Chapter 4

Internal Analysis: Resources,

Capabilities, Competencies, and
Competitive Advantage

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.
4-2

Return on Capital Employed for Selected U.S.

Department Stores, 1989-1998

FIGURE 4.1
Source: Data from Value Line Investment Survey

4-3

Value Creation

FIGURE 4.2
4-4

Generic Building Blocks of Competitive

Advantage

FIGURE 4.3
4-5

The Impact of Quality on Profits

FIGURE 4.4
4-6

The Impact of Efficiency, Quality, Innovation,

and Customer Responsiveness on Unit Costs
and Prices

FIGURE 4.5
4-7

The Value Chain

FIGURE 4.6
4-8

Distinctive Competencies, Resources, and

Capabilities

The roots of competitive advantage:

FIGURE 4.7
4-9

Strategic Resources and Capabilities

Tangible

Intangible

Land

Brand names

Buildings

Reputation

Plant

Patents

Equipment

Technological or

marketing know-how

4-10

Distinctive Competencies
Skills in effectively coordinating and
managing resources for productive use.
Unique resources and capabilities, or
Common resources and

unique capabilities.

4-11

Strategy and Competitive Advantage

The relationship between strategies and
resources and capabilities:

FIGURE 4.8
4-12

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.

4-13

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.

4-14