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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
Environment
Sociocultural
Industry
Environment
By studying the external
environment, firms
identify what they might
choose to do
(Structure>Conduct>Performance)
Competitor
Environment
Opportunities and
threats
Technological
General
2
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)
3
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?
4
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
Strategic
Analysis
Competitiveness
Core
Competencies
Identifying Core
Competencies
Identify
sustainable
competitive
advantages
Four Criteria
of Sustainable
Advantage
Value
Chain
Analysis
Capabilities
Resources
• Tangible
• Intangible
•
•
•
•
Valuable
Rare
Imitation/Substitutes = costly
Organized properly
• In/Outsource
• decisions
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Discovering Core
Competencies
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 Core
Competencies
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 Core
Competencies
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 Core
Competencies
Core
Competencies
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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Discovering Core
Competencies
Four Criteria
of Sustainable
Advantage
• Valuable
• Rare
• Imitation/Substitution = Costly
• Organized
Valuable: Capabilities that help a firm neutralize
threats or exploit opportunities
Rare: Capabilities that are not possessed by
many others
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Discovering Core
Competencies
Four Criteria
of Sustainable
Advantage
• Valuable
• Rare
• Imitation/Substitution = Costly
• Organized
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
12
Discovering Core
Competencies
Four Criteria
of Sustainable
Advantage
• Valuable
• Rare
• Imitation/Substitution = Costly
• Organized
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
Affected by
• integration of
resources
Core Competence
• Capability that is strategic
Does it satisfy the
criteria of
sustainable
competitive
advantage?
Y
N
Capability
• Capability that is not
strategic
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Performance Implications
Competitive
Consequences
No
Yes
Yes
Yes
Competitive
Disadvantage
Below Average
Returns
Competitive
Parity
Average Returns
Yes/
No
Temporary Competitive Advantage
Above Average to
Average Returns
Yes
Sustainable Competitive Advantage
Above Average
Returns
No
No
No
Yes/
No No
Yes No
Yes Yes
Performance
Implications
No
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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
18
Porter’s Value Chain
Support
Activities
Firm Infrastructure
Human Resource Management
Technology Development
Procurement
Primary
Activities
Upstream value activities
Downstream value activities
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Value Chain activities in Bio/Pharm
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Value Chain in Communications
Technology Industry
Source MIT Sloan School – “Architectures and roadmaps for communications
and media”
21
Global Value Chain
Management
Supplier A
Supplier B
Supplier N
Assembling,
Manufacturing and Sales
Distribution
Center
Supplier X
Supplier Y
Supplier Z
Assembling,
Manufacturing and Sales
Country Country
Market Market
A
B
Where will you design, assemble,
inventory, market, and manage?
22
Outsourcing
Support Activities
Outsourcing is
the purchase of
some or all of a
value-creating
activity from an
external supplier
Human Resource Mgmt.
Technological Development
Procurement
Service
Marketing & Sales
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
Usually this is
because the
specialty
supplier can
provide these
functions more
efficiently
Firm Infrastructure
23
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
24
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
25
Strategic Rationales for
Outsourcing
• Free Resources for Other Purposes
– permits firm to redirect efforts from noncore activities toward those that serve
customers more effectively
26
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
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