!

Firms resources & capabilities

! Distinctive competencies
Internal Analysis
pinpoints the strengths and weaknesses of the
organization. It includes assessments of:
Building/sustaining a competitive advantage
requires a company to achieve superior:


Efficiency
Quality
Innovations
Responsiveness to customers
Internal Analysis:
Strengths and Weaknesses
gives managers the information to choose the
strategies and business model to attain a
sustained competitive advantage.
Strengths
Assets that
boost
profitability
Weaknesses
Liabilities that
depress
profitability
Competitive Advantage
" Competitive Advantage- firms
profitability is greater than the
average profitability for all firms in
its industry.
" Sustained Competitive Advantage-
firm maintains above average and
superior profitability and profit
growth over a number of years.
Distinctive Competencies
firm-specific strengths that
allow a company to
differentiate its products
from those offered by rivals,
and/or achieve substantially
lower costs.


Resources
assets of a company.

1) Tangible (physical entities)- land, buildings,
equipment, inventory, & money
2) Intangible (nonphysical entities created by
managers & other employees)- brand names,
company reputation, employee knowledge &
experience, intellectual property

Capabilities
a companys skills at
coordinating its resources
and putting them to
productive use.


Competitive Advantage,
Value Creation, and Profitability

1. Value/utility customers place on products
2. Price company charges for products
# Consumer surplus = excess utility
consumer captures beyond price paid
3. Costs of creating product
Basic Principle
More utility consumers get from companys products
or services, the more pricing options company has.
How profitable a company becomes
depends on three basic factors:
Value Chain Activities
Primary Activities
$ R & D = design and
production
$ Production = creation of
good/service
$ Marketing = brand
positioning &
advertising
$ Customer Service =
after-sales service &
support
Support Activities
$ Materials Mgmt. =
transmission of
materials
$ HR = ensures right mix
of skilled people
$ IT = managing, tracking
$ Infrastructure = context
in which all other
activities take place

The Value Chain
company is a chain of activities for transforming
inputs into outputs customers value including primary
& support activities.
Building Blocks
of Competitive Advantage
! Efficiency fewer inputs to produce given output
Efficiency = Outputs / Inputs
! Quality customers perceive products attributes
provide higher utility in excellence & reliability
! Innovation
Product
Process
! Customer Responsiveness customers attribute
more utility by creating differentiation with
competitive advantage
Building Blocks
of Competitive Advantage
Analyzing Competitive
Advantage and Profitability
! Competitive Advantage- Profitability greater
than average of all companies in same
industry
! Benchmarking- Comparing performance
against competitors & historic performance
! Measures of Profitability
Return On Invested Capital (ROIC)
Net profit Net income after tax
Capital invested Equity + Debt to creditors
Net Profit = Total Revenues Total Costs
=

Drivers of Profitability (ROIC)
Durability of
Competitive Advantage
1.Barriers to Imitation- difficulty to copy
distinctive competencies
Resources
Capabilities
2.Capability of Competitors
Strategic commitment
Absorptive capacity
3.Industry Dynamism- ability to change
rapidly
Depends on:
Competitors also seeking distinctive
competencies that give them a competitive edge.
Why Companies Fail
% Inertia- difficult to adapt strategies &
structures to changing conditions
% Prior Strategic Commitments- limit ability to
imitate & cause competitive disadvantage
% Icarus Paradox- so specialized/inner-directed
by past success lose sight of market realities
% Rising/Falling industries:
Craftsmen Builders Pioneers Salespeople
Avoiding Failure:
Sustaining Competitive Advantage
1. Focus on Building Blocks
! Efficiency
! Quality
! Innovation
! Responsiveness to Customers
2. Institute Continuous Improvement &
Learning
3. Track Best Practice/Use Benchmarking
4. Overcome Inertia