Competing For Advantage Chapter 4 – The Internal Organization: Resources, Capabilities, and Core Competencies

Profitability in the U.S. Retailing Industry,

Why Internal Analysis?  Early strategy theory rooted in industry structural analysis - external focus  This approach has lost its appeal because: internationalization & deregulation has all but removed safe havens technology and changes in demand have blurred industry lines

Outcomes from Organizational Analyses Strategic Decisions

Components of Internal Analysis Leading to Competitive Advantage and Value Creation

Tangible Resources

Intangible Resources

Value of Intangible Resources Less visible Less imitable More sustainable

Evaluation of Resources Strength or Weakness relative to competitors basic business requirements key vulnerabilities

Tangible Resources Intangible Resources Org. Capabilities Examples….. Customer Service Product Development Employee Productivity Inputs into Outputs

Examples of Firm’s Capabilities

Core Competencies central to the firm’s competitiveness rewarded in market place combination of skills & knowledge, not products or functions flexible, long term platforms embedded in the organization’s systems distinctive competencies are those the firm performs better than rivals All core competencies have the potential to become core rigidities

Sony

Supporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to fully exploit its competencies in the marketplace

Tools for Building Core Competencies Four Criteria of Sustainable Competitive Advantage Value Chain Analysis

Sustainable Competitive Advantage Must be valuable, rare, costly to imitable, and non-substitutable Sustainability is a function of Durability - 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?

Four Criteria for Determining Core Competencies

Factors that Limit Imitation  Physical Uniqueness – location, patents  Path Dependency – accumulation effect  Causal Ambiguity – unable to disentangle  Social Complexity – social interactions are not readily understood nor duplicated  Absorptive Capacity – ability to identify, value, assimilate and use knowledge

Core Competencies as a Strategic Capability

Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Creating Value Key Terms Value – measured by a product's performance characteristics and by its attributes for which customers are willing to pay

Value Creation per Unit

Comparing Toyota and General Motors

What are some of Detroit’s Problem?  America’s largest purchaser of Viagra – GM GM Pension Plans Salaried Pension Plan 116,000 Salaried Retirees and Survivors receiving payments in the plan – $2.5B in 08 Hourly Pension Plan 377,000 Retirees and Survivors receiving payments in the plan – $6.5B in 08

Passengers per Employee  United – 938  Delta – 1,493  Alaska Air – 1,518  Southwest Air – 2,424

Relative costs and prices Where do cost/price differences come from? raw materials and components differences in technology, plant, equipment efficiencies, learning, experience, wages, productivity marketing, sales, promotion, warehousing, distribution, administration costs distribution inflation, exchange and tax rates

Porter’s Value Chain Views the organization as a series (chain) of activities, which may or may not create value

Porter’s Value Chain (cont.)  Primary Activities – Inbound logistics – Supply Chain Management – Operations – Outbound logistics - Distribution – Marketing and sales – Customer service – Contribute to the physical creation of the product/service, its sale and transfer to the buyer, and its service after the sale

Porter’s Value Chain (cont)  Support Activities Procurement Technological development Human resource management Firm infrastructure

The Value-Creating Potential of Support Activities

Firm Infrastructure HRM Technological Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin The Value Chain SupportSupport Primary

A low cost strategy….. Firm Infrastructure HRM Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin …tries to pull the arrow back….. Technological Development

A differentiation strategy….. Firm Infrastructure HRM Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin ….tries to pull the arrow forward... Technological Development

Suppliers Buyers Your Firm Your Rivals

Suppliers Buyers Your Firm Your Rivals Opportunities for Advantage

Suppliers Buyers Your Firm Your Rivals Opportunities for Adding Value Opportunities for Adding Value

Outsourcing Key Terms Outsourcing – purchase of a value- creating activity from an external supplier

Outsourcing Viability When a firm does not have the capabilities in the areas needed to succeed When a firm lacks a resource or possesses inadequate skills needed to implement a strategy When few organizations possess the resources and capabilities needed for competitive superiority in all primary and support activities necessary to compete When extensive internal capabilities exist for effectively coordinating external sourcing and internal core competencies

Benefits of Outsourcing Increased flexibility Mitigation of risks Reduced capital investments

Essential Skills for Outsourcing Strategic thinking Deal making Partnership governance Managing change