Reduce R&D expenses Research & Development
Increase Capital Turnover Reduce the amount of working capital Inventory, Accounts Receivable, Payables Reduce the amount of fixed capital PPE - Property, Plant & Equipment
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Comparing Wal-Mart to Target
Figure 3.10
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“Sears ignored us in the early years and in the end we simply blew right by them.”
- Sam Walton Chairman, Wal-Mart
www.walmart.com
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The Durability of Competitive Advantage
1.Barriers to ImitationMaking it difficult to copy a company’s distinctive competencies Imitating Resources Imitating Capabilities
2.Capability of Competitors Strategic commitment
Commitment to a particular way of doing business Absorptive capacity
Ability to identify, value, assimilate, and use knowledge
3.Industry DynamismAbility of an industry to change rapidly
The DURABILITY of a company’s competitive advantage over its competitors depends on:
Competitors are also seeking to develop distinctive competencies that will give them a competitive edge.
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Why Companies Fail Inertia
• Companies find it difficult to change their strategies and structures
Prior Strategic Commitments• Limit a company’s ability to imitate and
cause competitive disadvantage The Icarus Paradox
• A company can become so specialized and inner directed based on past success that it loses sight of market realities
• Categories of rising and falling companies: • Craftsmen • Builders • Pioneers • Salespeople
When a company loses its competitive advantage, its profitability falls below that of the industry. It loses the ability to attract and generate resources.
Profit margins and invested capital shrink rapidly.
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Avoiding Failure: Sustaining Competitive Advantage1. Focus on the Building Blocks of Competitive
Advantage Develop distinctive competencies and superior performance in:
Efficiency Quality Innovation Responsiveness to Customers
2. Institute Continuous Improvement and LearningRecognize the importance of continuous learning within the organization
3. Track Best Practices and Use BenchmarkingMeasure against the products and practices of the most efficient global competitors
4. Overcome InertiaOvercome the internal forces that are barriers to change
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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“Developing a sound and healthy organization requires understanding the environment
as much as understanding the organization.”
- Gary Hamel
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