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Competitive Advantage

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191 views

Competitive Advantage

Uploaded by

Guneet Dadyal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter

Three
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

Copyright © Houghton Mifflin Company. All rights reserved. © RoyaltyFree/ Stockdisc/ Getty Images 3|2
Internal Analysis
The purpose of internal analysis is to pinpoint the
strengths and weaknesses of the organization.

It includes assessments of:


The firm’s resources
and capabilities
Distinctive competencies
Building and 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
Internal analysis, along with the external analysis of
the company’s environment, gives managers the
information to choose the strategies and business
model to attain a sustained competitive advantage.

Strengths Weaknesses
Assets that boost Liabilities that
profitability depress profitability

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Competitive Advantage

 Competitive Advantage
• A firm’s profitability is greater than the
average profitability for all firms in its
industry.
 Sustained Competitive Advantage
• A firm maintains above average and
superior profitability and profit growth for a
number of years.

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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 or utility the customer gets from
owning the product
2. Price that a company charges for its
products
3. Costs of creating that product
 Consumer surplus is the “excess” utility a
consumer captures beyond the price paid
Basic Principle: the more utility that consumers
get from a company’s products or services, the
more pricing options the company has.
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The Value Chain
Figure 3.5
A company is a chain of activities for transforming
inputs into outputs that customers value –
including the primary and support activities.

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Building Blocks
of Competitive Advantage
Figure 3.6

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Efficiency
 Measured by the quantity of inputs it
takes to produce a given output:
Efficiency = Outputs / Inputs
 Productivity leads to greater efficiency
and lower costs:
• Employee productivity
• Capital productivity
Superior efficiency helps a company
attain a competitive advantage
through a lower cost structure.
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Quality
 Quality products are goods and services that are:
• Reliable and
• Differentiated by attributes that customers
perceive to have higher value
 A perception of quality allows a firm to
differentiate its products in the eyes of its
customers.

Superior quality = customer perception


of greater value in a product’s attributes
Form, features, performance, durability, reliability, style, design

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A Quality Map for Automobiles
Figure 3.7

When customers
evaluate the quality of a
product, they commonly
measure it against two
kinds of attributes:
1. Quality as Excellence
2. Quality as Reliability

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Innovation
Innovation is the act of creating
new products or new processes
• Product innovation
» Creates products that customers
perceive as more valuable and
» Increases the company’s pricing options
• Process innovation
» Creates value by lowering production costs
Successful innovation can be a major
source of competitive advantage –
by giving a company something unique.

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Customer Responsiveness
Identifying and satisfying customers’
needs – better than the competitors do.
 Enhanced customer responsiveness:
Customer response time, design,
service, after-sales service and support

Superior responsiveness to
customers differentiates a company’s
products and services and leads to
brand loyalty and premium pricing.

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Analyzing Competitive
Advantage and Profitability
 Competitive Advantage
• When a company’s profitability is greater than the average of all
other companies in the same industry that compete for the same
customers
 Benchmarking
• Comparing company performance against that of competitors and
the company’s historic performance

 Measures of Profitability
• Return On Invested Capital (ROIC)
• Net profit Net income after tax
ROIC = = Capital invested
Equity + Debt to creditors

• Net Profit = Total revenues – Total costs


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The Durability of Competitive
Advantage
The durability of a company’s competitive advantage over its
competitors depends on:
1. Barriers to Imitation
Making it difficult to copy a company’s distinctive
competencies
2. Capability of Competitors
• Strategic commitment
• Absorptive capacity
3. Industry Dynamism
Ability of an industry to change rapidly

Competitors are also seeking to develop distinctive


competencies that will give them a competitive edge.
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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 and inner-directed
based on past success that it loses sight of market realities
• Categories of rising and falling companies:
• Craftsmen • Builders • Pioneers • Salespeople

When a company loses its competitive advantage,


its profitability falls below that of the industry.
 It loses the ability to attract and generate resources.
 Profit margins and invested capital shrink rapidly.
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Avoiding Failure:
Sustaining Competitive Advantage
1. Focus on the Building Blocks of Competitive
Advantage
Develop distinctive competencies and superior performance in:
 Efficiency  Quality
 Innovation  Responsiveness to Customers
2. Institute Continuous Improvement and Learning
3. Track Best Practice and 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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