Chapter 4

Internal Analysis: Resources, Capabilities, Competencies, and Competitive Advantage

Strategic Management
An Integrated Approach

Charles W. L. Hill
Gareth R. Jones
PowerPoint Presentation by Charlie Cook

Fifth Edition
Copyright 2001 Houghton Mifflin Company. All rights reserved.

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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Return on Capital Employed for Selected U.S. Department Stores, 1989-1998

FIGURE 4.1
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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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The Impact of Quality on Profits

FIGURE 4.4
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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

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 and Capabilities

Tangible
Land
Buildings Plant Equipment

Intangible
Brand names
Reputation Patents Technological or

marketing know-how

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Distinctive Competencies
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

Barriers to imitation
Speed of imitation by competitors in reducing advantage Imitation by acquiring similar resources Imitation of capabilities (more difficult)

Limits on competitors
Prior strategic commitments Absorptive capacity for change

Industry dynamism
The rapid innovation

shortens product life cycles.

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Why Do Companies Fail?

What went wrong?
Inertia Prior strategic commitments The Icarus paradox

Avoiding failure and sustaining competitive advantage:

Focus on the building

blocks of competitive advantage. Institute continuous improvement and learning. Track best industrial practice and use benchmarking. Overcome inertia.

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