LESSON 1:

DISTINCTIVE
COMPETENCIE
S
OBJECTIVE:
By the end of this lesson,

A. Students will able to analyze how distinctive competencies contribute to

competitive advantage and profitability.

B. Identify strategies for avoiding failure while sustaining that competitive

advantage, and;

C. Understand how functional-level strategies can be aligned to achieve

superior efficiency.
A. Analyzing Competitive
Advantage and Profitability

B. Avoiding Failure and

Sustaining Competitive
Advantage
ANALYZING COMPETITIVE ADVANTAGE
AND PROFITABILITY

If a company’s managers are to perform a good internal analysis,

they must be able to analyze the financial performance of their
company, identifying how its strategies contribute (or not) to
profitability.
Competitive Advantage refers to factors that allow a company to
produce goods or services better or more desirable than its rivals.
These factors allow the productive entity to generate more sales
or superior margins compared to its market rivals.
Profitability refers to the measure of how efficiently a business
converts its expenses into profits for its owners. It is the extent to
which a company earns a profit.
Competitive
Advantage Analysis Profitability Analysis
Here are the five steps to complete a
Here are the six steps to do a profitability analysis:
competitive analysis:

Create a competitor overview Gather financial statement

Conduct market research Calculate the profitability metrics for
each company
Compare product features
Compare the results
Compare product marketing
Determine the drivers for differences
Use a SWOT Analysis
• Take action
• Identify your place in the market landscape
Analyzing Competitive
Advantage and Profitability
Although several different measures of profitability exist, such as return on assets
and return on equity, many authorities on the measurement of profitability argue
that return on invested capital (ROIC) is the best measure because “it focuses on the
true operating performance of the company.”
ROIC is defined as net profit over invested capital, or ROIC = net profit/invested
capital.
Net profit is calculated by subtracting the total costs of operating the company from
its total revenues (total revenues − total costs).
• Net profit is what is left over after the government takes its share in taxes.
• Invested capital is the amount that is invested in the operations of a company:
property, plant, equipment, inventories, and other assets.
• Invested capital comes from two main sources: interest-bearing debt and
Return on invested capital (ROIC) assesses a company’s efficiency in
allocating capital to profitable investments. It is calculated by dividing net
operating profit after tax (NOPAT) by invested capital. ROIC gives a sense
of how well a company is using its capital to generate profits.

A company’s ROIC can be algebraically divided into two major components:

return on sales and capital turnover. Specifically:
ROIC = net profits/invested capital

Where net profits/revenues is the return on sales, and

revenues/invested capital is capital turnover.
THE DURABILITY OF COMPETITIVE
ADVANTAGE

Three Factors of Durability of

Durability refers to the length Competitive Advantage:
of time that a competitive
advantage lasts, once it has • Barriers to Imitation
been created.
• Capability of Competitors
• Gneral Dynamism of the Industry
Environment
THE DURABILITY OF
COMPETITIVE ADVANTAGE
1. Barriers to Imitation A. Imitating Resources - In general, the
easiest distinctive competencies for
Barriers to imitation are a prospective rivals to imitate tend to be
primary determinant of the speed those based on possession of firm-
specific and valuable tangible resources,
of imitation. Barriers to imitation such as buildings, manufacturing plants,
are factors that make it difficult for and equipment.
a competitor to copy a company’s
distinctive competencies; the
greater the barriers to imitation, B. Imitating Capabilities - Imitating a
company’s capabilities tends to be more
the more sustainable a company’s difficult than imitating its tangible and
competitive advantage. intangible resources, chiefly because
capabilities are based on the way in
which decisions are made and processes
are managed deep within a company.
THE DURABILITY OF
COMPETITIVE ADVANTAGE
2. Capability of Competitors
A major determinant of the capability of competitors to rapidly imitate a
company’s competitive advantage is the nature of the competitors’ prior
strategic commitments.
By strategic commitment, a company’s commitment to a particular
way of doing business--that is, to developing a particular set of resources
and capabilities. Once a company has made a strategic commitment, it
will have difficulty responding to new competition if doing so requires a
break with this commitment. Therefore, when competitors have long-
established commitments to a particular way of doing business, they
may be slow to imitate an innovating company’s competitive advantage.
THE DURABILITY OF
COMPETITIVE ADVANTAGE
3. Industry Dynamism
A dynamic industry environment is one that changes
rapidly.The most dynamic industries tend to be those with a very
high rate of product innovation. In dynamic industries, the rapid
rate of innovation means that product life cycles are shortening
and that competitive advantage can be fleeting. A company that
has a competitive advantage today may find its market position
outflanked tomorrow by a rival’s innovation.
Avoiding Failure and Sustaining
Competitive Advantage

