Internal Analysis: Distinctive Competencies, Competitive Advantage and Profitability

STRATEGIC MANAGEMENT
CHAPTER-3
Internal Analysis:
Distinctive Competencies,
Competitive Advantage
and Profitability
Internal Analysis
Its a 3 step process:
1. Managers must understand the process by which
companies create value for customers and profit for
themselves, and they need to understand the role of
resources, capabilities, and distinctive competencies in this
process;
2. They need to understand how important superior
efficiency, innovation, quality, and customer responsiveness
are in creating value and generating high profitability; and
3. They must be able to analyze the sources of their
companys competitive advantage to identify what is
driving the profitability of their enterprise and where
opportunities for improvement might lie.
The Roots of Competitive Advantage

Distinctive Competencies:
Competitive advantage is based on distinctive
competencies. Distinctive competencies are firmspecific strengths that allow a company to differentiate its
products from those offered by rivals and/or achieve
substantially lower costs than its rivals.
Distinctive competencies arise from two complementary
sources: resources and capabilities.
Resources refer to the assets of a company. A companys
resources can be divided into two types: tangible and
intangible resources.
Capabilities refer to a companys skills at coordinating
its resources and putting them to productive use.
The distinction between resources and capabilities is

critical to understanding what generates a
distinctive competency.
For a company to have a distinctive competency, it
must at a minimum have either
a firm-specific and valuable resource and the capabilities

(skills) necessary to take advantage of that resource or
a firm-specific capability to manage resources.
A companys distinctive competency is strongest

when it possesses both firm-specific and valuable
resources and firm-specific capabilities to manage
those resources.

The Role of Strategy:
Distinctive competencies shape the strategies that a
company pursues, which lead to competitive advantage and
superior profitability.
However, it is also very important to realize that the
strategies a company adopts can build new resources and
capabilities or strengthen the existing resources and
capabilities of the company, thereby enhancing the
distinctive competencies of the enterprise.
Thus, the relationship between distinctive competencies and
strategies is not a linear one; rather, it is a reciprocal one in
which distinctive competencies shape strategies, and
strategies help to build and create distinctive competencies.
Relationship of a companys
strategies, distinctive competencies,
and competitive advantage
Competitive Advantage, Value

Creation, and Profitability
Competitive advantage leads to superior

profitability.
How profitable a company becomes
depends on three factors:
1.
2.
3.
The value customers place on the

companys products;
The price that a company charges for its
products; and
The costs of creating those products.
Competitive Advantage, Value

Creation, and Profitability
The value customers place on a product reflects the

utility they get from a product.
Utility must be distinguished from price.
It is a function of the attributes of the product, such
as its performance, design, quality, and point-of-sale
and after-sale service.
The price a company charges for goods or service is
typically less than the utility value placed on goods or
service by the customer.
It is because the customer captures some of that
utility in the form of what economists call a consumer
surplus.
The Value Chain
The term value chain refers to the idea

that a company is a chain of activities for
transforming inputs into outputs that
customers value. The transformation
process involves a number of primary
activities and support activities that
add value to the product.
Primary Activities
Primary activities have to do with the

design, creation, and delivery of the
product, its marketing, and its support
and after-sales service. The primary
activities are broken down into four
functions: research and development,
production, marketing and sales, and
customer service.
Support Activities
The support activities of the value

chain provide inputs that allow the
primary activities to take place. These
activities are broken down into four
functions: materials management (or
logistics), human resources, information
systems, and company infrastructure.
Durability of
Competitive
advantage
What is the Durability of competitive advantage

, given that other companies are also seeking
to develop distinctive competencies that will
give them a competitive advantage ?
The answer depends on 3 factors

Barriers to imitation
Capability of competitors
Dynamism of the industry environment
Barriers to Imitation
It is a primary determinant of speed of imitation.

Barriers are factors that make it difficult for a competitor
to copy a companys distinctive competencies.
It differs depending on whether rivals are imitating
resources or capabilities.
Resources- Tangible resources ( buildings, plant,
equipment)
Intangible resources ( brand name, marketing and
technological know-how)
Capabilities: They are invisible in nature and rarely
reside in a single individual; hence it is difficult to
imitate.
2. Capability of Competitors
The major determinant of the capability of

competitors to imitate a company's competitive
strategy rapidly is the nature of the
competitors prior strategic commitments
Example :
Us
automobile industry from 1945 to 1975
Absorptive capacity : refers to the ability of an

enterprise to identify , value , assimilate , and
use new knowledge .
Example :
Toyota
3 .Industry Dynamism
Dynamic industry environment is one

that is changing rapidly .
Dynamic industries tend to be those with
a high rate of product innovation .
Example :
Consumer electronic industry and
personal electronic industry
CASE: COMPARING
WALMART AND TARGET
For the year financial year ending

