Download Opening Case: BJ`s Wholesale—Competitive advantage

CHAPTER 3
Internal Analysis: Distinctive Competencies,
Competitive Advantage, and Profitability
SYNOPSIS OF CHAPTER
The goal of this chapter is to explore the basis of competitive advantage at the level of the individual
company. Put another way, the central question with which the chapter deals is why, within a given industry,
some companies do better than others. This is a very important chapter because it introduces a framework
for understanding competitive advantage that will be used throughout the rest of the book.
The chapter opens with a presentation of a basic model of competitive success. The text asserts that, to gain
a competitive advantage, the firm must adopt an effective strategy, which will le ad to the formation of
distinctive competencies, or firm-specific strengths. The distinctive competencies arise from the firm’s
resources and capabilities. Successful firms adopt strategies that build upon existing competencies or
develop new competencies.
Next, the text explains that companies use their competencies to offer superior value to customers. The
relationship between pricing, demand, costs, and differentiation is explored, as they relate to the creation of
superior value.
The discussion of the value chain aims to show students how the different value-creation activities of a
company fit together. A point strongly emphasized here is that each of the value chain activities is a
potential source of value creation.
The chapter then examines the role of distinctive competencies in helping to achieve the four generic building
blocks of competitive advantage: superior efficiency, quality, innovation, and customer responsiveness.
Companies that have superior performance in one or more of these areas are able to differentiate their products
and/or reduce costs, which leads to value creation and higher profitability. The financial calculation of superior
value (profitability) is explored in detail.
The durability of competitive advantage is the focus of the next section, which argues that the durability of a
company’s competitive advantage is a function of three factors: the height of barriers to imitation, the capability
of competitors, and the general dynamism of the industry environment.
Finally, the chapter addresses the reasons why formerly successful companies fail, focusing on organizational
inertia, past strategic commitments, and the Icarus paradox. The concluding section of the text mentions ways that
companies can avoid competitive failure and sustain a competitive advantage.
TEACHING OBJECTIVES
1.
Examine the internal causes of competitive success and failure.
2.
Show how effective strategies create distinctive competencies, including resources and capabilities, which
then aid a firm in achieving competitive advantage.
3.
Describe the process of value creation, using the concepts of pricing, demand, costs, and differentiation.
4.
Familiarize students with the concept of the value chain, and show how the different value-creation
activities of a company fit together.
5.
Explain how distinctive competencies lead to superior efficiency, quality, innovation, and responsiveness to
customers, which in turn allow a company to differentiate its products and lower its costs.
6.
Describe how competitive advantage leads to higher profitability, using financial measures.
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Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
7.
Identify the factors that influence the durability of a company’s competitive advantage, including the height
of barriers to imitation, the capability of competitors, and industry dynamism.
8.
Explain the role played by organizational inertia, past strategic commitments, and the Icarus paradox in the
failure of many formerly successful companies.
9.
Discuss the steps that companies can take to avoid failure and sustain a competitive advantage.
OPENING CASE: BJ’S WHOLESALE—COMPETITIVE ADVANTAGE
The Opening Case describes the competitive advantages enjoyed by BJ’s Wholesale, a membership-based
discount retailer that uses a business model similar to that of Costco or Sam’s Club. The firms in this industry
provide a limited selection of products in a no-frills environment, keeping costs low, and allowing them to sell a
high volume of low-priced products. BJ’s is the smallest of the big three competitors, but the most rapidly
growing and the most profitable. BJ’s competitive advantages include a location clustering strategy for efficiency,
a focus on markets with lower entry costs such as suburbs and small towns, a retail customer orientation that
allows them to charge slightly higher prices, and an information system that lowers costs and further increases
efficiency.
Teaching Note: This case provides an overview of many of the important concepts of this chapter, including
resources and capabilities, distinctive competencies, competitive advantage, profitability and other performance
measures, and the role of strategic choice in developing distinctive competencies. The Opening Case also provides
several examples of value chain functional area, including location selection (infrastructure), high volume
ordering (materials management), and acceptance of credit cards (customer service).
