Business Strategy – Shilpa Chadichal

Internal Analysis:
Distinctive
Competencies,
Competitive Advantage,
and Profitability
 Business Strategy – Shilpa Chadichal

Internal Analysis
The purpose of internal analysis is to pinpoint the
strengths and weaknesses of the organization.
Strengths lead to superior performance.
Weaknesses lead to inferior performance.
Internal Analysis includes an assessment of:
• Quantity and quality of a company’s
resources and capabilities
• Ways of building unique skills and company-specific or distinctive
competencies

Building and sustaining a competitive advantage

requires a company to achieve superior:
• Efficiency • Innovations
• Quality • Responsiveness to customers
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Mc Donald’s 2002-2008
• Started in 1955 by Ray Kroc
• Largest restaurant chain in the
World
• With 32,000 stores in 120 countries

• Net Profits -$1.7 billion in 2002 to $4 billion in 2008.

• Revenue expanded from $15.4 billion to $24 billion.
• ROIC – 2002 -from 9.4% to 18% in 2008
 Business Strategy – Shilpa Chadichal

Internal Analysis: Strengths and Weaknesses

Internal analysis - along with the external analysis of the
company’s environment - gives managers the information
to choose the strategies and business model to attain a
sustained competitive advantage.

Strengths Weaknesses
Of the enterprise Of the enterprise
are assets that are liabilities that
boost lead to lower
profitability profitability
 Business Strategy – Shilpa Chadichal

Internal Analysis: Three-Step Process

1. Understand the process by which companies create
value for customers and profit for themselves.
 Resources eg : Toyata
 Capabilities
 Distinctive competencies
2. Understand the importance of superiority in creating
value and generating high profitability.
 Efficiency  Innovation
 Quality  Responsiveness to Customers
3. Analyze the sources of the company’s
competitive advantage.
 Strengths – that are driving profitability
 Weaknesses – opportunities for improvement
 Business Strategy – Shilpa Chadichal

Competitive Advantage
• Competitive Advantage
• A firm’s profitability is greater than the average profitability
for all firms in its industry.
• Sustained Competitive Advantage
• A firm maintains above average and superior profitability
and profit growth for a number of years.

The Primary Objective of Strategy

is to achieve a
Sustained Competitive Advantage
which in turn results in
Superior Profit and Profit Growth.
 Business Strategy – Shilpa Chadichal

Profitability in the Computer Industry, 1998-2003

Dell has achieved a sustained competitive advantage over its rivals.

Data Source: Value Line Investment Survey

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Strategy, Resources, Capabilities, and Competencies

• Walt disney,1980 Suffered a string of

poor financial years.
• 1984 New CEO Michael Eisner
• Four years later sales increased from
$1.66 billion to $3.75 billion.
• Net profits $98 million to 570 million.
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Distinctive Competencies and Role of Resources and Capabilities

Resources
• Tangible (physical) and intangible (non-physical)
• Allow a company to create value for its customers
• Must have skills to take advantage of the resources
• Firm-specific and difficult-to-imitate resources
as well as valuable resources that create strong
demand for a company’s products lead to
distinctive competencies

Capabilities
• Coordinating resources & putting to productive use
• Skills reside in the organization’s rules, routines
and procedures
• Product of its organization, processes & controls
• Firm-specific capabilities to manage its resources
lead to distinctive competencies
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Distinctive Competencies to Gain Competitive Advantage

Distinctive Competencies
Firm-specific strengths allow a company to
differentiate its products and/or achieve
substantially lower costs than its rivals in
order to gain a competitive advantage.
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Competitive Advantage, Value Creation, and Profitability

How profitable a company becomes
depends on three basic factors:
1. VALUE or UTILITY the customer gets from owning the product
2. PRICE that a company charges for its products
3. COSTS of creating those products
 Consumer surplus is the “excess” utility a consumer captures
beyond the price paid.

