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InternalAnalysis
CompetitiveAdvantage
AfirmhasCompetitiveAdvantageifitsprofitabilityisgreaterthantheaverage
profitabilityofallthefirmsintheindustry
IfitisabletomaintainforlongerperiodthenitiscalledSustainableCompetitiveAdvantage
A
firm
has
to
find
out
what
internal
resources
willgiveSustainableCompetitiveAdvantage
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CreatingValue
Byexploitingtheircorecompetenciesfirmscreatevalue.
Valueismeasuredby:
Productperformancecharacteristics
Productattributesforwhichcustomersarewillingtopay
Firmscreate
value
by
innovatively
bundling
and
leveragingtheirresourcesandcapabilities.
CompetitiveAdvantage,Value
Creation,andProfitability
1. VALUEorUTILITYthecustomergetsfromowningtheproduct
2. PRICEthatacompanychargesforitsproducts
3. COSTSofcreatingthoseproducts
Consumersurplus istheexcessutilityaconsumercapturesbeyondthepricepaid.
Basic Princip le: the more utility that consumersget from a companys products or services, the
more pricing opt ions the company has.
How prof itable a company becomesdepends on three basic factors:
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SWOTAnalysis
Potential
Resource
Strengths Potential
Resource
Weaknesses Potential
Company
Opportunities Potential
External
Threats
Powerfulstrategy
Strongfinancial
condition
Strongbrandname
image/reputation
Widelyrecognized
marketleader
Proprietary
technology
Costadvantages
Strongadvertising
Productinnovation
skills
Goodcustomer
service
Betterproductquality
AlliancesorJVs
Noclearstrategic
direction
Obsoletefacilities
Weakbalancesheet;
excessdebt
Higheroverallcosts
thanrivals
Missingsomekey
skills/competencies
Subparprofits...
Internaloperating
problems...
FallingbehindinR&D
Toonarrowproduct
line
Weakmarketingskills
Servingadditional
customergroups
Expandingtonew
geographicareas
Expandingproduct
line
Transferringskillsto
newproducts
Verticalintegration
OpeningstotakeMS
fromrivals
Acquisitionofrivals
AlliancesorJVsto
expandcoverage
Openingsto
exploit
newtechnologies
Openingstoextend
brandname/image
Entryofpotentnew
competitors
Lossofsalesto
substitutes
Slowingmarket
growth
Adverseshiftsin
exchangerates&trade
policies
Costlynew
regulations
Vulnerabilityto
businesscycle
Growingleverageof
customers
or
suppliers Shiftinbuyerneeds
forproduct
Demographicchanges
ValueChain
Analysis
ValueChainanalysiswasfirstsuggestedby
MichaelPorter(1995)asawayof
presentingtheconstructionofvalueas
relatedtoendcustomer.
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ValueChain
Theterm
value
chain describes
away
of
looking
atabusinessasachainofactivitiesthat
transforminputsintooutputsthatcustomers
value
69
ValueChain
Analysis
(VCA)
Valuechainanalysis(VCA)attemptstounderstandhowabusinesscreatescustomervaluebyexaminingthecontributionsofdifferentactivitieswithinthebusinesstothatvalue
Italsohelpsustounderstandonhowtoimprovethevalueby Performingtheseactivitiesbetter
or Atalowercostthanthecompetitors
VCAtakesaprocesspointofview
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ValueChainAnalysis
Thevalue
chain
identifies
the
separate
activities
and
businessprocessesperformedtodesign,produce,
market,deliver,andsupportaproduct/serviceand
howwelltheycreatecustomervalue.
Consistsoftwotypesofactivities Primaryactivities :createcustomervalue
Inboundlogistics,Operations;Outboardlogistics;Sales&Marketing;&CustomerService
Supportactivities:Supportprimaryactivities Procurement;Technologicaldevelopment;HRM;Firm
infrastructure
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MARGIN
MARGIN
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUNDLOGISTICS
OPER-ATIONS
OUTBOUNDLOGISTICS
MARKET-ING
& SALES
SERVICE
PRIMARY ACTIVITIES
SUP-
PORT
ACTIV-ITIES
THE GENERIC VALUE CHAIN
PrimaryActivities
Inboundlogistics
Activitiesusedtoreceive,store,anddisseminateinputstoaproduct(materialshandling,warehousing,inventory
control,etc.)