LECTURE OUTLINE
I.
II.
Overview
A. The choice of industry affects firm performance but, within any given industry, some companies are
more profitable than others. Why do some companies do better than their competitors? What is the
basis of competitive advantage?
B.
Internal analysis leads to the identification of a firm’s strengths and weakness, and especially its
distinctive competencies, including its resources and capabilities.
C.
Distinctive competencies enable firms to create superior value for customers, by helping them to
achieve the four main building blocks of competitive advantage: efficiency, quality, innovation, and
responsiveness to customers.
D. Superior value creation is driven by a firm’s ability to differentiate its products or reduce its expenses.
When firms are able to create superior value, they experience higher profitability.
E.
It’s also important for firms to sustain their competitive advantages over time, to maintain their
competitive advantage, and to take steps to avoid competitive failure.
Distinctive Competencies and Competitive Advantage
A. A company has a competitive advantage when its profit rate is higher than the average for its
industry, and it has a sustained competitive advantage when it is able to maintain this high profit
rate over a number of years.
B.
Competitive advantage derives from a firm’s distinctive competencies, which are of two types:
resources and capabilities.
1.
Resources refer to the financial, physical, human, technological, and organizational resources
of the company. They can be divided into tangible resources, such as land, buildings, plant,
and equipment; and intangible resources, such as brand names, reputation, patents, and
technological or marketing knowledge.
a.
Resources that are firm-specific and difficult to imitate are unique. Resources that create
a strong demand for the firm’s products are valuable.
b.
Unique and valuable resources lead to a distinctive competency.
2.
Capabilities refer to a company’s skills at coordinating its resources and putting them to
productive use.
a.
These skills reside in the way a company makes decisions and manages its internal
processes.
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Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
31
b.
3.
Capabilities are, by definition, intangible. They reside not so much in individuals as in the
way individuals interact, cooperate, and make decisions within the context of an
organization.
The distinction between resources and capabilities is of the utmost importance in understanding
the source of a distinctive competency. A company may have unique and valuable resources,
but unless it has the capability to use those resources effectively, it may not be able to create or
sustain a distinctive competency. Thus, unique and valuable resources are helpful in creating
distinctive competencies, but capabilities are essential.
Show Transparency 15
Figure 3.2: Strategy, Resources, Capabilities, and Competencies
C.
A company’s profit rate and hence competitive advantage is determined by the value customers place
on the company’s goods or services, the price the company charges for the products or service, and
the company’s costs of production.
1.
Value is assigned by customers based on product attributes such as performance, design, and
quality. The more value a company creates, the more flexibility it has in assigning a price.
2.
The price a company charges is typically less than the value assigned by the consumer. The
customer captures that difference in value as a consumer surplus, which occurs because the
company is competing with other companies and so must charge a lower price than it could as a
monopoly supplier.
3.
Another factor that causes the price to be lower than the value is the impossibility of
segmenting the market so that the company can charge each customer a price that reflects that
individual’s reservation price (their assessment of the value of a product).
Show Transparency 16
Figure 3.3: Value Creation per Unit
4.
5.
Looking at Figure 3.3, the company’s profit margin is equal to the difference between price and
costs (P–C), whereas the consumer surplus is equal to the difference between value and price
(V–P). The company makes a profit so long as the price is greater than the cost. Its profit rate
will be greater the lower costs are, relative to the price. The lower the competitive intensity, the
greater the difference that can exist between price and value.
Looking at Figure 3.4, a company can create more value for its customers in two ways.
a.
Under Option 1, a company can make the product more attractive, raising costs (C) but
also raising value (V). Customers are then willing to pay a higher price (P increases).
b.
Under Option 2, a company can lower its price (P), creating a higher value (V), more
demand, and increased volume of sales. Economies of scale realized because of the
increased volume allow the company to reduce its costs (C).
Show Transparency 17
Figure 3.4: Value Creation and Pricing Options
D.
