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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