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Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability

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Title: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability


1
Internal Analysis Distinctive Competencies,
Competitive Advantage, and Profitability
  • Chapter 3

2
Internal Analysis Identifying Strengths and
Weaknesses
  • 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 companys competitive
    advantage (strengths and weaknesses)

3
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 unique application of resources and
    acquisition of capabilities

4
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 firms products may lead to distinctive
    competency

5
The Role of Capabilities
  • Capabilities
  • A companys skills at coordinating and using its
    resources
  • Capabilities are the product of organizational
    structure, processes, and control systems
  • We must add people, particularly leadership in
    building the structure, etc.

6
Strategy, Resources, Capabilities, and
Competencies
7
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

8
Competitive Advantage, Value Creation, and
Profitability
  • Profitability factors
  • Amount of value customers place on the companys
    products
  • Price charged
  • Costs of creating the value

9
Value Creation per Unit
10
Value Creation and Pricing Options
11
Comparing Toyota and General Motors
12
Differentiation and Cost Structure Roots of
Competitive Advantage
13
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

14
The Value Chain Primary and Support Activities
15
The Generic Building Blocks of Competitive
Advantage
16
Efficiency
  • The quantity of inputs it takes to produce a
    given output. Usually measured as outputs over
    inputs examples of latter
  • No. of employees
  • Capital investment
  • Productivity leads to greater efficiency and
    lower costs
  • Employee productivity
  • Capital productivity

17
Quality
  • Superior quality customer perception of greater
    value in a specific products 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

18
Quality (contd)
  • 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

19
A Quality Map for Automobiles
20
Innovation
  • The act of creating new, commercially viable
    products or processes
  • Product innovation
  • Creates products that customers perceive as more
    valuable, increasing the companys pricing
    options
  • Process innovation
  • Creates value by lowering production costs
  • Perhaps the most important building block of
    competitive advantage

21
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

22
Responsiveness to Customers (contd)
  • Sources of enhanced customer responsiveness
  • Customer response time, design, service,
    after-sales service and support
  • Differentiates a companys products leads to
    brand loyalty and premium pricing

23
Exercise
  • Strategy in Action 3.2 Southwest Airlines
  • Why would focusing on employee productivity and
    keeping operations simple, e.g. type of planes
    they use, ticketless system, etc., lead to
    competitive advantage in the Airline industry?

24
Analyzing Competitive Advantage and Profitability
  • Benchmarking company performance against that of
    competitors and the companys own historic
    performance
  • Return on invested capital
  • Net profit Total revenues Total costs

25
Definitions of Basic Accounting Terms
26
Drivers of Profitability (ROIC)
27
Why are taxes excluded in computing return on
invested capital?
28
Ways to Increase ROIC
  • Increase the companys return on sales
  • Reduce cost of goods sold
  • Reduce spending on sales force, marketing,
    general, and administrative expenses
  • Reduce RD spending
  • Increase sales revenue more than costs
  • Increase sales revenues from invested capital
  • Reduce the amount of working capital
  • Reduce amount of fixed capital

29
The Durability of Competitive Advantage
  • Barriers to Imitation
  • Imitating Resources
  • Imitating Capabilities
  • Capability of Competitors
  • Strategic commitment
  • Absorptive capacity
  • Industry Dynamism

30
Why Companies Fail
  • Inertia
  • Companies find it difficult to change their
    strategies and structures
  • Prior strategic commitments
  • Limit a companys 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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