Basic Principle: the more utility that consumers

get from a company’s products or services,the
more pricing options the company has.
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Value Creation per Unit

U
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Value Creation and Pricing Options

There is a dynamic
relationship among utility,
pricing, demand, and costs.
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Comparing Toyota and General Motors

Superior value creation requires that the gap between

perceived utility (U) and costs of production (C)
be greater than that obtained by competitors.
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The Value Chain

A company is a chain of activities for transforming

inputs into outputs that customers value –
including the primary and support activities.
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Building Blocks of Competitive Advantage

The Generic
Distinctive Competencies 
Allow a company to:
• Differentiate product offering
• Offer more utility to customer
• Lower the cost structure
regardless of the industry,
its products, or its services

 


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 Efficiency
• Measured by the quantity of inputs it takes to produce
a given output:
Efficiency = Outputs / Inputs
• Productivity leads to greater efficiency and lower costs:
• Employee productivity
• Capital productivity

Superior efficiency helps a company

attain a competitive advantage
through a lower cost structure.
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 Quality
Quality products are goods and services that are:
• Reliable and
• Differentiated by attributes that customers
perceive to have higher value
The impact of quality on competitive
advantage:
• High-quality products differentiate and increase the
value of the products in customers’ eyes.
• Greater efficiency and lower unit costs are associated
with reliable products.

Superior quality = customer perception

of greater value in a product’s attributes
Form, features, performance, durability, reliability, style, design
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A Quality Map for Automobiles

When customers
evaluate the quality of a
product, they commonly
measure it against two
kinds of attributes:
1. Quality as Excellence
2. Quality as Reliability
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 Innovation
Innovation is the act of creating new
products or new processes
• Product innovation
• Creates products that customers
perceive as more valuable and
• Increases the company’s pricing options
• Process innovation
• Creates value by lowering production costs

Successful innovation can be a major

source of competitive advantage –
by giving a company something unique,
something its competitors lack.
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 Responsiveness to Customers
Identifying and satisfying customers’
needs – better than the competitors
• 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.
 Enhanced customer responsiveness
Customer response time, design, service,
after-sales service and support

Superior responsiveness to customers

differentiates a company’s products and services
and leads to brand loyalty and premium pricing.
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Competitive Advantage: The Value Creation Cycle

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Analyzing Competitive Advantage and Profitability

 Competitive Advantage
• When a companies profitability is greater than the average of all
other companies in the same industry that compete for the same
customers
 Benchmarking
• Comparing company performance against that of competitors and
the company’s historic performance

 Measures of Profitability
• Return On Invested Capital (ROIC)
• ROIC Net profit
= Capital = Net income after tax
invested Equity + Debt to creditors

• Net Profit
Net Profit = Total revenues – Total costs
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Definitions of Basic Accounting Terms

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Drivers of Profitability (ROIC)

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Ways to Increase ROIC

Increase Company’s Return on Sales
 Increase sales revenue more than costs
 Reduce cost of goods sold 
 Reduce spending on SG&A
Sales, Marketing, General & Administrative Expenses
 Reduce R&D expenses 
Research & Development 

Increase Capital Turnover 

 Reduce the amount of working capital
Inventory, Accounts Receivable, Payables
 Reduce the amount of fixed capital
PPE - Property, Plant & Equipment
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Comparing Wal-Mart to Target

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“Sears ignored us in the early years

and in the end we simply blew right
by them.”
- Sam Walton
Chairman,
Wal-Mart

[Link]
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The Durability of Competitive Advantage

The DURABILITY of a company’s competitive advantage over
its competitors depends on:
1. Barriers to Imitation
Making it difficult to copy a company’s distinctive competencies
 Imitating Resources (GM imitated Ford ; Iacocca; Coca Cola)
 Imitating Capabilities
2. Capability of Competitors
 Strategic commitment
Commitment to a particular way of doing business
 Absorptive capacity
Ability to identify, value, assimilate, and use knowledge
3. Industry Dynamism
Ability of an industry to change rapidly

Competitors are also seeking to develop distinctive

competencies that will give them a competitive edge.
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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 and inner directed based on
past success that it loses sight of market realities
• Categories of rising and falling companies:
• Craftsmen • Builders • Pioneers • Salespeople

When a company loses its competitive advantage,

its profitability falls below that of the industry.
 It loses the ability to attract and generate resources.
 Profit margins and invested capital shrink rapidly.
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Avoiding Failure: Sustaining Competitive Advantage

1. Focus on the Building Blocks of Competitive Advantage
Develop distinctive competencies and superior performance in:
 Efficiency  Quality
 Innovation  Responsiveness to Customers
2. Institute Continuous Improvement and Learning
Recognize the importance of continuous learning within the organization
3. Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient global
competitors
4. Overcome Inertia
Overcome the internal forces that are barriers to change

Luck may play a role in success, so always exploit a

lucky break - but remember:
“The harder I work, the luckier I seem to get.” J P Morgan
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Thank You