CHAPTER 3

INTERNAL ANALYSIS: DISTINCTIVE COMPETENCIES,

COMPETITIVE ADVANTAGE, AND PROFITABILITY
Why , within a particular industry or
market, do some companies outperform
others?

What is the basis of their sustained

competitive advantage?
Sources of Sustained Competitive Advantage
(Southwest Airlines)
❑ Offers more reliable service
❑ Delivers more value to its customers
❑ At lower cost than that of their rivals
❑ Was a Innovator wrt strategy
❑ Flying point to point between smaller airports
❑ Responsive to needs of customers
❑ stgy that reduced total travel time and increased reliability.
 It has done all these in an
Efficient manner that has lowered the cost of business and enabled

them to offer lower prices and still make profits

when the rivals are losing money.
COMPETITIVE ADVANTAGE
▪ Exists when a company’s profitability is greater
than the average profitability of all companies in
its industry.
▪ Sustained competitive advantage - Exists when a
company maintains its competitive advantage
over a number of years.
▪ Primary objective of strategy is:
SCA SUPERIOR PROFITABILTY & PROFIT GROWTH

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DISTINCTIVE COMPETENCIES
▪ Firm- Specific strengths that allow a company to
differentiate its products and/or achieve lower
costs than its rivals.
▪ Arise from resources and capabilities.
e.g: Apple – competence in design
Toyota – Innovation – R&D – Mfg. – TLP system (lean
production system)

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DISTINCTIVE COMPETENCIES
▪ Resources: Assets of a company.
▪ Tangible resources: Physical entities.
▪ Land, buildings, and inventory, and money.

▪ Intangible resources: Nonphysical entities created by

managers and other employees.
▪ Brand names, company reputation, and intellectual property.

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DISTINCTIVE COMPETENCIES
▪ Capabilities- Company’s skills at coordinating its
resources and putting them to productive use:
▪ reside in an organization’s rules, routines, and
procedures.
▪ Intangible.
▪ lead to sustained competitive advantage if they are rare
and protected from copying.

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DISTINCTIVE COMPETENCIES
▪ Requirements
▪ Firm-specific and valuable resource, and the capabilities
to take advantage of that resource.
▪ Firm-specific capability to manage resources.
▪ Distinctive competency is strongest when a company
possesses both.

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©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
RESOURCE-BASED VIEW OF THE FIRM
▪ Most organizations recognize that a large budget
and state-of-the-art facilities do not guarantee
success.
▪ Success really depends on employees’ motivations,
competencies, and skills.
▪ Proposes that a company’s resources and
competencies (including its talent) can produce a
sustained competitive advantage by creating value
for customers by:
▪ Lowering costs
▪ Providing something of unique value
▪ Or some combination of the two

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RESOURCE-BASED VIEW OF THE FIRM
▪ Focuses attention on the quality of the skills of a company’s
workforce at various levels, and on the quality of the
motivational climate created by management.
▪ Human resource management is valued not only for its role
in implementing a given competitive scenario but also for
its role in generating strategic capability.
▪ Staffing has the potential to create organizations that are
more intelligent and flexible than their competitors, and
that exhibit superior levels of cooperation and operation.

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VRIO FRAMEWORK – RESOURCE BASED VIEW

VALUABLE

RARE

INIMITABLE

ORGANIZED

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VRIO FRAMEWORK – RESOURCE BASED VIEW

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©2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
COMPETITIVE ADVANTAGE, VALUE CREATION,
AND PROFITABILITY
▪ Profitability of a company depends on the:
▪ value customers place on its products.
▪ price it charges for its products.
▪ costs of creating those products.
▪ When a company strengthens the value of its
products, it can:
▪ raise prices to reflect the value.
▪ reduce prices to induce more customers to purchase its
products.

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COMPETITIVE ADVANTAGE, VALUE
CREATION, AND PROFITABILITY
▪ Point-of-sale price is less than the utility value
placed on the product by many customers, due
to:
▪ consumer surplus - customers capture some of that
utility.
▪ customer’s reservation price - each individual’s unique
assessment of the value of a product.
▪ competition from rivals.

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 PORTERS VALUE CHAIN
The concept that a company consists of a
chain of activities that are performed to

• Design, Produce, Market, Deliver and Support

its products .

