COMPETENCIES AND PROFITABILITY

ANALYZING INTERNAL RESOURCES

CHAPTER 3

Decena | Dy | Gastanes | Lim | Requejo | Santos | Tan

Opening Case
Standout performers in the US airline industry - ROIC 5.8% Famous for low fares 30% beneath rivals

Opening Case
Competitive Advantage Only one type of plane High employee-topassenger ratio 1 to 2,400 No meals, no movies and no baggage transfer Flies from point-to-point Gives a percentage of profit in terms of shares to its employees

The Roots of Competitive Advantage

DISTINCTIVE COMPETENCIES Firms-specific strengths that allow a company to differentiate its product from those offered by rivals, and/or achieve substantially lower costs than its rivals.

The Roots of Competitive Advantage

DISTINCTIVE COMPETENCIES: Resources Assets of a company - Tangible: Physical entities such as land, buildings, equipment, inventory and money - Intangible: Nonphysical entities such as brand names, reputation of company, and intellectual property

The Roots of Competitive Advantage

DISTINCTIVE COMPETENCIES: Capabilities Skills at coordinating its resources and putting them to productive use - Southwest Airlines: Select, motivate, and manage workforce

The Roots of Competitive Advantage

DISTINCTIVE COMPETENCIES: Resources, Capabilities and Competencies Use those resources effectively Establish a distinctive competitive advantage Both firm-specific and valuable resources and firm-specific capabilities to manage those resources

The Roots of Competitive Advantage

DISTINCTIVE COMPETENCIES: The Role of Strategy

Competitive Advantage, Value Creation and Profitability

How profitable a company becomes depends of three factors: - The value customers place on the products - The price that a company charges for its products - The costs of creating those products

Competitive Advantage, Value Creation and Profitability

Utility vs. Price: Utility is something that the customers get from the product. Consumer surplus: The price a company is typically less than the utility value Customers reservation price: The price that reflects that individuals unique assessment of the utility

Competitive Advantage, Value Creation and Profitability

VALUE CREATION PER UNIT

Competitive Advantage, Value Creation and Profitability

VALUE CREATION AND PRICING OPTIONS

Competitive Advantage, Value Creation and Profitability

COMPARING TOYOTA AND GENERAL MOTORS

The Value Chain

Idea that a company is a chain of activities for transforming inputs into outputs that customers value.

The Value Chain

Research and Development Design of products and production processes Production Creation of good or service

Primary Activities

Marketing and Sales Increase the value that customers perceive

Customer Service Provide after sales service and support

The Value Chain

Materials management (Logistics) Controls the transmission of physical materials through the value chain Human Resources Ensures that the company has the right mix of skilled people

Support Activities
Information Systems Largely electronic systems Company Infrastructure Companywide context within which all other value creation activities take place

The Building Blocks of Competitive Advantage

Efficiency

Customer Responsiveness

Quality

Innovation

The Building Blocks of Competitive Advantage

Generic competencies allow a company to: Differentiate its product = provide more utility Lower cost structure
Efficiency, quality, innovation and customer responsiveness are all INTERRELATED.

The Building Blocks of Competitive Advantage

EFFICIENCY Quantity of inputs to produce a given output A company is more efficient with few inputs and high outputs Employee Productivity
Output produced per employee

Capital Productivity
Sales produced per dollar of capital

The Building Blocks of Competitive Advantage

QUALITY A product has superior quality when customers perceive that its attributes provide them with higher utility than products sold by rivals

Quality as Excellence

Quality as Reliability

The Building Blocks of Competitive Advantage

INNOVATION Act of creating new products and processes Give the company something unique

Product Innovation

Process Innovation

The Building Blocks of Competitive Advantage

CUSTOMER RESPONSIVENESS Achieving superior quality and innovation Customize goods and services Customer response time: time it takes for a good to be delivered or a service to be performed

Competitive Advantage and the Value Creation Cycle

Business Model

Competitive Advantage and Superior Profitability

Distinctive Competencies

Strategies

Analyzing Competitive Advantage and Profitability

The key measure of companys financial performance is its profitability. Return on Invested Capital best measure of profitability because of its focus on true operating performance of the company.

Analyzing Competitive Advantage and Profitability

DU PONT FORMULA Decomposition of ROIC was first developed by managers at DuPont Company (1900s) as a method for identifying drivers of profitability.
COGS/Sales Return on Sales SG&A/Sales ROIC Capital Turnover Working Capital/Sales PPE/Sales R&D/Sales

The Durability of Competitive Advantage

BARRIERS TO IMITATION Primary determinant of the speed of imitation The greater the barriers to imitation, the more sustainable is a companys competitive advantage

The Durability of Competitive Advantage

IMITATING RESOURCES Firm-specific and valuable tangible resources
Buildings, plant and equipment

Intangible resources
Brand names, marketing strategies, patent system

The Durability of Competitive Advantage

IMITATING CAPABILITIES Based on the way in which decisions are made and processes managed deep within a company Product of how numerous individuals interact within a unique organizational setting

The Durability of Competitive Advantage

IMITATING CAPABILITIES: Capability of Competitors Commitment to a particular way of doing business Absorptive capacity: ability of an enterprise to identify, value, assimilate, and use new knowledge

The Durability of Competitive Advantage

IMITATING CAPABILITIES: Industry Dynamism Most dynamic industry: very high rate of product innovation

Avoiding Failure and Sustaining Competitive Advantage

WHY COMPANIES FAIL Profitability is substantially lower Lost the ability to attract and generate resources

Avoiding Failure and Sustaining Competitive Advantage

WHY COMPANIES FAIL: Inertia Argument: Difficult to change their strategies and structures in order to adapt to changing competitive conditions Organizational capabilities Distribution of power and influence (power struggle and political resistance)

Avoiding Failure and Sustaining Competitive Advantage

WHY COMPANIES FAIL: Prior Strategic Commitments Stuck with significant resources specialized for that particular business

Avoiding Failure and Sustaining Competitive Advantage

WHY COMPANIES FAIL: The Icarus Paradox Icarus in Greek mythology Miller: The greatest asset caused demise Four major categories: craftsmen, builders, pioneers, and salesmen

Avoiding Failure and Sustaining Competitive Advantage

STEPS TO AVOID FAILURE

Focus on the Building Blocks of Competitive Advantage

Institute Continuous Improvements and Learning

Track Best Industrial Practice and Use Benchmarking

Overcome Inertia

Avoiding Failure and Sustaining Competitive Advantage

THE ROLE OF LUCK In the face of uncertainty, some companies just happen to pick the correct strategy The harder I work, the luckier I seem to get