Exploring Corporate Strategy 7th Edition Part II The Strategic Position

Exploring Corporate Strategy 7th Edition Chapter 3 Strategic Capability

Strategic Capability - Outline Resources, competences and dynamic capabilities Continual improvement in cost efficiency Strategic capabilities and competitive advantage Organisational knowledge and strategic capability Diagnosing strategic capability: value chain, value networks, activity maps, benchmarking Developing strategic capabilities

Fit and Stretch or Chapter 2 Chapter 3 Internal strategic capability External environment Opportunities and threats Chapter 3 Internal strategic capability Strengths and weaknesses Matching strategic capabilities to opportunities in environment Strategic fit or Leveraging strategic capabilities for competitive advantage Strategic stretch

Resource-based View of Strategy Competitive advantage derives from the distinctiveness of an organisation’s capabilities Some businesses achieve extraordinary profits compared with others in the same industry Their resources or competences permit production at lower cost or generation of superior product or service at standard cost

Strategic Capability Strategic capability is the adequacy and suitability of the resources and competences of an organisation for it to survive and prosper Resources Tangible resources – physical assets of an organisation Intangible resources – non-physical assets of an organisation Competences The activities and processes through which an organisation deploys its resources effectively

Strategic Capabilities and Competitive Advantage Exhibit 3.1

Resources Physical resources Financial resources Human resources Machines, buildings, production capacity Financial resources Capital, cash, debtors/creditors, suppliers of money (shareholders, bankers etc) Human resources Number and mix of people, skills and knowledge Intellectual capital Patents, brands, business systems, customer databases, “goodwill”

Strategic Capability- the terminology Exhibit 3.2

Competences How an organisation employs and deploys its resources Efficiency and effectiveness of physical, financial, human and intellectual resources How they are managed Cooperation between people Adaptability Innovation Customer and supplier relationships Learning

Threshold Capabilities (1) Threshold capabilities: those essential to compete in a given market Required to be “in the game” Threshold levels change over time changes in CSFs new entrants competitor activity

Threshold Capabilities (2) Tradeoffs to achieve threshold capability for different customers high volumes of standard products versus high value specialities Possible redundancy of capabilities Can be difficult to dispose of Complementary resources and competences Competences required to manage the resources

Unique Resources and Core Competences Critically underpin competitive advantage and cannot be imitated or obtained by others Core competences Activities and processes through which resources are deployed such as to achieve competitive advantages in ways which others cannot imitate or obtain

Cost Efficiency Customers benefit from cost efficiency via Lower prices More product features for the same price Cost management can create competitive advantage … but … Cost management may become a threshold capability: Customers do not buy at any price – need appropriate value at acceptable price Competitive rivalry requires continual cost reduction

Sources of Cost Efficiency Exhibit 3.3

The Experience Curve Exhibit 3.4

Implications of the Experience Curve (1) Growth not optional Longer experience means lower costs Threat of competitors gaining cost advantages Real unit costs should decline each year First mover advantage can be important Accumulated experience

Implications of the Experience Curve (2) But Sustained competitive advantage unlikely due to unachievable market share Therefore Cost reduction becomes a threshold competence Outsourcing may become appropriate

Capabilities for Sustainable Competitive Advantage (1) Value Rarity Robustness Non-substitutability Dynamic capabilities

Capabilities for Sustainable Competitive Advantage (2) Value Ability to deliver what the customer values Rarity Unique resources, rare competences Who owns the competence and how easily transferable is it? Preferred access to customers/suppliers Situation dependent/non-transferable Sunk costs

Capabilities for Sustainable Competitive Advantage (3) Rarity Danger of becoming core rigidities Difficult to change Can lead to strategic drift

Capabilities for Sustainable Competitive Advantage (4) Robustness Complexity Culture and history Causal ambiguity Non-Substitutability Risk of substitution At product/service level by other products or services At competence level by a different approach

Capabilities for Sustainable Competitive Advantage – Robustness (5) Exhibit 3.5

Dynamic capabilities Sustainable competitive advantage is achieved by developing durable strategic capabilities that provide advantage over time In rapidly changing environments emphasis is placed on Organisational capability to change, innovate, be flexible, adapt and learn

