Chapter 3- Internal Analysis: Resources and Competitive Advantage Flashcards
What are the three steps to internal analysis?
1) Managers must understand the role of rare, valuable, and hard-to-imitate resources in the establishment of competitive advantage.
2) Managers must appreciate how such resources lead to superior efficiency, innovation, quality, and customer responsiveness.
3) Manager must be able to analyze the sources of their company’s competitive advantage to identify what drives the profitability of their enterprise, and just as importantly, where opportunities for improvement might lie.
When does a company have a competitive advantage?
Companies have this when its profitability is greater than the average profitability of all companies in its industry.
When do companies have a sustained competitive advantage?
Companies have this when it is able to maintain above-average profitability over a number of years.
Distinctive Competencies
Firm-specific strengths that allow a company to differentiate its products and/or achieve substantially lower costs to achieve a competitive advantage.
Resources
Assets of a company. They are the factors of production that a company uses to transform inputs into outputs that it can sell in the marketplace. Includes that basic factors of production such as labor, land, management, physical plant, and equipment.
Process Knowledge
Knowledge of the internal rules, routines, and procedures of an organization that managers can leverage to achieve organizational objectives.
Socially Complex
Something that is characterized by, or is the outcome of, the interaction of multiple individuals.
Tacit
A characteristic of knowledge or skills such that they cannot be documented or codified but may be understood through experience or intuition.
Organizational Architecture
The combination of the organizational structure of a company, its control systems, its organizational culture, and its human-capital strategy.
Intellectual Property
Knowledge, research, and information that is owned by an individual or organization.
Basic Factors of Production
Resources such as land, labor, management, plants, and equipment.
Advanced Factors of Production
Resources such as process knowledge, organizational architecture, and intellectual property that contribute to a company’s competitive advantage.
VRIO Framework
A framework managers use to determine the quality of a company’s resources, where V is value, R is rarity, I is inimitability, and O is for organization.
When can resources be judged as valuable?
They can be judged as valuable if they (a) enable a company to create strong demand for its products, and/or (b) lower the costs of producing those products.
Which valuable resources are most likely to result in a long-term, sustainable competitive advantage?
Process knowledge, organizational architecture, and intellectual property.
Barriers to Imitation
Factors or characteristics that make it difficult for another individual or company to replicate something.
Causal Ambiguity
When the way that one thing, A, leads to an outcome (or “causes”), B, is not clearly understood.
At the most basic level, a company’s profitability depends on what three factors?
1) The value customers place on the company’s products,
2) the price that a company charges for its products, an d
3) The cost of creating those products.
Value Chain
The concept that a company consists of a chain of activities that transforms inputs into outputs.
Primary Activities
Activities related to the design, creation, and delivery of the product, its marketing, and its support and after-sales service.
Support Activities
Activities of the value chain that provide inputs that allow the primary activities to take place.
Benchmarking
Measuring how well a company is doing by comparing it to another company, or itself, over time.
Employee Productivity
The output produced per employee.
Capital Productivity
The sales produces by a dollar of capital invested in the business.
Product Innovation
Development of products that are new to the world or have superior attributes to existing products.
Process Innovation
Development of a new process for producing and delivering products to customers.
Customer Response Time
Time that it takes for a good to be delivered or a service to be performed.
Research and Development (R&D)
Refers to the design of products and production processes. By creating superior product design, this can increase the functionality of products, making them more attractive to customers and thereby adding value. Alternatively, it may result in more efficient production processes, thereby lowering production costs.
Production
Refers to the creation of a good or service. For a tangible product, this generally means manufacturing. For services, this typically takes place while the service is delivered to the customer.
Marketing and Sales
Through brand positioning and advertising, this function can increase the value that customers perceive to be contained in a company’s product (and thus the utility that they attribute to the product). This function can also create value by discovering customer needs and communicating them back to the R&D function, which can then design products that better match those needs.
