Presentation on theme: "OBJECTIVES Explain the internal context of strategy"— Presentation transcript:
0 Chapter 3 Examining the Internal Environment: Resources, Capabilities, and Activities
1 OBJECTIVES 1 2 3 4 5 Explain the internal context of strategy Identify a firm’s resources and capabilities and explain their role in its performance2Define dynamic capabilities and explain their role in both strategic change and a firm’s performance3Explain how value‑chain activities are related to firm performance and competitive advantage4Explain the role of managers with respect to resources, capabilities, and value‑chain activities5
2 COMPARATIVE INDUSTRY REFORMANCE ROASemiconductorGlobal AutoROSGrocery StoreHow do such differences in profitability materialize?
3 RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS Full quote:“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”- Carl JungResourcesManagersCompetitive advantage/ disadvantageStrategyPerformanceManagement strategic decision makingCapabilities
4 RESOURCES AND CAPABILITIES: FUNDAMENTAL BUILDING BLOCKS OF STRATEGY Full quote:“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”- Carl JungStrategyCapabilities (competencies)ResourcesThe inputs that firms use to create goods and servicesUndifferentiated or firms-specificTangible or intangibleEasy to acquire or difficultA firm’s skill in using its resources to create goods and services. The combination of procedures and expertise that the firm relies on to engage in distinct activities in the process of producing goods and services
5 EXAMPLES OF CAPABILITIES Full quote:“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”- Carl JungCompanyCapabilityResultLogistics -- distributing vast amounts of goods quickly and efficiently to remote locations200,000-percent return to share-holders during first 30 years since IPO1An extraordinarily frugal system for delivering the lowest cost structure in the mutual fund industry, using both techno-logical leadership and economies of scale25,000-percent return to share-holders during the 30-plus year tenure of CEO John Connelly.2 As for ongoing expenses, share-holders in Vanguard equity funds pay, on average, just $30 per $10,000, vs. a $159 industry average. With bond funds, the bite is just $17 per $10,000Generating new ideas then turning those ideas into new, profitable products30 percent of revenue from products introduced within the past four years1: Stalk, Evans, and Shulman, 19922: Makadok, 2003
6 TRUST AS AN ORGANIZATIONAL RESOURCE Trust is an intangible resource1A trustworthy reputation for a firm can be leveraged.2
7 KNOWLEDGE Explicit (easy competitive intelligence) KNOWLEDGEKnowledge as a resourceExplicit (easy competitive intelligence)Tacit (more valuable)
8 THE VRINE MODEL Test Competitive implication Performance implication Valuable?Does the resource or capability allow the firm to meet a market demand or protect the firm from market uncertainties?If so, it satisfies the value requirement. Valuable resources are needed just to compete in the industry, but value by itself does not convey an advantageValuable resources and capabilities convey the potential to achieve “normal profits” (i.e., profits which cover the cost of all inputs including the cost of capital)Rare?Assuming the resource or capability is valuable, is it scarce relative to demand? Or, is it widely possessed by most competitors?Valuable resources which are also rare convey a competitive advantage, but its relative permanence is not assured.The advantage is likely only temporary.A temporary competitive advantage conveys the potential to achieve above normal profits, at least until the competitive advantage is nullified by other firmsInimitable and non- substitut- able?Assuming a valuable and rare resource, how difficult is it for competitors to either imitate the resource or capability or substitute for it with other resources and capabilities that accomplish similar benefits?Valuable resources and capabilities which are difficult to imitate or substitute provide the potential for sustained competitive advantageA sustained competitive advantage conveys the potential to achieve above normal profits for extended periods of time (until competitors eventually find ways to imitate or substitute or the environment changes in ways that nullify the value of the resources)Exploit- able?For each step of the preceding steps of the VRINE test, can the firm actually exploit the resources and capabilities that it owns or controls?Resources and capabilities that satisfy the VRINE requirements but which the firm is unable to exploit actually result in significant opportu- nity costs (other firms would likely pay large sums to purchase the VRINE resources and capabilities). Alternatively, exploitability unlocks the potential competitive and perfor-mance implications of the resource or capabilityFirms which control unexploited VRINE resources and capabilities generally suffer from lower levels of financial performance and depressed market valuations relative to what they would otherwise enjoy (though not as depressed as firms lacking resources and capabilities which do satisfy VRINE)
9 SUSTAINABILITY Sustainability: Just having a competitive advantage is not enough. Can it be sustained?DurabilityImitability
10 TANGIBLE AND INTANGIBLE ADVANTAGES +=Location selection+Rural real-estate=Wal-MartHigh traffic real-estateBrand+=McDonald’s
