Strategy - Chapter 8 “Looking Inside for Competitive Advantage” by Jay B.Barney

Introduction Barney builds on Penrose`s work by focusing on the role of resources and capabilities. He argues that to develop a sustainable competitive advantage, firms must not only search for environmental opportunities (i.e. for high opportunity, low- threat environments), they must also search for and develop their internal resources and capabilities.

A firm's resources and capabilities include:- 1.All of the financial (i.e. debt, equity, retained earnings), 2.Physical (i.e. machines, manufacturing facilities, and building firms use in their operations), 3. Human (i.e. experience, knowledge, judgment, risk taking propensity and wisdom of individuals associated with a firm), 4. Organizational assets (i.e. history, relationships, trust, and organizational culture along with a firm's formal reporting structure, explicit management control systems, and compensation policies) used by a firm to develop, manufacture, and deliver products or services to its customers

Barney claims that sustainable competitive advantage (the object of strategy) is developed when resources and capabilities can: Add value to firm. Are rare. Are hard to imitate. And interact with the appropriate organizational structure

First, The question of value: (Do a firm's resources and capabilities add value by enabling it to exploit opportunities and/or neutralize threats?) Some firms answer yes, such as Sony as it used it resources and their specific technological skills and their creative organizational cultures – make it possible for these firms to respond to, and even create new environmental opportunities. Some firms answer no, such as USX (traditional steel- making co.). They could not recognize new opportunities and threats; they delayed its investment in, among other opportunities (thin slab continuous casting steel manufacturing technology). Also, Sears was unable to respond to changes in the retail market that had been created by WalMart.

First, The question of value:(cont) Although a firm's resources and capabilities may have added value in the past, changes in customer tastes, industry structure, or technology can make them less valuable in the future. (i.e. IBM mainframe against personal & mini computers). The most important responsibilities of strategic managers is to continuously evaluate whether or not their firm's resources and capabilities continue to add value, despite changes in the competitive environment.

First, The question of value: How can we use our traditional strengths in new ways to exploit opportunities and/or neutralize threats? Many firms finding new ways to apply their traditional strengths, such as Hunter Fan Co. (due to the invention of air conditioning the sales of fans to cool manufacturing facilities had been reduced energy price had been raised and energy conservation became required, so they exploit this opportunity and shift to reduce home energy consumption, and develop some new skills as well, and new distribution networks).

The question of value: By answering the question of value, managers link the analysis of internal resources and capabilities with the analysis of environmental opportunities and threats. Firm resources are valuable only when they exploit opportunities and/or neutralize threats. The resources and capabilities of different firms can be valuable in different ways, even if firms are competing in the same industry (such as Rolex: very expensive watches and Timex: practical, reliable, low cost timekeeping manufacture watches).

Second, The question of rareness: (How many competing firms already own/have these valuable resources and capabilities?) Consider for example two firms such as NEC and AT&T competing in the global communications and computing industries, which are developing many of the same capabilities which are not rare. If they are not rare, they can't be sources of competitive advantage for any one. To gain competitive advantages, they must exploit resources and capabilities that are different from the communication and computing skills they are both cited as developing.

Second, The question of rareness: (How many competing firms already own/have these valuable resources and capabilities?) While resources and capabilities must be rare among competing firms in order to be a source of competitive advantage, this does not mean that common, but valuable, resources are not important. Indeed, such resources and capabilities may be essential for a firm's survival. On the other hand, if a firm's resources are valuable and rare, those may enable a firm to gain at least a temporary competitive advantage

Third, The question of imitability: (Do firms without resource or capability face a cost disadvantage in obtaining it compared to firms that already own/have it?) Imitation is critical to understanding the ability of resources and capabilities to generate sustained competitive advantage. Imitation can occur in 2 ways: 1.Duplication: occurs when an imitating firm builds the same kinds of resources as the firm it is imitating. 2.Substitution: firm may be able to substitute some resources for other resources. If these substitute resources have the same strategic implication and are no more costly to develop, then imitation through substitution will lead to competitive parity in the long run.

