BA 951
Policy Formulation and Administration
Lecture 3
Internal Analysis: Resources,
Capabilities, Competencies, and
Competitive Advantage
© Ram Mudambi, Temple University, 2007
Learning Outcomes
A systematic look inside the firm – why are
some firms more successful than others?
 The basis of competitive advantage
The boundaries of the firm
 ‘Make or buy’
 Inter-firm cooperation
© Ram Mudambi, Temple University, 2007
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Lecture Outline
The nature and sources of competitive
advantage
Generic strategies
The resource-based view of the firm
From resources to core competencies
From core competencies to value creation
© Ram Mudambi, Temple University, 2007
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Competitive Advantage: Value Creation,
Low Cost, and Differentiation
Competitive advantage is a firm’s ability to
outperform its competitors (earn higher
profits).
Sustained competitive advantage (SCA)
comes from maintaining higher profits than
competitors over long periods of time.
The source of competitive advantage is
value creation for customers.
© Ram Mudambi, Temple University, 2007
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Value Creation per Unit
U
© Ram Mudambi, Temple University, 2007
Sometimes called
producer surplus
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Comparing Toyota and General
Motors
Superior value creation requires that the gap between
perceived utility (U) and costs of production (C)
be greater than that obtained by competitors.
© Ram Mudambi, Temple University, 2007
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Definitions of basic accounting terms
© Ram Mudambi, Temple University, 2007
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Drivers of Profitability (ROIC)
© Ram Mudambi, Temple University, 2007
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Comparing Wal-Mart to Target
© Ram Mudambi, Temple University, 2007
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Generic Building Blocks of Competitive
Advantage
© Ram Mudambi, Temple University, 2007
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Porter’s generic strategies
Competitive Dimension
Cost
Differentiation
Competitive Broad Cost leadership Differentiation leadership
Scope Narrow Cost focus
Differentiation focus
© Ram Mudambi, Temple University, 2007
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Efficiency, quality, innovation, and
customer responsiveness
© Ram Mudambi, Temple University, 2007
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The resource-based view of the firm
Associated with Edith Penrose and more
recently with Birger Wernerfelt
The question is “what do we have?” rather
than “who do we serve?”
The external environment is in a constant
state of flux and largely out of the firm’s
control
The internal environment is more stable and
more in the firm’s control
© Ram Mudambi, Temple University, 2007
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What are the firm’s resources?
Tangible resources
 Financial resources
 Physical resources
Intangible resources
 Reputation
 Brand equity
Human resources
 Human capital – knowledge, skills, etc.
 Relationships – effectiveness of teams
© Ram Mudambi, Temple University, 2007
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From resources to capabilities
From ‘what to we have?’ to ‘what
can we do?’
Relative rather than absolute
measurements
© Ram Mudambi, Temple University, 2007
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What are the firm’s capabilities?
Capability = competence
Competencies are identified by
disaggregation
 Functional disaggregation
 Value chain disaggregation
Competencies are relative
 Importance of benchmarking
Core competencies are those which
 make a disproportionate contribution to ultimate
customer value or to the efficiency of its delivery
 are a basis for entering new markets
© Ram Mudambi, Temple University, 2007
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Value Chain Disaggregation
© Ram Mudambi, Temple University, 2007
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Core competencies
 A competence
becomes a core competence when the
well-performed activity is central to the company’s
strategy, competitiveness, and profitability
 Often, a core competence results from
collaboration among different parts
of an organization
 Typically, core competencies reside in a
company’s people, not in its physical assets
 A core competence gives a company a potentially
valuable competitive and collaborative advantage
© Ram Mudambi, Temple University, 2007
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Competencies
Uniqueness
- Selznick, Ansoff
Distinctive
competencies
Importance
- Hamel and Prahalad
Core
Competencies
Competencies
© Ram Mudambi, Temple University, 2007
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Examples of core competencies
Skills
in manufacturing a high quality product
System to fill customer orders accurately and swiftly
Fast development of new products
Better after-sale service capability
Superior know-how in selecting good retail locations
Innovativeness in developing popular product features
Merchandising and product display skills
Expertise in an important technology
Expertise in integrating multiple technologies to create
whole families of new products
© Ram Mudambi, Temple University, 2007
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Examples: Core competencies
Sharp Corporation

Expertise in flat-panel display technology
Toyota, Honda, Nissan

Low-cost, high-quality manufacturing capability and
short design-to-market cycles
Intel

Ability to design and manufacture ever more powerful
microprocessors for PCs
Motorola

Defect-free manufacture (six-sigma quality) of cell
phones
© Ram Mudambi, Temple University, 2007
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Profit potential of a competency
EXTENT
S U S T A IN A B IL IT Y
A P P R O P R IA B IL IT Y
S ca rcity
D u ra b ility
P ro p e rty rig h ts
R e le va n ce
M o b ility
R e la tive b a rg a in in g
power
R e p lica b ility
E m b e d d e d n e ss o f
re so u rce s
© Ram Mudambi, Temple University, 2007
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The Sustainability of Competitive
Advantage
Barriers to imitation
 Speed of imitation by competitors in reducing advantage
 Imitation by acquiring similar resources
 Imitation of capabilities (more difficult)
Limits on competitors
 Prior strategic commitments
 Absorptive capacity for change
Industry dynamism
 The rapid innovation
shortens product life cycles.
© Ram Mudambi, Temple University, 2007
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Overview of resource/capability
analysis
Best exploits the firm’s
capabilities relative
to its external
environment
Strategy
Profit potential
What can the firm
do relative to
Capabilities
its competitors?
Sources of strength
and weakness
© Ram Mudambi, Temple University, 2007
Identify resource gaps
Invest in resource base
Resources
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Distinctive Competencies, Resources, and
Capabilities
The roots of competitive advantage:
© Ram Mudambi, Temple University, 2007
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Why Do Companies Fail?
What went wrong?
 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
© Ram Mudambi, Temple University, 2007
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The Icarus Paradox
• A company becomes so specialized and
inner directed based on past success that it
loses sight of market realities
• Craftsmen – Texas Instruments, DEC – engineering
for engineering’s sake
• Builders – diversification – ITT, Gulf + Western
• Pioneers – Innovation – Wang Labs
• Salesmen – Sell anything – P&G, Chrysler
• Failure to see the link between competence
and value creation
© Ram Mudambi, Temple University, 2007
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Avoiding failure and sustaining
competitive advantage
 Focus on the building blocks of competitive
advantage.
 Institute continuous improvement and
learning.
 Track best industrial practice and use
benchmarking.
 Overcome inertia.
© Ram Mudambi, Temple University, 2007
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Summary
The building blocks of competitive
advantage
 Generic strategies
The resource based view of the firm
From resources to competencies
From competencies to value creation
 Sources of failures in this linkage
© Ram Mudambi, Temple University, 2007
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