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INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES, SUSTAINABLE COMP. ADV. & PROFITABILITY. Bus 189, 2-14-2012 CHAPTER 3, HILL & JONES 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 sustainable comp adv profitability

INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES, SUSTAINABLE COMP. ADV. & PROFITABILITY

Bus 189, 2-14-2012

CHAPTER 3, HILL & JONES

DR. MARK FRUIN

porter vs resource based view of the firm
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
    • GENERIC COMPETITIVE STRATEGIES SUCCESS BASED ON INDUSTRY STRUCTURE & POSITION
  • INTERNAL ANALYSIS = ORG ANALYSIS FROM RESOURCE BASED POINT OF VIEW
    • FIRM AS A COLLECTION OF RESOURCES
    • FIRM THAT BEST COMBINES, MOBILIZES & MANAGES RESOURCES WINS
    • RBV = R-C-C-DC (LONG TERM ORG PROCESS & CHANGE)
distinctive competencies
DISTINCTIVE COMPETENCIES
  • INVOLVE MANAGERIAL CHOICE & DISCRETION
  • INVOLVE CREATING SUPERIOR ORGANIZATIONAL PROCESSES
    • WHICH TAKE RESOURCES, TIME & EFFORT
    • WHICH RARELY OCCUR RIGHT AWAY & EASILY
    • WHICH INVOLVE AN INFINITE NUMBER OF FEEDBACK LOOPS, MORE CHOICES AND CONTINUOUS DISCRETION
  • NECESSARILY INVOLVE A MAJORITY OF ORGANIZATIONAL MEMBERS
    • STRATEGIC INTENT
    • STRETCH GOALS
resources
RESOURCES
  • TANGIBLE
  • INTANGIBLE
  • CREATE LITTLE VALUE UNLESS THEY ARE USED, SO USE RESOURCES
  • USING THEM, CONVERTS THEM INTO CAPABILITIES
    • CAPABILITIES ARE PRODUCTS OF FIRM STRUCTURE, PROCESSES & CONTROL SYSTEMS OR SO THE BOOK SAYS; ACTUALLY, IT’S THE REVERSE IN MY OPINION
    • RESIDE NOT IN INDIVIDUALS, BUT ARE EMBODIED IN ORGANIZATIONS
what makes resources valuable
WHAT MAKES RESOURCES VALUABLE?
  • BOOKS SAYS, “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”/ “ENABLING-ABILITY”
good news bad news
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 WRONG CHOICES MADE, HARD TO GO BACK
    • PATH DEPENDENCY; ESCALATING COMMITMENT
    • AS SOON AS YOU DRIVE OFF THE LOT, YOUR NEW CAR IS WORTH 20% LESS
dynamic capabilities
DYNAMIC CAPABILITIES
  • AS BUSINESS ENVIRONMENT CHANGES, CAPABILITIES & COMPETENCIES HAVE TO CHANGE TOO,
  • 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 & HARD CHARGING FAST FOLLOWERS/LATE COMERS
rbv and value creation
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

consumer surplus
CONSUMER SURPLUS
  • PRICE CHARGED IS TYPICALLY LESS THAN UTILITY VALUE TO CUSTOMERS
  • “EXTRA” UTILITY FROM CUSTOMER PT OF VIEW = CONSUMER SURPLUS
  • THE MORE UTILITY THAT CONSUMERS GET FROM FIRM OFFERINGS, THE MORE PRICING OPTIONS FIRM HAS
toyota example
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!!
  • FROM PORTER GENERIC COMPETITIVE STRATIES POINT OF VIEW, IS THIS COST LEADERSHIP OR DIFFERENTIATION?
generic competitive strategies
GENERIC COMPETITIVE STRATEGIES
  • COST LEADERSHIP OR LOWER COST STRUCTURES GIVES FIRMS MORE PRICING OPTIONS
  • DIFFERENTIATION CREATES MORE UTILITY/VALUE AND ALLOWS MORE PRICING CHOICES
value chain
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
value chain ii
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
  • IN KNOWLEDGE BASED FIRMS, WHAT’S PRIMARY AND SECONDARY?
    • LOGISTICS
    • HUMAN RESOURCES
    • INFORMATION SYSTEMS
    • COMPANY INFRASTRUCTURE
      • ORG STRUCTURE
      • CONTROL SYSTEMS
      • COMPANY CULTURE
value chain iii
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
building blocks of competitive advantage
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
innovation
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
competitive advantage and profitability
COMPETITIVE ADVANTAGE AND PROFITABILITY
  • LEARN & ANALYZE DUPONT FORMULA
    • SLIGHTLY DIFFERENT FROM APPENDIX, CHPT 1 & HOW TO DO CASE ANALYSIS CHAPTER
    • 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
durability of competitive advantage
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)
      • BEGIN WITH DIFFERENT RESOURCES
      • USE THEM IN DIFFERENT WAYS
      • DEVELOP THEM DIFFERENTLY
    • IMITATING CAPABILITIES IS EVEN HARDER TO DO
      • STRATEGIC COMMITMENTS (PATHWAYS) HARD TO IMITATE
        • A SEQUENCE OF CHOICES ALMOST IMPOSSIBLE TO IMITATE
      • ABILITY TO IMITATE MAY DEPEND ON ABSORPTIVE CAPACITY
why companies fail
WHY COMPANIES FAIL
  • INERTIA
  • PRIOR STRATEGIC COMMITMENTS
    • TOO COMMITED TO PRIOR INVESTMENTS/DECISIONS
    • 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)
steps to avoid failure
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 & BENCH-MARKS (There may be a contradiction here; what is it?)
    • 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)