Organisational Knowledge (1) is the awareness, consciousness or familiarity gained by experience of learning Organisational knowledge is the collective and shared experience accumulated through systems, routines and activities of sharing across the organisation

Organisational Knowledge (2) Sharing of knowledge and experience is a social process Knowledge exchange requires trust Explicit knowledge – codified and objective, transmitted in formal systematic ways Tacit knowledge – personal, context-specific, hard to formalise and communicate IT facilitation of knowledge sharing is of limited benefit The more formal and systematic the system, the greater the danger of imitation

The Value Chain Exhibit 3.6 Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985. Used with permission of The Free Press, a division of Simon & Schuster, Inc. © 1985, 1988 by Michael E. Porter. All rights reserved. Exhibit 3.6

Value Chain and Value Network To diagnose strategic capability To understand how value is created or lost in terms of the activities undertaken The value chain describes the activities within and around an organisation which together create a product or service

Value Chain Analysis Identifies clusters of activities providing particular benefit to customers Highlights activities which are less efficient and which might be de-emphasised or outsourced Requires managers to think about the role of such activities Can be used to identify the cost and value of activities

The Value Network Exhibit 3.7 Source: M.E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985. Used with permission of The Free Press, a division of Simon & Schuster Inc. © 1985, 1988 by Michael E. Porter. All rights reserved. Exhibit 3.7

The Value Network The value network Specialisation of roles Set of inter-organisational links/relationships necessary to create a product or service Specialisation of roles Underpins excellence in creating best-value products Need to understand whole process Where cost/value is created in supply/distribution chains How to manage links to improve customer value How product quality is a function of linked activities of manufacturer, suppliers and distributors

The Value Network – Key Questions (1) Where are cost and value created? Which activities are vital to an organisation? Retain direct control of core capabilities Outsource less important activities Where are the profit pools? Potential profits at different parts of the value network Availability of competences to compete in these areas

The Value Network – Key Questions (2) Make or buy? Outsourcing Develop competence in influencing performance of other organisations Who are the best partners? What kind of relationships are required?

An Activity Map Exhibit 3.8

Activity Maps Identify critical success factors Identify higher order strategic themes Unpack the themes by identifying the underpinning resources

Benchmarking Strategic Capability Historical – performance compared to previous years Industry/sector – comparative performance of other organisations Best in class – wider search for best practice Increased expectations due to improved performance in another sector Breaking the frame about performance standards to be achieved Spot opportunities to outperform incumbents in other markets – stretch core competences

SWOT Summarises analysis of Business environment: opportunities & threats Strategic capabilities: strengths & weaknesses Used for comparison with competitors Focuses on future choices and capability of organisation to support them Problems of SWOT analysis Can generate long lists: need to focus on key issues Danger of over-generalisation: not a substitute for rigorous strategic analysis

Stretching and Adding Capabilities Extending best practices Adding and changing activities Stretching competences Building on apparent “weaknesses” Ceasing activities Trade-offs External capability development

Building Dynamic Capabilities Promote a learning organisation Recognise intuition of people Accept conflicting ideas Experimentation as the norm Add activities to support learning, e.g. “venturing” business units Manage organisational knowledge Need right culture and structure Develop spiral of interaction between tacit and explicit knowledge Question core rigidities

Knowledge Creation Processes Source: I. Nonaka and H. Takeuchi, The Knowledge-Creating Company, Oxford University Press Inc., © 1995. Reprinted by permission of Oxford University Press. Exhibit 3.9

Strategic Capability – Key Points (1) Competitive advantage derives from strategic capabilities Strategic capability comprises tangible and intangible resources deployed via competences Continual improvement of cost efficiency is vital For sustainable competitive advantage strategic capabilities must be valuable, rare, robust or non-substitutable

Strategic Capability – Key Points (2) Dynamic capabilities are needed in a changing environment Value chain/value network/activity mapping to understand cost and value creation Benchmarking establishes relative performance and challenges assumptions Management of strategic capabilities involves stretching capabilities and building dynamic capabilities