Customer Service
The role of this function is to provide after-sales service and support. This function can create superior utility by solving customer problems and supporting customers after they have purchased the product.
What are the four functions that support activities can be broken down into?
1) Materials Management (Logistics)
2) Human Resources
3) Information Systems
4) Company Infrastructure
Materials Management (Logistics)
This function controls the transmission of physical materials through the value chain. The efficiency with which this is carried out can significantly lower costs, thereby generating profit.
Human Resources
This function ensures that the company has the right combination of skilled people to perform its value creation activities effectively. It… [also] ensures that people are adequately trained motivated, and compensated to perform their value creation tasks. If this is functioning well, employee productivity rises (which lowers costs) and customer service improves (which raises value to customers)…
Information Systems
Primarily the digital systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries, and so on.
Company Infrastructure
This is the companywide context within which all the other value creation activities take place. This includes organizational structure, control systems, incentive systems, and organizational culture- what we refer to as the organizational architecture of a company.
If managers are to perform a rigorous value-chain analysis, they need to:
1) Analyze how efficiently and effectively each activity is being performed.
2) Whenever possible managers should benchmark each activity against a similar activity performed by rivals to see how well the company is doing.
3) In addition to benchmarking performance against rivals, it can be valuable to benchmark performance against best-in-class companies in other industries.
4) Managers should use process improvement methodologies to analyze how well value creation activities are performing, and to identify opportunities for improving the efficiency and effectiveness of those activities.
5) Whenever there is potential for improvement within a value-chain activity, leaders need to evaluate and empower.
What are the building blocks of competitive advantage?
These consist of four different factors that help a company build and sustain competitive advantage. They include superior efficiency, quality, innovation, and customer responsiveness.
Efficiency
The quantity of inputs required to produce a given output; that is, input/output. The more the company has of this, the fewer inputs it requires to produce a particular output, and the lower its costs.
Superior Quality
A product is said to have this when customers perceive that its attributes provide them with higher utility than the attributes of products sold by rivals.
Quality-as-Excellence Perspective
From this perspective, the important attributes are a product’s design and styling, its aesthetic appeal, its features and functions, and the level of service associated with delivery of the product, and so on. When this is built into a product offering, consumers must pay more to own or consume it.
What are the two main types of innovation?
Product innovation and process innovation.
How does a company achieve superior customer responsiveness?
In order to achieve this, a company must be able to do a better job than competitors of identifying and satisfying its customers’ needs. Some sources of this include superior design, superior service, and superior after-sales service and support.
Return on Invested Capital (ROIC)
Net Profit/Invested Capital. Really, it measures the effectiveness with which a company is using the capital funds that it has available for investment.
Net Profit
This is what is left over after the government takes its share in taxes. (Total Revenues- Total Costs)
Invested Capital
The amount that is invested in the operations of a company: property, plants, equipment, inventories, and other assets.
What are the two main sources of invested capital?
1) Interest-bearing debt.
2) Shareholders’ equity.
Interest-Bearing Debt
Money that the company borrows from banks and those who purchase its bonds.
Shareholders’ Equity
Money raised from selling shares to the public, plus earnings that the company has retained in prior years (and that are available to fund current investments).
Cost of Goods Sold (COGS)
Total cost of producing products.
Sales, General, and Administrative Expenses (SG&A)
Costs associated with selling products and administering the company.
Research and Development (R&D) Expenses
Research and development expenditure.
Working Capital
The amount of money the company has to “work” with in the short term: Current Assets- Current Liabilities.
Property, Plant, and Equipment (PPE)
The value of investments in the property, plant, and equipment that the company uses to manufacture and sell its products; also known as fixed capital.
Return on Sales (ROS)
Net profit expressed as a percentage of sales; measures how effectively the company converts its revenues into profits.
Capital Turnover
Revenues divided by invested capital; measures how effectively the company uses its capital to generate revenues.
