internal analysis: distinctive competencies, sustainable comp. adv. & profitability fall 2009...
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INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES, SUSTAINABLE COMP. ADV. &
PROFITABILITY
FALL 2009
CHAPTER 3, BUS 189
DR. MARK FRUIN
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PORTER VS. RESOURCE BASED VIEW OF THE FIRM
• EXTERNAL ANALYSIS = INDUSTRY ANALYSIS– 5 FORCES MODEL = INDUSTRY “DYNAMICS”
(DESCRIPTIVE, NOT ANALYTICAL– SUPERIOR POSITION (IN INDUSTRY) =
COMPETITIVE SUCCESS
• INTERNAL ANALYSIS = ORG ANALYSIS FROM RESOURCE BASED POINT OF VIEW– FIRM AS A COLLECTION OF RESOURCES– FIRM THAT BEST COMBINES, MOBILIZES &
MANAGES RESOURCES WINS
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DELL COMPUTER
• FROM RBV, WHAT COMPETITIVE ADVANTAGES DOES DELL HAVE?
• RESOURCES = WHAT YOU “HAVE”
• CAPABILITIES = WHAT YOU “DO” WITH WHAT YOU HAVE
• COMPETENCIES = WHAT YOU DO WELL
• DISTINCTIVE COMPETENCIES = WHAT YOU DO WELL AND OTHERS DON’T DO AS WELL
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DELL COMPUTER II• WHAT DISTINCTIVE COMPETENCIES
DOES DELL HAVE– DIRECT SALES MODEL– EASILY NAVIGABLE WEBSITE
• 85% OF SALES MADE VIA INTERNET
– HIGH RETURN ON INVESTED CAPITAL– SUPPLY CHAIN SUCCESS
• MANAGE SUPPLIER RELATIONS, MORE THAN MANAGE SUPPLY CHAIN
– LOW INVENTORY COSTS– CUSTOMER LOYALTY - HIGH RESALES
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DELL COMPUTER III• ARE THESE DISTINCTIVE COMPETENCIES?
– FIRM-SPECIFIC STRENGTHS THAT ALLOW FIRM TO DIFFERENTIATE ITS PRODUCTS AND/OR ACHIEVE SUBSTANTIALLY LOWER COSTS THAN ITS RIVALS
• IF SO, WHERE DO THEY COME FROM?– ALL DISTINCTIVE COMPETENCIES STARTED AS
COMPETENCIES
– ALL COMPETENCIES STARTED AS CAPABILITIES
– ALL CAPABILITIES STARTED AS RESOURCES
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DISTINCTIVE COMPETENCIES• INVOLVE MANAGERIAL CHOICE & DISCRETION• INVOLVE CREATING SUPERIOR
ORGANIZATIONAL PROCESSES– WHICH TAKE RESOURCES, TIME & EFFORT
– WHICH RARELY OCCUR RIGHT AWAY & EASILY
• NECESSARILY INVOLVE A MAJORITY OF ORGANIZATIONAL MEMBERS– STRATEGIC INTENT
– STRETCH GOALS
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RESOURCES• TANGIBLE• INTANGIBLE• CREATE LITTLE VALUE UNLESS THEY ARE
USED• USING THEM, CONVERTS THEM INTO
CAPABILITIES– BOOK SAYS, P. 78– CAPABILITIES ARE PRODUCT OF FIRM STRUCTURE,
PROCESSES & CONTROL SYSTEMS– RESIDE NOT IN INDIVIDUALS, BUT ARE EMBODIED
IN ORGANIZATION
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WHAT MAKES RESOURCES VALUABLE?