Operations
Activitiesnecessarytoconverttheinputsprovidedbyinboundlogisticsintofinalproductform(machining,
packaging,assembly,etc.)
Outboundlogistics
Activitiesinvolvedwithcollecting,storing,andphysicallydistributingtheproducttocustomers(finishedgoods
warehousing,orderprocessing,etc.)
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PrimaryActivities(contd)
Marketingand
sales
Activitiescompletedtoprovidemeansthroughwhichcustomerscanpurchaseproductsandto
inducethemtodoso(advertising,promotion,
distributionchannels,etc.)
Service
Activitiesdesignedtoenhanceormaintainaproductsvalue(repair,training,adjustment,
etc.)
SupportActivities
Procurement
Activitiescompletedtopurchasetheinputsneededtoproduceafirmsproducts
TechnologicalDevelopment
Activitiescompletedtoimproveafirmsproductandtheprocessesusedtomanufactureit(processequipment,basicresearch,productdesign,etc)
HumanResourceManagement
Activitiesinvolvedwithrecruiting,hiring,training,developing,andcompensatingallpersonnel
Firminfrastructure
Activitiesthatsupporttheworkoftheentirevaluechain(generalmanagement,planning,finance,accounting,legal,governmentrelations,etc.)
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ConductingaVCA
1. Identifyactivities
2. Allocatecosts usingactivitybasedcosting
3. Analyzetheactivities
617
ActivityBased
Costing
in
VCA
ActivityBasedVCAapproach wouldprovidea
moremeaningfulanalysisoftheprocurement
functionscostsandconsequent valueadded
thanthetraditionalcostaccountingapproach
Existing
financial
management
and
accounting
systemsinmanyfirmsarenotsetuptoeasily
provideactivitybasedcostbreakdowns
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AnalyzingActivities
Eachactivityshouldbeexaminedrelativetocompetitorsabilitiesandratedassuperior,equivalentorinferior
Focusonactivitiesthatdifferentiatesthecompanyfromothercompetitors Lowercostoruniquevalue
Keepinmind theIndustry,Positionoffirminindustryvaluechainandobjectiveofthefirm
Identifythe
activities
where
the
firms
competitivestrengthishighaswellaslow
AssessingOrganizations
Competitive
Strength
Whatdoesahighcompetitivestrengthratingrelativetorivalsmean?
Strongcompetitiveposition&possessionofcompetitiveadvantages
Opportunityforcompanytoimproveitslongtermmarketposition
Good
strategy
entails Lookingforopportunitiestoleveragecompanystrengths into
competitiveadvantage
Usingcompanystrengthstoattackthecompetitiveweaknessesofrivals
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WhyDoaCompetitiveStrength
Assessment?
Revealsstrengthoffirmscompetitiveposition
Showshowfirmstacksupagainstrivals,measurebymeasure pinpointsthecompanyscompetitivestrengthsandcompetitiveweaknesses
Indicateswhetherfirmisatacompetitiveadvantage/disadvantageagainsteachrival
Identifiespossibleoffensiveattacks(pitcompanystrengthsagainstrivalsweaknesses)
Identifiespossibledefensiveactions(aneedto
correctcompetitive
weaknesses)
ResourceBased
View
(RBV)
RBV isamethodofanalyzingandidentifyingafirmsstrategicadvantagesbasedonexaminingitsdistinctcombinationofassets,skills,capabilities,andintangibles
TheRBVsunderlyingpremiseisthatfirmsdifferinfundamentalwaysbecauseeachfirmpossessesauniquebundleofresources
Eachfirmdevelopscompetenciesfromtheseresources,
and
these
become
the
source
of
the
firmscompetitiveadvantages
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ThreeBasicResources
1. Tangibleassets
are
the
easiest
resources
to
identify
andareoftenfoundonafirmsbalancesheet
2. Intangibleassets areresourcessuchasbrand
names,companyreputation,organizationalmorale,
technicalknowledge,patentsandtrademarks
3. Organizationalcapabilitiesarenotspecificinputs.
Theyaretheskillsthatacompanyusestotransform
inputsintooutputs
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The VRIO Framework
If a firm has resources that are:
valuable,
rare, and
costly to imitate, and
the firm is organized to exploit these resources,
then the firm can expect to enjoy a sustainedcompetitive advantage.
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The VRIO Framework
a resource or bundle of resources is subjected toeach question (VRIO) to determine the competitiveand economic implications of the resource
Applying the Tool
each question is considered in a competitivecontext
may also be applied to strategic initiatives(new products, new markets, new strategy, etc.)
