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Competing On Capabilities
Shantanu Dutta
– Understanding Company Capabilities
– P&G
– My research and findings on capabilities and firm
performance in the semiconductor industry
1
Sustainable Competitive Advantage and
Company Capabilities




Firms within the same industry vary
significantly in their performance.
This occurs because firms differ in their ability
to maintain sustainable competitive
advantage.
A key component which enables firms to
maintain sustainable competitive advantage
is their organizational capabilities.
We will explore the notion of capabilities
2
Role of Capabilities and Resources In
Profitability
Imperfect
Imitability
Imperfect
Mobility
Firm A
Superior Resources
Superior Capabilities
Firm B
Firm C
…
…
Firm N
Competitive Dynamics
Erodes Advantages
Competitive
Advantage
Firm’s
Profitability
Competing Firms
3
Identifying Company Capabilities



In a dynamic business environment marketing
strategy has to become more dynamic
Essence of successful strategy : Identify and develop
hard- to- imitate organizational capabilities that
distinguish a company from its competitors in the
eyes of customers
Three core features of such capabilities :
– they make a significant contribution to the perceived benefits
of the customer who consumes the end product
– they provide potential access to a wide variety of markets
– they are difficult for competitors to imitate
4
P&G’s Organizational Capabilities


Managing and organizing the marketing process
– P&G’s extraordinary depth of staff resources
dedicated to understanding consumers and other
market research was considered a key
competitive advantage
– The major strength of P&G’s consumer research
was the quality of interviewing and consistent
methodology among projects. This provided large
data bases of comparable research over several
years from which P&G could establish norms and
accurately track changing consumer perceptions
and habits.
Fortune 1998: P&G manages every element of its
business with a painstaking precision that most
5
organizations fail to approach.
P&G: Results of Organizational Capabilities


Thorough organization of the marketing activities
ensure that consumers perceive the benefits in the
manner that P&G would like them to perceive.
Brand equity for P&G
6
Shantanu Dutta
Marshall School of Business, University of
Southern California
CONCEPTUALIZING & MEASURING
FIRM’S CAPABILITIES
Presentation To:
Marketing Science Institute Board of Trustees Meeting
November 4, 1999
Resources and Capabilities: Key
Concepts

Resources: are assets that are
 Externally available and not firm specific
 Owned or controlled by the firm
 Convertible to achieve the firm’s goals/objectives

Capabilities: are organizational processes used to
deploy resources and are
 Information-based and firm-specific (and hence
display imperfect mobility)
 Developed through complex interactions among
the firm’s resources (and hence display imperfect
imitability)
 Form the basis for the firm’s competitive
advantage
8
Resources and Capabilities: The Case
of R&D
R&D Expenditure
R&D Capability
Technological
Base
Innovative
Output
Conceptualizing Firm’s Capabilities
Capabilities refers to a firm’s “[ability to] deploy
resources to effect a desired end”
A firm exhibits superior capability if it is able to
deploy its resources more efficiently than other
competing firms
A firm with a higher capability should be able to
achieve a higher level of objectives/goals for the
same set of resources
10
Description of Data
 Secondary data on 92 firms, one SIC




code (3674) from 1984-1994.
Some firms in the sample: Intel, Cirrus,
AMD
Business-to-business setting: Buyers are
firms like Compaq and Dell
Financial, Operations, Marketing data for
sample firms from Compustat
Patent data for firms from the USPTO
11
Application To Semiconductor Industry
RESOURCES
Technical Base
Advertising Stock
Stock of Marketing Expenditure
Relationship Expenditure
Installed Base
FIRM
Marketing Capability
Marketing Function
Sales
R&D Capability
Technical base
Cumulative R&D Expenditure
Marketing Capability
R&D Function
QualityAdjusted
Technological
Output
Operations Capability
Output
Cost of Capital
Labour Cost
Technical Base
Marketing Capability
Operations Function
Cost of
Production
Firm’s
Financial
Performance
Findings: Role of Marketing In
Technological Innovation



Marketing capability has a significant impact
on a firm’s ability to come up with
technological innovations
The impact of marketing capability on
innovativeness is greatest for firms which
already have a good technological base
A firm’s prior technological base has a
significant impact on its marketing capability
Impact of Firm’s Functional
Capabilities on Profitability
 Key Result:
 The most significant determinant of
profitability is the combination of R&D and
marketing capabilities
14
Distribution of Marketing Inefficiency
Distribution of Marketing Inefficiency Across
Firms
30
No. of Firm s
25
20
15
10
5
0
0-5
5-10
10-15
15-20
Marketing Inefficiency (%)
20-25
Distribution of R&D Inefficiency
Distribution of R&D Inefficiency Across
Firms
No. of Firms
25
20
15
10
5
0
0-5
5-10
10-15
15-20
R&D Inefficiency (%)
20-25
Distribution of Capabilities:
Implications


Average marketing capability lower than
average R&D capability
Implication: Lots of room for improvement in
marketing capability
More variance in marketing capability than in
R&D capability across firms
Implication: Greater bang for buck in
improvement in marketing capability
17
Some Examples of Organizational
Capabilities
Logistics/Product Design/Manufacturing
-Ability to reduce manufacturing costs
-Ability to protect/exploit patents
-Ability to customize products
-Relationship with key suppliers
-Flexible and adaptive manufacturing
-Strong track record of innovative
R&D
Marketing
-Ability to manage collaborators
/channels
-Ability to develop creative market
communications
-Ability to develop strong/loyal
customers and relationships
-Ability to offer high quality service
(technical support, repair, returns, etc.)
-Ability to introduce stream of
innovative products quickly to market
-Ability to develop products that
embody ease of use’
-Ability to develop customized products
18