Why Companies Fail?

When a company loses its competitive advantage, its profitability falls. The company does
not necessarily fail; it may just have average or below-average profitability and can remain in
this mode for a considerable time, although its resource and capital base is shrinking. Failure
implies something more drastic. A failing company is one whose profitability is substantially
lower than the average profitability of its competitors; it has lost the ability to attract and
generate resources and its profit margins and invested capital are rapidly shrinking.
THREE RELATED REASONS FOR FAILURE:

• Inertia
- It is the resistance to change within an organization, even when the external
environment shifts.

• Prior Strategic Commitments

- These are large investments or commitments that lock a company into a
specific path, making it difficult to change directions.

• Icarus Paradox
- Companies that become overly confident in their strengths may push them to
the extreme, leading to failure.
STEPS TO AVOID FAILURE

1. Focus on the Building Blocks of Competitive Advantage

2. Institute Continuous Improvement and Learning
3. Track Best Industrial Practice and Use Benchmarking
4. Overcome Inertia
5. The Role of Luck
LESSON 2:
STRATEGY
AT
FUNCTIONA
L LEVEL
- are strategies aimed at improving the
effectiveness of a company’s
operations.
STRATEGY AT LEVEL
FUNCTIONAL
Improves company’s ability to attain superior:

1. Efficiency
NAL LEVEL
2. Quality
3. Innovation
4. Customer Responsiveness

Increases the utility that customers receive:

5. Through differentiation
6. Lower cost structure
7. Creating more value than rivals
 Achieving Superior Efficiency
FUNCTIONAL STEPS
A company is a device for transforming
inputs (labor, land, capital, management, and 1. Economies of Scale
technological knowhow) into outputs (the 2. Learning Effect
goods and services produced). The simplest
3. Experience Curve
measure of efficiency is the quantity of
inputs that it takes to produce a given 4. Flexible Manufacturing and Mass
output; that is, efficiency = outputs/inputs. Customization
5. Marketing
6. Materials Management and Supply Chain
7. R & D Strategy
8. Human Resource Strategy
9. Information Systems
10.Infrastructure
ECONOMIES OF SCALE
Economies of scale are unit cost reductions associated
with a large scale of output;
• One source of economies of scale is the ability to
spread fixed costs over a large production volume.
• Ability of companies producing in large volumes to
achieve a greater division of labor and specialization.
Diseconomies of scale refers to the unit cost increases
associated with a large scale of output;
• Increased bureaucracy associated with large-scale
enterprises
• Resulting managerial inefficiencies
LEARNING EFFECTS
Learning effects are cost savings that come from
learning by doing;
• Labor - learns by repetition how to best carry
out a task.
• Management - learns by repetition how to best
carry out a task.
• Realization of learning effects implies a
downward shift of the entire unit cost
curve. As labor and management
become more efficient over time at
every level of output.
THE EXPERIENCE CURVE
The experience curve refers to the
systematic lowering of the cost structure,
and consequent unit cost reductions, that
have been observed to occur over the life
of a product.

