Chapter 3- Internal Analysis: Resources and Competitive Advantage

Question 1

What are the three steps to internal analysis?

Answer 1

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.

Question 2

When does a company have a competitive advantage?

Answer 2

Companies have this when its profitability is greater than the average profitability of all companies in its industry.

Question 3

When do companies have a sustained competitive advantage?

Answer 3

Companies have this when it is able to maintain above-average profitability over a number of years.

Question 4

Distinctive Competencies

Answer 4

Firm-specific strengths that allow a company to differentiate its products and/or achieve substantially lower costs to achieve a competitive advantage.

Question 5

Resources

Answer 5

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.

Question 6

Process Knowledge

Answer 6

Knowledge of the internal rules, routines, and procedures of an organization that managers can leverage to achieve organizational objectives.

Question 7

Socially Complex

Answer 7

Something that is characterized by, or is the outcome of, the interaction of multiple individuals.

Question 8

Tacit

Answer 8

A characteristic of knowledge or skills such that they cannot be documented or codified but may be understood through experience or intuition.

Question 9

Organizational Architecture

Answer 9

The combination of the organizational structure of a company, its control systems, its organizational culture, and its human-capital strategy.

Question 10

Intellectual Property

Answer 10

Knowledge, research, and information that is owned by an individual or organization.

Question 11

Basic Factors of Production

Answer 11

Resources such as land, labor, management, plants, and equipment.

Question 12

Advanced Factors of Production

Answer 12

Resources such as process knowledge, organizational architecture, and intellectual property that contribute to a company’s competitive advantage.

Question 13

VRIO Framework

Answer 13

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.

Question 14

When can resources be judged as valuable?

Answer 14

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.

Question 15

Which valuable resources are most likely to result in a long-term, sustainable competitive advantage?

Answer 15

Process knowledge, organizational architecture, and intellectual property.

Question 16

Barriers to Imitation

Answer 16

Factors or characteristics that make it difficult for another individual or company to replicate something.

Question 17

Causal Ambiguity

Answer 17

When the way that one thing, A, leads to an outcome (or “causes”), B, is not clearly understood.

Question 18

At the most basic level, a company’s profitability depends on what three factors?

Answer 18

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.

Question 19

Value Chain

Answer 19

The concept that a company consists of a chain of activities that transforms inputs into outputs.

Question 20

Primary Activities

Answer 20

Activities related to the design, creation, and delivery of the product, its marketing, and its support and after-sales service.

Question 21

Support Activities

Answer 21

Activities of the value chain that provide inputs that allow the primary activities to take place.

Question 22

Benchmarking

Answer 22

Measuring how well a company is doing by comparing it to another company, or itself, over time.

Question 23

Employee Productivity

Answer 23

The output produced per employee.

Question 24

Capital Productivity

Answer 24

The sales produces by a dollar of capital invested in the business.

Question 25

Product Innovation

Answer 25

Development of products that are new to the world or have superior attributes to existing products.

Question 26

Process Innovation

Answer 26

Development of a new process for producing and delivering products to customers.

Question 27

Customer Response Time

Answer 27

Time that it takes for a good to be delivered or a service to be performed.

Question 28

Research and Development (R&D)

Answer 28

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.

Question 29

Production

Answer 29

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.

Question 30

Marketing and Sales

Answer 30

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.

Question 31

Customer Service

Answer 31

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.

Question 32

What are the four functions that support activities can be broken down into?

Answer 32

1) Materials Management (Logistics)
2) Human Resources
3) Information Systems
4) Company Infrastructure

Question 33

Materials Management (Logistics)

Answer 33

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.

Question 34

Human Resources

Answer 34

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)…

Question 35

Information Systems

Answer 35

Primarily the digital systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries, and so on.

Question 36

Company Infrastructure

Answer 36

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.

Question 37

If managers are to perform a rigorous value-chain analysis, they need to:

Answer 37

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.

Question 38

What are the building blocks of competitive advantage?

Answer 38

These consist of four different factors that help a company build and sustain competitive advantage. They include superior efficiency, quality, innovation, and customer responsiveness.

Question 39

Efficiency

Answer 39

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.

Question 40

Superior Quality

Answer 40

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.

Question 41

Quality-as-Excellence Perspective

Answer 41

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.

Question 42

What are the two main types of innovation?

Answer 42

Product innovation and process innovation.

Question 43

How does a company achieve superior customer responsiveness?

Answer 43

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.

Question 44

Return on Invested Capital (ROIC)

Answer 44

Net Profit/Invested Capital. Really, it measures the effectiveness with which a company is using the capital funds that it has available for investment.

Question 45

Net Profit

Answer 45

This is what is left over after the government takes its share in taxes. (Total Revenues- Total Costs)

Question 46

Invested Capital

Answer 46

The amount that is invested in the operations of a company: property, plants, equipment, inventories, and other assets.

Question 47

What are the two main sources of invested capital?

Answer 47

1) Interest-bearing debt.
2) Shareholders’ equity.

Question 48

Interest-Bearing Debt

Answer 48

Money that the company borrows from banks and those who purchase its bonds.

Question 49

Shareholders’ Equity

Answer 49

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).

Question 50

Cost of Goods Sold (COGS)

Answer 50

Total cost of producing products.

Question 51

Sales, General, and Administrative Expenses (SG&A)

Answer 51

Costs associated with selling products and administering the company.

Question 52

Research and Development (R&D) Expenses

Answer 52

Research and development expenditure.

Question 53

Working Capital

Answer 53

The amount of money the company has to “work” with in the short term: Current Assets- Current Liabilities.

Question 54

Property, Plant, and Equipment (PPE)

Answer 54

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.

Question 55

Return on Sales (ROS)

Answer 55

Net profit expressed as a percentage of sales; measures how effectively the company converts its revenues into profits.

Question 56

Capital Turnover

Answer 56

Revenues divided by invested capital; measures how effectively the company uses its capital to generate revenues.