Applying the VRIO Framework
The Question ofValue
in theory: Does the resource enable the firmto exploit an external opportunity or neutralizean external threat?
the practice: Does the resource result in an
increase in revenues (change demand curve),a decrease in costs (change cost curve), orsome combination of the two?
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Applying the VRIO Framework
The Question ofRarity
a resource must be rare enough that perfectcompetition has not set in
if a resource is not rare, then perfect competitiondynamics are likely to be observed (i.e., nocompetitive advantage, no above normal profits)
thus, there may be other firms that possess theresource, but still few enough that there is scarcity
Applying the VRIO Framework
The Question ofImitability
if there are high costs of imitation, then the firmmay enjoy a period of sustained competitiveadvantage
a sustained competitive advantage will last
only until a duplicate or substitute emerges
if a firm has a competitive advantage, otherswill attempt to imitate it
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Applying the VRIO Framework
The Question ofImitability
Costs ofImitation
Unique Historical Conditions (LIC)
first mover advantages
path dependence
Applying the VRIO Framework
The Question ofImitability
Costs ofImitation
Causal Ambiguity (Infosys)
causal links between resources and
competitive advantage may not beunderstood
bundles of resources fog these causallinks
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Applying the VRIO Framework
The Question ofImitability
Costs ofImitation
Social Complexity (RIL)
the social relationships entailed inresources may be so complex thatmanagers cannot really manage themnor replicate them
Applying the VRIO Framework
The Question ofImitability
Costs ofImitation
Patents (Apple)
patents may be a two-edged sword
offer a period of protection if the firm isable to defend its patent rights
required disclosure may actually decreasethe cost of imitation, and the timing
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Applying the VRIO Framework
The Question ofOrganization
a firms structure and control mechanismsmust be aligned so as to give people abilityand incentive to exploit the firms resources
examples: formal and informal reporting structures,management controls, compensation policies,relationships, etc.
these structure and control mechanisms complementother firm resourcestaken together, they can help afirm achieve sustained competitive advantage
WhenResourcesProvideCompetitive
Advantage?
Add-Value?
No
Yes Rare?
No
Yes Hard to
Imitate?
No
Yes
Source of
Competitive Parity
Source of Temporary
Competitive Advantage
Irrelevant
Source of Sustained
Competitive Advantage
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ModificationstoVIRO
Theremustbenostrategicallyequivalent
valuableresourcesthatarethemselvesnotrare
orinimitable
Substitutabilitymaytakeatleasttwoforms
Competitormaybeabletosubstituteasimilarresourcethatenablesittodevelopandimplementthesame
strategy(iOS vs Android)
Verydifferentfirmresourcescanbecomestrategic
substitutes(Amazon
and
Wal
Mart
and
Barnes
&
Nobles)
CoreCompetence
Set of integrated and harmonized resourcesand capabilities that serve as a source of
competitive advantage over rivals.
Core competencies distinguish a companycompetitively and make it distinctive
McKinsey recommends using three to fourcompetencies when framing strategic actions
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CoreCompetencies
CompetenciestypicallycombinemultiplekindsofResources/Capabilities.
Severalcorecompetenciesmayunderlieabusinessunit.
Severalbusinessunitsmaydrawfromsamecompetency
CoreCompetence
Hondas abilitytoproducesomeoftheworldsbestenginesandpowertrainsdoes
providecustomerswithhighlyvaluedbenefits
ofsuperiorfueleconomy,zippyacceleration,
lessnoiseandvibration
Sony Miniaturizationinelectronics
Motorola Wirelesscommunication
MoserBaer OpticalMedia
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CoreCompetence SKF
SKF,theworldsleadingmanufacturerofrollerbearinghascompetenciesinantifriction,
precisionengineeringandmakingperfectly
sphericaldevices.
Risksof
ignoring
core
competencies
Opportunities for growth will be needlessly turned down.
May desensitize a company to its growing dependence onoutside suppliers of core products.
A company that fails to understand the core competence basisfor competition in its industry may be surprised by new entrantswho rely on competencies developed in other end markets.
May unwittingly relinquish valuable skills when they divest anunderperforming business
A company focused only on end products may fail to investadequately in new core competencies that can propel growth inthe future.
As a company divides and fractures into smaller business units,competencies may become fragmented and weakened
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