In other words, it transforms INPUTS into

OUTPUTS

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 PORTERS VALUE CHAIN
Mapping the value chain – we can map where
TRUE VALUE is created & Where Improvements need
to be made.

VALUE CHAIN SUPPLY CHAIN*

* One company’s value chain is embedded in a larger stream of supply chain Activities –
The Value System

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 VALUE CHAIN ANALYSIS
Fig. 3.5 Primary & Support Value Chain Activities

INPUTS
INPUTS OUTPUTS
R&D , PRODUCTION OUTPUTS

R&D , PRODUCTION

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 VALUE CHAIN ANALYSIS

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START 3.28

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PRIMARY ACTIVITIES
▪ Relate to a product’s design, creation, delivery,
marketing, support, and after-sales service.
▪ Research and development
▪ Design of products and production processes.
▪ Superior product design increases a product’s
functionality and add value.
▪ Production
▪ Creation process of a good or service.
▪ Helps lower cost structure and leads to differentiation.

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PRIMARY ACTIVITIES
▪ Marketing and sales
▪ Brand positioning and advertising - increase customers’
perceived value of a product.
▪ Help create value by discovering customers’ needs.
▪ Customer service
▪ Provide after-sales service and support.
▪ Create superior utility by solving customer problems
and supporting customers after a purchase.

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SUPPORT ACTIVITIES
▪ Provide inputs that allow the primary activities to
take place.
▪ Materials management
▪ Controls the transmission of physical materials through
the value chain.
▪ Lowers cost and creates more profit .
▪ Human resources
▪ Ensures value creation by making sure that the
company has the right combination of skilled people.

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SUPPORT ACTIVITIES
▪ Information systems
▪ Electronic systems to improve efficiency and
effectiveness of a company’s value creation activities.
▪ Company infrastructure
▪ Companywide context within which all the other value
creation activities occur.
▪ Organizational structure, control system and company culture

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 VALUE CHAIN ANALYSIS

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BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE
▪ Efficiency
▪ Measured by the quantity of inputs that it takes to
produce a given output.
▪ Employee productivity - Output produced per employee
▪ Helps attain competitive advantage through a lower cost
structure.
▪ Quality
▪ Superior quality - Customers’ perception that a
product’s attributes provide them with higher utility
than those sold by rivals.

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BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE
▪ Quality as excellence - Product features and functions,
and level of service associated with its delivery.
▪ Quality as reliability - Occurs when a product
consistently performs the function it was designed for,
and seldom breaks down.
▪ Innovation
▪ Product innovation: Development of products that are
new to the world or have superior attributes to existing
products.

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BUILDING BLOCKS OF COMPETITIVE
ADVANTAGE
▪ Process innovation: Development of a new process for
producing products and delivering them to customers.
▪ Customer responsiveness
▪ Superior responsiveness - Achieved by identifying and
satisfying customer needs better than one’s rivals.
▪ Customer response time: Time that it takes for a good
to be delivered or a service to be performed.
▪ Other sources - Superior design, service, and after-sales
service and support.

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BARRIERS TO IMITATION
▪ Make it difficult for a competitor to copy a
company’s distinctive competencies.
▪ Greater the barrier, more sustainable a company’s
competitive advantage.
▪ Imitating resources
▪ Firm-specific and value tangible resources are the
easiest to imitate.
▪ Intangible resources
▪ Brand names - Imitating them is prohibited by law.

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BARRIERS TO IMITATION
▪ Marketing and technical knowhow - Easy to imitate owing to
movement of skilled personnel between companies and
visibility of strategies to competitors.
▪ Technological knowhow - Easy to imitate as patents do not
provide complete protection.
▪ Imitating capabilities is difficult because:
▪ they are not visible to outsiders.
▪ no one individual has access to all the internal
operating routes and procedures of a company.

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CAPABILITY OF COMPETITORS AND
INDUSTRY DYNAMISM
▪ Capability of competitors is determined by the:
▪ nature of the competitors’ prior strategic commitments.
▪ strategic commitment - company’s commitment to a
particular way of doing business.
▪ Absorptive capacity - Ability of an enterprise to identify,
value, assimilate, and use new knowledge.
▪ Most dynamic industries are those with a very
high rate of product innovation.
▪ Where product life cycles and competitive advantages
are short-lived.

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