Hill 8e Basic Ch03

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Copyright Houghton Mifflin Company. All rights reserved. 3 | 1

Theory of Strategic Managementwith Cases, 8eHills, Jones

Chapter ThreeCompetencies and Profitability-

Analyzing Internal Resources


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In preparing for battle I havealways found that plans are

useless , bu t plann ing isindispensable.

- Dwight D.

Eisenhower

RoyaltyFree/ Stockdisc/ Getty Images


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The firms resourcesand capabilitiesDistinctive competencies

Internal Analysis

The purpose of internal analysis is to pinpoint thestrengthsand weaknessesof the organization.

It includes assessments of:

Building and sustaining a competitive advantagerequires a company to achieve superior:

Efficiency

Quality

Innovations

Responsiveness to customers


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Internal Analysis:Strengths and Weaknesses

Internal analysis, along with the external analysis ofthe companys environment, gives managers the

information to choose the strategies and businessmodel to attain a sustained competitive advantage.

StrengthsAssetsthat boost

profitability

WeaknessesLiabilities that

depress profitability


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Competitive Advantage

Competitive Advantage

A firms profitability is greater than theaverage profitability for all firms in its

industry.SustainedCompetitive Advantage

A firm maintains above average andsuperior profitability and profit growth for anumber of years.


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Strategy, Resources,Capabilities, and Competencies

Figure 3.1


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Competitive Advantage,Value Creation, and Profitability

1. Valueor utilitythe customer gets fromowning the product

2. Pricethat a company charges for itsproducts

3. Costsof creating that product

Consumer surp lusis the excess utility aconsumer captures beyond the price paid

Basic Principle: the more utility that consumersget from a companys products or services, the

more pricing options the company has.

How profitable a company becomesdepends on three basic factors:



Value Creation per Unit

Figure 3.2



Value Creationand Pricing Options

There is a dynamicrelationship among ut i l i ty,pr ic ing, demand, and costs .

Figure 3.3



Comparing Toyotaand General Motors

Superior value creation requires that the gap betweenperceived utility (U)and costs of production (C)be greater than that obtained by competitors.

Figure 3.4



The Value Chain

A company is a chain of activities for transforminginputs into outputs that customers valueincluding the primary and support activities.

Figure 3.5



Building Blocksof Competitive Advantage

Figure 3.6



Efficiency

Measured by the quantity of inputs ittakes to produce a given output:

Efficiency = Outputs / Inputs

Productivity leads to greater efficiencyand lower costs:

Employee productivity

Capital productivitySuperior efficiency helps a company

attain a competitive advantagethrough a lower cost structure.



Quality

Superior quality = customer perceptionof greater value in a products attributesForm, features, performance, durability, reliability, style, design

Quality productsare goods and services that are: Reliable and

Differentiated by attributes that customersperceive to have higher value

A perception of quality allows a firm todifferentiate its products in the eyes of itscustomers.



A Quality Map for Automobiles

When customersevaluate the quality of aproduct, they commonlymeasure it against two

kinds of attributes:

1. Quality as Excellence

2. Quality as Reliability

Figure 3.7



Innovation

Innovationisthe act of creatingnew products or new processes

Product innovation Creates products that customers

perceive as more valuable and Increases the companys pricing options

Process innovation Creates value by lowering production costs

Successful innovation can be a majorsource of competitive advantage

by giving a company something unique.



Customer Responsiveness

Enhanced customer responsiveness:Customer response time, design,service, after-sales service and support

Superior responsiveness tocustomers differentiates a companysproducts and services and leads tobrand loyalty and premium pricing.

Identifying and satisfying customersneedsbetter than the competitors do.



Analyzing CompetitiveAdvantage and Profitability

Competitive Advantage When a companys profitability is greater than the average of all

other companies in the same industry that compete for the samecustomers

Benchmarking

Comparing company performance against that of competitors andthe companys historic performance

Measures of Profitability

ReturnOnInvestedCapital (ROIC) Net profit Net income after tax

Capital invested Equity + Debt to creditors

Net Profit= Total revenuesTotal costs

=ROIC =


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Definitions ofBasic Accounting Terms

Table 3.1


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Drivers of Profitability (ROIC)

Figure 3.9


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The Durability of CompetitiveAdvantage

1.Barriers to ImitationMaking it difficult to copy a companys distinctivecompetencies

2.Capability of Competitors Strategic comm itment Absorpt ive capaci ty

3.Industry DynamismAb i l ity of an industry to change rapidly

The durabilityof a companys competitive advantage over itscompetitors depends on:

Compet i tors are also seeking to develop dis t inct ivecompetenc ies that wi l l give them a compet i t ive edge.


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Why Companies Fail

Inertia Companies find it difficult to change their strategies andstructures

Prior Strategic Commitments Limit a companys ability to imitate and cause competitive

disadvantageThe Icarus Paradox

A company can become so specialized and inner-directedbased on past success that it loses sight of market realities

Categories of rising and falling companies:

Craftsmen Bui lders Pioneers SalespeopleWhen a company loses its competitive advantage,

its profitability falls below that of the industry.It los es the abi l i ty to attract and generate resources.

Prof i t margin s and invested capita l sh rink rapidly.


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Avoiding Failure:Sustaining Competitive Advantage

1.Focus on the Building Blocks of CompetitiveAdvantageDevelop dist in ct ive competenc ies and super ior performance in:

Efficiency Quality Innovation Responsiveness to Customers

2. Institute Continuous Improvement andLearning

3.Track Best Practice and Use Benchmarking4.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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Hill 8e Basic Ch03