Chapter 3 Examining the Internal Environment: Resources, Capabilities and Activities.
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1 Chapter 3Examining the Internal Environment: Resources, Capabilities and Activities
2 Why Internal Analysis?Early strategy theory rooted in industry structural analysis - external focusThis approach has lost its appeal because:internationalization & deregulation has all but removed safe havenstechnology and changes in demand have blurred industry lines
3 Components of Internal Analysis Leading to Competitive Advantage and Value Creation Figure 4.3 illustrates the relationships among resources, capabilities, and core competencies and shows how firms use the four criteria of sustainable competitive advantage and value chain analysis to identify sources of value and ultimately competitive advantage and strategic competitiveness. Figure 4.3 also provides an outline of topics for much of the rest of this chapter.Combinations of resources and capabilities are managed to create core competencies. This can begin a discussion to define and provide examples of these building blocks of competitive advantage.
4 Tangible Resources Four types of tangible resources/assets: Financial OrganizationalPhysicalTechnological
5 Intangible Resources Three types of intangible resources/assets: Human InnovativeReputational
6 Evaluation of Resources Strength or Weaknessrelative to competitorsbasic business requirementskey vulnerabilities
9 TangibleResourcesOrg.CapabilitiesInputs into OutputsIntangibleResourcesExamples…..Customer ServiceProduct DevelopmentEmployee Productivity
10 Examples of Firm’s Capabilities Discuss some capabilities that can be found in an organization's functional areas.Table 4.3 illustrates that capabilities are often developed in specific functional areas (such as manufacturing, R&D, and marketing) or in a part of a functional area (for example, advertising). Research suggests that a relationship exists between capabilities developed in particular functional areas and the firm’s financial performance at both the corporate and business-unit levels, suggesting the need to develop capabilities at all levels.Firms committed to continuously developing their people’s capabilities are the most likely to sustain a competitive advantage longer than those firms that do not make such commitments. Educational benefits and employee training can have immediate positive effects on the skill levels of employees and managers, as well as new ideas leading to technological innovation. Also, applicants are drawn to firms that have a reputation for excellent employee treatment, which can increase the quality of human resources in the firm.Global business leaders increasingly support the view that the knowledge possessed by human capital is among the most significant of an organization’s capabilities and may ultimately be at the root of all competitive advantages. But firms must also be able to utilize the knowledge that they have and transfer it among their operating businesses.
11 Core Competencies central to the firm’s competitiveness rewarded in market placecombination of skills & knowledge, not products or functionsflexible, long term platformsembedded in the organization’s systemsdistinctive competencies are those the firm performs better than rivalsAll core competencies have the potential to become core rigidities
12 Supporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to fully exploit its competencies in the marketplaceCore Competencies (cont.) - Core competencies distinguish a company competitively and reflect its personality.Features of core competencies:Core competencies emerge within a firm over timeCore competencies are the capacity of an organization to take actionCore competencies are the activities that a firm performs well relative to its competitors, adding unique value for its customersCore competencies do not represent all of a firm's resources and capabilities, only those with strategic valueSupporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to fully exploit its competencies in the marketplace
13 Tools for Building Core Competencies Four Criteria of Sustainable Competitive AdvantageValue Chain AnalysisBuilding Core Competencies – Two tools are commonly used to identify and build core competencies that will create and sustain competitive advantages.
14 Sustainable Competitive Advantage Must be valuable, rare, inimitable, and non-substitutable, exploitableSustainability is a function ofDurability - how long will it last?Technology? Reputation? Fixed Assets?Imitability - how quickly can it be copied?Transparent - easy to see?Transferable - can it be done elsewhere?Replicable - can we do it here?
15 Factors that Limit Imitation Physical Uniqueness – location, patentsPath Dependency – accumulation effectCausal Ambiguity – unable to disentangleSocial Complexity – social interactions are not readily understood nor duplicatedAbsorptive Capacity – ability to identify, value, assimilate and use knowledge
16 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Table 4.5 shows the competitive consequences and performance implications resulting from combinations of the four criteria of sustainability. Discuss how this analysis helps managers determine the strategic value of the firm's capabilities.Capabilities that fall into the first row of the table should not be emphasized.Capabilities yielding competitive parity and either temporary or sustainable competitive advantage should be supported.Additional Discussion Notes for Discovering Core Competencies - These notes include additional materials that cover the criteria to determine core competencies, using Cartier and Starbucks as an examples to illustrate the process.Core CompetenciesA firm’s core competencies are those things that it does that give it a competitive advantage over another firm. They are generally valuable, rare, costly to imitate, and nonsubstitutable. They may or may not be unique to the firm. They may simply be an industry practice that a firm does better, or a set of industry practices that the firm does in a specific combination or sequence that allows the firm to be more efficient than its competitors.Using the Cartier example, to be able to manipulate the supply of gems in the market, Cartier must be very efficient and competent at predicting the demand for its gems. If they were not very skilled at this, there would be fluctuations in the supply and demand curve and, therefore, market price that would leave an opportunity for arbitrage. The value of this arbitrage represents lost profits for Cartier. It was this ability to predict demand that allowed Cartier to see higher profits than its competitors in the 1800s, eventually eroding the market share and profitability of these competitors. Cartier subsequently acquired these firms to create the monopoly it now holds on the world’s diamond market.As noted in the textbook, an important question is “How many core competencies are required for the firm to have a sustained competitive advantage?” While responses to this question vary, McKinsey & Co. recommends that its clients identify no more than three or four competencies. Recent actions by Starbucks demonstrate this point.Growing rapidly, Starbucks decided that it could use the Internet as a distribution channel to achieve additional growth. However, the firm quickly realized that it lacked the capabilities required to successfully distribute its products through this channel—and that its unique coffee, not the delivery of that product, is its competitive advantage. In part, this recognition forced Starbucks to renew its emphasis on existing capabilities to create more value through its supply chain. To do so, the firm trimmed the number of its milk suppliers from sixty-five to fewer than twenty-five and negotiated long-term contracts with coffee-bean growers. The firm also decided to place automated espresso machines in its busy units. These machines reduced Starbucks’ cost while providing improved service to its customers, who can now move through the line much faster. Using its supply chain and service capabilities in these ways allows Starbucks to strengthen its competitive advantages of coffee and the unique venue in which on-site customers experience it.When capabilities are valuable, rare, costly to imitate, and nonsubstitutable, they are effectively called core competencies. Alternatively, every core competence is a capability, but not every capability is a core competence. Operationally, one could argue that for a capability to be a core competence, it must be valuable and nonsubstitutable from a customer’s point of view, but unique and inimitable from a competitor’s point of view.As discussed in the textbook, an important key to success occurs when the link between the firm’s capabilities and its competitive advantage is causally ambiguous, where rivals can’t tell how a firm uses its capabilities as the foundation for competitive advantage. Gordon Forward, CEO of Chaparral Steel, allows rivals to tour his firm’s facilities and see almost everything. In Chaparral Steel’s causally ambiguous operations, workers use the concept of mentalfacturing, by which manufacturing steel is done by using their minds instead of their hands.