• Economies of scale and

learning effects underlie the
experience curve phenomenon.
• Once down the experience
curve, the company is likely to
have a significant cost
advantage over its competitors
FLEXIBLE MANUFACTURIN
AND MASS CUSTOMIZATION
Flexible Manufacturing Technology – a range of manufacturing
technologies that:
• Reduce setup times for complex equipment
• Improves scheduling to increase use of individual
machines
• Improves quality control at all stages of the
manufacturing process
• Increases efficiency and lowers unit cost

Mass Customization - Ability to use flexible manufacturing technology

to reconcile two goals that were once thought incompatible:
• Low cost and
• Differentiation through product customization
MARKETING
Marketing strategy refers to the
position that a company takes with
regard to market segmentation,
pricing, promotion, advertising,
product design, and distribution.
Customer defection (or “churn rates”)
are the percentage of a company’s
customers who defect every year to
competitors.
• Defection rates are determined by
customer loyalty, which in turn is a
function of the ability of a company
to satisfy its customers.
MATERIALS
MANAGEMENT AND
SUPPLY CHAIN
Materials management encompasses the activities necessary to get inputs and
components to a production facility (including the costs of purchasing inputs), through
the production process, and out through a distribution system to the end-user.
‘just-in-time’ (JIT) inventory system- system of economizing on inventory holding costs
Supply Chain Management - task of managing the flow of inputs and components from
suppliers into the company’s production processes to minimize inventory holding and
maximize inventory turnover.

RESEARCH AND DEVELOPMENT

SRATEGY
The role of superior research and development (R&D) in helping a
company achieve a greater efficiency and a lower cost structure is
twofold.
• R&D function can boost efficiency by designing products that are
easy to manufacture.
HUMAN RESOURCE STRATEGY

Employee productivity is one of Self-Managing Teams - members

the key determinants of an coordinate their own activities and
enterprise’s efficiency, cost make their own hiring, training,
structure, and profitability. work, and reward decisions.
Hiring Strategy - consistent with Pay for Performance - linking pay
its own internal organization, to performance can help increase
culture, and strategic priorities. employee productivity.

Employee Training - upgrades

employee skill levels to perform
tasks faster and more
accurately.
INFORMATI
ON INFRASTRUCT
SYSTEMS URE
A company’s infrastructure—that
is, its structure, culture, style of
strategic leadership, and control
The impact of information systems system—determines the context
on productivity is wide ranging and within which all other value
potentially affects all other creation activities take place.
activities of a company.
• Achieving superior efficiency
• Web-based information systems requires a companywide
to reduce the costs of commitment to this goal that
coordination between the must be articulated by general
company and its customers and and functional managers.
the company and its suppliers.
• A further leadership task is to
• Web-based information systems facilitate the cross-functional
to automate many internal cooperation needed to achieve
company activities. superior efficiency.
Conclusion
Therefore we conclude, analyzing competitive advantage and
profitability delves into the factors that differentiate businesses and
drive financial success. By understanding the unique strengths and
weaknesses of a company, businesses can identify opportunities to
outperform competitors. Avoiding failure and sustaining competitive
advantage explores strategies to maintain a competitive edge over
time, such as innovation, customer focus, and efficient operations.
Ultimately, achieving superior efficiency is key to maximizing
profitability. By streamlining processes, reducing costs, and improving
productivity, businesses can enhance their bottom line and solidify
their position in the market.
 Group 2 Members:

- Dela Peña JudyAnn

- Jemerga, Jeanelle
- Jarabelo, Christyl Faith
- Jerios, Nicole
THANK YOU! - Katalbas, Reenz Stephen
- Layam, Critzper
- Lumambas, Marven
- Redobles, Bea
- Sevillejo, Joylyn
- Solivio, Andrea Camille
- Ybañez, Jonaraiza
References
CHARLES W.L. HILL | GARETH R. JONES
| MELISSA A. SCHILLINGSTRATEGIC
MANAGEMENT AN INTEGRATED
APPROACHfile:///C:/Users/name/Downlo
ads/Strategic-Management-Theory-
Cases-AnIntegrated-Approach-
1%20(1).pdf
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Page 106-110
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Answer the following briefly. (2-3 sentences)

1. How is it important to analyze the competitive

advantage and profitability of a business?

2. There are three related reasons for organizational

failure. Choose one and discuss its impact on a company’s
success.

3. How significant it is to apply a strategy at functional

levels?