Chapter 4: 

Competitive Advantage: Resources, Capabilities, and Competencies

(3) critical chapter questions:

•      Once competitive advantage is attained, what factors influence its durability?

•       Why do successful companies lose their competitive advantage?

•       How can companies avoid competitive failure and sustain their competitive advantage over time?

Within industries, some companies are more profitable than others.

Why?

Where do building blocks come from?

An organization's:

•       competencies,

•      resources, and

•     capabilities

    Superior efficiency, quality, innovation, and customer responsiveness.

Competitive Advantage:

•       Achieved when profit rate is higher than the average for its industry.

•      Defined as ratio, e.g.

•       ROS

•       ROA

Formuli for competitive advantage:

•      Maintain lower costs than competitors,

                         or . . .

•     Differentiate product in some way so that higher price than the competition can be charged.

Porter:  Low Cost, Differentiation

•      Low-cost strategy: 

•     Based on doing everything possible to lower unit costs.

•      Differentiation strategy:

•     Based on doing everything possible to differentiate products from those offered by competitors in order to be able to charge a premium price.

Why are they generic? 

•     Represent four basic ways of lowering costs and achieving differentiation.

•     ANY company can adopt these techniques, irrespective of industry or products or services produced.

(4) Building Blocks are Interrelated

•     Superior quality can lead to superior efficiency,

•      Innovation can enhance efficiency, quality, and customer responsiveness.

1.  Efficiency

•       Cost of inputs required to produce a given output.

•       Efficiency lowers cost of inputs required to produce a given output.

•       Efficiency helps company attain a low-cost competitive advantage.

Ways to achieve Efficiency:

•      Utilize inputs in most productive way possible.

•       Via Employee productivity

•                       An input, measured by output per employee.

•                                   Companies with highest employee productivity have lowest costs of production.

2.  Quality

•      Quality products are goods and services are reliable; do the job they were designed for and do it well.

Quality...

--Creates a brand name reputation for a company's products, allows > price.

--Can also result in > efficiency, < costs.

--Less employee time is wasted fixing mistakes. (Higher productivity, lower unit costs result.)

3.  Innovation

-- Anything new or novel about the way a company operates or the products it produces.

--E.g., advances in the kinds of products, production processes, management systems, organizational structures, and strategies developed by a company.

Does strategy provide competitive advantage?

--Chapter one debated this, given the fact that MOST companies now think strategically.

--However, it may make firms MORE INNOVATIVE.

Innovation...

--Gives company something unique that its competitors lack

•     until competitors imitate

--Uniqueness allows differentiation, higher prices.

--May allow unit costs < competitors.

4.  Customer Responsiveness = give customers what they want when they want.

--      Improve the efficiency of production process, quality of output

--     Development of new products with new features

--    Improve response time

--     Customize product

--In other words, achieving superior efficiency, quality, and innovation are all part of achieving superior customer responsiveness.

Distinctive Competencies, Resources, and Capabilities

--A unique strength that allows accompany to achieve superior efficiency, quality, innovation, or customer responsiveness.

Another Way to Charge High Prices, lower costs Distinctive Competencies

Arise from: 

--       Resources, 

--      Capabilities.

To give rise to a distinctive competency . . .

--Tangible resources (land, buildings, plant, and equipment) and

--Intangible resources (brand names, reputation, patents, and technological or marketing know-how).

Capabilities.

--Refer to company's skills at coordinating resources, putting them to productive use.

--Skills reside in an organization's routines— the way a company makes decisions and manages its internal processes in order to achieve organizational objectives.

Durability of Competitive Advantage

--How long will a competitive advantage last, once it has been created?

--Answer depends on three factors:

1.  Height of barriers to imitation,

2.  Capability of competitors,

3.     General dynamism of the industry  environment.

Barriers to imitation

--Allows company to stay one step ahead of the competition.

--Intangible resources can be more difficult to imitate than tangible ones. e.g., brand names.

--Technological know-how not always protectable, often possible to "invent around" patents.

Industry dynamism.

-- One that is changing rapidly.

-- Very high rate of product innovation.

-- A company that has a competitive advantage today may find that its market position is outflanked tomorrow by a rival's innovation.

Failure, continued... Inertia

--Difficult to change strategies and structures to adapt to changing competitive conditions.

--Capabilities difficult to change

•     Distribution of power and influence is embedded within the established decision making.

Failure, continued... Prior strategic commitments

--Do more than limit firm’s ability to imitate rivals;

--May also be cause of competitive disadvantage.

Failure, continued... Icarus Paradox

--(Danny Miller)

--Companies dazzled by initial early success.

--Believe that pursuing the same course of action is the way to future success.

--Attitude leads to extreme specialization, and inner-direction

--Loses sight of market realities and fundamental requirements for achieving a competitive advantage.