• BOOKS SAY, P. 77-78, RESOURCES ARE VALUABLE WHEN THEY ARE FIRM-SPECIFIC AND DIFFICULT TO IMITATE
• CONFUSING BECAUSE RESOURCES HAVE LITTLE VALUE ON THEIR OWN
• WHEN RESOURCES ARE CONVERTED TO CAPABILITIES AND USED EFFECTIVELY =
• VALUE IS CREATED• OLYMPIC RING MODEL OF RESOURCE VALUE =
SCARCITY, DEMAND, APPROPRIABILITY, NON- SUBSTITUTABILITY, AND “ADHESABILITY”
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GOOD NEWS & BAD NEWS• THE GOOD NEWS IS THAT RESOURCES
BECOME VALUABLE TO THE EXTENT THEY ARE SPECIALIZED & DEDICATED– ASSET SPECIFICITY (GOOD ECONOMIST WORD)
• THE BAD NEWS IS THAT RESOURCES ARE VALUABLE TO THE EXTENT THAT THEY ARE SPECIALIZED & DEDICATED – IF MAKE WRONG CHOICES, HARD TO GO BACK– PATH DEPENDENCY; ESCALATING
COMMITMENT
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DYNAMIC CAPABILITIES• AS BUSINESS ENVIRONMENT CHANGES, AS
IT DOES, • WE DON’T WANT ANY OLD CAPABILITIES,
BUT DYNAMIC CAPABILITIES– CAPABILITIES THAT CAN BE ADAPTED TO
CHANGING CONDITIONS– FLEXIBILITY, ADAPTABILITY, RESILIENCY– BUT ORGANIZATIONAL INERTIA MAKES
FLEXIBILITY/ADAPTABILITY HARD TO REALIZE, ESPECIALLY IN LIGHT OF INDUSTRY LIFE CYCLE CHANGES
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RBV AND VALUE CREATIONPROFITABILITY BASED ON THREE FACTORS:
-THE VALUE CUSTOMERS PLACE ON PRODUCT/SERVICE OFFERINGS
-THE PRICE COMPANIES CHANGE FOR PRODUCTS
-THE COSTS OF CREATING/MAKING/ DELIVERING THOSE PRODUCTS
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CONSUMER SURPLUS
• PRICE CHARGED IS TYPICALLY LESS THAN UTILITY VALUE TO CUSTOMERS
• “EXTRA” UTILITY FROM CUSTOMER PT OF VIEW = CONSUMER SURPLUS
• P. 80-82, THE MORE UTILITY THAT CONSUMERS GET FROM FIRM OFFERINGS, THE MORE PRICING OPTIONS FIRM HAS
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TOYOTA EXAMPLE
• TOYOTA CREATES MORE UTILITY VALUE FOR CONSUMERS
• FOUND IN HIGHER QUALITY, GREATER SATISFACTION & MORE INNOVATION
• TOYOTA CAN CHARGE HIGHER PRICES THAN ITS RIVALS IN SPITE OF THE FACT THAT ITS COSTS ARE LOWER!!
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GENERIC COMPETITIVE STRATEGIES
• COST LEADERSHIP OR LOWER COST STRUCTURES GIVES FIRMS MORE PRICING OPTIONS
• DIFFERENTIATION CREATES MORE UTILITY/VALUE AND ALLOWS MORE PRICING CHOICES
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VALUE CHAIN• HOW ONE COMPANY’S INPUTS ARE
CONVERTED INTO OUTPUTS
• INTERCONNECTED CHAINS/SETS OF ACTIVITIES– FROM UPSTREAM TO DOWNSTREAM– PRIMARY VERSUS SECONDARY ACTIVITIES
• R&D
• PRODUCTION
• MARKETING & SALES
• CUSTOMER SERVICE
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VALUE CHAIN II• SUPPORT ACTIVITIES (OFTEN SHOWN AS A
SECONDARY VALUE CHAIN)• IN MANY CASES, IT’S HARD TO DISTINGUISH
PRIMARY AND SECONDARY ACTIVITIES; OLD IDEA ASSOCIATED WITH MFG FIRMS)– LOGISTICS– HUMAN RESOURCES– INFORMATION SYSTEMS– COMPANY INFRASTRUCTURE
• ORG STRUCTURE• CONTROL SYSTEMS• COMPANY CULTURE
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VALUE CHAIN III• WHAT BOOK DOESN’T SAY• LINKAGE & FEEDBACK BETWEEN STEPS IN
VALUE CHAIN JUST AS IMPORTANT AS WHAT HAPPENS WITHIN STEPS– FIRST ORDER FIT– SECOND ORDER FIT– THIRD ORDER FIT
• IN COMPLEX FIRMS, COMPLEX VALUE CHAINS– IN M-FORM FIRMS, FOR EXAMPLE, LITTLE
DISTINCTION BETWN PRIMARY & SUPPORT ACTIVITIES; SAME FOR SERVICE INDUSTRIES