Third, The question of imitability: (Do firms without resource or capability face a cost disadvantage in obtaining it compared to firms that already own/have it?) Most of resources and capabilities of firms may be costly to imitate, because of three factors that caused the internal dynamics of a firm to be unique: 1.The importance of history 2.The importance of numerous small decisions 3.The importance of socially complex resources

1.The importance of history As firms evolve, they pick up skills, abilities, and resources that are unique to them, reflecting their particular path through history. These resources and capabilities reflect the unique personalities, experiences, and relationships that exist in only a single firm. (i.e. Caterpillar dominant firm in the heavy construction equipment industry – Komatsu is competitor by exploiting its own unique design and manufacturing resources "not duplicate" by building machines that do not break down as frequently to be strategic substitute for Caterpillar's worldwide service and supply network). In general, whenever the acquisition or development of valuable and rare resources depends upon unique historical circumstances, those imitating these resources will be at a cost disadvantage building them. Such resources can be source of sustained competitive advantage. (also JIT example)

2. The importance of numerous small decisions Strategic managers and researchers are often enamored with the importance of Big Decisions as determinants of competitive advantage. Firm's competitive advantage seems to depend on numerous Small Decisions through which a firm's resources and capabilities are developed and exploited. From the point of view of sustaining a competitive advantage, Small Decisions have some advantages over Big Decisions. Big DecisionSmall Decision More obvious, easier to describe, and to imitate. Essentially invisible to firms seeking to imitate a successful firm's resources and capabilities.

3. The importance of socially complex resources Some physical resources (i.e. computers, robots, …etc) are easy to be imitated by purchase them, take them apart, and duplicate the technology. On the other hand, socially complex resources and capabilities organizational phenomena like reputation, trust, friendship, teamwork and culture are much more difficult to imitate (i.e. HP encourages teamwork and cooperation, that make it difficult for others to imitate its powerful and enabling culture).

Fourth,The question of organization: (Is a firm organized to exploit the full competitive potential of its resources and capabilities?) Numerous components of a firm's organization are relevant when answering the question of organization, including its formal reporting structure, its explicit management control systems, and its compensation policies. These components are referred to as complementary resources because they have limited ability to generate competitive advantage in isolation. However, in combination with other resources and capabilities, they can enable a firm to realize its full competitive advantage.

Fourth, The question oforganization: (Is a firm organized to exploit the full competitive potential of its resources and capabilities?) Numerous components of a firm's organization are relevant when answering the question of organization, including its formal reporting structure, its explicit management control systems, and its compensation policies. These components are referred to as complementary resources because they have limited ability to generate competitive advantage in isolation. However, in combination with other resources and capabilities, they can enable a firm to realize its full competitive advantage

Fourth, The question oforganization: (Is a firm organized to exploit the full competitive potential of its resources and capabilities?) (Caterpillar management implement a global formal reporting structure, global inventory and other control systems, and compensation policies that created incentives for its employees to work around the world, so it realized a competitive advantage). In other hand Xerox was prevented from taking full advantage of some of its most critical valuable, rare, and costly to imitate resources and capabilities because it lacked such organizational skills

Chapter 10 “Limits of the Learning Curve” by William J. Abernathy & Kenneth Wayne

Introduction The main discussion in this chapter is about comparing the strategies of: “Doing existing things better” against the Strategies of “Doing altogether Different Things” The most interesting aspects of the article, is that it takes about the "learning curve" as a strategy rather than a simple by-product of "learning by doing". The "learning curve" (or the experience curve) illustrates how unit costs or prices fall with cumulative output. The fall arises from the benefits associated with learning by doing: the more a firm produces, the more it learns about production, hence the more efficient it becomes. The learning curve is a strategy because learning by doing does not happen automatically; it must be coordinated through the organization of product design, marketing, purchasing, engineering and manufacturing. Strategies based on the learning curve are only valid when environments are stable, for example when consumer demand is not going through radical changes

Learning curve means:- That increasing a company`s product volume and market share will also bring cost advantages over the competition. However, other results that are not planned, foreseen, or desired may grow out of such :- 1.A market penetration 2.Cost reduction progression. 3. Reduced flexibility, 4. A loss of innovative capability, 5. And higher overhead may accompany efforts to cut costs.

Learning curve means:- In simple concept that the product costs decline systematically by a percentage each time that volume doubles. management cannot expect to receive the benefits of cost reduction provided by a steep learning-curve projection, and at the same time expect to accomplish rapid rates of product innovation and improvement in product performance". It is two different strategies.

The relationships between volume growth and cost reduction The learning curve shows that manufacturing costs fall as volume rises. The experience curve traces decline in the total costs of a product line over extended periods of time as volume grows. Typically, it includes a broader range of costs that are expected to drop than does the learning curve, but disregards any product or process design changes introduced during the period of consideration.

Hard strategic questions Evidence on cost decreases in a wide range of products, supports the notion that total product costs, as well as manufacturing costs decline by a constant and predictable percentage each time volume doubles, because this volume/cost relationship is reliable and quantifiable, it has appeal as a strategic planning tool for use in marketing and financial planning, as well as in production.. A strategy that seeks the largest market share at the earliest possible date can gain not only market penetration but also advantages over competitors who have failed to reach equal volume.

