COMM 4351 Internal Analysis: Distinctive Competencies, Chapter 3 ...
COMM 4351
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
ROOTS OF COMPETITIVE ADVANTAGE Competitive advantage: when a company’s profitability is greater than the average profitability of all companies in its industry Sustained competitive advantage: when the company is able to maintain above-average profitability over a number of years (ex. Walmart in retail, Verizon in wireless service) Distinctive Competencies Distinctive competencies: firm-specific strengths that allow a company to differentiate its products and/or achieve substantially lower costs to achieve a competitive advantage -
Ex. Verizon has a distinctive competence in customer care, which created value for customers, helps lower churn rates, and ultimately translates into higher costs
1. Resources Resources: assets of a company Tangible resources: physical entities, such as land, buildings, equipment, inventory, and money Intangible resources: nonphysical entities such as brand names, company reputation, experiential knowledge, and intellectual property, including patents, copyrights, and trademarks -
Resources are valuable when they enable a company to create strong demand for its products/services, or to lower its costs
-
Valuable resources are more likely to lead to competitive advantage if they are rare (barriers to imitation)
2. Capabilities Capabilities: a company’s skills at coordinating its resources and putting them to productive use, a product of their: -
Organizational structure
-
Processes
-
Control systems
-
Hiring strategy
3. Resources, Capabilities, and Competencies 4. Role of Strategy -
The strategies a company adopts can build new resources and capabilities or strengthen the existing resources and capabilities of the company
1
COMM 4351
-
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
Competitive advantage leads to superior profitability, which depends on 3 factors: o
The value customers place on the company’s products
o
The price that a company charges for its products
o
The costs of creating those products
*** See figures 3.2 (Value creation per unit) and 3.3 (Value creation and pricing options) pg 8788 THE VALUE CHAIN Value chain: the idea that a company is a chain of activities that transforms inputs into outputs that their customers value
2
COMM 4351
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
Primary Activities Primary activities: activities related to the design, creation, and delivery of the product, its marketing, and its support and after-sales service Four functions:
1. R&D 2. Production 3. Marketing and Sales 4. Customer Service Support activities Support activities: activities of the value chain that provide inputs that allow the primary activities to take place Four functions: 1. Materials management (logistics) o
Controls the transmission of physical materials through the value chain, from procurement through productions and into distribution
2. Human resources
3
COMM 4351 o
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
Ensures the right combo of skilled people to perform value creation activities effectively
3. Information systems o
Electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries etc.
4. Company infrastructure (refer back to Figure 3.5 The Value Chain) o
Companywide context within which all the other value creation activities take place
o
Top management should be considered part of the company infrastructure since they exert considerable influence upon shaping aspects of the company BUILDING BLOCKS OF COMPETITIVE ADVANTAGE
Four factors help companies to build and sustain competitive advantage: 1. Efficiency o
Quantity of inputs that it takes to produce a given output
o
Efficiency = inputs/outputs
o
Employee productivity: the output produced per employee
2. Quality as Excellence and Reliability o
A product can be thought of as a bundle of attributes (form, features, performance etc.)
4
COMM 4351 o
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
When customers evaluate a product, they commonly measure it against 2 kinds of attributes: i. those related to quality as excellence (design, styling, aesthetic appeal) ii. those related to quality as reliability (consistent performance, rarely breaks down)
3. Innovation o
Product innovation: development of products that are new to the world to have superior attributes to existing products
o
Process innovation: development of a new process for producing products and delivering them to customers
4. Customer Responsiveness o
Ex. The ability to customize goods and services to the unique demands of individual customer groups
o
Customer response time: time that it takes for a good to be delivered or a service to be performed
o
Other sources of enhanced responsiveness: superior design, service, and aftersales support
BUSINESS MODELS, THE VALUE CHAIN, AND GENERIC DISTINCTIVE COMPETENCIES
Remember a business model is a manager’s conception of how the various strategies that a firm pursues fit together into a congruent whole, enabling the firm to achieve a competitive advantage. ANALYZING COMPETITIVE ADVANTAGE AND PROFITABILITY 5
COMM 4351
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
-
A good internal analysis means managers can also analyze the financial performance of their company
-
To analyze strengths and weaknesses effectively, thy must be able to compare or benchmark the performance of their company against competitors
-
ROIC = net profit/invested capital (Return on Sales) o
-
Or, ROIC = net profits/revenues x revenues/invested capital (Capital turnover)
Example Case: “Focus on Walmart” pg 101-103 THE CURABILITY OF COMPETITIVE ADVANTAGE
Depends on the height of 3 barriers (below). When barriers are low, competitors come in and innovate, competitive advantage is transitory. Barriers to Imitation Barriers to imitation: factors that make it difficult for a competitor to copy a company’s distinctive competencies -
-
Imitating resources o
Buildings, equipment can be seen by competitors and imitated