Low cost and differentiation are two basic strategies for creating value and attaining a competitive
advantage in an industry. Competitive advantage (and higher profits) goes to those companies that can
create superior value—and the way to create superior value is to drive down the cost structure of the
business and/or differentiate the product in some way so that consumers value it more and are
prepared to pay a premium price.
Show Transparency 18
Figure 3.6: The Roots of Competitive Advantage
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32
III.
Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
The Value Chain
A. A company’s value chain is a sequence of interrelated activities for transforming inputs into outputs
that customers value. The process consists of a number of primary activities and support activities,
each of which can add value to the product.
Show Transparency 19
Figure 3.7: The Value Chain
1.
Primary activities have to do with the design, creation and delivery of the product, its
marketing, and with its support and after-sales service. There are four primary activities:
research and development, production, marketing and sales, and service.
a.
Research and development (R&D) is concerned with the design of products and
production processes. R&D occurs in manufacturing enterprises as well as service
companies. By superior product design, R&D can develop superior product designs,
which increase the functionality of products, making them more attractive to consumers.
Alternatively, R&D may develop more efficient production processes, lowering costs.
b.
Production is concerned with the creation of a good or service. For physical products,
production means manufacturing. For services, production takes place when the service is
actually delivered to the customer. The production function creates value by performing
its activities efficiently so that lower costs result. Production can also create value by
performing its activities in a way that is consistent with high product quality, which leads
to differentiation and lower costs.
c.
Marketing and sales functions create value through brand positioning and advertising,
which increase the perceived product value. They also create value by discovering
consumer needs and communicating them to the R&D function of the company, which
can then design products that better match those needs.
STRATEGY IN ACTION 3.1: VALUE CREATION AT PFIZER
Prozac, introduced by Eli Lilly, was the market leader in antidepressant drugs. But in 1992, rival Pfizer introduced
its own antidepressant, Zoloft, which is very similar to Prozac and has been gaining share from Lilly. Zoloft’s
success is due to an aggressive marketing and sales campaign designed to convince physicians that Zoloft is a
safer drug. Pfizer salespeople also logged more “face time” with physicians than Lilly’s, and Pfizer focused on
visits to primary care physicians, who increasingly prescribe antidepressants but are less familiar with them than
are psychiatrists. Pfizer has enjoyed rapidly increasing revenues and market share and, therefore, a greater return
on the company’s investment in developing Zoloft.
Teaching Note: This case describes Pfizer’s ability to create value for customers through the value chain function
of marketing and sales. The case notes several specific actions taken by the firm to differentiate their products
from those of their competitors. The actions included publishing the results of safety comparisons describing
Zoloft as safer than Prozac, spending more time on physician’s visits, and focusing on the more malleable primary
care physicians, rather than psychiatrists. One good discussion point would be to ask students whether these
actions might be expensive or difficult for other firms to imitate. Students can then predict whether these actions
would be likely to lead to a sustained competitive advantage for Pfizer.
d.
2.
The role of the customer service function is to provide after-sales service and support.
This function can create a perception of superior value in the minds of consumers by
solving customer problems and supporting customers after they have purchased the
product.
The support activities of the value chain provide inputs that allow the primary activities to take
place.
a.
The materials management function controls the transmission of physical materials
through the value chain, from procurement through production and into distribution. The
efficiency with which this is carried out can significantly lower cost, thereby creating
more value.
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Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
33
b.
IV.
The human resource function helps to create value by ensuring that the company has the
right mix of skilled people to perform its value creation activities effectively. It is also the
job of the human resource function to ensure that people are adequately trained,
motivated, and compensated to perform their value creation tasks.
c.
Information systems refer to the (largely) electronic systems for managing inventory,
tracking sales, pricing products, selling products, dealing with customer service inquiries,
and so on. Information systems, when coupled with the communications features of the
Internet, are holding out the promise of being able to alter the efficiency and effectiveness
with which a company manages its other value chain activities.
d.
The final support activity is the company infrastructure, or the company-wide context
within which all the other value-creation activities take place. The infrastructure includes
the organizational structure, control systems, and organizational culture. Because top
management can exert considerable influence in shaping these aspects of a company, they
should also be viewed as part of the infrastructure of a company.
