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Sustainability of a Competitive Advantage
• Sustainability of a competitive advantage is a function of:– the rate of core-competence obsolescence
due to environmental changes, e.g., technological shifts
– the availability of substitutes for the core competence
– the imitability of the core competence, e.g., diffusion of an innovation
– whether the firm is properly organized to capture value
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External and Internal Analyses
General
Environment
General
Environment
General
Environm
ent
Sociocultural
Global
Technological
Polit
ical
/Leg
al
Dem
ogra
phic Econom
ic
IndustryEnvironment
CompetitorEnvironment
By studying the external environment, firms identify what they might choose to do(Structure>Conduct>Performance)
Opportunities and threats
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External and Internal Analyses
By studying the firm’s (internal) capabilities & resources, firms identify what they can do (over time)
Unique resources, capabilities, and competencies
(sustainable competitive advantage)
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Internal Analysis (Resources, Capabilities)
• How do we effectively manage current core competencies while simultaneously developing new ones? (exploit/explore)
• How do we assemble bundles of resources, capabilities and core competencies to create value for customers?
• How do we learn to change rapidly?
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What affects decisions about Resources, Capabilities, and Core
Competencies
• Uncertainty regarding current/future characteristics of the general and industry environments
• Complexity - the interrelationship among factors that shape a firm’s environment(s), and top management perceptions of these environments
• Intraorganizational Conflicts among people making and affected by resource allocation decisions
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Components of Internal Analysis
Identifying CoreIdentifying CoreCompetenciesCompetencies
ResourcesResources• TangibleTangible• IntangibleIntangible
CapabilitiesCapabilities
CoreCoreCompetenciesCompetencies
Identify Identify sustainable sustainable competitivecompetitiveadvantagesadvantages
StrategicStrategicCompetitivenessCompetitiveness
Four CriteriaFour Criteriaof Sustainableof Sustainable
AdvantageAdvantage
• ValuableValuable• RareRare• Imitation/Substitutes = costlyImitation/Substitutes = costly• Organized properlyOrganized properly
ValueValueChainChain
AnalysisAnalysis
• In/OutsourceIn/Outsource• decisionsdecisions
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Discovering CoreDiscovering CoreCompetenciesCompetencies
Resources•Tangible•Intangible
Resources are what a firm draws upon to create value -- its assets– and valuable resources are embedded and difficult to trade in markets
Resources are inputs into a firm’s production process... IP, capital equipment, skills, brands, organizational routines, access to financial capital, talented managers, etc.
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Discovering CoreDiscovering CoreCompetenciesCompetencies
Resources•Tangible•Intangible
Tangible • Financial• Physical• Labor
Intangible• Technological• Innovation• Reputation• Organizational activity systems• Knowledge
markets for resources are often imperfect
resources are not intrinsically valuable
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Discovering CoreDiscovering CoreCompetenciesCompetencies
Capabilities
Capabilities describe the firm’s ability to create, deploy, modify, reconfigure, and leverage resources. Valuable capabilities permit resources to be combined in unique ways to create core competencies
markets for capabilities are imperfect
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Discovering CoreDiscovering CoreCompetenciesCompetencies
CoreCoreCompetenciesCompetencies
are resources and capabilities that are a source of competitive advantage over rivals
make a firm distinctive
McKinsey and Co. recommends isolating 3-4 competencies when framing strategic actions
Consider Amazon (culture, transaction scale economies, bundling, virtualization)
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Four CriteriaFour Criteriaof Sustainableof Sustainable
AdvantageAdvantage
•ValuableValuable•RareRare• Imitation/Substitution = CostlyImitation/Substitution = Costly•OrganizedOrganized
Discovering CoreDiscovering CoreCompetenciesCompetencies
Valuable: Capabilities that help a firm neutralize threats or exploit opportunities
Rare: Capabilities that are not possessed by many others
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Four CriteriaFour Criteriaof Sustainableof Sustainable
AdvantageAdvantage
•ValuableValuable•RareRare• Imitation/Substitution = CostlyImitation/Substitution = Costly•OrganizedOrganized
Discovering CoreDiscovering CoreCompetenciesCompetencies
Costly to imitate: capabilities that other firms cannot develop easily, usually due to
• Unique historical conditions - e.g., founder, culture• Causal ambiguity - capabilities hidden• Social complexity - capabilities distributed• Time diseconomies
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Four CriteriaFour Criteriaof Sustainableof Sustainable
AdvantageAdvantage
•ValuableValuable•RareRare• Imitation/Substitution = CostlyImitation/Substitution = Costly•OrganizedOrganized
Discovering CoreDiscovering CoreCompetenciesCompetencies
Nonsubstitutable: capabilities that do not have strategic equivalents
• Invisible to competitors• Firm-specific knowledge • Trust-based working relationships between
managers and nonmanagerial personnel
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Core Competence as a Strategic Capability
Resources• Inputs to a firm’s
production process
Capability• Capability that is not strategic
Core Competence• Capability that is strategic
Affected by
Does it satisfy the criteria of sustainable competitive advantage?
