Internal Analysis: Four Building Blocks

Four factors build competitive advantage: 1. Efficiency 2. Quality 3. Innovation 4. Customer Responsiveness **All four of the above represent four basic ways of lowering costs and achieving differentiation that ANY company can adopt and ALL ARE HIGHLY INTERRELATED

1. Efficiency- measured by the cost of inputs required to produce a given output

The more efficient a company is, the lower the costs of the inputs are (unit costs), thus efficiency helps a company attain a low-cost competitive advantage Key to achieving high efficiency: utilize inputs in the most productive way possible Employee productivity- measured by output per employee (most important component of efficiency) o All else constant, the company with the highest employee productivity will typically have the lowest costs of production To achieve high productivity and efficiency, a company must adopt: o Appropriate Strategy o Appropriate Structure o Appropriate Control Systems **Higher efficiency leads to lower unit costs

2. Quality- goods and services that are reliable in the sense that they do the job they
were designed to do and do it well - Creates a brand name reputation for a companys products which allows them to charge a higher price - Creates greater efficiency and lower unit costs because less employee time is wasted making defective products or providing substandard services o Basically less time is spent fixing mistakes o Translates into higher employee productivity and lower unit costs - **High product quality lets a company charge higher unit prices and lowers unit costs

3. Innovation- anything new or novel about the way a company operates or the
products it produces - Includes advances in the kinds of products, production processes, management systems, organizational structures, and strategies developed by a company - Perhaps the single most important building block of competitive advantage - Gives company something UNIQUE- something competitors lack o Allows company to differentiate itself and charge a premium price o May allow a company to reduce its unit costs below competitors o Allows a company to be the sole supplier of a new product Can charge a premium price for the new product/service By the time competitors catch up, the innovating company has built a strong brand loyalty - **Better innovation lets a company charge higher unit prices and may lower unit costs

4. Customer Responsiveness- give customers exactly what they want when they
want it - Must do everything possible to identify customer needs and satisfy them and give them value for money - May require the development of new products with features (maybe customization?) that existing products lack, therefore o Achieving superior efficiency, quality, and innovation are all part of achieving superior customer responsiveness - Customer Response Time- the time it takes for a good to be delivered or a service to be performed o Manufacturer- time it takes to fill a customers order o Bank- time it takes to process a loan o Supermarket- time that a customer must stand in check-out lines - Sources of enhanced customer responsiveness o Quality o Customization o Customer Response Time o Superior Design o Superior Service o Superior After-Sales Service and Support - **Differentiation and better Customer Responsiveness allow a company to build brand loyalty and to charge higher prices for their products

Summarysuperior efficiency enables a company to lower its costs; superior quality lets it both charge a higher price and lower its costs; superior customer responsiveness allows it to charge a higher price; and superior innovation can lead to higher prices or lower unit costs