Internal analysis

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Internal analysis

  1. 1. Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability Chapter 3
  2. 2. Internal Analysis: Identifying Strengths and Weaknesses <ul><li>Managers must understand </li></ul><ul><ul><li>The role of resources, capabilities, and distinctive competencies in the process by which companies create value and profit </li></ul></ul><ul><ul><li>The importance of superior efficiency, innovation, quality, and responsiveness to customers </li></ul></ul><ul><ul><li>The sources of their company’s competitive advantage (strengths and weaknesses) </li></ul></ul>
  3. 3. Distinctive Competences and Competitive Advantage <ul><li>Distinctive competencies </li></ul><ul><ul><li>Firm-specific strengths that allow a company to gain competitive advantage by differentiating its products and/or achieving lower costs than its rivals </li></ul></ul><ul><ul><li>Arise from unique application of resources and acquisition of capabilities </li></ul></ul>
  4. 4. The Role of Resources <ul><li>Resources </li></ul><ul><ul><li>Capital or financial, physical, social or human, technological, and organizational factor endowments </li></ul></ul><ul><ul><ul><li>Tangible and intangible </li></ul></ul></ul><ul><li>A firm-specific and difficult to imitate resource is likely to lead to distinctive competency </li></ul><ul><li>A valuable resource that creates strong demand for a firm’s products may lead to distinctive competency </li></ul>
  5. 5. The Role of Capabilities <ul><li>Capabilities </li></ul><ul><ul><li>A company’s skills at coordinating and using its resources </li></ul></ul><ul><li>Capabilities are the product of organizational structure, processes, and control systems </li></ul><ul><li>We must add people, particularly leadership in building the structure, etc. </li></ul>
  6. 6. Strategy, Resources, Capabilities, and Competencies
  7. 7. A Critical Distinction <ul><li>If a firm has firm-specific and valuable resources, it must also have the capability to use them effectively to create distinctive competency </li></ul><ul><li>A firm can create distinctive competency without firm-specific and valuable resources if it has unique capabilities </li></ul>
  8. 8. Competitive Advantage, Value Creation, and Profitability <ul><li>Profitability factors </li></ul><ul><ul><li>Amount of value customers place on the company’s products </li></ul></ul><ul><ul><li>Price charged </li></ul></ul><ul><ul><li>Costs of creating the value </li></ul></ul>
  9. 9. Value Creation and Pricing Options
  10. 10. Comparing Toyota and General Motors
  11. 11. Differentiation and Cost Structure: Roots of Competitive Advantage
  12. 12. The Value Chain <ul><li>A company is a chain of activities for transforming inputs into outputs that customers value </li></ul><ul><li>The transformation process is composed of primary and support activities that add value to the product </li></ul>
  13. 13. The Value Chain: Primary and Support Activities
  14. 14. The Generic Building Blocks of Competitive Advantage
  15. 15. Exercise <ul><li>Strategy in Action 3.2: Southwest Airlines </li></ul><ul><li>What portions of the value chain does Southwest Airlines work on to create value for its customers? </li></ul><ul><li>Why these portions rather than the more significant costs like fuel? </li></ul>
  16. 16. Efficiency <ul><li>The quantity of inputs it takes to produce a given output. Usually measured as outputs over inputs; examples of latter </li></ul><ul><ul><li>No. of employees </li></ul></ul><ul><ul><li>Capital investment </li></ul></ul><ul><li>Productivity leads to greater efficiency and lower costs </li></ul><ul><ul><li>Employee productivity </li></ul></ul><ul><ul><li>Capital productivity </li></ul></ul>
  17. 17. Quality <ul><li>Superior quality = customer perception of greater value in a specific product’s attributes </li></ul><ul><ul><li>Form, features, performance, durability, reliability, style, design </li></ul></ul><ul><li>Quality products = goods and services that are reliable and that are differentiated by attributes that customers perceive to have higher value </li></ul>
  18. 18. Quality (cont’d) <ul><li>The impact of quality on competitive advantage </li></ul><ul><ul><li>High-quality products increase the value of (differentiate) the products in customers’ eyes </li></ul></ul><ul><ul><li>Greater efficiency and lower unit costs are associated with reliable products </li></ul></ul>
  19. 19. A Quality Map for Automobiles
  20. 20. Innovation <ul><li>The act of creating new, commercially viable products or processes </li></ul><ul><ul><li>Product innovation </li></ul></ul><ul><ul><ul><li>Creates products that customers perceive as more valuable, increasing the company’s pricing options </li></ul></ul></ul><ul><ul><li>Process innovation </li></ul></ul><ul><ul><ul><li>Creates value by lowering production costs </li></ul></ul></ul><ul><li>Perhaps the most important building block of competitive advantage </li></ul>
  21. 21. Responsiveness to Customers <ul><li>Doing a better job than competitors of identifying and satisfying customers’ needs </li></ul><ul><ul><li>Superior quality and innovation are integral to superior responsiveness to customers </li></ul></ul><ul><ul><li>Customizing goods and services to the unique demands of individual customers or customer groups </li></ul></ul>
  22. 22. Responsiveness to Customers (cont’d) <ul><li>Sources of enhanced customer responsiveness </li></ul><ul><ul><li>Customer response time, design, service, after-sales service and support </li></ul></ul><ul><li>Differentiates a company’s products; leads to brand loyalty and premium pricing </li></ul>
  23. 23. Value Creation per Unit
  24. 24. Analyzing Competitive Advantage and Profitability <ul><li>Benchmarking company performance against that of competitors and the company’s own historic performance </li></ul><ul><li>Return on invested capital </li></ul><ul><li>Net profit = Total revenues – Total costs </li></ul>
  25. 25. Definitions of Basic Accounting Terms
  26. 26. Drivers of Profitability (ROIC)
  27. 27. Ways to Increase ROIC <ul><li>Increase the company’s return on sales </li></ul><ul><ul><li>Reduce cost of goods sold </li></ul></ul><ul><ul><li>Reduce spending on sales force, marketing, general, and administrative expenses </li></ul></ul><ul><ul><li>Reduce R&D spending </li></ul></ul><ul><ul><li>Increase sales revenue more than costs </li></ul></ul><ul><li>Increase sales revenues from invested capital </li></ul><ul><ul><li>Reduce the amount of working capital </li></ul></ul><ul><ul><li>Reduce amount of fixed capital </li></ul></ul>
  28. 28. The Durability of Competitive Advantage <ul><li>Barriers to Imitation </li></ul><ul><ul><li>Imitating Resources </li></ul></ul><ul><ul><li>Imitating Capabilities </li></ul></ul><ul><li>Capability of Competitors </li></ul><ul><ul><li>Strategic commitment </li></ul></ul><ul><ul><li>Absorptive capacity </li></ul></ul><ul><li>Industry Dynamism </li></ul>
  29. 29. Why Companies Fail <ul><li>Inertia </li></ul><ul><ul><li>Companies find it difficult to change their strategies and structures </li></ul></ul><ul><li>Prior strategic commitments </li></ul><ul><ul><li>Limit a company’s ability to imitate and cause competitive disadvantage </li></ul></ul><ul><li>The Icarus paradox </li></ul><ul><ul><li>A company can become so specialized based on past success that it loses sight of market realities </li></ul></ul><ul><ul><li>Craftsmen, builders, pioneers, salesmen </li></ul></ul>

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