The Generic Building Blocks of Competitive Advantage
A. Four generic factors build competitive advantage by allowing companies to better differentiate their
products or become more efficient in reducing costs: efficiency, quality, innovation, and
responsiveness to customers. They are generic because they represent actions that any company can
adopt, irrespective of industry. The factors are all highly interrelated.
Show Transparency 20
Figure 3.8: Generic Building Blocks of Competitive Advantage
B.
Efficiency is measured by the cost of inputs required to produce a given output.
1.
The more efficient a company, the lower the cost of inputs required to produce a given output.
Thus efficiency helps a company attain a low-cost competitive advantage.
2.
One of the keys to achieving high efficiency is utilizing inputs in the most productive way
possible. Companies with high employee productivity and capital productivity will have low
costs of production.
STRATEGY IN ACTION 3.2: SOUTHWEST AIRLINES’ LOW COST STRUCTURE
Southwest Airlines has consistently achieved the lowest costs in the industry, enabling it to grow market share by
offering lower prices, and helping the firm to weather industry downturns. A major contributor to the low costs is
the company’s high employee productivity, enabling them to serve more passengers with fewer personnel. High
productivity is due to a number of factors, including care in hiring. The firm is known for hiring only those with
positive attitudes and good teamwork skills. Incentives such as profit sharing also encourage hard work and
cooperation. Another contributor is its no-frills operations, with only one type of aircraft, no meals, no assigned
seats, and no paper tickets. Operations costs are further reduced because the firm only flies point-to-point, and
doesn’t use a hub system, as most of the other major carriers do, reducing the need for a large number of gates and
personnel.
Teaching Note: This case illustrates a number of ways in which Southwest Airlines has fostered high employee
productivity and high capital productivity. Southwest has scrutinized each area of airline operations, from
ticketing to baggage handling to food service to aircraft maintenance to route scheduling, for opportunities to
drive down costs. Southwest’s efficiency creates a challenge for competitors. Classroom discussion of the case
could center on the question of whether any firm could hope to imitate Southwest’s low-cost competitive
advantage—the answer would probably be negative, at least in the short term. A follow-up question could address
the possibility of a successful competitive attack by an airline pursuing a different strategy. What resources and
capabilities would be required for such an attack, and how might it lead to changes in the airline industry?
C.
Quality products are goods and services that have attributes that customers perceive as desirable. On
important attribute is reliability, meaning that the product does the job it was designed for and does it
well. Quality applies equally to goods and to services.
1.
Providing high-quality products creates a brand-name reputation for a company’s products. In
turn, this enhanced reputation allows the company to charge a higher price for its products.
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Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
2.
Higher product quality can also result in greater efficiency, with less employee time wasted
fixing defective products or services. This translates into higher employee productivity, which
means lower unit costs.
STRATEGY IN ACTION 3.3: CONTINENTAL AIRLINES GOES FROM WORST TO
FIRST
In 1994, Gordon Bethune became CEO of Continental Airlines, which had the lowest customer satisfaction and
on-time ratings of any U.S. air carrier. Bethune felt that the firm had cut costs too low, and decided to spend more
in order to improve quality. He set a goal for reliability improvement and gave bonuses when this goal was met.
Within a year, the firm ranked in the top three in reliability, and it still does. In addition, Bethune empowered
front-line employees to handle contingency situations as they saw fit. The increased flexibility and
decentralization has had a tremendous impact on customers’ perception of the quality of service they receive at
Continental.
Teaching Note: This case provides an excellent example of the ways in which higher quality can contribute to
higher efficiency. Continental experienced a dramatic increase in employee productivity, and that higher level of
effort by employees led to improved on-time performance and higher customer satisfaction. Through the changes
described in this case, Continental was able to both reduce costs and increase differentiation. Ask students to
consider the information in this case in conjunction with that presented in Strategy in Action 3.2, about Southwest
Airlines. Which of the two firms has the greatest competitive advantage? Why? How long will that competitive
advantage endure? What will it take for other firms to successfully imitate or bypass that advantage?
