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INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES OR SUSTAINABLE COMP. ADV.

INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES OR SUSTAINABLE COMP. ADV. . SPRING 2007 CHAPTER 3, BUS 189 DR. MARK FRUIN . PORTER VS. RESOURCE BASED VIEW OF THE FIRM. EXTERNAL ANALYSIS = INDUSTRY ANALYSIS 5 FORCES MODEL = INDUSTRY “DYNAMICS” (DESCRIPTIVE, NOT ANALYTICAL

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INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES OR SUSTAINABLE COMP. ADV.

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  1. INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES OR SUSTAINABLE COMP. ADV. SPRING 2007 CHAPTER 3, BUS 189 DR. MARK FRUIN

  2. 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

  3. 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

  4. 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

  5. DELL COMPUTER III • ARE THESE DISTINCTIVE COMPETENCIES? • P. 77 FIRM-SPECIFIC STRENGTHS THAT ALLOW A COMPANY 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

  6. BUILDING BLOCKS OF COMPETITIVE ADVANTAGE • BOOK ON P. 76 SAYS FOUR MAIN BUILDING BLOCKS OF COMPETITIVE ADVANTAGE ARE: • EFFICIENCY • QUALITY • CUSTOMER RESPONSIVENESS • INNOVATION • CONFUSING BECAUSE IN NEXT CHPT ON FUNCTIONAL LEVEL STRATEGIES, THE SAME FOUR ARE MENTIONED

  7. BEGGING THE QUESTION • IF DISTINCTIVE COMPETENCIES COME FROM FOUR BUILDING BLOCKS OF COMPETITIVE ADVANTAGE • WHERE DO THE BUILDING BLOCKS OF COMPETITIVE ADVANTAGE COME FROM? • DISTINCTIVE COMPETENCIES COME FROM COMPETENCIES • COMPETENCIES COME FROM CAPABILITIES • CAPABILITIES COME FROM RESOURCES

  8. DISTINCTIVE COMPETENCIES • INVOLVE MANAGERIAL CHOICE & DISCRETION • INVOLVE CREATING SUPERIOR ORGANIZATIONAL PROCESSES • NECESSARILY INVOLVE A MAJORITY OF ORGANIZATIONAL MEMBERS • STRATEGIC INTENT • STRETCH GOALS

  9. 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

  10. 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”

  11. 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

  12. DYNAMIC CAPABILITIES • AS BUSINESS ENVIRONMENT CHANGES, WE DON’T WANT ANY OLD CAPABILITIES, BUT DYNAMIC CAPABILITIES • CAPABILITIES THAT CAN BE ADAPTED TO CHANGING CONDITIONS • FLEXIBILITY, ADAPTABILITY • BUT ORGANIZATIONAL INERTIA MAKES FLEXIBILITY/ADAPTABILITY HARD TO REALIZE, ESPECIALLY IN LIGHT OF INDUSTRY LIFE CYCLE CHANGES

  13. RBV AND VALUE CREATION PROFITABILITY 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

  14. CONSUMER SURPLUS • PRICE CHARGED IS TYPICALLY LESS THAN UTILITY VALUE TO CUSTOMERS • “EXTRA” UTILITY FROM CUSTOMER PT OF VIEW = CONSUMER SURPLUS • P. 80, THE MORE UTILITY THAT CONSUMERS GET FROM FIRM OFFERINGS, THE MORE PRICING OPTIONS FIRM HAS

  15. 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!!

  16. GENERIC COMPETITIVE STRATEGIES • COST LEADERSHIP OR LOWER COST STRUCTURES GIVES FIRMS MORE PRICING OPTIONS • DIFFERENTIATION CREATES MORE UTILITY/VALUE AND ALLOWS MORE PRICING CHOICES

  17. 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

  18. VALUE CHAIN II • SUPPORT ACTIVITIES • LOGISTICS • HUMAN RESOURCES • INFORMATION SYSTEMS • COMPANY INFRASTRUCTURE • ORG STRUCTURE • CONTROL SYSTEMS • COMPANY CULTURE

  19. 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

  20. BUILDING BLOCKS • = FUNCTIONAL LEVEL STRATEGIES • 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

  21. 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 PROGRESS • RADICAL INNOVATION • DISRUPTIVE INNOVATION

  22. FIGURE 3.8, p. 93 • CIRCULAR ARGUMENT, NOT TO BE CONFUSED WITH VALUE CREATION CYCLE • DISTINCTIVE COMPETENCIES DO NOT ALLOW FIRMS TO ACHIEVE SUPERIOR EFFICIENCY, QUALITY, INNO & CUST SAT • SUPERIOR E, Q, I & C.S. MAY ALLOW FIRMS TO DEVELOP DISTINCTIVE COMPETENCIES • DISTINCTIVE COMPETENCIES ONLY REALIZED AFTER CHOICE, ORG LRNING & EFFORT • NOT OTHER WAY AROUND

  23. COMPETITIVE ADVANTAGE AND PROFITABILITY • LEARN & ANALYZE FIGURE 3.9: DUPONT FORMULA • 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

  24. DUPONT FORMULA • WORKS TO LOWER COSTS • OR INCREASE VALUE THROUGH DIFFERENTIATION • PP 96-97 DISCUSS WAL-MART VS. TARGET WITH RESPECT TO PROFITABILITY & WHY • WHICH HAS LOWER COSTS • HOW MUCH LOWER? • WHICH CREATES MORE VALUE • HOW MUCH MORE VALUE

  25. DURABILITY OF COMPETITIVE ADVANTAGE • OR SUSTAINABLE COMPETITIVE ADVANTAGE = DURABILITY • BARRIERS TO IMITATION • INDUSTRY DYNAMISM A BIG FACTOR • IMITATING/DUPLICATING RESOURCES (RESOURCE ENDOWMENTS) • IMITATING CAPABILITIES • STRATEGIC COMMITMENTS (PATHWAY) HARD TO IMITATE • ABILITY TO IMITATE MAY DEPEND ON ABSORPTIVE CAPACITY

  26. WHY COMPANIES FAIL • INERTIA • PRIOR STRATEGIC COMMITMENTS • ICARUS PARADOX (DANNY MILLER) • CRAFTSMEN • BUILDERS • PIONEERS • SALESMEN

  27. 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 BENCHMARK (There may be a contradiction.) • OVERCOME INERTIA • BE LUCKY (RIGHT TIME, RIGHT PLACE)

  28. GOOGLE SIDEBAR • PP 107-08 DISCUSSES GOOGLE’S SUCCESS • USING THE CONCEPTS FROM THIS CHAPTER, HOW WOULD YOU ACCOUNT FOR GOOGLE’S SUCCESS?

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