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Strategic Management
, Sixth Edition
Charles W. L. Hill, University of Washington
Gareth R. Jones, Texas A&M University
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Chapter Summaries
Chapter 3: Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
- Distinctive competencies are the firm-specific strengths of a company. Valuable
distinctive competencies enable a company to earn a profit rate that is above
the industry average.
- The distinctive competencies of an organization arise from its resources
(its financial, physical, human, technological, and organizational assets)
and capabilities (its skills at coordinating resources and putting them to
productive use).
- In order to achieve a competitive advantage, a company needs to pursue strategies
that build on its existing resources and capabilities and formulate strategies
that build additional resources and capabilities (develop new competencies).
- The source of a competitive advantage is superior value creation.
- To create superior value, a company must lower its costs or differentiate
its product so that it creates more value and can charge a higher price, or do both simultaneously.
- Managers must understand how value creation and pricing decisions affect
demand and how costs change with increases in volume. They must have a good grasp of the demand conditions in the company's market and the cost structure of the company at different levels of output
if they are to make decisions that maximize the profitability of their enterprise.
- The four generic building blocks of competitive advantage are efficiency, quality,
innovation, and responsiveness to customers. Superior efficiency enables
a company to lower its costs; superior quality allows it to charge a higher
price and lower its costs; and superior customer service lets it charge a higher price. Superior innovation
can lead to higher prices, particularly in the case of product innovations,
or lower unit costs, particularly in the case of process innovations.
- If a company's managers are to perform a good internal analysis, they need to be able
to analyze the financial performance of their company, identifying how the
strategies of the company relate to its profitability, as measured by the
return on invested capital.
- The durability of a company's competitive advantage depends on the height of barriers to imitation, the
capability of competitors, and environmental dynamism.
- Failing companies typically earn low or negative profits. Three factors seem to contribute
to failure: organizational inertia in the face of environmental change, the
nature of a company's prior strategic commitments, and the Icarus paradox.
- Avoiding failure requires a constant focus on the basic building blocks of
competitive advantage, continuous improvement, identification and adoption
of best industrial practice, and victory over inertia.
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