D.
V.
Process innovation occurs if there is anything new or novel about the way a company operates.
Product innovation occurs if there is anything new or novel about the company’s products. Thus
innovation includes advances in the kinds of products, production processes, management systems,
organizational structures, and strategies developed by a company.
1.
Successful innovation gives a company something unique that its competitors lack (that is, until
imitation occurs). This uniqueness allows a company to differentiate and charge a premium
price.
2.
Successful innovation may also allow a company to reduce its unit costs.
E.
Achieving customer responsiveness requires that a company give its customers exactly what they
want when they want it. It involves doing everything possible to identify customer needs and to
satisfy those needs.
1.
One way to increase customer responsiveness is to improve the efficiency production processes
and the quality of products.
2.
Another way to increase responsiveness is to develop new products that have features currently
not incorporated in existing products.
3.
Another way to increase responsiveness is to customize goods and services to the unique
demands of individual customers.
4.
Another way to increase responsiveness is to reduce customer response time, or the amount of
time it takes for a good to be delivered or a service to be performed.
F.
In summary, superior efficiency enables a company to lower its costs; superior quality enables a
company both to charge a higher price and to lower its costs; superior innovation can lead to higher
prices or lower unit costs; and superior customer responsiveness enables a company to charge a
higher price.
Analyzing Competitive Advantage and Profitability
A. Managers must understand the financial impact of their strategies. They can compare their processes
and outcomes to competitors, using benchmarking.
B.
The most widely used measure of financial performance is profitability.
1.
Profitability can be measured in different ways, but return on invested capital (ROIC) is one of
the most widely used.
Show Transparency 21
Figure 3.10: Drivers of Profitability (ROIC)
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Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
35
2.
C.
ROIC is calculated as net profits divided by invested capital. ROIC represents the effectiveness
with which a company is using the funds it has available for investment.
3.
ROIC can be decomposed into two parts. Return on Sales is calculated as net profit divided by
revenues, and represents how effectively the company converts sales revenues into profits.
Capital turnover is calculated as revenues divided by invested capital, and represents how
effectively the company uses its invested capital to generate revenues.
Managers can increase profitability by increasing return on sales, either by reducing expenses for a
given level of sales, or by increasing sales revenues faster than expenses. They can also increase
profitability by getting more sales revenue from their capital investment.
RUNNING CASE: DRIVERS OF PROFITABILITY FOR DELL COMPUTER AND
COMPAQ
Dell enjoys a low-cost competitive advantage, leading to an ROIC of 38 percent, as compared to Compaq’s ROIC
of 13 percent. Dell’s COGS is higher than Compaq’s, but its SG&A expenses are lower, due to Dell’s use of a
direct sales model, with much lower sales, distribution, and retailing expenses. In addition, Dell’s focus on low
cost PCs helps to keep its expenses low, while Compaq’s expenses are greater because it is trying to differentiate
its products with proprietary technology. Also, Dell’s PPE expenses are just one-third of Compaq’s, as a result of
Dell’s low inventory, efficient manufacturing processes, and web-based information system. [Compaq was
acquired by Hewlett Packard in 2001.]
Teaching Note: Dell’s low-cost, direct sales business model has been remarkably successful, giving the firm an
ROIC that is three times greater than its nearest competitor’s. Dell has reduced expenses in many areas of its
operations, as evidenced by the figures quoted in the case. You can ask students to consider whether Compaq will
ever be able to successfully imitate Dell’s low-cost strategy. They are likely to decide that Compaq cannot. Next,
ask students whether that implies that Compaq will ultimately fail, or whether they could succeed by adopting a
different strategy. Classroom discussion could include ideas for alternative strategies that might be useful to
Compaq in competing against Dell. This case, like several in this chapter, has an important but veiled message
about the impact of strategy on performance. You should make sure that students understand this point: Strategies
can give firms a powerful, sustained advantage, however, there are always other strategies that could also lead to
success. Managers must seek out alternate strategies if they want their firms to succeed against powerful rivals.
VI.