11 DYNAMIC CAPABILITIESFull quote:“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”- Carl JungMail Boxes Etc. franchiseStart-up plansPeopleValueBrandLocationProcessesDynamic capability: how we integrate recon- figure, acquire, or divest resources for competitive advantage?Mail boxes, etc., has developed the ability to combine resources better than the competition
12 VALUE CHAIN: INTERNET STARTUP EXAMPLE Full quote:“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”- Carl JungFirmInfrastructureFinancing, legal support, accountingSupportActivitiesHuman ResourcesRecruiting, training, incentive system, employee feedbackTechnologyDevelopmentInventory systemSite softwarePick & pack proceduresSite look & feelCustomer researchReturn proceduresProcurementCDsShippingComputersTelecom linesShipping servicesMediaInbound shipment of top titlesServer operationsBillingCollectionsPicking and shipment of top titles from warehouseShipment of other titles from third- party distributorsPricingPromotionsAdvertisingProduct information and reviewsAffiliations with other websitesReturned itemsCustomer feedbackWarehousingInboundLogisticsOperationsOutboundLogisticsMarketing& SalesAfter-Sales ServicePrimary Activities
13 USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE Full quote:“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”- Carl JungIdenticalDifferentiatedFind a different way to perform activitiesLonger-lasting advantageShorter-term advantage (competitors catch up)Find a better way to perform the same activities
14 INNOVATION AND INTEGRATION OF THE VALUE CHAIN INNOVATION AND INTEGRATION OF THE VALUE CHAINFull quote:“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”- Carl JungArea of innovationSourceAssembleDeliverIKEATransferred assembly and delivery to the consumerDellChoose an entirely direct distribution model (rather than through retailers) and outsourced component manufacturing
15 TRADE OFF PROTECTION - YOUR RIVALS CHOOSE NOT TO COPY YOU Full quote:“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”- Carl JungSelected difference between Southwest and large AirlinesTechnology and designOperationsMarketingSouthwestSingle aircraftShort segment flightsSmaller markets and secondary airports in major marketsNo baggage transfers to others airlinesNo mealsSingle class of serviceNo seat assignmentsLimited use of travel agentsWord of mouthMajor AirlinesMultiple types of aircraftsHub and spoke systemMeals (based on class of service)Seat assignmentsMultiple classes of serviceBaggage transfer to other airlinesExtensive use of travel agentsSouthwest made choices so that competitors did not copy - because copying would require them to abandon activities essential to their strategies
16 GUIDELINES FOR OUTSOURCING Activities that can create value for the firm should not be outsourced.1Those activities that represent key sources of learning for the firm should not be outsourced.2
17 Outsourcing and Offshoring What is Outsourcing?Sourcing the function, product, or service of a value chain activity from another company.Outsourcing arrangements are put in place to improve competitiveness in a function or set of functions.What is Offshoring?Taking the activity from a high-cost country to a low-cost country.What are some examples of outsourcing?
18 BUSINESS CASE FOR OUTSOURCING: ANALYSIS AND ACCURACY More than 80% of organizations base their sourcing decisions on inadequate financial information.Organizations fail to include up to 20% of internal costs in their calculations of a business case.More than 70% of discrete projects and longer-term outsourcing initiatives exceed original business case costing estimates.Building a financial business case for sourcing is a challenge – difficult to identify and estimate all possible costsAlso difficult to quantify choices and assess risks
19 HIDDEN COSTS OF GLOBAL SOURCING Project ManagementOnshore/Offshore Coordination DemandsRelationship ManagementCross-Cultural IssuesConnectivity and TelecomSingle Domestic vs. Multiple Cross-BorderProject TripsMultiple Personnel, Long TripsTransition and Knowledge TransferVirtual Decentralized Teams
20 OUTSOURCING KEYS TO SUCCESS Commit time and effort – beyond the initial cost savings, corporations must be prepared to invest in quality control and training to keep the outsourced or offshored activity competitive and efficientTreat outsourcing partners as partners: what was previously handled internally is now managed by a third party. Take advantage of the relationship to learn new things about product and process innovation.Involve middle management: middle management is the lifeblood of strategy execution. Middle managers bridge offshore activities with internal ones and put additional outsourcing arrangements into place as opportunities arise.
21 STRATEGIC LEADERSHIPFull quote:“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”- Carl Jung“Companies that overlook the role of leadership in the early phases of strategic planning often find themselves scrambling when it’s time to execute. No matter how thorough the plan, without the right leaders it is unlikely to succeed”– McKinsey & Company
22 BOTH SENIOR AND MIDDLE MANAGERS PLAY KEY ROLES Key tasks in the role of management:Identify resources and capabilitiesSpecify the resources that will create competitive advantageLocate an attractive industry in which to deploy themSelect the strategy to get the most out of themChoose when to change the mix of resources, capabilities, and targeted marketsMiddle managers contribute to corporate success within many roles:EntrepreneurCommunicatorPsychoanalystTightrope walker “In Praise of Middle Managers”, HBR (see text endnotes)