Y
N
Capability• integration of resources
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Performance Implications
Valuab
le?
Rare?
Imita
te/Sub
st. C
ostly
?
Organ
ized?
CompetitiveConsequences
PerformanceImplications
No No No NoCompetitiveDisadvantage
Below AverageReturns
Yes No NoYes/No
CompetitiveParity Average Returns
Yes Yes NoYes/No
Temporary Com-petitive Advantage
Above Average to Average Returns
Yes Yes Yes YesSustainable Com-petitive Advantage
Above Average Returns
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Value creation
• Profit determined by :– The amount of value customers place on
firm’s goods or services (V)– Firm’s cost of production (C)
• Consumer surplus occurs when price charged by a firm on a good or service is less than value placed on it by a customer
• Value creation = V-C
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Value creation
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Porter’s Value Chain
Firm InfrastructureHuman Resource Management
Technology Development
Procurement
SupportActivities
Inbound Logistics
PrimaryActivities Operatio
ns
Outbound
Logistics
Marketing
and Sales
Service
Upstream value activities Downstream value activities
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Value Chain activities in Bio/Pharm Value Chain activities in Bio/Pharm
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Source MIT Sloan School – “Architectures and roadmaps for communications and media”
Value Chain in Communications Technology Industry
Value Chain in Communications Technology Industry
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Global Value Chain Management
Assembling, Manufacturing and Sales
Assembling, Manufacturing and Sales
Distribution Center
Country Market
A
Country Market
B
Supplier ASupplier BSupplier N
Supplier XSupplier YSupplier Z
Where will you design, assemble, inventory, market, and manage?
Where will you design, assemble, inventory, market, and manage?
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OutsourcingOutsourcing is the purchase of some or all of a value-creating activity from an external supplier
Usually this is because the specialty supplier can provide these functions more efficiently
Margin
Margin
Prim
ary A
ctivities
Support Activities
Se
rvice
Ma
rketin
g & S
ales
Ou
tbou
nd L
ogistics
Op
era
tions
Inbo
und
Log
istics
Firm Infrastructure
Human Resource Mgmt.
Technological Development
Procurement
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Strategic Rationales for Outsourcing
• Improve Business Focus– lets company focus on broader business
issues by having outside experts handle various operational details
• Provide Access to World-Class Capabilities– the specialized resources of outsourcing
providers makes world-class capabilities available to firms in a wide range of applications
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Strategic Rationales for Outsourcing
• Accelerate Business Re-Engineering Benefits– achieves re-engineering benefits more
quickly by having outsiders--who have already achieved world-class standards--take over process
• Share Risks– reduces investment requirements and
makes firm more flexible, dynamic and better able to adapt to changing opportunities
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Strategic Rationales for Outsourcing
• Free Resources for Other Purposes– permits firm to redirect efforts from non-
core activities toward those that serve customers more effectively
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Outsourcing Issues• Greatest Value
– outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced
• Evaluating Resources and Capabilities– don’t outsource activities in which the firm itself can
create and capture value
• Environmental Threats and Ongoing Tasks– do not outsource primary and support activities that
are used to neutralize environmental threats or complete necessary ongoing organizational tasks
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Outsourcing Issues• Nonstrategic Team of Resources
– do not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantage
• Firm’s Knowledge Base– do not outsource activities that stimulate the
development of new capabilities and competencies
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Core Competencies: Cautions and Reminders
• Never take for granted that core competencies will continue to provide a source of competitive advantage
• All core competencies have the potential to become core rigidities
• Core rigidities are former core competencies that now generate inertia and stifle innovation