o
Ex. Imitating Toyota’s famous production system
o
Intangible resources are more difficult to imitate (ex. Brand names and the reputation they hold, marketing and technical knowhow)
Imitating capabilities o
More difficult since capabilities are based on the way in which decisions are made and processes are managed
o
Competitors can still gain insights into how a company operates (ex. By hiring people away from that company)
Capability of Competitors -
The capability of a competitor to rapidly imitate a company’s competitive advantage is dependent of how flexible they are with their prior strategic commitments (commitments to a particular way of doing business)
-
The less flexible they are, the less or slower they will be able to adapt that competitive advantage
Absorptive capacity: the ability of an enterprise to identify, value, assimilate, and use new knowledge Industry Dynamism -
A dynamic industry is one that changes rapidly
6
COMM 4351 -
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
Most dynamic industries are those that have a very high rate of product innovation (ex. Customer electronics, computer, and telecommunications industries) AVOIDING FAILURE AND SUSTAINING COMPETITIVE ADVANTAGE
-
When a company loses its competitive advantage, its profitability falls
-
The company may not fail, but it can only remain functioning with below-average profitability for so long
Why Companies Fail -
3 related reasons for failure: o
o
Inertia
Companies find it difficult to change their strategies and structures in order to adapt to changing competitive conditions
Organizational capabilities are difficult to change, especially to change quickly
Prior strategic commitments
o
Prior commitments limit a company’s ability to imitate rivals and may cause competitive disadvantage
The Icarus Paradox
The idea that your greatest asset can be your demise
Too many companies become so dazzled by their early success
As a result they become so specialized and myopic that they lose sight of market realities and the fundamental requirements for developing a competitive advantage
Steps to Avoid Failure -
Focus on the building blocks of competitive advantage – efficiency, quality, innovation, and responsiveness to customers
-
Institute continuous improvement and learning o
Change is constant and inevitable, today’s source of competitive advantage may soon be rapidly imitated by capable competitors or made obsolete by the innovations of a rival
-
Track best industrial practices and use benchmarking
-
Overcome inertia o
-
Overcome the internal forces that are a barrier to change within any organization
The Role of Luck 7
COMM 4351
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
o
Luck can play a critical role in determining competitive success and failure
o
However, luck is not an explanation for the persistent success of a company
8
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
ROOTS OF COMPETITIVE ADVANTAGE Competitive advantage: when a company’s profitability is greater than the average profitability of all companies in its industry Sustained competitive advantage: when the company is able to maintain above-average profitability over a number of years (ex. Walmart in retail, Verizon in wireless service) Distinctive Competencies Distinctive competencies: firm-specific strengths that allow a company to differentiate its products and/or achieve substantially lower costs to achieve a competitive advantage -
Ex. Verizon has a distinctive competence in customer care, which created value for customers, helps lower churn rates, and ultimately translates into higher costs
1. Resources Resources: assets of a company Tangible resources: physical entities, such as land, buildings, equipment, inventory, and money Intangible resources: nonphysical entities such as brand names, company reputation, experiential knowledge, and intellectual property, including patents, copyrights, and trademarks -
Resources are valuable when they enable a company to create strong demand for its products/services, or to lower its costs
-
Valuable resources are more likely to lead to competitive advantage if they are rare (barriers to imitation)
2. Capabilities Capabilities: a company’s skills at coordinating its resources and putting them to productive use, a product of their: -
Organizational structure
-
Processes
-
Control systems
-
Hiring strategy
3. Resources, Capabilities, and Competencies 4. Role of Strategy -
The strategies a company adopts can build new resources and capabilities or strengthen the existing resources and capabilities of the company
1
COMM 4351
-
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
Competitive advantage leads to superior profitability, which depends on 3 factors: o
The value customers place on the company’s products
o
The price that a company charges for its products
o
The costs of creating those products
*** See figures 3.2 (Value creation per unit) and 3.3 (Value creation and pricing options) pg 8788 THE VALUE CHAIN Value chain: the idea that a company is a chain of activities that transforms inputs into outputs that their customers value
2
COMM 4351
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
Primary Activities Primary activities: activities related to the design, creation, and delivery of the product, its marketing, and its support and after-sales service Four functions:
1. R&D 2. Production 3. Marketing and Sales 4. Customer Service Support activities Support activities: activities of the value chain that provide inputs that allow the primary activities to take place Four functions: 1. Materials management (logistics) o
Controls the transmission of physical materials through the value chain, from procurement through productions and into distribution
2. Human resources
3
COMM 4351 o
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
Ensures the right combo of skilled people to perform value creation activities effectively
3. Information systems o
Electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries etc.