The Durability of Competitive Advantage
A. Durability refers to the length of time that a competitive advantage lasts, once it has been created.
Successful companies earn above-average returns, which send a signal to competitors.
B.
Three factors lead to durability: high barriers to imitation, poor capability of competitors, and low
dynamism in the industry.
1.
Barriers to imitation are factors that make it difficult for a competitor to copy a company’s
distinctive competency. The longer it takes to imitate a company’s distinctive competency, the
greater is the opportunity for the company to improve on that competency or build other
competencies.
a.
The easiest distinctive competencies to imitate are those based on firm-specific tangible
resources such as buildings, plant, and equipment, which are visible to competitors and
can be readily purchased.
b.
Intangible resources are more difficult to imitate. Brand names symbolize a company’s
reputation, and are protected by law.
c.
Marketing and technological know-how are intangible resources that are relatively easy to
imitate.
(1) Marketing strategies are visible to competitors, and the movement of marketing
personnel between companies facilitates the diffusion of know-how.
(2) Technological know-how should be protected by patents, but in practice, it is often
possible to “invent around” patents.
d.
Imitation of capabilities is more difficult than imitation of resources. Capabilities are
often invisible to outsiders, and are based on the way in which decisions are made and
processes managed deep within a company. Also, a company’s capabilities are not
dependent upon one individual, but are the product of how numerous individuals interact
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Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
within a unique organizational setting. Thus, no one person can duplicate capabilities, and
therefore personnel movement will not be as useful in imitating capabilities.
2.
When a company is committed to a particular way of doing business based on a set of resources
and capabilities, the company will find it difficult to respond to new competition if doing so
requires a break with this commitment. This influence on the durability of competitive
advantage is called “capability of competitors.”
a.
A related concept is absorptive capacity—that is, the ability of an enterprise to identify,
assimilate, and utilize new knowledge. Firms with a low absorptive capacity may
experience an internal inertia that slows their ability to innovate and imitate.
b.
Therefore, when innovations reshape the rules of competition in an industry, value often
migrates away from established competitors and toward new enterprises that are
operating with new business models.
3.
Industry dynamism refers to the rate of product innovation. A high dynamism (rapid rate of
innovation) means that product life cycles are shortening and that competitive advantage can be
very transitory. Durability of competitive advantage is difficult for any company to sustain in a
highly dynamic industry.
VII. Avoiding Failure and Sustaining Competitive Advantage
A. Failing companies are not just below average; they earn very low or negative profits. Three related
reasons for failure are explored here: inertia, prior strategic commitments, and the Icarus paradox.
1.
The inertia argument is that companies find it difficult to change their strategies and structures
in order to adapt to changing competitive conditions.
a.
An organization’s capabilities contribute to inertia, because they are difficult to change.
Changing capabilities would require a redistribution of power and influence among the
key decision makers, and therefore will be resisted. Turf battles may result.
b.
Thus, capabilities can provide competitive advantage and also competitive disadvantage.
2.
Prior strategic commitments, such as investments in specialized resources, may also contribute
to competitive failure, because the resources are not well suited for other, evolving uses.
Changing resources is difficult and expensive.
3.
The Icarus paradox is based on the Greek myth of Icarus, who made himself a pair of wings
from wax and feathers, then flew so well that he went too close to the sun, melting the wings
and plunging to his death. The paradox is that his greatest asset, his ability to fly, gave rise to
his demise.
a.
Many successful companies become so dazzled by their own early success that they
believe that pursuing the same course of action is the way to future success. They may
pursue strategies such as “craftsmen,” “builders,” “pioneers,” and “salesmen.”
b.
This attitude, however, leads a company to become so specialized and inner-directed that
it loses sight of market realities and the fundamental requirements for achieving a
competitive advantage. Sooner or later failure ensues.
STRATEGY IN ACTION 3.4: THE ROAD TO RUIN AT DEC
By 1990, DEC’s superiority in producing high quality VAX minicomputers made it one of the largest
corporations in the world. However, the company’s success carried the seeds of its destruction. An increasingly
narrow focus on engineering capability led to a neglect of other functions, and the firm became dangerously out of
touch with changing customer needs and industry conditions. DEC went through a terrible change of fortune in
the early 1990s, returning to profitability only with the ouster of CEO Ken Olsen and a drastic change in strategy.
