3
Internal Analysis:
Distinctive
Competencies,
Competitive
Advantage, and
Profitability
Plotting a Route to the Top
• Do a SWOT analysis for yourself
• Outline a strategy for yourself
– Unique
• Making yourself known is absolutely
essential
– Next to talent, the second most important factor
in career or entrepreneurial success is taking the
time and effort to develop visibility
• Get your name in print
• Give speeches
• Continually add names to your Rolodex
• Volunteer for industry association and
professional organization jobs
• Take time off for a stint in government
• Make your superiors look good
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3-2
Internal Analysis
• Identifying the strengths and weaknesses of the
company
• Managers must understand
– The role of resources, capabilities, and distinctive
competencies in the process by which companies
create value and profit
– The importance of superior efficiency, innovation,
quality, and responsiveness to customers
– The sources of their company’s competitive
advantage (strengths and weaknesses)
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3-3
Competitive Advantage
• Competitive advantage
– A firm’s profitability is greater than the average
profitability for all firms in its industry
• Sustained competitive advantage
– A firm maintains competitive advantage for a
number of years
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3-4
Profitability in the U.S. Retailing
Industry, 1996-2001
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3-5
Distinctive Competences and
Competitive Advantage
• Distinctive competencies
– Firm-specific strengths that allow a company to
gain competitive advantage by differentiating its
products and/or achieving lower costs than its
rivals
– Arise from resources and capabilities
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3-6
The Role of Resources
• Resources
– Capital or financial, physical, social or human,
technological, and organizational factor endowments
• Tangible and intangible
• A firm-specific and difficult to imitate resource is
likely to lead to distinctive competency
• A valuable resource that creates strong demand for a
firm’s products may lead to distinctive competency
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3-7
The Role of Capabilities
• Capabilities
– A company’s skills at coordinating and using its
resources
• Capabilities are the product of organizational
structure, processes, and control systems
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3-8
Strategy, Resources, Capabilities, and
Competencies
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3-9
A Critical Distinction
• If a firm has firm-specific and valuable
resources it must also have the capability to
use them effectively to create distinctive
competency
• A firm can create distinctive competency
without firm-specific and valuable resources if
it has unique capabilities
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3 - 10
Competitive Advantage, Value Creation,
and Profitability
• Profitability factors
– Amount of value customers place on the
company’s products
– Price charged
– Costs of creating the value
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3 - 11
Value Creation per Unit
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3 - 12
Value Creation and Pricing Options
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3 - 13
Comparing Toyota and General Motors
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3 - 14
Differentiation and Cost Structure:
Roots of Competitive Advantage
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3 - 15
The Value Chain
• A company is a chain of activities for
transforming inputs into outputs that customers
value
• The transformation process is composed of
primary and support activities that add value to
the product
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3 - 16
The Value Chain: Primary and Support
Activities
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3 - 17
The Generic Building Blocks of
Competitive Advantage
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3 - 18
Efficiency
• The quantity of inputs it takes to produce a
given output
• Productivity leads to greater efficiency and
lower costs
– Employee productivity
– Capital productivity
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Quality
• Superior quality = customer perception of
greater value in a specific product’s attributes
– Form, features, performance, durability, reliability,
style, design
• Quality products = goods and services that are
reliable and that are differentiated by attributes
that customers perceive to have higher value
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3 - 20
Quality (cont’d)
• The impact of quality on competitive
advantage
– High-quality products increase the value of
(differentiate) the products in customers’ eyes
– Greater efficiency and lower unit costs are
associated with reliable products
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3 - 21
A Quality Map for Automobiles
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3 - 22
Innovation
• The act of creating new products or processes
– Product innovation
• Creates products that customers perceive as more
valuable, increasing the company’s pricing options
– Process innovation
• Creates value by lowering production costs
• Perhaps the most important building block of
competitive advantage
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Responsiveness to Customers
• Doing a better job than competitors of
identifying and satisfying customers’ needs
– Superior quality and innovation are integral to
superior responsiveness to customers
– Customizing goods and services to the unique
demands of individual customers or customer
groups
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Responsiveness to Customers (cont’d)
• Sources of enhanced customer responsiveness
– Customer response time, design, service, aftersales service and support
• Differentiates a company/its products; leads to
brand loyalty and premium pricing
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3 - 25
Analyzing Competitive Advantage and
Profitability
• Benchmarking company performance against
that of competitors and the company’s own
historic performance
• Return on invested capital
ROIC 
Net profit
Invested capital
• Net profit = Total revenues – Total costs
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Definitions of Basic Accounting Terms
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3 - 27
Drivers of Profitability (ROIC)
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Ways to Increase ROIC
• Increase the company’s return on sales
– Reduce cost of goods sold
– Reduce spending on sales force, marketing,
general, and administrative expenses
– Reduce R&D spending
– Increase sales revenue more than costs
• Increase sales revenues from invested capital
– Reduce the amount of working capital
– Reduce amount of fixed capital
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The Durability of Competitive
Advantage
• Barriers to Imitation
– Imitating Resources
– Imitating Capabilities
• Capability of Competitors
– Strategic commitment
– Absorptive capacity
• Industry Dynamism
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Why Companies Fail
• 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
– A company can become so specialized based on past
success that it loses sight of market realities
– Craftsmen, builders, pioneers, salesmen
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Avoiding Failure and Sustaining
Competitive Advantage
• Focus on the building blocks of competitive
advantage
• Institute continuous improvement in learning
• Track best industrial practice in use
benchmarking
• Overcome inertia
• Luck
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