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Class Plan 3 The early bird may get the worm, but the second mouse gets the cheese Anonymous Questions for the next case Brief discussion of the Apollo.

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Presentation on theme: "Class Plan 3 The early bird may get the worm, but the second mouse gets the cheese Anonymous Questions for the next case Brief discussion of the Apollo."— Presentation transcript:

1 Class Plan 3 The early bird may get the worm, but the second mouse gets the cheese Anonymous Questions for the next case Brief discussion of the Apollo case Review of 5-forces, including exercise Move on to Chapter 3 on Internal Analysis + extra information on VRIO approach Exercises & video on Internal Analysis

2 Questions for the Nokia case 1) Have Nokias mission and vision (or their implementation) been partially responsible for their faltering performance? 2) Using the 5-forces model, what industry threats should Nokia have identified in their strategic pursuits? 3) What can Nokia do to continue to compete globally and domestically?

3 Porters Five Forces Model (Fig 2.2 p45 adapted) Rivalry among established firms Risk of entry by potential competitors Bargaining power of suppliers Bargaining power of buyers Threat of substitute products Special role of complements

4 Product Lifecycle Time DemandDemand EmbryonicGrowthShakeoutMature Declining

5 Macro-environmental Forces [Environmental Scanning] Macroeconomics: growth rate of the economy, interest rates, currency exchange rates, inflation rates Technological: creative destruction, shifting barriers to entry Social: lifestyles, trends and attitudes Demographics: composition of the population, factors such as income distribution, education, labour mobility, gender Political & Legal : deregulation and free trade Global: falling barriers to trade, new economic development

6 More on 5-forces model Strategic Groups Def.: subsections of industry with the same basic strategy in-group Implications: closest competitors are in the same group groups, to some extent, face different 5+-forces exit & entry barriers exist between groups Limitations of 5+-Forces & Strategic Groups models Static picture with limited attention to innovation. Industries evolve unfrozen and reshaped by technology : punctuated equilibrium hyper-competitive industries with no equilibrium downplays individual company differences studies show that industry only accounts for 10%-20% of variance in firms profit rates

7 Internal Analysis The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organization. Strengths lead to superior performance. Weaknesses lead to inferior performance. Internal Analysis includes an assessment of: Quantity and quality of a companys resources and capabilities Ways of building unique skills and company- specific or distinctive competencies

8 The Theory Behind Internal Analysis The Resource-Based View developed to answer the question: Why do some firms achieve better economic performance than others? assumes that a firms resources and capabilities are the primary drivers of competitive advantage and economic performance used to help firms achieve competitive advantage and superior economic performance

9 The Resource-Based View Resources and Capabilities Resources: tangible and intangible assets of a firm » tangible: factories, products intangible: reputation used to conceive of and implement strategies Capabilities: a subset of resources that enable a firm to take full advantage of other resources »marketing skill, cooperative relationships

10 The VRIO Approach Value: Do a firms resources & capabilities in each section of the Value Chain enable the firm to respond to environmental threats or opportunities? Rarity: Is a resource currently controlled by only a small number of firms? (In)Imitability: Do firms without a resource face cost disadvantages in obtaining or developing it? Organization: Are a firms other policies and procedures organized to support the exploitation of its valuable rare and costly to imitate resources?

11 The VRIO Framework a resource or bundle of resources is subjected to each question to determine the competitive implication of the resource Applying the Tool each question is considered in a comparative sense (competitive environment) For further application information, see Conner, Tom (2002) The resource-based view of strategy and its value to practising managers, Strategic Change 11, )

12 Applying the VRIO Framework The Question of Value in theory: Does the resource enable the firm to exploit an external opportunity or neutralize an external threat? the practical: Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? (Levis reputation allows it to charge a premium for its Dockers pants)

13 Applying the VRIO Framework The Question of Rarity a resource must be rare enough that perfect competition has not set in if a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits) thus, there may be other firms that possess the resource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-lowering drugs, but the drugs are still scarcelook at prices)

