Globalization and Industry
Structure
• Globalization
– Globally dispersed production lowers
costs and increases quality.
– Global markets are replacing
national markets.
• Trend implications
– No isolated national markets
– More competitors, more intense competition
– More rapid innovation and shorter product life cycles
1
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 company’s competitive
advantage (strengths and weaknesses)
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
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
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
• We must add people, particularly
leadership in building the structure, etc.
Strategy, Resources, Capabilities,
and Competencies
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
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
Resources, Capabilities, and Competitive
Advantage: The Basic Relationships
INDUSTRY
KEY
COMPETITIVE SUCCESS
ADVANTAGE STRATEGY FACTORS
ORGANIZATIONAL
CAPABILITIES
RESOURCES
Tangible Intangible Human
The Generic Building Blocks of
Competitive Advantage
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
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
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
Innovation
• The act of creating new, commercially
viable 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
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
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
The Durability of Competitive
Advantage
• Barriers to Imitation
– Imitating Resources
– Imitating Capabilities
• Capability of Competitors
– Strategic commitment
– Absorptive capacity
• Industry Dynamism
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)
Defining Organizational Capabilities
Organizational Capabilities = firm’s capacity for
undertaking a particular activity. (Grant)
Distinctive Competence = things that an organization
does particularly well relative to competitors. (Selznick)
Core Competence = capabilities that are fundamental to a
firm’s strategy and performance. (Hamel and Prahalad)
Core competency
• “A bundle of skills and technologies
(rather than a single discrete skill or
technology) that enables a company to
provide a particular benefit to customers”
• Example: Pepsico’s unique distribution,
franchising, and branding skills bundled
together allowed for quick penetration of
Asian market with KFC
Discovering Core
Competencies
Discovering
Core
Competencies
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Core Competencies
“…are the essence of what makes an
organization unique in its ability to provide
value to customers.”
Core Competencies What a firm Does...
that is Strategically
For a strategic capability to
Valuable
be a Core Competency, it
must be:
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Core Competencies What a firm Does...
Core Competencies must be: that is Strategically
Valuable
Valuable
Capabilities that either help a firm to exploit opportunities to create value for
customers or to neutralize threats in the environment
Rare
Capabilities that are possessed by few, if any, current or potential competitors
Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to unique historical
conditions, causal ambiguity or social complexity
Nonsubstitutable
Capabilities that do not have strategic equivalents, such as firm-specific
knowledge or trust-based relationships
