Chapter 3

INTERNAL ANALYSIS:
DISTINCTIVE COMPETENCIES,
COMPETITIVE ADVANTAGE, AND
PROFITABILITY
 “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
“…pinpoints the strengths and weaknesses of the
organization. It includes assessments of:
Firm’s resources
& capabilities
Distinctive
competencies
Building/sustaining a competitive advantage
requires a company to achieve superior:
• Efficiency • Innovations
• Quality • Responsiveness to customers
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 Internal Analysis:
Strengths and Weaknesses
“…gives managers the information to choose the
strategies and business model to attain a
sustained competitive advantage.

Strengths Weaknesses
Assets that Liabilities that
boost depress
profitability profitability

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 Competitive Advantage
 Competitive Advantage- firm’s
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.
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 Distinctive Competencies

“…firm-specific strengths that

allow a company to
differentiate its products
from those offered by rivals,
and/or achieve substantially
lower costs….”
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1-6
 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
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 Capabilities
“…a company’s skills at
coordinating its resources
and putting them to
productive use.”

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 Strategy, Resources,
Capabilities, and Competencies

Figure 3.1

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 Competitive Advantage,
Value Creation, and Profitability
How profitable a company becomes
depends on three basic factors:
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
Basicproduct
Principle
More utility consumers get from company’s products
or services, the more pricing options company has.
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 Value Creation per Unit

Figure 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
Figure 3.4

Superior value creation requires the gap between

perceived utility (U) and costs of production (C)
be greater than attained by competitors.
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 Value Chain Activities
Primary Activities Support Activities
 R & D = design and  Materials Mgmt. =
production transmission of
 Production = creation materials
of good/service  HR = ensures right mix
 Marketing = brand of skilled people
positioning &  I. S. = managing,
advertising tracking
 Customer Service =  Infrastructure = context
after-sales service & in which all other
support activities take place

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 The Value Chain
“…company is a chain of activities for transforming
inputs into outputs customers value – including primary
& support activities.

Figure 3.5

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 Building Blocks
of Competitive Advantage
 Efficiency – fewer inputs to produce given output
Efficiency = Outputs / Inputs
 Quality – customers perceive product’s attributes
provide higher utility in excellence & reliability
 Innovation
• Product
• Process
 Customer Responsiveness – customers attribute
more utility by creating differentiation with
competitive advantage

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 Building Blocks
of Competitive Advantage

Figure 3.6

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 Quality Map for Automobiles
Attributes of Quality:
1. Excellence
2. Reliability

Figure 3.7

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 Competitive Advantage
& Value Creation Cycle

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1-19
 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

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 Drivers of Profitability (ROIC)

Figure 3.9

Cost of Goods Sold, Selling,General & Admin expense, Property,Plant & Eqpt
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 Ways to Increase ROIC
Increase Company’s Return on Sales
 Increase sales revenue more than costs Increase Capital Turnover
  Reduce the amount of working
Reduce cost of goods sold
capital
 Reduce spending on SG&A
 Reduce the amount of fixed capital
 Reduce R&D expenses


 




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 Durability of
Competitive Advantage
Depends on:
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
Competitors also seeking distinctive
competencies that give them a competitive edge.
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 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

When company loses competitive advantage,

profitability falls below the industry.
 Loses ability to attract/generate resources.
 Profit margins invested capital shrink rapidly.
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 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
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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