4. Company infrastructure (refer back to Figure 3.5 The Value Chain) o
Companywide context within which all the other value creation activities take place
o
Top management should be considered part of the company infrastructure since they exert considerable influence upon shaping aspects of the company BUILDING BLOCKS OF COMPETITIVE ADVANTAGE
Four factors help companies to build and sustain competitive advantage: 1. Efficiency o
Quantity of inputs that it takes to produce a given output
o
Efficiency = inputs/outputs
o
Employee productivity: the output produced per employee
2. Quality as Excellence and Reliability o
A product can be thought of as a bundle of attributes (form, features, performance etc.)
4
COMM 4351 o
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
When customers evaluate a product, they commonly measure it against 2 kinds of attributes: i. those related to quality as excellence (design, styling, aesthetic appeal) ii. those related to quality as reliability (consistent performance, rarely breaks down)
3. Innovation o
Product innovation: development of products that are new to the world to have superior attributes to existing products
o
Process innovation: development of a new process for producing products and delivering them to customers
4. Customer Responsiveness o
Ex. The ability to customize goods and services to the unique demands of individual customer groups
o
Customer response time: time that it takes for a good to be delivered or a service to be performed
o
Other sources of enhanced responsiveness: superior design, service, and aftersales support
BUSINESS MODELS, THE VALUE CHAIN, AND GENERIC DISTINCTIVE COMPETENCIES
Remember a business model is a manager’s conception of how the various strategies that a firm pursues fit together into a congruent whole, enabling the firm to achieve a competitive advantage. ANALYZING COMPETITIVE ADVANTAGE AND PROFITABILITY 5
COMM 4351
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
-
A good internal analysis means managers can also analyze the financial performance of their company
-
To analyze strengths and weaknesses effectively, thy must be able to compare or benchmark the performance of their company against competitors
-
ROIC = net profit/invested capital (Return on Sales) o
-
Or, ROIC = net profits/revenues x revenues/invested capital (Capital turnover)
Example Case: “Focus on Walmart” pg 101-103 THE CURABILITY OF COMPETITIVE ADVANTAGE
Depends on the height of 3 barriers (below). When barriers are low, competitors come in and innovate, competitive advantage is transitory. Barriers to Imitation Barriers to imitation: factors that make it difficult for a competitor to copy a company’s distinctive competencies -
-
Imitating resources o
Buildings, equipment can be seen by competitors and imitated
o
Ex. Imitating Toyota’s famous production system
o
Intangible resources are more difficult to imitate (ex. Brand names and the reputation they hold, marketing and technical knowhow)
Imitating capabilities o
More difficult since capabilities are based on the way in which decisions are made and processes are managed
o
Competitors can still gain insights into how a company operates (ex. By hiring people away from that company)
Capability of Competitors -
The capability of a competitor to rapidly imitate a company’s competitive advantage is dependent of how flexible they are with their prior strategic commitments (commitments to a particular way of doing business)
-
The less flexible they are, the less or slower they will be able to adapt that competitive advantage
Absorptive capacity: the ability of an enterprise to identify, value, assimilate, and use new knowledge Industry Dynamism -
A dynamic industry is one that changes rapidly
6
COMM 4351 -
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
Most dynamic industries are those that have a very high rate of product innovation (ex. Customer electronics, computer, and telecommunications industries) AVOIDING FAILURE AND SUSTAINING COMPETITIVE ADVANTAGE
-
When a company loses its competitive advantage, its profitability falls
-
The company may not fail, but it can only remain functioning with below-average profitability for so long
Why Companies Fail -
3 related reasons for failure: o
o
Inertia
Companies find it difficult to change their strategies and structures in order to adapt to changing competitive conditions
Organizational capabilities are difficult to change, especially to change quickly
Prior strategic commitments
o
Prior commitments limit a company’s ability to imitate rivals and may cause competitive disadvantage
The Icarus Paradox
The idea that your greatest asset can be your demise
Too many companies become so dazzled by their early success
As a result they become so specialized and myopic that they lose sight of market realities and the fundamental requirements for developing a competitive advantage
Steps to Avoid Failure -
Focus on the building blocks of competitive advantage – efficiency, quality, innovation, and responsiveness to customers
-
Institute continuous improvement and learning o
Change is constant and inevitable, today’s source of competitive advantage may soon be rapidly imitated by capable competitors or made obsolete by the innovations of a rival
-
Track best industrial practices and use benchmarking
-
Overcome inertia o
-
Overcome the internal forces that are a barrier to change within any organization
The Role of Luck 7
COMM 4351
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Chapter 3
o
Luck can play a critical role in determining competitive success and failure
o
However, luck is not an explanation for the persistent success of a company
8
