2. Internal Analysis: Identifying
Strengths and Weaknesses
Managers must understand
– The role of resources, capabilities, and
distinctive competencies in the process by
which companies create value and profit
– The importance of superior efficiency,
innovation, quality, and responsiveness to
customers
– The sources of their company’s competitive
advantage (strengths and weaknesses)
3. 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
4. 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 firm’s products may lead to distinctive
competency
5. The Role of Capabilities
• Capabilities
– A company’s 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.
7. A Critical Distinction
• If a firm has firm-specific and valuable
resources, it must also have the capability
to use them effectively to create distinctive
competency
• A firm can create distinctive competency
without firm-specific and valuable
resources if it has unique capabilities
8. Competitive Advantage, Value
Creation, and Profitability
• Profitability factors
– Amount of value customers place on the
company’s products
– Price charged
– Costs of creating the value
12. 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
15. Exercise
• Strategy in Action 3.2: Southwest Airlines
• What portions of the value chain does
Southwest Airlines work on to create value
for its customers?
• Why these portions rather than the more
significant costs like fuel?
16. Efficiency
• The quantity of inputs it takes to produce a
given output. Usually measured as
outputs over inputs; examples of latter
– No. of employees
– Capital investment
• Productivity leads to greater efficiency and
lower costs
– Employee productivity
– Capital productivity
17. Quality
• Superior quality = customer perception of
greater value in a specific product’s
attributes
– Form, features, performance, durability,
reliability, style, design
• Quality products = goods and services
that are reliable and that are differentiated
by attributes that customers perceive to
have higher value
18. Quality (cont’d)
• 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
20. Innovation
• The act of creating new, commercially
viable products or processes
– Product innovation
• Creates products that customers perceive as more
valuable, increasing the company’s pricing options
– Process innovation
• Creates value by lowering production costs
• Perhaps the most important building block
of competitive advantage
21. 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 customer
groups
22. Responsiveness to Customers
(cont’d)
• Sources of enhanced customer
responsiveness
– Customer response time, design, service,
after-sales service and support
• Differentiates a company’s products; leads
to brand loyalty and premium pricing
24. Analyzing Competitive
Advantage and Profitability
• Benchmarking company performance
against that of competitors and the
company’s own historic performance
• Return on invested capital
ROIC = Net profit
Invested capital
• Net profit = Total revenues – Total costs
27. Ways to Increase ROIC
• Increase the company’s 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 invested
capital
– Reduce the amount of working capital
– Reduce amount of fixed capital
28. The Durability of Competitive
Advantage
• Barriers to Imitation
– Imitating Resources
– Imitating Capabilities
• Capability of Competitors
– Strategic commitment
– Absorptive capacity
• Industry Dynamism
29. 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 based on past
success that it loses sight of market realities
– Craftsmen, builders, pioneers, salesmen
