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CHARLES W. L. HILL / GARETH R.
JONES
Strategic Management An Integrated Approach 10th ed.
Internal Analysis:
Chapter
Distinctive Competencies,
3 Competitive Advantage, and
Profitability
Student Version
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Prepared by C. Douglas Cloud , Professor Emeritus of Accounting, Pepperdine University

Learning Objective: After reading this
chapter you should be able to discuss the
source of competitive advantage.
THE ROOTS OF COMPETITIVE

ADVANTAGE
 A company has a competitive advantage
over its rivals when its profitability is greater
than the average profitability of all
companies in its industry.
 When it maintains this competitive
advantage over a number of years, it has a
sustained competitive advantage.
ADVANTAGE
 Distinctive competencies are firm-specific
strengths that allow a company to differentiate
its products from those offered by rivals, and/or
achieve lower cost.
 Resources refer to the assets of a company.
 Tangible resources are physical entities,
such as land, buildings, and inventory.
 Intangible resources are nonphysical
entities that are created by managers and
other employees, such as patents,
copyrights, and trademarks.
ADVANTAGE
 Capabilities refer to a company’s resources
coordinating skills and productive use.
 These skills reside in the style or manner
through which it makes decisions and manages
its internal processes to achieve organizational
objectives.
 Capabilities are intangible.
 Capabilities are valuable if they enable a
company to create strong demand for its
products, and/or lower its costs.
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3-7
ADVANTAGE
 For a company to possess a distinctive
competency, it must—at a minimum—have
either:
1) a firm-specific and valuable resource, and
the skills necessary to take advantage of
that resource, or
2) a firm-specific capability to manage
resources.
 Distinctive competency is strongest when a
company possesses both (1) and (2).
chapter you should be able to identify
and explore the role of efficiency, quality,
innovation, and customer responsiveness
in building and maintaining a competitive
advantage.
COMPETITIVE ADVANTAGE, VALUE
CREATION, AND PROFITABILITY
 At the most basic level, a company’s
profitability depends on three factors:
1) The value (utility) customers place on the
company’s product.
2) The price a company charges for its product.
3) The costs of creating those products.
COMPETITIVE ADVANTAGE, VALUE
CREATION, AND PROFITABILITY
 The price chosen by a company is typically less
than the utility value placed on the good or
service by the customer.
 The customer captures some of that utility in
the form of consumer surplus.
 The point-of-sale price tends to be less than
the utility value placed on the product by many
customers.
chapter you should be able to explain
the concept of the value chain.
THE VALUE CHAIN

 The term value chain refers to the idea that a
company is a chain of activities.
 This chain of activities transforms inputs into
outputs that customers value.
 The transformation process involves both
primary activities and supplies activities that add
value to the product.
THE VALUE CHAIN
 The support activities of the value chain

provide inputs that allow the primary activities to
take place.
1) The materials-management (logistics)
function controls the transmission of physical
materials through the value chain.
2) The human-resources function ensures that
the company has the right combination of
skilled people to perform its value creation
activities effectively.
(continued)
THE VALUE CHAIN
3) Information systems are, primarily, the

electronic systems for managing
inventory, tracking sales, pricing
products, selling products, and so on.
4) Company infrastructure is the
companywide context within which all the
other value creation activities take place:
a) Organizational structure
b) Control system
c) Company culture
chapter you should be able to
understand the link between
competitive advantage and profitability.
THE BUILDING BLOCKS OF

COMPETITIVE ADVANTAGE
 Four factors help a company build and sustain a
competitive advantage.
1) Superior efficiency
2) Superior quality
3) Innovation
4) Superior customer responsiveness
THE BUILDING BLOCKS OF
Superior Efficiency
 The more efficient a company is, the fewer inputs
are required to produce a particular output.
 The most common measure of efficiency for many
companies is employee efficiency.
 Employee productivity refers to the output
produced per employee.
 Employee productivity helps a company attain a
competitive advantage through a lower cost
structure.
Superior Quality
 A product is said to have superior quality when

customers perceive that its attributes provide
them with higher utility than the attributes of
products sold by rivals.
 When customers evaluate the quality of a
product, they commonly measure two attributes.
 Quality as excellence: Product design and styling,
aesthetic appeal, features, and so on.
 Quality as reliability: The product consistently
performs, its function well, and rarely, if ever, breaks
down.
Innovation
 Innovation refers to the act of creating new
products or processes. There are two main types
of innovation:
 Product innovation is the development of products
that are new to the world or have superior attribute
to existing products (Apple developed the iPod,
iPhone, and iPad in the 2000s).
 Process innovation is the development of a new
process for producing products and delivering them
to customers (Toyota’s lean production system
helped to boost employee productivity).
Superior Customer
Responsiveness
 To achieve superior customer responsiveness, a
company must be able to do a better job of
identifying and satisfying its customers’ needs.
 A company needs to customize goods and
services to the unique demands of individual
customers or customer groups.
 Customer response time is the time it takes for
the good to be delivered or a service to be
performed.
AVOIDING FAILURE AND SUSTAINING
Why Companies Fail

 Inertia
 Companies find it difficult to change their
strategies and structures in order to adapt to
changing competitive conditions.
 Changing the established capabilities of an
organization means changing its existing
distribution of power and influence—and this
triggers turf battles.
AVOIDING FAILURE AND SUSTAINING
Prior Strategy
 A company’s prior strategy commitments not Commitments
only limit its ability to imitate rivals but may also
cause competitive disadvantage.
The Icarus Paradox
 Many companies become so dazzled by their
early success that they believe more of the
same type of effort is the way to future success.
They eventually lose sight of market realities
and fail (like Icarus, of ancient mythology).

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CHARLES W. L. HILL / GARETH R.

Strategic Management An Integrated Approach 10th ed.

Prepared by C. Douglas Cloud , Professor Emeritus of Accounting, Pepperdine University

THE ROOTS OF COMPETITIVE

THE VALUE CHAIN

 The support activities of the value chain

3) Information systems are, primarily, the

THE BUILDING BLOCKS OF

 A product is said to have superior quality when

Why Companies Fail

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