14 Applying the VRIO Framework Valuable and Rare If a firms resources are:The firm can expect: Not ValuableCompetitive Disadvantage Valuable, but Not RareCompetitive Parity Valuable and Rare Competitive Advantage (at least temporarily)

15 Applying the VRIO Framework The Question of Inimitability the temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a cost disadvantage in imitating the resource »intangible resources are usually more costly to imitate than tangible resources (Harley-Davidsons styles may be easily imitated, but its reputation cannot)

16 Applying the VRIO Framework The Question of Inimitability if there are high costs of imitation, then the firm may enjoy a period of sustained competitive advantage »a sustained competitive advantage will last only until a duplicate or substitute emerges if a firm has a competitive advantage, others will attempt to imitate it (Razor scooters were a big hit and others quickly imitated them)

17 Applying the VRIO Framework Value, Rarity, & Inimitability If a firms resources are:The firm can expect: Valuable, Rare, but not Costly to Imitate Temporary Competitive Advantage Valuable, Rare, and Costly to Imitate Sustained Competitive Advantage (if Organized appropriately)

18 Applying the VRIO Framework The Question of Organization a firms structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firms resources examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc. these structure and control mechanisms complement other firm resourcestaken together, they can help a firm achieve sustained competitive advantage

19 The VRIO Framework Valuable?Rare? Costly to Imitate?Organization? Competitive Implications No Yes No Disadvantage Parity Temporary Advantage Sustained Advantage Economic Implications Below Normal Above Normal Above Normal

20 Generic Value Chain

21 A Typical Value Chain (Oil-based refined products) Exploring for crude oil Drilling for crude oil Pumping crude oil Shipping crude oil Buying crude oil Refining crude oil Sending refined products to distributors Shipping refined products Selling refined products to final customers

22 Value Chain Approach Analyze each of the functions that lead to production of the final product or service How well do they each perform? - quantitative & qualitative tools needed here How effectively do the different functions interact? Are the supporting functions adequate?

23 The Building Blocks Approach (Figure 3.6, p 95) Efficiency: What is the usual measure of efficiency? Quality: Excellence and reliability Innovation: Importance of both process and product innovation, role of innovation in becoming unique Customer responsiveness: Includes response time, customization, and after sales service and support

24 Applying the Building Blocks Approach Itemize instance of significant operational and managerial achievements and/or deficiencies under each of the categories. Use these noted observations to guide your recommendations.

25 Why companies fail Inertia Companies find it difficult to change their strategies and structures Prior Strategic Commitments Limit a companys ability to imitate and cause competitive disadvantage The Icarus Paradox A company can become so specialized and inner directed based on past success that it loses sight of market realities Categories of rising and falling companies: Craftsmen Builders Pioneers Salespeople

26 Avoiding Failure 1. Focus on the Building Blocks of Competitive Advantage Develop distinctive competencies and superior performance in: Efficiency Quality Innovation Responsiveness to Customers 2. Institute Continuous Improvement and Learning Recognize the importance of continuous learning within the organization 3. Track Best Practices and Use Benchmarking Measure against the products and practices of the most efficient global competitors 4. Overcome Inertia Overcome the internal forces that are barriers to change

27 Questions for Starbucks Video 1) List Starbucks major capabilities and discuss the strategic implications of these capabilities. 2) How is Starbucks utilizing their resources and capabilities to develop their brand overseas? 3) Describe Starbucks people-to-people business philosophy. How has this resource/capability contributed to Starbucks strategic success?

28 Questions 1) What is the role of luck in gaining possession of a particular resource or capability? Can a firm manage luck? Give 3 examples of resources or capabilities that specific organizations gained through luck. 2) Some firms products are so well known that the entire category of products offered in the industry (including rivals products) is often referred to by the leading firms brand name (which is called an eponym). Identify three such products, and for each case discuss whether their brand recognition gives the leading firm a competitive advantage. Why or why not?

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