Ford motor is the most important example because it actually shows the experience curve. (in a learning curve situation) During an initial period of less than two years, the average price of Ford automobiles was reduced from more than $5,000 to about $3,000 through the introduction of a dominant product, the Model T. The company cut the price of the Model T to less than $900 Before the Model T was conceived, when the least expensive Ford car was sold at a price of $850 and tires alone cost more than $60 a set, Henry Ford announced plans to sell autos at $400 After the death of former company president in 1907, the company felt confident in take the step towards product cost reduction. Therefore it built modern plants, extracting higher volume from the existing plants, obtaining economies of scale in purchased parts and getting efficiency through greater division of labour. By 1913 these efforts had reduced production throughput times from 21 day to 14 days. Later, production was spreader further through major process innovation like the moving assembly line. Because of the integration of the process, with more mechanized, the company felt less need for management in planning and control activities, therefore, the percent salaries of workers were cut nearly by 5%. This strategy of cost minimization followed with the Model T carried the seeds of trouble that affected the organization's ability to vary its products, alter its costs structure and continue to innovate.

From Model T to Model A At Ford, the experience curve did not continue indefinitely; it governed only the Model T era. Then Ford abandoned it for a performance-maximizing strategy by which the company tried to improve performance year by year at an ever higher product price. The product was the Model A. however, Ford's long devotion to the experience-curve strategy made the transition to another strategy difficult and very costly. Constant improvements in the production process made it more integrated, more mechanized, and increasingly paced by conveyors. Consequently the company felt less need for management in planning and control activities. The strategy of cost minimization single-mindedly followed with the Model T was a spectacular success. But the changes that accompanied it carried the seeds of trouble that affected the organization`s ability to vary its product, alter its cost structure, and continue to innovate

Decline of innovation Innovation starts with product innovation, to process innovation, and transfer of process technology. Innovation is not the pacing element; it is a part of the strategy. Unfortunately, the cost-cutting drives also led to weakening of the resources (the salaried employees) needed to initiate and carry out innovation. Ford did not improve until late 1940s, when new management restructured the company and made heavy plant investments. The Ford case provides a spectacular example of one company's action in pursuing a cost-minimization strategy to its end

Cost of transition When costs could not be reduced as fast as they were added through design changes, the experience-curve formula became inoperative

Ex…..Cost of transition In its effort to keep reducing Model T costs, Ford continued to invest heavily in plant, property and equipment even in rubber plantation, forestry operations to provide wooden car parts. This increased the fixed assets and raised the breakeven point. In early 1920, consumer demand began shifting to a heavier, closed body and to more comfort. On the other hand, General Motors, Ford's rival, quickly responded to this shift with new design, while Ford added more features to Model which increased its weight. This increased manufacturing costs up till 93% where some models were sold to dealers at prices below costs. Ford lost $200 million, replaced 15,000 machines tools and rebuilt 25,000 more, and laid off 60,000 worker in Detroit alone. So we can see that when costs could not be reduced as fast as they were added through design changes, the experience-curve formula became inoperative.

Common elements of change 1.Product: standardization increase, models change less frequently, less diversity, lower margin with larger volume. 2.Capital equipment and process: Vertical integration expands and specialization in process equipment, machine tools and facilities increases. (rate of capital investment rises while flexibility of these investments decline). 3.Task characteristics and process structure: with time, division of labor is extended; production process is rationalized toward line-flow operation. Amount of direct supervision decreases as labor input falls. 4.Scale: The process is segmented to take advantage of economies of scale. 5.Material inputs: Through either vertical integration or capture of sources of supply, materials inputs come under control. Costs are reduced by forcing suppliers to develop materials that meet process needs and by directly reducing process costs. 6.Labor: the more rationalized the process is, leads to greater specialization in labor skills.

Risk of success In determining how the learning-curve strategy should be pursued, management must realize the risk of misjudging the limits rises directly with the successful continuation of the strategy for two reasons: 1.First, the market becomes increasingly vulnerable to performance competition. 2.Seconds, attempts to continue reducing costs, diminish the organization's ability to respond to this kind of competition

Managing Technology The problem of developing new products is in the shift in strategy that has a pervasive effect across the organization's functional areas. The production department cannot follow a program of cost reduction along the learning curve at the same time that R&D or the marketing people are going full steam ahead into new ventures that change the nature of the product.

Managing Technology Two courses of action that some major companies have followed in avoiding the problems we have described. 1.One is to maintain the efforts to continue development of the exiting high-volume product lines. This requires setting the industry pace in periodically inaugurating major product changes while stressing cost reduction via the learning curve between model changes. 2.second course is to take a decentralized approach in which separate organizations or plants in the corporate framework adopt different strategies within the same line of business Neither of these courses of action will suit the needs of every organization, but some means of dealing with the issue of technological change and strategy transitions should be included in strategic planning.