Internal Environment & Competitive Advantage (Chapter 3)

Question 1

Discuss competitive advantage

Answer 1

Cost advantage:

• Process technology
• Size advantages
• Access to low-cost inputs

Ex.: Walmart (efficient logistics and distribution based on IS, size and scale andvantages)

Differentiation advantage:

• Brands
• Product technology
• Marketing, distribution and service capabilities

Ex.: Apple (innovation based on R&D, customer service)

These build core competencies that

• maximize profitability
• earn above average returns

Question 2

What are core competencies?

Answer 2

Firm’s distinct “talents,” “crown jewels,” processes perfected over time, signature approaches to conducting business - distinguish a company competitively and reflect its personality

Question 3

Examples of core competencies

Answer 3

(just read this slide)

Question 4

What are the tools to conduct internal analysis?

Answer 4

• Resource Based View Approach
• Value Chain Analysis
• Strengths and Weaknesses analysis (SW part of the SWOT)

These tools can be used as stand alone or in combination → DESIRED OUTCOMES

• Understand internal activities through which a firm achieves its current results
• Find the edge a firm might have over competitors and its sources
• Identify possible areas of improvement and devise corresponding strategies

Question 5

Describe the research based view approach

Answer 5

Capabilities (strengths) → core competencies (valuable, rare, costly to imitate, nonsubstitutable) → competitive advantage

Capabilities (strengths):

• Financial resources
• Human resources
• Physical resources
• Technological resources
• Reputation resources
• Operational resources

Question 6

What is the criteria in order to be considered core competencies?

Answer 6

To create a sustainable competitive advantage, core competencies must meet the criteria:

Valuable:
(Netflix vast selection of content vs. Blockbuster’s former vast physical distribution network)
Rare:
(Coca-Cola & Pepsico have valuable but similar capabilities and struggle for decades to create an advantage)
Costly to imitate:
(Amazon’s online personalization of customer experience based on years of R&D and artificial intelligence)
Nonsubstitutable:
(Dell pioneered cost-effective direct-to-consumer online sales model, but HP achieved the same cost savings through operational efficiencies)

A firm with a competitive advantage is bound to earn above average returns! Therefore, look for proof of an advantage by comparing financial results with those of competitors: profits, revenue, market share.

Question 7

What are the elements of the value chain?

Answer 7

Finance, human resource management, management information systems
+
Supply chain management, operations, distribution, marketing and sales, follow-up services
= ↑ PROFIT MARGIN

Question 8

What is value chain analysis useful for?

Answer 8

Identify firm’s activities that create value as well as spot those that don’t:

• The firm can then decide to either improve non-value creating activities, or outsource them to outside experts.

Evaluate and critique pricing and profit margins that the firm established for its product / services.

Recognize conflicting activities and make corrections to ensure alignment.

Trace and understand the firm’s business-level strategy or lack thereof (next chapter’s topic).

Question 9

What is outsourcing?

Answer 9

Outsourcing - purchase of a value-creating activity from an external supplier. Firms should outsource activities where they cannot create value or are at a substantial disadvantage compared to competitors.

Examples:

• Large corporations often outsource advertising to advertising agencies
• Netflix outsources cloud storage of its content library to Amazon Web Services (AWS)
• Computer manufacturers outsource component production to factories overseas

Question 10

What are the pros and cons of outsourcing?

Answer 10

Advantages:

• Flexibility to change suppliers
• Predictability of costs by not having to run project internally
• Reduction in capital investment
• Improved quality when rely on expertise of another firm
• Ability to concentrate on core activities

Concerns:

• Limited control over outsourced functions and completion timelines
• Limited differentiation
• Loss of domestic jobs when outsourcing overseas
• Risk of intellectual property theft