4 4.1 Looking Inside the Firm for Core Competencies Competitive advantage derives from core competencies, which enable:Differentiation of products/services creating perceived value, orCost leadership – offering products/services of comparable value at lower costNIKE – Core Competence – Just Do ItUnlocking human potentialAnyone can be a hero
5 Exhibit 4.2 Looking Inside the Firm for Competitive Advantage, Resources, Capabilities, Core Competencies, and Activities
6 Exhibit 4.4 Linking Resources, Capabilities, Core Competencies, and Activities to Competitive Advantage and Superior Firm Performance
7 RESOURCE CATEGORIESTangible Resources- Resources that have physical substance and presence, easy to move and transfer from one place to anotherExamples of tangible resource include: Financial resources, Physical resources (land, plant & equipment), Product resources, Cultural Artifacts (Auburn Creed, Policy manuals, Logos)Intangible Resources- Resources with no physical substance or form, difficult to move or transfer from one place to anotherExamples of intangible resources include: Individual KSAs, Intellectual Capital, Trust & Social Capital, Reputation, Organizational Culture
8 4.2 The Resource-Based View Resource Value CalculationMarket Value = Sum of Tangible & Intangible ResourcesBook Value = Value of Firm Tangible ResourcesValue of Intangible Resources = Market Value minus Book Value
9 4.2 The Resource-Based View Competitive advantage is more likely to develop from intangible rather than tangible resources..Tangible and Intangible Resources – Examples:AppleTangible Resource Value: $15 BillionIntangible Resource Value: $180 BillionGoogleTangible Resource Value: $8 BillionIntangible Resource Value: $110 Billion
10 Two Critical Assumptions The two assumptions – that firms may control – are critical in explaining superior firm performance for the resource-based model:Resource HeterogeneityModel assumption that a firm is a bundle of resources and capabilities differ across firmsResource ImmobilityModel assumption that a firm has resources that tend to be “sticky” and that do not move easily from firm to firmResource Endowments, Historical Context, Casual Ambiguity, Social Complexity
11 The VRIO Framework Valuable Imitation/Substitute Attractive featuresLower costs (& price)Higher profitsHonda – design & build enginesRareOnly a few firms possessToyota – lean manufacturingTemporary competitive advantageImitation/SubstituteUnable to develop or buy at a reasonable priceNike – YesCrocs - NoOrganizational Complementary CapabilitiesExploit competitive potentialStructureCoordinating systemsXerox PARC – No
12 Strategy Highlight 4.1 Applying VRIO: The Rise and Fall of Groupon Mason’s Strategic Vision for Groupon WasTo Be the Global Leader in Local Commerce:2008 – 27-year-old Andrew Mason founded GrouponGroupon creates marketplaces, i.e., a group-couponInternal Analysis – VRIO framework application would have predicted Groupon’s first mover competitive advantage as temporary at best.External Analysis – The five forces model would have predicted low industry profit potential.
13 HOW TO SUSTAIN A COMPETITIVE ADVANTAGE SUMMARYTaken together, a firm may be able to protect its competitive advantage – even for long periods of time – when its managers have consistently:Better expectations about the future value of resourcesHave accumulated a resource advantage that can be imitated only over long periods of timeWhen the source of their competitive advantage is causally ambiguous or socially complex
14 Strategy Highlight 4.2 Bill “Lucky” Gates Bill Gates is one of the richest people in the world.He is also “rich” in LUCK.In 8th grade his school got a computer and software programs.In 1975 founded Microsoft with long-time friend Paul Allen.In 1980 his mother heard IBM was looking for an operating system…Bill Gates didn’t have one, but he knew where to get one.He then sold copies of MS-DOS to IBM (through a non-exclusive license), and thus kept the copyright.
15 4.3 The Dynamic Capabilities Perspective A firm’s ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantageEssential to create a sustained competitive advantageA dynamic fit between internal strengths and external opportunitiesResource stocks – current level of intangible resourcesResource flows – investments to maintain or build a resource
16 Exhibit 4.7 The Bathtub Metaphor: The Role of Inflows and Outflows in Building Stocks of Intangible Resources
17 4.4 The Value Chain Analysis The internal activities a firm engages in when transforming inputs into outputsEach activity adds incremental value and associated costs.This concept can be applied to any firm – goods or service.The value chain helps to assess which parts add value and which do not.
18 Exhibit 4.8 A Generic Value Chain: Primary and Support Activities
19 Value Chain Activities Link to generic strategies (add features/control costs)Redefine Value Chain activities (create/add, eliminate/decrease)Restructure/reorganize Value Chain flowsInternalize (backward & forward integration) or externalize (outsourcing) key activities
20 4.5 Implications for the Strategist USING SWOT ANALYSIS TO COMBINE EXTERNALAND INTERNAL ANALYSISSynthesizes internal analysis of the company’s strengths and weaknesses (S and W) with those from an analysis of external opportunities and threats (O and T)SWOT =VRIO FrameworkValue Chain AnalysisPEST (PESTEL) AnalysisPorter’s 5 Forces Analysis
22 TOWS Matrix SO Strategies Strategies that enable competitive advantage, external opportunities match well with internal strengths, allows for competitive advantage to be built and maintained.
23 TOWS Matrix ST Strategies Mitigation Strategies, firm possesses internal strengths that facilitates neutralization of external threats, may lead to temporary advantage if competitors are impacted by environmental threats.
24 TOWS Matrix WO Strategies Acquisition/Development Strategies, situation where strategies are formulated to acquire or develop new resources/capabilities to take advantage of external opportunities.
25 TOWS Matrix WT Strategies Consolidation/Exit Strategies, if firms can’t find ways to convert weaknesses to strengths via acquisition/development, exit from market is recommended.
26 Using SWOT Analysis to Combine External and Internal Analysis SWOT LimitationsSWOT analysis – widely used management toolHowever, a strength can also be a weakness, and an opportunity can also be a threat.The answer is – it depends…To be an effective management tool, the strategist must conduct thorough external and internal analyses, grounding these analyses in rigorous theoretical frameworks, in order to derive a set of strategic options.