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BUILDING BLOCKS OF COMPETITIVE ADVANTAGE
• = FUNCTIONAL LEVEL STRATEGIES – DON’T BE CONFUSED; SEE CHAPTER 4
• EFFICIENCY = OUTPUT/INPUT• EFFICIENCY NOT JUST IN PRODUCTION, BUT IN
R&D, HR, LOGISTICS, SALES, ETC.• QUALITY AS EXCELLENCE & QUALITY AS
RELIABILITY• SOURCES OF QUALITY AS COMPETITIVE
ADVANTAGE = POSTWAR JAPAN & TQM– KAIZEN OR CONTINUOUS IMPROVEMENT
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INNOVATION• PRODUCT INNOVATION
– iPOD, INTEL PENTIUM CHIP
• PROCESS INNOVATION– LEAN PRODUCTION OR TPS– WALMART’S IT SYSTEM FOR INVENTORY CONTROL
& LOGISTICS
• INCREMENTAL INNOVATION– KAIZEN– KAIZEN X TIME = CONSIDERABLE, ACCUMULATED
PROGRESS-->HARD TO REPLICATE COMPT. ADV.– TENDENCY TO OVERLOOK INCREMENTAL INNO IN
FAVOR OF RADICAL & DISRUPTIVE INNOVATION
• RADICAL INNOVATION• DISRUPTIVE (DISCONTINUOUS) INNOVATION
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FIGURE 3.8, p. 92
• CIRCULAR ARGUMENT, NOT TO BE CONFUSED WITH VALUE CREATION CYCLE
• DISTINCTIVE COMPETENCIES DO NOT ALLOW FIRMS TO ACHIEVE SUPERIOR EFFICIENCY, QUALITY, INNO & CUST RESPONSIVENESS
• SUPERIOR E, Q, I & C.R. MAY ALLOW FIRMS TO DEVELOP DISTINCTIVE COMPETENCIES
• DISTINCTIVE COMPETENCIES ARE REALIZED ONLY AFTER CHOICE, INVESTMENT, EFFORT & ORGANIZATIONAL LEARNING– NOT OTHER WAY AROUND
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COMPETITIVE ADVANTAGE AND PROFITABILITY
• LEARN & ANALYZE FIGURE 3.9: DUPONT FORMULA– SLIGHTLY DIFFERENT FROM APPENDIX TO CHPT 1– WHERE ROIC = NOPLAN/IC (depreciation + adjusted taxes)
• ROIC (RETURN ON INVESTED CAPITAL) DECOMPOSED INTO TWO MAJOR COMPONENTS:– RETURN ON SALES
• (NET PROFIT/SALES)– COGS/SALES– SG&A/SALES– R&D/SALES
– CAPITAL TURNOVER• (SALES/INVESTED CAPITAL)
– WORKING CAPITAL/SALES– PPE/SALES
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KEY POINTS IN ANALYIS & DISCUSSION
• TABLE 3.1
• FIGURES 3.9 & 3.10
• WHY DOES DELL HAVE A MUCH BETTER ROIC THAN HP?
• WHY IS DELL’S ROIC SLIPPING RELATIVE TO HP IN RECENT YEARS?
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DURABILITY OF COMPETITIVE ADVANTAGE
• OR SUSTAINABLE COMPETITIVE ADVANTAGE = DURABILITY or LONGEVITY
• BARRIERS TO IMITATION– INDUSTRY DYNAMISM A BIG FACTOR
– IMITATING/DUPLICATING RESOURCES IS HARD TO DO (RESOURCE ENDOWMENTS)
– IMITATING CAPABILITIES IS EVEN HARDER TO DO• STRATEGIC COMMITMENTS (PATHWAY) HARD TO IMITATE
• ABILITY TO IMITATE MAY DEPEND ON ABSORPTIVE CAPACITY
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WHY COMPANIES FAIL• INERTIA• PRIOR STRATEGIC COMMITMENTS
– TOO COMMITED TO PRIOR INVESTMENTS– TOO INVESTED TO PULL OUT – TOO MYOPIC
• ICARUS PARADOX (DANNY MILLER)– CRAFTSMEN (TOO ENGINEERING FOCUSED)– BUILDERS (TOO ENAMORED OF BUILDING)– PIONEERS (TOO FIXED ON BEING CREATIVE)– SALESMEN (TOO FOCUSED ON SELLING)
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STEPS TO AVOID FAILURE• FOCUS ON THE BUILDING BLOCKS OF
COMPETITIVE ADVANTAGE (FUNCTIONAL LEVEL STRATEGIES)
• INSTITUTE CONTINUOUS IMPROVEMENT AND LEARNING PRACTICES
• TRACK INDUSTRY BEST PRACTICES AND BENCHMARKS (There may be a contradiction.)– NOTION OF COMPETITIVE ADVANTAGES BASED ON
DISTINCTIVE COMPETENCIES• UNUSUAL RESOURCES• UNUSUAL CAPABILTIES & COMPETENCIES• ESSENTIALLY, INIMITABLE; THUS, BEST PRACTICES MAY
NOT BE REPLICABLE
• OVERCOME INERTIA• BE LUCKY (RIGHT TIME, RIGHT PLACE)