Business Strategy Lecture 3 Resources and Competitive Advantage John Birchall

The Resource-Based View of Business Strategy Less a toolkit than a way of seeing: inside-out rather than outside-in (de Wit & Meyer 2005) Key theorists: Hamel & Prahalad (1994), Barney (1995) Firms can create or change their environment Start by looking inside the firm itself Develop distinctive strengths: resources and capabilities Use these to build core competenc(i)es Change the rules of the game …and win!

Questions Resource-based approach improves operational effectiveness, but is it strategy? (Porter,1996) Operational effectiveness: doing the same things better, usually at functional level is often cost focused Strategic innovation: doing new things in ways that span functional boundaries Can deliver a unique form of value (differentiation) If we focus on our strengths, will we lose sight of customers and competitors? How can we guard against complacency?

Identifying Resource Strengths Main categories: tangible/intangible Physical assets are tangible The skills needed to make use of them are intangible Many assets cross categories Relationships can be the most valuable assets of all

Competences and Capabilities Michael Porter’s breakthrough book Competitive Advantage (1985) Looked for internal strengths Invented a key analytical tool: The Value Chain Talked about capabilities Examples: relationships, reputation, innovation (Harrison 2003: ) Hamel & Prahalad’s bestseller Competing for the Future (1994) Similar ideas, different attitude Talked about competencies Examples: delivering consistent quality, responding fast to customer orders (Harrison 2003: 76-78)

Which is most important? The experts disagree, so you can decide Where there is debate, there is freedom to make up your own mind When you do your research, you gain confidence in your own opinions When you work through a case analysis, you begin to see how ideas relate to evidence Evidence can be used to suggest which ideas are most useful

Analyzing Internal Resources (Harrison 2003: Ch. 3) Look inside the organisation and assess your resource advantages Use the Value Chain: review the way resources are deployed Given existing technology and markets, are you effectively turning resource advantages into competitive advantage? Add dynamism by bringing in leadership and learning Aim for the future, not for the benchmarks

Examples of Firm Resources and Capabilities (Harrison 2003: 75) Financial Physical Human General Organisational Excellent cash flow Strong balance sheet Superior past performance Strong links to financiers State-of-the-art plant or machinery Superiority in a value- adding process or function Superior locations or raw materials Outstanding products and/or services Superior CEO characteristics Experienced managers Well trained, motivated, loyal employees employees High performance structure or culture Excellent reputation or brand name Patents Exclusive Contracts Superior linkages with stakeholders Knowledge / Learning Superior technology development Excellent innovation processes / organizational entrepreneurship Outstanding learning processes

What makes a resource strategic? Value – can create this for customers Rarity – competitors may not have it Hard to copy or substitute If all three qualities are present, we have a  strategic resource  core competence  distinctive capability and can use it to build and sustain…

If all or most competitors have a resource… It can still be valuable It could even be necessary : essential for survival A competence of this kind is called a threshold competence (Johnson, Scholes and Whittington 2005: )

Administration (Firm Infrastructure) Human resource management Technology development Resource procurement Support activities Primary activities Profit Inbound logistics Operations Outbound logistics Marketing and sales Service Profit Porter’s Value Chain Managing the Process of Resource Use (Harrison 2003: 83)

Strategic Leadership Create organisational vision Establish core values and culture Develop a management structure Foster organisational learning and development Serve as a steward for the organisation Build team relationships

Relationships Link the whole chain together Unite the system Require orchestration and leadership Are hard to copy Relationships between firms Improve flows of goods and information through the system Change the rules of the competitive game

Supplier value chains Buyer value chains Channel value chains Organisation’s value chain Relationships between Firms: Porter’s Value System ( Porter 1998: 140)

Strategic Thinking Deployment of resources Strategic competences Value chain and value system