Chapter 4

Internal Analysis: Resources,

Capabilities, Competencies, and
Competitive Advantage

Strategic Charles W. L. Hill

Management Gareth R. Jones

An Integrated Approach PowerPoint Presentation

by Charlie Cook

Fifth Edition

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 Competitive Advantage: Value Creation,
Low Cost, and Differentiation

Competitive advantage is a firms ability to

outperform its competitors (earn higher
profits).
The source of competitive advantage is value
creation for customers.
Sustained competitive advantage comes from
maintaining higher profits than competitors
over long periods of time.

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 Value Creation

FIGURE 4.2

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 Generic Building Blocks of Competitive
Advantage

FIGURE 4.3

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 Efficiency

The quantity of inputs it takes to produce a

given output
Productivity leads to greater efficiency and
lower costs
Employee productivity
Capital productivity

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 Quality

Superior quality = customer perception of

greater value in a specific products
attributes
Form, features, performance, durability, reliability,
style, design
Quality products =quality as excellence and
quality as reliability

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 Quality (contd)

The impact of quality on competitive

advantage
High-quality products increase the value of
(differentiate) the products in customers eyes
Greater efficiency and lower unit costs are associated
with reliable products

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 Innovation

The act of creating new products or

processes
Product innovation
Creates products that customers perceive as more
valuable, increasing the companys pricing options
Process innovation
Creates value by lowering production costs

Perhaps the most important building block

of competitive advantage

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 Responsiveness to Customers

Doing a better job than competitors of

identifying and satisfying customers needs
Superior quality and innovation are integral to
superior responsiveness to customers
Customizing goods and services to the unique
demands of individual customers or customer groups

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 Responsiveness to Customers
(contd)
Sources of enhanced customer
responsiveness
Customer response time, design, service, after-sales
service and support
Differentiates a company/its products; leads
to brand loyalty and premium pricing

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 Responsiveness to Customers
(contd)
Sources of enhanced customer
responsiveness
Customer response time, design, service, after-sales
service and support
Differentiates a company/its products; leads
to brand loyalty and premium pricing

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 The Impact of Efficiency, Quality, Innovation,
and Customer Responsiveness on Unit Costs
and Prices

FIGURE 4.5

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 The Value Chain

A company is a chain of activities for

transforming inputs into outputs that
customers value
The transformation process is composed of
primary and support activities that add
value to the product

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 The Value Chain

FIGURE 4.6

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 Distinctive Competencies, Resources, and
Capabilities
The roots of competitive advantage:

FIGURE 4.7

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 Strategic Resources

Tangible Intangible
Land Brand names
Buildings Reputation
Plant Patents
Equipment Technological or
marketing know-how

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 Capabilities

Skills in effectively coordinating and

managing resources for productive use.
Unique resources and capabilities, or
Common resources and
unique capabilities.

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 Strategy and Competitive Advantage
The relationship between strategies and
resources and capabilities:

FIGURE 4.8

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 The Durability of Competitive
Advantage
The DURABILITY of a companys competitive advantage over
its competitors depends on:
1. Barriers to Imitation
Making it difficult to copy a companys distinctive competencies
Imitating Resources
Imitating Capabilities
2. Capability of Firm
Strategic commitment
Commitment to a particular way of doing business
Absorptive capacity
Ability to identify, value, assimilate, and use knowledge
3. Industry Dynamism
Ability of an industry to change rapidly

Competitors are also seeking to develop distinctive

competencies that will give them a competitive edge.
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Why Companies Fail
Inertia
Companies find it difficult to change thei strategies and
structures
Prior Strategic Commitments
Limit a companys ability to imitate and cause competitive
disadvantage
The Icarus Paradox
A company can become so specialized and inner directed based on past success
that it loses sight of market realities

When a company loses its competitive advantage,

its profitability falls below that of the industry.
It loses the ability to attract and generate resources.
Profit margins and invested capital shrink rapidly.
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Avoiding Failure:
Sustaining Competitive Advantage
1. Focus on the Building Blocks of Competitive Advantage
Develop distinctive competencies and superior performance in:
Efficiency Quality
Innovation Responsiveness to Customers
2. Institute Continuous Improvement and Learning
Recognize the importance of continuous learning within the organization
3. Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient global competitors
4. Overcome Inertia
Overcome the internal forces that are barriers to change
Luck may play a role in succes so always exploit a lucky
break - but remember:
The harder I work, the luckier I seem to get. J P Morgan

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