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    Theory of Strategic Management With Cases, 8e: Hills, Jones

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    Adnan Ahmad Al-Nasser
    Internal analysis pinpoints the strengths and weaknesses of the organization. Competitive Advantage is greater than the average profitability for all firms in its industry. Value Creation and pricing options have a dynamic relationship.

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    Theory of Strategic Management With Cases, 8e: Hills, Jones

    Uploaded by

    Adnan Ahmad Al-Nasser
    51 views23 pages
    Internal analysis pinpoints the strengths and weaknesses of the organization. Competitive Advantage is greater than the average profitability for all firms in its industry. Value Creation and pricing options have a dynamic relationship.

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    Hill 8e Basic Ch03

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    Internal analysis pinpoints the strengths and weaknesses of the organization. Competitive Advantage is greater than the average profitability for all firms in its industry. Value Creation and pricing options have a dynamic relationship.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    51 views23 pages

    Theory of Strategic Management With Cases, 8e: Hills, Jones

    Uploaded by

    Adnan Ahmad Al-Nasser
    Internal analysis pinpoints the strengths and weaknesses of the organization. Competitive Advantage is greater than the average profitability for all firms in its industry. Value Creation and pricing options have a dynamic relationship.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 23

    Theory of Strategic Management with Cases, 8e

    Hills, Jones

    Chapter Three
    Competencies and ProfitabilityAnalyzing Internal Resources

    Copyright Houghton Mifflin Company. All rights reserved.

    3|1

    In preparing for battle I have always found that plans are useless, but planning is indispensable.
    - Dwight D. Eisenhower

    Copyright Houghton Mifflin Company. All rights reserved.

    RoyaltyFree/ Stockdisc/ Getty Images

    3|2

    Internal Analysis
    The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organization. It includes assessments of:

    The firms resources and capabilities Distinctive competencies


    Building and sustaining a competitive advantage requires a company to achieve superior:
    Efficiency Quality Innovations Responsiveness to customers
    3|3

    Copyright Houghton Mifflin Company. All rights reserved.

    Internal Analysis: Strengths and Weaknesses


    Internal analysis, along with the external analysis of the companys environment, gives managers the information to choose the strategies and business model to attain a sustained competitive advantage.

    Strengths
    Assets that boost profitability

    Weaknesses
    Liabilities that depress profitability

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    3|4

    Competitive Advantage
    Competitive Advantage A firms 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.

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    3|5

    Strategy, Resources, Capabilities, and Competencies


    Figure 3.1

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    3|6

    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 that product Consumer surplus is the excess utility a consumer captures beyond the price paid
    Basic Principle: the more utility that consumers get from a companys products or services, the more pricing options the company has.
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    3|7

    Value Creation per Unit


    Figure 3.2

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    3|8

    Value Creation and Pricing Options


    There is a dynamic relationship among utility, pricing, demand, and costs.

    Figure 3.3

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    3|9

    Comparing Toyota and General Motors


    Figure 3.4

    Superior value creation requires that the gap between perceived utility (U) and costs of production (C) be greater than that obtained by competitors.
    Copyright Houghton Mifflin Company. All rights reserved.

    3 | 10

    The Value Chain


    Figure 3.5

    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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    3 | 11

    Building Blocks of Competitive Advantage


    Figure 3.6

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    3 | 12

    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.
    Copyright Houghton Mifflin Company. All rights reserved.

    3 | 13

    Quality
    Quality products are goods and services that are: Reliable and Differentiated by attributes that customers perceive to have higher value A perception of quality allows a firm to differentiate its products in the eyes of its customers.

    Superior quality = customer perception of greater value in a products attributes


    Form, features, performance, durability, reliability, style, design
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    3 | 14

    A Quality Map for Automobiles


    Figure 3.7 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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    3 | 15

    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 companys 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.
    Copyright Houghton Mifflin Company. All rights reserved.

    3 | 16

    Customer Responsiveness
    Identifying and satisfying customers needs better than the competitors do.

    Enhanced customer responsiveness:


    Customer response time, design, service, after-sales service and support

    Superior responsiveness to customers differentiates a companys products and services and leads to brand loyalty and premium pricing.

    Copyright Houghton Mifflin Company. All rights reserved.

    3 | 17

    Analyzing Competitive Advantage and Profitability


    Competitive Advantage
    When a companys 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 companys historic performance

    Measures of Profitability Return On Invested Capital (ROIC)


    ROIC

    Net profit Capital invested

    Net income after tax Equity + Debt to creditors

    Net Profit = Total revenues Total costs


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    3 | 18

    Definitions of Basic Accounting Terms


    Table 3.1

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    3 | 19

    Drivers of Profitability (ROIC)


    Figure 3.9

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    3 | 20

    The Durability of Competitive Advantage


    The durability of a companys competitive advantage over its competitors depends on:

    1. Barriers to Imitation
    Making it difficult to copy a companys distinctive competencies

    2. Capability of Competitors
    Strategic commitment Absorptive capacity

    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.
    Copyright Houghton Mifflin Company. All rights reserved.

    3 | 21

    Why Companies Fail


    Inertia
    Companies find it difficult to change their strategies and structures

    Prior Strategic Commitments


    Limit a companys 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

    It loses the ability to attract and generate resources. Profit margins and invested capital shrink rapidly.
    Copyright Houghton Mifflin Company. All rights reserved.

    When a company loses its competitive advantage, its profitability falls below that of the industry.

    3 | 22

    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 3. Track Best Practice and Use Benchmarking 4. Overcome Inertia
    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

    Copyright Houghton Mifflin Company. All rights reserved.

    3 | 23

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