DEC was acquired by Compaq in 1998. [Compaq was acquired by Hewlett Packard in 2001.]
Teaching Note: This case provides a striking example of how successful firms can lose their competitive
advantage, through strategic mis-steps. To facilitate classroom discussion, you can ask students to describe the
causes of DEC’s failure, using the terms identified in section VII above. Students will see that DEC suffered from
all three of the major causes of failure. The firm’s large size led to inertia, making it more difficult for DEC to
adapt, and CEO Olsen was one of the worst offenders in terms of protecting his “turf” from changes proposed by
others. DEC also had prior strategic commitments, in the form of specialized engineering know-how, which made
change less likely. Finally, DEC suffered from the Icarus paradox. Dazzled by its early success, it became so
specialized and inner-directed that it lost sight of customers and competitors, leading to strategic failure.
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Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
B.
37
To avoid failure, companies can focus on the building blocks of competitive advantage, institute
continuous improvement and learning, track best industrial practice and use benchmarking, and
overcome inertia. Managers can also learn to exploit luck.
1.
Maintaining a competitive advantage requires a company to continue focusing on the four
generic building blocks of competitive advantage—efficiency, quality, innovation, and
customer responsiveness—and to do whatever is necessary to develop distinctive competencies
that contribute toward superior performance in these areas.
2.
In today’s dynamic and fast-paced environments, the only way that a company can maintain a
competitive advantage over time is to continually improve its efficiency, quality, innovation,
and customer responsiveness. The most successful firms are those that continually learn,
seeking out ways of improving their operations and constantly upgrading the value of their
distinctive competencies or creating new competencies.
3.
One of the best ways to develop distinctive competencies is to identify best industrial practice
and to adopt it. Only by doing so will a company be able to build and maintain the resources
and capabilities that underpin excellence in productivity, quality, innovation, and customer
responsiveness.
4.
The ability to overcome the inertial barriers to change within an organization is one of the key
requirements for continuing to maintain a competitive advantage.
5.
Luck can play a critical role in determining competitive success and failure, but it is an
unconvincing explanation for the persistent success of a company. It is difficult to imagine how
sustained excellence could be the product of anything other than conscious effort, that is, of
strategy. However, companies can be flexible and prepared to exploit lucky breaks as they
occur.
STRATEGY IN ACTION 3.5: BILL GATES’ LUCKY BREAK
Bill Gates, founder of Microsoft, benefited from luck in the company’s first product, the MS-DOS operating
system. He knew that Seattle Computer had developed a PC operating system. Through his mother’s business
contacts, he knew that IBM was looking to acquire such a system. His father, a prominent Seattle attorney, was
able to loan Gates the $50,000 to acquire the system from Seattle Computer, which was then licensed to IBM for a
tremendous profit. There were several elements of luck in this beginning, but Microsoft’s continued high
performance has been mainly due to Gates’ astute use of that initial profit to acquire resources and capabilities
that would lead to enduring success.
Teaching Note: Many students will enter the classroom with the idea that success is largely a matter of luck:
knowing the right people, being in the right place at the right time, or experiencing a sudden and undeserved
windfall. They have heard this idea many times in our popular culture and media. However, it’s important to
stress to students that a sustained success over determined rivals is unlikely to be result of mere luck; rather, it is
the logical result of a series of thoughtful and deliberate plans and actions. This case acknowledges the relatively
limited role that luck can play in organizational success, while focusing attention on the ways in which planning
has contributed to Microsoft’s more recent successes. To spark a classroom discussion, you can ask students to
describe other examples of organizations that benefited from luck, such as a helpful change in tax policy or the
development of a new product just as demand grew. Describe the benefits that came to the organization as a result
of luck. Then, ask students to consider how long those benefits endured. Students will see that luck is useful, but
transitory.
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