ROIC(Return on Invested Capital) for:
Jan
2008,
the
1.) Walmart = 14.1%

2.) Target = 10.6%
Walmart has a lower ROS(Return on Sales) than target

since its COGS(Cost of Goods Sold) as a percentage of
sales(76.5%) is higher than Targets(66.1%) i.e. its profit
margin on each item sold is lower.
By reducing spending on sales promotions and by

operating with a flat organization structure Walmart
reduces its SG&A/sales ratio.
Walmart has a lower working capital/sales ratio(2.90%) than Target(11.24%) i.e. Walmart doesnt
need any capital to finance its day-to-day operations.
Walmart has a significantly lower PPE/sales

ratio(25.9%) than Target(35.02%).This is because:
1.) Many Walmart stores are still located in small
towns where land is cheap.
2.) Walmart turns its inventory over so rapidly ,
hence does not need to devote as much space in
stores to storing inventory.
3.) Store traffic is higher at Walmart.
Avoiding Failure and

Sustaining
Competitive
Advantage
Why Companies Fail?
Inertia
The
inertia argument says that companies find

it difficult to change their strategies and
structures when adapting to changing
competitive conditions.
eg: IBM
Why do Companies Fail?
Prior Strategic Commitments
A companys prior strategic commitments

not only limit its ability to imitate rivals but
may also cause competitive disadvantage.
Why do Companies Fail?
The Icarus Paradox
Many companies become dazzled by the

early success and get over specialized and
inner-directed.
They loose the sight of market realities and
the fundamental requirements for
achieving a competitive advantage.
Step to Avoid Failure

Focus on Building Blocks of
Competitive Advantage.
Efficiency
Quality
Innovation
Responsiveness
Avoid
imbalance with respect to attention to

equal importance to each of these blocks.

Institute Continuous Improvement
and Learning
Maintain competitive advantage through

continually improve:
Efficiency
Quality
Innovation
Responsiveness to the customers
Track Best Industrial Practices and

Use Benchmarking
Identify and develop distinct competencies

that contribute to superior
Efficiency
Quality
Innovation
Responsiveness
to customer
Track the best practices followed by the other

companies in the industry or segment.
Overcome Inertia
Overcoming the internal forces that are a barrier to

change within an organization is of the key
requirements for maintaining a competitive
advantage.
Once this is achieved, implementing the change
requires.
Good
Leadership
Judicious Use of Power
Appropriate Changes in Organizational Structure and
Control System
The Role of Luck
Theres nothing called as luck.

To sustain in a competitive environment,
leaving the companys strategy in the
hands of luck is the ultimate suicidal move.
Thank You

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What are the three steps of internal analysis?

What are the three steps of internal analysis?

What are the two sources of distinctive competencies?

What are the two sources of distinctive competencies?

STRATEGIC MANAGEMENT

The Roots of Competitive Advantage

The Roots of Competitive Advantage

The distinction between resources and capabilities is

a firm-specific and valuable resource and the capabilities

A companys distinctive competency is strongest

The Roots of Competitive Advantage

Competitive Advantage, Value

Competitive advantage leads to superior

The value customers place on the

Competitive Advantage, Value

The value customers place on a product reflects the

The Value Chain

The term value chain refers to the idea

Primary activities have to do with the

The support activities of the value

What is the Durability of competitive advantage

The answer depends on 3 factors

It is a primary determinant of speed of imitation.

The major determinant of the capability of

automobile industry from 1945 to 1975

Absorptive capacity : refers to the ability of an

Dynamic industry environment is one

For the year financial year ending

1.) Walmart = 14.1%

Walmart has a lower ROS(Return on Sales) than target

By reducing spending on sales promotions and by

Walmart has a significantly lower PPE/sales

Avoiding Failure and

Why Companies Fail?

inertia argument says that companies find

Why do Companies Fail?

Prior Strategic Commitments

A companys prior strategic commitments

Why do Companies Fail?

The Icarus Paradox

Many companies become dazzled by the

Step to Avoid Failure

imbalance with respect to attention to

Step to Avoid Failure

Maintain competitive advantage through

Step to Avoid Failure

Track Best Industrial Practices and

Identify and develop distinct competencies

Track the best practices followed by the other

Step to Avoid Failure

Overcoming the internal forces that are a barrier to

Step to Avoid Failure

The Role of Luck

Theres nothing called as luck.

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