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Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

This chapter explores the importance of internal analysis in strategy formulation, particularly in identifying distinctive competencies and leveraging them to achieve competitive advantage and profitability. It provides an overview of different types of resources and capabilities, evaluation techniques, and factors that limit imitation. The chapter also discusses Porter's value chain concept and how it can be used to create value in primary and support activities. A low-cost strategy and a differentiation strategy are presented with examples of how companies can achieve each.

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Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

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  1. Chapter 4 Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

  2. Why Internal Analysis? • Early strategy theory rooted in industry structural analysis - external focus • This approach has lost its appeal because: • internationalization & deregulation has all but removed safe havens • technology and changes in demand have blurred industry lines

  3. The Role of Resources and Capabilities in the Creation of Profit A product of the Resource Based View Resources Build Shape Competitive Advantages Distinctive Competencies Core Competencies Strategies Build Capabilities Competitiveness & Profit

  4. Strength • Skill, specialized expertise, or important capability • Physical asset • Human assets or intellectual capital • Organizational asset • Intangible assets • Competitive achievement • Alliance or cooperative venture

  5. Evaluation of Resources Strength or Weakness • relative to competitors • basic business requirements • key vulnerabilities

  6. Other Threats • Emergence of cheaper/better technologies • Introduction of better products by rivals • Entry of lower-cost foreign competitors • Onerous regulations • Rise in interest rates • Potential of a hostile takeover • Unfavorable demographic shifts • Adverse shifts in foreign exchange rates • Political upheaval in a country

  7. Tangible Resources Org. Capabilities Inputs into Outputs Intangible Resources • Examples….. • Customer Service • Product Development • Employee Productivity

  8. Core Competencies • central to the firm’s competitiveness • rewarded in market place • combination of skills & knowledge, not products or functions • flexible, long term platforms • embedded in the organization’s systems • distinctive competencies are those the firm performs better than rivals • All core competencies have the potential to become core rigidities

  9. Sustainable Competitive Advantage Must be valuable, rare, inimitable, and non-substitutable Sustainability is a function of • Durability - how long will it last? • Technology? Reputation? Fixed Assets? • Imitability - how quickly can it be copied? • Transparent - easy to see? • Transferable - can it be done elsewhere? • Replicable - can we do it here?

  10. Factors that Limit Imitation • Physical Uniqueness – • Path Dependency – • Causal Ambiguity – • Social Complexity – • Absorptive Capacity –

  11. Relative costs and prices Where do cost/price differences come from? • raw materials and components • differences in technology, plant, equipment • efficiencies, learning, experience, wages, productivity • marketing, sales, promotion, warehousing, distribution, administration costs • distribution • inflation, exchange and tax rates

  12. Value Creation per Unit

  13. Comparing Toyota and General Motors

  14. Porter’s Value Chain Views the organization as a series (chain) of activities, which may or may not create value

  15. Porter’s Value Chain (cont.) • Primary Activities • Inbound logistics – Supply Chain Management • Operations • Outbound logistics - Distribution • Marketing and sales • Customer service • Contribute to the physical creation of the product/service, its sale and transfer to the buyer, and its service after the sale

  16. Porter’s Value Chain (cont) • Support Activities • Company infrastructure – General Admin • Human resource management • R&D, Technology and Systems Development • Procurement

  17. The Value Chain S u p p o r t Company Infrastructure HRM R&D, Technology & Systems Development Margin Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Margin Primary

  18. A low cost strategy….. Company Infrastructure HRM R&D, Technology & Systems Development Margin Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Margin …tries to pull the arrow back…..

  19. Low Cost - Support Activity examples…... Fewer layers of management Policies to reduce turnover IBM Printer - 150 to 62 parts, 3.5 minutes Margin Monitor supplier performance Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Margin

  20. Low cost - Primary Activity examples…. • Inbound - • Operations - • Outbound - • Marketing/Sales - • Customer Service -

  21. A differentiation strategy….. Company Infrastructure HRM R&D, Technology & Systems Development Margin Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Margin ….tries to pull the arrow forward...

  22. Differentiation - Support Activity examples…... Commitment to quality Compensation rewarding innovation Amazon Recommendations Margin Purchasing high-quality components Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Margin

  23. Differentiation - Primary Activity examples…... • Inbound - • Operations - • Outbound - • Market/Sales - • Customer Service -

  24. Your Firm Buyers Suppliers Your Rivals

  25. Your Firm Opportunities for Advantage Buyers Suppliers Your Rivals

  26. Your Firm Opportunities for Adding Value Opportunities for Adding Value Buyers Suppliers Your Rivals

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