17 Creating Value Key Terms Value – measured by a product's performance characteristics and by its attributes for which customers are willing to payCreating Value - exploiting core competencies and meeting global standards of competition to create superior value for customers
20 Relative costs and prices Where do cost/price differences come from?raw materials and componentsdifferences in technology, plant, equipmentefficiencies, learning, experience, wages, productivitymarketing, sales, promotion, warehousing, distribution, administration costsdistributioninflation, exchange and tax rates
21 Porter’s Value ChainViews the organization as a series (chain) of activities, which may or may not create value
22 Porter’s Value Chain (cont.) Primary ActivitiesInbound logistics – Supply Chain ManagementOperationsOutbound logistics - DistributionMarketing and salesAfter-sales serviceContribute to the physical creation of the product/service, its sale and transfer to the buyer, and its service after the sale
23 Tables 4.6 and 4.7 list the items to consider when assessing the value-creating potential of primary activities and support activities, respectively. The intent in examining both primary and support activities is to determine areas where the firm has the potential to create and capture value. All activities in both tables should be evaluated relative to competitors’ capabilities.
24 Porter’s Value Chain (cont) Support ActivitiesProcurementTechnological developmentHuman resource managementFirm infrastructure
25 The Value-Creating Potential of Support Activities Tables 4.6 and 4.7 list the items to consider when assessing the value-creating potential of primary activities and support activities, respectively. The intent in examining both primary and support activities is to determine areas where the firm has the potential to create and capture value. All activities in both tables should be evaluated relative to competitors’ capabilities.
26 The Value Chain Firm Infrastructure HRM Margin portFirm InfrastructureHRMTechnological DevelopmentMarginProcurementServiceMarketing& SalesInboundLogisticsOperationsOutboundLogisticsMarginPrimary
27 …tries to pull the arrow back….. A low cost strategy…..Firm InfrastructureHRMTechnological DevelopmentMarginProcurementServiceMarketing& SalesInboundLogisticsOperationsOutboundLogisticsMargin…tries to pull the arrow back…..
28 Low Cost - Support Activity examples…... Fewer layers of managementPolicies to reduce turnoverIBM Printer to 62 parts, 3.5 minutesMarginMonitor supplier performanceServiceMarketing& SalesInboundLogisticsOperationsOutboundLogisticsMargin
30 A differentiation strategy….. Firm InfrastructureHRMTechnological DevelopmentMarginProcurementServiceMarketing& SalesInboundLogisticsOperationsOutboundLogisticsMargin….tries to pull the arrow forward...
31 Differentiation - Support Activity examples…... Commitment to qualityCompensation rewarding innovationAmazon RecommendationsMarginPurchasing high-quality componentsServiceMarketing& SalesInboundLogisticsOperationsOutboundLogisticsMargin
34 Your Firm Buyers Suppliers Your Rivals Opportunities forAdvantageBuyersSuppliersYour Rivals
35 Your Firm Buyers Suppliers Your Rivals Opportunities forAdding ValueOpportunities forAdding ValueBuyersSuppliersYour Rivals
36 OutsourcingKey TermsOutsourcing – purchase of a value-creating activity from an external supplierOutsourcing - This is the practice of going outside of a firm to acquire value-creating activities, when it is a viable option to do so. This trend continues to increase at a rapid pace.
37 Outsourcing Viability When a firm does not have the capabilities in the areas needed to succeedWhen a firm lacks a resource or possesses inadequate skills needed to implement a strategyWhen few organizations possess the resources and capabilities needed for competitive superiority in all primary and support activities necessary to competeWhen extensive internal capabilities exist for effectively coordinating external sourcing and internal core competenciesOutsourcing value-creating activities can be a viable option for a firm under certain conditions:When a firm does not have the capabilities in the areas needed to succeedWhen a firm lacks a resource or possesses inadequate skills essential to successfully implement a strategyWhen few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities necessary to competeWhen extensive internal capabilities exist for effectively coordinating external sourcing and internal core competencies
38 Benefits of Outsourcing Increased flexibilityMitigation of risksReduced capital investments