Week 4 : Sustainable Competitive Advantage

Saib Dianati

BUSN9229

Sustainable Competitive Advantage

>Achieving Sustainable Strategic Competitive Advantage

>Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively– Acquired (S)– Bundled (S)– Leveraged (S)

>Over time, the benefits of any value-creating strategy can be duplicated by competitors

Key to Sustainable Competitive Advantage: Internal Environment

Examine opportunities and threats

Examine unique resources, capabilities, and competencies: S and W(sustainable competitive advantage)

The Context of Internal Analysis

> Effective analysis of a firm’s internal environment (learning what the firm can do ) requires:

– Fostering an organizational setting in which experimentation and learning are expected and promoted

– Using a global mind-set– Thinking of the firm as a bundle of

heterogeneous resources and capabilities that can be used to create an exclusive market position

Components of Internal Analysis

Creating Value

> By exploiting their core competencies or competitive advantages, firms create value

> Value is measured by

– A product’s performance characteristics (S)

– The product’s attributes for which customers are willing to pay (S)

> Firms create value by innovatively bundling and leveraging their resources and capabilities

Creating Competitive Advantage

> Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage

> Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies

The Challenge of Internal Analysis

> To develop and use core competencies, managers must have (S)

– Courage– Self-confidence– Integrity– The capacity to deal with uncertainty and

complexity– A willingness to hold people (and themselves)

accountable for their work

Resources, Capabilities and Core Competencies

Resources (S)Are the source of a firm’s capabilitiesAre broad in scopeCover a spectrum of individual, social and organizational phenomenaAlone, do not yield a competitive advantage

Resources, Capabilities and Core Competencies

> Resources (S)

– Are a firm’s assets, including people and the value of its brand name

– Represent inputs into a firm’s production process, such as:• Capital equipment• Skills of employees• Brand names• Financial resources• Talented managers

Resources

> Resources

– Tangible resources• Financial resources• Physical resources• Technological resources• Organizational resources

– Intangible resources• Human resources• innovation resources• Reputation resources

Tangible Resources (S)

> Financial Resources •The firm’s borrowing capacity•The firm’s ability to generate internal funds

> Organizational Resources • The firm’s formal reporting structure and its formal planning, controlling,

and coordinating systems

> Physical Resources •Sophistication and location of a firm’s plant and equipment

•Access to raw materials

> Technological Resources • Stock of technology, such as patents, trade-marks, copyrights, and trade

secrets

Intangible Resources (S)

> Human Resources • Knowledge> • Trust> • Managerial capabilities> • Organizational routines> > Innovation Resources • Ideas > • Scientific capabilities > • Capacity to innovate> > Reputational Resources • Reputation with customers > • Brand name > • Perceptions of product quality,

durability, and reliability > • Reputation with suppliers > • For efficient, effective, supportive, and mutually

beneficial interactions and relationships

Capabilities (S)

– Are the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired end state

– Emerge over time through complex interactions among tangible and intangible resources

– Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital

Capabilities (S)

> Capabilities

– The foundation of many capabilities lies in:• The unique skills and knowledge of a firm’s

employees• The functional expertise of those employees

– Capabilities are often developed in specific functional areas or as part of a functional area

Examples of Capabilities

Core Competencies

> Core Competencies

– Resources and capabilities that serve as a source of a firm’s competitive advantage:

• Distinguish a company competitively and reflect its personality

• Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

Core Competencies

> Core Competencies

– Activities that a firm performs especially well compared to competitors

– Activities through which the firm adds unique value to its goods or services over a long period of time

Four Criteria of Sustainable Competitive Advantage

> Four Criteria of Sustainable Competitive (S) Advantage1

– Valuable– Rare– Costly to imitate– Non-substitutable

Four Criteria of Sustainable Competitive Advantage

> Valuable Capabilities • Help a firm neutralise threats or exploit opportunities

> Rare Capabilities • Are not possessed by many others

> Costly-to-Imitate Capabilities

» Historical: A unique and a valuable organizational culture or brand name • Ambiguous cause: The causes and uses of a competence are unclear

> • Social complexity: Interpersonalrelationships, trust, and friendshipamong managers, suppliers, andcustomers

> Nonsubstitutable Capabilities • No strategic equivalent

Building Sustainable Competitive Advantage

> Valuable capabilities

– Help a firm neutralize threats or exploit opportunities

> Rare capabilities

– Are not possessed by many others

Building Sustainable Competitive Advantage

> Costly-to-Imitate Capabilities (S)

– Historical• A unique and a valuable organizational culture or

brand name

– Ambiguous cause• The causes and uses of a competence are unclear

– Social complexity• Interpersonal relationships, trust, and friendship

among managers, suppliers, and customers

Building Sustainable Competitive Advantage

> Non-substitutable Capabilities

– No strategic equivalent

Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Internal and external environment effects on SCA

> Factors that have a positive effect on SCA:

1. Organisational culture

2. Differentiation strategy

3. Internet retailing

4. Marketing programs

5. Speed of designing developing and producing new products

Impact of SWOT in achieving CSA

> Test the relationship between SW and competitive advantage

> Test the relationship between OT and competitive advantage

> Strong correlation between competitive advantage and SWOT analysis.

> Significant factors for CSA were: time, speed, quality and flexibility.

> Specific Factors: Other regions/countries; mergers and acquisitions; cost strategies in interest and loan issues

Strength and Opportunity to help identify : Sustainable competitive advantage

Strengths:

> Many diverse product lines: Attributes; durability reliability: costly to imitate &nonsubstitute

> Broad market coverage: Valuable> Manufacturing competence: capital equipment: physical resources: costly to

imitate> Good marketing skills: knowledge valuable and rare> R&D skills: technical resources: valuable and rare, unique> IS skills high level: Technological resources: valuable and rare, unique> Human resource competencies: employee skills, unique> Brand name reputation: brand name: reputation resources: valuable & rare> High level Management skills: Courage, integrity: Talented and capable: valuable,

unique> Good financial management: financial resources: valuable> Others?

Strength and Opportunity to identify : Sustainable competitive advantage

Opportunities:

> Expand core business: Valuable: costly to imitate> Exploit new market segments Valuable> Widen product range: costly to imitate; Valuable> Expand into foreign markets: Valuable> Apply R&D in new areas: Costly to imitate; rare> Make profitable new acquisitions’: Valuable; > Seek fast market growth: Valuable > Expand product line: Valuable> Serve additional customer groups: Valuable> Diversify into related products: Valuable> Find markets with faster growth: Valuable

Weaknesses and Threats to identify : Sustainable competitive advantageWeaknesses:

> Obsolete narrow product line> Rising manufacturing costs> Decline in R&D innovations> Poor marketing plan> Poor materials management> Loss of customer goodwill> Inadequate IS> Inadequate Human resources> Loss of brand name > Growth without direction> Bad management> Infighting among divisions> poor organisational structure> Poor financial management

Weaknesses and Threats to identify : Sustainable competitive advantage

Threats:

> Attacks on core business> Increase in competition> Change in consumer taste> Fall in barriers to entry> Rise in substitutes> Increase industry rivalry> Potential for takeover> Changes in demographic factors> Changes in economic factors> Downturn in economy> Rising labor costs> Slower market growth

In Sum

Components of internal analysis:

To establish Sustainable Competitive Advantage

Use the Four Criteria of Sustainable Advantage:> Valuable> Rare> Costly to imitate> Non substitutable

& Link these to the SWOT: Focus on the S & O

Reference List

1.Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2004). Strategic Management: Competitiveness and Globalization: Chapter three: The internal environment, Cengage South-Western.