3

InternalAnalysis:
Distinctive
Competencies,
Competitive
Advantage,and
Profitability

InternalAnalysis
Identifyingthestrengthsandweaknessesof
thecompany
Managersmustunderstand
Theroleofresources,capabilities,anddistinctive
competenciesintheprocessbywhichcompanies
createvalueandprofit
Theimportanceofsuperiorefficiency,innovation,
quality,andresponsivenesstocustomers
Thesourcesoftheircompanyscompetitive
advantage(strengthsandweaknesses)

CompetitiveAdvantage
Competitiveadvantage
Afirmsprofitabilityisgreaterthantheaverage
profitabilityforallfirmsinitsindustry

Sustainedcompetitiveadvantage
Afirmmaintainscompetitiveadvantagefora
numberofyears

ProfitabilityintheU.S.Retailing
Industry,19962001

DistinctiveCompetencesand
CompetitiveAdvantage
Distinctivecompetencies
Firmspecificstrengthsthatallowacompanyto
gaincompetitiveadvantagebydifferentiatingits
productsand/orachievinglowercoststhanits
rivals
Arisefromresourcesandcapabilities

TheRoleofResources
Resources
Capitalorfinancial,physical,socialorhuman,
technological,andorganizationalfactorendowments
Tangibleandintangible

Afirmspecificanddifficulttoimitateresourceis
likelytoleadtodistinctivecompetency
Avaluableresourcethatcreatesstrongdemandfora
firmsproductsmayleadtodistinctivecompetency

TheRoleofCapabilities
Capabilities
Acompanysskillsatcoordinatingandusingits
resources

Capabilitiesaretheproductoforganizational
structure,processes,andcontrolsystems

Strategy,Resources,Capabilities,and
Competencies

ACriticalDistinction
Ifafirmhasfirmspecificandvaluable
resourcesitmustalsohavethecapabilityto
usethemeffectivelytocreatedistinctive
competency
Afirmcancreatedistinctivecompetency
withoutfirmspecificandvaluableresourcesif
ithasuniquecapabilities

CompetitiveAdvantage,ValueCreation,
andProfitability
Profitabilityfactors
Amountofvaluecustomersplaceonthe
companysproducts
Pricecharged
Costsofcreatingthevalue

ValueCreationperUnit

ValueCreationandPricingOptions

ComparingToyotaandGeneralMotors

DifferentiationandCostStructure:
RootsofCompetitiveAdvantage

TheValueChain
Acompanyisachainofactivitiesfor
transforminginputsintooutputsthat
customersvalue
Thetransformationprocessiscomposedof
primaryandsupportactivitiesthataddvalueto
theproduct

TheValueChain:PrimaryandSupport
Activities

TheGenericBuildingBlocksof
CompetitiveAdvantage

Efficiency
Thequantityofinputsittakestoproducea
givenoutput
Productivityleadstogreaterefficiencyand
lowercosts
Employeeproductivity
Capitalproductivity

Quality
Superiorquality=customerperceptionof
greatervalueinaspecificproductsattributes
Form,features,performance,durability,reliability,
style,design

Qualityproducts=goodsandservicesthatare
reliableandthataredifferentiatedbyattributes
thatcustomersperceivetohavehighervalue

Quality(contd)
Theimpactofqualityoncompetitive
advantage
Highqualityproductsincreasethevalueof
(differentiate)theproductsincustomerseyes
Greaterefficiencyandlowerunitcostsare
associatedwithreliableproducts

AQualityMapforAutomobiles

Innovation
Theactofcreatingnewproductsorprocesses
Productinnovation
Createsproductsthatcustomersperceiveasmore
valuable,increasingthecompanyspricingoptions

Processinnovation
Createsvaluebyloweringproductioncosts

Perhapsthemostimportantbuildingblockof
competitiveadvantage

ResponsivenesstoCustomers
Doingabetterjobthancompetitorsof
identifyingandsatisfyingcustomersneeds
Superiorqualityandinnovationareintegralto
superiorresponsivenesstocustomers
Customizinggoodsandservicestotheunique
demandsofindividualcustomersorcustomer
groups

ResponsivenesstoCustomers(contd)
Sourcesofenhancedcustomerresponsiveness
Customerresponsetime,design,service,after
salesserviceandsupport

Differentiatesacompany/itsproducts;leadsto
brandloyaltyandpremiumpricing

TheDurabilityofCompetitive
Advantage
BarrierstoImitation
ImitatingResources
ImitatingCapabilities

CapabilityofCompetitors
Strategiccommitment
Absorptivecapacity

IndustryDynamism

WhyCompaniesFail
Inertia
Companiesfinditdifficulttochangetheirstrategiesand
structures

Priorstrategiccommitments
Limitacompanysabilitytoimitateandcausecompetitive
disadvantage

TheIcarusparadox
Acompanycanbecomesospecializedbasedonpast
successthatitlosessightofmarketrealities
Craftsmen,builders,pioneers,salesmen

AvoidingFailureandSustaining
CompetitiveAdvantage
Focusonthebuildingblocksofcompetitive
advantage
Institutecontinuousimprovementinlearning
Trackbestindustrialpracticeinuse
benchmarking
Overcomeinertia
Luck

AnalyzingCompetitiveAdvantageand
Profitability
Benchmarkingcompanyperformanceagainst
thatofcompetitorsandthecompanysown
historicperformance
Returnoninvestedcapital
ROIC

Net profit
Invested capital

Net profit = Total revenues Total costs

DefinitionsofBasicAccountingTerms

DriversofProfitability(ROIC)

WaystoIncreaseROIC
Increasethecompanysreturnonsales
Reducecostofgoodssold
Reducespendingonsalesforce,marketing,
general,andadministrativeexpenses
ReduceR&Dspending
Increasesalesrevenuemorethancosts

Increasesalesrevenuesfrominvestedcapital
Reducetheamountofworkingcapital
Reduceamountoffixedcapital